The US Federal Reserve has no monetary options whatsoever. They have been backed into the corner since 2007. It was coerced to reduce interest rates as the subprime mortgage crisis morphed into an absolute bond crisis, as the Jackass loudly stated during that fateful summer. The US bank leaders claimed it was contained. It was not. The USFed was backed into the corner in 2009, unable to raise interest rates from near 0% (the Zero Interest Rate Policy disease) and put into effect its propaganda theme of an Exit Strategy. The US bank leaders knew the longest period of time for the Fed Funds rate to stick at 0% was nine months, ensuring a future disaster. They saw it. They claimed a move toward normalcy. It did not come. The Jackass called them liars with a message of deception to manage the USTreasury Bond and stock market. They did not hike rates, as their bluff was called. The USFed looked weak as a result. They began to shed thick layers of prestige. The USFed was backed into the corner in 2010, unwilling to use printed money to monetize USTBonds, giving birth to the second dreaded Quantitative Easing disease. They did anyway. So the ZIRP & QE twin scourges became part of the landscape of ruin. The USFed denied they would embark on QE. The Jackass called them liars with a message of deception. They did embark on QE, then QE Lite, then QE2, all replete with denials. The USFed has lost all its prestige, all its credibility, and all its respect for economic analysis. They are actually a central office for the Syndicate. They are the focal point of the failure of the central bank franchise model.
The unfolding drama on Capitol Hill with the USGovt changed the entire picture, thus putting a toxic icing atop a hemlock pie with arsenic candles giving off deadly gas. In private discussions, my full expectation was for no debt default, not even close, with the debt limit extended, the unfolding American Tragedy saga taking place on a global stage. My call was for a path of least resistance to be taken in consensus, but it would involve decision avoidance and political expedience, if not constitutional cowardice. The players in the USCongress, along with the leader himself, were exposed as pusillanimous, deceptive, polarized, destructive, wayfaring fools. They are as much fully equipped squires for both the banking industry and the military establishment. They avoided a debt disaster in default, but they did not avoid a debt rating downgrade. They have given the system license to debase the USDollar further, as Gold has responded in a breakout. The President is so clueless as to believe patent reform can make a difference. The bigger obstacles are poor education, minimal math & science requirements, tendency to play video games & text messages than studying (even inside school classrooms). Of course the debilitation is compounded by the US lacking a strong industrial base. So better patent protection would mean the US corporations could more effectively protect their offshore jobs, where the majority of jobs are located.
Worse, the players on the global debt debate stage exposed the USGovt as Greece times one hundred. The veil of ruin and arrogance has been lifted for all to see, the deep blemishes and skin cancer visible for all to see. The USGovt borrowing costs are near 0% for the same reason that the Greek borrowing costs are at 30%. BOTH NATION'S FINANCES ARE BROKEN. To cap it off, the tombstone on the US Republic will feature a Super Committee to recommend the most difficult of budget decisions. Such fanfare without proper label. The committee is a formalization of the Politburo process, a perverse interwoven political stranglehold fabric that takes the worst of the Weimar Republic and melds with the worst of the Fascist Business Model. Slowly forming is the Fascist Dictatorship that follows logically from nationalization of Fannie Mae and AIG, the home mortgage cesspool and the derivative black hole. The growth of czars will grow dangerously. Look in the near future for a wave of office shutdowns. The USGovt is required to pay its creditors. But it will act with negligence and shut down offices. See the Federal Aviation Agency, which must contend with 70,000 job cuts. It has lost its funding, while the USCongress went on its August vacation. An improvement would have come if the cut in budget came to the Transportation Security Admin (TSA) to alleviate the public from airport assaults that draws tears from old ladies, anger from defiant citizens, and consternation from most everybody. By the way, the planned date for the Super Committee to convene and make its recommendations is in the middle of the Presidential Primary season next summer. Expect a circus.
EFFECT & PREPARATION
Speaking of spineless and pusillanimous, Moodys and Fitch call the debt deal with the USGovt a good first step. They maintain the AAA rating. The brave Lancelot might be Standard & Poor which has delivered a louder firmer threat of debt downgrade if not significant progress to reduce the budget deficit. They all three seem more like boys cracking whips without threat of anything substantial. Their offices might be Oslo'ed if they actually downgraded. The USGovt debt deal accomplished nothing but to raise the debt limit, which means THE USGOVT IS PERMITTED TO DEBASE THE USDOLLAR CURRENCY FOR ANOTHER YEAR OR MORE. It is actually quite funny to watch and listen to hacks on the tube, as they share their shaman wisdom. They told the public that when the debt limit was extended and the crisis was averted, Gold would probably subside and relax downward. What nonsense! Gold demand would continue from free rein to create more money to cover more permitted debt. They know nothing about gold. They seem to find no relevance or importance that the US money supply is rising exponentially, without benefit of even economic flatline stability. The inefficient usage of new money is a story for the ages, a symptom of the ruin in progress. This point is made in the Hat Trick Letter in detail.
The Gold market correctly interpreted the vacant gutless debt pact, a deal to make a future deal, a decision to make future decisions. The Gold price rose on Tuesday by $40 and the Silver price rose the same day by $1.50 per ounce. The damage is more hidden than what is seen in nominal price. The short covering process has begun. The defended $1600 barrier has been breached, smashed, and overrun. Those who recklessly placed their short positions at that level did not anticipate the power of this bull market, or recognize the strong attack from all four flanks. The $40 barrier is also being overrun. Gold will continue to fight the political battles, to bust the cartel phalanx, and to enable the harsh light of truth to shine on the wrecked USDollar and ponzi ridden USTreasury Bond. Silver will continue to run impressive breath-taking strides through the opened pathways. Expect a run past the $50 mark within the next two months, likely sooner. Things always seem to happen more quickly these days. The clock is running faster with all the fever and ruin.
Prepare for continuation in the long drawn out economic deterioration, business squeeze, financial depletion, and systemic failure. The USGovt debt default process is one for the history books, part of a bold Jackass forecast made in the wake of the Lehman, Fannie Mae, and AIG visible disaster in September 2008. At work was the more important but less visible destruction of the US banking industry. It has not recovered since the Lehman engineered bust kill job, fully exploited by Wall Street. Expect in the next couple years economic martial law, deep rationing, and economic implosion. Protect from lost life savings, forfeited wealth to the USTreasury Bond monster, and the fast pace of toxic paper spoilage. The answer is Gold & Silver, if not commodity stockpiles and energy deposits. For the small investor, the safest is precious metals with no paper securities and thus no counter-party risk. The GLD & SLV funds are both fraudulent, to be revealed in time, if not already for those with discerning eyes. They should be avoided, unless the investor wishes to miss the climax runup in price. The precious metals Gold & Silver have received zero positive press by the corrupted financial media, as well as very little respect despite being the best performing asset in the last decade. Ignore their deceptive messages, and climb aboard the Gold ship with Silver cabins, and watch the unfolding disaster from the heat tempered windows. The Fiat Paper locomotive has already gone over the cliff. The debt deal only defined a lower crash point in the abyss far below.
THE BIG HIDDEN BOND LEVER
The USGovt has the wonderful benefit of Interest Rate Swap contracts. They produce leveraged magnificent artificial demand for the 10-year USTreasury. Despite huge uncontrollable bond supply for USGovt debt, contrary to standard myopic finance theory promoted in universities (see USFed-funded chairs), the bond yield continues to decline. In no way does migration from stocks to bonds justify the move under 2.60% on the TNX yield. Every time some negative USEconomic news is released, and plenty of such lousy data has come in the last several weeks, a big bond rally comes. It is aided with a vast under-current of Interest Rate Swaps. Between 80% and 86% of the total derivative market is IRSwap contracts. That market was measured at $243 trillion by the Office of Comptroller to the Currency in its 1Q2011 report of the Top25 commercial banks and trust companies. Shockingly, Morgan Stanley increased to $51 trillion their derivative book in the first quarter alone, with zero coverage by the sleepy intrepid lapdog financial press. Let the reader decide if $9.1 trillion in added notional value spread over three months would have much effect on USTreasury Bonds.
The hacks who operate at the bond desks have pathetically little knowledge of their own sector. Most bond traders actually believe the IRSwap application has no practical effect on the USTreasury market, with no end product. They are at best stupid and at worst corrupt. As friend and colleague Rob Kirby points out, the IRSwap contract has a real actual end demand in a USTreasury Bill or Note or Bond. Typically, they sell a short-term USTBill in order to buy a long-term USTreasury, like a 10-year note. This is all within the structure of the IRSwap contract. Thus the fast move below 2.60% from 3.00% on the TNX yield.
THE BIG LIE
The USEconomy is stuck in a recession that worsens each quarter. The current recession is measured between minus 5% and minus 6%, is in progress, and is intensifying. The USGovt runs a devious stat lab shop. It uses every scummy trick known to the stat rats. The Jackass is a refined furry stat rodent, not a rat. Consider an honest method with integrity, which is actively avoided. A simple method is to take the nominal data (raw untreated numbers) for a full year and compare them to the nominal data for the previous full year, then adjust by a legitimate reasonable price inflation index. The Shadow Govt Statistics folks do a fantastic job in honest economic estimation, the best on the planet in my opinion. The SGS Consumer Price Inflation was about 9% in 2010 and currently runs about 10%. Anyone with half a brain can attest to the validity of their CPI estimate. The honest assessment of the USEconomy performance is minus 7.5% recession in 2010, much worse for 2009, seen in the red circle. Let's be conservative and call the valid CPI at 7% last year and 8% this year. Then the recession of 2010 would have been recorded at minus 5.5% last year and worsening in the current year.
The above graph is utterly shocking and calls the entire USGovt stat team liars. Notice how in 2009 (green circle) the nominal GDP growth was minus 2%. Apply any CPI index to register something worse. That bears repeating. The unadjusted economic growth data for full year 2009 was negative, without inflation adjustment. Anything positive for price inflation would mean a worse recession in 2009 than minus 2%. The quarterly method used by the Bureau of Economic Analysis is corrupt and deceptive, intentionally so. They measure quarters in sequence and apply a raft of absurd adjustments led by the hedonic quality lifts, then multiply their gross error by four to annualize. Even Goldman Sachs realizes the economy is sliding into reverse. Even Martin Feldstein must see the poor taste of federal pork on the plate, as he has given a 50-50 chance for a recession reversal. He must not know much about economics, since the recession is in its fourth year.
USFED WITHOUT OPTIONS
The USFed realizes to their dismay that debt monetization does not stimulate the USEconomy. They will be pushed into purchase of USTreasurys for a simple reason. Another big lie of past Quantitative Easing motivated to stimulate the USEconomy has come to light from direct exposure. The QE process will become an integral part of the monetary policy. The purpose for its continuation has been and will continue to be to prevent USTreasury auction failures which would paint a global billboard sign of USGovt insolvency, ruin, and default. The events from this week have profound meaning. The deliberations over the lifted debt ceiling were interwoven in toxic fashion with the budget debate. USGovt expenditures and taxation issues were hotly debated, enough to produce a stalemate that clearly continues. The main message behind the imminent new budget & debt limit deal is that the USGOVT IS GIVEN FREE REIN TO DEBASE THE USDOLLAR CURRENCY, while nothing has been done to reduce the .5 trillion deficit. The USGovt debt should lose its AAA rating due to chronic .5 trillion deficits, whose lethal continuation was forecasted by the Jackass in 2009. At that time, most people were suffering from deep shock. They were told by captains on the Titanic Helm that the next annual national budget deficit would be under trillion. The Jackass warned of consecutive calamitous .5 trillion forecasts. That was a correct call. One third of the .3 trillion cumulative USGovt debt is from war adventure. War spending for Iraq and Afghanistan since 2001 has totaled .3 trillion. An almost hilarious partial solution was offered by the bold Tyler Durden of Zero Hedge, so on point and so sensible as to be funny. Shut down 15% of the USGovt offices and save 0 billion per year, save .5 trillion in ten years. My suggestion is to disband the USCongress by referendum, and to replace it with a group of city mayors and county leaders who would block lobbyists to their offices. Let the House of Representatives represent the people from where they live and work, and not represent the banks and corporations whose lobby budgets are huge.
INSOLVENCY PLAGUE
The last two years have proved convincingly that treating insolvency with liquidity solves nothing. The ineffective blunt tool wielded by the USFed has resulted in a rise in the cost structure globally, not just in the United States. The deceptive message promulgated has been to engineer a lower USDollar for the stated purpose of stimulating the US export trade. This is a great lie! They wish to support the big US banks in unending fashion, until the end marred by systemic failure. The USEconomy has inadequate critical mass in the industrial base (see Chinese Foreign Direct Investment since 2002). The excess capacity in factories and workers does not prevent cost inflation (great irony, since lost base), as the clueless cast of US economists has insisted erroneously. The US bank sector is insolvent, heavily reliant upon naked USTBond sales and narco money laundering. The story broke in 2009 that the Wall Street firms had over trillion in undelivered USTBonds sold to clients and funds. They are chronically not delivered after 30 days, because they were sold naked illicitly by Wall Street. They are formally called Failures to Deliver. But the good news (at least to Wall Street) was that it was a fertile source of liquidity and revenue generation when investment banking hit the wall. Imagine selling lemonade at a stand but not providing a cup of the tasty product. The money laundering of dirty 'Agency' funds through Wall Street is uniformly applied across its pillars to the Syndicate. The process and criminality is out in the open. The laughable part is that no felony charges are ever filed, since deals are cut. Last year Wachovia completed a plea bargain, paid a fine, and walked away. The details escaped the sleep US financial press. Wachovia paid a mere 1/30-th of one cent per dollar of illegally laundered funds. The funds entered from Mexico. Chalk up a small business cost, a very small cost indeed. This is not a new story.
Back to the mainstream. The housing market is a guaranteed two-ton millstone to depress both households and banks by the neck. My annual forecast is for two more years of housing bear market decline. That always sounds better and more credible than a permanent bear market, which was the private Jackass forecast made privately in 2007. Read: permanent. Each year strong factors such as heavy new home supply and continued job loss make obvious another two years of powerful home price declines. The ugly joke in the bank industry is 3 million homes lie on bank balance sheets, 3 million homes stand in foreclosure, and 3 million line up in default. The overhang is staggering, enormous, magnificent, disastrous, and crippling. To claim the US housing market is in recovery is the most egregious of lies. The additional hidden supply of homes makes impossible the clearing within the market. The bank balance sheets are still growing, despite their recent decisions to send the REO bank owned homes for sale in the open market. That has resulted in the resumption of the visible price decline, noticed by the dumb slow and half blind analysts who fail to apologize for a skein of wrong forecasts.
NO MONETARY POLICY OPTIONS
The USFed has no monetary options whatsoever. The USFed realizes debt monetization does not stimulate economy. But it does prevent USTreasury auction failures. The painful direct impact of USFed response to crisis and taken action is a uniformly rising cost structure. Price is determined by Supply & Demand, but also the USDollar. The current budget patch deal will result in further dampers. The termination of extended jobless benefits, part of the latest debt deal, has a direct obvious effect. The Austerity Pills have begun to come to the US throats. The low USTreasury yields mean the Interest Rate Swap machinery is working overtime. The low bond yields force low saving yields for certificates of deposit at banks. The result is a damper effect on the USEconomy, not a stimulus. The only stimulus is to the stock market, which has become heavily reliant upon the Working Group for Financial Markets, which does its work at 10am and 3pm in the form of miraculous market index recoveries. The propaganda continues in mindless fashion. The public is told that the policy is in place, it needs time to work, and the second half recovery is to be expected. We are not morons!! The second half of 2011 will feature a massive powerful headline Gold & Silver breakout rally that reflects the broken USDollar, the broken USGovt finances, the broken USEconomy, and the broken USFed leadership. The rally will capture global attention and encourage additional investment demand. Even the USMint badly aggravates the Silver shortage domestically.
GOLD FACTORS
The gold price is driven by certain immutable principal themes, each powerful in its own right. Combined, they form the basis for a global Paradigm Shift in wealth transfer. Gold has run roughshod over the 00 supposed barrier. When it reaches 00, it will make quick strides and long strides in a sudden move to 00. The overriding themes are:
- ultra-low interest rates, the 0% scourge that urges asset protection
- lost faith in sovereign bonds, ruined on periphery, moving to core
- exploding government deficits, made worse each year.
Most every Gold bull market has been triggered by ultra-low interest rates. The term is Negative Real Rates, which means the prevailing interest rate is way below the prevailing price inflation rate (in the real world). Since 2009, the USFed has held the Fed Funds rate near 0%. It is a signal of ruin, not stimulus, verified by its chronic continuation. All major currencies will fall together versus Gold, as in the USDollar, the Euro, and the British Pound. The Hat Trick Letter in the last two months has shown vivid detail of the broad Gold bull market breakout. A contrary wind is also detected. The Swiss Franc, the Japanese Yen, the Aussie Dollar, and the Canadian Dollar have risen versus the more broken major currencies. What they have in common is grand mineral and resource wealth. Their still fiat paper currencies are indirectly supported by the commodity riches, making them much more favorable to FOREX traders. The best that central banks can achieve is stability among the major currency exchange rates. This theme is their next propaganda plank of deception. They can claim stability while ignoring the resumed rising cost structure. The mantra must be recognized. Inflate or die means more rising costs, without benefit of increased wages.
Nothing changed since the COMEX ambush of naked shorting in early May, the avalanche that prompted the parade of deceptive analysts to proclaim the end of the Gold trade, the end of the Anti-US$ trade. They were wrong, loud wrong, and we called them wrong. Mark Twain defined 'dogmatic' as wrong at the top of the voice. How true! How appropriate! Nothing changed on the endless spew of debt, the endless spew of bank welfare, the endless spew of budget deficits, the endless spew of wrecked toxic sovereign bonds, the relentless rise of costs, the relentless lost job security, the relentless assault on households. The debt crisis has moved into new ground, with the USGovt debt moving onto the same stage as Greece, Portugal, and Ireland. The next broken legs to walk on stage will be Italy and Spain. The biggest surprise will be the entry on stage by France, which looks much more like a PIGS nation than the others. A simple cluster analysis (nifty multi-variate statistical technique) would reveal France as part of the PIGS pen easily. See the debt ratio charts of the past for a basic pattern. They might lead the PIGS in a Mediterranean Central Bank with a common devalued Latin Euro currency. It would be devalued at least 30%, maybe 50%. A split is coming to the Euro Monetary Union, since the PIGS nations cannot carry such Euro currency in their tortured insolvent tattered wallets any longer. The July Hat Trick Letter covered the split in detail. My belief is firm that France will remain with Germany, since the German financial firms own 95% of French Govt debt, a dirty secret that never is mentioned. The Germans will need squires to carry their bags to meetings.
After the EMU split occurs, look for 20 Lehmans to go bust in Europe, as their large banks are badly exposed and heavily damaged. The key is Italy, and tethered Spain. The cross-border debt exposure is magnificent. Bear in mind that Italy is the #8 biggest economy in the world. Italy is responsible for 17% of all European sovereign debt. The practical implications are immediate, as the Italian Treasury must roll over 69 billion Euros in August and September. The Italian Govt debt due between July and end 2011 totals 175 billion Euros, whose financing simply will not happen. Italy must find buyers for a staggering 500 billion Euros in new securities by the end of 2013. Italy will break the Euro, period! A massive Gold Rush will come when money flees supposedly safe haven sovereign funds. The big European banks will drop like wrecked pillars.
WOW ON JAPANESE YEN
Check out the Japanese Yen currency breakout. This was forecasted by the Jackass in April as a paradox concept. The Japanese financial institutions, insurance firms, and central bank are selling USTreasury Bonds in order to pay for grand Reconstruction costs. The J-Yen blew through the 130 level this week. It translates to under 76 on the Dollar/Yen index. That prompted Bank of Japan action, but it will prove futile. They called 78 a line in the sand to defend. It was overrun. The Japanese financial firms are selling USTreasurys on a massive scale. As reported in the Hat Trick Letter two months ago, sale of USTBonds is a better alternative than more fiscal deficits or more debt monetization. Instead of prompting more domestic price inflation, they will take their risk with a rising Yen exchange rate, and watch the export damage. Never overlook the rampage of Yen short covering, as the Yen Carry Trade continues to shut down after 20 years of abuse. The USEconomy will import price inflation from Asia, a diverse effect. See Wal-Mart already on this factor. My view is that the next pact (just like in April with the hasty G-7 Meeting) to halt the J-Yen rise will be the guts of GLOBAL QE. The central banks in the next several months will drop their transparency initiative. Hyper monetary inflation is not a message they wish to provide gory details for.
FIRST STRONG DOLLAR & NOW WEAK DOLLAR
The Strong Dollar Policy of the 1990 decade resulted in a gutting of US industry. Many jobs were sent off-shore. The primary emphasis became the clean industry behind the financial sector, whose size grew markedly, leading up to the 2000 tech telecom bust. Then came the housing bubble then bust, and the deadly aftermath of insolvency that plagues the nation. The Weak Dollar policy engineered in the last two years as part of the Quantitative Easing programs has resulted in more gutting of US industry. The great majority of households and businesses are suffering from a uniformly rising cost structure, but not rising wages. The support of the banker largesse bailouts and USTreasury Bond debt monetization has lifted the entire cost structure. What is missing clearly is a Sound Fair Dollar Policy. But the Gold Standard is considered a third rail with heavy electric current to kill anyone who touches it. The standard will emerge from the ruins that befall the United States in its economy, its financial structure, and its political morass.
QUICK CONCLUSION
Gold rises from threat of chaos amidst debt default. Gold rises from continued debasement of the USDollar and other major currencies. Gold rises from the powerful current of price inflation. Gold rises from strong investment demand, side by side with Silver investment demand amidst chronic annual deficits. Gold rises from the increasingly recognized ruin of sovereign bonds. Where are the stooges who shot their mouths off in May? Do they merely preach as spokesmen for the Syndicate on the financial news channels?? Bring them back to explain where they went wrong. Start with two hacks named Dennis Gartman and Nouriel Roubini.
