Dear Jim,

This article from Bloomberg reinforces the point that I made yesterday in our weekly email that banks will be forced to buy government bonds to help the government get rid of them. The forced bond purchases may happen in several countries, not just the US.

Respectfully yours,

Monty Guild
www.GuildInvestment.com

Dear Monty,

I will give you three guesses as to why the Fed/Treasury is reluctant to take back TARP money. You will get it on the first guess.

The problem is the size of the US Treasury markets. It will take a few trillion dollars of bond buying in FRONT door (The Federal Reserve buys Treasuries) or BACK door (Fed/Treasury forcing banks to buy Treasuries with Federal bailout money) Quantitative Easing to offset the long dated Treasury bear market. Whether they can offset it is a big maybe.

Jim

BOE’s Tucker Says Regulators Should Require Bond Bank Buffers
By Svenja O’Donnell and Jennifer Ryan

May 28 (Bloomberg) — Global regulators should force banks to hold assets such as government bonds as a buffer after the financial crisis exposed a “shocking” lack of liquidity at some U.K. lenders, Bank of England official Paul Tucker said.

“Regulators should define the ‘liquidity buffer’ to comprise high quality securities that can reliably be traded or exchanged in liquid markets, including in stressed circumstances,” Tucker, the bank’s deputy governor for financial stability, said today in Tokyo. “In practice, that would mean focusing on government bonds in many economies.”

Prime Minister Gordon Brown has committed billions of pounds to saving Britain’s financial system as the global turmoil plunged the U.K. into a recession. His government has nationalized banks from Northern Rock Plc in 2007 to Dunfermline Building Society this year, and bought stakes in larger lenders including Royal Bank of Scotland Group Plc.

“It has been shocking over the past year or so to discover how many medium-sized banks and building societies did not hold government bonds or other very high quality assets; or if they did, how many did not have a regular presence in the gilt repo market,” Tucker said. “Turning up in the core secured-funding markets for the first time for years is an absolute giveaway of distress. All that has to change.”

The liquidity squeeze created a “vicious spiral” where the credit famine fed the recession and in the process impaired the quality of banks’ loan books, Tucker said. “It would have been better if, somehow, we could have preserved the liquidity of the markets.”

More…

Jim,

North Korea’s threats seem to be timed perfectly with the arrival of Russian warships in the Persian Gulf. Could this be just mere coincidence, or are we on the verge of World War III?

Best,
CIGA Black Swan

Dear Black Swan,

We have been in World War lll for quite awhile now.

The battlefield is everywhere.
The lines of demarcation are nowhere.
The rules of engagement are non-existent.
The strategy is economic, breeding out as well as military.

North Korea and Russia are not the likely culprits to make it more conventional in a nuclear age.

The following is your answer:

1. Israel makes a major miscalculation.
2. Pakistan goes Taliban
3. Turkey is a victim.

Regards,
Jim