The bankers in their great wisdom, decided to delay by one day their raid on gold and silver. On Thursday, the cartel saw the precious metals rise on a "great" auction in Europe. The rise provided extra juice for the bankers on Friday and they did not disappoint. Gold fell by $17.30 down to $1630.40. Silver was hit for a loss of 36 cents to $29.75. Bourses were hit first in Europe with news of a possible S and P downgrade on France. That brought the Dow down initially quite hard to triple digit losses, but it rallied on the close down only 48 points. Gold rose with the Dow advancing but not silver. France was finally downgraded at 4:30 pm Friday night. Here are the final closing prices:
Gold: $1639.70
silver: $29.77
The bankers have complete control of the paper price of gold and silver. I would like to report that again we had no USA bank failures Friday night.
Let us go to the comex and assess trading, amounts standing for delivery, inventory movements and the COT report for positions of the various players.
The total gold comex open interest rose by 4,383 contracts which provided the fodder for our bankers to whack on Friday. Always remember that all OI figures are 24 hours back. Thus the "real" OI Friday is officially the close of trading at the comex on Thursday. The front options expiry month of January saw the OI rise by 5 contracts from 30 to 35 despite 8 deliveries on Thursday. We thus gained another 1300 oz of additional gold standing and lost nothing to cash settlements. The next big delivery month is February and we are a little over 2 weeks to first day notice. The February month saw a contraction from 182,125 to 174,222 as many are rolling to other future months namely April. The estimated volume was quite high yesterday coming in at 230,480 and this was due to:
1. the high rollovers
2. the extra shorting by the bankers.
The total silver comex OI hardly budged in total contrast to gold. Here the OI fell by only 5 contracts to 103,877. There is no question that silver is trading in a different pattern to gold. Judging from the comex movements it seems that the CME is getting ready for some serious deliveries in March. The front options expiry month of January saw its OI fall from 185 to 122 for a loss of 63 contracts. We had 125 delivery notices filed on Friday for delivery on Tuesday so we again gained 62 contracts or 310,000 additional oz of silver standing for delivery and lost nothing to cash settlements. The next front month which appears to be of considerable interest to investors is the March contract and here the OI lost only about 600 contracts to roll overs. The OI rests this weekend at 55,029. The estimated volume on Friday came in at a weak 38,682. The confirmed volume on Thursday was also weak at 38,807 The entire silver comex longs appear to be in very strong hands as these guys do not seem to be bullied by the banker's antics.
Inventory Movements and Delivery Notices for Gold: Jan 14 2012:
Gold | Ounces |
Withdrawals from Dealers Inventory in oz | nil |
Withdrawals from Customer Inventory in oz | 835 (HSBC,Manfra) |
Deposits to the Dealer Inventory in oz | nil |
Deposits to the Customer Inventory, in oz | nil |
No of oz served (contracts) today | 13 (1300) |
No of oz to be served (notices) | 22 (2200) |
Total monthly oz gold served (contracts) so far this month | 1036 (103,600) |
Total accumulative withdrawal of gold from the Dealers inventory this month | 4297 |
Total accumulative withdrawal of gold from the Customer inventory this month | 161,756 |
For a weekend, the gold comex activity was quite tame. We had no gold deposits by the dealer.
We had no gold withdrawn by the dealer.
We only had two transactions involving customer withdrawals;
1. Out of HSBC: 578 oz
2. Out of Manfra: 257 oz
total customer withdrawal: 835oz.
Since we had no adjustments, the total registered gold inventory remains at 2.4997 tonnes or 77.75 tonnes of gold.
The CME reported on Friday that we had 13 delivery notices for 1300 oz of gold. This gold will somehow be used by the bankers in jurisdictions elsewhere to put out huge demand fires. The total number of gold notices for the month total 1036 for 103600 oz of gold. To obtain what is left to be served upon, I take the OI standing (35) and subtract out Friday delivery notices (13) which leaves us with 22 notices or 2200 oz of gold. The 22 notices are identical to Thursday, thus the bankers needed to pull these 1300 oz for use elsewhere.
Thus the total number of gold oz standing in this non delivery month of January is as follows:
103,600 oz (served) + 2200 (oz left to be served upon) = 105,800 oz or 3.29 tonnes of gold.
If we add the January and November months (non delivery months) to the delivery month of December we have a total of 73. 97 tonnes of gold standing for delivery of metal.
This represents 73.97/77.75 or 95.13% of available dealer or registered gold.
Yet no gold enters the dealer as a deposit nor does any gold leave the dealer. There is no question that shenanigans is quite prevalent at the gold and silver comex.
And now for silver
the chart: January 14 2012:
Month of January now commences:
| Silver | Ounces |
| Withdrawals from Dealers Inventory | nil |
| Withdrawals fromCustomer Inventory | 276,499 (Delaware,HSBC,Scotia,) |
| Deposits to theDealer Inventory | 597,014 (Brinks) |
| Deposits to the Customer Inventory | 891,247(Scotia, ,HSBC) |
| No of oz served (contracts) | 92 (460,000) |
| No of oz to be served (notices) | 30 (150,000) |
| Total monthly oz silver served (contracts) | 766 (3,830,000) |
| Total accumulative withdrawal of silver from the Dealersinventory this month | 268,115 |
| Total accumulative withdrawal of silver from the Customer inventory this month | 2,196,458 |
Again the silver comex vaults are quite active.
We had the following dealer deposit: 597,014 oz arrive at Brinks.
It may be a strange coincidence but on Thursday we had almost the same amount of silver arrive at the dealer Brinks: 596,741 oz.
The customer had the following deposit:
1. Into HSBC 290,777 oz
2. Into Scotia 600,470 oz
total: 891,247 oz.
We had the following customer withdrawal:
1. Out of Delaware: 17,406 oz
2. Out of HSBC: 8319 oz
3. Out of Scotia: 250,774 oz.
total customer withdrawal: 276,499 oz
It is also interesting that on Thursday we had a withdrawal from Scotia
of an almost identical 250,123 oz.
We had no dealer withdrawal of silver.
We had two adjustments:
1 a lease of 2089 oz whereby the customer leased silver to a dealer at Brinks.
2. a 2 oz silver addition count at Scotia due to a counting error.
It seems that their counting of silver is all over the place.
The CME notified us that we had 92 delivery notices for 460,000 oz of silver.
The total number of silver notices filed so far this month total 766 for 3,830,000 oz.
To obtain what is left to be served upon, I take the OI standing for January (122) and subtract out Friday deliveries (92) which leaves us with 30 notices or 150,000 oz left to be served upon.
Thus the total number of silver oz standing for delivery again advances:
3,830,000 oz (served) + 150,000 oz (to be served upon) = 3,980,000 oz.
Please note that this total is approaching the final totals for delivery in the normally big delivery month of December. Also note that January is generally the weakest delivery month for both gold and silver.
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.
Jan 14. 2012:
Total Gold in Trust
Tonnes:1,254.16
Ounces:40,322,451.77
Value US$:65,934,796,423.39
jan 12.2012:
TOTAL GOLD IN TRUST
Tonnes:1,254.16
Ounces:40,322,451.77
Value US$:66,963,739,550.16
JAN 11.2012
TOTAL GOLD IN TRUST
Tonnes:1,254.16
Ounces:40,322,451.77
Value US$:65,895,926,430.52
we neither gained nor lost any gold at the GLD despite the massive volatility in gold these past several days.
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.
Jan 14. 2012:
Total Gold in Trust
Tonnes:1,254.16
Ounces:40,322,451.77
Value US$:65,934,796,423.39
jan 12.2012:
TOTAL GOLD IN TRUST
Tonnes:1,254.16
Ounces:40,322,451.77
Value US$:66,963,739,550.16
JAN 11.2012
TOTAL GOLD IN TRUST
Tonnes:1,254.16
Ounces:40,322,451.77
Value US$:65,895,926,430.52
we neither gained nor lost any gold at the GLD despite the massive volatility in gold these past several days.
Sprott and Central Fund of Canada.
The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.
There is now evidence that the GLD and SLV are paper settling on the comex.
Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.
Jan 14. 2012:
Total Gold in Trust
Tonnes:1,254.16
Ounces:40,322,451.77
Value US$:65,934,796,423.39
jan 12.2012:
TOTAL GOLD IN TRUST
Tonnes:1,254.16
Ounces:40,322,451.77
Value US$:66,963,739,550.16
JAN 11.2012
TOTAL GOLD IN TRUST
Tonnes:1,254.16
Ounces:40,322,451.77
Value US$:65,895,926,430.52
we neither gained nor lost any gold at the GLD despite the massive volatility in gold these past several days.
And now for silver Jan 14 2012:
Ounces of Silver in Trust 305,970,641.100 Tonnes of Silver in Trust 
9,516.75
Jan 12: 2011:
Ounces of Silver in Trust 305,970,641.100
we neither gained nor lost any silver today in the SLV.
end.
end
And now for silver Jan 14 2012:
Ounces of Silver in Trust 305,970,641.100 Tonnes of Silver in Trust 9,516.75
Jan 12: 2011:
Ounces of Silver in Trust 305,970,641.100
we neither gained nor lost any silver today in the SLV.
end.
end
And now for silver Jan 14 2012:
| Ounces of Silver in Trust | 305,970,641.100 |
| Tonnes of Silver in Trust | 9,516.75 |
Jan 12: 2011:
| Ounces of Silver in Trust | 305,970,641.100 |
we neither gained nor lost any silver today in the SLV.
end.
end
And now for our premiums to NAV for the funds I follow:
1. Central Fund of Canada: traded to a positive 4.4 percent to NAV in usa funds and a positive 3.9% to NAV for Cdn funds. ( Jan 14 2012.).2. Sprott silver fund (PSLV): Premium to NAV fell to 23.93% to NAV Jan 14 2012:
3. Sprott gold fund (PHYS): premium to NAV rose to a 4.89% positive to NAV Jan 12. 2014).
end.
And now for our premiums to NAV for the funds I follow:
1. Central Fund of Canada: traded to a positive 4.4 percent to NAV in usa funds and a positive 3.9% to NAV for Cdn funds. ( Jan 14 2012.).2. Sprott silver fund (PSLV): Premium to NAV fell to 23.93% to NAV Jan 14 2012:
3. Sprott gold fund (PHYS): premium to NAV rose to a 4.89% positive to NAV Jan 12. 2014).
end.
And now for our premiums to NAV for the funds I follow:
1. Central Fund of Canada: traded to a positive 4.4 percent to NAV in usa funds and a positive 3.9% to NAV for Cdn funds. ( Jan 14 2012.).
2. Sprott silver fund (PSLV): Premium to NAV fell to 23.93% to NAV Jan 14 2012:
3. Sprott gold fund (PHYS): premium to NAV rose to a 4.89% positive to NAV Jan 12. 2014).
3. Sprott gold fund (PHYS): premium to NAV rose to a 4.89% positive to NAV Jan 12. 2014).
end.
The Sprott silver fund has been retreating in premiums over the past few days, but the central fund of canada has gained. Maybe a bit of arbitrage is occurring.
The gold premiums have been remaining quite strong for the Sprott gold.
Let us head over to the COT report which was released after the market closed:
Gold COT Report - Futures | ||||||
Large Speculators | Commercial | Total | ||||
Long | Short | Spreading | Long | Short | Long | Short |
166,262 | 33,502 | 33,354 | 160,949 | 327,523 | 360,565 | 394,379 |
Change from Prior Reporting Period | ||||||
-3,077 | -4,866 | -3 | -3,168 | 1,563 | -6,248 | -3,306 |
Traders | ||||||
161 | 68 | 79 | 50 | 51 | 246 | 172 |
Small Speculators | ||||||
Long | Short | Open Interest | ||||
57,358 | 23,544 | 417,923 | ||||
896 | -2,046 | -5,352 | ||||
non reportable positions | Change from the previous reporting period | |||||
COT Gold Report - Positions as of | Tuesday, January 10, 2012 | |||||
Those large speculators that have been long in gold, pitched 3077 contracts from their long side.
Those large speculators that have been short in gold covered a rather large, 4866 contracts from their short side, thinking gold would advance and their move was accurate.
Our commercials:
Those commercials that are close to the physical scene and generally long in gold somehow missed the tea leaves and pitched, 3168 contracts from their long side.
Those commercials who are perennially short in gold, added another 1563 positions to their short side.
Our small specs:
The small specs that are long in gold, added a tiny 896 contracts to their long side and got it right.
The small specs that are short in gold covered a rather large for them, 2,046 contracts as these guys were fearful of a gold advance and they were right.
Conclusion: a little bearish as the bankers were preparing their raid.
And now silver:
Silver COT Report - Futures | ||||||
Large Speculators | Commercial | Total | ||||
Long | Short | Spreading | Long | Short | Long | Short |
26,208 | 15,137 | 18,856 | 38,959 | 58,021 | 84,023 | 92,014 |
-421 | -1,854 | -356 | -2,341 | 805 | -3,118 | -1,405 |
Traders | ||||||
63 | 37 | 42 | 35 | 41 | 121 | 102 |
Small Speculators | ||||||
Long | Short | Open Interest | ||||
20,322 | 12,331 | 104,345 | ||||
362 | -1,351 | -2,756 | ||||
non reportable positions | Change from the previous reporting period | |||||
COT Silver Report - Positions as of | Tuesday, January 10, 2012 | |||||
Our large specs that are long in silver, covered only a tiny 421 contracts in silver. These spec longs seem to be in very strong hands.
Our large specs that are short in silver, saw the tea leaves and covered a rather large 1854 contracts from their shortfall.
Our commercials:
Those commercials who have been close to the physical scene and generally on the long side, pitched a rather large 2341 contracts from their longs.
Those commercials who have been perennially short in silver and subject to the silver investigation by the CFTC, added 805 contracts to their shortfall.
Our small specs;
The small specs that have been long in silver added 362 positions to their long side.
The small specs that have been short in silver covered a rather large for them, 1,351 contracts.
Conclusion: slightly bearish from the point of view of the commercials going more short.
Ted Butler had this to say Friday in a report to his subscribers.
(courtesy Ed Steer/Ted Butler)
.
Ted Butler mentioned that despite the hopes that the short position in SLV might have declined substantially with the big engineered price decline in silver over the holidays, that did not turn out to be the case. The good folks over atshortsqueeze.com showed that the number of SLV shares shorted jumped from 22.0 million to 24.9 million...an increase of 13.15%.
It was much the same with GLD shares, as their short position rose by 5.43%...as the number of shorted shares rose from 14.77 million to 15.58 million.
demand for gold and silver are quite high especially in silver with sales already at 4.6 million oz.
The yearly sales in silver at the mint is somewhere around 40 million oz or around the amount of silver production in the USA.
Canada also has sales of silver 1 oz coins greater than Canadian silver mine production.
Thus the comex folk need to import silver from Europe to satisfy long investor needs.
(courtesy Ed Steer)
The U.S. Mint had a sales report yesterday. They sold 3,000 ounces of gold eagles...500 one-ounce 24K gold buffaloes...and 340,000 silver eagles. Month-to-date the mint has sold 85,500 ounces of gold eagles...8,000 one-ounce 24K gold buffaloes...and 4,597,000 silver eagles.
end
Finally at the end of the day we got this notice of a downgrade to AA plus and outlook negative.
This puts the EFSF and its successor in funding the euro crisis in jeopardy as France will no longer contribute:
(courtesy zero hedge)
It's Official: France Cut To AA+ From AAA By S&P, Outlook Negative
Today's worst kept secret just hit the wires, as S&P announces that it has officially downgraded France
- FRANCE CUT TO AA+ FROM AAA BY S&P, OUTLOOK NEGATIVE
- "we believe that there is at least a one-in-three chance that we could lower the rating further in 2012 or 2013"
- "we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating,"
One notch, but the negative outlook means a future downgrade is likely.
Full statement below:
France's Unsolicited Long-Term Ratings Lowered To 'AA+'; Outlook Negative
Overview
- Standard & Poor's is lowering its unsolicited long-term sovereign credit rating on the Republic of France to 'AA+'. At the same time, we are affirming our unsolicited short-term sovereign credit rating on France at 'A-1+'.
- The downgrade reflects our opinion of the impact of deepening political, financial, and monetary problems within the eurozone, with which France is closely integrated.
- The outlook on the long-term rating is negative.
Rating Action
On Jan. 13, 2012, Standard & Poor's Ratings Services lowered the unsolicited long-term sovereign credit rating on the Republic of France to 'AA+' from 'AAA'. At the same time, we affirmed the unsolicited short-term sovereign credit rating at 'A-1+'. We also removed the ratings from CreditWatch with negative implications, where they were placed on Dec. 5, 2011. The outlook on the long-term rating is negative.
Our transfer and convertibility (T&C) assessment for France, as for all European Economic and Monetary Union (eurozone) members, is 'AAA', reflecting Standard & Poor's view that the likelihood of the European Central Bank restricting nonsovereign access to foreign currency needed for debt service is extremely low. This reflects the full and open access to foreign currency that holders of euro currently enjoy and which we expect to remain the case in the foreseeable future.
Rationale
The downgrade reflects our opinion of the impact of deepening political, financial, and monetary problems within the eurozone.
The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from policymakers lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone's financial problems. In our opinion, the political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those eurozone sovereigns subjected to heightened market pressures.
We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone's core and the so-called "periphery." As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.
Accordingly, in line with our published sovereign criteria, we have adjusted downward the political score we assign to France (see "Sovereign Government Rating Methodology And Assumptions," published on June 30, 2011). This is a reflection of our view that the effectiveness, stability, and predictability of European policymaking and political institutions (with which France is closely integrated) have not been as strong as we believe are called for by the severity of what we see as a broadening and deepening financial crisis in the eurozone.
France's ratings continue to reflect our view of its wealthy, diversified, and resilient economy and its highly skilled and productive labor force. Partially offsetting these strengths, in our view, are France's relatively high general government debt, as well as its labor market rigidities. We note the government is addressing these issues through, respectively, its budgetary consolidation strategy and structural reforms.
Outlook
The outlook on the long-term rating on France is negative, indicating that we believe that there is at least a one-in-three chance that we could lower the rating further in 2012 or 2013 if:
- Its public finances deviated from the planned budgetary consolidation path. Budgetary measures announced by the French government to date may be insufficient to meet deficit targets in 2012 and 2013, should France's underlying economic growth in these years fall below the government's current forecast of 1% and 2%, respectively. If France's general government deficit were to remain close to current levels, leading to a gradual increase in the net general government debt to surpass 100% of GDP (from just above 80% currently), or if economic growth were to remain weak for an extended period, it could lead to a one-notch downgrade.
- Heightened financing and economic risks in the eurozone were to lead to a significant increase in contingent liabilities, or to a material worsening of external financing conditions.
Conversely, the ratings could stabilize at current levels if the authorities are successful in further reducing the general government deficit in order to stabilize the public debt ratio in the next two to three years and in implementing reforms to support economic growth.
end.
The following is a great article written by Roberts. He asserts how QEIII will do nothing for the "Average Joe". The authors speculates that the Fed will engage in the purchase of massive mortgage backed securities. I differ with the author only in terms that the Fed is still engaging in QE III behind the scenes using swap dollars overseas to buy debt instruments nobody wants.
(courtesy Lance Robert/Street Talk Advisors/zero hedge)
Guest Post: Why QE3 Won't Help "Average Joe"
Submitted by Lance Robert of Street Talk Advisors
Why QE3 Won't Help "Average Joe"
Are the markets already front running a potential announcement of a third round of Quantitative Easing (QE 3)? Maybe so. We had expected QE3 at the end of last summer as the economy weakened substantially from the impact of the Japanese earthquake/debt ceiling debate/Eurozone crisis trifecta. However, with political pressures running high due to the raging battle in Congress raising the debt ceiling there was little support from the public for further intervention. Furthermore, with inflation, as measured by CPI, already outside of the Fed's comfort zone, the Fed opted to institute "Operation Twist" (O.T.) instead. With the Euro-Crisis on the broiler, another debt ceiling debate approaching, the U.S. economy struggling along as Europe slips into a recession and corporate earnings being revised down there are plenty of reasons for stocks to decline in price. Yet, they have continued to inch up. With short interest on stocks having plunged in recent weeks it certainly sounds like the markets are betting on something happening and soon.
Let's remember that the goal of both the QE programs and Operation Twist was to suppress interest rates on the longer end of the yield curve in a bet, which has failed to this point, to revive housing. Those programs did, however, drive a speculative frenzy as money flooded into the financial markets. As you can see by the chart above the actual implementation of QE1 and QE2 actually kept mortgage rates elevated as money flowed from bonds, suppressing prices and increasing yields, into stocks. When QE was not in effect and there was no support for the stock market money flowed back into bonds suppressing yields. The only effective program so far has been the most recent aberration of manipulation which has been dubbed "Operation Twist". However, even after more than $2 Trillion of infusions into the system housing is still in the doldrums as it is plagued by problems other than just trying to get interest rates low enough to entice people to buy a home. The housing market is still flooded with excess inventory and prices that are still higher than long term norms. The massive shadow inventory of homes that are in delinquent status have yet to be dealt with and the plethora of lawsuits against the major banks for foreclosure fraud and misrepresentation have clogged the progress of dealing with the problems. Furthermore, high unemployment, excess consumer debt and leverage and tighter lending standards are suppressing individuals ability to qualify for either refinancing or purchases of a home even if interest rates were at zero.
The importance of the housing market is not lost on the Fed and Ben Bernanke. Bernanke recently underscored the importance of residential real estate, which represents 15% of the economy, in a study he sent to Congress last week, that said ending the slump is necessary for a broader recovery. It now appears that the Fed is considering expanding their efforts to try and stimulate the moribund housing market as the study showed that Americans who might refinance and buy properties are getting shut out by stricter lending standards or avoiding transactions as values tumble amid mounting foreclosures.Here are the stats. Since the Fed started buying $1.25 trillion of mortgage bonds in January 2009, the value of U.S. housing has fallen 4.1 percent, and is down 32 percent from its 2006 peak, according to the S&P/Case-Shiller index. Unfortunately, the massive backlog of delinquent properties that need to move through the foreclosure process is likely to suppress prices further.
For "Average Joe" This Is A Losing GameCurrently, it appears as if the market is"front running" a third round of QE coming by March with the current estimate being roughly between another $300 to $750 billion in purchases. While the markets will likely get some boost from the program it is unlikely to spur any real resurgence in activity in the housing market. While this might be welcome news for jittery investors clamoring for Fed intervention to help boost market confidence another round of quantitative easing wouldn't be a panacea for the ailing U.S. economy.
For starters, the global economic landscape is drastically different than it was when the Fed launched its second round of QE2. Since then, a series of temporary shocks—a catastrophic earthquake in Japan, debt-ceiling drama in Washington, and the sovereign debt crises in the Euro-zone, coupled with more fundamental economic maladies—have rocked the global financial system to its core. Furthermore, the challenges policymakers face differ tremendously as well. Back in 2010, deflation was the crisis of the moment, with markets fearing an unavoidable downward spiral of lower prices, weak demand, and massive lay-offs.
The Fed now faces a much more important problem as it relates to the consumer and ultimately the economy - inflation. Commodity based inflation has risen markedly during the last two infusions of QE. With oil prices already in excess of $100 a barrel and food prices on the rise as well the risks to this game are heavily weighted against "Average Joe". Additional increases in inflationary pressures from a QE program would likely push the economy back into recessionary territory. In turn this would further impact consumer's incomes, which have been fairly stagnant over the last two years, as they find difficulty making ends meet by combating higher prices.
For an administration that has built itself upon the idea of creating "equality" for all Americans, while pointing the finger at Wall Street and blaming them for their increases in wealth, these programs continue to fuel that divide. QE programs are great for Wall Street - however, for "Average Joe" it is a drain on their standard of living.
What I Think I Know
While I am not sure that the Fed has the political clearance to fire off another round of QE at this point, given the rise in inflationary pressures and recent ephemeral upticks in the economy, Bill Gross of Pimco apparently does. According to my friend Tyler Durden at Zero Hedge: "in December the fund [Pimco] doubled down on its QE3 all in bet, by 'borrowing' even more cash, or a record $78 billion, using the proceeds to buy even more MBS, as well as Treasuries, which hit a combined 31% of the TRF's holdings. In other words, between MBS and USTs, Pimco holds a whopping 79% of total, mostly in very long duration exposure. In fact, this combination of long duration and pre-QE exposure has not been seen at PIMCO since late 2008, early 2009, meaning that as many banks have been suggesting, Gross is convinced that the Fed will announce if not outright QE3 this January, then at least intimate it is coming."
It appears that the markets are starting to come to the same conclusion given the recent "buy signal" that was issued last week. While I am not "comfortable" with much of the underlying economic conditions the markets are clearly moving back into a positive trend - at least for now. However, I wouldn't be "betting the farm" that QE3 will be a decisive win for the economy.
end.
Rob Kirby has brought out his paper on interest rate swaps and how the USA Government are using these instruments in keeping bond yields low and also to keep a lid on gold and silver prices.
His first blockbuster, the Elephant in the Room, exposed this fraud on the world in 2009.
This is a continuation of the manipulation by the USA Government:
(courtesy, rob Kirby/ goldseek.com/GATA)
-- Posted Friday, 13 January 2012 | | Source: GoldSeek.com The term “derivative” has become a dirty, if not evil word. So much of what ails our global financial system has been laid-at-the-feet of this misunderstood, mischaracterized term – derivatives. The purpose of this paper is to outline the origin, growth and ultimately the corruption of the derivatives market – and explain how something originally designed to provide economic utility has morphed into a tool of abusive, manipulative economic tyranny. Definition of Derivatives Derivatives are financial instruments whose values depend on the value of other underlying financial instruments or objects. The main types of derivatives are futures, forwards, options and swaps. The original intended use of derivatives was to manage risk [hedge]; however, now they are often traded as investments whether hedged, un-hedged or as component of a spread trading strategy. The diverse range of potential underlying assets and pay-off alternatives leads to a wide range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) — see inflation derivatives — or even an index of weather conditions, or other derivatives). In recent years, much has been written about credit derivatives - which have become an increasingly visible part of the derivatives complex. However, the largest component of the derivatives complex remains interest rate products which the U.S. Office of the Comptroller of the Currency tells us constitute more than 82 % of all outstanding bank held notionals. Interest rate derivatives have a great effect on interest rates as will be discussed later. Origin of Derivatives Derivatives have their roots in the agri-complex. From an historical context, it was agricultural commodities futures [mainly grain] that first gained traction as viable financial instruments. The genesis of these products dates back to the founding of the Chicago Board of Trade [CBT] in the mid-eighteen hundreds. Back in the eighteen hundreds large scale farming enterprises were difficult [risky] to “bank”. The risk was embodied by the known costs associated with planting seed, fertilizing and subsequent growth and harvest – versus the often volatile, unpredictable final selling price of a perishable commodity. Futures removed this this “unknown” from the banking/farming relationship and transferred it to speculators for a nominal fee or cost. From 1850 - 59, American agricultural exports were $189 million/year [81% of total exports]. With agriculture occupying such a huge percentage of exports and GDP it was only natural that business of this scale [potential fees and profits] would and did attract the attention of the money changers. The advent of futures and forward contracts in the agri-complex was productive: giving a higher degree of predictability to farm income making the business of farming more bankable. Making farm income more predictable enabled the growth of corporate agri-businesses which brought with it economies of scale, the freeing-up of human capital which enabled / translated into mass migration [urbanization] of farmers into cities in part assisting with the rise of the human capital pool essential for the industrialization of America. Early Growth – the Commodity Futures In the beginning, as with users in the agri-complex – there were IDENTIFIABLE END USERS [farmers] for these products. Over time, futures and forwards were developed to meet demand in other predominantly natural resource based commodities like coal, crude oil, lumber, cattle and others. Similar commodity futures markets for these products and trade volumes were driven primarily by end users and it’s important to distinguish that for the entire 1800s and virtually all of the 1900s – the growth in derivatives was primarily tied to the commodity trade. Commodities Law Dictates that Futures Only Aid In Price Discovery Definition of Price Discovery: A method of determining the price for a specific commodity or security through basic supply and demand factors related to the market. According to William J. Rainer, former Chairman of the Commodities Futures Trading Commission [CFTC] back in 1999, Section 3 of the Commodities Exchange Act espouses three basic purposes for the regulatory structure currently administered by the CFTC: (1) to protect the price discovery function; (2) to prevent the manipulation of commodities through corners, squeezes and similar schemes; and (3) to assure an effective vehicle for risk transference. Implicit throughout is the need to provide suitable customer protection from abusive trade practices and fraud. The Rise of Financial Engineering: The Genesis of OTC Interest Rate Derivatives President Nixon took America and the world off the gold standard in August, 1971. What ensued was a dramatic increase in the price of crude oil which led to burgeoning balances of petro dollars [Euro-dollars] as deposits in the treasuries of banks involved in international trade and a subsequent bolstering of their treasury operations to deal with the influx of ‘inflated dollars’. Interest Rate Derivatives were developed around 1980. Their basis was the four 3-month IMM [International Money Market] Eurodollar Futures Contracts [Dec, Mar, Jun, Sept] on the Chicago Mercantile Exchange [CME]. These futures contracts are derivatives of 3 month Libor [London Interbank Offered Rate] for Eurodollar Time Deposits. The 3 month Libor rate is ‘set’ daily by a group of banks selected by the British Bankers Association and represents where these ‘reference banks’ are willing to ‘loan’ their mostly recycled Euro Dollars [petro-dollar] to their most credit-worthy customers. These derivatives/futures gave banks the ability to ‘hedge’ or book profits on sizable amounts of predictable future cash flows. Up until 1980, this bank treasury trading business remained largely a cash trade. The Toronto - Chicago Nexus In 1980, Canada revised its Bank Act. In the ensuing few months, Canada had an influx of foreign banks - dubbed schedule “B” banks. Canada went from having 5 domestic banks to having roughly 65 banks in a matter of months. To protect their home turf, the existing domestic banking industry successfully lobbied Canadian politicos to limit the amount of capital new ‘schedule B’ banks could have [initially to 5, or in a couple of instances,10 million CAD]. This placed growth restrictions on foreign banks, new entrants, beginning operations in Canada; capital ceilings implied severe balance sheet restrictions. 60 new banks had just opened their doors – but they were substantially limited in participating in main stream bank treasury operations like lending long and borrowing short - in the inter-bank market because these activities bloated balance sheets. These new treasury operations needed to find a profitable raison d’etre or their parent banks would shut them down. Competition Breeds Innovation To differentiate themselves from the rest of the crowd back in the early 1980’s, particular institutions like Citibank, Toronto and Chemical Bank, Toronto and Chase, Toronto went on a hiring binge of Ph. D mathematician types and immersed themselves in ‘financial engineering’ utilizing then emerging exchange traded futures [cited above]. These financial engineers conjured into existence two Over-the-Counter [OTC] products – Future Rate Agreements [FRAs] and Interest Rate Swaps [IRS]. Trade in these products did not entail the exchange of principal sums between counterparties – only interest-rate differentials on principal amounts [referred to as notional underlying amounts]. The beauty of this “new trade” was a] it was fee based, b] that, for accounting purposes, it was “off balance sheet” and c] it circumvented capital ceiling restrictions. From a customer standpoint – these products were marketed to corporate customers as a means to achieve cheaper, more flexible funding or alternatives for funding in terms [yrs.] they otherwise would not be able to access. From an historical perspective - it was during the 1980s when Citibank, Toronto or Chemical Bank, Toronto traded the very first Inter-bank U.S. Dollar Interest Rate Derivative – known as an FRA [Future Rate Agreement] which, at its core – was nothing more than a glorified ‘bet’ on what 3, 6 or 12 month Libor will be at a future date. It was Citibank Toronto who first engineered a financial model to successfully book accounting profits from FRAs and interest rate swaps. In the beginning – these trades were ENORMOUSLY profitable – so much so that Citibank Toronto very quickly became the world’s biggest OTC interest rate derivatives house and was, in fact, the clearing house for OTC interest rate derivatives for Citibank worldwide. This business absolutely mushroomed!  Source: U.S. Comptroller of the Currency Tracking the evolution of the aggregate derivatives held by U.S. banks, it is apparent that trade in end-user products has been ABSOLUTELY OVERWHELMED by volumes in dealer trades – all in a “supposed market” which is 96% constituted by 5 players [the magnificent 5; J.P. Morgan, BofA, Citi, Goldman, Morgan Stanley] – as the U.S. Comptroller of the Currency tells us in the executive summary of their Quarterly Derivatives Report, “Five large commercial banks represent 96% of the total banking industry notional amounts.” At this rate of concentration, the derivatives complex appears a lot more like an “old boys club” than it does “a market”. Therefore, the derivative market rapidly evolved during the late 1990’s to the early 2000’s from a previously end-user-based to a dominantly dealer-based or trading market. The parabolic rise of these dealer traded volumes parallels the rise of market rigging or the movement toward a centrally planned economy. From Humble Beginnings, How and Why We Got Here The graph of outstanding notional amounts above depicts a serious growth curve. To explain why, let’s take a look at the same graph with some added highlights explaining “what” is growing so quickly:  Source: U.S. Comptroller of the Currency Through the late 1980’s and early 1990’s – folks at the Fed and U.S. Treasury – with a little bit of help from academia - realized that interest rate swaps could be utilized to CONTROL fixed income [bond] markets and hence – controllers could arbitrarily determine the cost of capital. As such, it’s no coincidence that institutions like Citibank Toronto had their ‘U.S. Dollar derivatives books’ repatriated back to New York in this time frame. The Neutering of Usury or “Neusury” Historically, the Federal Reserve/U.S. Treasury ONLY had control of the VERY short end of the interest rate curve – specifically the Fed Funds rate [the rate at which banks and investment dealers borrow and lend to each other on an overnight basis]. With the advent and proliferation of interest rate derivatives – specifically Interest Rate Swaps [IRS], the Fed/Treasury gained effective control of the “long end” of the interest rate curve. Thus the Fed / Treasury has been practicing an undeclared form of financial repression for a very long time. In free market economies the laws of usury dictate that the interest rate mechanism serves as the arbiter as to where scarce [finite] capital is allocated. Historically, it was a group of industry professionals known as the bond vigilantes who enforced this discipline – primarily on spend-thrift governments – by making them pay more, through elevated interest rates, when they demonstrated poor stewardship of national finances. Pre “neusury” – when we had truly free markets – when the bond vigilantes “sold” – interest rates WENT UP. To illustrate this point look no further than Bill Gross – the closest thing there is to a bond vigilante today - who heads the world’s largest bond fund PIMCO. It was CNBC who reported back on March 9, 2011 that, “Pimco has dumped all of its US Treasury bond exposure in its flagship Total Return Fund. The move makes sense given Pimco chief Bill Gross's public statements that Treasurys are over-valued.”  Pre “neusury” – such a pronouncement would have caused a MAJOR SELL OFF in bonds [higher rates]. Nowadays, the Fed / U.S. Treasury and their ‘captive’ investment banking vassals high-frequency-trade pre-determined outcomes through the Interest Rate Swap complex to show folks like Bill Gross who’s really in charge. The cascade in 10 year yields depicted above just happens to coincide with the first half of 2011 – when, according to the Office of the Comptroller of the Currency, Morgan Stanley just happened to grow their swap book from 27.2 Trillion to 35.2 Trillion in notional – for a cool increase of 8 Trillion in six months at one investment bank. The sheer volume physical U.S. government bond trade created by the interest rate swap derivative complex has resulted in “neusury” and OVERWHELMED the bond vigilantes – rendering them either impotent, extinct or perhaps just plain-old confused and afraid [take your pick?]. The incapacitation or extinction of the bond vigilantes has enabled the U.S. government to spend like drunken sailors, prosecute wars and misallocate resources on a grand scale – all the while lowering and / or keeping interest rates at or near ZERO. This arbitrary, gross mispricing of capital helped to spawn further abuses like the real estate and equity bubbles – the development of which produced new sub-sets of equity derivatives and cdo’s which also enabled the macro-management of these markets. Economics 101 tells us that capital is scarce and finite. By arbitrarily rigging interest rates too low – capital markets created the false impression of abundance – and loose lending practices resulted. Control over the long end of the interest rate curve works as follows: The U.S. Treasury’s Exchange Stabilization Fund [ESF], a secretive arm of the U.S. Treasury unaccountable to Congress, began entering the “FREE MARKET” – deals brokered by the N.Y. Fed - as a receiver of “all in” fixed rates - in terms from 3 to 10 years in duration. Interest rate swaps [IRS] trade at a spread – expressed in basis points – over the yield of the 3, 5, 7 and 10 year government bond yield. Banks are virtually all spread players. When trades occur between spread players – one side of the trade sells the other side of the trade the proscribed amount of U.S. Government bonds. This creates superfluous settlement demand for bonds. When the U.S. Treasury’s Exchange Stabilization Fund [ESF] intervenes in this market – they are not spread players. When the ESF trades with “spread players”[Morgan, Citi, BofA, Goldman, Morgan Stanley] – the banks are forced to purchase cash, physical U.S. Government bonds in the proscribed terms [3-10 years], almost dollar-for-notional-dollar – as hedges for each trade they do with the ESF [because the ESF does not supply them]. This is why – instead of the hollow, contrived, official excuses offered by the Fed – despite record, off-the-charts, government bond issuance – a remarkably large percentage of U.S. Government bond trades fail to settle. ++The ESF participates in these trades taking “NAKED INTEREST RATE RISK” – meaning they do not provide their counterparties with the requisite amount of bonds to hedge their trades – thus forcing them into the “free market” to purchase them. This generates UNBELIEVABLE “stealth” settlement demand for U.S. Government securities. This is how/why U.S. Government bonds and hence the Dollar can be made to appear “bid-unlimited” - even when economic fundamentals are SCREAMING otherwise. The amount of demand for cash government bonds that can be conjured out-of-thin-air in the derivative interest rate swap complex, which might be best described as “high-frequency-trade” on steroids - measured in hundreds of Trillions in notional - literally OVERWHEMS the cash bond settlement process. This means bond yields are set arbitrarily – in accordance with Fed / Treasury policy - NOT IN FREE MARKETS. This also explains why there are no identifiable end-users for the dizzying growth in interest rate derivatives [swaps] – the trade is all attributable to the Treasury’s ‘invisible’ ESF – an institution that is not publicly accountable to ANYONE or ANYTHING. This is why other nations can and do have, from time to time, failed bond auctions while America never has and NEVER WILL BE ALLOWED TO. This is all done in stealth to facilitate and give an air of legitimacy to the U.S. Treasury’s ZIRP [zero interest rate policy]. With gratitude, the detailed, documented, inner workings of the Treasury’s Exchange Stabilization Fund and their unique relationship with the N.Y. Fed trading desk is best explained by forensic financial researcher Eric deCarbonnel, here. This is the real reason why J.P. Morgan Chase and the rest of the magnificent 5 now sport OTC derivatives books of 50 - 80 TRILLION in notional. Here’s a peak of outstanding derivatives for U.S. Bank Holding Cos. as of June 30, 2011:  Source: U.S. Office of the Comptroller of the Currency How We Know the ESF is the Other Side of These Trades Morgan Stanley [MS] supplies us with the “smoking gun”. MS grew their derivatives book by 14 TRILLION in notional in the first 6 months of 2011 – virtually all in product [swaps] that requires 2-way / mutual credit lines. MS is a company with about 30 billion in market cap. who could not find a “dance partner” [anyone to buy them for a ‘pittance’] back in 2008 during the financial crisis. The GLOBAL BANKING SYSTEM – in aggregate - does not have sufficient credit lines to allow Morgan Stanley to conduct this level of trading activity in these credit dependent products as reported with legitimate banking counterparties. The notion that this obscene amount of trade represents legitimate business with banking counterparties that was bilaterally “netted” is preposterous and a non-starter. Ergo, the other side of the bulk [if not ALL] of this trade is necessarily the ESF – being done in the name of “national security” and / or the perpetuation of ZIRP and global U.S. Dollar hegemony. This obsequious, crony, insider trade has effectively served as an attempt to re-capitalize an insolvent MS via the public teat. The [Mistaken] Promoted and Populist View of Derivatives When the sub-prime crisis came to light in August 2007, much of the “blame” for our financial system melt-down was placed on the proliferation and reckless use of Credit Derivatives. Our bought-and-paid-for mainstream financial press was complicit in perpetuating this myth. This was a conscious effort to deflect attention away from what was being done the value of capital itself. Take note of the small proportion that Credit Derivatives [in yellow] contribute to the total outstanding notionals. Also take note of there being virtually ZERO identifiable end-users [slotted green line hugging the “x” axis]:  source: U.S. Comptroller of the Currency The rise in the use of credit derivatives paralleled the rise in securitization of mortgages. Credit derivatives were used to “guarantee” the falsified values of toxic mortgaged-backed securities [MBS]. The growth of the housing bubble, Credit Derivatives and Credit Default Swaps [CDS] is more a symptom of systemic debasement of the value of capital – through ZIRP – than a cause. Complete Capture of the Derivatives Complex and Defiling of Fiat Capital That irredeemable fiat money is designed to fail – by its very nature – is laid out very well in Chris Martenson’s, Crash Course – a staple which everyone is encouraged to take the time to watch. But rather than let the “fiat” U.S. Dollar fail, as all irredeemable fiat currencies are designed to do – the sociopathic miscreants in charge of the Anglo/American banking edifice have BOUGHT TIME through the capture of the DERIVATIVES PRICE CONTROL GRID – by blatantly commandeering the unlimited resources of the U.S. Treasury’s ESF along with the printing presses of the Federal Reserve. This is done to make historic alternative currencies, like precious metal, appear unworthy. This has further endangered the financial wellbeing of all who have acted prudently and financially responsible. Physical Precious Metal: The Achilles Heel of Fraud As the interest rate swap mechanism is used to corral interest rates – so are gold futures contracts on exchanges like COMEX and the London Bullion Market Association [LBMA] used to suppress the price of the U.S. Dollar’s number one competing currency alternative - gold. The reality is that metals exchanges, like those identified above, have sold as much as 100 times, or in some case much more, paper ounces or promises of gold in the form of receipts than they have physical bullion available for delivery in their vaults. There is plenty of documented proof available [even in the conflicted, dinosaur financial press] that conduits for procurement of physical precious metal like national mints have been choked or suspended for prolonged periods of time over the past few years for investment grade physical gold and silver bullion coins. These shortages have always been characterized by, or in, the dinosaur financial press as being the result of issues specific to the retail trade – like not enough gold or silver “blanks” available – from which bullion coins are stamped. These reported bottlenecks fly in the face of anecdotal reports by the likes of major industry players such as Sprott Asset Management principal, Eric Sprott, who has attempted to bring an air of transparency to these opaque markets. In reporting on difficulties and delays his firm has encountered, procuring institutional amounts of physical silver bullion – Eric Sprott has reported that institutional amounts of silver bullion RECEIVED – was virtually all smelted AFTER it was bought and paid for. The delays and difficulties receiving bought-and-paid-for physical silver bullion relayed by Eric Sprott over the past year are INCONSISTENT with the waterfall declines [sewering] of paper-silver-prices on highly conflicted and suspect exchanges like COMEX and also inconsistent with the notion that physical silver bullion shortages are strictly a retail phenomenon. The derivatives that trade on exchanges, supposed to reflect or aide in price discovery, are increasingly being used as tools of price manipulation. Regaining control and the reinstatement of integrity to our capital markets requires market participants to continue saying “NO” to paper promises and yes to physical bullion. Focus on M.F. Global The conflicted nature of the paper derivatives exchanges like COMEX / CME and their regulators has recently been brought into disrepute through the collapse of commodity broker M.F. Global and subsequent revelations by the likes of commodity industry mavens Gerald Celente and Ann Barnhardt. Celente, as a client of M.F. Global who wanted to exercise his COMEX gold futures contracts to take delivery of physical gold bullion – was denied his contractual rights when M.F. Global declared bankruptcy. He was screwed out of - not only his money in a supposedly secure segregated brokerage account – but his contractual rights to procure physical gold bullion at an agreed price. Ann Barnhardt had a different experience. She was the principal of a brokerage firm which specialized in trading cattle futures – whose expressed purpose was to aide cattle farmers in hedging their on-the-hoof live cattle exposure. Recognizing the M.F. Global bankruptcy for what it really is – Barnhardt chose to close her own brokerage and return her client monies for fear that that the risk of confiscation of funds was an inherent and unacceptable risk for her to expose her clients to. Ms. Barnhardt has become a hero of mine – correctly identifying the major exchange participants like Jon Corzine – former head of M.F. Global, former Democrat Senator and Governor of New Jersey and former Goldman Chairman, along with J.P. Morgan chief Jamie Dimon and regulators at the C.F.T.C. like Gary Gensler – another former Goldman lieutenant under Corzine, as being criminally responsible for breach of trust to investors and irresponsible actions threatening to destroy the integrity and confidence in our financial markets. Barnhardt makes special note of how Jon Corzine was complicit in seeing to it that M.F. Global’s bankruptcy was filed as that of a securities dealer – with 4 thousand securities clients – versus that of a commodities dealer – with 40 thousand commodities clients – ALL so creditors like J.P. Morgan would have first call on the residual value of liquidated M.F. Global assets – leaving segregated commodity account holders of M.F. Global – screwed!!! Ms. Barnhardt emphatically believes that Corzine’s and J.P. Morgan’s actions were pre-emptive, provocative and implemented with intentional malice toward commodities clients. Subsequent to M.F. Global’s bankruptcy filing, it is a fact that the aggregate of all of the physical precious metal due to be delivered by M.F. Global to their clients – almost to the ounce - appeared as a “book entry” into the registered holdings of none other than J.P. Morgan. This would appear to strongly support the notion that the M.F. Global debacle was physical, precious metals related or centric. Ms. Barnhardt states on her blog, “It is absolutely amazing to me, and frankly awful, that these interviews I do are so popular. Most interviews or radio programs I do wind up being the most popular (or top-three) for their respective program or host. And we talked about my "Going Galt" letter being #6 for ZeroHedge yesterday. Don't think for a second that I relish in any of this. The truth is, I find it very, very disturbing, as should all of you, that I, relatively insignificant me, am apparently one of the only people in Western Civilization who has the stones to simply state the OBVIOUS OBJECTIVE TRUTH. I am a minor cultural phenomenon because I basically say that one plus one equals two, and I can say it clearly and directly without a bunch of "uhs" and "ums" and "you knows". Really? So all a person need do in this culture to be some sort of a hero is be able to string three articulate sentences together which state the obvious? God help us. I have many detractors who say, "Who the hell is this chick and why the hell do we care what she says?" Yep. I'm right there with you. Where are the billion-dollar fund managers (excepting perhaps Kyle Bass)? Where are the captains and titans of industry? Where are the so-called "leaders"? WHERE IS THE CLERGY??? I'm cynical, but SURELY there must be SOMEONE ELSE who has a brain in their head and a pair in the bag who can speak proper English above a mumble besides me. Anyone? Anyone? My 15 minutes are surely winding down. Someone else is going to have to step up here.” All I can say is, “Ms. Barnhardt, welcome to our ‘systemically polluted’ capital markets. As a staunch supporter of GATA I’ve been writing about it for at least 8 years. The folks at GATA are very familiar with and have been documenting the systemic abuse of our capital markets since 1998 - LONG before ANYONE ever heard of Kyle Bass and years before the world ever heard of ZeroHedge.” Maintenance of the Dollar Standard at Any Cost If anyone still doubts whether or not the Fed and U.S. Treasury have been active in managing outcomes in strategically important markets or outright suppressing the price of gold and rigging the bond market - they might want to take a read of former Federal Reserve Governor, Kevin Warsh’s op-ed of Dec. 6, 2011 in the Wall Street Journal, snippets appended below: The 'Financial Repression' Trap “In Capitals Worldwide, Policy Makers Deliberately Obscure Market Prices and Prevent Informed Judgments” “…Markets are not always efficient, but the market-clearing prices for stocks, bonds, currencies and other assets (like housing) are critical to informing judgments, in good times and bad.Market-determined asset prices often reveal inconvenient truths. But the sooner the truth is revealed, the sooner judgments can be rendered and action taken. By contrast, government-induced prices send false signals to users and providers of capital. This upsets economic activity and harms market functioning. Markets that rely on governmental participation will turn out to be less enduring indicators of value….” “….ratings agencies have been rightfully criticized for assigning higher ratings to various financial products than were justified by their fundamentals, yet now we see a dangerous irony:Governments are trying to persuade ratings agencies to assign higher ratings to sovereigns than deserved or justified by market prices. Blaming the ratings agencies for the dysfunction in funding markets will not lower funding costs.” Warsh’s op-ed reads like a bloody confession! Anyone who reads it should be OUTRAGED!!!! Kevin Warsh is admitting that the finger prints of Government [read: the U.S. Treasury] are ALL OVER our dysfunctional, systemically failing financial markets. Furthermore, it appears that he is attempting to absolve the Fed and the part it has played in the subversion of our capital markets – laying the whole pile of disgusting, corrupt stench at the feet of government. Perhaps this is why Mr. Warsh announced his resignation from the Board of Governors of the Federal Reserve back on Feb. 11, 2011 – with his post not due to expire until January 2018. Who knows, maybe the man grew a conscience? In any case, make no mistake – the Federal Reserve has acted, lock-step, in cahoots with the sociopaths and sycophants “playing god” at the U.S. Treasury - aiding and abetting the ESF’s nefarious, ruinous interventions in our capital markets. Heck, the former President of the New York Fed, Timothy Geithner, is the sitting U.S. Treasury Secretary. Manufacturing Is Alive and Well in America All is not well in America – not by a long shot. America has been taken over through subterfuge in a financial, fascist coup and the perpetrators have installed a police state. America is no longer a nation of laws. Any additional regulation of the financial services industry would be fruitless. There already exists “laws on the books” – to prevent the blatant, criminal price rigging / abuse that has already occurred. The abuse has been allowed to occur by derelict regulators who have vacated [or been bought] their fiduciary duties. While America’s industrial potential has been largely “off-shored” – their Constitution and Bill of Rights are in tatters but their propensity to manufacture is there – it just manifests itself in different ways:
It’s all about control. Derivatives products – well intentioned when they were conceived – have been utilized to prop-up a failing fiat currency / undermine capital through the establishment of a phony, crony, price control grid. As such, derivatives have become very dangerous tools in the hands of a gaggle of miscreant sociopaths – who think, speak and act as if they are doing god’s work - that now occupy the U.S. Treasury / Fed and rule Wall Street. Got physical gold yet? Subscribe here. |
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The USA released its trade figures and it was awful to the tune of a deficit of 47.75 billion dollars for the month. This is an automatic subtraction from GDP. The data shows exports to the Europe faltering badly due to the mess over there!!
(courtesy Dow Jones)
DJ US Nov Trade Gap Surges 10.4% On Oil, Euro AreaFri Jan 13 08:30:17 2012 EST
WASHINGTON (Dow Jones)--The U.S. trade deficit widened for the first time in five months in November, as rising oil prices lifted imports and exports to the euro area slumped.
The U.S. deficit in international trade of goods and services jumped 10.4%, the biggest gain since May, to $47.75 billion, the Commerce Department said Friday. The October trade gap was revised down modestly to $43.27 billion from an initial estimate of $43.47 billion.
The trade gap was much higher than forecast. Economists surveyed by Dow Jones Newswires had expected the deficit to rebound to $45.2 billion.
With the euro area debt markets under siege and predictions of a double-dip recession, trade flows to the region have taken a hit. U.S. exports to countries using the euro were off 6.9% in November, pushing up the deficit with the euro area by 20.8% to $8.36 billion.
Tensions in the Middle East have also fueled the U.S. trade gap. Easing of global oil prices since the summer had helped to bring down the trade shortfall, but the recent confrontation with major producer Iran over its nuclear program has triggered a spike in oil futures back above $100 a barrel early in the new year.
Oil prices resumed their ascent in November, with the average price of imported crude climbing $3.66 to $102.50 a barrel. That drove up the tab for crude imports to $27.29 billion from $26.01 billion in October. Crude import volumes rose by roughly 3 million barrels to 266.2 million.
The U.S. paid $34.83 billion for all types of energy-related imports in November, up from $32.60 billion the previous month.
Meanwhile, the trade deficit with China narrowed 4.3% to $26.87 billion. Exports to the U.S.'s No. 2 trading partner rose 2.1% to $9.94 billion, the highest level in nearly a year, while imports decreased 2.6% to $36.81 billion after hitting a record high the previous month.
Still, the gap with China is expected to remain a key topic of debate during the election year, with Republican front-runner Mitt Romney pledging to take a tougher stance against Beijing if he is elected president. President Barack Obama is also under pressure from his own party, as Democratic lawmakers push for House passage of a bill that would penalize China for keeping its currency undervalued to support exports.
Treasury Secretary Timothy Geithner stressed the need for a further appreciation of the yuan during a trip to Beijing earlier this week, while the White House is setting up a task force to step up pressure on China over trade frictions, The Wall Street Journal has cited administration officials as saying.
Trade flows had been supporting the U.S. economic recovery during the much of last year, with exports mostly outpacing imports. A decline in the trade gap in the third quarter contributed 0.4 percentage point to gross domestic product, when the economy expanded at a 1.8% clip.
But Friday's report showed that the real, or inflation-adjusted deficit, which economists use to measure the impact of trade on GDP, rose to $47.49 billion in November from $44.05 billion the month before.
U.S. exports fell for a second straight month, down 0.9% at $177.84 billion, not adjusting for inflation. Imports were 1.3% higher at $225.59 billion.
Breaking down imports outside of petroleum products, purchases of capital goods increased $126 million in November to a record $43.83 billion.
Among exports, sales abroad of consumer goods rose $804 million to a new high of $15.68 billion.
The deficit with other major trading partners expanded, as well. The trade shortfall with Canada jumped by more than a third to $2.98 billion, the gap with Mexico increased 4.8% to $5.51 billion, while the deficit with Japan edged up 0.1% to $6.21 billion.
At the close Friday night, the Euro was at record short levels:
COT report/courtesy zero hedge)
Everyone Hates The Euro - EUR Shorts Hit New Record High
Presented with little but incredulous comment as the net short-interest speculative commitment of traders in EUR futures breaks to yet another record (at over 155k contracts) with no squeeze in sight yet...
whether it is the larger unlevered real-money exiting or simply that the catalyst for a squeeze hasn't arrived yet (QE3?), EURUSD is holding at August 2010 lows for now...next stop 1.2588?
Chart: Bloomberg
end.
Here is a great summary on why Greece will fail as its debt is unsustainable and no funds
will be forthcoming due to the downgrade of France and other nations:
(courtesy zero hedge)
Greek Debt Likely Unsustainable Even With Haircuts, Barclays Complete Q&A On PSI
As we discussed earlier, the bigger news of the day (as opposed to the ratings actions which are well-discounted) is the new reality that PSI talks are going nowhere. The lack of incentives for an increasingly 'hedged' community of GGB holders as the banks reduce exposure and shoot themselves in the foot leaves a glaring hole in the dis-union that is the EMU. Barclays Capital is out with a very complete Q&A on 'everything you wanted to know about Greek PSI Talks and implications but were afraid to ask' and while they remain more positive on the probability of a successful outcome than us, one thing we agree on is thateven with 100% participation Greek debt is not likely to be sustainable in the absence of substantial fiscal and structural adjustment in the years ahead.
Greek PSI - Questions And Answers
1) Will the PSI go ahead?
It seems at this stage that policymakers are quite determined to proceed with the PSI and finalise it as soon as possible. If Greece aims to stay in the eurozone without hard default, PSI is crucial as a funding resource (ie, via extension of maturities), as well as to improve debt sustainability. There is still some small probability that the whole PSI negotiations can fall apart and Greece can hard default on its debt. However, in this scenario, the risk of Greece leaving the eurozone would be much higher unless rest of eurozone decided to fund Greece for so many years to come. Given the vulnerable state of the eurozone at this stage, policymakers cannot afford to let such a scenario happen, in our view. Therefore, the most likely baseline scenario, in our opinion, is that PSI will go ahead in some form. [ZH - we are not so sure!!]
2) Can the PSI be delayed?
PSI has already been delayed many times since summer 2011, and there is not another three months to delay it. Greece was able to stretch its finances up until now to avoid a hard default. With the €8bn sixth tranche release from the EU/IMF first programme, Greece has enough funds to continue until the March redemptions (€14.4bn redemption on 20 March 2012). However, without the PSI and further EU resources, there is not any room for the March redemption to be paid. As such, March Greek redemption is implicitly the hard deadline for Greece.
3) What is the likely timeline?
The latest timeline reported by Reuters news reports is as follows. The technical details of the PSI deal are likely to be released over the next week or so. The Troika and Greece would then agree to the second Greek bailout package by the end of January (which is when the next EU summit is held). With all these in place, investors are then invited to the actual PSI process in early February, which is aimed to be finalised by before the end of February.
4) What are the broad targets for the PSI?
The October EU summit set two broad targets for the PSI: 50% notional haircut on €206bn eligible debt targeted for the PSI and 120% debt/GDP by 2020. Alongside these, the PSI was also deemed to be in voluntary in nature.
On the whole, the headlines coming from policymakers still by and large show that they are willing to stick with these broad targets. While the PSI is deemed to be voluntary, the Troika wants €100bn of debt relief from the PSI, which would imply almost 100% participation. This and the voluntary nature of the PSI are in conflict, though, because it is very difficult to get a universal participation in a voluntary PSI (especially recently – some sovereign wealth funds are reported to have said that if the ECB is excluded from the PSI, they will consider themselves “official sector” as well and not participate). However, Greece and the Troika seem much more determined on achieving universal participation and, as a result, are considering retroactive CACs into existing bonds under Greek law.
5) What are the likely technical details for the new bonds from the exchange?
The new bonds are likely to have a maturity of about 30yrs with coupons of about 4-5% and a 50% notional haircut. Investors would receive 35% notional of new bonds and 15% upfront cash (or a similar NPV worth AAA collateral). Depending on the maturity of the old bonds, the exchange bond might have different splits between notional and cash (but still a 50% notional discount) and a different maturity (a bit longer or shorter than 30y).
Let us also clarify the misunderstanding from the media regarding the haircut and NPV losses. The notional haircut is 50% in the PSI if Greece and Troika stick to the October EU summit target. However, the NPV loss will also depend on the final coupon and maturity, as well as the discount rate used to find the present value of the cash flows.For instance, a new 30y bond with 35% of notional, 15% upfront cash payment and a 5% coupon will result in about 65% NPV loss with a 9% discount rate, but a 70% NPV loss with a 12% discount rate. Moreover, while there was a dispute on this about a month ago, it seems most likely now that the new bonds from the PSI will be under English law.
6) Does the PSI in its current form make the Greek debt sustainable?
The October Troika debt sustainability report highlights that the current PSI with nearly universal participation gets debt/GDP close to 120% by 2020. First, this number is still on the high side to conclude that Greek debt is sustainable. Second, the underlying macroeconomic assumptions by the October Troika report in terms of GDP growth and primary balance post-2015 are still optimistic(c.3.8% average nominal growth and average 4% primary balance). If these macroeconomic assumptions are reduced to a more realistic 2.5-3%, then the debt sustainability picture would look much worse.As seen in Figure 1, a 50% national haircut with 50% participation does not get Greece close to 120% debt/GDP by 2020, as envisaged even with the relatively optimistic macro economic assumptions of the Troika. Only if 100% participation is achieved would close to a 120% debt/GDP target be reached. For this reason, the Troika does not want to sacrifice universal participation and is determined to do whatever is necessary to maintain it. When worse macroeconomic assumptions are used, the notional haircut needed for a reasonably sustainable debt path is about 80%.
Therefore, if Greece and the Troika go ahead with October summit broad parameters for the PSI, even with 100% participation Greek debt is not likely to be sustainable in the absence of substantial fiscal and structural adjustment by Greece in the years ahead.
7) How likely is it that CACs will be introduced to the existing Greek government bonds? If they are, will they be used and what do these mean for CDS triggers?
Given the determination of policymakers to achieve universal participation, CACs are very likely to be introduced to the existing bonds, in our opinion. The question remains whether they will be used at the end of the formal PSI process or not. The mere act of introducing CACs does not trigger the CDS, but if the CACs are used subsequently, that action will likely trigger the CDS. While we think that CACs are very likely to be introduced, policymakers would likely prefer not to use them to avoid CDS trigger if they can. In other words, if the mere existence of CACs brings a very high participation such as 95% from the voluntary PSI, then we do not think the holdouts will be forced by CACs. However, if the participation is less, say about 70-80%, policymakers would not hesitate to use the CACs due to the fact that debt sustainability is in even greater jeopardy without 100% participation.
8) Will the ECB participate?
With the probability of CACs being introduced to the existing bonds under Greek law, the expectation that the ECB might participate with its GGB holdings under the SMP has increased as well. However, even if CACs are introduced, it should still be technically possible to exclude the ECB.
During this week’s ECB press conference, President Draghi said the ECB is not in the private sector and therefore is not on table for negotiations with Greece regarding the details of the deal. However, he did not have as hard stance as Mr Trichet, and the press conference was somewhat vague regarding what the ECB might end up doing in the end. Therefore, we do not think some form of ECB participation can be ruled out at this stage.
9) What kind of difference does it make if the ECB did participate?
If the ECB participates in the PSI under the same terms as private investors, it would have certain implications for Greece as well as the markets. First, it would increase the probability of a higher take-up by other investors. Second, the debt sustainability of Greece would improve somewhat more because the PSI eligible paper size would increase from €206bn to about €250bn. The schedule for release of funds from the EU/IMF to Greece under the second programme would not have to be as frontloaded given that the ECB would likely to be holding mostly front-end Greek paper.
In terms of market implications, ECB participation is likely to give the market some important messages. First, it makes the December changes in the ESM draft regarding private sector participation more credible. In other words, Greece is unique and the only PSI for eurozone, but even if there might be more PSI in the future, there is at least some part of official sector that took a loss, which makes the issue of subordination of existing holders less concerning. Second, ECB participation also gives the message to the market that the ECB is determined and willing to be bold to help resolve the eurozone crisis.
10) Does it really matter if the CDS is triggered?
The GGB market is already pricing in pretty much the worst case scenario as bonds post-2014 maturities are trading flat at the 20-25 price level. The contagion effect of the CDS trigger on other asset classes is most likely to be muted as well, or at least not as negative as the market has been expecting. According to DTCC, net protection outstanding is pretty small as well at €3.3bn. More important, a CDS trigger is pretty well publicised now. Indeed, if the ECB decides to participate in the end as well, the market effect, as we discussed above, can be positive even if CDS is triggered. If the PSI negotiations fall apart and a hard default occurs, then the contagion and the implications for the market can be substantial.
Here is Toscafund describing what will happen to Greece if she leaves the Euro:
Toscafund: "Greece Exit Would Provoke European Social Unrest, Hyperinflation, And A Military Coup"
And here we are thinking we were bearish. As it turns out, compared to London hedge fund Toscafund we are rank amateurs. Reuters reports: "A Greek exit from the euro zone would be worse than catastrophic and could provoke greater social unrest, Zimbabwe-style inflation and a military coup, said London-based hedge fund firm Toscafund. In a stark note to clients, chief economist Savvas Savouri said introducing a new currency instantaneously in the wake of a euro exit would be impossible and the delay would lead to "a run on banks and evacuation of capital that would make what has already been seen as nothing by comparison". "The word catastrophic would not do it justice enough," said Savouri, who comes from a Greek Cypriot background. "Those who imagine some post-euro-exit stability would be restored ... quite simply fail to understand the magnitude -- social, economic and political -- of such an eventuality."" Well, at least he is objective... and tells us how he really feels.
More on what the end of the world will look like:
Savouri said he would expect the euro to remain the currency of choice in Greece even if it left the euro and for the official exchange rate with the euro to be quickly undercut on the black market.
He predicted a range of problems for the country, from hyperinflation, extreme difficulty for the government in raising money on bond markets and an evacuation of people able to leave the country, taking as much wealth as they can with them.
"Inflation in Greece would quite frankly spiral in a way resembling Zimbabwe's experience," said Savouri, who also predicted severe poverty amongst the elderly.
"The social unrest seen up until now in Greece would be nothing compared with what would be seen in the dawn of a new drachma.
"It would not be hyperbole to argue that the denouement of a Greek exit from the euro would be at worst the rise of poisonous political extremists and at best a military coup."
Last year Savouri produced research notes saying that reunification between North and South Korea was "certain" and that South Africa was flawed and set to "blow up" within the next 15 years.
Well, if the guy is right, it's been fun.
Over in Italy, the LCH just raised margin requirements on longer duration Italian bonds. These bonds of course are not covered by the LTRO swap.
(courtesy zero hedge)
LCH Hikes Italian Bond Margins, Again
A few weeks after it lowered margins on Italian Bonds, following a hike previously, LCH has completed the round trip and as of minutes ago hiked margins once again, raising deposit factors on 3.25 Year to 30 Year Italian Bonds, with the most expensive duration class being the 15-30 year tranche which will see an 18% Initial Margin, and 8.3% on the 7-10 year. End result: Italian curve is about to get even steeper as the long end is sold off to satisfy margins and the money floods into the LTRO protected sub-3 year maturities. Full statement below.
(if you want statement see www.zero hedge)
end.
here are the official releases on the LCH raising of margin requirements;
(courtesy Reuters)
12:14 LCH again raises margins on Italian debt - Reuters
* Reuters noted that LCH.Clearnet raised the initial margin call on 7- to 10-year Italian debt by 15 bp to 8.3%
* It added that the noticed also showed an increase in initial margins for all debt with a duration longer than 3.25 years, as well as inflation-linked BTPi bonds.
* The changes go into effect on 17-Jan-12 close of day positions with impact on the margin call on the morning of 18-Jan-12.
12:13 LCH.Clearnet raises margin requirement on Italian debt with maturities over 3.25 years
* On 7 to 10 year maturities the margin rises to 8.30% from 8.15%
* On 15 to 30 year maturities the margin rises to 18.00% from 17.80%
* Amounts shall come into effect on 17-Jan 2012 close of day positions with impact on the margin call on the morning of 18-Jan * * * *
Here is the closing yield on the 10 yr Italian bond; it rose a bit in yield after
falling in yield on Thursday:
Snapshot
Spanish 10 yr bond yield:
Snapshot
| SUMMARY | ONE-YEAR CHART INTERACTIVE CHART | ||
|---|---|---|---|
| Value | 5.22 | ||
| Change | (%) | ||
| Open | 5.15 | ||
| High | 5.26 | ||
| Low | 5.08 | ||
France 10 yr bond yield:
Snapshot
| SUMMARY | ONE-YEAR CHART INTERACTIVE CHART | ||
|---|---|---|---|
| Value | 3.08 | ||
| Change | (%) | ||
| Open | 3.05 | ||
| High | 3.12 | ||
| Low | 2.99 | ||
end