Bumble is at it again

We need Yukon Cornelius to detooth the Bumble one more time.

The latest from Stockhouse:

"The very largest traders for gold and silver are, wouldn’t you know it, big U.S. banks. It looks like a few big banks, some of the same ones whose brilliant management helped spawn a global financial crisis, have the largest positioning in gold and silver futures. As of February 3, their positioning in gold and silver futures was big all right – big and short the market for gold..."

"According to the monthly CFTC Bank Participation in Futures and Options Market report released Friday, February 6, two large reporting U.S. banks held zero long and 27,189 short futures positions in COMEX silver futures as of February 3. All commercial traders as a group held a net short silver position of 33,173 contracts that same day; so just two banks held 81.96% of all the COMEX commercial net short positioning for silver. "

All the information leads everyone to believe they have been affecting the price of gold and silver since late last summer. That is when the big spike in oil prices was starting to fall back. Oil peaked in July, 2008, and within a two week span, dropped almost $30. It kept falling. But that was after running up from $62 BBL to $150 BBL in ten months time.

The big banks have exchanged some of their toxic derivatives with the Federal Reserve for safe US Treasuries. In November of 2007, the Fed had no derivatives on its balance sheet. Today it has well over $1 Trillion. The reason for this is simple, and Bernanke admits it is an attempt to get liquidity back into the credit markets. No entity, bank or otherwise, will lend against any derivatives. Banks loan to each other all the time, or at least they used to. Because all the big banks have some exposure to derivatives, they know how worthless they really are. If their derivatives won't find any buyers, why would any other bank's derivatives find buyers? Since most of the claimed net worth of the big banks lies in these toxic assets, that may be worth $0, interbank lending has screeched to a halt.

The big banks that have received Treasury notes from the Fed through exchange have borrowed against them. They then take that money to the commodity exchanges, and place bets on futures contracts. That is what caused the spike in oil.

From December 2007 through June 2008, the amount of money at play in oil futures contracts on the NYMEX increased by $248 Billion. From December 2007 through June 2008, the amount of derivatives exchanged with the Fed for good Treasuries was, are you ready, $248 Billion.

Yeah, it's probably just a coincidence.

Because of the economic uncertainty, gold and silver are being hoarded by institutions and individuals, and there is very little free to buy. Go to your local gold or coin dealer. Spot price of gold is $942 per oz, right now. The dealer will not sell you a US Gold Eagle (1 oz.) for less than $1,100. Most will want $1,200 or more. Already the market, outside of the exchanges, is pricing in a sizeable premium. This is because demand is greater than supply. Since demand is greater than supply, logic dictates that gold and silver should be higher, and going higher.

But the current action on the COMEX concerning gold and silver could be the same type of play as oil was last year. Except to the downside, betting the metals will fall. Two reasons for this, the first is greed, the second is greed.

The first is to try and maximize profits by controlling price swings. If gold and silver should go down a little more, then they might go all in on the upside. What I mean is if they can get gold back to $850 oz., then when gold rises, that's an additional $90 per oz. profit. They know, everyone knows, sometime in the near future gold may easily double. Silver might triple.

The second reason is a bit more complicated, yet is likely to be more correct. If gold should rise, the value of those Treasuries the big banks have borrowed from the Fed goes down. So does the value of the dollar which those Treasuries are representative of. Since most of the big banks are are already insolvent, every penny means something.

The banks aren't just betting the amount they have in Treasuries, they borrowed up to 9 times more than that. It is that amount they are betting with. It's called leveraging, and is what got the financial system to where it is now.

Concerning the COMEX, the real danger lies with the other side of the trade. Should the people who have the other side of the contracts that the banks are betting on demand physical delivery of the metal on expiration, the banks are screwed. They have 10% of the total amount of gold and silver they are betting on (because of leveraging). If 20% of the other side of the trade demands physical delivery on the third Friday of the month (expiration for options and futures), the banks must scramble and go on the open market to buy what they can to meet settlement.

The first problem they will then have is the premium being charged. They may be forced into paying 10% or more than the settlement price just to get the metal.

The second, and more important problem, is the amount they will need to buy for settlement is usually not available. To make it available, they will have to pay even more. This will cause gold and silver to spike, instantaneously.

Fear of loss would set in, and gold, the one true perceived money that transcends all currencies, would gain in demand. This would cause another set of Treasury note holders, those buying very short term Treasury Bonds (at 0.5% or less coupon) to sell and chase gains in metals, forcing the price of gold and silver up even more furiously.

That sell off of US Treasury notes will cause all other notes to decline in value, just as fast as the rise in metals. Since the Bond market will be flooded with sellers trying to cash in and get a gain in metals, that means there will be few buyers of bonds. If supply is greater than demand, prices fall.

Should gold and silver spike in the near future, which seems almost certain, then a bond market crash is almost as certain.

It was the sell off of bonds in 1931 - 1932 that caused the Great Depression.

The Fed has enabled the big banks, who have already demonstrated they are fools with our money, to recreate the same scenario that caused the Great Depression.

Then again, maybe they are just following a blueprint. JP Morgan was able to increase its ownership of US businesses three-fold from 1930 - 1933. By buying at firesale prices. Bear Stearns did go from $62 down to $2 in less than a week.

Man, if that isn't firesale, I don't know what is.

Fuel to the fire

image courtesy of ft.com

The banks most in trouble, and most to blame for the current economic crisis, are the very ones getting the lion's share of taxpayer money. All with the blessing of our elected leaders.

The one true stab at stemming this crisis presents the new Treasury secretary pushing banks to make more loans to already over indebted consumers. Next, he blames the consumer for borrowing too much. Wow. Mr. Geithner further states "Our policies must be designed to mobilize and leverage private capital, not to supplant or discourage private capital." Well, that statement is designed to confuse, for this reason - Government investment crowds out private investment. Concerning these derivatives, the private investment will never replace the government investment, because the value on these WILL NOT go up, no matter what. That leaves the taxpayer with total exposure.

The other half of the equation is a bill the democrats filled with idiotic spending that has little chance of stimulating anything except more campaign contributions from the recipients of the money.

Please, do not think because a few republicans are crying foul now, that they would have voted differently had McCain been elected. Their actions for the past 15 years show where their true allegiance lies. In all likelihood, McCain's solution would have been to just give all this money to the banks with no strings attached.

The only solution to this mess is to allow those most responsible to live with the consequences. They will go bankrupt because they are bankrupt. We should demand all monies given to them be paid back, immediately, and that they should have no influence over markets going forward.

Yes, it would make our current situation seem worse. To do what the government has been and is doing will ensure a much worse outcome. $9.7 Trillion has been committed to the banks, so far, to cover their bad housing bets. $9.7 Trillion dollars, if given directly to homeowners, would have eliminated 90% of all mortgages.

Now, please tell me, how should that money be spent?

Sometime in the very near future, many good people are going to awake one fine morning. Within minutes, they will be immersed in a horrible epiphany. Their hard earned money, sitting in accounts they thought were safe, will have evaporated.

Do you think a money market account is safe, because your advisor told you it was? Think again. Many money market managers bought derivatives, because they were rated AAA. Pension funds? Same thing. Retirement accounts? Stocks and asset backed securities (derivatives).

Republicans and Democrats are equally to blame. The folly of deregulation of the banking industry removed well placed safeguards established after the great crash of 1929. Though a noble (and Christian) cause of helping the less fortunate , the welfare and supplemental programs have inadequate oversight, and have created a situation where some families have not seen an adult go to work for four or five generations.

The Bush administration, while focusing on 9/11 (this is the most polite way to state this), allowed the banks and investment houses to build a profit center that we now realize was rooted in deception.

The US economy has been rambling towards the soon to come morning for quite some time. Unions allowed corruption and mediocre performance. This gave the heads of big business the ammunition they needed to start opening plants in cheaper labor markets. Wall Street realized this was very profitable, and thus started the great trade-off of good paying manufacturing jobs for cheaper imports.

Somehow, someway, it had to end. Sooner or later you would run out of good paying jobs to trade. Yes, the trade off did create some jobs in the finance, insurance and real estate sectors. Yet, when the number of manufacturing jobs dwindled to such a small amount that there were not enough to trade any longer, Big Business began a new form of trading, that of outsourcing.

With the advice of Wall Street, big firms began sending the good paying jobs created by the increased profits from trading manufacturing jobs for cheaper imports, overseas. Same game, different name.

Now, the big firms and banks have full control. Congress, two administrations and the Fed have been and are doing what they say.

Many great leaders of this country have warned us about this:
Thomas Jefferson - I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

Theodore Roosevelt - "Let the watchwords of all our people be the old familiar watchwords of honesty, decency, fair-dealing, and commonsense."... "We must treat each man on his worth and merits as a man. We must see that each is given a square deal, because he is entitled to no more and should receive no less.""The welfare of each of us is dependent fundamentally upon the welfare of all of us." In reference to the "Square Deal" program of limiting corporate power.

Woodrow Wilson - “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world - no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”

Congressman Louis T. McFadden, Former Chairman of the Committee on Banking and Currency - "... the Federal Reserve Board and the Federal Reserve Banks ... This evil institution has impoverished and ruined the people of the United States... Some people think the Federal Reserve Banks are United States Government institutions. They are private credit monopolies which prey upon the people of the United States for the benefit of themselves and their foreign customers...

"The Federal Reserve (Banks) are one of the most corrupt institutions the world has ever seen. There is not a man within the sound of my voice who does not know that this Nation is run by the International Bankers.

"Mr. Chairman, ...The Fed has cheated the Government of the United States and the people of the United States out of enough money to pay the Nation's debt... The wealth of these United States and the working capital have been taken away from them and has either been locked in the vaults of certain banks and the great corporations or exported to foreign countries for the benefit of foreign customers of these banks and corporations. So far as the people of the United States are concerned, the cupboard is bare.

"When the Federal Reserve Act was passed, the people of these United States did not perceive that a world banking system was being set up here.

A super-state controlled by international bankers and industrialists... acting together to enslave the world... Every effort has been made by the Fed to conceal its powers but the truth is -- the Fed has usurped the government."

Dwight Eisenhower - "We annually spend on military security more than the net income of all United States corporations.

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the militaryindustrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together"

"Only an alert and knowledgeable citizenry can compel......" It is up to us to complete the sentence. It would be better if we didn't wait too long.

We can't hide it much longer

Dow Jones Industrial Average

Notice the sharp drop just after 11:00. That was 4 minutes into Secretary Geithners' unveiling of the new "What the H*LL do we with these derivatives" plan.

The market is telling us, the Obama administration, Mr. Geithner and all who will listen, the lying and thievery are going to stop, and if you don't stop it, the market will.

No one trusts the banks. It's the big boys that are in trouble. They levered up and bonused like there was no tomorrow, because they knew there would not be one. There are hundreds of solvent banks with little or no exposure to derivatives. They are victims as much as anyone else. But the smaller, solvent banks haven't been major contributors to the political machines, and the big boys have. The foisting of losses, made on insane leveraging, onto the backs of taxpayers is more than obscene, and the market demands justice.

Last fall, we had to put up with Bush and Paulson threatening martial law if the first bailout was not passed. It passed - and the market immediately regurgitated fully one-third of its value.

Is this part deux?

The current mess cannot be attributed to Obama. Yet, that does not give license to continue the nonsense of hide the losses, and pass them to the taxpayers when we lie to congress. Mr. Geithner was part and parcel of the group that advocated for the first bailout. He, along with many esteemed others, told us the first bailout would solve the liquidity problem. It solved the liquidity problem all right, now the banks have enough liquidity to bonus each other again. They just don't have enough to cover the bottomless pit of asset deflation created by derivative losses.

Mortgage rates will have to be decoupled from the 10 year Treasury note, and set artificially at a rate lower than the low in 2006. Why? Resets of prime ARM loans will continue to grow until the first quarter of 2011, when they reach a peak. Unless we want more than half of those loans defaulting, some mechanism must be manufactured to give homeowners reason to keep paying their mortgage. As things are going now, the rate of people walking away is growing exponentially.

Bad news - All of those ARM's scheduled for reset over the next two years were securitized and packaged into a CDO, CLO or CMO.

Any one want a friendly wager on how many of those will get more than ten cents on the dollar two years from now?