Broken Systems & Dysfunctional Mechanisms

by Jim Willie CB August 28, 2008

The highest functions of the financial system have finally broken to the point where smart and connected people are openly making comments. Shortages are acute, to the point where low prices for gold & silver, for instance, render supply as inadequate to meet huge growing demand that wants to exploit the artificially low prices. Even the USTreasury Bonds are enjoying artificially high prices, undoubtedly an extension of the colossal usage of US Federal Reserve lending swap facilities. They print new USTBonds and exchange new third world (US) government debt securities for acidic US mortgage bonds, some hastily cobbled into securities by ailing lending institutions from cratered mortgage loans portfolios. It seems the US Federal Reserve and the Euro Central Bank might accept bonds from English, German, and possibly Swiss sources soon. That seems fair, since they contributed to making vacant US mortgage bonds look attractive.

The market systems are broken, and dysfunctional mechanisms are limping along, as corrupt paper instruments have flooded the financial system to the point of wrecking the commodity markets entirely. If such words seem prone to hyperbole or silly exaggeration, consider that some specific markets are depleted of supply and cannot honor current prices. Those prices have been recently established by force, by the future contracts, all under the watchful eyes of regulators who are totally asleep, corrupt, in the pocket of Wall Street, and whose desks are occupied by means of revolving doors and chairs with Wall Street firms. Just try to imagine the Mafia crime syndicates regulated by agencies whose officials are retired Mafia dons. Let’s examine some mechanisms and a couple weak links to the phony price structure that provides intricate linkage among the USDollar, gold, crude oil, and USTreasury Bonds.

RESTORED ORDER – RELEVANT FACTORS

Many forces within the mechanisms themselves can easily work to push up the gold & silver prices. Other factors are highly likely to play a role to reverse the recent price movements that defy the broad shortages. The USDollar is certainly a specious specie, a form of legal tender whose value defies reality due to its chronic dependence upon a printing press. Some factors loom large. Here are a few.

The US banks are fast approaching the early warning season in early to middle September. They are required (Wall Street firms excluded) to come forward and provide guidance on their earnings, their balance sheet damage (called impairment, since sounds better), and their profits (nonexistent, as in extinct). Wall Street firms have almost no stock or bond issuance, no private equity packaging, so business is largely dominated by management of their demise, along with management of their propaganda messages that seem shrill lately. The US banks will in my estimation announce bigger Q3 losses than Q2. Their BS-stories continue since they are actively seeking cash to shore up balance sheets. Their mortgage related losses will be ongoing, but now those losses will be joined by prime mortgage losses, commercial loan losses, car loan losses, credit card losses, and more. The USGovt can claim the economy is in good shape, that exports are booming, but a grand disconnect has occurred. Something like 460 thousand jobs have been lost this year, and most job gains are on paper, from the Birth Death Model nonsense. More paper deception, this of the labor market. Consumers might spend less if they were keenly aware of US-based unemployment running over 14%. The steep decline in USGovt tax receipts testifies to a recession. Most statistics testify to recession, like the Leading Economic Indicators. Reverse gear for the USEconomy is bad news for the USDollar. And all the horrendous disasters coming from Fannie Mae and Freddie Mac acid pits cannot be good.

The crude oil price has the capability to knock the USDollar off its feet. It is vulnerable to hurricane storms. Will Hurricane Gustav do harm? Will another storm directly behind it hit with a one-two punch like Katrina and Rita in 2005? Much oil production has already been shut down in the Gulf of Mexico, where they have too much experience in weathering such storms. The biggest threat to the crude oil price is now the situation in Georgia and Iran. It has quickly exited the front page, as quickly as it entered. My personal view is that the USGovt is attempting to push Europe into a military confrontation with Russia. As a few key European friends say, EUROPE IS THE GRAND PRIZE. They refer to waning US sphere of influence, rising Chinese influence, and numerous other strong players in the mix. Not much of anything reported on the Georgia versus Russia conflict has been true. Under USMilitary guidance, most indications lead one to conclude that Georgia attacked Ossetia and Russia, only to be strongly repelled. The Russians held back and did not destroy the crucial BTC oil pipeline from the Caspian Sea through Georgia to the Mediterranean Sea. My view is that Russia wanted to highlight the BTC exposure, but not damage it, a deed certain to label Russia as aggressor. Experts call the Georgia fumble a gross error of US judgment. The US press parrots the fabrication handed them by official sources. Those evil Russians!!? The next foray is over Ukraine, who along with Georgia were denied entrance into NATO, that organization that might be a dead treaty already. The European nations have organized and agreed in preliminary fashion to a European Atlantic Treaty Organization, since almost all recent NATO accords have been violated by the current USGovt administration, without proper reporting by the sleepy obedient lapdog press.

The geopolitical risk is palpable and obvious, a risk capable of lifting the crude oil price and pushing the USDollar back down again. Technical signals favor a rise in the crude oil price, as the 50-week moving average offers support. An ‘Inside Week’ favors a reversal in oil upwards, just like an ‘Inside Week’ favors the silver price. See the September Hat Trick Letter for details. One primary place to retreat in the face of financial shock and disruption is crude oil. It is tangible, not so subject to false valuation, and best yet, it is suffering from natural supply depletion. Given the broken US banks, an economy in a recession, a consumer leaning lastly on credit cards with negative home equity and negative car equity and high credit card rates, the USDollar seems the last place to take refuge. Given the numerous insolvencies behind the US$ curtain, the USDollar seems the last place to take refuge. As Nouriel Roubini says, “The US is epicenter of market turmoil and global economic slowdown, the country most exposed to credit crunch.” The path for the USDollar long-term counter-trend rally was clearly created by the sharp correction in the crude oil price. The resumption of the USDollar decline and the revival of a damaged gold & silver trade could easily lie in a crude oil bounce up. The strong correction in crude oil clearly pushed down the gold price, or at least rendered gold weak enough for a Wall Street engineered pounce with a flood of paper. With the Georgia loss of the one million daily barrels from the BTC oil pipeline, with the sequence of hurricanes coming through the Caribbean alley into the platform region, with increasing unease tied to the US presidency turnover, with the global isolation exerted upon the US nation, the USTreasury Bond complex will be a much difficult sell to engineer. The world aint that dumb, certainly not as intellectually downtrodden as the American public. That they still give any credence to a shallow terrorism threat is testimony to extraordinary low brain wattage. Rome collapsed from within. The burning of Rome has a parallel in the dismissal of US manufacturing and the ruin of one third of US homeowners as their home equity has been killed.

The flight to safety lately has been mainly into physical gold by foreigners in Arab nations, China, and Russia. It is the story not told. They are increasingly shunning USTBonds on new trade surplus investments, and might soon unload large quantities of USTBonds held in reserves, turning instead in favor of gold. The early stages of this movement have contributed to the shortages of gold & silver. Expect those precious metal shortages to worsen. The trigger for a resumed decline in the USDollar might be a retest of the 140 level in crude oil. The USDollar is still tied at the hip with oil. Meanwhile, the physical realities, together with dealer hedging, will continue to apply pressure on gold & silver futures contracts. A friend called me this morning from overseas. He wondered if the Arabs, Chinese, and Russians are sufficiently angry at the whacking to the gold & silver prices for the large savings they hold in reserves in precious metals, enough to force the physical metals prices higher. My answer was simple: ONLY IF THEY ATTACK WITH GOLD & SILVER PAPER. Namely, if they attack with gold & silver futures contracts. They are increasingly likely, given their disgust with both Wall Street and USMilitary actions, to sell some of their vast USTreasury Bond holdings (paper) and purchase large amounts of gold & silver futures contracts (paper). Few seem to realize that a large new business has emerged in Russia, in gold bullion vault storage for Western investors. This stored wealth must be associated with shaky owners.

DID THEY REALLY ???

Did US oil giants really spend 80% of profit on stock buybacks in the last four years? That was a claim by an interviewed CNBC guest, in reply to the need for bigger heftier oil firm tax benefits from proposed Congressional legislation, as they fight the good fight to supply the USEconomy with ample crude oil and natural gas. Or is their battle to keep the Arab sheiks in power, to keep them buying USTreasurys? Do US oil giants prefer a higher oil price? Is their investment in alternatives an empty battle cry? These are questions to ponder.

The Exxon Valdez oil spill 18 years ago resulted in a $5 billion successful lawsuit, supposed to be awarded to fishermen, fish hatcheries, marina operators, shore land owners, and more. The decision was made final several years ago. Fast forward to just a couple years ago. The US Supreme Court summarily rejected the court decision, and reduced the award by fiat to be paid by Exxon Mobil to a mere $505 million. Individuals affected along the Alaskan shoreline have suffered losses typically near $100k per person, with ongoing lost income on the order of $50k annually. They received a mere $15k to $20k each. Business losses are much greater. To claim that justice was served is a total indisputable joke. The entire US system seems undermined.

BROKEN SYSTEMS – SEE BANKS

A good preface can be told regarding the short rule restriction applied to the bank stocks. They faced annihilation, so they appealed the change the rules. Refer back to a favorite quip of mine, that when billionaires are soon to be ruined, they make a phone call and change the rules. The short rule restriction triggered a short squeeze rally that killed off some hedge funds. As they reacted, they were forced to sell other positions. They tended to liquidate their crude oil contracts that were puffed up recently. One thing led to another. The USDollar benefited from not only the bank stock dead-cat rally and crude oil selloff, but the absurdly corrupted economic growth report about Q2 Gross Domestic Product. The claimed Q2 GDP rise of 1.9% was revised up to a 3.3% silly story. The key element to expose the ridiculous US growth story claim is that the GDP Deflator series was revised from 1.11% to 1.33% in a way that should cause raucous laughter. Price inflation in the second quarter, when the CPI was rising enough to cause alarm, when energy prices were hitting record highs, was so perilously close to zero??? Methinks not! The lie is 4% even within the corrupted USGovt statistics, if consistency is desired with the faulty Consumer Price Inflation index. The 3.3% GDP revised from strong exports should be minus 1%. The same report cited a PCE price index of 4.2% for Q2 (close to recent 5% CPI figures). So the USGovt provides clues of their own doctored numbers, and expects you will do nothing in pursuit.

What also significantly aided the USDollar in the last few weeks was the Euro Central Bank, which almost admitted they will not raise the key official interest rate. Now this week, Bundesbank President Max Weber announced they want to raise rates when their economy returns to recovery mode. Another bland comment, clearly designed to lift the euro, which fell almost 1000 basis points in the last few weeks, more than they wanted. The Shadow Govt Statistics folks cover the statistical sham, but so does Jesse’s Café Américain (click here). If the growth story were real, then the long-term 10-year USTreasury Note yield would not be below 4.0%, as it has been for several weeks. Some key author analysts seem missing in action (like PVE) to explain this, as they claimed wrongly that rising price inflation would cause long-term USTreasury yields to rise. They must have missed how most rising prices are costs without benefit of rising wages. Maybe they missed the China & India story. Then again, from my desk the big euro currency selloff and gold decline were missed, but not the crude oil selloff.

The talk of averting a USEconomic recession is laughable when it is here now, and worsening. The only recovery is statistical, and its false front is obvious to anyone who reads beyond the headlines. Debate on recession is utterly laughable. To point out the utter absurdity of it all, consider this. The reason given for the crude oil price decline is demand destruction from the big slowdown in the USEconomy. Gasoline consumption and oil demand in the aggregate is way down from a year ago! Credit flow and oil demand are the two major indisputable keys to USEconomic recession! So a recession explains the lower crude oil price. But the reason given for the USDollar rebound is a strong USEconomy, the strongest among the major continents! This is not a reason, but rather propaganda. It is the latest chapter in the ongoing US mythology saga, the US$ marketing pitch. Such chapters are extremely important in the continuation of a broken US$ system.

So back to bank stocks, where the focus of attention should be on stock option brokers. Here is where a broken mechanism lies. They might receive strong buyers in option put contracts for big bank stocks, even the BKX bank stock index. These profit from bank stock declines. The stock option broker would obviously sell the option put, thus putting the broker firm into an implied long position, totally undesired. The typical response from such brokers is to short the bank stocks and return to net neutral on their position. The short rule restriction disabled this mechanism. Since this corrupt rule has been removed two weeks ago (enabled huge insider illicit profits), the BKX stock index has fallen. It looks like an identical chart pattern as we head into the end of the Q3. Look for a bearish triangle to form or some pennant pause pattern to form, with a base of 55 set in July. Either way, the 20-week moving average seems impenetrable as a strong ceiling.

My claim is simple: Q3 bank losses will exceed those of Q2, just like Q2 losses exceeded those of Q1. Therein lie the lies told by the big bankers, led by the crime syndicate operating as Wall Street firms. For those who believe such a claim is outrageous, consider first their $1 trillion mortgage bond fraud, then their control of the financial press & media as bulwark advertisers, then their benefit from USFed tipoffs on changed monetary policy, then their flagrant marketing to investors opposite to their own corporate assets strategies, then their money laundering operations from clandestine Afghan contraband sales. The only pipeline coming out of Afghan land (recall an oil pipeline as partial justification for its annexation in 2003?) involves the flow a different black gooey substance, one refined into narcotics. The banks, their balance sheets, their losses, their dilution, and their stocks are covered in the upcoming September Hat Trick Letter. The point here is that market mechanisms were disrupted initially in bank stocks. The

Let us not forget the don of Manhattan Made Men Robert Rubin. Looking a bit nervous and frazzled, he publicly announced the need for banks no longer to mark their assets to market. Nice try, what gall, Bob! He urges the creation of a new government sponsored Garbage Can, or as he described it, a clearinghouse for credit derivatives. Surely a maneuver from the sublime to the ridiculous, and now to build a giant pink elephant to sit in the Wall Street board rooms, but without the voting privilege. Apparently, the Garbage Can managed by JPMorgan is not big enough, or broad enough, or deep enough. They want one with official USGovt sponsorship and moniker. That might be because the JPMorgan monstrosity is attracting too much attention. One way to relieve pressure to address the corruption caused by JPMorgan on currencies, Treasuries, crude oil, gold & silver with outrageous uneconomic paper futures contract positions is to put much of that corrupt duty under the aegis of the largest criminal enterprise foundation on the planet, the USGovt.

BROKEN SYSTEMS – SEE PRECIOUS METALS

The USMint has announced shortages of gold and silver coins. Major precious metals dealers have announced shortages of gold and silver in various forms, like ingots of bullion. UBS has announced shortages of gold across all of Europe, strong demand from India, Turkey, and the Middle East, and the “substantial liquidation has occurred in the COMEX, TOCOM, and OTC markets, although the ETF holders remain broadly resolute.” The COMEX refers to the Commodity Exchange in Chicago. The TOCOM refers to the Tokyo Commodity Exchange. Consider that the Exchange Traded Funds like the corrupt GLD gold fund managed by JPMorgan, and the corrupt SLV silver fund managed by Barclays might not have sold off gold & silver stored metal bullion respectively during the recent price decline, but rather THEY REDUCED THEIR NAKED SHORT POSITIONS. The South Africans just ran out of gold Kruggerands, due to a large Swiss order. Bear in mind that Arabs are extremely resentful of European bullion bankers, who ‘LOST’ their gold. Only paper certificates on Arab gold bullion accounts remain. Thus motivation for the rise of the Dubai and Abu Dhabi gold centers in the Middle East, where corrupt Westerners do not hold control. Curiously, popular (but very real markets) EBay and Craigslist show that silver is available, but closer to $17 per ounce than $13. Two markets exist, a corrupt paper one and more realistic physical one. Public outcry has begun. If you want physical deliveries, you must wait or pay a proper market price. The number of fools unloading their physical gold & silver supplies is dwindling, sure to cause a climax of shortage. They say physical always drives the paper futures contract price system. We are witnessing a steady depletion of inventory, delivery delay, and coins being unavailable. The price mechanism is not responding much at all, yet.

Well, don’t be too sure about physical markets dominating paper markets until a full examination is done of JPMorgan, the monster and center of the Wall Street syndicate. They are untouchable. Their books are not subject to scrutiny. They obtain a pass on disclosure for national security reasons, as they manage their giant Garbage Can. Is that because JPM plays illegal games with the USTreasury complex in managing a phony USDollar exchange rate, which plays on the gold price? Is that because JPM permits credit derivatives owned by an array of Wall Street firms to dump their acid garbage into the Garbage Can, so that Wall Street firms can report rosy earnings and only tainted (not destroyed) balance sheets? Is that because JPM had to hold vast Enron records and suspicious USTreasury Bonds (valued over $1 trillion) housed in the third World Trade Building that fell without any airline impact? Is that because JPM manages the Bank of Baghdad, where rumor has it the illicit contraband Afghan funds are channeled in vast money laundering? Is that because Wall Street firms enjoy broad benefits from Afghan black bag funds, enough to keep them afloat? For those who doubt JPMorgan would be involved in double booking, let alone burial of dead assets, and surely not money laundering, consider that JPMorgan owns the very same mix of ill-fated bond and other securities as the other Wall Street firms, but to date has yet to suffer much in the way of losses or stock decline.

Back to precious metal dealers. Reports abound of greater demand for physical gold & silver, which directly cause huge risks to dealers. Arab and Asian sources (including both China and Russia) are responsible for much but not all of demand. Reports come that COMEX physical demand is strong, enough to put their inventory of silver below that of the Barclays silver exchange traded fund. Word comes to me from an Irish source (Mark O’Byrne of Gold Investments, click here) that London and Irish gold supply is rock bottom, inadequate to meet demand. Dealers across the spectrum are telling customers that supply is available but delivery times are not guaranteed. Some like GoldMoney (click here) have supply, but that supply is not as strong as ten days ago. The common theme is that inventory of gold & silver is very low, if not having vanished.

Examine the very great risks involved to dealers. They enter a contract, set a price, and promise delivery of gold or silver. They usually require some time to fill the order and execute on the contract. But nowadays, the strain and risk is greater. Imagine a $1 million silver order from a wealthy shrewd investor in upstate New York or San Francisco or Dubai or Tokyo or Singapore or Shanghai or Moscow or Zurich. Say the price is set for $13.50 per ounce, plus a vig for the dealer. Remember, an artificially low price creates ultra-strong demand against vanishing supply in shortages. What moron would dump silver at $13 but someone who must, or someone who believes Wall Street & USGovt propaganda, or someone who might be coerced by bankers? Given the Fascist Business Model at work, the Wall Street and USGovt messages are fully coordinated, down to reports of the USGovt Strategic Petroleum Reserve being available to tap in the event of a hurricane disruption. A powerful storm would lift the crude oil price and push down the USDollar again. The crude oil price reversed on Thursday in response to the official news report. The USGovt did not sell anything from the SPR in recent weeks, and will not again in future weeks, but propaganda moves sheep.

So the silver dealer saddled with the risk of a big $1 million silver order must protect the business from risk. If the dealer struggles and scrambles to find the large supply necessary to satisfy the order, the dealer might have to pay up. An order that usually used to take a few days to fill might now take over two weeks to fill. The dealer must contend with big risks from the rigged market, whose price is artificial. The longer the rigged low silver price is in effect, the greater will be the disappearance of silver supply. That is how markets work. The presence of the powerful corrupt paper market atop the physical market is a big story of our times. Its resolution is not at all certain. The dealer can react to protect the business from acute risk by buying long silver futures contracts at the nearby month! So the abundance of gold & silver physical contract orders could easily result in a big surge in dealer hedging against their risk under unmet contracts. If this particular dealer is forced to fill the order at $14.50 per ounce instead, the loss is huge, enough to threaten the business. To purchase 74k ounces at $1 too high means simply around a $70k loss. Put a few such similar orders together, and the dealers shuts doors and is dead. Knock out a string of dealers and the problem becomes more severe to find supply to purchase. THE RESULT IS THAT DEALER HEDGING WILL EVENTUALLY ATTACK THE CORRUPT PAPER GOLD & SILVER MONOLITH

SYSTEM RISK – MANAGED SHORTAGES

We are not close to the crossroads, but rather squarely at the crossroad of brutal force used to control market mechanisms. The uprising of complaints that paper gold & silver has reduced significantly the price of physical gold & silver, while each has been in shortage and reduced mine supply, has raised criticism. So what? To complain nowadays is to be unpatriotic. To oppose a corrupt government and regulatory system, managed largely by a corrupt Wall Street entourage, is to be considered unpatriotic. The risk is rising, at our doorstep, that managed shortages against a backdrop of rigged price (low for physical, high for USGovt bonds) will be the rule not the exception. If the gold & silver prices are kept artificially low, then shortages will become profound. The only permitted buyers will be the privileged, the insiders, and the corrupt in power. If the crude oil and gasoline prices are kept artificially low, then rationing to businesses and consumers will become the rule of the day. Over the last year or more, my work has mentioned repeatedly that martial law will be the outcome, with a likely military dictatorship. The missing ingredient nowadays is public chaos, violence in the streets, and a call for order. All in time.

So far, the landscape is dominated by huge personal financial loss, a vast undercut to income and job security, rising costs of almost everything, challenges to feed families, strain on retirees never seen before, difficulty in securing loans, most viable products being imported, and incessant talk about threats from terrorists. The external threat is minimal. The internal threat is gigantic, real, and ongoing, enough to threaten the national structure. That is why martial law is very likely. The systems are imploding, starting with the USGovt federal finances, then to the yawning trade gap and need for foreign capital, now to the housing deficit from one third of the population suffering negative home equity, and lastly the insolvent bank system whose core capital has melted completely (not partially). Such broad and deep bankruptcy and insolvency is wholly inconsistent with freedom, liberty, and unencumbered paths to prosperity, let alone happiness. Dead banks don’t lend money, period! The fork in the road has resulted in an important turn being taken in late July and early August. Price controls have taken the form of powerful paper futures contract impositions. The fork in the road has been taken toward price controls and managed shortages.

If price mechanisms and market mechanisms return with force, then big shocks are coming. All the fraud, all the aggressive military movement in the last few years, these actions have resulted in an isolation of the Untied States in ways that have eluded detection by the great majority of Americans. The many continents are engaged in meetings, where new systems are being designed for trade and banking, as they prepare for a new age without American dominance, and perhaps without American participation. The more USGovt leaders talk about terrorism and use aggression abroad, the more the nation becomes increasingly isolated. One must wonder if the current US president will take up residence in Paraguay at the end of term, where he has purchased tens of thousands of acres of property only a few years ago. My personal preparations are in defense of what are considered to be a gradual relentless national degradation into martial law. The remaining question is whether the price structure will be consistent with shortages at work. With ultra-high prices might come violence. With ultra-low supply might come violence. With depleted job prospects might come violence. With continued home foreclosures might come violence. With helplessness to Congressional compromise, imposed burdens, and corruption might come violence. LIKE IN FRANCE AT THE BASTILLE, HIGH FOOD PRICES MIGHT COME VIOLENCE. With public expression of outrage at USGovt & Wall Street corruption, profiteering, and utter distortions of truth might come violence.

The proliferation of Exchange Traded Funds enables price controls, and leaves investors exposed to Wall Street corruption. If you invested in the Goldman Sachs Commodity Index in the summer of 2006, you lost big, from GoldSax manipulation of the unleaded gasoline price, and the coordinated sale of crude oil by the USMilitary, all before the November 2006 national election. Reports are strong that Barclays has not been buying silver with newly invested money. They are selling silver naked short illegally, in all likelihood. Reports are strong that GoldSux is selling short gold & silver mining stocks in a large scale effort by suppressing the GDX exchange traded fund under their management. There is the USO (oil ETFund) and numerous others, including a water ETFund. They are marketed by a stress of their convenience as an investor. Your convenience has a flipside open door to Wall Street corruption.

The current situation is reminiscent of the 1992-1993 era when George Soros opposed the Bank of England. The central bank attempted to prevent the British pound sterling from a precipitous decline in devaluation. The sterling currency did decline, much to the profit of Soros, who essentially made his name a public icon back then. One must wonder if history is repeating itself. The USGovt, Wall Street, and the USFed are locked in a titanic struggle to maintain totally false price structures, almost all interconnected. The USDollar, USTBond, gold, and crude oil are all connected in price structure. This will be interesting. Back 15 years ago, the Bank of England did not have the strong advantage of a JPMorgan monolith manipulation machine, nor a powerful US Federal Reserve, nor a $1 trillion slush fund behind the Working Group for Financial Markets (aka Plunge Protection Team), nor a potent USMilitary to enforce an Arab-led petrodollar (on its last legs), nor a printing press spinning off counterfeit bills with green ink and US$ markings. Yes, this will be interesting.