Joined: 25 Sep 2006
Location: Perth, Australia
|Posted: Sun Nov 23, 2008 2:59 am Post subject:
|A tsunami of hope or terror?
As the world slips into recession, it is also on the brink of a synthetic CDO cataclysm that could actually save the global banking system.
It is a truly great irony that the world’s banks could end up being saved not by governments, but by the synthetic CDO time bomb that they set ticking with their own questionable practices during the credit boom.
"Any one who has the power to make you believe absurdities has the power to make you commit injustices." Voltaire
Joined: 18 Jan 2006
|Posted: Sun Nov 23, 2008 6:38 pm Post subject:
|Very, very interesting article KiwiKeith.
Worth posting in full.
I think any mass transfer back to the banking sector -as outlined below-
could well be halted by a wave of litigation claiming fraud by the banks.
|A tsunami of hope or terror?
Commentary byAlan Kohler
7:28 AM, 19 Nov 2008
As the world slips into recession, it is also on the brink of a synthetic
CDO cataclysm that could actually save the global banking system.
It is a truly great irony that the world’s banks could end up being saved
not by governments, but by the synthetic CDO time bomb that they set
ticking with their own questionable practices during the credit boom.
Alternatively, the triggering of default on the trillions of dollars worth of
synthetic CDOs that were sold before 2007 could be a disaster that tips
the world from recession into depression. Nobody knows, but it won’t be a
A synthetic CDO is a collateralised debt obligation that is based on credit
default swaps rather physical debt securities.
CDOs were invented by Michael Milken’s Drexel Burnham Lambert in the
late 1980s as a way to bundle asset backed securities into tranches with
the same rating, so that investors could focus simply on the rating rather
than the issuer of the bond.
About a decade later, a team working within JP Morgan Chase invented
credit default swaps, which are contractual bets between two parties
about whether a third party will default on its debt. In 2000 these were
made legal, and at the same time were prevented from being regulated,
by the Commodity Futures Modernization Act, which specifies that
products offered by banking institutions could not be regulated as futures
This bill, by the way, was 11,000 pages long, was never debated by
Congress and was signed into law by President Clinton a week after it
was passed. It lies at the root of America’s failure to regulate the debt
derivatives that are now threatening the global economy.
Anyway, moving right along – some time after that an unknown bright
spark within one of the investment banks came up with the idea of putting
CDOs and CDSs together to create the synthetic CDO.
Here’s how it works: a bank will set up a shelf company in Cayman
Islands or somewhere with $2 of capital and shareholders other than the
bank itself. They are usually charities that could use a little cash, and
when some nice banker in a suit shows up and offers them money to sign
some documents, they do.
That allows the so-called special purpose vehicle (SPV) to have
“deniability”, as in “it’s nothing to do with us” – an idea the banks would
have picked up from the Godfather movies.
The bank then creates a CDS between itself and the SPV. Usually credit
default swaps reference a single third party, but for the purpose of the
synthetic CDOs, they reference at least 100 companies.
The CDS contracts between the SPV can be $US500 million to $US1
billion, or sometimes more. They have a variety of twists and turns, but it
usually goes something like this: if seven of the 100 reference entities
default, the SPV has to pay the bank a third of the money; if eight
default, it’s two-thirds; and if nine default, the whole amount is repayable.
For this, the bank agrees to pay the SPV 1 or 2 per cent per annum of the
Finally the SPV is taken along to Moody’s, Standard and Poor’s and Fitch’s
and the ratings agencies sprinkle AAA magic dust upon it, and transform
it from a pumpkin into a splendid coach.
The bank’s sales people then hit the road to sell this SPV to investors. It’s
presented as the bank’s product, and the sales staff pretend that the bank
is fully behind it, but of course it’s actually a $2 Cayman Islands company
with one or two unknowing charities as shareholders.
It offers a highly-rated, investment-grade, fixed-interest product paying a
1 or 2 per cent premium. Those investors who bother to read the fine
print will see that they will lose some or all of their money if seven, eight
or nine of a long list of apparently strong global corporations go broke. In
2004-2006 it seemed money for jam. The companies listed would never
go broke – it was unthinkable.
Here are some of the companies that are on all of the synthetic CDO
reference lists: the three Icelandic banks, Lehman Brothers, Bear
Stearns, Freddie Mac, Fannie Mae, American Insurance Group, Ambac,
MBIA, Countrywide Financial, Countrywide Home Loans, PMI, General
Motors, Ford and a pretty full retinue of US home builders.
In other words, the bankers who created the synthetic CDOs knew
exactly what they were doing. These were not simply investment products
created out of thin air and designed to give their sales people something
from which to earn fees – although they were that too.
They were specifically designed to protect the banks against default by
the most leveraged companies in the world. And of course the banks
knew better than anyone else who they were.
As one part of the bank was furiously selling loans to these companies,
another part was furiously selling insurance contracts against them
defaulting, to unsuspecting investors who were actually a bit like “Lloyds
Names” – the 1500 or so individuals who back the London reinsurance
Except in this case very few of the “names” knew what they were buying.
And nobody has any idea how many were sold, or with what total face
It is known that some $2 billion was sold to charities and municipal
councils in Australia, but that is just the tip of the iceberg in this country.
And Australia, of course, is the tiniest tip of the global iceberg of synthetic
CDOs. The total undoubtedly runs into trillions of dollars.
All the banks did it, not just Lehman Brothers which had the largest
market share, and many of them seem to have invested in the things as
well (a bit like a dog eating its own vomit).
It is now getting very interesting. The three Icelandic banks have
defaulted, as has Countrywide, Lehman and Bear Stearns. AIG has been
taken over by the US Government, which is counted as a part-default,
and Freddie Mac and Fannie Mae are in “conservatorship”, which is also a
part default – a 'part default' does not count as a 'full default' in
calculating the nine that would trigger the CDS liabilities.
Ambac, MBIA, PMI, General Motors, Ford and a lot of US home builders
If the list of defaults – full and partial – gets to nine, then a mass transfer
of money will take place from unsuspecting investors around the world
into the banking system. How much? Nobody knows, but it’s many trillions.
It will be the most colossal rights issue in the history of the world, all at
once and non-renounceable. Actually, make that mandatory.
The distress among those who lose their money will be immense. It will
be a real loss, not a theoretical paper loss. Cash will be transferred from
their own bank accounts into the issuing bank, via these Cayman Islands
special purpose vehicles.
The repercussions on the losers and the economies in which they live, will
be unpredictable but definitely huge. Councils will have to put up rates to
continue operating. Charities will go to the wall and be unable to continue
helping those in need. Individual investors will lose everything.
There will also be a tsunami of litigation, as dumbfounded investors try to
get their money back, claiming to have been deceived by the sales
people who sold them the products. In Australia, some councils are
already suing the now-defunct Lehman Brothers, and litigation funder, IMF
Australia, has been studying synthetic CDOs for nine months preparing
for the storm.
But for the banks, it’s happy days. Suddenly, when the ninth reference
entity tips over, they will be flooded with capital. It’s possible they will
have so much new capital, they won’t know what to do with it.
This is entirely uncharted territory so it’s impossible to know what will
happen, but it is possible that the credit crunch will come to sudden and
complete end, like the passing of a tornado that has left devastation in its
wake, along with an eerie silence.
Here's an analysis of the situation by
the largest litigation funder in Australia
|SYNTHETIC, SINGLE TRANCHE, NON SUB-PRIME,
COLLATERALIZED DEBT OBLIGATIONS REFERENCED
TO MULTIPLE, CORPORATE DEFAULTS
By Hugh McLernon - 23 September 2008
1. As can be seen from the topic, this is an area infested with jargon.
2. The wizards who created financial derivatives commenced their work by
creating a completely new language for themselves and their investors.
3. In their new world, black has become white and up has become down.
The meaning of words has become what the author wants them to mean.
4. In this world, artifice reigns over substance. Remember the general
definition of “jargon” is “obscure and often pretentious language marked
by circumlocutions and long words”. By way of example I give you the
“bankruptcy remote vehicle” which is a topic to which I shall return.
5. Remember too, that the definition of “circumlocution” is “the use of an
unnecessarily large number of words to express an idea”.
6. In many CDO documents one needs to trawl through 15 to 20
definitions in order to understand a single phrase.
7. Warren Buffett is best known for his description of derivatives as
“weapons of mass financial destruction” but, around the same time as he
made that comment, he also pointed to the circumlocution of derivative
documentation – “and CDO squareds – I figured out on a CDO squared
you have to read 750,000 pages to understand the instruments that were
8. Buffett seems to me to be a straight talker and the arch enemy of
circumlocution. I think he arrived at his weapon of mass financial
destruction comment, in large part, because of their complication.
9. The best known sub prime CDO in Australia is the Federation CDO
promoted by Lehman Brothers. I have tried to reverse engineer that CDO
and I can vouch for Buffett’s number. The federation CDO includes
tranches from forty different residential mortgage backed securities which
in turn sit above tens of thousands of residential mortgages. No one in
their right mind would try to carry out a full due diligence on such a
10. As will become apparent from what follows, I believe that jargon has
played its usual role in synthetic CDO’s ie.. to obfuscate and to leave the
reader in a position where he must rely, almost totally, upon the author.
11. I will seek to persuade you that these synthetic CDOs are not financial
instruments at all but, are rather complicated gambling tickets.
12. My secondary premise is that these particular CDOs represent the
final chapter in the derivative story – history will see them as the last and
most artificial effort of the derivative engineers.
13. To make good these premises I will first outline the players and their
14. The promoters of synthetic CDOs are generally international
investment and trading banks. Not all of the banks but most of them -
including some here in Australia.
15. The banks essentially lend their reputation to the deal. Not even the
most sophisticated investor would read all of the documents involved in
any given synthetic CDO so the reputation of the promoter is paramount.
16. The promoter structures the CDO. It pays the bills.
17. All of the Wall Street investment banks and many others, including;
Royal Bank of Scotland, ANZ, Westpac, Barclays were involved as
promoters in these transactions.
18. The promoter employs the lawyers to prepare the documentation, the
spin doctors to spread the story and the muscle to ensure that regulators
did not intervene.
120. It may turn out to be the case that the amount of CDS and CDO
issued during 2007 doubled from the previous year (which must mean
that 10’s of trillions of dollars of business were done in the area in 2007
alone) precisely for this reason.
121. These factors will make the rating agencies more and more
susceptible to claim from those who lost money during this process.
122. We do not know yet whether the banks set up back to back
arrangements with their synthetic CDO’s. i.e.. did they hold the principal
position so that they will get the major windfall which is about to occur or
did they pass that on to others in CDS transactions so that the bank
adopted a central position between both groups of investors.
123. If this occurred then the banks will not be the big winners from the
failure of the CDO’s- that benefit will have been passed on to the back to
124. The banks will suffer however if investors at the front end are able
to upset their transactions and the bank is unable to avoid the back end
of the transaction.
125. No matter who are the winners and losers out of this mess it is a
debacle which will be with us for the next decade as the CDO & CDS
transactions come to their full term.
Third and last update on diversification report.
Hugh McLernon 11/11/08
1. Our first three reports on this matter paint a gloomy and deteriorating
2. It remains the case that all but 5 of the 32 companies reported upon
are likely, and in some cases certain, to fail in one way or another.
3. The 5 companies that should escape the financial disaster presently
engulfing all financial markets are: Credit Suisse, Goldman Sachs, JP
Morgan, Citigroup and UBS. There are some others that may escape.
4. The U.S regulators have done all (or perhaps, nearly all) in their power
to prevent these companies from defaulting – in many cases, they have
forced companies to be taken over by other, more robust, companies.
5. It may well be the case, however, that the problems are simply too
large and too entrenched to be capable of massage. Readers also need to
keep in mind that these are but 32 of some 6 or 7 hundred companies
which have been included in the default baskets of synthetic Australian
Many of the other companies carry on business in the financial arena and
occupy the second ring out from the epicentre occupied by the 32
companies referred to in our earlier reports.
6. A new problem is now emerging – who will decide which companies
have failed and who will report upon their demise. Lehman Brothers is now
gone – it was one of the major promoters, and its interest in antipodean
CDO’s has no doubt waned.
7. This is our last report on this topic because the next six months will tell
the tale – there will either be sufficient company defaults to destroy the
value of all synthetic Australian CDO’s or the likelihood will be that the
CDO’s will limp on to maturity with partial, but not sufficient, defaults so
that their holders are paid out upon that maturity.
8. It is now apparent that fraud has been a hallmark of many of these
corporate failures. This being the case, it is impossible to say that the full
financial picture is available on all of the companies.
9. Company 1 – American International Group (Insurer) – in mid
September 2008 the US Government lent US$85billion to AIG. The loan
carries interest at about 12.5%. It is thought that most of the loan has
been drawn down. In return for the loan, the government received an
80% position in the company. Leading up to this point, the company
shares had fallen by 91% in the previous year. The shares are now
trading at US$2.11 (Document 2). Management has said that it will begin
selling assets as quickly as possible to clear the debt. There is serious
doubt as to whether the prices received for these assets will be sufficient
to clear the debt and it is likely that the company will eventually be wound
up. On October 7 Moody’s downgraded AIG from A3 to A2 and revised its
outlook on AIG to negative (Document 1). On 8 October 2008 the US
government agreed to advance a further US $38 billion in addition to the
US $85 billion (Document 3). AIG has been “bailed out” by the US
Government – it is not yet in default but may go into default if its asset
sales do not enable it to repay the US$123 Billion lent to it by the
government. As at 10 November 2008 the size of the bailout has grown to
US$150BN! (Document 4). It now appears that unless the US Government
fails then AIG will not fail.
10. Company 2 – AMBAC (Bond Insurer) – at the time of our last report
on 27 June 2008, AMBAC was trading at US$1.61. Over the following
months the share price went as high as US$9.00 but has now fallen back
to $US1.67 (Document 6). In mid September, Moody’s placed the ratings
of AMBAC and its subsidiaries on review for a downgrade. This was based
on the ongoing losses arising from the sub-prime crisis (Document 5). The
AMBAC share price is heading towards zero as it continues to
haemorrhage money from the sub-prime crisis. It is likely to fail. On 6
October 2008, the company announced a write-down of $401Million for
the month of August. If this company suffers a further downgrading,
which appears likely, then it will not have sufficient funds to cover its
obligations (Document 5). Ambac lost $2.43BN in the third quarter
(Document 7) and had its rating cut by 4 steps to BAAA1 by Moody’s
(Document 8 ). Ambac is alleging fraud by others (Document 9) and is
itself being sued. (Document 9A). Short of a government bailout this
company seems terminal.
11. Company 3 – Bear Stearns (Investment Bank) – This company was
taken over by JP Morgan. If JP Morgan were to fail, then this would
probably constitute two defaults, ie: one for JP Morgan and one for Bear
Stearns. (refer company 16 below). Bear Sterns has been purchased by
JP Morgan- it has not defaulted on its debt – its future is now dependant on
the future of JP Morgan.
12. Company 4 – Beazer (Home Builder) – Since our last report this
company along with all of the other major US home builders under went a
From about mid July 2008 through to mid September 2008 the share price
appreciated from around $3.50 to around $9. By 10 November 2008 the
price had fallen back to $2.88. (Document 10). In the meantime Beazer
was under investigation by the Securities and Exchange Commission in
relation to its accounting procedures. The SEC alleges that the company
fraudulently altered its earnings and it improperly recorded $100 million
of revenue in 2006. (Document 11). This company is likely to fail.
13. Company 5 - Centex (Home Builder) - This company saw its share price
rise from $12 in mid July to around $18 in mid September. By 10
November 2008 it had fallen to $10.85. (Document 12). On 8 October
2008 Moody’s downgraded all of Centex’s rating because of problems the
company was having with its credit. (Document 13)......
FULL PDF AT:
Minds are like parachutes.
They only function when open.
Joined: 07 Feb 2006
|Posted: Mon Nov 24, 2008 10:13 am Post subject:
|Could be good.
Litigation=publicity=possible increase in mass education=outlined enemy=action
Meanwhile Gold is hauling nicely.
Joined: 18 Jan 2006
|Posted: Mon Nov 24, 2008 10:25 am Post subject:
|Here's some old-fashioned "horse sense"
from a poster on MarketWatch.com.
Expect to hear none of this in the media:
|It is flawed theories that the politicians believe are still good, but need
"tweaking." The Banking elite for 95 years have managed to convince
Congress that each crisis from 1913 on was not their fault and that
fractional banking, loose credit and then tight credit, is not the problem
but, "unknown things," or "black swan events" are the problem that
nobody could foresee. They say that the system is absolutely necessary if
we are to have growth that keeps up with our needs and standard of
People want solutions and there are solutions. Several people have
complained that the people predicting a depression aren't offering
solutions but, they are. It is just that the solutions are not acceptable to
the majority of people or to our politicians.
The solutions, such as stopping borrowing, most spending, and bringing
the troops home from most of the world are not only not popular but
would cause a depression in and of themselves first before the nation and
its economy started to rebuild.
The current "solution" of delay isn't a solution no matter how they say
they are trying to "fix" this crisis. They are adding more debt to a
problem caused by debt. It wasn't the interest rates in and of themselves
or overpriced homes or 42% of job growth tied to housing or some of the
other things they say need to be "fixed." It was debt. Whether debt is at
the personal, city, state, corporate, or federal level, it was too high. Much
of the debt isn't tied to housing but to cities and states and corporations
AND of course, the Federal Government. They weren't buying houses but,
because the pin p**** to the debt bubble was housing, it gets blamed.
We have increased debt to GDP growth for 40 years, from 1968 on. From
that $1 for $1 GDP growth to now where some say it is $5 to $1 and
others might say infinity in that now, no matter how much they borrow,
inflation adjusted positive GDP may not even be possible. The trend line
indicated that 2015, using Government inflation numbers was the point of
no return. However, if we use inflation calculated the way we use to, we
have only had one quarter of positive GDP in 8 years. That would indicate
we have already passed the point of where adding more debt won't grow
GDP positive after real inflation adjusts it down.
The solutions are still there. Stop borrowing, cut most federal spending,
cut most city and state spending, bring the troops home, let the dollar
collapse, have a brief and very hard depression and rebuild with a sound
monetary and economic and tax policy. Tax policy is another solution.
Since we spend more for tax compliance in thousands of businesses than
we pay in taxes from them, a simple tax code would mean they could
actually pay more taxes and still be competitive and have a better profit.
We are paying 35% in hidden taxes and compliance costs according to
some studies and that has been going on for decades and yet, in spite of
all the testimony to Congress about it, we have yet to even remove one
tax line from the tax code but what many more are added. 17,000 pages
and 40,000 more pages of rulings, tax letters, etc. are used by companies
to comply with taxes and use any exemptions that might apply.
That too, is another solution and while it won't stop a depression caused
by consumer spending drying up, it needs to be included in rebuilding the
nation. Restoring the nation to a republic would help too but, that isn't
likely either as it would mean returning the power of taxation to the states
and having them send their share to Washington instead of hoping
Washington sends them some from all the taxes Washington collects to
waste and spend on pork and wars, and other things. It is obvious
Washington can't be trusted with the power to tax. Let each state decide
which taxes are best given their demographics and resources and let
them send only enough for a limited federal government to Washington.
There are several other "solutions" but don't count on any of them being
sought by our Congress or President because they are too busy moving
us away from a republic and to a "new world order." That is the purpose
of this crisis or else it is being used to move us to a "global community."
A global financial system is just the first step.
Minds are like parachutes.
They only function when open.
Joined: 18 Jan 2006
|Posted: Mon Nov 24, 2008 11:12 am Post subject:
|And now a couple of reality
checks from Karl Denninger:
|Change We Can('t) Believe In
I guess we've got at least part of our answer.
Friday about an hour before the market closed, it was "leaked"
that Obama intends to appoint Tim Geithner as head of Treasury.
Mr. Geithner is the President of the NY Fed. Among other travesties he
has overseen we can include the Bear Stearns and Lehman, along with
AIG fiascos. The first can legitimately be categorized as a looting
operation, as Bear was told they had a term credit facility only to see it
evaporate a couple of days later - giving them no time to work something
else out. We never have seen details of exactly what happened there,
and we've seen zero detail or explanation on the big pile of money that
apparently "disappeared" from the NY Fed when Lehman went "poof."
While there are worse picks Obama could have made, this is hardly
"change." Indeed, unless Mr. Geithner comes with a promise to open
the books of the NY Fed (and the Washington Fed), which I rate about as
likely as that of Santa Claus personally appearing in my fireplace in a
month or so, we certainly aren't getting "change" in Treasury. Opacity
reigns, even though its all our money (at least in theory.)
The market apparently liked it (from one pigman to another!) and rallied
500 points into the close Friday. Never mind the suspicious timing
of the announcement - one hour before options expire?! I've seen
obvious manipulation before (August 07 anyone?) but this was so
transparent as to be ridiculous. One hour later, no market impact.
I guess Obama can read a chart too eh? Hmmm.....
Next we heard that Obama wants to "stimulate" the economy. He's
missing the obvious (not that this is a surprise), which is that our problem
today is debt load, and you can't "stimulate" something with more debt
when carrying capacity has been exhausted.....
|Tired of The Crash?
The market and economy will not stop falling apart until:
Paulson is fired and his policies cease.
We have transparency in balance sheets - for every firm on the
exchange. No exceptions. All Level 3 asset mark models and assets
identified - period.
Bernanke withdraws all his alphabet soup programs or is removed from
office and his successor does, and the "crowding out" in the credit
Its that simple, and all three must happen before we will see any sort of
sustainable bottom put in.
This doesn't mean we can't have "rip your face off" rallies - we both can
But the market and economy will not bottom until the three things above
are done, and the only way that is going to happen is when you make it
That's right. Your 401k is a 201k (and will soon be a 41k) because you
(collectively) sat on your butts last October when I started running
petitions and because we have managed to garner only 50-odd people
There should be hundreds of thousands.
There should be general strikes - people who simply refuse to
go to work, en-masse, across the nation.
There should have not been one Congressman or woman who voted for
the bailout returned to office.
Bottom line: You have and are consenting to this economic depression -
and make no mistake, that is exactly what the credit markets are saying
we are entering right now.
Remember that more than a year ago Subprime Mortgage Bonds forecast
a total meltdown in that industry, and that nearly all of the companies in
that space would go bankrupt. We were told that this sort of
"Armageddon" scenario would not and could not occur, and that the credit
market was playing "histrionics". A number of so-called "smart money"
investors (Wilbur Ross anyone?) stepped in and bought these supposedly-
undervalued instruments - and promptly got slaughtered when the actual
performance was worse than the credit markets were forecasting.
The credit market was right and those who said it couldn't happen were
Now the credit market is saying that we are going to have more defaults
than happened during The Great Depression. That is, it is forecasting a
Greater Depression that worse than the 1930s. The TNX (10 year yield)
is threatening to break three percent, down another 6% (!) this morning
to 3.16%. The bottom going back as far as my charts extend is 3.07%.
The 13 Week T-Bill (IRX) stands at 0.1%, which is for all intents and
purposes zero. The Effective Fed Funds trading rate has been between
0.2 and 0.3% since the last putative rate cut to 1% - that is, effectively
Corporate AAA commercial mortgage spreads are at extreme wides,
standing at over 700 bips; added to reference this means that super
senior AAA commercial mortgages now yield more than 10%. Given the
level of credit enhancement in these deals this forecasts default rates of
more than thirty percent in this space. Similar extreme spreads are
found among both the "high grade" and "high yield" corporate bond
The credit market is telling you that we are headed for an S&P 500
trading at three hundred and a DOW at under three thousand. That we
are headed for unemployment north of 20% on the U6 (broad) measure,
and GDP contraction of twenty percent cumulatively from top to bottom.
That's one person in five in the US without a job, deflation of 20%
cumulatively or more in prices, over 2 million businesses going bankrupt
in the next three years, and literal starvation and privation - all across
America. No part of this nation will be spared.
The market callers are all saying all this is impossible.
Even though every thing the credit market has forecast thus far since this
problem began has been not only proved correct but conservative; that
is, if you bought believing that it would not be as bad as the credit market
is forecasting, you have had your head handed to you.
So who are you going to listen to?
Ben Bernanke ("we won't have a recession") and Hank Paulson ("the
economy is fundamentally strong"), along with all the market "callers" on
CNBC, who have been wrong every single time for more than 18 months?
Or the credit market which has been right 100% of the time thus far since
this crisis began?
Welcome to The Greater Depression, and make sure you remember that
the blame for this event belongs to Congress, Henry Paulson, Ben
Bernanke, and of course..... you, since you have failed to insist and force
your government (and yes, its your government, just as its my
government) to stop these clowns.
We will get out of this when - and only when - you stop believing that you
can "have a pony", "a chicken in every pot", "economic stimulus", and
"free credit for everyone."
Only when we the people (collectively) are either all bankrupted or we
come to our senses and demand that the fraudsters be locked up and the
bad debt purged by default will the system clear and both the economy
and market find a sustainable bottom.
Those are the only two choices folks, and right now, you're choosing
bankruptcy and Depression for all.
Minds are like parachutes.
They only function when open.
Joined: 16 Dec 2006
|Posted: Mon Nov 24, 2008 5:43 pm Post subject:
|"Adrift in a squall. Snapped mast. No rudder. Taking on water."... sums it up beautifully!
FED PLEDGES TOP $7.4 TRILLION
November 24th, 2008
Adrift in a squall. Snapped mast. No rudder. Taking on water.
The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
Joined: 18 Jan 2006
|Posted: Tue Nov 25, 2008 6:59 pm Post subject:
|That's one heckuva lot of money.
$7.4 Trillion is not chump change.
So what is going on?
|Continued Complacency Raises The Specter Of the Unthinkable
To say our self-serving bureaucracies have been printing a great deal of
currency to bail themselves out their ill-conceived exploits that
characterized the Bush years could easily be said to be an
understatement. Perhaps a better way of putting things is the drunken
sailors have finally come around, looked at what they have done, and
realized it's far better to tie one on again than to actually attempt
conscionable governance. They know however. They know the ship is
sinking, and it's just a matter of time before the US, and its almighty
dollar ($), goes down like the Titanic......
Jim Sinclair has posted some interesting insights on his website that
explains the leveraged speculator community is holding the $ up at
present, but that once they finish unwinding all their bad bets, it should
decline. And with this assessment I must agree, referring to the situation
as a 'synthetic squeeze', a term first coined by Richard Russell in this
Another pertinent term that was brought into view earlier this decade in
connection with the massive inflation efforts carried out by Japanese
banks (in cahoots with the Fed) is 'quantitative easing', which is
apparently something we should get ready for as both the Fed and other
central banks around the world attempt to save globalization by letting
loose hyperinflation. This is of course bad for the $ as well, being the
world's reserve currency.....
....there are multi-trillion dollar Credit Default Swap (CDS) and Interest
Rate Swap (IRS) bubbles which are ticking time bombs that will cause
further deleveraging next year, possibly maintaining the synthetic
squeeze in the $ far longer than most can contemplate. Of course the
good news for precious metals is when this starts to unwind it will
essentially take the banking system with it (because these bubbles are
gargantuan) via either hyperinflation or deflation, or both, possibly in that
And that might just have further implications:
|GOLD VS. THE DOLLAR
Howard S. Katz - November 24, 2008
Happy days are here again for gold bugs. The 43 dollar up move on
Friday completed a double bottom formation, which counts up to $860.
This should be enough to break the back of the bearish forces which have
been dominant since March.
Also, the large trader shorts in gold have made another losing play. Most
every time gold makes an important bottom these people get very
excited. They have been prejudiced against gold by their Keynesian
professors at college. So, encouraged by the decline, they rush in and
short heavily. For example, from Aug. 12 to Sept. 16, large trader shorts
went from 28,653 to 57,429 -- an increase of almost 30,000 contracts.
This sparked the 180 point gold rally of late September, and there was a
very painful rush to cover.
Now these gold shorts are evil people (corrupted by their evil Keynesian
professors), and it is your job as a gold bug to punish them by taking
their money. In addition to being your job, it is also a fun thing to do. But
there are a great many of them, and they are very stupid. No sooner had
they been burned in September than they committed the exact same
mistake in October. Large trader shorts went from 24,268 on Oct. 14 to
52,392 on November 11. Again these people were so gullible that they
shorted almost 30,000 contracts. The relentless grinding upward on Friday
was the sound of short covering. (Oh my, those margin calls do hurt.)
But the important thing is not what caused the gold rally. The important
thing is what the gold rally will cause. The very unusual thing about the
rally is that with gold up on Thursday by $13 the dollar was up for the
day. Again on Friday, with the dollar up gold still made a massive gain.
Further, if we look at the other commodities, they have been sold down to
The entire bearish case for gold and other commodities is based on a
very thin reed. It is based on a group of speculators who have turned
massively bearish over the past several months and have spent almost
all of their ammunition causing the recent declines. As the gold shorts are
forced to cover and gold rallies smartly, it will hurt the dollar. This will
frighten the shorts in other commodities, and they will be forced to run for
cover. Like a row of dominoes, the collapse of the gold shorts will turn
into a general rout of bearish speculators in commodities and a collapse
of the dollar.
Let us go into this more deeply. You know that there is a widespread
sentiment today that we are headed for a serious period of falling prices
(what the establishment calls deflation although the correct term would be
appreciation of the currency). Quite frankly, this is garbage. There is no
excuse for anyone being this stupid. And all of the people telling you that
prices are going to fall are badly in error (in the best case) or outright
frauds (in the worst case).
Why are they saying this? Because Henry Paulson saw his little world of
Wall Street falling apart. It should have fallen apart because these people
made outrageous (and unearned) profits in the early years of the century
when Greenspan put short rates down to 1%. When rates rose to over
5% in 2006, then profits were not so easy to come by. They defrauded
investors with their NINJA loans and sub-prime mortgages. Many
companies had let themselves go soft. They were due a very normal
But to Paulson this normal shaking out was a crisis. It was his friends and
his world which was being shaken. So he ran to President Bush
screaming, "crisis." Bush, who knows nothing about economics, bought
his story, hook, line and sinker. He announced a financial crisis. On Sept.
15, the New York Times decided to run with the story and startled the
world with the front page news: "FINANCIAL CRISIS."
Papers all over the country are in awe of the Times. It has too much
power and not enough brains. Pretty soon "FINANCIAL CRISIS" was
coming at people from every opinion source. The average American
thought that he was getting 5 or 6 opinions. He does not know that all of
these go back to Henry Paulson.
When there is too much opinion around, the recourse is facts. Here is the
fact about the coming "deflation."
To save the country from this imaginary "deflation," Ben Bernanke has
started the money creation process. In the last 10 weeks, he has
increased the monetary base (the second step in the money creation
process) by 69%. Federal Reserve Credit, the first step, has increased by
145% over the same period. So there is a lot more money in the pipeline
coming through. The money supply proper will increase more slowly, over
the next 6-12 months. But if they stop here, then we will have more than
a doubling of the U.S. money supply and a corresponding increase in
That is an INCREASE in prices, Mr. Bernanke, not a DECREASE.
You are living in the 1930s. You are out of touch with reality. What caused
the 1930s was a 30% decrease in the money supply over a 3-year
period. There has not been anything like it since. Indeed, there has not
been a decrease in the Consumer Price Index since 1955. You are living
in the past. You are out of touch with reality.
In simple terms, the facts predict an increase in prices. 99% of all
economists are predicting a decrease in prices. Because of this enormous
weight of opinion speculators have sold down the various commodities,
and there have been intermediate declines in commodities over the
middle part of this year. That is, the declines in prices to which everyone
is pointing are caused by speculative moves, not by fundamental supply
Gold is a good example of this. According to the Commitment of Traders'
report the net large trader position in gold went from +212,259 contracts
on 2-19-08 to +63,959 on 11-11-08. That is a swing of almost 150,000
contracts. A normal intermediate swing in gold would show a swing of
It is also important to understand that all of these people running around
shouting "deflation" have lost their perspective. Gold had a 7 year
advance of 298%. It has now had a 7 month decline of 35%. There was a
similar decline in gold which interrupted the rise of the 1970s. Over the
course of the '70s, gold rose by 2400%. But in the middle of the decade
(from year-end '74 to mid-'76) it fell by 45%. It was no big thing. Any
important bull move will have reactions.
Why are all these people so bent out of shape by a perfectly ordinary
35%, 7 month decline when the larger context is a 298%, 7 year
advance? Why are they making projections of this 7 month decline for
several years into the future? It is obvious that the speculators who have
caused these declines have used up their ammunition, and have to go the
other way. We can be very confident that some of these speculators
started to go the other way on Friday. ("Oh, those margin calls do hurt.")
Let us take the Wall Street Journal as an example. They claim to be free
market advocates. They claim to be monetarists. But in 2001, they were
screaming about "deflation." They talked as though it were a bad thing.
What happened in reality was that commodities turned and rose for the
next 7 years, and the Consumer Price Index increase to the highest rate
of advance since 1990. And you know what? Right in the middle of the
period when they were trying to scare us about "deflation" they raised
their newsstand price from 75¢ to $1.00. Damn. If there really were going
to be a "deflation," wouldn't that drive customers away? In a "deflation"
you get so many new customers by cutting prices that it brings in a bigger
WHY ARE THEY TELLING US ONE THING AND DOING THE OPPOSITE?
Now, of course, the newsstand price of the Wall Street Journal is $2.00,
and they are once again trying to scare us with "deflation." Perhaps in the
year 2015, the newsstand price will be $4.00 or $6.00, and they will be
screaming "deflation" once again.
John Maynard Keynes argued that there was a phenomenon called a
liquidity trap in which money simply disappeared. Presumably a liquidity
trap would be caused by people burying money in their mattress or in a
hole in the ground. Keynes was great at whipping around theories, but he
never looked at FACTS. These are not the days of Blackbeard the Pirate.
No significant number of people put money in holes anymore. Every time
the U.S. money supply (and price level) has declined has been the result
of a deliberate policy decision by the U.S. Government. The two periods
of "deflation" in the 20th century (1921 and 1930-32) were both caused
by the Republicans, who had a deliberate policy of a 5¢ cigar." Since
cigars had gone from 5¢ to 10¢ during WWI, this meant a 50% decline in
prices bringing the general price level back to its 1914 figure. And this in
fact was achieved in 1933. Some of the price declines which occurred in
the 19th century were caused by the retirement of the greenback and the
demonetization of silver. Always it was caused by government. Never was
it caused by ordinary people. Keynes was a fraud, and all Keynesians are
phonies. A college degree in Keynesian economics tells us that you are
certified as miseducated.
So what is the bottom line? If there were going to be "deflation,"
then gold (and everything else) would be going down. But there isn't.
There is going to be a massive rise in prices. Most everybody is wrong,
and I am right. (I would not normally boast like this, but I have a long
history of being right and seeing the establishment pretend that it never
happened. I was right on gold in 1970, and Fortune magazine called us a
"lunatic fringe." I am still waiting for Fortune to admit that gold went up in
Ben Bernanke is printing cash. He is printing it faster than ever before in
American history. In all of WWII, the U.S. money supply more than
doubled. In the past 10 weeks, Bernanke has beat that record (in terms
of Fed Credit). What we are seeing is unprecedented. Bernanke is living
in a dream world. Cash is trash. GET RID OF IT.
There are two worlds in the financial markets: speculative opinion, which
is overwhelmingly bearish, and fundamental facts, which are bullish.
Friday's rise in gold will shake the confidence of the bearish speculators.
Since they have played all their cards, all they can do is go the other
way. That will start rallies in some of the other commodities and a fall in
the dollar. The bearish opinion will be shaken. Finally it will collapse.
The New York Times and the Wall Street Journal have hundreds of
analysts and reporters working for them. The One-handed Economist has
only one man, myself. But one man plus the truth is an army. What do
you want, 300 wrong opinions or 1 right opinion? The One-handed
Economist sells a 1-year subscription for $300, which is ½ the newsstand
price of the Journal and 3/7 the newsstand price of the Times. If you want
to get the flavor of my writing, then please visit my web site,
www.thegoldbug.net (no charge).
This week's blog gives an overview of the economic crisis.
Thank you for your interest.
Minds are like parachutes.
They only function when open.
Last edited by Fintan on Wed Nov 26, 2008 10:16 am; edited 1 time in total
Joined: 16 Apr 2006
|Posted: Wed Nov 26, 2008 7:39 am Post subject:
|Meanwhile (Hey, Fintan, you type quicker than I can drink)
Anheuser-Busch InBev: Musings on the new world order
Lager Heads is a model of self-restraint, so we didn’t put ALL the good stuff in our Sunday story on Budweiser. (You can read the Post-Dispatch piece here). We posed the crucial question — what happens to Budweiser now that InBev has taken over Anheuser-Busch? – to a variety of experts. With a few notable exceptions, they predicted that InBev will be cautious in dealing with Budweiser, the flagship brand of “Anheuser-Busch InBev.”
Here’s a sampling of what we found.
Jeffrey Krug, associate professor of strategic management at Virginia Commonwealth University, has studied management turnover at more than 1,000 newly-aquired companies. He predicts that, if Anheuser-Busch is like other companies, you can expect to see 25 percent to 30 percent of A-B’s management team leave the company within a year.
Krug leaves InBev with a word of caution: “There is a tendency for an acquirer to come into an acquisiton and think they know a lot more than they really do.” Witness Daimler buying Chrysler and PepsiCo buying Kentucky Fried Chicken, he said.
“The real question,” Krug said, “is will InBev recognize that Anheuser-Busch has capabilities that they need to support and promote, and essentially minimize the interference” in A-B’s marketing and distribution machine. In fact, Anheuser-Busch’s well-honed marketing operation might be key to developing InBev’s big brands, such as Beck’s, he said.
If InBev is smart, said Krug, it will “leave (Anheuser-Busch) alone to some degree.”
We’ll see if that happens. Count longtime beer consultant Tom Pirko among the skeptics. He told Lager Heads that the outlook for the beer industry next year is not good. InBev’s ability to service the billions of dollars in debt that it took on to pay for Anheuser-Busch has changed dramatically since the summer, he said. InBev is going to be scrounging for cash to pay off its debt, placing Anheuser-Busch’s brands in jeopardy, he said.
Pirko asked: Where is InBev CEO Carlos Brito ”going to find the money? … At some point, he’s going to have to start burning some furniture.”
A New Beer Order, please. And a packet of nuts.
Joined: 18 Jan 2006
|Posted: Wed Nov 26, 2008 11:07 am Post subject:
|With significant inflation being a likely senario,
any analysis of DOW movements should be
done on an inflation-adjusted basis.
Here's such an analysis. Which shows a long
way down for the market in real terms:
|Of course in an inflationary depression one could actually see the DJI rise
even if as it fails to keep up with inflation. We are showing a chart we
found at Cycle Pro Analysis showing the US stock market from 1800 to
today. It is an inflation adjusted chart of the DJI based on yearly prices.
The chart shows a clear channel rising from those long ago dates. On an
inflation adjusted basis the decline will last until 2016-18 and fall to the
3000-4000 zone. Now remember this is on an inflation adjusted basis so
the actual may be considerably higher depending on the rate of inflation.
Minds are like parachutes.
They only function when open.
Joined: 18 Jan 2006
|Posted: Thu Nov 27, 2008 11:43 am Post subject:
One of the Jananese biggies just slid down the profits black hole.
None of the profit analysts saw it coming.
|Panasonic slashes profit forecast, to restructure
Thu Nov 27, 2008
TOKYO, Nov 27 (Reuters) - Japan's Panasonic Corp cut its annual
net profit forecast by 90 percent and announced plans to
restructure as the global financial crisis dampens sales of TVs
and other electronics.
Panasonic, the world's No.1 plasma TV maker, plans to book 130 billion
yen ($1.4 billion) in additional restructuring costs for the year to March to
respond to a downturn that has already forced rivals such as Sony Corp
(6758.T: Quote, Profile, Research, Stock Buzz) to lower their outlooks.
The new forecast, which is far below market expectations, surprised
investors who had seen Panasonic as relatively well positioned to cope
with the global slowdown thanks to its efficient output structure and
diversified business portfolio.
Panasonic, formerly known as Matsushita Electric, now expects its net
profit to trickle in at 30 billion yen in the current business year, down
from its previous forecast of 310 billion yen and from a 281.88 billion yen
profit a year earlier.
The new forecast, the smallest profit in six years, falls well short of the
consensus of 256 billion yen in a poll of 19 analysts by Reuters Estimates.
Minds are like parachutes.
They only function when open.
Joined: 07 Feb 2006
|Posted: Thu Nov 27, 2008 3:29 pm Post subject:
Restructuring is the new Rock N' Roll
we'll all be at it
until say the last Mayan 2011 epoch when it all plainly can't be analysed
when there's no hope about anything
then we'll have chance to step up to the next level.
Well we'll see.
Joined: 18 Jan 2006
|Posted: Sun Nov 30, 2008 10:05 pm Post subject:
|There's more to this
than meets the eye.
More below, but first
here's the report:
Citigroup says gold could rise above
$2,000 next year as world unravels
By Ambrose Evans-Pritchard - 7:29AM GMT 27 Nov 2008
Gold is poised for a dramatic surge and could blast through $2,000
an ounce by the end of next year as central banks flood the world's
monetary system with liquidity, according to an internal client note
from the US bank Citigroup.
The bank said the damage caused by the financial excesses of the last
quarter century was forcing the world's authorities to take steps that had
never been tried before.
This gamble was likely to end in one of two extreme ways: with either a
resurgence of inflation; or a downward spiral into depression, civil
disorder, and possibly wars. Both outcomes will cause a rush for gold.
"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the
bank's chief technical strategist.
"The world is not going back to normal after the magnitude of what they
have done. When the dust settles this will either work, and the money
they have pushed into the system will feed though into an inflation shock.
"Or it will not work because too much damage has already been done,
and we will see continued financial deterioration, causing further
economic deterioration, with the risk of a feedback loop. We don't think
this is the more likely outcome, but as each week and month passes,
there is a growing danger of vicious circle as confidence erodes," he said.
"This will lead to political instability. We are already seeing countries on
the periphery of Europe under severe stress. Some leaders are now at
record levels of unpopularity. There is a risk of domestic unrest, starting
with strikes because people are feeling disenfranchised."
"What happens if there is a meltdown in a country like Pakistan, which is
a nuclear power. People react when they have their backs to the wall.
We're already seeing doubts emerge about the sovereign debts of
developed AAA-rated countries, which is not something you can ignore,"
Gold traders are playing close attention to reports from Beijing that the
China is thinking of boosting its gold reserves from 600 tonnes to nearer
4,000 tonnes to diversify away from paper currencies. "If true, this is a
very material change," he said.
Mr Fitzpatrick said Britain had made a mistake selling off half its gold at
the bottom of the market between 1999 to 2002. "People have started to
question the value of government debt," he said.
Citigroup said the blast-off was likely to occur within two years, and
possibly as soon as 2009. Gold was trading yesterday at $812 an ounce.
It is well off its all-time peak of $1,030 in February but has held up much
better than other commodities over the last few months – reverting to is
historical role as a safe-haven store of value and a de facto currency.
Gold has tripled in value over the last seven years, vastly outperforming
Wall Street and European bourses.
The author of that article is the UK Telegraph's, Ambrose Evans-Pritchard
--whose articles I've linked to before, and who has a record of frankness
on financial matters unshared by his financial presstitute colleagues.
I checked and found that he had picked
it up from the Dow Jones Newswire:
|Gold Likely To Hit "North Of $2000" - Citi Strategist
Thu, Nov 27 2008, 04:09 GMT - http://www.djnewswires.com/eu/
SINGAPORE (Dow Jones)--Gold is likely to hit $2,000 an ounce regardless
of the long term macroeconomic scenario that unfolds, Citigroup said in a
research note dated Wednesday.
"For those who refer to gold as 'That useless piece of yellow metal that
has no real value and earns nothing' (And have done for years) they
might want to look at financial market charts more closely," Tom
Fitzpatrick, chief technical strategist at Citigroup in New York, said in the
The report cautioned that it is not forecasting an imminent move towards
$2000, but argues that it's a scenario that is likely to unfold in the next
few years regardless of the success of the monetary and fiscal bailout
of the global economy.
If the global economy is successfully reflated by the massive fiscal or
monetary stimulus being injected, it says, then gold will benefit via
In the event that the rescue and bailout policies prove unsuccessful then
further economic instability could lead to political instability in some
nations and possibly even domestic or regional unrest, in which case
gold will benefit from its safe haven status.
Check the story times and you'll see that Dow Jones put it out at 04:09 GMT
and Ambrose published it at 7:29GMT - just three hours later. It was after
all --really hot news-- as Citigroup was calling gold at over $2,000 in their
note to private clients.
But that's where the story died. Apart from a few small circulation
websites, nobody ran with it --as Google News confirms.
Excepting intel-linked slimeball Mike Adams of Natural News
(aka outed-as-fake News Target) and via him to CIA Fake Infowars.
Over the weekend the story has gotten legs on the net's forums and on
the alt financial and gold sites - but the mainstream is still ignoring it,
despite the fact that they know, because it was on Dow Jones newswire.
Was Tom Fitzpatrick at Citi just covering his ass with their private clients?
Or is this a stunt to suck people into gold for a planned ambush.
I'm just tipping you off on the development.
Minds are like parachutes.
They only function when open.
||All times are GMT - 5 Hours
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