MACRO ANALYSIS REPORT
ECONOMICS, CENTRAL BANK POLICY
BANKS, BONDS, GEOPOLITICS

* Miscellaneous Morsels
* Delusion & Warnings from Davos
* Big USBanks on Firing Line
* Housing Disaster Redux
* Rising Spectre of Price Inflation
* Sliding Economy Under Great Duress


HAT TRICK LETTER
Issue #83
Jim Willie CB, 
“the Golden Jackass”
09 February 2011

The limits of monetary policy are becoming clearer. History suggests any further easing probably would do too much for the stock market and asset prices, and too little for jobs."
~ Kelly Evans (of Wall Street Journal)

"[The fantasy of a sustainable recovery] magnifies fishy fabricated statistics with a large lens of wishful thinking. The result to be expected from this QE2 policy of inflation is a renewed recession in the US as higher energy costs absorb liquidity." ~ James Dale Davidson (editor of Strategic Investment)

"If the Congress fails to raise the debt ceiling, the implications for our financial system, for our fiscal policy, and for our economy would be catastrophic." ~ Ben Bernanke (USFed Chairman)

"Indeed, the only ones Bernanke can hear are the Primary Dealer banks, all of whom slap him on the back and tell him he is doing a great job. Bernanke is the nerd with a single skill the jocks currently find useful. He has mistaken their support for genuine admiration and camaraderie." ~ Tyler Durden (of Zero Hedge)

"Men who can both be right and sit tight are uncommon. Do not try to sell and buy back (core positions) on reactions in a bull market." ~ Jesse Livermore (the legend)

"Think of the press as a great keyboard on which the government can play." ~ Joseph Goebbels (Propaganda Minister of the Nazi Regime)

Editor Note: I never accept FaceBook or other social network invitations, no exception. My entire objective is to be prudent in handling exposure risk, and not to assist in presenting myself as a target. The USGovt has already threatened me, as have the Swiss bankers. Please do not bother with any future such invitations, since they are all deleted immediately. Thanks for the kind thoughts. The recent decision to stop issuing a Crisis Report is evidence of the higher danger level. My social network will remain small and at my discretion, as a choice has been made to operate with a lower profile under the radar. However, I do accept invitations for dinner from subscribers who visit Costa Rica personally, when possible. Two different visitors were met in the last two weeks, with one more arriving soon. Thanks Jason, Brook, and Frank.

MISCELLANEOUS MORSELS

◄ See the Special Report entitled "USFed as Agent of Destruction" for the February Hat Trick Letter. The unintended consequences of QE2 have been felt globally and with extreme force, starting with explosive food prices. USFed Chairman Bernanke's credibility is working toward rock bottom. He recently said that inflation is low and under control in the United States, arguing that it is seen just in the emerging markets. He claims QE has nothing to do with high food prices !! So inflation has erupted in global food prices and manifests itself as the after effect from bailouts of stone dead banks. While he believes emerging markets must find the appropriate tools to balance their own growth, he does not believe the US can reasonably be expected to grow its way out of our fiscal imbalances. Jim Grant harshly criticized the USFed again for grievous errors, directly accusing the USFed of supporting stock market prices. The system is out of control. Old broken methods continue despite their clear ineffectiveness. Monetary inflation has covered the financial crisis losses, which are steeped in fraud and bank thefts. The gold standard when mentioned ruins political standing, yet it is the solution. Bernanke clings to the notion of the Virtuous Cycle where rising asset prices fuel economic activity. The QE2 splurge, better known as monetary inflation, has lifted most asset prices, led by commodities in a grand backfire. Rules are required for money management by nations, which is gradually turning worthless. Bankers cannot be put in check without such rules. The Gold Standard is urgently needed despite all the opposition. The USFed monetary inflation has expanded for three years to produce a modern day Weimar volcano of money flow, but this time globally. The QE2 chapter has ignited an acceleration in the global financial crisis, creating new problems, as they try to save a monetary system that cannot be saved. A laundry list of largesse and corrupt devotion of funds has flowed in a grand sequence of events.

The USFed balance sheet has swelled with USTreasury Bonds. The gap between the central bank holdings and Chinese holdings is growing. The monetary press is the main buyer, from monetization of debt. The USFed installed an accounting change to manage its insolvency and heavy losses. It will transfer them to the USDept Treasury, all the caustic acid and toxic swill. The move is a logical sequitur to dumping on Fannie Mae. The USFed appears to be preparing for its own ruin, and have selected a bagholder. The US press dutifully called the move an advantage, without mention of the worsened Banana Republic look to USGovt finances. QE3 is being planned, according to a leak from an internal detractor Hoenig. The extreme damage is to be multiplied once more, since nothing is fixed or can be fixed. Look for the depth of the QE2 program to grow and the breadth of monetization to grow. Think state and city aid, but conditional upon breaking employee pension funds. China obscures its USTBond sales, after very heavy purchases in the last decade, probably promised as part of the granted Most Favored Nation deal cut in 1999. The official data shows only a small decline in holdings month to month, but a noticeable drop in the last year. Many global deals cut by the Chinese involve huge tranches of USTBonds committed. What the official data does not disclose is the extremely numerous deals struck by China with foreign entities, using up and spending their USTBonds, offering them as collateral, or even handing over the USTBonds themselves. Official data shows purchases but not sales, and surely not commitments as collateral in numerous foreign deals like in Africa and South America. A clash has begun. Fascist socialism of the United States must deal with the new capitalism of China. In the process the US became an inflation apparatus, while China became a capitalism engine.

◄$$$ SUEZ CANAL OPERATIONS ARE THREATENED BY THE VIOLENCE IN EGYPTIAN CITIES. IT IS A MAJOR WATERWAY TO EUROPEAN MARKETS, MUCH LIKE PANAMA IS TO THE AMERICAN HEMISPHERE. WATCH THE CRUDE OIL PRICE AS A METER ON GROWING CHAOS IN THE ARAB WORLD. $$$

The social and political violence in Egypt has large potential repercussions. The upheaval has spread to the city Suez, where the great canal is located. If closed or even temporarily shut down, the Suez Canal would wreak havoc on crude oil supplies, oil prices, and shipping costs. The nationwide curfew imposed will render Suez Canal operability more difficult. It seems a sit-down strike has begun at the Suez Canal site. Details are sketchy from Suez itself. Reuters and the UK Guardian, along with Tweeter accounts, have provided some details. Live gunfire has been reported in Suez, where the police headquarters have been taken over. Army insubordination has also been observed in this city. An executive for the Arabic Network called Human Rights Information shared information that some army units in Suez have refused to support the crackdown against the people, which usually means they refuse to beat heads, rough up the people, or shoot at the crowd. In short, the government may be about to lose control over Suez, and the all-important Suez Canal. Closure of the Suez Canal and the Sumed Pipeline (the Suez Mediterranean oil network) would divert tankers around the southern tip of Africa, thus adding 6000 miles (10,000 km) to transit time. The Suez Canal connects the Red Sea and Gulf of Suez with the Mediterranean Sea, a span of 120 miles.

Petroleum generally accounted for 16% of Suez cargos in 2009, measured by ship tonnage, including crude oil and refined products. The volume shipped in 2009 northbound through the Suez Canal was approximately 1.0 million barrels per day of crude oil and refined petroleum products. The level marked a decline from 2008, when 1.6 million bbl/d of oil traveled northbound toward Europe. That is a vivid recession signal. Some raw data is useful. Each year, 3500 oil tankers make passage through the Suez Canal. In all, 3 million barrels pass per day, representing 2.5% of global oil flow. Egypt is strategically important to the Mideast for centuries due to Arab culture, and for several decades due to crude oil delivery. Saudi Arabia is more important for religious basis to the Moslem foundation, and for crude oil production, even petrochemical output. Egypt is significant as the doorway and key pivot in control of the eastern Mediterranean and the Gulf. See the Zero Hedge article (CLICK HERE). If the Suez were to shut down for three weeks, the Brent crude oil price would shoot past $150/barrel easily, and cause some immediate economic problems for the European Economy.

◄$$$ MUBARAK WILL SOON DEPART HIS NATION IN EXILE, BLESSED BY $40 BILLION IN BOOTY. AS A NATION, EGYPT WILL STRUGGLE IN TRANSITION, MOST LIKELY INTO SOME FORM OF DEMOCRACY. IT IS AT A TIPPING POINT, WHERE VIOLENT MILITARY SUPPRESSION COULD SNUFF OUT THE PATH TO DEMOCRACY, AND LEAD TO ANOTHER HARSH RULE. THE NATION HAS VERY LITTLE RECENT HISTORY OF RADICAL ISLAMIC POCKETS. $$$

The Hat Trick Letter will not delve deeply into the highly complex geopolitics laced through the crisis in Egypt. Hosni Mubarak took over the President post after Anwar Sadat was assassinated in a public forum in full view in 1981. This recent supposely firm ally to the US & West has banned opposition political parties and jailed viable popular opponents. Mubarak intends to remain in power under a scheduled September election, where he obviously wishes to control the election and select his successor, thus securing his booty. For three decades Egypt has received a huge foreign aid stipend from the United States, whose sum is exceeded only by that given to Israel. It is supposedly to maintain the peaceful environs and commercial corridor. The USGovt officially states its preference for democracy in the region, but the Jackass suspects the devious American leaders are well aware that democracy and Arab culture do not mix well. Some analysts suspect that uprisings across North Africa have been helped along by the omnipresent and always meddlesome US security agencies. They wish to see a more united Islamic political front across the Arab world. Such evolution after instigated change would enable the Pentagon to more easily win large budget approval without cuts, since a more formidable enemy would be presented.

The US news networks focus entirely on the street violence and events toward transition of power. They overlook some of the specific reasons why Egyptians are angry. As president, Mubarak amassed a personal fortune estimated to be somewhere in excess of $40 billion. As President (or dictator), he benefited from numerous high valued military contracts, as in skimmed cuts and demanded heavy payola bribes. Most natives of his poverty stricken nation are well aware of the basic theft from multiple sources. The USGovt purchased Mubarak loyalty and won 30 years of peace in the Middle East. Some analysts calculate that his wealth represents half of all the US contributions to Egypt during his increasingly harsh regime. At $1.3 billion per year, over 30 years, the sum comes to $39 billion, less than his gathered booty. Mubarak has sequested most of the US-based foreign aid and much more.

My suspicion is that he skims heavily from the Suez Canal profits, and possibly is a minor cog in the narcotics wheel operated by the US agencies. Its strategic location between Iraq and Europe seems an obvious advantage. In the last two weeks, well over 100 flights loaded to the gills have left Cairo in favor of destinations like London. The wealth and flight have angered Egyptians, who have taken to the streets. Wealth is also exiting from investors, who have removed $7.3 billion from Emerging Market Funds that include Egypt. My guess is that the leaders will attempt to turn the natives against each other, like with Islamic factions versus the seculars. Other matchups such as pro-govt and anti-govt are relevant, as are local feuds. One can only hope that their military can serve as an agent of calm, rather than as a lit fuse attached to a powderkeg. Recent treatment of outside press reporters and camera staff is not encouraging. See the Ackerman essay on the topic (CLICK HERE) and the Hindu News article (CLICK HERE).

Many details can be provided on the Egyptian Economy. The benefits of $1.3 billion per year are not seen whatsoever to the economy or to the people. It goes to the elite, the military, and to the president, never to trickle down. The annual economy has an $800 billion size, equal to that of the state of Louisiana. It imports $6 billion of goods from the United States each year. Its national population is 73 million, of which 20 million come from Cairo. Tourism accounts for 4% of the economy, and the Suez Canal another 3%. Travel to visit the pyramids and numerous antiquity sites is popular, but now at a standstill. The chaos has cost the economy as estimated $310 million per day in tourism. News reporters are entering, but droves are leaving, some arranged by US State Dept chartered flights. Lastly, the Jackass was almost howling in laughter at the absurd reporting by Bloomberg Television News. When describing the vast wealth gathered by Mubarak, the anchor called him a prolific saver with only the hint of a slight wry smile. She described his $40 to $60 billion in sequestered wealth, and made comparison oddly to Bill Gates of Microsoft and Warren Buffet, who at least had corporate backgrounds. The Mubarak wealth was reported to be well placed in Swiss and British banks, where the Bloomberg anchor actually said it is safe from attempts back in Egypt to pursue it legally. The story included a list of his properties in London, Spain, France, Germany, the United Arab Emirates, New York, and WashingtonDC.

Absolutely no mention of ill-gotten gains or stolen US foreign aid has been mentioned by any major US press network seen on my part. In fact, only after ten days, was the private Mubarak wealth even mentioned in a news story. The reporter actually made it sound like protecting his pilfered wealth was a high priority of noble purpose. So a grand thief, who corners his nation's wealth, skims regularly off huge contracts, should hide his loot well from the victims, like Madoff or professional bank thieves. Only the bankers would think this way, who hold Mubarak's wealth of dubious origin in their financial firms. By contrast, some in academia identify the heavy handed leverage and utter corruption that led to Mubarak's wealth. Amaney Jamal is a political science professor at Princeton University. He regards the embattled leader's wealth as comparable with the vast wealth of leaders in other Gulf countries. He said, "The business ventures from his military and government service accumulated to his personal wealth. There was a lot of corruption in this regime and stifling of public resources for personal gain." Be sure such an opinion will not be echoed in the US press.

◄$$$ MOODYS WILL CHANGE ITS DEBT RATING EVALUATION TO INCLUDE UNFUNDED PENSION OBLIGATIONS. THIS MISCALCULATION AND ONGOING BLUNDER FINALLY WILL BE CORRECTED. EXPECT THE MOVE TO ENABLE A LAUNDRY LIST OF DEBT DOWNGRADES, SUDDENLY JUSTIFIED. $$$

Moodys Investors Service has finally decided to do its job better with respect to state debt securities. They plan to include unfunded state pension liabilities in their analysis. Their credit rating analysis will be greatly affected, as for US state debt. The New York Times broke the story, citing Robert Kurtter, managing director for public finance at Moodys. Up to now, the states have been given a pass, not required to include those liabilities, prompting growing anxiety and open worry among investors in municipal bonds. The new system will be comparable to the way Moodys now rates corporate and sovereign debt. States with the highest total indebtedness include Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey, and Rhode Island, as well as Puerto Rico, according to the New York Times. See the Bloomberg article (CLICK HERE).

◄$$$ SOCIAL SECURITY FINALLY IS IN THE RED, AT DEFICIT AND PERMANENTLY. THE DEMOGRAPHICS GUARANTEE IT. THE WRONG FORECASTS SUBMITTED RECENTLY BY THE USGOVT WERE PATHETICALLY INCOMPETENT AND EGREGIOUSLY INCORRECT. THE DRAIN WILL BE MAGNIFICENT OVER TIME. THE CUTBACKS IN BENEFITS WILL BE OBVIOUS AND THE OBJECT OF GREAT OUTCRY. THE USGOVT ACTUALLY EXPECTS A DOUBLE IN TAX REVENUE IN THE NEXT TWO YEARS, TO HELP RELIEVE THE SITUATION, THEIR NEXT ERROR. $$$

Over a year ago, the incompetent clowns in the USGovt claimed that Social Security would be positive until year 2015. Late in 2010, the first negative month was registered, where payouts exceeded incoming revenue from FICA taxes. Despite the USGovt using the funds, equivalent to tax receipts, the SS payments by individuals is not tax deductible. Massive cutbacks are coming to the broken and pillaged SS system. Added pressure has been put on the USDept Treasury. A nasty portrait of the broken fund can be painted. The Social Security Admin will run at a deficit this year in 2011. It will continue to run in the red until its trust fund is drained by about 2037, according to USCongressional budget experts. That is a bad joke, since the trust fund has been gutted by annual borrowing. The first deficit was recorded last year, but USGovt accountants still here and now project it would post further surpluses for a few more years before permanently falling into deficit in 2016. In the current year alone, Social Security is projected to pay out $45 billion more in retirement, disability, and survivor benefits than it collects in payroll taxes, according to the non-aligned Congressional Budget Office. If the temporary payroll tax cut is factored in, the shortfall this year will be $130 billion.

The Washington Post made a conclusion. They wrote, "Social Security has built up a $2.5 trillion surplus since the retirement program was last overhauled in the 1980s. Benefits will be safe until that money runs out. The $2.5 trillion surplus, however, has been borrowed over the years by the federal government and spent on other programs. In return, the Treasury Department has issued bonds to Social Security, guaranteeing repayment, with interest. Got that? The Treasury does not have $2.5 trillion to pay to the Social Security Trust Fund, and the Treasury is in hock for $14 trillion. Further, there is no end in sight to additional deficits, meaning a climbing debt load for the Treasury. There is no way this entire thing does not explode at some point. Either Bernanke starts to print like Robert Mugabe or the government is going to have to cut back big time, including on SS benefits. Former Treasury Secretary Robert Rubin was not kidding when he wrote the debt crisis could explode at any minute. It is starting already. That screeching noise you here is the debt balloon stretching to its max. You know what happens next." The USGovt official deficit will be aggravated by the net SS payouts.

The Social Security Trust and its funds have been gutted and pillaged. No funds exist. Some debate exists over the actual size of the borrowed sum from the SS fund. Currently an estimated $4.652 trillion in so-called trust funds are in fact IOUs in the Trustee file cabinet, almost double the stated surplus in accumulation. Legally, they are not debt securities, but they smell the same. However, in order to spend from the fund (pillage it), its mis-managers had to become legally bonded debt. This year, $45 billion of money from the SS fund, or about 1% of total, must be converted into actual marketable debt. Anticipate $180 billion per year to be forced into coverted debt securities, and then sold as additional USTreasury Debt in order to meet those legal requirements. Worse still, the projections are not linear. The big payouts will go to Baby Boomers until year 2020. The same dreamers in clown suits at the Congressional Budget Office estimate that tax revenues will climb by a ripe 50% in the next two years, over $1 trillion per year in tax collection, during this wondrous economic expansion, the same jobless recovery. Such nonsense justifies their signed approvals, thus kicking the can down the road. Trust long ago vanished from the Trust Fund. See the Economic Policy Journal (CLICK HERE) and the Market Ticker article (CLICK HERE).

◄$$$ CONSIDER A SAMPLE OF THREE STATES FOR THEIR DESPERATE ACTIONS. TEXAS USED ECONOMIC STIMULUS FUNDS TO PLUG THEIR BUDGET SHORTFALL LAST YEAR. CALIFORNIA SEEKS TAX EXTENSIONS TO COVER ITS GAPING HOLES AND VAST AGENCY OVERHEAD. ILLINOIS DOES NOT PAY BILLS, BEING LABELED A DEADBEAT STATE. SERVICES ARE DEEPLY AFFECTED. TO COMPOUND MATTERS, MUNI BOND ISSUERS ARE NEGLIGENT IN FILING UPDATES ON THEIR FINANCIAL CONDITION FOR INVESTOR INFORMATION. $$$

The supposed USGovt Stimulus Bill was a state budget shortfall rescue in disguise. No stimulus was anywhere located within the package. The state of Texas used the federal bandaid (stimulus) to cover 97% of its official budget deficit. Austin was facing a $6.6 billion shortfall for its 2010-2011 fiscal year. It plugged nearly all of that deficit with $6.4 billion in Recovery Act money. In fact, Texas depended upon stimulus funds the most among all 50 states to plug its deficit shortfall, according to the National Conference of State Legislatures. Nothing has been fixed, and the formerly secure fiscally sound state is in trouble for next year. In FY2012, the Texas deficit is projected to be $12 billion, over 30% of its budget, the third highest percentage in deficit in the country. Collectively, the fifty states face a $120 billion shortfall next year, but are unlikely to see any more federal aid from the USGovt. A war with the USCongress has been waged, as they wish to destroy the state pensions. See the Atlantic Monthly article (CLICK HERE).

Governor Brown seeks a 5-year extension of California taxes, unveiled as the first spending proposal of his administration. It includes a request to citizens to extend for five years a raft of temporary sales tax, income tax, and vehicle license fees, or else risk a drastic breakdown in state government. Numerous sacred programs have been slashed with deep cuts, such as budgets for universities, community colleges, and medical care for the poor. The Sacramento legislature is divided, so the public will demand, and its decision heard. The Brown budget projects the deficit at $25.4 billion over the next 18 months, still yawning in size, nothing remotely fixed. Great maneuvers will be required to close the grand gap. Rather extensive social program consequences will be part of the solution, such as state service restructure, shift in responsibility, and treatment of low-level jail inmates. Brown has an objective to end the state's continual deficits and balance the budget for the next several years without borrowing money to do so. California Dreaming. See the MSNBC article (CLICK HERE).

Numerous senior citizen service outfits are shutting down in Illinois, like the Shawnee Devmt Council. They were forced to close after $380k in non-payments by the deadbeat state. The state of Illinois has failed to pay their bills across wide swaths amidst the great budget crisis. The state has fallen months in arrears in making promised payments to businesses and organizations, pushing many of them to the edge of bankruptcy. Illinois simply ignores bills like a stack of scoffed parking tickets. Currently $4.4 billion worth of bills are sitting in the Illinois Comptroller office desk waiting to be paid someday, some dating back to October. Other agencies like SPARC, an agency that helps people with developmental disabilities, continue despite the lack of funds. The state owes SPARC about $2.5 million. The substance abuse treatment center Recovery Resources awaits payments of $200k from the state, the amount being two thirds of its annual budget. One supplier refused to sell bullets to the Dept of Corrections unless it was paid in advance. Legislators have received eviction notices for their district offices because the state had not paid the rent. Unpaid bills have piled up for two years, ever since the former Governor Rod Blagojevich was arrested on dubious charges, an event having caused great confusion. It seems Rod had to go after he crossed swords with Clinton and Rahm over past bank thefts at Household Bank in Illinois and coverups in Arkansas banks, according to the buzz. Some schools have tried to embarrass Illinois leaders into paying bills by posting signs announcing how much the state owes. The state chronically remains months behind. Illinois is on track to end the current fiscal year with about $6 billion in unpaid bills, a continuing theme by an official $13 billion deficit for the fiscal year. They earn their deadbeat label. The primary victims are needy, the elderly, the working poor, and day care. The state legislators are numb to deal with the problem, while banks regard creditworthiness of the state as shattered. Here is the kicker. The Pew Center on the States declared last year that in percentage terms, the Illinois deficit is as great as the gap in California, but the publicity is not comparable. See the MSNBC article (CLICK HERE).

DPC DATA Inc, a specialist in municipal disclosure, conducted an extensive analysis of disclosure of municipal bond finances. It found a glaring problem growing worse since a 2008 study, with over half of bond managers not filing ANY financial statements in any given year between 2005 and 2009. Of 17 thousand bond issues under study, over 56% filed no financial statements during that period. Over one third of borrowers entirely skipped three or more years. Insufficient information has been disclosed for the finances behind over $2 trillion of the $3 trillion in outstanding bonds, according to Peter Schmitt, chief executive of DPC in New Jersey. The study was made at the request of the Wall Street Journal. See their article (CLICK HERE). As colleague Craig McC said, "If publicly traded companies did such a poor job in reporting, their officers and directors would be in jail. This article reinforced calls by Meredith Whitney and others regarding significant defaults in the muni market."

◄$$$ PLANS ARE BEING DRAWN UP FOR PATHWAYS TO ENABLE STATE BANKRUPTCY. CHANGED LAWS WOULD LEAD TO RENEGE ON EMPLOYEE PENSION OBLIGATIONS. DENIALS OF MUNI BOND DISASTER SHOULD BE TAKEN AS CONFIRMATION. $$$

Plans are being constructed to permit the states to declare bankruptcy. The main victims would be pensioners and investors in state bonds. Senator John Cornyn from Texas has asked the US Federal Reserve about the possibility of crafting a bill allowing states to go bankr upt. Policy makers are working behind closed doors to enable the states to declare bankruptcy and escape crushing debts, including the pension obligations to retired public workers. Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any change that such status would require passage over Constitutional hurdles, since states are considered sovereign. This is curious, since the federal government tramples over the same Constitution on security matters, which former President Bush (Jr) and narco baron once called "nothing but a God-damned piece of paper." Suddenly, the paper has merit and value. Many states have deep structural problems, like insolvent pension funds, that have obstructed funds from being devoted to essential public services like education and health care. Some members of Congress expect it just a matter of time before a state seeks a federal bailout. The other alternative is bankruptcy, which would permit a state to alter its contractual promises to retirees. Retirees would clearly not receive promised pensions, but also state bond investors would suffer major losses, the so-called haircuts. Bond investors would find themselves at the back of the line as unsecured creditors. Fears of rendering the municipal bond market unstable on the path to state bankruptcy has brought a new wrinkle to the financial crisis. See the MSNBC article (CLICK HERE).

One architect was Newt Gingrich, an advocate for legislation to allow states to file for bankruptcy. The immediate consequence is allowing them to renege on pension and health benefit obligations. This maneuver seems part of the hidden trapping to the Obamacare. Tyler Durden speculated a couple months ago, "Obviously what this means for equity investors in assorted muni investments is that a complete wipeout is becoming a possibility, as in Meredith Whitney prediction. Everyone was quick to mock and ridicule, but it is about to come back with a vengeance." Up to $3 trillion in muni bonds have a high probability of being given the same treatment at General Motors. Investors would face severe losses. Proponents claim some states are so burdened that the only feasible way out may be bankruptcy and restructure. See the Zero Hedge article (CLICK HERE).

◄$$$ SANDY WEIL AND GLASS STEAGALL OFFER A GLIMPSE INTO THE PAST. THE MANY FACES OF FINANCIAL FRAUD ARE BEING DISCOVERED AND UNDERSTOOD BY THE PUBLIC. AN ALARM SYSTEM WAS REMOVED, SO THAT VAST BOND FRAUD COULD TAKE PLACE. THE RISE OF THE FINANCIAL SECTOR WAS NOT A STRENGTH OF THE USECONOMY, BUT A HARBINGER OF RUIN. $$$

Back in recent US history, a critical event took place in the 1998-1999 timeframe. The Rubin gangsters from banker offices (banksters) led a coordinated movement, as they worked with Wall Street corners to influence the USCongress to remove the failsafe systems installed in the wake and wreckage of the Great Depression. Check out old articles on the topic of the Glass Steagell repeal. That failsafe was designed to prevent joint ownership of the banking sector, the stock brokerage sector, and the insurance sector. A warning was given in 1995 against the major removal of the protection system. A 'Told Ya So' lecture was given in 1999 on the Great American Bank robbery, which was enabled by the removal of the protection, within the William Black video clip. The US public is only beginning to awaken to the bank thefts, a multi-$trillion heist in full view. In the clip is Sandy Weill, the former Citigroup CEO. He admitted on camera the corporate expense of $100 million per year for two years to repeal the Glass Steagall Act. Notice the great rise in the percentage of total assets tied to the top 3 US banks, relative to the entire commercial banking sector. Since the restrictions were revoked in 1999, the concentration almost doubled. So did the vulnerability for ruin, and ruin did come a dismantled alarm system. The actual bill that removed the cross-sector ownership was the Gramm-Leach-Bliley Act of 1999. Data was from the FDIC, but only insured deposit corporations. See the Cafe Americain article (CLICK HERE). These are crime syndicate activities in full view committed by revered bank leaders acting as fraud kings, treated like icon figures. Witness an intentional rape and ruin of the US financial structures, which required turning off the alarm system like with a commercial building to suffer a heist.

◄$$$ THE JAPANESE GOVT CREDIT RATING WAS DOWNGRADED BY STANDARD & POORS. LITTLE ATTENTION WAS GIVEN THE EVENT, SINCE EGYPT DOMINATED THE NEWS. DEFICITS FOR JAPAN ARE EXPECTED TO RISE, WHILE THE ACCUMULATED DEBT IS ALREADY TWICE THEIR ECONOMIC SIZE. $$$

The debt rating agency Standard & Poors downgraded the Japanese Govt credit rating from AA to AA- after citing their deteriorating debt situation, since the agency anticipated the Japanese Govt debt total to continue rising for at least ten more years. Although Japan has a strong industrial base, its debt condition has been systematically ruined, made worse each recession. It was especially damaged during the 1990 decade, the so-called lost decade after their property bubble bust. The United States is working its way through the same challenges, but without the benefit of the trade surplus that kept Japan floating through its past rough times. The Japanese Govt debt total stands at almost twice the national GDP, its annual economic output. S&P criticized Tokyo leaders for lacking any coherent strategy for tackling the debt problem, in their words. They curiously do not direct the same criticism to the USGovt for its debt size, growth, and lack of remedy. The change in thinking at S&P came concerning the forecasted rise in future Japanese debt. The forecast on the annual deficit remains in the 8.0% to 9.0% range for the next three years. It was an estimated 9.1% of GDP for the 2010 financial year. The quickly aging population is a major issue, certain to continue the burden on the state through benefit payments. See the British Broadcast Co article (CLICK HERE).

DELUSION & WARNINGS FROM DAVOS

◄$$$ RUBIN SUBMITTED A WARNING ESSAY AT DAVOS. HE CLAIMED THE USGOVT IS RUNNING OUT OF TIME, FACING A MAJOR INTRACTABLE CRISIS, WITHOUT THE POLITICAL WILL TO ADDRESS THE PROBLEMS. RUBIN WARNED THAT THE CREDIT CRISIS COULD EXPLODE AT ANY TIME, AS HE IDENTIFIED POTENTIAL TRIGGERS. THE BANKERS PRESENT DID NOT PAY MUCH HEED TO THE DIRE MESSAGE. HIS WAS A MESSAGE OF SYSTEMIC FAILURE BY ONE OF ITS OWN CHIEF ARCHITECTS, A MAN STILL IN CONTROL OF PUPPET STRINGS. $$$

The World Economic Forum in Davos Switzerland offered a nice winter retreat for a couple thousand banker the world over, some utter criminals. That is not an exaggeration any longer. The special Davos magazine given at hotel check-in featured an article by Robert Rubin, former US Treasury Secretary in the Clinton Admin. It has been called the Davos Warning aptly. He is perhaps the among the top 5 greatest financial fraud criminal in modern US history, and architect of some of the most destructive restructure avoidance practices at the same time. He is an insider's insider, an elite puppeteer in control of the USDept Treasury still. The people who are operating behind a president, do so under instructions by Rubin. The connections are numerous to Rubin, like the director of the Office of Mgmt & Budget, the former OMB director, the head of the National Economic Council, the former NEC head, the former chief of the White House Council of Economic Advisors, and more. Rubin is formerly a Goldman Sachs superstar and head of their London gold office. He is co-Chairman of the Council on Foreign Relations.

The essay from Rubin in the Davos magazine reads like a desperately written piece of advice tossed from the lifeboat after he left the ship. His Keynesian badge of failure showed, as he called for more USGovt spending. He hopes the outlays can be reversed in two or three years, after the USEconomy resumes proper course of growth. He is dreaming, and his readers probably recognize the Hail Mary pass before the buzzer. Growth is non-existent. He cannot recognize the failure of the Keynesian applications, US style, nor the delays in debt restructure he so steadfastly insists upon. The second part of the article offers a significant account of the systemic failure in the United States, in short what went wrong. Rubin wrote the following, excerpted and assembled. He must recognize that his policy of kicking the can down the road has run out of time, as the can went nuclear. He clearly no longer believes the can be kicked further, since too big and too toxic. Rubin has delivered a dire warning. The United States is in extremely deep financial and economic trouble, where the crisis will explode sooner or later, with or without action taken. That is his message. See the Economic Policy Journal article (CLICK HERE).

"The risks of our fiscal position are serious and multiple. And while these risks become more severe over time as our debt position worsens, all of these either have begun to materialize or could do so in the near term, so we should act now. To be specific about the risks, deficits could crowd out private investment, which could choke off a private investment recovery. Moreover, the capacity for public investment is already diminishing, and could be exacerbated by growing entitlement costs and mounting interest payments. Most dangerously, there is a risk of disruption to our bond and currency markets from the fear of much higher interest rates, due to future imbalances or from fear of inflation because of efforts to monetize our debt. The result could be significant deficit premiums on bond market interest rates, seriously impeding private investment and growth, or worse, acute bond market declines that cause an economic crisis. This could also start in the currency markets. While the likelihood of major market disruptions is greater in the intermediate and longer term, the shorter-term risks are also real. Market psychology can change unexpectedly and dramatically, either on its own or because of some catalyst, when underlying conditions are unsound. Possible catalysts are a debt ceiling confrontation, currency market problems, and state deficits. Growing out of our fiscal morass over time without policy action would require inconceivable rates of growth. Muddling through with unexpectedly favorable developments is extremely unlikely. The strong probability is that either we make the hard decisions so vital to our future, or we will be forced at some point to act more harshly and with less time to thoughtfully set priorities. Our long history of political and economic resilience should augur well. But these decisions are extremely difficult, and the question is whether we have the political will to face up to what we must do. Our structural fiscal trajectory is unsustainable with multiple serious risks, while at the same time, our large cyclical deficits are exacerbating debt levels and interest costs." Rubin talked of fear of inflation, rather than price inflation itself. The reality will most assuredly be worse than the fear, as will the domino effects.

◄$$$ DAVOS SUMMARY, DIRE WARNING VERSUS UNFOUNDED OPTIMISM. EXTREME PERSPECTIVES WERE PRESENTED AT THE CONFERENCE, BUT THE ROSY SCENARIO SEEMED TO PREVAIL. LEVERAGE AND RISK ARE STILL DEEPLY ENGRAINED IN THE SYSTEM. LOOSE MONETARY POLICY HAS GROWN AN ORDER OF MAGNITUDE WORSE. A DIVERGENCE FROM REALITY WAS THE DAVOS THEME, A WINTER RETREAT FOR THE BANKERS AND BRETHREN, THOSE RESPONSIBLE FOR THE GLOBAL MELTDOWN, THE HIGH PAID AND THE IDLE RICH. THE CONFERENCE WAS AN EXERCISE IN DENIAL, DELUSION, AND PRIVILEGE. $$$

Dire warnings were given at the World Economic Forum in Davos, the elite country club getaway event hosted periodically, invitation only. Quasi-billionaires only, and their squires. It includes some hacks like Nouriel Roubini, who sold his soul to the devils in exchange for club membership. The Wilkinson report offered the Davos crowd a second warning after Robert Rubin. Except that the second salvo granted four years of reprieve before the severe crisis crescendo would supposedly occur. Barrie Wilkinson from the consulting firm Oliver Wyman in London issued a report entitled "The Financial Crisis of 2015: An Avoidable History" in which he laid out the path for the next crisis, which extends from the current crisis but inevitably will occur since nothing has been remedied, and reactions have created pathways toward evermore wreckage.

Wilkinson warns that a 2015 financial catastrophe in on track. His points echoes many from the Hat Trick Letter. He wrote, "The fundamentals have not been addressed at all. The things that caused the previous crisis, loose monetary policy and trade imbalances, they are actually bigger now than they were then. Banks need to be less leveraged. The true test for me of whether they have deleveraged is if the industrywide returns on equity come down. If they do not, I am very suspicious that there are hidden risks in the system. If there is another banking crisis, the Western governments are just in no shape to stabilize the system. They have expended their entire arsenal on the last round of fiscal injections." Nice assessment in brief terms of the current financially ruinous condition and unaddressed factors. Basically he argues the big banks, through aggression to find high returns, will promote a new bubble within commodities or emerging markets. After the 2008 crisis, governments and central banks spent historically unprecedented amounts of public funds for bailouts, whether or not properly done. He worries that the system is likely to repeat its errors in different locations, only to cause another bust that governments will not be capable of rescuing, either financially or politically. His message clashed with the optimistic tone that was heard from the center of the forum, whose members have been exhausted by distress, justification for redemptions, and hand wringing since the September 2008 crash. They desperately sought positive messages.

One forum dinner was highly indicative of the global attitude toward systemic rescues, otherwise called banker welfare. The dinner gang concluded that governments have no other viable choice except to bail out any failing giant multinational bank because the system cannot possibly handle a controlled failure. The liquidation process would dismantle the entire financial structure and deliver the economy into a depression instantly. The damage could be severe and the contagion would be unstoppable. Simon Johnson from the MIT Sloan School of Mgmt had his own visceral reaction. He said, "I came into this dinner somewhat pessimistic and worried about the assignment we are here to discuss. I am now terrified. There is an incipient sovereign crisis here mixed in with the bank crisis." His comments are especially noteworthy since he is somewhat mainstream. He correctly sees the terror from systemic failure that many analysts like the Jackass have predicted a few years ago. Other attendees also noted the misplaced optimism, against the most grotesque government deficits and imbalances in modern history, which do not have much prospect to change. See the Bloomberg article (CLICK HERE).

Enough for niceties. Davos was really a disaster, a farce showcase of normalcy, replete with peptalks by the fraud kings in contempt for their high crimes. The bankers have steered the global financial structures and economics into a wrecking zone, as their perversion to capitalism has created paths to utter disaster. They are the practicioners of the Fascist Business Model to enrich themselves at public expose, with full impunity for financial crimes. The Davos perspective had no linkage to reality. It is obvious that the Ruling Elite cannot detect reality from their elevated wealth position behind their moats, nor the continuing risks. The documented global risks written in a thick polished report seems more like fine print disclaimers on prevalent fraud-laced contracts. The real motives of the Elite are personal wealth, political power, adulation, and icon status, with hardly a twit concern for the masses, whom they regard as disposable product units and exploitable sacks. They deceive on stated risks, knowing that captive governments will rescue them with public money, even with ready toxic bins to use for their plentiful financial garbage. Francis Fukuyama, in his book entitled "The End of History" provided detail on income inequality that has gone haywire in the United States over the past three decades. The high end has gathered the majority of the spoils within the advanced Fascist Business Model pathogenesis. Between 1978 and 2007, the share of US income accumulated by the top 1% segment rose from 9% to 23.5 % for Americans. The middle class has shrunk, composed in large part by the working classs, which together have seen both their home equity vanish and their pension funds depleted, without any hint of USGovt rescue like for the banker elite. See the Market Watch article (CLICK HERE).

◄$$$ WONKS CLAIMED THE WORLD ECONOMY REQUIRES AN EXTRA $100 TRILLION TO CONTINUE TO GROW AND FUNCTION SMOOTHLY. THEY BELIEVE IT CAN BE APPLIED CAREFULLY AND WITHOUT DIRE OUTCOMES. SIGNPOSTS ARE BEING WRITTEN FOR $5000 GOLD AND $150 SILVER. THEIR DELUSION SHOWS EASILY SINCE THEY BELIEVE IT CAN BE APPLIED RESPONSIBLY WITHOUT FURTHER CRISES. THEY MUST BE BLIND TO GLOBAL EVENTS FROM THEIR CASTLES. A CAUTIONARY NOTE FAILS TO MENTION THEIR TIGHT CHOKEHOLD ON THE CONTROLS AND POLICY FOR THE SYSTEM. $$$

So the world needs a ripe $100 trillion more credit, according to the errant geniuses at the World Economic Forum in Davos. Further economic growth over the next decade will require an extra $100 trillion in credit. The global credit supply has doubled in recent years, from $57 trillion to $109 trillion between 2000 and 2009. There is no limit to the audacity and delusion of the banker elite. They do not recognize it is GAME OVER, where they will surely and suddenly be cut off, just a matter of time. A new global currency of legitimate standing will unseat them. A Davos report actually stated that the doubling again of extended credit could be achieved without increasing the risk of a major crisis. They must sell this notion if the banker welfare is to continue, which includes redemption of ruined bonds, access to toxic bins for asset dumping, collusion with central banks on narcotics money laundering, exploited government liquidity facilities, ongoing control of regulators, a blind eye on naked shorting of USTreasury Bonds, and ample flow of executive bonuses. The attendees have paid little heed to warnings from researchers, who direct much of the blame for the current endless crisis on the failure in detection and constraint concerning the growth of debt to unsustainable levels.

Not one single USFed warning came in the past five years, only statements of minimized risks and containment from contagion, all of which were grossly incorrect. The report on credit needs, written in collaboration with consulting firm McKinsey, concluded with an obvious point then a candied point, "Pockets of credit grew rapidly to excess, and brought the entire financial system to the brink of collapse. Yet, credit is the lifeblood of the economy, and much more of it will be needed to sustain the recovery and enable the developing world to achieve its growth potential." The report actually made the conclusion that continued demand for credit could be met "responsibly, sustainably, and with fewer crises." In fairness, it did caution that to achieve this goal, financial institutions, regulators, and policy makers need more robust indicators of unsustainable lending, risk, and credit shortages. In reality, they need fewer players from the Wall Street crime syndicate centers and wings. See the UK Telegraph article (CLICK HERE). Time for a reality check. To achieve such a goal, the elite like Goldman Sachs must relinquish control of regulators and the USDept Treasury policy makers, as well as resign from executive posts in the leading financial institutions, if not foreign policy groups. Not gonna happen!!

BIG USBANKS ON FIRING LINE

◄$$$ LIFE INSURANCE COMPANIES HAVE FILED LAWSUITS AGAINST BANK OF AMERICA, IN PARTICULAR AGAINST COUNTRYWIDE, FOR SELLING KNOWN BOND GARBAGE PACKAGED AS HIGH QUALITY SECURITIES. THEY WANT TO PUT BACK THE MORTGAGE ASSETS TO THE CRIMINAL BANK, AND SO FAR THE COURTS ARE GIVING SUPPORT. PROVING THE VIOLATIONS WILL BE EASY. THE BOND LOSSES ARE ENORMOUS. $$$

On 24 January 2011, a group of life insurance companies filed a lawsuit against Countrywide. Acting as good faith institutional investors, they were defrauded by the big and now dead mortgage lender. Bank of America, which acquired the swill from Countrywide under duress exerted by the Wall Street giants as part of a survival gesture, must defend against allegations of selling a heap of bogus credit assets to a long list of large insurance companies across the world. At issue are the mortgage backed securities loaded with poorly underwritten home loans, laced with defects and negligence if not fraud and kickbacks. The insurance companies as plaintiffs have accused Countrywide of selling securities supposedly that were NOT backed by mortgages issued pursuant to specific underwriting guidelines and rated investment grade (primarily AAA). The bonds were grotesquely misrepresented. Time is running out and the legal cases are mounting quickly. The bond term sheets, prospectuses, and other materials were prepared by Countrywide contained deep misrepresentations, since the home loans did not come close to conforming to conservative mortgage underwriting standards. The blatant violations involve the appraisals of the mortgaged properties, the loan-to-value ratios, and basic income statements often neglected. The charges made by the insurance firms center on accusations that Countrywide was an enterprise driven by avarice, trampling on process, in order to originate and securitize into bonds as many mortgage loans as possible so as to generate maximum profits for their bank, without regard to the investors and their profound future losses.

Numerous other transgressions were identified by the insurance company plaintiffs. They charge that Countrywide failed to ensure that propery title to the underlying loans was effectively transferred. The terms of the pooling and servicing agreement (PSA) for each securitization did not conform to the existing law. The promissory notes and bond securities by law must be transferred by endorsement or sale. Also, the trustee must have physical possession of the original manually signed note in order for the loan to be enforceable by the trustee against the borrower in case of default. All manner of bank analysts and bank executives for years have been denying the importance of proper filing of titles, notes, and other official documents. Finally the liability is so grand, so acute, so treacherous, that the entire banking system teeters from an additional hit to the balance sheets on the legality of the entire home foreclosure process and entire mortgage securitization process. These banks are already operating in a pitifully insolvent condition. Running out of time with deadlines approaching, the defrauded bond investors have decided to file lawsuits rather than to shut up and eat the losses. A parade of lawsuits could follow, with small chance of peaceful settlements since the bond losses are enormous. See the Scribd article (CLICK HERE).

◄$$$ BANK OF AMERICA SET ASIDE $4.14 BILLION IN RESERVES FOR MORTGAGE PUTBACKS. EXPECT THAT FIGURE TO RISE 10-FOLD, WITH FULL DENIALS ALONG THE WAY. THE BANK HAS $29.1 BILLION IN OUTSTANDING LAWSUIT REPURCHASE CLAIMS FROM JUST THE PAST YEAR, ALL PENDING. THEY ARE GROSSLY UNDER-PREPARED WHAT STRONG DEMANDS THAT COME. A CALAMITY AWAITS THEM. EACH QUARTER, EXPECT A GIGANTIC DRAIN OF CASH INTO LOAN LOSS RESERVES, BUT BUTTRESSED BY NARCOTICS MONEY. $$$

Bank of America is in deep waters regarding so-called PutBacks of mortage bonds to the bank after fraud, negligence, and shoddy underwriting is proved in court. In their quarterly earnings disclosure, BOA set aside $4.14 billion in 4Q2010 for mortgage bond PutBack demands, nearly a five-fold rise from the $872 million set aside in Q3. This is just the beginning. The settlement with Fannie Mae on similar bond restitution demands was the main cause for the large reserves set aside, but that settlement was intentionally an official slap on the wrists, a sweet deal to try to establish precedent. BOA earnings fell vastly below expectations. The nightmare has begun. Last October 2010, the New York Fed and PIMCO initiated legal actions to put back $47 billion worth of mortgages to Bank of America, along with various other aggrieved investor parties. Consequently, one can easily conclude that Bank of America has woefully inadequate reserves to deal with the problem, an order of magnitude low. They could not practically set aside $10 or $15 or $20 billion, since they do not have such funds in their cash position. So they set aside a palty $4.14 billion and prepare for another similar amount to be placed into loan loss reserves each quarter, ad infinitum, as in forever. Even that will not be enough. BOA stock investors should prepare for a scheiss storm without end. The bank is suffering from blows by major bond investors at the same time as from homeowners who refuse to pay monthly bills in defiance. The Jackass has believed for over a year that BOA will suffer a long drawn out death experience. Yet they are kept alive and afloat by narcotics funds. They are the chief money laundering bank for our friendly security agencies and vast network of narcotics operations. They double as a legitimate bank caught in charred ruins of the housing bust and mortgage debacle, as one side provides cover for the other. See the Zero Hedge article (CLICK HERE). Details on reserves and payouts were given by the captain of the sinking ship.

CEO Brian Moynihan offered some details for the dramatic deterioration on reserves versus claims in recent months:

  • Increased 4Q10 representations and warranties provision of $4.1B as the current quarter included $3.0B in provision relating primarily to the impact of previously announced agreements with GSEs (Fannie & Freddie)
  • Resolved $8.0B of claims during the quarter, including $4.9B as part of the GSE agreements, leading to an overall $2.3B reduction in claims
  • Monoline claims outstanding continue to grow as newly submitted claims are made by parties generally unwilling to withdraw despite opposition
  • Received $1.9B in claims during the quarter from whole loan and private label securitization investors related to 2005 through 2007 origination vintages
  • Increase in rescissions and approvals in 4Q10 was substantially affected by the previously announced agreements with the GSEs.

CEO Brian Moynihan offered some details on the oodles of repurchase claims activity and payouts through December 31, 2010:

  • $13.7B of repurchase claims received on 2004-2008 vintage bonds
  • $5.6B in claims from monolineinsurers (e.g. MBIA)
  • $5.7B in claims from whole loan buyers
  • $1.7B in demands from private label securitization investors who lack the contractual right to demand repurchase of loans directly
  • $800M in claims from one counter-party submitted prior to 2008
  • $6.0B of resolved repurchase claims on 2004-2008 vintages
  • $800M resolved with monolines, wherein 15% were rescinded or paid in full (mostly second lien)
  • $5.2B resolved with private investors, of which 59% were rescinded
  • $7.7B repurchase claims remain outstanding on the 2004-2008 vintage bonds
  • $4.1B have been reviewed and declined for repurchase
  • Repurchase losses of $1.7B
  • $630M related to monolines
  • $1.1B with private investors.

◄$$$ JPMORGAN IS GRADUALLY BEING ENSNARED IN THE MADOFF PONZI SCHEME. THEIR ROLE AS CHIEF FRAUDULENT BANKER HAS BEGUN TO COME OUT IN THE COURT TRIAL. THE BANK'S STOCK APPEARS VULNERABLE, AS SOME HEFTY PUT OPTION ACTIVITY HAS BEEN SPOTTED. JPMORGAN FAILED IN ITS FUDICIARY RESPONSIBILITY, WHILE IT APPEARS TO HAVE BEEN PARTNER TO THE MADOFF FUND. $$$

JPMorgan has become the focus in complicity as part of the grand Madoff Ponzi fraud scheme. Their role is coming out slowly in the Trustee lawsuit case. The flow of events is filled with intrigue and scummy layers. JPMorgan Chase suspected that Bernard Madoff was perpetrating a fraud while the giant US bank intended to protect its own investments, so claims the Trustee in charge of liquidating the business by the convicted conman Madoff. Be sure to know that JPMorgan maintained a role spanning over 20 years with Madoff as his primary banker. The charge is of aiding & abetting the fraud, according to a formal statement submitted by Trustee Irving Picard. The lawsuit in 2010 against JPMorgan seeks to recover $1 billion in profits and $5.4 billion in damages. The complaint includes internal e-mails at the bank and numerous detailed allegations against JPMorgan, in support of claims that the bank was aware of ongoing securities fraud. Picard said. "Incredibly, the bank's top executives were warned in blunt terms about speculation that Madoff was running a Ponzi scheme, yet the bank appears to have been concerned only with protecting its own investments in BLMIS feeder funds." Motive was present. JPMorgan earned at least $500 million in fees and profits as Madoff fleeced his victims. The charges are broad, targeted, and detailed.

JPM is accused of having a longstanding business relationship with the Madoff Fund. Counsel Deborah Renner said, "As we allege in the complaint, JPMorgan Chase had a palpable concern that Madoff was a fraud for years, but it was not until October 2008 that it reported Madoff to government officials. Even then, JPMC executives did not restrict the BLMIS [Madoff Fund] bank account, even though it was being used to launder money from the Ponzi scheme." Another counsel David Sheehan accused JPMorgan as having "ignored its anti-money laundering obligations and repeatedly allowed suspicious transactions for high dollar amounts to occur in the BLMIS account. The complaint further alleges that, as the BLMIS banker, JPMC had financial reports in its possession that clearly evidenced fraud. The same reports led a prominent fund manager to conclude that fraudulent activity was highly likely. Madoff would not have been able to commit this massive Ponzi scheme without this bank. But with the case under seal, there was no way to gauge the documentation on which the Trustee based his $6.4 billion in claims against the bank, until now." The bright light is finally shining on the scummy lower layers. The complaint focuses on investors who lost $17.1 billion in principal by the time the Ponzi scheme exposure. The lawsuit was filed under seal on December 2nd in US Bankruptcy Court in Manhattan. The colossus of JPMorgan calls the case meritless. It might be dismissed for national security reasons, just a joke, well, not really.

The Picard Trustee complaint delves into dark places. JPMorgan is alleged to have reported Madoff in late 2008 to European authorities after his accounts were suspected to be used to launder money from Colombian drug traffickers. The Madoff investment method since the 1990 decade was the split strike conversion strategy. Investor funds were sent into a basket of 100 high profile stocks, fully hedged by means of options contracts linked to those stocks. No evidence exists that Madoff ever bought the equities or options. JPMorgan became an active participant in the Madoff strategies by early 2007. The big bank devised products for clients in its own Equity Exotics group, to make leveraged bets on Madoff feeder funds such as Fairfield Sigma, according to Picard. These suspicious products offered investors ways of committing three times as much money on feeders by virtue of loans extended by JPMorgan itself. That is direct participation and obvious complicity. One internal memo raised a red flag, as a JPM employee complained, "Madoff will not allow us to conduct any due diligence on him directly." The memo was sent as the bank was proposing to step up its creation of leveraged bets on feeders. The red flags, billowing smoke, and clear face of JPMorgan are fast emerging in full view. See the Bloomberg article (CLICK HERE).

Some thin defense is being demonstrated by the bank that resides alongside Goldman Sachs as centers of the financial crime syndicate. We are led to believe that JPM suspected fraud and money laundering, even planned eventually to report it. They were only admiring the art works, not stealing them, as some were found in their satchels. They were only talking with the street whores, not engaging in illicit sex, after letting the ladies of the night out of the car. They were only borrowing the car off the impound lot, not stealing it. Notice the reference to the Colombia drug cartel, of which there are two factions in competition. One must wonder if Madoff was mixed up with Colombian drug lords, perhaps on the wrong side of those working closely with the USGovt, across narco enemy lines in direct competition. Some strong hands just bought a significant 75 thousand share put spread block on JPM last week. The position is set to profit from a decline in the big bank's stock value. The lawsuit against JPM by Madoff Trustee Irving Picard directly accuses JPMorgan in complicity, sure to produce negative sentiment for the managed stock.

Janet Tavakoli is head of Tavakoli Structured Finance, a respected financial fraud expert. After an initial review, she believes Picard appeared to raise troublesome issues for JPMorgan. Tavakoli said the lawsuit alleges JPMorgan was "basically creating products to leverage off of this relationship with Madoff. Instead then of asking questions, terminating the relationship or talking with the Securities & Exchange Commission, they decided to create products based on something that they have a series of red flags on." This is smoking gun evidence. She commented further, that as the Madoff primary banker for more than twenty years, after failure to disclose red flags that it alone knew, the bank lent sponsorship and credibility to the Madoff Fund. In the process, they allowed the Madoff Fund to enjoy a 'Halo Effect' of legitimacy by direct participation. The failure by JPMorgan is comprehensive. They failed to take appropriate action such as investigating suspicious money transfers, investigation of concerns about structured products expressed by its employees, and investigations allegations that the fund was a Ponzi scheme. It should have terminated its business relationship with Madoff when the fund managers declined to allow JPMorgan to perform due diligence. The entire case paints a picture of partnership between the Madoff Fund and JPMorgan Chase, its bank. This case will not go away.

◄$$$ THE PROBLEM LIST OF USBANKS GROWS. CURIOUSLY, NO WALL STREET BANKS ARE ON THE LIST, EVEN THOUGH THEY ARE ALL INSOLVENT AND TEETERING TOWARD BANKRUPTCY, EVEN THOUGH THEY FACE A NEW GIANT PUTBACK THREAT ON MORTGAGE BONDS. THE REASON WHY IS THEIR AFFILIATION WITH THE SYNDICATE IN POWER THAT CONTROLS THE USGOVT. $$$

The Office of the Comptroller of the Currency released its actions through the middle of December 2010. Illinois distinguished itself as the only state having a banking authority that publishes its safety and soundness enforcement actions against banks. The unofficial problem bank list has increased to 937 institutions, with only minor additions and removals in the one week. The changes result in the problem bank list of 937 institutions with assets of $409.4 billion. Not so amazingly, not a single large US bank that is either part of or closely associated with Wall Street appears on the list. See the Calculated Risk article (CLICK HERE).

HOUSING DISASTER REDUX

◄$$$ THE HOUSING DEPRESSION CONTINUES FULLY DISGUISED WITHIN A PERNICIOUS ECONOMIC RECESSION, DESCRIBED OFFICIALLY AS A SLUGGISH RECOVERY. THE DETAILS READ LIKE A NEVER ENDING HORROR STORY. THE FANTASY OF A USECONOMIC RECOVERY CANNOT BE TOLD SERIOUSLY IN A RATIONAL GATHERING. $$$

The general portrayal of the US housing market reads like a total disaster, with many facades all in full wreckage. The worst immediate front staring at the sector is the mammoth supply of unsold homes, including the hidden inventory of bank held homes from foreclosures and ensuing seizures. The nightmare is sure to continue all through 2011, since banks and financial institutions will repossess at least a million more homes this year. A housing market recovery is an absurd notionThe hidden stealth supply of unsold properties will grow much worse. Potential home buyers are scared. Other possible buyers can no longer qualify for a home loan. Thus demand for unsold homes is extremely low without prospect of improvement. With Supply sky high and Demand abysmally low, prices will be heading down for at least another year or two, my ongoing stuck forecast. In order to preserve credibility, the Jackass forecast has been two years of declines since 2007, stated perenially. It remains, as my expectation is for two more years of additional home price declines.

US housing prices will decline another 10% to 20% before they hit bottom, as the tragedy drags on. A multitude of homes are on the edge currently. The proportion of homes with debt exceeding home value (negative equity, insolvent, underwater) will reach almost 50% this year!! Expect home prices to settle at 20% to 30% below construction costs when the dust clears. That will wreck the home builders, the final punch. All the USFed money created free by the electronic Printing Pre$$ accomplishes nothing in the housing market, the key point of vulnerability that will result in systemic failure for the United States. The easy money flowing from the monetary presses will chase the stock market, the bond market, and the commodity market, especially Gold & Silver. The housing crash in progress is absolutely unprecedented in US history, fully forecasted by the Hat Trick Letter every step of the way. The decline is growing worse!! So much for the Bush Ownership Society, a grand ruse and trap. See the Economic Collapse article (CLICK HERE). The following details offer evidence of the historic nature of the tragedy extending from the worst housing collapse in national history:

1)      Approximately 11% of all homes in the United States are currently standing empty.

2)      The rate of home ownership in the United States has dropped markedly, having all the way back to 1998 levels.

3)      According to the S&P/Case-Shiller index, US home prices fell 1.3% in October and another 1.0% in November. Four consecutive monthly declines have been seen in US housing prices. The resumed decline was anticipated after the end of the tax credit lunacy.

4)      The number of homes repossessed reached the 1 million mark during 2010, and another 1 million are projected to be forced out of their homes in 2011.

5)      According to RealtyTrac, over 3 million homes were repossessed by mortgage lenders between January 2007 and August 2010. This huge supply of additional inventory must be cleared and sold.

6)      Of the major USmetropolitan areas, 72% had more foreclosures in 2010 than in 2009.

7)      At least 8 million Americans are at least one month behind on their mortgage payments. according to the Mortgage Bankers Assn.

8)      An estimated 5 million homeowners in the United States are at least two months behind on their mortgages.

9)      Deutsche Bank projects that 48% of all US mortgages could have negative equity by the end of 2011.

10)   Some once proud US cities are rapidly converting into ghost towns. In Dayton Ohio today 18.9% of all houses are standing empty. In New Orleans Louisiana today 21.5% of all houses are vacant.

11)   According to Zillow, the 26.0% national decline to date in US home prices exceeds the 25.9% decline during the Great Depression.

12)   The US labor market situation is mired in thick mud, as 4.2 million Americans have been unemployed for one year or longer.

From 2002 to 2007 the USEconomy grew atop a housing bubble and mortgage finance Ponzi scheme perpetrated by Wall Street. In the wake of the great housing bust and mortgage debacle, the nation hurtles downhill toward systemic failure and a USTreasury Bond default. A total inventory of 6.2 million vacant homes have not yet been put on the market. Nearly 26 million Americans seek jobs for work. Substantial layoffs by state and local governments are coming, due to mounting financial woes. Some 42 million people on food stamps. About 78 million Baby Boomers are entering retirement, many without adequate pensions.

◄$$$ VACANT AMERICAN HOMES NUMBER 1 IN 9 AS A WICKED SHOCK. THE HOUSING BUST HAS LEFT A NIGHTMARE EYESORE OF GROTESQUE INEFFICIENCY, WASTE, AND WRECKAGE. VACANT HOMES SERVE AS A VISIBLE CLUE ON THE VAST SUPPLY OF BANK OWNED HOMES HELD IN SHADOW INVENTORY. $$$

Nearly 11%  of US houses lie empty, a figure hard to conceive. The quarterly homeowner report from Census contained some ugly facts. The American home ownership rate took a notable plunge in 4Q2010, from 66.9% to 66.5%, the lowest level since 1998. It had been holding steady for several months. Its peak level was seen at 69.2% in 2004. This rate has fallen at the same time as home prices have fallen, a bizarre development and a sign of a disaster of national proportions. Home affordability is much improved and inventories of new and existing homes are running very high, with bargains galore. The conclusion is deep poverty and unavaible credit. Even more worrisome and ugly like an eyesore is the vacancy rate. Of the nearly 131 million housing units in this country, 112.5 million are occupied. The ownership figure is 74.8 million, having declined by only 30 thousand in the past year. The rental figure is 38 million, up by over a million in the past year. The total count of vacant homes in the US was 18.4 million in 4Q2010. That comprises 11% of all housing units, as in vacant year round. Despite what appears to be a slight improvement in the vacant home count, the ugly fact is the 471 thousand homes are listed as Held Off Market. The shadow inventory is some gargantuan figure like over 1 million, a veritable Sword of Damacles positioned over the market, in constant position. See the CNBC article (CLICK HERE).

◄$$$ GOLDMAN SACHS EXPECTS HOUSING PRICES TO CONTINUE TO DECLINE, DUE TO DEMAND EROSION. THEY BASE THEIR CONCLUSION ON FALLING EXISTING HOME SALES AND FALLING HOME LOAN APPLICATIONS. THIS IS BASIC SCIENCE. THE USFED HAS TURNED DESPERATE, RAMPING UP MORTGAGE BOND ACQUISITIONS TO ADD TO ITS ALREADY DESTROYED BALANCE SHEET. $$$

Substantial future home price declines are predicted by the venerable syndicate temple at Goldman Sachs. A blip rise in existing home sales since October 2010 tells a lie. A Goldman housing market outlook is surprisingly bearish. The forecasted housing decline might actually be a central tactic to lay the foundation to start advocating for mortgage bond purchases as part of QE3. Their housing report by Sven Jari Stehn entitled "Mortgage Applications Point to Near-Term Home Sales Weakness" confirms the slippery slope, if not quicksand. In it, Stehn makes the point competently that existing home sales are deceptive and not a leading indicator of any importance. The recent plunge in mortgage applications is far more indicative and troublesome, and should be given far more stress as a warning signal. Stehn from GSax wrote, "The number of mortgage applications, however, has declined sharply in recent weeks. Specifically, the volume of mortgage applications for purchase, reported in a timely fashion every week by the Mortgage Bankers Assn, declined by a cumulative 14% during the last three weeks. Does the decline in mortgage applications suggest that home sales are set to decline again in coming months?" The obvious answer is yes, since they tip off imminent activity. Notice how after the October 2009 dip in applications, the home sales fell one month later. Notice how after the May 2010 dip in applications, the home sales fell two months later. Sales and later prices will fall again.

The higher mortgage rates are something the USFed do not tolerate but cannot avoid. The QE2 initiative, an exercise in self-destruction and economic mutilation, assures higher mortgage rates in the future. The Bernanke Fed might have turned to desperate measures on the mortgage front, as the avalanche of toxic mortgage bonds confronts the avalanche of bank owned homes, which combine to bury the big insolvent US banks. Notice how the USFed has been working overtime in accumulating mortgage bonds for its ruinous contaminated balance sheet, ordering a spurt in the last few weeks. The QE2 provisions called for $300 billion in MBS purchases. That limit will be exhausted soon, and a QE3 will be motivated for a fresh destructive launch. They fight the mortgage war on the bond side, where bankers live and breathe. Bernanke appears to be giving focus to the stock market, which is propped in order to hold onto hope that the pension funds will hold value. Think crowd control. See the Zero Hedge article (CLICK HERE).

◄$$$ HOME LOAN DEMAND IS CRATERING. REFINANCES FELL HARD, AS DID MORTGAGE APPLICATIONS. MORTGAGE LOAN RATES ARE CREEPING HIGHER. MUCH LOWER PRICES AWAIT DESPITE ALL OFFICIAL PROPAGANDA CLAIMS. $$$

Data is out from late January. Mortgage applications tumbled 12.9% while refinancing activity fell 15.3%, signaling a powerful decline in home demand. Lower demand will meet with fast growing Supply to produce lower home prices, an unending disaster. The Mortgage Bankers Assn reported the market composite index decreased 12.9% on a seasonally adjusted basis for the week ended January 21st. Unadjusted, the index fell 12.0% from the prior week, like the floor fell out suddenly. In fairness, the week covered the Martin Luther King holiday. After three weeks of increases, the number of refinancing applications fell 15.3% in the reported week to the lowest point in 12 months. Refinance loans accounted for 70.3% of all mortgage applications, down from 73.0% the previous week. When interest rates hovered around 4% in the autumn months, refinancings had accounted for over 80% of all mortgages. Purchase applications dropped 8.7% to the lowest point since October. The unadjusted purchase index fell 3.1% from the prior week and was 20.8% lower than a year earlier. The 30-year fixed mortgage rate has been climbing gradually, an unwanted development. The rate was 4.96% last week, up from 4.81% the previous week, and higher than the 4.77% in mid-January. See the Housing Wire article (CLICK HERE).

◄$$$ HOUSING PRICES CONTINUE DOWN, AS 8 USCITIES HIT NEW LOWS. THE POST-TAX CREDIT DECLINE HAS ARRIVED, VERY PREDICTABLY. THE DOWNWARD PRICE MOMENTUM WILL BE SHOCKING, DRAGGED BY THE GIGANTIC INVENTORY, BOTH VISIBLE AND HIDDEN ON BANK BOOKS. THE BOUNCE FROM 2010 IS DONE, DEAD, OVER. $$$

The Case-Shiller home price index for the US market has clearly resumed its decline. The extent of the next decline in home prices will shock the nation. The 12-15 month bounce is officially over. Prices keep weakening in major cities, hitting new lows in November. The eight markets are Atlanta, Charlotte, Detroit, Las Vegas, Miami, Portland Oregon, Seattle, and Tampa. These cities hit their lowest levels since home prices peaked in 2006 and 2007. The decline was broadly based. Home prices fell in 19 of 20 separate Metropolitan Statistical Areas (MSA) and in both Case-Shiller composite indexes. See the Calculated Risk article (CLICK HERE).

RISING SPECTER OF PRICE INFLATION

◄$$$ BERNANKE IS SUFFERING FROM DELUSION, IGNORANT OF THE GREAT DAMAGE, STILL CONFIDENT OF HIS DESTRUCTIVE DEVICES. HE IS THE MAIN PILOT ON THE ROAD TO MADNESS. NEVER LOSE SIGHT OF THE PROMISED CLAIM THAT BERNANKE BOASTED THAT THE USFED COULD TURN OFF THE MONETARY SPIGOT WHENEVER THEY SPOT PRICE INFLATION UPON ARRIVAL. BUT BERNANKE IS A BLIND BAT. $$$

USFed Chairman Bernanke listens intently to the big banks, which include the Primary Dealer banks. They pull the real strings at the USFed, exerting great influence. Their operate by a basic profit motive, caring little of theories or general public well-being. They will push the system until public outrage arrives, and it will arrive. The credibility of the USFed has never been lower. The pronouncements are often met with disbelief and derision. The Quantitative Easing series is evidence of failure, which will be clear to the majority of Americans and Western citizens soon. The absence of control or ability to react to crisis will become painfully obvious in the coming months. Worse, the USFed desperation renders them unwilling to halt their aggravation of crisis. The roots of Bernanke come from academia, and Princeton University is not Wall Street. Bernanke does not have friends in high places to help him. He instead has people in high places who hand his marching orders and policy directives. They selected him to serve as the Chief Inflation Engineer for printed money. His low stature, like that of Secy Treasury Tim Geithner, allow the masters to discard Bernanke (and Geithner too) and his misguided theories like an old broken noisy toy. They will not only make a human sacrifice of him, but also claim the system will suddenly be rectified, put on the right path, as soon as he is removed. Blame will be given to Bernanke and Geithner for the collapse of the USDollar, for the systemic failure in the USEconomy, and for the quick descent into Third World. If and when the US public demands somebody's head, they will be given Bernanke and Geithner, surely to have Greenspan spared. Both Ben and Tim are officially selected low ranking bagholders and planned objects of future blame. Not one single chapter to this dreadful episode has been foreseen by Bernanke. See the Zero Hedge article (CLICK HERE) which curiously did not mention Geithner as a twin scapegoat.

◄$$$ GONZALO LIRA HAS REITERATED HIS BOLD PREDICTION ABOUT THE INCIPIENT RISE OF PRICE INFLATION IN THE OFFICIAL C.P.I. INDEX. MY EXPECTATION IS THAT THE REALITY WILL BE POWERFUL IN ITS RISE, BUT THE OFFICIAL DATA WILL NOT SEE AS MUCH A RISE AS LIRA ANTICIPATES. $$$

Self-styled uncouth economic and political analyst Gonzalo Lira has repeated his calls on price inflation to penetrate the official index maintained with full corruption and engrained statistical fraud by the Bureau of Labor Statisitics. He forecasts a trip down a hyper-inflation pathway for the USEconomy. He predicts boldly and confidently the following sequence of events:

  • By March of 2011, once higher commodity prices reach the marketplace, monthly CPI will be at an annualized rate of not less than 5%
  • By July of 2011, annualized CPI will be no less than 8% annualized
  • By October of 2011, annualized CPI will have crossed 10%
  • By March of 2012, annualized CPI will cross the hyper-inflationary tipping point of 15%
  • After that, the CPI will rapidly increase, much like it did in 1980.

Lira emphasized in clarification. He stated, "Rest assured, I am not going to turn to John Williams Shadow Stats. According to his very well-researched data, 5% inflation has already been breached, and rising nicely. But in my October 28th piece, I did not claim that inflation would be at 5% by the end of March according to the Shadow Stats data. Rather, I claimed that the official inflation number, non-seasonally adjusted, would be at 5%." He forecasts that in the vast monetization initiative euphemistically called QE2, the USFed has set up the USTreasury Bonds to be the major risk asset. It is the new global asset bubble that glares at financial markets. See the Gonzalo Lira article (CLICK HERE).

Full agreement on the USTBond being the risk asset by the Jackass, as some damage to its bubbly tissues has been observed in the last few months since QE2 details were announced. My expectation, echoed by a few close colleagues, is that Gonzalo will be disappointed as the official CPI will not breach his forecasted levels. The BLS cheats just as boldly. They have no motivation to reform. The BLStat rats will find new improvements in their methods. They will find new components to introduce that are in decline. They will determine old components that are obsolete. They will invent hedonic benefits to use in adjustments. Remember that NECESSITY IS THE MOTHER OF INVENTION. An aside, the $2 trillion of cash on corporate sidelines is being pushed by the Obama Admin to enter the USEconomy in business expansion. On the one side, capital investment must produce jobs, my clarion call for capital formation. On the other side though is the avenue built, the ramps created, the channels for funds created that can tap the vast monetary inflation and direct it to Main Street. It could represent a major leak to turn to a spillover for mountains of newly printed money to enable price inflation in the USEconomy. The USFed will not be capable of stopping it.

◄$$$ THE M2 MONEY SUPPLY SURGED TO ALL-TIME RECORD HIGH. THE LATEST FIGURE SAW THE LARGEST JUMP SINCE 2008. THE EFFECTS OF QE2 ARE BEING FELT. WITNESS THE MONETARY INFLATION, WHICH SHOULD CONTINUE TO LIFT THE ENTIRE PRICE STRUCTURE, AND SPUR THE GOLD PRICE MUCH HIGHER. COSTS MUST BE PASSED ON, OR ELSE BUSINESSES SHUT DOWN. $$$

Watch the M2 supply for possibly making an upward parabolic move. A few tame weeks had been seen, but that appears finished. In the week ending 17 January 2011, the seasonally adjusted M2 surged by $46.6 billion, the biggest weekly increase in the broadest tracked monetary aggregate in recent years. Bear in mind that a 93% correlation between M2 and the Gold price persists over time. See the Zero Hedge article (CLICK HERE). The destination of the new money is uncertain. To be sure, it will find stocks and bonds, but also commodities. The food complex has been especially attractive for investors. The Gold & Silver opportunity is utterly obvious, as the real rate of interest is minus 7%, considering 8% true CPI and 1% prevaling short-term interest rate. Money is being destroyed, and the entire global monetary system is crumbling in full view. Think the path of least resistance as the ultimate destinations for the ample new money. General systemic price inflation has finally begun to accelerate, since leakage into the system can no longer be avoided.

◄$$$ A CLIMAX GRAND DECEPTION HAS BEGUN TO BE PRESENTED. PRICE INFLATION HAS ARRIVED, BUT IT WILL BE CALLED ECONOMIC GROWTH. VARIOUS JUSTIFICATIONS WILL BE OFFERED TO COOL PUBLIC CONCERN, LATER TO TURN TO MILD PANIC AND OUTRAGE. FOOD & GASOLINE PRICES WILL PUSH THE AMERICAN PUBLIC INTO OPEN DEMONSTRATION. THE FAILURE OF QE1 WAS MET BY QE2, WHOSE FAILURE WILL USHER QE3. MONETARY INFLATION DESTROYS CAPITAL, SIMPLY STATED. $$$

The Hat Trick Letter has warned fully and repeatedly. The price inflation that has begun to show itself in clear terms will be passed off with pure economic deception, and extreme statistical fraud. The effect of higher prices will be called economic growth. The price inflation within the adjustment process will grossly under-estimate the actual rising price rate. Therefore, the adjustment off the nominal economic activity will be grossly inadequate. The 10% to 12% price inflation will be called 3% to 4%, and thus a 6% to 9% error in the Gross Domestic Product will be made. The consequence will be that a powerful recessionary surge downward will be called a positive 4% to 5% GDP growth. The deception will calm public fears on the highly destructive effects of Quantitative Easing #2 and its price inflation side effects. Actually it is more like direct effects. No longer are the QE1 effects isolated to excess bank reserves held by the USFed. They were not excess anyway, since US banks simply held their loan loss reserves at the USFed. The main point is that price inflation will rise sharply, called economic growth, a process already begun. The USGovt and Wall Street handlers will ignore it, under-state it, and herald the return of growth as success. The reality will be less growth, in a deeper decline into recession. It has been my contention for the entire seven years of the Hat Trick Letter that the topic of inflation has been the most egregiously misunderstood and most common used deception device used against the American people, as the USEconomy has deteriorated in grotesque fashion for 20 to 30 years. They have been told to hedge against that inflation by home ownership, which has backfired in a national catastrophe. The underlying cause of the deterioration is massive monetary inflation and price inflation, manifested structurally as an over-priced US labor market that has sent jobs to Asia since the first migration phase to the Pacific Rim in the 1980 decade. The semanal event was the Vietnam War, which urged the broken Bretton Woods accord.

The justifications, explanations, and clever deceptions will be widespread. My ear is tuned to detect them and to record their many deceptions. Let's touch on the wrong messages made on the US Public Address systems one at a time and dismiss them. A) Rising prices are proof that the USEconomy can handle the higher costs. Not true! They are an indirect effect of massive monetary inflation, as surplus loose money sloshes until it makes higher priced items. A direct effect comes from a falling USDollar in whose terms commodities are priced. B) Rising commodity and material costs mean more profits all around. Not true! The exact opposite is the case, since profit margins are being squeezed. Businesses are making this statement openly. C) Rising prices mean the USGovt and USFed stimulus applied is finally working, as the system is coming alive. Not true! It signals the arrival of the nightmare, in the form of price inflation that the banking leaders said would not arrive. They boasted a year ago that the monetary inflation would not have a spillover effect. That spillover effect is precisely broadly rising prices, most evident in food & energy. Witness the spillover. D) Rising prices mean final demand has arrived, which is pushing up the prices. Not true! Final demand remains weak. Businesses do not anticipate a big rush of new demand, as their business investment is modest to non-existent. Consumers are strapped with weak income and no more home equity to raid.

More wrong messages made on the US Public Address systems. E) The USEconomy is least vulnerable to price inflation effects, since strongest and most resilient. Not true! The chief export in recent years from the United States had been mortgage bond fraud, along with the usual fare of USTreasury Bond empty paper. The chief export in the current period is commodity price inflation. The USEconomy remains a major importer, and thus will import the price inflation, a process already begun with both commodities and finished products. The US is the originator of massive monetary inflation. Since its economy is deteriorating and stifled, the resilience is born of weakness. Its back door will usher in that price inflation. F) The housing decline has kept prices in check from powerful deflation effects. Not true! The housing decline has guaranteed that the rising cost structure cannot be handled by the entire system. With the resumption in housing price decline, the insolvent banks will grow deeper in insolvency, while the households will fall more broadly into insolvency. Demand will not meet the higher prices required by corporations to even remain in business. Watch more job cuts and business shutdowns, since they must but cannot pass along the higher costs to customers.

More wrong messages made on the US Public Address systems. G) Higher prices in the stock market is prologue and harbinger for the growth of the USEconomy and corporate profits. Not true! The massive monetary inflation has spewed new phony money into the system. It leaks through an array of sieves. It finds paths of least resistance. Almost no resistance exists toward the stock market, especially with the Working Group for Financial Markets openly pushing up stocks, no longer in hidden fashion. The USDept Treasury finally admitted as much. H) Being a food producer, the USEconomy does not see rising food prices. Not true! For five years, the USEconomy has turned into a net importer of food products, although only slightly. The farm sector has seen their costs from diesel and other energy sources rise uniformly. The farm end product prices (like corn, wheat, soybean, cotton) are controlled on the commodity exchanges, not by farmers. So higher product and costs mean much higher prices at the US dinner tables. I) Rising producer costs is obvious. The miracle of not ending up in final product prices results in success of the system. Not true! If final products cannot have higher costs passed on, that means the businesses suffer important profit margin squeeze. In parallel, the lack of job or income growth means that households suffer important squeeze also on discretionary spending. The squeeze is systemic, not a success, resulting in lower demand and business layout cutbacks. J) Jobs will come eventually. Not true! This propaganda mantra is losing its mojo totally. Be prepared for a brief rejoice followed by the horrors of recognition that the USEconomy is suffering from broadbased price inflation and continued powerful deterioration. Monetary inflation destroys capital, a concept our clueless cast of economists cannot seem to conceive. In response to failure from monetary inflation, they order more in higher volumes. Prepare for QE3.

◄$$$ GLOBAL BLUEPRINT FOR THE RAGING PRICE INFLATION AND NASTY DISRUPTIONS IN THE COMING MONTHS HAS BEEN PROVIDED BY STANDARD CHARTER. THEIR PRIVATE RESEARCH IS ON TARGET. ASIA AND THE MIDDLE EAST ARE THE HOT SPOTS. THE FOOD & ENERGY SEPARATION IS SHOT DOWN ON ITS DECEPTIVE ERRANT PRACTICE. VULNERABLE NATIONS AND ECONOMIES ARE OUTLINED. $$$

A good piece of research from Standard Chartered Bank is worth a review. They fall victim to the errant notion of renewed albeit temporary USEconomic growth will occur. It will be disguised price inflation, masquerading as economic activity. The British headquartered bank issued a definitive report on global inflation and its miscontents, as they call it. A recent work of theirs was entitled "Inflation: Illusionary, Inflammatory" is considered in pockets to be one of the most detailed and comprehensive reports produced by an institutional entity in a long time. Standard Chartered has a keen ability to issues reports way ahead of the competition, only to become the definitive industry guidebook. As prologue, US food prices just hit another all time high in January. They argue that non-core food & energy prices are actual core issues, since essential for human and corporate survival. The West separates food & energy prices in data calculations, given their volatile nature and small weightings in consumer baskets. However, for Asian consumers, a higher share of expenditures is devoted to the critical consumer pair. Non-core inflation in the West is core inflation in Asia. The report offers a roadmap of the next nations to fall victim to social unrest. It also offers analysis on the global liquidity glut that they anticipate is overdue for an official attempt at pullback. It outlines the final steps available to central bankers before a powerful global wave reverses 100 years of failed US Federa l Reserve policies.

The Standard Chartered report describes the type of countries that will suffer the most:

  • Economies with large food & energy components in their consumer price baskets, such as the Philippines, China, India, Indonesia, and Vietnam.
  • Economies that suffered less and rebounded more robustly from the Great Recession of 2001. In addition to the five countries mentioned above, which all escaped recession during the crisis, Singapore and South Korea are high on the list.
  • Countries whose central banks are slow or late to act, such as Indonesia and the Philippines, where official interest rates remain at their post-crisis lows.
  • Governments that focus on addressing the symptoms rather than the sources of their problems, or put emphasis on the wrong places. That loudly points to the United States!!

Standard Chartered pereives three broad themes over the coming months: 1) a burst of strong US growth near-term followed by renewed disappointment, 2) periodic waves of concern over European debt as austerity takes effect, 3) rising inflation in emerging economies that threatens to bring sharp monetary tightening and socio-political instability. The last item is by far the most complex and deeply interwoven with geopolitical concerns. The report expects the Western monetary press engines to be reined in somewhat, as banking leaders finally notice the deeply disruptive effects of their policies like Quantitative Easing. The QE moniker is a farce, since it is endorsed accepted justified powerful hyper-inflation fitted to the system and its financial plumbing. The geopolitical challenge to maintain order in the oil producing Arab world is daunting. Filled with irony and intrigue, the rescue of US bankers has come at a cost of fast rising global food prices. The Arab world has perhaps the highest vulnerability to food prices among connected corners of the world, excluding much of Africa. Observe the economic standstill in Egypt, where for a time 80% of the economy has been inhibited. The risks in Asia are identified to be in Vietnam, China, South Korea, Indonesia, and the Philippines. See the Zero Hedge article (CLICK HERE).

SLIDING ECONOMY UNDER GREAT DURESS

◄$$$ A MASSIVE SQUEEZE IS COMING UNAVOIDABLY. TWO FORCES WILL CRUSH BUSINESSES AND THE CONSUMER IN BRUTAL FASHION. FINAL DEMAND WILL REMAIN WEAK WHILE THE ENTIRE COST STRUCTURE WILL RISE. BUSINESS PROFIT AND DISCRETIONARY HOUSEHOLD FUNDS WILL SHRINK. $$$

Hyper-inflation is coming to the USEconomy. One could say it is on a slow boat from China, but it is also coming from the back door on commodity prices, the indirect consequence of powerful series of Quantitative Easing initiatives (monetary inflation by any other name). The denial of hyper-inflation has been longstanding, but the denials lack validity. The food price effect has gathered momentum and recognition. The next extremely important chapter will center on the US consumer sector, which will suffer even worse economic disintegration. It will succumb to two competing forces: skyrocketing input costs and weakening final demand. The same forces will attack businesses. The entire cost structure, from food to energy, base metals, cotton, coffee, sugar, rice, are all rising fast. While gasoline is most visible as a fast riser that captures public attention, the price of natural gas has been surprisingly tame. Crude oil for European oil has surpassed the $100 mark finally, but natural gas remains tame. The flat consumer demand prevents businesses from lifting prices. The effect is to crush profit margins. Many businesses will cut the workforce or go out of business, maybe both. The myth of asset deflation to protect the USEconomy from rising prices is utterly false and deceptive. After the carnage and store closings and business shutdowns, the survivors can and will raise prices. A great economic disintegration process has begun. Soaring food prices carry many consequences. American grocery stores will not be able to sustain higher prices. They must raise prices. The next stage will see consumers often unable to pay up for the products. A shocking number of supermarkets will go out of business. See the Market Skeptics article (CLICK HERE).

Then consider the recently enacted tax cuts from payrolls. They merely extend the status quo, no advantage realized, still riding on empty. Most of the payroll tax benefit will vanish into automobile gas tanks since the $90 per barrel crude oil prices have led to higher nationwide gasoline prices. The average regular grade gasoline price is $3.124/gallon, whereas one month ago it was $3.083/gal, and one year ago it was $2.661/gal. That is a 17.4% annual price increase. More to come, sure to take their toll on both households and businesses. Each penny rise at the gas pump drains $1.5 billion of cash flow out of household cash flow, and more from businesses. The highest state gasoline prices are found in California, Oregon, Washington, Alaska, Nebraska, Illinois, Vermont, Connecticut, and New York. The lowest state gasoline prices are found in Texas, Louisiana, Arkansas, Mississippi, Missouri, Tennessee, and South Carolina. See the Fuel Gauge Report website (CLICK HERE) which includes a handy state by state map of prices. A steady theme has been a Hat Trick Letter message for three months. A brutal crush on business profit margins and household discretionary funds has begun. Job layoffs will mount by second half of 2011, since profits and available spending funds exert their powerful force at the margin within the USEconomy. Confusion will reign for a while as heralded improving USEconomic statistics from the USGovt boast of growth.

◄$$$ SHRINKING (OR VANISHING) BUSINESS PROFIT MARGINS ARE THE STORY FOR THE SPRING & SUMMER. WHIRLPOOL ANNOUNCED THEIR PROFITS PLUNGED, DUE TO A 100% RISE IN INPUT COSTS. THE SQUEEZE IS ON, AND POWERFULLY SO. THEIR STORY WILL BE REPEATED BY COUNTLESS COMPANIES, EVEN IN EUROPE. $$$

The household appliance maker Whirlpool released an important quarterly report. Its importance was totally overlooked by the financial media. Whirlpool has suffered the impact of rising commodity prices. Their operating profit plunges 61%, largely due to increasing input costs. Expect diverse downward earning revisions for the S&P500 companies to gradually materialize. Initial validation arrived courtesy of Whirlpool and Electrolux, both of which were slammed by surging input costs and an inability to offset them with higher final product prices. Like myriad other companies, they have trimmed down and streamlined their businesses, with nothing more available to cut. Few if any workers are marginal. Their official statement was typical Wall Street, as though written by Goldman Sachs. Due to tax change benefits and some non-operating items, Whirlpool's Q4 earnings increased 80%, but the kicker was loaded in the followup statements. They delivered a punchline, when they stated "Raw material inflation is driving costs higher and we expect to mitigate these costs with improvements in cost productivity, innovation, and recently announced price increases. Whirlpool's North American segment fell 1% amid a 61% drop in operating profit caused by a lower production volume and higher materials costs." Their opportunity for further innovation is likely to be shipping plants to Asia, in particular to China where many already were shipped several years ago. Their input to the manufacturing process has realized 100% cost increases in virtually all items, something impossible to offset. Pricing power aint there!!

Electrolux is the largest European home appliance maker. They complained of higher costs for raw materials and lower sales prices. Operating profit for the Swedish company dropped 15% to 1.71 billion Kronor from 2.02 billion Kronor last year. Worse still, the company expects raw material costs to increase by between 1.5 billion Kronor and two billion Kronor in 2011, their entire annual profit. The raw material exposure includes steel, plastics, copper, aluminum, even resins. See the Zero Hedge article (CLICK HERE). The rising input costs are a global problem, spurred by the USFed monetization of ruinous debt. All commodities are priced in USDollars, a point escaped by Bernanke.

◄$$$ JOB GROWTH WAS AGAIN ABYSMAL, BUT A CREDIBLE EXCUSE IN BAD WEATHER CAN BE LEANED UPON. NO USECONOMIC RECOVERY IS REMOTELY VISIBLE, CONFIRMED BY JOBLESS CLIAMS REMAINING OVER 400 THOUSAND.

A RECOVERY WOULD REQUIRE A REVAMP OF THE INDUSTRIAL BASE AND THE RESTORED CAPITAL BASE, A CONCEPT UNFAMILIAR TO ECONOMISTS. $$$

The January Jobs Report was horrible, a point not even in dispute, with the official USGovt estimate of 36k net new jobs created. The figure was significantly below expectations for payroll jobs, which were thought to be in the +150k range. Weather was clearly a factor. Some signs of life were noted in manufacturing +49k, in retail +28k, and in professional business services +32k. A major whack came from the usually friendly convenient Birth-Death Model, which this time reduced the official number by 339k. In my view this is a tacit admission that the recession has grown worse, since the B-D Model reflects small business trends in progress, not anticipated. The seasonally adjusted jobless claims are skewed to look better. Contrast to non-adjusted jobless claims graphs provided in the last few monthly reports. The biggest untold story within the report was the grand deception that occurs all the time. The Non-Farm Payroll estimates are always silly high for job growth, then revisions knock them down for one year later, when less attention is paid, and backs are turned. The benchmark revision, shown in the above graph, came as follows. The total nonfarm employment level for March 2010 was revised downward by 378k. The previously published level for December 2010 was revised downward by 452k. In all, over half a million jobs vanished from the benchmark revisions. These are in total employment levels, but still they reflect grand deceptions in statistical reporting policy. Every year, a similar huge reduction appears within the revisions. The gap is embarrassing and receives no publicity.

The percentage job losses in this recession (never ended, even worsening) is glaring in comparison to other past recessions. Notice, as shown in past reports, the total lack of typical recovery. That is because the US banking system is insolvent (lenders), the US households are deeply damaged with 21% insolvent (borrowers), and the inflationary effects rendering further damage (squeeze). The January unemployment rate fell to 9.0% as scads of people left the labor market discouraged. The unemployment rate decreased to 9.0%, but no need to rejoice. The Labor Force Participation Rate declined to 64.2% in January, the lowest level since the early 1980 decade, a sign of major discouragement often called depression. It is defined as the percentage of the working age population in the labor force. The participation rate is far below the 66% to 67% rate seen as stable for the last 20 years. Jim Grant commented that the labor force participation plunge suggests many have simply given up looking for work, removing themselves from the labor force, recognizing the labor market within the USEconomy as a wasteland. The graph below shows the job losses from the start of the employment recession, in percentage terms from the start of the recession. The dotted line is ex-census hiring with a blip explained. For the current employment recession, the graph starts in December 2007. Notice this recession is by far the worst recession since WWII in percentage terms. It is the second worst recession in terms of the unemployment rate in official doctored terms. The 1980 recession with a peak of 10.8% was worse, but that is before the Clinton-Rubin tagteam began grand deceptions with economic statistics. See the Calculated Risk article (CLICK HERE) which contains more graphs. Small businesses are the agent of change and growth. Only 12% plan to hire new people, and only 8% claim to have credit problems. The USEconomy is simply too sluggish for expansion and commitment.

◄$$$ THE I.S.M. NON-MFG INDEX SHOWED EXPANSION. THE POSITIVE NOTE WAS OFFSET BY FASTER RISING PRICES PAID. $$$

The Institute for Supply Mgmt (ISM) non-manufacturing index showed expansion last month. Evidence exists as signs of life still in the USEconomy, but it is a weak pulse. The January ISM non-mfg index was at 59.4, up from 57.1 in December. The employment index showed a faster rise in December at 54.5, up from 52.6 in December. Keep in mind that a figure above 50 indicates net expansion, but below 50 a contraction. The graph shows the ISM non-mfg index alongside the Employment Diffusion Index. Economic activity in the service sector grew in January for the 14th consecutive month, according to the ISM staff. The non-mfg Business Activity Index increased 1.7 points to 64.6, reflecting growth for the 18th consecutive month. The New Orders Index increased 3.5 points to 64.9, and the Employment Index increased 1.9 points to 54.5, indicating growth in employment for the fifth consecutive month and at a faster rate. The Prices Index increased 2.6 points to 72.1, indicating that prices increased at a faster rate in January. See the Calculated Risk article (CLICK HERE).

◄$$$ LOW BOND YIELDS HAVE GIVEN SAVERS NEXT TO NOTHING AS REWARD FOR THEIR THRIFT. THE USGOVT AND WALL STREET AND USFED POLICIES ARE DIRECT ATTACKS ON SAVERS IN THE COUNTRY. THEY WILL NOT RECEIVE REWARD. INSTEAD, SPECULATORS ARE ENCOURAGED TO FEED ON THE BACK OF THE THRIFTY WITHIN THE SOCIETY. MASSIVE MONETARY INFLATION AND ULTRA-LOW INTEREST RATES ARE AN EXTENSION OF THE PROBLEM. $$$

Saving money has long been considered outmoded, even contrary to growth initiatives, in the corrupted indebted USEconomy. Actually high rates of saving are openly considered to cause recessions. The ass backward mindset is astonishing. Savings promote legitimate funds for business investment, which spurs hiring and creates a bonafide virtual cycle. Instead, our banking leaders who hijacked the USGovt preach of a destructive deceptive virtual cycle of promoting asset bubbles, from which spending increases, and jobs supposedly result. But the jobs never arrive since the assets turn to bust. The process of saving is sternly pushed to the background in a debt induced economy built around spending. All manner of debt devices and credit instruments have contributed to a vast ruin on the USEconomy. The psychology is so perverted that access to credit has long been considered wealth itself. WEALTH WAS WRONGLY REGARDED AS ACCESS TO CREDIT, BUT THE TRUTH IS THE CONVERSE. POVERTY REMAINS WHEN CREDIT IS CUT OFF.

The clueless cast of economists have lost their way so badly, that they do not comprehend what legitimate income is, and worse, they cannot comprehend the destruction of capital from monetary inflation. They do not focus enough on capital formation, but instead perversely stress putting money in people's hands despite where it comes from. In the process, they have denigrated savings. They have promoted consumption to the point of national insolvency. The nation shipped off a large part of its manufacturing base to China in the last decade, while rendering consumption a giant segment to our GDP growth. Debt replaced income even further. Back to savings. Once upon a time, a decade ago, conservative savers could put their money into a bank account and earn 5% at a minimum. The accumulation systemically provided ample funds for business expansion without reliance upon the monetary inflation route. Only 10 to 15 years ago, pensions could rely upon a strong return on savings to finance a retirement package. Thrifty savers who trusted banks could place certificates of deposit and earn sufficient income to retire on without pension fund management. Those days are all gone. In fact, the problem is much more perverse and lethal economically than it seems. The income derived from savings is typically an order of magnitude higher than the interest expenses from consumer loans, like for cars, big ticket consumer items, education, and vacations. Therefore, low prevailing interest rates actually smother an economy, not stimulate it.

Check out the average 5-year USTreasury Bill rate over a long timespan. This graph displays the falling pulse of the USEconomy. Low stuck interest rates are a sign of economic deterioration. When combined with staggering ongoing debt like with the USGovt deficits and trade gaps, the ultra-low rates portend a death signal. The USFed is doling out harsh punishment to savers by keeping interest rates low in order to save the broken giant US banks, which cannot be saved anyway. After two years of ultra-low rates, the same big US banks remain at death's door staring at the abyss with huge new liabilities. Massive monetary inflation with near zero interest rates is not the solution, but rather an extension of the problem. See the MyBudget360 article (CLICK HERE).

Bill Gross of PIMCO concurs that the savers are being robbed in order to redeem the sins of big bankers and undercut USTBond creditors. He wrote, "To rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an extended period of time is the most devilish of all policy tools. The asset class holder that it affects, or better yet infects, is the small saver and institutions such as insurance companies and pension funds that hold long-term fixed income assets. It is anyone who holds bonds with coupons that cannot keep up with inflation or the depositor in a local bank who cumulatively holds trillions of dollars in time deposits that do not earn a real rate of interest. This is the framework that has been created by modern day policymakers who have innovated far beyond their biblical counterparts [who are NOT doing God's work]. To put it bluntly, they are robbing savers and taking money surreptitiously from longer-term asset holders who are incorrectly measuring future inflation." See the PIMCO essay (CLICK HERE). The housing bust has held the USEconomy hostage, as rates cannot be permitted to rise. In the meantime, savers go poor. The destruction is complete.

◄$$$ LOUSY PAYING JOBS DOMINATE IN THE NEW HIRES FOR THE DAMAGED LABOR MARKET. NEW JOBS ARE NOT BEING FORMED IN SUFFICIENT NUMBERS, WHILE PAY SCALES FOR THE NEW JOBS STINK. MOST LOST JOBS ARE FROM THE HIGHER WAGES POSITIONS, WHICH ARE NOT BEEN REGENERATED IN ADEQUATE NUMBERS. $$$

About 75% of jobs created so far in the recovery have been low wage jobs, according to the National Employment Law Project. Within the project report, Annette Bernhardt stated, "Growth has been concentrated in mid-wage and lower wage industries. By contrast, higher wage industries showed weak growth and even net losses." Growth has been far more unbalanced than during previous job recoveries. The analysis by Bernhardt of the first seven months of 2010 found that 76% of new jobs created were in low-wage to mid-wage industries, those earning between $8.92 to $15 per hour, well below the national average hourly wage of $22.60. Overshadowing this effect is the converse problem. Continued job losses in higher wage industries have been an ongoing nightmare, ever since the bust in the housing bubble, which rendered great damage to the construction and financial services sectors. Recoveries in those sectors helped lead the economy out of earlier downturns. The resumed housing market price decline and never-ending bank losses from mortgage assets assure the continuation of the Great Recession. High-wage sectors, whose pay scales lie between $17.43 and $31 per hour, accounted for nearly half the jobs lost during the recession, but have produced only 5% of the new jobs since hiring resumed. This effect has been known for several years, but data puts a face on the ugly facade. See the CNN Money article (CLICK HERE).

Thanks to the following for charts StockCharts,  Financial Times,  UK Independent,  Wall

Street Journal,  Northern Trust,  Business Week,  Merrill Lynch,  Shadow Govt Statistics.