Posted at 5:47 PM (CST) by & filed under General Editorial.

My Dear Friends,

I feel that gratuitously fielding calls from those that hide their numbers from view is somewhat of an inappropriate arrangement.

I certainly understand a desire for privacy, however if you wish to enter my privacy and hide yours that is an unfair arrangement.

All calls will be returned from voicemail later and according to my available time if they are appropriate.

Respectfully,
Jim

Posted at 5:18 PM (CST) by & filed under General Editorial.

Dear CIGAs,

Gold’s job is, and will always attempt to during periods of monetary stress, balance the INTERNATIONAL Balance Sheet of the USA.

Putting the Numbers Into The Equation:

$3,125,000,000,000 / 260,272,000 ounces of gold = $12,006.67 per ounce of gold.

In the early 70s I put an advertisement in Barrons predicting gold would rise to $900. When it got near that level, I left for 21 years.

I reappeared officially when Forbes published an article on my career December 10th of 2001. Click here to view the Forbes article…

The mathematics behind the $900 number came from the following equation plus reasonable trend estimates on the number going into the future.

You will note the number today fits in nicely with Alf’s high levels.

  • Major ONE up from $256 to $1,015 (actually 4 times the $255 low);
  • Major TWO down from $1015 to $699, say $700 (a decline of 31%);
  • Major THREE up from $700 to $3,500 (a Fibonacci 5 times the $500 low);
  • Major FOUR down from $3,500 to $2,500 (a 29% decline);
  • Major FIVE up from $2,500 to $10,000 (also a 4 fold increase, same as ONE)

I would not have revealed this unless a recognized expert who has a 100% track record such as Alf Fields predicted it first.

I did not wish to yell "fire in the theatre."

It certainly make the Comex manipulators, who could easily be stopped, look long-term silly today.

Jim

See the following two links as support:

http://research.stlouisfed.org/fred2/data/FDHBFIN.txt

http://en.wikipedia.org/wiki/Official_gold_reserves
In the past, I believe you have said that the price of gold could reach a level whereby in dollar terms this equation will hold:

Oz’s of Gold Held by US x $ Price of Gold = External Debt

From the above links we find:

Federal Debt held by Foreign Investors = $3,125,000,000,000 (as of 12/31/08)

Official US Gold holdings = 8,133.5 tonnes (or 260,272,000 oz’s)

Putting the #’s into the equation:

$3,125,000,000,000 / 260,272,000  = $12,006.67 per ounce of gold

My question is – what is the mechanism or thought process that makes the equation true?

(I guess that I am looking for the why?)

Thank you for your time.
CIGA Rich Gold

Posted at 4:32 PM (CST) by & filed under Guild Investment.

Dear CIGAs,

WE ARE SORRY THE NEWS IS BAD.  GOOD NEWS IS OUR PREFERENCE, BUT WE BELIEVE YOU WANT THE FACTS.  HERE ARE THE FACTS AS WE SEE THEM.

WILL THE EUROPEAN MONETARY UNION CONTINUE?

When Eastern European economies and currencies began to implode, many analysts began to question how long the European Monetary Union can continue. The banking system in Europe is under tremendous pressure from bad loans to over-levered individuals, companies, and governments in the former Soviet Union and Eastern bloc states, such as Russia, Poland, Hungary, Ukraine, Kazakhstan, and the Baltic States to name a few.  I have been thinking of writing about this subject for some time.  Coincidentally, the cover article for this week’s The Economist magazine is a story titled "The Bill that Could Break Up Europe".  

The article has a few main points: 

1. Clearly, one of the big issues of coming years will be the survival of the European Monetary Union and the Euro.

2. Banks in Austria, Italy, and Sweden lent heavily to Eastern European nations, often in the lending country currency.  After the collapse of many Eastern European currencies, these loans are now more expensive to repay.

3. Greece and Ireland are also weak.

4. The European nations who have been slow to install real economic reforms, mainly former Soviet states, must do so immediately.

5. Regulators and banks must watch for and avoid:

a. Currency loan collapse,
b. Bank depositors panicking and removing deposits,
c. Bank shareholders panicking and collapsing the banks’ share prices,
d. The default of the $400 billion in loans owed by Eastern European borrowers that are due in 2009.

If these four problems are handled, most economists believe that the monetary union will hold. 

Many more cynical observers disagree and are backing up their opinions with short sales. European banks are widely shorted, European stock markets are collapsing.

OUR OPINIONS

In our opinion, Europe will break off its admission of unstable Eastern European states.  The monetary union may collapse altogether, but every effort will be made to rescue the system.  It is by no means a sure thing that the Union will collapse, but there is a good probability that at least the European Monetary Union, the Euro, will eventually fail.

Hungarian Forint-Globex CME

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Currently, protectionism, a focus on national self interests and politics over regional interests is leading to the potential break up.  We will go into this in much greater detail in future notes.

THE GLOBAL ECONOMIC OUTLOOK IS NOT BRIGHT

As we mentioned in an earlier letter, the U.S. GDP decline for Q4 2008 was restated with a significantly larger decline.  We look for continued economic slowing and substantial declines in corporate profits worldwide for several more years.  As our readers know, we believe that corporate profits are the key determinate of stock market appreciation or depreciation.  A few industries may buck the trend. 

Below is a summary of the past five quarter’s GDP as reported by the U.S. Government, and our estimates for the next two quarters.

U.S. GDP (% change from the preceding period)

2007          2008                                    2008 (Guild’s Estimates)

Q4             Q1      Q2     Q3     Q4                      Q1         Q2

-.2%         +.9     +2.8*   -.5     -6.2                    -6.5       -5.0

* The first round of stimulus hit Q2 2008.

THE CURRENT WORLDWIDE RESCESSION/ DEPRESSION WILL PROBABALY CONTINUE TO WAX AND WANE FOR SEVERAL MORE YEARS.

IN OUR OPINION, MOST WORLD STOCK MARKETS WILL FALL SUBSTANTIALLY MORE BEFORE THE BEAR MARKETS ARE ENDED.
Global stock market rallies will occur and they will be selling opportunities.

THE TWO TRILLION DOLLAR DEFICIT
In the U.S., calendar 2009 could easily see a $2 trillion budget deficit.  The budget’s official projection is for $1.75 trillion, but the actual number will be higher due to the traditional rosy scenario modeling with unrealistic assumptions about tax receipts.

IN OUR OPINION, THE BEST INVESTMENTS CONTINUE TO BE GOLD AND AGRICULTURE

Gold-COMEX

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For those who sell short we suggest that retail, finance, and real estate continue to be attractive industries from which to pick short sales.

THE U.S. DOLLAR

Continued flows into the U.S. dollar are keeping it strong, in spite of terrible domestic economic and financial problems that have arisen, and are growing, in the U.S.  At some future date, the dollar will roll over and decline substantially.  We do not know the date, but we believe that constant monitoring will allow us to identify dollar weakness, and to move to other currencies at the appropriate time.

REMINDER, FOR A LIMITED TIME…

For no charge, as a service to our readers, we will be happy to examine your current investment portfolio, and explain how we might restructure it to meet your needs for income and capital appreciation in the current environment.  In recent weeks, we have received a number of requests to review investment portfolios and have been responding to them as time permits.  In order to provide a more meaningful evaluation of your portfolio, we will need additional information about your overall financial picture.  Please give us a call if we can help you in this regard.  

Thanks for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com

Posted at 4:20 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

General long liquidation and some fresh short selling continues to occur in the paper gold market at the Comex as short term oriented traders express disappointment in the lack of a reported increase in holdings in the gold ETF, GLD. Gold is still probing for a low from which to base. See the chart for some comments on the various technical levels where that might be found.

Gold moved inversely to the equity markets today as stock prices moved higher in a bit of a relief rally after being down for 5 straight days in a row. Chatter was that China was on the verge of an economic recovery and what is therefore good for China is good for the entire global economy. The surge in copper prices today after yesterday’s strong move higher also fed into that theory. What those espousing the “copper theory” do not understand apparently is arbitrage. Copper prices in Shanghai and London were and are trading at two different price levels and arbitragers are taking advantage of that price discrepancy. That has copper flowing to China and drawing down supplies in London which is being interpreted as signs that China is going to recover first. My view is that once arbitrage corrects the price discrepancy and the Chinese are finished restocking at bargain prices, the drawdown in LME copper stocks will come to an abrupt halt. China is certainly planning on using some of that copper with its own economic stimulus plan but one has to wonder if that sort of thing is going to produce lasting economic gains seeing that part of the problems in China are excessive production and supply capacity. I guess we will find out…

Crude oil prices were strongly higher today as data from the EIA showed a significant drawdown in stocks. The news pushed prices back above the $40 level once again. Crude is up near the upper boundary of its 3 month trading range. I am more confident than yesterday when I suggested that some of the weakness in gold is spreading taking advantage of the high gold/crude ratio. This source of gold selling should not be underestimated.

Generally what we are seeing is what I like to term, “the reflation trade”. Commodities across the board were higher with the rally in the equity markets which undercuts the safe haven bid for gold and for bonds, both of which were lower today. Should the stocks fade the bonds and gold will recover their losses. Should the rally in equities continue a while longer, expect for more pressure to be brought to bear on both gold and Treasuries. If you notice, gold is moving lower as the Dollar exhibits weakness which again, is signifying the lack of safe haven flows.

In an observation, all of the metals, platinum, palladium, silver and copper were higher today. Only gold was down.

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini

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Posted at 2:32 PM (CST) by & filed under In The News.

Advice to the EFTs:

Real versus counterfeit Gold test:

Different companies melt down the gold to analyze if it is real or not.

Many jewellers use an acid test to identify it. You can also check its purity by using face powder. First you need to put a small amount of powder on your hand and rub the gold in that powder. If it leaves a black mark then it is real and if it not then it is fake. It will happen because pure gold forms a chemical reaction with many makeup products. Molecules of pure gold are packed tightly together and make it heavy.

There is one more way to check the purity of gold and that is by seeing if it will sink into water speedily. Fake gold will sink more slowly. This is a bit harder for the untrained eye.

If it is paper gold then that should be apparent. Light a match and apply.

Jim Sinclair’s Commentary

This can put a Big Prick in the Dollar Bubble.

China’s Torpedo Play: Yuan Set to Replace Dollar in Asia
Posted by slowsmile February 10, 2009

The Yuan will soon replace the dollar as the new Asian regional reserve currency. This also confirms that China now will probably dump a large amount of her trillions of reserve dollars and Treasury Bills – a horrific prospect for America with dangerous economic and dollar impacts.

Whilst stumbling over the internet in search of some news I came across a detailed article on the Asia News website headed "Chinese Yuan Set to Replace Dollar". I was somewhat stunned at this headline. This article describes that Beijing is introducing a serious currency experiment – because of the dollar’s volatility and unreliability – to aid in the stability of the Asian economy. But in the Asian News article, it is fairly clear what China’s intentions are – which is to completely decouple both China and Asia from the American dollar and introduce the yuan as the regional reserve currency. My guess is that other Asian governments will fall over themselves to join with this new reserve currency. This will be horrific news for America and all Americans, since it is now apparent that China(and eventually all Asia) will have little further use for the sick US dollar in this heavyweight economic region. This implementation of the yuan as the regional currency of Asia is also entirely legal – ever since Nixon trashed Breton Woods by decoupling gold from the dollar in 1971(And this is what initiated the US government’s Treasury Bill/Debt exchange standard for the world). So, soon Asian members of this new reserve currency will be able to buy raw materials and commodities like Food and Oil for yuan in Asia. Ouch!! That’s really going to hurt the greenback…

With the likelihood of China, Russia, Korea, Taiwan and Japan all eventually joining and also dumping large quantities of their reserve dollars in favour of the yuan currency, which will severely weaken dollar demand and therefore weaken its value, the outlook seems pretty grim for the future of the American economy. And with all those trillions of dollars coming home to roost in America, there is now nothing that the US government will be able to do to avoid inflation, or – much more likely – hyperinflation.

More…

 

Jim Sinclair’s Commentary

Now the right questions are being asked. Who now has the $9.5 trillion?

Making good on OTC derivative trades gone bad. Making good to whom?

Solvent Insurer / Insolvent Insurer
By Barry Ritholtz – March 4th, 2009, 7:30AM

Forget the good bank/bad bank, I have an even bigger beef with this INSANE absurdity: Why are the taxpayers making good on hedge fund trades gone bad?

I cannot figure that one out.

When AIG first faltered, there were two companies jammed under one roof. One was a highly regulated, state supervised, life insurance company. In fact, the biggest such firm in the world.

The other firm was an unregulated structured finance firm, specializing in credit default swaps and other derivatives.

The first firm was Triple AAA rated. They had a long history of steady growth, profitability, excellent management. They made money (as the commercial goes) the old fashioned way: They earned it.

This half of the company held the most important insurance in many families’ financial lives: Their life insurance.  When an AIG policy holder passed away, the company paid off the policy, providing monies that get used to pay off mortgages, kids’ colleges, and surviving spouse’s life time living expenses. Given the importance of this payment, one can see why it is crucial to make sure there are sufficient reserves to make good on the promise of the life insurance policies. The actuarial tables used are conservative, the accounting transparent. The policy payoffs rock solid, utterly reliable.

AIG, this insurance company, was well run. It made a steady income, provided a valuable service to its clients.

It was also very solvent.

More…

Jim Sinclair’s Commentary

The major and internationally respected publication "The Hindu" in India published the following.

My answer is "Fat Chance."

When Jinnah initiated the march of Muslin fundamentalists to form Pakistan, destroying Ghandi’s plan for India, this end was set in cement.

Pakistan has already gone Taliban. Whomever runs the intelligence service of a country, runs the country, that is an axiom.

The world is yet to realize the obvious. The question is who will Dr. Doom and his team work for. The inviting answer is whomever will pay and is Pakistani. Sounds like whomever runs the country to me.

Wake up, stop supporting jehadis: British media to Pakistan

London (IANS): British newspapers Wednesday described Pakistan as a "failing state" and said it was time its politicians and generals stopped supporting jehadis, a day after a terror attack in Lahore killed eight people and wounded six Sri Lankan cricketers.

The Times described as "absurd" the initial claim by a Pakistani minister that the terrorists involved in Tuesday’s attack were Indians.

"President (Asif Ali) Zardari’s principal enemy is within and, until he and his ministers understand this, there is little chance that they will find the will and means to deal with the terrorist threat. India’s assertion that Pakistan has done next to nothing to pursue the masterminds of the Mumbai attacks has proven all too true.

"No real effort has been made to disband Lashker-e-Taiba, the extremist organisation implicated in Islamist terrorism. Pakistan’s initial denials of knowledge or responsibility have been grudgingly followed by a few token arrests – and, on past form, those held will be quietly released in a few months.

"The truth is that the army, the compromised Inter-Services Intelligence (ISI) agency and the political establishment have shown no serious interest in confronting the Islamists. They have too many sympathisers in their own ranks to risk a crackdown and too many fifth columnists ready to tip off the terrorists."

More…

 

 

Jim Sinclair’s Commentary

The most intriguing story on AIG is a strong rumor that AIG manages a high placed politicos Federal Retirement Program. I am looking for confirmation but do not yet have it. Have you?

Two thing are for sure:

1. This entire disaster never needed to happen if it were not for the sociopaths who made their living through OTC derivative manufacturing and distribution.

2. Bailout money goes in the front door or the OTC derivative loser and out the back door to the OTC winner. Who are they?

Is it any wonder now why $9.5 trillion has not done one thing for unemployment and housing?

Other interesting items:

U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up
SEPTEMBER 16, 2008
By MATTHEW KARNITSCHNIG, DEBORAH SOLOMON, LIAM PLEVEN and JON E. HILSENRATH

…Fed will lend up to $85 billion to AIG, and the U.S. government will effectively get a 79.9% equity stake

…It puts the government in control of a private insurer — a historic development, particularly considering that AIG isn’t directly regulated by the federal government.

More…

Pressure to reveal major AIG counterparties grows
Some suggest fees for firms that got billions of dollars from insurer’s bailout
By Alistair Barr & Greg Robb, MarketWatch
Last update: 6:35 p.m. EST March 3, 2009

….The insurer’s portfolio of credit default swaps was still notionally worth $302.2 billion at the end of 2008, despite government-supported efforts to aggressively unwind it during the fourth quarter.

More…

AIG reports $5.29 billion quarterly net loss
Insurance giant takes $11.12 billion charge from credit derivatives
By Alistair Barr, MarketWatch
Last update: 7:08 p.m. EST Feb. 28, 2008

…. The unit’s portfolio of credit derivatives had a net notional exposure of $505 billion at the end of September.

More…

 

Jim Sinclair’s Commentary

This bailout will come as we also bailout the pensions funds.

Hyperinflation is guaranteed.

Alf predictions are herein guaranteed.

FDIC’s Bair Says Insurance Fund Could Be Insolvent This Year
By Alison Vekshin

March 4 (Bloomberg) — Federal Deposit Insurance Corp. Chairman Sheila Bair said the deposit insurance fund could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

“A large number” of bank failures may occur through 2010 because of “rapidly deteriorating economic conditions,” Bair said in the letter. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said. The fund was drained by 25 bank failures last year.

Smaller banks are outraged over the one-time fee, which could wipe out 50 percent to 100 percent of a bank’s 2009 earnings, Camden Fine, president of the Independent Community Bankers of America, said yesterday in a telephone interview.

More…

Jim Sinclair’s Commentary

Ah yes, life in the country is looking better every day.

Brzezinski warns of riots in US
Sat, 21 Feb 2009 15:34:12 GMT

Zbigniew Brzezinski, a former national security advisor, has warned that the US could witness riots if economy continues its downward spiral.

"There’s going to be growing conflict between the classes and if people are unemployed and really hurting, hell, there could be even riots!" said Brzezinski, President Jimmy Carter’s national security advisor, in a recent interview with NBC.

"In 1907, when we had a massive banking crisis, when banks were beginning to collapse, there were going to be riots in the streets," he added.

At least 3.6 million jobs have been wiped out throughout the US since the recession began in December 2007. The jobless rate officially reached a 16-year high of 7.6% (11.6 million people) last month.

Earlier this week, a new Federal Reserve report said that US unemployment could increase to 8.8%, causing the economy to contract for a full calendar year for the first time since 1991, when a contraction of 0.2% was registered.

More…

Jim Sinclair’s Commentary

Here is another item that speaks nasty to the US dollar.

Financial TV seems to be uninterested in this most interesting development.

Chinese yuan set to replace dollar
by Maurizio d’Orlando
01/03/2009 17:55
ASIA – CHINA – U.S.

Milan (AsiaNews) – While the comments of economic observers have focused on what is happening to U.S. public debt and to financial markets overseas, the news media rarely mention what is happening in Asia, almost as if there were not a strong correlation between the two phenomena. But it is logical that a substantial accumulation of foreign exchange reserves in China, Japan and throughout Asia corresponds to an unprecedented supply of dollars, the global reserve currency.

But Asia now understands that the increase of money supply decreases the intrinsic value of a currency. That is why China is seeking a possible and rational attempt to decouple Asian currencies from the dollar, as recent news stories report [1].

In practice, China is trying to make its currency convertible and give it a role as a reserve currency. The first experiment is limited to transactions between Hong Kong and the neighboring provinces. It is also proposed that the yuan renminbi be used in 8 neighboring countries, including Russia. With these countries, agreements have already been signed for the settlement of contracts in the Chinese currency. Perhaps it is no coincidence that the news was released on Christmas Day, when Western markets are closed, reducing the impact on the dollar. In addition, the first weeks of January are usually fairly quiet. This means that although for now the trial is limited, China is preparing to establish full convertibility of its currency to all other currencies. Many in China have spoken out directly or indirectly in this regard: for example, Wu Xiaoling, former vice governor of the central bank, and Zhao Xijun, a professor of finance at Renmin University of China. The current governor of China’s central bank, Zhou Xiaochuan, in early December in Hong Kong had indicated that if the value of the dollar fluctuated drastically, its use as a settlement currency (for commercial transactions) would cause problems. It is clear that Chinese exporters, behind the scenes, are asking the government for permission to charge in yuan instead of dollars, which are losing value. Other warnings came in the middle of last December: the increase in purchases of U.S. Treasury bonds should not lead to the supposition that the U.S. can borrow its way out of the financial crisis [2]. Finally, on January 1, a well-known Chinese economist, Wu Jinglian, wrote that China must change its development model [3], with reference to the paradigm of economic growth driven by exports. We note, incidentally, that even the pope, who obviously has mainly pastoral responsibilities, has said the world must change its model of development [4] ("Are we are prepared to conduct together an in-depth review of the dominant development model, to correct it in a comprehensive and forward-looking way?" Benedict XVI asked).

More…

Jim Sinclair’s Commentary

Disinformation to the extreme:

Money goes in the front door of AIG who is in trouble over OTC derivatives. Then the money goes out the back door to the OTC derivative counter-party. This is no black hole, it is a very green hole enriching the unidentified and unknown new trillionaires.

The Feds’ Bailout Black Hole
Bailouts Are Hard To End – One Reason Not to Start Them, Says Declan McCullagh
March 4, 2009 | by Declan McCullagh

(CBS) If it wasn’t already obvious, this week’s$30 billion check that the U.S. Treasury handed to insurer American International Group should demonstrate the folly of propping up crippled companies.

This is the fourth bailout to AIG, which already has put over $170 billion in government funds at risk, and it won’t be the last. AIG lost $62 billion in the last three months of 2008.

Call it the Feds’ Bailout Black Hole. Once taxpayer funds cross its event horizon, they seem to disappear forever.

It’s not just AIG, of course. General Motors has received $13.4 billion from the Feds so far, and said last month that it will need another $16.6 billion.

That request will almost certainly be granted, even though GM reported last week that it lost $31 billion in 2008, or $3,700 on every vehicle sold. With sales off a stunning 53 percent from a year before, and a gale-force economic storm building, expect GM executives to show up in Washington to request a third or fourth or fifth round as well.

More…

Jim Sinclair’s Commentary

Now do you understand why $9.5 trillion has yet to save one home or produce one job?

U.S. private sector cuts 697,000 jobs in February
Wednesday March 4, 2009, 9:23 am EST
By Burton Frierson

NEW YORK (Reuters) – U.S. private sector job losses accelerated in February, according to a report by ADP Employer Services that suggests hefty employment declines are on the way in the government’s payrolls report due on Friday.

ADP said on Wednesday that private employers cut 697,000 jobs in February versus a revised 614,000 jobs lost in January. The January job cuts were originally reported at 522,000.

It was the biggest job loss since the report’s launch in 2001 and showed the misery of declining employment spreading broadly and evenly throughout the economy.

The service sector, which often resists the grip of recession longer than other areas, accounted for more than half of the total losses, reflecting the rapid deterioration of the economy in recent months.

"None really escaped the sword here," Joel Prakken, chairman of Macroeconomic Advisers, whose firm jointly developed the ADP report, said about the service sector.

More…

Jim Sinclair’s Commentary

As long as you see no return to the short sale uptick rule and no action taken against naked and pool short sellers, no 1930s type rally will occur and GE will be driven into bankruptcy along with motors and all major US industries.

Since these people are far from stupid, logic suggests the disaster is engineered. What comes next is not socialism, it is socially disguised fascism.

Short-Sale Rule Undermined as Bernanke Backs Review
By Edgar Ortega

March 4 (Bloomberg) — The revival of Securities and Exchange Commission rules aimed at curbing speculators who seek to drive down stocks may be hindered by a report from the agency’s own economists.

Daniel Aromi and Cecilia Caglio, economists at the SEC in Washington, said in a December report to former Chairman Christopher Cox that the so-called uptick rule was less effective when needed most, during panics that drive prices down and volatility up. Even with delays imposed by the curb, short sellers in a simulation executed trades 25 percent faster on average when stocks plunged than when prices were steady, according to the study.

“The uptick rule is not going to slow down the market that much,” said Michael Pagano, a finance professor at Villanova University in Villanova, Pennsylvania, who read the report. “The time when you’d want to see the uptick rule become more binding is exactly when you have high volatility, and particularly when you have large negative returns.”

Regulators are considering restrictions on speculators after theStandard & Poor’s 500 Index fell 54 percent in the 20 months since the uptick rule was eliminated. Mary Schapiro, who succeeded Cox, said in January during her confirmation hearings that examining the rule is “one of the things that I would be committed to doing very quickly.” Federal Reserve Chairman Ben S. Bernanke told Congress last week that the measure, removed after 69 years on the books, should be revisited.

More…

Jim Sinclair’s Commentary

This area of disintegration is more serious than either Iraq was and Iran is.

It will take the world by surprise and markets into total turmoil – more so than they are presently if that can be believed.

Has Pakistan become the central front?
Posted by: Myra MacDonald

In a report released late last month, the U.S. Atlantic Council think tank warned that the ramifications of state failure in Pakistan would be far graver than those in Afghanistan, with regional and global impact. “With nuclear weapons and a huge army, a population over five times that of Afghanistan and with an influential diaspora, Pakistan now seems less able, without outside help, to muddle through its challenges than at any time since its war with India in 1971.”

The report, co-sponsored by Senator John Kerry and urging greater U.S. aid, said time was running out to stabilise Pakistan, with action required within months. It’s not even been two weeks since that report was released, and already events in Pakistan have taken a dramatic turn for the worse – from the confrontation between President Asif Ali Zardari and former prime minister Nawaz Sharif to Tuesday’s attack on the Sri Lanka cricket team in Lahore.

“Pakistan’s disintegration, if that is what is now being witnessed, is a tragedy of Shakespearean dimensions, a riveting spectacle, and a clear and present danger to international security,” said a comment piece in Britain’s Guardian newspaper. ”But who in the world can stop it?”

The first question to ask is whether Pakistan has now become the central front in the battle against al Qaeda and its Islamist allies in the Taliban and other militant groups. During his election campaign, President Barack Obama said the central front was Afghanistan rather than Iraq. After he took office he shifted this to “Af/Pak” with the appointment of Richard Holbrooke as special envoy to Afghanistan and Pakistan. With turmoil now reaching Punjab, the heartland of Pakistan, he might need to shift his focus even further east.

More…

Is Pakistan in a state of war?
Lee Glendinning
guardian.co.uk, Wednesday 4 March 2009 09.37 GMT

THE STATE OF PAKISTAN?

Pakistan is in a state of war, the Independent declares on its front page today, following comments from the country’s interior minister after the attack on the Sri Lankan cricket team in Lahore yesterday, which killed six policemen and two bystanders, and injured seven players and officials.

The Guardian reports that Pakistani police had allegedly received specific warnings that militants were planning to ambush the Sri Lankan team, but were unable to prevent the attack because of the country’s political crisis.

The broadsheets examine the significance of the incident, with the Telegraph noting that the commando-style terrorist attack confirms Pakistan is one of the most dangerous places on earth.

"It is all the more dangerous for appearing so civilised, especially in cities such as Lahore, where fine gothic Victorian architecture, white colonial bungalows, and people’s passion for cricket, polo and tea conspire to make visitors feel safe,” the paper notes.

The tabloids focus on the role of former England cricketer Chris Broad, who shielded one colleague from gunfire, and is declared a "bloody hero" by the Mirror in its splash today.

More…

 

American’s New Dream Car:

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Detroit take notice!

Fiat Topolino
From Wikipedia, the free encyclopedia

The Topolino was the name given to an automobile model manufactured by Fiat from 1936 to 1955.

The Topolino (the Italian name for Mickey Mouse, meaning "little mouse") was the name given to the first Fiat 500 which was one of the smallest cars in the world at the time of its production. Launched in 1937, three models were produced until 1955, all with only minor mechanical and cosmetic changes. It was equipped with a 569 cc four-cylinder, side valve, water-cooled engine mounted in front of the front axle, and so was a full-scale car rather than a cyclecar. (The radiator was located behind the engine.)

Its top speed was about 53 mph (85 km/h), and it could achieve about 39.2 miles per US gallon (6.00 L/100 km; 47.1 mpg-). The Topolino sold for about 8,900 lire. Nearly 520,000 models of the Topolino were sold.

In 1955 the mid-size rear wheel drive Fiat 600 was launched by Fiat and that would become the design basis for the new Fiat 500, the 500 Nuova (often called bambino). The 500 Nuova is often thought, mistakenly, to be the only model 500 Fiat.

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Jim Sinclair’s Commentary

As usual the Comex is having their way with you.

Since few who can take delivery are, one can only assume you enjoy the experience.

To all things there is a limit however, and surprisingly that means the Comex gold manipulators as well.

Demand for gold soared in 2008
Natalie Kenway

Demand for gold increased by 64% in 2008, with most investors preferring physical gold such as bars or coins, according to the World Gold Council (WGC).

A report released by Lipper Fund Market Information (FMI) says that European investors sought to diversify assets away from the collapsing financials sector and hedge against the threat of inflation, which may return because of quantitative easing.

“The most striking trend has been the reawakening of investor interest in holding physical gold, with demand for bars and coins rising 87% last year according to the WGC. The most dramatic surge was in Europe, where bar and coin demand increased from just nine tonnes in the fourth quarter of 2007 to 114 tonnes in same quarter in 2008, a 1,170% increase,” says the report.

Demand has also grown this year and the gold price broke the $1,000 an ounce mark in mid-February. Lipper says Citigroup has forecast it could reach $2,000 by the summer.

The report says: “Around 60% of gold is sold for jewellery, mainly in Asia, but when the gold price is high these sales diminish. Recently demand has been driven by investors. The price is being underpinned by weak supply, following a period since 2001 when mining output has declined due to lack of exploration. Unless a central bank starts offloading its gold, this situation is unlikely to change in the near future.”

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Posted at 2:28 PM (CST) by & filed under Jim's Mailbox.

Dear Friends:

A short time ago I sent out an email to my distribution list detailing the move by the state of Oklahoma in passing a declaration of state sovereignty. Since that time, several additional state legislative branches are now in the process of bringing similar measures to the forefront. Below my brief comments is another important development along this same front which I have included in its entirety for your convenience.

It is important to note two things:

(1.) Legislation such as this does not arise unless it has considerable public support in those various states (elected representatives do not generally willy-nilly sponsor legislation which is wildly unpopular with the folks who vote) and
(2.) The fact that more and more states are moving in this direction is a sign that this movement is beginning to spread and could soon become a prairie fire

In my previous email (please let me know if you did not receive that and would like to have it) I argued that the states are the last line of defense against a creeping, no, strike that, surging tidal wave of socialism originating out of the Obama administration and his allies in the Democratically controlled Congress. Since we cannot count on either of those two branches voluntarily restricting their own power, seeing that both of them are now under the control of those who disdain the Constitution and our system of federalism, failure to assert their sovereign rights under the 9th and 10thamendments, will see the states inevitably become servile vassals of their would-be masters in DC.

Do not look for help from the Supreme Court in this fight because the deciding 5th vote in many such matters rests squarely on the shoulders of Justice Kennedy, whom many of you have come to rightfully understand as being notoriously unreliable when it comes to taking an originalist view of the Constitution.

It is becoming increasingly evident that the two systems of political theory that dominate the now United States are mutually exclusive of each other and that unless a bulwark erected by the states arises with which to check the rise of statism in this nation, Washington DC will soon more closely resemble the Brussels of the European Union than the center of the LIMITED federal government which our Founding Fathers not only envisioned, but bequeathed to us in stewardship for each successive generation.

I would urge all of you who love this nation and cherish the values upon which it was founded to not be lulled into a false sense of complacency and particularly not to become apathetic or indifferent to what is taking place around you. Remember, liberty is a rare, precious and fragile thing and is only one generation away from perishing. Do not let it be said by your children, that “my parents saw this happening and did nothing to prevent it”.

Might I urge those of you who might have never before actually taken the time to read through the Constitution of the United States to please do so? First time readers will simultaneously both be amazed and astonished. Amazed at the wisdom of our forefathers in devising such a marvelous system of limited government and astonished by the disdain of those now in power towards the very bedrock principles enumerated therein.

Sincerely,
Dan Norcini

Five More States Invoke the 10th
by A.W.R. Hawkins
Posted 03/04/2009 ET

Last week, HUMAN EVENTS reported that eleven states, Washington, New Hampshire, Arizona, Montana, Michigan, Missouri, Oklahoma, Minnesota, Georgia, South Carolina, and Texas, had all “all introduced bills and resolutions” declaring their sovereignty over Obama’s actions in light of the 10th Amendment.

These actions are in response to the Obama administration’s faux-“stimulus” legislation which directly assaults the rights of states to reject the money coming from the federal government. So far, several Republican governors — among them South Carolina’s Mark Sanford and Louisiana’s Bobby Jindal — have said they would refuse all or part of the stimulus money because of the constitutional infringements and because of the additional unfunded liabilities they impose on the states.

This week, HUMAN EVENTS is happy to report that five more states have decided to invoke the 10th as well.

These five — Tennessee, Kentucky, Kansas, Indiana, and West Virginia — have all begun their action under the 10th Amendment in a bid to protect themselves from what they view as nothing less than an unconstitutional usurpation of power on the part of the Obama administration.

On February 23, HJR 108 was put forth in the Tennessee legislature, indicating that legislators in that state decided “it [was] time to affirm state sovereignty under the Tenth Amendment to the Constitution of the United States and demand the federal government halt its practice of assuming powers and of imposing mandates upon the states for purposes not enumerated by the Constitution,” according to Truman Bean.

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Dear Trader Dan,

In light of your article this morning, the following gains some creditability as a trend of desire, if not reality. I used to feel this thesis was bonkers. I still feel it is quite extreme but anything is possible as people recognize they have been had

The only reason you got the plan to tank all SIVs or what is left of them by this morning’s mortgage program is the fact that $9.5 trillion has gone to the Fat Cats and done nothing for employment or housing – absolutely nothing at all.

This thesis is a dollar dead thesis.

Regards,
Jim

Russian scholar says US will collapse – next year
By MIKE ECKEL

MOSCOW (AP) — If you’re inclined to believe Igor Panarin, and the Kremlin wouldn’t mind if you did, then President Barack Obama will order martial law this year, the U.S. will split into six rump-states before 2011, and Russia and China will become the backbones of a new world order.

Panarin might be easy to ignore but for the fact that he is a dean at the Foreign Ministry’s school for future diplomats and a regular on Russia’s state-guided TV channels. And his predictions fit into the anti-American story line of the Kremlin leadership.

"There is a high probability that the collapse of the United States will occur by 2010," Panarin told dozens of students, professors and diplomats Tuesday at the Diplomatic Academy — a lecture the ministry pointedly invited The Associated Press and other foreign media to attend.

The prediction from Panarin, a former spokesman for Russia’s Federal Space Agency and reportedly an ex-KGB analyst, meshes with the negative view of the U.S. that has been flowing from the Kremlin in recent years, in particular from Vladimir Putin.

Putin, the former president who is now prime minister, has likened the United States to Nazi Germany’s Third Reich and blames Washington for the global financial crisis that has pounded the Russian economy.

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Subject: Watch for mortgage fireworks this afternoon and Thurs

Jim,

I only have a second to send this note to you as I and most of those on the operational side of the mortgage industry are spending an average 18+ hours a day, 7 days a week, trying to anticipate and plan for the operational impact of the Obama mortgage announcement this morning (which, by the way, no one in the mortgage industry fully knows the details of – yet).

All that most in the mortgage industry can agree on at this point in time is that there will be so many calls coming in to mortgage companies by borrowers lining up for their Obama benefits that most companies will not be able to handle them all. In fact, there is some concern that phone capacity in some areas of the country (I mean total phone capacity) may be overwhelmed as people start dialing for dollars this afternoon and Thursday.

Watch for news reports of people who are mad that they could not get through, or did not get the answer they expected, etc., etc.

I hope it isn’t so, but it is a strong possibility in my humble opinion (and in the opinion of others who know far more than I do).

Your CIGA in the Mortgage Finance Industry

Dear Jim,

Here is something of interest especially on Agriculture going forward:

Maria Bartiromo interviewed Jim Rogers for the current issue of Business Week. Rogers was George Soros’ partner when they started the fabulous Quantum Fund. Rogers retired and invented his famous commodity index. Here are some tidbits from the interview:

Question — What do you think of the government’s response to the economic crisis?

Rogers — "Terrible. They’re making it worse. It’s pretty embarrassing for President Obama, who doesn’t seem to have a clue as to what’s going on — which would make sense from his background. And he has hired people who are part of the problem (Treasury Secretary Tim Geithner who was head of the New York Fed, which was supposedly in charge of Wall Street and the banks more than anybody else. And you remember Obama’s chief economic adviser, Larry Summer, helped bail out Long Term Capital Management years ago. These are people who think the only solution is save their friends in Wall Street rather than save 300 million Americans."

Question — So what would you be doing?

Rogers — "What I would like to see happen? I’d like to see them let these people go bankrupt, let the bankrupt go bankrupt, stop bailing them out. There are plenty of banks in America that saw this coming, that kept their powder dry and have been waiting for the opportunity to go in and take over the assets of the incompetent. Likewise, many, many homeowners didn’t go out and buy five homes with no income. Many homeowners have been waiting for this, and now all of a sudden the government is saying: "Well, too bad for you. We don’t care if you did it right or not, we’re going to bail out the 100,000 or 200,000 who did it wrong." I mean, this is outrageous economics, and it’s terrible morality."

On Wall Street-

"Wall Street has paid something like $40 billion or $50 billion in bonuses in the last decade… Stan O’Neal (of Merrill Lynch)… He got $150 million for leaving, even though he ruined the company. Look at the guy at Fannie Mae, Franklin Raines. He did worse accounting than Enron. Fannie Mae and Freddie Mac alone did nothing but pure fraudulent accounting year after year, and yet that guy is walking around with millions of dollars. What the hell kind of system is this?"

On agriculture-

"I really think agriculture is going to be the place to be. Agriculture’s been a horrible business for 30 years. For decades the money shufflers, the paper shufflers, have been the captains of the universe. That is changing. The people who produce real things will be on top. You’re going to see stockbrokers driving taxis. The smart ones will learn to drive tractors, because they’ll be working for the farmers. It’s going to be the 29-year-old farmers who have the Lamborghinis. So you should find yourself a nice farmer and hook up with him or her, because that’s where the money’s going to be in the next couple of decades."

 

Jim and Dan,

"The price will rise high enough to balance out the Federal Government’s outstanding obligations which at the rate they are increasing, means a substantially higher gold price. When that occurs, the price of gold will no longer be free floating in the sense that it is today but it will be more or less a type of floating peg for lack of a better phrase."

Excellent description.

March0409-Eric

Regards,
CIGA Eric

Posted at 2:51 AM (CST) by & filed under General Editorial.

Dear CIGAs,

As the mega hedge funds pound on the non-euro middle European currencies, the mirror image is the USDX breaking to a new high.

As the dollar gets high, it is a good time to review the possible 10 interventions contained in the following article.

Let’s call it tonight the dollar on hedgies’ grass.

Ten Major Threats Facing The Dollar in 2009
by Eric deCarbonnel

Ten major threats are facing the dollar in 2009.

1) Foreign central banks selling US assets

Most of the nations which have been financing the US’s massive current account deficits in recent years have either begun to sell their dollar reserves last year or are planning on selling them this year in order to support their currencies. These nations generally fall into three categories:

A) Oil Producing Nations Oil producing nations have built up lavish spending habits and large dollar reserve in recent years as a result of profits from rising oil prices. Now that commodity prices have crashed, those profits are gone, and those Oil producing nations will have to bankroll their spending by selling their accumulated dollar assets. Saudi Arabia, for example, is projecting a 2009 Budget Deficit, which it intends to finance by selling off its US holdings. Russia, meanwhile, has already sold over 20% of its $598.1 billion reserves, and it can be expected to continue doing so this year. B) Emerging markets that have been relying on capital flows to fund their trade deficits

Many emerging markets around the world have been running trade deficits in recent years financed by capital flows. The most prominent example from this group is India.

India’s strong capital flows from tourism, software services, and remittances not only financed its trade deficit, but also increased its foreign reserves to an all-time high of 316.2 billion in May of 2008. However, due to the global slowdown and selloff in emerging markets, those capital flows have now reversed. India’s central bank, for example, has been forced to sell off its US holdings to curb its currency’s decline, and its total reserves have decreased by $62.2 billion. The central bank’s dollar sales in October alone exceeded purchases by a record $18.7 billion. India now has $254 billion foreign reserves left, the majority of which will be sold this year to protect its currency.

C) "Developed" Nations

The US isn’t the only "developed" nation in trouble. Other "developed" nations (ie: nations that have chosen to outsource the polluting and labor-intensive parts of their economies) are also collapsing. Japan, for instance, has seen a disastrous drop in demand for its goods.

Japan’s Industrial production fell 8.1% in November from the previous month (the biggest drop in the measure since the government started releasing comparable figures in 1953). Demand for Japanese exports is vanishing: November shipments of automobiles plunged 31.9 percent and shipments of microchips and other electronics components fell 29.0 percent. Due to this disappearing demand, Japan has incurred a trade deficit for two straight months for the first time since October-November of 1980.

With their own economic problems to deal with, it will not be other "developed" nations like Japan which will fund the US trade deficit in 2009. In fact, should the dollar begin to collapse, these nations could even be forced to sell their dollar reserves to protect their own currencies.

The dollar implications of this should be clear

After years of bankrolling US consumption with the purchase of dollar assets, most nations are going to be net sellers of dollars in 2009. Just Russia, Saudi Arabia, India, and Japan alone have around $2 trillion in US holdings, and, if the current trade trends continue, America can expect foreign central banks to sell at least 1 trillion dollars this year. This begs the question: who exactly is going to be buying all these assets?

2) The worsening US Trade deficit

The US Trade deficit is worsening because, while imports to the US are falling, exports are falling even faster. Demand for the big ticket durable and capital goods produced by "developed" nations is plummeting much faster than demand for cheap consumer imports, causing widening trade deficits with nations like China. The US’s increasing trade and current account deficits means that America needs to attract over 700 billion dollars this year to keep the dollar from weakening.

3) Treasuries

It is extremely important to understand that treasuries are the modern day equivalent of money under the mattress, and that, when a crisis confidence hits the dollar, treasuries will be redeemed for printed cash from the fed. This is due to the fact that the US can’t allow treasury prices to crash, for fear of having the world’s financial system break down and global trade collapse. So a sustained selloff in treasuries would therefore force the fed to expand its balance sheet by trillions to monetize much of the outstanding federal debt.

Why the government can’t let treasuries collapse Even if the government does not step in to support treasury prices amid a selloff, the end result will be the same. Allowing a crash in treasury market would make the financial system insolvent and cause runs on the bank. The fed would then have to print money to make good on the 6.5 trillion insured deposits around the country, the 1.5 trillion insured senior bank debt, etc… Since trillions of printed dollars would be hitting the marketplace in either case, the fed will choose the least disruptive option of putting a floor under treasury prices with printed money.

Selling treasuries is equivalent to printing money It is deceptive to think that, because the government is borrowing to fund its deficits and bailouts, it isn’t printing money. This is false. Treasuries should be seen for what they really are: "promises to print money".

4) Gold

Rising demand for physical gold is a threat to the dollar because it signals a growing loss of confidence in the paper currency. It is also key to understand that gold prices aren’t rising because of the changing fundamentals of gold, but because of the changing fundamentals of the dollar. In other words, gold isn’t rallying, THE DOLLAR IS FALLING. Gold is history’s oldest and most stable currency. Its utility is simply that it is rare, and for 5,000 years people have used it to store value for the future. All the gold that has ever been produced would fit in a solid cube of about 19 meters on each side, and this cube is only expanding by about 12 centimeters a year (2%). Since the value and supply of gold itself are fairly constant over long periods of time, the main driver of gold price fluctuations is the ebb and flow of confidence in paper currencies. Rising gold prices are, therefore, a signal of a weakening currency, which is why governments hate them and try to suppress them.

Right now, there is unprecedented worldwide demand for physical precious metals. As a result of this surging demand, gold futures have experiencing backwardation, a rare market condition where gold futures trade under spot prices. It is a signal that gold prices are headed higher and that confidence in our currency is fading quickly. When gold prices break above 1,000 again, the event should be recognized for what it is: the herald of a dollar collapse.

5) China and the yuan

China is in a different situation that most other nations as it has a growing trade surplus, which stood at $40 billion as of November. As a result of disappearing Asian demand for luxury items and commodity prices plunging, imports to China crashed 17.9 percent in November while its exports only fell 2.2 percent. This leaves China with a problem the US could only dream of: huge, unsustainable upward pressure on its undervalued currency.

In order to maintain the dollar peg, China would need to fund not only a large part of the US’s gigantic trade deficits, but also the trade deficits of those nations around the world which are selling their dollar reserves. If imports keep falling at their current pace, China will have to buy close to 1 trillion dollars this year alone, which leads to yet another problem: right now, China is not interested In any kind of risky US assets, and what "safe" assets does the US have to sell? (Please don’t say treasuries. All dollar denominated assets are inheritably unsafe due to the currency’s horrible fundamentals.)

Trying to prop up the dollar would end up destroying its currency without benefiting its economy, and China knows this, which is why you have Chinese central bankers on record as saying that, "The US dollar is unlikely to be stable next year". Even more ominous for the dollar, China stealthily announced its plan to make the yuan an international currency on Christmas Eve last year. Whether intentional or not, by allowing Chinese exporters to settle their trades in yuan, China is taking a major step towards supplanting the dollar with the yuan as the world’s reserve currency.

6) Never ending bailouts

Although many Americans such as myself are growing tired of America’s never ending bailouts, it is important to brace yourself because there are a lot more on the way. Here are a few of the bailouts we will be seeing this year which haven’t gotten much media coverage.

A) State government bailouts State budget troubles are worsening. States have already begun drawing down reserves, and the remaining reserves are not sufficient to weather a significant economic downturn. Also, many states have no reserves and never fully recovered from the fiscal crisis in the early part of the decade.

The vast majority of states cannot run a deficit or borrow to cover their operating expenditures. As a result, states must close budget shortfalls by either drawing on reserves, cutting expenditures, or raising taxes. These budget cuts often are more severe in the second year of a state fiscal crisis, after reserves have been largely depleted. The federal government will eventually be forced to step in and offer states some form of assistance to prevent economic collapses and humanitarian disasters. This means another bailout.

B) Unemployment bailout State-funded trusts which pay unemployment benefits are running out of money. The federal government has increased these funding problems through its repeated extensions of unemployment benefits, with the total run of the benefits now being 10 months. Since there is a massive, post-holiday wave of layoffs on the way, shortfalls in unemployment funding are going to come faster and be bigger than most anyone expects. In response to these shortfalls, congress will loan the states whatever is necessary to keep unemployment benefits coming, even if they have to print every last penny. After propping up financial institutions and indirectly paying their executives billions of dollars, they now have, politically speaking, no choice.

C) Pension Benefit Guaranty Corporation (PBGC) bailout PBGC is an agency established by Congress to insure participants in defined-benefit pension plans against losing their pension in the case their employer goes under. Nearly 44 million Americans in more than 29,000 private-sector plans are protected by PBGC, and some 1.3 million workers are already covered by plans that have been taken over by the agency. Although the PBGC is financed from insurance premiums collected from companies and the assets it assumes from failed pension plans, it is a widely presumed that the federal government would bail out PBGC. if it became unable to meet its obligations for retirees.

There are several reasons to expect that PBCC might need such a bailout this year. First, PBCC is underfunded by $11 billion (based on very optimistic projections). Second, the economic downturn and financial market meltdown will likely cause PBCC to take over many private pension plans this year and most of these will be severely underfunded. Third, the agency’s board decided recently to move a large share of the portfolio out of safe assets like Treasury bonds and into riskier assets like stocks. So, depending on how underfunded the pension plans it takes over next are and how badly its investment portfolio does, it is possible the PBCC might require a federal bailout by the end of the year. D) Housing bailouts Since a recovery from our downward spiral is unlikely until the housing markets stabilize, there is a good possibility that we will see another, bigger federal housing bailout this year as congress tries to jumpstart the economy. It is important to note that with every new bailout congress passes, it becomes harder to say no to such a homeowner bailout.

The true moral hazard of bailouts Most commentators misunderstand the true moral hazard of bailouts. While bailouts might have an adverse effect on the future actions of individuals and businesses by encouraging risk taking, the real problem is their effects on future actions of the government. Specifically, each bailouts makes it harder to say no to the next bailout. This pressure to fund future bailouts is made far worse if those receiving bailout money are truly undeserving. After all, If the government is going to give $45 billion to Citigroup (one of the banks responsible for our current mess) and insure $306 billion of its riskiest assets, then how can it say no to bailing out the state of California or South Carolina?

This "me too" phenomenon will get much worse after the treasury market collapses, and the fed starts monetizing the treasuries that were sold to fund the current bailouts. If fed printed money to bailout the banks, why shouldn’t it print more money to fund unemployment benefits? Politically speaking, you can’t bailout the irresponsible and then let the responsible sink, which means congress isn’t going to be saying no to a lot of the bailout requests this year. Unfortunately, these bailouts will become increasingly meaningless because, when you bail out everyone, you bail out no one as you destroy your currency.

7) US budget deficits and (lack of) Tax revenues

The federal government is facing a record breaking budget deficit in 2009. According to the latest government figures, the deficit currently is expected to be $438 billion. For a reliable idea of what our 2009 deficit will look like, to this number we need to: A) Add the cost of funding the on-going wars in Iraq and Afghanistan B) Add the cost of recent programs such as the TARP C) Add the cost of current and future bailouts for the auto companies D) Add the cost of another stimulus package E) Add the cost of the programs promised to us by the new administration

After subtracting a further 500 billion for lost tax revenues due to our collapsing economy, it is easy to project a budget deficit of at least 2 trillion. So far, the deficit now totals $401.6 billion in just the first two months of this budget year, and, at this annual rate, the budget shortfall is already on track to exceed our expected number. All this isn’t even taking into consideration our long term funding shortfall vis-a-vis baby boomers (the future of social security and Medicare is, unfortunately, clear: I would not expect it to be there when you retire (at least not anything like it is today)).

Our 2009 budget deficits will force the government to sell at least another 2 trillion treasuries this year. Taken together with planed sales by foreign central banks and the expected 1 trillion new bailouts mentioned above, at least 4 trillion treasuries will be sold in 2009. The question remains: who is going to buy them? The answer is that the fed will buy them with printed the money.

Don’t worry about the children For years Americans have worried about passing on our enormous federal debts to our children. Well there is good news on this front: you don’t have to worry about the children anymore. America’s massive debts aren’t going to be paid for by a future generation. They will be paid for today through a massive devaluation of our currency.

What the dynamics of hyperinflation will do to the federal deficits The current $2 trillion deficit projections being circulated in the media will prove woefully understated should the dynamics of hyperinflation take hold of the economy. A dollar collapse would cause our tax system to break down. Individuals whose income isn’t keeping up with inflation will forgo tax payments to spend all their cash on food and basic necessities. Businessmen will find that by merely delaying tax payments, depreciation in the dollar will virtually eliminate their true value. Even the tax revenue that is paid will have lost most of its value by the time the government collects it. Meanwhile, the rising cost of everything will drive up the federal spending. The government, lacking adequate income to cover these rising expenses and unable to borrow due to the collapse of the treasury market, will be forced to resort more and more to money creation. If/when hyperinflation takes hold of America, do not be surprised to see 1% of government income come from taxes and 99% come from the creation of new money.

8 ) The "flight to quality"

During the second half of 2008, a "flight to quality" began as hedge funds sold foreign assets to meet redemptions requests. These forced repatriations by hedge funds combined with dollar’s outdated reputation as a safe haven produced a record breaking rally in the treasury markets. This "flight to quality" is not something that hasn’t seen before.

The phenomenon of investors blindly piling into an asset class while ignoring all warnings about the horrible fundamentals and deteriorating outlook has been so common lately that I am growing tired of seeing it. They are called bubbles, and the pattern is always the same:

A) Stock market, October 2007

In October 2007, stocks rallied to new all time highs while commentators made insane predictions about the Dow going to 20000. While this was happening, credit markets collapsing, growing mortgage default were threatened bond insurers with insolvency, and the off-balance sheet vehicles of financial institutions were imploding. Considering that the frozen credit markets are the lifeblood without which the economy can’t function, these new highs made as much sense as subprime CDOs squared. It should not have surprised anyone that stocks collapsed.

B) Commodities, July 2008

In July 2008, commodities rallied to new all time highs while commentators made insane predictions about oil going to $200. All this was happening while thousands of factories in China were shutting down due to rising costs and falling orders. In the face of the world’s plunging demand, the only reason that could possibly have justified $147 oil would have been a complete collapse of the dollar. That was not the case, and the oil bubble burst sending commodity prices plunging.

C) Treasuries and the dollar, January 2009.

The current rally in treasuries and the dollar is the latest in a long line of bubbles. Those same commentator which got it wrong on previous occasions are now predicting months of deflation and a new multi-year bull market for the dollar (worst prediction ever). Out of all the bubbles so far, this current rally in treasuries and the dollar is the most ridiculous. The fundamentals behind the dollar, as outlined in this article, are horrendous. There is simply no rational reason to believe the dollar will retain an ounce of value by the end of 2009.

Side note on how to deal deflationists When faced with a deflationist (one of those individuals who believe in months of deflation and a dollar bull market), ask them this: who is going to finance our trade deficit and bailouts? If they say the world or foreign nations, then list off all the countries with trade deficits who will not be financing the US: Japan, India, Saudi Arabia, Russia, most European countries (with the possible exception of Germany), other oil producers, etc. If they insist on the notion that China alone will pick up the tab for everything, point out that during the great depression, when the US had massive manufacturing overcapacity, America shut down factories rather than extend credit to over indebted foreign nations.

A true "flight to quality" will soon begin Dollar inflows due to hedge fund are over now, as is the dollar rally. As a true "flight to quality" begins, foreigners will start selling their gigantic holdings of US debt. With America’s total external debt standing over $14 trillion, this move will cause the dollar’s value and purchasing power to plunge.

9) A loss of confidence

Confidence is the single biggest factor in determining a currency’s value, and periods of deflation, such as America has been experiencing these last few months, tend to undermine that confidence and create hyperinflation. Economic troubles, deteriorating debt ratios, and scary charts are a few of the factors resulting from a deflating economy that can lead investors to lose confidence in a currency.

US economic troubles The US has boatloads of economic troubles ahead which are sure to eradicate what little confidence is left in our economy. Here are just a few of the negative economic developments to expect this year.

A) Post-holiday wave of layoffs

There is a wave of post-holiday layoffs in the pipelines. Since employers don’t like to layoff workers right before or during the Christmas/New Year’s holidays (bad publicity), there is a slew of pent-up job cuts about to occur this month. Chicago, for example, is preparing for mass layoffs in 2009, and we are likely to see at least 1 million jobs lost in the first two months of this year.

B) Manufacturing sectors problems

After having outsourced its polluting and labor-intensive industries abroad, the US manufacturing sector has been left heavily concentrated in durable and capital goods. Orders for these types of big ticket items are set months, if not years, in advance. Even before Lehman brothers went under, new orders for these products were falling drastically. The full effect of last year’s big drop in orders, including job and production cuts, will only be felt throughout the course of this year. 2009 is not going to look pretty for what is left of our manufacturing sector.

C) New state taxes and spending cuts

As mentioned above, State budget troubles are worsening. Even with the eventually federal bailout, states will still need to drastically reduce spending and raise taxes. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. These cuts, like new taxes, drain an enormous amount of money out of circulation. This leaves business and individuals with less cash and thereby removes demand from the economy, causing state and federal GDPs to contract.

Deteriorating debt ratios With federal debt growing and our GDP shrinking, our debt ratios are rapidly deteriorating. Especially with 2008 over now, economists are going to start putting numbers together and making estimates which will be truly scary. Although official figures aren’t available yet, common sense can give us a good idea of what to expect. Take, for example, our net international investment position.

US’s net international investment position = US owned foreign assets – Foreign owned US assets

America’s net international investment position (what the US owes the world) has likely worsened enormously in 2008. For one, US stock markets have outperformed most foreign markets last year (easy to do since fed can print dollars to prop up the market), meaning that the valuation of US assets abroad decreased far more than the valuation of foreign owned assets at home. Hedge fund deleveraging and redemptions forced the selling of US assets abroad at those discounted prices, decreasing the amount of US assets held abroad and locking in the losses in crashing foreign stock markets. Furthermore, the misguided "flight to quality" which began in the second half of the year undoubtedly increased foreign claims on US assets as money flowed into treasuries. Finally, our trade and current account deficits likely increased foreign dollar holdings by at least $600 billion.

Taken together, these factors have most probably doubled the US’s negative investment position in 2008, from 2.5 trillion to 5+ trillion. Since our GDP for 2009 will shrink below 10 trillion, the US now owes around half this year’s GDP to the rest of the world. News that the US owes foreigners half its GDP will not exactly inspire confidence in the dollar. Scary charts Charts and other visuals can fully convey the magnitude of our current economic crisis in a way words cannot. With 2008 over now, expect to see some truly terrifying graphics depicting just how badly the US economy self-destructed last year. Here are two examples of what these charts will look like:

10) The dollar’s former self

The US dollar in 1944

Following the end of World War II, the United States was a global powerhouse whose domestic industries were producing half of the world’s manufactured goods. At this time, the US was also a creditor nation and held over half the world’s foreign reserves. As the US was running a huge balance of trade surplus, these immense foreign reserves were growing fast. In additions to foreign currencies, the United States also held $26 billion in gold reserves, approximately 60 percent of the world’s estimated $40 billion. Finally, the dollar was the only post-war currency fully backed by gold.

The strength of the US economy, the fixed relationship of the dollar to gold at $35 an ounce, and the dollar’s full convertibility into gold at that price made the dollar as good as gold. In fact, the dollar was better than gold: it earned interest and was more flexible than gold. It was under these strong fundamentals that, in 1944, the Bretton Woods agreement was signed and the dollar became the world’s reserve currency.

Today’s dollar

The fundamentals backing today are just as amazing as they were back in 1944, except in a negative sense. The US has managed to outsourced its industry to the point of total dependency on foreign imports for its basic consumer goods, energy, and, to an extent, even food. The US can today claim the exalted status of the most indebted nation in human history, with every level of society (individuals, corporations, local/state/federal governments, etc) owing an unpayably large amount of money. The US capital markets have been tarnish by widespread financial failures, haphazard bailouts, and blatant corporate corruption, the latest being the Madoff’s ponzi scheme. There are also growing doubts about how much gold, if any, are left in our reserves.

Perhaps the most damning indictment of our currency comes from this contrast between its past and current self. How can today’s dollar be anything but a joke when compared to its former greatness? The dollar’s status as the world’s reserve currency The dollar became the world’s reserve currency through its strong fundamentals and by having the longest reliable history of increasing purchasing power. Today’s dollar has long since lost both those qualities. Those pointing to the dollar’s special status and expecting a new dollar bull market should realize that not everything about being the favored international reserve currency is positive. The downside of being the world’s reserve is that everyone is sitting on a great pile of your money, which they could decide to dump back into circulation.

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