Thursday, March 5, 2009

The Only Stigma for the Banks is that they are Banks

I had to leave work at noon for the 6 month teeth cleaning. Always fun! Cannot complain as I have not had a cavity since 9th grade, so a cleaning is not so bad. Would have preferred to be in the dentist chair then to watch another market meltdown day anyway!

Golden Dreams, Fallacies, and Nightmares
Since 2003 I have been an aggressive buyer of the yellow metal, as well as it's little brother, Silver. I banked out when gold first hit $1000 and silver went over $15 (a little early as it ran to $20) to lock in some nice profits. Not too long ago I entered back in. I am no "Gold Bug" as I play other areas, but it is my favorite sector by far.

With that said there was plenty of information out there today that was interesting as it relates to gold. The first item is a gold buyers dream, China thinking about deploying their massive reserves into gold instead of useless US treasuries (Hat tip Jesse's Cafe):
Survey: Over Two-Thirds of Chinese Economists Favor Gold Over US Bonds
March 02,2009
by CSC staff, Shanghai
In a survey of major Chinese economists, more than two-thirds are reportedly bearish on the prospect of China increasing its holdings of US government bonds, and believe instead the nation should putting more of its hard-earned into gold.

According to a China Business News survey of 70 Chinese economists (including one foreign economist), the exact figure is 71.4% anti-bonds and pro-gold.
The use of China's huge foreign exchange reserve is a topic of concern and controversy. The remaining 28.6% of those polled believe China should continue to buy U.S. Treasury bonds. 38.6% think that China should not continue to buy, but also should not to sell US bonds. 32.8% believe that China should unload the bonds, 22.8% of whom think we should have a slight sell-off, while 10% think China should drop them like a bad habit.

All this is against a backdrop of China surpassing Japan to become America's largest US bond holder and of the ever-widening global financial kerfuffle.

Add to this mantra with this story about Russia:
RPT-Russia bans Nat'l Wealth Fund investment in agencies
Thu Mar 5, 2009 5:01am EST
MOSCOW, March 5 (Reuters) - Russia banned investment of its $83.7 billion National Wealth Fund in bonds issued by foreign government agencies such as Fannie Mae (FNM.N) and Freddie Mac (FRE.N), the Finance Ministry said on Thursday.

The ministry said earlier on Thursday it had also banned investment of its $136.3 billion Reserve Fund in foreign government agencies' bonds. (Reporting by Gleb Bryanski and Yelena Fabrichnaya)

China wanting to add to their gold reserves would be very positive for gold. Russia ceasing agency debt buying would also be positive as Russia has expressed a desire to add gold as well.

Taken together this is just a bunch of talk. It is worth noting however that open discussion is now common about leaving the automatic "buy US Treasuries and agencies" lever pulled to full throttle. What would happen if China started to buy gold aggressively and then started to dump US treasuries? I think you can figure that one out.

Also from Jesse's Cafe Americain today I saw this statement I have seen a million times that makes no sense to me:
"In all seriousness, if China starts pressing this issue the US will have no choice but engage in the long overdue revaluation of its national gold reserves significantly higher. This would be one method of reducing the national debt to China and buying back some of the Treasury bonds.

Unfortunately in this case 'higher' would be a factor of x5 at least, or as high as an order of magnitude, x10."

All the gold ever mined is 145,000 tonnes (1 Tonne=32,150.75 troy ounces). At a price of $900 an ounce that is a dollar equivalent of 4.1 trillion dollars. The US values its gold a price between $40-$50 dollars an ounce. The US has reported it has 8113.5 tonnes of gold as reserves. If we revalue this at $900 an ounce, the US holds 234 Billion dollars in gold bullion. That is not even enough to bail out AIG! Unless the US has some crazy store of gold we do not know about (Yamashita's gold?) this will not help at all.

Think about that for one minute: the US could almost buy all the gold in the world for what next years budget (3.6 Trillion) is going to be! Still think gold at $2000 or $3000 an ounce is "stupid" or "insane"?

Of course the ultimate nightmare is that fiat money collapses and then you can kiss any gold, gold mining stocks, and foreign gold stashes bye bye. Just like in 1933-1934 gold will be outlawed so only bankers can hold it. We must hope for something in between.

The "Moment" has not Yet Arrived
Loyal reader Watchtower reminds me that in an article from February 16th I offered the following:
"It feels like we are coming down to "the moment" at last. I have had this feeling two other times over the past 6 months, so maybe I am off as usual. The slow realization that the banks are too far gone may be taking hold. Remember just last August when analyst's were optimistic after banks had "kitchen sink" write downs? Soon we should have a price tag presented as well. All told we should be on the hook for over 10 trillion dollars. What a country."

Of course a stopped clock is right twice a day, and since that post the markets have lost ground in a major way.

So is this what I meant by "the moment"? Sadly, No. I would have guessed that with the DOW, S&P and Nasdaq where they closed today that "the moment" had occurred. I am uneasy that what I called for, realization about the banks, has not taken hold and yet the markets are getting mauled.

Market Ticker has a scary post up today showing what will happen if we do not get all the crap figured out soon and stop playing bailout games. If you want to sleep tonight, you may want to wait until tomorrow to read it.

There is still too much "hide the bad assets", "keep homeowners in their homes", and "get credit lending going" optimism for "the moment" to occur. Until and unless we grow up and face what has to happen, there may be no end to the downside.
Note: a related story on CDS weapons we talked about can be found here.

The Only Stigma for the Banks is that they are Banks
The new TARP, TALF, PUKE or whatever acronym programs were supposed to have greater transparency so that taxpayers might get an idea how their futures were being wasted, I mean spent. At every juncture the FED and the Treasury have balked and outright denied any accountability or documentation for their actions.

It has slowly come to light that the whole AIG dilemma is that the US taxpayer must make good on contracts to European Banks (hat tip Capitalist Preservation). Add to this that Bernanke and Geithner are a tandem echo chamber and claim that to release information about which banks took what funds and where they went might cast "A Stigma" on those banks and cause them a disadvantage.

Well I am no chart technician, but I would ask the FED and the Treasury to review the following 6 Month Charts:

Bank of America

Wells Fargo

JP Morgan

I would ask the FED/Treasury just what more do you think could happen? Soon all the banks will be at $1 and then I guess there will be no disadvantage!

The only stigma that matters is that the banks are holding tons of bad debts and the government keeps trying to stall for time. The pure lunacy of the FED/Treasury argument is hard to understand. There must be more, so much more to all of this. One day we may find out and the "no criminal charges" clause the TARP bill had attached for officials involved will come back to bite us. Of course, if a government is dissolved and another put in place all prior agreements are null and void. I wonder very much if Hank Paulson still lives in the USA?

Have a good night.


getyourselfconnected said...

I could be motivated to leave a new DNA cipher puzzle text tomorrow night. One a bit more complicated if anyone is interested. I promise not to post the solution too quickly. Anyone want to see one?

Lisa said...

Do you think the China/Russia deal of pulling away from US treasuries and debt is connected with JP Morgan's decision to re-open their US Treasury Money Market Fund?

I would love to see a new puzzle! Connecting the dots of fraud in the government is getting old :)

One request: Don't post the solution until Sunday night, at least. Thanks!

getyourselfconnected said...

That is one vote, any more? Lisa's vote alone probably will result in a puzzle anyway!

Anonymous said...


In spite of Deninger's outrage about the OTC derivatives there are two sides of that argument, here is one:

Talk about epic battle to the death.

General Electric (GE) for example is clearly caught in the crosshairs of this trade and is just one of many wounded enterprises currently being sniped... (More here.)

NOTE: Before you all rage at the injustice make damn sure you note that these traders did NOT put these companies into their respective situations. The companies did that all by themselves through their reckless behavior. Economic turbo Darwinism ain't pretty, but it is absolutely necessary.

He's one of my daily reads, and pretty sharp on technicals.


watchtower said...

The thought of a new, more difficult DNA puzzle is kind of intimidating, but bring it on!

I read KD's post earlier today and thought of strapping on one of those sandwich boards that reads "THE END IS NEAR" and parading around town, but thought better of it : )
I'm hoping KD is off on this prognostication...way off.

This is way off topic but I can't resist, I noticed they are going to do a sequel to the movie "TRON".
I'm probably nuts but I loved that movie when it came out in 1982, it just seemed so new and different at the time.

Lisa said...

You are right that these companies stepped in the dung all on their own. KD can definitely be dramatic, but one point needs to be made here: Some of the CDS activity is akin to naked shorting. If naked shorting of stocks was legal, shorts could take down any company's share price. Since these companies are already on the brink, the existing CDS's are the final nail in the coffin, because they end up getting rating cuts. That leads to even more problems, etc., and next thing you know,...Bear Stearns is owned by JP Morgan with a US gov backstop. Just a thought.

Anonymous said...

Lisa that is very true and being the broker dealers can naked short sell stocks legaly just where would you think the attacks started from in the first place. The banks were waging war with each other, survival of the fittest unfortunately it got out of hand. Bear was taken out bewcause they were the only firm that refused to help clean up the LTCM mess, pay back is a mother as they say.


Lisa said...

I don't disagree, Kevin :)

Anonymous said...


I have a request for rock bloging Friday.
Chris Rea - The Road To Hell Full Version
It's on Youetube

Kind of where we are me thinks.

Anonymous said...

It's comin' dude. Don't know the "when", but no way do we get through this without a cluster of negative black swan events.

Got over a 1000 April 10 calls on AUY, many more thousands of actual AUY shares, GDX, and UGL. Keeping 100k in cash to try and catch the inevitable miner run-up if the Yamana call bet fails. Let the Ides of March bring it.