He noted that “These people who were often truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the aristocracy,” he says, “only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”

This goes along with an article in the St. Petersburg Times about Tom James, chairman and chief executive of Raymond, James Financial, who had “some tough words for the wizards of Washington, DC who oversaw the $700-billion bailout package”.

He reports, “The Brave And Wonderful Mogambo (BAWM) was right all along! Those government weenies are the biggest freaking morons you ever saw, and we as a country should be ashamed of ourselves for having elected such corrupt, half-witted, utter failures and congenital idiots!”

As you have probably guessed by now, he did not say those exact words, but he implied every syllable when he said, “Legislators were almost embarrassingly ignorant of how the financial system works”, which I figure explains how they don’t understand the linkage between their own Bad, Bad Performance (BBP) as legislators and the subsequent Bad, Bad Performance (BBP) of the economy, and he says that only 3 of 16 legislators that he talked to actually understood what was going on in the “credit crisis.” Less than 20%! Hahaha! We’re doomed!

Well, maybe these Congressional losers will understand the unfolding economic slowdown, as evidenced by the Baltic Dry Index, which is an index of the cost to transport stuff by cargo ship, and which has fallen precipitously, which seems very important to me, and to Junior Mogambo Ranger (JMR) Riccardo, too, who is also alarmed by this like – as I previously said – me.

It’s actually beyond scary, in a terrifying kind of “ain’t nobody buying nothing in a consumer economy” kind of way, which means that without the consumer buying stuff as his or her contribution to the famous statistic of “the consumer is 70% of the economy”, we are, in case you ain’t heard, freaking doomed!

Well, maybe not all buying is drying up, as silver market analyst, Ted Butler, reports that in the last 10 months, “some 150 million ounces of silver can easily be documented to have been bought by investors. Undocumented purchases would add tens of millions more ounces.”

In fact, when you add it all up, “Investment demand for silver this year is running at a full 25% of world mine production and over 20% of total production (including recycling). This is a remarkable historical turnabout.”

Thus, it is easy to see why Mr. Butler is “bullish beyond belief for silver”, since this kind of demand means that “In silver, the documented 150 million ounces bought in the first ten months of this year is equal to 15% of all the silver bullion equivalent thought to exist!” Wow!

More than one-seventh of all the silver bullion “thought to exist” in the whole world was suddenly bought up in less than a year, and yet the price of silver has been pounded down to less than 10 bucks an ounce? No wonder I am so bullish on silver!

He also notes that the gold/silver ratio is at more than 80, which is “one of the biggest differences in history.”

And not only that, but since there are 4 to 5 billion ounces of gold in the world versus only 1 billion ounces of silver, that means that “the total dollar value of all the gold in the world is worth 300 to 400 times more than all the silver in the world (80 times 4 or 5)”.

Talk about undervalued! Hey! This investing stuff is easy! Whee!

Until next time,

The Mogambo Guru

Source: A Bull in a Silver Shop

The unit could fetch between $700 million and $1 billion, Reuters said. The Washington Journal said the price being talked about is actually in the range of $1.2 billion to $1.5 billion. The negotiations are continuing and the timing of any deal is unknown.

AIG, which bought Hartford Steam Boiler, or HSB, for around $1.2 billion in 2000, is under pressure to sell assets around the world to pay off a huge government loan. The U.S. government saved AIG from bankruptcy in September with a rescue plan that has since ballooned to about $152 billion (the government had to boost the value of the bailout package back in November after the company deteriorated faster than had been expected). AIG has several years to repay the loans, but the company is trying to sell businesses as quickly as possible, both to free itself from the interest it is paying to the government and to avoid further deterioration in the value of its assets.

That is forcing AIG – which has 74 million customers and 116,000 employees in 130 countries – to shed or sell stakes in units globally. AIG said in October that HSB would be among the assets it would sell to repay the federal government. In fact, the Hartford Steam Boiler deal would actually be AIG’s first major divestiture as it seeks to repay as much as $60 billion in loans that it received as part of the September government rescue package, sources familiar with the situation told The Wall Street Journal.

However, as AIG moves to sell assets to repay the loan, it faces the twin challenges of its own weakness and the global credit crisis, which has made it difficult – if not impossible – for interested suitors to obtain financing for buyouts or other high-dollar projects.

Hartford Steam Boiler insures steam boilers around the world. It also offers inspection services and engineering consulting. It provides insurance for a range of risks, including insurance to cover the cost of lost business and the cost of needed repairs when equipment breaks down. The company was founded in 1866.
Founded in 1880 in Munich, Münchener Rückversicherungs-Gesellschaft AG, or Munich Re, provides reinsurance coverage to traditional insurance companies in 150 countries, for everything from oil rigs to satellites and hurricanes.

AIG shares closed Friday at $1.60 each. They’ve traded as high as $60.04 in the past 12 months.

Source: AIG Looking to Divest Division

The bailout package bill for General Motors Corp. (GM), Ford Motor Co. (F) or Chrysler LLC was passed by House lawmakers by a vote of 231-170. Democrats said they reached agreement with the White House on the details of the plan yesterday.

“If we do nothing, we take the risk that, sometime soon, there’ll be no American automobile industry,” House Majority Leader Steny Hoyer, D-Md., told MarketWatch.com.

The $14 billion is a long way from the $34 billion now being sought by the Big Three. And that $34 billion was well in excess of the $25 billion in loans the carmakers said they would need. Of the three companies, GM and Chrysler are in the greatest need of cash. Ford says it is seeking a long-term line of credit and doesn’t need money in the short term.

The House bill, if enacted, would do several things. It would:

• Grant the U.S. government warrants for nonvoting stock equal to 20% of the value of the loan it makes to each company.
• Create a White House-chosen “car czar,” an appointee empowered to hold the companies accountable for developing long-term viability plans. The czar would be able to require immediate repayment of the loans if the companies don’t make adequate progress by Feb. 15.
• Require GM, Ford and Chrysler to submit “final” restructuring plans by March 31.
• End such financial standard fare as dividends for shareholders and “golden parachutes” and bonuses for executives – in the interest of conserving cash.

House Speaker Nancy Pelosi, D-Calif., said the bill is “tough love” for the industry but offers the Big Three “a chance to get back on track.”

The Bush Administration said yesterday that the “car czar” would have the power to revoke the loans and develop a new plan – including one that would have the Big Three seek Chapter 11 bankruptcy protection if the carmakers don’t make progress toward long-term viability by March 31.

“If there’s not a plan that makes these firms viable, the government gets its money back,” Joel Kaplan, deputy White House chief of staff for policy, told reporters.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., unveiled a bill similar to the House measure late yesterday. A vote in the Senate may not come until the weekend, Senate Majority Leader Harry Reid, D-Nev., said yesterday. Congress has been working on this for several weeks.

Shares of GM closed at $4.60 each yesterday, down 2%. Ford shares advanced 2 cents, or 0.62%, to close at $3.25. Chrysler is privately held, with private-equity firm Cerberus Capital Management LP holding a controlling interest. Before Cerebrus bought it, Chrysler had spent years as part of Germany’s Daimler AG (DAI).

Throughout the day yesterday, House and Senate Republicans repeatedly said that a Big Three bailout wouldn’t lead to a long-term viability or competitiveness for GM, Ford and Chrysler. In fact, U.S. Sen. Richard Shelby, R-Ala., who is the ranking GOP player on the Senate Banking Committee, vowed to block the legislation with a filibuster.

“Unless Chrysler, Ford and General Motors become lean and innovative and competitive in the marketplace, this is only delaying their funeral,” Shelby told journalists yesterday.

Of course, as MarketWatch reported, Shelby’s home state of Alabama has provided millions of dollars in subsidies to attract Japan’s Honda Motor Co. Ltd. (ADR: HMC), South Korea’s Hyundai Motor Co. (PINK: HYMLF) and the Mercedes-Benz unit of Germany’s Daimler AG, to build plants that provided 48,457 jobs in 2007. The Toyota Motor Corp. (ADR: TM) factory in Huntsville, Ala., makes motors for SUVs and pickup trucks.

The Wall Street Journal reported that a breakthrough in the negotiations between the White House and Democrats came after Democrats agreed to scrap language that would have forced the carmakers to drop lawsuits challenging tough emissions limits in California and other states.

Reid told MarketWatch that that he needs 60 votes to get the plan through the Senate. A key Democrat, Finance Committee Chairman Sen. Max Baucus, D-Mon., actually came out against the bill, since it contains a tax provision he said that he opposes. Democrats control the Senate by a narrow 50-49 majority.

Dodd said the Senate bill is “a far cry from a blank check to the industry.”

Said Dodd: “The legislation requires these companies to make painful, fundamental changes if they are going to be competitive internationally and viable in the long term.”

Source: Auto Bailout Passes House, Faces Hostile Senate

Unfortunately, the facts prove otherwise.  Three months before the recession was officially declared, Paulson and Bernanke have embarked on the largest bailout program ever conceived with the blessing of a lame-duck president and a complicit Congress – a program which so far will cost taxpayers $8.5 trillion. This staggering sum encompasses:  loans backed by worthless assets ($2.3T), equity investments in bankrupt companies with negative net worth ($3.0T), and guarantees on crumbling derivatives and other hollow collateral ($3.2T).

Back in September I was stunned that Paulson was able to make his case and win the support of Congress for a $700 billion bailout package (more than the total war spending in Iraq to date).

How could Americans (or more accurately, their representatives) agree to give such a broad mandate with so few checks and balances?  Have we become completely numb?

While I realize that many of our compatriots have been running large credit card balances and interest-only mortgages with little thought as to how they would repay their debt, one would expect a little more restraint when dealing with the financial future of the largest economy in the world.

Operating under the assumption that our largest financial institutions are “too big to fail”, in the span of a few weeks we went from pledging to spend $1 trillion to $3 trillion – a commitment which then grew to $5 trillion before ballooning to a staggering $8.5 trillion.

At the rate we are going, we will be dealing with double digits – in trillions- before the end of the year.
And while all off that money is not yet spent, make no mistake – these are real commitments with serious liabilities attached to them.

I have heard the argument that an equity infusion is not the same as spending money.  While I would agree that in an arms-length transaction this might actually be the case, our government is definitely paying a large premium.  What is the real value of Citicorp or AIG?  Since they are quasi-bankrupt (and would be totally bankrupt without massive injections from the Fed), a reasonable businessperson might pay a token price for their equity and the assumption of their enormous liabilities.  Before doing so however, a buyer would have to see some significant value in buying these entities as a continuing business.  In most cases, a buyer would not want to assume the company’s liabilities but would prefer to buy selective unencumbered assets in a bankruptcy proceeding.  Any money our government pays above what a reasonable person would pay in an arms-length transaction is real spending and should more accurately be called a grant.

While defenders of the too-big-to-fail policies argue that providing guarantees is not the same as granting money, the reality is that these guarantees are necessary to prevent the collapse of financial institutions currently lacking the necessary collateral to meet their loan covenants.  Should their loans be called, we could actually find out the real value of their assets.  The fact is that in-spite of Paulson’s and Bernanke’s efforts, deleveraging is already happening.  Although at a slower pace, one asset class after another is being adjusted down towards its intrinsic value, which is usually not much.  Make no mistake; many of these guarantees will eventually be called in by lenders.  In due time, unless our government is able to inflates its way out of this bottomless pit, it will have to honor most of these guarantees.

So how does $8.5 trillion dollars compare with the cost of some of the major conflicts and programs initiated by the US government since its inception?  To try and grasp the enormity of this figure, let’s look at some other financial commitments undertaken by our government in the past:

As illustrated above, one can see that in today’s dollar, we have already committed to spending levels that surpass the cumulative cost of all of the major wars and government initiatives since the American Revolution.

Recently, the Congressional Research Service estimated the cost of all of the major wars our country has fought in 2008 dollars.  The chart above shows that the entire cost of WWII over four to five years was less than half the current pledges made by Paulson and Bernanke in the last three months!

In spite of years of conflict, the Vietnam and the Iraq wars have each cost less than the bailout package that was approved by Congress in two weeks.   The Civil War that devastated our country had a total price tag (for both the Union and Confederacy) of $60.4 billion, while the Revolutionary War was fought for a mere $1.8 billion.

In its fifty or so years of existence, NASA has only managed to spend $885 billion – a figure which got us to the moon and beyond.

The New Deal had a price tag of only $500 billion.  The Marshall Plan that enabled the reconstruction of Europe following WWII for $13 billion, comes out to approximately $125 billion in 2008 dollars.  The cost of fixing the S&L crisis was $235 billion.

The best deal ever for a government program was the Louisiana Purchase, a deal with the French that gave us 23% of the surface of today’s US for only $15 million ($284 million in today’s dollars).  Why couldn’t Paulson and Bernanke display the financial acumen of a Thomas Jefferson?

How will our country repay its debts?   The current bailout represents 62% of our GDP.  Our current deficit of almost $11 trillion may exceed our GDP next year.

Recently the Treasury has been able to place new debt; investors have liquidated equities and bonds and sought refuge in the relative safety of the dollar and government bonds.

As we move forward however, our government will need to attract trillions of dollars annually to fund its programs and commitments.  The foreigners who have financed our irresponsible spending for many years will no longer be able to afford it, let alone finance more of our reckless behavior.

As a matter of fact, several countries have already announced their own bailout packages to prop up their domestic economy.  And, unlike during WWII, when Americans invested their savings to support the war effort and fund our government’s deficit, our citizens are in debt themselves with no savings left to invest.

In the near future, the Fed will have no choice but to turn on the printing presses and start operating them around the clock to create the money that can’t be raised in the capital market.

These actions will lead to a significant debasement of the dollar and a major appreciation of gold and all commodities (real assets).

Once this inflationary cycle starts, foreigners will realize that their investments in T-bills are depreciating rapidly.  There will be a massive exodus that will put more pressure on the dollar and on interest rates.  Our weakened US economy will be faced with the rising cost of capital and a painful period of stagflation.  Trillions of dollars will have been wasted.  Our government will have mortgaged America and the ensuing debt will have to be paid by future generations.

Not a very bright picture, to be sure, but the Casey Research team strongly believes that there are opportunities in every crisis. Preserving your assets and even profiting in times of crisis by making the trend your friend is the focus of Casey’s flagship publication, The Casey Report. We have helped subscribers get positioned in commodities in the late ‘90s, buy grains in 2006, and short financial stocks 18 months ago… resulting in double- and often triple-digit returns.

To learn more about the trends we predicted and, more importantly, the emerging trends we now foresee, click here now.

Source: The Real Cost of the Recession

This newest economic infusion follows a $700 billion banking system bailout package that was unveiled in late October. At least half the cash has been injected directly into U.S. banks and insurance companies, firing off a flurry of takeover deals – with more expected to come. And it precedes an anticipated package being designed by the new economic team that’s been assembled by President-elect Barack Obama. That package is still in its formative stages, but estimates of its ultimate size range from $500 million to $1.2 billion.

The $800 billion package unveiled by the Fed and Treasury Department yesterday consisted of several parts.

In one statement, the Fed announced it would purchase as much as $500 billion in mortgage-backed securities backed by the three government-chartered lenders: Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae. It will also buy another $100 billion in direct debt issued by those firms.

Beginning next week, the Fed’s primary lenders will auction off as much as to $100 billion of the housing-related debt. Selected asset managers will conduct purchases of as much as $500 billion of mortgage-backed security debt, hoping to have all those purchases completed by the end of the year.

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed wrote in a statement.

In a separate statement, the central bank announced the establishment of Term Asset-Backed Securities Loan Facility (TALF), a $200 billion program that will support asset-backed securities (ABS) – loans often taken for students, car owners, credit card holders and small businesses. One caveat: To be eligible, ABS exposure must be “newly or recently originated” by U.S.-based people and companies.

“Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity,” the Fed said in its second statement. “The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.”

The Treasury Department will provide $20 billion of that from the $700 billion TARP initiative.

These packages are the latest in a series of aggressive rescue measures to unfreeze credit markets, but it also more than doubles the amount of debt the government is taking on.

“They’re trying to put funds into the system, trying to unfreeze these markets,” William Poole, the former St. Louis Fed president, said in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”

A Wider Target

Through TARP, the Fed’s initial efforts involved taking stakes in lenders – making investments of as much as $25 billion in such banks as Citigroup Inc. (C), in return for a special class of preferred shares that gives the government an ownership interest.

But instead of using the government money to resuscitate lending, banks are instead using it to gobble up weakened banks that didn’t get aid.

At the end of the day these buyout deals are bad ones no matter how you evaluate them, says R. Shah Gilani, a retired hedge fund manager, an expert on the U.S. credit crisis, and the editor of the Trigger Event Strategist, a newsletter that identifies trading opportunities emanating from financial-crisis “aftershocks.”

“Why in the name of capitalism are taxpayers being fleeced by banks that are being given our money to grow their businesses with the further backstop of more of our money having to be thrown to the FDIC when they fail?” Gilani asked. “Consolidation does not mean that bad loans and illiquid securities are somehow merged out of existence. It means that they are being acquired under the premise that a larger, more consolidated depositor base will better be able to bear the weight of those bad assets. What in heaven’s name prevents depositors from exiting when the merged banks continue to experience massive losses and write-downs? The answer to that question would be … nothing.”

These new federal measures focus on the wider target – the people and businesses whose collective debt defaults are hampering the lenders. Consumer spending accounts for 70% of U.S. economic activity. So any measures that induce consumers to spend could have an expansionary effect on an economic system that’s widely believed to already be in a recession.

“Nothing is more important to getting through this housing correction than the availability of mortgage finance,” U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. said at a press conference yesterday, Bloomberg News reported.

And the onslaught on foreclosures have fueled a record decline in home prices, which actually dropped 17.4% in September from a year earlier, according to the S&P/Case-Shiller home-price index. Among the hardest-hit areas, Phoenix and Las Vegas lead with home prices falling 31.9% and 31.3%, respectively, The Wall Street Journal reported.

Miami, Los Angeles and San Diego were close behind, falling 28.4%, 27.6% and 26.3%, respectively.

Declining home and property values are crimping consumer confidence and, hence, spending.

Source: Fed Announces $800 Billion in Homeowner, Consumer and Small Business Aid

Good day… And a Wonderful Wednesday to you! OK… Are you up on these “pirates” stories going on right now? That’s pretty unbelievable, eh? And… We are all fans of “pirates” here on the Currency Trading Desk, but these guys now are giving “our pirates” a black eye!

The currencies range traded yesterday in a very tight range, as Treasury Sec. Paulson, didn’t give in to the lawmakers and allocate $25 Billion of the TARP (Troubled Asset Relief Program) funds to automakers. King Henry said, “The rescue (read bailout!) package was not intended to be an economic stimulus or an economic recovery package. The $700 Billion TARP was designed to stabilize financial markets and the flow of credit, and it not a panacea for all our economic difficulties.”

Well… For once, I’m not going to take King Henry to the woodshed… The lawmakers were banging on him and Fed Chairman Big Ben to dole out funds to anyone that was in dire straits… But they held their ground… And therefore did not cast any “unknown” shadows over the markets. But U.S. stocks didn’t like it, and sold off after the testimony and questions on Capitol Hill.

The thing to think about with these automakers is the fact that they have become such HUGE finance companies, which is where, I believe I read, they “really make the money”… Shutting them down because they haven’t run their businesses correctly over the years isn’t the issue… It’s what to do with those financing companies… I could be totally wrong here, off base and picked off by a wily veteran lefty, but it’s the way I see it…

OK, well, for the currencies… Like I said above, they were stuck in the mud, in a tight range, with no where to go and no one to see. I was reading a note from well respected and famous analyst, Richard Russell yesterday… Let’s listen in to see what Mr. Russell had to say…

“Please remember, all these billions of dollars that the government is throwing at entities – all this money represents additional DEBT.

How the US dollar will hold up against this building-tower of debt is the question.

Ultimately, the trillions of newly-created dollars could lead to hyper-inflation.”

Yes… But the question that I keep getting asked, and I would ask of anyone that makes a statement like that is “when?” When do the markets wake up and smell the coffee? When do the markets realize that they’re on the wrong side of the road? I keep saying that it will all happen when the credit markets get unlocked… But that certainly doesn’t look like it’s going to happen any time soon… I just getting frustrated by all this… The signs are there for dollar weakness… It’s like they are glowing neon signs in bright colors, pointing to the dollar with exclamations like “should be weak”…

Remember when I used to write about how the debt level in New Zealand would come into focus once the hype over the high interest rates and Carry Trades were history? And for years people would write me and cuss at me about how they sold their kiwi because I said it would be in trouble when the interest rates and Carry Trades were history… But I held my ground, then… And I’ll hold it now… In fact, I’ve got company… By good friends over at Casey Research, including the guy that inspired me to write more and more, David Galland, had this to say yesterday….

“The foreign debt of New Zealand, which includes private debt, is a serious problem for them and is why their currency has fallen from NZD 0.80 to NZD 0.60 to the USD.

What will happen when the world finally realizes that the U.S. government debt (that is not even accounting for private debt) is already in excess of $10 trillion and well on its way to exceed $12 trillion in 2009? This is at a time when our $13 trillion GDP is sure to contract by a couple trillion. I am afraid the U.S. chart next year will not be that different, which bodes well for gold as the only real substitute to the fiat currency that will be created to cover the deficits.”

OK… Let’s talk about what’s going on in the markets right now… Not the future, which is unknown to all of us… We can only speculate about the future based on the data we have now, and the knowledge of history… What’s going on, as Marvin Gaye used to sing, is simply that the sentiment in the markets right now is so terrible and fragile, which is keeping the risk takers on the sidelines and investments centered around risk aversion on the burners. Any time the risk takers go out on the limb, another deep, dark, dangerous piece of data prints, or our “leaders” (read Paulson and Bernanke) make some stupid comment, which leads to a dollar rally, and the risk takers get squeezed.

Speaking of deep, dark, dangerous data prints… How about the news that Citigroup is liquidating its CSO hedge fund after it lost 53% of its value last month? This news won’t be looked at as anything but deep, dark and dangerous!

Speaking of data… Today, we’ll see the stupid CPI (consumer inflation), some Housing data, and the last FOMC meeting minutes… I would think the Fed Heads wouldn’t have any surprises in their minutes, like the Bank of England (BOE) did in theirs… The BOE’s minutes showed that the 150 BPS rate cut that was delivered earlier this month (which also begs the question as to why the BOE can issue their minutes within two weeks, while it takes the Fed over a month?) Anyway, the BOE minutes showed the 150 BPS rate cut was unanimous… Plus… There were quite a few calls to go to 200 BPS! WOW!

So… Ok, the stupid CPI, I’ve beaten this horse to death (no animals were hurt!) here with why I feel that CPI is stupid… And when those that have payments tied to CPI see today’s print they will fully agree with me. CPI is expected to have fallen .9% YOY… To 4%… Of course you and I, and those on the payments ties to CPI believe that inflation is really around 10% or more!

The Housing data today is the October Housing Starts, and Building Permits, of which both are expected to be weaker than September’s data…

I met Dan Ferris a year or so ago… A quiet, soft spoken guy, that when you look at him you just know he’s got a lot of brain matter… Real intelligent! I follow his writing from time to time, and Ty Keough sent me a note from Dan… This was in the Stansberry Research letter… “The money we use every day in the U.S. is debt. It is lent into existence. This record level of Treasury borrowing is the inflation engine itself, tank filled with gas, hood popped up, revving into the red zone right before your eyes.”

OK… I just saw / read a story that came across the Bloomie, that Bank of America (BOA) and Barclays Capital, are calling for a Aussie dollar rally next year, as they believe Australia will skirt a recession, that Europe, Japan and the U.S. are mired in. They even called for a rise to 70-cents in the next 6 months. Hmmm… I guess they’re of the opinion that the Carry Trade unwinding is coming to an end.

I, on the other hand, don’t believe that the Carry Trade is anywhere near an end… So, do with this information in your individualistic manner!

The data yesterday, saw PPI fall -2.8% in October… Which was mainly made up by the fall in oil prices… The TIC Flows showed the improvement I said we would see in this data, as the October flows showed an positive balance of $66 Billion, VS the $21 Billion in Sept. This still does not cover what’s needed to finance the Current Account Deficit, and Federal Direct Investment. And should have been expected to be so robust, given the flight to safe haven Treasuries…

Currencies today 11/19/08: A$ .6480, kiwi .5495, C$ .8115, euro 1.2650, sterling 1.5080, Swiss .83, ISK 182, rand 10.38, krone 7, SEK 8.02, forint 214.75, zloty 3.0425, koruna 20.3390, yen 96.80, baht 35, sing 1.5280, HKD 7.75, INR 49.99, China 6.83, pesos 13.19, BRL 2.3590, dollar index 86.98, Silver $9.45, and Gold… $738.30

That’s it for today… Well… Anheuser Busch is no longer, as the InBev deal closed yesterday… I was so focused on getting the Pfennig out yesterday that I totally forgot to send some love and congratulations toward Albert Pujols, the National League MVP for 2008! Way to go Albert! And… Hey! This IS HUGE NEWS! The good folks at Agora sent me the news yesterday that the movie I.O.U.S.A. has made the cut from 94 Documentaries to the final 15 that will be voted on for an Oscar! WOW! And to think I was interviewed for that movie, but was left on the cutting room floor! Congratulations to my good friend Addison Wiggin, and the other folks at Agora that had the idea to put this together in the first place! No improvement in the eye yet, still some pain to deal with, but I have to believe it will get better! Thanks so much, once again, to all of you dear readers that sent along good wishes and prayers for me. I feel bad that I have to keep announcing this stuff, but it is what it is, and life goes on. God willing… OK… Time to go… I hope your Wednesday is Wonderful!

Chuck Butler

Source: King Henry Keeps His Cash!

We finally had some data releases here in the US which look to steer the markets, so I’ll just get right to it.

The dollar continued to strengthen yesterday after another round of bad weekly employment figures. Initial jobless claims increased to 516k during the first week of November, and last weeks numbers were revised up to 484k. The employment picture continues to darken here in the US, and it doesn’t look like it will improve any time soon. This is just what the US consumers don’t need right now. Not only are most consumers living paycheck to paycheck, but now many of those paychecks are being ripped out of their hands.

Personal bankruptcies are heading into record territory, and job losses will only make this worse. While the total size of the consumer credit market is dwarfed by the size of the mortgage market, with home loans there is an underlying asset providing some base from which banks can work. Credit card debt is different, the banks and investors who hold this debt have no underlying assets to fall back on. This fact has not been missed by the current administration, and Treasury Secretary Paulson is now looking to spend some of the bailout package to try and help out the consumer lenders. Unfortunately it looks like we will be taking another step into the deep dark area Chuck has continually talked about.

This morning we got the retail sales numbers here in the US which showed a further deterioration. Retail sales less autos were down 2.2% in October, almost double economist’s expectations. This fall is the largest monthly drop ever, and is just one more sign the US economy is heading for a doozy of a recession!

We did get some good news yesterday morning as the trade deficit narrowed somewhat, a result of a stronger dollar and lower oil prices. But even after the narrowing, we are still running a deficit adding to our need to attract foreign investments. Chuck let me have a sneak preview of December’s Review and Focus the other day before he sent it to the printer. In the latest issue, he talks about our need to finance the twin deficits which the US continues to amass. This financing need is one of the factors convinces me the US dollar will have to get weaker. The current dollar strength will not last, and once the ‘flight to quality’ buying of US Treasuries subsides, we will see the US currency return to its long term decline.

As I said earlier, the dollar continued to strengthen yesterday morning as the stock market fell. But both reversed course early in the afternoon after Paulson started talking. The Treasury Secretary said the big 3 auto makers should receive some government help, but he isn’t willing to take any of the funds already approved by congress to help them. Instead, he urged congress to come up with additional funds to help the car makers. He also said he would look to try and spend some of the already approved rescue package on ‘non-traditional’ lenders who give loans directly to consumers. Looks like Paulson is finally realizing what we have been saying for a while now, that the next big crisis is the consumer credit crunch.

Anyway, just after the news came across the wire about Paulson’s remarks, the stock market jumped 400 points and the euro bounced up over two cents in the matter of a few short minutes. The dollar has really become a contra indicator for the risk appetite in the market. The dollar index and the stock market have moved in opposite directions 88 percent of the time since the beginning of September. As investors feel more comfortable with risk, they sell the short term dollar holdings and invest them into other markets. The Europeans have started to take the dollar back up this morning, but it remains lower than at this time yesterday.

The Europeans are taking the euro down after it was confirmed that the European economy fell into its first recession in 15 years during the third quarter. Germany had already reported a third month of negative growth, and the European Union confirmed the GDP shrank .2% in the 15 euro nations during the third quarter. France, Europe’s second largest economy, unexpectedly grew in the third quarter as consumer spending gained and exports rebounded. I am still convinced that while things are bad across the pond, Europe’s economies are still in better shape than the US economy. And while some here in the US have given the ECB trouble about not lowering interest rates as quickly as the US; I believe they have done a better job navigating the current crisis, and Europe will be able to recover more quickly than the US.

And finally, the RBA was in the markets protecting the Australian dollar again. Lately, the RBA is intervening to hold the AUD$ up while there are rumors the Bank of Japan may start intervening to stop the appreciation of the yen. Officials at the Swiss National Bank have also been complaining about the rise of the Swiss franc. Both the Japanese yen and Swiss franc continue to strengthen as investors reverse carry trade positions. So we have a couple central banks intervening to hold their currencies down, and others who are intervening to try and keep theirs from falling further. Crazy Times!!

Currencies today 11/14/08: A$ .6585, kiwi .5595, C$ .8188, euro 1.2671, sterling 1.4738, Swiss .8409, ISK (No Quote), rand 10.152, krone 6.890, SEK 7.894, forint 213.42, zloty 2.9408, koruna 20.015, yen 96.39, baht 34.97, sing 1.5184, HKD 7.7501, INR 49.01, China 6.8250, pesos 12.97, BRL 2.30, dollar index 86.89, Oil $58.25, Silver $9.65, and Gold… $747.24

Source: Data Shows Just How Bad Things Are

I don’t think Treasury Secretary Paulson is having as good a time as I did in the nation’s capital. When he came down from NY a couple years ago to take over the Treasury, he was Wall Street’s best paid CEO and looked to cap his career with a high-profile sojourn in public service. But his credibility has really taken a hit over the past year, and his update before congress yesterday didn’t quite go as everyone expected. Chuck left me the following to share with readers this morning:

“Yesterday I told you that Treasury Sec. Paulson was going to give an update on the bailout package… And instead of an update, he threw the markets a great big 12-6 curveball! Treasury Sec. Paulson laid out his plans for the next stage of the financial market rescue package, announcing he has shelved a plan to buy troubled mortgage assets and is moving his attention to non-banks and consumer finance.

And… in a striking admission, Paulson said that buying mortgage assets “is not the most effective way” to use government funding. Geez Louise! I could have saved him, Congress, and the whole country a lot of time and stress on this if he would have just listened to me at the time! I said when it was first announced that the Gov’t had no business buying up these troubled assets, and getting involved in what used to be known as “free markets”! He’s changing horses in the middle of the stream! What gives? And… All this unknown stuff now, put the Trading Theme in overdrive, buying dollars in the deep, dark days of the U.S. economy!

There’s a silver lining here folks… And I believe that Sec. Paulson is seeing the seized up credit markets unlock. This development might just be nascent, but he believes it’s there. And when this problem with the credit markets eases, a return to the fundamentals could very well be in store. In fact, I would bet a dollar to a Krispy Kreme, those fundamentals are going to come home to roost once this credit market problem is in our rear view mirror.

Now, back to the bailout package… Now, the Treasury Sec. wants to put the government’s money toward unlocking student loans, credit card receivables, and auto loans… Some are calling this move a U-Turn, but in essence it isn’t… Before the Gov’t was going to buy toxic bonds made up of residential home loans… Now, they will be buying bonds made up of consumer loans, which in my opinion may end up more toxic than the first choice, given the fact that we’re in a recession and the recession will work out to be one that is protracted.

While these things “might” get the credit markets unlocked, they might miss the mark too, and until we get these credit markets unlocked, the markets focus will remain on the crisis and not return to focusing on the awful fundamentals in the U.S. economy. These awful fundamentals need to rise to the top again for risk takers to come back, and until the risk takers come back, currencies and commodities like euros and Gold, will continue to be put into a corner by the dollar.

We get a new Treasury Sec. in January when the new administration takes over… The new Treasury Sec. will have their hands full for sure!

On the side… OK…. Yesterday morning… I looked up to the TV and saw that knucklehead Jim Cramer on the Today Show… I swear.. He said this to Meredith… “I have been honest on this show, Meredith, and I “try” to be honest on my show”… He Tries to be honest? OMG!”

I agree with Chuck, whoever decides to take over as the new Treasury Secretary will certainly have their work cut out for them. I’ve heard they may bring back Volker to take over for Paulson. That would be an interesting choice, as he has ‘been there, done that’ crushing inflation during the 1980’s. But his high interest rate policies which he pushed caused the US to dip into a deep recession, and he also played an important role in bringing the US off the gold standard back in the early 70’s. Even if he doesn’t take the Treasury position, Volcker is one of Obama’s advisors, and will certainly have some influence on the new administration’s monetary policies.

Paulson’s curve ball put the markets in a sell mode, with investors moving back into the relative safety of US treasuries and money markets. The dollar strengthened after his bombshell, but started to fall again in Asian trading. The Japanese yen which has been one of the most volatile currencies, rose to a two week high against the euro after Paulson’s curve caused cuts in purchases of higher-yielding assets. But the yen reversed some of yesterday’s sharp gains overnight as currency traders worried about BOJ intervention. These concerns were heightened by comments from Japanese Finance Minister Nakagawa who warned that Japan would protect the yen against sharp volatility.

Despite the prospect of intervention, the yen remains a buy according to a report by Goldman Sachs group. Goldman believes the yen will strengthen 6 percent against the US dollar due to a continued unwinding of the carry trade. The dollar will weaken to 90 yen in three months, before gaining to 100 yen six months from now, Goldman said. “Deleveraging and funding constraints have likely created a new source of foreign-exchange demand and supply,” the Goldman analyst wrote. “We expect deleveraging patterns to continue into year-end, driving the dollar and yen stronger and putting pressure on higher-yielding currencies.” As readers know, Chuck has been talking about this carry trade reversal for some time, and we agree that this reversal will likely last through the end of the year and into the 1st or 2nd quarter of 2009. Look for further dollar strength during this time period, but watch out below once the dollar reverses course.

The reversal of the carry trades has led to a fall in the value of the Australian dollar, a move which accelerated yesterday. The currency drop became too much to bear for the Reserve Bank of Australia who intervened in the markets to protect the AUD$. An RBA spokesman confirmed the central bank bought its own currency, putting a floor under the currency after it dropped over 2 cents yesterday morning. This intervention is a good sign that the RBA is now concerned with the value of the Aussie dollar and won’t let it slip too much further than the current levels. With the RBA’s support, and the possibility of a bottoming of commodity prices, these could be excellent levels to buy into the Australian dollar.

The German economy, Europe’s largest, contracted more than economists expected in the third quarter, pushing the nation into the worst recession in at least 12 years. German GDP dropped a seasonally adjusted .5% from the second quarter, when it fell .4%. The economy is officially in a recession, as it has now contracted over two consecutive quarters. Traders increased bets that the ECB will reduce interest rates. The euro had been sold off before the announcement, hitting a low of 1.2389 vs. the US$, but then rallied back above $1.25 in early US trading.

This week has been a pretty slow data week here in the US, but today we have two important releases. The US trade deficit probably narrowed in September as retreating oil prices reduced the value of imports. The sharp increase in the value of the US$ over the past 6 months has also helped reduce our trade deficits. But I don’t think the commodity price slump will last, and also believe the US$ will turn back around sometime next year. So this narrowing of the trade deficit won’t last. We will also get the weekly jobs report today, which will likely show another big bounce in first time filings for unemployment. The labor market in the US is bad and getting worse, and I would be surprised to see a number below 500k for the weekly initial jobless claims. This is one of the factors which caused the Treasury Secretary to reverse course on the bank bailout, as he now moves his focus to the growing consumer credit crisis.

We talked about China’s big stimulus package earlier this week, and the impact it will have on China’s US$ reserves. But the stimulus package will have another impact on the markets. Most of the $586 billion stimulus will be focused on infrastructure building projects. These projects will mean China will continue to import large amounts of copper, iron ore, cement, and other building materials. They will also continue to demand a greater supply of oil and feul. This new demand will help offset some of the drop in commodity demand from the slowing western economies. Commodity prices have fallen dramatically as traders priced in the global slowdown. But China’s economy is still the fastest growing among the world’s 20 largest, with a growth rate close to 8 percent, and this latest stimulus announcement should cause a bounce back in the prices of these commodities. The countries supplying China with raw materials should also benefit, including the currencies of Brazil, Australia, and Canada, all of which have been beaten down lately.

Finally, Chuck let me know some great news for our St. Louis readers: There’s going to be a screening of Addison Wiggin’s movie, I.O.U.S.A. here in town… The screening will be Nov. 18 at the Missouri History Museum, part of the Community Cinema Series, co-sponsored by KETC and the History Museum. “I.O.U.S.A.” will be shown at 7, followed by a panel discussion.

Currencies today 11/13/08: A$ .6389, kiwi .5557, C$ .8113, euro 1.2535, sterling 1.4838, Swiss .8404, ISK (No Quote), rand 10.3166, krone 7.096, SEK 8.0703, forint 215.51, zloty 2.9765, koruna 20.095, yen 96.03, baht 34.99, sing 1.5119, HKD 7.7501, INR 49.2925, China 6.8298, pesos 12.97, BRL 2.305, dollar index 87.43, Oil $56.81, Silver $9.41, and Gold… $717.66

Source: Paulson throws the markets a curve…

The New York-based AIG will get $40 billion of new capital from the U.S. Treasury Department’s $700 billion bailout package, to help offset the damage wreaked by four consecutive quarterly losses, including a third-quarter deficit of $24.5 billion that the company announced yesterday (Monday), Bloomberg News reported. The U.S. Federal Reserve also is slashing an $85 billion loan to $60 billion, and is replacing a separate $37.8 billion loan to the insurance company with $52.5 billion in aid.

These actions were taken by the Treasury Department and the Fed after it became clear that the original deal would never save the foundering insurer. In total, AIG is receiving more than $150 billion in aid, the most ever provided to a private-sector company in the United States. Even so, Fed officials said they believed that taxpayers would be repaid.

The reason: The government is buying preferred shares of AIG stock, giving taxpayers an ownership stake in the company. In turn, restrictions will be placed on executive compensation at the firm, Forbes.com said.

U.S. taxpayers are assuming the additional risk in order to provide new AIG Chief Executive Officer Edward M. Liddy more time to salvage AIG. The insurer, which turned to the government in lieu of the bankruptcy courts in September, had planned to repay the original $85 billion loan package by selling some of its business units. But that plan stalled as the financial crisis hacked away at the value of these businesses, even as it hamstrung potential suitors by causing the credit markets to freeze up.

As AIG leaders looked for a way around that problem, the company continued to lose money. AIG’s third-quarter loss equaled $9.05 a share and compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a statement. Losses in the past year erased profit from 14 previous quarters dating back to 2004, Bloomberg reported.

“It was obvious to me from Day One that the terms of that arrangement were really quite punitive in terms of the interest rate and the commitment fee and the shortness of it,” Liddy said in a Bloomberg Television interview yesterday. “I started really about a week after I got here trying to renegotiate.”

Although most media reports attribute AIG’s predicament to the collapse of portions of the U.S. mortgage market, Money Morning Contributing Editor Shah Gilani – a national expert on the credit crisis – wrote in a recent investigative series that what really imploded the venerable insurance giant was an accumulation of misplaced bets on so-called “credit default swaps.”

And in the current economic environment, that problem will only get worse, Gilani said in an interview over the weekend, as reports circulated that a new deal was coming.

“AIG’s continuing problems are nothing short of extensive losses on mark-to-mark accounting of its ill-conceived foray into credit default swaps,” Gilani said. And that situation “will only get exponentially and catastrophically worse as the economy falters and reference companies it wrote swap insurance contracts on actually default, turning AIG’s unrealized losses, the subject of its margin calls, into realized losses for the full amount of its liabilities.”

Gilani isn’t surprised that the government had to restructure the AIG bailout package. Nor is he surprised that no real suitors emerged for AIG business units, several of which are actually superb businesses.

“The pieces of AIG that are desirable, and there are several very profitable divisions, are not getting serious consideration because potential acquirers’ stock prices are in the tank and there’s no inherent value in [the potential suitors’] stock prices as equity capital,” Gilani said. “There’s no one riding to the rescue because the horses are in the barn and the barn is burning.”

The U.S. reversed its opposition to an AIG bailout when the Fed realized that the potential ripple effects of a complete collapse could cause other firms to collapse, as well. The original $85 billion loan was disclosed on Sept. 16, a day after investment bank Lehman Brothers Holdings Inc. (OTC: LEHMQ) was permitted to collapse. AIG got an additional $37.8 billion credit line to shore up its securities-lending program on Oct. 8, and on Oct. 30 received an additional $20.9 billion as part of the central bank’s commercial paper program, which was designed to unfreeze the short-term debt markets.

Source: Federal Government Grants AIG a New Bailout Package

The most interesting news item recently was found on the cover of the Financial Times newspaper, where we learn that a guy named Lahde “made tens of millions of dollars from betting against the financial and property sectors during [the] past two years”, and he now wanted to thank “the low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA” who made it all possible for him to find enough suckers.

He noted that “These people who were often truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG (NYSE:AIG), Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the aristocracy,” he says, “only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”

This goes along with an article in the St. Petersburg Times about Tom James, chairman and chief executive of Raymond, James Financial, who had “some tough words for the wizards of Washington, D.C. who oversaw the recent $700-billion bailout package”.

He reports that “The Brave And Wonderful Mogambo (BAWM) was right all along! Those government weenies are the biggest freaking morons you ever saw, and we as a country should be ashamed of ourselves for having elected such corrupt, half-witted, utter failures and congenital idiots!”

As you have probably guessed by now, he did not say those exact words, but he implied every syllable when he said, “Legislators were almost embarrassingly ignorant of how the financial system works”, which I figure explains how they don’t understand the linkage between their own Bad, Bad Performance (BBP) as legislators and the subsequent Bad, Bad Performance (BBP) of the economy, and he says that only 3 of 16 legislators that he talked to actually understood what was going on in the “credit crisis.” Less than 20%! Hahaha! We’re doomed!

Well, maybe these Congressional losers will understand the unfolding economic slowdown, as evidenced by the Baltic Dry Index, which is an index of the cost to transport stuff by cargo ship, and which has fallen precipitously, which seems very important to me, and to Junior Mogambo Ranger (JMR) Riccardo, too, who is also alarmed by this like – as I previously said – me.

It’s actually beyond scary, in a terrifying kind of “ain’t nobody buying nothing in a consumer economy” kind of way, which means that without the consumer buying stuff as his or her contribution to the famous statistic of “the consumer is 70% of the economy”, we are, in case you ain’t heard, freaking doomed if the consumer ain’t buying!

Well, maybe not all buying is drying up, as Ted Butler, silver market analyst, reports that in the last 10 months, “some 150 million ounces of silver can easily be documented to have been bought by investors. Undocumented purchases would add tens of millions more ounces.”

In fact, when you add it all up, “Investment demand for silver this year is running at a full 25% of world mine production and over 20% of total production (including recycling). This is a remarkable historical turnabout.”

Thus, it is easy to see why Mr. Butler is “bullish beyond belief for silver”, since this kind of demand means that “In silver, the documented 150 million ounces bought in the first ten months of this year is equal to 15% of all the silver bullion equivalent thought to exist!” Wow!

More than one-seventh of all the silver bullion “thought to exist” in the whole world was suddenly bought up in less than a year, and yet the price of silver has been pounded down to less than 10 bucks an ounce? No wonder I am so bullish on silver!

He also notes that the gold/silver ratio is at more than 80, which is “one of the biggest differences in history.”

And not only that, but since there are 4 to 5 billion ounces of gold in the world versus only 1 billion ounces of silver, that means that “the total dollar value of all the gold in the world is worth 300 to 400 times more than all the silver in the world (80 times 4 or 5)”.

In dollars and cents, the dollar value of all the gold in the world is about $4 trillion, while the value of all the silver in the world is but a laughably low $10 billion! Where do YOU think the most profit potential lies? Me, too! Hey! This investing stuff is easy! Whee!

Source: A Bull in a Silver Shop