This isn’t some unexplained phenomenon. Martians have not invaded the US Treasury. There are real, measurable reasons behind the dollars demise, and its not rocket science.

Many of you may not remember when gasoline was .25 per gallon. There was a time, if you do not remember or were to young to remember, that this was the case.

Some people think the value of gas has really gone up ten times since then, but has it really? Or is there some other, sinister power at work here?

Interestingly, when you could buy four gallons of gas for a dollar, we also had a very different type of money.

The USD once upon a time was ‘backed’ by gold and silver, which meant that you could take a ’silver or gold certificate’ (what our money used to be called) and hand it in at the US Treasury, the the Treasury was required to give you silver or gold for it.

Todays systems is very different. If you pull a dollar bill out of your pocket, and you look at the top, you will see that is says “Federal Reserve Note”. What does that mean? Well a note, in financial terms, is a promise to pay something of value at a later time. The question here is, pay what?

Today, if you took your Federal Reserve Note to the US Treasury, and asked them to give you ’something of value’ for your ‘Note’, what do you think would happen? They would probably call the police and have you carted off, is what would happen.

So back to the point of the article, why is the Dollar Collapsing in value? The answer is, that because the dollar is no longer backed by anything of value, then the government can create as much of it as it wants, as you can see by the chart below:

So what affect does this have on the Dollar’s Value? Well simply, whenever there is more of something it is worth less. One of the fundamental requirements of money is that it remains scare. If Dollars were as common as rocks lying on the ground, they wouldn’t be worth very much now would they?

We see this taking shape in the form of less demand for Dollars, all around the world. OPEC is in discussions of de-pegging from the dollar, oil producing nations are starting ask for payment in oil in currencies other than the dollar, China has indicated it intends to diversify is national reserves out of Dollars and into other assets, and you have Trillions of Dollars in newly created Sovereign Wealth Funds, whose sole purpose is to buy hard assets around the world with ’surplus’ Dollars before the Dollar becomes worthless. It has gotten so bad, in fact, that the Dollar, once honored and coveted in China, is now seen as your neighbors garbage.

It can’t be that bad, you say. Well actually, it can. The chart below shows how far the purchasing power of the Dollar has fallen since 1913 when we created the Federal Reserve System:

So if you think about it, its not that gasoline, food, real estate, vehicles, etc have actually gone up in value, perhaps its more like your dollars buy much less than they did even 4 years ago, so maybe it takes more dollars to buy the same thing?

So now that you have me really depressed you might ask, what the heck is the solution?

The solution dear reader lies in gold and silver. Gold has retained its purchasing power for thousands of years, while governments have messed with various currencies that go up and down in value. An ounce of gold thousands of years ago would clothe a man very well. Today, and ounce of gold will also clothe a man quite nicely.

If you really want to preserve your wealth, take a serious look and investigate gold.

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While I have to applaud Mr. Greenspan for wanting to assist the poor nations of OPEC in managing inflation, it also is a bit concerning to see that my prior predictions are indeed coming true: The Oil Producers are going to de-peg and take payment for Oil in non-Dollar currencies.

Why is this an issue? Because we have front row seats to round 5 of the death spiral of the dollar.

Depegging from the dollar and then choosing to take payment for oil in non-dollar currencies will be a one-two punch for the worlds ailing reserve currency the US Dollar. By de-pegging, it signals a lack of confidence in the good ‘ole US Dollar. And a lack of confidence not from just anyone, but one of the Dollars biggest customers. If the US Dollar were a product (which it is), and the US were a corporation, we just lost our second biggest customer. The effect? The world is not likely to ‘not notice’ this. OPEC is a massive consumer of USD, as we pay for oil in Dollars, and have for many years. As the world notices that some of the USD’s largest customers have decided to move on, so will the rest of the world. Result? Continued lack of demand for the USD, and continued devaluation.

JEDDAH/ABU DHABI (Reuters) – Former Federal Reserve Chairman Alan Greenspan said on Monday near-record Gulf Arab inflation would fall “significantly” were the oil producers to drop their dollar pegs, in contradiction to Saudi policy.

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Alex’s Notes: Does the FDIC know something we dont know?

By Damian Paletta

WASHINGTON — The Federal Deposit Insurance Corp. is taking steps to brace for an increase in failed financial institutions as the nation’s housing and credit markets continue to worsen.

The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

FDIC spokesman Andrew Gray said the agency was looking to bulk up “for preparedness purposes.” The division now has 223 employees, mostly based in Dallas.

http://online.wsj.com/article/SB120398607404892133.html?mod=hps_us_whats_news

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Alex’s Notes: Do you still think we do not have a dollar inflation problem?

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A sinking feeling for the dollar in China
By Don Lee, Los Angeles Times Staff Writer
February 19, 2008

SHANGHAI — On a frigid winter afternoon, an old dumpling of a man with buzz-cut hair was holed up in his usual spot, the corner of a busy bank lobby here. He reached into his beige fisherman’s vest, pulled out a wad of bills and turned to the people hovering over him waiting to trade currency.

There was the young woman with 40,000 Japanese yen to exchange. Another had a stack of euros. Then an elderly couple, each clutching a handbag, sidled up to the man and asked if he would change their U.S. dollars into Chinese yuan.

“No, I don’t want dollars,” he snapped, shooing them away with a wave of his pudgy hands.

Nobody here wants the lowly American dollar anymore. Not businessmen, not bankers, not even the “yellow bulls” like this man, who has been a black-market trader for years and whose presence in the lobby of a large state-owned bank is tolerated, oddly, by its managers.

As the government has allowed the value of the Chinese yuan to rise faster against the greenback in recent months than it had before, there’s been a mad dash by many more people to sell their holdings. Money-changers are so flooded with dollars that they refuse to take any more. It’s too risky, they say, because the American currency’s value is slipping every day.

In 2007, the yuan appreciated almost 7% against the dollar, and most observers expect the pace to quicken this year. Since Jan. 1, it’s risen a further 2%.

The dollar might have fallen even faster had the Chinese government let the yuan float freely instead of controlling the daily exchange rate within a narrow 0.5% band. A dollar currently trades for about 7.16 yuan, down from a high of 8.28 in the last decade.

In recent years, the dollar’s slide has been much sharper against other major currencies, including the euro and the British pound, reflecting what many experts believe is the result of the U.S.’ borrowing binge over many years. That has left the nation deep in hock to foreigners, of which China is among the biggest creditors.

“It’s meaningless to buy U.S. dollars,” said another Chinese black-market trader whose turf is in front of the Citibank branch in Shanghai’s riverfront area known as the Bund. The currency has lost its luster, he said.

“Even the government doesn’t want it.”

It’s true: China’s central government doesn’t want too many dollars for the same reason — they are a shrinking asset. Thanks to its huge trade surplus, Beijing is sitting on the world’s largest stockpile of foreign reserves — about $1.5 trillion, much of it in U.S. dollars.

One way that the government is dealing with the dwindling dollar is by spending some of it in the U.S. through its sovereign wealth fund and other state-owned enterprises. With $200 billion in assets, China’s government investment fund bought a $5-billion stake in the Wall Street firm Morgan Stanley in December.

“No one would like assets that are depreciating. And government cannot ban people from selling dollars,” said Lu Sui, an associate professor at Peking University’s School of Economics. “That’s why experts and officials are figuring out ways like encouraging people to invest overseas, acquiring companies and resources overseas, and approving [so-called] QDII investments,” which give Chinese investors a way to put their money into overseas financial vehicles, thus encouraging them to keep their U.S. dollars.

Even as it is acting to encourage citizens to buy things with dollars, or keep them, China’s government is allowing faster appreciation of the yuan, also called the renminbi. This may seem counterintuitive, but by raising the yuan’s value, and thus making Chinese goods sold abroad more expensive, Beijing hopes to slow exports a bit. That could reduce its massive trade surplus and inflows of dollars — and the accompanying political pressure from trading partners and domestic inflation that has surged to worrisome levels.

Li Yiwen, 48, was in a hurry one day recently to exchange $10,000 that her relatives in the U.S. were wiring to her. Waiting at a Bank of China branch in central Shanghai, she was anxious to see if the money had arrived.

“Today is my second time coming here,” said the laid-off electronics factory worker on a Thursday afternoon. Li said she didn’t want to wait even a day before exchanging the currency.

Just a few years ago, Li, like many Chinese, treated dollars like the most precious of commodities.

“I thought I should exchange to get dollars whenever I had the chance,” she said. “The dollar seemed to be very valuable and hard to get. . . . People even admired us because we could easily exchange for U.S. dollars.”

As back then, many ordinary Chinese today would rather trade dollars on the black market than at banks, where lines are always long. Yellow bulls can often beat a state bank’s official exchange rate by a hair. What’s more, China’s government last year set a $50,000 limit on how much one person could exchange annually at banks.

“Many feel that $50,000 is not enough, and so they use their close relative’s ID to exchange more dollars,” said Lu Yongzhen, an officer responsible for foreign exchange at a Bank of China branch in Shanghai’s old French concession district.

These days, she said, twice as many people are coming into her branch to sell their dollars as did last year.

The heavy inflow of dollars is a strain on bank branches, too, as they have to exchange or sell them promptly to prevent excess supplies.

Many Chinese businesses face a similar bind.

He Bin, manager of Zhejiang Hexin Toy Co., an export company based in Zhejiang province, collects about $1 million in U.S. dollars every month from his overseas customers. As recently as 2006 — when the yuan appreciated just 3.25% over the entire year against the dollar — he didn’t worry about quickly converting that money to yuan. His finance department usually went to the foreign currency section once a month. He figured any extra dollars in hand could be used to buy imported materials.

“But nowadays, if we get the money in the morning, we go to the bank and convert it in the afternoon,” he said, adding that he faced an even bigger headache when it came to negotiating orders.

“Just a couple days ago, one Japanese client ordered 280,000 wooden toys from us, over $500,000 in U.S. dollars or about 4 million renminbi. . . . But the products aren’t due until June and July this year. And they want us to sign the contract in U.S. dollars,” he said. “It’s very likely that we won’t be able to make any money.”

“I wish I could only be paid in renminbi and get rid of my U.S. dollars as soon as possible.”

http://www.latimes.com/business/la-fi-cheapdollar19feb19,1,4692293.story

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The once mighty dollar is suffering more humiliation as shops in New York City begin accepting euros and other foreign currency as payment.

According to Reuters:

In the latest example that the U.S. dollar just ain’t what it used to be, some shops in New York City have begun accepting euros and other foreign currency as payment for merchandise.

“We had decided that money is money and we’ll take it and just do the exchange whenever we can with our bank,” Robert Chu, owner of East Village Wines, told Reuters television.

The increasingly weak U.S. dollar, once considered the king among currencies, has brought waves of European tourists to New York with money to burn and looking to take advantage of hugely favorable exchange rates.

“We didn’t realize we would take so much in and there were that many people traveling or having euros to bring in. But some days, you’d be surprised at how many euros you get,” Chu said.

“Now we have to get familiar with other currencies and the (British) pound and the Canadian dollars we take,” he said.

While shops in many U.S. towns on the Canadian border have long accepted Canadian currency and some stores on the Texas-Mexico border take pesos, the acceptance of foreign money in Manhattan was unheard of until recently.

This is just another sign that the greenback’s reign is ending. Years of irresponsible expansion in the nation’s money supply are taking their toll. In contrast, the euro is rapidly gaining in value and prestige. Watch for the economic leadership of the world to move from the United States to the European Union.

Buy Gold and Silver Bullion

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Alex’s Notes: Once again, why is this important? What you are seeing is a dominoe effect, where more and more countries are either de-pegging from the USD, or asking for resources such as oil in denominations other than USD.

What effect does this have on the US?

1. It lessens demand on the dollar, sending it farther down the death spiral in value

2. A further devaluing dollar becomes less and less attractive as a reserve currency, therefore will trigger futher dominoes of de-pegging and we will finally see the OPEC nations also ask for oil in currencies other than dollars, starting the cycle again at number 1 above

3. As more and more oil producing countries require currencies other than dollars for oil, it forces the USA to convert already weak dollars into stronger currencies in order to buy oil, not good for strategic or economic purposes

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20 February 2008
Posted to the web 20 February 2008

Kunle Aderinokun
Abuja

A few days after President Umaru Musa Yar’Adua stopped the payment of their share of monthly allocations and excess crude proceeds in US dollars as earlier proposed by the Central Bank of Nigeria (CBN), the 36 states of the federation yesterday said they supported the decision for the fact that the dollar is not the nation’s legal tender.

Also yesterday, the Federal Government directed the Office of the Auditor General of the Federation to carry out a comprehensive audit of all revenue inflows into the Federation Account from the Nigeria Customs Service, Nigerian National petroleum Corporation (NNPC), Federal Inland Revenue Service (FIRS), and Department of Petroleum Resources (DPR) as well as review the petroleum subsidy account.

Fielding questions from finance correspondents after the monthly meeting of the Federation Account Allocation Committee (FAAC) yesterday at the Ladi Kwali Hall of Sheraton Hotel and Towers, Ondo State Commissioner for Finance and Economic Planning and Chairman of Forum of Finance Commissioners, Chief Tayo Alasoadura, said the states’ support for the stoppage of the dollar payment was predicated more on the need to keep the country’s pride and independence than pecuniary reasons.

According to him, “We are happy with the decision. We don’t want dollar payment because we have raised the issue at the meeting that dollar is not our legal tender. Why should the highest revenue body of the country be paying money in dollar?

“We are degrading our own currency for other currencies. Let us have our money in naira. Anyone that wants to convert to dollar can go to the market to buy dollar. The legal tender of Nigeria is naira and we should be paid in naira. We are all in agreement with the President on this matter.

“Our rejection of the dollar payment is not because of depreciation of the dollar. Our decision is based on the country’s pride and our independence. We should be paid in our own legal tender. We don’t want dollar payment.”

Earlier, while declaring open the FAAC meeting, Minister of State for Finance, Mr. Remi Babalola, said that the issue of payment of statutory allocations to all tiers of Government in foreign currency had been laid to rest following the presidential directive.

“As some of you may already be aware, the President and Commander-in-Chief of the Armed Forces has directed that any plan to disburse Federation Account funds to Federal, state and local governments in foreign currency should be stopped forthwith. With this development, I believe that this matter should be laid to rest,” he said.

He added that, “the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) had written the president and my Ministry to express reservations about the proposed policy on several grounds and advising the President to stop its implementation.”

Babalola, however said on the order of the President, he had written to the Office of the Auditor General of the Federation to probe all inflows into the Federation Account with a view to ascertaining completeness as well as ensuring the integrity of balances in the account.

The directive, he said, followed series of complaints about non-remittance of accrued revenue by revenue generating agencies.

He said: “I noted at the last meeting that the issue of completeness of revenue being contributed to the Federation Account by the NCS, NNPC, DPR and FIRS was and is still a matter of great concern to the ministry.

“The activities of the Post-Mortem Sub-Committee to post-review completeness of inflows into the Federation Account did not appear to have had the desired effect.

“To arrest the deteriorating situation, and based on Presidential directive, I have written to the Auditor-General of the Federation to carry out a comprehensive audit of all inflows into the Federation Account. Additionally, the Auditor-General will review the Petroleum Subsidy Account, towards ensuring that government funds in this respect are properly utilised.”

However, speaking on the review of indices by the RMAFC, he noted that there were plans to implement the indices, which would be used in sharing of the Federation Account.

According to him, “with respect to the implementation of the new indices for revenue allocation recently submitted to the Office of the Accountant General of the Federation (OAGF) by RMAFC, I informed you that I have written Mr. President to intimate him about the situation and efforts being made to implement the new indices.

“I have set up a committee comprising representatives of the Ministry of Finance, Accountant-General of the Federation, National Planning Commission and RMAFC to look at the new indices to ensure equity, fairness and due process before implementation.

“The Committee met several times and recommended that the indices currently in place, that is the 2006 indices, should continue to be applied, while efforts are on to ensure the acceptability of the proposed 2007 indices. It should be noted that we are in sync with the NEC that the indices should be brought to currency as latest as practicable.”

After months of work, Babalola disclosed that the National Economic Council (NEC) had adopted the report of the Presidential Committee set up to review the ALGON/Primary Health Centre project. The ALGON/Primary Health Centre project, which involves the construction of a health centre in each of the 774 local governments of the Federation, was the idea of the administration of the former President, Chief Olusegun Obasanjo.
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As part of the decisions, he revealed, “the NEC has advised that the balance held with the Central Bank of Nigeria in an escrow account, amounting to N12.7 billion be refunded to the local governments on an equal basis. We are awaiting presidential directive in this respect.”

Meanwhile, the amount in the excess Crude Proceeds Account has grown to $13.9 billion as at the end of January this year.

The Accountant General of the Federation (AGF), Ibrahim Dankwambo, who confirmed this to newsmen yesterday at the end of FAAC meeting, said the amount represented an increase of 39 per cent over $10 billion accumulated as at August 2007.

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http://allafrica.com/stories/200802200406.html

Michael J. Panzner

The bad news is that Nouriel Roubini is an economist and an academic.

The good news is that this background has not prevented him from being one of the leading authorities on the economic and financial disaster that has been unfolding for many months now.

While other “experts” claim to have seen things coming, he has been out there, at the forefront, sharing his thoughts for all to see (and, earlier on, getting ridiculed for daring to espouse such controversial views.)

In his latest blog post, “The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster,” Professor Roubini addresses the question that TV pundits, stock traders, and most of the mainstream press should have asked, but didn’t.

Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.

To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.

That is the reason the Fed had thrown all caution to the wind – after a year in which it was behind the curve and underplaying the economic and financial risks – and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke Fed would be more cautious than Greenspan in reacting to economic and financial vulnerabilities.

To understand the risks that the financial system is facing today I present the “nightmare” or “catastrophic” scenario that the Fed and financial officials around the world are now worried about. Such a scenario – however extreme – has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.

Start first with the recession that is now enveloping the US economy. Let us assume – as likely – that this recession – that already started in December 2007 – will be worse than the mild ones – that lasted 8 months – that occurred in 1990-91 and 2001. The recession of 2008 will be more severe for several reasons: first, we have the biggest housing bust in US history with home prices likely to eventually fall 20 to 30%; second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitization the ongoing credit bust will lead to a severe credit crunch; third, US households – whose consumption is over 70% of GDP – have spent well beyond their means for years now piling up a massive amount of debt, both mortgage and otherwise; now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted. So let us suppose that the recession of 2008 will last at least four quarters and, possibly, up to six quarters. What will be the consequences of it?

Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession…

First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth. While the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use “jingle mail” (i.e. default, put the home keys in an envelope and send it to their mortgage bank). Moreover, soon enough a few very large home builders will go bankrupt and join the dozens of other small ones that have already gone bankrupt thus leading to another free fall in home builders’ stock prices that have irrationally rallied in the last few weeks in spite of a worsening housing recession.

Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005 through 2007 had these reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages – already dead for subprime and frozen for other mortgages – remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe.

Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles adding to the capital and liquidity crunch of the financial institutions and adding to their on balance sheet losses. And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing – rather than reducing systemic risk – and making the credit crunch global.

Third, the recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are dozens of millions of subprime credit cards and subprime auto loans in the US. And again defaults in these consumer debt categories will not be limited to subprime borrowers. So add these losses to the financial losses of banks and of other financial institutions (as also these debts were securitized in ABS products), thus leading to a more severe credit crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks.

Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided. Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place. The monolines should be downgraded as no private rescue package – short of an unlikely public bailout – is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products.

Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses – and potential runs – on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines’ downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system.

Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate. The housing crisis will lead – with a short lag – to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns. The CMBX index is already pricing a massive increase in credit spreads for non-residential mortgages/loans. And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today.

Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors’ panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide – an institution that was more likely insolvent than illiquid – has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks’ bankruptcies will add to an already severe credit crunch.

Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans – a good chunk of which were issued to finance very risky and reckless LBOs – is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower). Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone – not avoid – such bankruptcies and make them uglier when they do eventually occur. The leveraged loans mess is already leading to a freezing up of the CLO market and to growing losses for financial institutions.

Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD – or recovery given default – rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007). But now the repricing of risk has been massive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate default rates and the junk bond yield issuance market is now semi-frozen. While on average the US and European corporations are in better shape – in terms of profitability and debt burden – than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection – possibly large institutions such as monolines, some hedge funds or a large broker dealer – may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems – cannot be directly rescued by the central banks in the way that banks can.

Tenth, stock markets in the US and abroad will start pricing a severe US recession – rather than a mild recession – and a sharp global economic slowdown. The fall in stock markets – after the late January 2008 rally fizzles out – will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008. Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%.

Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates – TED spreads, BOR-OIS spreads, BOT – Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors’ risk aversion – will massively widen again. Even the easing of the liquidity crunch after massive central banks’ actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks.

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation.

Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per dollar of capital. The recapitalization of banks sovereign wealth funds – about $80 billion so far – will be unable to stop this credit disintermediation – (the move from off balance sheet to on balance sheet and moves of assets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses will dominate by a large margin any bank recapitalization from SWFs. A contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall in asset prices and sharp widening in credit spreads will then be transmitted to most parts of the financial system. This massive credit crunch will make the economic contraction more severe and lead to further financial losses. Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.

A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties – driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities – will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch.

In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century.

Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night? The answer to this question – to be detailed in a follow-up article – is twofold: first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century; second, the extent and severity of this financial crisis will depend on whether the policy response – monetary, fiscal, regulatory, financial and otherwise – is coherent, timely and credible. I will argue – in my next article – that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.

Beginners Guide to Gold and Silver Investing – Free

http://www.forexhound.com/article.cfm?articleID=73230

The notion of pricing oil in something other than dollars has been around for some time. In fact, there’s been a bull market in predicting just that, motivated in recent years by the buck’s general descent in foreign exchange markets and the resulting financial pain the trend has imposed on foreign oil exporters and nations that buy crude with paper printed by entities other than the U.S. Treasury. But rarely, if ever (as far as I can tell), has any high-ranking OPEC official discussed the idea in public in direct and transparent terms. Until now.

On Friday, OPEC Secretary-General Abdullah al-Badri told The Middle East Economic Digest: “Maybe we can price the oil in the euro. It can be done, but it will take time,” according to AFP. He also observed via The Guardian:

In oil exchanges in New York, Singapore or Dubai, you can see the currency is the euro or the yen. But as long as we see the final sign in dollar, that means the pricing is in dollars. It took two world wars and more than 50 years for the dollar to become the dominant currency. Now we are seeing another strong currency coming into the [marketplace], which is the euro.

Talking about pricing oil in something other than dollars is easy, of course. Doing it is something else entirely. The world’s oil market is still firmly tied into pricing crude in dollars, and changing the financial infrastructure will, as al-Badri said, take time–years, perhaps decades. At the same time, no one should dismiss the growing incentive to tackle this task, and where there’s a will there’s a way.

Economic logic certainly suggests that an evolutionary process that allows more oil pricing in other currencies is virtually inevitable. The U.S. no longer dominates the world economy the way it did in 1960s, when OPEC was founded. That’s less about America’s decline than it is about the rise of developing economies and the birth of the euro. Competition, in other words, is on the rise, and so the no-brainer decision to price oil in dollars decades ago looks a heck of a lot less compelling in capitals beyond the U.S. shoreline.

Still, let’s not go off the deep end. A large segment of the market in oil will probably always be priced in dollars for at least two reasons. One, the U.S. is the world’s largest consumer of crude. And for obvious reasons, sellers of oil aren’t eager to annoy their biggest customer with disruptive ideas about pricing. That’s not to say that they won’t engage in such actions, but they’ll likely be on the margins and evolve slowly.

Two, the U.S., for all its troubles of late, real or perceived, remains the planet’s biggest economy and the giant will remain a potent, if not dominant economic force for the remaining days of all who are reading this post.

Still, a rationale investor can’t ignore the implications of euro-priced oil, however remote the odds look in the here and now. With that in mind, it seems reasonable to consider why China, Japan and other nations are so willing to hold dollars when the value of that paper has declined in terms of the home currency. One reason, although hardly the only reason, is oil. There’s a certain economic logic to holding dollars if that’s the medium of exchange for a strategic commodity that you routinely purchase. Then again, if it’s possible to buy oil in some other currency, it’s only reasonable to expect that such a shift will negatively impact demand for dollars. In turn, anyone paying for oil in dollars (hint, hint) will have to pay that much more for the commodity, and all other imports for that matter.

Clearly, the prospect that oil is destined to be priced in multiple currencies is bad news for the dollar, which has enjoyed something of a monopoly to date. At the same time, to the extent that this change is measured and evolutionary, the fallout in any given year should be minimal and perhaps even invisible to the man on the street. Also, oil is but one factor in establishing the dollar’s international value. Nonetheless, the tectonic plates of the world economy are shifting and strategic-minded investors are well advised to pay attention and hedge themselves accordingly.

FREE-Beginners Guide to Gold and Silver Investing

http://seekingalpha.com/article/64085-the-dollar-the-euro-and-oil?source=d_email

by: Pluto

What follows is a collection of quotes from reports and investment signals I receive every day. Most of these are not free. In fact, I pay as much as $3,000 per year for some of my subscriptions. I’ve made selections from the past four days — to give you a peek behind the curtain.

My focus is on global markets and currencies (with side orders of petroleum and commodities). Meanwhile, the world’s focus is on deliberately kicking America’s ass (even if it hurts them in the short term). Many nations are willing to take a hard economic hit to rid the world of a dangerous invading nation with an insane leader threatening to “throw atomic bombs” at his make-believe enemies. As a result, experienced U.S. investors have been dumping their US dollars (frantically over the past ten days) — except for:

1. Investment professionals who watch CNBC — the corporate-profit-driven business cable channel with a propaganda mission to drive up the Dow.

2. Investment professionals with a case of cognitive dissonance, indecisive paralysis, senile dementia, or right-wing brain rot.

Your hand-picked selection of financial quotes appears below the fold.

THURSDAY — Get Ready for Another Dollar Bashing!

What Happened:
Yesterday, the markets got wind of the latest Durable Goods Report. Core Durables came in at 0.3%, as opposed to the 7% expected. That’s a big ouch! Durables as a whole came in – 1.7% vs. +1.6 as expected.

How Markets Reacted:
The U.S. dollar got crushed as traders heard about the less than enthusiastic numbers. They dumped the dollar with new found enthusiasm.

What It Means:
Man, the U.S. dollar just can’t catch a break. This has pushed EUR/USD back above 1.4300.

Are things going to get better anytime soon? More than likely not. Just Wednesday, Bank of America announced the layoff of several thousand employees. Motorola posted a loss this quarter in today’s announcements. Also, Daimler (Chrysler) announced a loss.

So what does this mean in currency land? The dollar is down because the market is losing confidence in the greenback fast. Plus, foreigners are taking more assets from the U.S. (selling their stock holdings of these slowing companies, selling real estate, etc.) and repatriating their money out of dollars and back into their home land.

This makes foreign currencies go up and the dollar go down. Currencies are moved by both economic and sentiment levels. Both right now are in the toilet. So until this picture changes fundamentally, all stock market rallies and dollar rallies should be sold once they start to roll over.

FRIDAY — Nations are Pouring Their Investment Funds into Asia

What Happened:
Foreign powers are now more willing to inoculate themselves from weakness in the United States. They’re doing this by establishing Sovereign Wealth Funds (SWFs), or government-sponsored investment companies. Booming countries – including major oil producers in the Gulf States as well as Russia – are going to make major changes to the way they invest. And Sovereign Wealth Funds are the vehicles they’ll use.

Nations use these government-owned investment corporations to invest surplus reserves. They’re rapidly becoming a popular way for central banks to get rid of their U.S. dollar investments, which are plunging in value on almost a daily basis.

It’s estimated that SWFs currently have more than US$2 TRILLION in assets under management. That’s quite a chunk of change! However, they are expected to exceed US$13 trillion in assets just 10 years from now.

How Markets Reacted:
Already, nations are moving their investment funds into other more stable currencies such as euros and British pounds.

What It Means:
This is just the beginning. Nations will become more aggressive in investing outside the dollar, which means currencies of other nations will get bid up in the process.

We believe the Japanese yen is one currency that will benefit greatly from this trend!

See, SWFs are going to allocate a much greater share of their investments to Asia. For some countries, it will amount to investing in their home region. For others, it will simply be going where the growth is. But all of them are likely to gravitate toward Japan, which is the second-largest economy in the world.

End result:

We will see more dollars being converted into the yen and other Asian currencies.

WEEKEND — Dollar Sell Signal Rumor from Commodities Guru Jim Rogers:

Jim Rogers broadcasted his intentions to sell ALL his U.S. dollars over the next few months. He’s using some of the profits to buy Chinese yuan instead.
According to this living legend, the “policy” of the Federal Reserve is “to debase the currency.” That’s why he’s trading in his dollars for yuan.

He used this little history lesson to point out why he’s so pessimistic about the greenback.

“The U.S. dollar is and has been the world’s reserve currency, the world’s medium of exchange. That’s in the process of changing. The pound sterling, which used to be the world’s reserve currency, lost 80% of its value, top to bottom, as it went through the whole period of losing its status as the world’s reserve currency.”

So even though it’s already been under pressure for years, the dollar still has significant downside risk, yikes! According to Rogers, the Chinese yuan (or renminbi) is “the best currency to buy right now. I don’t see how one can really lose on the renminbi in the next decade or so. It’s gotta go. It’s gotta triple. It’s gotta quadruple.”

MONDAY — A Private Trade Signal for Currency “Options” — and a High-Level Explanation of the Global Money Machine

Background:
I said last Friday that if the G-7 finance ministers didn’t make a strong statement supporting the dollar, the market may perceive it as a green light to sell the buck. Well, they didn’t, and the dollar is suffering the consequences.

The G-7 decided to let the dollar decline. That’s because a falling dollar will tend to add global liquidity to all asset markets. And that was the devil’s tradeoff for the G-7, i.e. either keep the global music playing by sacrificing the buck, or take a stand on the buck and risk a big selloff in global markets and risk more contagion.

Thus, we are in an environment that has to be labeled “The Return of Risk Taking.” And it’s a very fertile environment to hold options that bet on a continued dollar decline.

A Yuan for the Yen:

So what about the yen? Doesn’t it do badly in an environment of risk taking? Well, it used to, but I think the game has changed there, too.

Though the G-7 did not support the U.S. dollar, it did collectively bash the Chinese currency, complaining the Chinese yuan is significantly undervalued. This was the first time we saw the U.S., Canada, and Europe together in such a forceful manner on this issue. I think they are finally getting serious.

The Chinese currency is at least 40% to 80% undervalued against the U.S. dollar according to most analysts — and it could be a lot more than that. The political pressure on China and the inflationary pressures in China, are growing rapidly, thanks to the policy of currency manipulation. We may have finally reached that stage where it is in the best interest of China to act, and let its currency float much higher, much faster.

Why is a stronger yuan good for the Japanese yen?

Japan competes with China on exports to the West. A stronger yuan will allow Japan to implicitly let its currency move higher. I think this will now clear the way for the Bank of Japan to finally hike interest rates. Artificially lower interest rates in Japan have suppressed the yen for a while, as you know. It has been the catalyst for the carry trade.

Thus, we now have another reason why the carry trade in the yen could become unwound, besides just risk. That’s why I am still very bullish on the yen even in an environment of risk appetite.

(This signal goes on to tell investors to buy March Yen at a certain strike price…)

For those playing along at home — I wish I could tell you that if you invest in “international funds” through your mutual fund at work — that somehow you are in the “foreign” market.

Nothing, however, could be further from the truth. As long as your investment is demoninated in dollars, you are losing money every hour of the day.

The big problem this week, is that on Wednesday the Federal Reserve may lower interest rates (to keep the U.S. corporations happy with the Dow Jones Averages) — this will simultaneously cause the dollar to lose a great deal of value around the world. But most Americans won’t notice — yet. And on Friday, an important report on U.S. employment comes out (it’s called the Nonfarm Payroll report). If this shows the U.S. is losing jobs this month (doh!) it will signal to the world that the U.S. economy is in trouble, which will kick the dollar even further down in value.

http://www.docudharma.com/showDiary.do?diaryId=1841

Buy Gold and Silver Bullion

By Moming Zhou & Polya Lesova, MarketWatch

In after-hours trade, crude climbs to new record high of $95.28 a barrel

SAN FRANCISCO (MarketWatch) — Crude-oil futures closed at a new high of $94.53 a barrel on Wednesday after U.S. crude inventories dropped surprisingly in the latest week to the lowest level in two years and the dollar lost ground on the Federal Reserve’s rate cut.

In after-hours trading, crude-oil futures hit a new record high, surging as high as $95.28 a barrel on the New York Mercantile Exchange. Crude oil for December delivery was last up $4.84, or over 5%, at $95.22 a barrel.

Earlier Wednesday during the regular trading session, crude settled up $4.15, or 4.6%, at $94.53 a barrel, the highest closing price for a front-month contract.

Futures prices of petroleum products also surged.

U.S. commercial crude oil inventories, which are inventories excluding those in the Strategic Petroleum Reserve, fell by 3.9 million barrels to 312.7 million barrels in the week ending Oct. 26, the lowest since October 2005, the Energy Information Administration said Wednesday. Analysts surveyed by Platts expected on Tuesday a build of 1.25 million barrels in stocks.

The dollar hit a record low of $1.4503 per euro after the Federal Open Market Committee, the Fed’s rate-setting arm, cut the fed funds rate by 0.25% to 4.5% on Wednesday afternoon. See The Fed.

“This is another bullish report for crude oil,” said James Williams, an economist at WTRG Economics, an energy research firm. “Since the Fed cut met expectations, this is fairly neutral. The oil stock decline, not the Fed, is ruling today’s market.”

“This market continues to trade on fear and short term news,” Williams added.

Low inventories

EIA’s data showed that out of last week’s 3.9 million barrel drop, 3.1 million barrels were from Cushing, Oklahoma, which is the delivery point for crude traded on Nymex.

“The large decline at Cushing stocks adds to the upward pressure,” said Williams.

Mexico’s oil exporting ports closures will probably affect next week’s import and inventory data, according to WTRG’s Williams.

Crude imports over the last four weeks have averaged 9.7 million barrels per day, or 481,000 barrels per day less than the same period last year, the EIA said. Last week’s imports averaged 9.4 million barrels per day, up 278,000 barrels per day from the previous week.

U.S. imports nearly 70%, or 10 million a day, crude oil. Mexico is the second largest supply country after Canada, shipping 1.66 million a day to the U.S., according to EIA.

Fierce storms in the past few weeks forced Mexico to close its main oil exporting ports in the crude-rich Gulf of Mexico, cutting off most of the country’s crude shipments to the U.S. Over the weekend, Mexico’s state-owned Petroleos Mexicanos, one of the largest crude suppliers to the U.S., halted production of 600,000 barrels a day due to inclement weather.

The impact from Mexico will “be made up in the coming weeks,” said Williams.

Fed rate cut

“The Fed cuts were pretty much as expected, but it’s more bad news for the dollar, which means oil will likely rally even more,” said Kevin Kerr, president of Kerrtrade.com and Editor of Dow Jones MarketWatch’s Global Resources Trader.

A rate cut will weaken the dollar and raise the appeal of oil as an alternative investment. A weaker dollar also undermines the value of crude for its producers since the commodity is priced in the U.S. currency, putting upward pressure on crude prices as producers move to raise prices to limit the impact of the weak dollar.

“With a weaker dollar, one cannot expect prices to decline much if at all this week,” said John Person, president of National Futures Advisory Service, a futures brokerage. In fact, he said, the $100 dollar a barrel oil target becomes more of a reality in this scenario.”

“At this point if there were any news-driven shocks to the market that would indicate a supply disruption, oil would certainly be targeted at $120 per barrel, especially in this environment,” Person added.

Drop in refinery capacity

In the same report, EIA, which is part of the Energy Department, also said refinery capacity utilization fell sharply by 0.9% to 86.2%. Analysts expected a 0.5% point increase. The utilization was at the lowest in more than seven months.

“The severe weakness in the capacity utilization number is shocking,” said Global Resources Trader’s Kerr. “If capacity falls there will be less heating oil or gasoline.”

The EIA reported that gasoline supplies rose by 1.3 million barrels to 195.1 million barrels in the latest week, down from last year’s 206.4 million, while distillate stocks, which include heading oil, diesel and jet fuel, grew by 800,000 barrels to 135.3 million barrels, down from 144.1 million of the same period in last year.

“Without a chance to see oil inventories build we are in for higher prices at the pumps and for home heating costs this winter,” said National Futures Advisory Service’s Person.

In a separate report, the American Petroleum Institute reported that crude supplies fell by 3.3 million barrels to 311 million barrels. Distillate stocks rose by 3.1 million barrels to 136.2 million barrels, while gasoline stocks fell by 800,000 barrels to 196.1 million barrels, the API said.

On Nymex, November reformulated gasoline jumped 3.7%, or 8.29 cents, to $2.3400 a gallon and November heating oil rose 3.4%, or 8.32 cents at $2.5078 a gallon.

The EIA will release data on natural gas supplies at 10:30 a.m. Eastern on Thursday. John Kilduff, an analyst at MF Global, expects an injection of 56 billion cubic feet.

December natural gas surged 4.1%, or 33.1 cents, at $8.352 per million British thermal units.

http://www.marketwatch.com/news/story/oil-closes-new-high-9453/story.aspx?guid=%7BF078CE7B%2D5277%2D4358%2D9356%2D7A049EBBAFA6%7D

Diversify Your Income

– FREE Report “10 Reasons Gold Has Farther to Run”

Author: Jim Sinclair

Dear Friends,

If you have not started to protect yourself do so on Monday please.

I am quite concerned for all of you as inertia usually prevents people from protecting themselves. I always wondered how a certain ethnic and religious persuasion could remain in Germany as Hitler was clearly coming into power. I would have been out.

Even then, many of those who remained in Germany saved a great deal of their fortunes by certifying their investment shares in international companies, then burning the paper certificates.

What I am getting at is that the signs of an international financial accident are in those incidents that have recently happened.

There is no hiding place as this is a product of the greed and avarice of the new geek kids on the block who have killed themselves, their industry and hurt everyone everywhere. I am sure that in years to come derivative traders will be seen as pariahs and criminals deserving of prison – not as the multi-millionaires they are today.

On Monday start to protect yourself to the degree it can be accomplished by removing people and institutions between you and your assets. This is the real thing. This is what was discussed in the 1970s but did not happen. It was discussed by many in 2000 but it is happening here and now. There is no functional tool to stop a derivative meltdown. It will like the grim reaper clean out many financial institutions and start a domino effect that I do not want you to be caught up in.

You understand by now that I have the wherewithal (experience/industry contacts/etc.) to know these things before others. Call it cell memory, genetics or my historic access to some of the best teachers on earth in finance, risk management and markets. It’s simply ingrained in me. Truth be told, Bert Seligman, my father, knew before the market knew; Jesse Livermore, one of the greatest traders of all time, knew before the market knew. Who knows how? I generally know before the markets figure things out. I tend to know the end at the beginning. It has been so all my life. This is why I am able to do the things I do, take the risks I take, and build the companies I have built.

I want you to be safe. What can it cost you to take precautions? I believe that the cost to you is nothing. I am telling you to take less risk, not more. I know the central bankers will burn the dollar before all this comes down. What concerns me is that all this could easily get out of hand.

Operation “White Noise,” is getting hair thin as more and more financial institutions fess up to their ignorant greed-driven self destruction.

Tell me if you have started. I want to get a feel for how many of our CIGAs are taking action. Drop me an email at trechairman108@mac.com. I am not asking for a tome but simply “yes, I have started to protect myself.” Help me help you by giving me a feeling for how many of you have taken action.

But first some advice:

What you cannot withdraw and is in cash put into short term treasury instruments. For those able, I prefer Swiss and Canadian dollar Federal T bills.
Convert your investment shares into paper certificates. Do not lose them!
Reduce personal debt for peace of mind.
If you have coins stored at a coin dealer take delivery of them and request prompt service.
If you have accounts at Internet financial entities close them and transfer the accounts to a smaller firm that can confirm in writing that they have no over the counter derivative exposure. Be sure to ask for certificates for your share investments and take delivery of them.
Reduce – if not eliminate – your margined position even if that means selling down to rid yourself of debt on your securities or gold assets. The swings in gold now are going to become so violent that most people will not be able to tolerate it when debt is attached to their positions.
This is a time to be conservative, not adventurous. Gold is going to range trade wildly, but it is as I see it targeted here and now for $1,050.

My greatest concern is that my longstanding price objective of $1,650 might be much too low an estimate.

Sincerely,
Jim

Diversify Your Income

– FREE Report “10 Reasons Gold Has Farther to Run”

Road to Ruin (Excerpt)

Road to Ruin:
The gentlemen at Pimco are, once again, the leading cheerleaders for another round of easier “money.” Calling for the Fed to cut rates to 3.5%, Bill Gross commented Wednesday on Bloomberg television: “The nominal [third quarter] GDP number was 4.7%. Any time you get a nominal GDP growth less than 5% the economy is basically struggling. The U.S. needs at least 5% nominal growth in order to pay its bills on a longer term basis.”

I will, once again, take the other side of their analysis. First of all, 4.7% traditional nominal GDP growth would have easily in the past “paid its bills.” It doesn’t get it done today – even with 4.7% unemployment – specifically because of a long period of gross monetary excess. For some time now, the U.S. economy has been hopelessly finance-driven, and the greater and more protracted the Credit excesses the greater the “transformation” of the economic structure. And it is the underlying real economy that today cannot “pay its bills” and is therefore hooked on ever increasing Credit inflation. This should by now be recognized as the Road to Ruin. Contemporary finance and its operators should be held accountable.

The majority of contemporary “services” economic “output” is intangible in nature. The system creates various types of new financial claims (Credit), and this new purchasing power spins today’s economic wheels. It seemingly works wonders during the boom, but the end result is an endless mountain of financial claims backed by insufficient real economic wealth-creating capacity. Nominal GDP would “pay it bills” today only in the context of monetizing additional debt – or inflating the quantity of Credit to inflate “purchasing power” to inflate incomes and earnings – all in order to service previous borrowing excesses.

Admittedly, the Fed has opportunely administered several bouts of “reflation.” We have, however, reached the point where another round will be self-defeating. To throw out some numbers, from the Fed’s Z.1 “flow of funds” report we know that Total Credit Market Borrowings (non-financial and financial) expanded at a $3.75 TN annualized rate during the first half. To put the immense scope of recent Credit inflation into perspective, Credit Market Borrowings expanded on average $1.233 TN annually during the nineties (see chart above). Total borrowings accelerated to $1.694 TN in 2000, $2.013 TN in 2001, $2.365 TN in 2002, $2.767 TN in 2003, $3.085 TN in 2003, $3.380 TN in 2003, and $3.825 TN last year. It is this degree of Credit creation – and the associated Risk Intermediation – that is today untenable and unsustainable at any interest rate.

Before I dive into the U.S. Credit system fiasco, I was struck by a story by Jamil Anderlini from today’s Financial Times:

“The murder of a man who jumped a petrol queue in China’s central Henan province on Wednesday is the stuff of nightmares for the authoritarian Chinese government. Faced with worsening fuel shortages across the country Beijing raised petrol, diesel and jet fuel prices at the pump by almost 10% yesterday, in an effort to boost domestic supplies and exorcise the spectre of social unrest. The policy reversal came as shortages spread to the capital, which is usually immune from the country’s periodic supply crunches. But the government is unwilling to allow prices to rise too much because of a morbid fear of spiralling inflation, which has a history of toppling governments in China and is currently running at a 10-year high, above 6%… Soaring global crude oil prices…pose a serious dilemma for Beijing, which last raised its tightly controlled fuel prices in May 2006. China is the second-largest crude oil consumer after the US and although it was a net exporter as recently as 1993 it now relies on imports for nearly 5% of its crude supply. The current shortages, particularly of diesel, result from a combination of high global oil prices and strict government controls, causing huge losses for Chinese refiners that must pay more for oil but cannot raise prices at the pump.”

I pose the following question for contemplation: How much would the Chinese government, with their $1.4 TN stockpile of chiefly dollar reserves, be willing these days to pay for the necessary energy resources to sustain their economic boom and stem social unrest?

The legacy of years of runaway U.S. Credit excess includes many trillions of dollar liquidity balances circulating around the globe. Chinese reserves, for example, have inflated almost seven-fold in just five years. On the back of unprecedented global Credit and liquidity excess, energy, food, precious metals and other commodities now attract intense demand and virtually unlimited purchasing power. Our economy – our financially stretched consumers and vulnerable businesses – will now have no option other than to bid against highly liquefied competitors for a lengthening list of resources. Failure to recognize that this situation is a major inflationary problem is disregarding reality. The same can be said for suggesting that we can continue on this current course – with massive Current Account Deficits and rampant speculative financial outflows to the world fueling myriad dangerous Bubbles and maladjustment on an unprecedented global scale.

Today’s backdrop is unique. There are literally trillions of dollars of liquidity slushing around the world keen to hold “things” of value. Liquidity sources include the massive central bank reserve holdings as well as funds at the disposal of the sovereign wealth funds. Importantly, the more apparent becomes U.S. financial fragility, the keener they are to stockpile real “things”. There is as well a global leveraged speculating community, in control of trillions of liquid purchasing power. The speculators are also keen to acquire (non-dollar) “things” as opposed to our securities. Indeed, it should be noted that this is the Federal Reserve’s first attempt at reflation where U.S. securities are not the speculators’ or foreign central banks’ asset class of choice.

Not only is the pool of potential global buying power unparalleled in scope. It is fervidly attracted to tangible assets – as opposed to U.S. securities – and is highly speculative in character. At the same time, an unwieldy global boom is stoking unprecedented demand in China, India, Asia generally, and the other “emerging” markets including Russia and Brazil. Throw in various weather related issues and energy production constraints and the prospect for some very serious bottlenecks and shortages has developed.

Granted, these dynamics have been evolving for some time now. What has changed is the speed and breadth of financial crisis enveloping the U.S. financial system. When I read of mounting energy and food shortages and witness the unfolding run on the U.S. financial sector, as an analyst I must contemplate the likelihood we have entered a uniquely unstable monetary environment at home and abroad. In short, the backdrop exists where incredible dollar liquidity flows could be released (from myriad sources) upon key things (notably energy, food, metals and commodities) already in severe supply and demand imbalance. Again, how much are the Chinese willing to pay for energy? The Russians for food? The Indians for commodities in general? How much will investors be willing to pay for precious metals as a store of value? How aggressively will the speculators “front run” all of them? Can the Fed afford to continue fueling this bonfire?

I have so far this evening purposely avoided the unfolding U.S. financial crisis, a historic fiasco that took a decided turn-for-the-worst this week. I’ll admit that I am rather amazed that key financial stocks – including the financial guarantors, “money center banks”, and Wall Street firms – were hammered yet the market maintained its composure. NASDAQ was actually up on the week, as major technology indexes added to their robust y-t-d gains. I’ll assume there is a confluence of great complacency and gamesmanship, with operators determined to play aggressively through year-end (bonuses and payouts).

I wouldn’t bet on the stock market holding 2007 gains for another eight weeks. The Credit meltdown is now moving too fast and furious. Importantly, confidence is faltering for the entire Credit insurance industry, including the mortgage insurers and the financial guarantors. This is a devastating blow for the securitization marketplace, already reeling from pricing, liquidity and trust issues. The Credit system has lurched to the edge of meltdown, while the economy hasn’t even as yet succumbed to recession. It’s absolutely scary. Last week I wrote that subprime and the SIVs were “peanuts” in comparison to the CDO market. Well, the CDO marketplace is chump change compared to Credit Default Swaps and other over-the-counter (OTC) Credit derivatives that, by the way, have never been tested in a Credit or economic downturn.

The scale of the Credit “insurance” problem is astounding. According to the Bank of International Settlements, the OTC market for Credit default swaps (CDS) jumped from $4.7 TN at the end of 2004 to $22.6 TN to end 2006. From the International Swaps and Derivatives Association we know that the total notional volume of credit derivatives jumped about 30% during the first half to $45.5 TN. And from the Comptroller of the Currency, total U.S. commercial bank Credit derivative positions ballooned from $492bn to begin 2003 to $11.8 TN as of this past June. It today goes without saying that this explosion of Credit insurance occurred concurrently with the expansion of the riskiest mortgage (and other) lending imaginable. It’s got “counter-party fiasco” written all over it.

The stocks of Ambac and MBIA collapsed this week. I can only surmise that part of the selling pressure emanated from players caught on the wrong side of rapidly widening Credit default swap prices. Since these companies have limited amounts of bonds trading in the markets – in debt markets generally suffering acute illiquidity – those needing to hedge rising default risk in this industry had little alternative than to aggressively short the stocks. And the faster the stocks declined, the wider the CDS spreads and the more “dynamic” hedge-related selling required. This dynamic could play out throughout the financial sector and beyond. The “dynamic hedging” (shorting securities to offset increasing risk on derivatives written) of Credit risk today poses a very serious systemic issue.

The general inability to hedge escalating default and market risk has become and will remain a major systemic problem. Liquidity has disappeared, and there now exists an untenable overhang of risky securities and derivatives to be liquidated and/or hedged. Most playing in the Credit derivatives market lack the wherewithal to deliver on their obligations in the (now likely) event of a systemic Credit bust. The vast majority were “writing flood insurance during a drought, happy to book annual premiums while expecting to purchase reinsurance/hedge if and when heavy rains ever developed.” Well, it all happened at a pace so much faster than anyone ever contemplated. So abruptly, the flood is now poised to wreak bloody havoc the scope of which was unimaginable – and there’s no functioning reinsurance market.

Unlike this summer, this week saw the Credit crisis engulf the epicenter of the U.S. Credit system. Not surprisingly, the Fed rate cut only seemed to exacerbate market tension, with oil, gold and commodities spiking and the dollar faltering. Those arguing that the Fed needs to cut rates aggressively to avoid recession are disregarding the much higher stakes involved. There is today no alternative to a wrenching recession. The economy is terribly maladjusted, while the financial sector is at this point incapable of intermediating the massive amount of ongoing Credit necessary to keep this Bubble Economy inflated. Wall Street “structured finance” is today faltering badly, now leaving the highly vulnerable banking system with the task of sustaining the ill-fated boom. The least bad course for the Federal Reserve at this point would have a primary focus on supporting the dollar and global financial stability.

http://www.prudentbear.com/index.php?option=com_content&view=article&id=4812&Itemid=55

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Alex’s Notes: My main reason for posting the article below is to note what the Chinese are doing in preparations for their massive upcoming natural resource needs.

Between China and India, there is a rapidly growing group of some 1 billion people with new middle class incomes. When all of these people all decide they each want a car, a microwave, a new refrigerator, a new LCD TV, and all the amenities some of us in the western world take for granted, the natural resources requirements to fuel this wave of improved lifestyle will be staggering.

This is just one more example of how China and India thinks ahead, preparing generationally, for what is to come.

Proverbs 13:22: A good man leaveth an inheritance to his children’s children: and the wealth of the sinner is laid up for the just.

By contrast, what does the USA do?

We spend trillions supporting a worldwide military complex under the mantra of ‘national defense’. I still occasionally ponder how exactly projecting military power into another sovereign nation is defending yourself, but we have fallen that far.

We do not engage in the kind of future looking programs that will adress our educational, oil and energy needs of the future. Not to mention the staggering elder care and knowledge vacuum problems we face as our baby boomers enter retirement and remove a massive pool of knowledge, experience and know how from America’s workforce.

We have lost our generational thinking and planning long ago. While highschoolers in India study crammed 100 at a time into small sweltering rooms 7 days a week just to get into a technical college, we create programs like ‘No Child Left Behind’. New Middle Class from India and China work tirelessly with hopes of profiting in the digital future economy, and have no qualms about putting in 12 hour days. What have we taught our kids to do? Lets hook it up with more MTV, and spend our time drinking, doing drugs, having sex, and playing video games. Policies that discourage competition in our schools will have the effect of producing invalid, incompetent, and non-competetive workers that are not equipped to compete nor have the work ethic to do so even if they were equipped, while hard working knowledge workers from China and India take their jobs and leave them in poverty.

The moment we allowed ourselves to create entitlement programs that would enslave future generations because we were to lazy to accept personal responsibility for our retirement needs is the moment we lost our Moral Authority, and it was then that we lost our edge as world leaders. We are only beginning to see the results now. Just wait and see what the next 20 years holds if we do not change our tune.

We have allowed our government representatives to spoon feed us a utopian future, where everyones needs are cared for, just ‘elect me and I will pass legislature that will take care of everything’. What they did not include in those slogans was all the spending they would tack on to those bills for their personal interests, nor did they include the astronomical costs and damage to future generations that their ‘utopia legislature’ would create. Social Security and Medicare are hurtling towards a trainwreck of an event that many Americans are completely oblivious of, and even worse apathetic to. Most people in America still think there is money in the Social Security fund that hasnt been plundered for some other government program. HAHAHHAHAHAHA, thats a good one.

As faithful American citizens we of course voted these people into office and cheer as they provide a means of saving us from our own stupidity. What we are seeing now is only the effects of decisions we have made, and allowed our leaders to make in the past.

The consequences of our choices to spend now by our government will also not have to be dealt with by us, but by Americans who have not even been born yet. Our future generations will be born into a world with hundreds of thousands in National Debt burden from the moment they leave the womb. In our ‘I want it now, I will spend now, regardless of the cost’ culture – we have created a generational habit of instant gratification that may feel good now, but that our grandchildren will pay the price for.

Whats the solution? To take back our personal responsibility and forward looking planning on an individual level, to elect like minded officials, and to labor to create our own financial future versus relying on someone else to do it, and forcing our childrens children to pay the bill. We need to let go of the idea that the government is going to take care of us – let me let you in on a hint, they arent there to help you, they are there helping themselves, and using your tax money to do it.

Granted, now and then we see someone in government who believes in personal accountability and taking steps to improve the future of our chidrens children such as Ron Paul, but why should it be that he is an anomaly versus the norm?

Wake up America, the entire world is surging forward while we stagnate, and its economies are largely fueled by our willingness to becomes slaves to debt. If we allow a government that has no qualms about taxing the ever-living crap out of you to do what feels good for themselves, we are asking for it. If we at some point do not rise up and take back our own future, it will be dished to us on plates that will not taste good. No, they will not taste good at all.

/rantoff. We now return you to your regularly scheduled programming.

———————————————————

Written by Nicholas F. Benton

nfbenton@fcnp.com

My exclusive interview this week with a leading health official from the U.S. working on the AIDS crisis in Zambia, Africa, revealed conditions on the ground there almost too horrible to describe. There is no one critical problem there that is not interlinked with at least a half-dozen others and the conventional wisdom is that the best case scenario for a turnaround is at least 40 years away.

But as far as the U.S. or any Western interests are concerned, that day will likely never come, since their current foreign policy vacuum in that region has left it to strident and persistent advances by the Chinese.

China is moving into the most ravaged areas of Africa with no humanitarian intent. On the contrary, the Chinese are capitalizing on the corruption at the top of governments there to trade financial payoffs for titles to massive chunks of land rich in untapped natural resources.

The U.S. has turned its back to this process, from combined diplomatic, geopolitical and financial aid standpoints, because of its preoccupation with Iraq, the official said.

So the unspeakable human crisis there is not only a matter of concern for the people in that region, but for the wider global interests of the U.S., as well. The U.S. is stuck in the Iraq quagmire, having expended over $500 billion there to date, in an intended oil grab against perceived Russian and Chinese designs. Yet because of that, it is permitting access to even more vital resources in Africa and elsewhere to the same strategic competitors, over the poverty-stricken and disease-riddled rotting bodies of millions.

It is impossible to imagine anything but a massive shift of focus by the U.S. and its allies to turn this regrettable inevitability around.

As it is now, up to 40 percent of the population of Zambia and surrounding countries is infected with the HIV virus that causes AIDS. In Zambia, because of AIDS, the average life expectancy has dropped from 57 to 37 years of age in 20 years.

One out of every two children born there today will die from AIDS-related factors before age 24.

The death rate has created a massive displaced children problem and the local government has no interest in setting up orphanages. Instead, these AIDS orphans either move in with extended family members, live on the streets or are periodically rounded up into military camps.

These children are then either recruited into the exploding trend of child soldiers used as fodder in genocidal tribal wars, or into global human trafficking networks, shipped around the world and forced to become sex workers. The primary destinations of these networks are the large coastal urban centers of the U.S., the official said.

Neither condoms nor AIDS drugs are working in arresting the spread of HIV in Zambia, she added, noting that cultural mores and a pervasive sense of despair make them ineffective.

People living in conditions of extreme poverty have no energy to think beyond how they’re going to eat from day to day, and have no sense that they could work for a better future for themselves, or their children, in the long term. There is simply no notion of opportunities for a better life.

Foreign aids organizations are treated with great suspicion, with Afro-Americans from the U.S. being considered “white.” The suspicions are fueled by local witch doctors whose prescriptions for virility encourage sexual practices by adults with young children too heinous to describe explicitly. Polygamy, without the formality of marriage or commitment, is the norm.

Corrupt local leaders hold aid efforts at bay, demanding huge bribes and diverting resources for their own uses. And there is simply no way the U.S. or any other outside nation can carry out programs in those countries without the blessings of those leaders.

There appears to be no sweeping proposal for a “silver bullet” to fix all this. The only way to start, however, would be for the global community, most importantly the U.S., to begin fixing its gaze on what’s happening there, not only from a humanitarian but from a geo-strategic standpoint.

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IMF chief warns of threat to dollar but doesn’t acknowledge its source
Dear Friend of GATA and Gold:

Stories like the Agence France-Presse report appended here are doubly frustrating — first for the obvious attempt at deception in the comments being reported, and then for the failure of the news organization covering the story to point it out.

It’s a story about the departing head of the International Monetary Fund, Rodrigo Rato, a spokesman for international central banking, warning that the U.S. dollar could crash. But as Rato knows full well, the dollar is being supported by central banks and cannot crash unless they withdraw their support. Rato frames the danger to the dollar as if the source of the danger has nothing to do with his own sponsors.

And the AFP report fails to put the key question to Rato: In what circumstances will his central bank sponsors withdraw support for the dollar?

Why the United States should worry about any such withdrawal of support for the dollar by other central banks is hard to understand when those other central banks have been so subservient for so long. As Nixon administration Treasury secretary John Connally spat at them 36 years ago, “It’s our currency but your problem.” They have let it remain their problem ever since.

Of course if financial journalists ever were to put such direct and pointed questions to central bankers, the central bankers would allow financial journalists even fewer encounters for comment. But anything that showed up the secrecy, unresponsiveness, and unaccountability of international central banking would be a great start for journalism.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

IMF Chief Warns Dollar May Suffer ‘Abrupt Fall’

By Veronica Smith
Agence France-Presse
Monday, October 22, 2007

Yahoo News

WASHINGTON — The head of the International Monetary Fund, Rodrigo Rato, warned Monday of a potential “abrupt fall” in the US dollar that could roil the global economy.

“There are risks that an abrupt fall in the dollar could either be triggered by, or itself trigger, a loss of confidence in dollar assets,” Rato said at the close of annual meetings here of the IMF and the World Bank.

The outgoing IMF managing director spoke here as the European single currency hit a new high of 1.4347 dollars and global equity markets plunged amid renewed fears a US credit crunch could pitch the world’s biggest economy into recession.

“The uncertainty … comes from downside risks that are much higher than they were six months ago. The turbulence in the credit markets is a warning that we cannot take the benign (global) economic environment of recent years for granted,” Rato said on the final day of the annual meetings of the IMF and the World Bank.

“We still do not know the full effects of the decline in the housing market and the subprime problems of the US economy. Further disruption in financial markets and further falls in housing prices could lead to a global economic downturn,” he said.

A crisis in the risky US subprime mortgage sector, where loans are given to homebuyers with poor credit histories, erupted this year as borrowers defaulted on mortgages amid rising interest rates and a sharp slump in US housing prices.

The credit woes spilled into global financial markets and roiled stock markets worldwide in August. Although markets have recovered somewhat, the uncertainties of the extent of the problems are plaguing investors.

US Treasury Secretary Henry Paulson, addressing the plenary session of the 185-nation twin financial institutions, also sounded a note of caution.

“We need to continue to be vigilant, because all of our capital markets are not yet functioning normally,” Paulson said.

Rato warned that a global slowdown would exacerbate other existing risks, noting emerging economies’ reliance on private capital inflows which are expected to reach a record 620 billion dollars this year, after a 2006 total of 573 billion, according to the Institute of International Finance.

“Some emerging economies that have relied on external financing to fund large current account deficits could be tipped into crisis by a combination of reduced demand for their exports and tighter financial market conditions,” the IMF chief said.

He urged the governors of the IMF, which has a core mission of fostering global financial stability, to take action to avert a calamitous downturn.

“All of these risks make action on already agreed policies more urgent,” said the former Spanish finance minister, who is stepping down nearly two years before the end of his five-year mandate.

His successor, Dominique Strauss-Kahn, a former Socialist finance minister of France, takes office on November 1.

Rato also appeared to suggest that Europe may take steps to temper the strong appreciation of the euro, which is weighing on exports from the 13-nation bloc.

“There is a risk that exchange rate appreciation in countries with flexible exchange rates — including the euro area — could hurt their growth prospects, and that in these circumstances protectionist pressures could worsen,” he said.

Nevertheless, in an apparent reference to recent pressures from France and other eurozone members on the European Central Bank to curb the euro, Rato said: “Policymakers need to respect the independence of central banks and support their vigilance on inflation.”

Yahoo News

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By Mary Anne & Pamela Aden

Gold is glittering, soaring more than $100 since mid-August, to a new bull market high and to its highest level since January 1980. The six year bull market is strong and solid.

Crude oil, platinum, lead and wheat have been even more impressive, reaching record highs. Lower interest rates have given the commodity markets a boost. A mega rise is underway and it’ll likely last for years.

REASONS WHY GOLD AT NEW HIGH

Weak Dollar

The most obvious reasons why gold surged higher is due to the falling dollar. The dollar index fell to a record low when the Fed cut interest rates, which helped push gold up sharply. If the Fed continues lowering interest rates to ward off a slowing economy, this could cause gold to soar as the dollar falls further.

Lower rates this year could spur other world central banks to do the same and if so, it could also boost demand for gold as an alternative to all currencies.

Uncertainty & Crisis

Once again, an economic crisis caused gold to rise. An unsound financial system with monster deficits is good for gold. Easy money is good for gold. The world is slowly moving out of the dollar, which is another plus for gold. Tensions in the Middle East are good for gold. Basically, gold rises during times of uncertainty and crisis and that’s currently what’s happening.

Inflation fears have also pushed gold up. The record high in oil and other commodities is helping to fuel these fears, which are unlikely to end any time soon.

Growing Demand

Demand for gold is growing rapidly, which is also bullish. Gold buying in Asia and India is up sharply. Our good friend Brien Lundin says that India expects demand this year to be 50% above last year’s levels. That goes along with the idea that
India’s growth is following China’s.

Physical demand from the West is robust as well, based on the massive buying in the gold exchange traded fund (GLD). Plus, some central banks have been buying, and the Fall is a strong holiday demand season when the gold price tends to rise.

GOLD’S BULL MARKET

There are several ways we’ve been measuring gold’s bull market.

When gold first turned bullish in August 2001, we identified steps for the new bull market. The steps began to develop as the 1999 and 1990-96 prior peaks were surpassed.

The big moment for the bull market was when gold broke above the $500 level in December, 2005. This took gold into the fourth and final step, which is where it’s been trading since then. This reinforced that the bull market was solid.

With gold now at levels last seen in 1980, gold is on its way to completing this step. Once it rises above $850, the fourth step will be complete and that’ll be the next big milestone. Gold will be at a record high and it will then enter a new super strong bull market phase.

Gold has been a great investment. It’s up nearly 200% since 2001 and it’s up 20% so far this year. Even so, gold could still go much higher. Within gold’s big picture, the mega bull market is still young.

GOLD TIMING: On track

Over the past year, many investors worried that the bull market was about over. Six years, as the thinking went, was a long time for a bull market to last without a decent correction.

This could be a legitimate concern but all bull markets crawl a wall of worry. Most important, gold has stayed solidly above its 65-week moving average since August, 2001. This means gold’s trend is up and it will stay up above this average now at $653. This is a simple yet very effective way to stay invested with the major trend.

Within this uptrend gold has intermediate highs and lows, which is where our timing indicator comes in (see Chart 3B). This chart helps identify when gold in at an intermediate high or low level and what’s likely to occur next.

For now, gold’s been rising in what we call a C rise since June 27. Gold held firm in mid-August when most markets fell and it’s now at a new bull market high, reinforcing that this is a strong C rise, which is very important.

Remember, C rises in a bull market tend to be gold’s best intermediate rise when it moves up to a new bull market high, and that’s been the case since 2001. So the current C rise has essentially completed its purpose.

If gold now continues on to test or surpass its record high, then this C rise will become spectacular. But if it ends and stays below $850, that’s okay too. Keep an eye on $700 this month as gold will remain strong in a C rise above that level.

http://www.kitco.com/ind/Aden/oct182007.html

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– FREE Report “10 Reasons Gold Has Farther to Run”

by Gary Dorsch

For the past five years, the official mantra of the US Treasury has been a “strong dollar is in our nation’s interest,” while at the same time reminding traders that “currency values should be set in a competitive marketplace based on underlying economic fundamentals.” Most traders interpret that riddle to mean the US Treasury favors an “orderly devaluation” of the dollar, and won’t intervene to support the greenback as long as its descent doesn’t turn into a nasty rout.

The US dollar has lost more than a third of its value against the the Euro since 2002, and half its value against the Brazilian real. The latest blow to the “strong dollar mantra” occurred on Sept 18th, when the Bernanke Fed slashed the fed funds rate by a larger than expected 0.50% to 4.75%, knocking the US$ Index below the psychological level, and to its lowest level in 15-years.

US Treasury chief Henry Paulson is focusing on booming US exports, which rose to a record $138 billion in August, up 38% from five years ago. A weaker US dollar also inflates the earnings of S&P 500 companies, which earn roughly 44% of their revenue from overseas, mostly in Euros. And Mr. Paulson, the commander and chief of the “Plunge Protection Team,” aims to offset weaker US homes prices with an inflated stock market to keep the US economy from slipping into recession.

But the Bernanke Fed’s rate cut to 4.75% also ignited double-digit price increases for agricultural and energy commodities around the globe, and lifted gold 18% higher to $765 /oz, it’s highest in 28-years. The price of West Texas Sweet crude oil has increased by $19 per barrel since Mr. Bernanke began to flood the world with cheap US dollars. Soybeans have climbed 25% to $10 per bushel. Thus, Fed rate cuts, designed to bail out Wall Street brokers and bankers translates into sharply higher food and energy costs for the US and global consumers.

Foreign investors are rapidly losing faith in the Bernanke Fed and its cheap dollar policy, and dumped a net $163 billion of US securities in August, a record outflow. Net sales of long-term securities such as bonds, notes and equities hit an all-time high of $69.3 billion. Foreign central banks unloaded a net $29.7 billion of Treasury bonds in August compared with net sales of $6.9 billion in July.

Japan was a net seller of $24.8 of Treasuries, and China trimmed its holdings to $400.2 billion in August from $409 billion in July. Foreigners also sold $40.6 billion in US equities, a sharp reversal from net purchases of $21.2 billion the prior month. Foreigners are convinced that Mr. Bernanke has just begun a rate cutting campaign that can drive the dollar sharply lower, and are shifting their capital elsewhere.

While foreigners have nightmares about Mr. Bernanke’s control over the US money supply, which is expanding at an explosive 14.7% annual rate for M3, its fastest in history, the Bundesbank is warning that it’s too early to write off the chance of further tightening in Euro-zone interest rates. The European Central Bank has left its repo rate on hold for the past three months, but is now telegraphing a rate hike to 4.25% sometime in the fourth quarter.

“Risks to price stability are on the upside and, I would add, that they been have augmented in early September. We will do what is necessary to counter these risks. It is too early to dismiss the need for a future monetary policy response,” warned Bundesbank chief Axel Weber on Oct 18th. “Monetary policy has to do what is necessary to guarantee price stability. In a phase of robust growth around potential with little spare capacity, monetary policy no longer needs to support the economy, but instead should focus on risks to price stability,” Weber declared.

The US$’s interest rate advantage over the Euro has shrunk from +240 basis points a year ago to +37 basis points today, based on their respective six-month Libor rates. The shift in interest rates differentials in the Euro’s favor has lifted Europe’s currency from $1.260 in June 2006 to $1.430 today, a record high. The Bundesbank understands that higher food and energy prices are inflationary, and is ready to combat strong money supply growth in Europe with a tighter monetary policy, even at the expense of slowing down the local economy.

The US dollar fell to a seven year low of 1.785 Brazilian reals, after Brazil’s central bank kept its overnight Selic lending rate unchanged at 11.25% on Wednesday, pausing for the first time after 18 consecutive rate cuts. The Bank of Brazil has cut its Selic rate by 8.5% since August 2005, but has been unable to arrest the slide of the US dollar. The central bank intervenes regularly in the foreign exchange market to buy US dollars, boosting its FX reserves by $112 billion since January 2006.

The Bernanke Fed’s rate cut to 4.75% ignited a big increase in global commodity prices, which can boost Brazil’s exports and its currency. The local economy grew 5.4% in the second quarter from a year earlier, and exports in the first half of this year were $73.2 billion, up 20% from the year earlier period. The Bank of Brazil left its Selic rate unchanged at 11.25% due to higher inflation, which hit 4.15% in September, just below the bank’s 4.5% upper target.

The US dollar appears to be sliding in a bottomless pit in Brazil, and another round of Fed rate cuts would make Brazil’s high interest rates more attractive. Carry traders who borrow funds in Japanese yen to buy assets denominated in higher yielding currencies such as the real, have plowed money into the Bovespa Index, which is up 41% so far this year.

http://www.financialsense.com/Market/wrapup.htm

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– FREE Report “10 Reasons Gold Has Farther to Run”

Alex’s Notes: Been talking about this for a while now, looks like its starting to happen.

As more and more governments wake up to whats going on and come to the realization that we will never stop inflating until this thing is a smoking train wreck, they will bail out of dollar backed securities and head for safer ground, such as energy, basic materials, and yes, I am saying it again, Gold and Silver.

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US August net foreign long-term securities purchases -69.3 bln usd
Tue, Oct 16 2007, 13:44 GMT
http://www.afxnews.com

WASHINGTON (Thomson Financial) – Foreign money invested in US securities fled the US in August when market volatility was high, led by foreign government sales of Treasury bonds and private investor equity sales, the Treasury Department reported.

Net foreign long-term securities purchases amounted to minus 69.3 bln usd in August, an outflow of foreign capital that followed three months of declining capital inflows.

Small foreign purchases of short-term securities were not enough to make up the difference, as total net foreign capital purchases were minus 163.0 bln usd in August. The large net outflow followed a net inflow of 94.3 bln usd in July.

Some economists were expecting around 60-70 bln usd in new capital inflows in August.

Net official long-term purchases were minus 24.2 bln usd in August, which mostly reflects net foreign government purchases of minus 29.7 bln.

Private foreign investor purchases of US equities were minus 39.0 bln usd for the month. However, private investors loaded up on Treasury bonds, creating a net inflow of 27.1 bln usd. Still, net private investment in long-term securities were minus 10.6 bln usd for the month.

Foreign holdings of short-term dollar securities rose 33.9 bln usd after a net gain of 56.2 in July. Net Treasury bill buying was 21.0 bln usd compared with net buying of 18.6 bln in July.

Most of the T-bill buying in August came from private investors, with foreign governments buying 3.8 bln usd worth of Treasuries in the month.

Chinese holdings of Treasuries fell sharply by 8.8 bln usd in August, and Japanese Treasury holdings fell by 24.8 bln usd.

The Treasury holdings of oil exporting countries remained unchanged, while Caribbean banking centers dramatically increased their holdings by 33.1 bln usd.

http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=22ec649c-cba0-42f2-878c-397b557c8582

Diversify Your Income

– FREE Report “10 Reasons Gold Has Farther to Run”

by Greg Silberman
October 12, 2007

The US Dollar has lost 65% of its value against the Euro over the last 7 years. It’s no coincidence that a massive Hedge Fund industry has risen in its wake.

There are around 8,000 hedge funds globally managing over 2.5 trillion Dollars. All of them placing bets on global markets. Betting the market will rise, will fall, will do nothing. The vast majority are long-only which means they benefit from a rising market.

The underlying trend behind this level of speculation – the likes of which the world has never seen – is the fear of the worlds reserve currency, the US Dollar, becoming worthless. The fear of an outbreak in hyperinflation and a repeat of The Nightmare German Inflation of the 1920s (exceptionally well documented in the linked article by Scientific Market Analysis, 1970).

During the German Hyperinflation, the entire economy switched from production to speculation. In an effort to protect against a collapsing paper currency, people put their energy into speculating in things as opposed to building or producing.

As we mentioned in Using Commodity Prices as an Inflation Calculator the fact that Corn prices are at 35-year highs is a sign that inflation is boiling up from beneath the surface and the proliferation of hedge funds indicates they are the speculative vehicle of choice.

The sole question on this analysts mind as to high the speculative frenzy will go is how low the US Dollar will fall?

Chart 1 – US Dollar vs Euro

This dramatic chart shows the US Dollar versus the Euro. The Dollar has only recently broken major support below 0.60 (60 Euro cents to a Dollar). This has caused a break below a humongous multi year head and shoulders pattern. The technical target is 40 cents or 33% lower. A HUGE destabilizing move for the US Dollar lies ahead.

As in the Weimar Republic, the speculative fever today will continue to build as the US Dollar falls. That is, money will flee from devaluing cash into anything that will hold or increase its value namely Stocks with Gold and Oil Stocks outperforming. Based on the above analysis this is still quite a way away. The level and magnitude of speculation will be simply breathtaking. In the interim, the already large amount of Hedge Funds and Asset Management companies will continue to grow as will their assets!

http://www.financialsense.com/fsu/editorials/silberman/2007/1012.html

Alex’s Notes: I find it interesting to note, that the history of the word inflation, and where it seems to be headed, dont add up.

No, inflation is not prices going up, although that is a symptom.

No, inflation is not interest rates changing, that again, is a symptom.

Inflation, has always been, and always will be, adding more money supply to the economy (not by earning it, but in our current economy by printing it and ‘creating it out of thin air’).

The current ‘definition creep’ that you can see by looking up the word,is, in my opinion, nothing more than another attempt to continue dumbing down America. A stupid and uneducated people, are an easily controlled people.

Wikipedia: Inflation is measured as the growth of the money supply in an economy, without a commensurate increase in the supply of goods and services. This results in a rise in the general price level, as measured against a standard level of purchasing power.

Dictionary.com: Inflation: Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.

Why is this important? Because it serves to distract people from the problem: the fact that the Government is completely out of control printing money till the presses smoke and destroying the buying power of our dollars.

Then people scratch their heads and wonder why the value of the dollar is plummeting?

Supposedly well versed analysts who are reporting on our financial markets do not know what it means either:

Real inflation, a sustained rise in the general price level, is due to an excess supply of money — too much money chasing too few goods. Responsibility for inflation, therefore, must rest with the People’s Bank of China, not with the price of pork.

While this writer is partially correct, he is still missing the point that inflation IS an excess supply of money, not the prices going up.

To the point of the entry, China and other seemingly well to do economies are also suffering massive inflation.

There are many who feel that a good strategy to hedge against this rapid devaluation of the US Dollar is to move it into other currencies. This brings an image to my mind that Simon Heapes of Anglo Far-East shared with me:

“There is a big ship in the middle of a bunch of other ships, they all have holes in them and they are all sinking, and the rats are jumping from ship to ship trying to figure out which one isnt going to sink.”

While this may make some profits if done as trades in the short term, in the long term, every major currency in the world continues to inflate and will ultimately fail as history has shown, over and over. Another argument for why Gold and Silver are the true hedge and investment right now.

——————

When the 17th National Congress of the Communist Party of China convenes Monday, President Hu Jintao will be confronted with some serious challenges. Foremost will be to ensure steady economic growth and price stability.

Inflation is now at a 10-year high, reaching 6.5% (year over year) in August as measured by the consumer price index. Actual inflation is probably much higher given the defects of the CPI, which does not accurately reflect the consumption pattern of the present market-oriented system.

Housing prices and other asset prices are increasing at double-digit rates, but housing is underweighted in constructing the CPI (it only accounts for 13% of the index, compared with more than 40% in the U.S.). Moreover, some consumer goods are still subject to price controls.

Full article on Investors dot com here.

Mr Practical
Oct 10, 2007 9:33 am

Mr. Practical,

Rather than be angry, I would be better served to look for clarity. If in fact credit/debt is the way the US economy is driven, why then is this not explained in terms people can understand by the leaders in the country?

“We should acknowledge the source of our vibrant economic growth,” was Fred Thompson’s reference to tax cuts and economic policies.

I listen to the discourse very closely on many topics. The source and view of those I trust have become few and far between.

Can you comment on trade and the contention that increasing exports (shrinking dollar) will grow the economy? Also, tax cuts as they apply to revenues? Are corporations over taxed in U.S.?

-Minyan Skins

P.S. Adding to my skepticism is the fact that yesterday I entrusted my 19 year old son to the U.S.M.C. for 5 years. Bright enough, just cannot be in a classroom. “I’m going to get my resume.” I believe the economic current in the middle class swept him away.

Minyan Skins,

Ron Paul does explain it. “Those with ears will hear.” Almost no one has ears.

The U.S. economy used to manufacture things, have production, which created income for the middle class to save and invest, primarily in their homes.

But over time the U.S. has migrated toward a type of globalization that is insidious to the middle class of America, who are paying a high price. In the U.S., those who own companies outsource cheap/slave labor to increase profits. The Chinese economy benefits as they export and their standard of living rises. The U.S. middle class loses jobs to China as a result and must go into debt to pay for higher living expenses as the dollar falls relative to other currencies. The dollar is falling because debt is rising and that debt is external: it is owed to other countries like China that incrementally demand more and more dollars to lend.

Alex’s Note: Couldnt help it, have to comment on this. The dollar isnt dropping in value because of external debt, yes of course that plays a role, the dollar is dropping from the basic fundamental of supply and demand, we continue to make more dollars (literally, I am talking about printing money into existence not earning it), and then wonder why it goes down in value. Anything that has tremendous supply will drop in value, this isnt rocket science here.

As the U.S. middle class is now dependent on spiraling debt to finance consumption.

Tax cuts further make the rich richer and don’t help the U.S. middle class or poor.

As the dollar falls, nominal stock prices (priced in dollars) rise further helping the rich and hurting middle class who don’t own that many stocks (but encourages them to take this risk even when they can’t afford losses because they are so in debt).

Every time the Fed lowers interest rates, they de facto lower the dollar and further accelerate the process of transfer of wealth from U.S. middle class to Asia. The Fed must be careful to keep this process “slow” and “incremental” so U.S. middle class doesn’t really catch on to how their wealth is being taken away and given to exporting countries like China.

The U.S. rich support this as they are getting wealthier.

Eventually, the U.S. middle class will become poor. Because they are in debt they will be slaves to those who have lent them money. They will lose their assets (foreclosure) but won’t lose their debt, thus becoming indebted servants.

http://www.minyanville.com/articles/debt-US-China-middle+class-tax/index/a/14415