Hi Bill!
This sort of thing is above my pay grade, but I read the comments from Bill H with interest today in terms of the sudden spike in M2. It is my understanding that there are potentially trillions of dollars of CDS paper that could have been triggered by the downgrade in US debt last month, and therefore those bets must be paid off. We all know there is no real money backing those swaps and just as AIG was swinging in the wind after the mortgage bonds started detonating, I suspect some issuers of these CDS are in serious trouble here. We have no way of knowing just how serious the problem is because these are OTC deals. There was an initiative to install a central clearing house as a neutral counterparty to ensure that this kind of meltdown could be prevented and bring transparency into the system, but I think it stalled and went down in flames. So none of this paper has come to light yet, but I would think there is a very serious problem brewing here. So too with the rapid decline in the 10-yr note. Again, I do not play in that particular sandbox but I understand you can bet on the direction of interest rates as a form of hedging for those that
put big money into bonds, and I would have to believe the total leverage on these derivatives could be in the trillions as well. Some firm somewhere is probably going off like a hand grenade right now and it has simply not surfaced yet as to the extent of the crisis.

No wonder there is such a desire to own physical gold even as the price sets a new all-time high on almost a daily basis. This kind of thing has never happened in history. When LTCM and Refco blew up many years ago, the boys got together and found a way to keep it all contained and divide up the losses amongst themselves. Can a problem of this magnitude be resolved quietly with a huge pile of money injected into the system? I guess we will be finding out soon enough. Just adding up the total amount of money that has been printed to keep things from getting terminal so far, I would have to assume it is many multiples of the total amount of gold on the planet even with the current higher spot market price. And it seems to me the only option left to keep the system even in pretend mode is to continue printing and papering over each new crisis that comes out of this mess.

Which brings me to question, when will it occur to some of the really big money players out there to just start buying up gold juniors with large undeveloped deposits? I can think of many that are trading below $50 per ounce of gold in the ground. Historically the market
would value these juniors at 5 - 10% of in situ value and during manias that could climb much higher. Yet the juniors are getting cheaper by the day. Today alone I watched many solid juniors with multi-million ounce resources and huge cash positions in their treasuries getting hammered in the trading. Look up SBB, UXG, GCU, ER, EAS... These stocks have no reason at all to sell off in this market and if people start to understand that real gold and silver are the only asset of safety, then the light will have to go on soon and set off a buying frenzy in the high quality juniors.
Cheers!
MexicoMike

Dave from Denver…

Friday, August 19, 2011

Friday Quickie!

A colleague alerted me to the recent bloodbath in the high yield market the other day (thanks JR) and then zerohedge happened to post that day that the high yield market had its worst monthly sell-off in its 25-year history: LINK I wanted to put some attention on this because - and zerohedge did not report this aspect because Durden was probably still in high school back in the 1990's - when I was trading the high yield market on Wall Street back in the 1990's, large directional movements in the high yield market always preceded the same kind of directional movement in the stock market. So now that we've had a big drop in the Dow/SPX which was preceded by a big drop in the junk bond market, it will be interesting to see if "hot" money piles back into the junk market, which would likely precede a big bounce in stocks.

One other point of note about the statistics as reported in the zerohedge link. The credit spread between BBB and BB bonds has blown out to over 300 basis points. To me this indicates that the underlying economy is in much worse shape than is being acknowledged by the Fed, Obama and the media. I would also argue that the stock market is not discounting this degree of economic deterioration, which means the risk of a big stock market "accident" is still very high. To put this credit spread widening in perspective, at the height of the credit/housing bubble, single-B rated credits were trading tighter than 300 bps to Treasuries. In other words, the "handicapping" of financial risk in our system has more than doubled over the last month.

The implications of this massive repricing of credit risk points to a developing liquidity crisis in our financial system, similar to 2008, and reflects the overall dismal economic condition of the real economy. I'm sure you won't hear this from the Teleprompter that sits in the White House and pretends to lead the country, but those two facts are what the big-money odds makers of the U.S. financial casino are telling us.

As this situation further develops, you can be sure that a lot of the "hot" money that has left the high yield market and that is mispricing the stock market will continue to flow into the precious metals and mining stocks. Recently the idea that gold is in some kind of investment "bubble" has been promoted all over the imbecilic media, including a widely circulated report from the Einsteins at Wells Fargo that reads more like some kind flamboyant yellow journalism from the National Enquirer in that is was very poorly researched - if any bona fide statistical research was done at all - and its premise and assertions lacked any basis in fact. Need I remind any Wells Fargo employee/analyst that the bank's balance sheet is connected to one of the greatest bubbles of all time and Wells Fargo would have been liquidated in 2008 had it not been for the generosity of Tim Geithner, on behalf of the U.S. Taxpayers...

So I wanted to link a must-read commentary from John Embry, one of the investing patriarchs of the current precious metals bull market. Specifically, I wanted to highlight his comment about the nascent transition globally that is occurring from a fiat currency based system to the restoration of a gold-backed currency system (which has been the currency basis for 90% of the last 5,000 years):

The unfortunate result of these machinations will be the destruction of the existing debt, the end of this experiment with pure fiat currency and the implementation of an entirely new monetary system. Assets that will see investors through this traumatic transition will be gold and silver just as they have done in every previous example of fiat currency destruction.

The very fact that the average citizen has little or no understanding of this phenomenon virtually ensures its outcome. Those who do hold the precious metals and other hard assets instead of paper instruments of wealth will be the beneficiaries of the what will likely be the greatest transfer of wealth in history.

The bold emphasis is mine. I want to highlight that because it is either extreme stupidity or motivated deceit on the part of the bubble-promoters to label and define an investment bubble when the primary ingredient of dumb public money is so notably absent from the market. Here's Embry's piece: LINK

The next two weeks are usually among the slowest trading days of the year besides the year-end holiday period. I will try to post daily but most of my attention will focused on managing our fund and watching/playing a lot tennis.

***

U.S. economic news:

18-Aug-2011 22:54 BAC Bank of America may cut more than 10K jobs - WSJ (7.01)
CEO Brian Moynihan apparently sent out a memo this evening, though it's not clear how detailed it was. People familiar with the situation tell the WSJ:

* The bank is firing 3,500 this quarter, including positions in investment banking and trading.
* Thousands more jobs will be eliminated as part of "Project New BAC," whose scope probably won't be determined for a few weeks. Consumer banking, mortgage, legal, marketing, and HR will be targets, though one source says the cuts may be stretched over three years.
* Project New BAC's second phase will probably start in Q4 and target investment banking, trading, wealth management, and corporate banking.
*****

More bad news:

JPMorgan Cuts U.S. GDP Growth Forecast

By Scott Hamilton - Aug 19, 2011 6:03 AM CT

The U.S. economy may expand less than previously thought in the next two quarters as consumer sentiment drops and the housing market fails to gain momentum, JPMorgan Chase & Co. wrote in a report.

Gross domestic product will grow 1 percent in the fourth quarter rather than the 2.5 percent previously forecast and 0.5 percent in the first quarter of 2012 instead of 1.5 percent, Michael Feroli, JPMorgan’s chief U.S. economist in New York, said in an e-mailed note to clients today.

http://www.bloomberg.com/news/2011-08-19/gdp-growth-forecasts-for
-u-s-cut-at-jpmorgan-on-weaker-economy-housing.html

-END-

US Recession Was Worse Than We Thought - Fed's Pinalto

By Cynthia Lin

Of DOW JONES NEWSWIRES

The magnitude of the recession caused by the 2008 financial crisis is taking a bigger toll on the U.S. economy than most had expected, a U.S. central bank official said Friday, adding she was in favor of providing the nation's recovery with more support at the latest Federal Reserve meeting.

"The economy appeared to be strengthening, and yet once again, in the summer, storm clouds appeared," said Cleveland Federal Reserve Bank President Sandra Pianalto. "We learned that the magnitude of the recession was worse than we had thought."

In a speech to a community bankers association in Ohio, Pianalto said the U.S. has to grow by about 2.5% annually in order to keep the unemployment rate, currently at a towering 9.1%, from rising. She said it will take "quite a few years" to get that rate down to around 5.5%.

The central banker lowered her outlook on U.S. growth and sees inflation falling back to 2%. Given those projections, Pianalto said she was in favor of providing additional support to the recovery at a Federal Open Market Committee meeting earlier this month. She does not hold a voting slot on the monetary policy-setting FOMC.

With the targeted federal funds rate already near zero, Pianalto said the Fed explicitly announcing a mid-2013 time frame to stick to its loose monetary policy was a tool to help bring down interest rates along the yield curve.

"Under the circumstances, I think it made sense to take the unprecedented step of including that conditional guidance in our press statement," she said.

Pianalto now sees the economy growing at about 2% in 2011, and 3% in each of the next two years. In June, Pianalto said she expected the economy to grow at about 3% a year.

The Fed official points out that between June and August, several pieces of economic data showed a deteriorating labor market, tapering household spending and a still-depressed housing sector, suggesting that the U.S. was in store for a slower pace of recovery in the coming quarters than most expected.

With unemployment stubbornly high, consumer confidence falling and households expecting their income to decline in the next year, Pianalto said people are focused on rebuilding their wealth, not spending it.

"I put all of these facts together; I do not expect much of an economic boost from consumer spending any time soon," Pianalto said.

Turning to inflation, Pianalto sees inflation averaging around 2% in 2012 and 2013, expecting the pressures of rising food and energy costs to abate over time.

-END-

Municipal Bonds May Face Downgrades Following Final U.S. Budget, S&P Says

Standard & Poor’s, the credit rating company that cut the U.S. to AA+, said the federal budget deal may lead to downgrades on municipal credits.

The company, which said earlier this month that states and local governments could remain AAA even after the U.S. cut, said in a report today downgrades could come after reductions in federal funding or changed policy. Ratings changes would come based on "differing levels of reliance on federal funding, and varying management capabilities," and, after the Budget Control Act of 2011, will be felt "unevenly across the sector," S&P said.

"Experience tells me I would expect there to be some downgrades," said S&P credit analyst Gabriel Petek in a telephone interview. "These cuts are coming in addition to the losses of revenue that already came during the recession."

The initial budget cuts would be smaller than the revenue losses during the recession that ended June 2009, he said. States lost $67 billion in aggregate during the 18-month contraction, the report said. The federal government has planned $7 billion in cuts, most of which won’t be implemented until 2013, giving states some time to prepare, Petek said.

S&P will begin evaluating states and local governments starting Nov. 23, when a panel of 12 members of Congress, split evenly between Republicans and Democrats, is supposed to come up with recommendations, Petek said.

Federal Funding

In 2009, when the U.S. introduced economic stimulus, federal spending on average was 24.6 percent of state gross domestic product, the report said. States that had federal funds representing more than 30 percent of GDP included Alabama, Alaska, Hawaii, Kentucky, Maryland, Montana, Mississippi, New Mexico and West Virginia. The state with the lowest percentage was Delaware.

"We do not have immediate concerns at the state and local levels," said Natalie Cohen, managing director and senior municipal-bond analyst for Wells Fargo Securities, in an Aug. 16 report.

The 11,500 municipal bonds already downgraded from AAA in lockstep with the U.S. were a "logical extension," and "not a symptom of a meltdown in the municipal-bond market," she wrote. The debt was directly dependent on federal funding.

S&P mentioned possible changes to the municipal market if tax policy is altered. If tax cuts enacted during George W. Bush’s presidency are allowed to expire, federal taxes would increase and the tax exemption on municipal bonds would be more attractive to investors and drive yields on municipal bonds lower, S&P said.

Alternatively, Congress could limit some of the tax exemptions on municipal bonds to raise more government revenue, which would likely increase interest costs, S&P said.

-END-

What else is new…

MOODY'S ANALYST BREAKS SILENCE: Says Ratings Agency Rotten To Core With Conflicts, Corruption, And Greed

A former senior analyst at Moody's has gone public with his story of how one of the country's most important rating agencies is corrupted to the core.

The analyst, William J. Harrington, worked for Moody's for 11 years, from 1999 until his resignation last year.

From 2006 to 2010, Harrington was a Senior Vice President in the derivative products group, which was responsible for producing many of the disastrous ratings Moody's issued during the housing bubble.

Harrington has made his story public in the form of a 78-page "comment" to the SEC's proposed rules about rating agency reform, which he submitted to the agency on August 8th. The comment is a scathing indictment of Moody's processes, conflicts of interests, and management, and it will likely make Harrington a star witness at any future litigation or hearings on this topic.

The primary conflict of interest at Moody's is well known: The company is paid by the same "issuers" (banks and companies) whose securities it is supposed to objectively rate. This conflict pervades every aspect of Moody's operations, Harrington says. It incentivizes everyone at the company, including analysts, to give Moody's clients the ratings they want, lest the clients fire Moody's and take their business to other ratings agencies.

Read more: http://www.businessinsider.com/moodys-analyst-conflic
ts-corruption-and-greed-2011-8?op=1#ixzz1VV8RAr3C

-END-

In the "You Can’t Make This Up" column:

Goldman Sachs VP Changed Name, Now a Top Congressional Staffer

Thursday 18 August 2011

by: Lee Fang, ThinkProgress | Report

Peter Haller, now a congressional staffer, was previously known as Peter Simonyi when he served as a VP to Goldman Sachs. (Photo: bbrslaw.com)

Has Rep. Darrell Issa (R-CA) turned the House Oversight Committee into a bank lobbying firm with the power to subpoena and pressure government regulators? ThinkProgress has found that a Goldman Sachs vice president changed his name, then quietly went to work for Issa to coordinate his effort to thwart regulations that affect Goldman Sachs’ bottom line.

In July, Issa sent a letter to top government regulators demanding that they back off and provide more justification for new margin requirements for financial firms dealing in derivatives. A standard practice on Capitol Hill is to end a letter to a government agency with contact information for the congressional staffer responsible for working on the issue for the committee. In most cases, the contact staffer is the one who actually writes such letters. With this in mind, it is important to note that the Issa letter ended with contact information for Peter Haller, a staffer hired this year to work for Issa on the Oversight Committee.

Issa’s demand to regulators is exactly what banks have been wishing for. Indeed, Goldman Sachs has spent millions this year trying to slow down the implementation of the new rules. In the letter, Issa explicitly mentions that the new derivative regulations might hurt brokers "such as Goldman Sachs."

Haller, as he is now known, went by the name Peter Simonyi until three years ago. Simonyi adopted his mother’s maiden name Haller in 2008 just as he was leaving Goldman Sachs as a vice president of the bank’s commodity compliance group. In a few short years, Haller went from being in charge of dealing with regulators for Goldman Sachs to working for Congress in a position where he made official demands from regulators overseeing his old firm.

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It’s not the first time Haller has worked the revolving door to help out Goldman Sachs. According to a report by the nonpartisan Project on Government Oversight, Haller — then known as Peter Simonyi — left the Securities and Exchange Commission (SEC) in 2005 to work for Goldman Sachs, then quickly began lobbying his colleagues at the SEC on behalf of his new firm. At one point, Haller was compelled to issue a letter to the SEC claiming he did not violate ethics rules. A brief timeline of Haller’s work history underscores the ethical issues raised with Issa’s latest letter to bank regulators:

– After completing his law degree in 2000, Haller was employed by Federal Energy Regulatory Commission as an economist, and later with the Securities and Exchange Commission in the Office of Enforcement.

– In April of 2005, Haller resigned from the SEC to take a job with Goldman Sachs. He soon began lobbying the SEC on behalf of Goldman Sachs.

– On September 2, 2009, Haller left Goldman Sachs to take a job with the law/lobbying firm Brickfield Burchette Ritts & Stone.

– In January of 2011, Haller was hired to work for Issa on the Oversight Committee. Under the supervision of Haller, Issa sent a letter dated July 22, 2011 to bank regulators (including the heads of the Federal Reserve, FDIC, FCA, CFTC, FHFA, and Office of Comptroller) demanding documents to justify new Dodd-Frank mandated rules on margin requirements for banks dealing in the multi-trillion dollar OTC derivatives market, like Goldman Sachs.

When he took over the chairmanship of the Oversight Committee this year, Issa dramatically shifted the committee’s focus away from its traditional role of investigating major corporate scandals. Instead, Issa has used the committee to mergethe responsibilities of Congress with the interests of K Street and Issa’s own fortune.

In June of this year, ThinkProgress broke the story about Issa’s own complicated relationship with Goldman Sachs. We revealed that Issa purchased a large amount of Goldman Sachs high yield bonds at the same time as he used the Oversight Committee to attack an investigation into allegations that Goldman Sachs had systematically defrauded investors leading up to the financial crisis. This conflict of interests, along with our exclusive story about Issa’s earmarks benefitting his own real estate empire,received coverage in a recent piece by the New York Times.

We also broke a story last month revealing other revolving door conflicts within Issa’s staff. Peter Warren, Issa’s new policy director, maintains some type of financial contract with a student loan lobbying group he led last year, and received a bonus from the lobbying group before leaving to work for Issa. Since joining Issa’s staff, Warren and his colleagues have fought to weaken the recently created Consumer Financial Protection Bureau, the new agency charged with overseeing student loans.

The new revelations about Peter Haller, however, raise even more significant ethical concerns than Peter Warren and other ex-lobbyists working for Issa. Why did Issa hire a high-level Goldman Sachs executive to work on stopping regulations on banks like Goldman Sachs? Haller’s direct involvement in the July letter brings Issa’s ability to lead the Oversight Committee — charged with conducting investigations on behalf of the public interest — into serious doubt.

-END-

GOLD/SILVER

King World News interviews John Embry on metals' explosiveness

Submitted by cpowell on 09:02AM ET Friday, August 19, 2011. Section: Daily Dispatches

12:01p ET Friday, August 19, 2011
Dear Friend of GATA and Gold:

King World News today interviews Sprott Asset Management's John Embry about GATA's London conference, where he spoke, and the explosiveness of gold and silver. A summary of the interview is headlined "Silver About to Roar Through $50 All-Time High" and you can find it at King World News here:

http://kingworldnews.com/kingworldnews/KWN_Dai
lyWeb/Entries/2011/8/19_Jo...

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

Mexico Mike

Jeff Christian is at it again