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The Truth Behind The “Repo” Non-QE QE Money Printing

“The Fed first tried to justify the loans by saying they were a short-term measure to stem a liquidity crisis. But the so-called “liquidity crisis” has not prevented the stock market from setting new highs since the loan operations began on September 17. And the short-term operation has been running every business day since that time and is currently scheduled to reach into next year or last permanently. A cumulative total of approximately $3 trillion in overnight and longer-term loans has been funneled to unnamed trading houses on Wall Street without either the Senate or House calling a hearing to examine what’s really going on.”Wall St On Parade

The analysis below is an excerpt from my November 24th issue of the Short Seller’s Journal

“Credit deterioration is a typical symptom of the end of a cycle — and that is exactly what Credit Benchmark is finding, particularly in the industrial sector.” – Bloomberg News in reference to a report from Credit Benchmark on the deterioration in credit quality of the industrial sector globally.

Credit Benchmark offers data/analytic services which provide forward-looking insights into the credit quality and liquidity of companies and sectors globally.  Credit deterioration is a typical symptom of the end of an economic cycle. Credit Benchmark also noted last week that U.S. high-yield corporate credit quality has been crumbling since early 2019.

High yield debt sits below and props up leveraged loans held by banks, pension funds and CLO (collateralized loan obligations) Trusts. Leveraged loan credit quality is also declining, with many loan issues trading well below par and a not insignificant portion trading at distressed levels. Banks have been stuck with a lot of leveraged loans that were underwritten with the hope of sticking them in CLO investment structures. But big investors have been pulling away from CLO’s since mid-summer.

A CLO is a type of collateralized debt obligation. An investment trust is set-up and structured into tranches in order of “safeness,” with credit ratings assigned to each tranche ranging from AAA down to the “residual” or mezzanine/equity layer. Each tranche is sliced into bonds which are sold to investors, primarily institutional and wealthy investors, who invest in the various tranches of the CLO based on relative appetite for risk. Typically hedge funds and/or the underwriter of the CLO will provide funding for the mezzanine/equity layer.

Leveraged loans underwritten by Wall Street are pooled together and the interest and amortization payments are used to fund the interest and amortization payments of each layer of the trust. Each tranche receives successively higher rates of return to compensate for the level of risk. In addition each tranche is amortized based on seniority. If and when enough loans in the trust default and cash collected by the CLO trust is insufficient to pay off all of the tranches, the losses are assigned in reverse order from bottom to top. During the financial crisis, losses spread into the highest-rated tranches.

Invariably, as yield-starved investors grab for anything with a higher yield than is available from relatively riskless fixed income investments like Treasuries, agency debt (FNM/FRE) and high-grade corporate bonds, the underwriting standards of leveraged loans deteriorate. Wall Street requires loan product to feed the beast in order to continue raking in fat fees connected to this business. And, as you might have guessed, Wall Street opportunistically offers credit default derivative “insurance” products structured around the CLO trusts.

As I’ve detailed previously, credit rating downgrades in leveraged loans are mounting as the level of distress in the asset class rises. CLO’s purchase roughly 75% of all leveraged loans underwritten. In theory, CLO trusts are “over-collateralized” to account for a certain level of loan default and to ensure the top tranche receives the highest credit rating possible. But it would appear that many of these CLO trusts are starting to incur losses at the lowest tranches. This fact is reflected in the rececent performance of CLO bonds since June. As an example, through June, double-BB rated CLO bonds threw off a 10% ROR (interest payments and bond price appreciation). But by the end of October, this 10% ROR was wiped out, meaning the value of the bonds has fallen 10% since June including 5% alone in October.

The chart above plots the SPX vs an index of “generic” CLO triple-B rated bonds. The negative divergence of the CLO bonds reflects the escalating degree of distress in leveraged loans, which are underlying collateral funding the CLO trusts.

I am certain that part of the reason the Fed has had to start bailing out the banking system with its not-QE QE repo operations is connected to the rapid deterioration in the CLO/leveraged loan market. Chunks of thes CLO’s and leveraged loans are sitting on bank balance sheets.

The 2008 financial crisis was primarily triggered by the collapse of collateralized subprime mortgage CDO’s (these were the securities featured in “The Big Short”). I believe – and I’m not alone in this view – that CLO’s will cause the same type of systemic damage . The CLO market is roughly $680 billion just in the U.S. That was about the same size as the subprime mortgage market by 2008. Including the offshore market, the global leveraged loan market is now $1 trillion, doubling in size since 2010.

Most people think of the Fed when they hear the term “repo.” But the repo market primarily is funded by banks and money market funds. CLO bonds have been used as repo collateral for several years. As the credit quality of this asset class declines, banks are less interested in participating in repo market funding transactions to avoid the rising probability of suffering a counterparty default from use of CLO collateral, thereby reducing liquidity in the repo market.

In addition, many banks have been stuck with leveraged loans that could not be offloaded onto investors or CLO trusts. This inability to off-load loans into CLO’s started this past summer when the largest investor in CLO’s, a large Japanese bank, began to pull away from the CLO market. As the value of these loans declines, banks are forced to increase the amount of capital required to maintain reserve ratios – another reason for the Fed repo market intervention.

As the global economy, including the U.S. economy notwithstanding the insistence to the contrary by the Fed and Trump, continues to contract it’s quite probable that CLOs/leveraged loans will begin to melt-down Chernobyl-style. Referring back to the SPX/CLO bond price chart above, in my view there’s no coincidence that the Fed’s intervention in the repo market commenced at about the same time the triple-B CLO bonds began to take a dive. That price decline is even more pronounced for the tranches with ratings below triple-BBB.

To be sure, CLO’s are not the only financial wildfire outbreak targeted by the Fed’s money printing, but I would wager a healthy amount of gold coins that distress in the CLO market is one of the primary troubles right now. And the problem is magnified when you take into account the credit default swap transactions “wrapped around” these CLO trusts. These derivative trades also require an increasing amount of collateral as CLO tranche distress escalates.

To accompany the above analysis in my Short Seller’s Journal, I presented some ideas for expressing a bearish view based on the the eventual collapse in the CLO/leveraged loan market. You can learn more about this newsletter here:  Short Seller’s Journal information.

The Path Of Least Resistance For Gold Is Up

The price of gold has held firm at the $1460 (front-month contract basis, not the Kitco “spot” price) level despite the constant price attacks that have been occurring overnight and into the Comex floor trading hours since early November.

On an intra-day basis gold has managed to hold continuous aggressive attempts to push the price below $1460 for the last 6 trading days, including today.  Interestingly, last Tuesday (November 26) and Friday, gold shot up during the Comex floor trading hours in the absence of any news or event triggers.

Zerohedge attributed Tuesday’s spike in gold to the jump offshore yuan vs the dollar. But that day gold started moving before the yuan moved.  On Friday, gold soared as much as $14 from an intra-day low of $1459 while offshore yuan declined vs the dollar.  Zerohedge’s explanation for the mysterious movement in the gold price on two days thus lacks evidence.

The open interest in the December Comex contract remained stubbornly high through first notice day last Friday. The banks, which have an extreme net short position in Comex gold have exerted an enormous effort to force hedge funds either to liquidate long positions or to sell December contracts and move out to February, which is the next “front month” contract.

If an unusually large number of longs decide to stand for delivery, it would place an enormous amount of stress on the warehouse stock of gold that has been designated as available for delivery in Comex vaults. In addition India has been importing an enormous amount of gold starting in late October. This has provided strong price support from the physical market.

Also, the gold price has withstood a 43,000 contract liquidation in Comex open interest, including a 1-day record 127k contract liquidation in the December contract, much of which “rolled” out to February.  Historically a draw down in Comex open interest of this magnitude would have removed at least $50 from the gold price.

In the chart above, gold appears to be establishing a strong base in the $1460 area. The MACD shows an extremely oversold technical condition as does the RSI.  With the Central Banks, including the Fed, printing money at a furious pace right now, the conditions are in place for potentially a big move in gold.

The commentary above is a partial excerpt from my lastest issue of the Mining Stock Journal. In this issue I present an opinion on the Kirkland Lake acquisition of Detour Gold that may surprise some mining stock investors. The junior exploration stocks have been relentlessly pounded lower during this latest sell-off in the sector, especially relative to the shares of the mid-cap and large-cap producing miners. I believe several junior exploration stocks are trading at a price level which significantly reduces the risk and increases the potential ROR in these shares.

The Mining Stock Journal  covers several mining stocks that I believe are extraordinarily undervalued relative to their upside potential. I also present opportunistic recommendations on select mid-tier and large-cap miners that should outperform their peers.  You can learn more about this newsletter here:   Mining Stock Journal information.

The Telsla CyberTruck Event: Elon Musk’s Travelling Burlesque Show

As many of you are aware by now, Tesla’s roll-out of its Cybertruck, an event which pushed the stock price irrationally higher ahead of time, was a complete disaster. The vehicle itself, which one commentator said “looks like the product of a DeLorean that had sex with a triangle,” was visually quite unappealing. Morgan Stanley conducted a snap poll of its email distribution list to determine viewers’ impression of the Cybertruck.  Zero percent (0%) of those surveyed thought the truck would be a success.

Whether or not the claims by Musk & Co are true that over 250k people have plunked down a $C-note to “reserve” a Cybertruck, at this point it’s unclear whether not the vehicle will ever make it to production. Notwithstanding inconvenient realities, Musk fraudulently refers to the refundable reservations as “orders.”  Electrek.co and Musk’s Twitter pimps behave as if Tesla has already pre-booked $10 billion in revenues.

But Tesla has several hurdles to overcome before this electrified Lego block on wheels ever rolls off the production line, not the least of which includes addressing a technically insolvent balance sheet and raising the $100’s of millions of capex required. Notwithstanding this, the entire auto industry, including Tesla, faces gale force economic headwinds as the sector globally plunges into recession.

Based on YTD sales through October – plus estimates for November and December – data published by EV-Volumes, a service that provides a database of sales statistics for EVs, shows that total EV sales in the U.S. will decline 4% from 2018. After 10 years of EV availability, the market penetration rate for EVs is just 2% – and ex-California it’s 1%. Think about this in the context that the Government has provided enormous subsidies for EV/hybrids, thereby lowering the all-in cost for the buyer. As the largest EV seller in the U.S. (currently but not for long), Tesla is by far the most affected by the negative trend in EV sales.

Finally, because of plunging EV sales (along with plunging sales for the entire Chinese auto market), the Chinese Government is implementing major cuts to its EV sales subsidy program. The Chinese Association of Automobile Manufactures said that weak demand for the vehicles is one of the reasons for the pullback in the subsidy program.

Eric Peter’s Autos blog captured the essence of Musk’s farcical CyberTruck burlesque show:

Thousands of affluent marks have already put down deposits, unsightliness seen. And in spite of one of Elon’s many promises about the Cybertruck revealed to be a blatant lie right in front of their very eyes – the “shatterproof” door glass that wasn’t. It’s wondrous, baffling. Elon’s mesmeritic powers are so puissant he could probably get his followers – this includes the press – to bark like dogs if he asked them to.

You can read Peter’s entire commentary here:    And So They Drooled

Netflix’s Business Model Is Headed For An Epic Fail

How does NFLX manage to show positive net income yet burn hundreds of millions of dollars each quarter?  It’s the magic of GAAP accounting.  I did a detailed analysis for my Short Seller’s Journal subscribers back in 2017.  Each quarter NFLX has to spend $100’s of millions on content.  Most companies like NFLX capitalize this cost and amortize 90% of the cost of this content over the first two years.   Amortizing the cost of content purchased is then expensed each quarter as part of cost of revenues.  Companies can play with the rate of amortization to lower the cost of revenues and thereby increase GAAP operating and net income.

In the analysis I did for my subscribers, I demonstrated this accounting Ponzi mechanism:

The ratio of cash spent on content in relation to the amount recognized as a depreciation expense can be used to determine if NFLX is “stretching out” the amount depreciation recognized on its GAAP income statements in relation to the amount that it is spending on content. In general, this ratio should remain relatively constant over time.

For 2014, 2015 and 2016, this ratio was 1.42, 1.69 and 1.80 respectively. When this ratio increases, it means that NFLX is spending cash on content at a rate that is greater than the rate at which NFLX is amortizing this cash cost into its GAAP expenses. If NFLX were using a uniform method of calculating media content depreciation, this number should remain fairly constant across time. However, as content spending increases and GAAP depreciation declines relative to the amount spent, this ratio increases dramatically – as it has over the last three years. A rising ratio reflects the fact that NFLX has lowered the rate of depreciation taken in the first year relative to previous years. It does this to “manage” expenses lower in order to “manage” income higher.

In the first nine months of 2018, this ratio was 1.70, which explains largely why NFLX’s rate of GAAP “earnings” growth is declining.  To pay for its massive cash flow burn rate, NFLX has to continually issue more debt and stock.

NFLX’s 2019 Q3 income statement contained the usual GAAP games in order to show gross, operating and net income. But as I’ve detailed in the past, NFLX’s treatment of the amortization of the cost of buying content is highly questionable if not outright fraudulent. While the GAAP net income reported provides terrific headline material, the truth shows up in the statement of cash flows. Through the first nine months of 2019, NFLX’s operations burned nearly $1.5 billion in cash. On top of that, NFLX spent another $145 million on content acquisition. Keep in mind that NFLX’s North American subscriber growth has hit quick-sand.

But not only is NFLX’s business model a literal cash incinerator, the Company robotically issues debt. Through the first nine months of 2019, NFLX issued $2.24 billion in debt, which was $343 million more than the same period in 2018. But NFLX wasn’t finished issuing debt this year. Seven days after reporting Q3 numbers, NFLX issued another $2 billion in bonds. This brings its total debt issuance in 2019 to $4.24 billion. NFLX now has a total of $14.4 billion in debt. But we’re not finished. On top of this, the Company has $19.1 billion in streaming content obligations, $16.9 billion of which is due over the next three years. This makes a total $31.3 billion in debt and debt-like commitments.

On top of all of this, NFLX now faces stiff competition from well-funded companies which have started to roll-out their own content streaming operations at lower price points. In some cases, NFLX will no longer have access to desirable content. As an example, Disney rolled out its Disney+ streaming service on November 12th, signing up more than 10 million users by opening day. Verizon offers a free one-year subscription to Disney+ to wireless customers on unlimited plans. Disney’s service is $6.99/month. Apple rolled out its AppleTV streaming at $4.99/month. NBC Universal debuts streaming in early 2020 and is considering offering it for free. AT&T/Warner will soon launch a streaming service that will be similar to Netflix from a cost standpoint but will be built around HBO.

I believe part of the reason NFLX’s stock has run up like it has is due to the release of “The Irishman,” a highly acclaimed movie it produced that is directed by Martin Scorcese and features Robert DeNiro, Al Pacino and Joe Pesce, among other marquee actors. But the movie cost $160 million to produce, an amount NFLX will never recoup.

The movie debuted this past week in a limited number of theaters. Several major theater chains refused to show it because NFLX demanded a 3-week window of exclusivity before sticking it on its streaming platform. Three weeks is the minimum amount of time a movie must spend in public theaters to qualify for the Oscars.  Movie production companies rely on huge box office revenues plus revenue sharing deals on concessions to cover the production cost of blockbuster movies. After raking it in from the theaters, they look to milk huge fees from content syndication agreements. NFLX cut short its ability to pocket huge box office revenues and will not benefit from the ability to sell the rights to “The Irishman.”

NFLX sacrificed a large portion of box office revenues with the idea that it could use “The Irishman” as “bait” to catch new subscribers. However, people who don’t already subscribe to NFLX will likely either see it while it’s at the theaters or sign up for the free month to watch it and then cancel, which is what I’m going to do.

NFLX’s business model will lead to an epic fail. Eventually Netflix’s stock is dead meat. While Netflix has a viable streaming business, it simply has too much debt. It will never be able to service its debt load, especially in conjunction with the its content payment obligations.

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The commentary above is an excerpt from the Short Seller’s Journal. Each weekly issue contains macro economic analysis, market analysis, and short ideas.  I  To learn more about this short-sell focused newsletter, click here:  Short Seller’s Journal info

Holiday Sales May Be Missing In Action

I’m sure most of you are  inundated with “Black November,” “70% off” and “clearance” email promotions from the usual cast of brick/mortar/online chain retailers. It started with my inbox in October.   This is because retailers are terrified of what could be one of the worst holiday spending seasons in years.

The mainstream financial media, planted with soundbytes from Wall Street snakeoil salesmen, have already created this year’s “the dog ate my homework” excuse for poor holiday spending with the absurd notion that the period between Thanksgiving and Christmas is shorter this year.  Quite frankly, I would not be surprise if many households used Amazon’s Prime day and easy Amazon credit lines offered to buy holiday gifts early this year.

Speaking of AMZN, it warned that its expected holiday sales would be lower than previous guidance.  And Home Depot lowered its Q4 revenue estimates for the second time in three months.

Perhaps October retail sales offers a glimpse at what we can expect. The headline retail sales report promoted the idea that retail sales “rebounded” in October (recall September retail sales dropped 3%). October’s retail sales reportedly increased 0.3%. The headline number was rounded up from 0.27%. Compare this to the headline 0.36% CPI. This means that real retail sales in October (i.e. ex-inflation) declined.

Keep in mind that a survey of more than 5,400 Americans by the Financial Health Network revealed that 70% of households are struggling financially in some capacity. 17% said they can’t maintain a majority or all aspects of their finances. Another 54% said they’re struggling with at least one aspect of financial stability (likely credit card/auto debt). About 20% of middle class workers are spending more than they earn. This study confirms and reinforces other studies I’ve seen showing similar results.

Core retail sales, which are ex-automobiles and gasoline, increased 0.1%, which was worse than expected. When you think about it, aside from all of the statistical errors from estimating 16 out of 25 categories, the core retail sales ex-inflation was negative. It looks like gasoline sales drove the headline number as it was up 1.1%, which is the result of higher gasoline prices during the month.

Away from food, “core” discretionary categories suffered rather large declines from September. Clothing was down 1%, sporting goods/hobby/books were down 0.8%, furniture store sales dropped 0.9% and electronics/appliance sales were down 0.4%. Consumers also cut back spending at restaurants and bars, with sales dropping 0.3%.

The retail sales numbers for October, preceded by the big drop in retail sales in September, reflect and confirm my view that the consumer is “running out road” with the ability to assume more credit card debt for discretionary expenditures. The results of the survey above suggest that a not insignificant percentage of households need credit cards to make ends meet. This chart nicely summarizes the U.S. household financial conditions:

I suspect the Census Bureau will do its best to impose “seasonal adjustment” distortions at Trump’s behest in order to put the best possible spin on retail sales. But truth is that a majority of households are struggling with a heavy debt load and with real income after taxes that barely covers non-discretionary expenditures. Do not mistake a rising stock market as an indicator that economy is healthy. Right now the largest component of economic activity at 70% of GDP is terminally ill financially.

The commentary above is an excerpt from my weekly Short Seller’s Journal. It offers a glimpse of the type analysis presented which seeks to expose the real economic data hiding below the heavy dose of spin applied to “official” economic reports (for instance, real-time data for roughly 50% of the categories in the retail sales report is not available, leaving Census Bureau to “guesstimates” the monthly sales for those categories). And of course short ideas along with put option suggestions are posted in every issue. You can learn more about this newsletter here:  Short Seller’s Journal.

Gold May Be Set Up For A Pleasant Holiday Season Rally

In what has become a recent routinized pattern in the price of gold (and silver), the market rallies during peak Indian gold market hours and then sells off when London opens. After the customary price take-down when the Comex floor trading opens, gold and (and silver) typically recoup the overnight sell-off. In short, there seems to be epic price discovery battle going on between paper derivative gold and the physical gold market and that won’t take much to ignite a massive move higher.

The recent sell-off in gold has triggered massive gold demand from India. Recall that India had been dormant since June, when the Government increased the import duty by 25% on imported kilo bars. But the lower price of world gold, combined with India’s peak seasonal gold buying period has unleashed India’s gold importation beast.

Based on premiums being paid for gold after taking into account the import duty, Indian importation is running full-tilt.

Despite repeated attempts to take the price of gold lower, Indian physical demand has put a floor under the market, at least for now, and poses a potential threat to the record level of net short interest in Comex futures by the banks and hedgers…The rest of my commentary came be found at  Gold-Eagle.com.

CME Pledged Gold: Did The Comex Rescue HSBC

A couple days after the CME allowed clearing members to use warehouse warrants as collateral for the mandatory performance bond, the new form of collateral was implemented by HSBC.

With help from Craig Hemke (TF Metals Report) it appears as if the Comex activated a low-grade rescue of HSBC.  Chris Powell at GATA believes this “hypothesis fits the decades-long practice of the international gold price suppression scheme of governments, central banks, and bullion banks. That is, to keep metal moving around so fast that it can be applied to pressure points before its real owners notice that it’s missing — to make a single ounce of gold seem to be in as many as a hundred places at once.”

On November 4 authorization for traders on the New York Commodities Exchange to use “London gold” and Comex gold warrants as collateral was tripled, raised from $250 million to $750 million. HSBC now has used $340 million, or 45.3 percent, of its new collateral limit. It seems more than coincidental that HSBC took advantage of the collateral increase so soon after it was put into effect.

I see the rule change as a low-grade bailout of HSBC, analogous to the Fed’s low grade bailout of the big banks with the “repo” “quantitative easing.” The rule change also flags HSBC as the largest trader in the commitment-of-trader category that designates the percentage of the long and short contracts held by the four largest traders on the Comex.

Assuming, as is likely, that HSBC’s short position was largely put on at lower gold prices, the bank is probably getting hammered with a mark-to-market loss.

Here is the issue that needs to be answered but likely never will be: Do any of the warrants HSBC has pledged as collateral involve gold not owned by HSBC?

In my opinion, probably all the gold in these warrants is not really owned by the bank.

Most likely HSBC is using for collateral purpose gold that does not belong to the bank — customer gold. That is outright hypothecation.

I wonder if the agreement signed by the vault operators allows them to hypothecate gold held in the vault and not owned by the bank.

Now here’s where it gets even more interesting. Assume HSBC is short those warrants pledged as performance bond collateral and the price of gold moves a lot higher. Then HSBC is getting killed technically being short gold collateral it has pledged for its own liability but doesn’t own. How does the bank remedy this?

It uses an exchange-for-phyiscal or privately negotiated transaction using “London gold.” Since HSBC is the vault operator for the major gold exchange-traded fund GLD, this London gold EFP/PNT would likely use GLD vault gold that may or may not have been hypothecated.

HSBC is likely getting financially squeezed to a major extent on its Comex futures short position and the CME bailed it out by changing the collateral and performance bond margin rules.

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Did the Comex Just Create More ‘Paper Gold’ For Price Suppression?

A mysterious “pledged gold” entry has just showed up on the Comex gold warehouse report. The definition of this new warehouse stock classification for gold is provided in Chapter 7 of the New York Mercantile Exchange rulebook.

In brief, “eligible” gold is a gold bar stored in a Comex vault that meets Comex specifications (quality, size, purity, and brand).

A “registered” gold bar is one that has been designated for delivery and for which a warrant has been issued. This warrant is evidence of and specifies ownership title to the bar. Warrants facilitate the transfer of delivery under a Comex contract.

“Pledged gold” is a bar for which a warrant has been issued but for which the warrant has been placed on deposit at the CME Clearing House as part of a required performance bond.

The Chicago Mercantile Exchange (CME) has its own clearing division through which all trades are confirmed, matched (counterparties being verified), and settled (money changes hands). Each contract has a long and short counterparty.

A clearing member of the exchange is typically a bank, hedge fund, or commercial entity that has been admitted as a clearing member. The clearing mechanism is the “lubricant” that enables any securities exchange to function.

Part of a clearing member’s responsibility is to assume “full financial and performance responsibility for all transactions executed through them and cleared by the CME.” If you execute a trade on the Comex and fail to pay, the firm that took the other side of your trade is on the hook if you don’t pay for the trade. Or if you have elected to take delivery of a gold bar but can’t pay for it, the Comex member that has the other side of your contract is on the hook for the money.

Each clearing member is required to post a performance bond, a specified minimum amount of funds or collateral value that functions as a reserve to reinforce a clearing member’s obligation to guarantee the trades the clearing member executes. Think of this as a margin requirement.

A warrant that has been issued, which signifies titled interest in a gold bar, can now be used as collateral for the performance bond requirement. A warrant used this way is the “pledged gold” in the warehouse report. The gold bars connected to a warrant being used as collateral cannot be used to satisfy contract delivery requirements of the entity using the warrant as collateral. But the gold connected to warrants is still counted as part of the Comex gold stock.

Additionally, Comex clearing members can use what is called “London gold” as performance bond collateral. The CME rulebook does not define “London gold.” Presumably these are the standard 400-ounce London Bullion Market Association bars stored in a London vault.

But the term “London gold” remains unexplained and nebulous, and recently the CME tripled the amount of “London gold” that can be used by a clearing member as performance bond collateral, increasing it to $750 million from $250 million.

Why has the exchange tripled the amount of “London gold” that can be submitted as performance bond collateral and included Comex gold bar warrants as assets considered acceptable collateral?

As has been well documented, the open interest in Comex gold contracts has just reached a record high. The current open interest, more than 716,000 contracts, is 85 times greater than the “registered” gold stock on the exchange and almost nine times more than the total amount of gold in Comex vaults, including “pledged gold.”

As a technical matter “pledged gold” should not be considered part of warehouse stock because it cannot be delivered. The financial risk assumed by the Comex CME clearing members escalates with each new contract of open interest, especially to the extent that the open interest is “uncovered,” meaning the Comex lacks enough gold to bear the risk of a delivery default.

For this reason the size of the performance bond posted by each clearing member increases pro-ratably with the rising value of the gold contract open interest. (That is, clearing members that process an increased amount of contracts require higher margin deposits.)

This raises the question of the quality of “London gold” as collateral. The issue with “London gold” is whether the gold is verifiably sitting in a London vault or if the posting bank — for example, HSBC — even has legal title to the bar.

Hypothecation is when a bank borrows a gold bar held in its custody for a client, a bar owned by someone else, and uses that bar for another purpose like a delivery requirement or perhaps for posting it as collateral on the CME.

What process is in place to verify that the bank has the right to use that bar, or to verify that the bar even exists?

Even if the entity posting “London gold” as collateral may have some type of documentation showing rights to the bar in London, that bar may have been borrowed — that is, hypothecated by the London vault custodian and sent to Asia or India to satisfy a delivery requirement.

Keep in mind that the Bank for International Settlements now allows “gold receivables” to be counted as gold in custody. This hypothecated bar may exist only as a receivable entry on the books of the London vault operator.

Finally, there is the question of big bank liquidity. The “repo” and money printing recently undertaken by the Federal Reserve Bank of New York reflect a liquidity squeeze in the banking system. I would prefer to receive cash as collateral against a performance bond if I were in the business of extending credit for trading activities. Anyone with a brokerage account is required to use cash as margin equity. Try using a piece of paper that says you have titled interest in a gold bar.

It’s quite possible that the ongoing squeeze in big bank liquidity has forced the CME to triple the amount of “London gold” said to be available to the exchange and to include Comex gold warrants as acceptable collateral in lieu of requiring cash or Treasury bonds. This is the only way the CME could present the appearance of financial integrity and security with respect to the soaring gold contract open interest — open interest that is created by bullion banks and hedge funds and that bears almost no relation to the underlying stock of physical gold — to help contain the gold price.

The timing of the expansion of the collateral package is curiously correlated directly with the rapid escalation in gold contract open interest and the recent liquidity squeeze in the banking system.

The tripling of the use of “London gold” and the inclusion of warrants as collateral suggest that the CME and its Comex are preparing to allow an even greater expansion in Comex gold open interest to increase the ability of Comex banks to engage in gold price manipulation. Why else would the CME allow the open interest in gold contracts to dwarf the actual physical gold in Comex vaults?

Ultimately, the use of “London gold” and Comex warehouse warrants expands the fractional-reserve gold banking system and further weaponizes “paper gold” in support of the longstanding bullion bank and central bank campaign to suppress the gold price.

Stock Market And Gold Manipulation Efforts Intensify

Multiple technical signs are pointing to a possible sharp sell-off in stocks. Too be sure, the amount of money the Fed is printing and putting into the financial system might defer the inevitable, but at some point the stock market is going to converge with the economic reality imposed by the underlying fundamentals.

In addition, the open interest in paper gold contracts on the Comex has soared to all-time highs. This has been accompanied by a tripling of dollar amount of “London Gold” from $250 million to $750 million that can be used as collateral for a performance bond requirements (Note: Comex clearing members – i.e. banks and hedge funds primarily – assume full financial responsibility for their trades that are cleared by the CME).

There’s no way to know what “London Gold” means. It could be a paper claim on unallocated gold sitting in a London vault that may or may not have been already hypothecated. Nonetheless, the tripling of this class of collateral suggests the Comex is preparing for open interest in gold contracts to go parabolic.

Silver Doctors invited me onto their podcast to discuss the implications of a fiat currency based financial system that is going off the rails:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Tesla Is A GAAP Accounting Dumpster Fire

“If there is any brilliance to TSLA, it is in the accounting slight of hand” (from @georgia_orwell)

Unfortunately, the key regulatory agencies in the Government, like the SEC, have been co-opted by the big banks and by Wall Street lawyers who built a lucrative practices assisting big banks in  breaking the law.  As we’ve seen,  when caught the banks at worst receive a small financial wrist-slap that could be considered the cost of doing business. The same holds true with the big accounting firms. Witness this quote from a Wall St Journal article detailing the rationale used to justify burying accounting fraud in Mattel’s financials:

[S]senior finance executives and Mattel’s auditor, PricewaterhouseCoopers, decided to change the accounting treatment of the Thomas asset, effectively burying the problem…It was known within Mattel that if we took this approach, at worst we might get a slap on the wrist from the Securities and Exchange Commission” (this disclosure is from a whistleblower who was the director of Mattel’s tax reporting at the time).

Mattel considered disclosing the accounting “error” and restating its financials. But instead, the Pwc partner in charge of the Mattel account figured out a way to completely bury the issue, after which the partner was seen “walking down the hall, high-fiving people, after this decision was made.”

I’m certain that the PwC partner would have never buried the accounting fraud if he thought there was any risk of an SEC audit or of a whistleblower emerging to tell the truth.

It’s becoming increasingly apparent that Tesla’s accountant, Price Waterhouse (PwC), is readily complicit with looking the other way on Tesla’s accounting frauds, if not in fact helping the Company implement illegal accounting gimmicks.

In light of the Mattel situation, I am certain that PwC is fully aware of TSLA’s openly reckless accounting.  PwC earned $9 million in fees from Mattel while the accounting fraud scheme occurred. TSLA’s revenues are 3x larger than Mattel’s so I’m sure PwC is getting paid significantly more than $9 million in fees either to look the other way or to help with the accounting deception.

The Solar City acquisition deposition was a dumpster fire for the Tesla.  As it turns out, a lawsuit file by certain Tesla shareholders who assert the deal should have never happened  is working its way through the court system.  Notes from a recent deposition disclosed that Solar City’s form audit firm, Ernst & Young, testified that Solar City was insolvent at the time Tesla’s board “agreed” to pay $2.6 billion to acquire the zombie company.

The deposition of Kimble Musk, Elon’s brother, reads like a chapter from “The Gang That Couldn’t Shoot Straight.” The skilled questioning by the plaintiff’s attorney made it clear that the acquisition of Solar City was rife with extreme conflicts of interests.

After Kimbal was deposed it was clear that the acquisition served as a quasi-bailout for Kimble and possibly Elon, as they both had Solar City shares pledged as collateral against various loans, some of which were extended by Wall St banks. Solar City may well be the Company’s undoing rather than the implosion of the EV operations.

It’s likely that Tesla will be left alone by the regulators, who serve as hand-puppets for the big Wall St banks, until firms like Goldman Sachs and Morgan Stanley – financial advisors to both Tesla and Elon Musk – have completely milked any possible fees from the Company.

Eventually Telsa’s business model will dissolve from intensifying, superior competition and an inability to service its massive and growing load of debt and other fixed obligations.  This is happening already, as numbers for October from the U.S. and the EU show a stunning decline in Tesla registrations across all three models.  The only unknown is China.  But auto sales in China are falling like a rock every month. In October auto deliveries plunged 6%. The industry fundamentals are not conducive to the fairytale told by Musk that TSLA will eventually sell 12,000 cars per month in China.

Perhaps in the end justice will be properly apportioned and served on PwC for its role in helping Tesla and Elon Musk perpetrate what will eventually emerge as a largest financial fraud in U.S. history…but I’m not holding my breath