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Gordon T Long

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ALSO

SULTANS OF SWAP: Explaining $605 Trillion in Derivatives!

 

SULTANS OF SWAP: Fearing the Gearing!

 

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SULTANS OF SWAP: Gold Swaps Signal the Roadmap Ahead

 

SLIDE REFERENCE PAGE: Shadow Banking

 

The news rocked the global gold market when an almost obscure line item in the back of a 216 page document released by an equally obscure organization was recently unearthed. Thrust into the unwanted glare of the spotlight, the little publicized Bank of International Settlements (BIS) is discovered to have accepted 349 metric tons of gold in a $14B swap. Why? With whom? For what duration? How long has this been going on? This raises many questions and as usual with all $617T of murky unregulated swaps, we are given zero answers. It is none of our business!

Considering the US taxpayer is bearing the burden of $13T in lending, spending and guarantees for the financial crisis, and an additional $600B of swaps from the US Federal Reserve to stem the European Sovereign Debt crisis, some feel that more transparency is merited. It is particularly disconcerting, since the crisis was a direct result of unsound banking practices and possibly even felonious behavior. The arrogance and lack of public accountability of the entire banking industry blatantly demonstrates why gold manipulation, which came to the fore in recent CFTC hearings, has been able to operate so effectively for so long. It operates above the law or more specifically above sovereign law in the un-policed off-shore, off-balance sheet zone of international waters.

Since President Richard Nixon took the US off the Gold standard in 1971, transparency regarding anything to do with gold sales, leasing, storage or swaps is as tightly guarded by governments as the unaudited gold holdings of Fort Knox. Before we delve into answering what this swap may be all about and what it possibly means to gold investors, we need to start with the most obvious question and one that few seem to ask. Who is this Bank of International Settlements and who controls it?

READ MORE

 

 

EXTEND & PRETEND: Stage I Comes

to an End!


The Dog Ate my Report Card

 

Both came to an end at the same time: the administration’s policy to Extend & Pretend has run out of time as has the patience of the US electorate with the government’s Keynesian economic policy responses. Desperate last gasp attempts are to be fully expected, but any chance of success is rapidly diminishing.

Before we can identify what needs to be done, what the administration is likely to do and how we can preserve and protect our wealth through it, we need to first determine where we are going wrong. Surprisingly, no one has assessed the results of the American Recovery & Reinvestment Act 2009 (ARRA) which was this administration’s cornerstone program to place the US back on the post financial crisis road to recovery.

We can safely conclude either:

1-    The administration completely under estimated the extent of the economic crisis, even though we were well into it when the ARRA was introduced.

2-    The administration was unable to secure the actually required stimulus amount which was likely four to five times that approved.

3-    The administration failed to implement the program in a timely manner.

4-    The administration failed to diagnose the problem correctly and that in fact it is a structural problem versus a cyclical and liquidity problem, as they still insist it to be.

I personally believe it is all four of the above.

READ MORE

 

POPULAR ARTICLES:

SULTANS OF SWAP: BP Potentially More Devastating then Lehman!

 

EXTEND & PRETEND - Manufacturing a Minsky Melt-Up

 

EXTEND & PRETEND: A Guide to the Road Ahead


READER ROADMAP -  2010 TIPPING POINTS aid to positioning COMMENTARY

 

 

 

1

         

SOVEREIGN DEBT PIIGS

EU BANKING CRISIS
BOND BUBBLE

STATE & LOCAL GOVERNMENT

CENTRAL & EASTERN EUROPE
BANKING CRISIS II
RISK REVERSAL

COMMERCIAL REAL ESTATE

CREDIT CONTRACTION II

RESIDENTIAL REAL ESTATE - PHASE II
EXPIRATION FINANCIAL CRISIS PROGRAM
US FISCAL IMBALANCES
PENSION CRISIS
CHINA BUBBLE

TODAY'S TIPPING POINTS UPDATE

Last Update: 07/25/2010 11:24 AM

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AMBER ALERT

ACTIVITY

MONITOR

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POSTS:   WEEKEND 07-24/25-10

 

 

GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN

 

IRAN

House OK's possible Israeli raid on Iran

Source: Press TV

Republicans in the US House of Representatives have introduced a measure that would green-light a possible Israeli bombing campaign against Iran.

Resolution 1553 provides explicit support for military strikes against Iran, stating that Congress backs Israel's use of 'all means necessary' against Iran, "including the use of military force," BBC Persian reported.

The introduction of the measure coincides with a pattern of renewed calls for military strikes that have escalated since President Obama signed Congressional Iran sanctions into law.

Neoconservatives who were instrumental in orchestrating the Iraq War, such as Bill Kristol and Reuel Marc Gerecht, have led the stepped up calls for military action.

Hawkish former Bush administration official John Bolton recently laid out the game plan to prod Israel into attacking Iran, arguing that outsiders can "create broad support" for a strike by framing it as an issue of Israel's right to self-defense.

Supporters for military strikes, Bolton says, should "defend the specific tactic of pre-emptive attacks" against Iran.

He said that Congress can 'make it clear' that it supports such strikes and that 'having visible congressional support in place at the outset will reassure' Israel.

In spite of support from the neocons, top US military leaders have warned of the many dangers of military strikes against Iran.

Defense Secretary Robert Gates has argued "Another war in the Middle East is the last thing we need. In fact, I believe it would be disastrous on a number of levels."

Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff, has expressed his own serious reservations about an attack on Iran.

The US, which is already providing billions of dollars worth of arms to Israel every year, describes Tel Aviv's military edge in the region as being in America's interest.

READ: EXTEND & PRETEND: Stage I Comes to an End!

 

ISRAEL

 

KOREA 

North Korea Vows Nuclear Response If US-Seoul Drills Happen This Weekend  BI

Every time you think things are cooling down in Korea, Kim Jong-il ups the insanity. Now if US naval exercises happen this weekend, North Korea will counter with "powerful nuclear deterrence."

Reuters:

"The army and people of the (North) will legitimately counter with their powerful nuclear deterrence the largest-ever nuclear war exercises," the commission said in a statement carried by the country's official Korean Central News Agency.

Since America won't back down now, expect Kim Jong-il to explode some nukes off the coast of South Korea (causing who knows what tidal waves) or something else scary. The man is about to retire or die, so he's got nothing to lose.

READ: EXTEND & PRETEND: Stage I Comes to an End!

 

SOVEREIGN DEBT & CREDIT CRISIS

 

 

GREECE

 

SPAIN / PORTUGAL

 

FRANCE

 

GERMANY

 

ITALY

 

UK

  

JAPAN

 

CHINA

 

USA

 

 

EU BANKING CRISIS

 

EU STRESS TESTS

 

THE ACTUAL REPORTS

  • CEBS Press release (pdf)
  • Summary report (pdf)
  • Q & As (pdf)
  •  

    Interactive graphic- EU stress test results  FT

     

    Click for Interactive Graphic

     

    Explore the results of the EU banking stress tests on a bank-by-bank basis with the FT’s interactive graphic.

    Click for Interactive Graphic

     

    Seven banks fail EU stress test  FT

    Result risks undermining exercise designed to restore confidence

    EU stress tests seem ‘too soft’  FT

    Europe confronts banking gremlins  FT

     

    EU Bank Stress Tests Fail to Reassure Investors Wary of Capital Criteria  BL

    European regulators found that seven banks need to raise a combined 3.5 billion euros ($4.5 billion) of capital, underwhelming analysts who said the stress tests may not have been strict enough.


     

    Hypo Real Estate Is Only German Bank to Fail Stress Test BL

    Reuters Watch

    Stress test methodology triggers jitters MW
    EU Stress Tests Only Consider Bank Trading Book Bond Losses BL ECB

    Ten banks will fail European stress tests, says Goldman Telegraph  A CDStress test game

     

    Here's What We've Learned From The European Stress Tests

    Seven of 91 banks have failed, and yet what we've learned from those failures is little. Two of the banks are already nationalized, Cajasur and Hypo Real Estate. Four of the other five are troubled Spanish cajas of limited size. The final bank is Greek, ATE.

    Goldman Sachs' survey projected 10 banks to fail this morning. We felt that was reasonable, with several more Greek banks, perhaps Alpha Bank or the National Bank of Greece (which raised capital prior to the announcement), with the failure or Nova Ljubljanska Bank, which also raised capital today, possibly added in.

    There are serious doubts of the strength of the tests, not indifferent from when the U.S. government arranged a similar stress test here.

    In our pre-stress test report, we said we were looking for failure. We got 7. We're underwhelmed. It is hard to believe all of these banks, exposed to both real estate debts and the ignored central issue, sovereign debt, would have survived a real stress test.

    European authorities made sure that banks passed. This is obvious, because had they not done this they would have created a new crisis.

    But they also made sure that markets chief doubt, the state of sovereign debt on European bank's balance sheets, remains in complete doubt. If more details on sovereign debt holdings are released shortly, then perhaps this can be overcome.

    But the reality is that European leaders have not dealt with this situation. Markets will now return to their central concern, whether the euro can stand if periphery states economies continue to weaken, and whether (when) sovereign debt default will occur and endager the currency union.

     

    Analysts Were Expecting Results 10 Times Worse Than These Stress Tests

     

     

     

    NOW YOU HAVE READ THE SPIN - HERE IS THE REALITY

    Alright, it's official. The stress tests were a joke.

    • The adverse economic scenario was for a small decline.
    • The total capital needs of ALL the failed banks was just 3.5 billion eur.
    • Only 7 banks failed, and the two big ones are already nationalized.
    • Only one Greek bank failed.

    Verdict: joke.

    Very little reality in European bank tests – Calculated Risk

    ISSUE #1- The Committee of European Banking Supervisors, which was charged with executing the tests, revealed late in the day that only sovereign debt exposure held on a bank's trading book would be marked down.  As the ever-skeptical Pope points out, that on average represents just 10% of a bank's exposure to toxic sovereign debt with the other 90% held on the bank's books.

    Such an approach was widely anticipated. At a Bloomberg sovereign debt briefing in late June, a question was asked about whether the stress tests would look at sovereign exposure. Marco Annunziata, chief economist of Italy's Unicredit said it all when he responded: "I think that would be disastrous."

    ISSUE #2- Another issue with Friday's stress tests is that the haircuts the Committee took on securities are likely to raise eyebrows. For instance, Pope notes only 14% was shaved off Portuguese bonds in the testing process even though two-year notes from Portugal have widened to trade at a spread of 242 basis points over the German equivalent security compared to 226 basis points last Friday, a 7% gain in the spread in just a week.

    "Of course, all four Portuguese banks passed," the test says Pope. A widening spread suggests investors are demanding more of premium to hold a fixed-income security such as Portuguese bonds in this case.

     

    Look How Conveniently The Stress Test's Calculated Bank Income Offsets Calculated Debt Losses  BI

    We're not privy to the exact underlying calculations here... but we just have to point out how conveniently the stress test has forecast banks' income to boost Tier 1 ratios (capital levels relative to risk-weighted assets) by just the right amount to offset forecast impairment losses from bad debt.

    Looking at the decomposition of the effect of different component on the Tier 1 capital ratio under the adverse scenario (see Chart 3), one can see that the aggregate ratio is driven up by the pre-impairment income leading to the increase of ratio by 4.5 percentage point, offset by the same proportion by impairment charges associated with the impact of the adverse scenario after sovereign shock. The trading losses have a marginal impact on the composition of the aggregate Tier 1 capital ratio, driving it down by 0.2 percentage points including the impact of 24.0 bn € stemming from the application of an haircut on European sovereign debt holdings in the trading book (see Section 4.1.1).

    Chart

    +4.5%, then -4.5%. Which means the overall Tier 1 capital ratio isn't hit that badly under this 'stress' test.

    Keep in mind as well that this stress test only calculated effects for sovereign debt banks classify as 'trading' assets and not those classified as ' held to maturity'.

     

     

    Confirmation That Only Sovereign Bond Losses On "Trading Books" Will Be Considered Validates Stress Test Irrelevancy  ZH

    The circus in Europe can't come to an end soon enough. As Zero Hedge posted and speculated previously, according to a draft document, it has now been confirmed that banks will only be tested for sovereign debt exposure just on trading books, not on debt held to maturity. Guess what: about a month ago, all banks almost certainly decided to quietly reclassify their hundreds of billions of sovereign exposure from "trading" to "held to maturity," thus taking advantage of the same FASB 157 accounting abortion that America has gripped tightly on to for almost two years now, as accounting fraud follows the Bernanke Put in going global. If this is supposed to inspire confidence, then the market has truly lost it. As we explained last week, "the haircut will only pertain to trading books. In other words this is Europe's equivalent of FASB 157: everything that banks hold "to maturity" will not see a major haircut, and very likely not see any haircut at all. Which simply means that all European banks that hold such debt will merely reclassify their Greek exposure from trading to a "held to bankruptcy at par" category. The surreality of European banking assets (which as we pointed out previously is a $100 trillion circle jerk where one bank's assets are another bank's liabilities) has now passed well into the twilight zone." In other completely irrelevant news, the micro trading books will see the following haircuts, as presented by Bloomberg.

    The 91 banks being stress-tested were only examined on European sovereign debt losses for the bonds they trade, rather than those they hold to maturity, according to a draft European Central Bank document. "The haircuts are applied to the trading book portfolios only, as no default assumption was considered," according to a confidential document dated July 22 and titled "EU Stress Test Exercise: Key Messages on Methodological Issues." The tests will assume a loss of 23.1 percent on Greek debt, 14 percent of Portuguese bonds, 12.3 percent on Spanish debt, and 4.7 percent on German state debt, according to the document obtained by Bloomberg News. U.K. government bonds will be subject to a 10 percent haircut, and France 5.9 percent. The tests assume the weighted average yield on euro-area five-year government bonds will rise to 4.6 percent in 2011 from 2.7 percent at the end of 2009.


    Today's stress tests may seem like a mere public relations exercise, having excluded sovereign default from the "adverse" scenario. But this reveals and entrenches the EU's commitment to rule out sovereign defaults. We still think that commitment may have to be tested, considering the opacity of its terms. But our baseline scenario remains that non-core sovereigns should be strategically assumed to have implicit German credit quality.

    European Bank Stess Test a Joke  Reggie Middleton

     

    EU stress tests limited to banks' trading book losses – Bloomberg

    EU Bank Stress Tests Fail to Reassure Investors Wary of Capital Criteria BL Euro Falls

     

    BOND BUBBLE

     

    White House predicts record $1.47 trillion deficit AP
    The government is borrowing 41 cents of every dollar it spends.

    STATE & LOCAL GOVERNMENT

    Goldman- Deadbeat States' Spending Cuts Are Going To Hammer U.S. GDP This Year  BI

     

    California City's $800,000 Manager Quits Amid Outcry  BL

     

    Oregon's Public Employee Retirement System (PERS) in Deep Trouble, Taxpayers on the Hook  Mish

     

    Emergency Press Conference on Newark Budget Gap; Massive Service Cuts; No Toilet Paper for City Offices; Newark is Bankrupt  Mish

    Recession Continues to Batter State Budgets – CBPP.org


    CENTRAL & EASTERN EUROPE

     

     

    HUNGARY

    Moody's warns of Hungary downgrade AP

     

    BANKING CRISIS II

     

    Seven More U.S. Banks Shut by Regulators, Pushing Year's Failures Past 100   BL

     

     

    QE2- investors braced for the sequel  FT

    Quantitative easing is back on the agenda

     

    DODD FRANK ACT

     

    RATING AGENCIES

     

    RISK REVERSAL

     

     

    COMMERCIAL REAL ESTATE

     

    Shadow Office Space "Leased but Empty" Haunts Commercial Real Estate  Mish
    Shadow housing supply, foreclosed but not on the market as well as sellers who want out but cannot get out is one of the factors weighing on residential real estate. Similar supply issues weigh heavily on commercial real estate.  Office vacancies are widely reported, but few gave factored in the shadow supply, downsized companies with more leased space than they need, holding on to it hoping thing get better, or stuck in long-term leases with more space than they want or need.

    Minneapolis StarTribune article Shadow space haunts office market takes a good look at this very issue.

    National Problem

    Subleasing is not easy because of the glut of vacant properties, because walling off sections is impractical or impossible because of lease issues or physical constraints, and because of lease termination dates

    So the supply just sits and rental prices drop because of lack of demand. Companies with too much space respond by giving landlords notice of intent moving to smaller quarters, or demanding lease reductions.

    Commercial real estate is going to be in a funk for years. Residential housing will pick up first, and lets' face it, residential housing looks miserable as well, also burdened by real and shadow supply.

     

    RRESIDENTIAL REAL ESTATE - PHASE II

     

    Can the American mortgage market survive without taxpayer support? Economist

     

    EXPIRATION FINANCIAL CRISIS PROGRAM/font>

     

     

    PPENSION & ENTITLEMENTS CRISIS


    Despite gains, public pensions crashing Franklin Center

    CHRONIC UNEMPLOYMENT

     


    GOVERNMENT BACKSTOP INSURANCE

     

     

    CORPORATE BANKRUPTCIES

     

    BP - British Petroleum

    SULTANS OF SWAP: BP Potentially More Devastating then Lehman!

    ------------

    Yep, BP CEO Tony Hayward Is Outta Here  BI

    We were already pretty sure the rumors were correct, and now the WSJ is corroborating reports that BP CEO Tony Hayward is on his way out.

    WSJ:

    The BP board is scheduled to meet Monday and Mr. Hayward's possible departure will be discussed then, these people said. They described the decision to move toward Mr. Hayward's departure as "mutual."

    Under the plan being discussed, Mr. Hayward would not necessarily depart immediately, these people said, giving the company time to settle on a successor and devise and orderly transition. It is possible, however, that the board could move more quickly in tapping a new chief.

    Naturally, the question of his severance is the subject of much speculation and interest.

    Here's what The Telegraph reported earlier:

    If the details can be agreed, Mr Hayward will be paid at least £1.045m, equivalent to a year's salary, on leaving BP but is almost certain to demand more in compensation for agreeing to go for the good of the company where he has worked for 28 years.

    Under the terms of his contract, Mr Hayward is entitled to "current salary and benefits" on departure, the latest annual report states. Last year, Mr Hayward earned a total of £4.56m – made up of £1.045m in salary, a £2.09m annual bonus, an £852,000 long-term incentive payment and £440,000 by cashing in 220,000 share options.

     

    Alarm Was Disabled Before BP Blast  WSJ

    An alarm system aboard the Deepwater Horizon was partially disabled on the night the drilling rig caught fire, a worker testified.

     

     

    BP set for deep-water drilling off Libya  FT

     

     

    Government Study Confirms Spread Of Oil Below Gulf Surface  BI

    A NOAA study released today confirms previous reports that oil was spreading below the surface. The heavy liquid is not floating up to the surface as one might expect. This 3D map shows detected levels of oil, along with unrelated seepage from the ocean floor.

    Although underwater oil plumes could cause lethal oxygen depletion -- as Matthew Simmons warns -- these levels are NOT severe enough to kill aquatic life:

    Dissolved oxygen measurements sometimes show a drop in dissolved oxygen at or below a depth of 1,000 meters, although these drops were not severe enough to indicate impending hypoxic conditions.

     



     

    OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE

    FLASH CRASH - HFT - DARK POOLS

     

    MARKET WARNINGS

     

     

    GOLD MANIPULATION

     

     

    VIDEO TO WATCH

     

     

     

    QUOTE OF THE WEEK
    The President should stop talking and acting on anything else – not the deficit, not energy, not the environment, not immigration, not implementing the health care law, not education. He should make the whole upcoming mid-term election a national referendum on putting Americans back to work, and his jobs bill. But none of this is happening.br>
    Robert Reich
    Former Democratic Secretary of Labor
    We're in a One-and-a-Half Dip Recession Reich

    The U.S. economy continues to face the predictable effects of credit obligations that quite simply exceed the cash flows available to service them, coupled with the predictable shift away from the consumption patterns that produced these obligations. The misguided response of our policy makers has been to defend bondholders at all costs, using public funds to make sure that lenders get 100 cents on the dollar, plus interest, while at the same time desperately trying to prod consumers back to their former patterns of overconsumption. These policies are designed to preserve exactly the reckless and unsustainable behavior that caused the recent downturn. They are likely to fail because the strategy is absurd. The ultimate outcome, which will be forced upon us eventually if we do not pursue it deliberately, will be the eventual restructuring of debt obligations and a gradual shift in the profile of U.S. economic activity toward greater saving – either to finance exploding government deficits, or preferably, to finance an expansion in productive investment, research and development, and capital accumulation.

    From my perspective, bolder approaches are required. Debt that cannot be serviced should be restructured, rather than socializing the losses of reckless private decision-making. We will inevitably have a large "stimulus" package, but it will be essential to craft it in a way that emphasizes incentives to create and accumulate productive capital, both private and public.

    On the tax side, we also have options. There are far more possibilities than simply preserving or discarding the Bush tax cuts. Frankly, I was never a fan of those cuts, which added more variation, not less, in tax rates across various forms of income. Ideally, efficient tax systems should feature flat rates and very broad bases. You define income in a very wide manner, and you tax it all at the same rate. You introduce a progressive tax structure by creating large exclusions from taxes at low income levels, so that people at lower income scales pay no tax at all. In my view, the same thing should be done with Social Security – drop the rate substantially, but include all income – wage and non-wage. Three-quarters of Americans pay more in payroll taxes than in income taxes. By reducing the wedge between the hourly amount earned by employees and the hourly cost paid by employers, this strategy would create immediate incentives for employment. Moreover, it would raise more revenue because at present, even Warren Buffett only pays Social Security taxes on the first $106,800 of income. Combining a flatter income tax with a flatter and broader payroll tax would stimulate growth, employment, and greater economic efficiency without compromising total revenues.

    JOHN HUSSMAN - Hussman: Here's Why The Market Is NOT Cheap And You Should Start Saving

     
    Harvard economics professor Robert Barro says the real myth is the Keynesian multiplier, which is supposed to convert a fiscal stimulus into a significantly larger boost to aggregate demand. On the contrary, supersized deficits are denting business confidence, not least by implying higher future taxes.

     


    ZH - Zero Hedge - Business Insider, WSJ - Wall Street Journal, BL - Bloomberg, FT - Financial Times

     

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    Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

     

    © Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

     

             

    TODAY'S NEWS

    WEEKEND

    07-24/25-10

    JULY
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    Book Review- Five Thumbs Up for Steve Greenhut's Plunder!  Mish

     

     

     

     

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