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U.S. Bank Enemies At The Gates Could Trigger Sudden Gold Breakout

Commodities / Gold & Silver 2009 Aug 27, 2009 - 11:54 AM GMT

By: Jim_Willie_CB


Diamond Rated - Best Financial Markets Analysis ArticleWhile all manner of attention remains transfixed inside the United States on a remedy and recovery of its bank sector, once again Americans make dangerous assumptions. They tend to assume that the US Federal Reserve near 0% interest rates, Quantitative Easing (aka exploding Printing Pre$$ output), endless liquidity facilities (e.g. TALF), TARP funds (aka Wall Street slush fund), Stress Tests (rigged), bank stock sales (aided by FASB accounting fraud), bank carry trades (exploiting low short-term & higher long-term rates), and the passage of time can revive the US banking industry. They tend domestically to overlook the gradually worsening insolvency condition. Banks are bracing for a new wave of commercial mortgage losses, of prime Option ARMortgage losses, and credit card losses. The delinquency rate of prime Option ARMs is now higher than subprime home loans!!

Harken back to the summer 2007 when the hack USFed Chairman Bernanke called the bank crisis merely a subprime problem with upper limit potential for $200 billion in bank losses, and no risk of spilling over to the real USEconomy, and surely not the cause of any recession. Hack Bernanke has understood next to nothing in advance, all forecasts hopelessly wrong, but is a great manager of the Printing Pre$$ Operation. So he is loved. This hack now is due for reappointment to USFed Chairman post, his past failure the qualifications for future service. The same is true of Treasury Secy Geithner, whose failure at the New York Fed was his qualification for current service. Such is the nature of the great financial syndicate. The approval of Bernanke is sure to cause a major rift with the Chinese credit masters. Their wishes and warnings have been ignored. Their vengeance is next.

The American perspective is almost always very limited in scope, due to chronic arrogance and delusions of grandeur. Their convenient parochial view tends to focus almost entirely within the United States, its bank leadership, its USFed monetary flexibility, its Wall Street syndicate influence, its federal tax latitude, its bank reserves management, and more. THE REAL THREAT TO US BANKS COMES FROM ENEMIES AT THE GATES, FOREIGN CREDITORS. The dangerous assumption made is that foreign creditors will remain firm and loyal. The arrogance extends from the continued belief that they have no choice, even if the trillion$ frauds on Wall Street occurred, even though such frauds were never prosecuted.

The real threat comes from foreign creditors who must contend with challenges greater than ever experienced, such as:

  • Shrinking or vanished trade surpluses during global slowdown
  • Their own financial systems in tatters (banks, stock & bonds, currencies)
  • Vast regional construction booms gone bust (e.g. Dubai)
  • Numerous nationwide housing bubbles gone bust
  • Gathering storm from the need to liquidate insolvent banks
  • Reserves erosion due to over-weight in US$-based bonds
  • Systemic problems extended from a generation of USDollar reliance.


Take just two important examples, the Persian Gulf and China. Other regions bloated with USTreasurys exist, like Europe and Russia, eager to unload them in what soon could become a torrent. The regional construction boom in the Arab world has an epicenter in Dubai. Unfortunately, it has gone bust, and loudly so. If not for the prompt aid by Abu Dhabi bankers, a vast liquidation of Dubai would have embarrassed them in front of the world. Instead, a new threat comes. The Abu Dhabi rescue next must contend with an indigestion problem, as USTreasurys and likely other US$-based bonds are flooding their banking system. They might own a considerable batch of US bank stocks, soon to be dumped. Ambition led to a whiff of hubris, as fantastic architectural design led to large scope, seen in the skyscrapers and bridges. Not shown are the spectacular communities designed as trees with branches and leaf petals, many empty, busted, and without investment income. But they overdid it, and now must deal with corporate failures and liquidation challenges. But the Persian Gulf bank failures represent the clear and present threat. The outsized projects have yielded to outsized rescues and next outsized indigestion to handle the funds in ways so as to avoid a string of national bank failures. Vast liquidations come, word comes from contacts.

A bank panic in the Persian Gulf could ensue very soon, a back door threat. It would clearly have origins in the United Arab Emirates, spread to the entire Persian Gulf like to Saudi Arabia, Kuwait, and elsewhere. From this global toehold, the bank panic could then spread to London, New York, and points in Europe. The UAE bankers must manage their situation. They are loaded to the gills with USTreasurys, the main currency used in the liquidations and rescues local to the UAE. They also have pet stock accounts in big US banks. As further liquidations occur, avoidance of bank failures seems a remote prospect. Watch the enemies at the gates, outside looking in, in urgent need of dumping USTreasury Bonds and other US$-denominated securities.

China must contend with some unique problems. From 2000 to 2005, they insisted on a rigid currency structure of the Yuan pegged firmly to the USDollar. In doing so, they became the 51st state, yoked firmly to the USEconomy and subject completely to the USFed monetary policy. Yet they had no voting rights on USDollar policy. Ironically, now they do as chief creditor nation. Nobody thought twice about accumulation of Chinese debt to replace US income. It was the insane mind-numbing stupidity known as the ‘Low Cost Solution’ at the time, a policy that the great majority accepted as the next chapter of progress in the Globalization movement, a policy based in corporate betrayal to US workers and a grand global end run around US labor unions. Some, like the Jackass and other analysts on some of these gold journal websites, gave loud warning of a time bomb in construction certain to explode down the road. We are now down the road, reaping the bitter rotten harvest of the latest Economic Myth chapter.

China is experiencing a 40%+ decline in export trade. They have a mammoth $550+ billion stimulus plan that might have run its course. They have banks that are failing on a low level. Their stimulus might have found its way as much to their Shanghai stock market as to bank lending. Their industrial expansion is primarily linked to global trade and the export markets. As much as they would like to generate internal demand, it cannot prevent over 1000 industrial plants from shutdown, already done. More are to come. They respond with Yuan-based swap facilities in numerous foreign lands, but that can only accomplish so much in export markets. China is actively attempting to diversify its reserves. The reality (not a joke) is that they are trying to cobble together 2000 different $1 billion deals to secure hard assets in exchange for USTreasury Bonds, enough to dump their $2000 billion US$-based hoard at risk. They are acquiring stakes in foreign mining firms, stakes in mining projects, and entire properties. They are cutting fewer but larger energy deals, which include development of infrastructure and communities. The inescapable fact of life is that China has embarked on an USTreasury dumping initiative. They are even acquiring industrial property in Europe, unloading up to $10 billion per month in USTBonds. This aids the Euro Central Bank, stuck with too much bad debt from its southern member nations. They are dealing with the PIGS slop debt with vast commercial and industrial property sales. Discounts are being seen for both the USDollar and British Pound Sterling. Details are in the August Hat Trick Letter Gold & Currency Report.


Loan loss reserves at US banks are at a shockingly miserable low level. They not only hide their badly impaired (ruined) credit assets, but they inadequately furnish their loan loss reserve accounts. Notice the trend in coverage ratio for loss reserves (in red) that trends down down down. Filling the loan loss reserves eats into stated earnings, a process forbidden if bank stock prices are to continue up up up. Resolution is sought. Bold lies about their shaky condition works at both ends. It is very difficult to give an accurate number of the failed US banks, when more are failing every week, on an accelerated basis. The failures of Colonial and Guaranty rocked the bank sector in the last two weeks, enough to set back the Federal Deposit Insurance Corp by over $5 billion. Their fund is dead broke empty. They already raised bank fees once this year, and are likely to do so again. That should crimp bank lending, in reports out just today. The declared official list of troubled banks stands at 416. Surely, the true number is closer to 1000. Lying is better for the markets.

The FDIC has responded in two ways. They have opened the door for foreign financial firms to rescue the growing list of insolvent US banks, taking equity in exchange for infused funds as capital. This is unprecedented. Could this be due to the general insolvency of the great majority of big US banks? Yes! The FDIC also announced it might appeal to the USCongress for more funds, sure to spark heavy debate. The FDIC is designed to be a self-sufficient company, but it is a basket case instead. Worse, the FDIC head Sheila Bair, despite her valiant resistance to the USDept Treasury lordship, has its own ethical problems. The FDIC has avoided bank shutdowns on a broad basis. They have thus permitted losing situations to grow much worse. Case in point is the Colonial asset portfolio, some of which are to be liquidated at 65% losses. Where was the FDIC several months ago? The answer is not pretty. The FDIC in my opinion has acted as the new investment banker harlot for Wall Street. They have not shut down banks and liquidated them. They rather seek to feed assets to the Wall Street syndicate and thus avert more FDIC fund drainage.

By the way, Karl Denninger needs a reality check. He does great forensic analysis, but has not produced a single original thought or global hypothesis in memory. His view of a need for a New Resolution Trust Corp to clean up the mess shows a big blind spot. Any New RTC must be designed to operate as an independent entity, capable of turning a profit in a vast liquidation cycle with fees earned. The fact that many individual properties under mortgage are linked to multiple mortgage bond securities hints that the trust would actually lose quite a handy sum of money. Other mortgage bonds are pure counterfeit, with no property income stream linkage. Some bonds would cost more than they could redeem, while other bonds would not be redeemable at all. Mortgage bond fraud represents the gigantic shoe in the machinery. No meaningful home loan modifications, no New RTC, only top-down solutions favoring the big banks. My clarion call for a New RTC was made in 2007, but stopped in 2008 when that criminal fraud detail was revealed. Denninger must have been asleep back then. He has a great knack for dissecting trees, plants, and ferns, many rotten or acidic, but he misses the forests. Every squirrel has its expertise, but some have limited vision.

The FDIC has, like in courtship matchmaking, delivered insolvent midsized banks to the Wall Street syndicate for slaughterhouse processing and grand asset raids. See Countrywide, see Washington Mutual, see Wachovia. They arrange for merger acquisitions. Their bad assets are written off, while their assets are practically given to JPMorgan, Citigroup, and Bank of America. In the process, FDIC drains are avoided at public expense. The FDIC has not done its job. It has acted as a Grand Bank Consolidation agent, making the big dead banks bigger, consuming smaller distressed bank assets like vampires, while ignoring the hundreds or thousands of other midsized and regional banks in the United States. These ailing banks do not receive prompt FDIC action. Therefore the US banks are set to fall like flies in the summer Texas heat, almost all at once. The estimate of 150 or 200 US banks likely to fail soon, stated by Rochdale Securities analyst Dick Bove, is a gross under-statement, a very conservative low estimate, convenient for political circles, a pipedream on Main Street. He was brave to make the statement, and took heat.


The deception continues, worth mentioning regularly, worth harping on. THE REMOVAL OF PILLARS FROM BENEATH THE USDOLLAR FOUNDATION CONTINUES, INVITING A VIOLENT RESPONSE BY FOREIGN CREDITORS. The degree of monetization is staggering for USTreasurys. Issuance must be covered by the US$ Printing Pre$$ machinery, since the USGovt requires up to 7% of the entire global economy (its size, not its savings) to match that issuance. The USFed monetizes with Permanent Open Market Operations quickly after auctions, thus hiding their motive to monetize debt. Debt securities are taken by the primary bond dealers, only to find their way quickly to the USFed on their Permanent Portfolio. If the USFed bought them directly at auction, a firestorm of controversy would result immediately. Instead, the credit market observers are totally asleep at the wheel, or more likely badly compromised. CHINESE LEADERS SURELY NOTICE. This practice has come out into the open. Zero Hedge is on top of it, like expert sleuths. See their latest exposure data, the USFed’s dirty little secret entitled “$270 Billion Of POMOs To Date Running Ahead Of Schedule” (CLICK HERE)

The USFed established a gigantic Dollar Swap Facility. Last September 2008, it expanded this facility from $290 billion to $620 billion in order to enable a rush into the USTreasurys. The same $Swap Facility enables hidden monetization now, as foreign accounts chock filled with borrowed USDollars (in blue) bid on USTreasurys (in red). The USFed expanded balance sheet is also shown (in yellow). This is an old chart, but it makes the point well. Historically, monetization results in a severe devaluation of the inherent currency being debauched. This time will be no different.

Before showing a gold chart, something bears mention. USTreasurys are the current raging bubble, consuming wealth on a global scale. This represents a rush into bad money, soon to be recognized as a Third World Debt security. It is being actively discounted by cash currency intermediaries, in the unofficial restructuring of debt taking place. This is NOT in the financial news. However, a greater pox is evident. In the last couple weeks, a truly perverse phenomenon has begun to show itself, a rush into the worst junk imaginable. The stock rally in AIG, Fannie Mae, and Freddie Mac has taken root. They are seeing quite a runup in stock share values. Details are eye-opening. Since July, AIG has gone from 10 to 40 per share, Fannie Mae (FNM) from 0.5 to 1.7 per share, Freddie Mac (FRE) from 0.5 to 2.0 per share. Including Citigroup, a dead walking giant, this group accounts for 20% or more of the entire NYSE trading volume. THIS IS A RUSH TO JUNK. This is an end stage, just like in 1999 when was a hot stock with no income, priced on clicks and eyeballs.

The phenomenon of high-speed flash trading and other computer trading must be cited. It accounts for well over 70% of NYSE trading volume. A credible argument can be made that the US stock market, at least the top-tier New York Stock Exchange, is slowly vanishing. The dominant hand of the Plunge Protection Team, no longer hidden, occasionally admitted by USGovt finance ministries, makes the market even more the province of Wall Street to trade among themselves, exploiting both the non-financial sector and the pension funds. My description of the NYSE is that is has become a pit for Wall Street group masturbation. Their stained hands are too much involved.

The movement of chasing the worst quality stock issues brings to memory the famous quote by Sir Thomas Gresham in the 16th Century. He said, “Bad money drives out good money.” It does so on a temporary basis, while the craze continues, while the denial is rooted, while the propaganda prevails. But real money emerges triumphant after the inevitable crisis that ensues. THAT REAL MONEY IS GOLD, ALONG WITH SILVER, EVEN PLATINUM.


Many complain that the gold price cannot seem to overcome the important $1000 mark. It is true, the mark is stubborn. But $1000 gold would still be dirt cheap, given the flood of money on a global basis. The reasons why it should be overcome are growing a long list, and the gold price has a very firm support. The wizards did not enjoy the taste of a big single-day move up last Friday August 21st. The Powerz came out guns blazing on the following Monday to eradicate the gain. The 50-day moving average has provided reasonably strong support in the last month or more. Both it and the 200-day moving average are rising, a trend signal.

Pressures continue to mount. Surely impatience comes to many faithful gold investors, in whatever form (stocks, bullion, coins). The gold breakout will come suddenly, without warning. In my view it could easily come from ENEMIES AT THE GATE, foreign creditors responding to their own stress. It might come from a domestic shock from any of 20 potential events also. The US financial press gives the foreign front very limited coverage. When the breakout occurs, the gold price will vault past 1050 in a screaming move. The press will tell the wrong story, focusing again on domestic factors within the USEconomy, like price inflation, as they miss the importance of the USDollar. While prices might be due to rise in surprising fashion soon, the real issue is the global monetary crisis centered upon the USDollar. Foreign reserves are over 60%, nearly 65% in USTreasurys. The glut will be relieved before long. The fire sale leads to the Third World.


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by Jim Willie CB
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