Friday, February 18, 2011

The Day the Dollar Died

Why Isn't Wall Street in Jail?

By Matt Taibbi
February 16, 2011 9:00 AM ET

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

"Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."

I put down my notebook. "Just that?"

"That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody goes to jail. You can end the piece right there."

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

This article appears in the March 3, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive February 18.

The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even "one dollar" just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

Invasion of the Home Snatchers

Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice. "If the allegations in these settlements are true," says Jed Rakoff, a federal judge in the Southern District of New York, "it's management buying its way off cheap, from the pockets of their victims." (more)

5 Stocks to Play the Hottest Latin America Markets

Last year, Latin America was home of some of the best performing stock markets in the world. Peru, Chile and Colombia were the number two, three and four best-performing MSCI emerging market country indexes in 2010, driven primarily by the strength in commodity markets.

In fact, something I’ve talked about recently is the “New Silk Road,” which is an expression that has been used to describe the growing commercial interaction between the emerging markets of Asia, the Middle East, Africa and Latin America. This new, 21st-century version of the Silk Road effectively connects China and its voracious demand for commodities with commodity-producing countries.

But Latin America is so much bigger than just commodities. In Latin America, we have positive demographics, relative political stability and pro-business policies — save for Venezuela and Bolivia — as well as the development of consumer economies as prosperity trickles down to the masses.

Let’s take a look at five Latin America investments that are offering some very interesting opportunities:

#1 – AFP Provida

Chile is the most advanced market in Latin America with a GDP per capita of $11,600. The country has been benefiting from years of conservative budgetary policies that aim to save surpluses in a stabilization fund for a rainy day (like 2009), which contributes greatly to macroeconomic stability. And you better believe there are plenty of ways to play the boom here.

The first is AFP Provida (NYSE: PVD), a pension fund administrator that is expanding in new financial services and regional markets. The company has a highly stable fee business, which allows it to pay a 7% dividend with a valuation of nine times earnings. As plan assets grow, the company fee income grows. Rapidly developing Latin American economies allow for bigger pension contributions over time, which is a long-term positive for AFP. (more)


The dollar is now poised on the edge of the abyss.

The current intermediate cycle has rolled over and is making lower lows and lower highs. The current daily cycle has formed a swing high and is in jeopardy of rolling over into a left translated cycle. If the dollar breaks below the November intermediate bottom of 75.63 it will be an incredibly bearish sign as not only will the current intermediate cycle have topped in only 4 weeks but the larger yearly cycle will also have topped in only 4 weeks.

If that happens there is little chance the dollar will be able to hold above the March 08 lows as the crash down into the three year cycle low begins in earnest.

This will not only drive the final leg up in gold's huge C-wave it will also drive a huge spike in inflation in all other commodities. Food riots world wide will intensify. The rest of the world will be in an uproar over the collapsing dollar. Spiking commodity prices will collapse discretionary spending just like it did in 08 and 09.

The phony economy driven by Ben's printing press will roll over when he's forced to turn off the presses to halt the dollar collapse. (Just like it started to do last summer when QE ended and the stock market started to collapse.)

The dollar's rally out of the three year cycle low should correspond with stocks beginning the next leg down in the secular bear market and the next brief deflationary period just like the bounce out of the 08 three year cycle low drove the second leg down in the secular bear market.

The rally out of a three year cycle low usually lasts about a year to a year and a half. The next 4 year cycle low in the stock market is due in 2012. I expect that year long rally out of the coming three year cycle bottom to drive stocks down into the next major 4 year cycle trough and drive the CRB into it's next major cycle bottom.

A lot is riding on the next 2/3 weeks. If the swing high in the dollar yesterday does signal the top of the dollar's daily cycle then the November low will almost surely be broken and the chain of events I laid out will be set in motion.

SPX Targeting 1375

US equity markets have continued to make higher weekly closing highs, climbing relentlessly in defiance of calls for a pullback or a resumption of the bear market. Treasuries broke down from a month long consolidation and resumed their downtrend as capital continued to exit the perceived safety of fixed income for risk assets. Gold appears to have completed a correction of its recent decline and may be set to join Treasuries in a downtrend as investors exit safe haven plays. The Japanese Yen may have finally made a significant, long term top (and a bottom for Dollar.Yen) and if it breaks out soon it may signify a resumption of the carry trade, which would mean that another major liquidity stream is coming online to power the stock market rally even higher. The US Dollar Index may have found a bottom and there is some potential that it may climb together with US stocks as investment demand for big cap, developed nation companies appears to be the emerging story. There are some technical considerations which suggest a minor top may be due sometime soon. The worst case of the likely scenarios is a correction akin to the August 2010 decline. The likelihood of a top to this run resulting in a resumption of the bear market is low, but as always we must keep our minds open to the possibilities and keep one eye on the mouth of the bear cave.

Certain world markets--largely in Asia--have been in a downtrend since November and others, such as Korea's KOSPI, have experienced strong selling very recently. This has placed many traders and analysts on alert for a big decline. Indeed it is worth keeping a sharp lookout to determine whether these divergent markets are leading a topping process. A dramatic divergence between US and other developed market equities (Europe and Japan) and much of the Emerging Markets and BRIC markets has developed since the November bottom. At this moment I actually regard this as a bullish development. (more)

Silver Backwardation, What Everyone is Missing

Prudent investors make wise markets: this should be the quote above every trading desk. The enemy of the hedged investor is not wild markets, nor bearish markets; it is their own emotions.

With silver prices reeling to highs we haven’t seen since the 1980s, every piece of information has earned some urgency. Immediately, the world attempts to decipher new developments and information as if there is some sort of end of the world scenario looming below.

While we subscribe to the view that the silver market is being manipulated, backwardation cannot be immediately interpreted as a symptom of such manipulation. For that to be the case, we would have to reason that the majority of investors know about the excellent investment that is silver, as well as the market dynamics that make it so greatly undervalued. That simply isn’t the case.

Instead, backwardation is a very clear signal, and it is not inherently a tip of the hat to a shortage in silver. In fact, economics tells us there is shortage in everything, at least as it relates to price. The price of silver is nearing $30 per ounce; thus, there has to be a shortage of silver at $25 per ounce, otherwise $25 would be the market price.

What Backwardation Means

The time value of money may be a theory applied best in finance and one better assigned to paper currency, but it has relevance in the metals market, as well. When backwardation occurs, the markets are telling us that it is willing to pay less for a commodity in the future than it is right now. Essentially, the ratio of supply to demand is greater at the long-end of the curve than it is in the short-end.

That isn’t implicitly market moving, however. It could very well mean what we suspect it to mean: producers are far more interested (temporarily) in locking in prices into the future than investors are buying into the future. Consumers, those who wish to use the metal for production or consumption in manufacturing and jewelry, probably have plenty of forward contracts already…at lower purchasing prices. Those who need silver in the future have it (assuming, of course, that there will be metal for delivery when the time comes – another issue for another time).

Bringing back the time value of money, we know that an item should be worth more in the future than it is right now. Buying a March 2011 January future should be less expensive than a 2015 December future, since the December future should take into consideration the financing costs of borrowing money for four years.

However, what many are missing is that there is no time value of money. Borrowing costs are plummeting, and the risk-free rate is, for all intents and purposes, null and void.

This isn’t to say that investigation into silver backwardation and short-selling isn’t valid. Instead, it is to say that either: A) the markets are functioning properly and the price of silver is simply reflecting the risk-free rate advantage that can be earned elsewhere in combination with miners’ willingness to lock-in prices or B) that the markets are manipulated.

Either way, it doesn’t much matter. Money has no time value, and that isn’t natural. Consumption is as economically advantageous as is investment. Even if all the evidence pointing toward manipulation is found to be untrue, it is certain there is manipulation in currency, and that means silver goes higher.

By Dr. Jeff Lewis

Doug Casey: Make Corruption Your Friend

L: Doug, one of the complaints the Egyptians have of the rulers they are showing to the door is corruption. It's the same in Tunisia. It seems that more than the lack of freedom or even the secret police, it's government corruption that bothers citizens the most. This fits with your concern that ousting the old bosses will just lead to new bosses who will be every bit as bad; these people don't want to get rid of their governments, they want those governments to work. And yet, I've heard you speak of making corruption your friend. Can you tell us what you mean by that?

Doug: Sure. As always, the place to start is with a definition. This is critical, because people use terms like corruption in nebulous ways that enable sloppy thinking. Unless you can define precisely what a word means, you literally can't know what you're talking about. That's one reason why listening to commentators like Hannity, Beck, and O'Reilly is such a frustrating waste of time. These people are constantly conflating concepts – like the idea of America with the reality of the U.S., or confusing capitalism with fascism, or war with defense – because precise definitions often get in the way of emotive rhetoric.

L: My Webster's says corruption is:

  1. Impairment of integrity, virtue, or moral principle. Depravity.
  2. Decay, decomposition.
  3. Inducement to wrong by improper or unlawful means (bribery).
  4. A departure from the original or from what is pure or correct.

Doug: Yes, I looked it up too, and those definitions are accurate as far as they go. But they don't get to the heart of corruption, its essence, and why people hate it – even while it is often a necessary thing. A more meaningful definition – certainly when it comes to political corruption – is: a betrayal of a trust for personal gain.

L: Hmmm… Yes, that makes sense to me. Corruption is not just bribery of officials, though that's the context we started with. It's a bigger idea, and the "personal gain" angle is important.

Doug: Sure. One can find corruption within corporations, as when directors betray their duty to the shareholders for personal gain. Or churches, as when priests, for pleasure, betray the trust of the young people under their guidance. Even a parent can be corrupt, if he fritters away on high living money intended to be left to his kid. But those types of corruption stem from personal weakness and personal vices. They're horrible – but corruption in government is much worse. (more)

A Stock About to Make a Monster Move

Monster Worldwide, Inc. (NYSE: MWW) — This online employment solutions company provides a network of websites connecting employers with employees.

The stock fell from about $26 in December to under $16 due to a disappointment in earnings, which was the result of one-time charges. S&P looks for “much wider margins in 2011.”

The recovery of global economies should also help MWW’s rebound. S&P has a “four-star buy” on MWW with a 12-month target of $24.

Technically, the stock has held on its 200-day moving average following a dramatic sell-off. This week, the Moving Average Convergence/Divergence (MACD) indicator flashed a very strong buy signal. The target for a trade is $22-$23.

Trade of the Day - MWW Stock Chart

McAlvany Weekly Commentary

Are Gold Buyers The New Bond Vigilantes?

A Look at this Week’s Show:

-Gold, not interest rates are the new barometer for risk.
-Economic Recovery… Really?
-Interest rates can be artificially held down longer than we may think possible

These Indicators Suggest Stock Markets Have More Upside

A variety of technical analyses all clearly indicate that the S&P 500′s run is by no means over. Here are some charts and an analysis of what they mean for the markets, the U.S. dollar and gold.

Breakdown of Treasury Yield Ratio Suggests Changes Coming to Markets

The treasury yield ratio is the ratio of a long-term treasury yield to a short-term treasury yield. Although the yield ratio is not plotted exactly the same as the traditional yield curve, it has a similar importance in that it gauges changes in rates and maturities of treasury securities that will impact on financial markets. The yield ratio goes up as the spread between a long-term and a short-term rate widens, and vice versa.

The daily yield ratio of the 10-Year U.S. Treasury Yield ($UST10Y) to the 2-Year U.S. Treasury Yield ($UST2Y), as shown in the chart below, peaked last November 3rd at 7.85 - its highest level in 20 years – with the Fed’s QE2 announcement that it intended to buy $600 billion worth of long-term treasury securities in an attempt to drive down long-term interest rates. The yield ratio decisively reversed immediately thereafter forming a 7-month roof pattern that is a typical topping formation.

Just last week, on February 8, the yield ratio penetrated through the horizontal line of the roof pattern and confirmed the reversal of the yield ratio. As the Fed keeps adding pressure to long-term interest rates by QE2, the yield ratio should be expected to continue the downtrend that will bring significant changes to a broad range of financial markets worldwide.

UST10-2Y 2-11-2011

Decline in Treasury Yield Ratio Suggests Continuing U.S. Stock Bull-Market

During the last 20 years, there have been three occasions where a major downward slopping of the treasury yield ratio occurred. The chart below shows a comparison between the yield ratio which is plotted with a black line and the S&P 500 index which is plotted in the grey area. The first occasion was in 1992-1994 when the ratio went down from 1.67 to nearly 1.0, corresponding to a 15% advance in the S&P 500 index. The second time occurred in 1995-2000 when the yield ratio declined from 1.17 to 0.92, corresponding to a 200% advance of the S&P 500 index, and the third time happened in 2003-2007, when the yield ratio dropped from 2.8 to below 1.0, corresponding to a 73% advance in the S&P 500 index. (more)

CPM Group: Reports of Physical Silver Shortages "Blown Out of Proportion by the Silver Conspiracy Theorists"

There are some spot shortages in the physical silver market, but they are limited to higher purity metal in specific forms and locations at most, said commodities research and consulting firm CPM Group Wednesday.

There have been reports of shortages of physical silver circulating in the market, CPM Group said in a research note, but information about the market tightness has been “blown out of proportion by the silver conspiracy theorists who are trying to portray this as a much more cataclysmic event for the silver market.”

CPM Group explained that the tightness comes from the fact that refiners do not make 1,000 ounce bars, rather they make something called “silver shot” – also known as grain, powder, flake and/or sponge – because of demand from manufacturers.

“They do not waste time, money, and energy casting bars as their user clients do not want bars, and demand for sponge is very high due to increased demand in electronics and solar panels,” CPM Group said.

One-thousand ounce bars in silver purity of 0.999, the good delivery grade, are plentiful, but they said there is tightness in the higher purity 0.9999 and 0.99999 for two reasons. One, investors are buying more metal and two, refiners would rather sell higher purity silver in sponge, not bars.

Demand for photovoltaic cells used in the solar panels has surged, with growth accelerating in the second half of 2010, they said. The silver flake or powder used in this manufacturing must be of a high grade, which explains why there is tightness for silver of high purity. While producers of this specialized silver are increasing supply, there are only a few producers that source silver to the photovoltaic industry currently.

CPM Group said it has heard of only a specialized instance of actual supply tightness in the physical market. The firm added that there is talk in the market of shortages of 100-ounce investment-sized bars and coins, but its investigations dispute this. CPM Group said it surveyed Fidelitrade, Kitco, and Northwest Territorial Mint in the first week of February about the supply of these metals. “There were hundreds of thousands of ounces in 100-ounce bars available for immediate delivery, and NWTM said it was steadily producing more each day,” CPM Group said.

Regarding the rise in silver lease rates and the slight backwardation in March Comex futures prices, it said that lease rates are higher, at 0.8% versus 0.3% previously. Still, it said 0.8% lease rate is still very low, considering in the past 30 years lease rates have ranged between 3% to 6%. They also attributed the backwardation in futures to market congestion.

“In conclusion, there are short-term market developments along the lines of what CPM has repeatedly said to expect in February and March 2011, and there is spot tightness in high purity silver cast into bars as opposed to sponge. The rest is noise,” they said.