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Can The Fed “Normalize” Without Collapsing The System?

The official lies about the economy keep mounting.  The Dallas Fed reports that its regional economic activity metric surged in early September, despite the complete shut-down of Houston for a few days during the “measurement” period.  The “general activity” index spiked up to a 7-month high. Clearly the quality of this report is suspect, to say the least.

Contrary to this report, the Chicago Fed’s National Activity Index plunged to -0.31.  It was the weakest reading since last August and a huge plunged from the July reading of 0.03. The Street was expecting 0.11.  Because of the nature of this index (85 sub-components measured at the national level) it takes a lot to “move the needle” for this metric.  A negative point-three-one reading implies that the national economy broadly contracted during August.

Clearly the Dallas Fed propaganda was intended to reinforce the Fed’s empty threat to raise interest rates and “normalize” its balance sheet .  Silver Doctors invited me onto their Friday weekly market podcast to discuss the latest propaganda that spewed forth from the Fed’s FOMC meeting earlier in the week, the western Central Banks’ losing battle to push the price of gold lower and the continuing deterioration in the U.S. political and economic system:

The precious metals is in the early stages of another bull market run, like the one that occurred from 2001-2011. This one is being driven by the China-led movement to remove the dollar as the world’s reserve currency and replace with a currency that will incorporate incorporating gold back into the monetary system. The Mining Stock Journal is a bi-weekly newsletter that will help you get invested ahead of the next huge capital flow into the precious metals sector. To find more, click here:  Mining Stock Journal

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“Never Let A Good Crisis Go To Waste” – And Short AMZN

The “crisis” quote above originated with Winston Churchill. Several U.S. politicians have referenced it since then (most recently Rahm Emanuel when he was Obama’s Chief of Staff). I’m sure the Wall Street snake-oil salesmen and economic propagandists are more than happy to attribute the deteriorating economic numbers to the hurricanes that hit Houston and southwestern Florida.

Retail sales for August were released a week ago Friday and showed a 0.2% decline from July. This is even worse than that headline number implies because July’s nonsensical 0.6% increase was revised lower by 50% to 0.3% (and it’s still an over-estimate).

Before you attribute the drop in August retail sales to Hurricane Harvey, consider two things: 1) Wall St was looking for a 0.1% increase and that consensus estimate would have taken into account any affects on sales in the Houston area in late August; 2) Building materials and supplies should have increased from July as Houston and Florida residents purchased supplies to reinforce residences and businesses. As it turns out, building supplies and material sales declined from July to August, at least according to the Census Bureau’s assessment. Furthermore, online spending dropped 1.1%. Finally, the number vs. July was boosted by gasoline sales, which were said to have risen 2.5%. But this is a nominal number (not adjusted by inflation) and higher gasoline prices, i.e. inflation, caused by Harvey are the reason gasoline sales were 2.5% higher in August than July.

Too be sure, the retail sales overall were slightly affected by Harvey. But the back-to-school spending is said to have been unusually weak this year and AMZN’s Prime Day no doubt pulled some August online sales into July. However, back-to-school spending reflects the deteriorating financial condition of the middle class. I have no doubts in making the assertion that the factors listed in the previous paragraph which would have boosted sales in August because of Harvey offset significantly any drop in retail sales in the Houston area during the hurricane.

Note – John Williams published his analysis of retail sales and it agrees with my analysis above (Shadowstats.com): Net of Hurricane Harvey Effects – Headline Economic Numbers Still Were Miserable, Suggestive of Recession – Hurricane Impact on August Activity: Mixed, Probably Net-Neutral for Retail Sales – August Real [inflation-adjusted] Retail Sales Declined by 0.61% (-0.61%) in the Month, Plunged by 1.24% (-1.24%).

The Fed Continues To Target Stock Prices. The Dow and the SPX continue to hit new all-time highs every week. At this point there’s no explanation for this other than the fact that, according to the latest Fed data, the Fed’s balance sheet increased by $18 billion two weeks ago. This means that the Fed pushed $18 billion into the banking system, which translates into up $180 billion in total leverage (the reserve ratio on high-powered bank reserves is 10:1).

The good news – for Short Seller’s Journal subscribers – is that, despite this overt market intervention, a large portion of the stocks in the SPX are trading below their 200 dma:

The chart above shows the percentage of stocks in the SPX trading above their 200 dma. In March nearly 80% of the stocks were above the 200 dma. By late August the number was down to 54%. Currently 60% are trading above the 200 dma, which means 40% are trading below.

It’s uglier for the entire stock market, as only 43.5% of the stocks in the NYSE are trading above their 200 dma, which means that 56.5% are trading below the 200 dma. This explains why neither the Nasdaq nor the Russell 2000 were able to close at new all-time highs.

Without the Fed’s direct support of the stock market, there’s no question in my mind that the stock market would be crashing. Perhaps more frightening is the increasing amount of debt being added throughout the U.S. financial system. The debt ceiling limit was suspended until December. The amount of Treasury debt outstanding jumped over $300 billion to over $20 trillion the day the ceiling was suspended. John Maynard Keynes’ macro economic model was one in which Governments could stimulate economic growth through debt-financed deficit spending. But once the economy was in growth mode, the Government was supposed to operate at a surplus and pay down the debt. Never did Keynes state that it was acceptable to incur deficit spending and debt to infinity, which is the current course of the U.S. Government.

Trump has suggested removing the debt ceiling. I’m certain it was “trial balloon” to see how vocal the opposition to this idea would be. The Democratic leaders love the idea. I have not heard much resistance from the Republicans. My bet is that by this time next year, or maybe even by the end of the year, there will not be a debt-ceiling on the amount of money the Government can borrow. In truth, this is no different than giving the Government an unlimited printing press.

Corporate high yield debt issuance has exploded globally, as you can see from the chart to the right, which shows the amount of junk bond debt issuance annually on a trailing twelve month basis. Globally the amount outstanding has increased by more than 400%. Close to 60% of this issuance has occurred in the U.S. In conjunction with this, U.S. corporate debt hits an all-time high every month. Most of this debt is being used either to re-purchase stock or over-pay for acquisitions (see the AMZN/Whole Foods deal).

Currently the amount of debt issued to complete acquisitions as a ratio of Debt/EBITDA is at an all-time high, with 80% of all deals incurring a Debt/EBITDA of 5x or higher. The last time this ratio hit an all-time high was, you guess it, in 2007. As an example, let’s look at AMZN’s acquistion of Whole Foods. AMZN issued $16 billion of debt in conjunction with its acquisition of Whole Foods. No one discussed this, but the Debt/EBITDA used in the transaction was 13x. Whole Foods operating income plunged 25% in the first 9 months of 2017 vs the first nine months of 2016.

A 13x multiple outright for a retail food business with rapidly declining operating income is an absurd multiple. That the market let AMZN issue debt in an amount of 13x Whole Food’s EBITDA is outright insane. What happened to all that “free cash flow” that Amazon supposedly generates? According to Bezos, it was $9.6 billion on a trailing twelve month basis at the end of Q2. If so, why did AMZN need to issue $17 billion in debt?  We know that the truth (see previous analysis on AMZN) is that AMZN does not, in fact, generate free cash flow but burns cash on a quarterly basis. Currently AMZN is busy slashing prices at Whole Foods, which will drive WF’s operating margin from 4.5% toward zero. This is the same model that is used in AMZN’s e-commerce business, which incurred an operating loss in Q2.

In my view, AMZN continues to be one of the best short ideas on the board – the graph below is as of last Friday (Sept 15th) when AMZN closed at $986, Short Seller Journal subscribers were given some put option ideas as alternatives to shorting AMZN outright (click to enlarge):

The chart above is a 1-yr daily. Technical analysis adherents would see the head and shoulders formation I’ve highlighted in AMZN’s chart. This is potentially quite bearish. Despite the Dow and SPX hitting a series of all-time highs this month, AMZN has not come within 5% of its all-time high on July 26th ($1052 close). It traded up to $1083 intra-day the next day before closing below the previous day’s close and then dropped its Q2 earnings bombshell when the market closed. Based on its $986 close this past Friday, it’s 9% below its July 27th intra-day high-tick. Some might say that’s “halfway to bear market territory.”

AMZN lost $31 last week despite the SPX hitting a record high on Wednesday. This negative divergence is bearish.  In addition, Walmart has taken off the gloves and is directly attacking AMZN’s e-commerce business model.  WMT offers 2-day free shipping on millions of items without the requirement of spending money upfront to join a “membership.”  WMT is also running television ads during prime time which attack some of AMZN’s marketing gimmicks.

Some other bearish technical indicators, a highlighted above: 1) Since the end of July, the volume on down days in the stock price has been higher than the the volume on up days; 2) The RSI has been declining gradually since early April; 3) the MACD (bottom panel) has been declining steadily since early June. All three of these indicators reflect large institutional and/or hedge funds selling their positions.

The stock is sitting precariously on its 50 dma (yellow line above). I would not be surprised to see it test its 200 dma, currently $904, before it reports Q3 earnings. If you want to speculate on this possibility, the October 6th weekly $920 – $930 puts, depending on how much premium you want to pay, might be a good bet. You might also want to out another week to the October 20th series. One caveat is that AMZN will no doubt manipulate its numbers using merger and acquisition accounting gimmicks, which give the acquiring a window in which to egregiously manipulate GAAP numbers. I don’t know if the market will “see” through this or not. But based on the performance of the stock since AMZN dropped its Q2 earnings bombshell, I’d say the stock on “on a short leash.”

The above commentary and analysis is directly from last week’s Short Seller’s Journal. If you would like to find out more about this service, please click here:  Short Seller’s Journal subscription info.

Will The Fed Really “Normalize” Its Balance Sheet?

To begin with, how exactly does one define “normalize” in reference to the Fed’s balance sheet?  The Fed predictably held off raising rates again today.  However, it said that beginning in October it would no longer re-invest proceeds from its Treasury and mortgage holdings and let the balance sheet “run off.”

Here’s the problem with letting the Treasuries and mortgage just mature:   Treasuries never really “mature.” Rather, the maturities are “rolled forward” by refinancing the outstanding Treasuries due to mature.   The Government also issues even more Treasurys to fund its reckless spending habits.  Unless the Fed “reverse repos” the Treasurys right before they are refinanced by the Government, the money printed by the Fed to buy the Treasurys will remain in the banking system.  I’m surprised no one has mentioned this minor little detail.

The Fed has also kicked the can down the road on hiking interest rates in conjunction with shoving their phony 1.5% inflation number up our collective ass.  The Fed Funds rate has been below 1% since October 2008, or nine years.   Quarter point interest rate hikes aren’t really hikes. we’re at 1% from zero in just under two years. That’s not “hiking” rates.  Until they start doing the reverse-repos in $50-$100 billion chunks at least monthly, all this talk about “normalization” is nothing but the babble of children in the sandbox.  I think the talk/threat of it is being used to slow down the decline in the dollar.

To justify its monetary policy, Yellen stated today that she’s, “very pleased in progress made in the labor market.”  Again, how does one define progress?  Here’s one graphic which shows that the labor market has been and continues to be a complete abortion:

The labor force participation rate (left y-axis) has been plunging since 2000. It’s currently below 63%. This means that over 37% of the working age population in the United States is not considered part of the labor force. That’s close to 100 million people between the ages of 15 and 64 who, for whatever reason, are not looking for a job or actively employed. A record number of those employed are working more than one part-time job in order to put food on table and a roof over the heads of their household. Good job Janet! Bravo!.

The blue line in the graph above shows the amount of dollars spent by the Government on welfare. Note the upward point acceleration in the rate of welfare spending correlates with the same point in time at which the labor force participation rate began to plunge. Again, nice work Janet!

The labor force participation rate is much closer to the true rate of unemployment in the United States.  John Williams of Shadowstats.com has calculated the rate of unemployment using the methodology used by the Government a couple of decades ago and has shown that a “truer” rate of unemployment is closer to 23%.

The true level of unemployment  is definitively the reason why the rate of welfare spending increased in correlation with the decline in those considered to be part of the labor force.   It could also be shown using the Fed’s data that another portion of the plunging labor force participation rate is attributable to the acceleration in student loans outstanding.  I would argue that part of the splurge in student loan funding, initiated by Obama, was used to keep potential job-seekers being forced by economic necessity from  seeking jobs and therefore could be removed from the labor force definition, which in turn lowers the unemployment rate.

As I write this, Yellen is asserting that “U.S. economic performance has been good.”  I’d like to get my hands on some of the opioids she must be abusing.  Real retail sales have been dropping precipitously (the third largest retail store bankruptcy in history was filed yesterday), household debt is at an an all-time high, Government debt hits an all-time high every minute of the day and interest rates are at 5,000 year lows (sourced from King World News)

Note to Janet:   near-zero cost of money is not in any way an attribute of an economy that is “doing well.” In fact, record levels of systemic debt and rising corporate and household bankruptcies are the symptoms of failed Central Bank economic and monetary policies. This is further reinforced by the record level of income disparity between the 1% highest income earners and the rest of the U.S. labor force.

The entire U.S. economic and financial system is collapsing.  If the Fed truly follows through on its threat to “normalize” its balance sheet and raise rates, the U.S. will likely collapse sometime in the next couple of years. On other hand, up to this point since Bernanke’s famous “taper” speech in May 2013, most of the Fed’s statements with regard to hiking rates (hiking them for real) and reducing its balance sheet has been nothing but hot air.  And in fact, unless the Fed reverse repos its balance sheet back to the banks, it’s assertion of “balance sheet normalization” is nothing more than another in long series of lies.

Why Is The BIS Flooding The System With Gold?

A consultant to GATA (Gold Anti-Trust Action Committee) brought to our attention the fact that gold swaps at the BIS have soared from zero in March 2016 to almost 500 tonnes by August 2017 (GATA – BIS Gold Swaps). The outstanding balance is now higher than it was in 2011, leading up to the violent systematically manipulated take-down of the gold price starting in September 2011 (silver was attacked starting in April 2011).

The report stimulated my curiosity because most bloggers reference the BIS or articles about the BIS gold market activity without actually perusing through BIS financial statements and the accompanying footnotes.  Gold swaps work similarly to Fed repo transactions.  When banks need cash liquidity, the Fed extends short term loans to the banks and receives Treasuries as collateral.  QE can be seen as a multi-trillion dollar Permanent Repo operation that involved outright money printing.

Similarly, if the bullion banks (HSBC, JP Morgan, Citigroup, Barclays, etc) need access to a supply of gold, the BIS will “swap” gold for cash.   This would involve BIS or BIS Central Bank member gold which is loaned out to the banks and the banks deposit cash as collateral to against the gold “loan.”   This operation is benignly called a “gold swap.”  The purpose would be to alleviate a short term scarcity of gold in London and put gold into the hands of the bullion banks that can be delivered into the eastern hemisphere countries who are importing large quantities of gold (gold swaps outstanding are referenced beginning in 2010).

I wanted dig into the BIS financials and add some evidence from the GATA consultant’s assertions because, since 2009, there has been a curious inverse correlation between the amount of outstanding gold swaps held by the BIS and the price of gold (as the amount of swaps increase, the price of gold declines).   You’ll note that in the 2009 BIS Annual Report, there is no reference to gold swaps so we must assume the amount outstanding was zero. By 2011 the amount was 409 tonnes.

The gold swaps enable the BIS to “release” physical gold into the banking system which can then be used to help the Central Banks manipulate the price of gold lower.   This explains the jump in BIS gold swaps between March 2016 and March 2017 and the drop in the price of gold from August 2016 until early July 2017.  It also explains the rise in the price of gold between July and September this year, which correlates with a decline in the outstanding gold swaps between April and July .  Finally, the hit on gold that began earlier this month coincides with a sudden jump in BIS gold swaps in the month of August. (Note: there would be a short time-lag between the gold swap operation and the amount of time it takes to “mobilize” the physical gold)

The graphic below shows the increase in gold swaps from March 2016 to March 2017:

As you can see, the total amount of the gold loans outstanding increased by 14.1 billion SDRs (note: the BIS expresses its financials in SDRs). The accompanying note explains that most of this gold loan is comprised of an increase in the BIS’ gold swap contracts outstanding.

I find it interesting that the reports of gold backwardation in London (see James Turk’s interviews on King World News) and the backwardation I have observed between the current-month (delivery month) Comex gold contract and the London gold fixings over the past several months  correlates well with the sudden jump in gold swap activity at the BIS.

Backwardation in any commodity market indicates that the demand for delivery of the underlying commodity is greater than the near-term supply of that commodity.  It’s hard to ignore that the backwardation observed on the LBMA and with Comex gold delivery-month contracts has been accompanied by soaring gold demand from India, as reported by the Economic Times of India (article link):  Gold Imports Jump Three-Fold in April-August.

Furthermore, it appears as if the BIS gold swap activity continued to increase between March 2017 and August 2017, as the BIS’s August Account Statement  shows another 2.2 billion SDR increase in amount of outstanding gold loans (a BIS monthly account statement only reports the balance sheet with no accompanying disclosure). These loans primarily are swaps,  per the disclosure in the 2017 Annual Report.

However, this jump in gold swaps between March and August is somewhat misleading. The outstanding amount of loans declined from 27.2 billion SDRs at the end of March to 24.6 billion SDRs at the end of July.   The price of gold rose over 11% between July and early September.   By the end of August, the BIS balance sheet shows 29.3 billion SDRs.  A jump of 4.7 billion SDRs worth of gold swaps.

It was around April that the World Gold Council began to forecast that India’s gold importation would drop to 95 tonnes per quarter starting in Q2.  As it turns out, India imported 248 tonnes of gold in Q2 2017.  This number does not include smuggled gold. Please note the curious correlation between the jump in BIS gold swap activity at the end of the summer and the unexpected surge in Indian gold imports.

In my view, there is a direct correlation between this sudden leap in the amount of gold swaps conducted by the BIS between July and August and the price attack on gold that began two weeks ago.   The gold swaps provide bullion bar “liquidity” to the bullion banks who can use them to deliver into the rising demand for deliveries from India, China, Turkey, et al.  This in turn relieves the strength and size of “bid” on the LBMA for physical gold which in turn makes it easier for the same bullion banks to attack the price of gold on the Comex using paper gold.  This explains the current manipulated take-down in the price of gold despite the rising seasonal demand from India and China.  

Anti-Gold Puppet Now Hints Gold Will Soar

Several representatives of the elitists have been warning about a major global financial crisis.  Recently the former Head of the Monetary and Economics Department at the Bank of International Settlements, the Central Bank of Central Banks, warned that there are “more dangers now than in 2007.”

Goldman Sachs commodities analyst, Jeff Currie, who is infamous for incorrectly predicting gold would drop to $800 about three years ago, recently advised anyone listening to own physical gold:  “don’t buy futures or ETFs…buy the real thing. . .the lesson learned was that if gold liquidity dries up along with the broader market, so does your hedge, unless it’s physical gold in a vault, the true hedge of last resort.”

Jeffrey Christian has spent most of his career operating as a shill for the western Central Banks and bullion banks who lead the effort to manipulate gold using fraudulent paper gold derivatives.  He scoffs at the idea that gold is manipulated.   It was curious, then, when he was interviewed by Kitco and was recommending that investors should hold at least 20% of their assets in gold.  He also forecast a $1700 price target.

SGT Report invited me to discuss the significance Christian’s comments, which of course included a denial of gold manipulation:

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The Bitcoin And Cryptocurrency Bubble

I actively traded the internet stocks during the late stages of the internet/tech stock bubble in 1999 – from the short side. I will admit that I did take a few long-side day trade rides on a few internet stocks. I remember one Chinese internet stock that I bought in the morning at $10 after its IPO free’d up to trade and sold it about 2 hours later at $45.  To this day I have no idea what the company’s concept was all about  – I think it was one of those incubators. I doubt that company was in existence after 2001.  As such, the crypto-currency craze reminds me of the internet stock bubble.

The cryptos certainly are a heated debate. The volume from the Bitcoin defenders is deafening, the degree to which I’ve only seen near the peak of bubbles. I had a subscriber cancel his Mining Stock Journal subcription after sending me an email explaining that he canceled because he was pissed off that I was not a Bitcoin proponent.  He accused me of discouraging people from buying Bitcoins. His loss, he’s missed on out some high rate of return trade ideas in a short period of time like Banro and Tahoe Resources.  I’m not trying to discourage anyone from buying anything. I’m simply laying out the “caveat emptor” case.

Having said that, there’s truth to the proposition that the inability to short Bitcoin contributes to its soaring valuation.  I’d like to have an opportunity to see what would happen to the value of gold if the ability to short gold via the paper gold mechanism was removed from the equation.

Is it “Bitcoin” or “Bitcon?” The cost to produce, or “mine,” a Bitcoin does not imbue it with inherent value, as some have argued. It cost money to produce Pet Rocks in the 1970’s and they took off like a Roman Candle in popularity purchase price. Now if you own a Pet Rock, it’s nearly worthless. It costs money to produce and defend dollars. We know the dollar is headed for the dust-bin of history.

I’m not saying you can’t make money on cryptos. A lot of people made a small fortune on internet company stocks in 1999. But I’d bet that 98% of the internet stocks IPO’d during the tech bubble no longer exist. Currently cryptos are fueled by the “greater fool” model of making money. Most buyers of the cryptos are buying them on the assumption they’ll be able to sell them at a later time to another buyer at a higher price.

Cryptos are de facto fiat currencies. Perhaps there’s a limit to the supply of each one individually. But that proposition has not been vetted by the test of time. I do not believe that anything in cyberspace is 100% immune from hacking. Just because there have not been reports of the Bitcoin block-chain being hacked yet does not mean it can’t be hacked. It’s also possible that, for now, any breach has been covered up. Again, the test of time will resolve that. However, as we’ve seen already, the quantity of cryptocurrencies can multiply quickly in a short period of time. Thus, in that regard cryptos are no different than any fiat currency.

Finally, all it takes is the flip of a switch and your Bitcoin is unusable. But all these flaws are, for now, covered up by the euphoria of the mania. This is no different from every flawed “investment” mania in history. The current wave of crypto buyers are buying them with the hope of selling them at higher price later. “Hope” is not a valid investment strategy. “Hope” is the heart-beat of a speculative market bubble.

Perhaps one of the most definitive signals that the top in Bitcoin is imminent is this snapshot taken by the publisher of the Shenandoah blog at johngaltfla.com:

This picture was snapped in Florida. The sign says “got bitcoin? Passive income and no recruiting. Earn up to 1% on your money Monday – Friday.”

I recall reading about the process by which Bitcoins are “mined.” Anyone can get started but it involves an upfront investment plus the ongoing expense of the considerable amount of energy used to power the computer system required to engage in the mining process.

Let me guess, the creators of Bitcoin will be happy to assist you with buying the equipment and software necessary to get started?  How is this any different from a high-tech-equivalent of a multi-level marketing scheme?  As johngaltfla asserts: “When someone implies that it is ‘easy money’ it isn’t, it is a bubble.”

I’m not here to criticize anyone attempting to profit from trading Bitcoin. I am suggesting that it is not a good idea to get married to the trade. I regret not loading up on Bitcoins in 2012.

Without a doubt I believe there is legitimacy to the cryptocurrency concept. However,  I can envision a Central Banking-led attempt to implement the crptocurrency model as means of centralizing the process of removing cash currency from the system. But that also means the eventuality that Governments collude to remove competing cryptos from the internet. This is just surmisal on my part.  Again, the test of time will determine the ultimate fate of cryptos.

Speaking of time-tested money, it’s worth noting that China is going to roll out a gold-backed yuan oil futures contract – not a cryptocurrency-backed yuan contract. Perhaps one of the major Central Banks will eventually roll out a gold-backed cryptocurrency. That’s where I believe this could be headed.

“Things Have Been Going Up For Too Long”

I have to believe that the Fed injected a large amount of liquidity into the financial system on Sunday evening. The 1.08% jump in the S&P 500, given the fundamental backdrop of economic, financial and geopolitical news should be driving the stock market relentlessly lower. The amount of Treasury debt outstanding spiked up $318 billion to $20.16 trillion. I’m sure the push up in stocks and the smashing of gold were both intentional as a means of leading the public to believe that there’s no problem with the Government’s debt going parabolic.

Blankfein made the above title comment in reference to all of the global markets at a business conference at the Handlesblatt business conference in Frankfurt, Germany on Wednesday. He also said, “When yields on corporate bonds are lower than dividends on stocks – that unnerves me.” In addition to Blankfein warning about stock and bond markets, Deutsche Bank’s CEO, John Cryan, warned that, “We are now seeing signs of bubbles in more and more parts of the capital market where we wouldn’t have expected them.”

It is rare, if not unprecedented, the CEO’s of the some of the largest and most corrupt banks in the world speak frankly about the financial markets. But these subtle expressions of concern are their way of setting up the ability to look back and say, “I told you so.” The analysis below is an excerpt from the latest issue of the Short Seller’s Journal. In that issue I present a retail stock short idea plus include my list of my top-10 short ideas. To learn more, click here: Short Seller’s Journal information.

In truth, it does not take a genius or an inside professional to see that the markets have bubbled up to unsustainable levels. One look at GS’ stock chart tells us why Blankfein is concerned (Deutsche Bank’s stock chart looks similar):

The graph above shows the relative performance of GS vs. the XLF financial ETF and the SPX. Over the last 5 years, GS stock has outperformed both the XLF and the SPX. But, as you can see, over the last 3 months GS stock not only has underperformed its peers and the broader stock market, but it has technically broken down. Since the 2009 market bottom, the financials have been one of the primary drivers of the bull market, especially the Too BIg To Fail banks. That’s because the TBTFs were the primary beneficiaries of the Fed’s QE.

The fact that the big bank stocks like GS and DB are breaking down reflects a breakdown in the financial system at large. DB was on the ropes 2016, when its stock dropped from a high $54 in 2014 to $12 by September. It was apparent to keen observers that Germany’s Central Bank, the Bundesbank, took measures to prevent DB from collapsing. Its stock traded back up to $21 by late January this year and closed Friday at $16, down 24% from its 2017 high-close.

This could well be a signal that the supportive effect of western Central Bank money printing is wearing off. But I also believe it reflects the smart money leaving the big Wall Street stocks ahead of the credit problems percolating, especially in commercial real estate, auto and credit card debt. The amount of derivatives outstanding has surpassed the amount outstanding the last time around in 2008, despite the promise that the Dodd-Frank legislation would prevent that build-up in derivatives from repeating. It’s quite possible that the financial damage inflicted by the two hurricanes will be the final trigger-point of the next crisis/collapse. That’s the possible message I see reflected in the relative performance of the financials, especially the big Wall Street banks.

This would explain why the XLF financials ETF has been lagging the broad stocks indices.  It’s well below its 52-week high and was below its 200 dma until today’s “miracle bounce” in stocks.

Again, I believe the really smart money sniffs a derivatives problem coming. Too be sure, the double catastrophic hurricane hit, an extraordinarily low probability event, could well be the event that triggers a derivatives explosion. Derivatives are notoriously priced too low. This is done by throwing out the probability of extremely rare events from the derivative pricing models. Incorporating the probability of the extremely rare occurrences inflate the cost of derivatives beyond the affordability of most risk “sellers,” like insurance companies.

Let me explain. When an insurance company wants to lay off some of the risk of insuring against an event that would trigger a big pay-out, it buys risk-protection – or “sells” that risk – using derivatives from a counter-party – the “risk buyer” – willing to bet that the event triggering the payout will not occur. If the event does not occur, the counter-party (risk buyer) keeps the money paid to it to take on the risk. If the event is triggered, the counter-party is responsible for making an “insurance payment” to the insurance company in an amount that is pre-defined in the derivatives contract.

Unfortunately it is the extremely low probability events that cause the most financial damage (this is known as “tail risk” if you’ve seen reference to this). Wall Street knows this and, unfortunately, does not incorporate the truth cost – or expected value – of the rare event from occurring into the cost of the derivative. Wall Street plays the game of “let’s pretend this will never happen” because it makes huge fees from brokering these derivatives. When the rare event occurs, it causes the “risk buyer” to default because the cost of making the payout exceeds the “risk buyer’s” ability to honor the contract. This is why Long Term Capital blew up in 1998, it’s why Enron blew up, it’s why the 2008 de facto financial collapse occurred. We are unfortunately watching history repeat. This is the what occurred in the “The Big Short.” The hedge funds that bet against the subprime mortgages knew that the cost of buying those bets was extremely cheap relative the risk being wrong.

If the hurricanes do not trigger a financial crisis, the massive re-inflation of subprime debt – and the derivative bets associated with that – are back to the 2008 levels.

The optimism connected to the stock market is staggering. According to recent survey, 80% of Americans believe that stock prices will not be lower in the next 12 months. This is the highest level of optimism since the fall of 2007. The SPX topped out just as this metric hit its high-point. The only time this level of optimism was higher in the history of the survey was in early 2000.

The United States Of Hubris

The U.S. Government is following the propaganda formula used by Joseph Goebbels that was devised by Sigmund Freud’s nephew, Edward Bernays. The basic idea is to keep repeating a lie enough times so that eventually the masses believe it. The “Russia hacked the election” propaganda is the perfect example. Hillary Clinton first mentioned it in reference to “Russia hacked the DNC emails” during one of the debates. That lie transformed into the “Russia hacked the election” false-narrative repeated every 30 seconds on Fox News, CNN and the greater mainstream media. In truth, to this day not one single shred of evidence has been produced to support the claim. And yet, the lie perpertuates and the public fears Russia. Charles Dickens could not have scripted a better socio-political parody.

This guest post is from “Antonius Aquinas:”

This year, as of yet, North Korea has not been responsible for a single death of a foreign national. Nor has the tiny communist state ever used a nuclear weapon against an enemy like the US did with its immoral and hellish destruction of two Japanese cities, Hiroshima and Nagasaki at the conclusion of WWII.

On the other hand, since the start of the Trump Presidency, US-backed forces have been responsible for the deaths of some 3700 civilians in Mosul, Iraq.** This is not to mention its murderous armed strikes in Yemen and Afghanistan. Nor is American aggression limited to direct military action, but its arms supply sales to despots and its puppets has escalated tensions and makes conflicts that do break out much more brutal.

Fortunately, for the future of global peace, US hegemony is coming to an end. The nation is hopelessly broke while its welfare/warfare economy is beyond reform and faltering badly which means that when the inevitable collapse does happen, it will mean the end or a serious pull back of the Empire. A similar situation took place in Great Britain in 1945 after it took part in another senseless global conflict which liquidated the British Empire once and for all.

Click here to read the rest: The United States of Hubris

Wave Good-Bye To The Dollar’s Reserve Status

“Paper Money Eventually Returns To Its Intrinsic Value – Zero” – Voltaire

Set aside all other financial, economic and political concerns continuously shoved in our collective faces by the mainstream media.  It’s a distraction – to a large degree intentional.

These are the ONLY events that matter right now:    this, “China Begins To Reset The World’s Currency System,” and this,   “Venezuela Is About to Ditch the Dollar in Major Blow to US: Here’s Why It Matters.”

Once the dollar is no longer regarded or used as the reserve currency, third-world poverty will engulf everyone in this country below the upper half percent wealth stratum…except those who possess a fair amount of physical bullion.  I just bought more gold and silver coins from a friend yesterday who had an uncontrollable urge to get their house painted and needed to sell some to me to fund it.  It won’t matter what the house looks like in a couple years but they would never take my word on that.

The level of assumed entitlement in this country by the middle class is absurd…

All the money and all the banks in Christendom cannot control credit…Money is gold and nothing else – JP Morgan’s 1912 Congressional testimony on “the justification of Wall Street

Trump has suggested permanently removing the Treasury debt-ceiling. The Treasury debt-ceiling is the last remaining barrier to the ability of the Fed and the Government to create an infinite amount of fiat currency.  Debt that is issued behaves exactly like printed currency until that debt is repaid.  The non-repayment and continued issuance of the amount of debt outstanding is the critical point to understanding this concept.  Since the early 1970’s, the Treasury debt outstanding has grown continuously.

Printed Treasury certificates created in this manner behave no differently than printed currency. This is a reality that economists completely ignore.  Most analysts who think they understand monetary economics look upon this concept with disdain. The continuous issuance of an increasing amount of credit of any type is no different that outright currency printing (until the amount of outstanding credit is paid off, which it never has been since the demise of Bretton Woods in 1971).

Removing the debt-ceiling gives the U.S. Government, in conjunction with the Fed, the power to print an unlimited amount of Treasury notes. Historically, a large portion of these notes have been funded with recycled petro-dollars. The “QE” implemented by the Fed funded $2.5 trillion of the Treasury issuance.  I don’t know where the funding for the next round will come from unless the Fed prints a lot more money.  I suspect it will. The price of gold (and silver) spiked-up on Friday in correlation with the announcement of Trump’s proposal.  That’s your warning shot

Is Novo Resources Worth $600 Million At This Point?

In the July 27th issue of the Mining Stock Journal, I discussed briefly the run-up in Novo Resources‘ stock (NSRPF, NVO.V). At that point the stock, which had gone parabolic, was trading at US$1.93 for a $225 million market-cap. In defiance of any type of fundamental valuation logic, Novo continued straight up, high-ticking at $4.71. Currently as I write this, the stock is trading at $3.26.  At $4/share on a fully diluted basis (the warrants and options are currently well in the money) the stock sports a $656 million market cap. This is absolute insanity for a company which does not have any proved resource beyond 495,000 of indicated/inferred resource at a project (Beatons Creek) not related to the news flow from the project (Karratha) that is driving the run-up in the stock. Investors are throwing money into this stock with little to no understanding of the meaning behind the contents of the news being released.  (Click in image to enlarge):

To be clear, I’m not suggesting that Novo is not for real. It very well could be. What I’m stressing is that very little is known about what Novo may or may not have at Karratha based on the information that has been gathered by the Company and released to the public. Just like the pretty pictures of beautiful gold nuggets from outcroppings at Karratha that Novo has put in its corporate presentation, I can show you pictures given to me from the management at Eurasian Minerals from its Koonenberry project in Australia of beautiful gold nuggets collected from “coarse gold” samples. That was eight years ago and the project has not been advanced from that time.

In general, it is unlikely that anything above an inferred mineral resource can be estimated from surface sampling and assaying that has been on Karratha’s coarse gold environment. While coarse gold can be indicative of a high-grade gold-bearing system beneath the surface, the presence of very high grade nuggets of coarse gold do not guarantee it. Economic grades of gold are generally contained within discrete ore shoots and are surrounded by low-grade material. The presence of coarse gold can complicate the exploration process.

I exchanged emails with a senior officer at another mining company with an Australian presence to see if he had any knowledge or thoughts on Novo’s situation. He said that Quinton Hennigh (Chairman) “has a real nose for this stuff.” But, as I have suggested above, he admitted that only underground drilling (much deeper than the couple of bulk samples produced from trenching) will tell us where the real source of the gold is, assuming it’s there to be found.

This is a project that will take years to explore and assess. I’m guesstimating at this point the project would be 8-10 years away from transitioning into a commissioned mining operation. Between now and then there’s is a substantial amount of expensive exploration and de-risking that needs to occur. Again, the presence of high-grade course gold-bearing nuggets does not guarantee that an economically mineable resource exists below the surface.

I’m not trying to discourage anyone from taking a shot at Novo. But the odds that it’s the next large deposit discovered (in excess of 10 million ozs) is small. My view is that this would be a great risk/return proposition if the stock were still under a $30-50 million market cap. For my risky investment allocation, I think Precipitate or Mineral Mountain represent better risk/return speculative bets than Novo at a $600 million market cap.

NOTE – Subsequent Event: It was announced on September 5th that Kirkland Lake (KIRK, KL.TO, market cap of US$3.4 billion) would be investing up to $56 million for up 7.7% of Novo’s stock in a private placement. While this is a positive event in terms of providing the Company with additional funds for drilling, we still need to see drill results – and a lot of drill results. This does not change my overall view that the stock price has run ahead of itself given what is known about the potential mineralization on the project. I would sell into the move higher today and wait for the stock to pullback to a lower level before taking a longer term position in the Company’s stock.

The stock closed at US$3.26 today (Thursday). In the last issue of the Mining stock Journal I recommended selling it at US$3.76. The stock is down 25.4% from its high-close (US$4.33) and 30.7% from its all-time high trade ($4.71). I’m not recommending avoiding the stock at all. This could be a very interesting speculative play. But it’s a function of the cost to invest. At $600 million, I will let others bear the exploration risk. If the stock were to pullback below $2 – and it might not – I will probably talk to my partners about putting some in the fund. I think the $1.40 area is a good entry point but it may never trade that low again.

If you want to learn more about Precipitate Gold or Mineral Mountain, or several other promising junior exploration companies, please follow this link for information about subscription newsletter: Mining Stock Journal