Tuesday, January 17, 2012

The Doc Interviews Jim Willie: UniCredit Failure is on Tap, Euro Debt Crisis, and Gold Disconnecting from Futures Markets

With the S&P massively downgrading the Eurozone nations Friday, The Doc interviewed Jim Willie of goldenjackass.com regarding his thoughts on the Euro crisis and the implications to gold and silver.

Part 1 of the interview focuses on the Euro crisis and Jim's call for a domino like chain of bank failures across the Western banking system likely to begin with the failure of UniCredit.
Part 2 focuses on gold, physical gold and silver tightness, and the decoupling of the price of actual physical metal from the paper futures price.

Part 1 SilverDoctors Jim Willie interview

Copyright © 2012 SilverDoctors. All Rights Reserved.  Transcript may not be re-published without written permission, but linking is welcomed and encouraged.  Embedding of the video is also permissible.

Part 1 transcript:

This is The Doc from SilverDoctors.com, we have Jim Willie on the line to discuss his thoughts on the Euro crisis and a variety of other topics affecting gold and silver. Jim Willie is the founder of Golden Jackass.com where he releases weekly public reports exposing the corruption of the western banking system, and also publishes a subscription newsletter called The Hat Trick Letter.
Jim is no holds barred- he calls it like he sees it. Jim- it’s a pleasure to have you here today.

Jim: Well it nice to be on Mr. Silver Doctor, I’ll call you Doc from here on. Don’t call me Doctor, just call me Jim, Jim Willie.
Yeah, this is a very strange time, it’s great to be on your show, it’s nice to see that you’re kicking off a radio show, it’s long overdue, there’s so much to discuss, it’s really frightening what’s going on Doc.

Doc: We had quite a Friday yesterday Jim, how about we get right down to the Euro. We saw a big downgrade of France, Span, Italy- S&P has placed 14 of the 16 Eurozone nations on negative outlook- why don’t we start by discussing the Euro crisis.

Jim: It seems like every few weeks there’s another downgrade. The most important downgrade that I noticed yesterday was France. Let’s face it. Nicholas Sarkozy is in BIG TROUBLE. He’s actually trying to say the austerity plans they have in place, some of the budget cuts- that they will fix the situation and make the economy more stable, make their financial system more stable, put it on better ground, and I think he is DEAD WRONG. I don’t understand except to conclude that they’re trying to force an economic and financial breakdown. These austerity plans are poison pills. They result in a worse recession. They result in more job cuts. They result in bigger deficits. It seems like they don’t work, so they do it again. It didn’t work in Greece so they do it again. We’ve done about 4 or 5 austerity plans put in place with Greece- everything is getting worse.  Right now Sarkozy is something like 14 percent behind his primary opponent in the French primary polls. I think he’s going to be deposed.
So France got downgraded- lost it’s coveted triple A. Of course I don’t think there’s more than one country in the world that deserves a triple A, and that’s Germany- They still have trade surpluses.
But France has lost its triple A. And what does that mean? It means that big banks are going to have to shed their bonds of French government debt. And it means a lot of pension funds, it means a lot of insurance funds- the investment grade has been lost.
There’s something that has been missed though in this whole announcement. And that is that the Euro Financial Stabilization Facility, the EFSF ALSO issues bonds. And ITS triple A rating is now in jeopardy! I don’t know how many different countries contribute towards that bond, but if you have downgrades in the leading nations behind the stability fund, it’s going to be very difficult to sell those new EFSF bonds as triple A when they’re being downgraded on their components. This is going to be really dangerous Doc, I just see nothing fixed, and buying time.

Spain and Italy got downgraded, and I think the more important one right now is Spain, even though Italy has been in the news more- Spain has not been downgraded too many times, and has not really reached the critical 7% on the 10 year bond yield. Watch Italy and Spain both creep back up to 7%.
There’s a funny little line that I used to say to friends a few weeks ago, they’d say ‘well gee the European Central bank is buying bonds, so why is the Italian bond yield heading towards 7%? I thought that the Euro central bank is buying them!’ And I said well, the European Central Bank is buying truckloads, but the European banks are selling BOATLOADS! So the net is trouble and a net sale on those bonds.
These are NOT FIXABLE!! I think we have something like 1/3 of all the European sovereign bonds for the scheduled year to come from Italy. I mean they’ve got some really big volumes! A year ago when Greece was in the news almost every day I remember reading some very shallow analysis. I don’t pull punches as you say. How many times did we read a year or a year and a half ago that Italy’s ok- they’ve got good ratios!

Doc: Yeah, their ratios aren’t as bad, but the total volume’s a lot worse!

Jim: That’s exactly the point!! Their ratios! The two ratios of importance are the debt- the total debt for the country divided by their economic size- the GDP. And the other is what percentage of their entire budget is in deficit. And you know we kept hearing that Italy’s ok- Italy’s not so bad with the ratios. And I kept saying, NO NO NO! Wait till they try to float that GIANT VOLUME! So Doc, it’s all about volume now, and the ECB is an unwilling participant in this process!

Doc: It certainly seems that way. One thing I had wanted to ask you- in your weekly piece this week, US Dollar Paper Tiger you made a statement: ‘When the first Italian bank goes bust a French bank a German bank and a London bank will all turn to dust immediately. One day later a New York bank will follow to the glue factory.’ With this big downgrade this weekend, how soon are we likely looking at the first Italian bank going bust and this domino progression starting? Are we talking weeks? Days?

Jim: Wow. Timing questions are the hardest- definitely the hardest. I don’t know, it could be a month. Back in early December I thought it was going to be early in the new year, like in the middle of January- late January that the first Italian bank would go. And it looks like it’s going to be UniCredit. UniCredit is just hanging on by threads. We don’t have full access to what their portfolio is but all indications are that they’re holding a lot of toxic paper and they’re shedding a lot of probably government bonds, and they’re selling a lot at the ECB window. It’s really hard to say- I don’t know. I’ve been focusing on a different approach regarding the breakdown, and I learned this back in 03 when a certain liberation of a nation took place to remove a certain tyrant in Baghdad- but it’s basically the event schedule.
So next on tap is UniCredit going bad, going bust, failing, turning to dust. And when that happens look for at least another couple Italian banks to also go bust. And when that happens look for the French banks to go bust. The three major French banks. Credit Agricole, BNP Paribas, and Societe Generale. And when that happens look for at least one or two London banks to go bust- they’re all inter-connected! I’ve been putting out in my Hat Trick Letter reports graphs that show cross border exposure. Like how much Italian debt the French banks have. How much Spanish, Italian, and Greek debt the London banks have! Commerce Bank in Germany is not immune, they’re going to fall by the wayside! So all these banks are inter-connected! I’d like to make one little final point regarding this important topic and that is: we hear constantly about the counter parties for the derivatives that these banks own. And we hear that they offset. Like Bank A has credit derivatives for default of Bank B and vice versa, so they’re both ok, they cancel out. Well that’s DEAD WRONG! DEAD WRONG!! THEY BOTH DIE! They don’t help each other! It’s like saying well this guy’s drowning in a pool in the deep water, and so is his friend! Neither one can swim, but it’ll cancel them out, and they’ll both be ok. THAT’S A BUNCH OF GARBAGE!! The counter party risk is MUTUAL AND DEADLY!
When one or two banks go down, it’s going to hit overnight, hit rapidly, and probably involve a dozen banks. That’s my feeling Doc.

Doc: I definitely agree and see how that will happen. With the derivative system we have today, it’s all really a big house of cards, and one of these pillars is taken out, there’s nothing to support it any more.

Jim: No it’s not. They take each other down. The shadow banking system is a mutual millstone. They all go down together. And that’s why you saw with the Greek renegotiated bonds where they all agreed that ok, it’ll be a 35% haircut, or it’ll be a 40%, or maybe it’ll be a 50% bond loss. They declared that it would not be a default event. They even used the word re-definitition! So derivatives are deadly and they're doing their utmost (the bank leaders that is) they’re doing their utmost to prevent a declaration of default! Because if you see one you’re going to find out that they don’t help each other, they drag each other down! Simple as that Doc!

Doc: If you had told me a year or two ago that Greece would have a 50% default and it wouldn’t be called a default I wouldn’t have believed you, I would have thought you were crazy.

Jim: Well that’s what they’re doing, they’re just calling it a re-definition. They’re playing a lot of games with the contract wording. And they’re getting a lot of objections from the suddenly responsible debt ratings agencies: Fitch, Moody’s, S&P, and they’re saying, ‘you guys are just not legally correct’.
I’m expecting lawsuits from the holders of the derivatives contracts. They’re insurance contracts! It’s like saying I have a fire insurance policy on my house and my whole back side burned down. But the agents come in and say ‘well, we’re going to redefine what a fire is. No, that’s not a fire, that’s just extreme oxidation, and you don’t get your claim.’ The fire would just burn the whole neighborhood down. That’s my analogy. These derivatives are very strange, very cryptic, and they’re not going to go away. It’s just mind boggling. You know you can’t point to any area of the financial world and say ‘well that’s stable.’ Or ‘that’s doing well.’ Or ‘that shows complete transparency and health.’ NOTHING like that Doc, nothing!

Check back tomorrow for part 2 of Jim Willie's explosive interview where Jim discusses supply issues in gold and silver, the irrelevance of the COMEX, and the growing disconnect between the paper futures price of gold and the actual physical price of gold. 

Jim Willie's public analysis can be found at SilverDoctors, as well  GoldenJackass.com
Jim also publishes two excellent subscription newsletters here, which are available for a very reasonable $110 for a 6-month subscription.