Archive for October, 2011

Greek deal … just another kick in the can

The recently announced deal that resolves the Greek debt situation is simply the latest ‘kick’ to keep the ‘debt can’ moving down the road.

Market reaction has been mostly positive, as anticipated, to permit the market makers to get their profits off the table before the time comes that no more ‘kicks’ will work.

The Greek debt is not resolved, the deflationary spiral is not over and hyperinflation still remains a risk worldwide.

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“Carthago delenda est”

According to a speech President Obama gave in 2011,

We want Gaddafi gone. And this is non negotiable. Now we are shooting at him; but the purpose of the shooting is to make him back off,  not to crush him.”

It would appear that the ‘gone’ in this statement has been accomplished.  Now one must wonder at the state of the Libyan people.

Many may posit that a ‘form’ of democracy will take hold, this may yet be the result.  This will not be a one-stop-shop though.  The issues that drove Gaddafi from office remain and the struggle over the spoils in Libya has only just begun.

The sense that more political and economic struggle remains is clear, as is the likelihood that this situation on the north African coast is not over nor is it limited to just Libya and Egypt.

Expect the unrest to continue in both Libya and Egypt and for the issues that these people are struggling for to cause further disruptions across north Africa.  There are very real dangers for an expansion of a new form of colonial ‘association’ to take hold, there is a definite fear from many that are paying the price in lives and toil now that their efforts will be seconded by others waiting in the wings to hand over the spoils to European or American interests.

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The Greatest Daylight Robbery … ever.

Bloomberg reported on the 18th of October that Bank of America holding corp was getting support from the Federal Reserve to move at least some of the $74 TRILLION (with a T!) derivatives account holdings to an FDIC secured trading unit.Pen is mightier than the sword

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counter-parties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

The FDIC regulators are being overwhelmed by the savvy and strategic positioning of their opponents in the Federal Reserve and Treasury Department.

This action amounts to the largest single ‘heist’ in financial history, done in daylight, and likely to end up being forced into approval via the Treasury, as they work with great diligence to complete the looting of the US public purse.

The neuveau barbarians are not at the gates any more, they are in command of the world economy and moving it towards a planned collapse that leaves the minority IN CHARGE. Bank robbers no longer need guns to effect their shakedowns, though history shows that such events never go quietly.

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The collapse is not about ‘just money’ … the whole system is at risk

Tipping point.

Like when a glass of water is so full that the next drop will overflow it.

Which way will the riches flow out? For whose benefit?

This interview places more of these issues into a context … extending on a horizon much further out than just today and tomorrow or yesterday.

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System Shift

I quote Canadian Ian Gordon in his recent interview with The Gold Report. In response to the interviewers question on how long this will last he says,

“TGR: My final question is, how long will winter (of the long cycle) last?

IG: It will last until the debt has been eradicated from the economies of the world. So, to give it a date is difficult. If the whole world monetary system collapses under the massive mountain of debt that has accumulated worldwide, then it will happen reasonably fast, and a new world monetary system will evolve. I think that new system will be based on gold.”

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Cairo Demonstrations return

Violence has broken out in Cairo, beginning today at about 8 p.m. Demonstrators outside the state television station began firing on soldiers patrolling the area, according to reports from government sources. Two soldiers were reported dead and 25 soldiers were reported wounded so far. Other reliable reports say that multiple vehicle fires have broken out and that tear gas is being fired by the police at the crowd. Demonstrations are also under way at Tahrir Square.

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Dexia rescued … again

BELGIUM will take total control of the local arm of the troubled Franco-Belgian bank Dexia, Prime Minister Yves Leterme said after a cabinet meeting in Brussels.

Leterme said the move would “make secure” the retail bank inside Belgium and free it from “any risks resulting from the environment within parent body Dexia SA”.

Finance Minister Didier Reynders said his Government had offered four billion euros ($5.51 billion) for Dexia Bank Belgium, an amount he said was “reasonable”.

He told a news conference today: “With this agreement the wish of the Belgian Government is not to remain indefinitely in (control of) its bank nor to leave rapidly but to ensure its continuity.”

Reynders said Belgium would guarantee the financing of the future “bad bank” that would remain after the dismantling of the Dexia group, to the tune of 60 per cent, or 54 billion euros.

The guarantee by the three states – France, Belgium and Luxembourg – where Dexia is present amounted to 90 billion euros, he said, as against 150 billion when the bank was saved in 2008.


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EU House of Cards

Today’s comedic relief is brought to you, once again, by Europe. We weren’t going to write about the other side of the world today. But in this type of market you need an occasional good laugh, even if it threatens your wealth at the same time.

— After realizing the plan to leverage the European Financial Stability Facility (EFSF) was idiotic, the lemmings in Europe are running over to a new ‘solution’ – bank recapitalization. Like most things bureaucrats dream up, it’s good in theory. How it plays out in practice will be entirely different.

— That’s not the funny bit though. Check this out: Apparently European finance ministers have asked the European Banking Authority (EBA), Europe’s top (we use the word loosely) banking regulator, to stress test Europe’s banks – again.

— You may remember the same incompetent organization conducted stress tests in 2010 and 2011. The latest one, completed in July this year, found European banks to have a capital deficiency of just €2.5bn. At the same time as Athens was burning, these pompous fools didn’t even model a sovereign default. Now, just a few months later we’re talking about a need for €200 billion in fresh bank equity.

— But instead of all being sacked and the organization shut down – as would happen in the private sector – these imbeciles get another go. We can only conclude the EBA is a corrupt organization in the palm of the bankers. And it’s supposed to be their regulator?

— Look, the bank recapitalization plan is on the right track. We don’t dispute that. But it’s a plan being put together by a bunch of squabbling politicians who put their own re-election prospects ahead of anything else. So the chances of it actually being done properly are remote.

— As we wrote in our Sound Money. Sound Investments email update yesterday – bank recapitalization will be beneficial as long as they are accompanied by bad debt write-downs. The main problem with the global economy today is the amount of bad debt festering on bank balance sheets. This impedes the creation of new, productive debt.

— It also affects confidence. Banking is – and has always been – a business based on confidence. Without it, banks are exposed as the highly leveraged and fragile institutions that they are.

— So to improve confidence you need to purge the bad debt out of the system. This requires bank recapitalization to absorb the coming write-downs. Before we go any further, just what do we mean by ‘bank recapitalization’?

— The process is best explained with reference to a bank’s balance sheet. In balance sheet land, a company’s assets are equal to its liabilities and equity. The ‘equity’ value of a company is traded on the stock market. It is this portion usually referred to as ‘bank capital’.

— If you’re still with us, we’ll show you French basket case Société Générale’s balance sheet.

Assets €1.158 trillion

Liabilities €1.106 trillion

Equity €52.1 billion

— Here’s how it works. A write down in the value of its assets must be matched by a write down in the value of the equity. If the value of the banks assets fell by just 5 per cent, all the equity would be wiped out and the bank would be insolvent. This just goes to show how highly leveraged European banks are.

— Actually the bank’s assets have probably already fallen by 5 per cent. Luckily, it’s not required to ‘mark its assets to market’. Banks aren’t allowed to fail remember?

— Société Générale’s current market capitalization is just €14 billion. This is what investors think the bank’s equity value is worth. It will probably prove optimistic.

— This is where a recapitalization comes in. The Euro bailout fund, the EFSF, will contribute funds to banks in need of new equity capital. This should take the form of ‘preferred equity’, which will rank above existing equity when it comes to absorbing write-downs. That way anyone punting on European bank shares will take a hit before new taxpayer funds do.

— If all the bad sovereign debt in the system is really purged (which it won’t be, but bear with us) most of the existing equity holders will be wiped out. The pie-in-the-sky plan would then be for the preferred equity to convert to ordinary equity. Once this whole debt crisis thing blows over, say by Christmas*, the taxpayers would sell out for a profit, proving the eurocrats’ plan to be pure genius.

— There’s no harm in dreaming of course, but it won’t work out that way. There will be squabbling about which banks receive capital and how much is actually needed. If estimates of €200 billion are correct, the recapitalization plan will leave the EFSF just about empty, with no more funds to buy other struggling sovereign debt.

— And don’t forget, bad sovereign debt is the cause of the crisis. Insufficient bank capital is just a symptom of the problem. A Greek default still awaits.

— The Europeans are only just beginning to realize how big their problems are. So enjoy the rally, it won’t last for long.

* Remember in World War One the conventional European wisdom was the ‘it would be over by Christmas’. Christmas 1914 that is.

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Keep calm and carry on …

Great advice for Gold and Silver investors.

The recent drop in the price of Gold & Silver is most likely due to margin calls on the leverage investors.

By Peter Schiff, CEO of Euro Pacific Precious Metals

The past couple weeks have seen a strong pullback in both commodity prices and stocks. Gold fell sharply off its peak after soaring just past $1,900. Volatility in commodity, currency, and equity markets has been very high recently, and these short-term price movements have Wall Street pundits in an uproar.

As gold prices soared, many advisors recommended investing in the yellow metal with appeals to the “bandwagon effect”. A rising price, they argued, indicated changing sentiment, and thus future appreciation. For those who bought on this reasoning, a falling price is a bad omen.

In addition, for a while, gold prices were rising even as stock prices were falling. As a result, some investors bought gold to hedge stock market risk. When gold eventually followed equity prices lower, these trades were unwound.

But as my readers know, following the crowd has never been the reason to buy gold. After all, that same logic would have recommended buying a house in Phoenix five years ago. Since the fundamentals still point to gold’s long-term viability, our phones have been ringing off the hook with customers smartly seeking to take advantage of the dip.


It’s important to understand the fundamental reasons for owning gold, and those reasons have not changed. The US government embarked on a decades-long spending spree of historic proportions. To finance the resulting debt, the Federal Reserve is printing money furiously. Because most every central bank governor appears indoctrinated in the Keynesian economic philosophy, foreign central banks are simultaneously printing euros, yen, francs, yuan, and pounds to “keep up.” Of course, this competitive devaluation actually represents countries shooting themselves in the foot.

Don’t expect any abrupt changes either. The Fed’s philosophy – a resolute faith in central planning and debasement – has been unchanged since Paul Volcker stepped down as Chairman in 1987.

Rather than considering any change of direction, the Federal Reserve Board is likely asking itself: “Should we print $50 billion or $500 billion in our next round of stimulus?” “Can the ECB bailout Greece now or do we first need to bail out the ECB?” “Should we call our money-printing’liquidity assistance’ or ‘quantitative easing’?”Or perhaps, “Do we have enough ink refills for all those printing presses?”

You may think I’m joking, but this is quite serious. While monetary policy was bad under Greenspan, Ben Bernanke has literally instituted a revolutionary devaluation program for the dollar. And gold is the only way to avoid his guillotine.


Let’s remember that it is the fundamental value of an asset which dictates its long-term market price. Yet for some reason, many see this relationship backwards – they use the short-term market price to extrapolate the fundamental value. Consider a car on the dealer’s lot: if the price of the car falls tomorrow, it becomes a better deal. If the price rises tomorrow, the car has becomes less attractive.

This principle is equally true in long-term investments. I believe that gold’s fundamental value is far higher than $1,600, and far higher than $2,000. So, while it may be unsettling for some of those who own gold to see steep short-term price declines, remember to focus on the fundamental value of the asset, not the spot price on the market today.

Has the fundamental value of gold fallen in these past two weeks? Quite the opposite.


The Fed is still trying to find ways to manipulate the bond market with the newly announced “Operation Twist.” This is yet another plan to suppress yields, encourage spending (as if too little spending was America’s problem), and paper-over the untenable interest payments hanging over Washington. The manipulated US bond market is perhaps the greatest bubble in existence. Further manipulation only makes it more unstable in the long-term, and when that bubble bursts, gold should skyrocket.

Meanwhile, the European debt crisis is quickly spreading to Italy. On Sept. 28th, Italy was selling bonds at yields twice as high as the previous sale at the beginning of the year. The ECB may be able to keep Greece afloat, but Italy is the eurozone’s third largest member. That’s a load too heavy for the ECB to bear.

This is especially true in the wake of Moody’s downgrade of two of the largest French banks – Societe Generale and Credit Agricole. As reported in the Wall Street Journal, “[Moody’s] said its decision to downgrade the banks included the assumption of debt restructuring that would cost investors up to 60% on Greek sovereign debt, 50% on Portuguese and Irish debts, 10% on Spanish debt and 7% on Italy’s debt.”

In other words, the Western financial system is a debt-laden house of cards. This is the root of the current market panic. But what’s harder to explain is why investors are responding by selling gold and buying dollars and euros. Then again, I was always told not to look a gift horse in the mouth.


Do not get caught in the exuberance or pessimism of short-term movements, even if they’re sharp. Observe the fundamentals – the events in Europe, the looming budget calamity in the US, central bankers’ steadfast strategy of debasement, and emerging markets’ continued diversification into precious metals. These are the main drivers for gold’s long-term appreciation.

To my readers who may have purchased metals just before this pullback, your concern is understandable. But I believe this bull market has a long way to run, and the rise up ahead looks even steeper from these levels.

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Greece to stay

The EU community cannot currently afford to pay the rescue amounts needed for Italy, Spain and possibly France if the EU decided to allow Greece to fail.

Therefore the ‘cheaper’ course to follow is to continue to ‘muddle along’ with another bail out package.

The band-aid money will continue to flow into Greece to permit the time needed to re-finance and re-capitalize the other European nations and banks that are heavily exposed to Greek debt.

There will be an announcement, likely involving some land guarantees, or other revenue potential in the future for Germany and Finland from Greek assets, coming on Friday, most likely AFTER the close of trading in New York so that there will be time to ‘re-set’ portfolios of those in the know before the wider investment community learns via ‘official’ announcements.

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