Posted at 6:55 PM (CST) by & filed under Jim's Mailbox.

Dear Jim,

Interesting fact for you:

-For the April/June Qtr 2008, Treasury issuance was $13billion
-For the April/June Qtr 2009, Treasury issuance is expected to be $361 billion
-For the July/September Qtr 2009, Treasury issuance is expected to be $515 billion

I just can’t see how this gets funded without significant $USD weakness which should be supportive of gold and hard assets

Also it appears the long bond has topped and LT rates are going to shoot higher

CIGA Mike K.

Dear Mike,

You are 100% correct regarding the dollar and support for gold.

Look at the Pillars chart:




I was watching CNBC this morning while waiting for my internet service to be repaired and I had no idea the ‘recession’ was over!! Rah-rah! Kudlow absolutely declared the recession is now over. Wow was that fast. Not 6 weeks ago we were spiralling down out of control without any light seen at the end of the tunnel and now it’s all over and done with.

The traders they paraded in front of the camera’s are now declaring Dow 10,000 is right upon us and here we are, back in action just like the old days. I had no idea that major downturns the likes of nothing seen since the 1930’s could be turned like an F-16 doing mountain fury training… You got to love the Fed; man are they good. The new bull market has started and they are telling everyone to get back into the stock market, and now, or you’ll miss the move.

CIGA Bruce

Dear Bruce,

Please see my posting today concerning the deadly spider that has been found with a happy face on its tail. Consider Mr. Kudlow the spider. He looks good but be careful. Rallies in bear markets can be awe inspiring but not trend changing.


Posted at 2:32 PM (CST) by & filed under Guild Investment.

Dear CIGAs,

Today, we would like to talk about India, but first we would like to summarize our views on investment management strategy and tactics.

A. In order to maximize stock price appreciation, invest where corporate profits are growing fast.  In our opinion, and in the opinion of many investment professionals, corporate profits determine stock price appreciation.  Many academic studies corroborate this point of view.

B. Since corporate profits grow most rapidly in countries where GDP is growing most rapidly, we prefer to focus investments in those countries.  Which countries among the large countries will grow GDP and corporate profits fastest?  In our opinion, #1 will be China, #2 will be India, #3 will be Brazil, #4 will be the U.S., Canada, and Australia.  Europe and Japan will bring up the rear.

C. How we judge stock valuation.  There are many measures of stock valuation.  Based on traditional valuation measures, the world markets were very highly valued in October 2007.  As of today, valuations have plummeted, especially for those countries where stock prices have fallen while corporate profits have grown.  As a result of a major bear market, some world markets have become very inexpensive, in our opinion.

D. Last, but certainly not least, is RISK MANAGEMENT.  The standard "buy and hold" strategy employed by many investment managers may make their lives easier, but this strategy does not protect investors from violent financial declines, such as the world experienced since October 2007.  Guild Investment Management pursues active management by cutting losses.

Now that the damage to portfolios has been done, people are recognizing that many of the popular mathematical asset allocation models used by investors and financial mangers incorrectly managed for major risk by underestimating the frequency of such risks. 

These financial planning and asset allocation models’ evaluation of the frequency of violent declines is something that I argued about with my professors forty years ago, so I can assure you that when Guild Investment Management originated, it was organized with a plan to control big risk.  Our motto has been to always cut losses quickly.  In our opinion, even if you re-enter the markets and lose again, stick to the policy and in the long run above average returns will result. 

Here is an article on the subject from this past weekend’s Wall Street Journal.

Odds-On Imperfection: Monte Carlo Simulation
Financial Planning Tool Fails to Gauge Extreme Events
By Eleanor Laise, May 2, 2009.

If one had asked a financial adviser 18 months ago for retirement-planning guidance, there is a good chance he would have run a "Monte Carlo" simulation. This calculation method, as it is commonly used in financial planning, estimates the odds of reaching retirement financial goals.

But there is little chance your Monte Carlo simulation, named for the gambling mecca, would have highlighted a scenario like the market slide just seen. Though these tools typically run a portfolio through hundreds or thousands of potential market scenarios, they often assign minuscule odds to extreme market events. Yet these extreme events seem to be happening more often.

Some industry participants and academics are pushing to improve the Monte Carlo tools’ ability to highlight the risk of major market slides.

There is no standard Monte Carlo approach, but the method is nothing new. It was used during World War II to help develop the atomic bomb. By the late 1990s some financial-services firms, like T. Rowe Price Group Inc., had introduced Monte Carlo tools aimed at individuals.

Monte Carlo simulation has wide appeal, and is used in online tools offered by firms like Fidelity Investments and by independent retirement planners. The financial-services industry provides retirement planning, in part, because it attracts clients and boosts fee income.

Here is how a typical Monte Carlo retirement-planning tool might work: The user enters information about his age, earnings, assets, retirement-plan contributions, investment mix and other details. The calculator crunches the numbers on hundreds or thousands of potential market scenarios, guided by assumptions about inflation, volatility and other parameters.

It then spits out a "success rate," which shows the percentage of market scenarios in which the investor had money remaining at the end of his estimated life span. In many cases, the consequences of failure — say, running out of money at age 80 — aren’t laid out.

Many providers of the tools argue that it is a significant improvement over the traditional retirement-planning approach, which typically involves assuming some set market return, say 8% for U.S. stocks, year after year, an assumption considered unrealistic by academics and financial pros.

The questions about Monte Carlo tools reflect broader concerns about mathematical models for gauging portfolio risks.

These models were supposed to help quantify and manage the risks of mortgage-backed securities, credit-default swaps and other complex instruments. But given the events of the past couple of years, it appears that the models often gave big institutions, as well as small investors, a false sense of security.

Now, some investors have decided that if risk can’t be accurately measured, they will just have to play it safe. Jeff McComas, a chemical engineer in Woodbury, Minn., has used six or seven Monte Carlo calculators and found that none highlighted the possibility of a scenario like the recent market downturn. The lesson: "The future is so unknown that your prudent choice is to save as much as you can now and live below your means," said Mr. McComas, 39 years old.

Some financial advisers are equally skeptical. "I take whatever probability of failure that comes out of your Monte Carlo simulation and add 20 percentage points," said William J. Bernstein, author of "The Four Pillars of Investing."

Critics emphasize that the problem isn’t Monte Carlo itself, but the assumptions that go into it. Since no standard approach exists, one user might plug in a range of assumptions on interest rates, inflation or volatility that is different from another user.

Also controversial is that many Monte Carlo simulations assume that market returns fall along a bell-curve-shaped distribution. That means a high probability may be assigned to, say, a stock-market return of 5%, which would fall toward the middle of the bell, and negligible odds assigned to a 54% decline, which would fall near the extreme edge, or "tail."


"In a bell-shaped curve the probability of getting one of these extreme outcomes we’re seeing is basically zero," said Paul Kaplan, vice president of quantitative research at Morningstar Inc.

While a bell-curve model indicates there is almost no chance of a greater than 13% monthly decline in the Standard & Poor’s 500-stock index, such declines have happened at least 10 times since 1926, according to a report by Mr. Kaplan.

Some Monte Carlo models, like the one used by Financial Engines, assign higher odds to extreme market events than the bell-curve distributions. Even so, "I would not claim we have the magical ability to accurately predict very infrequent events," said Christopher Jones, the firm’s chief investment officer.

Some firms are considering revising Monte Carlo models to reflect a world where big market swings happen more often. Morningstar last year tweaked its asset-allocation software offered to institutional investors, allowing users to choose a bell-curve-shaped distribution or a "fat-tailed" distribution, which assigns higher probabilities to extreme market events. The company is exploring using this model in more products, Mr. Kaplan said.

Laurence Kotlikoff, a Boston University economics professor who developed the ESPlanner financial-planning software, and Richard Fullmer, senior portfolio strategist at Russell Investments, said they also are considering offering clients Monte Carlo scenarios that incorporate fatter-tailed distributions.
The choice could make a difference in an investor’s retirement plans. While a bell-curve model shows a negligible risk of a greater than 50% decline in the S&P 500 over extended time periods, a fatter-tailed model assigns it a probability of 4% or 5%, odds high enough to grab the attention of risk-adverse investors, according to Mr. Kaplan’s report.

Some industry participants and academics are pushing for Monte Carlo tools to more clearly illustrate the scarier scenarios. In a recent paper, Moshe Milevsky, associate finance professor at York University’s Schulich School of Business in Toronto, proposed a calculation that Monte Carlo tools could use to show a retirement plan’s vulnerability to extreme market events.

Some industry participants also are trying to set standards that could help Monte Carlo tools more accurately capture extreme market events. The Retirement Income Industry Association in 2007 issued a set of principles noting that the calculators should run a large number of scenarios.

The ideal models run tens of thousands or hundreds of thousands of scenarios, which help gauge extreme events at the tail end of the distribution, observers said. Yet some tools run only 1,000 scenarios or just several hundred.

-Neal Templin contributed to this article.


India is currently in the midst of a long national election process. The final results from all of India’s polling places will be announced on May 16, 2009.

Corruption will become more obvious as the election results are announced.  In India, some thieves (many politicians look at politics as a license to steal) will attain political office.  At the same time, many good people, who are selfless public servants, will also rise to high positions.  Still, India has managed to grow in spite of all of its myriad problems.

Most observers of the Indian scene agree that India is a land of large and numerous contrasts.  The election will point out many of these contrasts, and is likely to confuse us and other westerners.  It is easy to misunderstand India.

India has great intellects, a remarkable ancient culture.  India has some of the wisest and most foolish people I have ever met.  India has some of the most forward thinking, and backward thinking people I have ever met.  India may have the most educated and most uneducated people I have ever met, the most honest, and the most corrupt people that I have ever met, the most humble high achievers, and the most egotistic and arrogant failures…that I have ever met.

In short, I love India and remain baffled and enthralled by the place.  It has been forty four years since my first visit, and I have made forty or so more visits over the decades.


India is home to over 1.1 billion people.  It has numerous languages, cultures and many formerly independent countries operating as one nation.  Contrary to many countries, like the former Yugoslavia that have been broken into many parts, India has for the most part held together.  The current collapse of Pakistan makes India even more important to the entire world.

We look at India and see the potential for a huge positive force in world affairs, a country which is generally tolerant of difference, and which has been able to coexist with China and Pakistan on its borders.  Its military has had ongoing disputes with both, but have been able to avoid major wars with China.  Several very limited wars with Pakistan have developed in the decades since Pakistan and Bangladesh were carved out of India.

India is growing.  The key to their success has been education and wide spread spoken English.  They have developed a bigger domestic consumer market than China, but remain hampered by very poor infrastructure, a byzantine political system, and the remnants of a Fabian socialist economic system established by Oxford and Cambridge-educated Indians in the early and mid 20th century.    

Many uniquely Indian developments, such as the dreaded license Raj, (a system where a license is needed for many things that those of us in the west would never dream of needing permission to undertake) creates bureaucracy.  The further problem is that underpaid civil servants make the granting of a license an opportunity to collect a gratuity. This often slows activity to a standstill.

On the positive side, the Indians are generally rational in foreign affairs and very skilled engineers, scientists, technologists, and businesspeople. Education is respected and sought after, and the intense competition within the Indian university system causes many highly intelligent Indians to seek education abroad. Historically many have remained abroad and many countries have benefited from the talents of Indian entrepreneurs and scientists.

Today, in the United States and other parts of the world, Indians sit as CEO’s of some of the largest companies.  Indian professors populate many universities and are widely found in the professions.

As a result of all these facts, and in spite of its problems, we expect India to grow rapidly. China has grown at a very rapid rate.  India will grow slightly slower but still at a rate far in excess of growth in the developed world.


The investment world has once again embraced India, Brazil, China, and emerging Asia as good areas to invest.  We are focusing on these areas, and certain sectors in the U.S.  We hold energy and precious metals related investments in Canada and Australia.  We see Europe as an underperforming region, and have only a few investments in Europe.

We had a hard time understanding, the rally in the U.S. dollar earlier this year.  Now, it has once again begun to decline, which has given a boost to gold and to Asian stock markets.  Gold has also benefited from the turmoil that has resulted from the melt down of Pakistan.  We believe that Pakistan is already lost, and when the world comes to realize this, gold will appreciate further.  The ongoing decline of the U.S. dollar and the fiscal irresponsibility at work in the world today will also benefit precious metals.

Thanks for listening.

Monty Guild and Tony Danaher

Posted at 2:17 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

The big news today was the price action in the bond market. They were OBLITERATED at noon, CDT, as demand for the auction was much weaker than expected. Bonds were mercilessly murdered once news about the poor demand hit the market wires.

With commodity prices across most markets moving higher today and the CCI again strong,  I think it is safe to say that fears of deflation have now given way to fears of inflation. Quite simply – bond traders are terrified that the plague of locusts loosed upon the nation by the Administrations’ insanely reckless spending orgy, are now going to devour the sustenance of the land. Investors are positioning themselves accordingly.

Today, the worst of all possible worlds hit the monetary authorities – the equity markets dropped, the bond market collapsed, the dollar was weaker continuing its recent slide and commodities were all higher. I am not sure what trick they intend to pull out of their hat but whatever it is, it had better be good because the market is speaking in no uncertain terms that the jig is up and no one is swallowing the line that we can borrow our way into prosperity. Heaven help us especially the mortgage industry which must be spinning in their rooms at what they are witnessing in the interest rate markets.

I am still short pressed for time so I am going to include just a few charts but these charts paint a pretty decent picture of what is taking place.

Look first at the CCI – The Continuous Commodity Index. We have been watching this index slowing grinding higher now for most of this year. This week’s price action showed a gap higher than was above the recent highs. Clearly, there is very strong buying in this sector as investors who can read the trends are now positioning themselves in advance of the coming wave of inflation.

Click chart to enlarge in PDF formatclip_image001

Next is a chart of the long bond… look at the technical breakdown on the weekly chart…

Click chart to enlarge in PDF formatclip_image002

Gold closed above the downsloping trendline but not in a convincingly enough fashion to constitute a bona fide breakout. It must still take out $920 on a pit closing basis to start an uptrend. The price action however is friendly and gold is slowly grinding higher even in the face of obvious official sector opposition to the price rise.

Click chart to enlarge in PDF formatclip_image001[4]

Posted at 11:19 AM (CST) by & filed under In The News.

Mr Dear Friends,

Please do not let your guard down. The market conditions are text book.

Now please consider the following along with the articles on Credit Default Derivatives and

the published Alphaville FT article predictions going into 2012.


Global Crisis ‘Vastly Worse’ Than 1930s, Taleb Says
By Shiyin Chen and Liza Lin

May 7 (Bloomberg) — The current global crisis is “vastly worse” than the 1930s because financial systems and economies worldwide have become more interdependent, “Black Swan” author Nassim Nicholas Taleb said.

“This is the most difficult period of humanity that we’re going through today because governments have no control,” Taleb, 49, told a conference in Singapore today. “Navigating the world is much harder than in the 1930s.”

The International Monetary Fund last month slashed its world economic growth forecasts and said the global recession will be deeper than previously predicted as financial markets take longer to stabilize. Nouriel Roubini, 51, the New York University professor who predicted the crisis, told Bloomberg News yesterday that analysts expecting the U.S. economy to rebound in the third and fourth quarter were “too optimistic.”

“Certainly the rate of economic contraction is slowing down from the freefall of the last two quarters,” Roubini said. “We are going to have negative growth to the end of the year and next year the recovery is going to be weak.”

Federal Reserve Chairman Ben S. Bernanke told lawmakers May 5 that the central bank expects U.S. economic activity “to bottom out, then to turn up later this year.” Another shock to the financial system would undercut that forecast, he added.


Jim Sinclair’s Commentary

Protect Yourself.

Green-shoots, the newest Wall Street Bankster’s term, are like the Happy Face Spider. Use extreme caution when approaching.


Posted at 9:28 PM (CST) by & filed under Jim's Mailbox.

Dear Jim,

Here is a clear, clean and simple chart of gold sending a strong and very bullish message.

As long as the confluence of support area around 850 is holding, from a purely technical perspective gold is a strong buy.

All the best from Germany,
CIGA Olivier


Posted at 2:18 PM (CST) by & filed under In The News.

Dear CIGAs,

Here is a very good lesson in Credit Default Swaps and how to use them to kill massive amounts of people. When I say kill, I mean it literally as loss of jobs, homes, and families is worse than death and is a form thereof. When this comes as a product of fancy paperwork, the sin is egregious. No story of degradation in history can equal the horror of today’s financial world.

Financial predators are people eaters guilty of crimes more serious then murder, slow death and fear. Financial predators are criminals with victims suffering terribly. There is real blood on their hands.

If you are not now interested in this priceless knowledge please print out and file the following article as you will be there before the end of 2009.

Credit Default Swaps: Financial Weapons of Mass Destruction

"The credit world has become a hall of mirrors, where nothing is necessarily as it seems. At best, this makes it very difficult to tell how corporate defaults will affect banks; at worst, it creates the risk of needless value destruction as creditors tip companies into default."

"Financial companies have used their agents, U.S. lawmakers, to pressure the FASB to relax fair-value accounting rules. The result has been the official endorsement of fair-value lying. The other hand tax evader and Treasury Secretary Timothy Geithner has constructed a framework whereby politically privileged banks with worse than worthless toxic assets sell them for cash at an inflated fair value lying price to a self-funded Special Investment Vehicle (SIV), a similar entity as Enron used, that receives a non-collateralized loanfrom their government puppets."

"Company M is completely evaporated and thousands of workers lose their jobs.

Total profit for Banks G and J: $2.85M-$1M-$30k-60k=$1.76M. Nice pay for a day’s work slaughtering and cremating a slight hobbling but otherwise generally healthy going concern."

At a Cambridge House Investment Conference I received a question about Bear Stearns. In my answer I alluded to the possible financial benefit of some from its implosion. When pressed I had to explain how credit default swapsworked and then we were out of time. Because the owners of the majority of the financial press have too much money to make from bankruptcies this topic is sparingly covered. But the Financial Times editor let an article wiggle through.

On 6 February 2009 the Kazakhstan Tenge went poof and was devalued by 18% in a single day. The currency has continued falling from 110 to the current 150.60241:FRN$1. The free-flowing credit to Eastern Europe stopped gushing months ago. Although BTA, Kazakhstan’s largest bank, was taken over by the government, it still serviced its loans. BTA currently has total liabilities to credit institutions (.pdf) of 863,688,000,000 Kazakhstani tenge or about $5.7B. As the Financial Times reported:

But last week Morgan Stanley (MS) and another bank suddenly demanded repayment. BTA was unable to comply, and thus tipped intopartial default. That sparked fury among some other creditors and shocked some Kazakhs, who wondered why Morgan Stanley would havetaken an action that seemed likely to create losses. One clue to the US bank’s motives, though, can be seen on the official website of theInternational Swaps and Derivatives Association. One page reveals that just after calling in the loan Morgan Stanley also asked ISDA to start formal proceedings to settle credit default swaps contracts written on BTA.


A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults. In effect, the owner of a credit default swap is short the underlying going concern.

Many of the largest Wall Street banks are heavily involved in the derivative markets with reported (.pdf) notional amounts outstanding as of 31 December 2008 for JP Morgan (JPM) at $87.4T, Goldman Sachs (GS) at $30.2T and the single digit midgets of Bank of America (BAC) and Citigroup (C) at $38.3T and $31.9T, respectively.

The Financial Times reported,

As a result, speculation is rife that Morgan might have deliberately provoked the default of BTA to profit on its CDS, since a default makes the US bank a net winner, not a loser as logic might suggest. Morgan Stanley, for its part, refuses to comment on this speculation (although its officials note that the bank does not generally take active “short” positions in its clients). And I personally have no way of knowing whether Morgan is short or long, since Morgan refuses to disclose details of its CDS holding. Right now more than $700 million BTA CDS contracts are registered with the Depositary Trust & Clearing Corp. in New York.

This represents about 12.3% of the total liabilities to credit institutions. But later in the article the key point is hit upon:

But the rub for regulators and investors is that BTA credit risk has not entirely disappeared: Somebody right now is holding the other side of Morgan Stanley’s contracts, and unfortunately there is little way for outsiders to know exactly who. Worse, the presence of those CDS contracts makes it fiendishly hard to work out what the true incentives of any creditors are. In theory, lenders should have an interest inavoiding default. In practice, CDS players do not. The credit world has become a hall of mirrors, where nothing is necessarily as it seems. At best, this makes it very difficult to tell how corporate defaults will affect banks; at worst, it creates the risk of needless value destruction as creditors tip companies into default.


Financial companies have used their agents, U.S. lawmakers, to pressure the FASB to relax fair-value accounting rules. The result has been the official endorsement of fair-value lying. The other hand tax evader and Treasury Secretary Timothy Geithner has constructed a framework whereby politically privileged banks with worse than worthless toxic assets sell them for cash at an inflated fair value lying price to a self-funded Special Investment Vehicle (SIV), a similar entity as Enron used, that receives a non-collateralized loanfrom their government puppets.


For the sake of argument and simplicity assume that Bank G loans Company M $1M in either a leveraged buyout or some other type of deal that was common over the past few years when credit flowed freely. Then Bank G purchases a CDS on Company M’s loan for $30,000 from Bank B and the CDS is reinsured by Insurance Company A.

Company M deteriorates because its free cash flow and a little more all goes to service debt and Bank G sells 90% of its loan to Bank J. Because credit risk has increased Company M’s bond now trades in the market for $25,000 and Bank J purchases a CDS from Bank L for the current market price of $60,000 and reinsured by Insurance Company A. Banks B and L go bankrupt, the trader at Bank L who sold Bank J the CDS now either goes to work at Bank J or receives consulting fees and the privileged creditors of Banks B and L, such as subsidiaries of Bank J and G, receive government bailout payments through Insurance Company A.

Company B, while still able to service its debt, does violate some provision of its debt covenant.

First, being friendly competitors Bank G and J decide to both press for default proceedings and then initiate settlement of the CDS they own.

Second, they fund a SIV with $25,000 of cash which borrows another $825,000 from the Bank’s government puppets.

Third, the SIV pays Banks G and J $850,000 of cash for the Company M loan which, while trading for $25,000 in the market is being carried on their balance sheet for $600,000 and consequently results in a $250,000 gain on the income statement for the quarter after having written down a couple quarters ago.

Fourth, Banks G and J receive $2M in bailout funds for the failed CDS contracts.

Fifth, Company M is completely evaporated and thousands of workers lose their jobs.

Total profit for Banks G and J: $2.85M-$1M-$30k-60k=$1.76M. Nice pay for a day’s work slaughtering and cremating a slight hobbling but otherwise generally healthy going concern.


As the great credit expansion continued it culminated in hundreds of trillions of dollars worth of derivative instruments. Some of these are registered while many, if not most, are not. These instruments are at the evaporating top of the liquidity pyramid while gold and silver are at the bottom tip.

Just imagine what the GLD ETF Authorized Participants, including Bear Stearns & Co. Inc., Lehman Brothers Inc., Citigroup Global Markets Inc., Merrill Lynch, Goldman Sachs, J.P. Morgan Securities, and Morgan Stanley & Co., will use the language in the prospectus to do.

These derivatives, with their fiendish counter-party risk, infest the balance sheets of almost every publicly traded corporation along with many local, state and national governments. Financial terrorists are greatly incentivized to detonate these financial weapons of mass destruction.


When confronted with these type of financial terrorists society has often had to take powerful measures. For example, when John Law co-opted the French economy and tried to prevent its credit contraction by outlawing the use of gold and silver with the death penalty, the French Revolution was sparked.

In the United States of America Section 19 of the Coinage Act of 1792provided,

That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.

Under Section 9 of that Act a Dollar is

to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.

While the USA has 303M people about 2.3M are incarcerated or more than 1 in 100 American adults and it officially executed 59. On the other hand, the police state China has about 1.5M incarcerated adults and officially executed 3,400.

While China has had its problems it has not appeared to have had any serious problems with their domestic banks and derivative instruments. Perhaps a reason is because of how they deal with financial crimes. For example, the New York Times reported that Zheng Xiaoyu, former head of the State Food and Drug Administration in China, admitted to taking bribes to approve untested medicine and he was swiftly executed.


Because the great credit contraction has begun, capital has started burrowing down the liquidity pyramid to safety and liquidity. Individuals, companies and governments have more leverage than they can sustain.

With the Federal Reserve refusing to comply with Bloomberg’s FOIA request for where trillions of dollars have gone and with JP Morgan, Goldman Sachs, Bank of America and Citigroup all acting like Morgan Stanely and ‘refuse to disclose’ it does beg the questions: What are the next companies to be destroyed? How many hundreds of thousands of jobs will be lost as a result? What will the American people do about it?


Disclosure: Long physical gold and silver with no position in GLD, SLV, GS, C, BAC, JPM and MS. No credit default swaps or other similar position in Bear Stearns or Lehman Brothers and neither a job with nor consulting income from JP Morgan or Goldman Sachs.

Jim Sinclair’s Commentary

Not simply risk. It is guaranteed by quantitative easing. That is monetary madness.

China Says Global Easing Policies Risk Devaluation (Update2)
By Sandy Hendry

May 6 (Bloomberg) — Global central banks risk inflation, currency devaluation and a “big consolidation” in bond markets by pumping cash into their economies, the People’s Bank of China said in its quarterly monetary policy report.

The Federal Reserve and the Bank of England this year started quantitative easing, or printing money to buy government bonds, a policy that the Bank of Japan pioneered to revive its economy at the start of the decade. The European Central Bank’s 22-member board, which meets tomorrow, is split on whether it should buy financial assets to tackle its recession.

“A policy mistake made by some major central bank may bring inflation risks to the whole world,” China’s central bank said in the report today. “As more and more economies are adopting unconventional monetary policies, such as quantitative easing, major currencies’ devaluation risks may rise.”

Chinese Premier Wen Jiabao expressed concern in March that the dollar will weaken, eroding the value of China’s holdings of Treasuries, as the U.S. borrows unprecedented amounts to spend its way out of recession. China’s Treasury holdings climbed 52 percent in 2008 and stood at about $744 billion as of the end of February, according to U.S. government data.

“In the medium and long term, as the financial markets stabilize and economies gradually recover, increasing inflation expectations, rising interest rates and central bank’s liquidity-absorbing operations may cause a ‘big’ consolidation in bond prices,” the central bank’s statement said.


Jim Sinclair’s Commentary

As Armstrong says, "It Is Only Time."

Gold is headed into multiple four figures. When that will happen is only a short time away.

This winter is going to be unbearable to many.

The Gold War: China and the U.S. Treasury Market
"Who will win the Gold War? The simplest answer also holds the most truth. Over the past five thousand years, the winners are those who are holding the gold at the war’s end."
May 06, 2009

NEW YORK CITY, FEBRUARY 11, 2009 – Luo Ping, director-general at the China Banking Regulatory Commission, gave what may be a landmark quote in the years to come ahead. Besides chastising the United States for its "laissez-faire capitalism" – at which point I distinctly remember choking on my breakfast of delicious jiaozi (I was in Shanghai eating Chinese dumplings) since Ping obviously understands that corporate cronyism is NOT laissez-faire capitalism as fellow columnist Steven McDuffie recently reminds – in retrospect another part of his speech may prove to be the most prophetic. From Reuters:

Except for US Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.

As I related in "China Nearly Doubles its Official Gold Reserves", China revised its official gold holding from 600 tons in 2003 to 1,054 tons last month. However, the very fact that China reported no increase for 6 years and then suddenly doubled should prove one thing – the Chinese are abiding by the IMF Articles of Agreement only as it pleases them. For instance, the state-owned banks can hold as much gold as they wish without reporting, although this gold is de facto the Chinese government’s. Please understand that subtlety, not brazen statements like Bush’s sad "Mission Accomplished" ceremony or Obama’s 100 Days congratulation party, is the Chinese way.

"US Treasuries are the safe haven… the only option."

Really? Although March and April data are not available, you could have fooled me! For perspective, the size of the US Treasury market was $10,700,000,000,000 in December 2008. Of this, $727 billion, or 6.8%, belongs to China, and close to one-third is foreign-owned. (Although some would argue that the $4.8 Trillion owned by the Federal Reserve is foreign-owned as well, in actuality this interest is mostly returned to the Treasury as described here "The Federal Reserve – A Good Company to Work For?.") See the chart below (source


Jim Sinclair’s Commentary

In case you missed this the first time it was posted, please do not miss it this time. What allowed me to call $900 in the early 1970s was pure math.

Here is another exercise of similar character.

Mises’ Equation = Gold Price $6,000 – $31,000?

"Thorsten Polleit, Honorary Professor at Frankfurt School of Finance and Management, did some calculations for this and found (as of March ’09):

– backing all of M1 with gold. M1 divided by gold oz. results in $6000 per oz.

– backing M2 with gold and you get $31,000 per oz.

– backing Euro M3 and gold is E26,000"

Does Mises’ Equation Give a Basis for Gold Price?
May 03, 2009

Assuming you agree to a strict Austrian approach to life and love, Mises advocated sound monetary policy by returning to a gold standard and developed this equation for a “regression” to a properly backed currency called the gold cover ratio:

GCR = (C+D+T+S+L) / G

Where C is cash, D is demand deposits, T time deposits, S savings, and L banks long term liabilities. And our favorite variable G is oz of gold at Fort Knox.

Thorsten Polleit, Honorary Professor at Frankfurt School of Finance and Management, did some calculations for this and found (as of March ’09):

backing all of M1 with gold. M1 divided by gold oz. results in $6000 per oz.

backing M2 with gold and you get $31,000 per oz.

backing Euro M3 and gold is E26,000

But the real impact of Mises’ work is not in what the price of gold should or could be but rather the conclusion that no matter what the government does (e.g. quantitative easing, free running printing presses, artificially low interest rates, stimulus packages, bank bailouts, TARP, TALF, etc, etc) we still get a serious erosion if not all out loss of the exchange value of fiat money.


Jim Sinclair’s Commentary

You think it is about time? I bet this has to do with the Chrysler bankruptcy, amongst other things.

I will believe it when I see it. That is the prevailing attitude amongst the naked short North American crowd.

SEC’s Schapiro aims at short selling rules. Hedge funds next?
By Alan Fein

(AXcess News) New York – SEC Chairwoman Mary Schapiro says new short-selling rules are a priority, though the plague of recent hedge fund scandals could make Long Island’s seedy crowd of penny stock swindlers face deeper scrutiny by regulators who say hedge funds are next.

Sources in the New York Attorney General’s office say informal inquiries into hedge fund players in Long Island’s crowd of penny stock promoters and hard money lenders are being conducted quietly over a rash of complaints by investors who say losses they’ve incurred are a result of deliberate shorting through unregulated hedge funds.

"Trading patterns are difficult to associate with intent," a source within New York’s Attorney General’s office said in a telephone interview late Monday.

But with the SEC’s openness on short selling activities, a formal investigation into criminal activity may be pursued in New York if enough evidence can be built to support charges.  Those inquiries were brought to light following a growing number of news articles on stock swindlers after the downfall and arrest of Bernie Madoff.

At an open hearing in New York Tuesday, the Securities and Exchange Commission expressed concern over short selling practices with an eye towards evaluating deeper regulation.


Jim Sinclair’s Commentary

Today in Pakistan.

Pakistan: Christians locking themselves in their homes for fear of Misunderstanders of Islam
May 6, 2009

Christian families in Karachi, Pakistan are locking themselves in their own homes following escalating violence against them in recent weeks, Catholic Mission Pakistan director, Fr Mario Rodrigues has said.

Last week, six families’ homes were burned to the ground, along with shops, and a number of churches in the locale of Taiser Town, Karachi, Catholic Mission Australia reports.

Describing the violence, Fr Rodrigues said the perpetrators had "misbehaved with the women and asked them to accept Islam otherwise they will kill them."

"They burnt the Holy Bibles and the worst, they have killed people (when) a group of 35 to 40 men armed with AK47, TT pistols, repeaters, and rifles and fired indiscriminately at the Christian community," Fr Rodrigues said.

Prior to the violence, vandals had left messages on the Church walls which included – "Long Live the Taliban" and "Long Live Al Qaeda".

Women were beaten on the streets and dragged by their hair, and many people were injured, Fr Rodrigues reported.


Jim Sinclair’s Commentary

Another article that speaks for itself.

Bank of America Needs $33.9 Billion, U.S. Determines
Published: May 5, 2009

The government has told Bank of America it needs $33.9 billion in capital to withstand any worsening of the economic downturn, according to an executive at the bank.

If the bank is unable to raise the capital cushion by selling assets or stock, it would have to rely on the government, which has provided $45 billion in capital through the Troubled Asset Relief Program.

It could satisfy regulators’ demands simply by converting non-voting preferred shares it gave the government in return for the capital, into common stock.

But that would make the government one of the bank’s largest shareholders.

Executives at the bank, one of the largest being examined, sparred with the government over the amount, which is higher than executives believed the bank needed.


Jim Sinclair’s Commentary

As we move toward 2012 please understand there are no certainties even if the words of the agreement speak otherwise. You must protect yourself as no one else is going to do it for you.

As long as there is a financial agent between you and yours, you are in questionable safety.

True Custodian Accounts are the only way to go.

401(k)s Hit by Withdrawal Freezes
Investors Cry Foul as Some Funds Close Exits; Perils of Distressed Markets

Some investors in 401(k) retirement funds who are moving to grab their money are finding they can’t.

Even with recent gains in stocks such as Monday’s, the months of market turmoil have delivered a blow to some 401(k) participants: freezing their investments in certain plans. In some cases, individual investors can’t withdraw money from certain retirement-plan options. In other cases, employers are having trouble getting rid of risky investments in 401(k) plans.

When Ed Dursky was laid off from his job at a manufacturing company in March, he couldn’t withdraw $40,000 from his 401(k) retirement account invested in the Principal U.S. Property Separate Account.

That fund, which invests directly in office buildings and other properties, had stopped allowing most investors to make withdrawals last fall as many of its holdings became hard to sell.

Now Mr. Dursky, of Ottumwa, Iowa, is looking for work and losing patience. All he wants, he said, is his money.

"I hate to be whiny, but it is my money," Mr. Dursky said.


Jim Sinclair’s Commentary

The enormous domino Pakistan is in the marketplace is yet to be discounted.

Pakistan threat ‘worst since Cuban missile crisis’
By James Lamont in New Delhi
Published: May 5 2009 15:40 | Last updated: May 5 2009 15:40

Loss of control in nuclear-armed Pakistan threatened the world with the worst global crisis since the 1962 Cuban Missile Crisis, the closest the world has ever come to nuclear war, a senior former US diplomat warned on Tuesday.

The stark warning comes as US President Barack Obama meets the leaders of Pakistan and Afghanistan at the White House on Wednesday to discuss efforts to stabilise their countries in the face of Islamist insurgencies. It also comes as the international community fears a possible breakdown in the security surrounding Pakistan’s 100 warhead nuclear arsenal and their capture by religious extremists

The stark warning comes as US President Barack Obama meets the leaders of Pakistan and Afghanistan at the White House on Wednesday to discuss efforts to stabilise their countries in the face of Islamist insurgencies. It also comes as the international community fears a possible breakdown in the security surrounding Pakistan’s 100 warhead nuclear arsenal and their capture by religious extremists.

“For every good reason, the Obama Administration is devoting enormous thought to Pakistan, since it is the most dangerous foreign policy problem that Washington presently faces…The evolving situation in Pakistan is potentially the most dangerous international situation since the 1962 Cuban Missile Crisis,” Robert Blackwill, the former US ambassador to New Delhi, said.


Posted at 10:07 PM (CST) by & filed under In The News.

My Dear Friends,

How the World Will Look in 2012

In the effort to protect you from all contingencies, it appears the writer of this article has come to a perfect summation of the ‘What if it all hits the fan.”

You have the key to everything written by Armstrong. You have Alf’s important pronouncements. Now print out and put on your bulletin board how the world will look in 2012. PLEASE STUDY THIS IMPORTANT ARTICLE.


The Worst Case Scenario (Someone Has to Say It)
May 03, 2009

Since the economy began sliding downhill in late 2007, mainstream economic and market experts have consistently erred on the sunny side.

As late as June 2008, mainstream consensus held that the U.S. was heading for a “soft landing” and would avoid recession. Several months later, the slump was acknowledged to have started in January 2008, but we were supposed to see renewed growth by mid-2009, with unemployment peaking in the eight-to-nine percent range. A quick “shovel-ready” stimulus bag was supposed to set us back on the road to prosperity.

In January, recovery projections were pushed forward to late 2009. Today, the consensus is for a mid-2010 recovery, with unemployment peaking at just over 10 percent. Clearly, the mainstream has struggled to catch up to reality for well over one year. What are the chances that they finally have it right this time?

Moreover, the mainstream continues to see what is going on as a plain-vanilla recession that will be quelled with some on-the-fly monetary and fiscal tinkering. Washington, we are told, will pull us out of this slump—as soon as the masses can be enticed back to the shopping malls. Then things will return to how they were before. But what if the experts and politicians are wrong not only on their ever-changing recovery timeline, but also on the nature—nay, the very existence—of a recovery?

America’s reigning political-economic ideology has demonstrably failed. Given that its government is obviously fumbling along without a clue, its foreign and domestic credit is tapped out, and its 300 million people are discovering that their hopes for continuous material improvement will never be met, could the U.S. be headed the way of the USSR?

Instead of a recovery as the mainstream envisions it, what if America permanently bankrupts, impoverishes, and marginalizes itself? What if its cherished institutions fail across the board? For example, what happens when the police realize that their under-funded pension plans cannot support a decent retirement? Will they stay honest, or will they opt to survive by any means necessary? These are questions that the mainstream does not even begin to contemplate.

In the interests of providing you with an alternate vision—something outside the mainstream—below are ten predictions for America through the year 2012. This is not boilerplate doom-saying. Rather, I am laying out in highly specific terms what will happen over the next three-odd years. Others have thrown around the term “Depression”, but I am going to tell you precisely what it means for you, your investments, and your community.

When these predictions come true, I expect to be rewarded with a seven-figure consulting gig, a book contract, or a high-level position in whatever administration succeeds the doomed Obama team—that is, if anyone succeeds it at all.

Prediction one. The twenty-five-year equities bubble pops in 2009. U.S. and foreign equities markets will stop treading water and realign with economic reality. Stock prices will cease to reflect the “greater fool” mentality and will return to being a function of dividend yields, which have long been miserable. The S&P 500 will sink below 500. In a bid to stem the panic, the government will enforce periodic “stock market holidays”, and will vastly expand the scope of its short-selling prohibitions—eventually banning short-selling altogether.

Prediction two. With public pension systems and tens of millions of 401k holders virtually wiped out—and with the Baby Boomers retiring en masse—there will be tremendous pressure on the government to get into the stock market in order to bid up prices.

Therefore, sometime in 2010, the Federal Reserve will create and loan out hundreds of billions of fresh dollars to the usual well-connected suspects, instructing them to buy up stocks on the public’s behalf. This scheme will have a fancy but meaningless name—something like the “Taxpayer Assurance Equities Facility”. It will have no effect other than to serve as buyer of last resort for capitulating smart-money types who want to get out of stocks entirely.

Prediction three. Millions of new retirees—including white-collar people with high expectations for a Golden Retirement—will be left virtually penniless. Thousands will starve or freeze to death in their own homes. Hundreds of thousands will find themselves evicted and homeless, or will have to move in with their less-than-enthusiastic children. Already strained by the rising tide of the working-age unemployed, state and local welfare services will be overwhelmed, and by 2012 will have largely collapsed and ceased to function in many parts of the country.

Prediction four. “Quantitative easing” will fail to restart previous patterns of lending and consumption. As the government sends out additional “rebate” checks and takes ever-more drastic measures to force banks to lend, hyperinflation could take hold. However, comprehensive debt relief via a devaluation of the dollar is even more likely. This would entail the government issuing one “new” dollar for some greater number of “old” dollars—thus reducing both debts and savings simultaneously. This would make for a clean slate a la Fight Club.

As there are many more debtors than savers in the U.S., the vast majority would support devaluation. The Chinese and other foreign holders of our bonds would be screaming mad, but unable to do anything. Every country that has not found a way out of dollar-denominated reserve assets by 2012 will see its reserves eliminated.

Prediction five. The government will stop pretending that it can finance continuous multi-trillion-dollar deficits on the private market. By late 2010, the sole buyers of new U.S. Treasury and agency bonds will be the Federal Reserve and a few derelict financial institutions under government control. This may or may not lead to hyperinflation. (See prediction four).

Prediction six. As the need for financial industry paper-pushers declines and people have less money to spend on lawyers and Starbucks (SBUX), unemployment will rise until the private sector has eliminated all of its excess capacity and superfluous or socially needless jobs. The government’s narrow unemployment figure (U3) will rise into the high teens by late 2010. The government’s broader unemployment figure (U6) will cease to be reported when it reaches 25 percent—it will simply be too embarrassing. Ultimately, one in three work-eligible Americans will be unemployed, underemployed, or never-employed (e.g. college grads permanently unable to find suitable work).

Prediction seven. With their pension dreams squashed, and their salaries frozen or cut, police and other local government workers will turn to wholesale corruption in order to survive. America’s ideal of honest, courteous, and impartial cops, teachers, and small-time local functionaries will have come to an end.

Prediction eight. Commercial overcapacity will strike with a vengeance. By 2012, thousands of enclosed malls, strip malls, unfinished residential developments, motels, truck stops, distribution centers, middle-of-nowhere resorts and casinos, and small-city airports across America will turn into dilapidated, unwanted, and dangerous ghost towns. With no economic incentive for their maintenance or repair, they will crumble into overgrown, plywood-and-sheet-rock ruins.

Prediction nine. By the end of 2010, tens of millions of households will have fallen behind on their mortgages or stopped paying altogether. Many banks will be unable to process the massive volume of foreclosure paperwork, much less actually seize and resell the homes.

Devaluation (as mentioned in prediction four) could ease the situation for those mortgage holders still afloat, but it would also eliminate any incentive for most banks to stay in the mortgage business. In any case, the housing market in many parts of the country will lock up completely—nothing bought or sold.

With virtually no loans being made, even the government will finally acknowledge that most banks are fundamentally insolvent. A general bank run will only be averted through a roughly one trillion-dollar recapitalization of the FDIC, courtesy of new money from the Federal Reserve.

Prediction ten. As an economy is never independent of the society within which it functions, the next few paragraphs will focus on social and political factors. These factors will have as much of an impact on market and consumer confidence as any developments in the financial sector.

Whether rightly or not, President Obama, having come to power at the dawn of this crisis, will be blamed for it by over 50 percent of the population. He will be a one-term president. In response to his perceived socialization of America, there will be a swarm of secessionist and extremist activity, much of it violent. Militias and armed sects will be more prominent than in the early 1990s. Stand-off dramas, violent score-settlings, and going-out-with-a-bang attacks by laid-off workers and bankrupted investors—already a national plague—will become an everyday occurrence.

For both economic and social reasons, millions of immigrants and guest workers will return to their home countries, taking their assets and skills with them. The flow of skilled immigrants will slow to a trickle. Birth rates will plummet as families struggle with uncertainty and reduced (or no) income.

Property crime will explode as citizens bitter over their own shattered dreams attempt to comfort themselves by taking what is not theirs. Mutinies and desertions will proliferate in an increasingly demoralized, over-stretched military, especially when states can no longer provide the educational and other benefits promised to their National Guard troops.

There will be widespread tax collection issues, and a huge backlash against Federal and state bureaucrats who demand three-percent annual pay raises while private sector wages remain frozen or worse. In short, the “Tea Parties” of tomorrow will likely not be so restrained.

Finally, between now and 2012, we are likely to see another earth-shaking national embarrassment on the scale of the 9/11 attacks or Hurricane Katrina and its aftermath. This will demonstrate conclusively to all Americans that their government, even under a savior-figure like Obama, cannot, in fact, save them.

By 2012, there will be a general feeling that the nation is in immediate danger of blowing up or coming apart at the seams. This fear will be justified, given that the U.S. has always been held together by the promise of a continuously rising material standard of living—the famous “pursuit of happiness”—rather than any ethnic or religious ties. If that goes, so could everything else. We were lucky in the 1930s—we may not be so lucky again.



Jim Sinclair’s Commentary

Alleged pay to play will prove itself to be prolific in the retirement fund industry. Not only is this arena plagued with cartoon values on OTC derivatives, but illegalities put an icing on this rotten cake.

Connecticut Dismisses Pension Adviser Accused of Fraud
Published: May 4, 2009

Connecticut added its name on Monday to the list of public entities that have fired Aldus Equity Partners, the pension advisory firm whose founder was accused of securities fraud by federal and state authorities last week.

The Connecticut treasurer, Denise L. Nappier, announced the termination of Aldus’s contract with the Connecticut Retirement Plans and Trust Funds, which invests the pension money for 160,000 teachers and municipal employees.

Ms. Nappier said she ended the state’s relationship with Aldus “in order to protect Connecticut’s interest out of an abundance of caution.”

Aldus is one of the several public pension consulting firms caught up in a criminal and civil investigation into what the Securities and Exchange Commission has called a “multimillion-dollar kickback scheme” involving the New York State Common Retirement Fund.

Last week, Saul Meyer, the 38-year-old founder of Aldus, was charged with a fraud-related felony by the office of the New York attorney general, Andrew M. Cuomo. Mr. Meyer was accused at the same time by the S.E.C. of securities laws violations, as was Aldus Equity. Mr. Meyer has pleaded not guilty.



Jim Sinclair’s Commentary

Today a NYC Judge ruled that the objecting bond holding entities must make their identity known to the public.

This is high stakes poker being played in court in order to get the bankruptcy done fast and clean. A failure to make history in bankruptcy court in terms of time to completion endangers an enormous amounts of jobs, and a domino effect on suppliers as well as scaring the dickens out of GM suppliers and employees.

Word is that the bond holders are primarily hedge funds.

Basically the bond holders are correct in their assertion but these are times when the Constitution seems to not have much influence over legislative or legal actions.

This is a financial soap opera that better play out on budget and on time, or else.

Creditors object to Chrysler deal, setting up fight

NEW YORK (AFP) – – A group of Chrysler creditors objected Monday to the struggling automaker’s bid for a quick restructuring, calling it an illegal bid by the government that violates constitutional property rights.

The objections set up a showdown that challenges the effort led by the US government to save Chrysler through a "surgical" bankruptcy reorganization that clears away key debts and creates a new firm in partnership with Italy’s Fiat.

A court filing by a committee of lenders urged US Bankruptcy Court Judge Arthur Gonzalez to reject the Chrysler effort to sell the key assets of the automaker to a group including Fiat.

Under the plan proposed by Chrysler with the support of th e US Treasury, the lenders would get 2.0 billion dollars in place of the 6.9 billion in outstanding loans.

The creditors said these claims should get priority under law, but that the reorganization plan entails paying off billions of dollars in other debts in full, contrary to the bankruptcy code.


Jim Sinclair’s Commentary

Of course inflation is over the horizon on the near side.

It is an inflation not often understood. It is a currency event, not an economic event.

Warren Buffett: Inflation on the horizon
The Berkshire Hathaway chief says policymakers will have to raise money to pay off costly rescue plans – one way or another.
Colin Barr, senior writer
Last Updated: May 2, 2009: 1:32 PM ET

OMAHA, Neb. (Fortune) — Berkshire Hathaway chief Warren Buffett defended the government’s handling of the economic crisis, but warned that the purchasing power of the dollar may fall as policymakers stretch to finance expensive rescue plans.

Reflecting on the near implosion of the financial system last fall, Buffett said officials should be judged more leniently when facing "as close to a total meltdown as you can imagine."

But he warned that efforts such as the Treasury’s $700 billion Troubled Asset Relief Program and the $787 billion fiscal stimulus plan passed this year by Congress will have to be paid for, one way or another.

And with political leaders showing little inclination to raise taxes, one sure way to pay for excess spending is to inflate the value of the currency, Buffett said. The biggest losers in a surge of inflation, he added, would include holders of bonds and other fixed-income assets.

"I haven’t had my taxes raised," said Buffett, who has run Berkshire for more than four decades. "My guess is the ultimate price will be paid by a shrinkage of the value of the dollar."