Dear Friends,

Here is the $24,000 question. Will the Fed and the ECB really move to drain all the funds that they have extended for Santa Claus time or will they both be Santa by extending rather than collecting the nearly one trillion dollars provided for normal year end liquidity demands?

Extension of the year end liquidity loans by central banks will not get the media coverage that making the liquidity two week loans did.

What do you think?

Regards,
Jim

Click here for today’s charts on the 3 Month Money Yield, Rice, Wheat, Platinum, CCI and the US Dollar Index with commentary from Trader Dan Norcini

Jim Sinclair’s Commentary

This is a neat way for the Chinese to diversify out of the dollar. This is a direct buy from the Chinese Sovereign Fund. In other purchases the Chinese buyer borrows dollars at a low rate from the Chinese Trade Bank to make the purchase. Since most of the companies making these purchases are highly diversified they repay the loan in Yuan from internal cash flow. Note that this is not the first writedown at Morgan Stanley, leading one to believe that few have marked to no market, which is zero.

Morgan Stanley write-downs grow by $5.7 billion
China sovereign fund invests $5 billion; CEO Mack will forego a bonus
By John Spence, MarketWatch
Last update: 2:42 p.m. EST Dec. 19, 2007

BOSTON (MarketWatch) -- Morgan Stanley said Wednesday it's writing down an additional $5.7 billion of mortgage-related assets, taking the total fourth-quarter loss to nearly $10 billion in the latest sign that the credit crunch is worsening.

On another front, the Wall Street giant joined a string of rivals announcing investments from foreign governments as it unveiled an agreement with a Chinese sovereign fund that will inject $5 billion in fresh capital through equity units with mandatory conversion into common stock.

"The results we announced today are embarrassing," Chief Executive John Mack said during a conference call with analysts. "This loss was the result of an error in judgment that occurred on one desk, in our Fixed Income area and also a failure to manage that risk appropriately."

Mack also said in a statement that he won't accept a bonus for 2007.

Morgan Stanley shares rose 3.6% to $49.81 in afternoon trading. The China investment helped buoy the stock, along with hope that the big fourth-quarter write-down may leave fewer nasty surprises for 2008.

More…

Jim Sinclair’s Commentary

This is a Global problem with NO PRACTICAL SOLUTION.

India cannot remain immune to US subprime crisis, says Singh

New Delhi - India's economy cannot remain immune to global developments like the US sub-prime lending crisis, but with the right policies can continue its trajectory of growth even increasing it to 10 per cent by 2012, Indian Prime Minister Manmohan Singh said Wednesday. Singh was speaking at a meeting of India's National Development Council to approve the country's 11th five-year plan, to set out broad-based economic policies for the country's development.

The period ending March 2007 saw a 7.6 per cent growth in national gross domestic product against a target of 8 per cent. The 11th plan from 2007-2012 sets an ambitious growth rate of 10 per cent.

Sounding a word of caution, Singh said both the sub-prime crisis and rising commodity prices were likely to affect India's growth, which has been about 9 per cent over the past two years.

"There are some clouds on global financial markets following the sub-prime lending crisis," he said. "India cannot be fully immune to international developments."

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Jim Sinclair’s Commentary

The problem is huge and continuing to grow rather than getting smaller.

Aust funds suffer sub-prime woe November sees funds falter
By Stephen Blaxhall
Thu 20 Dec 2007

Australian high yield and credit-focused funds are struggling as the sub-prime crisis continues to unravel.

The fallout from the sub-prime disaster has hit Australian high yield and credit-related funds hard, according to Morningstar consultant Sallyanne Cook.

Widening credit spreads in the United States, as more institutions confessed to large sub-prime-related losses, resulted in poor November returns for high yield and credit-focused funds.

"Even top-shelf AAA-rated corporates offered no protection in what many fund managers are calling the worst month ever for credit markets," Cook said.

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Jim Sinclair’s Commentary

Sure it is over. Cities and states have been hit by the Formula.

Muni Bonds Swoon With Worst Total Returns Since 1999 (Update1)
By Michael Quint and Jeremy R. Cooke

Dec. 19 (Bloomberg) -- Wall Street's three-year love affair with debt sold by U.S. states and cities is over.

Municipal bonds, whose returns trounced Treasuries and corporate debt from 2004 to 2006, are headed for their worst year since 1999, according to Merrill Lynch & Co. indexes. They may remain laggards after securities firms reduced their holdings during the third quarter by the largest amount in at least 12 years, data compiled by the Federal Reserve show.

Citigroup Inc., Goldman Sachs Group Inc. and the rest of the securities industry reduced holdings of municipal bonds in their trading accounts by more than 16 percent, to $45 billion as of Sept. 30 from a record $53.9 billion at the end of June, according to the most recent Fed data released Dec. 6. The sales raised yields on municipal debt relative to Treasuries and increased financing costs for state and local governments planning bond sales by as much as $320 million through 2017.

``There's no money flowing into the market right now from hedge funds, banks or anywhere else,'' said Thomas Metzold, manager of the $6 billion Eaton Vance National municipal fund in Boston. ``The banks have other needs for their capital.''

More…

Dan Norcini’s Commentary

I suspect this is just the beginning.

UPDATE 1-Barclays sues Bear Stearns over hedge funds

NEW YORK (Reuters) - Barclays Bank Plc (BARC.L) on Wednesday accused Bear Stearns Co Inc (BSC.N) of using two hedge funds that collapsed last summer as places to unload troubled assets.

The London-based bank's allegations appear in a lawsuit filed in U.S. Court for the Southern District of New York in Manhattan.

Bear Stearns was not immediately available for comment.

Barclays described the collapse of two Bear Stearns-run hedge funds as one of the most shocking in the last decade. The bank said it was the sole shareholder to a Bear Stearns enhanced leverage fund with exposure to risky subprime mortgages. That fund and another run by Bear Stearns had more than $20 billion in assets before their collapse.

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Dear Dan,

The greatest profit that will be made on the derivative collapse will be made by attorneys. Yes, this is only a beginning.

Regards,
Jim

Jim,

The carnage continues. Problem? What problem? Is there a problem? What do problems look like? Would I know one if I saw one? Do problems bite when aroused? Do they have hair and horns? What do they eat?

http://www.reportonbusiness.com/serv...

http://www.theglobeandmail.com/servl...

Regards,
Yahn Investments

CIGA JB Slear’s Commentary

Stretched?! doomed is a better descriptive word.

U.S. Dollar's Credibility Being `Stretched,' UBS Economist Says
By Thomas R. Keene and Joe Richter

Dec. 18 (Bloomberg) -- The U.S. dollar's credibility as the world's benchmark currency will be put to the test as it loses value against other major currencies, said George Magnus, senior economic adviser at UBS Investment Bank in London.

``We're clearly at a point where credibility is being stretched, and we don't really know what comes afterward,'' Magnus said in an interview.

Magnus said that while it's unlikely governments and companies in emerging economies in Asia and the Middle East are ready to ``ditch the dollar'' and price assets in other currencies in 2008, the dollar is being ``severely tested.''

Sovereign wealth funds are one example of institutions that are avoiding the falling dollar in favor of assets that will preserve their wealth, he said.

The dollar has lost value as traders bet the Federal Reserve will continue cutting interest rates to keep the housing slump from triggering a recession. It was down 7 percent against a trade-weighted basket of currencies from its biggest trading partners in the 12 months ended in November, based on Federal Reserve data.

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Dear CIGAs,

Paulson calls for a global response to the credit problem. The Fed’s Lacker admits the severity of the problem.

Almost every major financial company is rating big DERIVATIVE losses. The problem is growing and the temperature is rising, it has not cooled down.

ECB adds $501 BILLION into the international monetary system to ease year-end liquidity needs. (Major BS).

The Fed is doing the same but $40 - $50 billion at time for the same SPIN reason, to ease year end liquidity needs. Santa must be delivering more presents than Goldman Sachs did.

Have you protected yourself? The scene is the same as previous examples given this day and is continuing to take shape?

You cannot monetize bankrupt debt without creating a currency debacle, but they are globally and will continue as a course of action. IN NO WAY IS THIS MADNESS A SOLUTION!

Are you being fooled by year-end profit taking by those long gold and short the dollar in order for fund managers to take big money home?

Those that call for a higher dollar give no technical or fundamental reason. When asked why all they can say is because it is down. When the dollar rally ends, which it will, gold will move above $850 on its way to $1050 and $1650.

Have you protected yourself, as previous examples given today are taking shape?

Jim Sinclair’s Commentary

What you cannot stop you approve.

White House: PKK "a threat" to Turkey, Iraq, U.S.

WASHINGTON, Dec. 18 (Xinhua) -- The White House on Tuesday declined to condemn Turkish incursion into Iraq, saying that the outlawed Kurdistan Workers' Party (PKK) fighters are "a threat" to Turkey, Iraq, and the United States.

Instead, White House spokeswoman Dana Perino told reporters that "We are coordinating with the Turkish and Iraqi authorities in the area. The PKK is a threat to Turkey, to Iraq, and to the United States. So we continue to share information, share intelligence, with them (Turkish and Iraqi authorities)."

"The Turks have moved forward with our coordination and in communication with the Iraqis in order to eradicate that threat," Perino said.

Referring Turkish incursion into Iraq, the spokeswoman also noted that the United States had urged Turkey to take "very targeted and limited" action against PKK militants.

"Since there are conflicting reports, let's wait and see what is actually happening on the ground there before we comment. We have asked Turkey to keep the operations very targeted and limited," Perino said.

More…

Dear CIGAs,

Do not be confused, Monty speaks as an Establishment Money Manager saying the same things that we do in another parlance

Question:

I have a question related to how commodities will perform in a hyperinflationary depression. Specifically, monetary metals such as gold and hybrid monetary metals such as silver, which also have a significant industrial component to their valuation versus non-monetary metal commodities. Copper immediately comes to mind.

Answer:

In stagflation certain commodities will rise according to the level of the US. Others that are not as sensitive where supply and demand is more influential, such as copper, will chop sideways from report to report on warehouse supply and Asian demand.

You need to make a distinction between “Honest Money” which is gold and its commodity role. When the US dollar enters a bull market, gold begins to transmute from a commodity role where value is primarily dependent on suppliers and industrial uses ($248) to a currency role wherein investment demand outstrips all other demand factors ($1650).

Should the dollar drop as badly as the super Head and Shoulder completed already and fundamentals indicate gold will leave its commodity status and become the currency of choice, gold will reach $1650 or more.

You might find it interesting that at $248 gold reached the low level of total cost to mine gold, not cost at mine-head. At this point hedging had to stop as all you would be setting in cement by hedging was zero earnings.

Do not now associate gold with general commodities. Associate gold with the US dollar as it is now running 85% as a currency.

Question:
Secondly I have been investigating the history of the Weimar Republic's post-WW1 hyperinflation cycle during the 1920s for several years now, as well as what happened more recently in Yugoslavia in the 1990s. In Yugoslavia's case, their nation suffered 5 × 1015 percent inflation per month (prices doubled every 16 hours) between October 1, 1993 and January, 1994.

It seems that the primary catalyst in these cases was the monetization of bad debt. Sound familiar? With the U.S. Congress seriously considering doing the same to the trillions of dollars of notional value in bad debt derivatives and other instruments related to the housing market collapse, I fear we may be headed for the very same situation although I do not expect the same level of severity.

Jim Comments:

The recent suggestion by the ex Chairman of the Federal Reserve that cash is the way the present Fed should go in order to manage the credit market problem certainly sounds like a total monetization of bankrupt debt. Each time you hear of injection of funds the Fed is monetizing bankrupt debt. That is a very dangerous course of action.

Jim Comments on the Historical Review:

CIGA Rusty says… We currently have several threads dedicated to this subject on the www.CometGold.com forum at the new www.ContraryInvestorsCafe.com website. I'll leave you with a small excerpt from a recent post in one of our sections entitled "Tales from the German hyperinflation":

"By July 1922, the German Mark fell to 300 marks for $1; in November it was at 9,000 to $1; by January 1923 it was at 49,000 to $1; by July 1923, it was at 1,100,000 to $1. It reached 2! 5 trillion marks to $1 in mid-November 1923, varying from city to city. So the printing presses ran, and once they began to run, they were hard to stop. The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. "If you want to save money," he was told, "and you want two cups of coffee, you should order them both at the same time."The presses of the Reichsbank could not keep up though they ran through the night. Individual cities and states began to issue their own money. Dr. Havenstein, the president of the Reichsbank, did not get his new suit. A factory worker described payday, which was every day at 11:00 a.m.: "At 11:00 in the morning a siren sounded, and everybody gathered in the factory forecourt, where a five-ton lorry was drawn up loaded brimful with paper money. The chief cashier and his assistants climbed up on top. They read out names and just threw out bundles of notes. As soon as you had caught one you made a dash for the nearest shop and bought just anything that was going." Teachers, paid at 10:00 a.m., brought their money to the playground, where relatives took the bundles and hurried off with them. Banks closed at 11:00 a.m.; the harried clerks went on strike. “The flight from currency that had begun with the buying of diamonds, gold, country houses, and antiques now extended to minor and almost useless items -- bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty thievery. Copper pipes and brass armatures weren't safe. Gasoline was siphoned from cars. People bought things they didn't need and used them to barter -- a pair of shoes for a shirt, some crockery for coffee. Berlin had a "witches' Sabbath" atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was the fashionable drug. In the cabarets the newly rich and their foreign friends could dance and spend money. Other reports noted that not all the young people had a bad time. Their parents had taught them to work and save, and that was clearly wrong, so they could spend money, enjoy themselves, and flout the old. The publisher Leopold Ullstein wrote: "People just didn't understand what was happening. All the economic theory they had been taught didn't provide for the phenomenon. There was a feeling of utter dependence on anonymous powers -- almost as a primitive people believed in magic -- that somebody must be in the know, and that this small group of 'somebodies' must be a conspiracy."When the 1,000-billion Mark note came out, few bothered to collect the change when they spent it. By November 1923, with one dollar equal to one trillion Marks, the breakdown was complete. The currency had lost meaning."

CIGA Rusty
www.ContraryInvestorsCafe.com , CometGold Forums

Jim Comments:

Replace the words “war reparations” with “credit and default derivative meltdown, crash in the housing market and monetization of bankrupt debt” and you have the cause of both dire currency experiences. Rusty, never say never. This could get out of hand easily as there are courses of action but NO PRACTICAL SOLUTION to the present credit and default derivatives situation.

Gold is going to $1650, but if this situation gets out of hand who knows where Honest Money will be fully priced to the level of crisis in the financial markets.

Rusty, are your readers prepared or have they as the masses have been bamboozled by the Spin Meisters?

Do not be confused. Monty speaks as an Establishment Money Manager saying the same things that we do in another parlance

Regards,
Jim

Question:

What might the equity markets do in this situation?

Answer:

Liquidity is the grease of the wheels of the equity market. In Germany as the currency evaporated their equity market skyrocketed for no tradition analytical reason. The answer then is wild swings, each looking like a new bull or bear market. Look at what is happening now when the market is up 300 points one day and down 300 the next with declining earnings and a financial meltdown. Sound familiar to the examples above?

Monty speaks as a balanced Establishment manager but says the exact same thing as myself and Trader Dan.

Click here for today's action in Gold, the US Dollar and Streettracks Gold Holdings with commentary from Trader Dan Norcini

Jim Sinclair’s Commentary

An interesting letter on the SAGA of protecting oneself. Merry Christmas to you too Wallace (Brave Heart) and keep your head down in 2008. PS - Marty will help you without obligation. That is the old school.

Hi Jim,

You may be interested in the latest saga involving the lengthy delay in receiving certificates for Company XYZ. I originally requested the certificates from my broker six weeks ago, November 5, and was told it would take approximately 7 to 10 days!

Yesterday I called the company’s Transfer Agent's office. The person I spoke with told me they had no record of a request for certificates in my name. I then called my broker and was put on hold for over 30 minutes while waiting to speak with an equity trader. I hung up and called back and was put on hold for another 20 minutes. No one came on the line so I hung up again. Are brokers really that busy these days?

This morning I was so annoyed I called your old friend Marty and told him if he could transfer my shares to the Registrar for paper certificates, that I'd be happy to switch my brokerage account to his firm. Marty told me that DTC may have put a "chill" on the shares for any number of reasons. He suggested that I call my broker again and if I didn't get a straight answer, I should ask to speak with a Compliance Officer and demand some answers. The equity trader at Fidelity spent about 20 minutes doing "research" on the paper trail and then told me that the paperwork was currently in the Transfer Agent's office! Only yesterday the Transfer Agent's office told me they had no record of the paperwork! It will be interesting to see what happens next! I'll wait until after Christmas before I call again.

Happy Holidays! Merry Christmas! And God help us all when the roof caves in!

CIGA Brave Heart

Jim Sinclair’s Commentary

This problem is not over. I am posting this simply as a reminder. Don't expect the truth from the CDC when it arrives, as it must in one form or another. The article was sent in by CIGA Dia.

Nassau County Resident With Travel History to Pakistan Tests Negative for Bird Flu

ALBANY, N.Y. (Dec. 16, 2007) – Today the New York State Health Department provided the following information concerning a 38-year-old male Nassau County resident who recently returned from Pakistan, where he was exposed to suspected avian influenza or H5N1, also known as bird flu. After consulting with the Centers for Disease Control and Prevention (CDC) and taking appropriate measures, the state and Nassau County Health Departments determined that there was no risk to the public or to individuals that this person came into contact with.

Upon returning from Pakistan, the man landed at JFK International Airport on December 5. He visited his private physician the next day and was referred to a local hospital for observation. The hospital reported the patient to the Nassau County Health Department on December 7. While this individual showed no symptoms, as a precaution the Nassau County Health Department notified the State Health Department on December 7 and had patient specimens sent to the state Wadsworth Laboratories in Albany to test for H5N1. The results of the tests were negative. This negative test result was confirmed by the CDC, which had dispatched its plane to Albany on December 8 to collect the patient's specimens and conduct testing in parallel. Upon confirmation of the negative test results on December 9, the man's quarantine period ended.

As an additional precaution, the Nassau County Health Department arranged for this individual to be voluntarily quarantined in his home and monitored his condition via videophone. Post-exposure prophylaxis (Tamiflu) was prescribed. Because this individual's family was not exposed to avian influenza, they were not prescribed post- exposure prophylaxis. However, one family member who was symptomatic both before and after the man's return was also tested for H5N1 by the state laboratory and CDC and also found negative.

According to the CDC, no human infections with avian influenza H5N1 have been detected in the United States. The state Health Department thanks Nassau County Health Department officials for their teamwork during this process. Preparedness exercises in the past had helped train medical staff to respond to this type of incident. CDC is working with the World Health Organization (WHO) and other international partners closely to monitor the avian influenza situation in humans.

More…

Jim Sinclair’s Commentary

An excellent article sent in by CIGA Luxem.

The coming collapse of the modern banking system
The banks don't have the reserves to cover their downgraded assets and the Federal Reserve cannot simply monetize their bad bets. There's no way out.
By Mike Whitney

Stocks fell sharply last week on news of accelerating inflation which will limit the Federal Reserves ability to continue cutting interest rates. On Tuesday the Dow Jones Industrials tumbled 294 points following the Fed's announcement of a quarter point cut to the Fed Funds rate. On Friday, the Dow dipped another 178 points when government figures showed consumer prices had risen 0.8 per cent last month after a 0.3 per cent gain in October. The stock market is now lurching downward into a "primary bear market". There has been a steady deterioration in retail sales, commercial real estate, and the transports. The financial industry is going through a major retrenchment, losing more than 25 per cent in aggregate capitalization since July. The real estate market is collapsing. California Gov. Arnold Schwarzenegger announced on Friday that he will declare a "fiscal emergency" in January and ask for more power to deal with the $14 billion budget shortfall from the meltdown in subprime lending.

Economists are beginning to publicly acknowledge what many market analysts have suspected for months; the nation's economy is going into a tailspin.

Morgan Stanley's Asia Chairman, Stephen Roach, made this observation in a New York Times op-ed on Sunday:

This recession will be deeper than the shallow contraction earlier in this decade. The dot-com-led downturn was set off by a collapse in business capital spending, which at its peak in 2000 accounted for only 13 percent of the country's gross domestic product. The current recession is all about the coming capitulation of the American consumer - whose spending now accounts for a record 72 percent of G.D.P.

Most people have no idea how grave the present situation is or the disaster the country will face if trillions of dollars of over-leveraged bonds and equities begin to unwind. There's a widespread belief that the stewards of the system - Bernanke and Paulson - can somehow steer the economy through this "rough patch" into calm waters. But they cannot, and the presumption shows a basic misunderstanding of how markets work. The Fed has no magical powers and will not allow itself to be crushed by standing in the path of a market-avalanche. As foreclosures and bankruptcies increase; stocks will crash and the fed will step aside to safety.

More…

Dear Extended Family,

As we are coming to the end of 2007 lets review some lessons learned:

1. You cannot successfully use TA if you lack a fundamental knowledge of the situation you are reviewing, invested in or trading.
2. To see the near and dear act destructively is not fun for me. Yesterday the near and dear pounded what they perceived as a breakdown of an asymmetrical triangle, keying stop loss orders placed by other near and dear only later to see how that action was counter to fundamental developments. Worse, they were bamboozled into the breakdown by their own action of trying to get ahead of the next person. The result was a self-fulfilling prophecy of a destructive nature.
3. You buy or stand aside at the oversold of any formation and sell on the overbought of any formation, including up channels.
4. You buy weakness and sell strength, not the other way around.
5. Trading is a zero sum game. In the end there will be one fat person and one machine left having taken all the money away from those that pride themselves as traders.
6. The only way to win at the trading game is to trade in the direction of the major move and at some point quit the game. That means in a bull market you buy before you sell. Then you sell only strength and buy only weakness. Yesterday I watched that law being violated by the near and dear many that think they learned the craft from me but clearly did not.
7. Just because you have purchased a book or two on trading does not make you a trader.

Fundamental Conclusions:

1. Gold is headed to $1050 and then onward to $1650.
2. The US dollar is headed to .7200 and will then continue its downtrend into the .6000s and the .5000s.
3. The cause can be found by a study of the Weimar experience. Drop the words “War Reparations” and replace them with “Credit and default derivative meltdown.”
4. There is no practical solution to the present credit problem and its effects.
5. There are many academic solutions to the credit problem but not one that will not backfire, making it a greater mess than it is.
6. Monetary inflation proceeds price inflation. Price inflation, already wild if measured by the same procedures as in the 70s, is going to get wild on the present camouflage procedures.
7. The swings in the equity markets will burn your hair as the PPT works to prevent it and massive liquidity confronts it with declining earnings providing a huge force of gravity.

This is it. PROTECT YOURSELF. YOU ARE THE BULLDOZER. PAY NO ATTENTION AND YOU WILL BECOME THE PAVEMENT. It will be your fault that your finances become asphalt.

Regards,
Jim

Happiest Holiday Greetings to All!

THE STOCK MARKET DOCTOR MAKES A SHORT PROGNOSIS

Unfortunately, our doctor is not Doctor Feel Good...at least not in the short run.

The prognosis is not good for the stock markets in the U.S. and Europe. Sure, they can rally, but don't count on any long bull runs. Any stock market runs we get in coming months are more likely to be bear runs, and those are seldom fun.

In our memo for November 26, we predicted four types of events to look for which would take place to ultimately end the current world liquidity crisis.

Prediction 1: New capital investments by sovereign wealth funds and wealthy companies into banks and other financial institutions with problems. This has begun happening and more investments are announced everyday.

Prediction 2: World central banks are going to provide increasing liquidity...this is happening with a vengeance. It seems that every day interest rates are being lowered somewhere, and everyday more liquidity is being provided to the markets by central banks. The latest are large coordinated loans by central banks to keep liquidity in the system. Instead of lending only on conservative government bonds, as had long been the policy, central banks are willing to take other forms of collateral, even junk mortgage paper. In spite of this, the crisis is not curing itself and illiquidity still pervades the world mortgage markets.

Central bank lending against low quality assets like mortgage paper is just a step away from prediction number three.

Prediction 3: An organization will be funded in the U.S. and/or Europe to buy bad mortgages and to make a market in them to provide a market price for illiquid mortgages.

Prediction 4: The U.S. and foreign governments will actually buy low the quality debt. This may happen sooner rather than later. Trial balloons are being floated in Washington D.C. in the last couple of days to renew the Home Owners Loan Corp. This organization was started in 1933 at the depths of the great depression, to buy mortgages from banks at a discount and refinance them on easier terms. It was closed down in 1951 once the depression and the mortgage crisis of the 1930's was long over.

Already in just three weeks, predictions one and two have happened, and will likely continue. Predictions three and four will have to happen soon if the U.S. wants to avert long-term real estate problems like those experienced during the 1930's.

THE CRISIS IS LEADING TO A RECESSION IN THE U.S., AND MAYBE IN EUROPE

This is temporary bad news for all markets. Long term, it is good news.

Historically, when people begin to realize that a recession is probably going to develop a bear market decline sets in. This may happen in the next few weeks. The process of this market decline and recovery will have several steps.

Step 1 is a "slowing down" in world investing psychology. Most all markets see a decline in their P/E ratios and even if corporate earnings continue to grow the stock markets decline in value.

Step 2 will be when fear recedes enough for the realization to dawn that developing economies especially those of India, China, Brazil and Russia have still been growing. This realization leads to an earlier recovery in these markets.

Step 3 will be when investors begin to realize that the growing markets continue to consume commodities at a rapid rate. Thus, commodity prices can begin a new uptrend.

Step 4 is the realization occurs to investors that developed economies will once again grow, and corporate profits growth will pick up. Finally, their stock markets also rise.

SUMMARY

The temporary bad news is that we believe most global markets for stocks and commodities will fall for the next few months. The long-term good news for the nimble is that we can repurchase at lower prices in a few months, and be ready for the time when a new market uptrend will begin.

Click here for disclaimer information and to visit Monty Guild’s Website

Dear Comrades In Golden Arms (aka CIGAs),

In answer to the many inquiries, please recall that I mentioned to you last week the possibility of aberration both on the TIC as well as the BOT.

The reason was twofold:

1. Many investors still see US Treasuries as a move to liquidity. As the market begins to swing wildly from plus 300 to minus 300 many pros move to the sidelines. The sidelines tend to be Treasury Bills of one kind or another. Since everybody trades every market, the conditions of the US equity and bond market are a major influence on TIC.
2. The funding of or purchasing of Treasuries by a financial institutions is an "investment" that gets counted as both a balance of trade item and an "investment flow" item in the TIC.

As a result of this, the Balance of Trade looked better which I addressed last week. The TIC was a beneficiary of the meltdown of many international investment banks and other financial institutions.

Do you recall where the investment funds came from in order to hold many major institutions afloat? It was not from within the US but from outside. Voila, an explosion in the "investment category" of the TIC and a plus item in the Balance of Trade. This has been going on for a longer time than the headlines have been tracking it.

To address the enormous herd of the uninformed, there is no basis for a dance of joy unless you find the US selling itself to any BIDDER on the planet as the credit crisis worsens a really great thing. It is not and it is not dollar positive.

Regards,
Jim

Dear CIGAs,

By now you have probably heard that the Treasury International Capital Flows data was wildly positive beyond the estimates of most analysts. The reasons for the increase is primarily due to purchases of US equities by foreigners in October of this year.

My own view is that any “wildly bullish” views of this should be tempered by the fact that in October the Dow surged above the 14,000 level and put in a very strong close. By November all of what it put on in October was taken back as the DOW collapsed from above 14,000 all the way down to 12,724 before recovering to end the month at 13,371. The Nasdaq also was very strong in October making a six year high. It too gave all that back and then some by the end of last month and is currently down for the month as well. Dollar bulls should stop drooling long enough to consider that next month equity purchase data is highly likely to revert back to more net selling of US equities by foreign investors. We will have a cash infusion into some individual stocks (notably banks) next month as they sold themselves to foreigners to raise cash to cover their derivatives debacle but overall I expect to see purchases decline.

Treasuries saw a HUGE jump in purchases by foreign investors to $49.8 billion from the previous month of $26.2 billion. Of interest is the fact that according to the holdings by country data, China sold $8.5 billion in treasuries with Japan buying about that same exact amount. What is most peculiar however is that $30.5 billion in Treasuries buying was done through London. In other words, no matter how you shake, bake, slice, dice or chop it, the bulk of the Treasury buying in the month of October was done through London banks. Many foreigners prefer to conduct their business through London because of privacy reasons, but those same privacy reasons also mean we have no idea who might or might not be doing the buying.

Take a look at the chart which shows the holdings of Treasuries for the five largest purchasers and you will see the spike in the plot line for Great Britain or London. Last year when Treasury revised the data a significant portion of London based buying was taken away from London and put in the China category. Whether that is the same case this year is anyone’s guess. Still, with all the antics we have seen of late in these markets and the stunningly arrogant and brazen abrogation of contracts on the interest rate front by the federal government in the so-called “rescue” package, I would not be the least bit surprised to eventually learn that the US Fed has been buying along the entire yield curve. After all, governments LOVE low interest rates and I have now reached the cynical conclusion that if the market will not give it to them, they will give it to themselves. And why not – after all, what is to stop them from doing so – ethics? Those were tossed out long ago when the feds decided to interpose themselves into the private marketplace because they did not happen to like the fact that two private parties had agreed amongst themselves that after a certain period of time, yields on purchased securities would rise. I for one am waiting for the day when the feds arbitrarily change the terms on US bills, notes and bonds because they think that the interest rates are too burdensome!

Click here for today’s charts on the TIC Data with commentary from Trader Dan Norcini

Dear CIGAs,

You know this. The Financial Times knows this. The main markets haven't a clue, YET! The markets will learn, but in the most uncomfortable way for those that believe because over the last 27 years no problem has been a problem therefore no problem is a problem.

This article in the Financial Times says what I have been telling you. There is NO PRACTICAL SOLUTION to this problem which is critical in nature.

Hold tight, the central banks have no plan
By Wolfgang Munchau
Published: December 16 200

"It turned out that market participants are not infinitely stupid."

"It is a fully fledged solvency crisis that has arisen because two giant and interlinked bubbles burst simultaneously – one in property, one in credit – leaving banks and investors on the brink of bankruptcy, some hanging on by their fingertips. Yet there is nothing the central banks are offering at this stage to alleviate a solvency crisis."

"So the message from last week is that central banks have no game plan. Expect continued stress in financial markets for most of next year and possibly beyond. Expect also further declines in property prices in the US and the UK and spill-overs to the real economy."

This has been the year when many deeply held beliefs have been challenged. One such belief was that central banks have the toolkit to sort out any conceivable economic or financial crisis.

Last week’s co-ordinated liquidity action by five central banks taught us that this is not the case. The idea was that a co-ordinated response would reassure the markets, but it had the opposite effect. It turned out that market participants are not infinitely stupid. They know by now that this is not a liquidity crisis at its core. If it had been, it would be over by now.

More…

Jim Sinclair’s Commentary

It appears that the vastly advertised Super Fund isn't so Super. There is no plan "B."

Japan big banks reluctant to pay for subprime fund
Mon Dec 17, 2007 5:44am EST
By Nathan Layne and Taro Fuse

TOKYO (Reuters) - Japan's top three banks are expected to resist a request to put up a total of $15 billion for a U.S.-led subprime rescue fund, a move that could further cloud prospects for the bailout plan.

Sources told Reuters last week that Mitsubishi UFJ Financial Group (8306.T), Mizuho Financial Group (8411.T) and Sumitomo Mitsui Financial Group Inc (8316.T) had each been asked to pony up $5 billion, and to give an answer this week.

Citigroup Inc (C.N), Bank of America Corp (BAC.N) and JPMorgan Chase & Co (JPM.N) initiated plans for the fund to prevent a fire sale of billions of dollars of securities held by structured investment vehicles (SIVs) at the heart of the subprime mortgage crisis.

But the size and even establishment of the fund have been put in doubt in recent days amid skepticism among market players over how effective it might be and an announcement by Citigroup that it would bail out SIVs on its own.

Executives at Japan's top three megabanks have meanwhile been wondering why they were asked to shoulder such a comparatively large part of the fund, whose size has recently been estimated by media at $30-60 billion.

More…

Jim Sinclair’s Commentary

The following is the wonderful reason for the improvement: foreign aid, airline tickets, consulting fees and foreign buyout of US Financial concerns. No, that is not reason to buy a stock or the stock of a country, the US dollar, nor is there any long term nature to this development.

US Trade Deficit Declines
By MARTIN CRUTSINGER - 2 hours ago

"The surplus in services, items such as airline tickets and consulting fees, increased by 3 percent to $26.5 billion. The surplus in investment income flows surged by 61.5 percent to $20.5 billion. The only deterioration occurred in the category that includes foreign aid, which rose to $25.8 billion, up from $23.2 billion the previous quarter."

WASHINGTON (AP) — The U.S. trade deficit declined during the third quarter to the lowest level in two years, raising hopes that the country's trade troubles could be easing.

The Commerce Department reported Monday that the current account trade deficit fell by 5.5 percent to $178.5 billion in the July-September quarter. That was a better-than-expected showing and the smallest current account imbalance since a $173.4 billion deficit in the third quarter of 2005.

The current account is the most comprehensive measure of trade because it includes not only trade in products and services but also investment flows between countries.

The current account deficit had set all-time highs for five consecutive years but has declined for two consecutive quarters, prompting economists to predict that this year will see the deficit finally start to decline.

The improvement reflects in part the decline of the dollar against many other major currencies. A weaker dollar makes U.S. products cheaper in foreign markets while making foreign goods more expensive for American consumers.

More…

Dear CIGAs,

The following charts are selected by popular demand of JSMineset readers only. They are not recommendations for investment from Jim, nor can they be considered derivative or any other risk free. Please use these charts accordingly.

This week we have included multiple charts of each company covered, approximately double what is usually posted. Enjoy!

Click here for this week’s action in Gold and the US Dollar Index with commentary from Trader Dan Norcini

Click here for this week’s action in Anglo American, Barrick Gold and Agnico Eagle Mines

Click here for this week’s action in ASA Limited, Yamana Gold and Aurizon Mines

Click here for this week’s action in Comp De Minas Buenaventura, Central Fund and Claude Resources

Click here for this week’s action in DRDGold, Ecu Silver Mining and Eldorado Gold Corp

Click here for this week’s action in Freeport McMoRan Copper and Gold, Fronteer Development Group and Great Basin Gold

Click here for this week’s action in Goldcorp, Gold Fields and Gammon Gold

Click here for this week’s action in Golden Star Resources, Hecla Mining and Harmony Gold Mining

Click here for this week’s action in IAMGold, Kinross Gold and Meridian Gold

Click here for this week’s action in Minefinders Corp, Mines Management and Metallica Resources

Click here for this week’s action in Northern Dynasty Minerals, Newmont Mining and Novagold Resources

Click here for this week’s action in Northgate Minerals, Pan Amer Silver and Pacific Rim Mining

Click here for this week’s action in Royal Gold, Seabridge Gold and iShares Silver Trust

Click here for this week’s action in Silver Wheaton, Samex Mining and Silver Standard Resources

Click here for this week’s action in Taseko Mines, Tanzanian Royalty Exploration, US Gold and Vista Gold