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Dear CIGAs,
Here are this morning’s news highlights:
1. There is no inflation. Oh yeah? There is $9.5 trillion in inflation that will transmit to prices for which there is no practical cure.
2. Not to worry, the Fed will drain as inflation starts. Oh yeah? The Fed is going to drain trillions from the world economy? That is total non-sense. There is no tool in the Fed’s power to pull off that miracle without causing a second disaster.
3. The mark to market rule of FASB 157 appear as if it is going to be modified so that value will be computer modeled according to assumptions of lines of income to maturity of SIVs, OTC derivatives. As a product of this value cartoon, no balance sheet for anyone from GE to the financials can be relied upon as factual. Who knows, maybe the world wants to be lied to.
4. Talk is ramping up as a PR campaign concerning the benefits of the US Fed buying tons of US Treasuries to hold rates. I might add as international demand for Treasuries falls that will threaten rates as that would force the borrowing to inland demand.
5. Housing starts are up which simply means that there will be more apartments and condos in inventory. Sales are in the trash can as building increases means more inventory. If builders have or can get building loans they would build them regardless of what the potential to sell is. Builders live off the building loan.
The COMEX gang was on gold the instant the PPI came out but that will continue until more deliveries are taken out of the COMEX warehouse.
Jim Sinclair’s Commentary
This has caused short term weakness, however it is a confirmation of the longer term uptrend.
Hyperinflation cannot be avoided and would sustain Alf’s objectives. There is no comparison here at all to what a top in the gold price looks like.
There is an axiom that if a market lets you out easily, you should stay. If a market offers you a ragged exit only, you should get out.
If Mr. Hulbert needs to find a person quite positive on gold he only needs to speak to me.
Where have all the gold bugs gone?
Commentary: Huge shift among gold timers from bull to bear
By Mark Hulbert, MarketWatch
Last update: 12:01 a.m. EDT March 17, 2009
ANNANDALE, Va. (MarketWatch) — Call it the retreat of the gold bugs.
Over the past three weeks, the editor of the average gold timing newsletter I monitor has hastily jumped off the bullish bandwagon. And a not insignificant number have taken the occasion to furthermore jump onto the bearish bandwagon.
At least from the point of view of contrarian analysis, this is good news for gold.
Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. The HGNSI’s latest reading is minus 16.5%, which means that the editor of the average gold timing newsletter is recommending that his subscribers allocate 16.5% of their gold portfolios to shorting the market.
Three weeks ago, in contrast, the HGNSI stood at 60.9%. So in just 15 trading sessions, the average recommended gold market exposure has fallen by more than 77 percentage points.
What sins did gold bullion commit to elicit this huge of a reaction? Failing to rise convincingly above the psychologically important $1,000 barrier, apparently: Spot gold in the futures market was able to close above that level for just one day (Feb. 20), and only barely at that ($1,001.70). And it then dropped.
Still, gold didn’t fall off a cliff. It’s currently just 8% below its Feb. 20 close, after all. Declines of that magnitude typically do not lead to such marked shifts in sentiment from bulls to bears.
Jim Sinclair’s Commentary
Well UBS? At least it makes for some good reading.
UBS Investment Research
Q-Series®: Gold
What is next for gold?
Where could prices go?
We believe that the current environment is one which can best be characterised as having a ‘low margin of error’ for central bankers; with the prospects for deflation/inflation as becoming more extreme. The high potential for policy error is generating considerable interest in certain assets which are perceived as ‘stores of value’ including gold.
Our econometric model indicates upside risk
Using a proprietary econometric model we have generated a probability cone for the future possible price path for gold. Using different environments for the level of inflation volatility, US dollar and absolute level of inflation we have determined that future returns on gold are likely to be positively asymmetric, with potential upside to US$2,500/oz.
Exposure to gold recommended
Our asset allocation team has moved gold to overweight from neutral. Given the broad uncertainties in the current macro climate we believe that investors should look to gold given its historic tendency to act as a hedge against these risks.
Equity performance
Our assessment of equity performance from 1900 suggests that gold equities are strong performers versus the market during periods of financial risk. During the 1929 crash, for example, Homestake Mining strongly outperformed the S&P. Preferred gold mining equities include Goldcorp, Anglogold and Lihir.
Jim Sinclair’s Commentary
AIG is not the only entity that will not repay one penny of the trillion the Treasury and Fed have provided (of course at no risk to the Treasury or Fed). What that means is you, I and our grandchildren are going to pay it back. Keep in mind the funds have not disappeared into a black hole somewhere. All that money has gone to the winners of the OTC derivatives. Yes, all that money.
AIG likely won’t be able to pay taxpayers back
The Associated Press
8:06 PM EST March 16, 2009
Pressure is mounting on the government to revise its bailout of AIG to ensure that taxpayers are repaid as much as possible of the $170 billion lent to the troubled insurer.
Experts warn we shouldn’t expect to get much back.
The problem stems from AIG’s obligations to its trading partners. So far, the hobbled insurance giant has honored in full its contracts with U.S. and foreign banks. It’s paid out more than $90 billion in taxpayer money to keep some of the biggest names in finance from losing money on bad bets linked to subprime mortgages and other risky assets.
As the cost of the rescue swells, experts says it’s becoming harder to envision a scenario in which the government could recoup its full investment. Even though the AIG payouts to major banks have angered critics of the bailout, it might be legally impossible to claw back any of the billions already doled out.
"A contract is a contract," said Russell Walker, a risk management professor at Northwestern University. "That money all went to people who bought protection from AIG."
The government agreed to uphold those contracts when it seized control of American International Group in September. It argued that failing to repay the debts of the globally interconnected company could cause catastrophic losses at big international banks, potentially toppling the financial system.
Scrutiny of AIG’s dealings with its trading partners comes after revelations over the weekend that the insurer plans to pay out tens of millions in executive bonuses. President Barack Obama on Monday accused AIG of "recklessness and greed." He pledged to try to block it from handing out the bonuses, which AIG insists it’s contractually obligated to pay.
Jim Sinclair’s Commentary
This is only one of the problems but it is one that can have the most significant impact on non Wall Streeters. It is a significant risk to the social order.
Many of these people are not sheep and will walk to the slaughter obediently, subserviently and quietly.
Hidden Pension Fiasco May Foment Another $1 Trillion Bailout
By David Evans
March 3 (Bloomberg) — The Chicago Transit Authority retirement plan had a $1.5 billion hole in its stash of assets in 2007. At the height of a four-year bull market, it didn’t have enough cash on hand to pay its retirees through 2013, meaning it was underfunded to the tune of 62 percent.
The CTA, which manages the second-largest public transit system in the U.S., had to hope for a huge contribution from the Illinois state legislature. That wasn’t going to happen.
Then the authority found an answer.
“We’ve identified the problem and a solution,” said CTA Chairman Carole Brown on April 16, 2007. The agency decided to raise money from a bond sale.
A year later, it asked Illinois Auditor General William Holland to research its plan. The state hired an actuary, did a study and, on July 17, concluded that the sale of bonds would most likely result in a loss of taxpayers’ money.
Thirteen days after that, the CTA ignored the warning and issued $1.9 billion in bonds. Before the year ended, the pension fund was paying out more to bondholders than it was earning on its new influx of money. Instead of closing its funding gap, the CTA was falling further behind.
Jim Sinclair’s Commentary
This is also securitized as OTC derivatives. It is another problem to add to the pile of items not going away.
U.S. credit card defaults rise to 20 year-high
Mon Mar 16, 2009 6:15pm EDT
By Juan Lagorio
NEW YORK, March 16 (Reuters) – U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express Co and Citigroup amid a deepening recession.
AmEx, the largest U.S. charge card operator by sales volume, said its net charge-off rate — debts companies believe they will never be able to collect — rose to 8.70 percent in February from 8.30 percent in January.
The credit card company’s shares wiped out early gains and ended down 3.3 percent as loan losses exceeded expectations. Moshe Orenbuch, an analyst at Credit Suisse, said American Express credit card losses were 10 basis points larger than forecast.
In addition, Citigroup Inc — one of the largest issuers of MasterCard cards — disappointed analysts as its default rate soared to 9.33 percent in February, from 6.95 percent a month earlier, according to a report based on trusts representing a portion of securitized credit card debt.
"There is a continued deterioration. Trends in credit cards will get worse before they start getting better," said Walter Todd, a portfolio manager at Greenwood Capital Associates.
Jim Sinclair’s Commentary
The Talking Heads, although somewhat cautious, are using the increased building of condos and apartments as an indicator of a bottom. They are forgetting the following.
Corporate meltdown leaves renters in limbo
Large apartment complexes abandoned to receivership and unruly weeds
By Kari Huus
updated 3:26 a.m. PT, Mon., March. 16, 2009
Nicholle Krause first noticed the weeds sprouting in the usually well-manicured grounds of her 320-unit apartment complex in Chandler, Ariz., in December. Soon, signs of neglect began multiplying: Garbage spilled over from the dumpsters, the water in the swimming pool turned a slimy pea green and the grounds were infested by swarms of bees — especially alarming because Krause is severely allergic to bee stings.
“I couldn’t even go outside to enjoy where I live,” said Krause, a 21-year-old office worker who pays $827 a month for a one-bedroom apartment with garage space. “I shouldn’t have to pay $800 a month to live in a … hole.”
It wasn’t until early March that Krause and other residents learned why the complex – the alluringly named Alante at the Islands — was rapidly going to seed. The property owner, Irvine, Calif.-based Bethany Holdings Group, had abandoned the complex and a dozen other large rental properties in the greater Phoenix area after defaulting on hundreds of millions of dollars in loans.
Jim Sinclair’s Commentary
Seems the Greeks take financial misconduct, or plain stupidity, somewhat more seriously than New Yorkers.
Greek extremists threaten more bombings after Citibank attacks
ATHENS (AFP) — A Greek extremist group known for its violent attacks has threatened to carry out more bombings in the wake of two recent strikes targeting US banking group Citibank.
In an eight-page proclamation published in Greek weekly Pontiki, far-left group Revolutionary Struggle said its aim remained to foment "revolution" and use the global economic crisis against capitalism.
"We intend to continue timed (bomb) attacks," the proclamation said.
"We need to rid ourselves for good of all the scum of economic and political power so that humanity can free itself from these criminals.
"We must create (a mass movement) here and now so that the crisis can become the system’s tomb," it added.
Greece’s most dangerous far-left organisation earlier admitted responsibility for two attacks against Citibank targets in north Athens that caused no injuries.
Jim Sinclair’s Commentary
This is hard to believe.
Should Geithner resign it would be critically bad for expectations of Obama’s ability to lead any business recovery.
Internationally, it would be an embarrassment to his administration that would be difficult if not impossible to overcome.
Geithner "Out Of The Loop," Resignation Talk Begins
Henry Blodget
Mar. 17, 2009, 2:25 PM
A week ago, we lost patience with Tim Geithner and called for him to be fired. He won’t be fired, of course–throwing him under the bus only a month or so into his tenure would embarrass the Obama administration–but we have now heard the first public discussion of a possible resignation.
Why might Tim Geithner resign?
· He still has no coherent plan to fix the banking system
· He has convinced no one that he’s the right man to lead us out of this.
· He helped design the past administration’s failed bailouts
· He was the architect of the original AIG bailout
· He tacitly helped cover up the AIG "counterparty" bailout beneficiaries for 6 months
· He approved the latest round of AIG bonuses last week (according to AIG)
At the very least, Geithner needs to answer for his role in the original AIG bailout, which has been a disaster, as well as the counterparty cover-up.
In September, Geithner and Hank Paulson engineered an AIG bailout in which Paulson’s firm (and one of Geithner’s patrons on the New York Fed) secretly received $13 billion of taxpayer money that no taxpayer was told about. Now that taxpayers have found out about it, they are justifiably pissed.
In any event, Republicans have been emboldened by Geithner’s stumbles, and they’re getting closer to calling for his head:
Jim Sinclair’s Commentary
Take your pick. There are so many black holes out there that our financial leadership has hit the panic button (SDRs). This speaks quite poorly for the grand hope that this new administration can save the USA (or world) from anything.
Freddie Mac: The Government’s Next Black Hole?
By STEPHEN GANDEL
Tuesday, Mar. 17, 2009
AIG is to date the most expensive corporate bailout in American history, requiring $180 billion in government funds. But it may soon have competition. Last week mortgage giant Freddie Mac said it had lost $50 billion in 2008 alone. A look at the company’s books suggests the government will have to spend at least triple that much to save the financial firm from collapse. If the housing market worsens, the tab could be even larger.
"Freddie’s portfolio of [mortgage] insurance is more risky than the market was led to believe," says Paul Miller, an analyst at FBR Capital Markets. Sister company Fannie Mae lost even more last year, with $58.7 billion of red ink. But Fannie was better capitalized than Freddie going into the credit crunch. So even though Freddie by many measures is smaller than Fannie, the problems at Freddie will probably end up costing more.
Citigroup and other banks have also lost money and will need more capital to survive. But in those cases it’s not clear who will take the hit — shareholders, bondholders or the government. In the cases of AIG, Freddie Mac and Fannie Mae, however, there is no question where the money will come from. Freddie and Fannie were taken over by the government and put into conservatorship last fall. AIG is currently 80% owned by the government. The losses at those companies are now taxpayer losses.
And like AIG, Freddie has had to go back to the government a number of times with cup in hand. The mortgage giant has already received $14 billion in government aid. After a fourth-quarter loss of $24 billion, the company said it needed an additional $31 billion from the government to keep the lights on.
