Monday, June 6, 2011

Peter Schiff: ‘US Economy Heading For Disaster’

(RussiaToday) – America’s credit rating is at risk, the unemployment is up and the residential real estate market has double dipped. Is it time to change the way the world economy works? “We are heading for a huge disaster,” says Euro Pacific Capital President Peter Schiff. As the US dips from a recession to a depression, Schiff says, America needs to stop borrowing money if they want to prevent driving off the proverbial cliff.

The Real "Margin" Threat: $600 Trillion In OTC Derivatives, A Multi-Trillion Variation Margin Call, And A Collateral Scramble That Could Send US Treas

While the dominant topic of conversation when discussing margin hikes (or reductions) usually reverts to silver, ES (stocks) and TEN (bonds), what everyone so far is ignoring is the far more critical topic of real margin risk, in the form of roughly $600 trillion in OTC derivatives. The issue is that while the silver market (for example) is tiny by comparison, it is easy to be pushed around, and thus exchanges can easily represent the illusion that they are in control of counterparty risk (after all, that was the whole point of the recent CME essay on why they hiked silver margins 5 times in a row). Nothing could be further from the truth: where exchanges are truly at risk is when it comes to mitigating the threat of counterparty default for participants in a market that is millions of times bigger than the silver market: the interest rate and credit default swap markets. As part of Dodd-Frank, by the end of 2012, all standardised over-the-counter derivatives will have to be cleared through central counterparties. Yet currently, central clearing covers about half of $400 trillion in interest rate swaps, 20-30 percent of the $2.5 trillion in commodities derivatives, and about 10 percent of $30 trillion in credit default swaps. In other words, over the next year and a half exchanges need to onboard over $200 trillion notional in various products, and in doing so, counterparites, better known as the G14 (or Group of 14 dealers that dominate derivatives trading including Bank of America-Merrill Lynch, Barclays Capital, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, RBS, Societe Generale, UBS and Wells Fargo Bank) will soon need to post billions in initial margin, and as a brand new BIS report indicates, will likely need significant extra cash to be in compliance with regulatory requirements. Not only that, but once trading on an exchange, the G14 "could face a cash shortfall in very volatile markets when daily margins are increased, triggering demands for several billions of dollars to be paid within a day." Per the BIS "These margin calls could represent as much as 13 percent of a G14 dealer's current holdings of cash and cash equivalents in the case of interest rate swaps." Below we summarize the key findings of a just released discussion by the BIS on the "Expansion of central clearing" and also present a parallel report just released by BNY ConvergEx' Nicholas Colas who independetly has been having "bad dreams" about the possibility of what the transfer to an exchange would mean in terms of collateral posting (read bank cash payouts) and overall market stability, and why a multi-trillion margin call could result in the biggest buying spree in US Treasurys... Ever. .....

Bottom line: instead of wondering how to nudge the silver market (lower) or the ES and TEN contracts (higher), perhaps it is time for the key exchanges, which are obviously captured by the very same G14s on whose tithes their existence depends, to actually proactively engage in some risk-mitigation when it comes to the one biggest threat: not that of the measly several billion dollar silver market, but of the $600 trillion IRS and CDS market, which is and continues to be the biggest ticking timebomb in capital markets. And on the other hand, if anyone is wondering what will cause the biggest run on US government bonds... ever... then as soon as every dealer is forced to be on a CPP, all one needs to do is a massive "risk-flaring" collapse which sends everyone scrambling to provide collateral. And since there is a 40-to-1 ratio of notional outstanding in OTC derivatives to total US debt, well, readers can do the math. Please read the entire article here

China Only Reduced US Debt Holdings by 2.5%- Chinese Infowars

Monday, June 6th, 2011
  • China Only Reduced US Debt Holdings by 2.5%- Chinese Infowars
  • Chinese short term debt holding had dropped to $5.69 billion in Bill holdings (in reality $5.7 billion) when back in June 2010 the total was far lower, or $3.999 billion.
  • One could have penned a just as irrelevant headline that "China has divested 98% of Bills" last summer"
  • $1139.2 billion in Long-Term Debt
  • Chinese Bill holdings only surged back in 2008 as a result of the Lehman Bankruptcy, when everyone scrambled to the safety of short-term US debt.
  • Total Chinese holdings have declined for five months in a row, but 2.5% decline in notional bonds from October 2010 through today ($1,175.3 billion to $1,144.9 billion


Cramer's Likes and Dislikes: AA, STEI, AMZN, PKD, MRO

Stocks discussed on the Lightning Round session of Jim Cramer's Mad Money TV Program, Friday June 3.

Bullish Calls
Alcoa (AA): "I like Alcoa. It is a very iinexpensive stock. Prices for aluminum are going to go sky high in the next few years's one of the biggest positions in my charitble trust, and I want to make it bigger, and I haven't felt that way (about Alcoa) in ten years."

Stewart (STEI): "The Funeral business sadly is indeed a source of tremendous profit for these companies. The stock has come down. I would be a buyer."

Amazon (AMZN): " right ...gas is high ...sales are still good. The government is trying to figure out how to make profits. They want to tax them ...and remember, it is a $190 stock, and when you see $190 stock, guys are going to come in and say 'sell sell sell.' I think you buy this with deep in-the-money calls and go out four months. You don't want the common in AMZN ... you want deep in-the-money calls."

Parker Drilling (PKD), Ensco (ESV): "I like is not my favorite of the favorite..the one I would want to buy, is Ensco ...just closed a very big merger."

Bearish Calls
Marathon (MRO): "... it happened.You've already picked up 15 points. It's too late."

The Dominant Intraday Arc Trendlines to Watch This Week in Gold

Intraday Gold prices are forming a classic “Arc Trendline” pattern that should be interesting to follow in the week ahead – depending on whether this structure continues gently or if price breaks firmly through one of the arc trendlines in place.

Let’s take a look at the pattern and note the levels we should be watching:

(click for full-size image via Flickr)

First, let’s take a brief look back at the beginning of May 2011 to see two more little “Arc Trendline” patterns that formed and respectively broke, resulting in an impulse move when price broke free of its arc trendline boundaries.

Arc trendlines are no different than typical trendlines, except that traders aren’t as accustomed to thinking in terms of ‘arc’ trendlines – straight line trendlines grab our eye easier.

Anyway, we had a quick arc trendline that ended May 5th with a breakthrough of the upper arc boundary which resulted in a rally from $1,470 to $1,530 in the context of another arc trendline pattern.

Price broke down sharply under the falling trendline on May 11th, resulting in an “ABC” move from $1,530 to $1,480.

As you’ll see from the chart below, price later broke through the boundaries of a common descending triangle pattern which puts us into the present, wider, arc trendline structure.

The current upper resistance trendline rests where price is now – at the $1,545/$1,550 region; the lower support trendline connects the swing lows and ends presently at $1,525.

These are the intraday/short-term structural levels to watch for any sort of breakthrough which could result in another impulsive breakout move. Otherwise, look for price to play “ping pong” between these boundaries.

If the chart above is too small, let’s step out to the 120 min chart and also draw in a nice triangle pattern:

Now we can see the little descending triangle pattern that formed for most of May that price broke through impulsively near the 20th on the breakthrough above $1,500 (round number).

This breakthrough is a good example of the pattern/concept – it was the trigger that opened the door to play for an upside rally that developed into the present arc trendline formation.

Keep these levels in mind and use these as neat little examples of both the ‘arc trendline’ concept and a triangle breakout play.

Corey Rosenbloom, CMT

What's better: a currency linked to gold, redeemable in gold, or backed by gold?

This article was originally published at

I often suggest that a currency should be "linked to" gold. Others might say that a currency should be "redeemable in" gold or "backed by" gold.

These terms are perhaps vague. But they have important differences.

When I say a currency is "linked to" gold, I mean that there is some active system of supply management, much like a currency board, which maintains the real market value of the currency at its specified gold parity. A currency might be "linked to" gold, but not "redeemable in" or "backed by" gold. This is in fact perfectly Ok, because as long as we have an active supply-adjustment process of some sort, the system will be successful.

A currency that is "redeemable in" gold is one in which the issuing body (typically a central bank) would agree to trade paper currency for gold bullion at some specified price. However – note this carefully – a currency can be "redeemable in" gold but not "linked to" gold. In other words, despite the redeemability feature, there is no properly-functioning supply-adjustment process.

This was the case at the end of the Bretton Woods period, in the late 1960s for example. Dollars could be redeemed in gold bullion – by European central banks, not U.S. citizens – but there was no active supply-adjustment process. In other words, the currency was not "linked to" gold.

Instead, the Fed had a sort of open-ended Keynesian interest rate target policy, which is inherently a floating-currency construct. Without an active supply-adjustment process, the currency-board-like automatic mechanism, the value of the dollar naturally deviated from its gold parity and sank well below this level. As a result, Europeans requested that these depreciating dollars be redeemed for gold bullion. Bullion inventories declined, and the system fell apart.

Thus, we can see that a currency that is "redeemable in" gold will fail if the currency is not also "linked to" gold by some supply-adjustment process.

Let's take an example. I'm going to issue a currency which is indistinguishable from a cocktail napkin. This napkin currency is "redeemable" in a brand-new Mercedes 500SL. Do you think that maybe you might ask for your napkin to be redeemed? Of course. I would soon run out of luxury cars. There is no mechanism to manage the value of the cocktail napkin, to keep it in line with its "Mercedes parity."

The term "backed by" gold is extremely vague, and essentially means nothing at all. It suggests a large amount of gold bullion stored in a vault somewhere. This term tends to be used by people who have almost no understanding of the proper techniques to manage a currency – the "link to" gold – and instead have a sort of superstitious faith that a pile of brainless metal will somehow manage their currency for them. Of course this is a recipe for instant failure.

I could have a whole parking lot full of Mercedes 500SL convertibles. But the cocktail napkin is still a cocktail napkin.

Personally, I think that it is preferable to have a currency that is "redeemable in" gold, but it must also be "linked to" gold. Historically, systems without a redeemability feature tend to be abused by unscrupulous politicians and central bankers. However, this "redeemability" is not strictly necessary. I would note that, as long as a currency is "linked to" gold, you would be able to trade your paper currency for bullion at the parity price at any private gold bullion dealer.

What terminology do you use? Do you know what it means? I would suggest that if you have been using the term "backed by" gold, you have a little studying to do.

Nathan Lewis is the author of Gold: the Once and Future Money (2007). His website

FOREX Trading Week Outlook: Jun. 6 - Jun. 10

( – After the daunting reminder of the lack of significant improvement in the U.S. jobs market has accelerated QE3 speculation and the U.S. dollar’s decline, the week ahead will bring the monetary policy meetings of four major central banks as the euro takes the center stage in anticipation of whether the European Central Bank will maintain its hawkish inflation-fighting stance despite of the EU debt crisis.

In preparation for the new trading week, here is a list of the Top 10 spotlight economic events that will move the markets around the globe.

1. AUD- Reserve Bank of Australia Interest Rate Announcement, Tues., Jun. 7, 12:30 am, ET.

With the Australian economy registering its largest contraction in 20 years in the first quarter of 2011 as a result of the massive floods in Queensland, the Reserve Bank of Australia is forecast to keep the benchmark rate unchanged at 4.75%. However, if the central bank views the shrinking of Q1 GDP as temporary and expresses concerns about the inflation thread from rising wages and commodity prices, the market could continue to price expectations of future interest rate hikes.

2. EUR- Euro-zone GDP- Gross Domestic Product, the main measure of economic activity and growth, Wed., Jun. 8, 5:00 am, ET.

The revised reading of the Euro-zone GDP is forecast to confirm the preliminary estimate that the economy accelerated by 0.8% q/q in the first quarter of 2011, faster than the 0.3% q/q growth in Q4 2010.

3. NZD- Reserve Bank of New Zealand Interest Rate Announcement, Wed., Jun. 8, 5:00 pm, ET.

Speculation has recently increased that the Reserve Bank of New Zealand may need to undo the aggressive 50 bps interest rate cut made in an effort to assist in the recovery efforts after the February earthquake in Christchurch. With exports climbing to a record in April and other data showing resilience in the economy, any hints of a possible rate hike in the near future could continue to support the Kiwi as the preferred choice for high yield seekers.

4. JPY- Japan GDP- Gross Domestic Product, the main measure of economic activity and growth, Wed., Jun. 8, 7:50 pm, ET.

Japan’s economy registered its third recession in a decade and contracted more than expected by 0.9% q/q in the first quarter of 2011. The revised GDP estimate is forecast to show the economy shrinking a bit less by 0.8% q/q in Q1 2011, same as the 0.8% q/q contraction in the fourth quarter of 2010.

5. AUD- Australia Employment Situation and Unemployment Rate, the main gauge of employment trends and labor market conditions, Wed., Jun. 8, 9:30 pm, ET.

The Australian economy is forecast to add up to 25,000 new jobs in May, recovering from the 22,100 jobs lost in the month before, while the unemployment rate remains unchanged at the low 4.9% level.

6. GBP- Bank of England Interest Rate Announcement, Thurs., Jun. 9, 7:00 am, ET.

After the BoE Inflation Report and the April CPI spike, the market is back to pricing a Bank of England rate hike sooner rather than later, but probably not in June or July, considering the recent soft U.K. economic data. Only a 2008-style risk aversion could send the GBP below its $1.60's range, while QE3 by the Fed could propel the GBP/USD exchange rate into the $1.70's.

7. EUR- European Central Bank Interest Rate Announcement, Thurs., Jun. 9, 7:45 am, ET.

Even though the European Central Bank is expected to raise rates another time or two this year, with the deadline for a new bailout for Greece approaching at the end of June, policy makers could decide to prudently sit on the sidelines and keep the benchmark interest rate at 1.25%. As the U.S. economic data disappoints and speculation of QE3 increases, the euro's direction will be driven by risk and will depend on whether the ECB would continue to fuel rate hike expectations.

8. USD- U.S. Jobless Claims, an important gauge of employment trends and labor market conditions, Thurs., Jun. 9, 8:30 am, ET.

The lackluster performance of the U.S. job market could continue with first-time applications for unemployment benefits forecast to reach 419K from 422K in the previous week. To indicate a significant decline in unemployment, economists estimate that jobless applications would need to fall to 375K or below.

9. GBP- U.K. Industrial Production, the main gauge of industrial activity measuring the output of factories, mines and utilities, Fri., Jun. 10, 4:30 am, ET.

In the aftermath of a sequence of week data from the manufacturing and services sectors, the U.K. industrial activity is expected to increase by 1.3% m/m in April from 0.7% in March.

10. CAD- Canada Employment Situation and Unemployment Rate, the main gauge of employment trends and labor market conditions, Fri., Jun. 10, 7:00 am, ET.

Following the stronger than expected 58,300 jobs created in April, the Canadian economy is forecast to add up to 23,400 new jobs in May, while the unemployment rate stays unchanged at 7.6%.

US Economic Calendar For The Week

Date Time (ET) Statistic For Actual Briefing Forecast Market Expects Prior Revised From
Jun 7 3:00 PM Consumer Credit Apr - $6.5B $6.0B $6.0B -
Jun 8 7:00 AM MBA Mortgage Index 06/04 - NA NA -4.0% -
Jun 8 10:30 AM Crude Inventories 06/03 - NA NA 2878K -
Jun 8 2:00 PM Fed's Beige Book Jun - - - - -
Jun 9 8:30 AM Initial Claims 06/04 - 430K 423K 422K -
Jun 9 8:30 AM Continuing Claims 05/28 - 3700K 3688K 3711K -
Jun 9 8:30 AM Trade Balance Apr - -$47.5B -$48.7B -$48.2B -
Jun 9 10:00 AM Wholesale Inventories Apr - 0.8% 0.9% 1.1% -
Jun 10 8:30 AM Export Prices ex-ag. May - NA NA 1.0% -
Jun 10 8:30 AM Import Prices ex-oil May - NA NA 0.6% -
Jun 10 2:00 PM Treasury Budget May - NA NA -$135.9B -