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US MARKETS

International Forecaster November 2007 (#5) - Gold, Silver, Economy + More

By: Bob Chapman, The International Forecaster

The theory of spreading the losses may have seemed like a good idea, but
what has happened in the MBS, CDO, ABS & SIV distributions is that
dispersement has brought distrust and a loss of confidence at the highest
levels of the financial world. Instead of seeing a handful of institutions go
under, we have thousands of institutions having to declare losses. It has
been over 3 months since central banks were forced to inject liquidity into
the banking system. Some $800 billion to $1 trillion and the problem is
nowhere near being solved. Daily we see admission of massive losses and
there is no end in sight just as we predicted so long ago.

Again the fiasco was created by the Fed and natured by the rating
services and the lenders. We have written for years of the terrible conflict
of interests of these three groups, but as usual few wanted to listen. How
can a rating system be objective when its members are paid by the people
they rate? After all the forensics are done, years from now, what you
have just witnessed in the mortgage market will be called the biggest
scam of all-time created by the Fed to keep the economy from collapsing
and to buy time until the elitists were ready to finally pull the plug. The
rating agencies magically made BBB securities into AAA securities by
mixing both together. They structured the product at the behest of banks
and the Fed, just like the pressure that was put on mortgage originators
to write loans that should have never been written. There is absolutely no
question that a conspiracy existed between the Fed, the banks and the
rating agencies that worked with the banks creating this toxic garbage to
be dumped on professional inventors worldwide.

What we have now is professionals that are trying to dump these toxic
securities into a market that is almost non-existent. That means in order
to balance their books these investors have to sell other assets to offset
these paper losses. This is called contagion and the spreading of
misfortune into other markets. Positions in other investment areas are
being sold to realize cash. This has led to unsettled lower markets in
stocks and other investments. Hedge funds are in serious trouble as well
with these CDOs, ABSs, MBSs and SIVs and if they are in trouble so are
the banks that lend to them. Usually loses can be easily absorbed by all
parties, but not when you are using leverage and that is what all these
parties have been doing. The full damage done would be finally known
for another year or two. If you mix in an overpriced stock market, a real
estate collapse and major losses you come up with a deep recession
accompanied by inflation. The only alternative is gold and silver related
assets.

GOLD, SILVER, PLATINUM, PALLADIUM AND URANIUM

Wall Street has a big, dark secret that you almost never hear mentioned
in the mainstream media. All we ever hear about are the underlying
mortgages, bonds and other securities which are in the process of being
trashed with ever-increasing thoroughness, such as CDO's, ABS's, MBS's
and other types of toxic alphabet soup which we have become all too
familiar with over the past several months. But these instruments along
with other equity swaps, futures and options are only the tip of the
iceberg. There are two other types of weapons of mass financial
destruction that comprise roughly 97.5% of the roughly 400 trillion
dollars of notional value for all outstanding derivatives. The loss
exposure from a meltdown of these derivatives is the big, dark secret
referred to above, and has been totally and deceitfully miscalculated by
the Bank of International Settlements (BIS) to be a tiny fraction of the
actual potential risk because they do not want investors to panic at the
sheer, gargantuan size of this loss exposure on a worldwide basis should
these derivatives fail. And believe us when we tell you, investors should
be panicking. If they had even a lick of sense, they would be fleeing all
financial markets in terror, with the exception of precious metals and
their resource stocks, because all these other markets will be vaporized
when the final cataclysm becomes manifest.

The first type of killer derivative is called a credit default swap (CDS).
Without getting too technical, this is basically a contract where party A
receives a periodic fee from party B over a specified period of time to
insure that party B suffers no loss from a default in the repayment of debt
owed in connection with a bond or other obligation of a reference entity
C. Never mind that party B does not necessarily have to own any of C's
bonds, as we can just make up the contract out of thin air if we want to
without any money being put up as collateral by party A for their
potential liability to party B. The total amount of insurance covered by
all party A's for all party B's, incredibly, has no relation to the actual
amount of debt owed by C on the underlying bond. As an example, you
could have CDS's covering many multiples of the total subject bond debt
of C, because there could be many different party A's insuring the full
amount of C's debt to their corresponding party B's. This is total
insanity, because if party C defaults, the resulting losses to the various
party A's under their insurance contracts with their corresponding party
B's could be many multiples of the actual total debt of party C. The
impact of C's default on the markets where its debt is traded could
thereby be greatly amplified due to this duplication of insurance. It is the
functional equivalent of allowing anyone with enough bucks to insure the
life of someone they do not even know, thus allowing for rampant
speculation on whether that person will live or die and inviting a
potential murder of that person by the parties who could benefit thereby.
These CDS's also give a false impression of market security, thus reducing
risk assessment and risk aversion, because multiple parties are insured
against the same risk, namely C's default, and no sell-off of the
underlying asset, namely C's bond, occurs because the risk of loss has
been insured over and over again by most, if not all, major investors in
C's bond. Who are the freaking geniuses who came up with this
magnificently imbecilic idea?

The second type of killer derivative, and by far the largest in terms of
notional value, is the interest rate swap (IRS), and we might add that
you have far less to fear from the IRS tax collectors than you do from
these IRS swaps. This little beauty comes in many shapes and sizes, but
the most common is a fixed-for-floating rate swap in the same currency
where party A agrees to pay party B a stream of floating or adjustable
rate interest income payable in a specified currency in exchange for a
stream of fixed rate interest income to be paid by party B to party A in
the same currency, starting with a zero net differential between the
floating and the fixed rate payments, with the principal amount for
purposes of calculating interest payments being notional only. This
means that the "principal" is an imaginary amount determined by the
parties for purposes of making interest calculations and that no money is
exchanged between the parties in terms of principal value, only in terms
of interest differentials between the fixed and the floating rates on the
notional principal as will vary over time depending on whether interest
rates are rising or falling. This means that the swaps are totally naked,
which allows once again for rampant speculation based on fluctuations
in rates of interest and which further reduces risk aversion for what
anyone would normally consider to be deadly adjustable rate loans
based on the illusion that they have hedged their bets even though no
collateral has been put up to cover the other party's potential liability
under the derivatives contract if rates move against them. This is how
risk is skewed by derivatives. Presumably, "all" you have to worry about
is the cost differential between the floating and adjustable rates when
applied to the notional amount of principal selected if interest rates turn
against you. So you can imagine how large the notional principal might
become for those with money to burn like hedge funds. These IRS
contracts are literally created out of thin air and are limited only by the
respective imaginations of the parties. And as with CDS's, no collateral
has to be put up by either party to secure their potential liabilities under
the derivatives contract, and due to their often unique nature and the fact
that they trade on the OTC derivatives markets, they may at some point
become very illiquid like the other forms of toxic waste if interest rates
get way out of balance. Again we ask, who are the boneheads that came
up with this idea?

Adding fuel to the upcoming conflagration will be the fact that the
majority of these CDS's and IRS's are as naked as a jaybird and are
leveraged to the hilt! This is why the IBS figures are so very wrong,
because they fail to take into account the myriad of leveraged situations
that these weapons of mass financial destruction are now a part of, and
what impact the sudden loss of market security resulting from a
meltdown of these derivatives might have on markets overall. There
could well be a synergistic effect where total losses are much greater
than the sum of their parts. What happens when nearly all bank reserves
are vaporized in a matter of a few months, or even within weeks, as they
and their customers swirl around in a big bankruptcy toilet bowl on their
way into being flushed into fiat money hell and oblivion? Will the Fed
skip monetizing trillions of dollars in repos and move right into
monetizing quadrillions? How much would a dollar be worth then? We
shudder to think!

As usual, our financial "geniuses" have not thought the full derivatives
process through to its potential ultimate conclusions. They look at the
positives and ignore the negatives. Just as with the black boxes used by
Wall Street and institutional investors that do not take into account
catastrophic situations involving heart-rending volatility of prices, the
whole system of derivatives is doomed to fail catastrophically if anything
happens outside of the artificially predetermined parameters chosen by
the "geniuses" who continually fail to recognize that playing markets is a
form of art and can not be boiled down to a series of mathematical
equations. The human elements of greed and fear which drive markets
can not be quantified with sufficient accuracy to safely trade when large
imbalances suddenly grip entire market segments such as with the real
estate debacle. The "geniuses" always get screwed any time something
unprecedented occurs. You cannot set parameters for something that has
never happened before, at least not accurately enough to remove the risk
of substantial and systemic failure.

And now because of the Fed's profligacy and the Treasury's
incompetence, we will soon become the next Weimar Republic, so fire up
your wheelbarrows full of dollars for the next time you have to go to the
grocery store. The rampant gambling and speculation on the back of
ludicrously low interest rates set during Greenspan's Folly, an
out-of-control national debt which has exploded on account of perpetual
wars for perpetual peace and perpetual profits, trade imbalances from
free trade, globalization, off-shoring and outsourcing, and now
monetization of repos in multi-hundreds-of-billions in bank bailouts
together with a hapless, abandoned dollar that is about to become a
Banana Republic currency as the Fed continues to lower interest rates to
bail out its denizens of Wall Street, we are headed toward inflation like
nothing anyone in the US has ever seen before in the entire history of the
United States. The resulting hyper-stagflation will drive interest rates
into the ozone and completely fry and vaporize those who are on the
wrong end of IRS's (i.e. those paying out interest based on the floating
rate side of the contract). And consumer spending and the real estate
markets will dry up, sending many corporations into bankruptcy and
igniting a thermonuclear meltdown of CDS's, with each defaulted
company bringing down multiple CDS insurers due to the duplication of
insurance discussed above. Perceived risk in the markets will then
accelerate, driving interest rates even higher, exacerbating
hyper-stagflation and further vaporizing both CDS's and IRS's in a
cascade of defaults that will take down the entire world economy and all
financial markets around the entire globe just as sure as God made little
green apples. All the leverage used by, and all of the interconnections
between, the various counter-parties involved in the many types of
derivatives will finally start to be known, and only those in gold, silver
and their related stocks will be saved from complete and utter financial
annihilation.

Well, the mainstream media, the analysts and the pundits are already
predicting the downward trend in gold to a price somewhere in the 750
range by the end of the year. The Fed-heads are out jawboning about
how we may not need more rate cuts in order to slow gold down and
support the sagging dollar as they continue to lie through their
Wall-Street-bailing teeth in their desperation to save the commercial
shorts from a walk into Crispy Critter Country. They say there will be a
big correction in gold and silver this year and prices will not move up
until next year. What they fail to mention is that there are still almost
240,000 open December gold futures contracts even after the 22,000 that
were closed out on Thursday which undoubtedly accounted for gold's
rise to about 818 that day, and that the commercial shorts own most of
them, many of which are now still underwater by about $15,000 per
contract even with gold stubbornly holding at about 790. Already the
open gold futures contracts for February have soared to a very
manipulative level of 116,000 contracts as the cartel gears up for the
winter/spring rally for precious metals, and as the cartel attempts to
intimidate traders and attempts to take the public out of the precious
metals markets for fear of a big correction and much lower prices. They
hope that everyone will forget about the issue of the 240,000 December
gold futures contracts that is still unresolved. Do not be intimidated.
Support the large specs in their battle to push gold past 850. Do not let
up on the cartel. The gold alarm must be rung so people can be alerted to
the coming danger. The covering of 22,000 shorts sent gold from
Wednesday's close of 797 to a high late Thursday of 818 before a series of
substantial central bank sales brought gold down to 785 on Friday. Can
you imagine what would happen to the price of gold if there were a
short-covering of many multiples of 22,000 short contracts?

The large specs have supported precious metals admirably, and have
used the strength provided by many seasonal factors to do substantial
profit-taking in gold, silver, oil and other commodities as they load their
16 inch guns with massive physical gold and silver projectiles and push
the charges filled with the powder (cash) they have kept dry into the
firing chambers to get ready for the final assault on 850. The large spec
market strategists are in the conning tower of the USS Silver & Gold, the
ancient flagship of our Founding Fathers, deciding on the coordinates for
the upcoming bombardment of the gold bear capital located within the
COMEX complex in the Land of Fiat Dollars. Many grim looking gold
bulls can be seen on the aft deck as they ponder the day they will board
the LST's for what can only be described as the next D-Day invasion,
financially speaking, embarking on a trip into shark and barracuda
infested waters where there can be no turning back. The Screamin' Gold
and Silver Eagle special forces were dropped behind enemy lines and
attacked the stock markets in the last hour of trading on both Wednesday
and Thursday to protect the huge gains they made with their protective
derivatives, especially those expiring in November, which the evil
Illuminati tried to squeeze with another rally-crash, starting with
Tuesday's 319 point Dow dead-cat bounce. The big Dow gain on Tuesday
was promptly erased by the large spec's special gold bull forces, who
attacked in the closing minutes of trading on Wednesday and Thursday
so the evil Fed and PPT did not have a chance to recover the losses. Large
gains were also made by large specs in stocks, which were sold into the
false strength provided by the PPT. Even the tiny resource stocks seemed
to light up on Friday. The large specs have paused to rest and reload.
This battle is not over yet, not by a long shot, so stay tuned to your short
wave radios as the epic battle between the forces of good and evil takes
center stage once again, and heats up to the boiling point as the
reprobate forces of the cartel attempt to take on the combined forces of
the large specs, ETF's, sovereign wealth funds, Indian brides, and
jewelers and investors from India, the Middle East, Russia, China and
Asia. Hopefully once we take out 850, the US and European public will
wake up and take gold to $2,000 and beyond!!!

...

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