The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride‐‐a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight‐out gift to Wall Street, for which American taxpayers got nothing in return. More Nov. 10 (Bloomberg) ‐‐ The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral. (MORE…) Our Comment: If I had a loan on a house in America and was a American taxpayer (I’m Canadian) I would be asking my congressman a few questions – first why should I pay my loan back? I was going to, but now by lending and bailing out all these banks and insurance companies am I not on the hook TWICE now? “If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand.” ­­ Milton Friedman If foreign reserves are not growing how is the US debt being serviced? Are the falling international reserves are signally central banks are no longer willing to finance the USA debt? Now, if the Reserves are no longer growing but diminishing, this might indicate that the exporting countries are no longer buying and accumulating more US, British and European debt. If they are not accumulating more foreign currency bonds and debt, then the fiscal deficits of the US, the Brits and the European Union countries are no longer being funded – especially important to the US, which is running an immense fiscal deficit, what with the US Treasury going into debt like a drunken sailor on account of the need to bail‐out all and sundry debtors. (More…) The dirty little secret of American borrowing
, however, is the maturity schedule of marketable U.S. debt held by the public. That sounds like a mouthful. But it just means debt held by banks, individuals, corporations, or even foreign central banks. When you look at that schedule, it shows you that 66% of America's $5.2 trillion in marketable debt held by the public matures within the next four years. Obama! Once those bonds mature, the U.S. government will try to "roll them over," or sell new bonds to the previous owners, preferably at the same low interest rate.
Source: United States Government Accountability Office, FINANCIAL AUDIT, Bureau of the Public Debt's Fiscal Years 2008 and 2007 Schedules of Federal Debt, November 2008 When a nation relies on overseas saving to fund its perpetual debt, it's playing a dangerous game. Nov. 24 (Bloomberg) ‐‐ The U.S. government is prepared to provide more than $7.7 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt . The pledges, amounting to half the value of everything produced in the nation last year . . .MORE Our Comment; This is beyond imagination and when these promises are provided (i.e. the failures come) What do you think will happen to the US$ ‐‐ I think we could see it drop a lot – the question is when my guess is anytime over the next 2 years . . as currently there is no other global alternative, so until there is improvement elsewhere the US$ will remain strong. The only hedge is GOLD, SILVER and OIL which we suggest are things one should accumulate. Last month, I mentioned a report from the International Energy Agency reached some shocking conclusions about global oil production. First, it said that global oil production is actually declining at around 9.1% a year. It's much faster than previously thought. That may not sound like a lot to you. But did you realize that if that number is correct, the world will produce half as much oil by 2015 as it does today? That's just seven years from now... What's more, if global oil production continues to decline at that rate, then by 2020 the entire world will be producing just enough oil to meet the daily demand of the world's single biggest user of oil, the United States. Take a look at the chart below to see what I mean. The good news in the leaked IEA report‐if you can call it good news‐is that the world's major oil producers could slow that rate of decline with some much‐needed investment. With $556 billion in new oil investment, the IEA says the rate of decline in global oil production can be slowed to 6.4%. Again we say BUY OIL and look at Alternative energy solutions – the sector has been hit very hard in the last several months but that is the time to BUY when prices are low and we can see the future will bring . . . . . OIL and Energy shortages! Oil Discovery (3 year average ­ past and projected) 1930­2050 This chart above shows how oil discoveries have been dropping since the 1960s. New major discoveries only last for a few years ‐ the trend line continues. The orange line indicates annual consumption. To avoid the problems of peak oil, we would not only have to slow the discovery curve but reverse it so that annual discoveries moved above the consumption line (or the line fell). Neither option seems likely. Source: ASPO Oil Production – 2001 to 2006 Over the last few years, world oil production has reached a plateau. With OPEC seemingly unable to increase production, it remains to be seen when the inevitable decline begins. Note: Defined as the production of crude oil (including lease condensate), natural gas plant liquids, and other liquids. Source: EIA Article of Interest; Nov. 10 (Bloomberg) ‐‐ Anadarko Petroleum Corp. and Dana Petroleum Plc, oil drillers that lost more than 25 percent in market value this year, may become acquisition targets as they show it's cheaper to buy oil and gas reserves than to go and find them. Anadarko's proven deposits had a stock market value of $6.99 a barrel Nov. 7 after its shares tumbled 45 percent this year in New York trading, while Dana's were at $7.80 a barrel. That's more than 39 percent below the $12.87 a barrel Royal Dutch Shell Plc spent last year to find and develop its own fields Exxon Mobil Corp., Shell, BP Plc, Chevron Corp. and Total SA, the five largest non‐state oil companies, held $82 billion of cash at the end of September, enough between them to acquire seven of the 11 members of the Standard & Poor's 500 Oil & Gas Exploration & Production Index. (more...) The Dow‐Gold ratio below represents the most important ratio between the relative prices of financial assets and real assets. The Dow component represents the valuation of financial assets; the gold component – of real assets. When leverage in the financial system increases significantly, so does this ratio. A very high ratio is interpreted as an imbalance between financial and real assets – financial assets are grossly overvalued, while real assets are grossly undervalued. It also implies that a correction eventually will be necessary – either through deflation, which implies deleveraging and a collapsing stock market, or through inflation, which implies stagnant stock market for many years and steadily rising prices of real assets, commodities, and gold, usually associated with stagnant economy and typically resulting in stagflation. The first case—deflation—occurred during the 1930s, while the second case—stagflation—occurred during the 1970s. The graph below illustrates the above concepts. The very high Dow‐Gold Ratio in 1929 was followed by the Great Depression, while the higher level in 1966 was followed by the stagflationary 70s. It is evident from the chart the peak in 2000 surpassed the previous two peaks in 1929 and 1966, so this provides a reasonable expectation that the forthcoming return to “normalcy” will be more painful than the Great Depression, at least in terms of cumulative pain over the next 10‐15 years. by Dr. Krassimir Petrov To see how assets inflate over time, ask yourself the following questions ... If you could go back to the depths of 1932 and buy stocks or commodities, would you? If you could roll back time to the severe 1973 — 1975 recession and buy stocks or gold, would you? If you could buy stocks after the 1987 stock market crash, would you? If you could turn back the clock and buy stocks or commodities during the 1990 S&L crisis, would you? If you could go back to the Long‐Term Capital Management and Asian currency crises of 1997 and 1998 and buy assets, even real estate, would you? If you could go back to the year 2000, or even 2001 post‐9/11, and buy gold, other commodities, even real estate, would you? What is coming? Deflation. A decrease in the prices of goods and services, usually tied to a contraction of money in circulation. Inflation. An increase in the prices of goods and services, usually tied to an increase of money in circulation. Hyperinflation: Extreme inflation, minimally in excess of four‐digit annual percent change, where the involved currency becomes worthless. A fairly crude definition of hyperinflation is a circumstance, where, due to extremely rapid price increases, the largest pre‐hyperinflation bank note ($100 bill in the United States) becomes worth more as functional toilet paper/tissue than as currency. Recession: Two or more consecutive quarters of contracting real (inflation‐adjusted) GDP, where the downturn is not triggered by an exogenous factor such as a truckers’ strike. The NBER, which is the official arbiter of when the United States economy is in recession, attempts to refine its timing calls, on a monthly basis, through the use of economic series such as payroll employment and industrial production, and it no longer relies on the two quarters of contracting GDP rule. Depression: A recession, where the peak‐to‐trough contraction in real growth exceeds 10%. Great Depression: A depression, where the peak‐to‐trough contraction in real growth exceeds 25%. From the Casey Report; This chart below compares last year’s assets, which were mostly Treasuries, to this year’s twice‐as‐large and far more questionable mix:
The other side of the balance sheet shows that the Fed has borrowed and taken in deposits to fund the loans that are as big as the issuance of currency. In effect, the Fed has doubled its footprint and doubled its responsibilities. Mostly under the covers, they added almost $1 trillion new credit to the financial world in about two months. The chart below courtesy of John Williams at Shadow Government Statistics. The US monetary base has literally exploded in recent weeks and is up a staggering 38% year‐on‐year ‐ the highest increase since 1939. Humm looks like Hyperinflation – buy hard assets There are additional important Fed actions not included in their balance sheet. For example, they invented a Money Market Investor Funding Facility (MMIF) to guarantee up to 90% of $600 billion of loans to that sector. They do this through special‐purpose vehicles established by the private sector (PSPVs). The latest Commercial Paper Funding Facility (CPFF) started October 27 and has issued $143 billion so far. These are both in addition to the Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility initiated September 19. The programs are beyond keeping up with. Nothing like this has ever been done before by the Federal Reserve. In time, the consequences in terms of confidence in the dollar will be bad. The only hedge is GOLD, SILVER and OIL which we suggest are things one should accumulate. •
Europe's funding risks. Over the next three years, around $2.1T of European corporate and bank debt will mature, creating 'substantial refinancing risk,' according to Standard & Poor's. After the collapse of Lehman Brothers, new bond issues are virtually frozen, leaving companies in a difficult position when it comes times to raise new debt to pay off maturing bonds. In Europe specifically, S&P reports, funding pressures have 'escalated sharply since September as stress in the global financial system accelerated.' Euro‐denominated senior bank debt is being offered at spreads close to 225 basis points over swaps, nearly 10 times wider than pre‐August 2007 levels. Through the end of 2008 alone, $206B of European debt will mature, most of it in the financial sector. This is in addition to the lending Europe has done with Emerging Markets see below. •
Parting comment;According to John Mauldin, credit card debt has exploded in the last few months:
Commercial Bank 'exposure' via the total amount of Credit Card 'loans' outstanding has risen MORE in the last ten
WEEKS, than it did in the previous ten MONTHS COMBINED !!! "Moreover, the growth in the last ten-weeks, $32.3
billion, or about $600 million per 'shopping day' since the beginning of August ... represents nominal growth of +
9.3% ... or ... + 48.3% annualized over the last ten weeks."According to American Express, delinquencies on credit
payments rose to 4.1% of all credit outstanding in the 3Q, up from 2.5% in 3Q of 2007, with Bank of America's rate
rising even more steeply, to 5.9% in the quarter. Moreover, the 'pool' of loans deemed 'uncollectable' rose to a high
6.7% in the 3Q, soaring from 3.6% last September. What consumer spending there is has been fueled in part by
the second largest "merchantvendor" for credit card use is now McDonalds. This suggests that many consumers are in
credit card. Greg notes this uncomfortable piece of data:
serious distress when they need to get their $4 Big Mac and fries with a credit card.
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