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Posts Tagged ‘timothy geithner’

by Tyler Durden
January 1, 2012
ZeroHedge

 

When it comes to the fabled President’s Working Group on Capital Markets, also known as the Plunge Protection Team, the myths about the subject are certainly far greater than any underlying reality. To be sure, vast amounts of popular folkflore has been expounded into the public arena, with most of it being shot down simply due to it assuming conspiracy theories of such vast scale that the human mind is unable to grasp the complexity, and ultimately the inverse Gordian Knot makes an appearance with the claim that vast conspiracies are largely untenable simply because it is impossible to keep a secret from so many people for so long. Yet what if the secret is not a secret at all but is fully out in the open, and is only a matter of interpretation, and contextualizing? Why just 3 years ago it would appear preposterous to allege the capital markets are a ponzi and that the Fed does everything in its power to keep stocks higher. Well, what a difference three years make: now the Chairman himself in a Washington Post OpEd has admitted that the sole gauge of Fed success is the loftiness of the Russell 2000, neither unemployment nor inflation really matter now that the Fed’s third mandate has been fully whipped out. Furthermore, Keynesian economics, and the entire top echelon of the educational system have also been represented as a paradigm which merely perpetuates the status quo as the alternative is the realization that the whole system is a house of cards. As for the global capital markets being nothing short of a ponzi, we merely point you to the general direction of Europe, the ECB and its bank, where the monetary interplay is nothing short of the world’s biggest pyramid scheme. Yet the PPT, or whatever it is informally called, does not exist? Consider further that only recently did it become known that the former SecTres Hank Paulson himself was exposed as presenting material non-public information to a bevy of Goldman arb desk diaspora hedge funds, headed by with none other than the head of the President’s Working Group on Capital Markets Asset Managers committee David Mindich. So, if contrary to all the evidence that there is some vast underlying pattern, if not a conspiracy per se, one were to take the leap of faith and take the next step, where would one end up? Well, most likely looking at the Exchange Stabilization Fund, or ESF, which Eric deCarbonnel has spent so much time trying to unmask. Is it possible that the ESF, located conveniently at the nexus between US monetary policy, foreign policy and last but not least, a promoter of the interests of the US military-industrial complex, is precisely the organization that so many have been trying to expose for years? Watch and decide for yourself.

As a reminder deCarbonnel is not some tinfoil hat clad sub-basement dweller – it was his input that led us to the realization that in attempting to control the Treasury curve, the Fed will, and already has, experiment with selling puts on various Treasury maturities in an attempt to generate reflexivity whereby the synthetic determines the value of the underlying (something ETFs are now doing oh so well), the value naturally always being higher, higher, higher irrelevant of what underlying demand there is (and as we showed last week, with a record amount of international outflows in the past month, the demand, at least from abroad, is just not there). So what does Eric assert?

Quite a bit as it turns out.

After months of work, the video series on the Treasury’s Exchange Stabilization Fund is finally finished!

 

Why you should watch these five videos:

 

It is impossible to understand the world today without knowing what the ESF is and what it has been doing. Officially in charge of defending the dollar, the ESF is the government agency which controls the New York Fed, runs the CIA’s black budget, and is the architect of the world’s monetary system (IMF, World Bank, etc). ESF financing (through the OSS and then the CIA) built up the worldwide propaganda network which has so badly distorted history today (including erasing awareness of its existence from popular consciousness). It has been directly involved in virtually every major US fraud/scandal since its creation in 1934: the London gold pool, the Kennedy assassinations, Iran-Contra, CIA drug trafficking, HIV, and worse…

So while nursing that New Year’s Day hangover, take some time and watch this series of videos. If nothing else, they even if merely the extended ramblings of some person that one can quickly dismiss as merely the latest lunatic, they do present an alterantive reality to what so many may be accustomed to. After all at the end of the day imagination, the ability to think outside the box, and to see patterns where previously there were none, is the greatest threat to the ending status quo by far.

 

Part 1

 

Part 2

 

 

Part 3

 

 

Part 4

 

 

Part 5

 

 

Read the entire article HERE.

by Matt Taibbi
November 10, 10:07 AM ET
Rolling Stone

Federal judge Jed Rakoff, a former prosecutor with the U.S. Attorney’s office here in New York, is fast becoming a sort of legal hero of our time. He showed that again yesterday when he shat all over the SEC’s latest dirty settlement with serial fraud offender Citigroup, refusing to let the captured regulatory agency sweep yet another case of high-level criminal malfeasance under the rug.

The SEC had brought an action against Citigroup for misleading investors about the way a certain package of mortgage-backed assets had been chosen. The case is very similar to the notorious Abacus case involving Goldman Sachs, in which Goldman allowed short-selling billionaire John Paulson (who was betting against the package) to pick the assets, then told a pair of European banks that the “designed to fail” package they were buying had been put together independently.

This case was similar, but worse. Here, Citi similarly told investors a package of mortgages had been chosen independently, when in fact Citi itself had chosen the stuff and was betting against the whole pile.

This whole transaction actually combined a number of Goldman-style misdeeds, since the bank both lied to investors and also bet against its own product and its own customers. In the deal, Citi made a $160 million profit, while its customers lost $700 million.

Goldman, in the Abacus case, got fined $550 million. In this worse case, the SEC was trying to settle with Citi for just $285 million. Judge Rakoff balked at the settlement and particularly balked at the SEC’s decision to allow Citi off without any admission of wrongdoing. He also mocked the SEC’s decision to describe the crime as “negligence” instead of intentional fraud, taking the entirely rational position that there’s no way a bank making $160 million ripping off its customers can conceivably be described as an accident.

“Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?” And this: “How can a securities fraud of this nature and magnitude be the result simply of negligence?”

Rakoff of course is right – the settlement is nuts. If you take Citi’s $160 million profit on the deal into consideration, what we’re talking about then is a $125 million fine for causing $700 million in damages. That, and no admission of wrongdoing.

Just imagine a mugger who steals $70 from some lady’s wallet being sentenced to walk free after paying back twelve bucks. Magritte himself could not devise a more surreal take on criminal justice.

It gets worse. Over the last decade, Citi has repeatedly been caught committing a variety of offenses, and time after time the bank has been dragged into court and slapped with injunctions demanding that they refrain from ever engaging the same practices ever again. Over and over again, they’ve completely blown off the injunctions, with no consequences from the state – which does nothing except issue new (soon-to-be-ignored-again) injunctions.

In this current case, this particular unit at Citi had already been slapped with two different SEC cease-and-desist orders barring it from violating certain securities laws. Here’s a summary from Bloomberg:

The commission already had two cease-and-desist orders in place against the same Citigroup unit, barring future violations of the same section of the securities laws that the company now stands accused of breaking again. One of those orders came in a 2005 settlement, the other in a 2006 case. The SEC’s complaint last month didn’t mention either order, as if the entire agency suffered from amnesia.

The SEC’s latest allegations also could have triggered a violation of a court injunction that Citigroup agreed to in 2003, as part of a $400 million settlement over allegedly fraudulent analyst-research reports. Injunctions are more serious than SEC orders, because violations can lead to contempt-of-court charges.

But the SEC avoided the issue of the 2003 injunction by charging Citi with a different type of fraud. But, as Bloomberg points out, it probably wouldn’t have mattered much if they had accused Citi of violating the 2003 injunction, since the bank had already done that once and not been punished for it:

In December 2008, the SEC for the second time accused Citigroup of breaking the same section of the law covered by the 2003 injunction, over its sales of so-called auction-rate securities. Instead of trying to enforce the existing court order, the SEC got yet another one barring the same kinds of fraud violations in the future.

So to recap: a unit of Citigroup, having repeatedly violated the same laws and having repeatedly violated the SEC’s own cease-and-desist orders and injunctions, is dragged into court one more time for committing a massive fraud.

And what does the SEC do? It doesn’t even bring up Citi’s history of ignoring the SEC’s own order, slaps the bank with a fractional fine, refuses to target any individuals, allows the bank to walk away without an admission of wrongdoing, and puts a cherry on the top by describing the $160 million heist not as a crime, but as unintentional negligence.

BRING OUT THE SOFT CUSHIONS! The SEC gets rough with Citigroup.

Imagine a car thief who, when caught driving a stolen Lexus, tells the police he simply stepped into the wrong car and drove off by mistake. Now imagine he tells the same story when, two years later, he’s caught screaming over the GW bridge in a stolen Mercedes.

Then, two years after that, he’s caught on the Cross-Bronx Expressway blasting the stereo in a boosted 7-series BMW. Cops ask him for an explanation. “I must have gotten in the wrong car by mistake,” he says, shrugging. And the cops buy the story and send him home without a charge.

That’s roughly what we’re dealing with with this SEC action. To extend the metaphor just a little further – let’s say that BMW wasn’t even the only car he accidentally drove away that day, but the cops didn’t bother with the others. In the latest Citi case, the $700 million fraud was just one of many dicey CDOs marketed by that unit of Citi. But the SEC chose to address just that one case in its settlement.

Rakoff quite correctly took issue with all of this. From Jonathan Weil’s Bloomberg piece:

“What does the SEC do to maintain compliance?” Additionally, [Rakoff] asked: “How many contempt proceedings against large financial entities has the SEC brought in the past decade as a result of violations of prior consent judgments?” We’ll see if the SEC finds any.

Rakoff gained some notoriety a few years ago when he rejected as inadequate an SEC settlement with Bank of America, which was accused of misleading shareholders about the size of the bonuses paid out by Merrill Lynch, the investment bank BofA was in the process of acquiring. Rakoff dismissed the original $33 million fine as “half-baked justice,” although he eventually approved a $150 million fine.

The amazing thing about the wave of corruption that has overtaken the financial services industry is that most of it couldn’t happen without virtually every player at every level signing off on these deals. From the ratings agencies to the law firms to the accounting firms to the regulators to the bank executives themselves, everybody had to be on board in order for a lot of these fraud schemes to work.

Judges are a part of that picture, and too often, members of the bench sign off on dirty deals made between banks and regulators when the law says that such settlements must be “fair, reasonable, adequate and in the public interest.”

It’s great that Rakoff is behaving as any decent human being would and rejecting these disgusting settlements. But equally disturbing is the fact that more judges haven’t done the same thing. Are people with backbones really that rare?

BY JIM WILLIE
10/26/2011
Financial Sense

The feverish positive sentiment has left the Gold & Silver market in the last two months. Raised margin requirements during falling prices alongside naked short ambushes in the COMEX, coupled with permitted asset damage from debt monetization conducted more in secrecy will always help to dampen enthusiasm. But with the billboard message on the European subway walls and boulevards and news magazines stating the obvious, that the European debt crisis has no solution, that Germany has no more checks to write in funding the bailouts, that Greece is set to default, that leaders in political spheres are opposed by bank leaders where the final decisions are made, the GOLD & SILVER PRICES ARE SET TO ZOOM. Only the dummies sold in the last round of ambushes and interrupted recoveries. The precious metals have suddenly awakened. The old defended range for the two metals was easily overrun as a splash of reality hit the market faces. A mad scramble is likely from here onto the end of year, as people realize that hyper-inflation is the solution on any massive bailout with clearer gigantic needs, and as people realize that a broad string of bank failures will drive gigantic flows into safer places since sovereign bonds will go from sacred to toxic. The powerful decline in September, down $200 in gold and down $10 in silver suddenly have presented a ripe easy recovery without resistance. A powerful reversal is near and coming. Many investors will rush back in, paying higher prices than where they unwisely sold. Many investors will rush in, seeing banks and government bonds as ugly options.

FRAUD LACED IN THE SYSTEM

Before delving into the easy 15% upside opportunity in gold and easy 25% upside opportunity in silver, a topic begs to be covered. The topic is fraud. While discussion and analysis of fraud in US high finance can fill volumes, an entire set of encyclopedias, from just the last generation, direct attention to the fraud of investment funds and fraudulent bank accounting. My desire is to cite specifics on how investors have been duped into not participating in major moves up in commodity prices, like crude oil and precious metals gold & silver. My desire is to cite specifics on how the big banks avoid reporting 75% cuts in profits by fabricating the most absurd of accounting profits that even financial newscasters dispute as valid. The various funds to participate in the black gold and yellow gold asset plays have been congames. The defense by the big US banks against utter and complete insolvency have been congames. The public must avoid the ETFund investments. The public must avoid the perception that the big US banks are anything but dead.

PINPOINT FAILURE OF U.S. CAPITALISM

A opening argument against fraud and misrepresentation goes far beyond the Wall Street practice of pandering toxic bonds with AAA ratings. It goes far beyond promoting a fund that actually is critical in shorting oil and gold, rather than investing in them as investors intend. It goes far beyond deceiving about a price inflation between 7% and 11% since year 2005. It goes far beyond hiding an economic recession that started in 2007 and never ended. It goes far beyond news coverage of foreign wars like in Libya, when $90 billion in Qaddafi parked funds have been frozen, probably never to be released by Western banks. It goes far beyond $50 billion gone missing from the Iraq Reconstruction Fund with direct $2.3 billion payment handed to a fellow who received the highest medal of honor to a private citizen. The biggest problems that plague the United States Economy, its financial system, and its capitalist structure relate to ineffective usage of brainpower, co-opted assets & capital, and enormous investment in the corrupted system.

Clearly the United States has untapped resources, deep riches, broadly spread. The nation has significant land, including agriculture, timber, and water resources. The nation has significant untouched oil & gas deposits, and natural energy in wind, sun, and geothermal pockets. The nation has significant knowledge and technology, some of which has never been used that could dramatically reduce a wide range of expenses. The nation has 300 million people who have a great deal of their time and energy ready for productive usage. The nation has enormous untapped resources. However, the investment and capital devoted to support the fraudulent system is staggering. Just look for instance at the CNBC and Bloomberg financial news center facilities. They are not devoted to industry that produces jobs directed at value added enterprise. Just look at the entire Wall Street and hedge fund and asset management sector. It is not directed at value added enterprise, but rather to shuffling of securities certificates. A Chinese economist remarked a year or more ago that of the $14 trillion US Gross Domestic Product, perhaps half was not legitimate since merely related to transfers of debt securities and other debt paper products. What a great point! The USEconomy might be exaggerated by double in legitimate size, a fact underscored by the industrial base that has been moved to Asia since 1980, first with the Pacific Rim and finally with the Chinese buildup. Just look at the vast network of consumption centers, like Wal-Mart and Target and Best Buy, the retail chains that do not invest in value added enterprise. Recall that 70% of the USEconomy is devoted to consumption, as some sort of sick religious exercise that all too often has resulted in home equity converted to things bought. America has spent its capital tragically and now finds its many sectors insolvent. The conclusion is that a large part of American capital is devoted to the syndicate and beholden to the advertisers. Resources do not mean much when the capital and brainpower is co-opted and dedicated to fraudulent enterprise and even to self-destruction.

Let’s consider some specifics. Larry Ellison of Oracle, Steve Jobs of Apple, and Bill Gates of Microsoft never finished college. They were productive, as Gates is given a pass for innovation in monopoly development and marketing theft to build a stodgy empire that has stagnated in the last decade happily. When young minds attend college, they emerge hungry to make a mark, to put a stake in the ground, to create an organization, to build wealth and to make a legacy. All too often, the best & brightest are hired by the bad guys. An entire generation of brilliant young minds has been largely co-opted. Microsoft took genius minds, as the Jackass knew of several who applied there. They produced co-opted software technology, source code theft during partnership ventures, little or no innovation unless one considers bundling to smother Netscape and Norton. Also Goldman Sachs took genius minds, as the Jackass knew none, but a couple wannabees. They produced insider trading in finance technology, derivative devices that enabled concealed debt, exchange traded funds that enable control of a market, and so much more. A Forbes Magazine editor once sat next to Gates on an airline flight. During the conversation, Gates admitted that his chief rival in hiring the best minds that America had to offer came from Goldman Sachs. So the best graduates pursue permitted monopoly and fraudulent finance. Also the Defense Contractors took genius minds, as the Jackass knows of one in particular. They specialize in weapon systems and the attendant equipment. The trickle down benefits are an illusion, as the end product is a structure in smithereens. Benefits trickle down in seven to ten stages. Destruction trickles down in two or three stages, with Senate kickbacks and cost overruns the chief icing.

The biggest problems in the US are

• diverted intellect toward fraud, theft, and monopoly enterprise
• war and destruction, in pursuit of dominance over rubble landscape
• absent industry after 30 years of off-shoring factories to Asia
• really dumb kids, whose perspective is both shallow and limited.

When the Jackass was in Digital Equipment Corp from 1980 to 1993, many of us shook our heads when Intel, then many others, including DEC, opened manufacturing plants in the Pacific Rim. Ours were Taiwan, Hong Kong, and Singapore. One of my little accomplishments was to streamline online testing of factory output in quality control procedures. We had one major success with clients on their manufacturing sites that produced monitors and memory among others. The initial strategy on the national movement to off-shore was “just manufacturing” but many of us kept shaking our heads, thinking “no way, next comes Research & Development.” Within only two years, the DEC site in Taiwan had a leading R&D center that ultimately developed a world class computer monitor, a smart monitor with loads of options. Patents were filed, and the business segments upstream were set to flourish. Capital was attracted to Asia by the boatload. The United States has huge resources. But as we have see in the last two decades, they have been tapped, and they will be tapped, but by foreign nations and foreign firms. For a disgusting sign of the times, look to the California high speed rail project. The California Legislature eventually had to install new laws to limit the contract funds and contract jobs going to China. Most stimulus aid foreign jobs. Even stimulus toward the infrastructure in a key project aided China more than the US. Sadly, most new jobs in the USEconomy are devoted to health care and retail. So we are becoming a nation of hospital orderlies and cash register clerks, whose products tend to be bedpans and checkout lines. No need for college on those fronts.

FUND GROWTH DESPITE INEFFECTIVENESS

Exchange Traded Funds are generally a profound fraud laced with deception and extremely slippery prospectus language. Many lazy investors are being duped. The flagship GLD fund is the worst perpetrator in my view. Many analysts and industry experts have offered details on all manner of problems, irregularities, and anomalies, like unstable bar lists, like shorted shares by management, like bullion metal inventory shipped to the COMEX, like vault fees without stored metal. Turn to the flagship crude oil fund. The popular crude oil ETFund has lost over half its value relative to tracking the commodity price. Funds might be regularly abused by managers to short the commodity and keep the price down, an old game with an easy fingerprints. Such practice would fly in the face of investors, who sometimes feel betrayed, when they discover what is happening under their desks. The investors think they are investing in gold or crude oil in a fund, but those in charge of management and fiduciary responsibility are working hard toward the opposite objective. Investors are duped into shorting the same assets they invested in, indirectly. The total volume of Exchange Traded Funds is fast approaching $2 trillion, but not well invested. The invested funds all too often support the system that wishes to keep down the commodity prices, so that paper financial products are encouraged. The GLD fund managed by HSBC receives the most attention on widespread illicit activity, from fraudulent drainage of its gold inventory toward the COMEX to meet delivery demands through massive shorting. The fund has never been subjected to the scrutiny of a full audit by an independent agency.

EXCHANGE TRADED FUNDS DO NOT TRACK

Another big fraud is the crude oil investment tracker. The United States Oil Fund (USO) was introduced as a vehicle for investors to track the crude oil price. When it began, the ETF had a 1:1 price relationship with the New York crude oil from the futures exchange, a close match. Its expense ratio was a mere 0.45% in overhead. What a huge change since inception! The active month crude oil contract trades between $85 and $95, but the USO fund has been bobbing around recently in a lowly ratio to crude oil below 40%, with a plunge below 30% in October. The penalty for investing in the oil ETF has come to 60% to the dopey lazy investor. The investors did not invest in crude oil at all. They benefited not at all from any rise in crude oil over the last three years. 

Analysts defend the fund, claiming that rollover from current nearby contracts has eaten up value, along with administrative costs. That seems a lie. The successive monthly contracts do ramp down, but by the month’s end, the difference should be very small. In all likelihood, just like GLD but to the extreme, the USO fund is being brutally abused to short the crude oil price on the West Texas contract. Recall that the WTIC oil price has consistently been $15 to $25 below the North Sea Brent oil price for months. Blame is placed for the gross differential on surplus storage at the Cushing Oklahoma facilities, but that too seems a lie. Look instead for a fishy finger on extreme Wall Street activity with futures contract shorts, perhaps even backed by the official Strategic Petroleum Reserve storage supply on oil slick cover. Notice in the ratio of USO/WTIC, the quantum decline in early 2009 corresponded to the extreme drop from $135 to $40 per barrel. Conclude that the USO fund might have been instrumental in generating some extreme profits on the downside when they drove down the crude oil price. Even more leverage is deployed with futures options.

One can see the other smaller quantum declines circled on the graph. Even they are outsized, since 6% is not the cost to roll into the current nearby month. The spread from successive months is typically only 30 to 60 cents, well under 1%. See for yourself from the INO website on the CL crude oil futures contract (CLICK HERE). However, between those sudden drops one can notice a steady ramp in decline. That is where the fraud and abuse lies, since they should be flat horizontal, acting like a true tracking fund. There is no tracking. Funds are in high likelihood removed regularly in illicit shorting programs, to sell the crude oil contract with investor funds. Just speculating, but this is an old game.

A final comment on the lavish expense ratios. For the SPDR Gold Shares (GLD) it is 0.40%, which does not seem like much. However, the size of the fund is about $55 billion, making 0.40% a hefty $220 million. That is a big fee to charge for mismanagement. At best it is badinvestment decisions, but at worst it is fraud such as from shorting the shares, the money drawn out to sell into the gold market. The metal inventory from short programs would go straight to the COMEX, as some intrepid reporters have revealed from insider sources. Conclude that investors are violated coming and going. Only total idiots and morons invest in such funds, of course along with lazy folks, cheered on by intellectual clowns like Adam Hamilton of Zeal Intelligence, who seems never to have identified a fraud in his entire career.

BIG BANK FRAUDULENT ACCOUNTING

Let me introduce you to my little friend, said the infamous Scarface. The little friend for the giant US banks is the Debt Value Adjustment, which fabricates profits from bond decay. The success is in placating really stupid investors, who rush in, only to see the bank stock fall by the afternoon sesssion. The accounting fraud committed by JPMorgan is typical. Instead of taking a loss on their own declining corporate bonds, or doing nothing, they posted a queer profit in a Debt Value Adjustment of $1.9 billion, equal to 29 cents per share. The JPM bond yield spread has widened by 200 basis points versus the USTreasury Bond. The bank colossus paid out $1 billion in legal expenses for bond investor lawsuits. They raided $96 million from Loan Loss Reserves, which will be needed later, like in bond fraud investor settlements. They cut 1100 in bank staff. They posted a $700 million decline in investment banking profit. Their biggest line item of profit was the fiction of a $1.9 billion profit from their decaying corporate bonds. It is not a profit & loss event at all. If they default on the corporate bond, imagine the accounting profit could be maximized. Only in American bank accounting!! Blessed as good by the FASB and USCongress!! JPMorgan is a wreck, as their businesses are tanking. Their tight grip on the Silver market could be loosened in time. 

Profits announced by the big US banks are phony. A laundry list of tainted supposed profits came in the last two weeks for the entire crew of giant insolvent us banks. The Debt Value Adjustment (DVA) deception is the main common thread of deception. Citigroup posted $1.9 billion in Debt Value Adjustments, the same amount JPMorgan posted for DVA in a parade. This item is so corrupt as to be indefensible by any rational person. They take the fallen value of their own corporate debt, cite how they could buy it back at a lower cost, and book the difference as profit. But the debt is not bought back, only pretended. Similar games are played with bond spreads widening, but keep the argument simple. Imagine a corporate bond rising in principal, but not as fast as USTBonds, booked as a profit since the spread has worsened. So if the corporate bond fails altogether and goes to zero, the DVA would maximize the profit for the dead firm. In my book, dead firms do not buy back their debt. As a statistical analyst, the Jackass always prefers to carry an argument or method to the extreme to reveal its legitimacy or flaw.

Bank of America also posted a $1.7 billion DVA profit, but the winner was Morgan Stanley, which has the highest risk of death. They posted a hefty $3.4 billion fictional profit from a non-event adjustment to their corporate debt, the same Debt Value Adjustment. Without such tainted profits, the big US banks would have shown their dead decaying matter more clearly. Worse, during a time when mortgage assets and lawsuits are all the rage, they raided their Loan Loss Reserves, more phony profits. Bank of America even listed litigation losses while raiding LLReserves in the amount of $1.6 billion. Citigroup snatched back $1.4 billion in LLR, while Wells Fargo snatched back $0.8 billion in LLR. The big US bank quarterly reports were worse than dreadful, as they were corrupted and phony, the rot visible. Amazingly, the Bloomberg financial news identified the practice as questionable but legal, calling them poor quality profits!! Poor quality indeed. They are too kind. In March they called outgoing Egyptian leader (emperor) Mubarek a prolific saver, for having accumulated $60 billion. Maybe they will call the pilfered Libyan funds sticky, when not returned. 

DERIVATIVES DUMPED ON DEPOSITORS WITH USFED BLESSING

Bank of America dumped its derivative book, possibly preparing for a restructure. The dumping ground is likely a pitstop en route to the USGovt toxic vats. The USFed applauds while the FDIC complains. Raids of assets preceded the Lehman Brothers failure, alert students of history note. This event might be no different. Bank of America engaged in devious accounting. Not only did they call their own corporate bond decay a phony profit, butthe firm shifted much of its mountain of derivatives held on its balance sheet as of June 30th. They moved it to their retail bank. Just last week, Moodys downgraded the bank holding company from A2 to Baa1. The retail bank was downgraded more gently to A2 from Aa3. The collateral backstopping will next be done fully and effectively by the bank’s $1.041 trillion in deposits. A bank run has been rumored at the big lumbering insolvent bank. Its website was down for several consecutive days, inhibiting usage of funds. Furthermore, the insurance agency to the depository base is very angry, namely the Federal Deposit Insurance Corp. The FDIC is another dead entity, devoid of funds, posing as a Wall Street harlot, this time betrayed by its brethren. The USFed favored the shift on the books, so as to give relief to the bank holding company (in their words). Conclude that depositors are forced to backstop its $53 trillion derivative book, as clients continue to depart. Savings accounts and certificate holders might be wiped out on a liquidation.

Bank of America already had the threat of failure looming due to deep insolvency from mortgage and litigation losses. Until now, the operations like the retail banks would not be affected and could be spun out to a new entity, even sold. Shareholders would be wiped out and holding company creditors like the bondholders would take losses. The derivative shift changed everything. Bank analyst Chris Whalen calls it either criminal incompetence or abject corruption by the USFed. Dumping derivatives into the depository business segment goes in diametric opposition to Dodd Frank resolutions. So much for Financial Regulatory Reform if not enforced. The US Federal Reserve and Federal Deposit Insurance Corp are in deep disagreement over the transfers. The USFed favors moving the derivatives to benefit the bank holding company, while the FDIC objects since it must pay off depositors in the event of a bank failure made more likely. The FDIC will attempt to reject this brazen move. The corrupted USFed will argue not to disrupt the financial markets further. Witness the justification for a Dodd Frank resolution and ruling.

The 2005 bankruptcy law was revised to permit derivatives counter-parties to be given the first in line position. They grab assets first in a little known feature of the bankruptcy reform that favored the banks. This truly devious bold move amounts to a direct transfer from Merrill Lynch derivatives risk to the USGovt via the FDIC. It means depositors will be made whole only after derivatives counter-parties have seized collateral. Depositors are lined up for a legalized raid, better yet a theft. Recall back in September 2008, that Lehman Brothers failed over a weekend after JPMorgan grabbed its collateral in a basic daylight raid. Expect another TARP type of bank bailout, as the Wall Street firms jockey to slide their derivative exposure under carefully crafted shells. The bad news for them is that they have over $200 trillion left, even after this ugly maneuver to shift the Merrill Lynch exposure.

GOLD & SILVER READY TO REBOUND

The Gold market is on the verge of a powerful move. The reversal base has been created. The $1620 level was tested successfully a few times. The uptrend has been defended and should continue in a powerful surge upward. The Chinese have been buying with both hands on the physical market, as the London traders report. They took full advantage of the horrendous display of market interference, as the gold contract margins were hiked in repeated fashion during the price declines. It was engineered. The nasty ambush appears over. A bullish divergence is clear, as the daily stochastix showed positive signals while the price was forming a flat bottom near the $1600 level. A powerful reversal is in progress, one that echoes the reversal in the Euro currency from 132 up to 140. Gold had fallen on the back of the Euro decline. Now the Gold price is rising from lack of resolution witnessed and confirmed in Europe. The gap to fill should be swift, easy, and loud. The gap from $1670 to $1770 is a full hundred points. As it is filled, the naysayers on Gold will have to defend why they advised clients to abandon the only true safe haven in the financial universe, Gold, along with its little brother Silver.

The growing economic recession will reveal many dead objects in the flotsam & jetsam, much like a tide going out to sea. That is a primary function of recessions, to clear the deck of bad debt and start anew, to plow the soil and permit nutrients to work again. Gold will shine. Gold is not loaded with the fraudulent traps and snares built by Wall Street from the devious risky paper realm. Gold has no fraud from counter-party risk. Gold is legitimate money. The United States will be forced back to the Gold Standard, but it will be the currency used over a landscape that features rubble, ruin, and discontent. Be sure that every measure will be taken to save the current system, to debase the major currencies in every way possible, at the greatest allowable volume. The USDollar and other majors will be wrecked in the process, and Gold will be lifted in value in corresponding opposite fashion. The Western leaders have no desire to reform, to yield power, and to install a viable sound monetary system. Banks should become utilities, not casinos and helms of market control. A grand disruption cometh!

The Europeans provided the trigger on Tuesday for the big $50 move up in the Gold price, and the $1.50 move up in the Silver price. Their bankers, politicians, and commissioners are in deep discord. No solution exists. Big bond losses are coming. Big banks that are already insolvent will topple. The Greek Govt debt will default. They are trying to make the default orderly. The gang in crisis resolution talks could not be more in discord. The Germans want out of the obligation of being the savings account of last resort to use. The Germans are actually working toward a new alliance with Russia and China, with Persian Gulf support. They look East as they see the West in shambles. If the Euro banks benefit from a big bailout from a $2 trillion filled fund, at minimum, then the monetary debasement will be great for Gold. Tremendous leverage would be the only means of supplying that volume of funding. The Europeans dislike the Geithner concept of heavy leverage usage. If the Euro banks do not fail to secure funding, and cannot recapitalize, a string of bank failures will rock the continent. The contagion will slam London and New York like a tsunami. The crisis would intensify to a new dangerous level that brings talk finally of systemic failure from banking system collapse, which will be great for Gold. Those who jumped or were pushed off the Gold locomotive in September are the real losers. If they relied upon the leverage inherent to the rigged futures contract game, shame on them. Let them climb aboard on the legitimate rail cars that feature physical Gold bullion benches, not the paper fake asset.

Finally, attention has grown on the gathering storm of Italy. Their debt is being downgraded steadily, just like Spain. The Italian prime minister seems like a clown in a suit, calling the crisis a fiction written by the press. They reject austerity measures, as their debt runs out of control. The nation of Italy must fund over EUR 200 billion of debt before the end of 2012, from rollover. Their bond yield has surpassed the 6.0% level known to serve as the alarm bell. Then tack on fresh debt. The Greek domino could easily push over the Italian domino, which lies next to the fragile Spanish domino. The European Monetary Union will break. Germany announced the return of the Deustche Mark, the date unclear for re-launch. It will be priced for conversion at one Euro to 1.95 DMarks, the same as the 1999 exchange rate when the ill-fated Euro was born. Regard this vehicle as a transitional currency to a new gold-backed currency, the USDollar Killer, the ticket to the Third World. Details are in the October Gold & Currency Hat Trick Letter report. These are exciting times, but dangerous times, full of risk, but full of opportunities.

Read the entire article HERE.

by Bernie Sanders
U.S. Senator of Vermont
October 19, 2011

WASHINGTON, Oct. 19 – A new audit of the Federal Reserve released today detailed widespread conflicts of interest involving directors of its regional banks.

“The most powerful entity in the United States is riddled with conflicts of interest,” Sen. Bernie Sanders (I-Vt.) said after reviewing the Government Accountability Office report. The study required by a Sanders Amendment to last year’s Wall Street reform law examined Fed practices never before subjected to such independent, expert scrutiny.

The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves.  “Clearly it is unacceptable for so few people to wield so much unchecked power,” Sanders said. “Not only do they run the banks, they run the institutions that regulate the banks.”

Sanders said he will work with leading economists to develop legislation to restructure the Fed and bar the banking industry from picking Fed directors. ”This is exactly the kind of outrageous behavior by the big banks and Wall Street that is infuriating so many Americans,” Sanders said.

The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose “reputational risks” to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates “an appearance of a conflict of interest,” the report added.

The 108-page report found that at least 18 specific current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis.

In the dry and understated language of auditors, the report noted that there are no restrictions in Fed rules on directors communicating concerns about their respective banks to the staff of the Federal Reserve. It also said many directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve.  The rules, which the Fed has kept secret, let directors tied to banks participate in decisions involving how much interest to charge financial institutions and how much credit to provide healthy banks and institutions in “hazardous” condition. Even when situations arise that run afoul of Fed’s conflict rules and waivers are granted, the GAO said the waivers are kept hidden from the public.

The report by the non-partisan research arm of Congress did not name but unambiguously described several individual cases involving Fed directors that created the appearance of a conflict of interest, including:

• Stephen Friedman In 2008, the New York Fed approved an application from Goldman Sachs to become a bank holding company giving it access to cheap Fed loans. During the same period, Friedman, chairman of the New York Fed, sat on the Goldman Sachs board of directors and owned Goldman stock, something the Fed’s rules prohibited. He received a waiver in late 2008 that was not made public. After Friedman received the waiver, he continued to purchase stock in Goldman from November 2008 through January of 2009 unbeknownst to the Fed, according to the GAO.
• Jeffrey Immelt The Federal Reserve Bank of New York consulted with General Electric on the creation of the Commercial Paper Funding Facility. The Fed later provided $16 billion in financing for GE under the emergency lending program while Immelt, GE’s CEO, served as a director on the board of the Federal Reserve Bank of New York.
• Jamie Dimon The CEO of JP Morgan Chase served on the board of the Federal Reserve Bank of New York at the same time that his bank received emergency loans from the Fed and was used by the Fed as a clearing bank for the Fed’s emergency lending programs. In 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns.At the time, Dimon persuaded the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. He also convinced the Fed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank.

To read a more detailed analysis of the GAO report prepared for Sen. Sanders, click here.

To read the full GAO report, click here.

Read the entire article HERE.

BY CRIS SHERIDAN
10/19/2011
Financial Sense

The Government Accountability Office (GAO) just released its findings from their second audit of the Federal Reserve revealing a well-established revolving door and numerous conflicts of interest between the Fed and top banking executives, most of whom sit on its board.

As revealed in The Sanders Report, which should probably be mandatory reading for the Occupy Wall Street movement, specific board members directly profited from removing restrictions or giving certain banks access to cheaper Fed loans while simultaneously holding stock in that company. Although such actions would’ve normally been restricted by the Fed’s own internal regulations to prohibit such obvious conflicts of interest, waivers were issued instead to certain individuals allowing them to maintain their financial relationships with companies like the most-beloved Goldman Sachs.

What is most troubling, however, aside from the numerous incidents cited in the report, is how completely non-transparent the Fed is when compared to other central banks around the globe. Here’s an astonishing list of examples from The Sanders Report mentioned above (emphasis mine):

The central bank in Australia prohibits its directors from working for or having a material financial interest in private financial companies located in its country. If such regulations were in place at the Fed, the CEO of JP Morgan Chase and many other bank executives would be prohibited from serving on the Fed’s board of directors. (See page 65 of GAO report)

The central bank in Canada requires its directors to disclose any potential conflicts of interest as soon as they are discovered; avoid or withdraw from participation in any real, potential, or apparent conflicts of interest; and cannot vote on any matters in which there is a conflict of interest. If these regulations existed at the Fed, Stephen Friedman would have been required to immediately resign from Goldman’s board, sell his Goldman stock, or resign from the Fed’s board of directors. Instead, Mr. Friedman was allowed to financially benefit from the increase in Goldman’s stock while it received approval from the Fed to become a bank holding company and received billions in emergency Fed loans. (See page 46 of GAO report)

The central bank in Canada also prohibits its directors from having affiliations with entities that perform clearing and settlement responsibilities in the financial services industry or serve as dealers in government securities. The Fed does not. These regulations would have prevented both Friedman and Dimon from serving on the Fed’s board of directors. (See page 46 of GAO report)

The directors of central banks in Australia, Canada, England and the European Union all have to disclose potential conflicts of interest and must disclose its conflict of interest policies on the internet. The Federal Reserve does not. (See page 47 and 49 of GAO report)

Unless you have time to read all 127 pages of the GAO release, I highly encourage you to read the 5 page Sanders Report instead. Given how ugly and incriminating this information is, the Fed should start thinking about some high-profile firings or, at least, putting together a top-notch public relations team…if they haven’t already.

If they don’t do something, expect to see protesters showing up at the Federal Reserve Bank in New York pretty soon (conveniently located down the street from Zuccotti Park at 33 Liberty Street).

By the way, for those of you who believe our banking institutions are the root of our financial problems, I pose to you the following questions:

Q: Which is the largest bank in the nation?
A: Our central bank, the Federal Reserve

Q: Who is primarily responsible for supervising and regulating the banking industry?
A: The Federal Reserve

Q: Who is reponsible for maintaining financial stability?
A: The Federal Reserve

Q: Who lowered interest rates to artificially low levels and helped foster a speculative housing bubble?
A: The Federal Reserve

Q: Who said on live television in 2005 that we weren’t in a housing bubble and that we wouldn’t see a recession? (click here for video)
A: Federal Reserve Chairman Ben Bernanke

(BTW, if you think that a housing bubble and market crash weren’t seen by others years earlier, click here)

Q: Who now bails out the banks with money printed out of thin air and raises the cost of living for everyday Americans?
A: The Federal Reserve

Of course, it wouldn’t be fair to blame the Federal Reserve for all our problems, but holding their feet to the fire to implement far greater transparency and a comprehensive elimination of various conflicts of interest with member banks is a good place to start.

Read the entire article HERE.

OCTOBER 18, 2011
The Daily Bail

 

This story from Bloomberg just hit the wires this morning.  Bank of America is shifting derivatives in its Merrill investment banking unit to its depository arm, which has access to the Fed discount window and is protected by the FDIC.

This means that the investment bank’s European derivatives exposure is now backstopped by U.S. taxpayers.  Bank of America didn’t get regulatory approval to do this, they just did it at the request of frightened counterparties.  Now the Fed and the FDIC are fighting as to whether this was sound.  The Fed wants to “give relief” to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.  You will also read below that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve.

What this means for you is that when Europe finally implodes and banks fail, U.S. taxpayers will hold the bag for trillions in CDS insurance contracts sold by Bank of America and JP Morgan.  Even worse, The Total Exposure Is Unknownbecause Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure.

This is a recipe for Armageddon.  Bernanke is absolutely insane.  No wonder Geithner has been hopping all over Europe begging and cajoling leaders to put together a massive bailout of troubled banks.  His worst nightmare is Eurozone bank defaults leading to the collapse of the large U.S. banks who have been happily selling default insurance on European banks since the crisis began.

Original Article HERE.

 

*****Bloomberg By Bob Ivry, Hugh Son and Christine Harper – Oct 18, 2011*****

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Accommodating Clients

Jerry Dubrowski, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment on the transfers or the firm’s discussions with regulators. The company “continues to accommodate the needs of our clients through each of our multiple trading entities, including Bank of America NA,” he said in an e-mailed statement, referring to the company’s deposit-taking unit.

Barbara Hagenbaugh, a Fed spokeswoman, said she couldn’t discuss supervision of specific institutions. Greg Hernandez, an FDIC spokesman, declined to comment.

Bank of America posted a $6.2 billion third-quarter profit today, compared with a loss of $7.3 billion a year earlier, as credit quality improved and the firm booked one-time accounting gains. The lender rose 7.3 percent to $6.47 at 1:54 p.m. in New York trading, making it the day’s best performer in the Dow Jones Industrial Average. Credit-default swaps on Bank of America eased 10 basis points to a mid-price of 380 as of 11:49 a.m. in New York, according to broker Phoenix Partners Group.

Moody’s Investors Service downgraded Bank of America’s long-term credit ratings Sept. 21, cutting both the holding company and the retail bank two notches apiece. The holding company fell to Baa1, the third-lowest investment-grade rank, from A2, while the retail bank declined to A2 from Aa3.

Moody’s Downgrade

The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.

Bank of America estimated in an August regulatory filing that a two-level downgrade by all ratings companies would have required that it post $3.3 billion in additional collateral and termination payments, based on over-the-counter derivatives and other trading agreements as of June 30. The figure doesn’t include possible collateral payments due to “variable interest entities,” which the firm is evaluating, it said in the filing.

Dubrowski declined to comment on collateral or termination payments after the downgrade.

‘Be Prepared’

Bank of America’s rating is now four grades below the one Moody’s assigned to JPMorgan Chase & Co. (JPM), the biggest U.S. bank by deposits at midyear, and a level below the rating given to Citigroup Inc. (C), the third-biggest. Bank of America is the only U.S. lender that lacks a rating of A3 or higher among the five firms listed by the Office of the Comptroller of the Currency as having the biggest derivatives books.

“We had worked very hard over the course of the last nine months to be prepared to the extent that we did receive a downgrade, and feel very good about the way that we’ve minimized the potential impact” Bank of America Chief Financial Officer Bruce Thompson said in a conference call today with analysts. “Since the downgrade, we have not seen any change in our global excess liquidity sources.”

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.

Dodd-Frank Rules

Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation.

The legislation gave the FDIC, which liquidates failing banks, expanded powers to dismantle large financial institutions in danger of failing. The agency can borrow from the Treasury Department to finance the biggest lenders’ operations to stem bank runs. It’s required to recoup taxpayer money used during the resolution process through fees on the largest firms.

Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first, in 2008, included $15 billion for the bank and $10 billion for Merrill, which the bank had agreed to buy. The second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill. The company repaid federal bailout funds in 2009 with interest.

‘The Normal Course’

Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

The moves by Bank of America are part of “the normal course of dealings that we’ve had with counterparties since Merrill Lynch and BofA came together,” Thompson said today.

‘Created a Firewall’

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.

As a general rule, as long as transactions involve high- quality assets and don’t exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act, Omarova said.

In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed’s website.

The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one.

Section 23A “is among the most important tools that U.S. bank regulators have to protect the safety and soundness of U.S. banks,” Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.

 

Read the entire article HERE.

BY STEVE ST. ANGELO
10/10/2011
Financial Sense

 

 

The world is about to peak in global silver production. This will not occur due to a lack of silver to mine, but rather as a result of the peaking of world energy resources, declining ore grades, and a falling Energy Returned On Invested – EROI.  The information below will describe a future world that very few have forecasted and even less are prepared.  This is an update to my previous article Peak Silver and Mining by a Falling EROI.  In my first article I stated that global silver production may peak in 2009 if we were to enter a worldwide depression.  We did not have the global depression as massive central bank printing and bailouts have thus far postponed the inevitable.

The world has entered a plateau of global oil production over the past 5-6 years.  A higher oil price has not brought on more supply to offset depletion rates from existing fields.  From the graphs above we see a correlation between global silver supply and oil production, especially in the latter part of the 20th century.  Up until the late 1800’s and early 1900’s the majority of energy used in mining silver came from human and animal labor.  It is truly amazing just how much silver was produced in the United States at this time without the use of oil and modern mining practices (information provided later in the article).  This all changed as global oil production as well as the technique of open-pit mining increased.

 

The 3 Big Energy Game Changers for Silver Mining

 

There are a number of some very large open-pit mining projects supplying silver that are forecasted to go into production within the next several years as well as others by the end of the decade.  It is astounding to see these 25-45 year extended forecasts by these mining companies without any consideration of what the energy environment will be like in 2015-2020 or later.  It seems like everyone in the sector assumes there will be ample supplies of energy at commercially viable prices.

 

This is where the trouble begins.  There are three negative energy game changers that will impact the mining industry going forward.  They are: (1) the Peaking of global oil production, (2) the Land Export Model and (3) the falling EROI – Energy Returned On Invested.  Of the three, I believe the falling EROI will be the most devastating.  Before explaining why this is the case, let’s take a look at each.

 

Peak Global Oil Production

 

According to JODI’s global oil production figures represented HERE in a post on theOilDrum.com, it looks like the global peak of convention crude/condensate and natural gas liquids took place in 2006:

 

 

Global oil production has increased steadily since the early 1980’s and has now been in a bumpy plateau for the past 5-6 years even with much higher oil prices.  It is true that there are more projects and oil fields slated to come online in the next several years, but much of the increase will be offset by depletion in existing fields.  To add insult to injury, the majority of oil that is exported throughout the world is being supplied by countries that are also increasing their own domestic oil consumption.  This is a double-edged sword for dependent oil importing nations— which leads us to the Export Land Model.

 

Export Land Model

 

The Export Land Model developed by geologist Jeffery Brown and others shows how oil- exporting countries suffer higher declines of exports due to increased domestic consumption.  As the nation increases its own oil consumption for their expanding economy, this causes exports to fall even greater than declines in oil production alone.  This becomes apparent when we look at what is taking place in Saudi Arabia.

 

 

In 1980, Saudi Arabia produced approximately the same amount of oil it is presently. However the kingdom is exporting 2+ mbd (million barrels a day) less oil.   The right side graph above reveals that as domestic consumption has increased (black line), exports have declined.  By 2020, Saudi Arabia’s domestic consumption is forecasted to reach 5.9 mbd of oil equivalent, including natural gas, which will decrease the country’s exports even further (Jadwa Investment’s “Saudi Arabia’s coming oil and Fiscal Challenge”).

 

If we add up all the other exporting oil countries and consider what the future percentage loss from this model might be, the drop in oil exports will be significant indeed.  Here we can see that the peaking of global oil production, plus the declining oil exports described above by the Export Land Model, puts a serious dent in the ability for future growth in the world economies.  If the world economies are unable to grow, neither will the supply of base metals and silver.

 

These two energy constraints are in themselves bad enough news for the global economy and the mining industry.  Unfortunately the third is by far the most devastating.  The falling EROI measures what amount of that oil will be available for market.  It is also described as the net energy that remains after production costs are considered.

 

The Falling EROI: Energy Returned on Invested

 

In my opinion, the EROI —Energy Returned On Invested— is by far the most important aspect confronting our economy, society and world at large.  Ironically, the EROI of oil and natural gas has been falling ever since man drilled his first well.

 

 

According to work done by Cutler Cleveland of Boston University, the EROI of U.S. oil andgas was 100/1 in 1930. It fell to 30/1 by 1970, and hit 11/1 by 2000.  Oil was so abundant during the 30’s in the States that it only took the cost of 1 barrel of oil to produce 100 barrels for market.  By 2000, it has declined nearly tenfold.

 

The graph on the right side shows the falling Global oil and gas EROI (by Gagnon, Hall & Brinker) to be 18/1 in 2006.  They plot with a solid black line that a possible 1:1 EROI projection may be by the mid 2030 decade.  As this EROI ratio continues to decline, it puts a huge stress on the world economies by increased energy costs while providing less net energy for the market.

 

There has been so much misinformation put out by different organizations as to the amount of oil and natural gas reserves that it is has totally confused the investing community and the public.  Whenever I get into a debate about peak oil or oil reserves there is always someone who brings up the notion that the United States is sitting on trillions of barrels of shale oil.  This is  the subject of a whole other article, but to get to the point, shale oil as a savior of the inevitable United States (or World) Energy Crisis is a pipe dream.  Here are the three biggest lies propagated in the U.S. energy industry:

 

1. 1950’s – Nuclear energy…..too cheap to meter.
2. 2000’s – Shale Oil trillion+ barrels of U.S. reserves
3. 2000’s – Shale Gas 100 years worth of U.S. supply

 

To explain why there is a great deal of hype in shale oil and gas, take a look at the graph below.

 

 

Shale oil is much more expensive to extract than light sweet crude in Saudi Arabia.  Many say that increased technology will bring more oil to the market, but it does so at a lower EROI.  The lower the EROI, the less net energy is available for market.  With less net energy, there is less growth.

 

Furthermore the depletion rates of a typical shale well in the North Dakota Bakken Field are 75-80% by the second year.  Shale gas depletion is even worse, with fields reported from the Texas Barnett Field declining 60% in the first year.  The notion that the U.S. will be able to increase oil production significantly with shale oil turns out to be a red herring when you figure that these severe depletion rates make it impossible to do so.

 

Another nail in the coffin for shale oil is its low EROI.  The figures on the right side of the graph above show the different EROI ratios for conventional and nonconventional energy sources.  The only thing worse on the EROI scale than shale oil (5:1) is tar sands (2-4:1).  Why are these EROI ratios so important and ultimately devastating to the world economy and silver mining?  The next graph provides the answer.

 

 

As we can see from the left side of the global oil peak, everything is rosy; high EROI ratios with a majority of net energy already consumed by the world economies.  Once we slide over to the other side, the picture gets downright scary.  Even though there is a great deal of oil on the downward side of the peak, the majority of it gets consumed in the production of the energy itself.  Once it costs more to produce a barrel than you get in return, the game is over.

 

Unfortunately, there is more to it than that.  There is a minimum EROI that a modern society needs to sustain itself.  All the EROI ratios listed above are figured from the point the oil & gas comes out of the well.  We have to remember the oil & gas has to be transported and refined and the interstate-highway system and infrastructure has to been maintained.  All of these are costs that are subtracted out of that EROI ratio.  This is explained in detail by Charles Hall & David Murphy HERE.  The bare minimum a modern society needs is an EROI of 3:1….but if you want the luxuries of art, entertainment, medicine, education or etc; the ratio has to be higher still.

 

The graph above is one possible forecast of net energy.  The creator of the graph has produced another showing a more gradual slope of net energy.  I have had several conversations and email exchanges with other geologists and engineers who believe the graph presented above is a more realistic representation than the second.  I agree.

 

Peak Oil is Here Whether You Believe it or Not

 

Before we get into the silver part of the article, there is one more topic on energy that needs to be discussed.  There is continued debate about the Abiotic Theory of Oil as well as the blocking of oil drilling in certain areas of the United States by environmentalists.  The Abiotic Oil Theory states that oil fields are continuously being refilled, so there will be no peak oil.  Even though this might be true in some small cases as it pertains to methane, the amount is infinitesimal.

 

 

The list of countries presently past peak is long.  If we consider a good portion of these countries are in areas of the world that do not have much in the way of regulations or environmentalists, peak oil still took place.  It is true that there is still some oil in the U.S. being kept from the market by environmentalists and the government, but in the end….it doesn’t change the overall picture all that much.

 

Lastly, for those of you who believe the information above is controlled by the Illuminati, Bilderbergs or whomever and there is still plenty of oil in wells capped all over the country, there is nothing that can be written or said to change your mind.  As illustrated by the data, peak oil is here whether you believe it or not.

 

As the world is currently peaking in oil production, the United States passed its peak forty years ago in 1971.   The same can be said for overall silver production.  The U.S. extracted the majority of its high grade silver by the middle of the 20th century.  Today, the U.S. has to resort to mining a great deal more total ore to produce the same or less silver than it did years ago.   This process is occurring throughout the world.  In my first article (link provided at the top of this article) most of the information on ore grades came from Gavin Mudd and his work on the Australian mining industry as well as data on declining global gold ore grades.   To continue to understand this ongoing process, I choose to focus on the United States as the USGS – U.S. Geological Survey – has kept some very detailed records of historical mining activity in the States.

 

CASE STUDY: United States Past Silver Production and Falling Ore Grades

 

In the early days, miners and investors sought out the best quality and highest ore grades they could find.  The higher the ore grade, the higher the profit.  Today, there is a great deal of excitement when mining companies release drill results with higher ore grades than expected.  Yet, these same ore grades would have been embarrassing to the prospector and investor just 100 years ago.  How the passage of time makes us forget what life was like just a short while ago…

 

The majority of the top eight silver ore-producing states in the country peaked in annual silver production before the 1940’s.  Only Idaho and Nevada had higher peaks after 1950.

 

 

Colorado had the highest annual silver production of all 50 states with 25.8 million ounces produced in 1893, almost 120 years ago.  New Mexico peaked in 1885, Montana in 1892, California in 1921, Utah in 1925, and Arizona in 1937.  Even though Idaho had its true peak in 1966 at 19.8 million ounces, it surpassed its previous record by only 200,000 ounces, which occurred in 1937.  Nevada peaked late in the game due to two factors:  1) it has recently become the largest gold producer in the country currently, providing nearly 75% of nation’s gold.  (with gold mining comes by-product silver), and  2) due to the McCoy/Cove Mine, which single-handedly mined 11 of the 27.4 million ounces Nevada produced at its all time peak in 1997.

 

Not only did the McCoy/Cove Mine help Nevada to become the second-highest silver producer in U.S. history, it also accounted for 35% of all silver extracted from the state between 1987 and 2003.

 

 

The record silver production in Nevada as well as the McCoy/Cove mine are now gone.  In its last recorded year of production, the McCoy/Cove Mine produced 596 oz of silver in 2006.  That’s correct, a mere 596 oz (that year it was still producing some gold).  According to theMajor Mines of Nevada 2010 publication just released, Nevada only produced 7.3 million ounces of silver in 2010…a 70% decline in just 13 years from its peak.

 

From the late 1800’s to 1950’s the same eight states listed above produced the lion’s share of silver in the country.  Very few people who are asked will know which state was the largest producer at this time.  Most when asked will say Idaho, Utah or Colorado.  I was quite surprised to find out that Montana outperformed them all by producing 775 million ounces by 1950.

 

 

Montana produced the most silver in the country at this time due to the richness of copper in the state, where silver was a by-product.  According to the MONTANA MINING NEWS MINING JOURNAL dated 8/30/1930:

 

Anaconda Copper Mining Company is confining work at the Flathead Mine, near Kalispell, Montana, to development, because of the present metal prices, according to a reported statement by Jack Dugan, superintendent. Thirty men are employed in extracting 40 tons daily, of ore, said to average 50 ounces of silver, per ton.

 

This is an example of the kind of high grade ores they were pulling out of Montana back in 1930.  Impressive as it was, this was not the average.  To give you an idea of the difference of 75 years, Montana produced 9.3 million ounces of silver in 1935 at an average ore grade of 3.45 oz/ton.  In 2010 there were only two mines producing silver as a by-product of copper.  The larger producer is the only publicly traded company in Montana and it produced a little more than 1 million ounces of silver at an average ore grade of 0.87 oz/ton or a 75% decline.

 

The USGS provides Mineral Yearbooks for the states back until 1932.  One can imagine what the ore grades must have been in 1892 when Montana produced its most silver in one year at 19 million ounces.

 

Idaho:  the Largest Silver Producer in the Country’s History

 

The one state that sticks out like a sore thumb in the graph above is Idaho.  It is the only state that has produced over a billion ounces silver by 1990 with the majority of it after 1950.  Even with this significant production, Idaho wasn’t able to escape the negative aspects of falling ore grades.

 

In the late 1800’s and early 1900’s a larger percentage of silver came from a grade called “Dry and Siliceous Ore”.  During this time, between 40-50% of silver produced in the country came from this type of ore.  To give you an example in 1922, 46.8% of silver in the U.S. came from dry and siliceous ore.   The percentage dropped over the next decade— falling some years into the teens (especially during the 1930’s depression).  By 1935, it climbed back to 40%.

 

This is the sort of ore that primary silver mines are made of as it contains the most silver per ton.  Idaho had some of the richest dry and siliceous ore grades in the country.  The graph below represents how much this sort of ore grade has declined since the 1940’s.

 

 

The reason why this graph only shows data up until 1980 for Idaho and 1989 for the U.S. is due to the fact that information was withheld from the USGS due to proprietary reasons by the mining companies.  Furthermore, this is also true for individual state reporting of detailed silver statistics after 1990.  In the early days the states provided the USGS with so much information on gold and silver that many of the gold-silver reports were over 200-300 pages.  Today the Silver Yearbooks barely fill 15 pages.

 

To bridge the gap to the present day, we can look at what has taken place in the largest publicly traded mining company in the state.  Hecla’s Lucky Friday Mine in Idaho produced 3.3 million ounces in 2010 at an average ore grade of 10.25 oz per ton.  The chart below compares the difference from the same mine in 1965.

 

 

Here we can see that Hecla has only produced a little more than 100,000 ounces of silver than it did in 1965 but has to process almost double the amount of total ore.  This insidious decline of silver ore grades over the years seems subtle to the mining industry that is focused on quarterly results, but becomes an increasingly difficult problem now that the world suffers from peak oil and a falling EROI.

 

The United States:  Produced 25% of all Global Silver 1900-1950

 

When the U.S. was the Saudi Arabia of the world in oil production at the early and middle part of the 20th century, it was also the second-largest silver producer in the world behind Mexico.   Of the 10.5 billion ounces of silver produced by the world from 1900-1950, the United States accounted for 2.7 billion (or 26%) of the total amount.

 

 

This historical graph is relevant due to the fact that in next 60 years from 1951-2010 the U.S. only produced 2.58 billion ounces of silver… with significantly falling ore grades shown below.

 

 

The chart above represents total ore from mining gold, silver, copper, lead and zinc.  The majority of silver comes from base metal mining in which zinc/lead provides the highest percentage compared to copper and gold.  In 75 years, the total ore grade of silver has fallen nearly 92% while actual production has remained basically flat.  This is due to the fact that all base metal ore grades in the U.S. are falling as well.

 

For example, copper has shown a huge decrease in ore grade since the early 1900’s.  In 1906 the average ore grade for copper was 2.5%.  By 1935 the average copper ore grade had fallen to 1.89% and in 2009 the United States produced copper at 0.43% a ton.  This is a decline of 77%.

 

The Falling EROI and Declining Ore Grades

 

On top of declining ore grades and adding insult to injury, is the falling EROI of energy.   When the U.S. and the world were tapping into high quality concentrated ore grades in the early years, they did so with the majority of human and animal labor.  This kind of labor was not only very efficient but it also utilizing a higher EROI.  The open-pit mining practices employed today are in fact quite the opposite….extracting metal at a much lower EROI.

 

For example, people today have this misguided opinion that modern farming is very efficient.  They see one farmer on a huge tractor working hundreds or thousands of acres of agricultural land.  They do not factor in all the energy it costs to plant, fertilize, harvest and process the crop.  This does not include all the energy and technology it takes to develop hybrid seeds, the manufacturing of the tractor and equipment as well as many other aspects that go into modern farming.  In reality, the pre-industrial farmer with horse and plow was extremely more efficient that his modern counterpart.

 

FOOD EROI’s

 

Hunter Gatherer = 10/1
Pre-Industrial farmer = 10/1
Modern high-tech farmer = 1/10

 

The pre-industrial farmer with horse and plow was able to produce 10 calories (of food) for market for every 1 calorie of energy (food) consumed by the operation.  Today, the modern farmer needs to consume 10 calories of energy to provide only 1 calorie of food for market.  If we consider this ratio, the modern farmer is 98.8% less efficient than the simple farmer with horse and plow.

 

The only reason why modern farming practices have been successful at this horrible rate of efficiency is due to the high EROI of energy over the past 100 years.  Now that the EROI is falling considerably, it is putting severe pressure on the agricultural industry.  This will also be true for the mining industry.

 

Base metals are extracted by either open-pit or underground mining.  Of the two, open-pit mines account for the larger percentage of metal produced in the world. (Surface Mining Methods and Equipment)  The technique of open-pit mining utilizes huge excavators and large haul trucks to move the ore from the mine.  There is a great deal of energy consumed in the development, manufacturing, maintenance and operation of these huge earth moving machines in the mining industry.

 

It is difficult to estimate an EROI ratio for open pit mining as the end product is metal and not energy.  That being said, a simple rule of thumb can be assumed if we take the negative EROI of modern farming as an example.  The larger and more complex the machine used in industry, the more inefficient its production as it pertains to the EROI.

 

Now that we understand the past and present EROI ratios in the agricultural sector, we can see why the early miners and prospectors were much more efficient in producing silver than the huge open-pit mining operations of today when we consider all the energy involved.  As the world’s energy sources start to decline in the future and the falling EROI destroys an ever increasing portion of the net energy available for market, the number of open-pit mines will decline as well.  As this process takes place, the peak in global mining will occur due the fact that human or animal labor cannot equal the extraction rate of diesel powered earth-moving machines.  What is taking place in the mining industry today is the WORST OF BOTH WORLDS… declining ore grades on top of a falling EROI of energy.

 

The Coming Global Depression:  Another Nail in the Coffin for Peak Silver

 

The world hasn’t suffered an economic depression for almost 80 years.  The Kondratieff-Wave analysts who study business cycles say we are now overdue for a depression.  Even though this is true, they are correct for the wrong reasons.  Business cycles have occurred because humans were able to constantly grow and expand their economies.  It was due to the 10/1 EROI of the pre-industrial farmers that enabled the rest of the economy to grow and flourish.  After several generations of booms, we had the busts.

 

As we moved into the modern-industrial economy cheap energy with a high EROI allowed the world economies to grow exponentially—allowing these business cycles to continue.  Today we are at the top Boom part of the cycle.  The big Bust and depression have been postponed due to the ability of central banks to print money and financial institutions to invent hundreds of trillions of dollars worth of derivatives to hedge overly inflated assets.  When the global depression finally arrives, we will never return to anything like we enjoyed before.  This bust will be the depression that ends all global depressions.

 

If we consider what took place during the last depression, base metal & silver mining activity fell off a cliff.  The interesting thing to note in the next two graphs below as global silver production declined, gold production actually increased.

 

 

 

Global silver production declined 38% from 1929 to 1932, whereas gold production actually increased 24% in these three years.  It took eight years before the world was able to increase silver production over its 1929 figure.  Gold on the other hand, increased its global production a staggering 80% during the same time.

 

This time will truly be different.  The world will not be able to increase its gold production anywhere near the percentage it did in the 1930’s.  There is a good chance that actual global gold production will decline as the supply chains break down disrupting the highly technical method of refining and processing gold.  Another reason may be due to its dependence on copper production as part of its supply.  When economies collapse, so does the demand for base metals such as copper, zinc and lead.  This is the reason why silver production suffers greater during a depression than gold.

 

 

Here we see just how much difference there is in the base metal mining percentage between gold and silver.  Zinc & Lead account for the larger portion of the base metal percentage of silver mining, whereas copper production provided 15% of all the gold produced in the world in 2010….or 75% of the base metal pie.

 

When the world’s central banks are unable to continue to prop up the global economies with money printing, economic growth will drop considerably.  China is starting to show signs of an economy heading into a brick wall.  Base metal production will decline significantly in the following years cutting back the production of silver as well.  If history is a good reference, the future global supply of silver can decline between 20-40%.

 

A Brief look at World Silver Production

 

Over the past decade global silver production has increased on average between 2-3% per year.  In 2010, according to the World Silver Survey, global silver production reached 735 million ounces of silver.   In the first half of 2011 some of the top silver-producing countries have increased their production while others have seen declines.   The top producing silver mine in the world, BHP Billiton’s Cannington, has seen its production decrease from 18.9 million oz in the first half of 2010 to only 15.5 million ounces in the first half of 2011 (an 18% decline).  Cannington — like all mines— suffers from falling ore grades.

 

 

In 2000, Canningtion mined 1.6 million tons of ore and produced 30 million ounces of silver at an average ore grade of 636 g/t.  By 2011, it mined 3.1 million tons of ore (or 92% more) just to produce an additional 5 million ounces than it did eleven years ago.  What is occurring at Cannington is typical of mines throughout the world.

 

If we take a look at global silver supply, only a handful of countries have increased their production significantly over the past several decades.  Out of all the countries listed in the graph below since 1985, China has had the largest percentage increase.  China increased its estimated production from only 2.5 million ounces in 1985 to 99 million oz (or +3,850%) by 2010.  The other countries that have increased their production in order of highest percentage are, Bolivia from 3.6 mil oz to 41 mil oz (+1,039%), Argentina from 2.1 mil oz to 20.6 mil oz (+880%), Chile from 16.6 mil oz to 41 mil oz (+147%), Peru from 58.2 mil oz to 116.1 mil oz (+100%), and finally Mexico from 73.2 mil oz to 128 mil oz (+75%), in the same time period.  Even though Mexico is the number one silver producer in the world, it had the lowest percentage increase of all six countries.  These countries account for 61% of all global silver supply.

 

 

Australia was not included in the graph for two reasons.  First, even though its production has increased 71% since 1985, its future growth is not forecasted to improve as much as the nations listed above.  Secondly, because of Australia’s western form of capitalistic government, it is least likely to deal with issues of political instability, threats of nationalization or protectionist policies such as those in South America, Mexico and China.

 

Argentina, Bolivia, Chile and Peru— which are located in South America— may suffer from the same type of policies that have plagued the resource industry in Venezuela.  Not only are Venezuela’s oil fields nationalized, in August of this year, President Hugo Chavez has also ordered the same for the gold mining industry.

 

In Mexico, billionaire Hugo Salinas Price has gained significant support in the country to reintroduce the Silver Libertad as legal tender to compete with the Peso for the Mexican people.  If this policy were to pass, a large percentage of Mexico’s silver production would be consumed by its own people to protect them from continued inflation.  Furthermore, the country suffers from a great deal of upheaval and violence from the drug wars which could lead to political instability possibly threatening the mining industry.

 

Lastly, over the past several years the world has felt the ramifications of China’s cutback of rare earth mineral exports.  China currently produces between 95-97% of the 17 rare earth minerals in the world.  Not only have prices of rare earth minerals increased substantially due to this monopolistic policy, it is also forcing foreign companies to move their facilities that manufacture end-user products in China.  These companies are also being requested by China to transfer valuable technology to other domestic companies so they can benefit from the knowledge.

 

This may also occur in exports of Chinese silver.   As global tensions increase due the continued disintegration of the world fiat currency system, China may decide to put a total ban on silver exports.  Even though Chinese exports have declined substantially (from 3,000 metric tons in 2005 to only 1,575 metric tons in 2009), there is a good possibility that they may turn off the silver spigot completely.

 

The countries listed above are enjoying the best records of increased silver production, but at the same time are some of the worst candidates for dependable future global supply.

 

Final Remarks and Conclusion

 

The world produced a record amount of silver in 2010.  Many analysts are forecasting a continued increase in global production for the next decade.  There are several factors that show why this will not be possible.

 

As the world peaks in global oil production and the net energy available for market continues to shrink due to the falling EROI (Energy Returned On Invested), of oil and natural gas, global economic growth will come to a screeching halt.  The falling EROI of energy is a one way street to the bottom.  Unconventional energy sources such as shale oil, shale gas and tar sands will not be able to stop this decline.

 

As global economic growth disintegrates so will the demand for base metals – which 70% of silver is a by-product.  On top of that, silver ore grades are relentlessly falling in mines throughout the world which takes an increasing amount of energy just to keep production flat.  If the mining industry tries to incorporate more human and animal labor to offset declining oil based energy in the future, it will do so only at much lower rates of production than today.  This is due to the fact that human or animal labor cannot match the extraction rate of diesel powered excavators or huge dump trucks when it comes to mining silver.

 

Then there is the negative effect of a global depression on the production of silver.  Presently the world has entered into tremendous chaos and economic turmoil.  Conditions are ripe for a complete disintegration of the financial markets, thus pushing the world over the edge into a new dark age of hyperinflationary depression.  In this sort of atmosphere, countries may resort to the nationalization of mines as well as other protectionist’s policies.

 

When the nails of the peak silver coffin are added up, the death of increasing future supply is close at hand.  The CEO’s and analysts in the mining industry are for the most part oblivious to these factors that will destroy their ability to make viable forecasts of future projects.  It amazes me to see professionals plan a huge open-pit mine with a 25-45 year economic plan without any consideration of what the energy environment will be like at that time.  For some strange reason, there is this false assumption that “If we build it, the energy will come.”

 

If the world enters a depression within the next year or two, this will certainly guarantee the global peak of silver production.  Why?  It won’t matter if the global economy recovers in the next decade, because the peaking of oil and the falling EROI of energy will have destroyed enough net energy to kill any attempt to bring global silver production back to the level it was before.

 

Lastly, anyone who is good at connecting the dots will realize the ramifications of this article go way beyond just the peaking of silver.  The falling EROI of energy will not only be a destroyer of precious net energy, but will also help bring down the largest empire in the world.  This will be the subject of a future article.

Read the entire article HERE.
 

 

 

 

 

 

 

 

 

 

 

 

By Robert Holmes
08/07/11 – 11:54 AM EDT
The Street

BOSTON (TheStreet) — After a 7% plunge in equities last week, investors are fearful of what the Standard & Poor’s downgrade of U.S. debt will mean for stocks come Monday.

Unfortunately, the outlook is grim if one dusts Friday’s trading session for clues. U.S. stock indices rallied more than 1% at the start of trading Friday on a better-than-expected July employment report, retracing some of the 5% loss from Thursday.

Stocks fell anew, however, on market chatter that S&P was planning to announce a downgrade of its triple-A rating on U.S. debt after the closing bell. After briefly topping 11,550, the Dow Jones Industrial Average gave up its gains and fell as low as 11,150 shortly before midday, a swing of more than 400 points in less than three hours.

Stocks ultimately ended the day mixed, but if Friday’s early swoon is any indication, Monday’s trading session will see plenty of red. Matthew Rubin, director of investment strategy with Neuberger Berman, says that investors may not have priced in the full extent of an S&P downgrade.

“We could wake up on Monday morning and see the futures down precipitously, but I want to believe some of this was priced into the market,” Rubin said by phone Friday after the S&P announced its decision to cut the rating on U.S. debt to double-A-plus from the coveted triple-A rating.

Jeffrey Sica, president and chief investment officer of Morristown, N.J.-based Sica Wealth Management, says that investors are not caught completely surprised by the downgrade, yet he still expects a “substantial selloff” in equities on Monday as market participants begin to understand the ramifications of the first downgrade of U.S. debt in history.

“We maintained the triple-A rating through the Great Depression and all the wars and recessions, so you have to believe it’s going to concern people,” Sica said by phone late Saturday. Investors were bracing for a downgrade all week, but “there will be a lot of fear and worry,” he adds.

A late Friday downgrade announcement by the S&P was a premeditated move that was designed to allow investors to digest the news.

Read the entire article HERE.

by Brian Sylvester
The Gold Report
July 29, 2011

The Gold Report: You recently wrote that these are not normal times. Perhaps the current macroeconomic picture is the new normal?

Jay Taylor: The new normal is being shaped. We haven’t seen the final product yet. The new normal will be a world in which most Americans do not enjoy the standard of living that they have enjoyed in the past. I think this directly results from a situation in which the people who are able to create money out of nothing wrestle wealth away from those who create it. The miners, the manufacturers, the investors, the farmers—people who actually do things that are good for people—are not getting their fair share because the banking class attached to the politicians has control of the system. This is one of the reasons that I think we should go back to a gold standard. The new normal will be a decline in the general standard of living for most Americans. And I don’t think we’ve seen the bottom of that yet.

TGR: Your Inflation/Deflation Watch (IDW) chart is up about 53% since you launched it on Jan. 31, 2005. However, you believe that the chart’s current neutral direction suggests that the market is running on speculative money, not growth. Can you explain your rationale for that?

JT: By “neutral,” I mean that it is just a momentum gauge. We actually saw a decline in the IDW, or a real deflation, for a few months after the Lehman Brothers crash in 2008. Huge amounts of money, trillions and trillions of dollars of stimulus pumped into the economy, have managed to get it back up to the positive 50%-plus you noted. Now, it seems that we could be topping out. What we’ve seen is a rise in commodity speculation and games played by Wall Street—not a substantial rise in the real economy globally.

TGR: Recently, companies like Apple, Morgan Stanley and AT&T have all posted really strong earnings. That sounds like growth to me.

JT: Look at the economic statistics. Look at the unemployment numbers. I’m not saying that that top 20% isn’t going to do better. They are. Quite frankly, we have a fascist economic system and it’s becoming more and more so because the people who are really calling the shots are getting stronger.

TGR: Do you worry about marginalizing yourself by labeling this system a fascist economy?

JT: Go to the definition of fascism: government and corporate entities in bed together. What about the bankers getting bailed out at the expense of the poor? Is that good for poor people? Is that good for middle-class people? You might think it is. That’s the game. That’s the propaganda that we’ve been fed. I don’t buy it. The top banks, those that are “too big to fail,” know full well that they can enter into the next risky business and always get bailed out.

TGR: You had a conversation with Ian McAvity, the author of the Deliberations on World Markets newsletter, who suggested that we are in a secular bear market that dates back to 2000. He believes the Dow Jones Industrial Average will ultimately fall below its March 2009 lows. What do you make of Mr. McAvity’s projection?

JT: I think we are in a secular bear market. I’m not absolutely sure that we’ll see the nominal lows of 2009. In fact, if you look at what the equity market has done via gold, you’ll see that we are in a heck of a bear market right now in terms of the Dow Jones. In terms of purchasing power, there’s going to continue to be a decline in the wealth of the Dow.

TGR: What will be the impact of all this on gold and silver? There’s certainly been an unusually good run in July.

JT: I focus on the bigger picture. I look at the long-term secular moves. There have been 10 straight years of bull markets in silver and gold. I don’t know how much longer it’s got to run, but I think that it will keep running as long as the global economic picture remains unstable. The whole global system is in disarray right now. We have a system that’s broken. That’s why I don’t care whether the economy goes into a hyperinflation or deflation—gold has to be the cornerstone of a portfolio to preserve wealth. Investors want to own real money. They want to own what the markets have determined to be money over centuries: gold and silver. Fiat currencies have always failed. The U.S. dollar will eventually fail. This is a perfect storm for gold and silver.

TGR: Your model portfolio recently consisted of about one-third speculative mining equities. Why do you dedicate such a large position to one of the riskiest sectors of the market?

JT: I don’t think it is one of the riskiest sectors in this market. During the last 10 years, we’ve had triple-digit gains very frequently in those kinds of securities. Yes, we’ve had a soft patch in gold and silver stocks, which have not kept up with bullion markets. But they will. I remain very bullish on this sector because the majors need the juniors to replenish their resources and reserves. The large companies produce many millions of ounces of gold per year. They are not very good at replacing those ounces.

I caution my subscribers not to back up the truck and buy one or two of these stocks, but to spread out their portfolios and limit their allocation to about 5% of any one name. Taken as a basket, these types of companies will enhance returns very significantly, as they have over the last 8 to 10 years.

TGR: Another financial collapse could force some mining companies lacking adequate cash reserves to go out of business. You suggest searching for companies with plenty of cash, low burn rates and good management.

JT: I prefer companies that are project generators or prospect generators. Riverside Resources Inc. (TSX:RRI), Millrock Resources Inc. (TSX.V:MRO) and Yale Resources Ltd. (TSX:YLL) are very careful about how they spend their money. Yale uses its intellectual capital to find good prospects. Then it lets other companies take those risks and put money in the ground to pull out these deposits.

I like the new producers that are producing cash flow. Dynacor Gold Mines Inc. (TSX:DNG) is a new producer doing custom milling for companies in Peru. It is selling at about three times cash flow, but has lots of growth potential. It also has some exploration potential that looks extremely good.

Among the silver mining companies, Alexco Resource Corp. (TSX:AXR; NYSE.A:AXU) in the Yukon is earning very nice profits with huge upside right out of the gate. It has exploration and production potential.

Great Panther Silver Ltd. (TSX:GPR; NYSE.A:GPL) is also cash flow positive.

TGR: Great Panther is a company that would see immediate benefits from a rise in the silver price. It recently acquired new concessions near its existing mines in Mexico. Do you have any idea how long it might be before it starts drilling those?

JT: I’m not absolutely sure what the company’s plans are right now. I do like the management though. They do a great job of executing and lowering costs. The big things there are underground mines and there are some limitations on how much ore can be pulled out. If the company is able to pull up some more ore in that vicinity, it could bode very well for longer term profits.

Another company that is ready to take off is San Gold Corporation (TSX.V:SGR). It’s a long-term favorite of mine. It has a new management team that is really starting to execute its business plan of under-promising and outperforming.

It’s taken awhile for the company to get the operational side of its business in place, but it is going to drill. The new chief executive, who was a top operating guy at Placer Dome Inc., said that it is the most aggressive drill program he’s ever seen on a single project. The company can finance all this from cash flow, so it doesn’t have to dilute shareholder interest any further.

Timmins Gold Corp. (TSX.V:TMM) is another new producer with good cash flow and the ability to grow; it has great exploration potential.

These are new gold producers that have the opportunity to grow organically.

TGR: Do you know anything about Merrex Gold Inc. (TSX.V:MXI)?

JT: Merrex is a good exploration company. I have a very high opinion of it. The management is outstanding. IAMGOLD Corp. (TSX:IMG; NYSE:IAG) owns about 11% of Merrex’s stock. However, I like the fact that its management owns something like 15% of the stock, too.

Merrex has the Siribaya Gold Project in western Mali. Its latest NI 43-101 resource number is 315,000 oz. (315 Koz.). However, I could see that growing to 500 Koz. with a very extensive drill program; if that is the case, it could have upwards of 5 Moz. Moreover, we’re looking at 3 g/t. I’d caution that this is really forward-looking. Nobody knows until the company drills it out. However, the possibility for a very high-grade, open-pit deposit is certainly what attracted IAMGOLD, which is earning 50% interest by spending $10 million to fund this exploration.

The stock has not done well since I put it in my newsletter. We recommended it at nearly $0.60 and it’s down to $0.49—and there are more shares outstanding than there were before. I just think this is an excellent exploration program. IAMGOLD is very successful. This stock is certainly worth a couple of percentage points of a portfolio because it could come up really big. If the markets were to perceive that possibility of 500 Koz., it could lift share prices considerably.

TGR: Is Siribaya near any other noteworthy gold deposits?

JT: A couple of other properties nearby are in production: the Sadiola Gold Mines and the Loulo Gold Mine. Geologically, they are considered to be very similar to the Siribaya.

TGR: Another company you’ve discussed in your newsletter is Crocodile Gold Corp. (TSX:CRK; OTCQX:CROCF). The guidance there for 2011 is between 85 Koz. and 100 Koz. Do you think that it’s going to meet those expectations?

JT: I think it will. Last year was a bit of a disappointment. The share price has come down significantly. I recommended the stock at $1.56, and it’s at something like $0.68 now. It’s not one that I like to brag about. But fundamentally, the company is in a position to grow over the long term. It is a high-cost producer at around $875/oz.–$975/oz., but with gold selling at $1,600/oz., that still creates a pretty nice margin. The company is going into an underground mine with higher grades; that should help them bring their costs down as well.

Crocodile had its wettest rainy season in many decades last year, and that virtually halted its open-pit production. Mother Nature was the company’s biggest enemy last year. It did try to stockpile ahead of time, but no one had any idea that it would be such a wet season.

If the company is able to produce 85 Koz. to 100 Koz. as expected this year, it will generate enough cash flow to possibly allow the company to start producing.

TGR: Are there any other names that you’re excited about?

JT: Northern Gold Mining Inc. (TSX.V:NGM) has the potential to come up with a multimillion ounce, open-pittable deposit. The Garrison Project is in the Timmins Gold Camp, located along the Destor-Porcupine fault system. The Garrcon property within the Garrison claim area is a bulk-mineable target that would definitely appear to have open-pit, multimillion-ounce potential. Its Jonpol deposit is a high-grade underground target. The company has come up with a couple of very spectacular drill intercepts. It has enormous upside potential.

TGR: Vishal Gupta at Dundee Securities thinks the resources at Garrcon and Jonpol could go from about 1.1 Moz. to between 3 Moz. and 5 Moz. Do you agree?

JT: That would seem to be in the cards, but you never know until the truth machine tells you. I think that’s very well within reason, however, and it could possibly be much bigger than that over the long term.

TGR: Any parting thoughts on a macro level?

JT: We are in a bull market of a lifetime for gold mining companies, caused by the macroeconomic situation, the loss of confidence in fiat money, the deleveraging that needs to take place in the credit markets and the need to go back to honest money rather than the fake stuff that we’ve been conned into using by the policymakers. Gold has gone from $250/oz. to $1,600/oz. within the last 10 years. This is probably the sixth major credit-deleveraging episode over the past 300 years, with the first four being U.K.-centric and the fifth being the U.S. in the 1930s. In deleveraging cycles, what an ounce of gold will buy rises dramatically. That’s good news for gold mining profits.

Before Lehman Brothers’ demise, an ounce of gold would have bought 17% of the Rogers International Raw Materials Fund, which is a fund that has all manner of commodities in it. By March 2009, an ounce of gold would have purchased 44% of the Rogers International Raw Materials Fund. Now it’s around 40%. The real price of gold is up dramatically and that is not a fluke. That is the overriding theme that makes me extremely bullish—we are in a secular bull market of a lifetime for gold mining companies.

TGR: That sounds great, Jay.

 

Read the entire article HERE.

by Tyler Durden
ZeroHedge
06/06/2011 17:48 -0400

Last Thursday we attempted a rough estimation of how much the Treasury has been dipping, or as it is also known “disinvesting”, into the G-fund and the Civil Service Retirement and Disability Fund (CSRDF). Courtesy of Stone Mountain, we now have a definitive number. Even we did not realize how bad it is: in a nutshell, since the debt ceiling breach in mid May, Tim Geithner has replaced one IOU (that of the Fed) with another (that of the Treasury) in the G Fund to the tune of $57 billion, and in the CSRDF of about $22 billion. In other words, retirement funds have seen a “disinvestment” of nearly $80 billion in the past 3 weeks just to make space for further funding of bloated government, defense spending, and healthcare benefits. But don’t worry: Tim promises it shall all be well.

From Stone McCarthy:

Treasury’s release this afternoon of its Monthly Statement of Public Debt provides more insight into how much of those options Treasury has tapped so far. The following chart shows non-marketable securities held by the CSRDF each month since April of last year.

In May, those holdings declined $21.8 billion. Non-marketable holdings by the CSDRF are volatile on a monthly basis, but that decline is larger than average. In reality, there isn’t that much mystery about the room created by redeeming securities held by the CSDRF. Treasury Secretary Geithner made it pretty clear when he announced on May 16 that he was declaring a Debt Issuance Suspension Period (DISP) for about 2 1/2 months — from May 16 to August 2. The amount of room created by redeeming securities held by the CSDRF depends on the length of the DISP. In a nutshell, Treasury can create — upfront — about $6 billion per month of the DISP, plus a little bit more related to the suspension of new investments by the CSDRF.

The change in the balance of securities held by the Thrift Savings Fund was more telling. This fund is also known as the “G-Fund;” it’s one investment fund available to federal employees who participate in the Thrift Savings Plan (TSP), which is a defined contribution retirement plan available to federal employees.

The balance in the G-fund was $73.3 billion as of May 31, down $56.0 billion from the end of April. As our next chart shows, the pattern is for the balance in the G-fund to drift higher. Over the last year, the G-fund balance increased by about $1.1 billion each month. If we assume that would have occurred in absence of debt ceiling actions, then we can assume that Treasury suspended investing about $57.0 billion of G-fund securities in order to create room under the debt limit.

Read the entire article HERE.