The Ostrich Head

Australia and Canada should support the Global Bank Tax

    Following the 2008 financial crisis, dozens of countries bailed out hundreds of banks, costing tax payers trillions of dollars.  Clearly, something has to be done to share the burden. 

    The IMF has come up with the fairest idea to share that burden: a global bank tax.  This obviously fair and simple way of ensuring that there's a big fund -- to bail out banks tax payers in the event of the next another financial crisis -- is now in danger of failing to become reality thanks largely to Australia and Canada.

    The arguments put forward by these two recalcitrant countries are as weak as they are irrelevant:

 

1. Neither country had to bail out any banks

2. Both countries have sound financial systems

3. Neither country plans to bail out Greece

 

    These arguments, while true, are clearly not very neighbourly. 

    I mean, Australian and Canadian tax payers are pretty fair minded people (I've never been one myself, but I've met some) and would be happy to step up to the plate by paying higher bank charges to cover this tax.  Australian bank charges are so extortionate already that a few more percent would hardly even be noticed.

    Compare the Australian/Canadian arguments with those of the main proponents and you'll see how unfair these two countries are being.

    America's argument is that banking and finance is global (Goldman Suchs sells junk bonds mortgage backed securities in dozens of countries, for example) and therefore the pain should be shared globally as well. 

    Sounds fair to me.

    After all, when American tax payers bailed out over 700 banks, it was for the global financial good -- and not because banks were the top contributors to Barack Obama's presidential campaign.

    And on the European end, Germany, France and the UK strongly support this tax.  Sure, these countries had to bail out a few banks of their own, but it's more the community mindedness that's behind this push.

    Specifically, they're worried about the European Community.  Even more specifically, they want a great big slush fund to bail out Greece (initially), Ireland, Portugal, Spain, Italy, and then Greece a second and third time.

    Fair enough.  I'm worried about these countries as well.  The idea of simply forcing them to live within their means is as repulsive to me as banks placing credit limits on VISA cars. 

    The two taxes being proposed are: a) a percentage of the on-balance sheet and "possibly" off-balance sheet items; and b) a percentage of bank profit plus total compensation. 

    This is awesome.  Obama's 0.15% balance sheet tax alone would bring in $120 billion from JP Morgan's $80 trillion balance sheet in the first year.  It may bankrupt JP Morgan and trigger another financial crisis, but at least we'll have the tools to deal with it!

    If you feel as strongly about this as I do, write letters to the treasurers of Australia and Canada, enclosing cheques to the value of how much you would like to contribute to bail out failed US banks and mismanaged European governments.

 

    I think JFK put it best when he said:

 

Ask not what your country can do for you. 
Ask what you can do for someone else's country.

 

 

    Cheers,

 

    Peter. 

The most corrupt company in history

    The Daily Bear (aka The Ostrich Head) has, through perusing thousands of audit reports, selected the most hideously corrupted company in the world.  Here are a few extracts of the 26 page report:

    Material weaknesses discussed later in our report continued to (1) hamper the [company]'s ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; (2) affect the [company]'s ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities; (3) impair the [company]'s ability to adequately safeguard significant assets and properly record various transactions; and (4) hinder the [company] from having reliable financial information to operate in an efficient and effective manner.

 

  • Certain material weaknesses in internal control over financial reporting and other limitations on the scope of our work resulted in conditions that continued to prevent us from expressing an opinion on the accompanying consolidated financial statements for the fiscal years ended September 30, 2009 and 2008.

 

    Because of the [the company]'s inability to demonstrate the reliability of significant portions of the its accompanying consolidated financial statements for fiscal years 2009 and 2008… we are unable to, and we do not, express an opinion on such consolidated financial statements.

 

    As a result of these limitations, readers are cautioned that amounts reported in the consolidated financial statements and related notes may not be reliable. 

 

    The material weaknesses that contributed to our disclaimer of opinion on the consolidated financial statements were the [company]'s inability to

 

  • satisfactorily determine that property, plant, and equipment and inventories and related property were properly reported in the consolidated financial statements;

 

  • ensure that the [company]'s consolidated financial statements were (1) consistent with the underlying audited entities’ financial statements, (2) properly balanced, and (3) in conformity with GAAP; and

 

  • identify and either resolve or explain material differences between certain… changes in cash balance… and underlying financial information and records.

 

    Due to the material weaknesses and other limitations on the scope of our work discussed above, there may also be additional issues that could affect the consolidated financial statements that were not identified.

 

    To make the fiscal years 2009 and 2008 consolidated financial statements balance, [the company] recorded net increases of $17.4 billion and $29.8 billion, respectively, to net operating costs, which it labeled “Unmatched transactions and balances.”  An additional net $8 billion and $11 billion of unmatched transactions were recorded in costs for fiscal years 2009 and 2008, respectively.  [The company] is unable to fully identify and quantify all components of these unreconciled activities.

    It goes on and on and on.  I mean, this is worse than Enron right?  What company, seriously, could possibly get away with this and pull the wool over both government and shareholders' eyes? 

    And don’t tell me you actually guessed this is the US government.  I mean, this is the fair and transparent administration of Barrack Obama we're talking about. 

    But yes, sadly, this is from the official audit of the US government by the Government Accountability Office.

    And you wonder why the SEC can't find guys like Madoff?  Here's what the GAO had to say about the SEC:

 

    As of September 30, 2009, SEC did not have effective internal control over financial reporting.  We identified six significant deficiencies that collectively represented a material weakness in SEC’s internal control over financial reporting.

    In other words, the regulator that's supposed to weed out poor reporting and governance can't even get its own house into order!

    To clarify the accounting text in the Government Accountability Office Auditor's Report (or, rather, the non-report), the Whitehouse issued A Citizen’s Guide to the Financial Report of the United States Government.

     For easy consumption, the Whitehouse managed to reduce a 26 page report into 14 pages.  At least it does discuss transparency (once):

The website, Recovery.gov, is the centerpiece of the President’s commitment to transparency and accountability. Recovery.gov features information on how the Act is working, tools to help hold the government accountable, and up-to-date data on the expenditure of funds.

    Oops.  That's somewhere between an untruth and a straight out lie!

    The Citizen's guide also had a look at the problem of the horrendous lack of controls and balances -- in the securities market!  In fact, the citizen's copy totally missed out the bulk of the GAO report.

    Specifically, it missed the 27 pages (of a total of 28) that stated why the GAAP reported budget deficit of just $1.4 trillion was a complete sham.

    Fair enough I guess.  You don't want concerned citizens finding out about this sort of thing.

    Fortunately, you can't fool everyone all the time, and the guys at Shadow Stats who take government figures and compare them to reality found that the actual GAAP loss was $4.3 trillion.

    The reason I bring this up is the number of tea parties held recently.  For those of you who don't know the history of the Boston Tea Party, it basically marked the end of low-tax British Government Regime and the institution of the high-tax US Government Regime.

    Thanks to the GAAP loss, which is in essence a deferred tax, and to the corrupt and absurd policies that created it, Americans really should be holding their tea parties the day after Christmas!!

Cheers,

Peter.

The Tea Parties should be held the day after Christmas

    A number of tea parties were held recently in celebration of the Boston Tea Party.  For those of you who don't know the history of the Boston Tea Party, it basically marked the end of low-tax British Government Regime and the institution of the high-tax US Government Regime.

    Not much to celebrate for sure.  Now Tea Partiers celebrate the time of year when they've finished paying money to the government (about 35% of their year) and are now earning for themselves. 

    This is clearly misdirected and wrong.  These guys really need to take a long hard look at the numbers.

    The GAAP budget shortfall of $4.3 trillion is what Americans will have to pay in future taxes.  So it's nothing more than a deferred tax.

    If we add on the $1.75 trillion that individual American's already paid in tax, that brings the total tax bill to $6.05 trillion. 

    With the 155 million Americans over 15 that are working and earning an average of $39,500 a year, total personal income in the US is $6.12 trillion.

    That means total paid and deferred taxes account for 98.9% of the average income.  This puts the proper celebration for the Tea Party on the day after Christmas.  This still gives Americans four days to earn money for themselves (and five in a leap year)!

 

    Cheers,

    Peter.

Making sense out of the airline baggage fees

    Shame on the airlines for charging baggage fees.  Shame.

    In the land of the free, it should be our democratic and libertarian right to have two free checked in bags and free carry-on baggage.

    Indeed, last week, Senator Chuck Schumer introduced a bill to protect precisely those rights. 

    In his heavy hitting statement before introducing the bill, Chuck decried that, "When you charge for a carry-on bag it is a slap in the face for anyone who flies.  We're fed up with airlines that keep nickel and dime-ing the passengers from departure to arrival."

    Precisely.  Heck, I'm even fed up with airlines and governments that gouge me for hundreds of dollars.  But best to start with the nickels and dimes.

    But hey, this isn't nickel and dime territory.  United, US Air, and Delta now charge $25 for the first checked bag.  And then up to $600 per bag for your sixth checked piece of luggage.  Who can go anywhere for more than a weekend with less than six bags?

    Even Southwest, the super cheapie who still lets you check in two bags free of charge, is going to dong you $50 a piece for your third and, if you are going on a longish holiday, another $110 for your tenth checked bag. 

    Is this unfair or what?????

    Not that it's fair over here in Asia, where we only get to check in one bag free of charge and then pay through the nose for the rest.  I'd just never realized that I should be subsidizing other passengers' excess baggage.  Damn unthoughtful of me.

    On top of checked in baggage, the People are up in arms about Spirit Airlines now charging up to $45 for carry-on baggage.  Duh!  They never expected that charging for checked baggage would result in more carry-on bags -- that came as a complete surprise.  Especially as the carry on limit is one bag plus one briefcase!

    But what on earth could have prompted airlines to, all of a sudden, begin charging for checked and carry-on luggage after decades of not charging?

    Some would say that it's healthy competition.  Others (such as I) may contend that this is merely the free market following a natural progression due to changes in the regulatory environment.

    Back in January, the Treasury ruled that airlines should receive preferential tax treatment for fees on services that are not deemed necessary for air transportation -- and that transporting bags through the air wasn't necessary for air transportation. 

    I think the responsible treasury official either had a massive brain fart at the time or, more likely, is approaching early retirement through the revolving door into the airline industry.

    Nevertheless, it's an interesting concept.  Naturally, more legislation will be required to undo the impact of earlier legislation to simplify the tax code.

    If we follow this to its logical conclusion, we can break down the basics of what is "deemed necessary for air transportation" and what isn't.

    Here's what's necessary:  Transport you from A to B.

    Here's what's not necessary: Check-in baggage, carry-on baggage, food, water, seat, toilet, stewardess service, climate control, airport check-in service (you can do it on the internet), internet check-in service (you can do it on the phone), phone check-in service (you can do it at the airport), and the fuel surcharge left over from when oil was at $130 a barrel.

    Think I'm being absurd?  Think again.  Ryan Air is already planning a fee for using the toilet!

    The logical conclusion is that flying in the US will follow the £3 model from Ryan Air:

·        Ticket: Awesomely cheap at just £3

·        Online check-in: £5

·        Administration fee: £10

·        Airport boarding card: £40

·        First bag fee: £20        

·        Second bag fee: £40

·        More if you don't take your own pot to piss in.

    Compared to this, US airlines charging for bags may seem somewhat innocuous.  But this is just the thin edge of the wedge.  Just as well senators are on the ball to prevent this dastardly threat to life, liberty, and the pursuit of free.

   

Cheers,

 

Peter.

Short the Japanese yen NOW

Last week, Shizuka Kamei, Japan's Financial Affairs Minister, called upon the Bank of Japan to prevent deflation by monetizing government debt.

    Monetizing government debt simply means buying government bonds with money created out of thin air. 

    Every government that's done this, from the Weiner Republic to modern day Zimbabwe, has gotten the same result: rapid devaluation of the currency.

    But this isn't going to be an unwanted side-effect:  This is precisely what the government wants.

    In a draft by 130 lawmakers from the ruling Democratic Party of Japan, the government called for an inflation rate of above 2% and an exchange rate of ¥120 to the dollar.  That's a 30.4% devaluation from the current exchange rate of 92.1.

    The Bank of Japan has so far resisted this push, but as with central bank everywhere, resistance to government demands only lasts so long.

    The bank doesn't even have to give into the government's demands for the currency to crash.  All it will take is for the Bank of Japan to seen to consider accommodating the government for a massive flow of cash out of the yen.  This will result in an immediate and steep devaluation of the currency.

    With the right currency options, you can get over 100:1 leverage on the Japanese yen all the way out to January 2011 at a pretty decent price.  A 30% devaluation can easily net you a 1,000% return on these options. 

    Even a more realistic 10% devaluation should at least double your money in seven months. 

    Alternatively, you can invest in 12 month US treasuries at 0.38%, roll them forward for the next 182 years, and double your money risk-free.  Personally, I see the put options as the lower risk bet right now!

 

Cheers,

 

Peter.

The silver short squeeze has started... $50 an ounce here we come

    In the first 14 weeks of this year, the US mint reported that it has sold a total of 10,170,500 one ounce silver eagles, or 726,000 per week.  This is just shy of average weekly production of 742,000.

Source: US Mint

     Clearly, with the mint buying up the entire US silver supply there is a bit of a squeeze happening on the supply side. 

    Indeed, the main alternate source of storage, the silver ETF (NYSE: SLV), has been raided heavily over the past seven weeks.

    Since February 26, 17.9 million ounces -- or 2,557,000 per week -- have been withdrawn from the ETF by authorized participants.  Now withdrawing a tad over 6% of the silver out of SLV (it has 286.5 million ounces) may not sound like much.  But try putting it into this context:

    SLV accounts for around 50% of world silver inventory.

    Or, to put it another way, 3% of the world's silver inventory disappeared in just seven weeks!

    Another major reason for the squeeze is that government sales, which as recently as 2006 made up 8.6% of silver supply, have all but stopped (India, China and Russia used to be the largest sellers). 

    Now, with demand at around 900 million ounces a year, total inventory is around 8 months.  That ain't much given that industrial demand has risen by an average of 19.5 million ounces a year for the five years to 2008.  It has now risen from 38.5% of demand in 1999 to 50.3% in 2008.

 Source: The Silver Institute

 

    To cap it off, mining and scrap supply in 2008 was only 858.5 million ounces, creating a 40 million ounce shortfall. 

    Given that scrap supply is driven by recycled photographic paper, there isn't going to be any increase there. 

    And mine supply can take years to come on line, with a typical lead time between discovery and production of 8-10 years.

    If mine production keeps rising at the lethargic 2.2% it maintained for the nine years to 2008, there's no way in hell it's going to be able to keep up with demand. 

    That means the 40 million ounce shortfall is likely to rise even faster over the next 3-4 years towards 50-60 million.  At that point, the silver ETFs will have been raided dry and the bullion banks are going to have a heck of a time convincing even the most naive politicians and bureaucrats that they are protecting their "silver holdings".

    The only way out for bullion banks is to let silver appreciate towards the traditional gold/silver ratio.  Over the past 15 years we've gotten used to a gold/silver ratio of 50-80.  But if you look back into history, the ratio was 37 in 1980, 32 in 1900, 15.5 in 1840, and averaged around 16 for the several hundred years before that.

    And 300 years ago, there wasn't a great deal of silver used in electronics.

    We're clearly headed back towards a gold/silver ratio of 30-40, and possibly more like 20 in the long term.  That would put silver at $50 an ounce in the hugely unlikely scenario that gold fell to $1,000 an stayed there.  

    That's hugely bullish for silver -- and it's where my money is going right now!

 

Cheers,

 

Peter

SEC brings a harsh judgement against arms dealer Adnan Khashoggi

    Bad boy Adnan Khashoggi, the Saudi arms dealer who negotiated the arms sales to Iran in the Iran-Contra affair, has finally been brought to justice by the ever-vigilant SEC.

 

Let me give you some background:

    Having started his career as an honest businessman, brokering arms deals in the Middle East for Lockheed Martin, Raytheon, and Northrop-Grumman, and investing in diamond mining in the Central African Empire, Khashoggi became the world's richest man in the 1980s.  (It was his yacht below that was used in the James Bond film Never Say Never Again.)

    However, business wasn't always good.  His Triad Holding Company, for example, went bankrupt after he was indicted for using it to channel money for the Iran-Contra deal.  Fortunately, he made his $4 million bail thanks to his friend, Peter Munk, chairman of Barrick Gold.  Barrick Gold, which was founded by Khashoggi in the first place, is also deep into illegal government activity.  He still held onto his Barrick Gold shares though -- despite them being held as collateral for the arms deal.

    Business was good for a while, having helped out his good friend Imelda Marcos hide her gold and assets -- legally according to the verdict.

    Having got off that one, Khashoggi started another business, called GenesisIntermedia, a telemarketing company.  This was during the .com boom. 

    The stock was the best performer in 2000 despite losses of more than $17 million on just $229,000 revenue.   

    However, it wasn't the best performing stock for no reason.  And this is where Khashoggi began breaking the law.  Didn't see that coming did you?

 

    A well known financial commentator, Courtney Smith, helped push this stock on CNBC, Bloomberg, and elsewhere, for a tiny $1.1 million fee. 

    Having pushed the stock from $1 a share all the way up to $17, Khashoggi paid off some brokers to borrow his stock and lend it to Deutsche Bank Canada to the tune of $130 million.  (Yup, the very same company with internet revenues of less than half a million.)

    Under this scheme, Deutsche borrows the stock and pays Khashoggi the value of the shares.  Or, to put it another way, Khashoggi gets the cash for his shares without having to sell them and give away his game.

    After 9/11 his stock crashed and he owed Deutsche Bank Canada and other brokerages $130 million.  Naturally, GenesisIntermedia went belly up and Khashoggi made out like a Saudi oil tycoon.  Deutsche Bank and a few securities companies were left holding the baby.  Khashoggi made the $130 million disappear -- cleverly done considering the FBI was watching every international bank transfer at the time!

    Now what Khashoggi did was illegal.  As were the actions of the Deutsche Bank employee who circumvented the safeguards, other principals of the company, and Courtney Smith.  The SEC went after them with the speed of an oak tree.

 

    This month, however, the SEC finally brought them to justice. 

 

    As a result of this fraud, Richard Evangelista, who enabled the $130 million stock lending fraud was fined a hefty $40,000 in settlements and penalties.

    But Khashoggi didn't get away anywhere near as lightly as that.

    Nope, the arms broker, in a settlement with the SEC, agreed to a five year officer and director ban in return for the SEC dropping all charges, fines, and penalties.

    And you think that's stiff?  The SEC managed to get even more from him than that.  Khashoggi even had to agree to an order preventing future violations.  Take that!  Now it's illegal and, and... you promise not to do it again too.  So there!

 

Cheers,

 

Peter

Operation Iraqi Freedom a resounding success

    Since the invasion of Iraq in 2003, the number of Iraqi deaths by suicide bombers, car bombs, gunfire and executions has fallen from a peak of 72 per day to just 9.6 a day this year.  That corresponds to just 11.2 per 100,000 population per year. 

    If we call that the murder rate (and it's probably pretty close), see how well Iraq stacks up:

Sources:
http://www.cdc.gov/nchs/data/nvsr/nvsr58/nvsr58_08.pdf
http://www.nationmaster.com/graph/cri_mur_percap-crime-murders-per-capita
http://www.census.gov/compendia/statab/cats/law_enforcement_courts_prisons/crimes_and_crime_rates.html

 

    Heck, if Thailand gets any more dangerous, I'll head to Iraq for safety.  Well done George W Bush and Obama.  You guys are terrific. 

    Still, it gets me thinking that if the US had spent $3 trillion on New Orleans instead of Iraq -- $26.5 million per family instead of $0.6 million per Iraqi family -- it could have reduced the murder rate there slightly, as well as turning it into a show case city.  A hard sell politically of course.  They'd have to get the Congressional Budget Office to forecast a budget of just $20 billion a year and then watch it blow out 30-fold!

    It worked for the war, it will probably work for health care, so why not for the poor souls in New Orleans.

    Realistically, though they are probably better at helping to reduce Afghan civilian casualties.

 

Cheers,

 

Peter. 

Radical terrorist group planning to overthrow the US government with Weapons of Mass Destruction thwarted by FBI and Detroit Police

Luckily for Obama, the Detroit Police (without the help of Axel Foley) and FBI managed to infiltrate and shut down the operations of the Hutaree Christian militia group.

     Eight suspected terrorists have been arrested, indicted, and jailed because they "conspired to overthrow the US government."

     Whew!  Damn lucky the police moved when they did.  I mean, look at these masterminds who would easily have brought down the government and used their superior intellects to dominate America.

 
 

The shallow end of the gene pool

    In addition to conspiring to overthrow the US government, these religious zealots are charged with seditious conspiracy, attempting to use weapons of mass destruction, and possession of a firearm in relation to a crime of violence.  David Stone Sr and David Stone Jr also are charged with teaching/demonstrating use of explosive materials.’

     Let me clarify that for you.  The indictment actually said they were planning on attacking and killing local, state, and federal police officers.  Their method?  Kill one, and then attack the funeral procession later. 

     Damn.  That's some elaborate plot.  Definitely worthy of seditious conspiracy charges, which carry a 20 year sentence.

     But worse, they conspired to attempt to use a weapon of mass destruction!

     Shock horror.  Aren't these the things that Saddam was supposed to have? 

 

For your information, a "weapon of mass destruction" is now defined as just about any weapon excluding standard firearms.  These include: bombs, grenades, mines, and missiles having an explosive or incendiary charge of more than one-quarter ounce.  A whole quarter ounce?  That's huge.  They also include any firearm that isn't a shotgun with a bore of over 0.5 inches.  I just looked on line, and found a weapon of mass destruction for sale.

    Man, when I was a kid, I remember my letterbox getting blown up by a bunch of local kids using a pool chlorine and sugar bomb.  I didn't realize at the time that my house had come under attack by WMD.

    This is scary.  The maximum sentence of life in prison seems comparatively light for the offence of conspiring to use one of these things.  Oh, and don't imagine that being outside of the US gets you off the hook.  Any US citizen owning, possessing, or using a WMD outside of the US is also up for life in prison.  This guy must be in jail already.

 

    But what's worse about the Michigan 8 is that one of the guys was even teaching other people (let's call them "terrorists") how to use explosives.  That's also a criminal offense with a 20-year jail term by the way -- even if they had no intention of using the explosives.  Don't follow this link or I'm going to jail as well!

     The final charge, which they all got banged with, was possession of a firearm in relation to a crime of violence.  So, having a licensed firearm is ok, but if you happen to have a firearm and conspire to do something violent, then it carries a mandatory 5-year license.

     Good, get these thought-criminals off the street.

     The judge -- sensibly in my view -- refused them bail on the grounds that they would be a threat to the community.  Heck, one of them even has a record of aggravated assault -- from driving his truck into the path of a police car 20 years ago!

     The prosecution is rapidly building a water-tight case against the Michigan 8, having seized firearms, grenade smoke, ammunition, military uniforms, a copy of Adolf Hitler’s “My New Order,” a samurai sword, and a jewelled dagger. 

     Yup, damning evidence indeed.  I mean a jewelled dagger?  That's what the terrorists in "Romancing the Stone" gave to Danny DeVito. 

     But it gets worse for the Michigan 8.  The prosecution alleges that their leader delivered a speech including the words, “How much longer are you going to put up with a foreign army controlling your streets and highways?  Now it’s time to strike and take our nation back so that we may be free again from tyranny.  Time is up.”

     Indeed.  The right to freedom of speech should only be stretched so far, and this clearly goes beyond it.  Imagine if they'd said something as like:

    We can do this. It will not be easy. It will require struggle and sacrifice. There will setbacks and we will make mistakes. And that is why we need all the help we can get.  So tonight I want to speak directly to all those Americans who have yet to join this movement but still hunger for change - we need you.  We need you to stand with us... This is just the beginning of our efforts to take back our country... We will not let America sink into further... without a fight.   - quotes from Sarah Palin's Facebook and an Obama campaign speech

     I mean, the group discussed various way of killing people, how to take over a county, and even plotted to take over a handful of counties in southeast Michigan -- including Hillsdale, Washtenaw and Lenawee counties -- to lure the enemy to them.  All 20 of them.  I remember doing a similar exercise in primary school to take over Tasmania.  Thank god I got away with it.

     So in summary, we have a group of guys with guns that trained 3-4 times a year, an outspoken leader, wacky plans, and an explosives expert who could create all kinds of WMD.

     Explosives expert?  It recently came out that the explosives expert was actually an undercover FBI agent.  So the police that arrested them actually provided the reason for arresting them in the first place.  Now that's efficient police work.

     In fact, it's so efficient that it is becoming the modus operandi of the FBI, having worked so well previously.

     So now we know why America is so safe despite having so many terrorist training camps!  The FBI infiltrates disgruntled right-wing paramilitary groups, supplies the WMD and arrests them.  This is MUCH more efficient -- not to mention safer -- than waiting around for them to actually attempt to commit a crime. 

     Heck, having a full time agent on the inside and mounting a massive surveillance team is pretty expensive, and if the group actually decides not to break the law it would all go to waste anyway.  Much better to get them to commit "seditious conspiracy", arrest the lot of them, throw 'em in jail, and move onto the next target.

     And I gotta say, I'm very pleased they are going after Christians as well as Muslims now.  This ties in nicely with Obama's recent policy shift in dealing with Jihad, Islam, and crusades.

 

Cheers,

 

Peter.

IMF gold holdings: why mine the stuff when your accountants can create it?

    Last week Eric Sprott, who heads up the Sprott Physical Gold Trust (NYSE:PHYS), created a bit of a storm when he offered to buy the IMF's remaining 191.3 tons of gold for sale on the market.  The IMF told him to piss off.

     So the world started wondering if the IMF actually has the 3,005.3 metric tons of gold it claims.  Or, if the US and other countries have the gold they claim to have.

     The issue really comes down to ownership.  We all know the old adage, "Possession is 90% of the law."  One wonders if that applies to the IMF. 

     The IMF originally got most of its gold from payments of quotas, whereby member countries paid in 25% of their funding quotas to the IMF in physical bullion.  This method was maintained until 1978 when it was already abundantly clear that gold production couldn't keep up with government printing presses and the gold standard was abolished.

     Since 1978, the IMF hasn't dealt much in gold, but did manage to acquire 403.3 tons of gold since then, mainly from South Africa in 1999.  That's the gold for sale (less the 212 sold to India, Sri Lanka and Mauritius central banks).

     The rest of the gold paid in by member countries is stored in depositories in the US, the UK, France, and India (which made the 200 ton sale to India rather simple, not to mention coincidental). 

     This gold belongs to the IMF of course.  But if 85% of IMF vote holders decide to send the gold back to whence it came, the gold goes back to the countries that donated it.  The US, with 17% of the vote, obviously has veto power over this. 

     Of all the gold paid into the IMF, 50% had to be stored in "the depository designated by the member in whose territories the Fund has its principal office."  That's another way of saying "Uncle Sam's vault" (the IMF is headquartered in Washington D.C. across the road from the World Bank and less than a km from the Federal Reserve).

     This is all pretty boring stuff, until you read the adjustment to the articles adopted on 1 April 1978 (not an April Fool's Day joke, but it may as well be):

 

       F-2. The Fund may hold gold under earmark for members.

 

    This is such a tiny innocuous little phrase and really shouldn't make a diff right? 

     But the problem comes down to its other articles of incorporation, which state that the IMF can't loan its gold.  However, if instead of calling the gold its own, it holds gold "under earmark for members" then the members can simply loan out the gold... as well as call the gold their own.

    Sure, I'm not a lawyer and may be misinterpreting this deliberately ambiguous phrase, but it's what is actually going down. 

     The US gold reserves, for example, include the gold it has paid into the IMF and which the IMF holds "under earmark for members".

 

    This came out last year when in an interview with Conny Lotze of the IMF who stated that, "Members do not include IMF gold within their reserves because it is an asset of the IMF.  Members include their reserve position in the fund in their international reserves."  That's world-class gobbledegook.

     To put it in English, IMF gold isn't counted as reserves, but the gold that the IMF holds under earmark for members is their reserve position in the fund and therefore gets counted in their international reserves. 

     That's all pretty handy really.  So the IMF owns the gold and doesn't lend it, but because it's held under earmark for members, the members themselves can lend it (and include it in their own stated gold reserves). 

     It also brings into question the accounting standards used. 

     If the countries that provided the gold are still counting that gold amongst their reserves -- or can selectively decide to do so -- one wonders how much of the IMF gold is double counted as central bank gold.  It seems pretty clear that if you added up all the gold in the world's central banks plus the IMF gold, you'd be coming up about 3,005.3 tons short of what's actually in the depositories.  Or at least physical bullion plus JP Morgan IOUs!

     Once again, this is mere speculation with little factual basis.  But there is an interesting jump in the amount of official gold holdings between 1958 and 1959.  This was the first major increase in IMF gold since 1945, and boosted institutional gold holdings (IMF) by 797 tons.  At the same time, central bank holdings -- the supposed source of this gold -- fell by just 48 tons.  Hah!  And you through Enron was breaking ground with accounting fraud!

     This one time jump in total official gold holdings of 749 tons was the second largest on record -- beaten only by the 1963 jump of 833 tons ahead of the 1966 increase in IMF gold.  Since 1966 there has only been one year where official global gold reserves rose by more than 150 tons.  And if you haven't guessed that it was the next time the IMF increased its gold holdings, then you really aren't getting my drift.  That was 1970 when world official gold holdings rose by 320 tons.  I'm willing to bet the IMF's entire gold reserves (less 191.3 tons) that they are double counted.

     One final thought... between 1950 and the peak of the 1980 gold bubble, world official gold holdings rose by 4,740.1 tons, according to the World Gold Council.  The same source notes that gold held at institutions (IMF, BIS, EMI) which was transferred from central banks also increased by 4,740.1 tons.  Gold held at central banks was unchanged after 30 years at 29,721.0 tons. 

     This is entirely coincidental by the way and you shouldn't read anything into it at all.

 

 

Cheers,

 

Peter.

 

 

The US economy created 162,000 jobs in March

    There are few clearer signs that the recession is over than rising employment.  Clearly, that's precisely where we are.  For the month of March, the Bureau of Labor Statistics report that 162,000 jobs were created in March.

    This is the best result since March 2007.  TIME TO CELEBRATE.

    But, as always when good news comes out, the bloody naysayers, pessimists, and perennial bears come out with some claptrap to suggest that this isn't as good as it seems.

    One hugely positive report was the number of temporary workers hired by the 2010 census.  Some of the naysayers suggest that the extra 48,000 temp workers hired to get surveys filled in shouldn't count because they aren't contributing anything to the economy and are only temporary.  Not like newsletter writers or the other 313,000 temporary help workers hired since September.  Besides, this is government employment.  Of the entire public service (17% of all employed), these census workers are probably the most productive.

    Then there's the population gain.  The population is growing at a rate of 0.997% per year, or around 250,000 a month, implying an extra 62,500 more service providers are required each month (based on a ratio of 1 in four -- a rather conservative estimate given that the current ratio is 1 in 3.4).

    Sure enough, health care and social assistance alone added on 36,700 new jobs in the month.

    "And don't forget the weather!" yell the pundits.  Sure, global warming took a holiday in February, which meant fewer jobs as construction and other outdoor work to the tune of around 100,000 according to Whitehouse estimates.

    So, three temporary effects added 210,500 new jobs.  But apart from that, the 162,000 jobs number is pretty rosy right?

    Except for U6 unemployment -- the widest measure of unemployment -- rising to 16.9% from 16.8% in February and 16.5% in January.

    Oh, and the 414,000 increase in long term unemployed (27+ weeks).

    And irrelevantly, average hourly earnings of all employees fell by 0.1%.

    But at least at 9.7%, the US is still in single figures in terms of headline unemployed and there's no sign of an uptick.  At least on the official U3 headline number!

 
 
   

Cheers,

 

Peter.

The Economic Republic of JP Morgan

    For those who aren't aware of it, JP Morgan is both the official banker to the Federal Reserve and a major shareholder in the Federal Reserve.

    If you think this gives JP Morgan huge powers, you are of course correct.

    If you think that JP Morgan and its partially owned client would use this relationship to make huge profits, then of course you are correct -- who wouldn't.

    And if you think JP Morgan, controls a small percentage of the US financial industry and financial markets, you'd probably be wrong.  While fractional reserve banking can leverage assets about 20:1, derivatives can leverage assets by more than 500 times. 

    As of the end of the last reporting period, JP Morgan had total paid in capital of $165 billion, but has a nominal derivatives portfolio of over $80 trillion!

 

    And as scary as this number is, the Bank of International Settlements reported that as of June last year, the total amount of over-the-counter derivatives totalled $529 trillion.  Add in the rest, and we're looking at more than ten times world GDP. 

    To be fair, though, JP Morgan hedges much of its derivative portfolio, and a bunch more is just there because it created synthetic interest rate swap derivatives (by far and away the largest part of its portfolio) for unsuspecting clients.

    Rather than go on a rant about JP Morgan (which isn't all that different from other large companies, in that it tries to maximize its profit by doing anything it can get away with), its tactics are brilliantly demonstrated in this Rolling Stone article.

    The story is basically how federal government interference, local government corruption, and JP Morgan's illegal tactics turned a $250 million sewage plant into a $5 billion debacle.  The average sewage bill is now around $16 a week, or a buck a dump.

    It's an awesome read and makes even the worst politicians in Washington look like boy scouts.  Enjoy.

 

Cheers,

 

Peter.

The other I in PIGS

    If you've ever been to Club Med, you know that one of the attractions is that you don't have to worry about money.  Because you've paid for everything up front (except for the supposedly optional activities of drinking and game fishing), everything seems free.  It's a great feeling I tell you.

    Imagine, though, that halfway through your holiday it seems that your payment had come short, all activities now have to be paid for, it's all going on your visa card at 28% interest, and you can't leave the island.

    Would you be pissed?  You bet.  Would you tell Club Med that this isn't what it promised?  Yup.  Would you Molotov cocktail the mean French bastards running the place?  It may come to that.

    This is how people are starting to feel in the Club Med Countries. 

    The Club Med Countries are those members of the eurozone that back onto the Mediterranean Sea -- Portugal, Italy, Greece, and Spain (creative geography was used to include Portugal) -- collectively known as the PIGS.

    The PIGS were admitted to the eurozone on the condition they keep their budget deficits below 3% or, in the case of Greece, first reduce the budget deficit and then get it below 3%. 

    Good politicians in all four countries said, "I do" and the governor of the European Central Bank said, "Until death or bankruptcy do you part."

    This worked for a while, partly because the economy was growing strongly, and partly because the Greek government got itself involved in complex financial derivatives that hid the actual debt it was piling up.

    Now, in order for Greece to get its deficit under 3% -- and no doubt the other PIGS in the future -- the government has to curtail all those activities that were previously considered paid for and seemingly free.  And I'm not talking about drinking and deep sea fishing.  This is stuff like old age pensions, health insurance, and unemployment benefits that life in socialist Europe is unimaginable without.

    Riots in Greece?  Yup.  People pissed?  Yup.  Molotov cocktails?  You bet.

    In Greece, the σκατά has really hit the fan.

 

 But over in not-so-sunny Ireland, it's looking even worse.  That country's now neck deep in cac.

    That the Irish can't run a bank doesn't really come as a complete surprise.  I know a lot of Irish jokes and have found a disproportionate number of them to be true.  Not that running banks into the ground is a particularly Irish phenomenon.

    This, however, isn't a joke:

    Irish banks need another $43 billion in new capital thanks to plunging property prices, which aredown 33.9% since their high in July 2006 -- and still in freefall. 

    This is because the National Asset Management Agency (NAMA) which was formed to buy EUR80 billion (USD107 billion) of bad assets from banks, found that the first batch was only worth 53% of face value. 

    Given that this is a government run and funded venture, and that housing prices are still falling, it would be pretty generous of NAMA to assume that the rest of the toxic waste being dumped on them is going to be worth 53% of face value. 

    Remember, these are loans that banks volunteered (or were forced to volunteer) to sell, so they ain't 30% loan to value primes.  These are really smelly toxic second mortgages.

    With housing down 33.9% from the top, second mortgages taken out three years ago on top of conservative 66% loan to value primes are now worth close enough to zero -- unless Paddy gave up drinking to keep up payments on his underwater house.

    Now this number, $107 billion, is what the government has to come up with somehow.  That's to fund NAMA and bail out the banks for the shortfall.  Sure, a couple of banks will be able to beg, borrow, or steal from its shareholders, but others such as Anglo Irish Bank in need of EUR18 billion, can only turn to the government because they are already nationalized.

    The number $107 billion is:

·        $1.5 million per square kilometre for the entire country

·        $25,934 per Irish person (even more per person living there)

·        47% of GDP (eerily similar to the discount applied)

·        $55,268 per tax payer

·        102% of the entire 2009 budget (oops!)

·        74% of what the entire Irish stock market was worth before the crisis

·        87.8% of current public debt (i.e. this could increase government debt by 87.8% to around 137% of GDP)

    This looks pretty dire, which is why Ireland was initially added to the Club Med Countries to create the PIIGS.

    One thing that we can look forward to here is further deterioration in asset quality and higher taxes on Guinness.

    That means, quite simply the Irish government is going to have to go even further into debt, find even more taxes to pay the interest, and cut back on social spending programs.

    This will take a while (i.e. until politicians can convince the electorate that outside forces are making them do things they'd never support otherwise, such as what the Greek government is doing). 

 

    But the immediate problem of public sector debt pales in comparison to total external debt.

 

    Total external debt means the public debt PLUS private debt -- what banks, companies, and individuals owe to the rest of the world.

    In this particular area, Ireland has a noticeable problem: total external debt as of September last year was $2,287 billion dollars.  And no, the comma isn't a typo -- that really is $2,287,000,000,000.00

    Ireland has the seventh largest external debt in the world -- slightly less than a sixth of the US, just behind Spain, and narrowly beating out Japan.

    For a country of 4.2 million people, that's over a half a million dollars per person.  OUCH.

    The IMF and World Bank (yeah, I know, not exactly the best economic advisors in the world) consider an external debt to exports ratio of 150% to be sustainable. 

    Ireland's external debt to exports is currently 1,906% based on 2008 numbers (and worse if using 2009 numbers). 

    This is nearly twice as bad as the US at 1,077%.  And America can simply create dollars out of thin air to pay its debts, while Ireland simply doesn't have access to the same printing press.

    Clearly, something has to give here. 

    I'm bullish on the euro... and would go long on it... but it looks like a few more closets will have to be opened and skeletons disposed of before I'm properly sold on it.

 

Cheers,

 

Peter.

One Hundred to One

    For those of you who haven't been following the latest shocking revelations in the gold market, here's a (not very) brief synopsis.

    The gold market has been manipulated for years by large bullion banks borrowing gold from the Federal Reserve or ETFs and selling it short.  This is an accepted fact in some circles, particularly in GATA, the Gold Anti-Trust Action Committee.

    For ten years now, GATA has been niggling for a proper investigation by the Commodities Futures Trading Commission (CFTC) into manipulation into gold and silver prices.

    Eighteen months ago, the CFTC finally agreed to investigate the markets and proceeded with typical bureaucratic rigor.  In other words, they've so far discovered nothing at huge expense.

    But just two weeks ago a whistle blower by the name of Andrew Maguire, an experienced gold trader who decided he's made enough money manipulating gold for ten years, contacted the CFTC with some stunning revelations.

    In a series of emails, he sent the commissioner a blow-by-blow description of precisely how the gold price would be manipulated on a particular day -- two days in advance.

    The CFTC somehow managed to control its excitement and exuberance when it responded to the entire collection of emails with, "I have received and reviewed your email communications.  Thank you so very much for your observations."

    A few days later when the CFTC held an open hearing into gold price manipulation, Andrew Maguire wasn't invited -- nor were other troublesome people.  Naturally, the CFTC listened politely and said, "Thank you for your time.  We'll get back to you."

    That really pissed of Mr Maguire, so he went on King World News and told the world what he'd told the CFTC.

    So why King World News?  Because these were the guys that helped Harry Markopolos publicize the Madoff ponzi scheme after the Federal Reserve -- supposedly the responsible regulator -- basically ignored him.

    In the interview, Andrew Maguire not only confirmed that the gold price was being manipulated, he also explained how he'd made his fortune front running the manipulation, shared the emails he'd shared with the CFTC -- exposing them for the bureaucrats they are (incompetent at best, but more likely corrupted) -- and then dropped an absolute bombshell.  The ratio of physical gold to actual gold traded on the world's main gold market, the London Bullion Exchange, is

One Hundred to One

    That's not the amount changing hands every day.  That's the outstanding short selling contracts net of hedges and spreads. 

    Or, to put it simply, each ounce of physical gold at the exchange has been sold 100 times over.

    This is fractional reserve banking on steroids.  We saw what happened when THAT house of cards collapsed.  The treasury had to borrow trillions of dollars to shore up the banks and the Fed went off and printed another $1.7 trillion to prevent a shortage of money.

    But with gold, it's somewhat more awkward than that.  For example, the US government can't go and borrow gold so easily -- especially when it's already lent its gold reserves to JP Morgan.  And the Fed, alas, can't create gold out of thin air like it can dollars.

    Not that the Treasury and Fed aren't completely aware of what's going on and cooperating closely -- unless they have their collective heads in the sand.  Remember Bernie Madoff?  Who was head of the New York Fed -- Madoff's regulator -- while Bernie was ripping off billions?  Tim Geithner, the current Treasury Secretary.  He managed to get out of the job on January 26, 2009 -- just four weeks after Madoff was arrested and before the corruption and incompetence of the Fed was revealed.

 

    So back to the story...

    Having dropped this bombshell, backed up by examples, emails, and ten years of bathroom conversations with JP Morgan's brokers, both King World News and Andrew Maguire became very unpopular.  Particularly in the finance-government-military-industrial complex circles.

    Having finished the interview, the shadowy organizations that don't actually exist went to work James Bond style.

    Andrew Maguire and his wife were hospitalized in a hit and run "accident" the following day, although in a very un-007 turn of events the perpetrator was caught after a multi-car and helicopter chase.  No word on him yet, or if he's talked.  But he'll be ignorant of who hired him anyway.

    As helicopters were chasing the cut-out with their infra-red imaging systems, a team of hackers began with the King World News website.  Now hacking a firewall protected news website can't be all that easy right?  But within minutes of the text of the interview being posted, the last third was erased by hackers -- the third about the 100 to 1 ratio.

    You might say, "Come on, US government or quasi-government agencies wouldn't do something like that."  You'd be wrong.  And who would know better than the Director of National Intelligence Dennis Blair, a retired four-star United States Navy Admiral.  In his testimony before Congress, he stated pretty clearly that, “Being a U.S. citizen will not spare an American from getting assassinated by military or intelligence operatives … If we think that direct action will involve killing an American, we get specific permission to do that.”

    The obvious thing to do right now is to buy physical gold or gold miners.  That's for you and me.  But for funds it becomes much harder.

    Betting on gold by going long is all very well for a small fund such as Greenlight Capital, which sold its holdings of GLD and bought the physical metal.  However, for an investment bank or a large fund, it's betting against the government.  And governments (and the Fed) don't like that:

    Remember Bear Stearns?  This was the one major bank that had huge long positions on gold at the beginning of the crisis -- betting against the government sponsored manipulation.  JP Morgan et al -- with complicit help from the US government -- drove the price of gold through the floor and bankrupted the company.  And then in the fallout while Bear shareholders were crying foul, the Federal Reserve announced that it would guarantee all Bear assets if JP Morgan would kindly take it over at just $2 a share -- at a time the stock was trading at over $20.  Oh, and this offer isn't available to anyone else AND we guarantee Bear will go bankrupt if shareholders vote against the deal.  Nice gift.  Thanks.

    So, any big hedge fund that starts being naughty and taking physical delivery of the stuff will be pretty firmly discouraged by the regulators.

    Not that hedge fund managers have any illusion about the value and potential gains of gold: 90% of hedge fund managers have been buying gold for their personal accounts, according to a survey by London-based Moonraker Fund Management.  But they'll keep their funds out of it.

    This will postpone the inevitable for a while.  But... remember George Soros' comment about gold being the "ultimate bubble"?

    This was misconstrued at the time by mainstream press to say that gold was in a bubble, but later SEC filings showed that Soros had actually been buying the stuff.

    What he really meant -- and said -- was that, "low interest rates lead to bubbles."  With low interest rates and huge money printing as far as the eye can see, the price of gold will head to a price that balances supply and demand -- and then a whole lot more.  THAT will be a bubble.

    Last time this happened, gold soared from $35 an ounce in 1971 to $800 an ounce in 1980 -- a 2,200% return in just nine years, or 41% annualized.  

    So why did gold soar?  "Joint intervention in gold sales to prevent a steep rise in the price of gold... was not undertaken.  That was a mistake."

    That's a quote from former Fed Chairman Paul Volker, who by the way is an advisor to the Obama administration.  Intervention may as well be public policy.

    In 1980, gold was definitely in a bubble.  Nine years from now, gold may well become a bubble again -- at $20,000 an ounce.  I've been swapping out of paper gold into physical gold, silver, and platinum over the past few months because, heck, I'm willing to wait a few years for a 2,000% return!

 

Cheers,

 

Peter.

New Zealand adopts cap and trade for livestock

    After two years of debate, the New Zealand legislature yesterday voted to adopt changes in its emissions trading scheme (NZ ETS) proposed in November.

    The adoption of the scheme will mean carbon offsets by forest owners will have to trade their carbon credits locally instead of exporting them to Europe.  It also has huge implications for the livestock industry.

    Unlike the EU Emissions Trading Scheme, though, the NZ scheme will include all six greenhouse gases identified in the Kyoto Protocol: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6). 

    The biggest hurdle to date has been the issue of methane being emitted from cattle.  Bovines typically lose around 6% of their ingested energy through methane emissions.

    Collectively, sheep and cattle produce between 400 and 600 million tons of methane per year, which is a carbon equivalent of around 10 billion tons of CO2.

    In fact, according to a recent UN report, rearing cattle actually produces more greenhouse gases than driving cars.

    Initially, the government and the NZ Farmers Association planned to simply follow the US EPA's AgSTAR Program to recycle waste manure.  However, this wouldn't work so well in New Zealand where sheep and cattle are grass fed (free range) rather than grain fed (where their first look at the outside world is the trip to the abattoir).

    But thanks to a grant from the New Zealand Climate Change Information Agency (NZ CIA), a part of the Ministry for the Environment, New Zealand's own Sheep Research Foundation developed two new methods for harvesting the methane from livestock.

 

 
    First, all livestock will be fitted with manure catchers similar to the horse bun bag.  These will be fitted with an electronic catch which will automatically trigger when the livestock are within 5m of a predetermined position for manure collection.

 

    Second, to capture the belching -- responsible for more than half of the methane emissions, livestock will be fitted with carbon filter gas masks.  A series of balances allow the mask to open when in feeding position and close when in "chewing the cud" mode. 

    These WWI technology masks capture 80% of the CH4 emitted if changed every day.

    The special design, which reduces the permeability of the filters as they absorb methane, will reduce the oxygen intake of the animal and make it easier to catch and replace the filter. 

    Over time, the livetock will learn to head to the filter change location and either have their filters changed by a farm hand, or change their own filter.  According to the head researcher, Cliff Rogering, sheep can be trained to do just about anything.

    Of course, this could all be unnecessary in the end, thanks to a team of New Zealand researchers who mapped the sheep flatulence genome and are working on a vaccine.  (My girlfriend has already pre-ordered one for me). 

    This, combined with flatulence retarding cashew oil and new low flatulence grasses could reduce bovine emissions to that of Le Pétomane.

    While I'm a bit of a cynic when it comes to global warming and supposed solutions, for once I'm pleasantly surprised to see government doing something well, and raising the level of respect the world has for our Kiwi friends.

 

Cheers, 

Peter.