Syria: What Just Happened?

This essay on the ramifications of the United States’ Deep State missile attack on Syria.  The OPCW – Organization for the Prohibition of Chemical Weapons – is an independent organization formed to implement the provisions of the Chemical Weapons Convention.  There’s 192 member states, including the U.S. and Russia.

Russia sponsored a resolution in the U.N. for the U.N. to endorse the OPCW’s investigation of the alleged chemical attack in Syria.  Not surprisingly, the U.S. blocked the U.N. from endorsing the mission, which will still proceed as planned.  I would have  thought the U.S. would have led call for an independent investigation…

Eric Zeusse of the Strategic Culture Foundation writes:

So: what is at stake here from the OPCW investigation is not only the international legitimacy of Syria’s Government, but the international legitimacy of the Governments that invaded it on April 13th. These are extremely high stakes, even if no court in the world will possess the authority to adjudicate the guilt — either if the US and its allies lied, or if the Syrian Government lied.

The entire article is worth a perusal: Syria: What Just Happened?

As for the U.S. Government’s Deep State: Oh what a tangled web we weave, when first we practice to deceive. – Sir Walter Scott

Insane Valuations On Top Of Insane Leverage

The recent stock market volatility reflects the beginning of a massive down-side revaluation in stocks. In fact, it will precipitate a shocking revaluation of all assets, especially those like housing in which the price is driven by an unchecked ability to use debt to make the “investment.” This unfettered and unprecedented asset inflation is resting precariously on a stool that is about to have its legs kicked out from under it.

The primary reason the U.S. is now holding a losing hand at the global economic and geopolitical “poker table” is that this country has been committing too many sins for too long for there not to be a price to be paid. With bankrupt Governments (State and Federal), a bankrupt pension system, a broken healthcare system, all-time high corporate and household debt levels and a broken political and legal system, the U.S. is slowly collapsing. This is the “perfect storm” for which you want to own plenty of gold, silver and related stocks.

Eric Dubin and I are producing a new podcast called, “WTF Just Happened?” The inaugural show discusses the topics mentioned above:

“WTF Just Happened?” w/ Dave Kranzer and Eric Dubin is produced in association with Wall Street For Main Street       –       Follow  Eric here: http://www.facebook.com/EricDubin

This Is A Slippery Slope

First, does California State Senator, Richard Pan, hate the United States?  He is sponsoring a Bill in California that would effectively censor the internet.  Not withstanding fact that this proposed legislation stands in violation of Amendments 1, 5 and 14 of the United States Constitution, if passed it would impose State-sponsored censorship of the citizens of California.   Perhaps if Pan hates the United States and everything this country used to stand for, he should move back to the country of his ancestral origin where he might feel more comfortable.

Citizens  in a democracy have a responsibility to stay informed and conduct their own fact-checking.  Unfortunately, the majority of Americans have grown comfortable hearing headline sound-bytes on cable news media or seeing headlines in newspapers and assuming those are valid of evidence of fact. This is when freedoms and rights are in danger of removal.

Every mainstream media source in the U.S. recently has been required to retract news reports that were originally taken for granted as truth.   I shudder to think to of the number of Americans who still believe Russia rigged Trump’s victory or Russia poisoned Skirpal or Assad is spraying his citizens with gas.  All of these “facts” completely lack any shred of real evidence beyond propagandistic U.S. hear-say reports.

Furthermore, Pan’s Bill would establish State-sponsored “fact checkers” before anything could be posted on the internet.  This one is curious.  Why would anyone in this country trust the State?  Who would fact-check the fact checkers?  This part of the legislation would rip open a wide berth for State-sponsored tyranny.  Again, if Pan feels more comfortable in this type of system, please go back from whence your family came.

The First Amendment is supposed to guarantee free speech.  That means that anyone can say or write anything for public consumption.   What if the assertion or statement is false? Liable and slander laws have been implemented as a check and balance.  This falls under Constitutional Amendments 5 and 14, which guarantee “Due Process of Law.”  Pan’s proposed legislation stands in direct violation of the Due Process Clause that is contained in two separate Constitutional Amendments.  That reinforces the importance the Founding Fathers placed on the concept of “innocent until proven guilty.”  And that Due Process is to occur in a Court of Law, not in some back office of a State Administration building.

I just finished reading “Red Notice,” which documents the horrors of State-enabled tyranny, terrorism and corruption in Russia.  This is what happens in a country which does not have an overriding body of laws that are based on Rule of Law.  Pan’s Bill, if passed, would circumvent the Rule of Law held sacred by the Framers of the Constitution.

If Trump wants to demonstrate that he wants to Make America Great Again, perhaps he should take actions to destroy Pan’s Bill and show Pan the door back to Pan’s land of native origin.

Constitutional Amendment 1:  “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances”

Constitutional Amendment 5:  “No Person…be deprived of life, liberty, or property, without due process of law;”

Constitutional Amendment 14 (this one specifically applies to Pan’s Bill):   “… No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

Is War By Proxy With Russia Inevitable?

The U.K. refuses to release for independent examination any of the evidence that would link the Skirpal poisoning to Russia.  As such, we can only assume that Russia was meant to be the scapegoat.  Same deal with the chemical attack in Syria.   There’s a complete lack of evidence that would connect the incident to any specific perpetrator.  But the U.S. seems satisfied that a case built on no-evidence hear-say and western media headlines proves the allegations.

Amazingly, some of neo-cons at Fox News are now questioning the legitimacy and motives for U.S. belligerence toward Russia using Syria as the “host.” Tucker Carlson went nuts on the idea, which is surprising because Fox typically is pro-war against anyone and anything without bona fide cause and for any reason:

Perhaps of more concern is the analysis presented by Paul Craig Roberts, who has a little more experience in DC politics and Government policy advisement than anyone in the cable media:

No sign this morning of Washington coming to its senses. Zero Hedge reports that Trump is canceling his trip to Peru’s Summit of the Americas in order to oversee the US attack on Syria. If the attack is real and not merely a hit at an unimportant target for PR effect, war could be upon us…”War With Russia Approaching” and “On The Threshold Of War.”

Let’s hope saner minds somehow prevail in DC, though I’m not sure where those brain cells might reside. With a debt-riddled and a larger “explosion” than the one that hit in 2008 percolating throughout the U.S. financial system, it seems that Washington’s policy alternative of choice is, “when all else fails, start a war.”

The insane intra-day and inter-day volatility in the stock market is the primary signal that the system is spinning out of control.  The “trade war” narrative is strictly cosmetic.  The market turmoil reflects the conflict between the extreme inert overvaluation of financial assets and the money sloshing around in the hands of perma-bullish traders who never experienced a market collapse.  The drum-beat of war – trade and military – is meant to deflect the public’s attention from the underlying economic reality.

I would suggest that this is why gold is moving higher despite the overt effort by the Fed/banks to suppress the price and  the overwhelming negative investor sentiment toward gold.

Is The Silver COT Bullish?

There’s been an abundance of commentary on the net long position of the “Swap Dealers” in Comex silver futures per the COT report.  As of the latest COT report, the Swap Dealers are net long almost 22k silver contracts.  This is unprecedented.  At the same time, the “Large Speculators,” the majority of which is comprised of the “managed money” (hedge funds) sub-component, are net short nearly 17k silver contracts.  The data my business partner tracks goes back to April 2004.  In that period of time, the Large Speculator category has never been short until February 2018.

On the surface, the silver COT report appears to be extraordinarily bullish. However, there’s a bigger picture not discussed by “COT” analysts that includes the other segment of the large “Commercial” category and the COT structure of gold.

The other “commercial” segment includes producers of silver, commercial “users” of silver (jewelers) and “merchants.”  It would be naive to assume that the Comex banks do not throw a large percentage of their gold/silver short positions in to the this category.  That would be within the CFTC regulations.  Hell, JP Morgan was fined a little over $650k a few years when it was caught by the CFTC putting a portion of its trades into the “speculator” category of trader.  This was not within regulations.  $650k is a joke and would not deter Jamie Dimon from speeding on the Long Island Expressway let alone manipulating the silver market.

Currently the “Commercial” segment per the latest COT report is net short  2.6k contracts.  Again, this is by far the lowest net short position in the Commercial category going back to at least April 2004 and likely ever.  The closest the net short position has been before now was for the June 3,  2014 COT report, when the Commercial category net short in silver was down to 9.6k.   Back then silver was trading at $18.80.  It bounced briefly to $21 by early July then headed lower from there.

While the silver COT appears to be exceptionally bullish, it needs to be analyzed in the context of the gold COT structure.  The gold COT structure currently, based on historical statistics, is neutral but trending toward bullish.  I looked at data going back to the beginning of the current bull market cycle in the metals, which is commonly considered to be early-December 2015.

From the beginning of December to the latest COT report, the average large spec net long position in gold is 171k. The high was 315k (bearish) and the low was 9.7k (very bullish).  For the Commercials as a whole, the average net short during that time period is 209k contracts.  The high was 340k (bearish) and the low was 2.9k (very bullish).  The low net short  in gold for the commercials banks occurred in the December  1, 2015 COT report.  This also corresponded with the low print in the large spec net long.  This type of COT structure is the most bullish for both gold and silver.

Currently, the large specs are net long 166.5k gold contracts and the commercials are net short 188.8k contracts. You can see vs the averages over the time period that this is still neutral to bearish, but it’s trending in the direction of becoming bullish.

The other element for a bullish gold COT structure is open interest.  A high open interest tends to correlate with a bearish COT structure – i.e. a  high commercial  bank net short – and a low relative o/i correlates with a cyclical low-point in gold.  From December 2015 to present, the average o/i in gold has been 492k contracts.  The high was 652k and the low was 357k.  The net short of the commercials as percentage of the total o/i at the low-point in total o/i was 0.74% – again in the December 1, 2015 COT report.  Currently the open interest is 493k which is about average.  The commercial short position as percentage of total o/i is 38%.  Again, about average for the time period.

I have noticed that the last two moves higher over the last two years have occurred with the total gold o/i in the 420-440k range.  This would suggest that, minimally, the open interest needs to drop by 60-70k contracts before the gold COT structure can be considered favorable for a rally in the price of gold.

On average and  in general, gold and silver are highly correlated in their directional movements, especially over long periods of time.  Since 2001, it’s been my experience that major moves higher in the precious metals sector begin with gold taking off and tend to end with silver outperforming gold by a substantial margin.  The numbers presented above would suggest that both gold and silver will not be set-up to embark on a major move higher until the both the total open interest in gold and the net short position in gold of the commercials banks declines by another 60-70k contracts.

In the context of my analysis and my view on methods used by the banks to manipulate the paper price of gold and silver on the Comex, in my pinion the silver COT report – though remarkably bullish on a stand-alone basis – is not as bullish as some analysts are presenting when both the gold and silver COTs are considered in tandem.  At this point, I believe gold will lead both metals higher when the next big move begins. Once that move is underway, I’m highly confident silver contract short-covering by the hedge funds will send silver soaring.

Why Trump Won: People Vote Their Wallets

This commentary is emphatically not an endorsement of Trump as President.  I have not voted since 1992 because, when the system gives the public a Hobson’s Choice, voting is pointless.

An  age-old adage states that “people vote with their wallets.”  The chart below suggests that this adage held true in 2016:

The graphic above (sourced from Northman Trader) was prepared by Deutsche Bank and the data is from the Fed. It shows that, since 2007 through 2016, U.S. median household net worth declined between 2007 and 2016 for all income groups except the top 10%.

Given that a Democrat occupied the Oval Office between 2008-2016, and given that the economic condition of 90% of all households declined during that period, it follows logically that empty promises of a Republican sounded better to the general population of voters than the empty promises of a Democrat.

In other words, the “deplorables” didn’t vote for Trump because they wanted a wall between the U.S. and Mexico or they wanted to nuke North Korea off the map, they voted for a Republican because the previous Democrat took money from their savings account.

The rest of the propaganda and rhetoric  connected to the 2016 election, which was elevated to previously unforeseen levels of absurdity, was little more than unholy entertainment that served to agitate the masses.  These two graphs explain a lot about the outcome of the 2016 “election.”

The Housing Market Is Heading South

A subscriber from Canada emailed me last night about the Canadian housing market: “Toronto and Vancouver sales down 40% and 30% YoY respectively. Prices are still up in Vancouver but down 14% in Toronto. I don’t know how prices stay up if the volume continues to trend down. Canadians are even more levered than Americans I believe. This is going to get ugly before it’s all over.”

The only part I disagree is Canadians being more levered than Americans. The average first time buyer in the U.S. can buy a Fannie/Freddie guaranteed mortgage financed home with zero down as long as the credit score is north of 570. “Zero down?” you ask. Yes zero down. Now included in the down payment is any amount of concessions tossed in by the seller. Soft dollars. Fannie and Freddie are already asking for “bail out” money from the Government after posting big losses. Fannie posted a $6.5 billion loss in Q4. How is that possible if the housing market is healthy? It’s the sign that the average homebuyer is overleveraged.

Now I’m hearing ads all-day long (sports radio) for 100% cash-out refis, home equity loans, purchase and refi mortgages for buyers who don’t even have FICO ratings. “Past bankruptcy” is okay. “Simon Black” (his nom de plume) wrote a piece the other day accusing the bankers of being idiots for letting the subprime debt issuance get out of control again. He’s wrong. It’s the Taxpayers who are idiots for rolling over every time the Government bails out the bankers. Quite frankly, if I lacked morals and ethics, I’d rather be on the bankers’ side of this trade. They make massive bonuses underwriting all of the nuclear waste and then pay themselves even bigger bonuses when the debt blows up and the Taxpayers bail them out. Who’s the “dumb-ass,” Simon?

Homebuilder stocks are a low-risk shorting proposition.
A subscriber asked me about the 10yr Treasury yield, which for now appears to be headed lower, and if a significant drop in the 10yr yield would stimulate home sales.

That’s a great question. Mortgage rates are a function, generally, of the 10yr Treasury yield and risk premium. As the risk of repayment increases, mortgage spreads increase. The LIBOR-OIS spread reflects the market’s rising fear of repayment risk.  I just noticed that the 30-yr mortgage rate at Wells Fargo – 2nd largest mortgage lender – has not changed much in the last few weeks despite the decline in the 10yr yield.

Part of my argument is that the general credit quality, and ability to make any down payment, in the remaining pool of potential first time buyers is dwindling. In other words a large portion of under 35’s, who make up most of the 1st time buyer cohort and who are in the “pool” of potential homebuyers, do not have the ability financially to support home ownership. In the last 2 months, the percentage of 1st time buyers in the NAR’s existing home sales report has started to decline.

New homes on average are more expensive than existing home resales. This fact makes my argument even more compelling. We saw this in KBH’s FY Q1 2018 numbers, which showed flat home deliveries vs Q1 2017. Homebuilders are also getting squeezed by commodity inflation (lumber and other materials), which lowers gross margins.

I saw a study that showed the annual rate of change in real wages, where “real wages” is calculated using a “real” inflation rate, is declining. Furthermore, most of the nominal wage gains are concentrated in the upper 20% of the workforce. The lower 80% of wage-earners are experiencing year over year declining wage growth.

The conclusion here is that a majority of those in the labor that would like to buy a home can not afford to make the purchase. In fact, a study by ATTOM (a leading housing market data aggregator) showed that the average worker can not afford the median-priced home in 70% of U.S. counties. The relative cost of mortgage interest is only part of this equation, which means lower mortgage rates based on a falling 10yr yield would likely not stimulate home buying at this point.

I think the only factors that can possibly stimulate home sales would be if the Government takes the FNM/FRE down payment requirement to zero and directly subsidizes the interest rate paid. I’d be surprised if either of those two events occur.

P.S. – just for the record, Lennar’s real earnings yesterday were substantially worse than the headline GAAP-manipulated EPS that ignited the rally in the homebuilder sector. I’ll be reviewing LEN’s numbers in Sunday’s Short Seller’s Journal and showing why the reported GAAP numbers were highly deceptive. I’ll also suggest ideas to take advantage of this knowledge.

Economic, Financial And Political Fundamentals Continue To Deteriorate

I’ve been writing about the rising consumer debt delinquency and default rates for a few months.  The “officially tabulated” mainstream b.s. reports are not picking up the numbers, but the large credit card issuers (like Capital One) and auto debt issuers (like Santander Consumer USA) have been showing a dramatic rise in troubled credit card and auto debt loans for several quarters, especially in the sub-prime segment which is now, arguably the majority of consumer debt issuance at the margin.  The rate of mortgage payment delinquencies is also beginning to tick up.

Silver Doctor’s Elijah Johnson invited me onto his podcast show to discuss the factors that are contributing to the deteriorating fundamentals in the economy and financial system, which is translating into rising instability in the stock market:

If you are interested in learning more about my subscription services, please follow these link: Mining Stock Journal / Short Seller’s Journal. The next Mining Stock Journal will be released tomorrow evening and I’ll be presenting a junior mining stock that has taken down over 57% since late January and why I believe, after chatting with the CEO, this stock could easily triple before the end of the year.

“Thanks so much. It was a pleasure dealing with you. Service is excellent” – recent subscriber feedback.

Short Sell Ideas: Will Overstock.com End Up At Zero?

Overstock’s attempt to capitalize on “blockchain mania” appears to have fallen flat. The SEC is investigating it ICO fund-raising scheme and a class-action lawsuit has been filed in connection with the deal. OSTK finally announced today that it was pulling its attempt to unload 4 million shares on the public. This is after a failed effort to sell its e-commerce business. Meanwhile, OSTK’s operating losses are mounting, including a big loss in Q4, a period in which retailers can put on a blind-fold and make money.

I believe OSTK can be profitably shorted at its current price of $33 if you are willing to endure periods in which the stock might respond to highly promotional announcements from the Company that would cause the stock to spike up temporarily. My ultimate price target is below $10.

As I write this (Thursday, March 29th), CNBC is reporting that Overstock has canceled its 4 million share offering, though the Company has not issued a formal press release to that effect. The reason given is “market conditions.” If this is true, in my view, it means that a lack of demand at the current stock price – $37 – would have necessitated pricing the deal significantly lower in order to place the shares. I would suggest that this indicates that OSTK stock is headed lower anyway.

Seeking Alpha published my anlysis on OSTK, you can read the rest of here: Overstock.com: An Epic Short Opportunity

You can learn about short ideas in the Short Seller’s Journal, a weekly newsletter that provides insight on the latest economic data and provides short-sell ideas, including strategies for using options. You can learn more about this newsletter here: Short Seller’s Journal information.

2008 Redux-Cubed (at least cubed)?

There is plenty of dysfunction in plain sight to suggest that the financial markets can’t bear the strain of unreality anymore. Between the burgeoning trade wars and the adoption in congress this week of a fiscally suicidal spending bill, you’d want to put your fingers in your ears to not be deafened by the roar of markets tumbling – James Kuntsler, “The Unspooling

Many of you have likely seen discussions in the media about the LIBOR-OIS spread. This spread is a measure of banking system health. It was one of Alan Greenspan’s favorite benchmark indicators of systemic liquidity. LIBOR is the London Inter-Bank Offer Rate, which is the benchmark interest rate at which banks lend to other banks. The most common intervals are 1-month and 3-month. LIBOR is the most widely used reference rate globally and is commonly used as the benchmark from which bank loans, bonds and interest rate derivatives are priced. “OIS” is an the “overnight indexed swap” rate. This is an overnight inter-bank lending benchmark index – most simply, it’s the global overnight inter-bank lending rate.

The current 1-month LIBOR-OIS spread has spiked up from 10 basis points at the beginning of 2018 to nearly 60 basis points (0.60%). Many Wall Street Einsteins are rationalizing that the LIBOR-OIS spread blow-out is a result of U.S. companies repatriating off-shore cash back to the U.S. But it doesn’t matter. That particular pool of cash was there only to avoid repatriation taxes. The cash being removed from the European banking system by U.S corporations will not be replaced. The large pool of dollar liquidity being removed was simply masking underlying problems – problems rising to the surface now that the dollar liquidity is drying up.

Keep in mind that the effect of potential financial crisis trigger events as reflected by the LIBOR-OIS spread since 2009 has been hugely muted by trillions in QE, which have kept the banking system liquefied artificially. Think of this massive liquidity as having the effect of acting like a “pain killer” on systemic problems percolating like a cancer beneath the surface. The global banking system is addicted to these financial “opioids” and now these opioids are no longer working.

Before the 2008 crisis, the spread began to rise in August 2007, when it jumped from 10 basis points to 100 basis points by the end of September. From there it bounced around between 50-100 basis points until early September 2008, when it shot straight up to 350 basis points. Note that whatever caused the spread to widen in August 2007 was signaling a systemic financial problem well in advance of the actual trigger events. That also corresponds with the time period in which the stock market peaked in 2007.

What hidden financial bombs are lurking behind the curtain? There’s no way to know the answer to this until the event actually occurs. But the market action in the banks – and in Deutsche Bank specifically – could be an indicator that some ugly event is percolating in the banking system, not that this should surprise anyone.

The likely culprit causing the LIBOR-OIS spread is leveraged lending. Bank loans to companies that are rated by Moody’s/S&P 500 to be mid-investment grade to junk use banks loans that are tied to LIBOR. The rise in LIBOR since May 2017 has imposed increasing financial stress on the ability of leveraged companies to make debt payments.

But also keep in mind that there are derivatives – interest rate swaps and credit default swaps – that based on these leveraged loans. These “weapons of mass financial destruction” (Warren Buffet) are issued in notional amounts that are several multiples of the outstanding amount of underlying debt. It’s a giant casino game in which banks and hedge funds place bets on whether or not leveraged companies eventually default.

I believe this is a key “hidden” factor that is forcing the LIBOR-OIS spread to widen. This theory is manifest in the performance of Deutsche Bank’s stock:

DB’s stock price has plunged 33.8% since the beginning of January 2018. It’s dropped 11.3% in just the last three trading days (thru March 23rd). There’s a big problem behind the “curtain” at Deutsche Bank. I have the advantage of informational tidbits gleaned by a close friend of mine from our Bankers Trust days who keeps in touch with insiders at DB. DB is a mess.

DB, ever since closing its acquisition of Bankers Trust in the spring of 2000, has become the leading and, by far, the most aggressive player in the global derivatives market. During the run-up in the alternative energy mania, DB was aggressively underwriting exotic derivatives based on the massive debt being issued by energy companies. It also has been one of the most aggressive players in underwriting credit default swaps on the catastrophically leveraged EU countries like Italy and Spain.

DB is desperate to raise liquidity. Perhaps its only reliable income-generating asset is its asset management division. In order to raise needed funds, DB was forced to sell 22.3% of it to the public in a stock deal that raised US$8 billion. It was originally trying to price the deal to raise US$10 billion. But the market smells blood and DB is becoming radioactive. The deal was floated Thursday (March 22nd) and DB stock still dropped 7% on Thursday and Friday.

Several U.S. banks are not far behind in the spectrum of financial stress. Citigroup’s stock has declined 15.1% since January 29th, including a 7.5% loss Thursday/Friday. Morgan Stanley has lost 11.8% since March 12th, including an 8.8% dive Thursday/Friday. Goldman Sachs’ stock has dumped 11% since March 12th, including a 6.3% drop on Thursday/Friday. JP Morgan dumped 6.7% the last two trading days this past week (thru March 23rd).

If Deutsche Bank collapses, it will set off a catastrophic chain reaction of counter-party defaults. This would be similar to what occurred in 2008 when AIG defaulted on counter-party derivative liabilities in which Goldman Sachs was the counter-party. While it’s impossible to prove without access to the inside books at DB and at the ECB, I believe the primary driver behind the LIBOR-OIS rate spread reflects a growing reluctance by banks to lend to other banks for a duration longer than overnight. This reluctance is derived from growing fear of DB’s deteriorating financial condition, as reflected by its stock price.

The commentary above is from last week’s issue of the Short Seller’s Journal. In addition to well-researched insight into the financial system, the SSJ presents short-sell ideas each week, including ideas for using options. This week’s issue, just published, discusses why Tesla is going to zero and how to take advantage of that melt-down. You can find out more about this service here: Short Seller’s Journal information.