I am semi-retired, have only a few subscribers and accredited incentive management accounts with closely-held companies, and do not give specific public investment advice. I am out of CDE, which went from $3.60 to $24.86. I am currently accumulating Dollars, XOM and growth values like LVLT with trailing stops. This may change without notice. I leave daily market calls to people who are reliably good at it like Rick.

If I were a younger man, I might be looking ahead at the legalization of marijuana like the Bronfman/Kennedy families and Prohibition. What will all those people in prison for pot do as they are released because jails are overcrowded and governments can’t afford them or illegals?

The dollar going up with precious metals going down during deflation could surprise a lot of people accustomed to betting on inflation. It pays well to keep an open mind and use Trailing Buy and Sell Stops to preserve profits.

If gold hits $10,600 or higher with hyperinflation, after years or even decades more of deflation and war like the Thirties and Forties, with dollars the only valuable money available for some time, then both may be true at significantly different times.

An Amero backed by gold or silver may not practical now because of the imbalance between debts, income, prices and precious metals in America, Canada and Mexico. If/when debts, prices and wages get down to 1932 peso levels, maybe. Amero pictures posted on the internet are bogus. The Amero has the same issue the Euro has: productive Northern economies benefit at the expense of Southern unemployment.

http://www.snopes.com/politics/business/amerocoin.asp

Feds pushed on the proverbial string with more of the same debt and deficit government spending that got us into Bubbles and Depression. The Feds got a lot of help from monopoly media. A few more election upsets with official unemployment numbers over 10%, a quarterly GDP less than 3.5%, and even the majority mass media that voted for ObamaNation HealthCare Bailouts may think twice.

We trust John Williams’ 22% unemployment numbers at ShadowStats.com because headline official numbers count part-time employed as employed (U-6 numbers are rarely reported). Many unemployed were dumped off government rolls and stats after a year, perhaps after two years with the latest proposed legislation, meaning even the official unemployment numbers may continue to climb. The devil may be in the details.

http://www.shadowstats.com/alternate_data

JW figured the 1980 CPI fell from 13% last year to 6% this year. This was not reported in official headline numbers with multiple revisions to keep government COLA Cost of Living Adjustments down on government military pensions and social security. CPI is basically a measure of the cost of government.

The Fed stopped providing M-3 (Shadowbank) numbers in 2006, claiming M-2 had all the info. In fact, M-3 includes Credit, vitally important to the deflation going on now. If we look at ShadowStats M-3, we see Credit rolling over from 17% growth in early 2008 just after the stock market peaked, and now approaching 2% growth, less than the real CPI, suggesting more deflation may be ahead.

While we’re looking at Alternate ShadowStats, let’s note GDP growth peaked at 7% in 1984, the dollar peaked at in 1985, and bottomed in 2008. The contrary opinions of popular gurus, inflation fear headlines and seminars may confirm this. As Steve Forbes says, a cheap dollar is a form of (failed) protectionism. He says the American people will not allow this to continue; low interest rates mean the financial system is not functioning.

With much respect for Chuck and Rick, deflations are ultimately not kind to precious metals, which may be approaching bubble status like Buffett bonds.

In practical prosperity terms, we sold the Palo Alto property, went to Hawaii and are selling the Tahoe property. We have canned goods and are getting an efficient floor freezer with renewable energy generators to ride out diesel supply disruptions and empty food shelves. Growing our own off the grid makes a lot more dollars and sense as government services break down.

Ron Paul recently reported his Fed Audit bill was gutted by Barney Frank and Mell Watt from North Carolina where BAC is headquartered. Dr Paul hopes to pass an amendment to return it to a full audit. Maybe. Time will tell.

http://www.bloomberg.com/apps/news?pid=20670001&sid=atc2o1ijLRno

The comparison of derivatives to horse tracks may be apt with the house making money at the expense of the players. The analogy may break down when contingent obligations of naked option sellers are included. It is absolutely correct looking at bottom lines or totals does not tell the whole story. One man’s debt is another’s asset in the case of Intergovernmental Debts and off balance sheet toxic assets. The House may keep the vigorish, but lose big if it starts betting. With nominal OTC derivative open interest so large, there may be enormous winners and losers less the vig over coming decades. Banks or Buffett may think they are hedged against counterparty and market risk with their price models. They can lose big with continuing deflationary defaults like LEH, GM, AIG and CIT with market declines for which they are on the hook. Banks and government can only transfer costs and risks to taxpayers for so long before people vote with their feet. Judging from the decline in market volume since SPX 666 and last Fall, this happened. How long can BAC, C, GS, JPM, MS and WFC trade profitably with each other? As Rick notes, something may be going on with GS currently targeting 150, perhaps debt deflation with a liquidity trap.

http://stockcharts.com/charts/gallery.html?gs

We do not assume the fetal position or the legal system will survive intact.

Regards*Rich

JubileeProsperity@gmail.com

Opacity is a great word.

Thank you both for taking your valuable time to try to explain derivatives to me.

Sorry, I’m a slow learner.

One of things that I have read many times about derivatives is that they are mostly unregistered, OTC instruments. Congress has been pushing to get them registered so that the world can better idea what is at stake. I have continually been left with the impression that no one knows what’s really going on.

OK, $492T is a lot of POTENTIAL winnings and losing, but, using the race track analogy again, I still don’t understand:

Who are the betters?
What horses are they betting on and how much?
Who is taking the bets at the window?
Who juiced any of the horses?
Whether the jockeys had a fight with their wives the night before?
What are the odds ?
How the horses are fairing during the race?
How many furloughs long the race is?
Whether the race is over?
Whether the track has mark their betting wins and loses to market?
Whether the track executives paid themselves huge bonuses during the race?
How many times the track has insured or re-insured against Ol’ Yeller winning?
How well the insurance company is capitalized?
How well the insurance company determined the odds?
Whether the Gov’t has pumped money into the insurance co. and how much?
Etc., Etc., Etc.

Bottomline: There are millions of bets and players within that $492T and, for the most part, we have to put an “unknown” along side all of the questions, above.

Just knowing the totals on the bottom of a balance sheet doesn’t tell you squat about the financial condition of the company–its only tells you the assets and total for liabilities and equity.

The number $492T doesn’t tell me squat about whether I should assume the fetal position, even if it 8 times the world’s GDP. It does tell me that, given the legal system survives intact, lawyers, accountants, judges and juries will be very, very busy for a really long time after the ___ hits the fan.

Again, thanks.

Nice to see the usual skeptics around market turning points.

Quite right nobody knows when; that’s why we use Trailing Buy and Sell Stops, watch the Big4 and buy cash flow value as low as we can.

The skeptics did not question factoids and quote typos, so we will.

(CNBC now ranks CIT the fifth largest bankruptcy after LEH, WM, WCOM and GM.) This omits Bear Stearns, the 7th largest securities firm, with less equity than CIT.

BS was leveraged 35.5 to 1 with $13 Trillion in derivatives and $395.5 Billion in assets. BS was acclaimed Most Admired financial firm in 2007 for the second time in three years. BS stock traded as high as 172.

A year later in March of 2008 JPM took BS over at $2 using Fed and Taxpayer loans, then $10 a share after class action suits were filed by BS shareholders. Holders included a Who’s Who of leading money managers including Barclays and Morgan Stanley. Washington Mutual took a similar guillotine at JPM and Wachovia at Wells Fargo with the benefit of TARP and special tax rules.

http://en.wikipedia.org/wiki/Bear_Stearns

CIT had over 73,000 shareholders. As Rick pointed out, CIT has/had even more clients. CIT traded at a nickel after $61.59 in February 2007. CIT’s leverage was only 15.7 to 1. Unlike GM, CIT had over $11 a share book value.

A little over a nickel on the dollar for the BS masters of the universe.
Less for LEH, WM, WCOM, GM and CIT holders.

The point is, BS and CIT may be the Rodney Dangerfield canaries in the financial coal mine that got or get no respect. Knowing that Banking Conglomerates still do not properly value OTC derivatives and other toxic assets on their balance sheets or mark them to market as Dick Bove, Meredith Whitney and others observed, suggests Black Swan IV may await. (Black Swan I 1987, Black Swan II 1998, Black Swan III 2008, Black Swan IV ?) Being from a Nobel Laureate Family or even having one in Economics is no protection against Black Swans.

Most of the financial community yawned and kept doing hot business as usual for another 6 months after BS, before waking up to the cold reality of derivative debt default deflation with Lehman and TARP.

Debt deflation was spelled-out by famous Yale Economist Irving Fisher as penance. Fisher went from 1929 assuming inflation would keep us on a plateau of permanent prosperity, to realizing in 1933 the implosive power of debt deflation.

Now immense financial debt, derivative and equity markets yawn again while teeny tiny gold hits new highs. This suggests the deflating process may not yet be over. Deflation may not be over until everyone is screaming Deflationary Depression at the tops of their lungs while jumping off the rooftops.

In contrast to Article I Section 9 of the Constitution, gold, silver (and copper per the Mint Act of 1792) are not legal tender in the settlement of debts. Copper, gold and silver are taxed today by Uncle Sam for capital gains and sales tax. Ron Paul pointed this out this week in announcing his 304 Rep HR1207 Sponsors, and 31 Senate S 604 Sponsors to fully audit the Fed, which also may not happen.

Shimon, the point is the $829 Billion to $8 Trillion physical cash dollars circulating around the world far exceed the $5 Billion dollars of gold ever mined, most of it off the market. It may come down to Who made the better trade, the IMF or Central Bank of India, China or the USA? We have learned not to bet too long or too often against the USA. If/when ATMs, Internet Banks and Telephone Brokers close for another Banking Holiday, we may be more than likely to see familiar dollars trading rather than non-fungible precious assets with people arguing over their worth.

We are still looking for funding for our Gold, Platinum Silver Eagle Armoured ATMs for cash patent.

How many scams with counterfeit coins, mad markups, magic beans and uncut fake gems does it take to educate people? At least the Secret Service works to stop US Currency counterfeiting. The Fed backed every dollar with legal debt usury paid by Taxpayers that are now tapped out. They wish they had more cash.

Holocaust survivors including Elie Wiesel, Einstein, Roman Polanksi and the late Congressman Tom Lantos survived the Nazis with family, friends and heroes using their wits, rather than diamond jewelry, gold and silver coins or gold teeth confiscated at the camps. Spielberg’s moving Shoah Project film, The Last Days, includes a woman telling at length how she hid her mother’s diamonds in her clothes and possessions. These were taken from her at the concentration camp and her head was shaved. She somehow secretly swallowed the diamonds in line and kept recycling them from her excrement. In 1998 the diamonds were still jewelry mementos on the shelf of her Manhattan apartment, not tickets to freedom or survival.

If gold, diamonds and silver were magic passports, God or even legal tender, we might not have the movies about Oskar Schindler, the 98 year-old Polish Schindler Irena Sendler (Life in a Jar) who smuggled 2500 Jewish Children out of the sewers of Warsaw Ghetto, Raoul Wallenberg Foundation, or kindertransports reunions like Czech Stockbroker Winton at age 100:

http://www.timesrecordnews.com/news/2009/sep/04/jews-who-escaped-nazis-kids-recreate-train-trip/

The reality may be that for every French Underground or Vietnamese boat fisherman who bought his way to freedom with gold, many more with art, gold, diamonds and silver perished after pirated, taken, stolen or swindled. I met a Hapsburg Psychiatrist who made it out alive with rolled up artwork and one silver candelabra only, out of the vast landholdings and wealthy mansions when Castor took over Cuba. (He worked as a Manhattan doorman until he could reestablish his bona fides and licenses.) Then there are counterfeits and mark-up schemes on illiquid numismatic coins with spreads so wide trucks can drive through, or ETFs without the unencumbered physicals their prices suggest.

If gold gets high enough, and times tough enough, gold could be confiscated again like 1933, before the next currency reinflation scheme with -69% dollar devaluation like 1934. That government inflation attempt, by the way, produced 7% inflation that year, and not much else, as defaulting debt drove continuing deflation and depression until 1949 and markets took until the Sixties to catch up in real terms. We already had -84% dollar devaluation, 9% CPI and –15+% GDP with the media refusing to use the D word. We may be resuming deflation even as the 3.5% StimTarp Inventory Q3 GDP hiccup hides it. How long can we continue the charade?

Paul, please pardon the opacity. For maybe the 1001st time, the point of even a fraction of derivatives 8 times the world GDP defaulting, may mean something. People who write options do have counterparty risk, contrary to Mr Buffett’s 2008 Annual Report assertions about his 251 weapons of mass destruction disclosed as a $41 Billion risk (on BRK book value of 70,530). Some people suspect BRK silver was called away by a Barclays BRK option. So far we saw the BRK risk manifest as volatile earnings write-downs of –95% in Q4 2008. “We have told you before that our derivative contracts, subject as they are to mark-to-market accounting, will produce wild swings in the earnings we report. The ups and downs neither cheer nor bother Charlie and me.” Beside derivatives with MidAmerican, BRK also had the usual insurance liabilities, Clayton Home mortgages, bank deposit, and tax-exempt bond liabilities. People are switching from Geico to Allstate and 21st Century Farmers to save money. We wonder about the Chief Risk Officer of BRK comparing Insurance Risks to Naked Put Writing. The point is not the return on float or low cost of the bet, but the obligation. We may win or lose our hundred bucks at the track, but they do not come after us for the Parimutuel pool as they may BRK for writing naked puts with less than 1% margin. At least two credit rating agencies removed BRK’s AAA credit rating so far. We remember Merrill customers crowing about clockwork returns writing naked options, and the horror of them wiping out their equity and accounts when the market turned against them the Spring of 1982. If memory serves well, Hong Kong naked put writers almost put Schwab out of business.

Occdude, describing CIT as a non-event may be like ignoring the default of BS. That worked for a mere 6 months until Lehman.

Gary, sorry to lose you re the EuroDollar Nations and Hong Kong Dollar economies. The Federal Reserve Note is based on debt rather than equity, as are all modern currencies since FDR and Nixon, which made a lot of money for bankers until it stopped working like naked puts. The USA dollar may become the best of a bad lot. Hong Kong and the Euro Nations are many times more indebted relative to their GDPs than the USA, as the link to the World’s Biggest Debtor Nations showed. Ireland’s debt liabilities were over 12 times their GDP. Perhaps that had something to do with Mr Buffett’s 89% writedown on his Irish Banks so far? Mr Buffett does not provide a moneyback annual subscription guarantee on his published advice as we do. Frankly, we have done better than Mr Buffett, probably because we are admittedly small fry.

Senior Cuidado, your one comment in agreement out of five, corresponds with what we found at market turning points since 1949. The critical enthusiastic loud popular majority are seldom right at turning points. Solely having a quiet minority opinion contrary to the crowd does not make us right either. That is why we admire and respect the precision market timing of Rick. Our subscribers have not yet asked for a refund.

We agree with Mr Buffett that “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.”

We disagree that inflation may bail out bond, gold, silver, stock or derivative bubble risks.

The USA tried that with the Revolutionary and Civil Wars with Continentals and Greenbacks. It did not work then or in the Great Depression. We have a Jubilee Generation of several Spring, Summer and Fall decades of recent inflationary economic experience since 1933 and 1971, versus the witness of many millennia of rising and falling empires that tried to bluff and inflate their way out of reality. Winter approaches.

Derivative debts may well be paid by deflation despite the best attempts of mice and men.

Derivative bets and debts will be paid.

Regards*Rich
JubileeProsperity@gmail.com

I don’t get it. He seems to be speaking out of both sides of his mouth. In one instance he says gold will be $10,600. Then in another he says the dollar is king, but it’s backed by nothing.

Well, which is it?? Which way do we turn?? Maybe, half gold and silver stocks, one-qtr in physical and the rest cash, then hope for the best??

I know you stand on the deflationary side. But that has to be a short term stance right??
The price of my house may have fallen 10% in value, but oil is up, food is up, medicine is up,
gold and silver are up, my power bills are up, everything I really need in my life is rising in price not falling. Maybe there will be a sudden and quick deflationary hammer dropped on us.
But don’t you think it will be followed immediately by massive inflation??

Thanks and enjoy your info!

&&&&&&

Hyperinflation will come, but not in time to save homeowners. I have written dozens of commentaries on this, so please check the archive if you’re interested. RA

You are a lover of language obviously. “Fuddy duddy” is an expression I haven’t heard in a while. Never knew the source of that one. I heard “crackers” this morning on Bloomberg used to mean “crazy” which I hadn’t heard in about 20 years. Also heard the rarely used verb “filch” twice tonight watching Shakespeare’s Othello.

Re CIT: good luck to us all. We’re gonna need it because most folks don’t understand what’s coming. They refuse to consider any future other than the same old general post WWII status quo. In America we assume it’s always going to turn out OK. But we’ve had three dire emergency periods where events could easily have turned out much worse for us: 1776-86, 1860-65, 1929-1945. Seems we are due for another ultra high stress period in American history.

PS Thanks for highlighting the EU’s dark underbelly. I am weary of people like Sinclair who have religious faith in the euro and never have a bad word to say about it. The euro is already up 50% against the dollar since 2001 and the EU is a political minefield about to blow sky high.

No your destiny lies in New York my friend. A balmy winter day, hopefully snow on the ground for dramatic effect. A grass skirt an adoringTimes Square public and thee. Don’t entertain any ideas of grander, the die is cast, your fate is sealed, buy the ticket before the skyrocketing price of oil raises the price up twice or even thrice. That should teach you, you unworthy vat of protoplasm to EVER cross the gifted brain trust of Goldman and Sachs.

Go over to the dark side Rick, the bulls await………………say hello to Kudlow for me.

&&&&&

No escaping, is there, Ron? RA

For the one thousandth time over the past year I’ve heard about the $500 Trillion of derivatives [$454T, above] that are somehow “alive” out their on institutions’ books and ready to be totally savaged in The Great Inconvienience, Part II. [Like the Big Robot, above, was threatening to do to humanity in the 50s.]

Let me try a very simple example using my betting $100 on the 10000-1 shot at the Derby. Say my horse, Ol’ Yeller, wins, but Churchill Downs, Inc., can’t pay. My out of pocket loss is $100, not the $1,000,000 the track screwed me out of.

Please don’t tell me that banks, etc., have put down bets costing $454 T. If the cost really is $454T, then the CDO insurance companies ought to be paying off claims just on the interest that they are making. If the insurance companies claim they don’t have the money, then someone ought to be checking some remote portion of the Grand Canyon for a huge pile o’ money.

My losing $100 at the track isn’t going to break me. It may cost me thousands of Ameros in the future to sue the track, but I’ve lost only the initial $100, not one million. I just don’t see how the financial world falls apart if only the CDO insurance premiums will be lost.

Please, someone, help me out here, or save my dignity, by pleading equal ignorance on the true size of the potential disaster after the Great Derivatives Meltdown.

&&&&&&

BIS estimates topped out (if memory serves) at around $600Tr dollars, but this number was a fabrication that double- and triple-counted huge sums of derivative-related paper. But even if you arbitrarily lop 80% off the BIS estimate, you’re still dealing with a number that is twice what the world produces each year in goods and services. It is probably reasonable to say, however, that the dollar value of the imploding debt-bubble vastly exceeds the world’s tangible economy. This is the source of deflation’s irresistible power. RA