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August 7, 2011
Issue 159  -  It's Time to Be Very Careful
 
 
 
The coming week could be one like no other in decades.  It's not a sure thing at this point, but the signs are there to read.  The largest sign will have long reaching effects no matter how much everyone just sloughs it off like nothing has changed:
 
 

US downgrade by S&P may lead to direct buying by Fed and QE3

, Finance Examiner
August 6, 2011

Now that the downgrade of the United States credit rating has finally come to pass after S&P pushed through a drop on August 5th to AA+, the entire global economy will be looking hard at their US holdings and have to make some difficult decisions going forward.  These decisions could very well lead to direct buying of US debt by the Fed, all out monetization, and little choice but to implement QE3 on or before the August Federal Reserve meeting at Jackson Hole.

The downgrade by S&P of the US credit rating will automatically have reverberating effects in Asia, Europe, and the United States.  Every nation and bank that holds US debt, US paper, or interest bearing products will be taking the time to study each one, assess their exposure, and then make determinations on whether it is economically feasible to continue to hold onto that debt, or purchase more in the future.  These decisions, especially by European interests that are entrenched in a credit crsisis of their own with Ireland, Greece, Spain, and Italy, may cause a chain reaction which leads to a massive dumping of our treasuries on the open market, or limit dealers from future purchases as they seek more sound investments.

In either case, the Federal Reserve would be forced to purchase any and all paper that comes into the US bond markets, and at a time when the US government intends to sell an additional $2 Trillion in new debt now that Congress has passed legislation raising the debt ceiling.

There are also many repercussions for the American people now that the US has been downgraded from its AAA+ status.  Interest rates on mortgages and other borrowing is expected to go up, even if the Fed continues to hold interest rates at the banks discount window near 0.  Other factors that are sure to affect Americans is a rise in price inflation as the FED would need to begin a larger program of debt monetization and money printing to make up for the losses incurred from foreign interest in buying US debt.  In fact, a report on August 6th by the Hindu Business Line out of India estimates that their economy may gain, even as the US falters on the inflation front due to the downgrade.

The US dollar is now expected to depreciate, leading economists concur, but, unlike during 'normal times', this would have a beneficial impact for India.

This is because the 'new normal' would see the falling dollar bring international commodity prices also down. In normal times, the impact would just be the opposite; cheaper dollar turning asset classes traded in the greenback affordable to aspire for, driving up their prices in the local currency.

But the 'new normal' is such that the downgrade would lead to interest rate hikes in the US and slow down the investment cycle there, badly impacting demand for commodities including crude oil.

Lowered international commodity prices would be the best thing for India to happen, since the inflation bugbear stomping around the economic landscape has been feeding on what has come to be known as 'imported inflation'. – Hindu Business Line

This depreciation in the dollar, coupled with the dropping interest in foreign purchases of US debt going forward will lead the Fed to have little choice but to massively monetize, and implement a QE3 program that will make QE2 look like a drop in the bucket.  Deflation to a country that carries massive outstanding debt obligations is a pre-cursor to absolute default, thus paving the way to hyperinflate to ensure that current and future debt can be paid for.

Now that the threats of a US downgrade to our credit rating have become reality, the global economy will be taking the next week to digest just what this means to their current US debt holdings, and the future value of purchasing more.  The results of this will lead inevitably to the Fed choosing a course of monetization and QE3, and the American people will soon feel the absolute effects of this policy

 
Now this has to be one of the most obvious outcomes in the history of the world and yet some couldn't see it coming.  How is this possible?  We are broke.  We won't be able to pay our bills if the reserve currency status is taken away from us.  This is simple mathematics, yet some can't see it.  Luckily our fearless leaders are on top of it.  Or are they?  Here's a video from an interview of Tim Geithner, the tax evading treasury secretary where he says something.......ohhhhhh......rather interesting in light of what has happened.
 
 
 
Boy he was right on top of that one wasn't he?  I guess it all depends on what definition of "no" you use.  Whatever, he was either lying or just stupid.  Each of these is unacceptable for the treasury secretary of the United States.  To try and cover his arse and make himself look better he then produced this doozy on Sunday:
 

Geithner: S&P Showed "Really Terrible Judgment" In Downgrade

Zeke Miller | Aug. 7, 2011, 7:08 PM | 2,200 | 36
Treasury Secretary Tim Geithner made his first public remarks about the S&P downgrade of U.S. debt Sunday in an interview with CNBC's John Harwood.

Geithner said the ratings agency showed "really terrible judgment" and a "stunning lack of knowledge about basic U.S. fiscal budget math," adding "they reached absolutely the wrong conclusion."

He said the policies of the Obama administration are "absolutely not" responsible for the downgrade.

"There is no risk the—the United States of America would ever not be in a position to meet its obligations," he said.

During the debt ceiling negotiations, the Obama administration repeatedly stated just the opposite was true if the borrowing limit wasn't raised.

Asked whether Treasuries remain as safe as they were before the downgrade, Geithner replied, "Absolutely. And the judgment by S&P changed nothing."

He also called on European leaders to establish a "unequivocal financial backstop" for countries mired in fiscal and debt problems.

Geithner also addressed his decision to stay in his post through at least the 2012 election.

"I think if a president asks you to serve, you have to do it," he said, adding that he believes in President Barack Obama and his agenda. "I love my work," he said.



Now who are we to believe here.  The third party who rates ALL countries or the head of finances in the country that was downgraded?  Hmmmmmmmm....that's a tough one.  Ok, it's not tough at all.  I believe the third party.  How about you?  Want some of that Timmy G. Kool-aid?  That must me some strong stuff.  To show how absurd his statement is, I present Exhibit A:
 
 
 
What does this show?  How about the first day delta in the debt subject to the debt limit.  My math shows a huge increase, Zerohedge says this:
 

Gross US Debt Surges By $240 Billion Overnight, US Debt To GDP Hits Post World War II High 97.2%, Official Debt Ceiling Increase Only $400 Billion

Two things happened when the Senate voted in the "Bipartisan" plan into law yesterday: i) deferred debt on the Treasury's balance sheet finally caught up with reality, and ii) as a result of i) America's Debt/GDP just hit a post World War 2 High of 97.2%. Becasue as the Daily Treasury Statement as of last night indicates, total US marketable debt surged by $124.6 billion, while debt in intragovernmental holdings (Social Security, Government Retirement Accounts, etc), soared by $113.6 billion, for a combined one day change of $238.2 billion, the single biggest one day increase of US debt in history. Obviously this is a result of massive underfunding and disinvestment in the various government retirement accounts as well as due to deferred debt which was to be booked since the debt was breached on May 16. However, how marketable debt could increase by a whopping $125 billion without any actual auction settlement is slightly confusing. Just as confusing is that according to the endnote in the debt subject to limit calculation, the new ceiling is not the $900 billion increase as requested, but only $400 billion more than the $14.294 billion previous, or at $14.694 billion. We hope this is some Treasury type or misunderstanding as this new ceiling will be breached in a month. And the last thing we need is this whole debt ceiling drama back again in September. One thing there is no confusion about, however, is that based on the latest gross debt number of $14.581 trillion, and the just reported Q2 GDP of $15.003 billion, total US debt to GDP is now a post World War II high of 97.2% (and that excludes the GSE off balance sheet debt).
 
So we used up 60% of the debt ceiling increase in one freaking day!  We are so screwed.  The time has come to be very careful in where you put your money.  The market could crash, it could surge, there is just no way to know.  With all of the high frequency trading, it is just not a time to take chances.  I would sit on the sidelines before deploying any new money.  I expect gold and probably silver to continue higher.  Silver will eventually catch up but it could be delayed.  It is just too risky to be buying here.  Phasing into the market as it falls is a viable strategy.  Adding 10% of your money for each 5% that the market falls makes some sense if you want to try and buy on weakness.
 
 
The real story this past week was gold as it is screaming higher and higher.  This is the long awaited "flight to safety."  People are starting to realize that gold is the only thing that isn't someone else's liability.  IF you have gold, you aren't dependent on anyone else to come through and make you whole.  It is money and nothing else.  Those who talk about it like it's some commodity are just plain wrong and misinformed.  Gold will be money for a lot longer than any paper money no matter how much nonsense spews from the powers that be:
 

No Chance of Default, US Can Print Money: Greenspan

Published: Sunday, 7 Aug 2011 | 3:15 PM ET

Former Federal Reserve Chairman Alan Greenspan on Sunday ruled out the chance of a US default following S&P's decision to downgrade America's credit rating.

 
 
"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default" said Greenspan on NBC's Meet the Press

"What I think the S&P thing did was to hit a nerve that there's something basically bad going on, and it's hit the self-esteem of the United States, the psyche" said Greenspan

Austan Goolsbee, the chairman of the White House's council of economic advisors, hit out at S&P on the same show, insisting the credit ratings agency had got its math wrong.

"Well, the basic case is they made a $2 trillion math error and forgot to check their work," he said. "So rating agencies that didn't make a $2 trillion math error reaffirmed the AAA status. You saw Warren Buffet say that, if they had a AAAA, he would put U.S. Treasurys in AAAA status."

 
Are these idiots for real?  We can't default because we can "always print money."  What are they smoking?  Printing unbacked money IS defaulting.  We have been in default since 1971 and it's just taken this long to run its course.  The end of this road is ugly and unpleasant.  The joke of it all is how so many people sit and wait with baited breath on every utterance of "experts" like Warren Buffet.  Here he says we should be rated AAAA.  This is so far out there that it defies description.  How can anyone listen to this guy anymore.  Yeah, we have over $100 trillion in debt and liabilities and if S&P had only calculated the correct $98 trillion, everything would be dandy.  What a farce.  The end game is inflation and in the not so distant future, perhaps a sign like this will pop up in the U.S.:
 
 
 
Yes, don't use the dollars for toilet paper, it clogs them!  Honestly, with our electronic world, this is an unlikely scenario, but it drives home the point that ALL current currencies are backed by nothing and therefore can collapse at any point.  If that were to happen, only tangibles will be worth having.  Money in bank accounts, cds, money markets, and even under your bed will be worth next to nothing.  I'm not sure when the final death will come but I'm willing to bet it will take years with perhaps one or two huge plunges.  The dollar has been the reserve currency for a long time and I see the power structure that benefits from this status to fight hard to stay alive.  In fact, our esteemed congress has just shown how much of a fight will be put up with this warning shot:
 

Senate panel reviewing S&P downgrade

WASHINGTON | Mon Aug 8, 2011 7:11pm EDT

WASHINGTON (Reuters) - The Senate Banking committee has begun looking into last week's decision by Standard and Poor's to downgrade the U.S. credit rating, a committee aide told Reuters on Monday.

The aide said the panel was gathering information about the S&P move but no decision had been made on whether it will hold hearings into the downgrade.

While an official investigation has not been launched, the aide said that all options were being weighed.

Late on Friday, S&P said the world's largest economy no longer deserved the top AAA credit rating, cutting it one notch to AA-plus.

The move was driven by concerns over Washington's inability to achieve at least $4 trillion in long-term savings amid a national debt that has climbed above $14.3 trillion.

Instead, after a rancorous fight between Democrats and Republicans, Congress and President Barack Obama recently negotiated a 10-year deficit-reduction plan that could end up saving a little over $2 trillion.

Senate Banking Committee Chairman Tim Johnson, in a statement, called S&P's downgrade an "irresponsible move" that could have a far-reaching impact.

The Democrat said the downgrade may "have spillover effects that tax the American people by increasing interest rates on home loans, credit cards, and car loans, and by increasing the cost of finance for some state and local governments."

S&P also came under attack from House of Representatives Majority Leader Eric Cantor, a conservative Republican who has been outspoken in his opposition to tax increases.

In a memo to his fellow Republicans that was made public by his office, Cantor noted that S&P's analysis of the U.S. fiscal situation "is overly focused on resolving the debt crisis in a manner that would greatly worsen the jobs crisis."

He was referring to S&P's contention that "the majority of Republicans in Congress continue to resist any measure that would raise revenues" to help ease the country's fiscal problems.

During the debt limit negotiations, Cantor and fellow Republicans successfully opposed raising taxes on Americans despite Democrats' insistence for more revenue.

Meanwhile, White House Spokesman Jay Carney told reporters that he was not aware of any administration conversations about clamping down on S&P and other ratings agencies through tougher regulations.

Since S&P's announcement last week, Republicans and Democrats in Congress mostly have been engaged in blaming each other for the government rating downgrade.

And with Congress having just started a month-long recess, legislative activity has mostly ground to a halt as senators and House members are scattered across the country.

One senior House Republican aide told Reuters that he had not heard of any new legislative efforts brewing on rating agency reform.

The House Financial Services oversight subcommittee, which held a hearing on the credit agencies last month, has no plans for another hearing, a congressional aide said late on Monday.

Columbia University law professor John Coffee said the fate of future reform efforts for the ratings agencies was uncertain.

Credit rating agencies were widely criticized for fueling the 2007-2009 financial crisis by assigning top ratings to securities that were backed by subprime mortgages, which then plummeted in value as the housing market collapsed.

The new Dodd-Frank regulatory reform law does not include a tough reform amendment offered by Democratic Senator Al Franken of Minnesota, but it did require a two-year study of the credit ratings industry, perceptions that it suffers from an inherent conflict of interest, and what to do about it.

Of particular concern is the fact that companies issuing financial instruments pay the ratings agencies to do the analysis that results in their ratings, Coffee said.

Governments do not solicit or pay credit agencies for ratings.

 
The king will not give up without a fight.  Look for hearings to come shortly and subpoenas to be issued.  Even though this company (S&P) is not under the purview of congress, don't think it will stop them from parading these guys up there and grilling them hard.  S&P will comply but nothing will happen.  The intent is a not so subtle warning to the other ratings agencies to tread lightly.  This collapse should be epic.
 
 
Positions
 
GORO  (closed $24.87, up $0.05, average price paid $6)  GORO is still the target of a massive shorting operation.  There are now over 5,000,000 shares short and the number is still growing.  This is about 10% of the total number of shares.  If the stock reports strong earnings this week, there could be fireworks as these shorts may have to start buying back.  A short squeeze in this stock could take your breath away.  The stock could easily hit $35 if a significant number of shorts cover.  Still long on GORO.
 
Mexus Gold  (closed $.17, down .02, average price paid, $.22) 
 
Tug is back in Ketchikan and ready to pull cable.  Press release:
 

Mexus Gold US Cable Update

 

CARSON CITY, Nev., Aug. 8, 2011 (GLOBE NEWSWIRE) -- Mexus Gold US (OTCQB:MXSG.OB - News) is a company engaged in the evaluation, acquisition, exploration and development of mining properties and conducts salvage operations for the recovery of precious metals.

Mexus Gold US is pleased to announce current events regarding our cable salvage project. The cable salvage project is designed to conduct operations for the purpose of retrieving certain communication cable, which contains a significant amount of cooper. At this time, Mexus Gold US has focused the salvage operation on the cable deployed in the offshore waters of northwestern United States. The following is an update to the status of the operations conducted thus far.

The Mexus Gold US tug, "Caleb" has now arrived in Ketchikan, Alaska ready to commence salvage operations. Bryan Farcey, Captain of the Caleb, said the voyage from the tug's home port in Washington to Ketchikan went well and salvage operations are expected to begin this week. The tug brought along a barge with onboard cable salvage equipment and a resonance vessel with associated equipment. The resonance vessel and associated equipment will be off loaded and travel further north to begin surveys in areas of known interest while the tug and ancillary equipment will begin salvage operations nearby.

Mexus Gold US, President, Paul Thompson stated, "It has taken a bit of time we did not originally anticipate. We are now in Alaska. We are now equipped like we should be for this operation. We are now ready to go forward with putting cable on the deck of the barge. We expect this to be a five year project so we wanted to get started in the best manner possible."

 
So that is very good (belated) news.  As I've said countless times, if this company can produce any significant revenue, the stock price will rise fast.  With Paul confirming that the project will be five years, the revenue stream should be strong.  Still a strong buy at these low prices.   
 
Alexco Resource Corporation -  AXU  (closed $6.90, down .54, recommended at $7.90)  
 
Nothing has changed about this company other than silver has dropped.  This is a very strong company and should prosper in the coming years.
 
Stocks    (Current status, out, sold on March 18)
 
The large drop on Friday had me thinking of getting back in.  A further 5% drop will get me at least to dip my toe back in the water.
 
Physical Gold  (Closed $1,660,  up $44,  average price paid $395)
 
Physical Silver  (Closed $39.30,  up $0.81,  average price paid $5.31)
 
 
I'll close with a world record video of a "blob" jump.  Now THAT looks like fun.  Have a great week!