Thain called to testify on Merrill bonuses

Following the series of events of last week in reverse order:

• More details emerge on Thain
• John Thain fired by Ken Lewis
• Merrill and John Thain exposed by the FT

It appears that John Thain has been issued a subpoena to testify in court.

This could get interesting and we might be facing various exiting endings (my interpretation/opinion):

• If the management of BofA really knew what was going on, they might lose their job and face the same public humiliation as Thain.
• If the Fed was really behind the merger of BofA with Merrill as I suggested before, they might try to force Thain to be a scapegoat to protect themselves.
• In which case, Thain might decide he doesn't want to go under alone, and will try to take down as many of these corrupt people with him as he can. This story would hence become a really big deal in the US and around the world.
• If it is that big a deal as mentioned in the previous point, they will do their best not make it public and save the face of the Establishment and of the United States by forgetting the whole thing and settling it with a no ground for prosecution. (My best guess is that we'll end up here...)
  

Here's the FT report:

John Thain has been issued a subpoena to testify about Merrill Lynch’s accelerated payment of bonuses last month, when his firm doled out close to $4bn in incentive pay, in spite of posting losses of $27bn for the year.

Merrill paid the bonuses even as Bank of America was asking the US government for an additional $20bn in Tarp money to complete its acquisition of the troubled investment bank.

The subpoena, issued on Tuesday by Andrew Cuomo, New York attorney-general, takes the dispute between Mr Thain and top management at BofA to a new level, with potential legal exposure for both parties. Mr Cuomo also issued a subpoena to J. Steele Alphin, BofA’s chief administrative officer, who is said to have had several discussions with Mr Thain about the bonus payments in late November and early December.

The accelerated bonus payments were first disclosed by the Financial Times last Thursday, the same day Mr Thain was dismissed by BofA chief executive Ken Lewis. At the time, BofA said it was Mr Thain’s decision to pay the bonuses.

Since then, in a memo to Merrill Lynch staffers and in an interview on CNBC Monday, Mr Thain has said that BofA knew about the bonus payments and even recommended changes in their cash-and-stock mix. BofA told the FT on Sunday that “we never said we didn’t talk” about the bonus payments, just that Merrill, as an independent company, was responsible for its decisions.

In a statement, Mr Cuomo said: “These subpoenas are part of an ongoing inquiry into billions of dollars in bonuses paid by Merrill Lynch late last year just days before Merrill was taken over by Bank of America. The fact that Merrill Lynch appears to have moved up the timetable to pay bonuses before its merger with Bank of America is troubling to say the least and warrants further investigation.”

While the back-and-forth fusillades between Mr Thain and BofA may not resolve the matter, Mr Cuomo’s inquiry could eventually pose a threat to Mr Lewis, BofA’s chief. It is expected that Mr Cuomo will not only look at the payment of bonuses, but also at Mr Lewis’ lack of communication with BofA shareholders about the state of Merrill’s financial condition before and after the December 5 shareholder vote to approve the transaction.

BofA has already been slapped with several lawsuits, alleging that Mr Lewis kept his shareholders in the dark about the state of Merrill’s financial condition prior to the deal being closed. BofA has said that it was only in the second week of December, after the shareholder vote, that Merrill’s losses ballooned well beyond expected levels. Mr Thain said on Monday that BofA’s managers were on site from September through December and that they received daily reports concerning Merrill’s financial condition.

Inflation or Deflation? - 4

It's funny how on the same week-end I published a post about Inflation vs Deflation, a couple of minds I highly respect publish also their own opinions about it:

• Adam Hamilton, Big Inflation is Coming
• Mish's reply: Is Big Inflation Coming
  

These are both interesting reads. It helps get opposing points of view, even though I haven't made my mind yet, I tend to think that at least in the UK, inflation is going to be really high, as I wrote in Inflation or Deflation? - 3.

Mish also published Peter Schiff was Wrong which balances all the bullish stuff we hear about Peter Schiff. I must admit that I am a "fan" of both Peter Schiff and Mish. I have read both Peter's books and read what both of them write. I am not particularly following their advices, but trying to use my own judgment while still getting inputs from Schiff, Mish, Jim Rogers, Marc Faber, and so on. I already mentioned and told Peter Schiff that even though he was probably right on big picture, his extreme views tend to discredit him and that the one big mistake he committed in 2008 was to not hedge his clients portfolios with Puts. Again, apart from that, I mainly share his points of view and ideas, but to a less extreme extend (except that I am very bearish about the UK, bearish Australia's and New Zealand's currencies, and also the CHF).

Mish is really hard on Peter Schiff, but I guess it again helps balance our opinions and help himself advertise the Sitka Pacific funds for which he's the advisor. All in all, it's worth reading, with a grain of salt: if portfolio performance was the only benchmark as Mish tends to imply, my portfolio having performed far better than Sitka, would it mean that I am doing a better job than Mish? Obviously not. So... grain of salt it is...

Warren Buffett's Unhappy New Year

I had already written a while ago about Warren Buffett's decisions during the panic of 08, and him being public about his shares investments. I even questioned his integrity while doing so, since it could hurt small investors who would follow him without having the background required to understand what was going on.

This all was in late October 2008, while all the news reports were overly bullish in Warren, and trying to talk up the markets...

Today Barron's Magazine is publishing an article about Warren Buffet and his unhappy/unlucky investments in 2008. Unfortunately, it requires a subscription (and I am no subscriber), but there's still a preview available:

EVEN GREAT INVESTORS MAKE MISTAKES. Warren Buffett's affinity for a group of financial stocks, including American Express, Wells Fargo and U.S. Bancorp, is likely hurting his equity returns in 2009.
Buffett's Berkshire Hathaway has sizable holdings in that trio, and the sizable declines in their share prices this year are dragging down Berkshire's vaunted equity portfolio, which totaled $76 billion at the end of the third quarter, the latest reporting period.
We estimate Berkshire's equity portfolio could have dropped 14% in 2009 through Thursday, against an 8% decline in the S&P 500.

It isn't an easy step to bet against Warren Buffett, specially when you're a nobody in the financial world, but still, I am happy to keep the score for myself: Pej 1 - Warren 0 :-)

Inflation or Deflation? - 3

This is a sequel to the two previous posts:

1. Inflation or Deflation - 1 (07/12/2008)
   
2. Inflation or Deflation - 2 (10/12/2008)

This time, I think, we can be more pragmatic and let the academic debate for a forthcoming post. And we will focus on the UK, because this is were I live and also because the GBP is collapsing like the currency of a developing country and that the duo-pole Brown/Darling and Mervyn King are behaving as if the collapse of their currency does not matter.

First, remember that they are just acting like in a bad play, and that they're just pretending, and deceiving the public. I mentioned their acting back in September '08.

Second, remember congressman Fadden stating that the Fed is one of the most corrupt institutions in the world? Well, I think he didn't say the most corrupt because that rank might be already taken by the Bank of England. The reasons? As corrupt and absurd and dangerous as the Fed is, they still publish a lot of information about what they are doing on a day to day basis and it is possible to track down their actions in a fairly detailed way.

The Bank of England is lot more secretive about what they are doing, they have even obtained from their accomplice in crime (Gordon Brown) to not have to disclose their short term liquidity help to banks. They also stopped publishing most of the Money Aggregates (the likes of M0, M1, M2, M3, M4, etc.). They only publish M4 now, which is the least useful of these money aggregates...

Unfortunately, even the little information they publish remains very scary. Look at these charts: the M4 is skyrocketing at a very dangerous rate. The charts come from the official BoE publication.


As you can see, the money aggregates in the UK are rising at 45-50% yearly rate! That's really gigantic and would just by itself explain the crash of the currency in the Forex markets.

Where am I going with all this? Well, I would like to answer all the people who keep on telling me or the radio/TV/newspapers that basically, "Since you leave in the UK, it doesn't impact you". This just plain non-sense or stupidity.

My point is that if China did that, they would be fare less impacted, since they produce almost everything they need. But a country like the UK which doesn't produce ANYTHING and keeps on importing everything from agricultural products to industrial ones, is going to see a major impact. Moreover they also import highly skilled people to manage their industry and most of the people who work in finance are also foreigners who got attracted by the high salaries and the highly over-valued Pound (including myself!). Also, most of the low-end tasks are carried out by foreigners as well (Indians, Pakistanis for example, are the people I see running the public transports or 99% of the tills in the supermarkets). I hear lots of people from eastern-Europe came to the UK to do engineering, plumbing, or working in construction...

All these people are going to leave the country. The UK is losing its workforce. Most of my friends from the Euro-zone have left already, and those remaining are preparing their departure as well. Many many people from Eastern Europe have left, because it doesn't make sense for them to stay in the UK, leave far from their family, work in a hard working environment, and earn 30% less than what they were doing just 12-18 months ago.

This is the first impact.

The second one is that everything you find in the supermarkets and shopping centres in the UK are imported. So yes, in the short term, clothing companies are making huge discounts to get rid of their inventories, but this is not going to last. Next season's collection is going to either be a lot more expensive to cover for the loss of value of the pound if the company is based abroad, or to cover for the higher expenses (producing abroad) if the company is UK-based (there aren't that many of these...).

What I have noticed when doing my grocery shopping is that the size of everything is decreasing very quickly: washing powders, cleaning products, fruit boxes, etc. Even the cucumbers are a lot shorter than before. This is no joke! Cucumbers are a lot shorter, and I have showed this to my friends, they laughed when they saw them! The fruits and vegetables are really low end quality. When going to Sainsbury's (low end supermarket chain) I felt like being in Russia. I am shopping at Waitrose (high end supermarket chain) but I feel like everything is really nice, but super expensive!

Another thing that gave me the shivers, is that I haven't been to find Mach-3 blades for the past month in the supermarket. This is to me a very good proof that things are getting really really bad, because shaving blades, alcohol, cigarettes are the typical things people tend to stock at home while expecting the worst to happen...

So my belief is that the Eurozone and Japan are not going to be impacted by price-inflation, and will see prices decline on the short and mid-term, the UK is going to see a massive inflation because of the huge money printing and the huge drop in the value of the GBP. I believe the USD is going to fall in the short-to-mid term, bringing inflation in the US since they import a lot of stuff. But that inflation is going to be far less than the one we'll see in the UK.

[updated: fixed many typos... apologies]

Moorad Choudry ridicules himself on Bloomberg TV

Moorad Choudry, the Head of Treasury at the Euro Arab Bank and the author of many financial books completely ridiculed himself on Bloomberg TV. Not only does he seem to understand nothing from what is going on in the economy and the markets, but he also disagrees openly with Jim Rogers with completely stupid arguments and impolite behaviour.

Obviously, I am not surprised that academics like him do not understand the real world and I believe that their prescriptions bring countries into major crisis and economic/fiscal/monetary disasters, but I do not see how being impolite would make him more credible to the eye of the public.

Nonetheless, to find out the list of books that you shouldn't read, please click here: Moorad Choudhry on Financial Gurus and Moorad Choudhry on Amazon.com.

The videos I mentioned:

Gold production drop 4% in 2008, forth yearly drop in a row

After small decreases in 2005, 2006 and 2007, worldwide gold production fell for the 4th consecutive year, by 4% in 2008.

Obviously, this is very bullish for gold since prices have been steadily climbing since 2003-2004, and that they were at record levels during 2008 and yet, mining companies couldn't increase their output to cope enough with demand and take advantage of these high prices.

GMFS also announced that the average production cost of gold is about $470/oz. Sadly, this is probably not considering the huge environmental cost of mining...

GFMS is also announcing that hedging production is dropping to below 500 tonnes worldwide.

All these news are highly bullish for gold investors. Gold prices are up 2.5% today, to about $880/oz.

Here's a report from The Economist:

The output of the world’s gold mines fell by 4% last year, according to estimates in a new report from the GFMS, a consultancy. More than half the 88-tonne fall in production was accounted for by a slump in gold mining in Indonesia. Supply from South Africa, once the world’s largest producer, fell by 14%—the biggest drop since the Boer War. Last year’s fall was partly owing to new safety procedures, which helped reduce the industry’s fatality rate. Skills shortages and power cuts also affected operations. Australia’s output fell by 14%, too, amid reports that some fledgling mining firms faced closure because of scarce credit. Of the world’s six big producers, China, Russia and Peru all increased output last year.

More details emerge on Thain

It is worth reminding this sentence one more time:

When asked why he didn't wait until Monday to get Merrill at a lower price, Bank of America CEO Ken Lewis stated "the strategic opportunity was so compelling it couldn't wait."

All the following show how arrogant and corrupt Thain was. Hopefully this public humiliation will put an end to his career and reveal also what has been going on in the finance industry for the past many years.

Merrill Lynch CEO Thain Spent $1.22 Million On Office:

When John Thain became Merrill Lynch’sCEO in early 2008, he hired Michael S. Smith Design to revamp his office suite, spending approximately $1.22 million according to documents.

Additionally, documents showed that Thain signed off on the purchases personally, and that he used another $5,000 to pay the expenses Smith incurred in doing the work.

The following is a list of the items in his suite:

• Area Rug $87,784
• Mahogany Pedestal Table $25,713
• 19th Century Credenza $68,179
• Pendant Light Furniture $19,751
• 4 Pairs of Curtains $28,091
• Pair of Guest Chairs $87,784
• George IV Chair $18,468
• 6 Wall Sconces $2,741
• Parchment Waste Can $1,405
• Roman Shade Fabric $10,967
• Roman Shades $7,315
• Coffee Table $5,852
• Commode on Legs $35,115

Thain also paid his driver $230,000 for one years work, which included the driver's $85,000 salary and bonus of $18,000, and another $128,000 in over-time pay, documents show. Drivers of top executives are often paid about half that amount.

This reckless behavior has brought BofA on the brinks of a collapse, and people are now talking about the bank as a defacto nationalized one:

Jan. 23 (Bloomberg) -- The U.S. government’s decision to pledge billions of additional dollars with strings attached to Citigroup Inc. and Bank of America Corp. may be nationalization by another name, according to former bankers and regulators.

Faced with pressure from lawmakers, banks have shaken up management, eliminated executive bonuses and staff and canceled conventions. They’ll be forced to do monthly reports on how they’ve boosted lending while slashing quarterly dividends to one cent a share for three years.

“When the Treasury tells a bank to pay a penny a share vs. its old dividend, you know who’s calling the shots,” said Jon Bruss, a 40-year industry veteran and founder of Hartland, Wisconsin-based Fortress Partners Capital Management Ltd., which invests in banks. “It may not be de jure nationalization but I think it’s de facto nationalization.”

The worst part is that a nobody like me was able to predict this whole mess since the very beginning. The good news is that even Ken Lewis job is now at stake, and he might have to resign very soon:

Jan. 23 (Bloomberg) -- Kenneth Lewis’s purchase of Merrill Lynch & Co., the deal that was supposed to cap his career as Bank of America Corp.’s master builder, may wind up derailing it.

Bank of America, the largest U.S. bank by assets, dropped 15 percent in New York trading yesterday as Lewis ousted former Merrill Chief Executive Officer John Thain three weeks after the transaction closed. The bank is worth $36.3 billion, a fraction of the more than $100 billion Lewis spent on acquisitions since he became CEO in 2001. Its quarterly dividend is a penny a share, down from 64 cents six months ago.

“This deal could cost Lewis his job eventually,” said Ralph Cole, a money manager at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which sold almost 361,000 Bank of America shares in the third quarter. “They will give him more time to work this out, but everything is moving so quickly.”
[...]
Lewis began to lose confidence in Thain in December, when he learned of Merrill’s loss from members of his own merger- integration team, according to a person familiar with Lewis’s thinking. Lewis indicated that he thought Thain should have been more proactive in keeping him apprised of the results, according to this person.

Lewis was further taken aback early this month, when he learned that Merrill’s investment-banking chief, Greg Fleming, planned to leave for a teaching job at Yale University. Lewis liked Fleming, 45, a 17-year Merrill veteran, and believed Thain had helped to drive him away, the person familiar with his thinking said. Lewis also was put off by the size of bonuses paid to Merrill employees, this person said.

Another person familiar with the matter said Merrill’s loss shouldn’t have been a surprise. Lewis’s transition team at Merrill’s headquarters had access to trading results daily throughout the fourth quarter, the person said. Moreover, Bank of America executives were deeply involved in discussions about year-end bonuses for Merrill employees, according to this person.

Thain’s actions indicate he didn’t see the end coming. In December, at Merrill’s final shareholder meeting, Thain said he wouldn’t have done anything differently during his tenure at Merrill. As recently as Jan. 21, he spent $483,066 to buy 84,600 shares of Bank of America at $5.71 each, a regulatory filing showed.

The next day, at 11:30 a.m., Thain found himself face-to-face with Lewis, who had flown up from Charlotte, in his 33rd-floor office at Merrill’s headquarters in downtown Manhattan’s World Financial Center. It was the same office previously occupied by Thain’s predecessor, E. Stanley O’Neal, who resigned in October 2007 after the firm reported a then-record $2.24 billion loss.

The office had undergone a transformation. Thain spent $1.2 million early last year to redecorate, a person familiar with the matter said. The costs included $87,784 on area rugs and $18,468 on a George IV chair, CNBC reported.

John Thain fired by Ken Lewis

Just a few hours after my previous post about the robbery orchestrated by Thain and the massive losses hidden in Merrill, Bloomberg reports that John Thain is leaving BofA where he was supposed to be the head of investment banking. The final sentence shows also the extend of the debacle and pillage of Merrill's shareholders:

Jan. 22 (Bloomberg) -- John Thain, who engineered the sale of 95-year-old Merrill Lynch & Co. to Bank of America Corp. in September, was ousted after Merrill’s $15.4 billion loss forced the bank to seek more money from the U.S. rescue fund.

Thain, 53, “agreed his situation was not working out and that he should resign,” said Robert Stickler, a Bank of America spokesman, in an e-mail. The resignation ends Thain’s tenure with the Charlotte, North Carolina-based bank less than a month after Merrill’s takeover was completed.

[...]

Thain this year spent $1.2 million to redecorate his office at New York-based Merrill, CNBC reported today.

Merrill and John Thain exposed by the FT

The FT published this interesting report about the shameful behaviour which looks more like a robbery than anything else (emphasis mine):

Merrill Lynch took the unusual step of accelerating bonus payments by a month last year, doling out billions of dollars to employees just three days before the closing of its sale to Bank of America.

The timing is notable because the money was paid as Merrill’s losses were mounting and Ken Lewis, BofA’s chief executive, was seeking additional funds from the government’s troubled asset recovery programme to help close the deal.
[...]
In past years, Merrill had paid bonuses later – usually late January or early February, according to company officials.

Within days of the compensation committee meeting, BofA officials said they became aware that Merrill’s fourth-quarter losses would be greater than expected and began talks with the US Treasury on securing additional Tarp money.

Last week, BofA said it would be receiving $20bn in Tarp money, in addition to the $25bn that had been earmarked for it and Merrill last year. It was then revealed that Merrill had suffered a $21.5bn operating loss in the fourth quarter.

Despite the magnitude of the losses, Merrill had set aside $15bn for 2008 compensation, a sum that was only 6 per cent lower than the total in 2007, when the investment bank’s losses were smaller.

The bulk of $15bn in compensation was paid out as salary and benefits throughout the course of the year. A person familiar with the matter estimated that about $3bn to $4bn was paid out in bonuses in December.

Nancy Bush, an analyst with NAB Research, described the size of the 2008 Merrill bonus payments as “ridiculous”.
[...]

Jim Rogers: "The UK is finished" [Updated2]

Jim Rogers just said at loud what I have been thinking for several years now: the UK is going to sink into the abyss because of their bubble economy, complete reliance of the economy on the Financial and Housing industry. The other major issue is the huge amounts of debt contracted by the UK citizens as well as the reliance on foreigners for high-end and low-end jobs. When your currency weakens, the foreigners flee the sinking ship (this is probably the next step for me as well)!

I have sold most of my pounds before the big collapse that started 18 months ago now, and have sold some more in the 1.30€ area, and since I got lucky and was right on the call that I made a few weeks ago, I sold almost all the remaining GBPs during the rally that followed the rate cut last week. I do not own a single share of a UK based company. And of course, my pension funds investment styles are Asia and Europe ex-UK.

For those who still do not who is Jim Rogers, here's a quote from Wikipedia:

Born in 1942.
In 1970, Rogers joined Arnhold & S. Bleichroeder, where he met George Soros. That same year, Rogers and Soros founded the Quantum Fund. During the following 10 years the portfolio gained 4200% while the S&P advanced about 47%.
In 1980 [at age 37], Rogers decided to "retire".

Finally, here's the excerpt from the Bloomberg interview:

“I would urge you to sell any sterling you might have,” Jim Rogers, chairman of Singapore-based Rogers Holdings, said in an interview with Bloomberg Television. “It’s finished. I hate to say it, but I would not put any money in the U.K.”

Here's another post worth reading, on the Telegraph this time: Gordon Brown brings Britain to the edge of bankruptcy:

The country stands on the precipice. We are at risk of utter humiliation, of London becoming a Reykjavik on Thames and Britain going under. Thanks to the arrogance, hubristic strutting and serial incompetence of the Government and a group of bankers, the possibility of national bankruptcy is not unrealistic.

The ridiculous and shameless Gordon was already famous for this "I will not allow house prices to get out of control" quote in 1997 but I hadn't heard about this one, which has been dug by many on the web during the past few days:

"A weak currency arises from a weak economy, which in turn is the result of a weak government" (Gordon Brown in 1992)

The GBP has crashed against all major currencies: 30% against the EUR, about 25% against the USD, and about 50% against the JPY! Doesn't that sound like the kind currency move you hear about in developing countries?


Jim Willie is very realistic in my opinion about the UK & US:

US & UK ECONOMIC FAILURE – RUNNING ON SCHEDULE
The death of the AngloSphere is unstoppable and on course. The two nations suffer from imperial over-reach, from corrupted paper markets in everything conceivable (stocks, bonds, housing, commodities). They both suffer from a devastating backlash related to nationwide dependence upon a housing bubble as an economic foundation. What a very sick concept!

RECOGNITION OF FAILURE – PAIN OF ISOLATION
The year 2009 will be marred by recognition of the Untied States and United Kingdom as failed states, beyond remedy. My description is for the US-UK to have morphed into crime syndicate control of government bodies in a widespread sense. They have strangled their hosts, and sucked them dry. The nations of the world will embark on a mission to protect themselves from the imploding giants. The natural progression in failed nations is from democracy to fascism, from capitalism to the Fascist Business Model, from free societies to martial law. A tragedy has already begun. It will run its full course.

Citigroup dismantled

The news is now official, Citigroup in its configuration is going to disappear. Next step is complete dismantlement and selling itself in pieces?

Jan. 16 (Bloomberg) -- Citigroup Inc. posted an $8.29 billion loss, twice as much as analysts estimated, and said it will split in two under Chief Executive Officer Vikram Pandit’s plan to rebuild a capital base decimated by the credit crisis.
[...]
A dwindling capital cushion and sinking stock price forced the 52-year-old Pandit to abandon Citigroup’s decade-old strategy of providing investment advice and insurance alongside branch banking, stock underwriting and corporate lending. He’s shedding units to free up capital and save the bank from insolvency.

“They are going to try to home in on what’s worth something, and try and sell the pieces that they really can’t value,” Todd Colvin, vice president of MF Global Inc., said in a Bloomberg TV interview.
[...]
The plan to cut off “non-core” businesses in a deteriorating economy may put the bank into a deeper hole, Sanford C. Bernstein & Co. analyst John McDonald wrote in a Jan. 14 report.

“It will likely be difficult for Citi to effectively dispose of assets and businesses in the current environment,” McDonald wrote. “Any new solution is likely to need an incremental infusion of common equity, either from the government, private investors or the public markets, any of which is likely to be dilutive to existing Citi shareholders.”

BofA in deep trouble, Ken Lewis humiliated

I already mentioned in Creature of Bernankenstein that the BofA acquisition of Merrill Lynch was highly overpaid and that it would anyway lead to a disaster. Remember how crazy Ken Lewis got about his acquisition? Like a kid with a new toy? He had already acquired Countrywide, which was a major mistake, but he couldn't prevent from doing a bigger one.

When asked why he didn't wait until Monday to get Merrill at a lower price, Bank of America CEO Ken Lewis stated "the strategic opportunity was so compelling it couldn't wait."

Oh, and of course, both the government and the Fed are massively pouring money into BofA to keep it afloat and the bill is going to be sent the USD holders (and not just the US tax-payer as I see written just EVERYWHERE). Government intervention is destructive of value, not creative.

The nightmare scenario is now unfolding:

Jan. 15 (Bloomberg) -- Bank of America Corp., the biggest U.S. bank by assets, may get more aid from the government to help absorb losses tied to this month's acquisition of Merrill Lynch & Co., three people familiar with the matter said.

Details are likely to be disclosed on Jan. 20, the people said. That's when Bank of America may post its first quarterly loss in 17 years as it digests the purchases of Merrill Lynch and Countrywide Financial Corp. The combined company has already received $25 billion from the U.S.

Bank of America told regulators in December the takeover might be abandoned because of Merrill's worse-than-expected results, said the people, who declined to be identified because the talks are private. The government insisted the transaction proceed because its collapse would create new turmoil in the financial system, they said.
[...]
The Merrill purchase followed Bank of America's July acquisition of Countrywide, the largest U.S. home lender. That transaction is probably causing losses at Bank of America because of the declining value of U.S. home prices, Townsend said. Losses from Countrywide's loans to delinquent borrowers may top $29 billion through 2011, Horowitz wrote in his report.

Jan. 16 (Bloomberg) -- [...]

The fourth-quarter loss of $1.79 billion, or 48 cents a share, compared with net income of $268 million, or 5 cents, a year earlier, the Charlotte, North Carolina-based company said in a statement today. Results didn't include a $15.3 billion loss at Merrill, acquired this month.

The losses, coupled with the government lifeline of $138 billion, raise doubts about the future of Chief Executive Officer Kenneth D. Lewis, who engineered takeovers of unprofitable New York-based brokerage Merrill and ailing mortgage lender Countrywide Financial Corp. [...]

“This thing is unraveling so fast Lewis may know his job is lost,” said Paul Miller, an analyst at Friedman Billings Ramsey Group Inc. in Arlington, Virginia, who has an “underperform” rating on Bank of America. The management team has “lost credibility,” he said before results were announced.

CPI higher than expected

Although the CPI is highly manipulated figure to the point that it is totally untrustworthy and useless, the fact even with all this manipulation, it fails to drop as much as expected might be a sign that the deflationists are wrong and that inflation will shoot up in the short- to mid-term (with all the disastrous consequences that come with it).

Wait & See.

WSJ:

The consumer price index dropped 0.7% in December on a seasonally adjusted basis compared to the previous month, the Labor Department said Friday, after falling at a record pace in November. Economists had expected a 0.8% decline.

PS: I will wait to see if Mish (deflationist for now) publishes any comment on that.
Update: Mish is more deflationist than ever.

Gold vs Gold (Paper vs Physical) pt5

This is yet another update of the Gold vs Gold (Paper vs Physical) series, which I started in September 2008 and you can read the previous posts here:

1. Gold vs Gold (Paper vs Physical) pt1 2008-09-12
2. Gold vs Gold (Paper vs Physical) pt2 2008-10-10
   
3. Gold vs Gold (Paper vs Physical) pt3 2008-10-15
4. Gold vs Gold (Paper vs Physical) pt4 2008-11-03

The Telegraph reports:

Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or "paper" proxies.

Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. "People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs," he said, referring to exchange trade funds listed in London, New York, and other bourses.

"They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands," he said.

This confirms one more time the disconnect between physical bars/coins and paper. While paper gold took a big hit this week, it is amazing that inventories are still very low among bullion merchants and even worth: the premium on physical products over paper assets is getting bigger and bigger, to reach as much as 40% on a silver 1oz coin (above paper).

James Passin on Commodities and Treasuries

This is a quote from an interview which I am posting here since it totally reflects my opinion. I don't need to spend time expressing it and it also put some weights on the balance.

I think $30 billion of Treasury Bills were purchased with a zero yield. And short-term Treasury Bills in secondary markets are now trading with a negative yield. It's extremely interesting, especially in light of the horrible fiscal position of the Treasury. The Treasury has replaced a lot of its assets with ownership of insolvent financial institutions and is essentially committed to monetizing all of this toxic debt. And yet the US Treasury is able to borrow with zero cost. I applaud that; they should keep borrowing at zero cost. I wouldn't be surprised to see new Treasury Bills issued with a negative coupon. Why not make people pay to loan money to the US Treasury?

This really is a manifestation of a deflation bubble, which will prove to be short-lived. At this point I don't have a short position in US Treasuries, but I think it's an interesting time to begin contemplating shorting US Treasury, given the cost of servicing that position is effectively zero.

The corollary of what's going on in the Treasury market is what's going on in the commodity market. Commodities have now collapsed and the CRB Index is back to multi-decade lows. There are quite significant short positions in all of the exchange-traded commodities and most commodities now are at levels that are very quickly ruining mining companies. A number of projects that were previously quite profitable are now unprofitable and there's no debt or equity capital to finance the losses needed to sustain production. This is leading to wholesale abandonment of mining projects, of energy projects.

If commodity prices stay at these levels for very long, given the absence of capital for anything, we're going to see a dramatic reduction in the output of raw materials. The interesting question really is to what extent the resource industry's financial pain and the ensuing destruction of raw material output will offset the falling demand.

We're starting to look for signs of distress in the commodity market, the kind of signs that would signal the bottom. We're seeing that everywhere from the collapse of hedge funds focused in commodities to the hundreds of junior resource companies that have market caps below their cash on the balance sheet. I think we've reached a point where if you have the time horizon and risk appetite, the market will reward you for aggressive bets on commodities.

DESCRIBING HIM as "the Indiana Jones of frontier stock markets," the Financial Times praises emerging-markets investor James Passin for visiting "rough, difficult places, rather than swanning around the more comfortable nightclubs..."

Former editor and research director at investment newsletter Taipan, James is now a fund manager at Firebird Management LLC, which runs four private funds dedicated to investing in publicly traded equities of companies operating in the former Soviet Union and early-stage Eastern European countries, as well as two global portfolio equity funds. He also serves on the Board of Directors of National Investment Bank of Mongolia; Sharyn Gol, a coal producer listed on the Mongolian Stock Exchange; and Maghreb Minerals PLC, a mineral exploration company listed on London's AIM.

Fox Business sues Fed

I mentioned it before here, Bloomberg has already sued the Fed because they refuse to disclose any information about the assets they have on their balance sheets and the companies they are being them from, and now, it is the turn of Fox to do so as well. According to the report, they have also sued the Treasury back in December 2008, which is something that I didn't know...

Fox Busuiness sues the Fed (emphasis mine):

WASHINGTON, Jan 12 (Reuters) - News channel Fox Business Network sued the U.S. Federal Reserve on Monday, saying that the government has failed to release details on financial companies receiving federal funds.

Fox said it made an initial request on Nov. 10 last year under the Freedom of Information Act. The network asked for the identification of the financial institutions receiving funds and details on the collateral provided by these firms between August 2007 and November 2008.

The network made a second request on Nov. 18, asking for more information on financial firms that received lending from Fed programs. It also asked for the amount of collateral held by the Fed as of Nov. 14.

[...]

Fox filed a similar lawsuit in December against the U.S. Treasury Department for what it called a failure to respond to repeated requests for information on how it has allocated the $700 billion bailout fund.

Bloomberg exposes Hank Paulson

It's refreshing to see that Bloomberg, despite having the banking industry as its main source of revenue, is capable of suing the Fed, and also exposing the corruption at the Federal level in the US by exposing what Paulson is doing (emphasis mine).

Paulson should be judged for treason against the Nation and sentensed to remain in a 3m2 cell for the rest of his pathetic life of destruction and robery.

Jan. 9 (Bloomberg) -- [...]

The Treasury secretary has made 174 purchases of banks’ preferred shares that include certificates to buy stock at a later date. He invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, yet gained warrants worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.
[...]
The transactions are “just egregious,” said Johnson, a fellow at the Peterson Institute for International Economics in Washington. “You want to do it the way Warren does it.”
[...]
Giving Money Away

“Paulson said he had to make it attractive to banks, which is code for ‘I’m going to give money away,’” said Joseph Stiglitz, who won a Nobel Prize in 2001 for his work on the economic value of information.

“The worst aspect of this is that they were designed not to do what they were supposed to do,” he said in a telephone interview from Paris Jan. 7. “In many ways, it’s not only a giveaway, but a giveaway that was designed not to work.”

The Treasury would have held warrants for 116 million shares of Goldman Sachs under Buffett’s terms, which would be equivalent to a 21 percent stake when added to those currently outstanding. Instead, the dilution is 2.7 percent under the Treasury plan. Blankfein is the company’s biggest individual investor, with 2.08 million shares worth about $178 million today, according to Bloomberg data. His 0.47 percent interest would have declined to 0.36 percent under Buffett’s terms and would be 0.44 percent if the Treasury’s warrants were exercised.
[...]
Stiglitz said finance professionals at Treasury possessed expertise on warrant pricing that members of Congress didn’t. As a result, Paulson gave lip service to the lawmakers’ intent on TARP without gaining much value for taxpayers, said Stiglitz, a Columbia University professor who described the pricing mechanism as “a gimmick to make sure that they were giving away something worth nothing.”

“If Paulson was still an employee of Goldman Sachs and he’d done this deal, he would have been fired,” he said.
[...]
A $5 billion U.S. loan last week to GMAC LLC, the Detroit- based finance affiliate of General Motors Corp., was made under the Treasury program and was part of $6 billion advanced to keep the automaker afloat.

In advancing the $5 billion, Paulson accepted warrants that reward taxpayers with an additional $250 million, or 5 percent of the stake. That compares with 15 percent on the 174 completed bank rescues as well as the 100 percent Berkshire Hathaway Inc. Chairman Buffett obtained on an investment in Goldman Sachs in September, Bloomberg data show. A warrant is a company-issued certificate that represents an option to buy a certain number of shares at a specific price by a predetermined date.
[...]
The government has received warrants valued at $13.8 billion in the 25 biggest capital injections from TARP, according to Bloomberg data. Under the terms Buffett negotiated for his $5 billion stake in Goldman Sachs, the TARP certificates would have been worth $130.8 billion.

Buffett received 43.5 million Goldman Sachs warrants valued at $82.18 apiece on the date of the transaction, or $3.6 billion, Bloomberg analytics show. Paulson, who served as the New York- based bank’s chief executive officer until 2006, injected twice as much taxpayer money into Goldman Sachs a month later and got 12.2 million warrants worth $72.33 each, or $882 million.

No Confidence

If the Treasury had received the same terms as Buffett, taxpayers would have become the biggest investors in most of the bailed-out banks and existing stakes would have been diluted, Bloomberg data show.

[...]
Congress left it to Paulson and his staff to decide how warrants would be priced and how many the U.S. would receive under the TARP, according to Caleb Weaver, a spokesman for the program’s oversight board. Treasury imposed identical terms for 140 capital injections. Thirty-four closely held lenders issued certificates to the government for preferred stock instead of common shares and one community development institution wasn’t required to issue warrants, according to the Jan. 6 Treasury report on TARP.
[...]
Paulson left money on the table in three ways, according to economist Johnson: accepting fewer warrants than Buffett did; setting the certificates’ price trigger, or strike, above market values; and receiving an annual yield on the preferred shares that is half of what Buffett will get for the first five years.

The government will forgo almost $48 billion over the next five years in preferred stock dividend payments from the 25 biggest TARP infusions, as compared with Buffett, according to the terms of the deals.

The taxpayers’ certificates were set at the 20-day trailing average of the share price, which for Goldman Sachs was $122.90 on Oct. 28, when the company closed almost $30 cheaper at $93.57. The trailing average ensured a higher strike price, and lower value for the warrants, because bank stocks were plummeting.

By contrast, Buffett received an 8 percent discount to the market price at $115 a share on Sept. 23, when the stock closed at $125.05.

Taxpayers also acquired preferred shares as part of the bailout. These securities, which can’t vote unless the issue at hand is the creation of a more senior preferred stake, carry an interest payment of 5 percent that increases to 9 percent in five years. Buffett’s preferred shares in Goldman Sachs pay a 10 percent yield.

If Goldman Sachs rises to its five-year average price of $147, Buffett will be able to profit by $1.4 billion from exercising his warrants. The government warrants will be in the money for $294 million, or about a fifth as much for twice the investment.
[...]
Under Buffett’s terms, the Treasury’s investment in Citigroup would also have brought greater potential for profit to taxpayers. The two cash infusions totaling $45 billion would have resulted in warrants for about 5.6 billion shares, which would more than double the 5.4 billion of existing shares. The Treasury’s warrants call for 464 million shares, or 8 percent of the number under Buffett’s terms.
[...]
To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net .

Are central banks silently selling their gold?

Rob Kirby (tries to) prove(s) that the reason why gold is not a lot higher than where it currently trades is mainly due to Central Banks around the world selling their gold silently, since he found that there's a big discrepancy between what is mined, what is scrapped from current holdings, and the deliveries on the markets.

Let’s take a look at the primary sources of global gold supply:

1] - Global gold production: has been running at roughly 2,500 metric tonnes per annum in recent years

2] – Scrap: From the available evidence, we might guesstimate that as much as 25 million ounces of gold is added to world supply through “scrap sales.”

You see folks, grade six math dictates that fundamentally, world gold supply [1 and 2, above] equal approximately 113 million ounces [88 + 25 million ounces]. Now, if one simply looks at the number of ounces of gold transferred at the LMBA in the most recent 12 month period [Dec. 07 – Nov. 08], we can see that 275.2 million ounces of gold [two and one half times annual global production + scrap] allegedly changed hands:

Month	Millions of Ounces Transferred
Dec 07	25.0
Jan 08	25.3
Feb 08	22.9
Mar 08	25.7
Apr 08	21.1
May 08	22.1
Jun 08	21.2
Jul 08	21.5
Aug 08	23.3
Sep 08	24.8
Oct 08	24.0
Nov 08	18.3
Total	275.2

This does not even touch on amounts transacted / settled on New York’s COMEX.

That such a discrepancy exists between annual global gold supply and amounts of physical ounces being transferred DICTATE that someone or something is “filling the gap.”

That something “IS” vaulted Central Bank / Sovereign gold.

German Bond Auction Fails to Attract Enough Demand

Weirdly enough, nobody mentioned this on the blogosphere, but I think it's a major piece of news.

With all the major states in the world trying to borrow and with all the savers' investments being wiped out and so many people deeply into dept because they have borrowed for their mortgages, for their cars and in some countries, to pay for their studies and even to fuel their cars with credit cards, it is going to be probably very tough for government to raise money. Basically, there are no savings left to tap into!

So what is going to happen when auctions fail in other countries? It is likely that yields will skyrocket, and that governments will sell their bonds to their central banks, thus creating a massive amount of inflation. This is what I believe is going to happen in the US.

For this particular case of Germany, the main reason why the auction wasn't successful enough (in my opinion) is that the Euro is a common currency for many countries, and that it doesn't make sense to pay more (get a lower yield) on German Bunds than say on French bonds. The two countries are probably going to have the same fate in the next 10 years. Hard to believe that one would default and not the other.

Jan. 7 (Bloomberg) -- Germany’s sale of 10-year Bunds lured the least demand in six months as investors shied away from a flood of government securities, raising the prospect of increased borrowing costs for Europe’s biggest economy.

Investors bid for 5.2 billion euros ($7.1 billion) of the bonds offered today, a level of demand that prompted the Bundesbank to retain 32 percent of the securities, according to the central bank’s Web site. European governments want to raise money to finance more than $96 billion in bank bailouts and stave off the worst of the global recession. France may sell 7 billion euros of bonds tomorrow and Ireland began marketing five-year debt today. Spain is also planning a sale.

“I would call this a failed auction,” said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of France’s Credit Agricole SA. “This was a very poor start of auction season.”

The U.K. is planning an unprecedented 146.4 billion pounds ($221.1 billion) of debt sales in the fiscal year ending March 31. The government today sold 2 billion pounds of 4.75 percent bonds due in 2038. The securities yielded 3.98 percent and investors bid for 1.72 times the debt offered.

The U.S. sold a record $30 billion of three-year notes today yielding 1.2 percent and attracting bids 2.21 times the amount offered. President-elect Barack Obama said yesterday he expects to inherit a $1 trillion budget deficit and that similar shortfalls are in store “for years to come” as the government grapples with a recession and other spending demands.

Adolf Merckle died? [Update: suicide confirmed]

It looks like Adolf Merckle has died in a train accident (My guess: suicide? [Update: suicide confirmed]) ? My German is not so good, but the news can be found on German newspapers like here on the Morgen Post.

I think the 74-year-old German billionaire had lost all this fortune in speculating and getting caught in the Great Unwind a couple of months ago...

Here's an extract from Bloomberg and from an FT report:

Dec. 23 (Bloomberg) -- German billionaire Adolf Merckle is still in negotiations with more than 30 banks on emergency financing and no deal has been reached, said the family’s VEM Vermoegensverwaltung GmbH investment unit.

Merckle given more time to repay debt (Published: December 30 2008 12:07

German billionaire Adolf Merckle has taken a first step out of a financial crisis triggered by losses in speculative share trading, although any final deal with his banks looked set to diminish or even dissolve his cement-to-pharmaceuticals empire.

Suicide confirmation:

Jan. 6 (Bloomberg) -- German billionaire Adolf Merckle committed suicide, “broken” by the collapse of his corporate empire, his family said.

Merckle, 74, was hit by a train near his hometown of Blaubeuren, southeast of Stuttgart, yesterday evening, Die Welt newspaper reported.

“The dedicated family businessman was broken by his inability to handle the situation and he ended his own life,” the Merckle family said in a statement today.

Merckle, whose holdings spanned the cement, machinery and drug industries, was battered by bets on Volkswagen AG, a drop in the value of his HeidelbergCement AG stock and increasing debt. Merckle, whose estimated $9.2 billion fortune put him 94th on Forbes’ list of the world’s richest people, had been negotiating for more than two months with a group of more than 30 banks led by Commerzbank AG, Deutsche Bank AG, Royal Bank of Scotland Group Plc and Landesbank Baden-Wuerttemberg.

The Merckle family will likely have to sell stakes in HeidelbergCement, Germany’s biggest cement maker, Phoenix Pharmahandel AG, a drug wholesaler, and Ratiopharm GmbH, a generic drugmaker, people familiar with the matter said on Dec. 15.

HeidelbergCement fell 8.2 percent to 30.60 euros in Frankfurt trading. The Heidelberg-based company declined 70 percent last year, a fall that led the banks to seek additional financial guarantees from the billionaire.

Japan should help the US the same way they help third world countries

I don't know how I have missed that - actually, I know, it's probably because I was trying to enjoy my holidays - but here's what Akio Mikuni, president of credit ratings agency Mikuni & Co. said on Bloomberg TV:

Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession.
[...]
The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy.
[...]
It’s difficult for the U.S. to borrow its way out of this problem. Japan can help by extending debt cancellations.
[...]
Marshall Plan:
Japan should also invest in U.S. roads and bridges to support personal spending and secure demand for its goods as a global recession crimps trade, Mikuni said.

Replace the dollar and the USA by any poor country in Africa, and read again. This really gives me the shivers.

The Real Price of Gold

National Geographic features this long article about the real price of gold. There are many confusions in the article when it comes to financial turmoil and economic policies, but the article is nonetheless a very interesting read. The highlights from the article can be found below (emphasis mine):

[...]
No single element has tantalized and tormented the human imagination more than the shimmering metal known by the chemical symbol Au. For thousands of years the desire to possess gold has driven people to extremes, fueling wars and conquests, girding empires and currencies, leveling mountains and forests. Gold is not vital to human existence; it has, in fact, relatively few practical uses. Yet its chief virtues—its unusual density and malleability along with its imperishable shine—have made it one of the world's most coveted commodities, a transcendent symbol of beauty, wealth, and immortality. From pharaohs (who insisted on being buried in what they called the "flesh of the gods") to the forty-niners (whose mad rush for the mother lode built the American West) to the financiers (who, following Sir Isaac Newton's advice, made it the bedrock of the global economy): Nearly every society through the ages has invested gold with an almost mythological power.
[...]
In 2007 demand outstripped mine production by 59 percent. "Gold has always had this kind of magic," says Peter L. Bernstein, author of The Power of Gold. "But it's never been clear if we have gold—or gold has us."
[...]
the biggest consumer nations, namely India, where a gold obsession is woven into the culture, and China, which leaped past the U.S. in 2007 to become the world's second largest buyer of gold jewelry.
[...]
Part of the challenge, as well as the fascination, is that there is so little of it. In all of history, only 161,000 tons of gold have been mined, barely enough to fill two Olympic-size swimming pools. More than half of that has been extracted in the past 50 years. Now the world's richest deposits are fast being depleted, and new discoveries are rare. Gone are the hundred-mile-long gold reefs in South Africa or cherry-size nuggets in California. Most of the gold left to mine exists as traces buried in remote and fragile corners of the globe. It's an invitation to destruction. But there is no shortage of miners, big and small, who are willing to accept.
[...]
Extracting a single ounce of gold there [Newmont Mining Corporation's Batu Hijau operation in eastern Indonesia] requires the removal of more than 250 tons of rock and ore.
[...]
Her truck is part of a 111-vehicle fleet that hauls close to a hundred million tons of rock out of the ground every year. The 1,800-foot volcano that stood here for millions of years? No hint of it remains. The space it once occupied has been turned into a mile-wide pit that reaches 345 feet below sea level. By the time the seam at Batu Hijau is exhausted in 20 years or so, the pit will bottom out at 1,500 feet below sea level. The environmental wreckage doesn't concern Nur Piah anymore. "I only think about getting my salary," she says.
[...]
Even so, no technology can make the massive waste generated by mining magically disappear. It takes less than 16 hours to accumulate more tons of waste here than all of the tons of gold mined in human history. The waste comes in two forms: discarded rock, which is piled into flat-topped mountains spread across what used to be pristine rain forest, and tailings, the effluent from chemical processing that Newmont pipes to the bottom of the sea.
[...]
This method of "submarine tailings disposal" is effectively banned in most developed countries because of the damage the metal-heavy waste can do to the ocean environment, and Newmont practices it nowhere but in Indonesia. Four years ago an Indonesian court brought criminal charges against a Newmont subsidiary—even jailing five of its employees for a month—for pumping pollutants into the sea near its now defunct Buyat Bay mine on the island of Sulawesi.
[...]
Nowhere is the gold obsession more culturally entrenched than it is in India. Per capita income in this country of a billion people is $2,700, but it has been the world's runaway leader in gold demand for several decades. In 2007, India consumed 773.6 tons of gold, about 20 percent of the world gold market and more than double that purchased by either of its closest followers, China (363.3 tons) and the U.S. (278.1 tons). India produces very little gold of its own, but its citizens have hoarded up to 18,000 tons of the yellow metal—more than 40 times the amount held in the country's central bank.
[...]
the springtime festival of Akshaya Tritiya, considered the most auspicious day to buy gold on the Hindu calendar. The quantity of gold jewelry Indians purchase on this day—49 tons in 2008—so exceeds the amount bought on any other day of the year throughout the world that it often nudges gold prices higher.
[...]
As the price of the metal goes up, however, poor Indian families are having a harder time raising the gold they need for dowries. Though the dowry retains a social function—balancing the wealth between the families of bride and groom—the rising price of gold has only fueled its abusive side. In the neighboring state of Tamil Nadu, the struggle to acquire gold has led to dowry-related domestic violence (usually when grooms' families beat the brides for bringing too little gold) and selective abortions (committed by families desperate to avoid the financial burden of a daughter).
[...]
Only gold, that object of desire and destruction, could have conjured up a place of such startling contradictions as La Rinconada. Remote and inhospitable—at 17,000 feet, even oxygen is in short supply—the town is, nevertheless, growing at a furious pace. Approaching the settlement from across the high plains, a visitor first sees the glint of rooftops under a magnificent glacier draped like a wedding veil across the mountain. Then comes the stench. It's not just the garbage dumped down the slope, but the human and industrial waste that clogs the settlement's streets. For all its growth—the number of mines perforating the glacier has jumped in six years from 50 to around 250—La Rinconada has few basic services: no plumbing, no sanitation, no pollution control, no postal service, not even a police station. The nearest one, with a handful of cops, is an hour down the mountain. This is a place that operates, quite literally, above the law.
[...]
The local saying—"Al labor me voy, no sé si volveré"—translates as "Off to work I go, I don't know if I'll make it back." A death in the mine, in fact, is considered a good omen for those left behind. Human sacrifices, practiced in the Andes for centuries, are still considered the highest form of offering to the mountain deity. According to local beliefs, the chemical process by which the mountain absorbs a human brain brings gold ore closer to the surface, making it easier to extract.
[...]
In small-scale gold mining, UNIDO estimates, two to five grams of mercury are released into the environment for every gram of gold recovered—a staggering statistic, given that mercury poisoning can cause severe damage to the nervous system and all major organs.

The Greater Depression

For the past several days, I have been talking with many friends who live in the Matrix (i.e. in the real world, but with no understanding whatsoever of economics, politics, financial markets, etc.) and they often ask me how I feel about the economy they don't understand and I have hard time explaining why:

• A weak currency is a bad thing
• Low interest rates are dangerous
• Inflation is not an exogenous phenomenon, out of the government's control but a totally controlled one that is purposefully created by that same government (and more precisely, para-governmental/privately held central banks)

These misunderstanding or lack of understanding are very dangerous, but I cannot really blame them since the media is feeding its cattle with wrong definitions and the policy makers are using propaganda and false statements to manipulate public opinion and make them behave the way they want them.

The current fusion of Government/Media/Corporations in most countries lead to some sort of fascism state where it is hard to distinguish truth and lies. The government trying to prop up the stock market (the big corporations) and the media being so enthusiastic about the governments actions lead people to believe that everything is moving in the right direction and that the government is in control and will fix all the issues soon.

For example, Roosevelt is seen as a savior, and the zero interest rate policies of many central banks is seen as a blessing, and Keynes is dug out of the ground, and his policies are now applied all around the globe but maybe Germany.

Just watch at this 1933 pro-inflation propaganda to see how fallacies can be advocated by media and governments. They still want to make people believe that printing valueless pieces of paper can create wealth.

Watching this CNBC footage about inflation shows also clearly how the media misinforms the public, probably because having a 20-year-old inexperienced and uneducated bimbo presenting financial and economic news does not lead to the best results. She goes as far as stating that "fighting inflation is very difficult for the Fed". She somehow forgets that inflation is created intentionally by the Fed! The Fed's only purpose is to inflate!

I won't go through all the details of this madness, but rather point to these great posts from Mish, which I highly recommend reading:

• How "Something For Nothing" Ideas Become Policy
• Fiscal Insanity Virus Rapidly Spreading The Globe (Part 1)
• Fiscal Insanity Virus Rapidly Spreading The Globe (Part 2)
• Fiscal Insanity Virus Strikes Canada, Sweden, Italy, IMF

Most importantly, when I hear people say that with Obama things are going to get better, it really drives me crazy. The problem with Obama is that he is just as well intentioned as any of his predecessors and has really no will to change anything, contrary to what he states publicly. He has chosen the very same people to lead with him than those who have brought the US where it is, and is likely to get things a lot worse than they currently are, by spending and inflation even more than Bush.

My bleak view is that things look far worse than even during the Great Depression, specially for the US and the UK. Let's have a quick look at the current situation in the US

• The Federal State is broke and is printing like crazy, while its debt - already massive - is getting bigger and bigger
  
• The individual states are about to fill for bankrupcy or request bailout from the Federal Government (see for example, Mish)
  
• The municipalities are about the fill for bankrupcy
• The US citizen is broke, is jobless and has a mortgage to pay back, a home equity loan, and credit card loans
  
• There is a massive trade deficit running in the US
• The amount of US dollars held by foreigner is about 7-8 trillion US, and Federal Notes (US Dollar notes) are nothing but liabilities against current assets in the US.

So, when I tell my friends that I wouldn't be surprised to see many revolutions in various countries, including the USA, I get a really weird reaction from them. But the first symptoms are already showing: riots and demonstration in Iceland, Greece, Italy, Spain are just the beginning.

I strongly believe that there will either be a revolution in the US because people will not be able to both sustain the current government spendings via taxes as well as their own expenditures, including massive inflation or why not, a Third World War, since the Second World War was the way the US got out of the Great Depression. Nobody knows if anybody on the planet would survive the 3rd World War, but I still cannot totally reject the idea that the US will initiate that. There is already a lot of geopolitical instability, for example Israel vs. Palestine, Russia vs Ukraine, etc.

The reaction of my friends really disturbed me as I was wondering if I was the only one with such scary forecasts, so digging a little bit, I found these great interviews of Doug Casey and Gerald Celente, which are both great minds and who basically also think that the current crisis is far worse than the Great Depression and that Obama's team is going to lead a disaster. I highly recommend listening to them:

• Gerald Celente on Jeff Rense America trends for 2009 - part1 - part2 - part3 - part4 - part5
• Doug Casey on Gold Seek - part1 - part2
• Gerald Celente on Fox Business by 2012 America Underdeveloped Nation
  

Pedge Fund Performance 200812

Just a quick post to relate the performance of PedgeFund for the month of December 2008. November is available here.

Summary:
Pedge Fund USD
December performance: +2.2% (gross, approx)
Year to Date performance: +53% (gross, approx)

Highlights:

• Gains thanks to the precious metals (long gold and silver)
• Nice gains on Northgate Minerals, bought at $0.56 on the 5th of December, and worth $0.83 on the close of 31st (gain of 48% within a month) though it's a tiny holding in the portfolio.
  
• BIG losses on long oil (commodity and stocks)
  
• BIG losses on short treasuries, again
  
• Losses on treasuries partly compensated by the short USD long EUR position

I am quite happy with the performance of the portfolio this year, even though one must not forget the role of luck in any portfolio.

Mike Connell: Bush adviser's strange death

I don't want this blog to be dealing with conspiracy theories too much because it usually sends the wrong signal to many, but Reality Lenses is about the world that has been pulled over our eyes, so I cannot avoid the whole thing completely neither.

So, following a comment from Tim Fleming on my previous post about Dick Cheney and Barack Obama, I have spend a few minutes digging about the death of Mike Connell on the web.

Here are a few interesting links and info.

Raw Story, on the 20th of December 2008. The whole report is worth reading, but here's a quote:

A top level Republican IT consultant who was set to testify in a case alleging GOP election tampering in Ohio died in a plane crash late Friday night.

Raw Story, on the 22nd of December 2008. The whole report is worth reading, but here's a quote:

The Republican consultant accused of involvement in alleged vote-rigging in Ohio in 2004 was warned that his plane might be sabotaged before his death in a crash Friday night, according to a Cleveland CBS affiliate.

YouTube videos:

• Bush adviser's strange death
• Mike Connell: planecrash or murder?
• Connell Death 1/2: "Circumstances suspicious & convenient for Rove & WH"
• Connell Death 2/2: "Circumstances suspicious & convenient for Rove & WH"

The conmen take over the US - part2

I had already mentioned that the conmen had taken over the US. It has probably been the case since the creation of the Fed and it became more obvious with the repudiation of the gold link with the dollar (which was nothing but a default of the US government on their debt), but now, it seems like they don't even try to hide the scam anymore:

The Treasury announced yesterday that they will bail-out any company they want, without any transparency and at their total discretion, taking money from all the US citizens as well as anybody who own US dollars, to give them to any person they see fit. This is a completely totalitarian move, and doesn't involve any democratic process. Given that Paulson is leaving the office in less than a month, he could have left this to his successor joining Obama's team from the Fed, Geithner. But he seems to be in a hurry to fix everything before leaving office...

Here's a quote from the AFP report (emphasis mine)

WASHINGTON (AFP) — The US Treasury Department has given itself free rein in deciding the rescues of companies in the finance and auto sectors, according to two Treasury statements published this week.

The Treasury on Friday released guidelines for its Targeted Investment Program (TIP), part of emergency legislation enacted in early October to ease a credit crunch from the worst global financial meltdown since the Great Depression.

Related Links:

• Full AFP report
• Mish's take on the TIP
• Peter Kraus Works for Merrill Lynch for 3 Months and Receives $25 Million Payout