by Jim Willie CB
April 16, 2009
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Jim Willie CB, editor of the “HAT TRICK LETTER”
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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.
One must give a tip of the hat to the Wall Street conmen for engineering a reasonably robust
stock rally. The Dow and S&P were led by financials. The Financial Times out of London
claims ‘no real money’ was behind the stock rally of over 20%. They must mean huge short
covering, enhanced by pressure tactics from Wall Street brokerages themselves. They must
mean Working Group For Financial Markets putting to work some of their ‘Black Bag’ money.
They must mean influenced arbitrage games from preferred versus common shares, which
harmed the public but enriched the insiders. Amazing how a better financial journal on US
topics comes from outside the Untied States. A movement pervaded Lower Manhattan offices
to formally call in all Citigroup shorted shares on loan. Whether legal or not, it helped cause a
big bank stock rally. Other ‘C’ share games were played that enabled preferred shares to serve
as collateral on common share shorts, as the plebeian shares descended to $1/share value.
Never lose sight of the fact that Plunge Protection Team funds came in large part from missing
$1.5 billion in Fannie Mae funds from 1988 to 2000, specifically out of the HUD offices in
Houston (Papa Bush regional home) and in Oklahoma City (Clinton home region), whose
funds keep America strong. Then you have all the absurd giant steps backwards to permit big
banks to ignore Mark-to-Market and just conjure up asset values from indefensible models,
with blessing from Financial Accounting Standards Board and the USCongress. This reform?
As citizens pay their income taxes, and observe the ‘Tea Parties’ around the nation, think
deeper than the many plain shallow placards with great intention. The original Boston event
prompted a Revolutionary War. The battle cry was over taxation without representation, a tax
levy on tea to the colony, without a voice in the King George court. With the USCongress
taking orders from Wall Street and having votes bought by lobbyists, the focus should be not
on high taxes or low taxes, but taxation without proper representation by members of the
USCongress. The august body in the USCongress has received countless million$ from Wall
Street firms and Fannie Mae, along with dozens of other firms embroiled in the banking crisis
that has destroyed the US banking system. Thousands of lobby groups have taken control of
the USCongress, including the Council on Foreign Relations and AIPAC. My firm belief is
that bribery is the way of the House & Senate. The people have little or no voice anymore,
which is the basis of any charge of tyranny.
In order to remedy the banks and recapitalize them, our banking and government leaders must
find more intricate methods with greater confusion and more hidden requirements to enable the
big banks to be replenished at federal expense, while the public remains ignorant, and Main
Street is directly and plainly neglected. The TARP congame has been discredited. The Public
Private Partnership Investment Program is a revamped TARP sham. Listen to the Jackass on a
radio interview (CLICK HERE), that covers many aspects of this disguised carry trade
program, criticism from watchdog and Nobel Prize winner Stiglitz, the interior battle between
the FDIC and Dept Treasury, and how the requirements for its official ‘Fund Manager’ are
only met by the five Wall Street banks that committed the majority of the bond fraud. Geithner
plans to build a bus to transport capital to big banks, called ‘The Geithner Summers Structured
Investment Vehicle’ after the infamous SIVs.
Forget economist forecasts, both inaccurate and old - fashioned. New research shows corporate
bonds have been far better at predicting where the USEconomy is headed than one might expect.
The great churn to subsidize and redeem the Wall Street banks has brought them off their knees,
now ready to lend again at a minimal level after their fraudulent chapter. Their insolvency will
remain for another year or more. Signals from the corporate bond spreads suggest strongly
that the USEconomy will falter worse. In the autumn of 2007, before conditions began to
falter, corporate bond prices raised the red flag. The spread between corporate bond yields and
USTreasury yields had begun to widen as the mortgage crisis showed its subprime prima facie
that summer in 2007. More declines are coming, signaled by current corporate bond spreads.
Staggering additional monetary inflation comes, initially from programs by the USGovt and
USFed to date. More monetary debauchery is right around the corner, to be extremely clear by
summertime. Bank losses will become a national nightmare, seemingly never ending. Only
deception buttresses the bank sector now, their specialty. Both central bank and USGovt funds
will become an absolute torrent when they finally come to grips with the bank losses
upcoming and the momentum for USEconomic downturn toward depression. Vicious
feedback loops at finally in high gear. When the printing press becomes more heavily relied
upon, the clarity of USDollar support also coming from USMilitary actions will render the gold
& silver assets more desirable safe haven investments. Furthermore, USFed authorities must be
deeply worried about the seeds they are planting for future price inflation. The USFed just
purchased $1.5 billion in Treasury Inflation Protection Securities (TIPS) in an unprecedented
maneuver. No longer does the TIPS tell of inflation expectorations. What on earth is going in on
their tiny minds?
The story not told often enough is the utterly huge short gold futures contract positions put
on by JPMorgan immediately when the USFed announced its $1 trillion monetization plan
in mid-March, and the additional batch of gold short contracts they put on during the G20
Dollar Funeral event in early April. Perhaps the USDept Treasury can access some of the $1.9
billion from the AIG car insurance business unit sale to Zurich Financial to fund more market
corruption and interference, with a simple handoff from to their free market brothers at
JPMorgan. Still, despite all the harmful, unregulated, and relentless pressure put on precious
metals, their prices refuse to be pushed down. The gap between the physical gold price and paper
COMEX price continues to widen. The story behind the scenes that captured my attention
centered on Germa n demands to return all their gold bullion held in custodial accounts on US
soil. The deep source contact said something like, “the German demand is making the US bank
nazis sweat bullets. Pressure on COMEX will get much worse.” Expect even more pressure on
the June gold contract than was seen with the March gold contract, as far as delivery default is
concerned. Deutsche Bank saved the COMEX bacon with a last minute 850,000 ounce delivery,
courtesy of the Euro Central Bank at the eleventh hour. Such are the games not told on national
financial networks, but which are central to Hat Trick Letter analysis.
The gold price is busy carving out the Right Side Handle to a messy Cup & Handle reversal
pattern, one which is testing the patience of yellow metal investors. When the weekly stochastix
cycles down a little farther, the consolidation should be at an end. We observe not so much a
battle of monetary inflation versus asset deflation, as with free market pricing structures versus
disruptive USGovt custodial management that will someday be chronicled as the most corrupt in
modern history. Asian and Arab creditors to the USTreasury Bonds are not pleased with what the
management of either the USGovt bond securities or gold, and they hold both in great volume.
The target for gold remains almost 1300, with a breakout inevitable.
The silver chart looks even more bullish. Instead of a clear reversal pattern, it shows a recovery
pattern that struggles to find strong footing on the less stable 20-week moving average. Its move
to reach old highs will be easier, once near-term resistance is overcome. The 50% retracement of
the long run from last October to February would paint a line at the 12.3 level for Fibonacci
support. He was a friend of Botticelli, Lambourghini, Zepharelli, and great grandfather to
Roubini, surely good company to keep. Look for an upcoming crossover of the 20-wk MA (in
blue) above the 50-wk MA (in red), a powerful technical bullish signal for moves to approach
the July and March 2008 highs. It is also inevitable.
The two root causes of the deep historically unprecedented US bank losses from bond assets
and credit portfolios are housing price declines and home foreclosures. For to claim the banks
have stabilized without the home prices or forced foreclosures is absurd on its face. What has
changed would please US Federal Reserve Chairman Ben Bernanke, market psychology. He
favors inflation expectorations for USTreasury Bonds over monetary growth, as the USDollar
is debauched into oblivion. He favors consumer sentiment for the USEconomy over retail store
shutdowns and shopping mall vacancies. The Wall Street maestros sold the investment
community a bill of phony goods that will be evident by summer. They engineered a bank
sector rally based on falsified earnings reports, orders by the USFed to keep the Bank Stress
Tests secret until May, a return of the uptick short stock rule, and a return to valuing bank
assets by creative methods based upon valuation models. Those hidden proprietary models
contain a scad of silly assumptions like a 7.0% jobless rate. The March data already gave us
8.5% on that meter, but the reality-based Shadow Govt Statistics claim the jobless rate (when
people without jobs are counted) is 17.0% actually.
Housing prices continue down. The January Case-Shiller housing index for 20 cities showed
a minus 19.0% change from a year ago, a statistic remarkably free of USGovt garbage
adjustments. It is just the change from Jan 2008 to Jan 2009, no frills, no deception. The key
point of the C-S housing index is that it has been in decline for consecutive months going back
to the beginning of the officially recognized recession in December 2007. The other key point
is that all 20 cities are in price decline, all of them. My forecast in the Hat Trick Letter, given
in year 2005 and repeated in 2006, was for a seemingly endless housing decline in a powerful
unprecedented bear market, in essence a double correction since Greenspan diverted the
expected bear from its path in 2001, denying him his due. The price decline dictates impossible
conditions to refinance under-water home loans, which applies to almost 30% of US homes
with mortgages (loan balance exceeds current home price). Falling home prices encourage
homeowners to stop making mortgage payments, viewed as throwing away money down a
Although repossessed bank-owned (real estate owned) REO liquidation sales make up 60% of
total sales in the gogo states, REO listings make up only 33% of total listings. Banks are
holding back inventory, amidst a flood. In doing so, they hide losses. Incredibly, exactly half of
ordinary home sales outside bank liquidations are short sales, meaning sellers must produce
cash above the sale price in the lawyer’s office. Individuals who own homes falling in value,
whether sapped of equity or running negative equity, are unable to tap credit lines from Home
Equity Lines of Credit (HELOC). Worse, as a household with negative home equity usually
contains people who stop spending in normal fashion. The USEconomy is thus deeply affected
by declining home prices. Banks in particular stand at the apex of losses, since their borrowers
lose credit worthiness, and loan instruments are leveraged. More data and analysis is provided
in the April Hat Trick Letter macro economic report just posted.
Sweetheart analyst Meredith Whitney expects home prices to fall another 30%. US banks and
mortgage lenders would have much worse crippling losses ahead. She expects such losses
would finally kill a long list of US banks, large and mid -sized. She makes a great point, saying
“Home prices cannot bottom while liquidity is still contracting from the economy.” She
predicts that peak-to-trough home price declines will average 50% nationally before the US
housing crisis ends. We are halfway to the bottom, and likely have seen half of the bank losses
to come. Whitney is known for her bearish calls, largely correct to date.
Home foreclosures continue up. The biggest single factor behind a home foreclosure is job
loss with discontinued income. The second biggest factor is unexpected medical expenses,
which extends to other family members like parents. RealtyTrac just reported today that home
foreclosures for the first quarter of 2009 are up 24% from a year ago. In California, where the
moratorium has lifted, foreclosures rose by 80% from February to March, hitting 50
thousand!!! The April increase could be well above 100% in makeup mode. JPMorgan, Wells
Fargo, and Fannie & Freddie each lifted their moratorium. Incredibly, prime mortgages
delinquent over 60 days more than doubled in 4Q2008 to 2.4%, when compared to the
first quarter 2008. A uniform upward uptrend in the delinquency rates has occurred over the
last several months. Nobody in Bank Land prefers to discuss the rising defaults of the prime
mortgages, which include Pay Option ARMs, Intermediate term ARMs, and more. The prime
default rates are much lower than the subprime and Alt-A garbage loans (often with no income,
no documentation, no assets, and no verification), but the volume of prime home loans is huge,
resulting in great potential for future bank loss. The adjustable rate mortgage default flood has
begun, with full warning given to Hat Trick Letter subscribers several months ago. Mark
Hanson has been indispensable source of great information.
Mr Mortgage, as he is known, has a great website (CLICK HERE) chock full of relevant
timely data that is well ahead of the pack. His work is often quoted on national financial
networks. He points out that Jumbo loans now comprise 31% of all fresh loan defaults. So
the foreclosure problem has hit the high end, where losses per loan to banks will be much
greater. All the delay in lifting the conforming Fannie Mae lo an limit from $417k to $729k led
to severe damage to high end property prices. Then you have the ‘Revolving Door’ of federal
modified home loans. The 1Q2008 vintage modified loans defaulted 41% of the time after
eight months. The 2Q2008 modified loans had a 46% default rate down the road. The third
quarter trends are worsening, according to the Office of the Comptroller of the Currency
(OCC) and the Office of Thrift Supervision. Data is not yet available. The Federal Housing
Admin is the new subprime slime lender, under the USGovt leaky roof. At end of February, a
huge 7.5% of FHA loans were deemed ‘seriously delinquent’, up from 6.2% a year
earlier, typically with under 3% to 5% down payments. The FHA share of the US mortgage
market soared to nearly 33% of loans originated in 4Q2008, from about 2% in 2006. More data
and analysis is provided in the April Hat Trick Letter macro economic report just posted.
The bank sector is debating this topic now, complete with considerable denial and departures
from reality (what the facts state). Inside reports speak of grand internal sandbag projects by
big banks to brace for the coming storm expected. The delinquency rate for commercial
mortgages has more than doubled since September to 1.8% this month, on $700 billion in
securitized loans , according to Deutsche Bank. This market is usually highly stable. The
current delinquency rate is just below the peak in 2004. Some experts anticipate the current
commercial slump will exceed that seen in the early 1990s. Foresight Analytics of Oakland
California estimates the US banking sector could suffer as much as $250 billion in commercial
real estate losses in the current crisis. They project that over 700 banks could fail as a result of
their exposure to commercial real estate. That is five times the charges on commercial real
estate debt between 1990 and 1995. Deutsche Bank estimates the default rates on the $700
billion of commercial mortgage backed securities could reach 30%, and aggregate loss rates
could reach 10%.
Besides securities backed by commercial real estate loans, about $524.5 billion of whole
commercial mortgages held on portfolios by US banks and thrifts will come due between 2009
and 2012. Nearly 50% would not qualify for refinancing in today’s credit environment,
estimates Matthew Anderson at Foresight Analytics. Lenders generally reject loans over 65%
of a commercial property value. General Growth was a victim today of inability to refinance
and roll over their debt. They had strong fundamentals, but unfortunately bankers do not. More
data and analysis is provided in the April Hat Trick Letter macro economic report just posted.
The official FDIC Banking Profile report from the fourth quarter of 2009 reveals that failing
loans have risen faster than reserves. The big banks cannot bring in new capital (from
TARProgram, USGovt -sponsored carry trades, or equity investors in Saudi Arabia) to
match growth in their losses. This has caused the ‘co verage ratio’ to plunge below 100%, cut
in half since 2005. It is below 80% actually (shown in red). The big banks must dig into
earnings to build loan loss reserves. Case in point JPMorgan today, adding $4.2 billion into
loss reserves. Case in point Capital One yesterday, reporting credit card charge-offs of $526.5
million. Banks remain behind the curve. Banks face multiple fronts for profound losses, as
mortgages are but one factor. Recall the Bernanke claims in 2007 that subprimes would be
contained, no broad contagion to bonds would occur, the USEconomy would be insulated, and
the total bank losses would be under $200 billion. What a hack! But then again, he is just a
dumb professor, now a full-time lithographer. It seems the gold journals contain numerous
better bank analysts and economic forecasters than the good chairman.
Michael Mayo of Calyon Securities gave warning of broadening bank losses, which actually
roiled the stock market when released. He said, “Mortgage related losses are about halfway to
their peak, while credit card and consumer loan losses are only a third of the way to their
expected highest levels. The nation’s largest banks may be transitioning from a financial crisis
marked by write-downs of capital, to an economic crisis featuring large loan losses.” And then
the headline catching report from Calyon Securities suggesting that total bank loan losses could
reach 5.5% by the end of year 2010.
Here is fine piece of analytic work from a friend named Trace Mayer. He comes to the gold
community with a different slant and background. He has a law scholar with emphasis on the
Constitution, especially how it applies to the gold and currency topics. In his e-book entitled
“The Great Credit Contraction” one can read about the historical significance of a crisis that
will surely reshape the world. The global economy is built on an illusion currency that is
evaporating before our very eyes. This book is an autopsy of the current worldwide systems
and begins with financial history, discusses the current great deflationary credit contraction,
projects the future environment, and concludes with suggestions on how to generate and
preserve wealth in this challenging time. An appendix analyzes important topics. (CLICK
From subscribers and readers:
At least 30 recently on correct forecasts regarding the bailout parade, numerous nationalization
deals such as for Fannie Mae and the grand Mortgage Rescue.
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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 limita tions of economic credentials.
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