Posted at 10:01 PM (CST) by & filed under In The News.

Jim Sinclair’s Commentary

Do you recall Goldman as a massive seller of any stock you owned?

Case Sheds Light on Goldman’s Role as Lender in Short Sales

It would be easy to overlook the case against Goldman Sachs filed by the Securities and Exchange Commission on Jan. 14. It involved a complex piece of Wall Street plumbing, led to a minuscule $15 million fine and came on the same day that Goldman agreed to pay up to $5 billion to settle prosecutors’ claims that it sold faulty mortgage securities to investors.

But the smaller settlement merits close study because it sheds light on one of Wall Street’s most secretive and profitable arenas: securities lending and short-selling.

Although the firm settled the matter without admitting to or denying the S.E.C.’s, allegations, some of Goldman’s customers may now be able to recover damages from the firm, securities lawyers say.

Essentially the regulator said Goldman advised its clients that it had performed crucial services for them when it often had not. Customers who paid handsomely for those services may want their money back.

The $15 million punishment is just petty cash for Goldman, but this case tells us a lot about one of the most important duties that Wall Street firms perform for their clients — executing trades for hedge funds and other large investors. When these clients want to bet against a company’s stock, known as selling it short, they rely on brokerage firms to locate the shares they must borrow and deliver to a buyer.

Selling stock short without first locating the shares for delivery is known as naked shorting. It is a violation of Regulation SHO, a 2005 S.E.C. rule. Goldman’s failure meant that some of its clients were unknowingly breaching this important rule.

The S.E.C. has said that naked shorting can be abusive and may drive down a company’s shares. Therefore, brokerage firms are barred from accepting orders for short sales unless they have borrowed the stock or have “reasonable grounds” to believe it can be secured. This is known as the “locate” requirement.

Goldman violated the rule from November 2008 through mid-2013, the S.E.C. said. Through that period, which included the market decline of early 2009, the firm was “improperly providing locates to customers where it had not performed an adequate review of the securities to be located.”

More…

Posted at 7:44 PM (CST) by & filed under Bill Holter.

Dear CIGAs,

Every once in a while it is a good thing to review something we already know and have known for quite a while. What we’re talking about are derivatives and the very basics of how they work… or not. We have seen massive volatility since the Fed raised rates last month. The humor (tragedy), admitted to yesterday by the Fed, the 4th quarter saw slowing economies all over the world and “Nobody Really Knows Anything Right Now” ! I say “humor” because the Fed tightened rates just as the economy was weakening again. Many have said the Fed raised rates at “exactly the wrong time”. History may agree with this, I do not. In fact, there has not been one single day since the end of 2008 the Fed “should have” raised rates simply because of the massive debt embedded in the system and those pesky weapons of mass financial destruction called DERIVATIVES! Higher rates will only serve as a “margin call” in a system with no margin left!

First, derivatives are generally a zero sum game contract between two parties “betting” on something. They can be looked at as a speculation, a hedge, or even “insurance”. For this missive, let’s look at the “insurance aspect” of derivatives as literally $10′s of trillions in gains and losses have occurred just this month alone worldwide.

For example and as you know, the price of oil has collapsed. Ignoring the gains and losses directly on oil, let’s look at companies who’s business is oil. Whether it be production, exploration, transport or even “trading”, huge sums of money have been gained or lost depending on which way your bet was. Many oil related companies have CDS (credit default swaps) written against their debt. These contracts have been rising and rising in value as oil has dropped and the possibility of bankruptcies have risen. Huge gains by owners and losses by the “writers” of CDS have accrued.

This is just ONE AREA as derivatives are everywhere and written just as bookies would regarding almost anything. In fact, CDS is even written on the debt of sovereign governments …including the U.S. Treasury. Please think this through for a moment, who, or what “company” could possibly perform and payout the “insurance” to someone who bet (and won) the U.S. Treasury would default? Would anything even be open? If the U.S. Treasury defaulted, would stock or bond markets be open? How about your bank? How about ANYTHING (including your local Walmart)! Do you see where we are going here?

Now lets talk for a moment about “collateral” as presumably this is what needs to be used or “put up” by the issuers of CDS if their exposure begins to broaden if the contract goes against them. I have spoken many times in the last few years about collateral and specifically the LACK of collateral. Whether it be QE in the U.S. or Europe soaking up too many sovereign bonds or systemically nothing left to borrow against, the lack of collateral is a direct problem for derivatives. You see, as a contract moves one way or the other, theoretically the party who is losing needs to post more collateral. It was this inability to post collateral in 2008 by Lehman Bros. that kicked off the problem.

From a broad perspective, everyone is running down the street naked while assuring everyone else they are “insured”. Greece was even aided into the ECU because they claimed their derivative positions “erased” much of their debt, fat chance! In the end, “losers” must pay winners. If losers lose so big as to bankrupt them, the winners will not get paid. Both sides are losers. When this happens on a grand scale, it will be the entire financial system and thus “us” who are the ultimate loser.

I have a topic to finish with but want to make a statement, then ask a couple of questions first. Someone recently said to me regarding the trek from 2008 to present, “the only thing that has changed since 2008 is that nothing has changed”. I would pretty much agree with this, the policies in place that put us on our knees are still in place, only being implemented with more force. I would also say the biggest change is we now have more debt, more derivatives and much more money supply. Please remember, the Fed took all sorts of substandard paper (mortgage backed securities) on to their balance sheet. What has happened to all of this paper? Much of it is non performing but sitting in a dark corner and being ignored …because it HAS TO BE! What would happen if the Fed ever sold any of this paper for a true market value? Banks would have to mark their portfolios down, that’s what! One last question, if this “bad paper” amounts to more than $100 billion in losses (it does, probably by many multiples), what would it mean if the loss was greater than the Fed’s “equity” reportedly now less than $50 billion? Just because the Fed does not ‘fess up to the losses on their books …does not mean the losses do not exist. Going one step further in this thought process, if the Fed admitted to these losses, they would be admitting to a negative net worth! Would you accept an IOU from someone you knew for fact had a negative net worth? I hate to state the obvious but, you do this every single day when you accept dollars for payment!

One last topic and I’m not 100% positive what it means. Silver flash crashed last night and the morning fix came in .84 cents below where spot was quietly trading on the LBMA http://www.bulliondesk.com/silver-news/update-silver-market-disarray-after-benchmark-priced-far-below-spot-rate-108129/ ! My initial reaction was someone needed to “settle” a trade and the price had to be below $14 in order to not trigger something. In fact, it is being said that this anomalous “fix” will not be reversed but will instead stand. Why would this be? Why, if it was a “mistake” would it not be fixed?

After a five mile afternoon ride to ponder this, I can only come up with two viable scenarios. Scenario A. as I just mentioned above, it is possible some bank, broker or other entity needed to “settle” some sort of contract UNDER $14. It is possible this fishy fix enabled someone to close a short without any pain. It may have been an “accommodative” trade so to speak. Scenario B. this may have been “margin liquidation” meaning someone was long silver but received a margin call from another market that needed to be met and very sloppily liquidated all at once. This is not normally how trades are done but if it was a forced sale, the action is possible. We have had huge volatility in so many other markets, it is certainly possible this was a forced sale. The one thing I am quite sure of since backwardation now rules the day in London, this was not a “cash” fix. I am quite sure it was a paper contract “fix”. Why else is China so hell bent on creating a “cash only” exchange? Because China knows!

It is important to understand we will see things going forward we never expected or ever dreamed of. What started to happen in 2008 where counterparties lost trust in each other is exactly where we are headed again. Central banks stepped in to restore trust, I am not so sure they have enough credibility or goodwill left to turn a far larger credit tsunami than 2008. The credit bubble is again unwinding like 2008 with no White Knights large enough or credible enough to restore confidence once broken. All I can say is “gee, what rocket scientist could have figured out the greatest credit boom in the history of history would begin to unwind after an interest rate increase”?

Standing watch,

Bill Holter
Holter-Sinclair collaboration
Comments welcome!  [email protected]

Posted at 6:49 PM (CST) by & filed under In The News.

Jim Sinclair’s Commentary

The myth of an economic recovery is falling apart.

- New Orders for Durable Goods Fell in Fourth-Quarter 2015, Both Before and After Consideration for Commercial Aircraft and Inflation
- Orders Signaled Deepening Downturn and Contracting First-Quarter Production
- North American Freight Activity Has Indicated Renewed Economic Contraction in the Context of No Economic Recovery
- With Heavy Systemic Distortions Recognized in Headline Existing-Home Sales Swinging from Down by 10.5% (-10.5%) in November to Up by 14.7% in December, Consistent Sales Numbers Were Closer to Down by 4.8% (-4.8%) and Up by 1.9%
- Fourth-Quarter 2015 Existing-Home Sales Plunged by 20.0% (-20.0%) against Third-Quarter Activity, Irrespective of the Monthly Reporting Issues
- Although Not Statistically Significant, New-Home Sales Rose Month-to-Month, Year-to-Year and Quarter-to-Quarter

“No. 782: December Durable Goods Orders, New- and Existing-Home Sales “
Web-page: http://www.shadowstats.com

Posted at 2:55 PM (CST) by & filed under In The News.

Jim Sinclair’s Commentary

The myth of economic recovery is looking somewhat tattered.

Texas Economy Collapses – Dallas Fed Survey Crashes To 6-Year Lows As “D” Word Is Uttered
Submitted by Tyler Durden on 01/25/2016 15:38 -0500

For the 13th month in a row, The Dallas Fed Manufacturing Outlook was contractionary with a stunning -34.6 print following December’s already disastrous collapse back to -20.1, post-crisis lows. With “hope” having plunged back into negative territory (-2.2) in December, January saw a complete collapse to -24.0 as one respondent exclaimed, “we expect the continued depression in the oil and gas industry to negatively impact our customer base and result in significant demand reduction.”

Bloodbath…

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And its across the board with production, employment, and shipments all collapsing…

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As hope is crushed…

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Chart: Bloomberg

But the punchline was the respondents, virtually all of whom confirm the recession, and one even casually tossed in the “D”(epression) word:

Primary Metal Manufacturing

· The impact of the continued decline in the energy sector, compounded with several new regulations from both the Environmental Protection Agency and Occupational Safety and Health Administration, is depressing economic conditions even further from 2015. Our top 10 customers continue to indicate declines in manufacturing and new capital expenditures for 2016. Outlooks continue to be adjusted down from six months ago, and we are seeing several foundry closings in our industry due to the state of our industry and strong offshoring projects.

· Our projected increase in business is related to market-share gains at the expense of our main competitor (foreign owned) who is having service problems.

Fabricated Metal Product Manufacturing

· We expect the continued depression in the oil and gas industry to negatively impact our customer base and result in significant demand reduction.

· I believe that if the stock market continues to deteriorate, spending on housing replacement products will decrease. Large purchases on housing seem to parallel consumers’ 401k performance.

· It is getting pretty ugly, and the strength of the dollar is really making us noncompetitive.

Machinery Manufacturing

· The continued downturn in the energy sector and its impact on oilfield services companies is brutal and financially punishing, leading to significant reductions in our labor force and facility closures.

· Seasonally, it is a slower time of the year currently. There aren’t any indicators of any big change in the next six months.

· Our increases in volume do not stem as much from ideal economic conditions as much as from breadth of development in multiple states. Brand expansion and awareness are more of the catalyst than the typical industry indicators. Our customers in Texas are experiencing significant decreases in business volume. As a whole, I would rate the economic conditions in Texas and many other parts of the country as poor.

· Oil and gas prices and their impact on capital spending by our customers continue to be our biggest concern.
I expect the Fed to recognize the weakness in the economy and the fact that we are in recession and drop interest rates again.

More…

Posted at 9:56 PM (CST) by & filed under Bill Holter.

Dear CIGAs,

A reader recently sent me these charts.  I do not know who put this collection together to give credit to but I do want to say these charts pretty much tell the WHOLE STORY!  Please note each graph has grey shaded areas which identify recessions.  What we need to focus on is what has happened since the last “official” recession of 2008/2009.  I put the word official in quotation marks because it is clear something has gone very wrong since 2009, have we really recovered?

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Taking these charts and grouping by commonality we have; student loans/federal debt/money supply, food stamps/labor force participation/worker’s share of economy/median income/home ownership, I would put healthcare costs on their own.

Starting with the first grouping “debt and money supply” we can see an explosion in each chart since 2008.  This clearly depicts the efforts made at reflating the system.  Massive amounts of debt have been taken on and accompanied by a gross quadrupling or more of the money supply.  Funny how the money supply has exploded yet the dollar has strengthened versus foreign currencies since then.  I will finish with the chart which I believe is the reason for this anomaly.

The second group, let’s call this income/cost of living also shows unprecedented deterioration.  Less people working …for lower wages and thus unable to afford a home …or even the ability to feed themselves!  How is this “better”?  Clearly, the standard of living is far more stressed today than when we entered the 2007/08 beginning of the Great Financial Crisis.

Lastly we have healthcare costs as a cherry on top of this “poo pie”.  If more debt and fixed costs along with less employment and income available to service the newfound debt were not enough, healthcare costs of 10% or more of income should be enough to put a dagger in the heart of the American dream.

These charts are very easy to decipher and understand, even a 4th grader who must budget a weekly allowance can understand it!  However, apparently Wall Street cannot understand this.  I would say the same about Washington and those who “pull their strings” but I don’t believe it to be the case.  I have said for years now, policy implemented could not have been by mistake and thus must be planned because no one could be so STUPID to have done the things our “leaders” have!

As for Wall Street, I actually think CNBC has guests on who actually believe the pabulum they spew.  In fact just today I heard a guest say he was super bullish because now we have QE behind us, we can get back to normalization and sound footings …  Really?  Would we have even “arrived” here today with markets still opened were it not for the $ trillions pumped in by the various QE’s?

I promised one last chart.  “Velocity” or lack of, explains a lot of what has already happened.  When velocity returns it will also explain a lot, we’ll get to that in a moment.

<b>Velocity</b> Of <b>Money</b>: Demand In The Current Moment by Miller Howard ...

You will notice velocity was cratering during 2008, it experienced a brief bounce and has done nothing but continue lower since then.  This is explained by the previous and subsequent buildup of debt.  People were feeling the “bite” of debt leading up to 2008.  As asset prices began to drop, people started to hold back on spending and began to hoard cash as a safety net to be able to pay on debt.  This strategy has continued.  To offset the lack of velocity, the Fed was forced to “push” more money into the system.  Which brings us to where we are now, more debt, less income and more $ trillions of money supply in the system.

I believe the lower velocity accounts for strength in the dollar.  Richard Russell called the debt buildup in terms of dollars a “synthetic short”.  This short being covered at a time of record low velocity has caused the rise in the dollar.  This by the way has occurred while foreigners have offloaded over $1 trillion of reserves in the past year and soaked up most likely by the ESF.

In my opinion, a defining event is just about to happen.  Because the Fed blinked and forced an unjustified rate hike, one of two things will happen.  Either they stay the course (and maybe hike again), in which case asset markets will implode to unrecognizable levels.  Or conversely the Fed blinks again and actually does further QE and pushes rates negative.  In this case I believe they will finally get a reaction from velocity.  I believe velocity will shoot straight up and probably to new high levels as “non-credible” monetary policy will spook a run out of dollars!  A reversal by the Fed will begin the game of hot potato where owners will want out of dollars while they still can.

Switching gears entirely, it looks like the COMEX finally did make delivery of most of the 6.44 tons they owed for December delivery.  I say “finally” because it makes no sense to wait so far into the month since the previous owner had to pay storage.  If it was truly available, there was every incentive to deliver on day one or two …which they did not.  Now, COMEX sits with a whopping 2.3 tons left of registered gold (73,000 ounces) coming into the February delivery month.  As of tonight, there are still 114,219 Feb. contracts open which represents 11.4 million ounces!  Yes of course, much of this open interest will either roll or evaporate as it has over the last two years …but with three trading days left there is 11.4 million ounces contractually open and only 73,000 ounces available for delivery!

I do want to point out the highly unusual!  Today was options expiration for gold, in the past I want to say gold was ALWAYS hit and hit very hard on this day so as to make the call options either cheaper or worthless.  This did not happen today as gold is now up over $20 in the last two days.  Also, COMEX has NEVER EVER gone into an active delivery month with such a small amount of registered gold available.  In fact, I cannot remember a time when the registered category was ever more sparse than it is now.

The amount of gold in the registered category is now roughly $80 million.    To put this in perspective for you, when I was managing a retail brokerage office with just seven brokers in a medium to small Texas town in the middle of nowhere, we had assets under management of nearly $500 million.  I personally had well over $100 million under management.  Yet COMEX, a global market and the “pricing” mechanism for the world’s gold only has $80 million worth of gold available to deliver?

Folks, this is not only scary, I cannot believe COMEX would allow these numbers to be seen.  I will surely be trolled and told “they always come up with the metal” but to advertise your vaults are virtually empty with just three days prior to first notice day?  How confidence building is that?  We will keep you informed as to how this plays out but I believe they are playing with something far hotter than fire!

Standing watch,

Bill Holter
Holter-Sinclair collaboration
Comments welcome! [email protected]

Posted at 9:40 PM (CST) by & filed under General Editorial.

Dear Extended Family and Friends,

Thank you for your overwhelmingly positive responses to my Preparedness articles. I greatly appreciate your input, and regret that I am unable to respond to your emails individually.  There isn’t enough time to permit me to respond to each of you personally, so if you just get a “Thank you” from me, please know that your contributions are acknowledged, important and appreciated.

The next subject which needs to be addressed in preparedness is food.  We all need food and prudent storage is very important.  No one can tell you what you need.  Your needs and desires are as individual as you are, and your budgets, storage space and dietary needs and restrictions are just as varied.  No one in one article or even one book could completely address your needs.  In this article I hope to share with you some ideas about things to consider, if you aren’t already engaged in some form of food storage.  This article will suggest some things to think about and help you move on with your own research.

We can be faced with lots of challenges which could influence our ability to obtain food.  It doesn’t have to be a broad scale emergency like we just experienced on the East Coast of the USA from the storm Jonas.  Your food emergency could be as individual as the loss of a job or other personal tragedy which compromises your ability to get food.  We all need air, food and water to survive.  This is known as the Rule of Threes.  Usually – You can’t survive more than 3 minutes without air.  You can’t survive more than 3 days without water, and you can’t survive more than 3 weeks without food.  It is recommended that the minimum amount of water to have, not including water to rehydrate food is one gallon/4 litres per day, per person.

Although, I will make some suggestions for you to consider in storing food, you can do some independent research on Google using parameters such as “long term food storage.”  You can pay anywhere from about $1500 on up for a one year basic food supply for one person.  If you purchase long term storage food, there are a few things to know.  You need to store it in a cool, dark place without moisture.  You need to store water, because the food is dried or dehydrated.  You need to store oil, since the dried/dehydrated foods don’t contain fats.  Fats would shorten shelf life since fats become rancid.  You need to have a manual/non-electric can opener or your food won’t be very accessible in a power outage.

A few days ago, the winter storm in the US may have provided the opportunity for some of you to learn where you are prepared and where you aren’t.  Hopefully this experience wasn’t with dire consequences.  The school of experience is expensive.  Grocery store shelves in the affected areas were cleaned out days before the storm, and there was nothing available to buy.  Those people who had some food stored would have been the most prepared, even with the numerous power outages which occurred.  We won’t always be warned of a coming storm, whether it is an environmental storm or a financial storm.  We need to Be Prepared.

Although the long-time readers of JSMineset are aware that gold and silver will be the ultimate safety net in the long term, there is a period between a time of crisis and it’s resolution.  It is that period, which I hope to address, especially since we have so many new readers.  There is a path to prosperity, even in undesirable or unfortunate circumstances, but we have to survive and thrive in the interim period.

For those of you who already have bulk and long term food supplies, my congratulations to you and well done.  For those of you who are just embarking on preparedness, much of what is written is for you, and I hope you benefit from having some things to consider.  Since 1 out of every 6 Americans is presently receiving food assistance, the need for preparedness may be critical for your families.  You can prepare a little at a time, each and every time you shop.  The first of the month is approaching and I am writing now so that, if you are receiving food assistance, you can start your planning now.  The issuance of EBS cards have electronically hidden what would have been the bread lines of the Great Depression.  We don’t see bread lines these days because of EBS, but if we did, they would be long and populated by adults, seniors and children from all walks of life including some of your neighbors.

You can prepare with a little planning.  Devote $5 or $10 every time you shop.  Start with things like pasta, canned spaghetti sauce, rice, peanut butter, canned fish, spam, canned chili or stew and crackers, orange flavored breakfast drink, powdered, boxed, or canned milk, canned soups, etc.  Crackers can be a substitute for bread and have a much longer shelf life.  Many of these items you can get for around $1 each.  Start storing some as soon as possible.  Some food supplies last almost indefinitely and are very versatile and useful.  Among these are sugar, salt, honey, vinegar, rice, pasta and dried beans.

Be sure to try to stock foods your family will eat.  A rapid change in diet can and usually will create disturbances in the intestinal tract.  For this reason it is advisable  to have medications for constipation and diarrhoea.  Additional items which need to be stocked with food are vitamins.  The foods you are able to stock may not be the most nutritionally desirable.  Many college students live on Ramen Noodles.  Although you can survive on them, they aren’t nutritionally balanced.  Vitamins are particularly important for the young.  In difficult times, if you must sacrifice nutrition for food in your belly, be sure to have vitamins.

Don’t forget about spices, cooking oil and some shelf stable comfort foods.  If you need coffee or tea, aim to stock some, and keep some non-dairy creamers if you prefer.  Some hot cocoa mix can be an enormous comfort food in a time of need and popcorn can be an inexpensive shelf stable treat.

Don’t forget pet food in your preparedness planning.  You will want to provide for Fido and Kitty too.

Last, the item you will hopefully consider is seeds.  Not seeds for consumption, but some heirloom seeds for planting in order to grow food, if needed.  Even a small square foot garden or potted window or porch garden is better than no garden at all.  If you don’t need your seeds down the road, you can always barter them for something you do need.  Be sure to get heirloom seeds, so that they will continue to produce seeds from the plants you grow.  Hybrid and GMO seeds will not reproduce with true seeds and likely not grow anything at all.

Take some time and sort out some things to obtain for your food storage.  You can do it and for only $5 or $10 a week.  Look for Google links and Youtube videos.  You can’t really go wrong with food.  Your worst case is that you will eat it.  If you have the resources for expensive long term food storage, it is great to have it.  It is like insurance.  If you have expensive long term storage food but don’t use it, you can always donate it to your area church, soup kitchen or food shelf and take a tax deduction for your contribution.

It doesn’t matter who you are or where you are in the socio-economical, political, gender, geographic or demographic landscape.  It is better to plan and be safer for the effort.  The important thing to take away from this article is to not only know that you can do this, but to start- now.

Respectfully yours,
Jim Sinclair

Posted at 9:29 PM (CST) by & filed under In The News.

Jim Sinclair’s Commentary

The myth is the so called recovery.

Sprint Fires 2500: 8% Of Its Entire Workforce
Tyler Durden on 01/25/2016 14:20 -0500

Anyone who dares to question Obama’s grand renaissance is supposedly peddling fiction. Meanwhile, in today’s latest mass layoff event (which, oddly enough, has become a daily thing during the “recovery”) some 2,500 Sprint workers  – 8% of the company’s 31,000 total employees – have already received, or are about to be “peddled” pink slips.

According to the Kansas City Star, “layoffs and cutbacks at Sprint Corp. have claimed at least 2,500 jobs and struck six customer care centers, company officials confirmed.

The job cuts are coming mostly in customer care but also include 574 other positions eliminated at the Overland Park headquarters campus. The total does not include any jobs that may have been eliminated at other Sprint employment centers.

Last week, Sprint notified Kansas officials that 829 Sprint employees were told their headquarters jobs were being eliminated. Boyd said these included 255 at the Overland Park headquarters campus call center. She said 360 employees at the center would remain on the job after the cutbacks.

This wave of layoffs is part of a months-long effort to slash $2.5 billion in spending across all parts of Sprint’s operations. It also marks the third round of cutbacks at Sprint in the last two years.

Sprint shed 1,700 jobs in the fall of 2014 and announced plans to cut 2,000 more. The 2,500 come on top of those totals, bringing the announced job cut total in that time to more than 6,000.

More…

 

Jim Sinclair’s Commentary

The Obama Economic Recovery is a total myth.

Energy Debt Is Imploding – Housing Market To Follow
January 24, 2016

“The banks are still clinging to their reserve reports and praying.  The bonds are all toast. Most are in the single digits or teens.”

I asked a former colleague of mine from my Bankers Trust junk bond days who is now a distressed debt trader what was going on in the secondary market for energy sector bank debt and junk bonds.  The quote above was his response.

Zerohedge posted a report last night with a Bloomberg article linked that describes what is going on – “Assets selling for far less than what companies owe lenders – Creditors are left holding prospects no one wants to buy.”   the article further cites the ridiculously small reserves that four biggest banks in the energy sector have set aside:  “Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. — have set aside at least $2.5 billion combined to cover souring energy loans and have said they’ll add to that if prices stay low”  – (Bloomberg).

Considering that those four banks combined probably have at least $100 billion of exposure to sector – not counting the unknowable amount of credit default swaps and other funky OTC derivative configurations the financalized Thomas Edisons at these banks dreamed up – the $2.5 billion in loss reserves is a complete joke.  It’s an insult to our collective intelligence.  Of course, Congress and the SEC took care of the problem of forcing banks to do a bona fide mark to market after the 2008 financial crash.

This is the 2008 “The Big Short” scenario Part 2.  The banks underwrote over $500 billion in debt they knew was backed by largely fraudulent reserve estimates.  I bet most of the “professional” investors at pension funds and mutual fund companies were not even aware that oil extracted from shale formations trades at a big discount to WTI.  When creditors go to grab assets in liquidation, they’ll get a few handfuls of dirt to resell.  And when the bondholders go to grab assets, they’ll get an armful of air.

The same dynamic is about to invade and infect the housing market.  Notwithstanding the incredulous existing home sales report released on Friday – (how can the NAR expect us to believe that December experienced the largest one month percentage increase in existing home sales in history when the economy is sliding into recession and retail sales were a disaster?) – the housing market is on the cusp of imploding.  I was expecting to see a unusually high number of new listings hit the Denver market right after Jan 1st and so far my expectations have been met. The acceleration of new listings is being accompanied by a flood of “new price” notices.   I believe a rapid deterioration in home sales activity will take a lot of the housing bulls by surprise.

More…

Posted at 9:27 PM (CST) by & filed under Bill Holter.

Dear CIGAs,

There can be little contention the world is experiencing an economic slowdown.  The problem is this; the slowdown is occurring at a time when credit levels have never been higher than they are today.  The logic is simple, less activity, less turnover, less velocity of money with such high levels of debt make the debt unpayable.  This is the classic case of deflation the Dent’s and Armstrong’s of the world speak about …but they all stop one step short of where this really ends up.

I have noticed recently via e-mails and comments, “they can do this forever, nothing will stop them from printing and doing QE so nothing will change” is almost becoming a national mantra.  I would say, “well, yes, until it does not work any longer”.  If we look at just one market alone, the oil market, it is clear the point of “unsustainability” has been reached.  In the oil patch alone, the amount of bad and nonperforming loans has exploded.  Because of the fractional reserve nature of the global banking system, bad oil loans by themselves are probably enough to wipe out the underlying equity of lenders.

My point is this, we now face the other side of the coin in the debt markets.  What was “good” is no longer because new marginal debt does not produce growth, in fact it now only speeds up the moment of systemic seizure!  “Slowdowns” in the past were turned around because governments, central banks, lenders and businesses had the ability to reflate.  This ability is now gone as the episode since 2008 has been an “all in strategy”.  The ability to borrow more is largely gone by any and all entities including central banks and treasuries.  The amount of unencumbered assets available is nonexistent as new collateral is also largely gone.  The ability to “reflate” does not exist in any corner of the financial world.

So here we are at a point in time where reflation is no longer possible and the deflationists are being proven correct.  They are correct in regards to a credit system working in reverse with a negative feedback loop stoking a deflationary death spiral.  There is just one small problem, what will happen to the currencies of these issuers (including and especially The Fed) who are also caught up in the negative feedback loop?

This is THE biggest and most pressing financial question you will ever face in your lifetime.  Will the currencies survive and thrive in the deflation or will they be seen for what they are, IOU’s of bankrupt issuers at the very center of the credit crisis vortex?  If you answer this question incorrectly, you may end your own financial life.  The key to this question is what will assets “deflate” against”?  The answer of course is as it has always been, “money”.  While Martin Armstrong will have you believe “gold was devalued versus the dollar in 1934″, I assure you it was quite the opposite.  And while Harry Dent will have you believe the “dollar” was THE best investment in the 1930′s, again I assure you he is wrong!  Dollars were “derivatives” (derived from) of gold.  They were freely interchangeable at banks until 1933, then the dollar was devalued from $20.67 cents to $35 dollars required to purchase one ounce of gold.  In other words, it took nearly 75% more dollars to purchase an ounce of gold… end of story, gold was King during the last and only deflation since then, dollars (and other currencies) were and will be devalued versus gold.

The two most important aspects of gold is it cannot “bankrupt” nor can it be freely “printed”.  Those who say the U.S. can never “go bankrupt” because the debt is in dollars and we will just print more are 100% correct but horribly wrong!  Correct, the U.S. can print any amount of dollars necessary to pay off debt.  This still doesn’t mean they do not “default”.  In other words, if Wimpy fails to give you a promised hamburger next Tuesday but instead promises you a hamburger every Tuesday for the rest of his life, where’s the beef?  It never ever comes just as there will be zero value to any dollar bill should the U.S. decide to print the $trillions needed to avoid default.  This falls under the crazy category of SUPPLY AND DEMAND!  In case you don’t understand what I just said, “old” dollars will become worthless as they became over printed to avoid “default” …devaluation is a default in its own right.

In the meantime while we wait for the currency event termed “hyperinflation”, we must navigate a deflationary environment where credit is drying up everywhere you look.  It should amaze you that the world is facing a liquidity crisis after all the trillions of digital currency units added to the system since 2008… it seem almost impossible to have a lack of liquidity doesn’t it?  But this is the fact we face globally and what threatens to shut the system down, no liquidity!

Taking this two steps further than the deflationists, what exactly will happen once credit does collapse and the spigot gets shut off?  In the case of the U.S., we most likely will “print” to the point of full (rather than the current partial) monetization of all the debt.  This printing will be done by a bankrupt entity with more IOU’s around the world than can be humanly counted.  How will the massive supply of dollars issued by a bankrupt and fraudulent issuer possibly be a “good thing” for value of dollars?  This thought process no matter how simple seems to be two steps too far for the deflationists!

The real world result of credit freezing up will amount to a national and probably global hunger fest.  For those of you who just recently went through the northeast winter storm, what did the shelves of your local grocery store look like going into Saturday morning?  Could there be a bigger storm than existing credit collapsing and new credit no longer being issued?  I find it incredible that the aspect of credit is almost never connected to “distribution”.  Forget about actual farming or production needing credit to function, how will product make it to store shelves without credit even if it does “grow”?
EmptyShelves

Folks, when I use the word “grow” I am talking about FOOD!  Even if you are part of the “government will never let it happen” or “they can just print forever” army, what if you are wrong and instead common sense is correct?  How will you fare when “WHEN” comes since “IF” has already left the building?   Without a doubt, the alarm clock wake up call for a sleeping public will be when their stomachs start growling.  Nothing will make stomachs growl more than an overleveraged system with no credit forthcoming!

On a side note I have a prediction for you.  When credit does collapse, “Jesus Christ” will surely make a comeback for some.  No, I would never try to predict the timing of His second coming nor would I ever want to offend the non believers out there.  When credit ceases we will see the absolute worst humanity has to offer, and as the old saying goes, “there are no atheists in a foxhole when the bombs are dropping”.  In the aftermath, I predict the world will turn to whoever their God happens to be and religion will make a long overdue comeback!  Please, don’t throw any flaming e-mails my way as I am not trying to turn this into a God or religious site.  What I am trying to say is simply; without a doubt we will exit what is coming with grossly changed social values, ideas and beliefs.  While truth, honesty, one’s word or whatever are seemingly meaningless today, this will not always be the case.  History has shown the need for great calamity and upheaval to force change.  A great financial calamity is mathematically coming, great “change” in values of all sorts will result!

Standing watch,

Bill Holter
Holter-Sinclair collaboration
Comments welcome [email protected]