Jim Willie's latest 8/9/11

ksammut

Inflation & Deflation in a Storm

"The most important featured message from the FOMC meeting and Bernanke's speech was that he painted a powerful recession picture. He admitted the recession in clear terms. He promised 0% rates for two more years, an admission of failed policy and wrecked system. No central bank in history has ever admitted such failure indirectly. It was not enough, as stocks will resume a powerful downward trajectory, seen in stark fashion on Wednesday. The stock market will decline until the USFed announced a broad new QE3 with features directly to support the failing US Stock market. That decision will also be unprecedented. Gold senses it and rallies into breakout territory.

My firm forecast is that QE3 will be announced. The so-called QE2.5 powered by the positive effect on mortgage bonds that releases $25 to $40 billion per month will prove woefully inadequate. Mortgage rates are falling, rendering bonds more valuable. The USFed exposes its own vested interest in lower bond yields, the likely master hand behind the Interest Rate Swap lever. The QE3 needs another $1.0 to $1.5 trillion, as the mortgage benefit will be shown as inadequate. My firm belief is that the next QE3 will be admitted to provide strong S&P stock support. The USFed might declare the stock market to be a vital element that supports the USEconomy and confidence levels. The other more hidden motive for QE3 is to prevent USTreasury auction failures. Low bid action at 3.0% yields will be worse at 2.0% offered. The QE3 will be seen as a necessary evil, an urgently needed alternative, a perilous road that must be taken. Worse still, QE3 will be taken with full knowledge that QE3 will not stimulate the USEconomy at all. The discredited and defensive USFed will look for moral support at Jackson Hole at the end of August. From the banker bunker will come QE3, just like QE2 which was also fully denied until urgently required. In fact, that QE3 will be intended to boost stocks will be obvious to all, the main priority being to stabilize the financial markets on a global level. Foreign central banks will pressure the USFed, despite the risks. In doing so, the USFed will admit that they have routinely being intervening in the US Stock market.



GOLD RECOGNIZED AS BEST SAFE HAVEN

So the debt crisis is flourishing, as contagion has spread to Italy, Spain, and the United States. The broken nature of the Southern Europe sovereign debt is manifested in higher bond yields. The broken nature of the USGovt debt is manifested in ultra-low bond yields, evident of a massive liquidity trap, and excessive reliance upon Interest Rate Swaps. So the sovereign bonds are being ruined, both by grand losses in Europe and forced participation in an asset bubble in the Untied States. So the price inflation is rising worldwide, the unfortunate but unavoidable consequence of the USFed monetary expansion in hyper inflation style. Observe the next 3-step breakout process in the Gold price in staircase action. It should be followed by consolidation, but that consolidation phase will most likely feature a Silver price breakout. Gold fights the political wars, but Silver rides through the broken phalanx on a white horse to capture outsized gains. This time will be no different. Some mistakenly expect Silver to be regarded as an industrial metal. It is that, but it is much more. It is not replaceable in industry. It is expanding its role as both a reserve asset and a household saving vehicle. Silver will follow Gold in this round, as they are inextricably linked through history. As colleague Andy Hoffman said, "Gold & Silver will go no offer soon!" The Jackass could not agree more. Eventually the Silver metal will not be available at any price from profound shortage, and Gold will be scarce since central banks scramble to recapitalize their wrecked currencies. At that time, even the Sprott Fund will not both to source the silver in an expanded fund offering. Well, maybe they will try, just to expose the extreme silver shortage!!"

jmski52

Seems like silver HAS been the whipping boy as of late. MoneyLA did point out recently that the disparity leads one to think that either gold is due for a drop or silver is due for a rise.

It's a tough call, especially in light of what's happening to stocks.

derryb

I have a lot of respect for JW. He makes some gutsy calls and many dead-on accusations. At times it appears he has his own intelligence network working deep inside of government and wall st.

jmski52

The broken nature of the USGovt debt is manifested in ultra-low bond yields, evident of a massive liquidity trap, and excessive reliance upon Interest Rate Swaps. So the sovereign bonds are being ruined, both by grand losses in Europe and forced participation in an asset bubble in the Untied States.

Can someone elaborate on the nature of a massive liquidity trap, and what an Interest Rate Swap is? I don't want to make any assumptions in my understanding and I want to get it right.

InYHWHWeTrust

jmksi, I bet RR can help on the Interest rate swap explanation, been waiting for him to chime in.

JW is always a good read and for a zinger or two: here is my favorite from the latest:

"...They [US Banking Industry] are mere twisted casinos struggling to recapitalize under the relentless strain of a housing bear market and lawsuit siege, working the USTreasury carry trade to its conclusion, riding the Interest Rate Swap wave on surfboards bearing a South Manhattan brand."

roadrunner

<< <i>The broken nature of the USGovt debt is manifested in ultra-low bond yields, evident of a massive liquidity trap, and excessive reliance upon Interest Rate Swaps. So the sovereign bonds are being ruined, both by grand losses in Europe and forced participation in an asset bubble in the Untied States.

Can someone elaborate on the nature of a massive liquidity trap, and what an Interest Rate Swap is? I don't want to make any assumptions in my understanding and I want to get it right. >>



I don't know if I can read another Jim Willie missive so soon....maybe this weekend when things are calmer.

The US debt has been maintained manageably by ultra low interest rates. That could not have been done w/o some mechanism to ensure rates stayed low at all parts of the yield curve.
Enter interest rate swaps, or more generally over the counter interest rate contracts/derivatives. Our top 25 banks carry over $200 TRILL worth of them. The rest of the world carries more than $200 TRILL as well. And then double those amounts due to the BLS shifting accounting rules back in 2008 to try and hide this skyscraper of leveraged bets. This pile of IRC/IRS's provided much liquidity to the big banks. Each IRC is tied to a USTBond, hence the effect on rates. The interest rate swap is an interest rate contract between 2 parties where one side wants to reduce the risk of a large rate change by paying a cyclical premium to the interest rate contract issuer. I would imagine most of the receiving parties were looking for protection from rates shooting up. Fat chance of that with hundreds of TRILLIONs of these out there betting against that. Banks were more than happy to provide the contracts and cash the premiums as well as % for making the deal. This was how bankers created their own debt-money system around the standard US monetary system. Who needs congress to appropriate money when you can invent your own?....hence unlimited liquidity. Unfortunately, someday these contracts have to be unwound. If one of the banks holding around $20-$70 TRILL of these contracts goes bankrupt, someone has to step in and pay off those bets. If not, there are counterparties who are now short $20-$70 TRILLION in assets. Won't be pretty. That's why they are too-big-to-fail and won't be allowed to fail. They would just be taken over by another bank and their derivatives assumed, similar to Bear Stearns. Another Lehman type failure would be gruesome as then 100% of the derivatives have to be settled immediately. By assuming the derivatives of a failing bank, the can is just kicked down the road again.

roadrunner

MilesWaits

Damn, RoadRunner, you paint the situation so eloquently and painfully clear.

Thanks......

Miles

jmski52

Thanks for the primer, roadrunner.

So, if one bank has put out a bunch Adjustable Rate Mortgage loans at around 4% under the Community Reinvestment Act to someone who will never be able to pay it off anyway, that bank could contract with a second bank to insure that if rates go up to 6%, they would collect the extra money from the second bank? So the first bank would pay a premium over the life of the loan to the second bank, and the second bank would risk the chance of a rise in rates?

Then, when the increased payments cause the mortgage holder to default, the first bank has a bum mortgage note, and the second bank still has to cover part of it under contract? Not so good for either.

Then, if that loan was sold into a pool for resale as a bundle to another bank, who sliced & diced portions of it into tranches and then sold parcels of it off to retirement funds based in Iceland, when a massive bunch of defaults happens there is a real problem in sorting it all out?

Geez. I think I now understand it, but I really don't want to.

Why aren't these bankers in jail for fraud? Oh, they got bailed out? Uh-huh.

cupronik

Jmski52:

What you just described is analogous to a couple of cattle with mad cow's disease make it to the slaughterhouse whose meat gets ground up and mixed with other beef before getting parceled out to many different locales, except with these adjusted mortgages that get pooled with other loans the percentage is much, much higher of being toxic.

InYHWHWeTrust

<< <i>Thanks for the primer, roadrunner.

.... Why aren't these bankers in jail for fraud? Oh, they got bailed out? Uh-huh.[b/] >>



Thank you RR as well.

As to jmski question, black letter law has been broken time and again from the mortgage fraud to the GM bondholders getting shafted, and no one is going to jail. We are all too busy with our cable and american idol and dancing with the stars or monday night football or whatever it is.
We are a virtual banana republic.
Anyone here trusting in the gubbermint for anything in any way needs to take warning...
I think most tuning in here are preparing the best they can with the best they got to be as self-sufficient as possible in context of local community of like-minded individuals/families.

roadrunner

jmski52, it is the biggest ponzi scheme ever invented. It makes Bernie Madoff look like a church lady who lifted $5 from the Sunday basket. That's the difference in scale between $1.14 Quadrillion and $65 BILL. It's large enough to take down the entire world's financial system several times over. If we spent even half the time invested so far in tracking down all of Bernie's hidden money towards resolving the otc derivative's mess, it would be time well spent. After all, it's a 10,000X bigger problem.

Sinclair mentions in an April interview in another thread titled with his name, that by not bailing out Lehman the daisy chain of failed derivatives commenced with no possibility of reversal. I don't claim to fully understand this topic. And any simplistic working knowledge I have comes from guys like Sinclair, Kirby, and others who actually traded these things at one time in their careers. No one can be prosecuted for this fraud because it is so widespread and involves important people on so many levels including across the oceans (banks, insurance and mortgage companies, rating agencies, politicians, corporations, FASB, etc.). A shorter list would be to identify those people who were not involved.

For now, these derivatives can be valued by the owner and counterparty at any figure they like as no one will check. And since they don't trade, no one can determine a price w/o a sale.
The bankers know they are mostly worthless but have the too-big-to-fail backstop on their side. Someday someone will once again shine a light into that closet. That will be an oops,
sort of like when S&P decided to downgrade on their own....only with 100X the effect.

roadrunner

jmski52

Great analogy, cupronik. Mad cow money. Yeppers. Mind if I use that analogy from time to time? The more I say it, the funnier it is.


This was how bankers created their own debt-money system around the standard US monetary system. Who needs congress to appropriate money when you can invent your own?....hence unlimited liquidity. Unfortunately, someday these contracts have to be unwound.

So, is this what the "liquidity trap" really is? Is it just the fact that - if they were to unwind these contracts, they would be in a massive loss position, so they simply won't do it?

And if they actually did unwind them, there isn't enough new money to pay them off? Is that it?

Geez.


As to jmski question, black letter law has been broken time and again from the mortgage fraud to the GM bondholders getting shafted, and no one is going to jail.

IYWT, I was being somewhat facetious in asking that rhetorical question. If I go much beyond talking to myself about it, I tend to get pretty frustrated and I decided that it's not worth my angst.


it is the biggest ponzi scheme ever invented. It makes Bernie Madoff look like a church lady who lifted $5 from the Sunday basket. That's the difference in scale between $1.14 Quadrillion and $65 BILL. It's large enough to take down the entire world's financial system several times over.

roadrunner, every time I consider what to do with a new batch of earnings this is the endpoint at which I find myself. When I have to figure out how to deploy new money, the stock market or bonds are not even a fleeting consideration. That game is over.

I do think that the financial system is heavily at risk and even if it survives, there will be impacts that we still can't foresee. Your point about the size of the ponzi scheme is a critical consideration. It simply means that the consequences are more likely to surface - and sooner rather than later. Like an elephant with painted toenails trying to hide in the strawberry patch.

Other than a nominal mortgage, I'm still 98% in pms. I still think that pms are the absolutely best way to avoid getting slammed.

roadrunner

So, is this what the "liquidity trap" really is? Is it just the fact that - if they were to unwind these contracts, they would be in a massive loss position, so they simply won't do it?
And if they actually did unwind them, there isn't enough new money to pay them off? Is that it?

They can't unwind the bulk of these contracts because 80% are interest rate contracts helping to keep rates low. If rates go up, the game is over and the financial system explodes.
Those contracts are in place with the full faith and approval of the US Treasury and Federal Reserve. The bankers are probably figuring that other issues may bring the system to a
crushing end even before the IRC's come to the table. They are probably hoping for one giant cancellation of all otc derivatives. One last bail out of the banks.

Yeah, if they started to unwind them they'd have to find buyers, of which there are none. And yes, many would be in loss positions and would immediately start to require banks to
post higher reserve levels to meet banking guidelines. That means selling off other assets and pulling back loans and other assets (ie further contraction). Consider that when Lehman's
book was sold they netted 9% of stated value for their derivatives. So even assuming a massively conserative and optimistic 90% valuation of the $1.14 Quad, that's still a $100 TRILL
loss to be covered over. You can bet that the 90% figure is way off. Maybe the 9% is as well. But anything inbetween will still be a killer. These contracts are leveraged to the tune of
30-1 to 50-1. Not satisfied with one contract to apply to a legitimate risk avoidance situation, they piled on 49 other contracts for better leverage (ie annual profits). We already saw the effect with mortgage backed securities. Rather than 1 contract to cover the case where J6P would default on his home, the bankers wrote another 49 contracts betting he would default. We know how well that worked out.

roadrunner