Friday, October 30, 2009

Chart of The Day: Depression Era Bear Market 1929-1932

Depression Era Bear Market 1929-1932:

For some perspective on the current stock market rally and how it compares the 1929-1932 bear market (which also included bank failures, bankruptcies, severe stock market declines, etc.), today's chart illustrates the duration (calendar days) and magnitude (percent gain) of all significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots). For example, the bear market rally that began in November 1929 lasted 155 calendar days and resulted in a gain of 48%. As today's chart illustrates, the duration and magnitude of the current Dow rally (hollow blue dot labeled you are here) is greater than any that occurred during the 1929-1932 bear market.

My comment: there is a total disconnect between the stock market and reality. House prices are plummeting and the US consumer is flat on his back. Unemployment is at 22% and banks are not borrowing money to companies and consumers. Where is the rally? Huh? Welcome to cloud cuckoo land where anything goes as long as you are well connected.

Thursday, October 29, 2009

Under Attack, Credit Raters Turn to the First Amendment

In case you did not know:

1. Wall street sold knowingly worthless financial products to unsuspected investors world wide with an AAA rating from rating agencies like Moody's, Standard & Poor and Fitch, confirming that the investor bought a blue chip investment.

2. Rating agencies asked more money for a good rating then for a bad rating, so ratings were flawed from the beginning.

3. Now the rating agencies, under attack and sued by many disgruntled investors, say they cannot be sued for bad advices as ratings are "opinions" and "opinions" are protected by the First Amendment (Free Speech).

My comment: Madoff also sold an opinion on his investments!

Under Attack, Credit Raters Turn to the First Amendment

Huffington Post

For two decades, the nation's top credit rating agencies have managed to fend off a crackdown from Washington by relying on a surprising ally - the First Amendment.

Despite their key role in the most recent economic calamity, the three big bond raters--Standard & Poor's, Moody's and Fitch--seem poised to do it again. With help from two of the most storied constitutional lawyers in the country, the raters have successfully argued that when they make a mistake -- say, awarding the top triple-A grade to a multibillion-dollar bundle of bonds that later default -- they cannot be sued or held accountable.

That's because ratings are opinions, the agencies claim, protected by the constitutional right to free speech.

A Huffington Post Investigative Fund examination of court filings, congressional testimony and Securities and Exchange Commission documents illustrates how the companies have repeatedly invoked that right to free speech to dodge government regulation and court action. The raters have never lost a courtroom battle to a disgruntled investor, not even in the Enron scandal. Enron enjoyed high grades on its bonds just four days before it filed for bankruptcy in 2001.

Critics of the rating companies argue that they are misusing the Bill of Rights to protect a flawed but highly profitable business.

Frank Partnoy, who used to design investment products while working for Morgan Stanley, said that given the success of the First Amendment defense, it is not surprising the companies have published "unreasonably high" ratings. "Rating agencies have had a free go at it under a cloak of the First Amendment," said Partnoy, now a professor at the University of San Diego Law School.

But Floyd Abrams, the renowned First Amendment lawyer who has represented Standard and Poor's for more than 20 years, said the rating companies are entitled to the same free-speech protections afforded to journalists.

"It's an opinion," Abrams said. He acknowledged: "It may not be a great opinion if, when you look back on it, you say, 'you gave it triple-A, how could you do this?'"

To be sure, there have been some small cracks in the credit raters' defenses given the magnitude of the current financial crisis. Last month, a federal judge in New York declined to dismiss an investor's lawsuit even in the face of a First Amendment claim.

And on Wednesday, the House Financial Services Committee approved the latest bill designed to rein in the agencies. But after hearing testimony last month from the raters' lawyers and executives, the committee backed off a plan to make the companies collectively liable for mistakes in each others' ratings.

Partnoy said he expects lawmakers to water down most attempts at tightening regulation of the business.

"I've watched the rating agencies be recklessly wrong, over and over again, and I've seen them get nothing more than a slap on the wrist," said Partnoy, who is also an expert consultant for the government, defense attorneys and plaintiffs, including investors who sue the raters. "Anytime you can hold up the Constitution, it's going to get people's attention."

'The Safest Possible Place'

Credit raters are entrenched in the U.S. financial system.

When banks, corporations or city governments want to raise money, they issue debt in the form of bonds for investors to purchase. The rating companies judge the quality of the bonds. Ratings can range from the highly-coveted triple-A to the "junk" bond status of C or lower.

For several decades, until the early 1970s, the big three raters charged investors for ratings. Then the rating companies started charging the banks and companies that issue the bonds. That payment arrangement, critics argue, creates an inherent conflict of interest, where the agencies serve the issuers rather than the investors who rely on the ratings.

King County in Washington state relied on ratings and lost between $70 and $100 million from a several-billion dollar fund that manages, among other things, school lunch programs, according to the countys lawyers. Along with the Abu Dhabi Commercial Bank, the county filed a lawsuit against S&P and Moody's alleging that they used "flawed" assumptions to issue "false and misleading" ratings.

Some of the investments King County made were rated triple-A, its suit alleges, leading the county to believe it was making conservative decisions.

"They were trying to be good fiduciaries and put their money in the safest possible place," said Patrick Daniels, an attorney for the county.

Despite the top rating, the investment was actually quite risky. The county had bought into structured investment vehicles, which are complex bundles of bonds backed by assets such as mortgages, credit cards and car loans. When the mortgages defaulted, so went the bonds, and ultimately the county's money.

Another lawsuit brought by the California Public Employees' Retirement System alleges that the fees for rating structured products ranged from $300,000 to $1 million per deal.

Indeed, the rating companies saw their profits peak in 2006 and 2007 while structured products were flourishing. Now that bubble has burst, and the raters' profits have returned to 2005 levels. But even in a down year like 2008, S&P and Moody's generated more than $1.7 billion in revenue. Moody's last year had net income of $457 million while Standard and Poor's saw operating profits of more than $1 billion, although that total includes earnings from the S&P index.

Fitch is not a publicly traded company so its profits are unknown. Fitch and Moody's officials declined requests for an interview.

A federal judge in New York last month threw out most of King County's claims but refused to dismiss the suit altogether. In a rare defeat for the agencies' First Amendment defense, Judge Shira Scheindlin said in a preliminary ruling that because the county alleged the ratings were not widely published, the companies weren't entitled to free-speech protections.

'Part of the Culture'

Some former Moody's employees believe the rating companies are wrong to claim free-speech protections.

"To my eye, the problem with the First Amendment defense is it seems to shield them from any accountability," said Jerome Fons, a former managing director for credit quality at Moody's.

Eric Kolchinsky, a former Moody's managing director turned critic of the company, said that the First Amendment defense enabled some Moody's analysts to adopt a laissez faire attitude toward the quality of ratings. "Some people almost didn't even care because they feel it's just an opinion," said Kolchinsky, who is also a lawyer. "It's part of the culture there."

Kolchinsky added, however, that he believes the raters' First Amendment protections should not be lifted entirely.

Egan-Jones Rating Co. is a smaller competitor of the big three that sells its ratings to investors instead of bond issuers to avoid a conflict of interest. Sean Egan, the company's managing director, believes that rating companies should be entitled to some free-speech protections because "it's legitimate to make mistakes." But when bond issuers pay for ratings, Egan said, "there's a clear bias" and the "potential liability should increase."

Floyd Abrams is joined in his defense of the companies by Laurence Tribe, a longtime Harvard Law professor who was hired by Moody's in June. He was a law-school mentor to then-student Barack Obama and later became an adviser to Obama's presidential campaign.

In an interview with the Investigative Fund, Abrams said that credit ratings are educated opinions about the quality of bonds, not guarantees that the bonds will or will not default."Is it an opinion based upon a level of expert knowledge and analysis? I hope so," Abrams said. "That certainly is what rating agencies try to be and try to do."

The First Amendment protects other opinions, such as newspaper editorials, so why not credit ratings, he argues.

Abrams noted that there are some limitations to the First Amendment defense. It cannot shield the raters from fraud, he said. And even with free-speech protections, Abrams said the agencies still face some accountability for their ratings.

"We've got lots of lawsuits." About forty to be more exact, he said.

'Believe It When I See It'

Investors are also looking to Congress and the SEC to hold the rating companies accountable.

But nearly every time the SEC has broached the idea of rating agency reform, the companies have filed comments with the commission invoking the First Amendment, records show. In the face of these claims, the SEC has often either abandoned or modified some of its attempts at regulation. The rating companies said they have tightened internal controls in response to criticism and remain open to some government oversight.

More recently, the commission enacted some rating agency regulations to increase competition among the agencies and require them to disclose their conflicts of interest. The commission also approved rules this month that will require agencies to disclose a history of their ratings. It's now discussing a plan to expose the rating companies to greater liability in certain situations.

But Congress has prevented the SEC from changing the rating companies' methodologies. Abrams and agency executives have flocked to Capital Hill in recent years to remind lawmakers that those methodologies are protected by the First Amendment, congressional testimony shows.

Rep. Paul Kanjorski (D-Pa.), a member of the House Financial Services Committee, proposed a draft bill last month that would have required the companies to share liability when one violates securities laws. The committee approved a modified proposal Wednesday, by a 49-14 vote, without such a provision. The bill would instead make it easier for investors to sue the companies if they fail to follow their own rating methods, a feature sure to attract opposition from the companies as it hits the House floor and the Senate.

Partnoy, the law professor, said he doubts Congress will allow much to change.

"I'll believe it when I see it," he said. "The agencies are on their own, against common sense and public opinion, and yet they continue to win."

Tuesday, October 27, 2009

Without jobs, where's the recovery?

US Whig poster showing unemployment in 1837Image via Wikipedia

It took the main street press a long time to get some insight on what was happening around them. But let's be honest, they are is still in denial and cheerleaders of the criminals on Wall street. Slowly, slowly catch a monkey and slowly main street press will realise that app 300 executives on Wall street own the USA, Congress and the press.
Please read the article below of the distinguished professor but note the BIG disclaimer at the end. No please, the guy is a professor, but it is his opinion, not the opinion of CNN.

Too late mate, you had to wake up earlier. The old media is dead; long live the new media!

Editor's note: Julian E. Zelizer is a professor of history and public affairs at Princeton University's Woodrow Wilson School. His new book, "Arsenal of Democracy: The Politics of National Security -- From World War II to the War on Terrorism," will be published in December by Basic Books. Zelizer writes widely about current events.

Princeton, New Jersey (CNN) -- When the stock market broke the 10,000 point barrier a few weeks ago, many investors celebrated. Economists have started to talk about the end of the "Great Recession." But many Americans can't see what all the enthusiasm is about.

National unemployment rates remain extraordinarily high, having reached almost 10 percent. According to the Congressional Budget Office, unemployment will climb to 10.2 percent in 2010 before falling to around 9.1 percent the following year.

Within particular states, the situation is dire. In Massachusetts, unemployment rates have reached a level not seen since 1976. Michigan's unemployment rate is at a little over 15 percent. State budgets, according to a report by the Rockefeller Institute of Government, are still devastated by rapidly declining tax revenue. According to its study, collections by states fell by 16.6 percent from April to June.

The term that is being used to describe this situation is a "jobless" recovery. Some experts are worrying about a "new normal," in which unemployment rates remain much higher than before.

"We're going to have elevated unemployment for four years to come," said one economist at the liberal Economic Policy Institute.

Since the 1970s, this has been the trend. Jobs have taken longer to reappear after recessions end because a weaker manufacturing sector can no longer produce the kinds of jobs that used to exist in the post-World War II period, the era that one historian has called an era of "grand expectations."

Many jobs have gone overseas and will never return. Now the nation needs high rates of consumer spending to boost the powerful service sector, but this will take time.

A jobless recovery is in some ways a predictable, though unsatisfactory, kind of recovery after several decades when the nation has witnessed growing income inequality.

The gap between the rich and the poor has continued to increase through the 1990s and 2000s. Now we are watching a recovery where the improvement begins up top.

But the so-called jobless recovery -- a term that in fact suggests we are not seeing an actual recovery -- threatens both parties politically. For Democrats, the threat is twofold. The first is that voters unhappy with economic conditions could take it out on the party in power.

The other threat is that the failure to resolve high rates of joblessness will open Democrats up to the neo-populist attacks some Republicans have been employing as they blame the administration for focusing on saving Wall Street but not doing much for Main Street.

The threat from joblessness, however, can also harm Republicans. Many party officials still acknowledge that the severe financial collapse that took place in the final months of President George W. Bush's administration remains a huge liability to the party given that voters still associate his White House with that collapse.

And so far, polls indicate that many voters are unhappy with the Republican Party and don't see the GOP as offering a positive domestic agenda.

It is possible that continued frustration about jobs allows Democrats to target Republicans as an obstructionist party that has in fact hampered their efforts to revitalize economic growth. During the 1930s, President Franklin Roosevelt understood that you could not have recovery without jobs. This is why he made public works programs the centerpiece of the New Deal.

Although we often remember Social Security or the National Industrial Recovery Act, the major government intervention that happened in that decade, as the historian Jason Scott Smith recently documented, was public works spending.

Two-thirds of emergency spending between 1933 and 1939, he writes, went to public works.

From the start, FDR realized that without getting people back on the job, his party would remain vulnerable. Both parties have a political incentive to take more aggressive action.

There have been several recent proposals that could potentially gain bipartisan support, including some kind of tax credit to stimulate hiring, increased economic assistance to the states, and an accelerated schedule for spending the rest of the economic stimulus money that was appropriated in February 2008.

With joblessness, both parties have an issue on which they should be able to find some common ground.

If the moral imperative to make sure that Americans can feed their families is not enough in Washington, Democrats and Republicans should at least be moved by the political risks that both parties can face as a result of inaction.

The opinions expressed in this commentary are solely those of Julian Zelizer.

Friday, October 23, 2009

Process of Collapse

We are caught in this severe exposure between inflation or deflation leading to currency collapse or zero bound. We were close to zero bound before with the Lehman failure. The inflationary side everyone understands, the deflationary concern is more mysterious. This video explores that dynamic..

Video WE Pollock, October 23, 2009

Put this in your pipe and smoke it!

Daniel Hannan, Conservative MEP for the South East of England, giving a speech to the European Parliament in Strasbourg on 22nd October, in which he criticises the decision to increase the EU budget

  • You are taking money out of people's private purses and spending it on their behalf on the bureaucracies.....
  • The core function of the EU is the employment of its employees, that's why its budget always rises....
  • If people have to save because of budget constraints, why don't you?

Thursday, October 22, 2009

US Housing Market To Get Uglier

Consider the words on the situation of the US housing market of Jim Willie in his latest famous Hat Trick Letter :

"The housing market is nowhere prepared for a recovery or even a true stability for another two years. The hidden housing inventory maintained by banks, burdened by their foreclosure portfolios, assures constant overhang of supply to pressure prices down. Banks have been compelled to make their own Sophie Choice. They can either flood the market with foreclosed homes, thus pushing down home prices by another 30%, or conceal their hidden inventory like just another off balance sheet game, thus perpetuating the housing bear market. My forecast has been for perpetuation of the hidden inventory, since it is based upon government help and false hope. The bankers expect some meaningful home loan modification, but will not receive it. They expect some stability for a housing market generally based upon vaporous historical precedent".

The fact that banks are hiding millions of foreclosed homes is an accident waiting to happen.

Like the Obama administration, the banks are betting that the economy will start to grow in the coming months, so everybody will enter the housing market again and start borrowing money like the good old times. Forget about it, will you. It is just not going to happen!

To make the problems worse, the article in the Wall street Journal below confirms also that the US government put a finger in the dyke :) by assisting people financially in order to stop the foreclosure of their homes --for the time being--. Great effort, but this is throwing good money after bad: what happens when the music stops?

The policy is to play for time and at the same time hope there will be a strong recovery in the coming months. Which again, won't happen.

Moral of the story: this is a typical "we-do-not-confront-problem- and-will-wait-until-the-problem-will-go-away- syndrome" and should be declared a new disease.

Obama had his time and chose the wrong financial people on his side. It is time for him to go. Big, big mistake to first trying to push through a health care bill (which cannot be paid in any case) and leave the financial problems for later.
In the meantime Wall street continues to plunder the US middle class while the Obama team looks the other way.

Therefore: bye, bye Obama c.s.

We support the Libertarian
Ron Paul.

Waiting for the Next McMansion to Drop

Wall Street Journal

Despite some tentative signs of recovery, the U.S. housing market remains vulnerable to further price drops—especially in areas where large numbers of mortgages are headed toward foreclosure over the next few years.

The Wall Street Journal's quarterly survey of housing-market data in 28 major metro areas shows sharp drops in the number of homes listed for sale across the country. But the potential supply of homes is far larger because banks are likely to acquire significant numbers of foreclosed homes in some areas, notably Las Vegas, Atlanta, Detroit, Phoenix, Miami and other parts of Florida, and Sacramento, Calif., over the next few years.

Sales of those homes may depress prices further. By contrast, metro areas with relatively low foreclosure and mortgage-delinquency rates include Boston, Denver, Minneapolis, San Francisco, Seattle, Raleigh, N.C., and Portland, Ore., making them less vulnerable.

Homeowners and potential buyers have been whipsawed by conflicting signals about the state of the market in recent months. Ulani and Mike Thiessen found the market surprisingly hot when they went shopping for their first home in Las Vegas during the summer. With the help of Kim Kelly-Reed, an agent from One Source Realty & Management, the Thiessens finally bought a foreclosed house in September for about $136,000—but only after being outbid on three other houses.

"It's a crazy market out there," says Ms. Thiessen, who works for an electrical contractor.

Despite a continuing surge in defaults, there is a shortage of well-preserved foreclosed homes on the market in Las Vegas, Sacramento and some other metro areas where first-time home buyers have been competing with investors for newly affordable properties. "Anything under $300,000 that is decent within hours has dozens of offers," says Michael Lyon, CEO of Lyon Real Estate in Sacramento.

The supply of foreclosed homes listed for sale has dwindled largely because of government-mandated efforts to save as many borrowers as possible from losing their homes. That campaign has gummed up the foreclosure process, slowing the flow of houses into bank ownership—but only temporarily.

Over the next few years, housing analysts believe, millions of other homes are heading for bank ownership, but no one can say how long that will take or when a sudden torrent of bank-owned properties may swamp certain local markets.

Nearly 27% of first-lien home mortgages are at least 30 days overdue or in foreclosure in the Miami-Fort Lauderdale area, according to research firm LPS Applied Analytics in Denver. The rate is 23% in Las Vegas, but about 8% in Denver and Seattle. The national average is 12.4%, up from 5.2% at the end of 2006.

Among the millions of homeowners whose fate remains undecided are Jill and Robert Loy, who live in Scottsdale, Ariz. They bought their home in 2004 for $630,000 but figure it is now worth only about $350,000, well below the $470,000 owed on their mortgage.

Falling Behind

The couple fell behind on their loan payments last spring when Ms. Loy was temporarily jobless, and they have been trying to work out a modification of their loan terms with the company that collects payments on their mortgage, Colonial Savings FA of Fort Worth, Texas. A Colonial spokeswoman says the bank is trying to help the Loys.

Concentrated Risk


The housing market is heading into the winter doldrums—when fewer people shop for real estate—after a summer marked by strong demand for low-end to midrange homes, spurred by a temporary federal tax credit for first-time buyers. How the market fares in the spring will depend largely on the state of the economy and the pace of foreclosures.

"The number of people receiving paychecks will drive the demand for houses and apartments," Jay Brinkmann, chief economist for the Mortgage Bankers Association, said Tuesday in testimony to the Senate Banking Committee, "and the recovery will begin when unemployment stops rising."

For now, the market seems to be stabilizing, says Jeffrey Otteau, president of Otteau Valuation Group, an East Brunswick, N.J., appraisal firm. But if the job market gets much worse and mortgage rates rise sharply, "that could be the tipping point" for another drop in prices.

Mark Zandi, chief economist at Moody's, predicts that average national home prices will bottom out in next year's third quarter, assuming that employment begins growing again in mid-2010. But prices in some metro areas still have a long way to fall, he believes. Prices in the second quarter of 2010 will be down about 30% from a year earlier in Miami, 27% in Orlando, Fla., 24% in Las Vegas and 23% in Phoenix, Moody's forecasts.

Foreclosures and short sales (in which a home is offered for less than the mortgage balance) dominate the markets in some metro areas. Satish M. Mansukhani, a market strategist in New York, estimates that such "distressed" homes account for 79% of home listings in the Detroit area and 75% in Las Vegas, but just 16% in Houston and 7% in Boston.

One big question is how much more the federal government will do to prop up housing. Congress is debating whether to extend the tax credit for home buyers beyond Nov. 30. Meanwhile, the Federal Reserve is phasing out its massive purchases of mortgage-backed securities and plans to conclude the program by the end of March. Those purchases have helped keep interest rates on 30-year fixed-rate mortgages around 5%. Mr. Zandi says mortgage rates are likely to rise as much as one percentage point after the Fed ends that support. Analysts at Barclays Capital in New York forecast mortgage rates will be slightly over 6% by the end of March.

High-Priced Home Glut

While supplies of moderately priced homes have shrunk, there is still a glut of high-priced houses in many areas, suggesting that prices on those properties may fall sharply as more owners default. In Sacramento, there are enough homes on the market at $600,000 and above to last more than 15 months at the recent rate of sales, compared with just 1.5 months for homes priced at $300,000 and below, according to Lyon Real Estate.

Home sellers will also face tougher competition from landlords, who generally have been cutting rents in the past year. The national apartment-vacancy rate in the third quarter was 7.8%, the highest in 23 years, according to Reis Inc., a New York research firm. It predicts "a few more quarters of distress, lower rents and higher vacancies."

Apartment rents may face further downward pressure as investors buy foreclosed single-family homes and turn them into rental units, says Ryan Severino, an economist at Reis, who notes that there is little data on the number of houses being converted into rental properties.

Write to James R. Hagerty at

Tuesday, October 20, 2009

America's Soul Is Lost, Collapse Inevitable

Cover of "Collapse: How Societies Choose ...Cover via Amazon

America's Soul Is Lost, Collapse Inevitable


ARROYO GRANDE, Calif. -- Jack Bogle published "The Battle for the Soul of Capitalism" four years ago. The battle's over. The sequel should be titled: "Capitalism Died a Lost Soul." Worse, we've lost "America's Soul." And worldwide the consequences will be catastrophic.

That's why a man like Hong Kong's contrarian economist Marc Faber warns in his Doom, Boom & Gloom Report: "The future will be a total disaster, with a collapse of our capitalistic system as we know it today."

No, not just another meltdown, another bear market recession like the one recently triggered by Wall Street's "too-greedy-to-fail" banks. Farber is warning that the entire system of capitalism will collapse. Get it? The engine driving the great "American Economic Empire" for 233 years will collapse, a total disaster, a destiny we created.

OK, deny it. But I'll bet you have a nagging feeling maybe he's right, the end may be near. I have for a long time: I wrote a column back in 1997: "Battling for the Soul of Wall Street." My interest in "The Soul" -- what Jung called the "collective unconscious" -- dates back to my Ph.D. dissertation: "Modern Man in Search of His Soul," a title borrowed from Jung's 1933 book, "Modern Man in Search of a Soul." This battle has been on my mind since my days at Morgan Stanley 30 years ago, witnessing the decline.

Has capitalism lost its soul? Guys like Bogle and Faber sense it. Read more about the soul in physicist Gary Zukav's "The Seat of the Soul," Thomas Moore's "Care of the Soul" and sacred texts.

But for Wall Street and American capitalism, use your gut. You know something's very wrong: A year ago "too-greedy-to-fail" banks were insolvent, in a near-death experience. Now, magically they're back to business as usual, arrogant, pocketing outrageous bonuses while Main Street sacrifices, and unemployment and foreclosures continue rising as tight credit, inflation, skyrocketing Federal debt killing taxpayers.

Yes, Wall Street has lost its moral compass. They created the mess, now, like vultures, they're capitalizing on the carcass. They have lost all sense of fiduciary duty, ethical responsibility and public obligation.

Here are the Top 20 reasons American capitalism has lost its soul:

1. Collapse is now inevitable

Capitalism has been the engine driving America and the global economies for over two centuries. Faber predicts its collapse will trigger global "wars, massive government-debt defaults, and the impoverishment of large segments of Western society." Faber knows that capitalism is not working, capitalism has peaked, and the collapse of capitalism is "inevitable."

When? He hesitates: "But what I don't know is whether this final collapse, which is inevitable, will occur tomorrow, or in five or 10 years, and whether it will occur with the Dow at 100,000 and gold at $50,000 per ounce or even confiscated, or with the Dow at 3,000 and gold at $1,000." But the end is inevitable, a historical imperative.

2. Nobody's planning for a 'Black Swan'

While the timing may be uncertain, the trigger is certain. Societies collapse because they fail to plan ahead, cannot act fast enough when a catastrophic crisis hits. Think "Black Swan" and read evolutionary biologist Jared Diamond's "Collapse: How Societies Choose to Fail or Succeed."

A crisis hits. We act surprised. Shouldn't. But it's too late: "Civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power."

Warnings are everywhere. Why not prepare? Why sabotage our power, our future? Why set up an entire nation to fail? Diamond says: Unfortunately "one of the choices has depended on the courage to practice long-term thinking, and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions."

Sound familiar? "This type of decision-making is the opposite of the short-term reactive decision-making that too often characterizes our elected politicians," thus setting up the "inevitable" collapse. Remember, Greenspan, Bernanke, Bush, Paulson all missed the 2007-8 meltdown: It will happen again, in a bigger crisis.

3. Wall Street sacked Washington

Bogle warned of a growing three-part threat -- a "happy conspiracy" -- in "The Battle for the Soul of Capitalism:" "The business and ethical standards of corporate America, of investment America, and of mutual fund America have been gravely compromised."

But since his book, "Wall Street America" went over to the dark side, got mega-greedy and took control of "Washington America." Their spoils of war included bailouts, bankruptcies, stimulus, nationalizations and $23.7 trillion new debt off-loaded to the Treasury, Fed and American people.

Who's in power? Irrelevant. The "happy conspiracy" controls both parties, writes the laws to suit its needs, with absolute control of America's fiscal and monetary policies. Sorry Jack, but the "Battle for the Soul of Capitalism" really was lost.

4. When greed was legalized

Go see Michael Moore's documentary, "Capitalism: A Love Story." "Disaster Capitalism" author Naomi Klein recently interviewed Moore in The Nation magazine: "Capitalism is the legalization of this greed. Greed has been with human beings forever. We have a number of things in our species that you would call the dark side, and greed is one of them. If you don't put certain structures in place or restrictions on those parts of our being that come from that dark place, then it gets out of control."

Greed's OK, within limits, like the 10 Commandments. Yes, the soul can thrive around greed, if there are structures and restrictions to keep it from going out of control. But Moore warns: "Capitalism does the opposite of that. It not only doesn't really put any structure or restrictions on it. It encourages it, it rewards" greed, creating bigger, more frequent bubble/bust cycles.

It happens because capitalism is now in "the hands of people whose only concern is their fiduciary responsibility to their shareholders or to their own pockets." Yes, greed was legalized in America, with Wall Street running Washington.

5. Triggering the end of our 'life cycle'

Like Diamond, Faber also sees the historical imperative: "Every successful society" grows "out of some kind of challenge." Today, the "life cycle" of capitalism is on the decline.

He asks himself: "How are you so sure about this final collapse?" The answer: "Of all the questions I have about the future, this is the easiest one to answer. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent ... overspends ... costly wars ... wealth inequity and social tensions increase; and society enters a secular decline." Success makes us our own worst enemy.

Quoting 18th century Scottish historian Alexander Fraser Tytler: "The average life span of the world's greatest civilizations has been 200 years" progressing from "bondage to spiritual faith ... to great courage ... to liberty ... to abundance ... to selfishness ... to complacency ... to apathy ... to dependence and ... back into bondage!"

Where is America in the cycle? "It is most unlikely that Western societies, and especially the U.S., will be an exception to this typical 'society cycle.' ... The U.S. is somewhere between the phase where it moves 'from complacency to apathy' and 'from apathy to dependence.'"

In short, America is a grumpy old man with hardening of the arteries. Our capitalism is near the tipping point, unprepared for a catastrophe, set up for collapse and rapid decline.

15 more clues capitalism lost its soul ... is a disaster waiting to happen

Much more evidence litters the battlefield:

Wall Street wealth now calls the shots in Congress, the White House America's top 1% own more than 90% of America's wealth The average worker's income has declined in three decades while CEO compensation exploded over ten times The Fed is now the 'fourth branch of government' operating autonomously, secretly printing money at will Since Goldman and Morgan became bank holding companies, all banks are back gambling with taxpayer bailout money plus retail customer deposits Bill Gross warns of a "new normal" with slow growth, low earnings and stock prices While the White House's chief economist retorts with hype of a recovery unimpeded by the "new normal" Wall Street's high-frequency junkies make billions trading zombie stocks like AIG, FNMA, FMAC that have no fundamental value beyond a Treasury guarantee 401(k)s have lost 26.7% of their value in the past decade Oil and energy costs will skyrocket Foreign nations and sovereign funds have started dumping dollars, signaling the end of the dollar as the world's reserve currency In two years federal debt exploded from $11.2 to $23.7 trillion New financial reforms will do little to prevent the next meltdown The "forever war" between Western and Islamic fundamentalists will widen As will environmental threats and unfunded entitlements

"America Capitalism" is a "Lost Soul" ... we've lost our moral compass ... the coming collapse is the end of an "inevitable" historical cycle stalking all great empires to their graves. Downsize your lifestyle expectations, trust no one, not even media.

Faber is uncertain about timing, we are not. There is a high probability of a crisis and collapse by 2012. The "Great Depression 2" is dead ahead. Unfortunately, there's absolutely nothing you can do to hide from this unfolding reality or prevent the rush of the historical imperative dead ahead.

Copyright © 2009 MarketWatch, Inc.

Thursday, October 15, 2009

Cover up or Denial: The Truth Behind the Financial Crisis.

I asked George Washington a question: the inability of the Americans to look at the truth of their financial and economic situation and the fact that there is no investigation and no prosecution of the guilty is this a cover-up (malice) or a denial (stupidity)?

There is a big difference between the two, I would guess the difference to be 20 years in prison.

The stakes are high with letting the system work: too many people are dependent on milking money from the system: it start with the simple pensioner who is obliged, via his 401(k) pension plan to invest in the stock market, all the way to Congress which has been bought and paid by Wall street.

Another problem is that the media in the US parrots what the financial bosses have to say. Critical thinking is non-existent as their salaries depend on licking boots.

Imagine the consequences of being confronted with the truth.

So here you are: you have to read alternative media, bloggers, critical web sites to get to the bottom of this.

And as the denial or cover up is America, a second crash would confront them suddenly with reality which would in turn:

  • crash the DJ from 10.000 to 2500 in 2 days
  • whiplash the Plunge Protection Team (PPT) which would in turn close the banking system for an indefinite period (in Argentina the government closed banks incl deposit boxes for 8 (eight) months)
  • create panic and riots on the streets
  • create food supply problems for the population
  • create more riots
  • limit the free press
  • close down certain internet traffic
And then? Dick Cheney for President?

Until such time, we wait and see.

Washington's Blog

The Ongoing Cover Up of the Truth Behind the Financial Crisis May Lead to Another Crash

William K. Black - professor of economics and the senior regulator during the S & L crisis - says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts").

Indeed, as I have previously documented, 7 out of the 8 giant, money center banks went bankrupt in the 1980's during the "Latin American Crisis", and the government's response was to cover up their insolvency.

Black also says:

There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well.

PhD economist Dean Baker made a similar point, lambasting the Federal Reserve for blowing the bubble, and pointing out that those who caused the disaster are trying to shift the focus as fast as they can:

The current craze in DC policy circles is to create a "systematic risk regulator" to make sure that the country never experiences another economic crisis like the current one. This push is part of a cover-up of what really went wrong and does absolutely nothing to address the underlying problem that led to this financial and economic collapse.
Baker also says:
"Instead of striving to uncover the truth, [Congress] may seek to conceal it" and tell banksters they're free to steal again.
Economist Thomas Palley says that Wall Street also has a vested interest in covering up how bad things are:
That rosy scenario thinking has returned to Wall Street should be no surprise. Wall Street profits from rising asset prices on which it charges a management fee, from deal-making on which it earns advisory fees, and from encouraging retail investors to buy stock, which boosts transaction fees. Such earnings are far larger when stock markets are rising, which explains Wall Street’s genetic propensity to pump the economy.
The media has largely parroted what the White House and Wall Street were saying. As a Pew Research Center study on the coverage of the crisis found:

The gravest economic crisis since the Great Depression has been covered in the media largely from the top down, told primarily from the perspective of the Obama Administration and big business, and reflected the voices and ideas of people in institutions more than those of everyday Americans…

Citizens may be the primary victims of the downturn, but they have not been not the primary actors in the media depiction of it.

A PEJ content analysis of media coverage of the economy during the first half of 2009 also found that the mainstream press focused on a relatively small number of major story lines, mostly generating from two cities, the country’s political and financial capitals.

A companion analysis of a broader array of media using new “meme tracker” technology developed at Cornell University finds that phrases and ideas that reverberated most in the coverage came early on, mostly from government, particularly from the president and the chairman of the Federal Reserve...

  • Three storylines have dominated: efforts to help revive the banking sector, the battle over the stimulus package and the struggles of the U.S. auto industry. Together they accounted for nearly 40% of the economic coverage from February 1 through August 31. Other topics related to the crisis have been covered much less. As an example, all the reporting of retail sales, food prices, the impact of the crisis on Social Security and Medicare, its effect on education and the implications for health care combined accounted for just over 2% of all the economic coverage.
  • Actions by government officials and business leaders drove much of the coverage. The White House and federal agencies alone initiated nearly a third (32%) of economic stories studied through July 3. Business triggered another 21%. About a quarter of the stories (23%) was initiated by the press itself and did not rely on an external news trigger. Ordinary citizens and union workers combined to act as the catalyst for only 2% of the stories about the economy.
  • Fully 76% of the datelines on economic stories studied during the first five months of the Obama presidency were New York (44%) or metro Washington D.C. (32%). Only about one-fifth (21%) of the stories originated in any other city in the U.S., and about a quarter of those emanated from two other major media centers: Atlanta and Los Angeles.
As I have previously reported, concentration in the mainstream media (along with a number of other dynamics) has severely undermined the credibility of the media.

Why Should We Care?

Why should we care if there has been a cover up?

Well, initially, if there has been activity which is harmful to the economy and may lead to another financial crisis, wouldn't we want to know about it, so that we prevent it from happening again?

The answer is obviously yes.

But if the government, Wall Street, and the media are all in cover-up mode, then independent auditors, financial analysts and economists cannot shine a light into financial practices to find out what really went wrong.

In addition, if we don't know what's really going on, we can't gauge whether the government's economic policies are working. For example, Time Magazine called Tim Geithner a "con man" and the stress tests a "confidence game" because those tests were so inaccurate.

William Black said:
How do you think we did the stress tests? Like doing a stress test on an airplane wing, but you don’t actually have airplane wing. And don’t know what airplane wing is made out of. It’s a farce.
I agree.

Without accurate information, we will not know if we're heading in the right or the wrong direction.


One of the foremost experts on structured finance and derivatives - Janet Tavakoli - says that rampant fraud and Ponzi schemes caused the financial crisis.

University of Texas economics professor James K. Galbraith agrees:

You had fraud in the origination of the mortgages, fraud in the underwriting, fraud in the ratings agencies.
Congress woman Marcy Kaptur says that there was rampant fraud leading up to the crash (see this and this).

According to economist Max Wolff:

The securitization process worked by "packag(ing), sell(ing), repack(aging) and resell(ing) mortages making what was a small housing bubble, a gigantic (one) and making what became an American financial problem very much a global" one by selling mortgage bundles worldwide "without full disclosure of the lack of underlying assets or risks."

Buyers accepted them on good faith, failed in their due diligence, and rating agencies were negligent, even criminal, in overvaluing and endorsing junk assets that they knew were high-risk or toxic. "The whole process was corrupt at its core."

William Black says that massive fraud by is what caused the economic crisis. Specifically, he says that companies, auditors, rating agencies and regulators all committed fraud which helped blow the bubble and sowed the seeds of the inevitable crash. And see this.

Indeed, as I have previously noted, the giant ratings agencies have a culture of covering up improper ratings (and they essentially took bribes for giving higher ratings).

Black also notes:

  • Everyone involved knew that the CDOs which packaged subprime loans were not AAA credit-worthy (which means that they are completely risk-free). He also said that the exotic instruments (CDOs, CDS, etc.) which spun the mortgages into more and more abstract investments were intentionally created to defraud investors
  • The government knew about mortgage fraud a long time ago. For example, the FBI warned of an "epidemic" of mortgage fraud in 2004. However, the FBI, DOJ and other government agencies then stood down and did nothing. See this and this
  • "Accounting is the weapon of choice in the financial sphere", with the top executives involved in these fraudulent schemes vacuuming out huge profits for themselves and select insiders, and having auditors rubber stamp what's being done
  • In November 2007, one rating agency - Fitch's - dared to take a look at some loan files. Fitch concluded that there was the appearance of fraud in nearly every file reviewed
Black and economist Simon Johnson also state that the banks committed fraud by making loans to people that they knew would default, to make huge profits during the boom, knowing that the taxpayers would bail them out when things went bust.

See also this and this.

The Economy Won't Recover Until We Prosecute

So there was a little fraud, no big deal, right?

Wouldn't looking backwards at fraudulent conduct be distracting for the people, the government, and the economy? Shouldn't we look forward so we can recover?


Specifically, t
he Wharton School of Business has written an essay stating that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable.

The Wharton paper states:
The public will need to "hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again." In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again...
For more on the importance of trust in the economy, see this.

The stakes are high. As Pam Martens, who worked on Wall Street for 21 years, writes:
The massive losses by big Wall Street firms, now topping those of the Great Depression in relative terms, have yet to be adequately explained. Wall Street power players are obfuscating and Congress is too embarrassed or frightened to ask, preferring to just throw money at the problem and hope it goes away. But as job losses and foreclosures mount and pensions and 401(k)s shrink, public policy measures to address the economic stresses require a full set of unembellished facts...

It was four years after the crash of 1929 before the major titans of Wall Street were forced to give testimony under oath to Congress and the full magnitude of the fraud emerged. That delay may well have contributed to the depth and duration of the Great Depression. The modern-day Wall Street corruption hearings in Congress ... must now resume in earnest and with sworn testimony if we are to escape a similar fate.

Monday, October 12, 2009

The Manipulation of the Gold Price

Remarks by Chris Powell

Gold Anti-Trust Action Committee Inc.
New Orleans Investment Conference
Hilton Riverside Hotel
Thursday, October 8, 2009

On Friday, September 25, Jim Rickards, director of market intelligence for the Omnis consulting firm in McLean, Va., was interviewed at length on the cable television network CNBC. Talking about the currency markets, Rickards remarked: "When you own gold you're fighting every central bank in the world."

That's because gold is a currency that competes with government currencies and influences interest rates and the prices of government bonds.

Of course such an assertion in itself was no surprise to my organization, the Gold Anti-Trust Action Committee. To the contrary, that assertion has been our premise for most of our 10 years and we have documented it extensively. It was spectacular that an analyst should have expressed it in the mainstream financial news media and have been allowed to keep talking. But since we met here in New Orleans last year there have been many spectacular disclosures of what central banks meant to be surreptitious intervention in the currency markets to suppress the price of gold -- particularly intervention by the central bank of the United States.

You may have heard GATA derided as a "conspiracy theory" organization. We're not that at all. To the contrary, we examine the public record, produce documentation, question public officials, and publicize their most interesting answers, or refusals to answer. I'd like to review the spectacular disclosures of the last year.

First, in January, was the discovery of a 16-page unsigned memorandum in the archive of the late Federal Reserve Chairman William McChesney Martin:

The memorandum is dated April 5, 1961, and is titled "U.S. Foreign Exchange Operations: Needs and Methods." It is a detailed plan of surreptitious intervention to rig the currency and gold markets to support the dollar and to conceal, obscure, or falsify U.S. government records and reports so that the rigging might not be discovered. This document remains on the Internet site of the Federal Reserve Bank of St. Louis.

Then in August the international journalist Max Keiser reported an interview with the Bundesbank, Germany's central bank, in which he was told that all of Germany's gold reserves were held in New York:

Some people saw that admission as a suggestion that Germany's gold had become the tool of the U.S. government. GATA consultant Rob Kirby of Kirby Analytics in Toronto then pressed the Bundesbank for clarification. On August 24, the Bundesbank replied to Kirby by e-mail with a denial of Keiser's report that was actually pretty much a confirmation:

"The Deutsche Bundesbank," the reply said, "keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centers. This," the Bundesbank continued, "has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centers. Moreover, the Bundesbank needs to hold gold at the various trading centers in order to conduct its gold activities."

The Bundesbank didn't specify those "gold activities" and those "trading centers." But those "activities" can mean only that the Bundesbank is or recently has been surreptitiously active in the gold market.

Then last month an financial market professional and student of history named Geoffrey Batt posted at the Zero Hedge Internet site three declassified U.S. government documents involving the gold market.

The first was a long cable dated March 6, 1968, from someone named Deming at the U.S. Embassy in Paris to the State Department in Washington:

The cable described the strains on the London Gold Pool, the gold-dishoarding mechanism established by the U.S. Treasury and the Bank of England to hold the gold price to the official price of $35 per ounce. The London Gold Pool was to last only six months longer.

The cable is a detailed speculation on what would have to be done to control the gold price and particularly to convince speculators "that there is no point any more in speculating on an increase in the price of gold" and "to establish beyond doubt" that the world financial system "is immune to gold losses" by central banks.

The cable recommends creation of a "new reserve asset" with "gold-like qualities" to replace gold and prevent gold from gaining value. To accomplish this, the cable proposes "monthly or quarterly reshuffles" of gold reserves among central banks -- what the cable calls a "reshuffle club" that would apply gold where market intervention seemed most necessary.

These "reshuffles" sound like the central bank "gold swaps" of recent years.

The idea, the cable says, is for the central banks "to remain the masters of gold."

Then Zero Hedge's Batt disclosed a memorandum from the Central Intelligence Agency dated December 4, 1968, several months after the collapse of the London Gold Pool:

The CIA memo said that to keep the dollar strong and prevent "a major outflow of gold," U.S. strategy would be:

"-- To isolate official from private gold markets by obtaining a pledge from central banks that they will neither buy nor sell gold except to each other."

And "-- To bring South Africa to sell its current production of gold in the private market, and thus keep the private price down."

The third declassified U.S. government document published by Batt at Zero Hedge may be the most interesting, because it was written on June 3, 1975, four years after the last bit of official fixed convertibility of the dollar and gold had been eliminated and the world had been told that currencies henceforth would float against each other and gold and gold would be free trading.

The document is a seven-page memorandum from Federal Reserve Board Chairman Arthur Burns to President Ford. It is all about controlling the gold price through foreign policy and defeating any free market for gold:

Burns tells the president: "I have a secret understanding in writing with the Bundesbank, concurred in by Mr. Schmidt" -- that's Helmut Schmidt, West Germany's chancellor at the time -- "that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce."

Burns adds, "I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market-related price."

While the Burns memo is consistent with the long-established interest of central banks in controlling the gold price, it was still 34 years ago.

But now at last there has been a contemporaneous admission of U.S. government intervention in the gold market. It has come out of GATA's long Freedom of Information Act struggle with the U.S. Treasury Department and Federal Reserve for information about the U.S. gold reserves and gold swaps, information that has been denied to GATA on the grounds that it would compromise certain private proprietary interests. (Of course such a denial, a denial based on proprietary interests, is in itself a suggestion that the U.S. gold reserve has been placed, at least partly, in private hands.)

Responding to President Obama's declaration, soon after his inauguration, that the federal government would be more open, GATA renewed its informational requests to the Fed and the Treasury. These requests concentrated on gold swaps. Of course both requests were denied again. But through its Washington lawyer, William J. Olson -- -- GATA brought an appeal of the Fed's denial, and this appeal was directed to a full member of the Fed's Board of Governors, Kevin M. Warsh, formerly a member of the President's Working Group on Financial Markets.

Warsh denied our appeal but in his letter to Olson he let slip some stunning information:

Warsh wrote: "In connection with your appeal, I have confirmed that the information withheld under Exemption 4" -- that's Exemption 4 of the Freedom of Information Act -- "consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."

So there it is: The Fed today -- right now -- has gold swap arrangements with "foreign banks."

Eight years ago Fed Chairman Alan Greenspan and the general counsel of the Federal Open Market Committee, Virgil Mattingly, vigorously denied to GATA, through two U.S. senators, that the Fed had gold swap arrangements, even though FOMC minutes from 1995 quote Mattingly as saying the U.S. has engaged in gold swaps:

But now the Fed admits such arrangements.

Of course Fed Governor Warsh did not say that the Fed has actually swapped any gold lately, only that it has arrangements to do so -- and, just as important, that the Fed doesn't want the public to know about those arrangements, doesn't want the public to know about the disposition of the country's gold reserves.

There is a reason for the Fed's insistence that the public must not know what it is doing in the gold market.

GATA believes it's because, as the recently disclosed documents suggest, suppressing the gold price is part of the general surreptitious rigging of the currency and bond markets by the U.S. government and that this rigging is the foremost objective of U.S. foreign and economic policy, and because this rigging can't work if it is exposed and the markets realize that they aren't really markets at all.

And the rigging increasingly is being exposed.

Jim Rickards, the analyst who remarked the other day on CNBC that "when you own gold you're fighting every central bank in the world," was not quite right. For lately a few central banks -- those in China, Russia, and even in Europe -- have hinted that they've figured the so-called gold market out and are not playing along anymore. Now there is open reporting and commentary on what is being called the Chinese put on gold, and even open reporting and commentary on international collaboration to replace the dollar as the world reserve currency.

Meanwhile, as in the last months of the London Gold Pool 40 years ago, there has been vast dishoarding of Western central bank gold, and the supplies necessary to suppressing the gold price are drying up. World gold production has fallen dramatically because the rising price is not yet close to the price necessary to make more production profitable. And investors are realizing that most paper gold is not backed by real gold but rather that each ounce of real metal is probably supporting paper claims to 20, 50, or even a hundred ounces.

In any case, there's an important international story here, and GATA plans to pursue it by suing the Federal Reserve in U.S. District Court in Washington for the information being withheld from us about the U.S. gold reserve. Given all the new documentation, we hope that financial journalists and gold market analysts will get interested and start pressing central banks for detailed answers about gold.

This story is important despite this week's dramatic rise in the gold price. For even as the price of gold has been rising, we really don't yet know what a fair price, a free-market price, for gold is, since gold has not traded in a free market for many years. Indeed, since central bank intervention in the currency, bond, and equities markets has exploded over the last year, we don't really know what the market price of anything is anymore. Thus this is a story about the valuation of all capital and labor in the world -- and whether those values will be set openly in free markets, the democratic way, or secretly by governments, the totalitarian way.

The specifics of the gold price suppression operation are complicated, but you don't have to remember them all if you know what they mean.

They mean that there's a currency war going on between central banks. There has been such a war for many years, only the victims were not really fighting back. Now some of them are. Signs of this war are now everywhere -- like the story this week by Robert Fisk in the British newspaper The Independent, which rocked the currency and gold markets:

It described an international plan to replace the dollar in oil trading.

Gold and silver are currencies and will be remonetized by markets eventually if not by central banks as well. But when you invest in currencies like gold and silver, you risk getting caught in the crossfire of the currency war. There was crossfire last night when several Asian central banks intervened in the currency markets to support the dollar:

But this intervention was not officially acknowledged. Much central bank intervention is undertaken secretly.

As in any war, truth is the first casualty in the currency war, even as secrecy is always the first principle of central banking.

Meanwhile, not asking the right questions of the right people seems to be the first principle of most financial journalists and even many gold and silver market analysts. These journalists and analysts take government secrecy for granted, even as the evidence of market intervention and manipulation explodes all around them. Their acceptance of secrecy reminds me of the bumbling police detective played by Leslie Nielsen in the "Naked Gun" movies, particularly his performance in this scene:

Well, there is something to see here.

The precious metals promise great rewards to investors, but to get the necessary information you have to do a lot more work than other investors.

And you have to remember the remarkable properties of gold and silver. It's not just that gold is the most malleable and lustrous of metals, or silver the most conductive and reflective, but also that, once they get into the hands of central banks, bullion banks, and exchange-traded funds, gold and silver become invisible.

If you would like to help GATA, we're recognized by the U.S. Internal Revenue Service as a tax-exempt educational and civil rights organization, and financial contributions to us are federally tax-deductible in the United States. Our Internet site is and the documentation we have discovered is posted there. We'll be grateful for your help and promise to try to make good use of it.

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Saturday, October 10, 2009

US Congress is bought and paid for. Receipt please!

George Washington writes in this excellent piece how Congress is run by bankers. People are now asking why there is no violent revolt in the US. My guess: tummies are full and TV is on.

An Oligarchy is described by Wikipedia as

"a form of government in which power effectively rests with a small elite segment of society distinguished by royal, wealth, intellectual, family, military, or religious hegemony..... Such states are often controlled by politically powerful families whose children are heavily conditioned and mentored to be heirs of the power of the oligarchy. Oligarchies have been tyrannical throughout history, being completely reliant on public servitude to exist."
The problem is that the oligarchs will not abandon power easily. Forget the law, Congress will just change it to suit their needs. So, moral of the story is: "keep the TV switched on".

Bought and paid for.

Lobbyists from the financial industry have paid hundreds of millions to Congress and the Obama administration. They have bought virtually all of the key congress members and senators on committees overseeing finances and banking.

This is easy to confirm in black-and-white. See for yourself: here, here, here, here, here and here.

Manhattan Institute senior fellow Nicole Gelinas says:

The too-big-to-fail financial industry has been good to elected officials and former elected officials of both parties over its 25-year life span

And economic historian Niall Ferguson says:

Guess which institutions are among the biggest lobbyists and campaign-finance contributors? Surprise! None other than the TBTFs [too big to fails].
No wonder two powerful congressmen said that banks run Congress.

No wonder two leading IMF officials, the former Vice President of the Dallas Federal Reserve, and the the head of the Federal Reserve Bank of Kansas City have all said that the United States is controlled by an oligarchy.

With the exception of a handful couple of Congress members who have the American people's interest in mind, Congress is bought and paid for.

Note: A friend on the Hill made an important point to me by email.

Maxine Waters and Ron Paul get almost nothing [from the financial lobby. Sherman, Kucinich, Grayson and Kaptur are some other congress members who have not been bought and paid for].

The story isn’t just that a lot of members are bought and paid for, it’s that some aren’t.

Tuesday, October 6, 2009

Gold vs. Paper Money

MMNews (h/t GATA)

Egon von Greyerz, Managing Partner of Matterhorn Asset Management AG in Switzerland, is known for his clear cut analysis on worldwide financial developments. His message: “The Dark Years Are Here.” In an exclusive interview for MMnews, Mr. von Greyerz reflects on hyperinflation, the end of the “US empire” and his expectations related to the gold market.

Egon von Greyerz is the Founder and Managing Partner of Matterhorn Asset Management AG in Zurich (---> Matterhorn and its gold investment division GoldSwitzerland are part of the Aquila Group, which is the largest independent asset management group in Switzerland. Mr. von Greyerz, born and educated in Sweden, started his career as a banker in Geneva, lived and worked for 17 years in London and has been actively involved with financial investment activities including Mergers and Acquisitions and Asset allocation consultancy since the 1990’s. Every month, he publishes a Gold Market and World Economy Newsletter at Matterhorn’s website to share his views on current developments. GoldSwitzerland’s website is: --->

Mr. von Greyerz, recently I did an interview with investment manager Marshall Auerback and asked him about his position on hyperinflation in the United States.[1] You have read his answer to that question. What are your thoughts on his arguments related to this topic – and why do you have a fundamental different opinion than Mr. Auerback?

Virtually without exception, hyperinflation arises as a result of a collapse of the currency. It does not stem from demand pull or costs running out of control.

The prerequisites for hyperinflation are a deflationary or non-inflationary recession/depression leading to major government deficits. The government issues debt paper to finance the deficits. Initially investors continue to buy the government bonds especially as in the case of the US with the dollar being a reserve currency. This is the first stage of the money printing cycle.

Then foreign investors stop buying the bonds and the government has to buy their own paper. This is the second stage of the money printing cycle which is called quantitative easing (a nonsensical fancy word for money printing).

As the money printing accelerates due to growing deficits, foreigners will no longer buy the worthless paper and the currency begins to fall. This leads to a vicious circle of a falling currency, more money printing, inflation and finally hyperinflation. I realise that this is simplified version of the course of events leading to hyperinflation but I believe in explaining things so that most people can understand.

In my view the quantitative easing will now accelerate both in the UK and the US. Unemployment is going up in both countries. Real unemployment in the US is over 20% which is 30 million people. With dependents there are now 100 million people in the US affected by unemployment.

In the UK real unemployment including benefit seekers is 17% or 6.4 million. Including dependents there are 20 million people affected by unemployment. That means that both in the US and in the UK there around 1/3 of the population is affected by unemployment and the numbers are getting bigger daily. This is an untenable situation.

The next area which will necessitate acceleration in money printing this autumn is the financial system. None of the problems in the banks or the financial system have been solved in the last 12-18 months. They have just been swept under the carpet. The toxic debt situation is still critical. A big percentage of the $1 quadrillion derivatives is worthless.

The lower figure, circa $500 trillion, of outstanding derivatives published by the BIS is just another “adjustment” in order to massage the figures. Other major problem areas in the US are Option A and Alt A mortgages. This could be a bigger problem than sub-prime. Then we have commercial real estate, personal credit, car loans, etc. Most of these loans were raised in good times and there is no chance whatsoever that they will be repaid in bad times. The average Americans is one pay check from bankruptcy. The UK is in a similar position.

My strong opinion is that the US dollar and the UK pound are going to very weak this autumn. This is the beginning of the hyperinflationary stage which will later spread to many countries.

What effects would an hyperinflation in the United States have for the global economy? And could you put it in the bigger picture related to the “US empire”?

There won’t be hyperinflation only in the US but also in the UK as I have just mentioned and in many Eastern European countries as well as the Baltic States. If Ireland were not in the Euro zone they would also have the same problem.

The US, UK and some other countries will have a hyperinflationary depression, but most other countries in the world will have at least severe recessions but many also depressions. There is total interdependence in the world today both in the financial system and trade.

The cause of the problems in the US and UK is the credit bubble and the leveraged financial system. So far almost 100 banks in the US have collapsed this year. The FDIC has run out of money and the government will have to print massive amounts in coming months to fund the FDIC. But until now only small banks have gone under, except for Lehman, but I would expect bigger banks to have major problems again in the next 6-12 months.

I believe that there is a high risk that more than one major US bank will come under severe pressure during this period. The US Government might be able to save one major bank but not two. And since the problem is across the board in virtually all banks it will not stop with one. Take JP Morgan Chase which has almost $100 trillion in derivatives. In case of default it is the gross amount of derivatives that is exposed

When the world’s biggest economy collapses, this will have a major effect on the rest of the world. US imports and world trade in general will drop dramatically and a worldwide depression would be a virtual certainty. There is also a high probability that the world financial system does not survive in its present form.

There is a limit to money printing and we have practically reached that limit. Greenspan was totally incompetent as Chairman of the Fed and so is Bernanke. There was only one solution to every problem – flood the market with liquidity and make money free. The bankers prospered, politicians loved it since their voters thought that they were prosperous. Little did the people understand that their prosperity was false and based on credit. There has been collusive back scratching between politicians and bankers with both sides benefiting enormously from the credit bubble and money printing. Power and greed runs the US economy and many others.

When will politicians ever learn that money printing only serves the purpose of keeping them in power for a short while whilst it totally destroys the economy and money? Voltaire said already in 1729 that “Paper money eventually returns to its intrinsic value – ZERO”. No paper money has ever survived in its original form and the dollar as well as most other currencies will not survive this time either.

It would be a lot better for the world in the long term that we have a proper forest fire so that all the weak growth disappeared and that the forest or the world financial system started again from a sound base. No politician would be so brave as to let the banks fail because with the massively inflated financial system we have today, the consequences will be catastrophic. But sadly it is likely to happen anyway and an uncontrollable collapse of the world financial system is likely to take place within the next few years and change the world as we know it today.

As regards the US empire, it is already finished. Very few nations have any respect for the US financially or politically. The US is conducting its affairs just like the Emperor who had no clothes. They are bankrupt financially and intellectually but they still believe that they are ruling the world. Don’t get me wrong, I love America and the American people but their country is in dire straits once the current crisis has settled, and it could take at least 20 years as I said in my Newsletter “The Dark Years Are Here”. It could also take longer. Remember that the Dark Ages lasted for 500 years.

What advantages does gold posses that the US-Dollar doesn’t have?

Recall the Voltaire statement: “Paper Money eventually returns to its intrinsic value – ZERO.” In the past governments at least had to print the paper to create money but now in our electronic world, all they need to do is to press a button. The temptation for governments throughout history to print money to stay in power has always been too great.

Gold has been money for 5,000 years whilst no paper money has ever survived. Gold can’t be printed and has no debt attached to it. Gold is not one country’s currency and can’t be manipulated, except for in the short term. Also gold is a store of wealth and is indestructible. Virtually all gold ever produced still exists. Gold has a very high value to weight ratio. All the gold ever produced will fit into a 20 meter cube.

Also gold has limited supply. World annual production is around 2,500 tons and declining. This means that only $80 billion of new gold is produced every year which is miniscule in today’s financial markets. There is only about $800 billion of investment gold held privately currently. This is only 0.5% of world financial assets. Central banks worldwide are now net buyers with China and Russia buying whatever they can lay their hands on without pushing the price up too fast.

I have been forecasting for some time that the next phase in the gold price rise would start in the autumn of 2009. We are around $1,000 now and I see a rapid rise from here. Virtually no average investor or fund holds gold today. This will change very soon. But investors are not going to trust paper gold in the future but will want physical gold. With a limited supply rapidly increasing demand for gold can only be satisfied at much higher prices and they are coming very soon.

In my view, there is only one way to buy gold. It has to be physical and it must be under your own personal control, stored outside the banking system. This is what Matterhorn Asset Management and our division GoldSwitzerland do for investors.

One of your recent newsletters for “Matterhorn Asset Management” was titled “The Dark Years Are Here”.[2] Can you let us know what will happen in the near foreseeable future besides inflationary developments that make you think we’re about to enter dark years?

Unemployment will continue to increase worldwide. Government deficits will escalate with revenues declining and expenditure soaring. The toxic loans and derivatives in the financial system will never be repaid. Because of these massive problems the recession will lead to depression and then hyperinflation.

Eventually hyperinflation ends in deflationary collapse. With the financial system likely to collapse life will not be the same in the world for a very long time. Law and order will be virtually impossible to maintain so there will be social disorder and major increase in crime. There will be anarchy in many countries. There will be food shortages and extreme poverty. There will be wars. The world will not be the same for a very long time.

But there is always a positive side to every problem. The family will again become the kernel of society. Today’s society which is based on material values and instant gratification will disappear and so will the golden calf. Instead soundly grounded ethical and moral values will return, built around family and close friends.

One of the reasons why the gold price is rising is in fact because inflationary tendencies are feared. On the 7th of September, the price jumped for the first time (since February of this year) over the “magical” number of US$1000 per ounce. Will it rise furthermore? If it fails to do it, experts say we could see a sharp decline in bullion and precious metals mining stocks. Put simply, if the price of gold fails to climb past US$1,000 per ounce and instead, it falls below US$920 per ounce, it will be a negative omen.”[3]

Gold will not fail to go up from here. If there has ever been a clear investment situation, this is it. A financial system built on quicksand will see to that. Also, hyperinflation and money printing will see to that. Some people ask, what about if we get a deflationary collapse instead, won’t gold go down then?

I see the probability of a deflationary collapse as very low. Governments will not stop the printing presses. But even if I were wrong and we get a deflationary collapse, gold is still the best protection.

Because in a deflationary collapse there is absolutely no chance whatsoever that the banking system will survive. No loans or derivatives could ever be repaid in a deflationary asset implosion. This is why gold is a win-win situation whether we get inflation or deflation.

Since 2002, “Matterhorn” advised its investors to put up to 50 percent of their liquid assets in physical gold. That’s quite unusual. Why 50 percent? And moreover, which elements should a wealth preservation portfolio a ) contain, and b) not contain in these times of crisis?

It was very simple. Gold was ridiculously cheap at $300 when we advised investors to put 50% of their assets in the yellow metal. Already back in those days we forecast that the housing and credit bubbles would lead to major problems in the banking system and inflation/hyperinflation.

For the investors who followed our advice the 50% of their liquid assets in physical gold has become over 80% after gold has appreciated more than three times. We now feel very comfortable with 80% in physical gold. A smaller percentage of that could be in silver. Silver has more potential then gold to appreciate but it is very volatile. I believe that 10-15% could be in precious metals mining stocks.

There is enormous potential in these stocks but the problem is that it is not wealth preservation. If something happens to the financial system, investors might not get access to their stocks for years. Also there is the risk of nationalization of mines or punitive taxation when precious metals prices surge.

Stocks might go up in a hyperinflationary scenario but not in real terms. The Dow and most world stock markets are down over 80% against gold in the last 10 years. I expect another 90% fall at least of the Dow against gold. I would definitively not recommend government bonds or any other bonds. Investors are unlikely to be repaid in normal money and bond prices will collapse as interest rates go up.

There are many ways to invest in gold. At “Matterhorn” you do not offer everything you could. Why do you exclude certain things and why do you recommend to store gold outside the banking system?

Physical gold held in your own name and stored safely outside the banking system is the only true form of wealth preservation.

Virtually every other form of gold is paper gold. Many ETF’s don’t hold physical gold and even if they do, all you have is a piece of paper which is of no use if the banking system collapses. I would not store the gold in a bank due to the risk of the banking system failing.

And storing gold at home is definitively not a good idea. With the increase in crime in the next few years, this is very risky. There are two major and very good companies that sell gold on the internet and store it outside the banking system. But you don’t own your own gold bars but fractions of a 400 oz bar. If something happens to the financial system you cannot go and collect your gold bar to pay your expenses.

There is clearly no absolute method of wealth preservation that protects investors against all eventualities. But it is vital to have a plan that gives the best available level of protection for peace of mind.

On September 3rd, Hong-Kong recalled all its physical gold holdings from depositories in London.[4] What are your thoughts on this?

I think they are right. You should have your own gold under your own control. There is so much lending of gold taking place between central banks that there might not be any gold left at the end.

As you know there are rumors for years that Germany’s gold reserves are not located in Germany but in New York. Let’s assume this is the case: wouldn’t now be the perfect time to order them back? And if it was the case that the total amount of Germany’s gold holdings were stored in the vaults of the Federal Reserve of New York – why should this be of interest to the German population?

Yes, and for the same reason that Hong Kong took its gold back, I think Germany should. Firstly, only then do they know if the gold still exists and secondly I wouldn’t want another nation to control my gold, especially not a bankrupt nation.

One last question, Mr. von Greyerz. You are familiar with the claims of the Gold Anti-Trust Action Committee (GATA), that the gold market is rigged by “the Gold Cartel” in order to suppress the price of gold.[5] Do you follow the activity of Bill Murphy and his camp with particular sympathies?

Yes, I am very familiar with GATA and their activities. I am convinced that the gold market is rigged (as well as the silver market) and Bill Murphy and GATA have done a great job in trying break the gold cartel. My view is that very soon paper gold manipulation will be ineffective and only physical gold will count. The world will then find out that a lot of central bank gold has been lent out and there will be major discrepancies in physical gold. This will lead to audits of central bank gold by new governments since the existing ones are part of the cartel. I am sure that we will then find out that there is lots of gold missing or double counted. The result of this will have a major impact on the gold price.