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ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Posts Tagged ‘MF Global

Gold, Eurodollars, and the Black Swan that will devour the US Futures and Derivatives Markets

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by Jesse at CaféAméricain
Posted December 3, 2011

THE EURODOLLARS ESTIMATE IN THE CHART BELOW IS BASED ON THE BIS BANKING ESTIMATES from Commercial Banks and may not include official reserves held by Central Banks. As you know the Federal Reserve stopped reporting Eurodollars some years ago, with the consequence that it also stopped reporting M3 money supply. I like to think of Eurodollars and banking system derivatives as the Fed’s off-balance-sheet method of monetization and policy implementation, with plausible deniability.

Swap lines are provided to other Central Banks, and they in turn make the loans to their member banks, and from there to their customers. So this eurodollar creation is made outside the real domestic economy, and therefore has no immediate effect on domestic money supply and prices at the end of the money chain. But the effect is there, and the smart money closer to the financial system sees it coming. I do not know if the Fed’s swap line activity actually shows up immediately in their Balance Sheet and therefore the Adjusted Monetary Base. But I think it is fairly obvious that if swaps are used to create dollars by foreign central banks, who in turn loan those dollars to their own members, the impact of that broader dollar creation will only be felt with a significant lag in the domestic US economy. But it will be felt at some point.

When the Fed was tracking Eurodollars, I believe that they were not counting certain assets, or liabilities from the banks point of view, as money.  What exactly those assets might be and how liquid they are is a open question.  How much of them were held in Agency debt, and how much in Treasury debt?  Is a liquid obligation held by a foreign source part of the broad money supply, or not?  Since it can be quickly converted into dollars, and then into another currency, leaves little question that it is potential money at least.

At least part of the problem being faced by Europe in this crisis is the sharp point of the deleveraging of US assets underlying dollar denominated debt.   And if foreign confidence in the US dollar debt breaks, the losses would be daunting for the holders of that debt, so there will first be a rush into Treasuries and away from Agency debt and CDOs.  This will be like the ocean retracting, causing people to flock to the shore in wonder at the cheapness of the debt.  But eventually the returning tsunami of US dollars may very well swamp the Fed’s Balance Sheet and the domestic US economy and the savings of many. The hyper-inflation of financial paper is happening quietly and  off the books. The growth rate in derivatives held by the Banks is mind boggling. And how this will manifest in the real world economy is not fully known. A good sized chunk of the financial system may simply vaporise.  And I suspect that the policy makers will heavily allocate the damage to the least powerful members of the private sector.

Ownership of the real economy will continue to be concentrated in fewer and fewer hands. Stagflation is the most likely outcome because of this lack of reform and the rise of a self-serving oligarchy. As for the US Dollar, as I have said on numerous occasions, inflation and deflation are at the end of the day a policy decision. Period. Those who see a hyper-deflation or a hyper-inflation as inevitable elude my knowledge of the facts as they are. The Fed owns a printing press, and it uses it selectively.

Speaking of lags, I think the unusually long lag between the growth in Eurodollars and the price of Gold can be attributed to the gold sales programs by the Western Central Banks. Once those programs were suspended, and the Banks turned again into net buyers, the gold price rose dramatically. The most recent Eurodollar operation of the Central Banks in relieving the Dollar short squeeze in euro is not yet in the totals.

It should also be noted that there are other correlations one can use in determining the gold price, most notable ‘real interest rates.’ However, there are linkages amongst all the variables, given a non-organic increase in the money supply and artificially low interest rates for example being among them. So, when will the price of gold stop rising? Most likely when the Central Banks stop printing money, and return to transparently set market based interest rates and a productively reformed financial system. ‘Not on the horizon’ does come to mind.

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As the world crumbles: The ECB spins, the Fed smirks, and US banks pillage

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by Nomi Prins
Posted November 21, 2011

OFTEN, WHEN I TROLL AROUND WEBSITES OF ENTITIES LIKE THE ECB AND IMF, I UNCOVER LITTLE OF STARTLING NOTE. They design it that way. Plus, the pace at which the global financial system can leverage bets, eviscerate capital, and cry for bank bailouts financed through austerity measures far exceeds the reporting timeliness of these bodies.

That’s why, on the center of the ECB’s homepage, there’s a series of last week’s rates – and this relic – an interactive Inflation Game (I kid you not)  where in 22 different languages you can play the game of what happens when inflation goes up and down. If you’re feeling more adventurous, there’s also a game called Economia, where you can make up unemployment rates, growth rates and interest rates and see what happens.

What you can’t do is see what happens if you bet trillions of dollars against various countries to see how much you can break them, before the ECB, IMF, or Fed (yes, it’ll happen) swoops in to provide “emergency” loans in return for cuts to pension funds, social programs, and national ownership of public assets. You also can’t input real world scenarios, where monetary policy doesn’t mean a thing in the face of  tidal waves of derivatives’ flow. You can’t gauge say, what happens if Goldman Sachs bets $20 billion in leveraged credit default swaps against Greece, and offsets them (partially) with JPM Chase which bets $20 billion, and offsets that with Bank of America, and then MF Global (oops) and then…..you see where I’m going with this.

We’re doomed if even their board games don’t come close to mimicking the real situation in Europe, or in the US, yet they supply funds to banks torpedoing local populations with impunity. These central entities also don’t bother to examine (or notice) the intermingled effect of leveraged derivatives and debt transactions per country; which is why no amount of funding from the ECB, or any other body, will be able to stay ahead of the hot money racing in and out of various countries.  It’s not about inflation – it’s about the speed, leverage, and daring of capital flow, that has its own power to select winners and losers. It’s not the ‘inherent’ weakness of national economies that a few years ago were doing fine, that’s hurting the euro. It’s the external bets on their success, failure, or economic capitulation running the show. Similarly, the US economy was doing much better before banks starting leveraging the hell out of our subprime market through a series of toxic, fraudulent, assets.

Elsewhere in my trolling, I came across a gem of a working paper on the IMF website, written by Ashoka Mody and Damiano Sandri,  entitled ‘The Eurozone Crisis; How Banks and Sovereigns Came to be Joined at the Hip” (The paper does not ‘necessarily represent the views of the IMF or IMF policy’. )

The paper is full of mathematical formulas and statistical jargon, which may be why the media didn’t pick up on it, but hey, I got a couple of degrees in Mathematics and Statistics, so I went all out.  And it’s fascinating stuff.

Basically, it shows that between the advent of the euro in 1999, and 2007, spreads between the bonds of peripheral countries and core ones in Europe were pretty stable. In other words, the risk of any country defaulting on its debt was fairly equal, and small. But after the 2007 US subprime asset crisis, and more specifically, the advent of  Federal Reserve / Treasury Department construed bailout-economics, all hell broke loose – international capital went AWOL daring default scenarios, targeting them for future bailouts, and when money leaves a country faster than it entered, the country tends to falter economically. The cycle is set.

The US subprime crisis wasn’t so much about people defaulting on loans, but the mega-magnified effects of those defaults on a $14 trillion asset pyramid created by the banks. (Those assets were subsequently sold, and used as collateral for other borrowing and esoteric derivatives combinations, to create a global $140 trillion debt binge.) As I detail in It Takes Pillage, the biggest US banks manufactured more than 75% of those $14 trillion of assets. A significant portion was sold in Europe – to local banks, municipalities, and pension funds – as lovely AAA morsels against which more debt, or leverage, could be incurred. And even thought the assets died, the debts remained.

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Gold & Whirlwind Crisis

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by Jim Willie CB
Posted Thursday, 17 November 2011

WHAT AN INCREDIBLE WHIRLWIND OF CRISIS from seven foul winds around the globe. Most emanate from Europe, which is far from its climax in crisis. Three steps will lead to full blown eruption, the first Italy with rising bond yields and a bank run, the second Spain with rising bond yields and admission that banks are far more insolvent than recognized, and third the failure of all three largest French banks as the principal swine creditor. In fact, a great split has occurred, as France has been cut off from the future world by Germany, which looks East to Russia and China. The Berlin leaders will not be needing French squires to carry their bags, but instead will watch as Paris becomes the appointed leader of the PIIGS. As the most exposed banks to Southern European sovereign debt, pig slop of immeasurable weight is tied around the laced Parisian necks. The common link across the Atlantic pond is derivative corruption.

The Europeans are doing their best to force feed a convenient but cockeyed definition of a debt default event. The Americans resort to old fashioned theft, calling it missing funds, blaming the crisis, while breaching the sacred segregated client fund directive. The crisis struck the US shores with the hidden JPMorgan chamber implosion and urgently needed theft, whose visible face is the MF Global heist and failure. My belief is that JPMorgan used its MFG patsy to anchor derivative trades, that just happened to be long sovereign debt in Europe. Nobody in his right mind, even a Corzine of GSax pedigree would place such large wrong trades unless obligated as a syndicate cog in the machinery. The big US banks will sit on the bankruptcy boards and decide the fate of victim accounts without client representation in a full scale insider exercise that makes a mockery of justice. That has been the American norm.

Witness the middle stage of the collapse of the COMEX, which has lost all trust as segregated client cash accounts vanished in a vast ongoing commingling campaign. One must conclude that JPMorgan must have really needed the money. The thought of a Madoff Redux comes to mind to the alert but weary. The MF Global vanished funds will eventually be measured over $3 billion. The actual Madoff pilfered funds totaled $150 billion, triple the more palatable figure often quoted. The locations of the missing funds have commonality, the ruling untouchable syndicate. Gold smells the destruction of the monetary and banking systems, aggravated by Western recession. Gold smells new application of debt to repair old failed debt structures, where central bankers chase their tails. Gold smells the vast reconstruction project for the giant Western banks, not too big to die of internal rot, only too big to let fail by a gavel.

The twisted bizarre attempt to control commodity prices by presiding over a series of negligent policies is coming to an end. The Western recession is too much for the insolvent banks to bear. The US banks have real estate debt rot, but the European banks have both real estate debt rot and PIIGS debt rot. In truth, the US banks share great risk from across the pond. The thrust of the French-based central bank over the pen of swine cannot be far from a formal announcement. Not quite what the highbrow French had in mind for leadership. Better to rule in clubmed pig slop than serve as lackey in the teutonic core.

GREAT CREDIT SWINDLE

The death of the monetary system has its main motive in the refusal of governments either to manage finances responsibly or to repay debt in the usual manner. They accumulate larger debts and plan the swindle of inflation in return. Their only viable approach, hardly a solution, is to inflate debt and thus to reduce its burden. Creditors feel betrayed, seek defensive measures, like to cut off credit and loan up quietly on gold, while lying about reserves. The creditors are not involved in the important decisions to debase the currency. Those decisions are made unilaterally by the debtors. A run on the US Treasury Bonds is occurring by angry foreign creditors. The USDollar is kept afloat by some secret corners. The pages of history are littered with examples of government debt default, but more often with the public paying for debt reduction in basic price inflation. The debts accumulated by many governments large and small cannot be repaid. History shows that tangible assets like Gold & Silver protect from the worst economic consequences. For the current financial crisis, only one pathway seems likely, although painful. The system cannot be remedied, only patched over. Vast inflation is the only politically viable method of repudiating these unmanageable obligations. Of key importance is the velocity of money in determining whether or not inflation turns into hyper-inflation, which requires final demand not to falter badly. Hyper-inflation requires sustained activity like an engine, which cannot stall. Higher price inflation is coming like night follows day, but probably not an extreme case. It will be painful though, since the cost structure will be the primary damage center. The US Consumer Price Inflation runs at 11.1% in the honest broker Shadow Govt Statistics calculation, which is painful enough.

The retreat is well along, the isolation to the hyper inflation machinery well along, the sovereign bond ruin well along. The Fed was hit with withdrawals of $83.3 billion on November 2nd, the largest withdrawals coming from its deposit accounts. This single day removal was the largest since February 2009, and not associated with quarterly tax payments. The withdrawals are being demanded by countries angered by USGovt policies, like China, Russia, Latin American, and other Asian players. It is only the beginning of a bloodletting. A run on USTBonds is in progress, covered up by Quantitative Easing and Operation Twist, programs given innocuous names but integral to the grand debasement process underway. The bond exodus is complemented nicely to significant removal of depository funds from the major banks in the ‘Move Your Money’ movement. Despite pleading by the big US banks for customers not to extract their money, impressively 650 thousand customers moved a total $4.5 billion dollars out of the big banks. The damage done is 10x to 20x, due to fractional banking practices. The funds went into smaller banks and credit unions in October.

TOO BIG TO FAIL: ASSURED FAILURE

The entire concept of Too Big to Fail is a hangman’s noose around the US banks and the banking system. The debate over cause or effect is curious. The related propaganda is obscene, if not comical. The smear campaign against gold will turn absurd, before the USDollar breaks permanently on the world stage, in the form of rejection in international commerce. It is called the Dollar Kill Switch, and it will be applied to the crude oil market. Conformity with the Too Big To Fail doctrine is synonymous with the path to systemic failure. Charles Hugh Smith sees the destructive force clearly. The absent liquidity of the biggest Western banks assures the systemic failure itself. Smith wrote, “The irony is that the propping up of a deeply intrinsically pathological and destructive financial system is not saving the economy, rather it is the reason the economy is imploding. The Big Lie technique of propaganda is to reverse the polarity of reality: we are told up is down until we believe it. We are told that liquidating the overhang of bad debt, leverage, and hedges would destroy the world as we know it. The truth is that keeping the zombie system from expiring and covering up the corruption with propaganda is actually destroying the world as we know it. Thus the collapse of the current financial system of central banks, pathological Wall Street, and insolvent banks would be the greatest possible good and the greatest possible positive for the global economy and its participants.”

G-20 SUGGESTION LEGITIMIZES GOLD

The G-20 group actually suggested that Germany donate a block of gold reserves for European banking system stability, as in to fortify the stability fund. Obviously the Germans told them to get lost and mind their own business. The German nation has been the ox & yoke to pull the Southern European cart for a decade. They have had their fill of seeing savings drained! The emerging nations showed a mix of chuptzpah and ignorance. Look for the PIIGS nations instead to forfeit their central bank gold in the next several months, part of the Chinese discounted purchase of sovereign bonds. The Chinese are not stupid, careful to put hooks in the deal. In a bold stroke, the G-20 finance ministers actually demanded that German Gold reserves be used to backstop the EFSFund for bank bailouts. The backward irony of the story is that Germany will in no way whatsoever hand over Gold bullion to stabilize a system it finds revolting on a beneficial one-way street. In doing so, the G-20 Ministers actually legitimized Gold as the premier asset. The fund seeks EUR 1 trillion but in reality needs EUR 3 trillion, possibly supplied via leverage. Much confusion has circulated around the story, not fully confirmed. But Reuters cited that, “The Frankfurter Allgemeine Sonntagszeitung reported that Bundesbank reserves, including foreign currency and Gold, would be used to increase Germany’s contribution to the crisis fund, the European Financial Stability Facility (EFSF) by more than 15 billion Euros ($20 bn).”

The recipient of the alleged transfer would be the most insolvent of global hedge funds, the European Central Bank. One must suspect that no pledge was made, and a trial balloon was floated. It was promptly shot down. Germany has lost its appetite to make huge annual donations to support an unjustified standard of living for Southern Europe, which grossly lacks industry, a strong work ethic, and ability to collect taxes. Those nations abused the low Germanic interest rate, built housing bubbles, perpetuated young pension benefits, permit tax evasion, and face ruin. Germany will no longer sacrifice Euros at the foot of any PIIGS altar, plainly stated. Conclude that the EuroZone, the Euro Central Bank, and the European Financial Stability Facility are all dead broke and insolvent, and worse, have zero credibility in the capital markets. The real ugly controversy comes soon when collateral placed in return for grandiose aid will be lost, including some central bank gold bullion. The European Commission has no voice either, having pandered to the bankers.

GOLD PROPAGANDA & REALITY

The CME has advised that 1.42 million ounces of registered COMEX silver inventory is unavailable for delivery due to MF Global bankruptcy, as well as 16,645 registered ounces of gold also unavailable for delivery. That is a lot of bullion in breach of contract. The lawyers will be lined up very quickly to carve the metals exchanges into pieces. The COMEX is totally broken, unable to honor basic contracts, unable to deliver from committed legal contracts, unable to even protect client funds from commingling grabs. But during a period when investors cannot protect themselves, an ambush could easily come in the next week to push down the Gold price in the usual manner, via naked shorting. As the grandiose destinations become clear for vast new monetary creation, the Gold & Silver prices will run higher. The big immediate questions center on how much dithering the banker elite that run our governments will permit with malignant motive before the decisions are made, and how much economic deterioration will be permitted to contain commodity prices before the decisions are made. The destinations are bank bailouts for toxic sovereign bonds, recapitalization of the big Western banks, coverage of new USGovt debt, and economic stimulus. A few $trillion will be needed, as estimates by well-informed veterans mount like a stack of white papers. The economic damage is being done, even though the crude oil price has finally zipped above the $100 mark.

Ironically, as the orchestrated Libyan liberation war finished, the crude oil price has moved from $77 in early October to $102 today. Demand is not coming from economic growth, but from hedging against the ruined major currencies, all of them. Global QE is alive! With the gold market in turmoil from grand Asian raids, from absent COMEX inventory, from snatches of GLD inventory, from pilfered COMEX fringe accounts, from continued naked shorting, the safer bet with quicker payoff has been crude oil hedges. But Gold will have its day, and Silver will scoot through the opened phalanx as usual. The delay in reckoning is laden with frustration, but the day of $2000 is coming. It is something the bankers cannot stop. They are so busy kicking cans down the road, they do not see the Rotweillers and Dobermans sniffing their trails.

ITALY IS KAPUT, CONTAGION WILD

The biggest and most important danger signal for complete eruption of the Eropean financial crisis is the Italian sovereign bond. Their yield surpassed the 7% mark to sound great alarms, completing a Jackass forecast over the last several months. This level is the recognized crisis signal, the call to arms, the call to remove deposits, the call to demand collateralized loans. Their sovereign bond yield has zoomed upward in response to higher margin requirements. Italy is the next Greece, which was a crisis prelude. Italy scares the American and European central bankers witless. The Italian Govt Bond yield remained for 40 days above the 5% mark before it hit 6% two weeks ago. Its rise has accelerated, as the panic widens. The Italian yield suddenly surged past 7% with haste last week, reaching 7.5%, setting off shrill alarms. The Italian leadership is in question, its Prime Minister to be a victim. The 10-year yield went below 7% only because of heavy emergency buying by the Euro Central Bank, against their stated wishes. The Italian banks are far weaker than they reveal. The next PIIGS domino is soon to fall, for certain to take down Spanish Govt Bonds also. The new head of the EuroCB, the resplendent GSax pedigreed Mario Draghi, must cover the debt or watch the European Monetary Union crumble in a sea of fire. The central bank must make overt commitments of magnitude. If the crumble happens upon inaction, expect 20 Lehman events with numerous bank failures, starting with France. The conflagration would extend to London and New York.

The market is stating that Italian Govt repayment of rollover debt is in crisis mode, highly unlikely. Italy must roll over more than EUR 360 billion (=US$490 bn) of debt before end 2012. The borrowing costs for Italy have become highly burdensome, if not crippling and destructive. The debt rollover in upcoming auctions stands as the immediate event to watch. Lenders do not wish to hand money to Italy for servicing past debt interest, good money after bad. Even if budget reforms succeed, the austerity measures will constitute more poison pills that assure a faster economic recession from cut projects, more unemployment, and hostile response by the public, like worker strikes. Recall Jackass comments made a year ago. The prevailing opinion was that Italy had favorable debt ratios, like cumulative debt to GDP, like annual deficit to total budget. My objection was that ratios mattered little, when the required debt volume to finance was too large in a crisis filled bond market. My forecast was for Italy to erupt along with Spain eventually. That viewpoint has turned out to be correct.

Barclays has declared that Italy is finished kaput. The next Greek ruin on the plaza square is happening in Rome. The bond market is rejecting Italy loudly. Italy has dragged its feet for two months, rejecting warnings, refusing budget cuts, while its prime minister has given defiant messages loaded with denial. He even accused financial journalists of causing a run on their bonds. Time has run out on Italy. Watch for France to catch the viral contagion, being a major creditor. The Euro Central Bank is the only buyer of Italian Govt Bonds. They are the focus for action. When Italy erupts, it will spread to Spain first, and then quickly to France as its primary creditor. The nation of Spain is not in the news much at all, but it will be next year, just like Italy with the same type of problems, but compounded by a bigger housing bust. The research staff at Barclays in London has declared that Italy is formally finished and cooked, as they put it “Italy is now mathematically beyond the point of no return.” The Greek tragedy has finally struck Italy. Expect violence on the streets of Rome and other cities, an Italian tradition where innocuous brands of communism have splintered roots.

BANK RUN NEXT FOR ITALY

An invisible bank run is occurring in Italy. Their banks are trapped, attempting to de-leverage on a perilous tightrope forced by tightened bank reserve requirements. They have developed a big dependence on Euro Central Bank funds. The Credit Default Swap market indicates an expected Italian default. Next the bank deposits will exit. Italian banks have grown overly dependent on the European Central Bank. They borrowed EUR 111.3 billion (=US$152 bn) from the central bank at the end of October, up from EUR 104.7 billion in September and a smaller EUR 41.3 billion in June, as per Bank of Italy data. The five biggest lenders accounted for 61% of the country’s draw on ECB funds in September, double that of January. The banks include UniCredit, Intesa Sanpaolo, Banca Monte dei Paschi di Siena, Banco Popolare, and UBI Banca. These distressed banks must reduce their debt load in a highly dangerous bond environment marred by distrust and volatility. The decline in Italian Govt Bonds has rendered great damage to the private banks, reducing their reserve ratios and eroding loan collateral devoted to support regular business credit.

The Italian banks are trapped in the Italian sovereign debt securities. The austerity plans being forced will ensure a recession, thus even more losses for the banks. The run on Italian banks is just beginning, to become more visible in a couple months. The bond market expects some calamities. The debt insurance for individual banks demonstrates the extreme level of distress. European private banks are dumping sovereign bonds, hampering the already strained market. They are forced to comply with tougher newly enforced BIS reserves requirements. They are fighting to survive, but exposing the sovereign bonds as junk, and worse, dragged down by old real estate debts just like in the United States. The entire system is collapsing without potential remedy unless all major banks are liquidated, and that will never happen. They house the political power center, and the bond fraud laboratories. At the heart of the vulnerability is the fractional banking system itself. Insolvency arrives quickly and only worsens until a run occurs. Then comes rampant bank failures.

THE EUROPEAN BANKING SYSTEM IS TOPPLING. IT CANNOT BE STOPPED. GREAT CONTROVERSY WILL RESULT. MOST LARGE BANKS ARE POSTING HUGE LOSSES FROM GREEK EXPOSURE. THE NEXT ROUND OF LOSSES FROM THE OTHER P.I.I.G.S. NATIONS WILL BE AN ORDER OF MAGNITUDE LARGER. THE EXTREME BREAKDOWN WILL OCCUR WHEN THE BIG FRENCH BANKS GO BUST.

Even Citigroup chief economist Willem Buiter recognizes the extreme risk and dire nature of the situation in Europe. He said, “I think we have maybe a few months, it could be weeks, it could be days, before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy, which would be a financial catastrophe dragging the European banking system and North America with it. So [the central banks] they have to act now.” Look for enormous Dollar Swap Facility usage for covering PIIGS bonds, in particular from Italy and Spain. The French Govt Bonds will be next under attack, like in January. Their yields remain low, but they are rising, and the Bund spread is widening. My guess is that the swap facility is already being tapped in heavy volume, on days the Euro currency rises especially.

COUP DE GRACE IN FRANCE

France introduced budget austerity, a surefire time bomb for the big banks that teeter in Paris. Nothing was learned from Greece, where recession is accelerating from the poison pills. The French banks bear the largest load for Italian Govt debt, more than double the German load and almost half the entire European load. France is tied with the lethal umbilical cord from Italy. The Dexia exposure to Greece and Italy has been detailed. German banks are not immune from big losses, nor immune from the financial crisis. Commerzbank suffered a big loss, typical of the German banking sector. With all the attention last month given to the big French banks, the weak links inside the German banking system are only recently coming to light. They are less but still sizeable. US banks are deeply exposed to European Govt debt default insurance. The risk is not offloaded, but rather shared and joined. The risks are rising astronomically for American banks, while large commitments are made, and partnerships are formed. The US press blithely reports a condition of near immunity of US banks from the financial crisis separated by an ocean. Great controversy lurks on insured debt.

If the regional recession does not pull France down, its banks will. They will succumb to horrendous Italian exposure. Notice the French banks have three times as much debt with Italian companies, versus Italian Govt debt. As the Italian Economy slides rapidly into recession, a considerable portion of the nearly $400 billion in total debt exposure will go rotten. One can see that Italy is Greece times seven. German banks are also on the hook for Italian sour grapes, but less than half the total.

The Spanish Govt Bond is the fuse that lights the Semex behind the French bank failures. Their bond yields surged past 6% as the contagion spreads. The bonds of Spain will endure similar pressures as Italy, deep scrutiny, and relegation to the Euro Central Bank outhouse, the major bagholder. The banking system in Spain operates on fairy tale reserves. The Spanish Economy is weighed down by 23% jobless rate. All PIIGS nations will be crushed by the crisis, no nation spared. Spain has officially entered the red zone as their sovereign bonds have been targeted. They have solved nothing, dealt with nothing, and downgraded no bank assets, preferring to live in a make believe world. While the Italian Govt Bond yield has relaxed toward levels below 7%, the Spanish Govt Bond yield has risen steadily since August from 5% to above 6% in an unrelenting march. It took five weeks to breach the 6% level, once the 5% level was breached. The Euro Central Bank is reported to be actively purchasing sovereign bond from both countries, to stem the crisis. Their efforts are futile, since private bank sales rise to supply the central bank at the window. After the official purchases, the private banks are highly reluctant to purchase anew, since that bond market has been badly tainted.

THE CARDIAC MEASURES

The Italian & Spanish Bovt Bonds are in big trouble, but the sleepy story is how France will soon join the PIIGS as the leader in the toxic sloppy pen where monetary paper feces spews openly. Some heavy damage is being quietly done on French bonds, where the banks hold much of their own national debt and the toxic Italian debt. Some claim it is game over with Italy on the ropes. My view is that the game is almost over, as the Italian debacle has spread quickly to Spain. But the main event in the recognized implosion is the sudden failure of all three of France’s big banks. When Societe Generale, BNP Paribas, and Credit Agricole all go bust in a sudden burst wave of insolvency, illiquidity, and recorded losses to their artificially lifted balance sheets, the game is truly over. Then and only then, the great reconstruction of the European banking system will begin, complete with $3 trillion in freshly printed money. The Gold market comprehends this fact, and anticipates it fully, with patience. The MF Global corrupted chaos has put a new log in the golden road.

REDEFINED DEBT DEFAULT

The bank leaders have attempted to redefine debt default, as part of the bailout fund negotiations. This is the latest deeply corrupt practice, with some objection showed by the major debt rating agencies. Any loss of original debt security terms is a default, whether voluntary or blessed by the elite cartel. Expect court action and lawsuits in response. Another angle is being covered, whereby redenomination of debt in another currency is also declared not a default event. Great lengths are being taken, for a simple reason. A string of Credit Default Swap claims on debt default would expose the entire market as corrupted and under-funded by a wide margin to honor claims. With defaults, all the big banks would die in a flash. This is huge issue not addressed that invalidates an entire shadow-filled market. If sovereign bonds cannot be hedged effectively and predictably, the bond yields will rise fast from lack of demand. Watch out below for Italy. European banks will suffer losses without buffers that were expected to serve as hedges.

FRAUD OR JPMORGAN RUPTURE?

Coverage to the MF Global fraud, theft, and violation of the financial markets is full of intrigue and bold strokes. A sacred pledge has been broken against segregated accounts and their partitioned sanctity. Witness the second stage of the grand American fraud exposure. The first stage was the subprime mortgage fraud, with Lehman Brothers kill, JPMorgan assert grab and reload, followed by the TARP Fund dispersal, and the mortgage contract forgeries. The MF Global theft exposes the lack of integrity in the financial futures markets, and one step closer for the death of JPMorgan, which is plugging holes rather than permitting a COMEX default. Over a thousand gold contracts will not be delivered, a breach. Over ten thousand silver contracts will not be delivered, a breach. The final stage could feature a bank holiday and background heist of personal accounts. Some thought such forecasted warnings to be wild and reckless, but look at the pilfered futures cash accounts. Precedent has been set, warning given. Nothing is safe in the American system. Veteran traders should have known better, like Gerald Celente, whose accounts are locked up, cash and all. What a travesty and blight on the US system! Time is slim to remove money from the US system, whose banner is fraud.

MF Global is a more visible and flagrant breach and desecration than the Madoff Fund fraud and theft. The total missing Madoff funds was reported to be $50 billion, when the actual total was closer to $150 billion. The MF Global missing funds are reported to be $650 million, when in reality the total is closer to $2 to $3 billion. MF Global has located $658.8 million in customer funds in a custodial account at JPMorgan Chase, which contained a total of $2.2 billion as of October 31st, including both the MFG money and customer funds, pure commingling of funds. This is a smoking gun certain to go unpunished.

My belief is that JPMorgan stole the easily accessible funds placed too close to the action. Harbor doubts that CEO John Corzine will be indicted or serve prison time. The FBI is on the case. Their investigation will most likely be as effective as with Madoff, and recall they protected Goldman Sachs three years ago when a Russian man snatched the Unix software used by GSax for insider trading. It viewed incoming orders on the NYSE microseconds before the orders were executed. The FBI arrested the man, the illegal trading trail went cold, and the venerable firm continued doing God’s work. In my view, the MF Global case will render irreparable harm to the US financial system on the commodity side. Countless professional traders and their firms recognize the threat to segregated accounts and their sanctity. Trust is gone, and so is their money. No new money will enter those tables.

Safeguards did not merely fail, they were abused once more in a long list of fraud events. The Commodity Futures Trading Commission has failed on the job for the public, while doing an excellent job for the syndicate in power led by JPM and GSax. The next sham charade will be the big US banks serving on the creditor committees to oversee dispersal of funds that they were not able to steal already. JPMorgan is the agent for a $1.2 billion syndicated line of credit to MFG. It was named to the committee despite also having a $300 million secured loan against the MFG brokerage unit, a position pitted against other unsecured creditors in an obvious conflict of interest.

JPMorgan slapped a lien on MF Global assets in an audacious maneuver. A formal dance is in progress, where the public is amateur. Lack of cooperation has been given by MF Global so far. Witness a possible hidden derivatives meltdown, as the European implosion has a conduit to the United States. With inter-bank lending so scarce, many Wall Street banks extended heavy loans to the distressed European banks in the last couple months. The story is not told that way, only as a large financial firm failure run by an ex-Senator and ex-Governor, a fallen pillar in the financial crisis. What has happened could be a critical step toward the ruin of the COMEX itself, and its transition into a Cash & Carry operation for precious metals. The reins holding back Gold are slowly vanishing or being discarded.

Our fragile “hothouse” economy

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by Charles Hugh Smith
from Of Two Minds
Posted November 03, 2011

Financialization has led to a “hothouse” global economy where the slightest disruption in central bank/Central State intervention will cause the sickly flowers to wilt and expire.

Of the three great financial truths that have been left unspoken for the past four years out of sheer dread, lest their mere mention collapse our economy, let’s start with the most obvious:

The first great financial truth: If the Federal Reserve and Federal government ever crimped the dripline of “easing” and bailouts, America’s financial sector would promptly roll over and expire.

Does this strike you as a robust, flexible, transparent system? Of course not. Rather, it is a “hothouse” financial sector, one that needs constant injections and a carefully controlled environment just to keep it alive.

And since the U.S. economy has been fully financialized, it is now dependent on financial machinations and skimming for its “growth,” profits and the debt expansion that fuels everything else, including the metastasizing Savior State, a gargantuan aggregation of an unaccountable National Security State with crony-capitalist cartels and a dependency-inducing Welfare State.

Without the debt conjured into existence by the Fed, Treasury and the financial sector, even the mighty multi-tenacled Savior State would quickly starve.

As a result of our dependence on financialization and exponential debt, our entire economy has become a weak, sickly “hothouse” economy which can only survive in a narrow band of temperature, debt injections and opaque manipulations of data and what’s left of the nation’s shriveled markets.

Once exposed to Nature, i.e. “wild” transparent markets that are allowed to discover the price of all assets naturally, then both the nation’s financial sector and its economy would implode.

The second great financial truth is that the financial sector has long been detached from the real economy. The real economy is for chumps; the “no-risk” skimming of monetary legerdemaine is the raison d’etre of the entire financial sector, a point brilliantly made in this “must read” essay posted on Zero Hedge: MF Global Shines A Light On Monetarism’s Incapacity To Enhance The Real Economy. Granted, some of the financialization schemes described are not that easy to grasp, but here’s the primary point:

That is why this system has to change at some point. It is exactly designed to be misleading, and the reason is so very simple. In any fractional system there will be a desire to amplify that fraction to the maximum degree. But in doing so, participants recognize that the process of maximization entails creating negative human emotions and perceptions since history is not really that kind to this manner of fractionalization. So the system has institutionalized, abetted by the very regulators that are supposed to cap fractions and leverage, these methodologies of hiding just how much financial entities have engaged in maximizing themselves under the cover of mathematical precision.

The Panic of 2008 was supposed to correct these excesses and remedy the fact that risks have not been accurately priced for decades. Yet the system has resisted every effort, simply settling for redefining the appearance of safety yet again. Somewhere in that mathematical pursuit of maximum fractions, the very goal of finance changed, as if traditional banking was no longer sufficient to support the pursuit’s ever-growing ambitions. So the financial economy has broken away from the real economy, using the ironic cover story of enhancing price discovery to the process of intermediation.

The fact that money is disconnected from the real economy never enters the consciousness of monetarists since money is always the answer. But make no mistake, the primary reasons for this global malaise are that money has lost its productive capacity and its proper place as a tool within the system.

The third great unspoken truth is that the conventional Status Quo – the financial punditry, the Cargo Cult of Keynesianism, the incestuous academic community, the PhDs in the Fed and Treasury, the politico lackeys, the self-serving think-tanks of both empty ideologies (“which is better, Bud or Bud Light?”), not to mention the lobbyists, revolving door toadies and all the other hangers-on in New York and Washington – have no Plan B and certainly no Plan C. In other words, they are utterly clueless about what to do when their abject and total failure becomes unavoidably obvious.

It is of course a crisis of self-service; nobody dares put their own status, wealth, power and perks at risk by thinking independently, much less speaking All That Cannot Be Spoken Lest This Sucker Implode.

But it is also a monumental lack of imagination; the lackeys and toadies cannot imagine any other Beast other than the one whose teat they have sucked all their lives. They live in mortal fear not of being ignorant or lacking in imagination – those deficiencies are too obvious to contest – but of the truth of the system’s increasing weakness and vulnerability being openly revealed.

America’s (and the world’s) financial sector is a fragile, sickly hybrid which will shrivel and expire the moment it is placed in the real, dynamic world. And because the global economy has become dependent on the slouching beast of financialization, it too is fragile and sickly, sensitive to the slightest perturbations and exquisitely vulnerable to any disruption of the constant life support offered by central banks and Central States.

It is neither capitalism nor socialism, but a twisted hybrid of the worst traits of each.

I happened to catch a brief interview on DW TV (German TV, with English announcers and subtitles) of one of the few ECB (European Central Bank) officials with the integrity to resign in protest at the ECB’s blatant interventions in the bond market (buying Italian bonds to prop up a market that would implode the second ECB support vanished) and the central bank’s slippage toward money-printing as the answer to every problem.

This gentleman said that the ECB had to monitor the global economy 24 hours a day lest some tiny policy mistake bring the entire shaky edifice down.

Does that strike you as a description of a robust, adaptable, capitalist system based on transparancy and price discovery of assets? Of course not; it describes a hothouse economy, always on the ragged edge of collapse if its central bank and Central State minders make the tiniest error in its care.

For four precious years we have been force-fed nothing but lies, obfuscation, misdirection, fear-mongering, spin, sins of omission, misinformation, propaganda, false rumors and false hopes. The hothouse is slowly falling apart, and the sickly global financial sector is wilting. The financial media is heralding every “save” and every “rescue” with ever-shriller enthusiasm, lest a contagion of truth spread through the hothouse like a chill wind.

But we can be sure of one thing: those who know better have already sold, and it is now the job of the politico lackeys and the toadies of the Mainstream Media to convince the bagholders to hold on and not sell, because “everything’s been rescued.” Distilled to its essence, that is their one and only job: to convince you not to sell. That keeps the bid up for their Masters to sell into.

If history is any guide, the final collapse will be triggered by an apparently “controllable” event, something like the bankruptcy of MF Global. All eyes are on Greece’s referendum, apparently scheduled for December 4 or 5; but regardless of the vote, does a “yes” or “no” change that nation’s fundamental insolvency? No, it doesn’t.

Does the passage of some toothless law in Italy magically render that nation solvent? No, no, a thousand times no; none of these public-relations tricks can change the fact that all these nations are insolvent, the banks are insolvent, and even France and Germany are staggering under unprecedented burdens of debt.

The smart money sold in May, 2010, and the disbelievers among the Power Elite sold in May 2011, or perhaps August. Now those below the smart money (but still above the dumb money) are sniffing the fetid hothouse air, where the rank, sweaty desperation of the minders is now ever-present.

So the apparatchiks and foot soldiers have been ordered to keep the dumb money from selling, until their “betters” can sell into a rumor-juiced bid. This explains the sudden jump in the S&P 500 on every rumor of rescue, as if an over-indebted and leveraged-26-to-1 financial system can be rescued with “belt-tightening” and ECB intervention with taxpayer money.

The entire euro “project” was a scam that enabled a vast new scale of financialization. Now that the “project” is falling apart, the bagholders who bought into the shuck-and-jive are nervous and fearful; has it all really been “saved”?

No, it hasn’t; it cannot be saved. The only “solution” available is to sell: sell now, while there is still a bid. Sell fast, sell hard, sell everything denominated in euros. That is precisely what the Status Quo fears the most: an awakening continent of bagholders and debt-serfs.

Anyone thinking the euro (and eurozone) can’t possibly go down until after the Greek referendum may well find their confidence in the Status Quo’s “rescue” has been sorely misplaced.

500 Million Debt-Serfs: The European Union Is a Neo-Feudal Kleptocracy (July 22, 2011)
The Dynamics of Doom: Why the Eurozone Fix Will Fail (July 25, 2011)
The European Model Is Also Doomed (February 7, 2009)
When Debt-Junkies Go Broke, So Do Mercantilist Pushers (March 1, 2010)
Why the Euro Might Devolve into Euro1 and Euro2 (March 2, 2010)
Why the Eurozone Is Doomed (May 10, 2010)
Ireland, Please Do the World a Favor and Default (November 29, 2010)
Why The European Union Is Doomed (March 28, 2011)
Greece, Please Do The Right Thing: Default Now (June 1, 2011)
Why the Eurozone and the Euro Are Both Doomed (June 23, 2011)
Greece Is a Kleptocracy (June 28, 2011)