Sunday, May 31, 2009

Global systemic crisis: June-August 2009 - ? When the world steps out of a sixty-year old referential framework

Global systemic crisis: June/Aug. 2009 - ?

When the world steps out of a

sixty-year old referential framework

failure of the two major economic stimulus plans:

namely the Chinese and American plans

GEAB N°35 is available! Global systemic crisis: June 2009 - When the world steps out of a sixty-year old referential framework

The financial surrealism which has been at the heart of stock market trends, financial indicators and political commentaries in the past two months, is in fact the swan song of the referential framework within which the world has lived since 1945....

Just as in January 2007, the 11th edition of the GEAB described that the turn of the year 2006/07 was wrapped in a « statistical fog » typical of an entry into recession and designed to raise doubts among passengers that the Titanic was really sinking (1), our team today believes that the end of Spring 2009is characterized by the world’s final stepping out of the referential framework used for sixty years by global economic, financial and political players in making their decisions, in particular of its “simplified” version massively used since the fall of the communist bloc in 1989 (when the referential framework became exclusively US-centric). In practical terms, this means that the indicators that everyone is accustomed to use for investment decisions, profitability, location, partnership, etc … have become obsolete and that it is now necessary to find new relevant indicators to avoid making disastrous decisions.

This process of obsolescence has increased dramatically over the past few months under pressure from two trends:

. first, the desperate attempts to rescue the global financial system, particularly the American and British systems, have de facto “broken navigational instruments” as a result of all the manipulation exerted by financial institutions themselves and by concerned governments and central banks. Among those panic-stricken and panic-striking indicators, stock markets are a perfect case as we shall see in further detail in this issue of the GEAB. Meanwhile, the two charts below brilliantly illustrate how these desperate efforts failed to prevent the world’s bank ranking from experiencing a major seism (it is mostly in 2007 that the end of the American-British domination in this ranking was triggered).

. secondly, astronomical amounts of liquidity injected in one year into the global financial system, particularly in the U.S. financial system, led all financial and political players to a total loss of touch with reality. Indeed, at this stage, they all seem to suffer from a syndrome of diver’s nitrogen narcosis – impairing those affected and leading them to dive deeper instead of surfacing. Financial nitrogen narcosis has the same effects than its aquatic counterpart.

Destroyed or perverted sensors, loss of orientation among political and financial leaders, these are the two key factors that accelerate the international system’s stepping out of the referential framework of the past few decades.

Top 20 financial institutions by market capitalization in 1999 (USD billions) - Source: Financial Times, 05/2009
Top 20 financial institutions by market capitalization in 1999 (USD billions) – Source: Financial Times, 05/2009
Top 20 financial institutions by market capitalization in 2009 (USD billions) - Source: Financial Times, 05/2009
Top 20 financial institutions by market capitalization in 2009 (USD billions) – Source: Financial Times, 05/2009
Of course, it is a feature of any systemic crisis and easy to establish that, in the international system we are used to, a growing number of events or trends have started popping out of this century-old framework, demonstrating how this crisis is of a kind unique in modern history. The only way to measure the magnitude of the changes under way is to step back several centuries. Examining statistical data gathered over the last few decades only enables one to see the details of this global systemic crisis; not the overall view.

Here are three examples showing that we live in a time of change that occurs only once every two or three centuries:

1. In 2009, the Bank of England official interest rate has reached its lowest level (0.5 percent) since the creation of this venerable institution, i.e. since 1694 (in 315 years).

Bank of England official interest rate since its creation in 1694 - Source: Bank of England, 05/2009

Bank of England official interest rate since its creation in 1694 – Source: Bank of England, 05/2009

2. In 2008, the Caisse des Dépôts et Consignations, the French government’s financial arm since 1816 under all France’s successive regimes (kingdom, empire, republic…), experienced its first yearly loss ever (in 193 years) (2).

3. In April 2009, China became Brazil’s leading trade partner, an event which has always announced major changes in global leadership. This is only the second time that this has happened since the UK put an end to three centuries of Portuguese hegemony two hundred years ago. The US then supplanted UK as Brazil’s leading trade partner at the beginning of the 1930s (3).

It is not worth reviewing the many specifically US trends popping out of the national referential framework compared to the past century (there is no relevant referential framework older than that in the US): loss in value of the Dollar, public deficits, cumulated public debt, cumulated trade deficits, real estate market collapse, losses of financial institutions… (4)

But of course, in the country at the heart of the global systemic crisis, examples of this kind are numerous and they have already been widely discussed in the various issues of the GEAB since 2006. In fact, it is the number of countries and areas concerned, which is symptomatic of the world’s stepping out of the current referential framework. If there was only one country or one sector affected, it would simply indicate that this country/sector is going through an unusual time; but today, many countries, at the heart of the international system, and a multitude of economic and financial sectors are being simultaneously affected by this move away from a “century-old road”.

Stock market trends – adjusted for inflation – during the last four major economic crises (grey: 1929, red: 1973, green: 2000, and blue: current crisis) - Source: Dshort/Commerzbank, 17/04/2009

Stock market trends – adjusted for inflation – during the last four major economic crises (grey: 1929, red: 1973, green: 2000, and blue: current crisis) – Source: Dshort/Commerzbank, 17/04/2009

Thus, to conclude this historical perspective, we want to emphasize that the stepping out of the century-old reference system is graphically visible in the form of a curve simply popping out of the frame which allowed ongoing trends and values to be represented for centuries. This popping out of traditional referential frameworks is speeding up, affecting increasing numbers of sectors and countries, enhancing the loss of meaning of indicators used daily or monthly by stock markets, governments, or official sources of statistics, and accelerating the widespread awareness that “the usual indicators” can no longer give any insight, or even represent the current world developments. The world will thus reach summer 2009 without any reliable references available.

Of course, everyone is free to think that a few points’ monthly variation of a particular economic or financial indicator, itself largely affected by the multiple interventions of public authorities and banks, carries much more value on the evolution of the current crisis than those stepping out of century-old referential frameworks. Everyone is also free to believe that those who anticipated neither the crisis nor its intensity are now in a position to know the precise date when it will end.

Our team advises them to go see (or see again) the movie Matrix (5) and to think about the consequences of manipulating the sensors and indicators of one’s perception of given environment. Indeed, as we will examine in detail in our special summer 2009 GEAB (N°36), the coming months could be entitled « Crisis Reloaded » (6).

In this 35th issue of the GEAB, we also express our advice on which indicators, in this period of transition between two referential frameworks, are able to provide dependable information on the evolution of the crisis and the economic and financial environment.

The two other major themes addressed in this May 2009 issue of the GEAB are, first, the programmed failure of the two major economic stimulus plans: namely the Chinese and American plans, and, secondly, the United Kingdom’s appeal to the IMF for financial assistance by the end of summer 2009.

In terms of recommendations, in this issue, our team anticipates the evolution of the worlds’ largest real estate and treasuries markets.



(1) At that time, our team added « Just like always when change occurs, the passage by zero is characterized by a «fog of statistics» where indicators point in opposite directions and measurements provide contradictory results, with margins of error sometimes wider than the measurement itself. Regarding our planet in 2007, the on-going wreck is that of the US, that LEAP/E2020 has decided to call the « Very Great Depression », firstly because the « Great Depression » already refers to the 1929 crisis and the years after; and secondly because, according to our researchers, the nature and scope of the upcoming events are very different ». Source: GEAB N°11, 01/15/2007

(2) Source: France24, 04/16/2009

(3) Source: TheLatinAmericanist, 05/06/2009

(4) Political leaders and experts insist on comparing the current crisis to the 1929 crisis, as if the latter were a binding reference. However, in the US in particular, current trends in many fields have moved beyond the events which characterized the « Great Depression ». LEAP/E2020 already reminded in GEAB N°31 that relevant references were to be found in the 1873-1896 global crisis, i.e. more than a century back.

(5) In the Matrix series of movies, reality perceived by humans is created by computers. They think they live a comfortable life when in fact they live in squalor, but all their senses (sight, hearing, taste, touch, smell) are manipulated.

(6)The title of the second in this series of movies: « Matrix reloaded »....


Ellen Brown - trial attorney and the author of the book Web of Debt - has launched an initiative to urge Obama to save the economy by taking the power to create money away from the bankers, and give it back to the government as the Founding Fathers intended.

Brown's ideas have been endorsed by many very smart and independent financial experts.

Click here and vote Brown's proposal up.

This is a brief introduction to Brown's idea. See this for more information.

Saturday, May 30, 2009

The New Capitalist Pyramid Vs. the Old.....“The name for our profits is democracy” –

The New Capitalist Pyramid

A cartoon from the early part of the 20th Century by an IWW artist gives a power analysis in graphic form. It also underlines the slogan “We are the many, and they are the few!”

It is a graphic some of you may have seen before, but how many of you knew it was a IWW original?

A short history of the US branch of the most revolutionary mass organisation in American history, the Industrial Workers of the World union, the IWW.
The IWW changed American trade unionism forever, being the first big union to organise black and white across entire industries, and calling for the abolition of the wage system and industrial democracy. It was largely defeated by a massive campaign of repression launched by bosses and the government

A ‘Wobbly’ 20th Century ......and a much worse 21st.....

“The name for our profits is democracy” –

"I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. . . . corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed."- Lincoln, Nov 21, 1864

"War is a racket. It always has been. It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives. A racket is best described, I believe, as something that is not what it seems to the majority of the people. Only a small 'inside' group knows what it is about. It is conducted for the benefit of the very few, at the expense of the very many. Out of war a few people make huge fortunes." - Smedley Butler, "War Is a Racket" (1935)

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence — economic, political, even spiritual — is felt in every city, every statehouse, every office of the federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society. Dwight Eisenhower, Jan 17, 1961

"The high office of the President has been used to foment a plot to destroy the American people's freedom, and before I leave office, I must inform the citizens of this plight." JFK, Nov 12, 1963

“The name for our profits is democracy” –.......
The Elite established a “divide and conquer” tactic that is still very much in place in most societies.[4]

Historian Edmund S. Morgan pointed out, “For those with eyes to see, there was an obvious lesson in the rebellion. Resentment of an alien race might be more powerful than resentment of an upper class.”[5]

Edward Bernays, the grand master of propaganda stated: “We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized.”[6]

The government and their compliant corporate press mold and manage our perceptions and prefer that we focus our anger and attention on numerous distractions – the illegal aliens, illusive terrorists, same-sex marriages, welfare recipients, North Korean testing, whether the CIA lied or was it Pelosi, Islamic fundamentalism, whether torture photos should be released or the current Supreme Court nominee, as if one court appointment can change the political landscape. The fact is that the government Elite set up this entire environment of contention to divert our attention from their treacherous unconstitutional, criminal activities – in both parties. This is all part of America’s drive into a One World Order, now hyper accelerated under the current administration.

You might ask – how did government Elites create the current environment. Decades ago the government abandoned the constitutional principles of non entanglement with foreign countries. Government officials are no longer public servants but private servants to deep-pocketed multinational corporations whose money keeps ego-driven politicians in power. Those same multinational corporations control the media flow of information in order to keep the people in an ignorant trance. Character-challenged politicians, mesmerized by power and money, cater to the insatiable greed of the privileged Elite under the pretext of spreading democracy, ousting cruel dictators, restricting the spread of Communism, Nazism, Fascism or terrorism.

The CIA created al Qaeda, the database and instigated Islamic fundamentalism by training 100,000 fundamentalist Muslim Mujahadeen. The CIA-friendly Zbigniew Brzezinski revealed that, unbeknownst to the American public and Congress, that Trilateralist Jimmy Carter authorized $500 million on July 3, 1979 to create an international terrorist movement that would spread Islamic fundamentalism throughout Central Asia in order to destabilize the Soviet Union, another made-in-America enemy that had served the purpose of its creation and now had to be dismantled. The CIA called this Operation Cyclone and functioned from 1979 to 1989 at a cost of $20-30 million per year beginning in 1980 which rose to $630 million per year in 1987. The U.S. poured another $4 billion into setting up Islamic training schools in Pakistan (Taliban means student). Young zealots were recruited and sent to the CIA's spy training camp in Virginia, where future members of al Qaeda were taught sabotage skills – terrorism. Young Afghans, Egyptian and Jordanian Arabs and some African American Muslims were instructed in the latest sabotage skills.[7]

Taxpayer funds financed the I-hate-America textbooks for Muslim students. Prior to 1967, Islamic fundamentalism was a relatively small movement. In the early 1980’s, the U.S. Agency for International Development (AID) gave a taxpayer funded grant to the University of Nebraska-Omaha and it’s Center for Afghanistan Studies to develop specialized textbooks. For more than twenty years the U.S. spent millions of dollars producing fanatical Islamic schoolbooks for distribution in Afghanistan, a country now known for its terrorist training camps. The schoolbooks, used throughout the 1990s for the country’s core curriculum, included illustrations of guns, bullets, soldiers, and mines to indoctrinate young minds towards violent destruction. Who authorized this hateful instruction for young impressionable minds?[8]

For $190,000 a year, Donald Rumsfeld sat on the board and “attended nearly all of the board meetings” of the Swiss-based ABB Company between 1990 and February 2001.[9] In 2000 (based on a Clinton era contract) ABB sold $200 million worth of components to North Korea to allow construction of two nuclear reactors. Currently, there are concerns about their activities. In December 1983 and again in March 1984, Ronald Reagan sent his personal emissary, Donald Rumsfeld, a former Secretary of Defense, to meet with Saddam Hussein along with Reagan’s handwritten note. This first meeting, on December 20, 1983, was for the reestablishment of diplomatic relations between Iraq and the United States, the first since the 1967 war. We formally restored diplomatic relations with Iraq in November 1984. Then, Rumsfeld and his corporate cronies secretly supplied Saddam's military with the components to build chemical and biological weapons. Rumsfeld is just one example from dozens of Elites who repeatedly shift from boardroom to government office while stuffing their pockets from both positions.

David Rockefeller admitted in his relatively-recent book: “For more than a century, ideological extremists at either end of the political spectrum have seized upon well-publicized incidents such as my encounter with Castro to attack the Rockefeller family for the inordinate influence they claim we wield over American political and economic institutions. Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as 'internationalists' and of conspiring with others around the world to build a more integrated global political and economic structure - one world, if you will. If that is the charge, I stand guilty, and I am proud of it.”[10] What further proof do we need of a pervasive conspiracy – just look at the mounting evidence and forget the mesmerizing, feel-good political jargon emanating from Washington.....

Last week, Marc Faber said “I Am 100% Sure that the U.S. Will Go Into Hyperinflation”

Now, Universa Investments L.P - a hedge fund affiliated with Nassim Nicholas Taleb - is making a big bet that we'll get hyperinflation.

Are they right, or are the jumping the gun in calling for runaway inflation?

I'm not sure, partly because it is impossible to know how many of the trillions of dollars in various bailout programs are being spent by the financial giants. If they are sitting on them as reserves - to weather the upcoming alt-a mortgage and commercial real estate meltdowns, credit default swap pay outs, and other financial hits - then the bailout dollars are not actually being put back in the economy, the money velocity is not increasing (i.e. dollars are not changing hands quickly), and inflation is still a ways off.

On the other hand, if those dollars are being spent anywhere in the economy, then the magnitude of dollars doled out by the government (and other governments) could quickly ignite runaway inflation.

Mish is my favorite writer continuing to argue for deflation . I think that Mish will be about a month late in calling inflation (since he was ahead of almost everyone in seeing deflation coming, and will probably not comment on inflation until it is a fait accompli). So if Mish even hints that we may start to see inflation, I'll make an immediate call for imminent hyperinflation.....

Institutional Insider trading and Manipulations galore by the utterly Corrupt US Government arms.....and private criminals

Institutional Insider trading and Manipulations galore by the utterly Corrupt US Government arms.....and private criminals

Wall Street's mantra is that markets move randomly and reflect the collective wisdom of investors. The truth is quite opposite. The government's visible hand and insiders control markets and manipulate them up or down for profit - all of them, including stocks, bonds, commodities and currencies.

It's financial fraud or what former high-level Wall Street insider and former Assistant HUD Secretary Catherine Austin Fitts calls "pump and dump," defined as "artificially inflating the price of a stock or other security through promotion, in order to sell at the inflated price," then profit more on the downside by short-selling. "This practice is illegal under securities law, yet it is particularly common," and in today's volatile markets likely ongoing daily.

Why? Because the profits are enormous, in good and bad times, and when carried to extremes like now, Fitts calls it "pump(ing) and dump(ing) of the entire American economy," duping the public, fleecing trillions from them, and it's more than just "a process designed to wipe out the middle class. This is genocide (by other means) - a much more subtle and lethal version than ever before perpetrated by the scoundrels of our history texts."

Fitts explains that much more than market manipulation goes on. She describes a "financial coup d'etat, including fraudulent housing (and other bubbles), pump and dump schemes, naked short selling, precious metals price suppression, and active intervention in the markets by the government and central bank" along with insiders. It's a government-business partnership for enormous profits through "legislation, contracts, regulation (or lack of it), financing, (and) subsidies." More still overall by rigging the game for the powerful, while at the same time harming the public so cleverly that few understand what's happening.

Market Rigging Mechanisms - The Plunge Protection Team

On March 18, 1989, Ronald Reagan's Executive Order 12631 created the Working Group on Financial Markets (WGFM) commonly known as the Plunge Protection Team (PPT). It consisted of the following officials or their designees:

-- the President;

-- the Treasury Secretary as chairman;

-- the Fed chairman;

-- the SEC chairman; and

-- the Commodity Futures Trading Commission chairman.

Under Sec. 2, its "Purposes and Functions" were stated as follows:

(2) "Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:

(1) the major issues raised by the numerous studies on the events (pertaining to the) October 19, 1987 (market crash and consider) recommendations that have the potential to achieve the goals noted above; and

(2)....governmental (and other) actions under existing laws and regulations....that are appropriate to carry out these recommendations."

In August 2005, Canada-based Sprott Asset Management (SAM) principals John Embry and Andrew Hepburn headlined their report on the US government's "surreptitious" market interventions: "Move Over, Adam Smith - The Visible Hand of Uncle Sam" to prevent "destabilizing stock market declines. Comprising key government agencies, stock exchanges and large Wall Street firms," this group "is significant because the government has never admitted to private-sector membership in the Working Group," nor is it hinting that manipulation works both ways - to stop or create panic.

"Current mythology holds that (equity) prices rise and fall on the basis of market forces alone. Such sentiments appear to be seriously mistaken....And as official rhetoric continues to toe the free market line, manipulation has become increasingly apparent....with the active participation of selected investment banks and brokerage houses" - the Wall Street giants.

In 2004, Texas Hedge Report principals Steven McIntyre and Todd Stein said "Almost every floor trader on the NYSE, NYMEX, CBOT and CME will admit to having seen the PPT in action in one form or another over the years" - violating the traditional notion that markets move randomly and reflect popular sentiment.

Worse still, according to SAM principals Embry and Hepburn, "the government's unwillingness to disclose its activities has rendered it very difficult to have a debate on the merits of such a policy," if there are any.

Further, "virtually no one ever mentions government intervention publicly....Our primary concern is that what apparently started as a stopgap measure may have morphed into a serious moral hazard situation."

Worst of all, if government and Wall Street collude to pump and dump markets, individuals and small investment firms can get trampled, and that's exactly what happened in late 2008 and early 2009, with much more to come as the greatest economic crisis since the Great Depression plays out over many more months.

That said, the PPT might more aptly be called the PPDT - The Plunge Protection/Destruction Team, depending on which way it moves markets at any time. Investors beware.

Manipulating markets is commonplace and as old as investing. Only the tools are more sophisticated and amounts involved greater. In her book, "Morgan: American Financier," Jean Strouse explained his role in the Panic of 1907, the result of stock market and real estate speculation that caused a market crash, bank runs, and hysteria. To restore confidence, JP Morgan and the Treasury Secretary organized a group of financiers to transfer funds to troubled banks and buy stocks. At the time, rumors were rampant that they orchestrated the panic for speculative profits and their main goals:

-- the 1908 National Monetary Commission to stabilize financial markets as a precursor to the Federal Reserve; and

-- the 1910 Jekyll Island meeting where powerful financial figures met in secret for nine days and created the private banking cartel Federal Reserve System, later congressionally established on December 23, 1913 and signed into law by Woodrow Wilson.

Morgan died early that year but profited hugely from the 1907 Panic. It let him expand his steel empire by buying the Tennessee Coal and Iron Company for about $45 million, an asset thought to be worth around $700 million. Today, similar schemes are more than ever common in the wake of the global economic crisis creating opportunities to buy assets cheap by bankers flush with bailout cash. Aided by PPT market rigging, it's simpler than ever.

Wharton Professor Itay Goldstein and Said Business School and Lincoln College, Oxford University Professor Alexander Guembel discussed price manipulation in their paper titled "Manipulation and the Allocational Role of Prices." They showed how traders effect prices on the downside through "bear raids," and concluded:

"We basically describe a theory of how bear raid manipulation works....What we show here is that by selling (a stock or more effectively short-selling it), you have a real effect on the firm. The connection with real value is the new thing....This is the crucial element," but they claim the process only works on the downside, not driving shares up.

In fact, high-volume program trading, analyst recommendations, positive or negative media reports, and other devices do it both ways.

Also key is that a company's stock price and true worth can be highly divergent. In other words, healthy or sick firms may be way-over or under-valued depending on market and economic conditions and how manipulative traders wish to price them, short or longer term.

The idea that equity prices reflect true value or that markets move randomly (up or down) is rubbish. They never have and more than ever don't now.

The Exchange Stabilization Fund (ESF)

The 1934 Gold Reserve Act created the US Treasury's ESF. Section 7 of the 1944 Bretton Woods Agreements made its operations permanent. As originally established, the Treasury ran the Fund outside of congressional oversight "to keep sharp swings in the dollar's exchange rate from (disrupting) financial markets" through manipulation. Its operations now include stabilizing foreign currencies, extending credit lines to foreign governments, and last September to guaranteeing money market funds against losses for up to $50 billion.

In 1995, the Clinton administration used the fund to provide Mexico a $20 billion credit line to stabilize the peso at a time of economic crisis, and earlier administrations extended loans or credit lines to China, Brazil, Ecuador, Iceland and Liberia. The Treasury's web site also states that:

"By law, the Secretary has considerable discretion in the use of ESF resources. The legal basis of the ESF is the Gold Reserve Act of 1934. As amended in the late 1970s....the Secretary (per) approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities."

In other words, ESF is a slush fund for whatever purposes the Treasury wishes, including ones it may not wish to disclose, such as manipulating markets, directing funds to the IMF and providing them with strings to borrowers as the Treasury's site explains:

"....Treasury has often linked the availability of ESF financing to a borrower's use of the credit facilities of the IMF, both to support the IMF's role and to strengthen assurances that there will be timely repayment of ESF financing."

The Counterparty Risk Management Policy Group (CRMPG)

Established in 1999 in the wake of the Long Term Capital Management (LTCM) crisis, it manipulates markets to benefit giant Wall Street firms and high-level insiders. According to one account, it was to curb future crises by:

-- letting giant financial institutions collude through large-scale program trading to move markets up or down as they wish;

-- bailing out its members in financial trouble; and

-- manipulating markets short or longer-term with government approval at the expense of small investors none the wiser and often getting trampled.

In August 2008, CRMPG III issued a report titled "Containing Systemic Risk: The Road to Reform." It was deceptive on its face in stating that CRMPG "was designed to focus its primary attention on the steps that must be taken by the private sector to reduce the frequency and/or severity of future financial shocks while recognizing that such future shocks are inevitable, in part because it is literally impossible to anticipate the specific timing and triggers of such events."

In fact, the "private sector" creates "financial shocks" to open markets, remove competition, and consolidate for greater power by buying damaged assets cheap. Financial history has numerous examples of preying on the weak, crushing competition, socializing risks, privatizing profits, redistributing wealth upward to a financial oligarchy, creating "tollbooth economies" in debt bondage according to Michael Hudson, and overall getting a "free lunch" at the public's expense.

CRMPG explains financial excesses and crises this way:

"At the end of the day, (their) root cause....on both the upside and the downside of the cycle is collective human behavior: unbridled optimism on the upside and fear on the downside, all in a setting in which it is literally impossible to anticipate when optimism gives rise to fear or fear gives rise to optimism...."

"What is needed, therefore, is a form of private initiative that will complement official oversight in encouraging industry-wide practices that will help mitigate systemic risk. The recommendations of the Report have been framed with that objective in mind."

In other words, let foxes guard the henhouse to keep inventing new ways to extract gains (a "free lunch") in increasingly larger amounts - "in the interest of helping to contain systemic risk factors and promote greater stability."

Or as Orwell might have said: instability is stability, creating systemic risk is containing it, sloping playing fields are level ones, extracting the greatest profit is sharing it, and what benefits the few helps everyone.

Michel Chossudovsky explains that: "triggering market collapse(s) can be a very profitable undertaking. (Evidence suggests) that the Security and Exchange Commission (SEC) regulators have created an environment which supports speculative transactions (through) futures, options, index funds, derivative securities (and short-selling), etc. (that) make money when the stock market crumbles....foreknowledge and inside information (create golden profit opportunities for) powerful speculators" able to move markets up or down with the public none the wiser.

As a result, concentrated wealth and "financial power resulting from market manipulation is unprecedented" with small investors' savings, IRAs, pensions, 401ks, and futures being decimated from it.

Deconstructing So-Called "Green Shoots"

Daily the corporate media trumpet them to lull the unwary into believing the global economic crisis is ebbing and recovery is on the way. Not according to longtime market analyst Bob Chapman who calls green shoots "Poison Ivy" and economist Nouriel Roubini saying they're "yellow weeds" at a time there's lots more pain ahead.

For many months and in a recent commentary he refers to "the worst financial crisis, economic crisis and recession since the Great Depression....the consensus is now becoming optimistic again and says that we are going to go from minus 6 percent growth to positive growth in the second half of the views are much more bearish....The problems of the financial system are severe. Many banks are still insolvent."

We're "piling public debt on top of private debt to socialize the losses; and at some point the back of (the) government('s) balance sheet is going to break, and if that happens, it's going to be a disaster." Short of that, he, Chapman, and others see the risks going forward as daunting. As for the recent stock market rise, they both call it a "sucker's rally" that will reverse as the US economy keeps contracting and the financial system suffers unexpected or manipulated shocks.

Highly respected market analyst Louise Yamada agrees. As Randall Forsyth reported in the May 25 issue of Barron's Up and Down Wall Street column:

"It is almost uncanny the degree to which 2002-08 has tracked 1932-38, 'Yamada writes in her latest note to clients.' " Her "Alternate Hypothesis" compares this structural bear market to 1929-42:

-- "the dot-com collapse parallels the Great Crash and its aftermath," followed by the 2003-07 recovery, similar to 1933-37;

-- then the late 2008 - early March 2009 collapse tracks a similar 1937-38 trajectory, after which a strong rally followed much like today;

-- then in November 1938, the market dropped 22% followed by a 26% rise and a series of further ups and downs - down 28%, up 23%, down 16%, up 13%, and a final 29% decline ending in 1942;

-- from the 1938 high ("analogous to where we are now," she says), stock prices fell 41% to a final bottom.

Are we at one today as market touts claim? No according to Yamada - top-ranked among her peers in 2001, 2002, 2003 and 2004 when she worked at Citigroup's Smith Barney division. Since 2005, she's headed her own independent research company.

She says structural bear markets typically last 13 - 16 years so this one has a long way to go before "complet(ing) the repair process." She calls the current rebound "a bungee jump," very typical of bear markets. Numerous ones occurred during the Great Depression, 8 alone from 1929 - 1932, some deceptively strong.

Expect market manipulators today to produce similar price action going forward - to enrich themselves while trampling on the unwary, well-advised to protect their dollars from becoming quarters or dimes....

Thursday, May 28, 2009

BOND prices and a possible Gold Tsunami...

It is no secret to investors that the US 30-year "long" bond has risen in value for 28 years.

It has certainly also been noticed that this almost one-third century trend has recently reversed - with the reversal confirmed by a break in the long-term-trend-defining 65-week moving average this very week.

The implication is that bond prices could now fall, and interest rates rise, for the next one-third century or so.

The cause, of course, is the massively inflated, bloated, still over-valued US dollar.

The rate of change in the bond market is typically glacial, though do remember that even glaciers have periods of rapid movement - when the weather is very cold or very hot.

However, the key point here is that bonds will soon cease to be the outperforming investments that they have been for the past 3 decades. Additionally, it has grown increasingly obvious that general equities are in a long-term bear market.

What then will investors turn to for preservation of the value of their holdings?

You know and I know that gold is a store of value in uncertain times.

The reversal in the long-bond trend is a seismic event in the investment world. The tremors will be felt far and wide for decades to come.

The falling bond price is the seismic shift that will ignite the gold tsunami.

With both bonds and equities in decline, gold remains the only secure vehicle in the investment world. Other investments may rise, but only gold possesses the combined qualities of relative strength (its time is now) and security (gold is no one else's obligation and thus is not subject to possible default).

Tsunamis begin with a deep undersea earthquake. The disruption in the ocean depths is transmitted to the surface, giving force to the giant waves that later crash to shore at the ocean's perimeter.

The collapse of the 30-year bond price is the earthquake.

The price of gold is the tsunami.....!!!

PhD economist Marc Faber says:

“I am 100% sure that the U.S. will go into hyperinflation.”
On the other hand, Boston Federal Reserve Bank President Eric Rosengren said last Thursday that the risk of deflation is currently more of a concern than inflation. And Henry C K Liu, writing in the Asia Times, argues that inflation and deflation are really meaningless terms:
The conventional terms of inflation and deflation are no longer adequate for describing the overall monetary effect of excess liquidity recently released by the US Federal Reserve, the nation's central bank, to deal with the year-long credit crunch.

This is because the approach adopted by the Treasury and the Fed to deal with a financial crisis of unsustainable debt created by excess liquidity is to inject more liquidity in the form of both new public debt and newly created money into the economy and to channel it to debt-laden institutions to reflate a burst debt-driven asset price bubble.

The Treasury does not have any power to create new money. It has to borrow from the credit market, thus shifting private debt into public debt. The Fed has the authority to create new money. Unfortunately, the Fed's new money has not been going to consumers in the form of full employment with rising wages to restore fallen demand, but instead is going only to debt-infested distressed institutions to allow them to deleverage from toxic debt. Thus deflation in the equity market (falling share prices) has been cushioned by newly issued money, while aggregate wage income continues to fall to further reduce aggregate demand.

Falling demand deflates commodity prices, but not enough to restore demand because aggregate wages are falling faster. When financial institutions deleverage with free money from the central bank, the creditors receive the money while the Fed assumes the toxic liability by expanding its balance sheet. Deleverage reduces financial costs while increasing cash flow to allow zombie financial institutions to return to nominal profitability with unearned income and while laying off workers to cut operational cost. Thus we have financial profit inflation with price deflation in a shrinking economy.

What we will have going forward is not Weimar Republic-type price hyperinflation, but a financial profit inflation in which zombie financial institutions turn nominally profitable in a collapsing economy. The danger is that this unearned nominal financial profit is mistaken as a sign of economic recovery, inducing the public to invest what remaining wealth they still hold, only to lose more of it at the next market meltdown, which will come when the profit bubble bursts.

Hyperinflation is fatal because hedging against it causes market failures to destroy wealth. Normally, when markets are functioning, unhedged inflation favors debtors by reducing the value of liabilities they owe to creditors. Instead of destroying wealth, unhedged inflation merely transfers wealth from creditors to debtors. But with government intervention in the financial market, both debtors and creditors are the taxpayers. In such circumstances, even moderate inflation destroys wealth because there are no winning parties.

Debt denominated in fiat currency is borrowed wealth to be repaid later with wealth stored in money protected by monetary policy. Bank deleveraging with Fed new money cancels private debt at full face value with money that has not been earned by anyone, that is with no stored wealth. That kind of money is toxic in that the more valuable it is (with increased purchasing power to buy more as prices deflate), the more it degrades wealth because no wealth has been put into the money to be stored, thus negating the fundamental prerequisite of money as a storer of value.

This is not demand destruction because decline in demand is temporarily slowed by the new money. Rather, it is money destruction as a restorer of value while it produces a misleading and confusing effect on aggregate demand.

Thinking about the value of any real asset (gold, oil, and so forth) in money (dollar) terms is misleading. The correct way is to think about the value of the money (dollars) in asset (gold, oil) terms, because assets (gold, oil, and so on) are wealth. The Fed can create money, but it cannot create wealth.

Central bankers are savvy enough to know that while they can create money, they cannot create wealth. To bind money to wealth, central bankers must fight inflation as if it were a financial plague. But the first law of growth economics states that to create wealth through growth, some inflation needs to be tolerated.

The solution then is to make the working poor pay for the pain of inflation by giving the rich a bigger share of the monetized wealth created via inflation, so that the loss of purchasing power from inflation is mostly borne by the low-wage working poor and not by the owners of capital, the monetary value of which is protected from inflation through low wages. Thus the working poor loses in both boom times and bust times.

Inflation is deemed benign by monetarism as long as wages rise at a slower pace than asset prices. The monetarist iron law of wages worked in the industrial age, with the resultant excess capacity absorbed by conspicuous consumption of the moneyed class, although it eventually heralded in the age of revolutions. But the iron law of wages no longer works in the post-industrial age in which growth can only come from mass demand management because overcapacity has grown beyond the ability of conspicuous consumption of a few to absorb in an economic democracy.

That has been the basic problem of the global economy for the past three decades. Low wages even in boom times have landed the world in its current sorry state of overcapacity masked by unsustainable demand created by a debt bubble that finally imploded in July 2007. The whole world is now producing goods and services made by low-wage workers who cannot afford to buy what they make except by taking on debt on which they eventually will default because their low income cannot service it.

All the stimulus spending by all governments perpetuates this dysfunctionality. There will be no recovery from this dysfunctional financial system. Only reform toward full employment with rising wages will save this severely impaired economy.

How can that be done? Simple. Make the cost of wage increases deductible from corporate income tax and make the savings from layoffs taxable as corporate income.


The next leg DOWN.....

Collapsing home prices and credit markets continue to put downward pressure on consumer spending, forcing the Federal Reserve to take even more radical action to revive the economy.

Last week, Fed chief Ben Bernanke raised the prospect of further monetizing the debt by purchasing more than the $1.75 trillion of Treasuries and mortgage-backed securities (MBS) already committed. The announcement sent shockwaves through the currency markets where skittish traders have joined doomsayers in predicting tough times ahead for the dollar.

Foreign central banks have been gobbling up US debt at an impressive pace, adding another $60 billion in the last three weeks alone. That’s more than enough to cover the current account deficit and put the greenback on solid ground for the time being. But with fiscal deficits ballooning to $3 trillion in the next year alone, dwindling foreign investment won’t be enough to keep the dollar afloat. Bernanke will be forced to either raise interest rates or let the dollar fall hard.

Export-led nations are looking for an edge to revive flagging sales by keeping their currencies undervalued. But the strong dollar is making it harder for Bernanke to engineer a recovery. He’d like nothing more than to see the dollar tumble and reset at a lower rate. That would reduce the debt-load for homeowners and businesses and send consumers racing back to the shopping malls and auto showrooms.

Perception management is a big part of stimulating the economy. That’s why the financial media have been airbrushing articles that focus on deflation and shifting the attention to inflation. It’s an effort to kick-start consumer spending by convincing people that their money will be worth less in the future. But deflation is still enemy number one. Rising unemployment, crashing home prices, vanishing equity and tighter credit; these are all signs of entrenched deflation.

Bernanke faces three main challenges to put the economy back on track. He must remove the hundreds of billions in toxic assets from the banks’ balance sheets, reignite consumer spending to offset the sharp decline in aggregate demand, and fix the wholesale credit-mechanism that provides 40 percent of the credit to the broader economy.

Treasury Secretary Timothy Geithner has taken over the distribution of the remaining TARP funds, and created a new program, the Public-Private Investment Partnership (PPIP), for purchasing toxic mortgage-backed assets. The PPIP will provide up to 94 percent “non-recourse” government loans for up to $1 trillion of assets which are worth less than half of their original value at today’s prices. The Treasury’s plan is an attempt to keep asset prices artificially high so that the losses will not be realized until they’ve been shifted onto the taxpayer.

Here’s how John Hussman of Hussman Funds summed up Geithner’s PPIP: “From early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount -- the remainder being “non-recourse” financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficiently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.

“Make no mistake -- we are selling off our future and the future of our children to prevent the bondholders of U.S. financial corporations from taking losses. We are using public funds to protect the bondholders of some of the most mismanaged companies in the history of capitalism, instead of allowing them to take losses that should have been their own. All our policy makers have done to date has been to squander public funds to protect the full interests of corporate bondholders. Even Bear Stearns bondholders can expect to get 100% of their money back, thanks to the generosity of Bernanke, Geithner and other bureaucrats eager to hand out the money of ordinary Americans.” (John Hussman, “The Fed and Treasury -- Putting off Hard Choices with Easy Money, and Probable Chaos,

The second part of the Fed’s plan is to fix the wholesale credit-mechanism, which means restoring the securitization markets where pools of loans are transformed into securities and sold to investors. Until Bernanke is able to lure investors back into purchasing high-risk debt-instruments comprised of student loans, mortgage securities, auto loans and credit card debt, the credit markets will continue to sputter and growth will be flat. Structured-debt creates the asset base which is leveraged though traditional loans or complex derivatives. Credit expansion maximizes profit, inflates asset prices and establishes the structural framework for shifting wealth to financial institutions via speculative asset bubbles. This is the basic financial model that US banks and financial institutions hope to export to the rest of the industrial world to ensure a greater portion of global wealth for themselves and a stronger grip on the political process.

Bernanke’s Term Asset-backed Securities Loan Facility (TALF) provides up to $1 trillion in non-recourse loans to financial institutions willing to buy AAA-rated debt-instruments backed by consumer and small business loans. So far, the response has been tepid at best. For all practical purposes, the market is still frozen. Bernanke knows that there will be no recovery unless the credit markets are functioning properly. He also knows that the TALF won’t succeed unless he provides guarantees for the underlying collateral, which are loans that were made to applicants who have no means for paying them back. Bernanke’s guarantees will cost the taxpayer billions of dollars without any assurance that his plan will even work. It’s a complete fiasco.

From the Federal Reserve Bank of San Francisco Economic Letter, “US Household Deleveraging and Future consumption Growth” by Reuven Glick and Kevin J. Lansing: “More than 20 years ago, economist Hyman Minsky (1986) proposed a ‘financial instability hypothesis.’ He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions.

“Until recently, U.S. households were accumulating debt at a rapid pace, allowing consumption to grow faster than income. An environment of easy credit facilitated this process, fueled further by rising prices of stocks and housing, which provided collateral for even more borrowing. The value of that collateral has since dropped dramatically, leaving many households in a precarious financial position, particularly in light of economic uncertainty that threatens their jobs.

“Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.” (The Federal Reserve Bank of San Francisco Economic Letter, “US Household Deleveraging and Future consumption Growth” by Reuven Glick and Kevin J. Lansing)

The economy is in the grip of deflation. Commercial banks are stockpiling excess reserves (more than $850 billion in less than a year) to prepare for future downgrades, write-offs, defaults and foreclosures. That’s deflation. Consumers are cutting back on discretionary spending; driving, eating out, shopping, vacations, hotels, air travel. More deflation. Businesses are laying off employees, slashing inventory, abandoning plans for expansion or reinvestment. More deflation. Banks are trimming credit lines, calling in loans and raising standards for mortgages, credit cards and commercial real estate. Still more deflation.

Bernanke has opened the liquidity valves to full-blast, but consumers are backing off; they’re too mired in debt to borrow, so the money sits idle in bank vaults while the economy continues to slump.

In an environment where businesses and consumers are rebuilding their balance sheets and paying off debt, there’s only one option; inflation. Bernanke will keep interest rates low while increasing monetary and fiscal stimulus. The ocean of red ink will continue to rise. Still, the system wide contraction will persist despite the Fed’s multi-trillion dollar lending programs, quantitative easing (QE) and Treasury buybacks. The “Great Unwind” is irreversible; the era of limitless credit expansion is over.

David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, believes that the equities markets have undergone a “gargantuan short-cover rally” and that stocks will retest the March 9 low, which was a 12-year low for the S&P 500 Index. Rosenberg said he doesn’t expect the economy to recover in the second half of the year.

“I’m seeing no revival of consumer spending in the second quarter,” Rosenberg said. (Bloomberg)

The conditions that supported the explosive growth of the last decade no longer exist. The credit markets are in a shambles, the banking system is hanging by a thread, and the consumer is out of gas. Traders are clinging to the slim hope that the worst is over, but they could be mistaken. There’s probably another leg down and it will be more vicious than the last.....

The Final Conquest; Corporate Frankensteins

Wednesday, May 27, 2009

Is Obama truly a realist....? or merely forced into the role by the terrible hand he is playing....and the total lack of morality ....

Is Obama truly a realist....? or merely forced into the role by the terrible hand he is playing....and the total lack of morality in the utterly corrupt US Government.

John Hussman, President of Hussman Investment Trust, has stated in simple terms what is wrong with the bailout process.

It has diverted funds from hopeful and productive enterprises to wasteful and inefficient activities. The cost? Our future wealth, health, productivity and morality.

Mr. Hussman states:

"The bailout is not something "neutral" that cancels itself out, but instead amounts to a transfer of trillions of dollars of purchasing power directly and indirectly from those who didn't finance reckless mortgage loans to those who did. Farewell to the projects, innovation, research, investment, and growth that might have been financed by the savings and retained earnings of good stewards of capital. Those funds are being diverted to the careless stewards who now stand to be made whole.

"In short, these bailouts are emphatically not neutral to society as a whole, because they damage incentives and divert productive resources into hands that have proven themselves to be reckless and incapable. To believe that the bailouts are just money we owe to ourselves is to overlook serious ethical implications, as well as distributional and incentive effects."

What else is there to say?

Well, perhaps I do have one point to add....

Now that we are funding vice rather than virtue, what becomes of the bigger issues at stake in the world? How does waste on this scale impact the chances of war versus peace? International cooperation versus conflict? Responsible government versus cronyism and promotion of special interests? Opportunity for all versus inequality? Hope versus cynicism? Moral progress versus moral dissolution?

We have not yet begun to count the costs, both financial and non-financial, of the greatest bailout of the reckless by the responsible in world history. The costs will inevitably be greater than those that are presently being reckoned.

Friday, May 22, 2009

The "Worse" is yet to come....?

The Worst is yet to come....

When you give someone US$1 billion as an interest-free loan, with an uncertain payback period and no interest costs, do you think they will:
a. Settle all their outstanding debts and start earning money to repay this new facility?
b. Invest in some safe securities to eke out a secure return?
c. Bet the whole thing on red?

If you answered "c", then congratulations - you are now eligible to become a banker in the United States. The unsaid part of the current global rally in risk assets is that the process is being driven almost exclusively by financial institutions that are currently in the intensive care unit of the US Treasury.

Be it the tightening of credit spreads for high-yield bonds or the rising prices of commercial mortgage-backed securities, the sole buyers inevitably tend to be the very financial institutions whose holdings of these securities in 2007 jeopardized the entire financial system.

It is not the hedge fund villains who have ridden back from their dirty past to ramp up their purchases of distressed securities, bonds and equities; rather these hedge funds are still going bust at regular intervals. There are many examples of silly behavior in global markets as I write this:
1. US and European stocks are pretty much where they started the year, give or take a few points, despite macroeconomic data getting steadily worse;
2. Significant jumps in the stock prices of various emerging market countries, including those in Asia, in the last few weeks;
3. Credit spreads of the world's most leveraged companies have tightened dramatically since the beginning of the year, despite rising corporate defaults;
4. Some of the most beaten-up parts of the securitization market including residential and commercial mortgage-backed securities (RMBS / CMBS) have shown some improvement in recent weeks even as property sales / price data gets progressively worse;
5. Banks have raised new capital (including for example Bank of America's $13.2 billion common equity issued this week) from the sale of common equity to the public.

My basic premise is that it is in understanding the dynamics of point No 5 above that the rest of the market moves make any sense. In other words, I contend here that financial institutions globally are misrepresenting economic data for their own short-term selfish ends.

Making such contentions is no easy task. What is the evidence: firstly, we have to "prove" that a crime is taking place to then allege that the perpetrator also happens to be the main beneficiary of such an event. To do that, let us examine some of the most recent data that underpins the markets over the long term:
a. The European Union recorded the sharpest economic decline in its history for the first quarter of this year, led down by Germany's awful figures for the quarter;
b. Figures for the month of April appear no better, highlighting likely declines in the quarters to come for Europe;
c. US indicators on gross domestic product growth, unemployment and new investment all continue to flash red as I write this; only the color-blind could possibly see any green shoots in this data ;
d. Japan stunned with an annualized 15% decline in its economy, shrinking an amazing 4% in just the first quarter of this year;
e. Granted, some of this was due to inventory declines, but the overall trend is abysmal even after taking into account all the government stimulus spending being stored up.

Why then are investors persisting with this course of action that adds risks? Many theories have been propounded, but a clear framing of the future outlook would help to understand the sheer "courage" that is involved in buying such assets now. To make things easier, I have used a modified decision tree wherein the basic trend has been used as the title, with financial market consequences being highlighted below each such possible trend. Such an approach is provided below:

1. Green Shoots of economic recovery are for real (hahahahahaha, but let's take these bubble-spewers at face value for now; or else read "Truth is too hard to handle").
a. This could only be due to the US and European consumer spending money on borrowed time; yet again
b. Over the short-term that would argue for buying risky assets such as stocks and high-yield bonds and going short US Treasuries;
c. Inflation will rise inevitably, so buy physical commodities including gold;
d. Go short anything near the government bond curve including US Treasuries and German Bunds, among others.
2. We are into a Great Depression
a. The monetization of the debt cycle would have failed for this outcome to percolate to the masses in Europe and the US;
b. Financial institutions in Group of Eight leading industrialized countries cannot raise any capital from the public;
c. Forget about stocks, high-yield bonds that will fall in price dramatically just as soon you buy them for your retirement account;
d. Buy some government bonds, but only of countries that can service their future debt obligations (that is, avoid the likes of the US and pretty much all of Europe);
e. You will need to have some stuff that has real economic value rather than the worthless IOUs issued by G-8 governments, so buy some gold;
f. This might also be a good cue to buy some weapons and ammunition.
3. We will have a Y-shaped recovery (see How about a Y-shaped recovery, Asia Times Online, February 23, 2008.)
a. The US and Europe are toast, but emerging markets will do well;
b. Financial institutions in G-8 countries cannot raise any capital from the public;
c. Buy emerging market equities and bonds, sell everything else;
d. As most emerging market currencies are quite funky and don't really fit into your wallets, you will need some gold for your travels.
What the average reader thinks for himself is one thing; what he is being told by the financial media at large (and G-8 financial media in particular) is altogether a different matter. Whilst I would normally lean towards the school of an incipient economic recovery after a couple of years of any economic bust, a number of factors conspire to deny any such notion in my mind at the moment:
1. This is very much a crisis caused by excess leverage in the US (and, less so, in Europe). Until the leverage is washed out, there is no chance of any economic recovery;
2. Governments have engaged in widespread monetization of such leverage, rather than addressing the core event itself. This has the effect of actually making the future even more uncertain. For example, General Motors or Chrysler as private companies would have entered bankruptcy many months ago; but thanks to government intervention now re-emerge as worker-owned companies that couldn't possibly get bank financing down the road (due to the destruction of creditors' rights by the Obama administration). Ergo, this is money wasted by the government at great cost to the average US taxpayer: not exactly the recipe for an economic recovery;
3. Then there is the question of bank funding. Most analysts point to a funding gap of around US$20 trillion for the G-8 banking system by 2011, made worse by the reduced velocity of money (that is, a lower money multiplier). This problem has not been addressed, and most likely will not be; unless banks can pledge more useless collateral with their central banks and in effect get "free" funding;
4. Export-driven markets are toast, be it China or Germany or Japan. All these countries will have to reinvest in their domestic markets: some to fruitful results (China) but others to no avail (Japan). Whatever they do, it is clear what they will NOT do - that is, they will not buy more US sovereign and state-guaranteed debt;
5. Many of the weaker emerging market countries are facing funding pressures; particularly those in Eastern Europe. The resulting increase in defaults promises to fell the rest of the European banking system that hasn't already fallen victim to the US financial collapse. This will also divert more resources from the International Monetary Fund and so on, to the expense of the G-8;
6. Increased strategic risks: think Pakistan's ongoing fights with the Taliban, Iran's nuclear weapons program, Russia's anger with the North Atlantic Treaty Organization over Georgia as just a few examples of what could go wrong in the very, very near future.
Based on all this, it is clear to me that the only people who could possibly believe that risky assets such as high-yield bonds and common stocks are a good buy are either the people who currently own them (and therefore will post profits when they rise in price) or those that need to get out of their positions (that is, sell their bond positions or raise new equity).

In most cases, the answer is "both of the above", namely US and European banks who are loading up on some securities to cause artificial shortages that in turn help to raise prices of the rest of their books. These institutions have the benefit of knowing that a good trade gets them out of jail, but bad trades only result in more government assistance being lavished on them.

They aren't playing with their own money, but rather with yours. When you are only ever going to lose other people's money, the rules change and an entirely different "game" takes hold. That is what you are seeing now; until the final blows of economic data help to chase these fake rallies out of the market. When that happens, the biggest losers will be the people who own these risky assets like high-yield corporate bonds in the US (or Europe) and stocks of banks across G-8.

What should the average investor do amidst all this game theory around them? Neither a lender or borrower be; neither a buyer or seller be. Close your positions on these financial assets, buy some physical commodities, sit back and watch the fun....

.....The New American Century


This film is astonishing, it goes in detail through the untold history
of The Project for the New American Century with tons of archival
footage and connects it right into the present.

This film exposes how every major war in US history was based on a
complete fraud with video of insiders themselves admitting it.

This film shows how the first film theaters in the US were used over a
hundred years ago to broadcast propaganda to rile the American people
into the Spanish-American War.

This film shows the white papers of the oil company Unocal which called
for the creation of a pipeline through Afghanistan and how their exact
needs were fulfilled through the US invasion of Afghanistan.

This film shows how Halliburton under their “cost plus” exclusive
contract with the US Government went on a mad dash spending spree akin
to something out of the movie Brewster’s Millions,
yet instead of blowing $30 million they blew through BILLIONS by
literally burning millions of dollars worth of hundred thousand dollar
cars and trucks if they had so much as a flat tire.
I have seen a ton of films, this film contains a massive amount of
incredible footage I have never seen before anywhere, it is an
historical documentary which exposes all the lies of the past
so that you can understand the present. This film is a must see.

“A stunning film. It should be seen as widely as possible, in cinemas,
bars, clubs, at meetings and, of course, through the internet.
I’m sure the film will continue to be a source of debate and political
education for many years. Maybe until the war criminals have been
brought to trial.” - Ken Loach

“In the White House, they weren’t thinking of 9/11 as an attack, but as
a gift!” - Robert Steele, former CIA agent

While Massimo Mazzucco’s first political documentary, Global Deceit
(2006), focused on the long list of inconsistencies in the official
version of the 9/11 attacks, The New American Century explores the
historical, philosophical and economic background that suggests a matrix
for such events that is much closer to home than the so-called “Islamic

The film provides solid evidence for the true reasons behind the
Afghanistan and Iraq wars, whose unfolding is described in chilling
detail in a document called
“Project for the New American Century”, published in the year 2,000,
that seems to have served as the actual blueprint for such dramatic events.

Tuesday, May 19, 2009

Tavan Tolgoi coal deposit and the Oyu Tolgoi gold and copper field.

**Mongolia: The Promise of 'Minegolia'....

MOSCOW. - The Russian rail monopoly and its Mongolian partners agreed to set up a joint venture during Prime Minister Vladimir Putin's visit to Mongolia on May 13.

Russian Railways (RZD) has pledged to modernize and build railways in return for development licenses for Mongolia's largest deposits, the Tavan Tolgoi coal deposit and the Oyu Tolgoi gold and copper field.

It has signed an accord with Erdenes MGL, the Mongolian state mining company, and MTZ, the country's national railway company, to set up a joint venture to build railways to the mineral deposits and develop the fields. The Russian company will hold a 50% stake in the $7-billion venture, while the Mongolian partners will each hold 25%.

At the initial stage, they are to contribute $1.8 million for a feasibility study, which is due to be ready by September. The JV will receive development licenses for the deposits in 2010.

Erdenes MGL owns all strategic deposits in Mongolia, including the Oyu Tolgoi (Turquoise Hill) gold and copper project, the Tavan Tolgoi coal deposit, and the Dornod uranium deposit.

MTZ owns railroad assets, including a fiber-optic-based railway communication system, while Mongolia's railroads proper are controlled by Ulaanbaatar Railway, parity owned by the governments of Mongolia and Russia.

Tavan Tolgoi, located 342 miles from the Mongolian capital, is one of the world's 10 biggest coal deposits (6.5 billion tons).

Oyu Tolgoi (32 million tons of copper and 32 million oz of gold) is located in the south Gobi region 342 miles south of Ulan Bator and 50 miles north of the Chinese-Mongolian border.

The joint venture will not develop the deposits, but will hold tenders to choose co-investors. It will form project operators with the winners, holding 25% plus one share in them and leaving 75% minus one share to the selected co-investors.

In the past, RZD planned to recruit the assistance of Oleg Deripaska's En+ Group, Viktor Vekselberg's Renova, and Alexei Mordashov's Severstal Resurs for these projects.

En+ and Renova are ready for cooperation, but the new agreement stipulates that the Russian-Mongolian joint venture is to hold tenders. This means that the Russian miners will not receive any privileges and will have to participate in the tenders on a par with Japanese, Chinese, American and other contenders.

Mongolia also hopes that Russia's contribution ($250 million) could be used to increase the charter capital of Ulaanbaatar Railway, half of whose railroads need to be overhauled. It also expects Russia to provide an easy loan ($300 million) for the purchase of Russian grain, agricultural machinery and mineral fertilizer, and a $1.5 billion loan facility for other purposes.

The partners also agreed to set up a joint venture to process uranium produced at the Dornod deposit (49,000 tons, located in northeast Mongolia) and the East Gobi fields. The Russian partner will be Rosatom, with Japan's Mitsui considering participation.

The stakes to be held by the partners and possible investment have so far not been determined.

Currently, Russia's largest projects in Mongolia are Erdenet and Mongoltsvetmet, joint non-ferrous producers established during the Soviet era. Mongolia holds controlling stakes in them (51%) while Russia's stakes (49%) have been recently turned over to the Russian Technology state corporation.

The corporation is considering adjusting the Erdenet project to the Udokan copper project in Russia. Russian Technology's partner, Alisher Usmanov's Metalloinvest, has been recently granted the development license for the Udokan project....

**Mongolia: The Promise of 'Minegolia'....

Prashanth Parameswaran 21 Oct 2010

With nations scouring the globe in pursuit of dwindling mineral supplies, the world's attention has shifted to Mongolia, a country some are heralding as the next resource success story. Among the last places on earth with rich, untapped mineral deposits, this landlocked, underdeveloped country is expected to become one of the world's fastest-growing economies over the next decade -- if, that is, it can address a set of daunting challenges and bring these resources to the market.

According to some estimates, there is about $1.3 trillion worth of untapped coal, gold, silver, copper, uranium and zinc deposits in what is being called "Minegolia." The country's GDP is expected to rise as much as 10 percent per year, from the current $5 billion to $30 billion by 2020, as a result of revenue from these minerals alone. Meanwhile, per capita income is expected to quadruple, from $3,000 in 2008 to $12,000 by 2015 -- or about what the average person in Shanghai currently earns (.pdf).

This transformation is already under way. The government is currently in a joint venture with Ivanhoe Mines Ltd. and Rio Tinto PLC to exploit the Oyu Tolgoi mine in the south Gobi Desert. The mine is one of the world's largest underdeveloped copper-gold projects, and could yield up to $50 billion in revenue when production begins in 2013. Tavan Tolgoi, the world's largest untapped coking coal site, is expected to generate up to 50 million tons of coal per year for 200 years once production is ramped up. And with a relatively open society and a fairly accommodating business environment, Mongolia is also fast becoming a popular investment destination for brands such as Louis Vuitton and Burberry. Companies listed on the Hong Kong stock exchange have also acquired almost $1 billion in Mongolian resource assets through mergers and acquisitions.

Yet the country will have to overcome a set of formidable challenges if it is to realize its full resource potential. First, having been historically subjected to Chinese control until the early 20th century, and then under Soviet influence until the end of the Cold War, Mongolia will have to manage relations with its two neighbors deftly while preserving its sovereignty. Relations with Beijing will be an especially tough balancing act. China is the country's top export market, accounting for 64 percent of Mongolia's exports, and increasingly relies on Mongolia for energy. But there are lingering suspicions among Mongolians that the country is becoming overdependent on China.

When the government signed more than 66 percent of the rights to Oyu Tolgoi's deposits over to foreign companies last year, the decision was denounced as a sellout. Some domestic critics remain convinced that these companies are bringing in experienced Chinese miners rather than hiring Mongolians. Similar concerns may also have motivated the government's decision to cancel an equity-stake sale in Tavan Tolgoi to a foreign company in favor of full state ownership. (Chinese coal company Shenhua had been seen as one of the front runners in the bidding.) Ulan Bator has also tried to diversify its portfolio by strengthening its relations with other countries as well. Within the last few months alone, it has agreed to supply energy-hungry Japan with rare earths, reached out to Vietnam to exchange development experience, concluded an agreement with Canada to invest more than $600 million and set up direct charter flights with Taiwan to promote tourism and trade.

The leadership must also ensure that the economic benefits derived from these resources are felt by the population at large, even as it confronts the country's myriad development problems. Mongolia ranks 147th in the world in terms of nominal GDP, with a fifth of the population living on less than $1.25 a day (measured in 2005 purchasing power parity terms). About 30 percent of the population is still nomadic or semi-nomadic. The country's reliance on resources and agriculture makes it vulnerable to price fluctuations and natural disasters, and the combination of a harsh winter in 2009 and the global financial crisis reduced GDP growth last year from 8 percent to 2.7 percent. The government has issued cash handouts but cut child-benefit payments and subsidies for young couples, which has only caused inflation to spike, hitting the poor even harder. Mongolia also faces a massive urbanization crisis, with 40 percent of its population living in the capital alone and that number expected to swell even more in the future.

There are also concerns that the government is not adequately balancing economic and environmental imperatives. Decades of poorly regulated urbanization and industrialization have resulted in severe air pollution, overgrazing, deforestation and soil erosion. As a result, according to the United Nations Environment Program, more than 70 percent of Mongolian territory suffers from desertification, while wheat yields are about half those of the 1980s, and several rivers and lakes have begun to dry up. Yet the government has proven unwilling or unable to enforce regulations governing foreign mining companies, and reports of arsenic traces at sites and polluted rivers have begun to surface.

Frustrated environmental activists and farmers are increasingly taking the law into their own hands, and there have been six reported mining-related confrontations -- including one death -- so far this year. In the latest incident last month, four activists from the United Movement of Mongolian Rivers and Lakes opened fire on gold-mining equipment belonging to Chinese and Canadian firms, claiming that the companies had violated a law prohibiting exploration or mining at the headwaters of rivers.

The promise of Minegolia is clear, and the pressure for this resource-rich nation of steppes and deserts to develop is mounting. But the government's ability to navigate a dizzying array of geopolitical, development and environmental obstacles to drive the country into a bright economic future is still unproven....

Prashanth Parameswaran is a master's candidate at the Fletcher School of Law and Diplomacy.

Iran boosts Mongolia ties

Meat and uranium are the bread and butter of Mongolian-Iranian relations as trade between the two countries helps to deepen ties. The United States would do well to place business with Ulaanbataar higher up on its own menu of priorities. - Alicia Campi