Posted at 6:03 PM (CST) by & filed under Guild Investment.

Dear CIGAs,

Anna Schwartz is 92 years old and is one of the world’s most respected economists.  She co-authored with Milton Friedman the brilliant work A Monetary History of the United States, and has worked with the National Bureau of Economic Research for 67 years.  She retains her emeritus professorship at the Graduate Center of the City University of New York.

Dr. Schwartz has recently been speaking out on the ad-hoc nature of the bailout programs that Finance Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have cobbled together recently.  We find her interview in this past weekend’s Barron’s to be an extremely important read.

In it Dr. Schwartz discusses her prescription for how policymakers should change their approach.

  1. “Stop managing by press release…Ad hoc program announcements have only undermined faith in the U.S. financial system…”
  2. She suggests that they turn off the liquidity that is flooding the world banking system.  “The federal government needs to turn off the liquidity spigot and quarantine bad assets.”
  3. Policy makers need to be more transparent.  She says “It’s like there’s a bunch of guys that are making it up as they go along. They talk about transparency and what they present is opacity, programs that don’t make sense, or are not yet fully laid out. This only increases the already high level of uncertainty and anxiety.”
  4. The problem of pricing illiquid assets must be addressed.  “The problem comes from the introduction of new instruments and the difficulty in pricing these securities or pools of mortgages. The trouble is that mortgage pools are made of good, bad, and insufficient mortgages, and it’s hard to name a price. To make matters worse, the rating agencies were used to rate the securities. And they came up with ratings in an arbitrary manner without really doing due diligence. Now no one has any idea of how to price these securities. And the rating agencies are lowering the ratings on some of the instruments to which they have given top grade.”
  5. The ability to determine who is solvent has yet to be addressed before banks are comfortable lending.  “Another spinoff from mortgage-backed securities is credit-default swaps.  There was no way of evaluating what effect a downturn would have on the derivatives markets and their counterparties.  Few who deal in the derivatives market have a clear notion of their responsibilities.  We have a bewildering array of instruments with uncertain prices.  And as a result, we don’t know who’s solvent and who’s not.  The problem comes from a lack of ability to price the instruments, not a lack of liquidity.  Evidence of the banks’ unwillingness to lend can be seen in the most basic Federal Reserve statistics,…”
  6. Do not disregard the inflationary effects.  “Since mid-summer, Fed credit appears to have ballooned greatly, and that’s behind the upward pressure in the consumer price index.  The Fed pooh-poohs inflation because of a perceived slowdown in oil and gas prices.  But theoretically any increase in the monetary base must be met with a tightening if inflation is to be avoided.  Right now the Fed is pursuing a pro-inflation strategy by lowering interest rates and showering the banking system with liquidity.  They’re not even considering inflation.”

We agree with Dr. Schwartz that the therapies being applied to fix the banking system have shortcomings and severe consequences.  Expansionary fiscal monetary policies will lead to inflation down the road…how far down the road is the question.

We find it surprising that Dr. Schwartz did not receive the Nobel Prize for her work on economics.  Nonetheless, what she has to say now is very important and we believe her voice should be heard.

Thanks for listening,
Monty Guild
www.GuildInvestment.com

Posted at 7:45 PM (CST) by & filed under In The News.

Dear CIGAs,

Keep your eye on the ball.

The Problem is not broken entities. That is a symptom. The basis of the problem is OTC derivatives. That is the foundation that is never addressed. If you treat symptoms without handling the cause the result is more symptoms. Because the aim of remedial actions is improper, there is little chance of a fix, only an ebb and flow in a downward spiral that lacks real intervention.

In competitive shooting it pays to aim, which is the same when attempting to right an economic crisis.

Even the Fed buying these failed special performance contracts mucks up the Fed’s balance sheet without solving the problem. It simply shifts the problem to where more serious trouble could occur, and that is in the credit rating of US Treasuries.

You can say that unless the real target is aimed at, the problem will persist. The problem now however is it is too late. There is no way to net the derivatives as many are written totally naked such as the majority of older credit default derivatives. The ability to net all OTC derivatives died as dislocations began in the ability of the final asset to maintain its value. Credit default derivatives were created on an actuarial type analysis and of course that went boom.

Jim Sinclair’s Commentary

There is no question that Pakistan tightened up its China connection to offset the US. In the final analysis this offsets nothing but complicates everything.

China reiterates support for Pakistan
* Beijing to give Islamabad soft loan, encourage investment by top business corporations

BEIJING: China will stand by Pakistan in all circumstances to safeguard the country’s sovereignty and territorial integrity, while maintaining the existing bonds of their strategic partnership.

This assurance was conveyed to Prime Minister Yousuf Raza Gilani by Chinese leaders during Gilani’s visit to Beijing that concluded on Saturday, Pakistan’s Ambassador to China Masood Khan said.

Gilani, during his interaction with Chinese Prime Minister Wen Jiabao and Chinese People’s Political Consultative Conference Chairman Jia Qingling, was assured that China would continue to help Pakistan meet new challenges in the wake of terrorism and a financial crisis.

China is supportive of Pakistan’s stand on counterterrorism, normalisation of its relations with India and its role as a frontline state to wipe out terrorism, Khan said.

Loan: China assured Pakistan that it would help the country overcome its financial difficulties. Besides giving direct financial help in terms of a soft loan, Chinese leadership will encourage its top-level business corporations to investment more in Pakistan.

More…

Jim Sinclair’s Commentary

It will be critical how the new president, whoever he, is handles these situations. You can be sure that he will be tested severely by his adversaries in his first six months of office.

US special forces launch rare attack inside Syria
Oct 26 05:54 PM US/Eastern
By ALBERT AJI

DAMASCUS, Syria (AP) – U.S. military helicopters launched an extremely rare attack Sunday on Syrian territory close to the border with Iraq, killing eight people in a strike the government in Damascus condemned as “serious aggression.”

A U.S. military official said the raid by special forces targeted the foreign fighter network that travels through Syria into Iraq. The Americans have been unable to shut the network down in the area because Syria was out of the military’s reach.

“We are taking matters into our own hands,” the official told The Associated Press on condition of anonymity because of the political sensitivity of cross-border raids.

The attack came just days after the commander of U.S. forces in western Iraq said American troops were redoubling efforts to secure the Syrian border, which he called an “uncontrolled” gateway for fighters entering Iraq.

A Syrian government statement said the helicopters attacked the Sukkariyeh Farm near the town of Abu Kamal, five miles inside the Syrian border. Four helicopters attacked a civilian building under construction shortly before sundown and fired on workers inside, the statement said.

More…

Jim Sinclair’s Commentary

Why shouldn’t a fertilizer manufacturer buy into the US banking industry?

Bank in Southwest Florida being sold to distant buyers
Published: Monday, October 27, 2008 at 1:00 a.m.
Last Modified: Thursday, October 23, 2008 at 8:20 p.m.

Investors from Brazil plan to buy the struggling Riverside Bank of the Gulf Coast for $23 million.

Cape Coral-based Riverside, which has offices in Nokomis and Venice, needed a capital infusion, said Chairman Elmer Tabor. The buyers were looking to get into the U.S. banking business, he said.

It was cheaper for them to buy an existing bank than to spend at least $30 million to start and grow a new one, Taber said.

“From my point of view, it really is a match made in heaven,” he said. “By infusing capital in the bank, it gets you in a position to get back on your growth plan.”

More…

Jim Sinclair’s Commentary

Here is some good advice when your holdings are in Honest Money in a fake world. This picture was taken of Trader Dan during the rainy season in Houston.

Jim Sinclair’s Commentary

File this relationship in your memory as it will be a topic in the future.

Pakistani PM leaves for Turkey on 5-day official visit
www.chinaview.cn
2008-10-27 19:39:59

ISLAMABAD, Oct. 27 (Xinhua) — Pakistani Prime Minister Syed Yousaf Raza Gillani Monday left for Turkey on a five-day official visit, according to official Associated Press of Pakistan (APP).

Gillani is scheduled to hold bilateral talks with the Turkish leadership in a bid to woo investors and to lobby for the Friends of Pakistan initiative to help the country overcome its financial problems.

“Turkey is our good friend and our relations are not only between the governments, but reach out deep at the people to people level,” he told reporters before boarding his special aircraft for Ankara at the Chaklala Air Base here.

Gillani said he looked forward to the Friends of Pakistan initiative to help the country steer out of the economic crisis it was currently facing.

“Pakistan is an important country and is at the forefront in fighting extremism and terrorism, while spreading the message of peace for the entire world, ” he said.

More…

Jim Sinclair’s Commentary

Pakistan is more than a simple threat, it is a key element in determining our future. Now watch developments concerning Turkey. The difference is that Turkey will play the victim on the world stage in the upcoming unwind of the entire Middle East.

ANALYSIS-Afghan-Pakistan threat worse for next US president
Mon Oct 27, 2008 1:28pm EDT
By David Morgan

“More disturbing still, analysts say, Pakistan is now facing an existential threat from Islamist militants at a time when the nuclear-armed nation and its new civilian government are engulfed in extraordinarily difficult economic problems.”
WASHINGTON, Oct 27 (Reuters) – The next U.S. president stands to inherit a potentially more dangerous challenge in Afghanistan and Pakistan than the situation that led to the Sept. 11 attacks in 2001.

The situation is so serious that analysts say the incoming administration will need to move quickly on a broad new initiative to address the Pashtun region, which both countries share, with a mix of military pressure and economic aid.

“It will be extremely important to have an effective new strategy right out of the box. They cannot wait for a lengthy transition,” said J. Alexander Thier of the U.S. Institute of Peace, a congressionally funded Washington think tank.

The two U.S. presidential nominees, Democrat Barack Obama and Republican John McCain, have pledged to make Afghanistan a top priority if elected to the White House on Nov. 4.

More…

Jim Sinclair’s Commentary

This is just a drop in today’s financial disaster bucket.

US to inject $125bln into major banks this week: Treasury
Monday, October 27 12:59 pm

Nine major US banks will receive 125 billion dollars in capital injections this week from the US government, a Treasury official said Monday.

Assistant Treasury Secretary David Nason told CNBC television that “We executed the agreements for the nine institutions late last night so the money will go out the door for these institutions early this week.”

The nine will get half of the 250 billion dollars to be invested by the government in the banks as part of a massive rescue of the financial system.

The nine banks are Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs, Morgan Stanley, Wells Fargo, Bank of New York Mellon, State Street and Merrill Lynch, soon to be taken over by Bank of America.

The remaining 125 billion dollars will go to smaller banks and lenders which agree to the capital for equity program, which includes mandated limits on executive compensation.

More…

Jim Sinclair’s Commentary

Surprise, surprise!

Smaller US banks fear predators armed with bail-out money
Andrew Clark in New York
Monday October 27 2008 16.53 GMT

America’s smaller banks are claiming they could be vulnerable to government-funded predatory takeovers as their larger rivals enjoy huge cash injections from a $250bn (£157bn) Treasury bail-out.

The list of US banks signing up for government capital swelled to at least 19 today as middle-ranking names including State Street, Capital One and SunTrust announced they were issuing shares to the Treasury in return for about $17bn.

But critics have questioned whether the funds will be put to good use. Lending remains sparse on the high street and there are fears that the recipients will simply hoard the money – or use it to buy smaller players.

Camden Fine, the chief executive of the Independent Community Bankers of America, said it was unfortunate that the US treasury had imposed few conditions on the way the money was used, other than a stipulation that dividend payouts to shareholders must not rise.

“When you have taxpayers’ money used by larger banks to purchase otherwise healthy banks, that just promotes the kind of consolidation that got us into this mess in the first place,” said Fine.

More…

Look who pays for the bailout
Meet the Henrys (high earners, not rich yet). They make $250,000-plus and get taxed to high heaven. And they’re about to get socked again.
By Shawn Tully with Joan Caplin
Last Updated: October 27, 2008: 12:37 PM ET

(Fortune magazine) — Bill Kwon is the embodiment of the American dream. His father – who was arrested by North Korean Communists in the early 1950s for championing democracy – brought the family from Seoul to Illinois when he was a baby. Bill worked himself ragged pursuing every opportunity America’s heartland offered, never leaving Peoria.

Just out of college, he was earning a six-figure salary at a telecom company and sleeping in his parents’ basement. Now he’s a wealth advisor earning $375,000 at Morgan Stanley (MS, Fortune 500), with a five-bedroom brick home, a minivan, a son in private school, and three younger kids to follow. “My dad never made more than $25,000 a year,” says the burly, outgoing Kwon, 39. “When I was a kid, this was the top neighborhood in Peoria. I never thought I could live here.”

For all his blessings, Kwon gets really steamed when politicians and pundits claim that he and other Americans in his income group aren’t shouldering their “fair share” in taxes and should pay more. Nor does he appreciate being branded as “rich” when it’s far from certain he’ll ever build the kind of lavish nest egg the truly wealthy enjoy, especially after the current market meltdown. “I’m not a trust-fund baby,” says Kwon. “Raising taxes for people at my income level is like being punished for success, for working hard.” Kwon’s total tax bill is already more than $100,000, and the bite is taking an ever-rising share of his raises and bonuses, not to mention his wife’s income as a photographer. Kwon fears that America risks killing the incentive for people like him by shrinking the rewards for logging extra hours or starting a business, diminishing the dream that brought his father from Korea.

More…

Posted at 7:38 PM (CST) by & filed under Jim's Mailbox.

Jim Sinclair’s Commentary

The following is a little monetary history from CIGA Rusty Bayonet:

“The painful experience of runaway inflation and the collapse of the Continental dollar prompted the delegates of the Constitutional Convention to include the gold and silver clause in the United States Constitution so that the individual states could not issue bills of credit.”

A few things to think about today:

  1. Where will the next Administration find themselves a Paulson? Regardless of your feelings concerning his actions you must give him credit for his brilliance. His mission is to hold things somewhat together until at least November 2nd and to a maximum of 89 days following that. His performance has been nothing short of a miracle in finagling.
  2. Paulson and Bernanke are not stupid men. Why did they let Lehman go bust when they knew full well of the consequences?
  3. Gold is not part of the problem. It is part of the solution.
  4. You do know that the rally in the US dollar is a product of the mechanics of unwinding massive spreads causing short covering. That makes it a game of musical chairs. When it ends no one knows, but when it ends everyone will hear the blast.
  5. If some major players gave notice to the Comex for delivery of 2000 contracts per month, in ten months the exchange would have to novate (unilaterally declare a contract null and void in all or in part) the gold contract and go to cash trading only. This would unseat the gold banks as the paper tigers of the bullion market pricing, giving the seat to the international cash market. That would only be a repeat in gold of the novation of the silver contract at the Comex in 1980 by “sellers only,” and margin at 100% in silver during the Hunt Crisis. What happened before, just like “The painful experience of the runaway inflation and collapse of the Continental dollar prompted the delegates to the Constitutional Convention to include the gold and silver clause into the United States Constitution.” would this time be the modernized and revitalized Federal Reserve Gold Certificate Ratio.

Dear Jim,

Clearly, “Bretton Woods II” is all about “The revitalized and modernized Federal Reserve gold certificate ratio”. As you said before: The revitalized and modernized Federal Reserve gold certificate ratio will be tied to a reintroduction of M3. It will not be tied as in the pre-Bretton Woods Agreement. The Treasury Department will have nothing whatsoever to do as the open market will do it for the department.

Jim, can you tell us anything more? Have you been contacted by world leaders? What are the chances that this will happen?  Do you still believe that it will be at a level of $1650 USD with 1 EUR = 2 USD?

Ciga Stefaan,
Belgium

  • On September 26, 2008, French, and current European Union president, Nicolas Sarkozy, said, “we must rethink the financial system from scratch, as at Bretton Woods.”
  • On October 8, 2008, Argentine President Cristina Fernandez de Kirchner said “the financial world crisis will need a strong regulation in the matter of financial markets and capital movements throughout the world. A new Bretton Woods will be needed”.
  • On October 13, 2008, British Prime Minister Gordon Brown said world leaders must meet to agree to a new economic system. “We must have a new Bretton Woods, building a new international financial architecture for the years ahead.” However, Brown’s approach is quite different than the original Bretton Woods System, emphasizing the continuation of globalization and free trade as opposed to a return to fixed exchange rates.
  • Italian Economics Minister Giulio Tremonti has said that Italy will use its 2009 G7 chairmanship to push for a “New Bretton Woods.” He has been critical of the U.S.’s response to the September-October 2008 economic crisis, and has suggested that the dollar may be superseded as the base currency of the Bretton Woods system.
  • On 20 October 2008, Tremonti told the Italian daily Corriere della Sera that proposals for a new Bretton Woods had been spread for many years by Lyndon LaRouche.

Dear Stephan,

You make too much of the spin title of “Bretton Woods the Second.”

The present US Administration is a lame duck so that should give you a clue. The problem is a meltdown of OTC derivatives combined with the world’s love of phony assets and earnings that OTC derivatives provided.

The general feeling is that the EU would like to see the US Fed take an official position as the lender of last resort to the EU. It is already so what is the big deal?

The FRGCR, modernized and revitalized, is in the future and not now.

Regards,
Jim

Dan,

Thanks for all your hard work in these very interesting times. I hope all of you at JSMineset know there are many of us out here who are grateful that your forum exists. As gold is the uber currency, I thought you might be interested in this offering.

Best,
CIGA Butch

Europe on the brink of currency crisis meltdown
The crisis in Hungary recalls the heady days of the UK’s expulsion from the ERM.
By Ambrose Evans-Pritchard
Last Updated: 10:52AM GMT 26 Oct 2008

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.

“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

More…

Thanks Dan and Butch,

The numbers say that the developing world debt (4 trillion) is peanuts compared to the OTC (quadrillion plus) mess in the West.

The bottom line is that all paper money is going in the crapper, causing increased velocity of money a la Weimar through the unleashing of inflation of a lifetime during stinking business conditions.

Selecting a currency based on which is deeper in the hole is madness, but then so is the world of finance.

The problem of selection suggests gold will reach a  price a lot higher than my call.

Regards,
Jim

Posted at 8:25 PM (CST) by & filed under David Duval.

Dear CIGAs,

Here’s a thought provoking article about an M.I.T.trained economist, Krishnamurthy Narayanan,  whose GI Global Opportunities Fund has returned 57% in the past year and 19 per cent (compounded) over the past five years.

For those of you who remain convinced of the long term invincibility of the U.S. dollar, he sounds a note of caution if not down right alarm.

He also has some positive things to say about the Canadian dollar, gold, oil and uranium – hardly mainstream views these days. But his views were hardly mainstream a year ago when he warned about the financial crisis that is currently spreading like wildfire around the globe.

Heed the advice of The Smartest Man
October 25, 2008 at 6:00 AM EDT

Crackpot. Crank. Scaremonger. Alarmist.

The Smartest Man We Know has heard the slurs. When you make your living on Wall Street, yet hold the opinion that Wall Street is populated by incompetent fools, you’re not going to win a lot of friends at dinner parties, are you?

And when you bet millions that the American financial system is going to fall apart, that its economy will be seized with fear – and when you were doing this and saying this before there was any hint of real trouble – well, you couldn’t really expect other people to welcome the message, could you?

The Smartest Man, when delivering his prophesies, did not sugar-coat them. “This could potentially make Long-Term Capital [the financial crisis of 1998] look like some kind of walk in the park,” he predicted. “The reckoning has started.” No soft landing this time: It could even be “like the Great Depression of this century.” He said these things not last week, not last month, but on July 26, 2007. That day, the Dow Jones industrial average closed at 13,473.

But The Smartest Man was just getting warmed up. Checking in with him again this January, he was every bit as gloomy. By that point, credit fires were burning all over the place; the Dow was at 12,500; the world’s biggest banks had been forced to turn, cap in hand, to Singapore, China, the Middle East and elsewhere for billions of dollars. It won’t be enough, he said. “There’s a whole bunch of companies that just have to hit the wall. They can’t survive.”

What kind of companies? U.S. financial institutions, mostly. Wachovia looks bad. The major investment banks are shaky. It’s about to get a lot uglier, warned The Smartest Man. “The implications of what’s going on for the U.S. economy, credit, for lending over all, are not that pleasant to think of.” Two months and two days later, Bear Stearns was gone.

More…

Posted at 12:16 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

The following article provides what I believe is a window into what the Chinese actually think in regards to the Dollar. As was pointed out by an informed reader in an earlier post this week and as Jim has long said, the East tends to speak indirectly and drop hints about their intentions and/or wishes that must oftentimes be ferreted out by those of us in the West who do not understand this mode of “diplomacy”. The bluntness of this article is all the more startling for that very reason.

U.S. has plundered world wealth with dollar: China paper
Fri Oct 24, 2008 6:14am EDT

BEIJING (Reuters) – The United States has plundered global wealth by exploiting the dollar’s dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.

The front-page commentary in the overseas edition of the People’s Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.

A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said.

The People’s Daily is the official newspaper of China’s ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.

Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington’s economic policies and global financial dominance in the wake of the credit crisis.

“The grim reality has led people, amidst the panic, to realize that the United States has used the U.S. dollar’s hegemony to plunder the world’s wealth,” said the commentator, Shi Jianxun, a professor at Shanghai’s Tongji University.

More…

Posted at 9:32 AM (CST) by & filed under General Editorial.

Dear CIGAs,

Gold is a currency.

Paper currency insures nothing.

Gold is insurance.

Gold is not a commodity.

Gold will trade at a minimum of $1650 MUCH SOONER THAN I HAVE ANTICIPATED.

The shorts in gold shares will get what they deserve – financial decimation.

Your friend,
Jim