Curried Wealth Building
Finding an Edge

If you want help with your finances, give me a call at 703-791-3243.
 

January 8, 2012

Issue 181  -  A Very Important Warning

 

 

I’m having a great deal of trouble with my web hosting company so this week’s update is short but I also think very important.  As the stock market rises to new highs, I see a lot to be worried about.  In fact, I believe that we could see a time over the next year or so that things just really fall apart.  In that case you will need to have physical gold, silver and cash.  I want you to look at few charts first.

 

 

This chart shows utilization of the U.S. industrial complex.  We aren’t even back to levels of the 2007.  But wait, I thought we were back on track? As you look at this chart, remember that 1% is huge.  While we have had a great comeback from the bottom, it’s definitely not all roses as we are about 5% below 2007 levels and over 10% below the mid 90s.  This is a lot of excess capacity.  I believe that this chart is starting to flat line.  Here’s another:

 

 

You’ve probably heard that the housing market is making a come back.  As you can see here, this come back isn’t that impressive in a relative way.  In fact we are still below the anemic levels of the early 1990s!  This is amazing when you consider the population increased from 252 million to over 308 million in that time frame.  This is over 22% more people requiring housing and yet the housing starts are lower.  This shows a very weak market and would lead me to think that that isn’t likely to change any time soon.   Of course this is primarily due to overbuilding of inventory.  And another…

 

 

As you can see here, electrical power consumption, a very difficult thing to fudge, has turned back down.  This is highly correlated to production and domestic output as manufacturing uses a great deal more energy than domestic users.  What this shows is a another turndown in the economy is close.  We had a nice bump up and now it is turning down.  Not a good sign for the economy. 

 

A lot of this trouble is having a harsh and dramatic impact on state and local governments.  They can’t print money so they suffer the most.  One of the greatest problems is in pension funds.  These are the funds that are invested to pay retirees in the future.  The state of these funds has never been much worse:

 

Funded Status of U.S. Pensions Falls to 72.4 Percent in December, According to BNY Mellon Lower Rates Send Liabilities Higher at Year End

Wed Jan 04 07:47:00 2012 EST

A sharp bounce in liabilities in December resulted in a 2.7 percentage point decrease in the funded status of the typical U.S. corporate pension plan, according to BNY Mellon Asset Management. For the year, the funded status declined 12.7 percentage points to 72.4 percent, according to the BNY Mellon Pension Summary Report for December 2011.

The decline in funded status was the second biggest calendar year decline since BNY Mellon began tracking this data in 2005. The large decline in 2011 was due to the liability discount rate reaching a new historic low, 4.36 percent, surpassing the record set in September 2011, according to the report. BNY Mellon noted that assets for the typical plan did increase 2.7 percent in 2011, but liabilities increased much faster, 20 percent, to send funding levels lower for the year.

The rise in liabilities during December was driven by a decrease in the Aa corporate discount rate, which fell 30 basis points to 4.36 percent, according to BNY Mellon. Plan liabilities increased 4.6 percent in December, overshadowing a 0.8 percent increase in plan assets, the report said. The plan assets increased as a result of a slight gain in U.S. equity markets, BNY Mellon said.

Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Lower yields on these bonds result in higher liabilities.

"The continuing uncertainty regarding the prospects for a U.S. economic recovery and the ongoing European debt crisis drove investors back into bonds during December, which sent interest rates lower," said Jeffrey B. Saef, managing director, BNY Mellon Asset Management, and head of the Investment Strategy & Solutions Group (a division of The Bank of New York Mellon). "We expect continuing volatility until investors believe the recovery in the U.S. is sustainable and some resolution is reached in Europe."

 

This will lead many to not have a pension, or at least a drastically reduced pension.  Some may have to look to other sources:

 

 

Because these funds are run by idiots who are using traditional investment strategies, they are STILL forecasting a 8-10% return per year.  This is insanity and has NO chance of occurring by simple math.  This WILL end in tears.  How bad has the insanity gotten?  How about trying to top this bit of lunacy:

 

Michigan Borrows Record $3.3 Billion in Debt to Repay Unemployment Costs

By Chris Christoff - Dec 28, 2011 12:01 AM ET Wed Dec 28 05:01:00 GMT 2011

Michigan, whose joblessness led the nation during 2006-09, will issue $3.3 billion of variable-rate bonds -- its largest-ever sale, according to treasury officials -- to repay federal unemployment-benefit loans.

The two-year bonds underwritten by a unit of Citigroup Inc. (C) were selling at a yield of 0.24 percent, said Tom Saxton, deputy state treasurer. That compares with estimated 3 percent interest on federal loans next year, Saxton said. Repaying the U.S. government by Dec. 31 will save as much as $100 million in interest and avoid federal penalties, he said.

"This is a good deal for the employer community," he said.

The sale through the Michigan Finance Authority closes today. The state joins Texas and Idaho in tapping debt markets to repay unemployment loans after the 18-month recession that ended in June 2009. Michigan’s 9.8 percent jobless rate in November marked the first time in two years it’s been below 10 percent. The national rate for November was 8.6 percent.

Twenty-seven states and the Virgin Islands owed the federal unemployment trust fund a combined $39.3 billion as of Dec. 22, according to the U.S. Department of Labor. California owes the most, $9.7 billion, followed by New York and Michigan.

Michigan chose variable-rate bonds to take advantage of historically low short-term interest rates, Saxton said. He said that will give the state flexibility to convert the borrowing to long-term financing in 2012.

Two-year debt with a AAA rating yields 0.41 percent, compared with the average 2.82 percent since 1992, according to Bloomberg Fair Market data.

Borrowing to Save

Michigan will levy a separate assessment on employers to pay back the bonds. It also will set a higher tax to shore up its unemployment fund, under legislation linked to the debt-sale authorization. Still, businesses will pay less than if the federal loans weren’t retired, said David Jessup, spokesman for the Small Business Association of Michigan.

Saxton said the bonds still await a rating. Citigroup, the nation’s third-largest bank by assets, is providing a letter of credit, he said.

Proceeds from the sale will repay $3.2 billion borrowed beginning in 2006. The money also will reimburse the general fund for $38 million used for interest on federal loans, plus other unemployment costs, Saxton said.

Unemployment benefits paid in Michigan jumped to $1.15 billion in the first quarter of 2009 from $612 million in the last three months of 2008, according to the bond statement. The state paid $331.4 million in the quarter ending Sept. 30.

In August, Idaho borrowed $202.4 million to pay back unemployment loans, said Bob Fick, spokesman for its Labor Department. The sale will save $15 million, Fick said.

The bonds, which employers must repay, will eliminate a federal surcharge next year, he said. Employers in Idaho "are still trying to come out of the recession," he said.

In November and December 2010, Texas borrowed about $2 billion to reimburse the federal government.

 

 

Oh sure extra debt is BOUND to cure this ailment......   So how is the U. S. debt evolving?

 

 

Gee, that doesn't look sustainable to me, how about to you?  Didn't think so.

This moon shot increase is not likely to slow down without outside interference.  Because Europe is so weak, I don’t see it happening yet.  That doesn’t mean it’s safe however.  In fact, I believe all of these factors are setting us up for the mother of all falls. I’m including a very long article to close this week because I think it’s very important that you read and understand it.  This was linked from ZeroHedge and should scare the heck out of you. 

 

Guest Post: A Run On The Global Banking System - How Close Are We?

Guest Post via Gonzalo Lira
 

Nine weeks after its bankruptcy, the general public still hasn’t quite realized the implications of the MF Global scandal.

My own sense is, this is the first tremor of the earthquake that’s coming to the global financial system. And how the central banks and financial regulators treated the “Systemically Important Financial Institutions” that had exposure to MF Global—to the detriment of the ordinary, blameless customer who got royally ripped off in its bankruptcy—is both the template of how the next financial crisis will be handled, and an accelerator that will make the next crisis happen that much sooner.

So first off, what happened with MF Global?

Simple: It went bankrupt—because it made bad bets on European sovereign debt, by way of leveraging positions 100-to-1. Yeah, I know: Stupid. Anyway, they went bankrupt—which in and of itself is no big deal. It’s not as if it’s the first time in history that a brokerage firm has gone bust. But to me, the big deal in this case was the way the bankruptcy was handled.

Now there are several extremely serious aspects to the MF Global case: Specifically, how their customers were shut out of their brokerage accounts for over a week following the bankruptcy, which made it impossible for those customers to sell out of their positions, and thus caused them to lose serious money; and of course how MF Global was more adept than Mandrake the Magician at making money disappear—about $1 billion, in fact, which still hasn’t turned up. These are quite serious issues which merit prolonged discussion, investigation, prosecution, and ultimately jailtime.

But for now, I want to discuss one narrow aspect of the MF Global bankruptcy: How authorities (mis)handled the bankruptcy—either willfully or out of incompetence—which allowed customer’s money to be stolen so as to make JPMorgan whole.

From this one issue, it seems clear to me that we can infer what will happen when the next financial crisis hits in the nearterm future.

Brokerage firms hold clients’ money in what are known as segregated accounts. This is the money that brokerage firms hold for when a customer makes a trade. If a brokerage firm goes bankrupt, these monies are never touched—because they never belonged to the firm, and thus are not part of its assets.

Think of segregated accounts as if they were the content in a safety deposit box: The bank owns the vault—but it doesn’t own the content of the safety deposit boxes inside the vault. If the bank goes broke, the customers who stored their jewelry and pornographic diaries in the safe deposit boxes don’t lose a thing. The bank is just a steward of those assets—just as a brokerage firm is the steward of those customers’ segregated accounts.

But when MF Global went bankrupt, these segregated accounts—that is, the content of those safe deposit boxes—were taken away from their rightful owners—that is, MF Global’s customers—and then used to pay off other creditors: That is, JPMorgan.

(The mechanics of how this was done are interesting, but insanely complicated, and ultimately not relevant to this discussion. To grossly simplify, MF Global pledged customer assets to JPMorgan, in a process known as rehypothecation—customer assets which MF Global did not have a right to. Needless to say, JPMorgan covered its ass legally. Ethically? Morally? Black as night.)

This was seriously wrong—and this is the source of the scandal: Rather than being treated as a bankruptcy of a commodities brokerage firm under subchapter IV of the Chapter 7 bankruptcy law, MF Global was treated as an equities firm (subchapter III) for the purposes of its bankruptcy.

Why does this difference of a single subchapter matter? Because in a brokerage firm bankruptcy, the customers get their money first—because after all, it’s theirs—while in an equities firm bankruptcy, the customers are at the end of the line.

In the case of MF Global, what should have happened was for all the customers to get their money first. Then everyone else—including JPMorgan—would have picked over the remaining scraps. And the monies MF Global had already pledged to JPMorgan? They call it clawback for a reason.

The Chicago Mercantile Exchange, which handled the bankruptcy, should have done this—but instead, the Merc was more concerned with making JPMorgan whole than with protecting the money that rightfully belonged to MF Global’s 40,000 customers.

Thus these 40,000 MF Global customers had their money stolen—there’s no polite way to characterize what happened. And this theft was not carried out by MF Global—it was carried out by the authorities who were charged with handling the firm’s bankruptcy.

These 40,000 customers were not Big Money types—they were farmers who had accounts to hedge their crops, individuals owning gold (like Gerald Celente—here’s his account of what happened to him)—

—in short, ordinary investors. Ordinary people—and they got screwed by the regulators, for the sake of protecting JPMorgan and other big fry who had exposure to MF Global.

That, in a nutshell, is what happened.

Now, what does this mean?

It means that nobody’s money is safe. It means that regulators care more about protecting the so-called “Systemically Important Financial Institutions” than about protecting Ordinary Joe investors. It means that, when crunchtime comes, central banks and government regulators will allow SIFI’s to get better, and let the Ordinary Joes get fucked.

So far, so evil—but here comes the really troubling part: It is an open secret that there are more paper-assets than there are actual assets. The markets are essentially playing musical chairs—and praying that the music never stops. Because if it ever does—that is, if there is ever a panic, where everyone decides that they want their actual asset instead of just a slip of paper—the system would crash.

And unlike with fiat currency, where a central bank can print all the liquidity it wants, you can’t print up gold bullion. You can’t print up a silo of grain. You can’t print up a tankerful of oil.

Now, question: When is there ever a panic? When is there ever a run on a financial system?

Answer: When enough participants no longer trust the system. It is the classic definition of a tipping point. It’s not that all of the participants lose faith in the system or institution. It’s not even when most of the participants lose faith: Rather, it’s when a mere some of the participants decide they no longer trust the system that a run is triggered.

And though this is completely subjective on my part—backed by no statistics except scattered anecdotal evidence—but it seems to me that MF Global has shoved us a lot closer to this theoretical run on the system.

As I write this, a lot of investors whom I know personally—who are sophisticated, wealthy, and not at all the paranoid type—are quietly pulling their money out of all brokerage firms, all banks, all equity firms. They are quietly trading out of their paper assets and going into the actual, physical asset.

Note that they’re not trading into the asset—they’re simply exchanging their paper-asset for the real thing.

Why? MF Global.

“The MF Global scandal has made it clear that the integrity of the system has disappeared,” said a good friend of mine, Tuur Demeester, who runs Macrotrends, a Dutch-language newsletter out of Brugge. “The banks are insolvent, the governments are insolvent, and all that’s left is for the people to realize what’s going on—and that will start a panic.”

He hit it on the head: Some of the more sophisticated people—like Tuur, like some of my acquaintances, (like myself, frankly)—have realized that the MF Global scandal means that there is no safety for any paper investment: The integrity of the systems has been completely shattered. If in the face of one medium-sized brokerage firm going under, the regulators will openly allow ordinary people to be ripped off for the sake of protecting the so-called “Systemically Important Financial Institutions”—in this case JPMorgan—what will happen if there is a system-wide run? What if two or three MF Globals happen simultaneously?

Will they protect the citizens’ money? Or will they protect the “Systemically Important Financial Institutions”?

I think we know the answer.

And I think we all know the answer to the question of whether there will be crisis flashpoint in the near-term future: After all, as Demeester pointed out, all the banks and all the governments are broke.

Thus it’s only a matter of time before they come for your money.

At SPG, we’ve been putting together Scenarios for other black swan events which are becoming increasingly likely: What to do if the eurozone breaks up, what to do if you have to leave America, what to do if there is an Israeli-Iranian war, what to do if there is forced dollar devaluation, and so on.

Now, because of this open kleptocracy and cronyism being shown by the financial authorities in the wake of the MF Global bankruptcy, we’ve been obliged to put together a new Scenario, devoted exclusively to preparing for a run on the markets: What to do in order to protect your assets from regulatory malfeasance, if there is a system-wide MF Global-type breakdown and a subsequent run on the entire financial system.

And there will be such a run on the system: It’s only a matter of time. In fact, the handling of the MF Global affair has sped up the timeframe for this run on the system, because the forward-edge players—such as Demeester, myself, and my other acquaintances who understand the implications of the bankruptcy—realize that the regulators will side with the banksters, and not the ordinary investors: So we are preparing accordingly.

Once there is a full-on panic, anyone with money in the system will lose at least a big chunk of it, in one of two ways, or a combination thereof:

• One, the firms—commodities brokerage firms, equity firms, investment banks and commercial banks—will not allow people to withdraw the totality of their money, and/or they will put a withdrawal cap of some sort, enforced by the central banks and other regulatory bodies. (Like they did in Argentina.)

• Two, the central banks will “provide liquidity”—that is, print money—while simultaneously declaring a banking holiday to, quote, “calm the markets”. During that bank holiday, the currency will be devalued by double digits—which will mean that your cash holdings will essentially be taxed to save the banksters—again. (Like they did in Argentina.)

Thus apart from proving that the United States really is Argentina with nukes, the MF Global bankruptcy has proven something crucial: The central banks and government regulators have completely fallen into the trap of confusing the welfare of the “Systemically Important Financial Institutions” with the welfare of the system itself. They don’t seem to realize that the SIFI’s are actors within the system—not the system itself.

We critics of the current, corrupt state of affairs also sometimes confuse the SIFI’s with the system itself, whenever we say, “The whole system is corrupt!”

But the system is not corrupt—it’s the regulators and SIFI’s who are corrupt. If nothing else, the handling of the MF Global bankruptcy has proven that, once and for all. That’s why we’re pulling out our money now—while we still can.

Because once the general public catches on to what we already know . . . oh boy.

This is a stark picture of what lies in the future.  The odds of this happening at some point are at least 50%.  The system is set up against you.  You MUST have physical metal in your possession for this coming freefall.  Nothing else may matter.  Do it this week if you haven’t already.  This is insurance you can’t be without. 

 

 

Positions
GORO (closed $24.17, up $2.33, average price paid $6)
Mexus Gold (closed $.07, up $.015, average price paid, $.22)
AXU (closed $6.59, down $.08, recommended at $7.90)
MBI (closed $12.29, up $.04, recommended at $10.58)
 
Stock Market  (currently out)
 

I'll close this week with the quickest artist you'll likely ever witness.  How about two 6x9" paintings in under 2 minutes?  Have a great week!