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Crisis Redux: Road to Perdition

July 8, 2010

Time to awaken to a new dreadful reality. Just like autumn 2008, all over again, the stock market is breaking down in a powerful visible manner, after nothing was fixed with the vast financial structures but much money was spent. If only the USGovt had decided to address the problems instead of funding the myriad liquidity facilities, which by the way serve as a virtual banking system. If only the USGovt had decided to address the problems instead of funding the US Federal Reserve equity reserves, as in excess bank reserve lures. If only the USGovt had decided to address the problems instead of funding the bank preferred stock and bank executive bonuses. If only the USGovt had decided to address the fundamental need for capital formation toward job growth instead of simple extensions of jobless benefits. If only the USGovt had decided to address the dire need to liquidate impaired assets instead of warehousing them, which has produced a form of constipation within the bank system loan processing. If only the USGovt had decided to address the cancerous large corporations too big to fail that must be permitted a funeral, instead of letting them continue to control vital government finance ministries. If only the USGovt had decided to address one of the root causes of USEconomic deterioration, namely endless war, so that more funds would be available for that essential capital formation and job growth, not to mention state budget plugs, as the 50 states suffer from massive capital drain through taxation re-routed to the federal level.

When no solutions are achieved, even no solutions pursued, the sugar high vanishes, the adrenalin rush wears off, and the underlying root causes return as the same symptoms to the sick patient. With no remedy, the symptoms turn much worse!! The symptoms return with a vengeance, as seen right now. Shocks to the body economic are imminent, assured by lack of required credit for almost two years, compounded by the Gulf of Mexico toxic event applied to the Southern appendages.

One of the hidden devious factors is that the supposedly excess bank reserves parked at the USFed are actually Loan Loss Reserves attracted by the USFed itself, by virtue of interest yield offered. Banks are running naked and insolvent and constipated. The extraordinary measures have worn off, as has political will to sustain them. A rot has permeated the USEconomy. Personal bankruptcies are up 14% in the first half of 2010, hardly a sign of a recovery. Home sales are down, no longer buttressed. Foreclosures are unrelenting, the American Tragedy. Retail sales are down. Factory orders are down. California might look worse than Greece. About one million Americans have dropped out of the jobs market in the last two months. Eight million jobs have been lost in the recession that never actually ended. The rolls of people unemployed but not receiving a jobless insurance check amount to 9.2 million. The USFed has begun to eye the Printing Pre$$ once again. Internal battles within the USFed center upon asset deflation and resumed bond monetization. The august body serving on the US Federal Reserve Board argue in heated fashion about QE2, a Round #2 of powerful monetary printing, bond purchase, and financial market tampering, with predictably destructive capital formation effects toward which they remain unaware.

Urban Bread Line

Beware the new Modern Day Bread Lines. The new bread line is from job fairs, where unemployed workers seek to become the breadwinner again, a desperate struggle for families to survive. People queue for a job fair in New York in this photo. The share of the US population at working age with jobs in June fell from 58.7% to 58.5%, a big drop from 63% just three years ago.


The S&P500 stock index carries added meaning, since the large swath of US citizens who are not insolvent choose to react strongly to the assaults on stock account wealth. Paper wealth is fast vanishing, part of the convulsions witnessed to the fiat paper monetary system. First the US banking system died in autumn 2008, still an unrecognized fact. Next the global monetary system is dying. Denial is rampant. The people react with fear, alarm, and anger when their pension and mutual funds suffer significant loss. Those funds suffered significant loss in autumn 2008, and they are on the verge of suffering a similar loss in the next several weeks. My sincere considered opinion is that the stock market breakdown is part of a plan, one to permit or even force a political change toward a powerful grandiose second event of inflation. Fiscal stimulus and monetary accommodation have been withdrawn in the past few weeks, as the mythical recovery is permitted to take root. Its fruit is rotten, infested, and trampled. A shock to public sentiment will open the flood gates to a new bigger round of monetary inflation. The first one was all for the big bankers. The second one will be all for the USEconomy, on the verge of a powerful breakdown, if not collapse, since no remedy has been pursued since Lehman Brothers failed, while both AIG and Fannie Mae required the cover of federal sponsored darkness.

The S&P stock index decline will be at least as bad as the autumn 2008 decline. Claims of Price/Earnings ratios being low are pure deception, since earnings are derived from lax accounting rules. The indicators are dire, strong, and undeniable. The 50-day moving average (in blue line) is soon to cross below the 200-day MA (in red line). Small armies of technical analysts do indeed notice this vital signal, a reliable one hardly shrouded in mystery or abstruse theory. The 50-day MA used to serve as a support since autumn 2008, but now it is acting as a ceiling of resistance (in green circles). Notice the transition it endured in February 2010, flipping to resistance. Other similar MA indicators come with the 20-week MA crossing below the 50-week MA, a matching event in progress, but a little slower in developing. The bearish MA crossover is a clear Death Cross signal. A powerful decline is imminent and unavoidable, one to shake the world financial markets globally. It will permit political policy change to come, as sentiment will turn to fear. Look for the S&P500 index to retest the March low, which reached 666, the signatory number within certain spiritual chambers. Any US stock rout will be matched in the London FTSE and European bourses.

A queer statistic has emerged that underscores the perversion that is Wall Street and the stock market. High Frequency Trading has not gone away. A couple months ago, when it was exposed during a single day swoon event, such trading was responsible for 83% of the entire New York Stock Exchange trade volume. Somehow the word 'Incest' comes to mind as the bank cartel competes toward a liquidity climax with fewer able bodied players remaining each year. A liquidity analysis by Abel-Noser indicates that the US stock market has morphed into a concentrated pool where the top 99 stocks account for 50.1% of total domestic trading volume. In June, the top 20 stocks accounted for 28.9% of all domestic volume, an increase to record level logged each month. The HFT algorithms are forced methodically in a reduced number of only the most liquid stocks. The game actually results in gradual removal of players from the market. The US stock market could eventually degrade into an arena without volume. At that time, large pension and mutual funds will be forced to consider that their vast portfolios might find artificial value like the volume-less mortgage bonds tucked away in the bank balance sheets. They might be difficult to redeem.


The effect will differ from the past, due to the Paradigm Shift in full force. The effect on the gold & silver prices will surely include some initial downside movement. However, this time around, with sovereign debt under heavy siege, the way it plays out will be very different. However, this time around, with gold having taken a reserve currency role, the way it plays out will be very different. However, this time around, with USFed balance sheets badly bloated, the way it plays out will be very different. Imagine a powerful stock market decline panic with a coincident crisis in sovereign debt. USTreasury Bonds might still attract big money, but this time it is hardly Smart Money, since the USTBond is scheduled to be the last sovereign debt targeted for attack. Usage of new government debt to prevent the disaster in asset prices will force a vicious cycle of ruin, which will undermine remaining confidence in all things paper. Gold has in the last several months claimed an important spot at the opposite head of the monetary reserve dinner table. It is a key ingredient in non-Anglo backroom restructure initiatives. The United States bankers are trapped in quasi-depression 18 months deep into a Zero Interest Rate Policy climate, after Round #1 of Quantitative Easing is complete, and wasted fiscal stimulus that sent the annual budget deficit above 10% of GDP.

Recall a Jackass Axiom: The first nations that abandon the USDollar and the US$-based financial system, both with banking and commerce, will be the leaders in the next chapter, part of the Paradigm Shift and its effect. Recall the Sound Money Corollary: The next global reserve currency cannot be paper based, operating by fiat and faith, since no paper currency can replace a fiat paper global reserve currency. Thus the Intl Monetary Fund and their ill-conceived Special Drawing Rights plan would serve as a mere raft of papyrus reeds, tied together, heading toward a dangerously high waterfall.

Gold lies at the nexus of the systemic vulnerability, the linchpin holding the fiat system together, whose controlled price mechanism is ready to release. The interference to prices has damaged a host of markets anchored to the USDollar, since few seek equilibrium, most being distorted. Without the constant props, these markets would all likely collapse of their own weight toward significantly lower price levels, real levels. The effect on the gold price from Round #1 was a push down followed by a powerful boomerang up to new highs. The effect on the gold price from Round #2 will be similar in direction but more powerful in upward movement. Think $2000 gold !!


Realities are soon to force emergency changes to official policy. We are about to observe a repeat of the Great Depression stock decline pattern, with pattern recognized broadly, despite all the printed money squandered. That pattern was identified by a strong recovery off a nasty decline, mislabeled a return of a stock bull by the compromised, followed by even lower price levels. A titanic battle is underway. On one side is the political cabal that stands ready to exploit the situation to carry out its political agenda of concentrated power, even emergency power like martial law or at least rationed supply. On the other side is the Weimar option of hyper-inflation, as the extreme new money creation leaks into the system and forces prices of everything upward.

A dynamite type risk exists, unfortunately. If much higher price inflation becomes engrained and recognized, if the official price inflation statistics begin to reflect reality, then grand powerful effects would come to the bond market. Worse still, grand powerful effects would come to the shadowy appendage to the bond market, the credit derivatives. Refer to both the Interest Rate Swaps and the Credit Default Swaps. Recall the USGovt has a huge conflict of interest.

They sell USTreasury Bonds. They have issued over a fresh $Trillion each year for the past two years, enough to threaten their bond structures. So decline to the USEconomy and the US stock market coincides with their objectives and motives. They must create more bond demand to match the extraordinary supply. Heavy duty price inflation would kill the plan. But a stock breakdown fits well with the plan. Heavy duty price inflation would ignite a credit derivative explosion, or a series of explosions, as their long fuses are both hidden and criss-crossed. These fuses would be easily lit from a bout of broad price inflation.

The key to holding the USEconomy hostage is the excess reserves held in the USFed vaults, and the tighter lending rules among banks. Bear in mind that three types of credit creation exist in the USEconomy. In order they are 1) vendor finance (which has largely vanished), 2) bond securitization (which has largely vanished), and 3) bank loans (which have largely vanished). So the USEconomy is being strangled. One could say that vendors and bond issuers and banks recognize the heightened risk of falling collateral value and weakening income streams. They react by lending less.

The current economic decline might have much more powerful trouble spots ahead. The US housing market has begun a powerful resumed second decline. Somehow, university textbooks in Economics curriculum failed to cover the current situation of extraordinarily high bank inventory of foreclosed homes, working opposite to an extraordinarily strong decline in home purchase applications, amidst a banking system heavily dependent upon $100 billion temporary intermediate credit lines, while the big banks park their Loan Loss Reserves at the USFed, and the USFed struggles to avoid repeated powerful Quantitative Easing programs. (That last very long sentence should be read a few times in repetitive fashion.) If truth be known, prominent Think Tanks fund many university professor chairs, thus perpetuating an education process that inculcates fallacious theories.

Recall that the entire 2002-2005 USEconomic expansion was built atop the housing & mortgage bubble, a chapter fully endorsed by even the erudite prestigious among the national economic counselors. To be sure, the May end to the home tax credit has made an effect. The housing market will enter its fourth consecutive year of decline. My ongoing forecast stated since 2007 was for two years of home price bear market. My 2008 forecast was for two more years of home price bear market. My 2009 forecast was for two more years of home price bear market. My 2010 forecast is for two more years of home price bear market. That is a better and more credible approach to forecasting then a more honest approach: ENDLESS HOUSING BEAR MARKET.

The upcoming S&P500 stock plunge will serve a purpose, perhaps a planned purpose. It will permit the USGovt to announce with expedience a resumed Quantitative Easing in order to prevent an economic collapse. Renewed stimulus and accommodation will be rendered a snap, easy as pie, with no political obstacles. Deficits be damned, the system must be saved !!

The Gulf of Mexico disaster will soon spread like an oil-soaked wildfire of economic destruction down South, which could easily affect the supply chain with grain delivery up the Mississippi River. Barges with oil-soaked hulls will not be permitted up the river. In fact, electricity power generating stations along the coast are at risk of shutdown, due to the likelihood of oil entering the water intake valves. Rumors of evacuation plans have been circulating, confirmed by USMilitary sources. The great majority of US states are at the end of their rope with budget shortfalls and benign federal neglect, certain to result in broad layoffs, even dismissal of police and teachers and garbage collectors. These three groups of workers are commonly viewed as most critical.

Mega-trend comparisons offer further strong warnings, reflecting powerful changes compared to autumn 2008. They pertain to the USGovt debt picture with horrendous $1.5 trillion annual back-to-back deficits. They pertain to the monthly $200 to $300 billion federal debt issuance that has become a standard billboard feature, along with newfound scrutiny toward the USTreasury complex regarding bid sources, primary dealers, and monetization. They pertain to the new reality of the 10-year USTreasury yield (TNX) that used to be hovering around 4.0% level but is now under the 3.0% red light level. They pertain to the US housing market set for a surprising sinkhole event, since supply is not only rising, but is hidden, while demand is falling, absent the tax credit stimulus. A nasty shock event from liquidity drought is coming right around the corner. First sight will be the SPX in a heavily publicized tumble. It will scare the USCongress for sure, inviting hasty reaction. The plunge will scare the wits out of the US public again, fearful of their savings.

Four other mega-trend factors hover with a nasty specter. 1) The nation of Mexico is in the midst of a failed state breakdown into pure chaos. 2) The Gulf of Mexico is fast turning into a kill zone, both ecologically and economically. 3) The European Bank Bailout with its $1 trillion in aid fixed absolutely nothing across the Atlantic, but did send a few $100 billion into USTreasurys. 4) Refusal to permit big financial firms to fail removed reform and restructure entirely, whose 20 months of progression since autumn 2008 has taken a heavy toll.


The US money supply shows powerful declines in circulating money. Contrast this graph to that of the broad money supply, which counts funds tucked away in the bank vaults and the USFed itself, ensuring no usage for lending capital. Broad money supply is skyrocketing, as money velocity is careening downward. The Leading Economic Indicators look ominous. None of these many factors were showing such dire signals 20 months ago (maybe LEI was). Anyone who believes the USFed and financial runners in the USGovt will not reverse course and begin Quantitative Easing Round #2 are just plain simple-minded. A confirmation signal comes from the sub-3% long bond among USTreasurys. Recoveries coincide with the long bond yield rising, not falling. This contradiction of recovery claims escapes most economists, who often show little insight.

As the USEconomy falters in the second half already underway, instead of recovering, the USGovt will soon announce the expedience of a resumed Quantitative Easing in order to prevent an economic collapse. The USGovt will also soon work toward a massive economic stimulus plan in almost emergency atmosphere, which might actually contain some stimulus, unlike the last evasive political display. The states will send governors to WashingtonDC directly, in acts of desperation.

The entrenched economists will continue to harp for more of the same non-remedies that have failed to avert systemic tribulation. Keynesian abuses have rendered the nation into a policy corner, as bankers with economists at their side press harder on what has failed to work !! Private discussions among bankers reveal a palpable worry, as typical remedies have accomplished nothing. We hear of much less bang for the buck. We hear shallow thinking like volume of stimulus being important, whereas quality of stimulus is hardly mentioned, a Santelli theme on CNBC. The choices seem like polarized options. Solutions are sorely and universally absent.

Look out below. Investors had better be in gold & silver heavily. It is time to roll out the new currency (Nordic Euro) backed in part by gold, and maybe oil too. Buy with both hands any further hefty discount offered on physical metal gold & silver. This time, the COMEX and London Metals Exchange are at greater risk than in autumn 2008 since so much physical metal has been withdrawn in recent months. The paper gold & paper silver markets must be watched closely, for worsened divergences from the physical market. Physical gold & silver demand is enormous. Vast inventory supply in silver is exiting the metals exchanges, without much reporting. Rising potential for an event can be detected.


Add the absent economic stimulus and absent monetary accommodation, the newest features after hollow political resolve supposedly has entered the room. The Obama Admin, like the Bush II Admin, does not comprehend that liberal money creation actually destroys capital, destroys businesses, and destroys income. The US political leaders and banking leaders have not learned the lesson of economics in half a century. Worse, the Obama Admin tax hikes are soon to kick in. They must pay for the Health Care Program. Many monthly health care payroll plans will triple in cost. Tragically, the banking and political leaders are caught in a bind fashioned from their own deceptions. They have been talking about a USEconomic recovery, fragile though it may be, a recovery they urge needs more nurturing. It needs more reality instead. So the bankers and politicians will let the USEconomy swim without life preservers, ride the bicycle without the training wheels, walk without crutches. A bad chapter is soon to be written. At least the economists in charge will be able to produce more demand for USTreasury Bonds, the most important bond they sell. The public, the investment community, might soon catch on. The USGovt and Wall Street have never made any legitimate effort to reform or restructure. Their entire purpose has been to secure as much bank aid as possible, and block any bonafide reform.

The tax cut stimulus is going away. The car purchase tax credits are going away. The mortgage bond monetization program is going away. The jobless benefit extension beyond 99 weeks is going away. The lack of job prospects is not going away. The missing incentive for business expansion is not going away. The vast budget gaps and pension obligations for many US states is not going away. The home foreclosures and bankruptcies are not going away. The challenges in securing credit and loans is not going away. The syndicate control of the USDept Treasury is not going away. The sacred defense budget is not going away.



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At least 30 recently on correct forecasts regarding the bailout parade, numerous nationalization deals such as for Fannie Mae and the grand Mortgage Rescue.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at . For personal questions about subscriptions, contact him at [email protected]

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

Jim's career continues to make waves in the financial editorial world, free from the limitations of economic credentials.

Jim is gifted with an extremely oversized brain as is evidenced by his bio picture. The output of that brain can be found in his articles below, and on the Silver-Phoenix500 website, on his own website, and other well-known financial websites worldwide.

For personal questions about subscriptions, contact Jim Willie at [email protected]


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