Friday, November 18, 2011

November, Friday 18, 2011

DOW + 25= 11796
SPX  -.0.48 = 1215
NAS  - 15 = 2572
10 YR YLD +.05 = 2.01%
OIL – 1.37 = 97.44
GOLD + 4.70 = 1725.60
SILV +.65 = 32.46
PLAT + 10.00 = 1598.00

For the week, the Dow fell 2.9 percent, the S&P dropped 3.8 percent and the Nasdaq lost 4 percent.

A major question has been whether the European Central Bank will find a way to act as a lender of last resort – essentially will they act like the Federal Reserve in 2008. Speculation has grown the ECB could lend money to the International Monetary Fund to bail out some euro zone members. Nothing today, but clearly this is the game plan moving forward.

Quietly, The Swiss National Bank, that’s the Central bank for Switzerland, has imposed significant restrictions on its two biggest banks, UBS and Credit Suisse – forcing the banks to reduce risk and shrink, possibly selling off parts of the bank, and also forcing the banks to increase capital reserves perhaps by double.  Meanwhile, here in the USSA, we force our banks to do – umm – nothing.

There’s an election in Spain on Sunday. Next week, we’ll wrap up third quarter earnings reports. Also, a shortened week because of the holiday, and then Thursday will be Black Friday – the start of the holiday shopping season, which actually started just before Labor Day.

The Congressional SuperCommittee will need to have a deal in place by Monday, if they hope to meet their deadline on Wednesday.  If they don’t meet their deadline, then the approval rating for Congress might fall even lower than 9%.

I actually read an article today entitled “Gold’s Safe Have Status in Question”

Despite its reputation as a safe place to hide from the chaos roiling global markets, gold has hardly been a bastion of strength. The yellow metal suffered a tough week falling 3.5%. The price tumbled 3% on Thursday alone, actually outpacing the decline in U.S. stocks. For a traditional safe haven, the recent action has been concerning for those invested in the precious metal.
The question on the minds of gold bugs everywhere is whether this a flashing yellow light?
Just a little reminder – Gold has gone form around 1350 a year ago to 1725 today.  By comparison, Morgan Stanley is down 12% this week, and down 45% for the past year.
ETF Demand was up 58% in Q3,
*Total gold investment was up 6%
*Demand for gold bars and coins rose 29%
Demand in Europe and China is at near record highs.
*Central banks bought over 140 tons during Q3

Hi Sinclair--  Read your book and enjoyed it.  While I agree with you about having a bank set up for veterans,  I didn't see who would control it and do the funding and screening.  Also, while the current banking system is so corrupt and beyond redemption, I didn't see how a new system might be structured and how it would be made transparent and viable.  I probably missed some of these items,  so I'll apologize in advance!!  

My more pressing question is one of inflation or deflation.  I read a lot and listen to a lot of talk radio---the conservative kind of course-- and i still can't quite seem to get my mind around where we are headed and what action to take.  

I know you believe in gold, and do a lot of complimentary discussion for Pat Gorman.  I also own gold and in terms of history it seems the proper action at this time.  My problem is with – and here he gives a couple of names I won’t repeat because they are not here to defend their positions – (Bill Tatro, whom I greatly respect and admire, and also Harry Dent).  Both of them, as I'm sure you know, are very much in the deflationary camp.  (Tatro) often talks about the gold bubble, and oil for that matter, and (Dent) feels the same; i.e., gold will go to $200-$400 and the market will plunge to 1500-2500, etc.  Obviously we can't do both, surely not in our lifetime. 

I'd like very much to know what your thoughts are--- inflation or deflation--- and why.  Maybe even give some suggestions as to what could be read to back up your positions.

Love you're show, and am very happy you're back on the radio.  I try to catch all the broadcasts, but miss them every so often.  So if you do decide to talk about this subject, maybe you could give a heads up as to when?  

Thanks for reading the book. Article 1 of the Constitution grants power to Congress to make rules regulating the military, and Congress has the power to pay debts and provide for the common defense of the country. I think Congress could direct the Treasury to make direct payments. I think Department of Defense could oversee the actual branches of a Military Bank, which could offer our troops the same rates the Federal Reserve offers the big banks.  Congress/Treasury/Defense are already involved; my idea would simply eliminate the middleman functions of the Federal Reserve and retail banks.

Regarding a new banking system with transparency and viability: (Chapter 43 - Eat the bankers - Cut into small digestible pieces and Serve with wine.) enforce anti-trust laws; too big to fail is too dangerous to exist; reinstate Glass-Steagall breaking the banks into retail banking and separate investment banks. If the investment banks want to gamble they can; if they fail, they fail. Retail banks would be depositories; they would not be able to charge excessive interest (usury). It is a simple business model; it has worked well in the past. Take deposits; pay a little interest; charge a little more interest on responsible loans. The banker wouldn't make the enormous bonuses like we've seen in recent years but they could make a nice living. Multiple suppliers create a more competitive marketplace.

Inflation or deflation? The answer is "yes". It is a great question. Since I have been saying for 3 years that we are in a depression, clearly I believe there are some massive deflationary factors. The Federal Reserve has made some $16 trillion in near-zero interest rate loans; and it now holds more than 2 trillion in toxic assets; further, the Fed has required banks to hold $1.6 trillion in excess reserve to insure liquidity; massive losses in the housing market and derivatives markets, plus soaring unemployment. These are all symptomatic of deflation. Quite simply, all the bad usury will need to be deleveraged and unwound, either through repayment or default.

Of course, economies are dynamic, not stagnant. The reaction to deflation is reflation. Central banks and politicians respond to the slightest threat of deflation with a mix of inflationary stimulus programs (QE, QEII, Operation Twist, American Recovery, HARP, etc.). Although much of the stimulus has not found its way to Main Street, it would be incorrect to claim it has not had an effect. Wall Street was deluged with new (electronically) printed money. Take away the bailout and the Dow might be trading around 5,000; and we might not have Bank of America, Citigroup, Morgan Stanley, General Motors, Chrysler. I am not trying to defend the bailout but I won't pretend it did not have some effect. Regrettably, considering the trillions spent it doesn't seem like we got much bang for our buck.

While inflation/deflation can influence gold prices, this is not the only, or deciding reason to invest in gold. There is no absolute rule that says gold will perform in an inflationary or deflationary environment. During the Great Depression, gold returned 70% in less than 12 months (1933-34) as the dollar was devalued. Another example of deflation was Japan over the past 10 years; gold priced in yen gained about 300%; in the past 5 years you might say we have been in a deflationary depression and gold has been a top performer.

The idea of gold as an inflationary hedge probably comes from the 1970's, a period of high inflation and record highs for gold and silver, but I think the high inflation was secondary. Inflation during 1980's and 1990's was higher than in the 2000's but from 1980 to 2000, gold was in a secular bear market. The primary drivers were currency devaluation and safe haven demand. Remember that Nixon took us off the gold standard and devalued the dollar beginning in 1971.

(Dent and Tatro) might be right. I can't predict the future with absolute certainty. However,  (Chapter 31) history shows that when the cost to service debt becomes overwhelming, when economic growth does not keep up with debt and inflation created by usury, the result is: 1) quick economic collapse, 2) prolonged deflation, or devaluation of the currency to unwind the debt and try to work through the systemic problems, 3) or a catastrophe (like war) to demolish the debt. Since currency devaluation and safe demand are primary drivers, if I have a choice between gold/silver or paper, I tend to prefer the metals, especially when the going gets tough. 

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All 3 major TV business channels: Bloomberg, CNBC and especially Fox are continuing their bashing of the OWS movement.

FOX and specifically Stuart Varney and his mourning show take an exceptional vigor in trashing the movement and the people.

These networks and their brainless employees are going to try and protect the corrupt system as it exists today.

Yea, that’s a shame, and everything but… hey did you see that Demi and Ashton are going to divorce, and this is the last broadcast for Regis! A little bit of good news though – It looks like Lindsey Lohan is going to actually spend some time in jail, so America is safe again. I mean – let’s get our priorities in order here.

The protesters – relegated to the dustbin of the last news cycle. It was an interesting little sideshow. Resistance is not futile, but it won’t be a walk in the park.
I think the movement will eventually grow larger, maybe in fits and starts, and it’s going to have an impact on a variety of issues in this country. We have systemic problems in this country; they are not being fixed; they are not going away; if the media won’t address them honestly, the people will.

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There seems to be a great deal of confusion among the professionals in the marketplace
as to what economic event triggers the Credit Default Swaps (CDS).

Would it be possible to clarify what exactly triggers these CDS?

Since the pros are disagreeing on this definition, I realize it may be difficult to define!

Just a little background. The Euro-political leaders got together in Brussels a couple of weeks ago to try to resolve the Greek debt problem; part of the idea was to voluntarily write-down the Greek debt in order to avoid a payout on credit default swaps – a form of insurance that is triggered when a so-called "credit event" occurs.
An important point is figuring out how losses are categorised and whether they are judged to be voluntary or compulsory.  Who decides?
The responsibility for deciding a credit event rests with the International Swaps and Derivatives Association’s determinations committee.
But two things have to happen before Isda considers whether credit default swaps on Greek debt will pay out. Firstly, a debt writedown must have been formally signed, as Isda can only rule retrospectively.
Secondly, Isda only rules in response to requests from market participants – so, if no participant requests a ruling, no swap payouts will occur.
What triggers CDS payouts?
The trigger for CDS payouts varies depending on the asset involved. For example, a swap taken out on the debt of a US corporate will be triggered by different circumstances from those that will provoke a payout on the sovereign debt of a western European sovereign. Further, you have the boilerplate Credit Default Swaps and you can also have customized Swaps – so ISDA is going to have to review everything individually and distinctly.
In the case of Greece, and other western European sovereigns, there are three types of possible credit events: failure to pay, repudiation or moratorium, and restructuring.
In this instance, restructuring is the credit event at the center of debate. According to Isda, a payout based on restructuring would be triggered if either of the following events occurred:
1) If there is “a reduction in the rate of interest or amount of principal payable” – more commonly referred to as a haircut.
2) If there is a “deferral of payment of interest or principal” – in other words they extend the maturity, that is, they exchange a 5 year bond for a 20 year bond.
Each of these conditions would appear to be met by the latest deal brokered between Greece and its bondholders in Brussels.
Isda put out an update to its position on credit events:
“Bond restructuring is voluntary and not binding on all bondholders”, and will not  “trigger payments under existing CDS contracts”.
However, the "voluntary" acceptance of the bailout might not last. Voluntary means that  that not all bondholders were bound to accept the haircut. That could end up in producing payouts.There could be hold outs, in which case Greece, in the future, might fail to make payment on them, and in that case, you’d have a credit event.”

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