Imminent Erosion of USDollar Seawall
Jim Willie CB July 16, 2009
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Jim Willie CB is the editor of the "HAT TRICK LETTER"
Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.
The globe is losing patience with leadership and management of the USGovt ship at sea. They simply refuse to offer a credible solution to the primary keynote crack in the hull, falling housing prices and cratered mortgages, each of which work their destructive magic to wreck the banks. The home loan modifications are a farce, a travesty not designed to modify but rather to frame a series of loan forbearances. The motive for not fixing the mortgage mess is mysterious to the masses, but not here. Jackass claims have been consistent, that effective loan modifications would alter the underlying mortgage bonds drastically. The Powerz wanted enough time delay to rework as many mortgage bonds as possible into new securities, thus rendering impossible any legal challenges to the original mortgage package process. Charges of bond fraud still remain. The USDollar is vulnerable here and now, as a new wave of bank losses is imminent from numerous types of mortgages along with some basic types. Let's see if the grapevine is correct, that the USDollar will begin to see a trashing initiative starting this weekend, out of Asia. They must be impatient beyond description. This autumn is expected to see some rather tumultuous events unfold, as the US financial structures are breaking across most of its ramparts even as loyalty to it is fading like a mist. There will be no return to the US of yesteryear, only a tragic march. Even the venerable Goldman Sachs seems under fire, for alleged NYSE tracking software with the potential for market manipulation.
One surely struggles mightily where to begin to describe the incredible weakness, confusion, corruption, and lopsided interests when it comes to managing the USEconomy and US banking system. The recovery is a hobbled man taking a rest on a couch in the morgue waiting room. The nonsensical Green Shoots of recovery are recognized as a painted mirage at worst and error due to faulty information at best. More like a congame to sell bank stocks at inflated prices, an act difficult to repeat. The Stimulus Plan apparently has very little stimulus inside it, and 75% of its vigor is planned for next year. The US Federal Reserve is fighting disclosure of not only its balance sheet but its disbursement of TARP Funds. Imagine a silly setup where Congress cannot find out what its central bank is doing, when acting as its own contractor, how ludicrous! Perhaps claims for independence will later be packaged in executive privilege as seen three decades ago. Appeal to the US Supreme Court might take a long time, since they enjoy three months vacation in summer. Next could come a Constitutional challenge of the USFed as Congressional contractor to find its way to the august high court.
RESTLESS US CREDITORS BEING DECEIVED
Patience has almost run out in the minds of foreign creditors, exhibited by their words and actions. They observe many events, many programs, many directives, many speeches. The do not, however, see much change in the course of the USGovt ship at sea. It remains aground. If observant enough, they can detect how the USDept Treasury and comrade in arms the USFed have used the foreign central banks to quietly bid for USTreasurys at auctions. The auctions were doing very poorly in May and June until foreign central banks stepped up to the plate. The major question unasked and unanswered is whether the USFed gave foreign central banks the USDollars with which to bid up the USTreasurys at auction. My belief is obviously yes, for three reasons. First, the USFed was struggling at auctions with rising bond yields and bad publicity. Second, the process was applying sufficient pressure to their own stable of primary bond dealers, which was sitting on over $360 billion in gradually lower quality bond inventory, to bring down their own dealer network. Dresdner Kleinwort exited the dealer network, but two Canadian big banks entered (or are entering) the dealer network motivated by grave imprudence. See Toronto Dominion and Royal Bank of Canada. Third, they have the means, they have the ability, they have the sway, they have the bold defiant arrogance. The US banker syndicate can rejigger the Indirect Bidder definition, but that is but a small smokescreen that fades by noontime. Notice how Indirect Bidders (largely foreign central banks) grabbed over half the USTreasury supply with a participation rate of 54% in a recent purchase of $18.878 billion of the $35 billion for sale. Thanks to the superstar Greg Weldon for the chart. His work is unrivaled.
China has been the principal spokesman for challenging the USFed in the monetization of USTreasurys, a reckless but unavoidable practice. The Beijing objections are motivated by a steadfast refusal to permit the USGovt inflate the debts down at a time when it would be impossible to inflate them away. The task reminds one of Sisyphus, who was compelled to roll a huge rock up a steep hill, but it would always roll back down again when he rested, forcing him to repeat the arduous task. The USGovt financial stewards must deal with multiple huge rocks, as each month produces new auction volume. So the answer to the riddle appears to be HIDDEN MONETIZATION. If foreign central banks used their own money, a strong USDollar response would surely have come, since the volume of the USTreasury auctions each week is larger than the typical monthly volume a year ago. Would the USFed set up accounts in foreign locations for the purpose of bidding on its own USTBonds secretly? Obviously yes. They already set up vast USDollar Swap Facilities last October in foreign locations. This ugly deception will leak out in time. Besides, the declining IMF reserves data seems to contradict the USFed claims of not monetizing. The impact will be felt upon the USDollar initially, since the weaker sister in the attached USTreasurys will be vigorously defended.
BANKS BRACE FOR NEXT CRUSHING WAVE
Details are provided in the July Hat Trick Letter, the Macro Economic Report just posted this week, on the plight of the banks. They must contend with rising prime delinquencies, rising commercial loan defaults (due to 35% property valuation declines and no funding facilities), rising Jumbo mortgage defaults, rising home equity loan defaults, and the advent of the major wave of Prime Option ARM defaults. Let's not leave out rising credit card defaults, and the unprecedented wave of small business bankruptcies. The two big assaults will clearly be delivered by the commercial loans and Prime Option ARMs, but Jumbo losses might creep up to challenge for the top ignominy. The insane Option mortgage loan is the major time bomb that finally has entered the building for bankers. Here is a shocker statistic, one that Ben Bernanke should read carefully, given his stated belief in summer 2007 that the credit crisis was contained within the Subprimes. My contention immediately in response was the credit crisis was an ABSOLUTE BOND CRISIS, touching all bonds of all types, sure to be clear. It is now clear. The continued spike in the delinquency rate is growing worse for prime mortgage loans. Their DQ rate has risen astoundingly in the last three years, spiking to nearly 5.94% in May. The combination salvos will be deadly. The banks masquerade as solvent, but are not, despite the Stress Test charade. With the revised accounting rule change to help lift the bank stocks, they were able to sell investors their damaged stock.
Big banks will have a major obstacle in pulling off the Grand Consolidation game. They are hoarding reserves, placing them under the watchful care of the USFed, even gaining a paltry interest. The big banks probably are lying in wait, watching and waiting for the regional banks, the mid-sized banks, to suffer painful commercial loan losses.
Then the big banks will swoop down and acquire the regional banks at distress level prices, using their vast funds held at the USFed.
THIS IS THE GRAND BANK CONSOLIDATION PLAN. Recall that the banking system has 96% of its reserves sequestered at the USFed. The USDept Treasury under former Secy Paulson urged the participating TARP fund recipients not to open the loan gates, but rather acquire banks over time patiently. So we have some hint of intentions. THE ONLY PROBLEM FOR THE BIG BANKS IS THEIR IMMINENT RUIN FROM MAJOR ADDITIONAL CRIPPLING LOSSES FROM ABOVE CITED SOURCES. They might masquerade as healthy solvent banks, but they are actually large seaside cottages whose foundations washed away to sea long ago. The pillars visible to the beachcombing public are mere facades. Their attempts to put fresh paint on the facades do not work, since one cannot apply paint to an underwater surface.
The big banks have generously agreed to assist the State of California in the IOU coupon issuance. JPMorgan Chase, Bank of America, Wells Fargo, and Union Bank consented to accept the registered warrants as they are officially called, until last Friday July 10th. The IOUs are not legal tender, but interest bearing warrants in coupon form. Hmm! No Constitutional challenge there! The $3.4 billion in such coupons have floated. The process is opening Pandora's Box and raises numerous questions. Big banks do not carry large exposure, but the development is one more log on a burning bonfire. Thanks to local Californians who supplied rich information, the July report covers some interesting angles. A side market, for instance, has emerged on Craigslist even after eBay was blocked by the diligent SEC. In some cases taxes can be paid with these IOU coupons. Reminds me of a circus with numerous tents. The other tents feature migrant workers who have begun to demand cash sent from Latin American home areas, never seen before. The mortgage foreclosure endless wave of destruction continues to wreck havoc upon California. The state is one of the most besieged, with metropolitan Los Angeles the epicenter for damage. As property values continue to fall, now at nearly 40% in the Golden State, its economy and households and banks all suffer death throes, with no exaggeration.
BRACE FOR BANK SHUTDOWN
Harry Schultz and Bob Chapman have revealed some harsh plans for temporary US bank system shutdown on or about September 2009. The story has been promoted by Peter Brimelow on MarketWatch for further publicity and legitimacy (CLICK HERE). See "Latest Schultz Shock: a Bank Holiday" which explains the US State Dept tipoff to the many US Embassies. The July Hat Trick Letter cites multiple confirmations solicited and given. My analysis goes on about speculation as to the motive, implementation, cover for criminal activity, and market impact. The USDollar would likely suffer a sudden quantum drop devaluation, followed by incredible pressure to avert USTreasury default. The risk of an upcoming USTreasury default is unfolding like a path growing more narrow and treacherous, vulnerable to attack from strategic high ground. The creditors will likely show their strength very soon. The unintended consequences would be endless, not the least of which might be possible path toward declaration of state of emergency, at least in a few states. Attempts at capital controls should be on the table of discussion soon, but that comes with a monumental backfire waiting to happen, as implementation seems next to impossible in less than two years time. Look for implementation of numerous plans to be circumvented by the reality of market forces, like changes to the federal taxation system nationally.
GROWING DISORDER WILL LIKELY PREVAIL WITHIN SEVERAL MONTHS, PERHAPS A YEAR AT MOST. My deep suspicion is that a bank holiday would enable the forced merger of reasonably healthy banks across the nation with the badly impaired banks on Wall Street. The opportunity to join with stronger banks, and to assimilate their deposits under the pressure exerted by the USGovt, could occur under such a setting, justified as firming up the national banking system. On the more local level, as my friend SteveK says, "It is my belief that as the system continues breaking apart the so-called 'authorities' will not have the resources to cope. Not even close." Total agreement here.
The USDollar is at grave risk of washing out to sea with the historically unprecedented flood of liquidity, urged on by monetization, concealed by hidden collusion. The troubled USGovt ship at sea is due to endure added risk from losing its anchor in the USDollar. High waves from rampant insolvency, and high winds from global revolt render it extraordinarily vulnerable. The great reversal outlined in previous articles all spring and early summer has not gone away. It has gathered strength, built energy, and prepares to resume its downward descent into a very dark place. A collapse is at risk, but not until the 72 support level is knocked out and broken. The cyclical indexes all look horrible. The attempt at recovery in the US$ DX since May has been weak, without gusto, lacking follow through, not up to the hype, and evidence of imminent powerful decline. Time has run out on the important technical crossover, closely watched all these months. The faster 20-week moving average (in blue) is very close to crossing over and below the slower 50-week moving average (in red). When it clearly crosses over, the loud bear signal will have been given, for ALL OVERBOARD in the abandonment of the broken bloated mismanaged USDollar. It drags down the global economy and puts at risk any nation tightly linked to it. When the breakdown resumes, gold & silver will rise. When the breakdown takes the US$ below the important 72 level, then gold & silver will be unleashed to rise to levels not imagined in years.
The acceleration to their rise will come upon arrival of the long-awaited surge in price inflation, which will surprise many. The outcome will be a powerful perverse stubborn deep Inflationary Recession, already giving a glimpse. Few with mental acuity argue that the nation flirts with a depression anymore.
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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at JimWillieCB@aol.com