Posted by: John Gilmore | September 16, 2006

A Perfect Storm

[Email to friends and family – August 25, 2009]

Hello everyone,

As most of you know, I’ve been actively following the current economic crisis for the past 2 years. Since we’re entering the time of year when we’ve historically seen high market volatility (Sept/Oct) – now is a good time to evaluate what is happening with regards to our economy – and what you can do now to protect yourself in the event things get interesting.

If you only listen to most of the mainstream media outlets (CNN, CNBC, Fox News, Wall St. Journal, etc.) – it would seem that things are turning around. If you are someone who studies the data yourself and forms your own opinions – like myself – you see something else.

I have written many articles over the past 2 years on what is happening with regards to the economy and why – but I felt that since we’re again heading into September with deteriorating economic data/activity – now would be a good time to summarize the greatest threats to our economy and what you can do now to help protect your finances.

If you are like most people in our nation today – then you accept what you hear from many of our financial and political leaders and you hope things turn out ok. What I’ve found is that many of the people we listen to everyday are manipulating economic information and ‘spinning’ things to sound more positive than reality. If my conclusion is correct, then we are heading toward a significant economic decline – something that you and I have never seen before. It’s important to understand what’s happening – and more importantly – why it’s happening.

I have attached an article that reviews the most significant current threats to our economy. I hope you find it informative.

Take Care,

John
____________________________________________________

Today is August 25, 2009. There seems to be many positive news articles this week regarding our economy. Here’s a few I’ve seen over the past couple of days:

‘Bernanke, Trichet See End to Global Slump, Caution on Recovery’ – Bloomberg

‘We saved the world from disaster, Fed’s Bernanke says’ – MarketWatch

‘Consumer confidence soars – Sentiment reading increased to 54.1 in August, well above economists’ expectations.’ – CNN

‘Stocks show confidence – Bernanke appointment, signs of stability in housing market and rise in consumer sentiment report push market higher.’ – CNN

“Bernanke: ‘We have been bold’ – Fed chief defends central bank’s response to the economic crisis as Obama says he will nominate him to another 4-year term” – CNN

‘Upbeat Data Buoy Stocks’ – Wall St. Journal

‘Bernanke Wins Vote of Confidence’ – Wall St. Journal

‘Housing Lifts Recovery Hopes – Stocks Soar on 7.2% Spurt in Home Resales; Bernanke Optimistic but Foreclosures Loom’ – Wall St. Journal

‘Central Bankers Breathing Easier’ – Wall St. Journal

‘Stocks, Oil Hit New 2009 Highs’ – Wall St. Journal

‘European Stocks Post Biggest Gain in Month’ – Wall St. Journal

‘Financials Help Stocks Climb’ – Wall St. Journal

‘New-Home Sales Post Strong Gain’ – Wall St. Journal

As I’ve said before – underlying economic data is telling us that our economy continues to deteriorate. I see nothing that would tell me that things are turning around or anything that would restore my confidence in the system.

There is nothing within real economic data (raw data – no ‘adjusting’ or ‘massaging’ or ‘modeling’) that tells me that investing in Stocks, Bonds, Derivatives – would be a good idea at this time (brokerage account, 401(k), etc.). In fact, by investing in any of these types of investments – you are taking significant risks with your money. When I say significant – I mean that you could lose everything.

Since September and October have historically been the most volatile time of the year for financial markets – in this post, we’re going to take a look at some significant risks to our economy that we’ve discussed previously that could cause our entire system to collapse. Regardless of what we’re told by mainstream media – our economy has now reached a point that any one of the items below – or combination of items – could cause our economy to begin a decline much more severe than what happened last year (September – December 2008).

The following is what I (and others who are paying attention) have been watching closely over the past year. Since things are getting much worse below the surface of what we’re told by the mainstream media – the time for you to act is now.

1. Bank failures continue to accelerate – and the FDIC insurance fund is now effectively out of money. There are various ways for the FDIC to replenish their funds – but these options either require more U.S. Treasury debt or more stress on banks (additional fees assessed to banks). Based on current financial conditions – it will not be easy to execute either option. Regardless, there is no way for the FDIC to gain access to enough money to insure the bank failure tsunami that is coming. This means that at some point in the near future – banks will fail – and depositors will not be able to withdraw their money. Contrary to what most people believe – banks only keep a fraction of their deposits (the downside of fractional reserve banking). Banks earn money by lending money at greater interest rates than they pay on deposits – there is no incentive for them to keep deposits. Without the FDIC insurance fund – there will be no money for depositors. This could possibly lead to a run on the banking system – followed by a bank holiday (banks are closed for a period of time by the government).

From Saxo Bank Research (Author: Robin Bagger-Sjoback):

“The current Reserve Ratio of 0.014% strongly indicates how bad this crisis has affected U.S. financial institutions. However, this is not the entire story. If we take a closer look at the non-current loans and charge-offs from banks, one realizes that the FDIC still has a lot of work to be done. Combined non-current loans and charge-offs amounted to nearly $100 billion in Q1 2009 compared to $15 billion/quarter pre-crisis. Moreover, according to analysts at the Royal Bank of Canada, the U.S. still has banking failures in the thousands to face before the crisis is over.”

2. U.S. Treasury debt sales are sky-rocketing due to out of control government spending and recent ‘stimulus’ and ‘bailout’ packages. Two weeks ago the U.S. Treasury auctioned over $230 billion in bills/notes. They are auctioning over $200 billion this week. Just a year ago – weekly auctions were in the $10-$15 billion range.

From Karl Denninger (http://www.market-ticker.org/):

[Treasury Auctions this week]:

“*U.S. TREASURY TO AUCTION $27 BLLION IN 52-WEEK BILLS
*U.S. TREASURY TO AUCTION $42 BILLION IN TWO-YEAR NOTES
*U.S. TREASURY TO AUCTION $31 BILLION IN THREE-MONTH BILLS
*U.S. TREASURY TO AUCTION $28 BILLION IN SEVEN-YEAR NOTES
*U.S. TREASURY TO AUCTION $30 BILLION IN SIX-MONTH BILLS
*U.S. TREASURY TO AUCTION $39 BILLION IN FIVE-YEAR NOTES

“This is the price of supporting the grift and fraud in our banking system.

I count $207 billion, coming two weeks after a $250 billion dollar week.

Let’s annualize – that would be about $5 trillion a year in annualized issuance.

My-oh-my how long can this continue?

Who knows. What I do know is that this is absolutely unsustainable, it is approaching 40% of GDP annually, and yet this is what is required to keep all the balls and plates in the air as a direct consequence of our government’s decision to sponsor and permit massive financial system fraud to continue.”

Keep in mind that current Treasury auctions do not include any additional FDIC funding for future bank failures. If we add in the potential costs for ‘universal healthcare’ – the numbers get even more ridiculous.

3. Foreigners are not purchasing our debt or investing huge sums of money in the U.S. any longer. Based on our current account balance with the world – this is a very bad development.

If Foreigners are not purchasing our debt – who is? This question leads us to item #4.

4. It appears that the Federal Reserve is now directly purchasing U.S. Debt (commonly referred to as ‘monetizing’ debt). The Fed is now printing money out of thin air and giving it to the U.S. Treasury in exchange for U.S. debt. If you’re scratching your head and thinking that this is a very bad idea and could lead to some very bad things – you’d be right – which is why it is forbidden by the Federal Reserve Act of 1913.

We laugh at a country like Zimbabwe where hyperinflation has destroyed the value of their currency (people of Zimbabwe now use gold as money – rings, necklaces, coins, nuggets, etc – whatever they can find) and we think – wow, those guys don’t have a clue what they’re doing. The problem is – if we took the time to look into our own monetary (central banking) system – we would realize that we are using the exact same fiat currency monetary system as Zimbabwe.

 What started Zimbabwe’s final spiral into hyperinflation? The President of Zimbabwe ordered their central bank to print trillions of Zimbabwe dollars to pay off their debts. What are we doing today? We are printing trillions of U.S. dollars to pay off our debts.

 What is one of the first things you learn in Management 101? If you keep doing the same thing – don’t expect a different result.

So – if we look at the value of the U.S. dollar – what do the trends tell us? The trends tell us that the recent actions of the Federal Reserve could very easily cause the value of the dollar to decline significantly in the coming months/years.

Since the Fed’s activity (direct buying of U.S. Treasury debt) is not lawful, you’re not going to see the Fed do this out in the open and you’re not going to see this activity touted by mainstream media. Instead, they must create a grand illusion. Here’s a brief excerpt from a recent blog article by Chris Martenson that shows us their slight of hand.

“In concert with the claims I made in the prior Martenson Insider post, The Fed bought $7 billion in Treasuries today and even more yesterday.

This is at the upper end of their recent range of already exceptional purchasing activity.
If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?

This $14 billion plus buying activity by the Fed represents fresh money created out of this air that was exchanged for the sovereign debt of the US. However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that’s why they are called “POMOs”) we can consider these additions of money as good as permanent themselves.

Looking at the maturity range we can see that these are all long-dated bonds with the one today specifically offering us a tantalizing clue as to how the shell game is being played.

Here’s the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday). Please note the specific CUSIP number circled. Every bond in this auction carries this specific identifying number.

And now let’s look at the detail for this most recent POMO:

Good grief! Just last week, when the auction results were announced it was trumpeted to great fanfare that there was “more than sufficient” bid-to- cover, “strong demand” and all the rest.

And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.

They didn’t even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using “primary dealers” and “POMOs” and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.

The speed of the shell game is accelerating.”

Now you know why the Federal Reserve and many of our political leaders are opposed to an audit of the Federal Reserve. They would prefer that we didn’t see behind the smoke and mirrors.

5. What is the real reason our government is bailing out banks and corporations – and providing trillions of dollars in economic ‘stimulus’? We’ve been told that our government needed to do these things or our entire financial system would collapse. Is this true? No. If you’ve read my previous articles on our monetary system – then you know that this system is going to collapse whether or not our government bails out anyone or not.

The truth that our leaders will not discuss and the mainstream media will not expose is that our economy is based on a monetary system that requires exponential debt growth (since our money is created by debt). Our monetary system requires that we create enough new debt each year equal to the aggregate interest on all of our outstanding debt. This number is now over $4 trillion dollars. The United States must now create over $4 trillion dollars of new debt each year – or the system will begin to fail – resulting in increased foreclosures and bankruptcies – leading to the collapse of the system.

This is exactly what we’re seeing today. We’re told that things are turning around by financial and political leaders – but if we ignore the rhetoric and study the data – what do we see? We see increasing numbers of bankruptcies and foreclosures by individuals, businesses and corporations. We see individuals and corporations taking on very little new debt because of the amount of existing debt – which is dramatically reducing the growth of our money supply. Again, the math tells us that this had to happen at some point. It’s happening now.

So, when we see household/consumer debt graphs that look like this……


……we must see government debt graphs that look like this – or the entire system would have collapsed months ago.

Since our money is created by debt and debt growth is now slowing considerably – we would expect to see the rate of growth of our money supply to also slow considerably – and that’s exactly what’s happening.

The blue line below shows our total money supply growth rate.

If you don’t think debt is destroying the system – take a look at this chart by Chris Martenson.

(This chart compares total debt (or “credit”) in the U.S. to GDP (or Gross Domestic Product) on a percentage basis. Current total credit-market debt stands at more than 340 percent of total GDP.)


If you want to understand the basics of our monetary system – how it works, who created it, why we’re currently in a deep recession, why it is unsustainable and what it means for our future – here’s a link to my article:

http://endtimediscussions.blogspot.com/2006/09/our-monetary-system.html

All of the recent Federal Reserve and government actions are simply delaying the inevitable collapse of this system. The debt of individuals, corporations and governments is now crushing the system. As individuals, we don’t want to take on anymore debt because we’re tapped out. The same thing is now happening to corporations and governments around the world. The problem is that exponential debt creation is required to prevent the system from collapsing.

6. What is the next shoe to drop? If you’ve read my earlier article on current stock market price to earnings ratios – then you know that P/E ratios are at all time highs. With the recent stock market run-up and corporate earnings plunging 15-20% this year – this shouldn’t surprise anyone. What is surprising is how high the P/E ratio is. Take a look at the chart below. The S&P 500 PE ratio is approaching 150. Until recently, it’s never been above 60. This would tell you that stocks are priced extremely high compared to earnings. The question you need to ask is – will earnings increase dramatically in coming quarters or will prices decline dramatically? History tells us that one or the other is going to happen – and happen soon.


However, P/E ratios don’t tell the whole story.

There are many people who are saying that all of the recent Federal Reserve actions have pumped billions of dollars into the system – and much of this money has found its way into the stock market.

The following is from Nathan’s Economic Edge (http://economicedge.blogspot.com/)

Wondering where the fuel for the recent rocket shot is coming from? Well, as Point put it, “The New York Federal Reserve bought a record $5.6 billion in agency debt today. There’s your fuel for the equity fire today.”’
 Fed buys record $5.6 billion in agency debt

NEW YORK (MarketWatch) — The Federal Reserve Bank of New York bought $5.605 billion in housing-agency debt on Friday, the biggest purchase since it began buying debt in the sector in December in the hopes of capping mortgage rates. It bought about half of the $11.209 billion offered to it by bond dealers, which analysts noted was rather high. The large purchase is a big switch from recent operations, which have slowly gotten smaller. Analysts hypothesized the central bank may have been trying to stretch out its purchases over a longer timeframe to improve the effect. “The size of today’s purchase will lead many to pay greater attention to the next pass to see if the Fed is increasing the speed at which it purchases Agencies,” said Dan Greenhaus, chief economic strategist at Miller Tabak. The Fed has bought $116.6 billion of the originally-stated $200 billion in debt issued by home-finance agencies.


From Chris Martenson (http://chrismartenson.com/):

‘Today [August 7, 2009], again, we receive news that the Fed is continuing to pour more and more POMO money into the banking system, this time with a ‘mere’ ~$2 billion addition.’

“August 7 – New York Fed purchases $1.937 billion in agency coupons”
‘As long-time readers here know, I have been tracking the Permanent Open Market Operations (or “POMO”) activity of the Fed for a long time.’
‘Today I want to update that chart above [Fed Treasury Purchases] and provide a little more context by placing it beneath a scaled chart of the Dow Jones index (time periods match exactly so the charts align). Again, what you are looking at is a chart of POMO activity (Treasury + Agency) that is being expressed as “billions of dollars per day.” No effort has been made to account for weekends or holidays; this is simply taking each POMO and dividing it by the number of days that pass until the next one.’


‘What we might wonder here are three things:

1. How would the stock markets have behaved without the massive daily additions of billions of dollars?

2. When the stock market turned around in advance of the initiation of the POMO purchases which major bank holding companies, such as GS, were effectively front-running this flood of money?

3. If the stock market is up 40%+ and green shoots are everywhere, why is the Fed continuing to pour gasoline on the fire ($16 billion this week so far)?

Part of the answer may lie in a nice piece of work posted at ZeroHedge which notes that on POMO days that stock markets exhibited some statistically unlikely upward thrusts in the final few minutes of each associated trading day.

Under this scenario POMO money is being shuffled out of the endless thin-air vaults of the Fed and into the banking system where it needs to find something to do. One of those things, it seems, is to goose the stock market, especially late in the day.

The goal, we surmise, is simply to get the stock market to move upwards. This is not an unthinkable idea to me because, frankly, it is exactly the prescription I would write for an economy as dependent on rising asset prices as is the United States’. If a rising stock market helps to get people out buying and spending again then it is a worthy goal in many a policy-makers mind, I am sure.’ –Chris Martenson

I believe that this is certainly true – Fed buying activities are pumping up the market – but there also appears to be a certain level of market manipulation taking place. I and others have noticed that there seems to be a lot of overnight futures buying in the stock market that is driving stocks higher.

From Nathan’s Economic Edge on 8/20:

‘As is this manipulated market’s custom, key areas are often jumped overnight and that occurred again last night in the midnight hours. The release of higher than expected jobless claims, however, sent prices back below that level and they are now very close to even’:


…and on 8/21:

 

‘Equity futures rose “in the midnight hours” once again, rising non-stop from midnight eastern at 996 on the /ES to this morning at 1,013 – a leap over resistance’:

This is happening over and over again. These are not people actually buying stocks – these are people placing massive bets that the stock market will rise. With the stock market being extremely expensive at the moment, it seems like a very strange thing to do. Regardless, with all of the money being pumped into the system – the system itself is being manipulated on a massive scale. The question is – what happens when the music stops and the ‘stimulus’ ends? Nothing good for you and me.

If we step back and take an objective look at what is really happening with our economy, we see the following:

1. The banking system is under significant stress (81 banks have failed so far this year) and regulators expect hundreds more to fail in coming months/years.

2. The FDIC insurance fund is at an all time low reserve ratio.

3. The U.S. Treasury is auctioning massive amounts of debt – recent auctions are approximately $5 trillion annualized.

4. Foreign investors and governments are no longer buying massive amounts of our debt. This is required for us to continue to fund our current deficits.

5. The Federal Reserve is stepping in and secretly buying billions of dollars of U.S. Treasury debt to make up for the lack of foreign purchases.

6. Stocks are priced at historic highs compared to earnings.

7. Unemployment continues to deteriorate with hundreds of thousands of jobs lost each month. This continues to adversely affect housing sales/housing prices, etc.

There are a number of possible scenarios that could happen at any time that will result in the beginning of a collapse of our monetary/economic system. The following are the greatest threats to the stability of the system:

1. The #1 threat right now to our economy is a stock market collapse. It’s at historic highs compared to earnings, underlying economic fundamentals are deteriorating, it is highly volatile, Americans have placed their faith in the fact that the market will always rise and it has been manipulated higher due to all of the Fed/Government actions. While the stock market is a horrible indicator of the overall health of our economy – it does hold immense power over our state of mind. If it falls significantly – vast amounts of wealth will vanish overnight – possibly leading to a panic and a complete loss of faith in the entire system.

2. U.S. Treasury auctions begin failing. If the Fed allows auctions to begin failing (bid to cover ratios consistently drop below 2), then the U.S. Treasury will be required to offer much higher interest rates to get the money it needs to fund our deficits. If this happens, interest rates for us will sky-rocket. This, in turn, will have a significant negative impact on the stock and bond markets.

3. The banking system fails. If bank failures accelerate to the point the FDIC cannot back deposits – expect a national bank holiday for a period of time without access to your funds while the government ‘decides’ what to do. Again, all financial markets will be negatively impacted.

4. Federal Reserve actions cause the value of the dollar to plunge. If this happens – all kinds of bad things happen to us. Prices for imported goods (most of what we buy) will sky-rocket. Interest rates for us will sky-rocket. The dollar will quickly be replaced as the world’s reserve currency (there is already a global movement to replace the dollar). Other nations will require payment from us in other currencies – which will be very difficult for us to do.

All of these things will obviously cause a global crisis – not simply a crisis within the U.S.

Here’s what you need to do today:

1. Check on the financial stability of your bank. How is the stock price? Do they own large amounts of illiquid securities and assets? Have they purchased high risk derivatives? Does their loan portfolio contain large real estate holdings that are not marked to market? Are they on the FDIC list of problem banks? Here’s the link:

http://www.calculatedriskblog.com/2009/08/problem-bank-list-unofficial-aug-14.html

2. Diversify your brokerage account, 401(k), retirement funds, etc. For now – shift funds out of stocks and riskier investments. If you can – move to a gold ETF fund or buy physical gold (coins) if you can. At the least – move investments to cash. If you can, stay away from paper assets – stocks, bonds, derivatives, etc. If the crisis does get worse – these types of holdings will rapidly decrease in value.

3. If possible, keep enough cash in your home (out of the bank) for a couple of month’s worth of expenses.

4. Stock your pantry more often.

5. Pay close attention to what is happening and check everything you’re told. Do not blindly accept what our political and financial leaders tell you through mainstream media. Think for yourself.

What we’re witnessing is a perfect financial storm that has enveloped our entire financial system. It’s like we’ve passed into the eye of the hurricane, so things seem somewhat calm – and we’re forgetting that the other side awaits us.

Once things begin to deteriorate – think about all of the positive mainstream media articles you’ve read and all of the positive speeches from our financial and political leaders you’ve listened to and ask yourself – were these people that clueless or was there another agenda at work here?

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