Recipe for Disaster: The Formula That Killed Wall Street
By Felix Salmon Email 02.23.09
In the mid-'80s, Wall Street turned to the quants—brainy financial engineers—to invent new ways to boost profits. Their methods for minting money worked brilliantly... until one of them devastated the global economy.
Photo: Jim Krantz/Gallery Stock
Road Map for Financial Recovery: Radical Transparency Now!
A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.
For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.
Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.
David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.
How could one formula pack such a devastating punch? The answer lies in the bond market, the multitrillion-dollar system that allows pension funds, insurance companies, and hedge funds to lend trillions of dollars to companies, countries, and home buyers.
A bond, of course, is just an IOU, a promise to pay back money with interest by certain dates. If a company—say, IBM—borrows money by issuing a bond, investors will look very closely over its accounts to make sure it has the wherewithal to repay them. The higher the perceived risk—and there's always some risk—the higher the interest rate the bond must carry.
Bond investors are very comfortable with the concept of probability. If there's a 1 percent chance of default but they get an extra two percentage points in interest, they're ahead of the game overall—like a casino, which is happy to lose big sums every so often in return for profits most of the time.
Bond investors also invest in pools of hundreds or even thousands of mortgages. The potential sums involved are staggering: Americans now owe more than $11 trillion on their homes. But mortgage pools are messier than most bonds. There's no guaranteed interest rate, since the amount of money homeowners collectively pay back every month is a function of how many have refinanced and how many have defaulted. There's certainly no fixed maturity date: Money shows up in irregular chunks as people pay down their mortgages at unpredictable times—for instance, when they decide to sell their house. And most problematic, there's no easy way to assign a single probability to the chance of default.
Wall Street solved many of these problems through a process called tranching, which divides a pool and allows for the creation of safe bonds with a risk-free triple-A credit rating. Investors in the first tranche, or slice, are first in line to be paid off. Those next in line might get only a double-A credit rating on their tranche of bonds but will be able to charge a higher interest rate for bearing the slightly higher chance of default. And so on.
"...correlation is charlatanism"
Photo: AP photo/Richard Drew
The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.
But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are.
Investors like risk, as long as they can price it. What they hate is uncertainty—not knowing how big the risk is. As a result, bond investors and mortgage lenders desperately want to be able to measure, model, and price correlation. Before quantitative models came along, the only time investors were comfortable putting their money in mortgage pools was when there was no risk whatsoever—in other words, when the bonds were guaranteed implicitly by the federal government through Fannie Mae or Freddie Mac.
Yet during the '90s, as global markets expanded, there were trillions of new dollars waiting to be put to use lending to borrowers around the world—not just mortgage seekers but also corporations and car buyers and anybody running a balance on their credit card—if only investors could put a number on the correlations between them. The problem is excruciatingly hard, especially when you're talking about thousands of moving parts. Whoever solved it would earn the eternal gratitude of Wall Street and quite possibly the attention of the Nobel committee as well.
To understand the mathematics of correlation better, consider something simple, like a kid in an elementary school: Let's call her Alice. The probability that her parents will get divorced this year is about 5 percent, the risk of her getting head lice is about 5 percent, the chance of her seeing a teacher slip on a banana peel is about 5 percent, and the likelihood of her winning the class spelling bee is about 5 percent. If investors were trading securities based on the chances of those things happening only to Alice, they would all trade at more or less the same price.
But something important happens when we start looking at two kids rather than one—not just Alice but also the girl she sits next to, Britney. If Britney's parents get divorced, what are the chances that Alice's parents will get divorced, too? Still about 5 percent: The correlation there is close to zero. But if Britney gets head lice, the chance that Alice will get head lice is much higher, about 50 percent—which means the correlation is probably up in the 0.5 range. If Britney sees a teacher slip on a banana peel, what is the chance that Alice will see it, too? Very high indeed, since they sit next to each other: It could be as much as 95 percent, which means the correlation is close to 1. And if Britney wins the class spelling bee, the chance of Alice winning it is zero, which means the correlation is negative: -1.
If investors were trading securities based on the chances of these things happening to both Alice and Britney, the prices would be all over the place, because the correlations vary so much.
But it's a very inexact science. Just measuring those initial 5 percent probabilities involves collecting lots of disparate data points and subjecting them to all manner of statistical and error analysis. Trying to assess the conditional probabilities—the chance that Alice will get head lice if Britney gets head lice—is an order of magnitude harder, since those data points are much rarer. As a result of the scarcity of historical data, the errors there are likely to be much greater.
In the world of mortgages, it's harder still. What is the chance that any given home will decline in value? You can look at the past history of housing prices to give you an idea, but surely the nation's macroeconomic situation also plays an important role. And what is the chance that if a home in one state falls in value, a similar home in another state will fall in value as well?
Here's what killed your 401(k) David X. Li's Gaussian copula function as first published in 2000. Investors exploited it as a quick—and fatally flawed—way to assess risk. A shorter version appears on this month's cover of Wired.
Probability
Specifically, this is a joint default probability—the likelihood that any two members of the pool (A and B) will both default. It's what investors are looking for, and the rest of the formula provides the answer.
Survival times
The amount of time between now and when A and B can be expected to default. Li took the idea from a concept in actuarial science that charts what happens to someone's life expectancy when their spouse dies.
Equality
A dangerously precise concept, since it leaves no room for error. Clean equations help both quants and their managers forget that the real world contains a surprising amount of uncertainty, fuzziness, and precariousness.
Copula
This couples (hence the Latinate term copula) the individual probabilities associated with A and B to come up with a single number. Errors here massively increase the risk of the whole equation blowing up.
Distribution functions
The probabilities of how long A and B are likely to survive. Since these are not certainties, they can be dangerous: Small miscalculations may leave you facing much more risk than the formula indicates.
Gamma
The all-powerful correlation parameter, which reduces correlation to a single constant—something that should be highly improbable, if not impossible. This is the magic number that made Li's copula function irresistible.
Enter Li, a star mathematician who grew up in rural China in the 1960s. He excelled in school and eventually got a master's degree in economics from Nankai University before leaving the country to get an MBA from Laval University in Quebec. That was followed by two more degrees: a master's in actuarial science and a PhD in statistics, both from Ontario's University of Waterloo. In 1997 he landed at Canadian Imperial Bank of Commerce, where his financial career began in earnest; he later moved to Barclays Capital and by 2004 was charged with rebuilding its quantitative analytics team.
Li's trajectory is typical of the quant era, which began in the mid-1980s. Academia could never compete with the enormous salaries that banks and hedge funds were offering. At the same time, legions of math and physics PhDs were required to create, price, and arbitrage Wall Street's ever more complex investment structures.
In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled "On Default Correlation: A Copula Function Approach." (In statistics, a copula is used to couple the behavior of two or more variables.) Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps.
If you're an investor, you have a choice these days: You can either lend directly to borrowers or sell investors credit default swaps, insurance against those same borrowers defaulting. Either way, you get a regular income stream—interest payments or insurance payments—and either way, if the borrower defaults, you lose a lot of money. The returns on both strategies are nearly identical, but because an unlimited number of credit default swaps can be sold against each borrower, the supply of swaps isn't constrained the way the supply of bonds is, so the CDS market managed to grow extremely rapidly. Though credit default swaps were relatively new when Li's paper came out, they soon became a bigger and more liquid market than the bonds on which they were based.
When the price of a credit default swap goes up, that indicates that default risk has risen. Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market. It's hard to build a historical model to predict Alice's or Britney's behavior, but anybody could see whether the price of credit default swaps on Britney tended to move in the same direction as that on Alice. If it did, then there was a strong correlation between Alice's and Britney's default risks, as priced by the market. Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).
It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.
The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.
As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function.
The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.
At the heart of it all was Li's formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.
"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie, a Stanford University finance professor who served on Moody's Academic Advisory Research Committee. The Gaussian copula soon became such a universally accepted part of the world's financial vocabulary that brokers started quoting prices for bond tranches based on their correlations. "Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus," wrote derivatives guru Janet Tavakoli in 2006.
The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation.
David X. Li
Illustration: David A. Johnson
In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop.
In finance, you can never reduce risk outright; you can only try to set up a market in which people who don't want risk sell it to those who do. But in the CDO market, people used the Gaussian copula model to convince themselves they didn't have any risk at all, when in fact they just didn't have any risk 99 percent of the time. The other 1 percent of the time they blew up. Those explosions may have been rare, but they could destroy all previous gains, and then some.
Li's copula function was used to price hundreds of billions of dollars' worth of CDOs filled with mortgages. And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared. Naturally, default correlations were very low in those years. But when the mortgage boom ended abruptly and home values started falling across the country, correlations soared.
Bankers securitizing mortgages knew that their models were highly sensitive to house-price appreciation. If it ever turned negative on a national scale, a lot of bonds that had been rated triple-A, or risk-free, by copula-powered computer models would blow up. But no one was willing to stop the creation of CDOs, and the big investment banks happily kept on building more, drawing their correlation data from a period when real estate only went up.
"Everyone was pinning their hopes on house prices continuing to rise," says Kai Gilkes of the credit research firm CreditSights, who spent 10 years working at ratings agencies. "When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn't rating agencies build in some cushion for this sensitivity to a house-price-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO."
Bankers should have noted that very small changes in their underlying assumptions could result in very large changes in the correlation number. They also should have noticed that the results they were seeing were much less volatile than they should have been—which implied that the risk was being moved elsewhere. Where had the risk gone?
They didn't know, or didn't ask. One reason was that the outputs came from "black box" computer models and were hard to subject to a commonsense smell test. Another was that the quants, who should have been more aware of the copula's weaknesses, weren't the ones making the big asset-allocation decisions. Their managers, who made the actual calls, lacked the math skills to understand what the models were doing or how they worked. They could, however, understand something as simple as a single correlation number. That was the problem.
"The relationship between two assets can never be captured by a single scalar quantity," Wilmott says. For instance, consider the share prices of two sneaker manufacturers: When the market for sneakers is growing, both companies do well and the correlation between them is high. But when one company gets a lot of celebrity endorsements and starts stealing market share from the other, the stock prices diverge and the correlation between them turns negative. And when the nation morphs into a land of flip-flop-wearing couch potatoes, both companies decline and the correlation becomes positive again. It's impossible to sum up such a history in one correlation number, but CDOs were invariably sold on the premise that correlation was more of a constant than a variable.
No one knew all of this better than David X. Li: "Very few people understand the essence of the model," he told The Wall Street Journal way back in fall 2005.
"Li can't be blamed," says Gilkes of CreditSights. After all, he just invented the model. Instead, we should blame the bankers who misinterpreted it. And even then, the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust.
Nassim Nicholas Taleb, hedge fund manager and author of The Black Swan, is particularly harsh when it comes to the copula. "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism."
Li has been notably absent from the current debate over the causes of the crash. In fact, he is no longer even in the US. Last year, he moved to Beijing to head up the risk-management department of China International Capital Corporation. In a recent conversation, he seemed reluctant to discuss his paper and said he couldn't talk without permission from the PR department. In response to a subsequent request, CICC's press office sent an email saying that Li was no longer doing the kind of work he did in his previous job and, therefore, would not be speaking to the media.
In the world of finance, too many quants see only the numbers before them and forget about the concrete reality the figures are supposed to represent. They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years. Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.
As Li himself said of his own model: "The most dangerous part is when people believe everything coming out of it."
HOW THE FORMULA WORKS
A description of the Gaussian copula function from an article in Wired magazine by Felix Salmon:
Consider something simple, like a kid in an elementary school: Let's call her Alice. The probability that her parents will get divorced this year is about 5 per cent, the risk of her getting head lice is about 5 per cent, the chance of her seeing a teacher slip on a banana peel is about 5 per cent, and the likelihood of her winning the class spelling bee is about 5 per cent. If investors were trading securities based on the chances of those things happening only to Alice, they would all trade at more or less the same price.
But something important happens when we (also look at) the girl she sits next to, Britney. If Britney's parents get divorced, what are the chances that Alice's parents will get divorced, too? Still about 5 per cent: The correlation there is close to zero. But if Britney gets head lice, the chance that Alice will get head lice is ... about 50 per cent – which means the correlation is probably up in the 0.5 range. If Britney sees a teacher slip on a banana peel, what is the chance that Alice will see it, too? ... It could be as much as 95 per cent, which means the correlation is close to 1. And if Britney wins the spelling bee, the chance of Alice winning it is zero, which means the correlation is negative: -1.
If investors were trading securities based on the chances of these things happening to both Alice and Britney, the prices would be all over the place, because the correlations vary so much.
— Felix Salmon (felix@felixsalmon.com) writes the Market Movers financial blog at Portfolio.com.
Read More http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all#ixzz0k7zB3fEh
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
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Sunday, April 4, 2010
Europe: Out of Time-Outs
Europe: Out of Time-Outs
by Bryan Rich 04-03-10
Bryan Rich
In sports, if the opposition is on a roll and the momentum is squarely against you … you need a “time-out.” This interruption in action can break the rhythm of the opposing team and give your team a moment to re-evaluate and re-group.
In the euro zone, European officials called a time-out back in February hoping to stem the heavy wave of selling against the euro and the speculative pressures on sovereign debt risk.
And when they re-grouped they brought out a carefully managed game-of-confusion.
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For conservative, core holdings … for your growth and income investments … and for your more aggressive growth money … you get recommendations designed to hand you impressive total returns.
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Here’s how it worked …
* They announced support for Greece; but they didn’t provide any details,
* They leaked rumors of a financial aid package; then denied any notion of transferring taxpayer money from a fiscally responsible country to a fiscally irresponsible country, and
* They talked about creating a European Monetary Fund to support ailing countries in the monetary union; then denied the viability of such an idea.
In short, they gave enough cross signals to confuse market speculators, to break their rhythm and confidence. As such, the euro stabilized, and the bets against Greek debt subsided a bit.
Euro-zone leaders created enough confusion to buy some time for their common currency.
Euro-zone leaders created enough confusion to buy some time for their common currency.
Yet, based on the structural flaws of the monetary union, the likelihood of actual intervention resolving the problems — in Greece, the other weak spots in Europe, and the resulting damage done to the euro — was nil.
Out of Time-Outs
It’s now apparent that Europe has exhausted its allotted “time-outs.” And we have some semblance of resolution on the “they will or they won’t bail-out” subject. European leaders have finally agreed to act with the IMF as a lender of last resort to Greece.
Although Europe now professes support for this plan, prior comments on record are to the contrary. Here’s what the three big hitters in Europe had to say prior to this agreement …
* French President Nicolas Sarkozy has said an IMF option would make the E.U. look incapable of resolving its own crises,
* European Central Bank President Jean-Claude Trichet previously said IMF involvement would “not be appropriate,” and
* German Chancellor Angela Merkel said, “We want to solve our problems ourselves.”
So now it’s up to the markets to determine whether or not the IMF/EU safety net works. Is it enough to reduce the risk premium associated with investing in Greek debt?
The early indication: Apparently not. Take a look at this chart …
Greek Chart
The spread between German bond yields (the orange line) and Greek bond yields (the white line) has worsened since the announcement of Europe’s rescue plan. With the Greek bond sale this week, the cost of borrowing for Greece is a key barometer for gauging the confidence (or lack thereof) that the EU/IMF plan has attempted to manipulate. And it didn’t go well.
The EU/IMF Rescue Plan Smell Test
There are some very fundamental problems that don’t get this “rescue plan” past the smell test. Here are three of them:
1. How do mandates imposed by taking IMF funds marry with monetary union principles?
2. The dam has broken, and other weak countries will be lining up for a similar backstop. How can they be denied?
3. Direct or indirect bail-out of a euro member is a breach of the monetary union’s guiding principles. How can confidence be restored in a concept that has proven to be flawed?
For some insight, see what Dominique Strauss-Kahn, head of the IMF, had to say about Europe’s future this week:
“The risk for European economies is to be in the second league and not in the first, with the United States and Asia.”
Europe’s Exit Strategy … on Hold?
The risk of a double-dip recession is bound to put downward pressure on the euro.
The risk of a double-dip recession is bound to put downward pressure on the euro.
The markets are also starting to recognize the monetary policy impact that the struggling euro-zone constituents will have on the ECB’s ability to reverse ultra-easy money conditions. With aggressive austerity plans facing Greece, Spain, Portugal and Ireland, a risk of a double-dip recession for the euro zone rises dramatically.
With these euro economies under the gun to rein in deficits now in order to bring deficits back toward treaty limits set forth by monetary union guidelines, the outlook is grim.
Greece’s GDP contracted by 2 percent in 2009, while running a 12.7 percent deficit. Now under its austerity plan it’s attempting to cut the deficit (relative to GDP) by 4 percentage points this year … while growth is expected to contract again in the neighborhood of 1.7 percent.
Indeed, the possibility of that plan succeeding seems highly unlikely.
This creates a policy divergence between the U.S. and all three of its leading, developed market competitors … the UK, the euro zone and Japan. So with interest rate prospects widening in favor of the U.S., and the continued uncertain outcome in the euro zone, look for the euro to continue its decline.
Regards,
Bryan
http://www.blogger.com/post-create.g?blogID=732117036333292949
by Bryan Rich 04-03-10
Bryan Rich
In sports, if the opposition is on a roll and the momentum is squarely against you … you need a “time-out.” This interruption in action can break the rhythm of the opposing team and give your team a moment to re-evaluate and re-group.
In the euro zone, European officials called a time-out back in February hoping to stem the heavy wave of selling against the euro and the speculative pressures on sovereign debt risk.
And when they re-grouped they brought out a carefully managed game-of-confusion.
Internal Sponsorship
Get Recos for Every
Kind of Money You Have!
For conservative, core holdings … for your growth and income investments … and for your more aggressive growth money … you get recommendations designed to hand you impressive total returns.
All of this with NO subscription or renewal fees! We want to hand you the keys to the Weiss Research Kingdom.
Click here for your special invitation …
Here’s how it worked …
* They announced support for Greece; but they didn’t provide any details,
* They leaked rumors of a financial aid package; then denied any notion of transferring taxpayer money from a fiscally responsible country to a fiscally irresponsible country, and
* They talked about creating a European Monetary Fund to support ailing countries in the monetary union; then denied the viability of such an idea.
In short, they gave enough cross signals to confuse market speculators, to break their rhythm and confidence. As such, the euro stabilized, and the bets against Greek debt subsided a bit.
Euro-zone leaders created enough confusion to buy some time for their common currency.
Euro-zone leaders created enough confusion to buy some time for their common currency.
Yet, based on the structural flaws of the monetary union, the likelihood of actual intervention resolving the problems — in Greece, the other weak spots in Europe, and the resulting damage done to the euro — was nil.
Out of Time-Outs
It’s now apparent that Europe has exhausted its allotted “time-outs.” And we have some semblance of resolution on the “they will or they won’t bail-out” subject. European leaders have finally agreed to act with the IMF as a lender of last resort to Greece.
Although Europe now professes support for this plan, prior comments on record are to the contrary. Here’s what the three big hitters in Europe had to say prior to this agreement …
* French President Nicolas Sarkozy has said an IMF option would make the E.U. look incapable of resolving its own crises,
* European Central Bank President Jean-Claude Trichet previously said IMF involvement would “not be appropriate,” and
* German Chancellor Angela Merkel said, “We want to solve our problems ourselves.”
So now it’s up to the markets to determine whether or not the IMF/EU safety net works. Is it enough to reduce the risk premium associated with investing in Greek debt?
The early indication: Apparently not. Take a look at this chart …
Greek Chart
The spread between German bond yields (the orange line) and Greek bond yields (the white line) has worsened since the announcement of Europe’s rescue plan. With the Greek bond sale this week, the cost of borrowing for Greece is a key barometer for gauging the confidence (or lack thereof) that the EU/IMF plan has attempted to manipulate. And it didn’t go well.
The EU/IMF Rescue Plan Smell Test
There are some very fundamental problems that don’t get this “rescue plan” past the smell test. Here are three of them:
1. How do mandates imposed by taking IMF funds marry with monetary union principles?
2. The dam has broken, and other weak countries will be lining up for a similar backstop. How can they be denied?
3. Direct or indirect bail-out of a euro member is a breach of the monetary union’s guiding principles. How can confidence be restored in a concept that has proven to be flawed?
For some insight, see what Dominique Strauss-Kahn, head of the IMF, had to say about Europe’s future this week:
“The risk for European economies is to be in the second league and not in the first, with the United States and Asia.”
Europe’s Exit Strategy … on Hold?
The risk of a double-dip recession is bound to put downward pressure on the euro.
The risk of a double-dip recession is bound to put downward pressure on the euro.
The markets are also starting to recognize the monetary policy impact that the struggling euro-zone constituents will have on the ECB’s ability to reverse ultra-easy money conditions. With aggressive austerity plans facing Greece, Spain, Portugal and Ireland, a risk of a double-dip recession for the euro zone rises dramatically.
With these euro economies under the gun to rein in deficits now in order to bring deficits back toward treaty limits set forth by monetary union guidelines, the outlook is grim.
Greece’s GDP contracted by 2 percent in 2009, while running a 12.7 percent deficit. Now under its austerity plan it’s attempting to cut the deficit (relative to GDP) by 4 percentage points this year … while growth is expected to contract again in the neighborhood of 1.7 percent.
Indeed, the possibility of that plan succeeding seems highly unlikely.
This creates a policy divergence between the U.S. and all three of its leading, developed market competitors … the UK, the euro zone and Japan. So with interest rate prospects widening in favor of the U.S., and the continued uncertain outcome in the euro zone, look for the euro to continue its decline.
Regards,
Bryan
http://www.blogger.com/post-create.g?blogID=732117036333292949
Saturday, April 3, 2010
EMERGENCY FED MEETING
the Federal Reserve is meeting on Monday 04/05/2010 to discuss the discount rate. Its the only topic for discussion. I can only conclude that the Federal Reserve is interested in hiking the discount rate again.
Implications:
When the Fed raised the discount rate last time, the US Dollar rallied. So anyone long on USD/JPY may feel a bit more comfortable in their position. Of course, we have to get through NFP - its the quiet before the storm.
For a full detail of the announcement:
http://www.federalreserve.gov/board...advancedexp.htm
The Fed hiked the discount rate on Feb 18 so I went back and looked at the charts and saw that the dollar rallied across the board, here are my findings:
EUR/USD fell from 1.3615 to 1.3450ish
GBP/USD fell from 1.56ish to 1.53ish.
USD/JPY rallied from 90.5 0 to 92.00
Of course, there is a possibility the markets reaction may not be so strong this time as it is the discount rate, but I still see it as a dollar bullish event primarily because it is for short term borrowing and it signals tightening and normalization of monetary policy. The Fed expects to return to a 100 basis point spread for the discount rate BEFORE they start hiking funds rate. That means we need a 1.25% discount rate (it’ll be 1.00% or more on Monday if they hike it) for further reserve draining/fed fund hike. The US is also the only G-8 country at this time who is beginning to tightening monetary policy and remove excess stimulus measures.
The BoJ and ECB are no where near raising rates or removing stimulus.
Implications:
When the Fed raised the discount rate last time, the US Dollar rallied. So anyone long on USD/JPY may feel a bit more comfortable in their position. Of course, we have to get through NFP - its the quiet before the storm.
For a full detail of the announcement:
http://www.federalreserve.gov/board...advancedexp.htm
The Fed hiked the discount rate on Feb 18 so I went back and looked at the charts and saw that the dollar rallied across the board, here are my findings:
EUR/USD fell from 1.3615 to 1.3450ish
GBP/USD fell from 1.56ish to 1.53ish.
USD/JPY rallied from 90.5 0 to 92.00
Of course, there is a possibility the markets reaction may not be so strong this time as it is the discount rate, but I still see it as a dollar bullish event primarily because it is for short term borrowing and it signals tightening and normalization of monetary policy. The Fed expects to return to a 100 basis point spread for the discount rate BEFORE they start hiking funds rate. That means we need a 1.25% discount rate (it’ll be 1.00% or more on Monday if they hike it) for further reserve draining/fed fund hike. The US is also the only G-8 country at this time who is beginning to tightening monetary policy and remove excess stimulus measures.
The BoJ and ECB are no where near raising rates or removing stimulus.
Friday, April 2, 2010
Conspiracy uncovered, new world order, illuminati, alex jones - the whole truth about the iraq war
Conspiracy uncovered, new world order, illuminati, alex jones - the whole truth about the iraq war
56:08 - 1 year ago
Conspiracy uncovered, new world order, illuminati, alex jones - the whole truth about the iraq war
http://video.google.com/videoplay?docid=4965604104366244462&hl=en&emb=1#
The Real Story - Economic Collapse by Design
The Real Story - Economic Collapse by Design
32:00 - 1 year ago
Economy Bail = out rip off , Wake up , MMM Mass Media Manipulation, Why would they poison you?
http://video.google.com/videoplay?docid=-7470326975799663208&hl=en&emb=1#
Monopoly Men (Federal Reserve Fraud) (1999)
Monopoly Men (Federal Reserve Fraud) (1999)
47:22 - 3 years ago
The Federal Reserve, or the Fed as it is lovingly called, may be one of the most mysterious entities in modern American government. Created during Wilson's presidency to protect the economy in times of financial turmoil, its real business remains to be discovered. During the Wilson presidency, the U.S. government sanctions the creation of the Federal Reserve. Thought by many to be a government organization maintained to provide financial accountability in the event of a domestic depression, the actual business of the Fed is shrouded in secrecy. Many Americans will be shocked to discover that the principle business of the Fed is to print money from nothing, lend it to the U.S. government and charge interest on these loans. Who keeps the interest? Good question. Find out as the connective tissue between this and other top-secret international organizations is explored and exposed.
http://video.google.com/videoplay?docid=-7065177340464808778&hl=en&emb=1#
FIAT EMPIRE - Why the Federal Reserve Violates the U.S. Constitution
FIAT EMPIRE - Why the Federal Reserve Violates the U.S. Constitution
58:53 - 2 years ago
This documentary with RON PAUL, G. EDWARD GRIFFIN, EDWIN VIEIRA and TED BAEHR is an excellent primer for the citizen who wants to get an understanding of how money is created and why the U.S. government is in partnership with the elite banks.
http://video.google.com/videoplay?docid=5232639329002339531&hl=en&emb=1#
The Coming Collapse of the Middle Class
January 31, 2008 — Distinguished law scholar Elizabeth Warren teaches contract law, bankruptcy, and commercial law at Harvard Law School. She is an outspoken critic of America's credit economy, which she has linked to the continuing rise in bankruptcy among the middle-class. Series: "UC Berkeley Graduate Council Lectures" [6/2007] [Public Affairs] [Business] [Show ID: 12620]
http://www.youtube.com/watch?v=akVL7QY0S8A
Impending Economic Collapse of the USA
Impending Economic Collapse of the USA - More bloopers are a click away
Impending Economic Collapse of the USA
It seems most people won't figure out until it is too late. The USA is on the brink of total economic collapse. The Euro is replacing the Dollar and the world's reserve currency as the dollar sinks to record lows every day. Still, this is only the beginning of what will be the chaotic downfall of the United States. Start buying food, Berkey water filter, gas masks, a generator, etc. Get your movies and music from alternative media and buy Made-in-USA.
http://www.metacafe.com/watch/1535135/impending_economic_collapse_of_the_usa/
The Crash -- Coming Financial Collapse of America
The Crash -- Coming Financial Collapse of America
39:56 - 3 years ago
A very scary and possibly real situation that could unfold very shortly. Also, check out "History of the Federal Reserve" for other information that connects with this video.
Argentina's Economic Collapse (FULL VERSION)
Argentina's Economic Collapse (FULL VERSION)
59:05 - 1 year ago
Documentary on the events that led to the economic collapse of Argentina in 2001 which wiped out the middle class and raised the level of poverty to 57.5%. Central to the collapse was the implementation of neo-liberal policies which enabled the swindle of billions of dollars by foreign banks and corporations. Many of Argentina's assets and resources were shamefully plundered. Its financial system was even used for money laundering by Citibank, Credit Suisse, and JP Morgan. The net result was massive wealth transfers and the impoverishment of society which culminated in many deaths due to oppression and malnutrition. If you want to stop the same thing from happening here, and it is happening here, right now, please join the revolution at the Kick Them All Out Projet http://www.KickThemAllOut.com and the Fire Congress Campaign.
http://video.google.com/videoplay?docid=4353655982817317115&ei=uQO2S6jjKIbEqgLqkuy5Dg&q=collapse&hl=en#
Wednesday, March 31, 2010
Tuesday, March 30, 2010
The Truth About Gold
http://www.minyanville.com/businessmarkets/articles/markets-gold-dollar-GLD-CDS-treasuries/3/13/2009/id/21618?page=full
Op-Ed: Exterminating the Gold Bugs
By Minyanville Staff Mar 13, 2009 10:42 am
Super-bearish "dollar collapse" scenario is bogus.
Editor's Note: As an emerging-markets banking analyst, James Kostohryz has firsthand experience of banking collapses and their subsequent resolutions in Mexico, Argentina and Southeast Asia. Since leaving his position as Head of International Investments at Brazil's Banco Pactual in 2000, James has worked as an independent trader and investor.
Dear Professor Kostohryz,
I've been following your comments in Buzz & Banter, and I was interested in your opinion on gold. In particular, I wanted to ask about the correlation between gold and the dollar -- which haven't been correlated for some time -- and why they're now moving up at once. Some people have called this a fear rally driving gold, though now I see a number of people saying it's transitioning to an inflation rally. But can people change their rationale behind a rally that easily and justify increases? It's strange.
David
Dear David,
As you may know from the Buzz & Banter, a couple of weeks ago, I sold several gold stocks for a substantial profit. And I assure you, it had nothing to do with the US dollar/gold correlation.
Regarding the ever-shifting rationales cited by many gold “experts” (aka gold bugs) to buy gold, if you've been around long enough, you probably know this is a unique crowd. Among other things, they tend to be highly ideological. To them, everything and anything is a reason for gold to go up. And any decline in gold is dismissed as selling by ignorant people who, at best, don’t “get it,” or, at worst, by people who are part of some conspiracy.
Thus, we'll variously be informed by gold bugs, with great conviction, that if the dollar is down, that’s good for gold; if it's up, it’s good for gold. Gold is good as a hedge against inflation, and it's good as a hedge in times of deflation. If the S&P is going to crash, it’s good for gold; and if it rallies, it's good for gold. You get the picture.
Fundamentally speaking, at this juncture, I don’t think there's anything more to the gold/dollar inverse correlation than the fact that gold is an international commodity. If the value of gold remains constant on a trade-weighted currency basis, then its value in US dollars will decline when the dollar rises against a trade-weighted currency basket.
I say this correlation is of meager fundamental importance because, unlike many gold bugs, I believe that the super-bearish “dollar collapse” thesis is bogus. It's my fundamental view that the US dollar is actually more sound fundamentally than most of the world’s major currencies. If the US dollar ever collapses, other currencies will probably collapse faster and more profoundly than the US dollar.
Thus, gold might be a good investment in an environment in which there's a general crisis of confidence regarding fiat currencies, but it will have nothing to do with the correlation of gold versus the value of the US dollar relative to other currencies.
Certainly, it's possible that at times, there may arise an inverse correlation between gold and the value of the USD against other currencies, and that this movement may be related to the ascendance of doomsday “dollar collapse” theories. However, when such theories become popular, gold will tend to trade up, not only against the US dollar, but against everything else as well, on the basis of generalized fear - and speculation about fear.
To some extent, that was what was happening late last year. Gold was trading up against everything on the basis of general fear of a sharp deterioration of economic and financial conditions.
But, in truth, the specific fundamental basis for the gold/US dollar correlation is extremely weak. And to the extent that the correlation existed, it's because it was merely one indication amongst many others (equity, corporate bonds, CDSs, etc.) of a rise in generalized fear and a rise in systemic cross correlations amongst asset classes.
If one is bearish on the US economy, there are far superior vehicles to trade that hypothesis. For example, you could short equities, buy puts, etc. If you believe the US dollar is going down relative to other currencies, then play the currency markets and short the dollar against the yen or euro. And if you believe that all currencies are going down relative to gold, then buy gold. One has no necessary connection to the other.
Currently, the specific fear of a US dollar collapse has receded a bit, so one would expect the inverse correlation to gold might weaken, and it has. This brings us to another point. I think it's pretty clear that recently, gold has traded as a function of generalized fear (not just US-dollar fear) and speculation about a sharp deterioration in economic and financial conditions.
Look at the up and down days on the S&P and compare it to gold, day by day.
The idea -- propounded by many pundits, such as the ones you refer to -- that gold is currently trading as an inflation play, has little basis in fact. If that were the case, TIPS wouldn’t be projecting long-term below trend inflation. Long-term US Treasuries yields would not be at historic lows. And I could cite many other examples where action in financial markets directly contradicts the idea that inflationary pressures are building or that fears of inflation are building.
So I don’t think there's any real evidence that gold is trading as an inflation hedge. Besides, the fundamental case for inflation rearing its head anytime soon is extremely weak, to say the least. On this point, there are sophisticated ways to measure the “option value” of gold’s inflation hedge. When you perform such an analysis, it will indicate clearly that expectations of inflation have little or nothing to do with the recent dramatic rise in gold.
Gold is best viewed as a vehicle for a peculiar type of speculation. In particular, gold tends to trade as a function of speculations regarding general stress in the economy and the financial system. And one must analyze this within the context of a very particular community that trades gold. Because of this very specific milieu -- and the ideology that tends to drive people that trade in the yellow metal -- trying to find a fundamental rhyme or reason for the movements in gold is often an exercise in futility.
In a very real sense, and in many different ways, intense interest in gold can fundamentally be viewed as a symptom of irrationality. This is a market that's driven by greed, that traffics in fear; it's one where ideological dogmatism tends to reign, and where, as a result, rationality is at a discount. One must keep that firmly in mind when analyzing gold and gold-related markets.
Sincerely,
James Kostohryz
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http://www.minyanville.com/businessmarkets/articles/Kostohryz-gdp-gold-bugs-inflation-gld/3/30/2010/id/27537?page=full
Is Gold a Smart Indicator of Inflation?
By James Kostohryz Mar 30, 2010 9:20 am
What, if anything, the gold market is “telling” us about the prospects for a dramatic inflationary scenario on a global scale.
I suggest readers take a look at Howard Simon’s Article, entitled Gold Needs More Irresponsibility. It’s a really funny article that touches on some interesting points about the gold market. One of those points relates to how the gold market reacts to expectations about future inflation.
In a separate article yesterday entitled Gold Provides Invaluable Insight, Przemyslaw Radomski indirectly makes the useful observation that gold isn’t only rising against the USD, but against all currencies.
Why Invest in Gold? Getting the Reasons Straight
Many people think that investing in gold is a way to play a decline of the US dollar. As I've pointed out elsewhere (see Exterminating the Goldbugs), this is a nonsensical investment strategy. If you think that the USD is going to decline, then you should invest directly on that thesis by shorting the USD against some given currency or currencies (see UUP).
There are many perfectly legitimate reasons one might want to invest in gold, and most have nothing to due with the USD. For example, you might think that the demand for jewelry in India will rise significantly. Or you may expect that the supply of gold on the market at a given point in time may decline.
Another viable thesis is that the value of all fiat currencies around the world will soon decline en masse relative that of a given quantity of gold. The scenario is a bit macabre, but at least the investment thesis is coherent. Lest we think that this be completely unrealistic, as Radomski points out, gold has been recently gaining against just about every currency in the world -- just as it has, I’d add, for the better part of the past decade.
But this general “fiat trade” -- if you will -- is based on a very different sort of rationale than a prediction that the USD will decline. It’s important to understand this distinction.
The Difference Between Beliefs and Predictions
In this article I won’t address whether it’s sensible to buy gold as a financial markets investment based on the notion that all fiat currencies will soon fall victim to inflation. I will also won’t discuss whether there might be other investments that might outperform gold in such a global inflationary scenario.
What I would like to touch on in this article is the issue of what, if anything, the gold market is currently “telling” us regarding the prospects for a dramatic inflationary scenario on a global scale.
First of all, let’s distinguish between investors’ beliefs that markets transmit, and whether those beliefs are actually predictive of anything. Just for the record, virtually all of the serious empirical research that’s been done on the matter shows that gold isn’t a good predictor of inflation. In fact, my own research coincides with other academic research in suggesting that with the exception of a period during the 1970s, gold has, if anything, been a contrary predictor of inflation. (Don’t feel bad, gold fans. The research is also quite pessimistic regarding the ability of any variable or combination of variables to predict inflation in any sort of consistent manner.) So, let’s not confuse the beliefs of gold investors, or anyone else, with claims regarding their clairvoyance.
Having got that point straight, let us turn our attention to Howard Simons’ observations regarding the beliefs being transmitted by gold markets about future inflation.This is interesting to contemplate because unless we think that gold investors are from Mars and that investors in other financial assets such as bonds are completely different creatures from somewhere such as Venus then it would be somewhat strange to expect that the beliefs of gold investors regarding inflation will be significantly different than the beliefs about inflation being reflected in other financial asset prices. After all, global financial markets are integrated, and arbitrage should ordinarily be expected to smooth out such divergences.
The gold market is far from unique as a gauge of investor expectations about inflation. Indeed, bond markets are, by far, the largest and most liquid markets that reflect expectations about future inflation. What are they saying? Well, Howard Simons pointed out yesterday, the prices of TIPS as well as other fixed-income instruments started signaling last year that bond investors were expecting an uptick in inflation. Interestingly, gold investors seemed to be thinking the same thing as the price of the yellow metal was rallying at around the same time.
Then, at the beginning of last year inflationary expectations reflected in the bond markets started to wane. And perhaps not coincidentally, at virtually the same time, gold prices started to pull back.
So, the bond and gold markets seem to be agreeing in regards to the general direction of inflationary expectations. But some investors might be curious: What magnitude of inflation are we talking about here?
Well, in the bond market, depending on what exact indicator you look at, investors seem to be pricing in expectations for average annual inflation rates in the order of about 2.4% for the next 10 to 30 years.
How about the gold market? Well, that’s a little harder to divine. But I have developed a methodology that allows one to “read” the inflationary expectations priced into the gold market. The methodology is far from perfect, but I haven’t seen anything better. It essentially consists of analyzing the premium/discount of the price of gold to an estimate of the all-in marginal cost of producing gold. The value of this premium/discount should relate to expectations regarding the rate of future inflation. The model is built on the expectation that the price of gold at a given point in the future will roughly equal its all-in marginal cost of production and that the cost of producing gold will rise in line with inflation. I also assume that the all-in cost of a marginal producer to produce an ounce of gold is $800. One can change any of these assumptions accordingly.
Based upon this methodology, the gold market appears to be factoring in an average inflation rate of about 2.1% per annum for the next 10 years.
An amazing coincidence, no?
So How Attractive Is Gold as an Investment?
Somehow, I don’t think that most of the investors and speculators that have been piling into gold-based investments such as GLD and GDX in the past few years have been doing so in the expectation that inflation is going to be 2.1% per annum. Indeed, I think that if you told them that this is what the gold market is actually saying, they’d be aghast.
So what do you think? Do you think that the gold market is “smart” about inflation?If you do, then you must concede that the bond market is currently just as “smart,” as it’s pricing in about the same amount of future inflation. And if you concede this point you may conclude that buying gold is a waste of your hard-earned resources. A 10-Year Treasury Bond currently yielding 3.86% would be a much better deal as it would provide you with a substantially better real return on investment.
Or maybe you think that the gold market and the bond market is “dumb” and that they’re grossly overestimating/underestimating future inflation. Indeed, my analysis shows that if you believe that the average annual inflation rate will be above 2.1% for the next 10 years, then gold might still be a great bargain at current prices.
Or perhaps you think that the price of gold and bonds in the market are “manipulated” by global conspirators, thereby making their current prices irrelevant. In this scenario, and assuming that these conspirators won’t be able to continue holding the price of gold down for the next 10 years, then gold might still be a bargain at current prices.
For example, let’s assume that you think the gold market is currently either dumb and/or grossly manipulated and that you therefore disregard as irrelevant the information about inflation contained in current gold prices. Let us also assume that you think the average inflation rate for the next 10 years will average 10%. According to the model described above gold today would be worth about $1,980 to you. Is such forecast reasonable? On such assumptions about inflation, such a prediction for the price of gold is entirely reasonable.
But if you believe that the price of gold is going to explode to $2,000, $5,000, or whatever, don’t come around tomorrow and tell me how the rising or falling prices of gold are “predicting” anything about inflation. You’d be engaging in a gross contradiction.Conclusion
What’s my point? My point is that potential investors in gold need to get their story straight. You can’t go around saying that the gold market is an accurate predictor of inflation when it’s currently forecasting 2.1% inflation and at the same time go around saying that there’s gong to be hyperinflation within the next 10 years and that therefore gold is a great investment.
You either think that the gold market is smart (i.e. efficient) and therefore acknowledge that gold is probably a mediocre investment at best. Or you drop the nonsense about gold being a great “predictor” of inflation and simply say what you really believe -- which is that the gold market is dumb and/or that it’s grossly manipulated. You can’t have it both ways.
What’s my own take on gold? My views of gold as an investment have nothing to do with a prospective collapse of the USD, expectations of out-of-control inflation, or gold market conspiracies led by the Council on Foreign Relations. My view is that gold is in sweet spot right now and will probably remain so as long as global growth is strong. Strong global growth should drive vigorous jewelry demand in Asia and the Middle East as well as industrial demand around the world. Furthermore, the fears of rising inflation that always accompany economic recoveries should help maintain the level of investment demand for gold in positive territory.
For a different, more “hopeful” sort of rationale to be advanced in favor of gold, we need a lot more disastrous “irresponsibility,” in Howard Simon’s parlance.
But don’t despair if you believe in such a scenario: For belief in imminent financial Armageddon doesn’t necessarily imply that you will always be a grumpy old fuddy-duddy. As Howard Simons suggests, gold bugs are quite upbeat folks when speaking of economic meltdown -- in much the same way that Anne Stiller becomes the happiest woman on earth when she imagines her husband to be miserable.
Seriously, let’s be careful not to confuse our deep-seeded longings regarding what we’d like the world to be like with predictions of what it will actually become. And let’s be conscious of the logical implications of our beliefs.
In the case of the gold market, belief in its wisdom necessarily should imply recognition of the virtual impossibility of making any money in it. Furthermore, logical coherence requires that faith in the efficiency of the gold market be accompanied by a belief that the long-term rate of inflation should be quite low.
On the other hand, if you believe that the annual rate of inflation over the long term will be substantially over 7% then paraphrasing the urging of one Christopher by a certain Ferdinand: “Get gold, cheaply as possible, but by all hazards -- get gold."
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http://www.minyanville.com/businessmarkets/articles/gold-euro-eurozone-dollar-index-USD/3/29/2010/id/27469
Gold Needs More Irresponsibility
By Howard Simons Mar 29, 2010 7:55 am
After years of low interest rates and debt crises, the yellow metal needs more frivolity to push it further.
The comedienne Anne Stiller, wife of Jerry and mother of Ben, had a signature line loosely remembered as, “If I knew you were miserable, I’d be the happiest woman on earth!” I have no idea what her position on gold is, if any, and I thought better of contacting her publicist for fear of winding up on one of those stalker lists, but her attitude toward others’ miseries always has struck me as redolent of gold bugs’ attitude toward the rest of humanity.
When we strip gold of all the mysticism, gold as a financial asset is really a very simple market: When expected inflation rises faster than the short-term interest rate costs of holding it, its price will apparently rise. A more accurate way of saying this is gold remains constant while the purchasing power of the currency measuring it declines.
Gold is an actual physical market replete with supply/demand balances as well. One of the great propellers of gold’s move higher between 2004 and 2008 was the income effect in India, Dubai, and other markets where gold was purchased, as it always had been, with newly acquired paper money.
This last factor allowed gold to rise during the period between 2004 and 2006 when short-term interest rates were rising. We can map the excess of expected inflation as derived from the TIPS market over the three-month repo rate against the price of gold both in US dollar terms and in dollars adjusted for changes in the dollar index. Once the Federal Reserve began its loose-goose response to the financial crisis in August 2007, marked with a magenta line, gold began to track the net expected inflation measure closely.
The net expected inflation measure peaked on January 11, 2010 at 2.415%, and has lost almost 30 basis points since then. Gold peaked on December 2, 2009 in USD terms; in dollar index-adjusted terms, it peaked much later, March 2, 2010.
The implications are astonishing: Years of ultra-low interest rates, global competitive devaluation of currencies, sovereign debt crises, and fiscal policy out of a Fellini movie have pushed gold so far but have been unable to push it further. The yellow metal needs an exponentially greater level of irresponsibility. Will you do your part?
Euro Gold
The picture changes if we look at gold priced in euros and construct a similar net expected inflation measure for the eurozone. Here gold rose along with the aforementioned increase in physical demand even as net expected inflation declined into the financial crisis of 2008, once again marked with a magenta line. Interestingly, the pace of gold’s ascent didn’t change materially before and after September 29, 2008: The two periods are identical at 80.6% confidence.
Gold’s recent rate of ascent in euro terms exceeds the change in net expected inflation. The idea that Europeans eager to hedge their continent’s woes are fleeing to gold and not to those once-scorned dollars isn’t supported in the data. Both measures have declined in recent weeks; net expected inflation peaked on February 19, 2010 and gold on March 5, 2010. The dollar has gained more than 2.05% against the euro on a full-carry basis since February 19, 2010.
Yes, we need more irresponsibility here in our global village. Some real Bugs Bunny, Zimbabwe numbers on inflation will do the trick. But then why would you ever sell your gold to get the paper money to buy food; were you planning on carrying your stash around with you?
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http://www.minyanville.com/investing/articles/gold-precious-metals-USD-index-correlation/3/29/2010/id/27508?page=full
Gold Provides Invaluable Insight
By Przemyslaw Radomski Mar 29, 2010 8:05 am
Its relationship with the USD Index suggests that precious metals are ready to move higher.
In China News and Recent Moves in the Dollar Index, I analyzed the situation on the USD Index, and because it has just moved sharply higher, I believe you'd appreciate an update. After covering the situation on the US Dollar market, I'll move to the implications it may have on the precious metals sector.
Moving on to the technical part of this week's update, let's begin with the long-term chart:
Source: StockCharts.com
Previously I mentioned that I saw the USD Index break below the up-trending channel line. This move was confirmed with three consecutive closes below the lower channel trend line, so the next significant move in the index is likely to be down.
Well, by definition, from time to time unlikely has to occur, and this is what we've seen this week as the USD Index rallied dramatically higher. This week the USD Index pierced the lower border of the previous trading
channel and once again moved inside of it. However, there is still a lot of evidence that this rally isn't going to last because the latest upswing is knocking up against resistance at the Fibonacci 50% retracement level of the previous decline (March to December 2009). Key Fibonacci levels have historically been reliable in identifying key support and resistance, especially on the US Dollar market.
In addition, the Relative Strength Index (RSI) is right at the 70 level and, looking at when this was the case, in the past four out of five times at least a small rally took place in the precious metals market. Therefore, the long-term USD Index chart suggests higher precious metal prices. Let's take a look at the short-term chart for more detailed view.
Source: StockCharts.com
What is even more visible on the short-term chart than it was with the long-term one is the way precious metals reacted to the recent strength in the US Dollar. Please note that even though the USD Index had a significant rally, Gold and Silver were basically unharmed as they moved down just slightly. I realize that the very recent downswing in precious metals might have appeared dramatic on a day-to-day basis; it's much less so when one compares it to the analogous move in the US Dollar. This certainly bodes well for the possibility of higher prices in the precious metals going forward.Therefore, despite this week’s price appreciation in the USD Index, I'm still not bullish on this market. Given the historical significance of the RSI being at 70 and the fact that the USD Index has just touched the 50% retracement of the previous rally leads us to anticipate that the recent USD Index rally will stall out and retrace. In addition, a rally for precious metals and precious metal stocks is looking more and more probable.
Additional details regarding the correlation between the USD Index and the precious metals can be found in our correlation matrix:
The main thing to notice on the correlation matrix this week is how we're starting to return to the highly negative correlation between the US Dollar and the precious metals. Look over the last 10 trading days how that the Gold/USD, Silver/USD, and HUI/USD are all starting to increasingly get more negative.
Additionally, please take a look at the 30-day column and the values of correlation coefficients between Gold and USD Index/S&P 500. What is particularly interesting is the fact that for the first time in many weeks the correlation between gold and USD Index is stronger than with the general stock market. Moreover, that is also the case with the HUI Index.
When I commented on the correlation matrix last week, I wrote:
These values are nothing to call home about per se, but once you compare them with the values from the previous week we see that they have all declined, suggesting that perhaps we won't have to wait too long for the return of the strong negative correlation between precious metals and the USD Index.
This week, I see stronger evidence of the return of the negative correlation between gold and USD Index, which (as mentioned two weeks ago) is one of the things that would indicate that the precious metal market is ready to move higher.
Summing up, the USD Index moved to its resistance level after having rallied strongly. This rally caused gold to move lower, but its decline was relatively small. This is bullish for precious metals in two ways. Firstly, it means that gold is once again becoming negatively correlated with the USD Index, which in the past meant that precious metals are ready to move higher. Secondly, it suggests that the gold market is strong, as it has held up relatively well.
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Sell-off in US Treasuries raises sovereign debt fears
http://www.telegraph.co.uk/finance/economics/7533014/Sell-off-in-US-Treasuries-raises-sovereign-debt-fears.html
Investors are braced for a further sell-off in US Treasuries after dramatic moves last week raised fears that the surfeit of US government debt is starting to saturate bond markets.
By Ambrose Evans-Pritchard
Published: 9:06PM BST 28 Mar 2010
Comments 26 | Comment on this article
The yield on 10-year Treasuries – the benchmark price of global capital – surged 30 basis points in just two days last week to over 3.9pc, the highest level since the Lehman crisis. Alan Greenspan, ex-head of the US Federal Reserve, said the abrupt move may be "the canary in the coal mine", a warning to Washington that it can no longer borrow with impunity. He said there is a "huge overhang of federal debt, which we have never seen before".
David Rosenberg at Gluskin Sheff said Treasury yields have ratcheted up 90 basis points since December in a "destabilising fashion", for the wrong reasons. Growth has not been strong enough to revive fears of inflation. Commodity prices peaked in January and US home sales have fallen for the last three months, pointing to a double-dip in the housing market.
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Mr Rosenberg said the yield spike recalls the move in the spring of 2007 just as the credit system started to unravel. "The question is how the equity market is going to handle this back-up in rates," he said.
The trigger for last week's sell-off was poor demand at Treasury auctions, linked to the passage of the Obama health care reform. Critics say it will add $1 trillion (£670bn) to America's debt over the next decade, a claim disputed fiercely by Democrats.
It is unclear whether China is selling US Treasuries after cutting its holdings for three months in a row, or what its motive may be. There are concerns that Beijing may be sending a coded message before the US Treasury rules next month on whether China is a "currency manipulator", though experts say China is clearly still buying dollar assets because it is holding down the yuan against the greenback. Some investors may be selling Treasuries as a precaution against a trade spat.
Looming over everything is the worry that markets will not be able to absorb the glut of US debt as the Fed winds down its policy of bond purchases, starting with an exit from mortgage-backed securities. It currently holds a quarter of the $5 trillion of the MBS market.
The rise in US bond yields has set off mayhem in the 10-year US swaps markets. Spreads turned negative last week, touching the lowest level in 20 years. The effect was to drive credit costs for high-grade companies such as Berkshire Hathaway below that of the US government. This may have been a technical aberration.
Investors are braced for a further sell-off in US Treasuries after dramatic moves last week raised fears that the surfeit of US government debt is starting to saturate bond markets.
By Ambrose Evans-Pritchard
Published: 9:06PM BST 28 Mar 2010
Comments 26 | Comment on this article
The yield on 10-year Treasuries – the benchmark price of global capital – surged 30 basis points in just two days last week to over 3.9pc, the highest level since the Lehman crisis. Alan Greenspan, ex-head of the US Federal Reserve, said the abrupt move may be "the canary in the coal mine", a warning to Washington that it can no longer borrow with impunity. He said there is a "huge overhang of federal debt, which we have never seen before".
David Rosenberg at Gluskin Sheff said Treasury yields have ratcheted up 90 basis points since December in a "destabilising fashion", for the wrong reasons. Growth has not been strong enough to revive fears of inflation. Commodity prices peaked in January and US home sales have fallen for the last three months, pointing to a double-dip in the housing market.
Related Articles
*
US to reap $7bn profit from Citigroup stake sale
*
DMO seals biggest syndicated gilt sale ever
*
Bond vigilantes set for rebellion against the West's wasteful ways
*
Bond markets defy Fed as Treasury yields spike
*
Gilts continue to slide as Budget 2009 sparks UK sovereign rating fears
*
Borrowing puts UK's AAA rating in danger after Budget 2009
Mr Rosenberg said the yield spike recalls the move in the spring of 2007 just as the credit system started to unravel. "The question is how the equity market is going to handle this back-up in rates," he said.
The trigger for last week's sell-off was poor demand at Treasury auctions, linked to the passage of the Obama health care reform. Critics say it will add $1 trillion (£670bn) to America's debt over the next decade, a claim disputed fiercely by Democrats.
It is unclear whether China is selling US Treasuries after cutting its holdings for three months in a row, or what its motive may be. There are concerns that Beijing may be sending a coded message before the US Treasury rules next month on whether China is a "currency manipulator", though experts say China is clearly still buying dollar assets because it is holding down the yuan against the greenback. Some investors may be selling Treasuries as a precaution against a trade spat.
Looming over everything is the worry that markets will not be able to absorb the glut of US debt as the Fed winds down its policy of bond purchases, starting with an exit from mortgage-backed securities. It currently holds a quarter of the $5 trillion of the MBS market.
The rise in US bond yields has set off mayhem in the 10-year US swaps markets. Spreads turned negative last week, touching the lowest level in 20 years. The effect was to drive credit costs for high-grade companies such as Berkshire Hathaway below that of the US government. This may have been a technical aberration.
JP Morgan Whistleblower Injured in Hit and Run Accident the Day After Testifying
By MICHAEL GRAY
Last Updated: 4:51 AM, March 29, 2010
Posted: 12:37 AM, March 29, 2010
A London-based precious-metals trader who had accused JPMorgan Chase of manipulating the gold and silver markets was involved in a bizarre weekend car accident that triggered a police chase before the suspect was nabbed.
Andrew Maguire, a metals trader at the London Bullion Market Association, and his wife were traveling in their car when a second car coming out of a side street struck their vehicle. That car then hit two more vehicles before fleeing.
London cops using helicopters and patrol cars chased the hit-and-run driver before nabbing that person, whose name has not been released by authorities.
Maguire and his wife were released from the hospital yesterday. London police would not comment on the accident investigation.
The hit and run occurred after Maguire's name came to light Thursday during a US Commodities Futures Trading Commission hearing on limiting gold and silver positions held by large market participants in order to prevent manipulation.
During the hearing, Maguire was identified as having sent e-mails to Bart Chilton, a CFTC commissioner, and Eliud Ramirez, head of the commission's enforcement division, alleging that JPMorgan had used its massive metals positions to manipulate the commodities markets.
In one e-mail, Maguire wrote, "It is common knowledge here in London among the metals traders that it is JPM's intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits," referring to last week's CFTC hearings.
JPMorgan inherited the positions when it acquired Bear Stearns two years ago.
When the allegations first surfaced last week, JPMorgan declined to comment.
Read more: http://www.nypost.com/p/news/business/jpmorgan_chase_story_in_uk_DsMN4PnXFoQG5KdevIsQ7N#ixzz0jglILlqP
Last Updated: 4:51 AM, March 29, 2010
Posted: 12:37 AM, March 29, 2010
A London-based precious-metals trader who had accused JPMorgan Chase of manipulating the gold and silver markets was involved in a bizarre weekend car accident that triggered a police chase before the suspect was nabbed.
Andrew Maguire, a metals trader at the London Bullion Market Association, and his wife were traveling in their car when a second car coming out of a side street struck their vehicle. That car then hit two more vehicles before fleeing.
London cops using helicopters and patrol cars chased the hit-and-run driver before nabbing that person, whose name has not been released by authorities.
Maguire and his wife were released from the hospital yesterday. London police would not comment on the accident investigation.
The hit and run occurred after Maguire's name came to light Thursday during a US Commodities Futures Trading Commission hearing on limiting gold and silver positions held by large market participants in order to prevent manipulation.
During the hearing, Maguire was identified as having sent e-mails to Bart Chilton, a CFTC commissioner, and Eliud Ramirez, head of the commission's enforcement division, alleging that JPMorgan had used its massive metals positions to manipulate the commodities markets.
In one e-mail, Maguire wrote, "It is common knowledge here in London among the metals traders that it is JPM's intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits," referring to last week's CFTC hearings.
JPMorgan inherited the positions when it acquired Bear Stearns two years ago.
When the allegations first surfaced last week, JPMorgan declined to comment.
Read more: http://www.nypost.com/p/news/business/jpmorgan_chase_story_in_uk_DsMN4PnXFoQG5KdevIsQ7N#ixzz0jglILlqP
Could the Dollar strengthen along with the stock market?
Goldman Capitulation on Dollar Shows Reversal on U.S. (Update3)
http://www.bloomberg.com/apps/news?pid=20601010&sid=aygrT1tq5K3E
By Oliver Biggadike and Inyoung Hwang
March 29 (Bloomberg) -- The strengthening U.S. economy, subdued inflation and rising stock prices are propelling the dollar rally into its fifth month as traders seek refuge from Europe’s fiscal crisis and Japanese deflation.
Goldman Sachs Group Inc. and Citigroup Inc. ended bets on a falling dollar last week after the trades lost 2.8 percent. Strategists are raising greenback forecasts at the fastest pace since last March, just before U.S. stimulus efforts that poured as much as $12.8 trillion into the economy ended the currency’s strongest rally in 28 years. Median predictions for the dollar against 47 currencies tracked in Bloomberg surveys rose an average of 1.4 percentage points in the month to March 24.
A year after correctly predicting the currency’s decline and likening it to the fall of Rome, Royal Bank of Scotland Group Plc’s Alan Ruskin said it may soar 22 percent to $1.10 per euro if Greece defaults.
“We’ve moved away from the worst fears,” said Ruskin, the head of currency strategy for RBS Capital Markets in Stamford, Connecticut. “In the U.S., the economy picked itself up off the ground,” he said in an interview. “Compared to what it might have looked like from the view of March 2009, March 2010 looks very good.”
The U.S. Labor Department will report on April 2 that 190,000 jobs were created this month, the most in three years, according to the median estimate of 62 economists surveyed by Bloomberg. The Standard & Poor’s 500 Index has gained 5.6 percent in March, and the latest report on consumer prices showed the cost of living was unchanged in February, ensuring inflation won’t cut off the recovery.
Lagging Growth
Consumer prices in Japan, meanwhile, fell for a 12th month in February, the government reported March 26. The Organization for Economic Cooperation and Development said the same day that the nation’s potential growth rate between 2011 and 2017 will be the lowest among Group of Seven at 0.9 percent.
Leaders of the 16-nation euro region sought International Monetary Fund help to respond to Greece’s budget crisis. Portugal’s credit rating was cut one step by Fitch Ratings to AA- with a “negative” outlook, meaning there may be more downgrades.
“We have clearly underestimated the impact on the euro from the European sovereign crisis,” Goldman analysts led by Thomas Stolper in London said in a March 25 e-mail. “Building consensus among euro-zone members is becoming increasingly difficult,” they wrote, explaining Goldman’s decision to exit the bullish euro bet it made two weeks earlier. “These political headwinds currently matter far more for the euro than the cyclical factors.”
‘Inopportune’ Timing
Citigroup cut its losses on a similar trade after deciding its timing had been “inopportune,” strategists Todd Elmer in New York and Michael Hart in London wrote in a March 25 note.
Sentiment toward the dollar is shifting on optimism the currency’s best run since 2008 will be invigorated as Federal Reserve Chairman Ben S. Bernanke stops printing money and raises borrowing costs amid predictions the U.S. economy will grow twice as fast as Europe’s and Japan’s.
The dollar gained against all 15 major currencies tracked by Bloomberg last week except the Mexican peso, rising 1.1 percent to $1.3410 per euro, 0.8 percent to $1.4898 per pound and 2.2 percent to 92.52 yen. The Intercontinental Exchange Inc. Dollar Index is up 1.2 percent in March after gaining in each of the past three months.
Playing Catch-Up
The rally has been fueled by Greece’s debt-and-deficit crisis, which sparked speculation the euro region would suffer its first default or dissolve. Forecasters are trying to catch up with the euro’s decline. The median euro prediction has it at $1.36 by the end of the year, down from an estimate of $1.48 in December.
The Fed’s printing of dollars last year prompted Royal Bank of Scotland to predict in June the euro would appreciate to $1.40 by the end of 2009.
“The psychological impact should not be underestimated,” Ruskin wrote last March of the central bank’s quantitative- easing program. “This is an historic moment -- the start of debasement of the world’s reserve currency -- and it feels to many participants that in the grand sweep of history we are witnessing the end of ‘Rome’ on the Potomac.”
By last week, modern-day fiscal turmoil centered on the ancient city of Athens had prompted Ruskin to reverse course on the euro. “If major contagion occurs, we could go down to $1.15,” he said. “If it looks like one country is going to get cleaved off or there’s a default in the euro area, $1.10 would not be unreasonable.”
Loans for Greece
European leaders agreed last week to provide Greece with a mix of IMF and bilateral loans at market rates if the country runs out of fund-raising options. The accord didn’t specify what events would trigger the plan.
Greece is selling 5 billion euros ($6.7 billion) of seven- year bonds today. The securities will be priced to yield 310 basis points more than the benchmark mid-swap rate, according to a banker involved in the transaction, who declined to be identified before the sale is completed.
Dennis Gartman, the economist who correctly predicted in June 2008 that commodities would tumble, said the agreement doesn’t solve the euro region’s problems.
“This just pastes them over for a short period of time,” Gartman, who publishes a daily market commentary from Suffolk, Virginia, said on Bloomberg Television March 26. “The problem of Greece is just the first. Portugal lies next, Spain behind it, Italy behind that. This is not a pretty picture.”
‘Huge Issue’
Gartman predicted the euro will sink to as low as $1 within three years. The cost of protecting Portugal’s debt from default has risen 151 percent in the past six months, the second most in the world behind Greece, followed by increases of at least 52 percent for the U.S., France, the U.K., Belgium, Spain and Italy, credit-default swap data compiled by Bloomberg show.
“The Greek fiscal crisis may be over for now, but sovereign stress is likely to remain a huge issue in the euro area for years to come,” said David Mackie, the chief European economist at JPMorgan Chase & Co. in London, in a March 26 note.
Dollar gains may be limited by U.S. investors sending money overseas in search of higher yields as stocks worldwide climb. The MSCI World Index of developed market equities gained 42 percent in the past year as the MSCI Emerging Markets Index rose 66 percent.
‘Reserve Accumulation’
“We expect strong flows into emerging markets that will translate into reserve accumulation and diversification into the euro out of dollar,” said Daniel Katzive, a currency strategist at Credit Suisse Group AG in New York, who sees the dollar falling 6.2 percent to $1.43 per euro in three months. “It’s not just about recovery. It’s about how central banks respond to that recovery. We’ve seen the dollar weaken through a U.S. recovery if monetary policy is very accommodative.”
At this time last year, the Dollar Index was starting to slide after rising 21 percent in the previous nine months, the quickest gain since 1981, as investors sought the safety of U.S. assets amid the global credit crisis.
Then the Fed began to expand its quantitative-easing program, with $1.15 trillion in debt purchases to shore up credit markets. The currency declined 14.9 percent against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona in nine months, the fastest drop since 1987 as measured by the Dollar Index.
Now futures traders are more optimistic on the greenback than any time since 1999, the year the European Union’s shared currency was introduced. Hedge funds and other large speculators had 74,917 more wagers the dollar would rise than contracts that profit from it falling as of March 23, the widest gap on record, Commodity Futures Trading Commission data show.
Inflation Mandate
Investors last year placed too much emphasis on the European Central Bank’s mandate to fight inflation when they bet on euro gains, said Marshall Gittler, the chief strategist for the international division at Deutsche Bank Private Wealth Management in Geneva. He predicts the dollar will gain as much as 5 percent this year against the yen as the Fed raises rates.
“All the majors are suffering from the same fiscal crises, but just at different speeds and severity; the market tends to target them in rotation,” Gittler said. “The euro’s the one out of fashion right now.”
The U.S. economy will expand 3 percent this year, outpacing the 1.1 percent growth in the 16 nations using the euro and 1.9 percent in Japan, the median estimates of as many as 53 economists show.
“The U.S. is always faster out of a recession than Europe or Japan; this is a cyclical rally in the dollar,” said Stuart Thomson, a money manager at Ignis Asset Management in Glasgow who helps oversee about $107 billion. He predicts the dollar will reach $1.26 per euro and 100 yen by the end of the year.
Rate Increases
The Fed will start raising its benchmark rate by Sept. 30 as the ECB and policy makers in Japan, the U.K., stand pat until at least the fourth quarter, consensus forecasts show.
“If you look at what’s happening today, it’s really a dollar move led by rates,” said David Tien, a money manager in New York who helps Fischer Francis Trees & Watts invest $19 billion. Tien predicts the euro will fall to $1.23 by Dec. 31. “So while some might say this is the euro getting destroyed, I take this as more of dollar strength coming through,” he said.
John Taylor, who oversees the world’s largest currency hedge fund as chairman of FX Concepts Inc. in New York, predicts the dollar will gain 12 percent to $1.20 per euro by August.
“The whole world’s been negative on the dollar since 2002,” said Taylor, who manages $9 billion. “Those people who are calling for the euro to go up are thinking the stock market is going to continue higher and that the euro zone problem is not going to spin out of control. I disagree with both of these things.”
To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net
Last Updated: March 29, 2010 10:44 EDT
http://www.bloomberg.com/apps/news?pid=20601010&sid=aygrT1tq5K3E
By Oliver Biggadike and Inyoung Hwang
March 29 (Bloomberg) -- The strengthening U.S. economy, subdued inflation and rising stock prices are propelling the dollar rally into its fifth month as traders seek refuge from Europe’s fiscal crisis and Japanese deflation.
Goldman Sachs Group Inc. and Citigroup Inc. ended bets on a falling dollar last week after the trades lost 2.8 percent. Strategists are raising greenback forecasts at the fastest pace since last March, just before U.S. stimulus efforts that poured as much as $12.8 trillion into the economy ended the currency’s strongest rally in 28 years. Median predictions for the dollar against 47 currencies tracked in Bloomberg surveys rose an average of 1.4 percentage points in the month to March 24.
A year after correctly predicting the currency’s decline and likening it to the fall of Rome, Royal Bank of Scotland Group Plc’s Alan Ruskin said it may soar 22 percent to $1.10 per euro if Greece defaults.
“We’ve moved away from the worst fears,” said Ruskin, the head of currency strategy for RBS Capital Markets in Stamford, Connecticut. “In the U.S., the economy picked itself up off the ground,” he said in an interview. “Compared to what it might have looked like from the view of March 2009, March 2010 looks very good.”
The U.S. Labor Department will report on April 2 that 190,000 jobs were created this month, the most in three years, according to the median estimate of 62 economists surveyed by Bloomberg. The Standard & Poor’s 500 Index has gained 5.6 percent in March, and the latest report on consumer prices showed the cost of living was unchanged in February, ensuring inflation won’t cut off the recovery.
Lagging Growth
Consumer prices in Japan, meanwhile, fell for a 12th month in February, the government reported March 26. The Organization for Economic Cooperation and Development said the same day that the nation’s potential growth rate between 2011 and 2017 will be the lowest among Group of Seven at 0.9 percent.
Leaders of the 16-nation euro region sought International Monetary Fund help to respond to Greece’s budget crisis. Portugal’s credit rating was cut one step by Fitch Ratings to AA- with a “negative” outlook, meaning there may be more downgrades.
“We have clearly underestimated the impact on the euro from the European sovereign crisis,” Goldman analysts led by Thomas Stolper in London said in a March 25 e-mail. “Building consensus among euro-zone members is becoming increasingly difficult,” they wrote, explaining Goldman’s decision to exit the bullish euro bet it made two weeks earlier. “These political headwinds currently matter far more for the euro than the cyclical factors.”
‘Inopportune’ Timing
Citigroup cut its losses on a similar trade after deciding its timing had been “inopportune,” strategists Todd Elmer in New York and Michael Hart in London wrote in a March 25 note.
Sentiment toward the dollar is shifting on optimism the currency’s best run since 2008 will be invigorated as Federal Reserve Chairman Ben S. Bernanke stops printing money and raises borrowing costs amid predictions the U.S. economy will grow twice as fast as Europe’s and Japan’s.
The dollar gained against all 15 major currencies tracked by Bloomberg last week except the Mexican peso, rising 1.1 percent to $1.3410 per euro, 0.8 percent to $1.4898 per pound and 2.2 percent to 92.52 yen. The Intercontinental Exchange Inc. Dollar Index is up 1.2 percent in March after gaining in each of the past three months.
Playing Catch-Up
The rally has been fueled by Greece’s debt-and-deficit crisis, which sparked speculation the euro region would suffer its first default or dissolve. Forecasters are trying to catch up with the euro’s decline. The median euro prediction has it at $1.36 by the end of the year, down from an estimate of $1.48 in December.
The Fed’s printing of dollars last year prompted Royal Bank of Scotland to predict in June the euro would appreciate to $1.40 by the end of 2009.
“The psychological impact should not be underestimated,” Ruskin wrote last March of the central bank’s quantitative- easing program. “This is an historic moment -- the start of debasement of the world’s reserve currency -- and it feels to many participants that in the grand sweep of history we are witnessing the end of ‘Rome’ on the Potomac.”
By last week, modern-day fiscal turmoil centered on the ancient city of Athens had prompted Ruskin to reverse course on the euro. “If major contagion occurs, we could go down to $1.15,” he said. “If it looks like one country is going to get cleaved off or there’s a default in the euro area, $1.10 would not be unreasonable.”
Loans for Greece
European leaders agreed last week to provide Greece with a mix of IMF and bilateral loans at market rates if the country runs out of fund-raising options. The accord didn’t specify what events would trigger the plan.
Greece is selling 5 billion euros ($6.7 billion) of seven- year bonds today. The securities will be priced to yield 310 basis points more than the benchmark mid-swap rate, according to a banker involved in the transaction, who declined to be identified before the sale is completed.
Dennis Gartman, the economist who correctly predicted in June 2008 that commodities would tumble, said the agreement doesn’t solve the euro region’s problems.
“This just pastes them over for a short period of time,” Gartman, who publishes a daily market commentary from Suffolk, Virginia, said on Bloomberg Television March 26. “The problem of Greece is just the first. Portugal lies next, Spain behind it, Italy behind that. This is not a pretty picture.”
‘Huge Issue’
Gartman predicted the euro will sink to as low as $1 within three years. The cost of protecting Portugal’s debt from default has risen 151 percent in the past six months, the second most in the world behind Greece, followed by increases of at least 52 percent for the U.S., France, the U.K., Belgium, Spain and Italy, credit-default swap data compiled by Bloomberg show.
“The Greek fiscal crisis may be over for now, but sovereign stress is likely to remain a huge issue in the euro area for years to come,” said David Mackie, the chief European economist at JPMorgan Chase & Co. in London, in a March 26 note.
Dollar gains may be limited by U.S. investors sending money overseas in search of higher yields as stocks worldwide climb. The MSCI World Index of developed market equities gained 42 percent in the past year as the MSCI Emerging Markets Index rose 66 percent.
‘Reserve Accumulation’
“We expect strong flows into emerging markets that will translate into reserve accumulation and diversification into the euro out of dollar,” said Daniel Katzive, a currency strategist at Credit Suisse Group AG in New York, who sees the dollar falling 6.2 percent to $1.43 per euro in three months. “It’s not just about recovery. It’s about how central banks respond to that recovery. We’ve seen the dollar weaken through a U.S. recovery if monetary policy is very accommodative.”
At this time last year, the Dollar Index was starting to slide after rising 21 percent in the previous nine months, the quickest gain since 1981, as investors sought the safety of U.S. assets amid the global credit crisis.
Then the Fed began to expand its quantitative-easing program, with $1.15 trillion in debt purchases to shore up credit markets. The currency declined 14.9 percent against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona in nine months, the fastest drop since 1987 as measured by the Dollar Index.
Now futures traders are more optimistic on the greenback than any time since 1999, the year the European Union’s shared currency was introduced. Hedge funds and other large speculators had 74,917 more wagers the dollar would rise than contracts that profit from it falling as of March 23, the widest gap on record, Commodity Futures Trading Commission data show.
Inflation Mandate
Investors last year placed too much emphasis on the European Central Bank’s mandate to fight inflation when they bet on euro gains, said Marshall Gittler, the chief strategist for the international division at Deutsche Bank Private Wealth Management in Geneva. He predicts the dollar will gain as much as 5 percent this year against the yen as the Fed raises rates.
“All the majors are suffering from the same fiscal crises, but just at different speeds and severity; the market tends to target them in rotation,” Gittler said. “The euro’s the one out of fashion right now.”
The U.S. economy will expand 3 percent this year, outpacing the 1.1 percent growth in the 16 nations using the euro and 1.9 percent in Japan, the median estimates of as many as 53 economists show.
“The U.S. is always faster out of a recession than Europe or Japan; this is a cyclical rally in the dollar,” said Stuart Thomson, a money manager at Ignis Asset Management in Glasgow who helps oversee about $107 billion. He predicts the dollar will reach $1.26 per euro and 100 yen by the end of the year.
Rate Increases
The Fed will start raising its benchmark rate by Sept. 30 as the ECB and policy makers in Japan, the U.K., stand pat until at least the fourth quarter, consensus forecasts show.
“If you look at what’s happening today, it’s really a dollar move led by rates,” said David Tien, a money manager in New York who helps Fischer Francis Trees & Watts invest $19 billion. Tien predicts the euro will fall to $1.23 by Dec. 31. “So while some might say this is the euro getting destroyed, I take this as more of dollar strength coming through,” he said.
John Taylor, who oversees the world’s largest currency hedge fund as chairman of FX Concepts Inc. in New York, predicts the dollar will gain 12 percent to $1.20 per euro by August.
“The whole world’s been negative on the dollar since 2002,” said Taylor, who manages $9 billion. “Those people who are calling for the euro to go up are thinking the stock market is going to continue higher and that the euro zone problem is not going to spin out of control. I disagree with both of these things.”
To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net
Last Updated: March 29, 2010 10:44 EDT
Monday, March 29, 2010
Crimes and Corruupton Too Big to Jail
Crimes-Corruption
Too Big To Jail? DoJ: Wall St. Bailout Buds 'Co-Conspirators' In Plot To Rip Off State, Local Governments
Published on 03-28-2010 Email To Friend Print Version
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Source: Crooks And Liars
Municipal bonds are where a lot of the political kickbacks and corrupt deals are typically hidden, so I can't say I'm surprised. In fact, it's sort of funny that the governments dealing with these guys apparently thought they could trust them, considering how crooked the business is. Lie down with dogs, rise up with fleas, as the nuns used to say:
March 26 (Bloomberg) -- JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case.
A government list of previously unidentified “co-conspirators” contains more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, two of General Electric Co.’s financial businesses and Salomon Smith Barney, the former unit of Citigroup Inc., according to documents filed in U.S. District Court in Manhattan on March 24.
Gee, look how many were firms that were already taking money from us on the front end. They wanted the back end, too?
The papers were filed by attorneys for a former employee of CDR Financial Products Inc., an advisory firm indicted in October. The attorneys, as part of their legal filing, identified the roster as being provided by the government. The document is labeled “list of co-conspirators.”
None of the firms or individuals named on the list has been charged with wrongdoing. The court records mark the first time these companies have been identified as co-conspirators. They provide the broadest look yet at alleged collusion in the $2.8 trillion municipal securities market that the government says delivered profits to Wall Street at taxpayers’ expense.
Excuse me while I rush to my fainting couch. I'm a little dizzy from the shock.
“If the government is saying they are co-conspirators, the government believes they have sufficient evidence that they can show they were part of the conspiracy,” said Richard Donovan, a partner at New York-based law firm Kelley Drye & Warren LLP and co-chair of its antitrust practice. Donovan isn’t involved in the case.
The government’s case centers on investments known as guaranteed investment contracts that cities, states and school districts buy with the money they receive through municipal bond sales. Some $400 billion of municipal bonds are issued each year, and localities use the contracts to earn a return on some of the money until they need it for construction or other projects.
The Internal Revenue Service sometimes collects earnings on those investments and requires that they be awarded by competitive bidding to ensure that governments receive a fair return. The government charges that CDR ran sham auctions that allowed the banks to pay below-market interest rates to local governments.
[...] Banks may choose to cooperate with prosecutors because in light of the government bailout funds they’ve received “a guilty plea would just be an absolute disaster for some of these companies,” said Nathan Muyskens, a partner at Shook, Hardy & Bacon in Washington and former trial attorney with the Federal Trade Commission’s Bureau of Competition.
“There have been antitrust investigations where there have been companies involved that were just never indicted,” he said in a phone interview.
Yes, this is what's now known as "too big to jail." Why, they're too big for just about anything!
At the same time, the government will probably focus on seeking to convict individual bankers, he said.
“When someone goes to jail for five years, that resonates,” he said. “When a company pays $200 million, it’s simply a balance sheet issue. Jail time is what captures corporate America’s attention.”
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Too Big To Jail? DoJ: Wall St. Bailout Buds 'Co-Conspirators' In Plot To Rip Off State, Local Governments
Published on 03-28-2010 Email To Friend Print Version
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Source: Crooks And Liars
Municipal bonds are where a lot of the political kickbacks and corrupt deals are typically hidden, so I can't say I'm surprised. In fact, it's sort of funny that the governments dealing with these guys apparently thought they could trust them, considering how crooked the business is. Lie down with dogs, rise up with fleas, as the nuns used to say:
March 26 (Bloomberg) -- JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case.
A government list of previously unidentified “co-conspirators” contains more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, two of General Electric Co.’s financial businesses and Salomon Smith Barney, the former unit of Citigroup Inc., according to documents filed in U.S. District Court in Manhattan on March 24.
Gee, look how many were firms that were already taking money from us on the front end. They wanted the back end, too?
The papers were filed by attorneys for a former employee of CDR Financial Products Inc., an advisory firm indicted in October. The attorneys, as part of their legal filing, identified the roster as being provided by the government. The document is labeled “list of co-conspirators.”
None of the firms or individuals named on the list has been charged with wrongdoing. The court records mark the first time these companies have been identified as co-conspirators. They provide the broadest look yet at alleged collusion in the $2.8 trillion municipal securities market that the government says delivered profits to Wall Street at taxpayers’ expense.
Excuse me while I rush to my fainting couch. I'm a little dizzy from the shock.
“If the government is saying they are co-conspirators, the government believes they have sufficient evidence that they can show they were part of the conspiracy,” said Richard Donovan, a partner at New York-based law firm Kelley Drye & Warren LLP and co-chair of its antitrust practice. Donovan isn’t involved in the case.
The government’s case centers on investments known as guaranteed investment contracts that cities, states and school districts buy with the money they receive through municipal bond sales. Some $400 billion of municipal bonds are issued each year, and localities use the contracts to earn a return on some of the money until they need it for construction or other projects.
The Internal Revenue Service sometimes collects earnings on those investments and requires that they be awarded by competitive bidding to ensure that governments receive a fair return. The government charges that CDR ran sham auctions that allowed the banks to pay below-market interest rates to local governments.
[...] Banks may choose to cooperate with prosecutors because in light of the government bailout funds they’ve received “a guilty plea would just be an absolute disaster for some of these companies,” said Nathan Muyskens, a partner at Shook, Hardy & Bacon in Washington and former trial attorney with the Federal Trade Commission’s Bureau of Competition.
“There have been antitrust investigations where there have been companies involved that were just never indicted,” he said in a phone interview.
Yes, this is what's now known as "too big to jail." Why, they're too big for just about anything!
At the same time, the government will probably focus on seeking to convict individual bankers, he said.
“When someone goes to jail for five years, that resonates,” he said. “When a company pays $200 million, it’s simply a balance sheet issue. Jail time is what captures corporate America’s attention.”
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The Vulcan Report - Opening Bell US Session - 29 Monday 2010.mp4
Central Banks Stashing Away Gold at Brisk Pace
Published on 03-27-2010 Email To Friend Print Version
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Source: MoneyNews.com
Central banks around the world added 425.4 metric tons of gold to their reserves last year, the biggest increase since 1964, according to the World Gold Council.
That represents a 1.4 percent gain to put their holdings at 30,116.9 tons in total. The increase was the first since 1988.
Central banks in India, Russia and China were among those boosting their gold reserves last year, as the precious metal jumped 24 percent, hitting a record of $1,226 an ounce in December.
Central banks now possess 18 percent of all gold ever mined.
“There’s clearly been a renaissance of gold in central bankers’ minds,” Nick Moore, an analyst at Royal Bank of Scotland, told Bloomberg.
“It’s not just been central banks taking on gold, but a general shift for physical gold in the investment sector.”
Many are now singing gold’s praises, with the precious metal up about 3 percent so far this year.
“Gold is quietly, at the edge, becoming the world’s second reservable currency, supplanting the euro and rivaling the dollar,” money manager Dennis Gartman wrote in his Gartman Letter, obtained by Bloomberg.
“The trend shall continue months, if not years, into the future.”
David Skarica, editor of The Gold Stock Adviser, tells Moneynews.com that central banks will continue to buy gold.
“The next lot sold by the IMF (International Monetary Fund) will go to China’s central bank,” he said. “The IMF has a supply overhang.”
Sunday, March 28, 2010
I told you that GOLD and SILVER is being manipulated!!!!
See Evidence below
http://jessescrossroadscafe.blogspot.com/2010/03/bombshell-whistleblower-steps-forward.html
25 March 2010
Whistleblower Speaks Out On J. P. Morgan's Market Manipulation - Reports Violations to the CFTC in the Silver Market
Do we have another Harry Markopolos here, describing in detail the manipulation of the silver markets by J.P. Morgan to the CFTC? How does this square with the testimony today from the CFTC Commissioners, who seem to indicate that the markets are functioning extremely well, and that investor can have full confidence in them?
I am led to understand that Mr. McGuire had offered to testify before the CFTC today, and that he was refused admittance. I do not know him, or the position he is in within the trading community. I cannot therefore assess his credibility or the validity of any evidence which he may present or possess. But I have the feeling that nothing will come of this.
Remember, there was no action on the Madoff scandal until AFTER his fraud collapsed, and the government was forced to acknowledge Markopolos' existence. He had been ignored and dismissed by the bureaucrats at the SEC for years because of Madoff's power and standing with the trading establishment. And of course by those who had an interest in hiding Madoff's scheme, if nothing else, to promote 'confidence' in the markets.
What seems particularly twisted about this is that JPM is the custodian of the largest silver ETF (SLV). Is anyone auditing that ETF, and watching any conflicts of interest and self-trading? Multiple counterparty claims on the same bullion?
If you ever wanted to see a good reason for the Volcker rule, this is it. These jokers are one of the US' largest banks, with trillions of dollars in unaudited derivatives exposure, and they seem to be engaging in trading practices like Enron did before it collapsed.
Have they lost their minds, or are they just that reckless, immature, short term, and arrogant? Morgan practically holds the keys to the US Treasury, a recent recipient of billions in taxpayer support, and still receiving signficant subsidies from the Fed. They seem to be in dire need of adult supervision. Blatantly and clumsily rigging the silver market, and then bragging about it to people outside their company. What's next, bumping off grannies for their Social Security checks? Three card monte games on the boardwalk?
I was trying to understand why this item struck me so hard this evening. It shocked me in a way that few things do anymore. I think it is because I had unconsciously come to the same conclusion earlier, on my own, in the post where I showed the repeated and obvious bear raids on gold into this option expiration, and it struck a resonant chord when I read McGuire's description of the silver manipulation. I refused to believe it, but apparently there it is. The "Dr. Evil" trading strategy that Citigroup was caught using in the Eurobond markets.
I do not expect the detailed facts on this to ever reach the light of day in my lifetime. The implications are far too political.
ADDITIONAL STATEMENT BY BILL MURPHY, CHAIRMAN OF THE GOLD ANTI-TRUST ACTION COMMITTEE
HEARINGS ON THE METALS MARKETS, MARCH 25, 2010
On March 23, 2010 GATA Director Adrian Douglas was contacted by a whistleblower by the name of Andrew Maguire. Mr. Maguire, formerly of Goldman Sachs, is a metals trader in London. He has been told first hand by traders working for JPMorganChase that JPMorganChase manipulates the precious metals markets and they bragged how they make money doing so.
In November 2009 he contacted the CFTC enforcement division to report this criminal activity. He described in detail the way in which JPM signals to the market its intention to take down the precious metals<. Traders recognize these signals and make money shorting the metals along side JPM. He explained how there are routine market manipulations at the time of option expiry, Non-farm payroll data releases, and Comex contract rollover as well as other ad hoc events.
On February 3 he gave two days advance warning by email to Mr Eliud Ramirez, a senior investigator of the Enforcement Division, that the precious metals would be attacked upon the release of the non-farm payroll data on February 5. Then on February 5 as it played out exactly as predicted further emails were sent to Mr. Ramirez in real time while the manipulation was in progress.
It would not be possible to predict such a market move in advance unless the market was manipulated.
In an email on that day Mr. Maguire said "It is 'common knowledge' here in London amongst the metals traders it is JPM's intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits. I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC allowing by your own definition an illegal concentrated and manipulative position to continue"
Expiry of the COMEX APRIL call options is today. There was large open interest in strikes from $1100 to $1150 in gold. As always happens month after month HSBC and JPM sell short in large quantities to overwhelm all bids and make unsuspecting option holders lose their money. As predicted in advance by GATA the manipulation started on March 19th when gold was trading at $1126. By last night it traded at $1085.
This is how much the gold cartel fears the enforcement division. They thumb their noses at you because in over a decade of complaints and 18 months of a silver market manipulation investigation nothing has been done to stop them. And this is why JPM’s cocky and arrogant traders in London are able to brag that they manipulate the market.
It is an outrage and we are making available the emails from our whistleblower, Andrew Maguire available to the Press wherein he warns in advance of a manipulative event.
Additionally Mr. Maguire informed us that he has taped recordings of his telephone communications with the CFTC for which we are taking the appropriate legal steps to acquire.
-END-
From: Andrew Maguire
Sent: Tuesday, January 26, 2010 12:51 PM
To: Ramirez, Eliud [CFTC]
Cc: Chilton, Bart [CFTC]
Subject: Silver today
Dear Mr. Ramirez:
I thought you might be interested in looking into the silver trading today. It was a good example of how a single seller, when they hold such a concentrated position in the very small silver market, can instigate a selloff at will.
(Note: This is the "Dr. Evil" trading strategy that got Citi rebuked and fined in the Euro Bond markets, and also got Enron into trouble in the energy markets. - Jesse)
These events trade to a regular pattern and we see orchestrated selling occur 100% of the time at options expiry, contract rollover, non-farm payrolls (no matter if the news is bullish or bearish), and in a lesser way at the daily silver fix. I have attached a small presentation to illustrate some of these events. I have included gold, as the same traders to a lesser extent hold a controlling position there too.... I brought to your attention during our meeting how we traders look for the "signals" they (JPMorgan) send just prior to a big move. I saw the first signals early in Asia in thin volume. As traders we profited from this information but that is not the point as I do not like to operate in a rigged market and what is in reality a crime in progress.
As an example, if you look at the trades just before the pit open today you will see around 1,500 contracts sell all at once where the bids were tiny by comparison in the fives and tens. This has the immediate effect of gaining $2,500 per contract on the short positions against the long holders, who lost that in moments and likely were stopped out. Perhaps look for yourselves into who was behind the trades at that time and note that within that 10-minute period 2,800 contracts hit all the bids to overcome them. This is hardly how a normal trader gets the best price when selling a commodity. Note silver instigated a rapid move lower in both precious metals.
This kind of trading can occur only when a market is being controlled by a single trading entity.
I have a lot of captured data illustrating just about every price takedown since JPMorgan took over the Bear Stearns short silver position.
I am sure you are in a better position to look into the exact details.
It is my wish just to bring more information to your attention to assist you in putting a stop to this criminal activity.
Kind regards,
Andrew Maguire
Read more on this, and some particular examples of silver market manipulation, here.
Market Concentration - Approximately 80% of the Precious Metal Derivatives
This is remniscent of the Oil and Steel Trusts from the turn of the 20th Century
Friday, March 26, 2010
The Vulcan Report - Friday 26 March 2010 - pt2 - I told you that GOLD and SILVER are being manipulated.mp4
http://jessescrossroadscafe.blogspot.com/2010/03/bombshell-whistleblower-steps-forward.html
25 March 2010
Whistleblower Speaks Out On J. P. Morgan's Market Manipulation - Reports Violations to the CFTC in the Silver Market
Do we have another Harry Markopolos here, describing in detail the manipulation of the silver markets by J.P. Morgan to the CFTC? How does this square with the testimony today from the CFTC Commissioners, who seem to indicate that the markets are functioning extremely well, and that investor can have full confidence in them?
I am led to understand that Mr. McGuire had offered to testify before the CFTC today, and that he was refused admittance. I do not know him, or the position he is in within the trading community. I cannot therefore assess his credibility or the validity of any evidence which he may present or possess. But I have the feeling that nothing will come of this.
Remember, there was no action on the Madoff scandal until AFTER his fraud collapsed, and the government was forced to acknowledge Markopolos' existence. He had been ignored and dismissed by the bureaucrats at the SEC for years because of Madoff's power and standing with the trading establishment. And of course by those who had an interest in hiding Madoff's scheme, if nothing else, to promote 'confidence' in the markets.
What seems particularly twisted about this is that JPM is the custodian of the largest silver ETF (SLV). Is anyone auditing that ETF, and watching any conflicts of interest and self-trading? Multiple counterparty claims on the same bullion?
If you ever wanted to see a good reason for the Volcker rule, this is it. These jokers are one of the US' largest banks, with trillions of dollars in unaudited derivatives exposure, and they seem to be engaging in trading practices like Enron did before it collapsed.
Have they lost their minds, or are they just that reckless, immature, short term, and arrogant? Morgan practically holds the keys to the US Treasury, a recent recipient of billions in taxpayer support, and still receiving signficant subsidies from the Fed. They seem to be in dire need of adult supervision. Blatantly and clumsily rigging the silver market, and then bragging about it to people outside their company. What's next, bumping off grannies for their Social Security checks? Three card monte games on the boardwalk?
I was trying to understand why this item struck me so hard this evening. It shocked me in a way that few things do anymore. I think it is because I had unconsciously come to the same conclusion earlier, on my own, in the post where I showed the repeated and obvious bear raids on gold into this option expiration, and it struck a resonant chord when I read McGuire's description of the silver manipulation. I refused to believe it, but apparently there it is. The "Dr. Evil" trading strategy that Citigroup was caught using in the Eurobond markets.
I do not expect the detailed facts on this to ever reach the light of day in my lifetime. The implications are far too political.
ADDITIONAL STATEMENT BY BILL MURPHY, CHAIRMAN OF THE GOLD ANTI-TRUST ACTION COMMITTEE
HEARINGS ON THE METALS MARKETS, MARCH 25, 2010
On March 23, 2010 GATA Director Adrian Douglas was contacted by a whistleblower by the name of Andrew Maguire. Mr. Maguire, formerly of Goldman Sachs, is a metals trader in London. He has been told first hand by traders working for JPMorganChase that JPMorganChase manipulates the precious metals markets and they bragged how they make money doing so.
In November 2009 he contacted the CFTC enforcement division to report this criminal activity. He described in detail the way in which JPM signals to the market its intention to take down the precious metals<. Traders recognize these signals and make money shorting the metals along side JPM. He explained how there are routine market manipulations at the time of option expiry, Non-farm payroll data releases, and Comex contract rollover as well as other ad hoc events.
On February 3 he gave two days advance warning by email to Mr Eliud Ramirez, a senior investigator of the Enforcement Division, that the precious metals would be attacked upon the release of the non-farm payroll data on February 5. Then on February 5 as it played out exactly as predicted further emails were sent to Mr. Ramirez in real time while the manipulation was in progress.
It would not be possible to predict such a market move in advance unless the market was manipulated.
In an email on that day Mr. Maguire said "It is 'common knowledge' here in London amongst the metals traders it is JPM's intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits. I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC allowing by your own definition an illegal concentrated and manipulative position to continue"
Expiry of the COMEX APRIL call options is today. There was large open interest in strikes from $1100 to $1150 in gold. As always happens month after month HSBC and JPM sell short in large quantities to overwhelm all bids and make unsuspecting option holders lose their money. As predicted in advance by GATA the manipulation started on March 19th when gold was trading at $1126. By last night it traded at $1085.
This is how much the gold cartel fears the enforcement division. They thumb their noses at you because in over a decade of complaints and 18 months of a silver market manipulation investigation nothing has been done to stop them. And this is why JPM’s cocky and arrogant traders in London are able to brag that they manipulate the market.
It is an outrage and we are making available the emails from our whistleblower, Andrew Maguire available to the Press wherein he warns in advance of a manipulative event.
Additionally Mr. Maguire informed us that he has taped recordings of his telephone communications with the CFTC for which we are taking the appropriate legal steps to acquire.
-END-
From: Andrew Maguire
Sent: Tuesday, January 26, 2010 12:51 PM
To: Ramirez, Eliud [CFTC]
Cc: Chilton, Bart [CFTC]
Subject: Silver today
Dear Mr. Ramirez:
I thought you might be interested in looking into the silver trading today. It was a good example of how a single seller, when they hold such a concentrated position in the very small silver market, can instigate a selloff at will.
(Note: This is the "Dr. Evil" trading strategy that got Citi rebuked and fined in the Euro Bond markets, and also got Enron into trouble in the energy markets. - Jesse)
These events trade to a regular pattern and we see orchestrated selling occur 100% of the time at options expiry, contract rollover, non-farm payrolls (no matter if the news is bullish or bearish), and in a lesser way at the daily silver fix. I have attached a small presentation to illustrate some of these events. I have included gold, as the same traders to a lesser extent hold a controlling position there too....
I brought to your attention during our meeting how we traders look for the "signals" they (JPMorgan) send just prior to a big move. I saw the first signals early in Asia in thin volume. As traders we profited from this information but that is not the point as I do not like to operate in a rigged market and what is in reality a crime in progress.
As an example, if you look at the trades just before the pit open today you will see around 1,500 contracts sell all at once where the bids were tiny by comparison in the fives and tens. This has the immediate effect of gaining $2,500 per contract on the short positions against the long holders, who lost that in moments and likely were stopped out. Perhaps look for yourselves into who was behind the trades at that time and note that within that 10-minute period 2,800 contracts hit all the bids to overcome them. This is hardly how a normal trader gets the best price when selling a commodity. Note silver instigated a rapid move lower in both precious metals.
This kind of trading can occur only when a market is being controlled by a single trading entity.
I have a lot of captured data illustrating just about every price takedown since JPMorgan took over the Bear Stearns short silver position.
I am sure you are in a better position to look into the exact details.
It is my wish just to bring more information to your attention to assist you in putting a stop to this criminal activity.
Kind regards,
Andrew Maguire
Read more on this, and some particular examples of silver market manipulation, here.
Market Concentration - Approximately 80% of the Precious Metal Derivatives
This is remniscent of the Oil and Steel Trusts from the turn of the 20th Century
Posted by Jesse at 8:41 PM
Category: CFTC, market manipulation, price manipulation, regulatory capture, Regulatory Reform
Thursday, March 25, 2010
Wednesday, March 24, 2010
Tuesday, March 23, 2010
The Vulcan Report - Tuesday March 23, 2010. "AUD/USD" Austrailian Dollar mp4
Today's stock market analysis and commentary.
AUD/USD forex pair.
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Monday, March 22, 2010
THE VULCAN REPORT - MONDAY MARCH 22, 2010.mp4
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