December 2011 Market

[68Camaro]

First (placeholder) post for December, content to follow

(Dec 2011 thread is here) viewtopic.php?f=17&t=10063
Post on pro/cons/procedure for taking possession of physical stock certificates
- viewtopic.php?f=17&t=10063&p=104059#p104013

(Nov 2011 thread is here) viewtopic.php?f=17&t=9307
(Oct 2011 thread is here) viewtopic.php?f=17&t=8831

[theo]

The markets are looking good so far with the unemployment rate decreasing and rumors of a longer term fix in Europe. However the unemployment rate decrease is mainly due a 315,000 increase in discouraged workers who are not counted in the labor force and of course Europe is a shell game. This a textbook example of MOP (management of perception) economics.

[68Camaro]

The markets are looking good so far with the unemployment rate decreasing and rumors of a longer term fix in Europe. However the unemployment rate decrease is mainly due a 315,000 increase in discouraged workers who are not counted in the labor force and of course Europe is a shell game. This a textbook example of MOP (management of perception) economics.

Roger that. And interestingly, despite some initial equity excitement this morning to what would appear to be the best news in several years, the response is very muted. So it was either partially leaked and baked into Wednesday's rise, or else the reality of these numbers is apparent even to the big traders. It's artificial "goodness". There are NOT more people working. What there are, are fewer people looking for jobs - a bad definition of unemployment. Discouraged workers fell off the table. And there was some limited private sector seasonal employment hiring, which will go away in a month.

This at noon, and market is threatening to head negative.

The brief euphoria of Wed over Europe is about over, and Euro is heading down again.

[68Camaro]

How does Europe borrow from the Fed?

http://www.cnbc.com/id/45492655/

Key part of this:

When the ECB wants dollars, it gives notice to the New York Fed. The notice contains how many dollars the ECB wants, when it wants them, what the exchange rate is at the time, when it will pay back the dollars, and what the interest rate will be.

...

Next—and this is important—nothing happens. Not really, that is.

Nothing moves anywhere. No currency flotillas leave for the high seas.

All that happens is that an account at the NY Fed that the ECB has designated as its swap account gets credited with the dollars. This account is really just a line on a spreadsheet in a computer in that Fed building on Maiden Lane. Crediting the account just means that someone enters numbers into a spreadsheet.

At the same time, the ECB enters numbers onto a spreadsheet housed in a computer in Frankfurt, Germany, where the ECB is headquartered.

Those numbers represent Euros that are now “in” an account for the NY Fed.

Neither the dollars nor the Euros come from anywhere. They aren’t moved or debited from anywhere. They are invented right on the spot with a few taps on the key pad. And that’s all. There’s no printing press fired up to make new dollars or euros.

How Does Europe Borrow Dollars From the Fed?
Published: Wednesday, 30 Nov 2011 11:26 AM ET
By: John Carney, Senior Editor, CNBC.com

The Federal Reserve and other banks announced Wednesday that they were engaging in a coordinated action to provide liquidity to Europe's credit markets.

What essentially happened is that the Fed cut the interest rate it charges the European Central Bank to borrow dollars.

The ECB wants the dollars so it can lend them out to European banks, which have been having trouble borrowing dollars at affordable rates due to fears about their financial health.

It’s worth taking a moment to see what actually happens with these swap facilities because they can create the illusion we’re sending boatloads of dollars overseas and the ECB is sending us boatloads full of euros.

Would-be pirates will be disappointed that no currency flotillas cross back and forth on the Atlantic.

What really takes place, for the most part, is down on Maiden Lane in Manhattan’s financial district. That’s where the headquarters of the Federal Reserve Bank of New York is located.

Like most interbank transfers these days, everything is done electronically.

When the ECB wants dollars, it gives notice to the New York Fed. The notice contains how many dollars the ECB wants, when it wants them, what the exchange rate is at the time, when it will pay back the dollars, and what the interest rate will be.

Until today, the interest rate was one percent plus something called the US dollar Overnight Indexed Swap Rate. Today's announcement cut the spread in half, so that the ECB now borrows at just half a percent over the OIS. (It’s very telling that only the ECB has to pay interest. There’s no price for the Fed getting to hold euros.)

Next—and this is important—nothing happens. Not really, that is.

Nothing moves anywhere. No currency flotillas leave for the high seas.

All that happens is that an account at the NY Fed that the ECB has designated as its swap account gets credited with the dollars. This account is really just a line on a spreadsheet in a computer in that Fed building on Maiden Lane. Crediting the account just means that someone enters numbers into a spreadsheet.

At the same time, the ECB enters numbers onto a spreadsheet housed in a computer in Frankfurt, Germany, where the ECB is headquartered.

Those numbers represent Euros that are now “in” an account for the NY Fed.

Neither the dollars nor the Euros come from anywhere. They aren’t moved or debited from anywhere. They are invented right on the spot with a few taps on the key pad. And that’s all. There’s no printing press fired up to make new dollars or euros.

This is sometimes called “fiat money.” But that makes it sound as if some command from a sovereign created the money. It’s really closer to “keyboard money,” since it is created by data entry in a computer.

While the swap is outstanding, the ECB can lend the dollars in its account to European banks. It does this simply by telling the NY Fed that it wants to credit the account of a European bank and debit its account. This all happens, again, by someone typing the data into a computer.

Flash forward to the maturity date—the date when the swap is supposed to be unwound. On that day, the Fed simply zeros out the ECB’s account. This means there are no dollars left in it to be lent out to banks, although that’s really just a metaphor. What it really means is that the Fed will not credit the accounts European banks if asked to do so out of the zero’d out account.

If the ECB’s account on the maturity date has the right amount in it, then the swap is closed off. If there’s a shortfall, then a new swap is created to represent this amount. This means that it’s pretty much impossible for the ECB to default on this loan, since any shortfall is just rolled over into a new loans.

Why might there be a shortfall? Remember, the ECB is borrowing dollars so that it can lend them out to European banks. If those banks haven’t repaid those loans, it must “purchase” the dollars from elsewhere—most likely other banks.

What’s more, the ECB must pay interest on the swap—which means that it must always purchase a few dollars more than it borrowed or collect those dollars in interest from the banks it lent to. If it doesn’t purchase the dollars or get those interest payments, you get a shortfall.

By the way, there’s nothing in the swap agreement about what happens if the Fed doesn’t have the euros to refund the ECB. That’s because it is impossible for the Fed not to “have” those euros. You see, the ECB created the euros “held” as collateral for the loan by entering data on a spreadsheet. As far as I can tell, there is no provision at all for the Fed to “draw” from the “account” in which the euros are held.

They just “sit” there—although, again, since its just numbers on a spreadsheet, nothing is physically sitting anywhere.

To be honest, I don’t think there is an economic point to the existence of the Fed account with the ECB. What do we care if there is a spreadsheet in Frankfurt that represents the conceptual Fed possession of a bunch of euros?

I suspect the reason for this is entirely legal and optical. It’s good for all the central bankers to be able to tell the world that these loans are fully collateralized. Depending on how you read the regulations, the Fed may even be required to be able to claim it has collateral for the loans—even if that collateral is just a line entry on a spreadsheet in a computer housed in the very central bank that is borrowing dollars.

I’m not even 100 percent confident that anyone in Frankfurt does enter the numbers into a spreadsheet. Why would they? There’s no point at all to having them entered and automatically erased at the end of the swap.

And since the Fed doesn’t use those euros during the period of the swap, there’s no need to keep track of how many are in the account. If you’re a Frankfurt central banking clerk, why not just take a smoke break instead of opening the computer file that has this totally made up account in it?

[theo]

You could say that we simply exchanged our worthless paper for their worthless paper, but it didn't even rise to that level. This was the manipulation of electronic signals masquerading as an actual wealth tranfser. To think that the Dow rose 500 points on what amounts to a glorified Facebook exchange. Truly amazing.

[68Camaro]

I have not been terribly inspired by any market news yet this month; not enough to make much comment. Things have been "going on", but same ole thing, nothing strikingly new. In the meantime I finally joined BS (after much pressure from several here) to see what is going on over there, and there is one comment thread by "collective" that has an interesting view, which Ray pointed me to, which I finally read (or skimmed most of it). I don't subscribe to a number of his side views, but his primary point is an interesting variant of some others. He sees major deflation and a credit crunch happening before hyperinflation, but sees both in the end. He also subscribes specific blame on the Rothschild family, about which I have no opinion. I posted the following, which I will cross-post here rather than link:

I don’t know to what extent there is long-term conspiracy behind the economic turmoil in the world. It’s certainly something to think about. You’ve made me go back and touch up on my reading of the Rothschild family. Regardless, I don’t have to speculate too much about the following, and where it leads me to act is independent of the source, reason, or the exact timing.

Sovereign debt continues at extraordinary levels across the world, increasing each year, with no sign of control – anytime, ever.

Debt is financed by the “sale” of bonds, which are now sold to the Fed and its banks by the Fed allocation of more US$, which moves that money to the US government for disbursement. (With similar tricks done in and for other countries.) The US has taken advantage of its role as world reserve currency, to the detriment of much of the rest of the world.

Massive finance and mortgage fraud were approved by government decree, then executed by private and semi-private banking and finance organizations, which failed, to be bailed out by the printing more money. The net effect is to remove trillions of value from the real estate market and push many of those trillions into the banks. This encourages more people to become dependent on the government.

Banks have trillions in cash to dispense, but certain types of credit appear to be purposely restricted, such as new mortgage debt. Other types of debt, such as credit cards, continue to flow freely and are easily available. The net effect is to make private home ownership more difficult, while continuing to put the typical person further and further behind. Despite the massive printing of money, the velocity of money into certain market sectors seems to be unusually low. Housing is deflating (stealing wealth), while food and consumer goods are inflating (stealing wealth). This encourages more people to become more dependent on the government.

The bulk of the sovereign debt is used for various entitlements to a growing proportion of population. This encourages more people to become more dependent on the government.

Four decades of entitlement abuse has created a persistent welfare class that does not know how to earn a living and views achievement as a high ability to be able to scam more “entitlements” from the government. This encourages more people to become more dependent on the government.

Those persons receiving entitlements now exceed half of the population. They are now able to vote themselves more entitlements. This encourages more people to become more dependent on the government.

The remainder that do work go increasingly deeper into personal debt to finance their wants, which they confuse as needs. This will ultimately push more people to become more dependent on the government.

There is a trend to the above, I think.

So regardless of the source, I think we certainly agree on this next. Convert your FRNs to long-term food sources, water supply, energy sources, safe housing outside of the center city, guns, ammo, training, physical metal (copper, nickel, silver, and gold). Make friends with your neighbors and hold your family close.

[68Camaro]

It does appear like events are moving to a crescendo soon, though TPTB have been very good about kicking the can down the road over and over. I have almost grown to accept their talent at this, and I'm concerned that I'm being lulled into fog of inattention, and will be caught by surprise when the collapse does come, and by the direction of it. Ray PM'd me some concerns about things coming to a head soon, and what direction that could take, which woke me up a bit from my drowsiness.

I'm afraid that virtually anything could happen, and that whatever finally does actually happen I won't be properly prepared for it. Why? I think few would admit it, but if we're honest with ourselves I think most of us have that nagging doubt that we've been scammed in some way, because we all KNOW that we are in the middle of a great scam which is underway by great powers. Knowing that, it is natural to be concerned we haven't smoked out the correct direction of it. Have we been steered in a direction that makes us easy pickings later? Will TPTB prohibit PM trading in the future? (Or worse?) There, it's said. That said, I think I've done all I can do to prepare and to be balanced. Re-read the last paragraph of my previous post above.

[NHsorter]

Dear 68, All of these arguments that you present seem perfectly logical and you are scaring the hell out of me. I am hoping that soon you will do something that demonstrates that you are bat-$hit crazy so that I can rightfully disregard your prophecies and stick my head back in the sand where everything is much more fun. Thanks, NH

[Mossy]

Yeah, 68, if you look at that and have any familiarity with the 3rd world (thankfully mine is indirect), it looks very familiar.

Survival means frugility and ingenuity.

[68Camaro]

No intent to frighten. (Any more than I'm uneasy myself.)

I'm personally uncomfortable with making "pronouncements". I don't really like the responsibility of having people follow me, as I don't want to deal with consequences of others if I'm wrong. I don't trust timing predictions, even my own. (I've been economically right a lot of times, but the timing of my predictions has been less accurate, because most often they depend on things that others who are more powerful are purposely trying to counter.)

Do no harm. That's a primary objective in this. Or perhaps, do a little harm as possible, might be more realistic. Spread your assets, be broad in your preps. Don't put all your eggs in a single basket. Now granted, I've got a whole LOT of my eggs in PMs - but those are split between silver and gold, and I've got a fair amount of other hard assets (including food etc), and I've still got FRNs as a just in case bridge.

Be prepared to change direction, when/if needed. That's another primary objective. Become more informed. Don't let TPTB box you into a corner. Don't play their game, to the best that you can figure it out.

Gotta go, more later.

[NHsorter]

Ha, sorry. I know prophecy was not the right word to use. I like reading your market summaries and it is a nice breath of fresh air in comparison to the garbage oozing out of the MSM. If someone were to strictly follow your lead in terms of timing investments, it would still be their own fault and not yours if things went wrong. I am a grown up and I take responsibility for my own decisions. Nothing against you, but I really hope that you are dead wrong about a lot of this. I tend to agree with most of what you are saying, so I hope that I am wrong as well. On the bright side... I still think that if Obama loses that we could see some hiring, lending, and investing take place. That won't solve the debt problems, but the right person might even be able to start addressing that. I don't think we are 100% screwed just yet.

[68Camaro]

Hope isn't a plan, but I also hope there is a path out of this. I wouldn't want to be responsible for fixing this mess.

Even if the best possible candidate (your favorite) won the election, and had a full congress behind him/her, with the full support of the people and the media, I do not envy anyone trying to fix this. (And they won't have that luxury.) Personally I think the damage is done, and undoing it will require a complete reset. I hope I'm wrong.

[Mossy]

If I had someone like the present office temp on one of my rubber boots, I'd burn the boot instead of trying to wash it off.

However. The system was ready to fall apart when he got elected (by the graveyard voters, IMO), so I'm not blaming him. Sure short of sympathy for him, though.

The mess is reversable, but I doubt if anyone has the powers to get it done.

[NHsorter]

Your right, we are probably screwed. Hope is not my plan, it's Obummers. My plan involves lots of lead and manure.

[aloneibreak]

excellent posts rich - i enjoy reading your thoughts

i try not to be a complete pessimist, but i really dont see a way out of this mess short of a complete failure, a time of chaos and then a rebuilding

change in the leadership isnt going to change a thing

change in the financial sector isnt going to change a thing

what must change is the mindset of the PEOPLE - and maybe some serious hardships is what it will take to weed out the weak leeches

tough times are coming - no doubt in my mind

im sure of my ultimate destiny, so im not as "worried" about the road ahead as some may be

but ive done everything i can to be self-sufficient and prepare to care for and protect my family

[beauanderos]

I am an alarmist. You are forewarned. But I think the system has already failed. The nation and most states are bankrupt, but most citizens are in denial. Any efforts to resist the tide, even globally, are futile and result only, if we're lucky, with kicking the can further down the road. However, in my opinion (fed by Chris Martenson) we have reached the end of the road... the only thing remaining to get kicked is our a$$es as we all get canned.

[texcollex]

This thread most closely reflects what has been going on in my mind for some time now. I told my dear wife a few days ago that I felt like "a dark cloud" was hanging over us all.

68, you have laid into words things that have been nagging at me increasingly over the last few years. The phrase "this encourages more people to become more dependent on the government", for example, relays exactly what I have been telling my closest confidants for a good while. It seems like whenever I mention that to someone, though, they just nod, and look thoughtful, maybe say "yeah, that's right".

I can't quite get over the feeling that this economic and social state we're in has been carefully engineered. Kinda like a SCUD missile, but one with a real guidance system. I'm not a "conspiracy theory" kinda guy, either. I am just becoming more convinced daily that TPTB really ARE "The Powers That Be".

[68Camaro]

%^* dog woke me up, and now I can't go back to sleep for thinking. I had previously posted this to Collectivist on his conspiracy theory:

"I'm a skeptic, but I don't discount a conspiracy theory; I do not believe people at that level work in a vacuum. I've personally seen evidence of communication, cooperation, even collusion, at those levels in non-banking fields, so why not in banking and finance? But I've also seen evidence of parochial interests, and fratricide, so I don’t believe they all have common goals, nor do I think they are as smart as they think they are. I believe most of them simply have a bull by the tail – some are smart enough to know it and are fearful, and others are too self-absorbed to even realize the danger they themselves are in. If there is a group that is really smart enough to be doing this all on purpose and actually providing a measure of control for it (and I’m not saying they don’t exist, just that I am skeptical) then they are truly wicked evil people. (And I do believe in wicked evil people.)"

[68Camaro]

Away from doom and gloom a moment; something finally clicked for me after I saw a "breakout" interview clip with a investment "strategist" named Purvis.

http://finance.yahoo.com/blogs/breakout ... 17826.html

From his point of view, gold's short-term slump is partly due to an ownership transition, which he describes as "a process of going from less stable hands to more stable hands."

Specifically, Purves points to the massive, high profile, forced selling by hedge fund manager John Paulson, who is paring down a 3 million ounce position in gold --a stake that Purves says is larger than the gold holdings of the Reserve Bank of Australia.

Paulson has made some bad judgement calls this year - I've been aware of some of that. Also knew he had a large position in gold. But I hadn't appreciated how much, or that he was having to sell it off to cover his other losses. That's certainly a factor in gold prices seeking a new balance. (Even though paper gold isn't really gold.)

[beauanderos]

Whatever is going to happen... will. We don't know what that will be, all we can do is prepare. Try to strike a balance between prepping (in case the worst happens) and making investment choices that are prudent yet provide the opportunity to profit (in case the worst doesn't happen). After that, you have to learn to relax and just go along for the ride. Don't be shaken from your conviction that precious metals will rise. They will... in time. In the meanwhile, try to enjoy life. 90% of the things we worry about never come to pass. You can give yourself an ulcer trying to guess every outcome of every potential black swan event. Not only is that not possible, even if you were omniscient enough to predict, you would just as likely be wrong as right.

[texcollex]

%^* dog woke me up, and now I can't go back to sleep for thinking. I had previously posted this to Collectivist on his conspiracy theory:

"I'm a skeptic, but I don't discount a conspiracy theory;...
...If there is a group that is really smart enough to be doing this all on purpose and actually providing a measure of control for it (and I’m not saying they don’t exist, just that I am skeptical) then they are truly wicked evil people. (And I do believe in wicked evil people.)"

Yeah, I've always held the view that there are Truly Wicked People, and that their work often coincides and appears harmonious to one another because Wickedness is unified it its goals.

[68Camaro]

Source of the "deathstar attack" today? ZH reports that central banks were selling gold. Others think it is just another JPM short sale. Regardless, it is already recovering.

gold.gif (16.86 KiB) Viewed 919 times

Eventually demand will overcome their ability to do this.

[68Camaro]

Little news of real substance in the past week.

UK declines to join Europe in their failure. The UK has problems like the US, but they do know a looming failure when they see it.

Ratings agencies warning of downgrades for Europe.

Gold has dropped another $80 since my last post, as the Euro has continued to fall and confidence in Europe, which ebbs and flows daily based on nothing more than press releases. Euro still has a long way to drop, and the price of gold is being emotionally affected to a greater extent than the dollar change warrants, but for the moment it is real.

[68Camaro]

Looks like a great time to buy in to PMs, based both on technicals and market sentiment.

[theo]

I hope you are right. But with our own sputtering economy holding down spending and the European crisis driving investors towards the U.S. dollar, I'm concerned that deflation might win this particular battle. I also think that there could be big news coming out of Europe in the next week or two, like an Italian default or Germany leaving the Euro. The resulting liquidations would place even more downward pressure on PMs which in turn would be amplied by JPM and company shaking out the weak (and even not so weak) hands. It could send silver down to 20 and gold to 1250.