themusingsoffritz: 11/22/09

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Dinosaurs on the path to extinction

In this post you will find information about

Tungsten

Economy
- GEAB Report
- Soc.Gen.tells clients how to prepare for global collapse

Gold
- my musings
- Marc Faber: “I don’t think that you’ll see gold below $1,000 per ounce probably ever”
- The Fed is sending gold higher
- gold bars that are rather tungsten bars

Banks and banksters
- my musings
- IMF warns second bailout would 'threaten democracy'
- Bank of America, UBS, JPMorgan Sued Over Derivatives
- Fed under fire as public anger mounts

Fixed Income
Bets rise on rich country bond defaults

USD
- Well-Written, Well-Timed: The Dollar Meltdown
- must see video interview with Ron Paul

Oil
Weekly overview by ASPO

Tungsten

Dear reader do you know what Tungsten is? Please have a look at wikipedia http://en.wikipedia.org/wiki/Tungsten
Why do I mention tungsten? The reason for doing so is that lately more and more information is popping up informing us that apparently good delivery gold bars being shipped out of the US are rather gold plated tungsten bars and not gold bars as it should be. More on that later.

Before we go into more details following an last weeks overview from www.prudentbear.com

For the week, the S&P500 slipped 0.2% (up 20.8% y-t-d), while the Dow added 0.5% (up 17.6% y-t-d). The Morgan Stanley Cyclicals dipped 0.5% (up 64.2%), and Transports slipped 0.4% (up 11.5%). The Morgan Stanley Consumer index gained 0.4% (up 21.8%), while the Utilities declined 0.4% (down 1.8%). The Banks rose 1.2% (down 1.5%), while the Broker/Dealers declined 1.6% (up 49.5%). The S&P 400 Mid-Caps fell 1.5% (up 27.7%), and the small cap Russell 2000 declined 0.3% (up 17.1%). The Nasdaq100 gave back 1.4% (up 45.6%), and the Morgan Stanley High Tech index fell 1.7% (up 59.6%). The Semiconductors sank 3.0% (up 45.2%). The InteractiveWeek Internet index declined 1.3% (up 67.1%). The Biotechs fell 2.8% (up 33.9%). With bullion up another $31, the HUI gold index gained 2.6% (up 56.3%)

Economy
GEAB N°39 is available! Global systemic crisis – States faced with three brutal options in 2010: inflation, high taxation or default
http://www.leap2020.eu/GEAB-N-39-is-available!-Global-systemic-crisis-States-faced-with-three-brutal-options-in-2010-inflation,-high-taxation_a3995.html

Société Générale tells clients how to prepare for 'global collapse'
Société Générale has advised clients to be ready for a possible "global economic collapse" over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.

By Ambrose Evans-Pritchard Published: 6:12PM GMT 18 Nov 2009
Comments 4 | Comment on this article

Explosion of debt: Japan 's public debt could reach as much as 270pc of GDP in the next two years. A bullet train is pictured speeding past Mount Fuji in Fuji city, west of Tokyo Photo: Reuters
In a report entitled "Worst-case debt scenario", the bank's asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.
Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US ), whether public or private. It must be reduced by the hard slog of "deleveraging", for years.

'Debt levels risk another crisis'
"As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse," said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.
Under the French bank's "Bear Case" scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.
Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK , 125pc in the US and the eurozone, and 270pc in Japan . Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.
( UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).
The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," it said.
Inflating debt away might be seen by some governments as a lesser of evils.
If so, gold would go "up, and up, and up" as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.
The bank said the current crisis displays "compelling similarities" with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.
SocGen advises bears to sell the dollar and to "short" cyclical equities such as technology, auto, and travel to avoid being caught in the "inherent deflationary spiral". Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.
Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would "generate turbo-charged returns" mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan's 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.
SocGen's case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.
Mr Fermon said his report had electrified clients on both sides of the Atlantic . "Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried," he said.
http://www.telegraph.co.uk/finance/economics/6599281/Societe-Generale-tells-clients-how-to-prepare-for-global-collapse.html

Gold

Well dear reader, as you know I have been an advocate of holding gold and silver for the last 10 years. As prices have gone up considerably over the past weeks, many people ask me now if we are in a bubble (well most do not ask but tell me that we are in a bubble because they were told by others). So are we or are we not? This of course is a good question and is a question that I heard, like an evergreen song, many times over the past 10 years. I heard the same argument or question when we moved from USD 300 per ounce to 450 and later from 450 to 750 and later from 750 to 1030. Now again, I am asked the same question. Well guess what. Most probably I will hear the same question for another 10 years but each time, like going up a step, at higher levels each time I will be asked. Yes of course prices to not go up or down in a straight way and therefore we will have to face fluctuations, no doubt about it. These fluctuations will certainly increase, both in amounts and percentage wise, but the primary trend is up and nobody can convince me, for the time being, of something else. Although the gold exchange rate versus the USD has gone up from below 300 per ounce in 2001 to almost 1,200 the fundamentals have not changed at all. Gold and Silver is still the currency or asset if you like, to hold for the next couple of years. Of course there will be a time when one should change it’s gold and silver holdings into another asset but we are still far away from that moment. Once we will see the gold/dow ratio below 1 to 2 we should start moving into stocks primarily. But again it will take time to get to this ratio. So, hold gold and silver, enjoy the ride and don’t worry about fluctuations. Any move down is a good opportunity to increase the holding. Don’t forget that gold and silver is the only currency without counterparty risk and that is in today’s brave world a very important fact, especially with all the Central Banks printing money like there is no tomorrow. So don’t listen to the self-proclaimed gurus telling you that gold and silver is in a bubble. Yes it is overbought for the moment being but that does not mean it is in a bubble. If your guru (maybe an employee of a bank or a broker) tells you that gold and silver is not a good investment, because of the following reason; it’s overvalued, it’s too risky, the crisis is over, so there’s no reason to own it, it pays no interest, it’s antiquated, and the list goes on, think about the reason why he or she is doing so. Might it be because the banks or brokers do not earn anything or almost nothing if their clients hold gold and silver while they earn way above 1% p.a. (most products earn between 1.5% and 3%) with the structured products that are offered to you? Some structured products might be OK in certain situations. However most of them I do not like because of the counterparty risk involved and secondly because clients are better off holding the underlying investment directly. Talking about holding the underlying asset directly please make sure that the products you buy do really hold physical. The ETF GLD and SLV for example do hold lots of paper metal vehicles. Of course they might hold some bullion as well but as an investor in an ETF you want them to hold 100% in bullion. The ETFs are a huge magnet for any money that would want to find its way to actual bullion. The paper is a way to soak up that demand. If the ETFs were not established several years ago, gold would have skyrocketed by now as people would have had to get the physical metal directly instead of these ‘gold vehicles’ which are actually just paper claims on gold.
It’s a lot easier for a $billion to find its way into a fund than for it to be transferred directly into the gold bars, which if a $billion of gold were ordered on the spot markets, it would drive prices way up immediately.
So once again I do not recommend to GLD or SLV. If you like to know how to hold physical, send me an e mail.

Marc Faber: “I don’t think that you’ll see gold below $1,000 per ounce probably ever”
By Edward Harrison of Credit Writedowns
Marc Faber is in a bullish mindset, particularly on gold. In a wide-ranging interview with CNBC TV-18 in India, Faber talked about where he sees markets headed and why he thinks gold will never drop below $1,000 an ounce.
http://www.nakedcapitalism.com/2009/11/marc-faber-i-don’t-think-that-you’ll-see-gold-below-1000-per-ounce-probably-ever.html

The Fed is sending gold higher: Rolfe Winkler
Rolfe Winkler is a Reuters columnist. The opinions expressed  are his own –
NEW YORK, Nov 18 (Reuters) - Is gold going to $6,300? Dylan Grice, an analyst with Societe Generale, says it's possible, given the decline in central bank credibility. But investors need to keep one thing in mind: Gold is merely a vehicle to protect the purchasing power of money.
Gold is surging because investors see that the Federal Reserve -- more concerned with deflation and unemployment than sound money -- may be trapped in a never-ending cycle of monetary accommodation.
Ben Bernanke says he won't monetize debt, but he already has. His Fed has bought $300 billion of Treasuries and is on pace to buy $1.45 trillion of government-backed mortgage debt all of which is being salted away indefinitely on the Fed's balance sheet.
Why indefinitely? Because the Fed has no intention of unwinding its balance sheet so long as the economy is stressed.
Witness comments this week from Bernanke, Fed Vice Chairman Don Kohn and San Francisco Fed President Janet Yellen all suggesting that the Fed's "extended period" of low interest rates can be measured in years, not months. Today St. Louis

Fed President James Bullard said rates aren't going up till 2012.
So long as deficit spending continues, if the Fed wants to avoid deflation, it will be forced to monetize more debt.
Elsewhere, capital controls are again being erected in emerging economies like Brazil, Taiwan, and possibly Indonesia in order to keep speculative waters at bay. As Hong Kong's chief executive remarked last week, a dollar carry trade spawned by low rates threatens to inflate dangerous asset bubbles in emerging markets the same way low Japanese rates did in the '90s.
Exploding debt throughout the developed world means other central banks face similar pressure. Confidence in paper currencies is waning.
Some people say it is absurd to buy gold; the metal has no intrinsic value. That may be. But is it any less absurd to hold paper? The best that can be said for paper is that if you lend or invest it, tomorrow someone will give you more paper in  return. This is fine so long as its purchasing power is maintained. But it isn't. A 2009 dollar is worth a 1914 nickel.
Eventually the value of all the paper you've accumulated goes to zero. The trick is to turn that paper into tangible assets with tangible value.
At least gold has maintained its purchasing power, as a chart by Grice demonstrates:
http://blogs.reuters.com/rolfe-winkler/
Grice contends that the price of gold could reach $6,300 an ounce. He explains:
"The U.S. owns nearly 263 million troy ounces of gold (the world's biggest holder) while the Fed's monetary base is $1.7 trillion. So the price of gold at which the U.S. dollar would be fully gold-backed is currently around $6,300. Gold is very cheap -- at current prices, the USD is only 15 percent gold-backed."
Absurd you say? It happened 30 years ago. President Nixon ended the Bretton Woods global monetary system and his compliant Fed Chairman Arthur Burns let inflation run wild. So by 1980 gold spiked to a level at which the dollar was "overbacked" according to Grice.
Did gold overshoot in 1980? Sure, but only because Paul Volcker was willing to hammer the economy to re-establish the Fed's credibility. Today's Fed has been very clear that it isn't willing to put up with a recession of any kind in the service of sound money.
All of that said, investors should be careful. Grice's chart shows that, over the long run, gold is likely to do no better than protect your purchasing power. An ounce of gold today buys a good men's suit; in 100 years, it is likely to buy the same. So gold won't make you rich. But it may protect you from becoming poor.

Tungsten

There is more and more information popping up saying that gold bars do appear that only have gold plating but are in fact Tungsten bars. Tungsten has very similar qualities as gold and therefore cannot easily be detected. Following a comment from Jim Willie
The tungsten deposits come in very high grade ore, located in shallow rectangular deposits dispersed widely across the world, segregated in unusual vault heap leach mineralizations. Yes, these guys are leeches! In October, the Hong Kong bankers discovered some gold bars shipped from the United States were actually tungsten with gold plating. This is the exact same Modus Operandi as the silver clad zinc dimes from 45 years ago. History repeats itself. The parallels to mortgage bond fraud with either subprime borrowers or multiple property titles used in bond securitization is easy to spot. A consistent theme runs through the American management of finance and dissemination of fraudulent assets on a global basis. Tungsten gold bars is a feat difficult to surpass.
For more please go to the following link
http://news.goldseek.com/GoldenJackass/1258596000.php

Is the tungsten story OK?
http://fofoa.blogspot.com/2009/11/is-dollar-good-as-tungsten.html

Bank and banksters

On Friday it was mentioned on Bloomberg that the top five financial institutions are paying out US $150 billion in bonuses this year. Goldman Sachs set aside US $16 billion and more and likely will raise that amount to US $23 billion. All of these are companies have received TARP money and some of them still haven’t paid off their debt. Then you have other too big to fail institutions like AIG, Freddie Mac, and Fannie Mae that have to go back to the public trough and ask for more money. In particular you have a company like AIG, under the watchful eye of the actualTreasury Secretary, which paid one hundred cents on the dollar when it was negotiating payment of its debt to companies like Goldman Sachs. Yet the same Secretary insisted that bond holders and preferred debt holders of GM get next to nothing when it came time to pay them off. This is a classic example of Wall Street versus Main Street and guess who will win?
The bailouts had nothing to do with concern for the public. It was all about moving money from the public to the banksters in order to let them pay out even higher bonuses and furthermore it was to help consolidate the power of a company named Gold and something and to help them get rid of their competition. The Goldies got the meat, the lucrative business, from those financial institutions that had to go while the bones were left to the public.
The failure of Lehman was the key, as it forced Congress to commit to TARP money that would eventually fill Goldman’s coffers. Poor Lehman who drew the short stick even though they all were more or less equally leveraged.

Both the Fed and Treasury now clear everything through Goldman, allowing them to make trading profits on 89 out of 92 days in the third quarter, a phenomenal accomplishment to say the least. The taxpayers and USD holders of course pay for all of this. Taxes will be raised, lot’s will lose their job, the currency you hold is worth less every day and at the same time you risk that your savings will be taken as well. AIG, Freddie Mac, Fannie Mae, Bank of America, Citibank, Goldman Sachs, and a few others received staggering amounts of money, while the average American received nothing. Imagine what the money thrown after the selected few could have done if the same money would have been given to the taxpayers. Would we really be worse of without the institutions that received government funding? Sooner or later these institutions will fail anyway meaning that all money thrown at them be it in the past or in the coming months will be lost anyway. History is full of testimonies telling us that too big to fail is against natural laws. The Dinosaurs, empires and so on become to big to fail but failed eventually. The financial dinosaurs will become extinct within less than a decade, at least so I believe. I think I mentioned it in one of my previous posts, small is beautiful again and if small means guarantees from states without external debt even better. You still work with the dinosaurs? Well the Dino’s did not die out from one day to the other but does it make sense to stay with an institution that is most probably on its path to the graveyard anyway?

A picture says more than words. The following chart shows you another reason why the dinosaurs are on the path to extinction
These derivatives are not only toxic but highly explosive

click on the table in order to get an enhanced picture

IMF warns second bailout would 'threaten democracy'
The public will not bail out the financial services sector for a second time if another global crisis blows up in four or five years time, the managing-director of the International Monetary Fund warned this morning.
Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.
"Most advanced economies will not accept any more [bailouts]...The political reaction will be very strong, putting some democracies at risk," he told delegates.

He pointed to the debate in the US over the Troubled Asset Relief Programme and said that in many countries, including France and Germany, he doubted that politicians would secure the mandate needed to secure any further bail-outs if banks got in to trouble again
http://business.timesonline.co.uk/tol/business/economics/article6928147.ece

In my humble opinion, they should not have bailed them out in the first place at all. It was a clear mistake because the unavoidable is just postponed but not solved.

Bank of America, UBS, JPMorgan Sued Over Derivatives (Update1)  By Joel Rosenblatt
Nov. 17 (Bloomberg) — Bank of America Corp., UBS AG and JPMorgan Chase & Co. were sued by a California public utility over claims they rigged sales of municipal derivatives and shared illegal profits through kickbacks.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aBMy4gnnFIk4&pos=7

Fed under fire as public anger mounts
That means that the privately owned bank, the FED finally comes under certain pressure. To read the story of the creation of the FED I can recommend the book “The creature of Jekyll Island” from Griffin.

Following the information found on Yahoo news
Strip the Fed of its bank regulation powers, some in Congress are demanding. Get probing audits of its behind-the-scenes operations, others say.
The chairman of the Federal Reserve Board is always fair game for criticism and second-guessing, usually over interest rate actions. But this year the criticism is much broader as Congress responds to widespread public anger that the Fed bailed out Wall Street but not ordinary Americans, and with unemployment in double digits.
http://news.yahoo.com/s/ap/20091122/ap_on_an/us_punching_bag_fed_analysis

In the above report it is stated
Quote
Many economists and Fed watchers say congressional efforts to rein in the Fed's powers could interfere with the central bank's ability to help guide the fragile economy to recovery.
Unquote
This dear reader, is in my opinion an absolute crap. The only thing the FED does is serve it’s masters, the bankers and the real owners of these banks (guess who they are) and nothing else. Without the FED the 1929 depression would have ended faster. The track record of the FED is poor (writing poor I am very nice with them because I think I should need a stronger word to describe the bad track record). The FED has no ability at all to help guide the fragile economy to recovery. All they do is make it worse. I think it goes without saying that those economists and FED watchers that say the above probably are paid by the FED (in some cases it’s not only probably but proven to be the case) just like those doing the lobby work in Washington in favor of the banks and the FED.

Fixed Income

Bets rise on rich country bond defaults
LONDON -- The mounting level of debt in the industrialised world is prompting a growing number of investors to use the derivatives market to bet on the chance of rich governments defaulting on bonds.
The volume of activity in sovereign credit default swaps -- which measure the cost to insure against bond defaults -- linked to the US, UK, and Japan have doubled in the past year because of concerns about their public finances.
CDS volumes for Italy, which has one of the highest debt burdens of the developed economies, are now the highest for an individual country, according to the Depository Trust & Clearing Corp.
In contrast, the outstanding volume of CDS linked to emerging nations such as Russia, Brazil, Ukraine, and Indonesia have been flat or fallen in the past 12 months as investors have become less interested in trading the risks of those countries.
In the past, the CDS market for developed countries was sluggish, because few investors saw the need to buy or sell protection against a risk of default that seemed exceedingly remote.
However, rising debt levels and growing political and economic uncertainty has created a more active market, with more investors now seeking insurance. Meanwhile, many banks are prepared to offer protection in exchange for a fee.
This fee has recently jumped, since the cost to insure the debt of developed countries has increased since the summer of last year, while the cost of insuring emerging market debt has fallen.
Gary Jenkins, head of fixed income research at Evolution, said: "The biggest single risk hanging over the bond markets is the rapid rise in public debt in the industrialised world. If we get to a point where the market thinks the levels of debt are unsustainable, then we will see an almighty selloff in the government bond markets, with yields soaring. Governments need to take action to cut deficits and debt."
Fitch Solutions, the data arm of the Fitch Group, said that there is almost as much uncertainty in the CDS market about the outlook for the developed economies and their bond markets as there is for emerging economies.
Comparisons between Italy and Brazil are often used by strategists as an example of the contrasting fortunes of the developed and emerging world.
Italy's debt to gross domestic product ratio is forecast to rise to 127.3 per cent in 2010.
On the other hand, Brazil's debt to GDP ratio is forecast to stabilise at 65.4 per cent in 2010.
Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, said: "It is not surprising that investors are increasingly worried about debt in the industrialised world. Debt to GDP of more than 100 per cent is difficult to sustain."
http://www.ft.com/cms/s/0/f4f9a4f0-d791-11de-b578-00144feabdc0.html?nclick_check=1

My comment to the above; I certainly believe that hedging against an increasing risk makes sense. However isn’t it a bit naïve to believe that those who sell the insurance will be able to pay when they have to?

November 19 – Bloomberg (Laura Cochrane): “From Angola to Belarus, emerging- market governments are planning first-time debt offerings to take advantage of the biggest bond rally in at least 11 years… ‘It’s because of the wall of money that comes from extremely accommodative monetary policy globally,” said Edwin Gutierrez, an emerging-market money manager…for Aberdeen… ‘There is just absolutely loads of liquidity out there still trying to find a home for that money.’”
My comment; Sounds like a bubble and sounds very much like hyperinflation

USD
Well-Written, Well-Timed: The Dollar Meltdown
http://www.dollarcollapse.com/inp/view.asp?ID=115

Here Is Why The Dollar Is Now Effectively Worthless
A picture is worth a thousand Krugman essays, which is why we present a chart comparing the US Monetary Base (and by subtracting Reserve Balances with Fed Reserve Banks, Currency in Circulation), and the Fed's holdings of MBS and Agency paper (worthless GSE/FHA garbage). In summary: Currency in Circulation: $920 billion; MBS/Agency Holdings: $997 billion. The dollar in your pocket is now entirely backed only by worthless, rapidly devaluing and subsidized housing.
http://www.zerohedge.com/article/here-why-dollar-now-effectively-worthless