Did Fabulous Fabrice Really Cause the Financial Crisis

Did Fabulous Fabrice Really Cause the Financial Crisis

Here is a reminder from Greg Palast, who is one of those rarest of creatures, the investigative journalist, about what caused the last financial crisis, and the source of the criminogenic environment that is likely to be a major contributing factor to the next.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

"...In August 2007, hot-shot hedge fund manager John Paulson walked into Goldman Sachs with a brilliant plan to cash in on the US housing crisis.

He paid Goldman to announce that Paulson would invest a big hunk of his fund's wealth, $200 million, in securities tied to the US mortgage market’s recovery. A few lucky investors would be allowed to give Goldman their billions to bet with Paulson that Americans would not default on their home mortgages.

It was a con. Secretly, Paulson would bet against the mortgage market, hoping it would collapse – making sure it would collapse. All he needed was Goldman to line up the suckers to put up billions to be his "partners".

It was Goldman’s and Paulson's financial version of Mel Brooks' The Producers, in which a couple of corrupt theatre producers schemed to suck investors into a deliberate flop...

What did the Feds do to Paulson? He received... a special tax break.

Am I defending the Fabulous Fabrice, the French-fried scapegoat? After all, he was just along for the ride. But he was deeply thrilled to carry water for the Bad Boys. And the charges against him are merely "civil", meaning he won't get jail time even if found guilty.

And what about Goldman, whose top brass knew of the entire game? The Securities and Exchange Commission did fine Goldman for its duplicity – a sum equal to 5 percent of the cash Goldman got from the US Treasury in bail-out funds.

After Goldman’s con became public, its CEO, Lloyd Blankfein was hailed as a visionary for offloading mortgage-backed securities before the shit hit the finance fan. Blankfein hailed himself for, he said, "doing God's work". God did well. Blankfein’s bonus in 2007 brought his pay package to $69 million for the year, a Wall Street record.

Rather than prison or penury, Blankfein was appointed advisor to Harvard University’s business and law schools.

So here’s the lesson all Harvard students are taught: If you can't do the time, don't do the crime... unless your booty exceeds a billion."

Read the entire piece by Greg Palast here.

Gold finaly Breaks out to the upside

A Shuffle of Aluminum, but to Banks, Pure Gold

http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?pagewanted=1&=_r=6&_r=2&amp&

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Others now fear that Wall Street banks will repeat or revise the tactics that have run up prices in the aluminum market. Such an outcome, they caution, would ripple through the economy. Consumers would end up paying more for goods as varied as home plumbing equipment, autos, cellphones and flat-screen televisions.

Robert Bernstein, a lawyer at Eaton & Van Winkle, who represents companies that use copper, said that his clients were fearful of “an investor-financed squeeze” of the copper market. “We think the S.E.C. missed the evidence,” he said.

run for your gold, there is not enough for all -Reuters

"The current dislocation indicates that holders of gold futures have begun demanding delivery. But because of the large amount of leverage in the market, participants are not able to deliver on their obligations."

Reuters, Gold Futures Hiccup Indicates Demand Outpacing Supplyhttp://www.reuters.com/article/2013/07/19/derivatives-gold-idUSL1N0FP1CB20130719

A dislocation in the gold futures market indicating that demand for physical delivery of the metal is now far outweighing supply has intensified in recent weeks, increasing concern in the market that the change may not be a momentary blip and participants may have become over-leveraged.
Gold went into backwardation in comparison to the three-month futures contract in early January, meaning the spot price rose above the short-dated future contact. Now that process looks set to creep out the futures curve to longer-dated maturities, signalling some cause for alarm.
"The fact that has remained and widened ... indicates that the physical market has tightened up substantially, a postulation that is corroborated by the growing premiums being paid ... and the ongoing wholesale delays in the delivery of substantial bullion tonnage," wrote Ned Naylor-Leyland of Cheviot Asset Management in a report this month.


"The bullion banks want to get gold back into contango and stop the movement of the remaining inventories by shaking the market lower, using paper leverage to do so," wrote Naylor-Leyland.
"It hasn't worked, indeed more and more investors are now seeking allocation, delivery and physical metal at the expense of synthetic products offered by the banks. The squeeze we have been waiting for is closing in, it is always darkest just before dawn."

JP Morgan Chase, Once Considered "The Good Bank," Is About to Pay Another Massive Settlement

In the three-year period between 2009-2012, Chase paid out over $16 billion in litigation costs. Noted financial analyst Josh Rosner of Graham Fisher slammed Chase in a report earlier this year, pointing out that these settlements and legal costs represented a staggering 12% of Chase's net revenue during this time. There couldn't possibly be a clearer demonstration of the modern banking model, in which companies break rules/laws as a matter of course, and simply pay fines as a cost – a significant cost – of doing business.

Read more: http://www.rollingstone.com/politics/blogs/taibblog/chase-once-considered-the-good-bank-is-about-to-pay-another-massive-settlement-20130718#ixzz2ZSPIbSgx
Follow us: @rollingstone on Twitter | RollingStone on Facebookhttp://www.rollingstone.com/politics/blogs/taibblog/chase-once-considered-the-good-bank-is-about-to-pay-another-massive-settlement-20130718#ixzz2ZQq176Ev

$NYA50R Lower Top

China reportedly planning to back the yuan with gold

http://rbth.asia/business/2013/07/17/china_reportedly_planning_to_back_the_yuan_with_gold_47997.html


Recent media reports suggest that Beijing is considering backing the yuan with gold. This decision, if taken, will likely affect China's economy and may trigger a new wave of the global economic crisis. For Russia, however, such a scenario may have its benefits.

According to media reports of early July, the People's Bank of China is mulling the possibility of phasing out the dollar as the reference currency for the yuan exchange rate, and to start using gold as the reference point.
The reports have not been confirmed officially, but analysts are warning that the step, if taken, will weaken the yuan and destabilise China's already troubled economy, ultimately provoking a new bout of the economic crisis worldwide.
Beijing's possible move to back the yuan with gold would not be meant as a strategic measure to strengthen the national currency and increase its attractiveness as an investment medium. Rather, it would be a flaunt aimed at demonstrating to the world (and to the USA in particular) that China is capable of taking the risks associated with a departure from the dollar standard. Experts warn however that, apart from benefiting no-one, such a decision may actually have catastrophic consequences.

Ten Thousand People Waiting In Line To Buy Gold

http://www.zerohedge.com/news/2013-06-14/stunning-images-china-ten-thousand-people-waiting-line-buy-gold

Argentina Beats Vietnam for Gold Premium

At the time my friend decided to buy gold, the price was about US$1,700.  If we include the premium, it cost him US$1,800 at the 6-to-1 exchange rate.  In black market terms, this fiasco cost him 10,800 pesos per ounce.  If he was allowed to purchase gold legally, it would have only cost 8,100 pesos.  That’s a premium of 25% or US$600!

Weapons Of Mass Distraction and Bending Towards Justice

http://jessescrossroadscafe.blogspot.com/2013/07/bill-moyers-weapons-of-mass-distraction.html

The Bernanke Conundrum

The Bond Vigilantes

This is what the bond market is already starting to do in fits and spurts. But we haven`t seen anything yet by the bond vigilantes. The only thing we have seen so far is an $80 Billion withdrawal from bond funds as investors try to protect principal. Make no mistake we haven’t even begun to experience any vigilantism in bond markets.

When this happens the worst thing the fed can do is try to fight them as the perception that they are out of touch further erodes credibility, and the market becomes panic stricken where normal valuations and previous models go out the window.

http://www.zerohedge.com/contributed/2013-07-13/bernanke-conundrum

Gold is most oversold ever!

http://theshortsideoflong.blogspot.com/2013/07/charts-of-day-precious-metals-sector.html

Source: iMarket Signals / dShort

Regular readers of this blog should know by now that I consistently track annualised performance of various asset classes. This indicator is commonly referred  to 12 month rate of change or a yearly rolling performance. The first chart we are focusing on, seen above, shows that the current Gold correction is the most oversold ever (Gold started trading freely on COMEX in early 1970s). The corrections of 1971, 1976, 1982, 2001 and 2008 were all sharp, where the price fell almost 2 standard deviations away from its average annualised percentage movement.

In 1999, Gold became so oversold, that the price moved over 2 standard deviations away from its mean. That became known as a secular bear market bottom and one of the greatest buying opportunities over the last decade. Fast forward to today, and what is even more interesting is the fact that Gold has now become the most oversold ever, even suppressing those 1999 conditions. On the daily basis, as Gold traded below $1200 per ounce in recent weeks, the price was almost 3 standard deviations away from its annualised mean. What we have here, is one of the most important contrarian "buy signals" in the precious metals sector over the last 50 years!

Chart 2: Gold miners hold similarities to the greatest oversold conditions

Source: The Daily Gold

Another friend of mine, who runs a great precious metals newsletter over at The Daily Gold, recently sent me a chart of Gold Mining equities that he compiled dating back to 1930s. Essentially, the chart shows that regardless of weather Gold is in a secular bull or a secular bear market, the sharpest corrections over the last 80 years have averaged about 65% on the downside.

From there, various observations can be made. Personally, the current correction (labeled D) is currently one of the strongest out of 8 major sell offs since 1939. We are more then 65% down from the all time highs (just about the average of all others too), but more importantly corrections are not only measured in percentages, but also in time.

With that in mind, we can easily see that the current correction is one of the sharpest, only third behind the infamous crash of 1980 (the end of the secular bull) and the global financial crisis of 2008 (Lehman panic). Observing the chart above and taking into context the historical price action comparison, we could assume that Gold Miners are either near or at a major low as we speak.

Chart 3: South African mining industry has now entered into total disarray 

Source: Bank Credit Analyst

Wage inflation and general employment conditions are usually a favourite tool of economists and Wall Street analysts. Those guys (and girls) love to follow lagging data to tell us how good (or bad) the current conditions are. However, as contrarian investors, we have to remember that markets are usually discounting the future events and fundamental conditions today, and at times look forward 6 to even 12 months in front of what the current data says. As I always say, investing is about anticipating the future.

South Africa is traditionally known for its strong precious metals industry and high global exports. If we look at the chart above, the current employment conditions have reached dreadful levels. Previous similarities can be seen during 1993, 1999 and 2006 downturns. As mining conditions deteriorate, the supply that was planned for the future usually does not come on board (just like we saw in 1999), so the market starts discounting up-and-coming shortages. Therefore, current conditions could be foretelling another major contrarian buying opportunity.

Interestingly enough, looking at the South African annual mining wage change and comparing it to the price, we can see how Gold (and other precious metals) tend to find a bottom just as conditions turn awful. Consider the fact that in 1993, 1999 and 2006 Gold found major bottoms out of which it rallied powerfully, so I would not be surprised at all that we are nearing another major low as we speak.

What I Am Watching

Bernanke: Highly Accommodative Policy Needed for 'Foreseeable Future'

http://www.cnbc.com/id/100877586

Jeremy Grantham GMO April 2011 Letter - Time to Wake Up

http://www.fundmymutualfund.com/2011/04/jeremy-grantham-gmo-april-2011-letter.html

$1 billion of gold has been shipped from New York to South Africa this year

http://qz.com/83396/1-billion-of-gold-has-been-shipped-from-new-york-to-south-africa-this-year/



Examining US trade data, we were surprised to see that South Africa’s $402 million trade surplus with the United States in January had turned into a $689 million deficit by March. Why?

It turns out the $1.1 billion swing is entirely due to unusual shipments of gold from the US to South Africa in February and March. So far this year, 20,013 kg of unwrought gold, worth $982 million, has left John F. Kennedy International Airport (JFK), in New York, for somewhere in South Africa, according to the US Census Bureau’s foreign trade division. (Unwrought gold includes bars created from scrap as well as cast bars, but not bullion, jewelry, powder, or currency.)
The shipments from JFK were the only unwrought gold to leave the US for South Africa in 2013; another large shipment occurred in September 2012.

South Africa has an enormous mining industry, and a lot of the material leaves the country–$1.72 billion worth of precious stones and metals were exported in March according to the South African Revenue Service. Although the country’s gold output has been falling steadily for decades, it remains one of the world’s largest producers and is still primarily an exporter. In fact ordinary South Africans are legally prohibited from importing or owning unwrought gold. (Refiners, dealers, and jewelers are granted licenses.)
However, the strikes that rocked South Africa’s mining industry last year briefly caused gold output to fall sharply, around the same time as last autumn’s big gold shipment from JFK. Overall 2012 production declined by a relatively modest 6% (pdf) over the year before, according to a preliminary figure from the US Geological Survey; but those first estimates have sometimes proven wide of the mark. (In 2009 the USGS estimated South Africa’s 2008 production to be 250 tons; it subsequently revised the figure to 213 tons.) So it could be that the strikes dealt a more severe blow to the country’s gold industry than the data show.
Still, even if gold output did fall precipitously, it’s not clear why South Africa would need to start importing it. One possible destination for the gold is the South African Mint, which produces legal-to-own gold coins called Krugerrands; the gold used in them is first refined by the Rand refinery. Calls to the South African embassy in Washington, DC were not returned.
(Update May 17: The Rand refinery released a statement claiming responsibility for the gold imports.)
The data do not imply that the gold originated from the New York area, only that JFK was the gold’s final point of transit before it made its way to South Africa. For instance, a US domestic cargo carrier could have delivered the gold to an international carrier in New York, who in turn hauled it across the Atlantic. The amount of unwrought gold exported through JFK has more than doubled in recent years.
In 2012, 335,204 kg was transported from the airport to other countries, up from 148,894 kg in 2009.

The shipments to South Africa amount to 16% of all unwrought gold exported through JFK in the first three months of 2013 and 9% of all unwrought gold exported from the US this year.

All the gold was not necessarily shipped at the same time. However, if it was, it would take up no more space than a washing machine. The Boeing 747-200, a cargo model of the distinctive jumbo jet, is capable of transporting a shipment six times heavier than the 20,013 kg exported so far this year. That’s all we know.
If you have a better theory about (or the full story behind) these gold shipments, feel free to get in touch.

"The Fed & German Gold Is Gone”

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/7/9_Game_Over_-_Its_All_A_Farce,_The_Fed_%26_German_Gold_Is_Gone.html

Dow Will Hit 60,000 in 20 Years: Ron Baron

http://finance.yahoo.com/news/dow-hit-60-000-20-124549767.html

On June 20, a day when investors were heading for the hills and the market was down sharply, Ron Baron's Baron Capital saw its strongest inflows of the year. 

The markets plunged that day after Federal Reserve  Chairman Ben Bernanke indicated the central bank was getting ready to exit its extreme monetary easing program. 

When asked about the recent equity market sell-off that accompanied Fed fears, the renowned buy-and-hold investor stressed buying and selling on news is not a good strategy.

(Read More: One Eye on Earnings, the Other on Bonds )
"Money is running from bonds and gold. I think people investing in bonds can have significant capital depreciation over the next several years," he said in an interview.

"Everyone thinks they are advantaged by trading on news. They are not. This is why the average investor in mutual funds makes 3 percent per year while the average mutual fund earns 7 percent per year." Baron added.

"Investors who base their buy and sell decisions on current news generally sell and buy at exactly the wrong times. It's crazy," he continued.


"Companies have almost doubled their earnings in the past 13 years while stock prices have increased only about 25 percent," he said.

 Expecting stock market returns for the next 20 years to approximate the 7 percent annual returns earned by U.S. stocks for generations, Baron quoted Albert Einstein that "the most powerful force in the universe is compound interest." 

 He said in his opinion based on the compounding effect, "the Dow Jones will be 30,000 in 10 years, 60,000 in 20 years." 

Baron is putting his money behind his words.

Mish Buys a Basket of Miners

http://globaleconomicanalysis.blogspot.com/2013/06/mish-buys-basket-of-miners.html

Most of my investment funds are under management at Sitka Pacific. I also have investments with GoldMoney and some other assets from my late wife Joanne.

I believe precious metal miners represent true value, but I cannot state when the market will come to the same conclusion.

Last week I bought a basket of miners with a significant amount of money. Many of these stocks are also held in various Sitka Pacific strategies.

Mish Miner Basket

Symbol	Average Price	Initial Weight	PE	Dividend	Yield
NEM	$34.08	30%	10.06	$1.40	4.10%
GG	$29.18	15%	15.70	$0.60	2.10%
ABX	$20.64	15%	NA	$0.80	4.00%
GDX	$29.60	10%	11.00	NA	1.20%
GLDX	$16.73	5%	NA	NA	6.52%
HMY	$4.08	5%	11.73	$0.10	2.30%
SBGL	$3.38	2%	NA	NA	NA
SLW	$23.72	9%	14.22	$0.48	2.00%
PAAS	$12.65	9%	42.38	$0.50	4.10%

General Comments

As you can see, most of the investment is with major mining companies that pay substantial dividends. PEs are trailing, not optimistic or unrealistic forward estimates. Price per book value is low in most cases. Each symbol is a clickable link to Yahoo!Finance statistics.

Gold Stock Comments

• NEM - Newmont Mining: My best value play and weighted accordingly. Price/book is a mere 1.19 and I have no reason to believe book value is overstated. Trailing PE is 10.04 and the dividend yield is 4.10%. What's not to like?
• GG - Goldcorp: A major Canadian gold miner with a respectable PE and dividend. Goldcorp trades right at book value (.99 to be precise).
• ABX - Barrick Gold Corporation: Another major Canadian gold miner with a respectable dividend. Earnings were negative last quarter due to writedowns. Dividend appears solid. Price/per book is a mere .88 (less than book value).
• GDX - Market Vectors Gold Miners ETF. Rather than pick too many additional stocks and following them all, I put 10% of my basket into a gold miners ETF basket.  
• GLDX - Global X Gold Explorers ETF. This is a speculative play on gold explorers. Some of the companies in the ETF are likely to go bust. Hopefully some will strike it big. I weighted this according to risk, with only 5% of my basket.
• HMY: Harmony Gold Mining Company Limited: This is a South African mining company that stands to appreciate from its gold mining operations and also from a falling Rand.
• SBGL - Sibanye Gold Limited: This is another South African miner and arguably my most speculative play. It is weighted accordingly at 2% of the basket.

Silver Stock Comments

• SLW - Silver Wheaton Corp: SLW has a respectable PE and pays a reasonable dividend. It is a play on the price of silver which I expect to recover at some point.
• PAAS - Pan American Silver Corp: PAAS is a major silver producer with a nice dividend yield of 4.10%. Pan American is trading at 68% of book value.

As you can see I weighted the basket 82% gold to 18% silver which reflects my belief that gold is a far safer play. None of these picks constitutes a recommendation in any way. Please do your own due diligence.

Whip inflation now

http://en.wikipedia.org/wiki/Whip_inflation_now


Whip Inflation Now (WIN) was an attempt to spur a grassroots movement to combat inflation, by encouraging personal savings and disciplined spending habits in combination with public measures, urged by U.S. President Gerald Ford. People who supported the mandatory and voluntary measures were encouraged to wear "WIN" buttons,^[1] perhaps in hope of evoking in peacetime the kind of solidarity and voluntarism symbolized by the V-campaign during World War II.
The campaign began in earnest with the establishment by the 93rd Congress, of the National Commission on Inflation, which Ford closed with an address to the American people, asking them to send him a list of ten inflation-reducing ideas.^[2] Ten days later, Ford declared inflation "public enemy number one" before Congress on October 8, 1974, in a speech entitled "Whip Inflation Now", announcing a series of proposals for public and private steps intended to directly affect supply and demand, in order to bring inflation under control. "WIN" buttons immediately became objects of ridicule; skeptics wore the buttons upside down, explaining that "NIM" stood for "No Immediate Miracles," or "Nonstop Inflation Merry-go-round," or "Need Immediate Money."
In his book The Age of Turbulence, Alan Greenspan as the Chairman of the Council of Economic Advisors recalled thinking "This is unbelievably stupid" when Whip Inflation Now was first presented to the White House. According to historian Yanek Mieczkowski, the public campaign was never meant to be the centerpiece of the anti-inflation program.^[3]

Ritholz on Gold and on Making Predictions

http://globaleconomicanalysis.blogspot.com/2013/07/ritholz-on-gold-and-on-making.html


Grave Dancing

Ritholtz claims to be agnostic regarding gold. I suggest his current hyperbole proves otherwise, even though he once liked the metal.

For the record, Ritholtz is a good guy, we just happen to disagree regarding gold. 

And I certainly side with Ritholtz regarding the folly $10,000 or even $3,000 gold predictions by hyperinflationists, especially when people put timeframes on them.

But not every gold fan is a hyperinflationist or an inflationist of any kind. As a staunch deflationist, as well as someone who is definitely not agnostic regarding gold, I am proof enough.

And who is it now that is coming out of the woodwork to dance on the grave of gold? It's a Plague of Gold Bears Now Say "Gold Unsafe at Any Price".

What's the Real Long-Term Driver for Gold? Click on the preceding "Plague of Gold Bears" link to find out.

We are firmly convinced that the fundamental argument in favor of gold remains intact. There exists no back-test for the current era of finance. Never before have such enormous monetary policy experiments taken place on a global basis. If there was ever a time when monetary insurance was needed, it is today.

Gold is the only liquid investment asset that neither involves a liability nor a creditor relationship. It is the only international means of payment independent of governments, and has survived every war and national bankruptcy. Its monetary importance, which has established and manifested itself in the course of the past several centuries, is in the process of being rediscovered.

Contrary to 1979/1980, the current gold bull market will unlikely end due to a sudden strong rise in interest rates, as the balance sheets of governments, households and corporations are tainted by huge debt. In the current environment, this would lead to a deflationary depression. According to the BIS, the combined debt burden of governments, households and non-financial corporations in the 18 OECD core countries has risen from 160% of GDP in 1980 to 340% of GDP in 2012.

In order to counter the current problems in the financial sector, but also in the real economy, the Fed, the Bank of Japan, the Bank of England and the ECB are going to continue to hold interest rates at a low level. There has always been a strong link between negative real interest rates and the gold price.

The New York Times had the definitive take on the vicious sell off in gold (Now and Then)

The New York Times had the definitive take on the vicious sell off in gold. To summarize one of their articles:

Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight.  The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels.

 

The rout says a lot about consumer confidence in the worldwide recovery. The sharply reduced rates of inflation combined with resurgence of other, more economically productive investments, such as stocks, real estate, and bank savings have combined to eliminate gold's allure.

 

Although the American economy has reduced its rapid rate of recovery, it is still on a firm expansionary course. The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators' dreams into a nightmare.

 

This analysis provides a good representation of the current conventional wisdom. The only twist here is that the article from which this summary is derived appeared in the August 29, 1976 edition of The New York Times. At that time gold was preparing to embark on an historic rally that would push it up more than 700% a little over three years later. Is it possible that the history is about to repeat itself?

Central Banks, Earnings, and Economic Recovery Data are now Headwinds for Risk Assets

http://www.mercenarytrader.com/2013/07/central-banks-earnings-and-economic-recovery-data-are-now-headwinds-for-risk-assets/