Wednesday, January 11, 2012

A Look Behind the Curtain

Money flows to the US are in the hundreds of billions of Euros.  The 50 largest  EU banks are seeing capital flowing  from their vaults  faster than the capital flows from the ECB, IMF and the Fed.  Unicredit is the worst of the breed but all are in bad shape.  Most are zombies with unknown amounts of Euro bond debt and  negative equity.
Our stock market benefits from this influx of capital since sloshing capital drives stocks.  Stocks are the easiest place to put capital to work without the extreme danger of losses.  But the S&P is highly tied to Europe.  20% of the 500 S&P firms are Euro centric.
Here's a peek at the banks who hold Greasy PIIGS debt  and how much bacon they own:
JPM 15 B
BA   13 B
Citi     7 B
GS  2.5 B
MS  2.1 B
This does not include derivatives. 
The debt situation is very toxic. The PIIGS have $760 billion that must be refinanced within one year, much coming in 6 months.  Most is Italian and Spanish and both must pay 7% to their lenders.  This is not sustainable.  The largest banking institution in Italy is the Mafia,   FYI. 
Crime pays. See Monti. Draghi, Dimon and Corzine. Goldman ghouls all.
 This refi level can't be funded by the EFSF, the ESM or IMF.  The weakest European banks have parked nearly $500 billion Euros since they refuse to lend to each other   No one knows who will fail first.
 The Fed is the only one with enough money to deal with these imbalance. 
 Hello Ben, got FIAT?    Sent it!     See my Tipping Point post of November 17, 2011
Supposedly this is not a bad situation but exposure to bonds with almost 100% default rates is not a place I would like to be.  The US money markets have about $500 billion in Euro cash and debt.  It pays a very low rate.  Since there are such low returns defaults could break the $1.00 money market barrier.
The Fed is not getting  new takers for OUR rolling debt and deficits.   Over 50% of the Fed debt is being forced down  Fed pension fund managers throats.   With an expected yield of 8% to sustain pay outs to pensioners, and an abysmal rate of 0% to 2% on USTs, these pension funds will go broke.  The average Federal pension is $50,000 per annum and unless they take a haircut  GRAs are the solution.   Your pension fund or IRA is ground zero for that extraction.
Some of the gold bugs are stating they expect gold to go to $2,500 with silver at $50 or more, if for no other reason than the Gold to Silver Ratio would still be 50 to 1, out of whack but at least not getting much higher.  Pray for 30 to 1 and we get $80 plus silver.  
Stack it boys and girls.  $30 is cheap.  But it could trade in a narrow range as things get dicey in Europe   Iran and even China are  rattling sabres.  Geithner is in China getting the stink eye from Zemin. They play him like an out of tune lyre.  
The fear trade could  drop PM prices temporarily.   They hit PM prices  by 25% in 2008.   Prices have already been affected by the hasty sales of those who need liquidity,  like PIIG banks.  Some gold and silver was sold by fund managers to balance portfolios, either taking profits or losses as the case might be.  Paulson, the mega billionaire, lost over 50% on his hedge fund and dumped about $6 billion in GLD ETF to get liquid and pay his margin calls.  Others are probably in the same situation.  I would say the buyers and seller are fairly in balance but don't count on that lasting.
Turd and a few of the other silver singers are bullish,  drilling down into the charts,  checking their guts, talking about March backwardation is good for silver,   shorts  much fewer in number  and longs, according to Butler,  growing in number.  This could slingshot silver in the next few months.
Sinclair said something big would happen in the next 48 hours---he said that a day ago---so watch closely.  I don't what it might be but weighed in some opinions Monday  that are probably not  worth the paper they are printed on 24 hours later. Maybe some massive debt fueled paper trading taking away from the price of silver. Who knows. 
Puplava noted that the Christmas pop in consumer spending was due to a 60 cent drop in gas prices plus $180 billion drawn from credit cards savings accounts. The employment rate kicked up last week and that is also temporary and due to seasonal workers and delivery people.  Internet sales are enormous.
 If this window dressing for holiday sales does not continue into the new year, the S&P will get an earnings knock in the first quarter.  If stocks get kicked around then PMs could be the beneficiary  There are trillions of dollars wallowing around the world looking for a safe haven. The USD is that now but won't be for long.
On a personal note I was distressed to learn that  Hostess Twinkies  filed for  bankruptcy due to  $900,000,000 in  loans,  $2,000,000,000 billion in under funded  pensions plus large increases in the costs of labor, fuel, food oils, wheat and sugar. That tells  you that even half a century of comfort food  is no safe harbor in this inflationary economy.   Maybe Romney's Bain Capital can save them.
My philosophy as to how to beat inflation is own assets that grow in value faster than inflation.  Shadow Stats clear indication that inflation is running at 10% plus is not something you can ignore.   It is quite insane to me to hear a  Fed governor saying it's ok  that the  Fed should buy more mortgages because the Fed's indicated inflation rate of 1.5% is "unhealthy".  What-- 3% is healthy? Did I hear right?  1.5% Inflation is unhealthy  Give me a break.
Inflation is not healthy and we are at about 10%.  Printing FIAT exacerbates inflation and boosts the prices of precious metals faster than inflation. Hence the reason we buy silver and gold. The best inflation protection there is.
If nothing else speaks to  physical silver  prices disconnecting from paper  in this reality of inflation it's  the 32% premium for Sprott's  PSLV.  The paper attachment to silver is breaking down finally and the COMEX, CME and CFTC know it. The handwriting is on the wall.  Maybe they will effect one more hit to the prices.  Maybe.
 And if they do,  the first thing we should do is be  ready to place our orders when prices drop. The second best thing we can do is buy now.
There are many opinions as to why  there is this spread but most likely it seems that the price spread for the real stuff is getting wider and wider  as  supplies are absorbed and becoming a bit more difficult to find.  With  least  a week or so of waiting time, silver  coins and rounds are soaking up as much as 10-15% of available  world production.   Supplies ARE  being taken up quickly.  Even  Sprott can't get his orders filled quickly,  Coin silvers have  to be first rate .999 pure so it is not reclaimed scrap or old coins and jewelry that feeds this need.   Those are not supply to the degree that some claim. They are junk bullion for the most part and not adequate for the job.  Besides which, who gets rid of good coins for new coins.
In the long pull,  as I noted in a post a couple of days ago,  the M2 FIAT supply is up 1000% in 30 years (China is printing mad to keep their economy afloat).  There are 200% more millionaires in 30 years,  50% more people since 1980 and only a 45% increase in gold.  Something has to give.  And silver is even more disposable so we don't have thousands of tons to fall back on in bullion banks and the other depositories so common for gold storage.
 A 500% increase in Gold prices  in 10 years is only part way to its real potential. A basic math calculation indicates that for every 1% increase in USD supply  it  creates a .9% increase in gold price.  So a 10 fold increase in money supply would have you think gold should be about $3,000 an oz.    But after the massive drop in the manipulated price of gold in 1981-82, the more realistic adjustment could be $5,000 a ounce to take into account the number of people with disposable income , increased wealth,  fear of FIAT and all seeking a limited supply of that precious metal.
The Dollar is temporarily in a happy place. She the least homey girl at the Kallikack hoedown.  She's gonna get lucky tonight.   But that won't last.  If Europe corrects and takes it medicine, the Dollar will fade.
China is working feverishly to become  a backup reserve currency with Japan and maybe Russian and a few others to climb on board.  They are not dumping dollars but they are all RELUCTANT buyers.  If we can't sell bonds to the next foolish investor we will have to increase interest rates and increase them a lot.  Say to 6-8%;  like Italy.
That will crush the value of the bonds bearing 2% held today. The dollar devaluation will be very heavy; maybe worse the 1934 or 1971-1981.   It will hit those unprepared and it will jack up the prices of your metals in a way that no one can really express, or at least without being thought of as crazy.  $10,000 gold and $1,000 silver are dreams but the price to get there is one that imposes great difficulty on all of us.
But there is good news. The government is not going to confiscate your gold.  There are easier places to fund it.  Like Europe and Iran and Venezuela and who knows where else.  Bury your silver and gold and tell no one where it is. 
There is not enough gold in private hands to make it worth the government's time and effort to expropriate it.  Unlike the 1934 period, there are 100,000,000 citizens with 300,000,000 guns. Janet Napolitano's goons probably scan this site and she knows we mean business. Non-violence works.  We back it up with the ferocity of the American people when their fur is rubbed the wrong way. 
I'll be putting together a working paper and post about prepping this weekend. Once  I get my computer whiz to help me post through the back door of Silver Doctor, I'll give you all a 20 plus page outline of prepping and all the goodies that come with that.  It's not going to be  a bunch of TEOTWAWKI scenarios. 
 It is a gentle and easy to follow outline that will give you some good starting points to work from. 
Thanks for listening