When I read this, I have a image pop into my mind:

Picture Buzz Lightyear shouting “Quantitative Easing..To Infinity..and Beyond!”

Ask yourself the question:

Is it more likely or less likely that individual US States will be bailed out?

If you answered, “more likely”, then you and I are in agreement.

Finally and perhaps more importantly, ask yourself if you have a plan to deal with what will be the guaranteed results of such bailouts (massive Quantitative Easing).

Got gold yet?
By Alison Vekshin

May 18 (Bloomberg) — The U.S. Senate rejected an amendment to financial-regulation legislation aimed at preventing taxpayer bailouts of state and local governments that have defaulted or are at risk of defaulting on debt.

Senator Judd Gregg’s proposal, which would have barred use of federal funds to purchase or guarantee debt or extend lines of credit to governments facing default, failed to win the 60 votes required for adoption.

“They shouldn’t expect the federal government to come in and take them out of their distress,” Senator Judd Gregg said before the vote. “There should be nothing that’s too big to fail in this country, including state governments,” said New Hampshire’s Gregg, the top Republican on the Budget Committee.

The Senate is modifying Banking Committee Chairman Christopher Dodd’s sweeping plan for remaking financial-industry regulations, aiming to prevent a repeat of the 2008 credit crisis and respond to voter anger over the $700 billion bailout fund Congress approved for companies including Citigroup Inc. and American International Group Inc.

Gregg cited California, which is facing a $19.1 billion budget gap for the year starting July 1, as an example of why states shouldn’t be permitted to burden U.S. taxpayers.

“The people of California, because their government has been totally irresponsible in spending for a large number of years, has created a massive obligation, especially in their pension programs, their public pension programs which they can’t afford to pay,” Gregg said. “And why did they run up those obligations? So the people running for office in California could get elected.”

Dodd Opposition

Dodd opposed the amendment, saying the federal government should have the flexibility to extend aid to struggling states.

“In certain circumstances, local governments or state governments have made irresponsible choices,” Dodd said. “But you don’t blame the entire population of that state or locality because some leadership has made a bad choice.”

Senate Majority Leader Harry Reid filed a motion yesterday to end debate and hold a final vote on the bill. A vote on Reid’s motion may come as soon as tomorrow.

If approved, the Senate measure would have to be reconciled with a bill approved in December by the House of Representatives before President Barack Obama can sign it into law. Among other things, the legislation would create a consumer protection unit at the Federal Reserve and a council of regulators to monitor risks to the economy.

Article Source

The big hoopla around the net is the recent announcements that Germany is banning “Naked Short Selling of Credit Default Swaps” (CDS)

The part I find amusing about all of this, is that no one seems to be asking the question “Ok, how are you going to do that across jurisdictions?”

One of the biggest conundrums that bankers globally have tried to figure out since the mid 70’s…with little luck, is how to regulate the “Eurodollar” market, and its progeny, OTC derivatives of all sorts.

The reality is, talks have been underway for DECADES on how to regulate this stuff, and the problem has always been, how do you regulate across borders?

In the words of a Swiss Banker personally involved in one such deliberation, “If we regulate it here, it will simply move someplace else”.

In terms of regulating the CDS market that is currently eating sovereigns and currencies for lunch all I have to say is, “Good luck with that”.

Germany to Ban Naked Short-Selling at Midnight

By Alan Crawford

May 18 (Bloomberg) — Germany will temporarily ban naked short selling and naked credit-default swaps of euro-area government bonds at midnight after politicians blamed the practice for exacerbating the European debt crisis.

The ban will also apply to naked short selling in shares of 10 banks and insurers that will last until March 31, 2011, German financial regulator BaFin said today in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, the regulator said.

The move came as Chancellor Angela Merkel’s coalition seeks to build momentum on financial-market regulation with lower- house lawmakers due to begin debating a bill tomorrow authorizing Germany’s contribution to a $1 trillion bailout plan to backstop the euro. U.S. stocks fell and the euro dropped to $1.2231, the lowest level since April 18, 2006, after the announcement.

“You cannot imagine what broke lose here after BaFin’s announcement,” Johan Kindermann, a capital markets lawyer at Simmons & Simmons in Frankfurt, said in an interview. “This will lead to an uproar in the markets tomorrow. Short-sellers will now, even tonight, try to close their positions at markets where they can still do so — if they find any possibilities left at all now.”

Merkel, Sarkozy

Merkel and French President Nicolas Sarkozy have called for curbs on speculating with sovereign credit-default swaps. European Union Financial Services Commissioner Michel Barnier this week called for stricter disclosure requirements on the transactions.

Allianz SE, Deutsche Bank AG, Commerzbank AG, Deutsche Boerse AG, Deutsche Postbank AG, Muenchener Rueckversicherungs AG, Hannover Rueckversicherungs AG, Generali Deutschland Holding AG, MLP AG and Aareal Bank AG are covered by the short-selling ban.

“Massive” short-selling was leading to excessive price movements which “could endanger the stability of the entire financial system,” BaFin said in the statement.

The European Union last month proposed that the Financial Stability Board, the group set up by the Group of 20 nations to monitor global financial trends, should “closely examine the role” of CDS on sovereign bond spreads. Merkel said earlier today that she will press the Group of 20 to bring in a financial transactions tax.

Merkel’s ‘Battle’

“In some ways, it’s a battle of the politicians against the markets” and “I’m determined to win,” Merkel said May 6. “The speculators are our adversaries.”

Germany, along with the U.S. and other EU nations, banned short selling of banks and insurance company shares at the height of the global financial crisis in 2008. The country still has rules requiring disclosure of net short positions of 0.2 percent or more of outstanding shares of 10 separate companies.

The disclosure of the rules drew criticism from lawyers who said that they should have been announced well ahead of time.

“The way it’s been announced is very irresponsible, and it’s sent many market participants into panic mode,” said Darren Fox, a regulator lawyer who advises hedge funds at Simmons & Simmons in London. “We thought regulators had learned their lessons from September 2008. Where is the market emergency that necessitates the introduction of an overnight ban?”

Short-selling is when hedge funds and other investors borrow shares they don’t own and sell them in the hope their price will go down. If it does, they buy back the shares at the lower price, return them to their owner and pocket the difference.

Credit-default swaps are derivatives that pay the buyer face value if a borrower — a country or a company — defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy insurance on bonds they don’t own.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Article Source

Over 10,000 customers a day pack a local gold market in China.

Video:

New video posted. This video is 47:49 minutes long, but in my opinion is well worth it to understand what you are up against when trying to trade todays markets.

Quants, and High Frequency Trading (HFT) Video

Larry Kudlow asks Rick Santelli about the gold rally, and gets a whopper of a response.

If you are not yet familiar with Chris Martenson’s work in the “Crash Course”, I highly recommend taking the time to review it.

Over a period of three years I spent over 3000+ hours trying to wrap my mind around what my gut feelings were telling me was something very wrong in the economy.

It nagged at me for years, but I could not put my finger on it.

What I learned in that three year period is summed up by Chris in a way that is simple to understand, and eloquently presented.

His video series the “Crash Course” is in my estimation far more valuable to the average person in terms of understanding what is happening in the global economy than a 4 year degree in economics. And whats even better is it doesnt take you 4 years, or 3000+ hours of study to figure it out, his videos are a series of short presentations you can watch over time if you like, the whole thing is less than a few hours.

You can find a copy of one of his recent posts below:

The Financial Crisis Is Far From Over

If you are a central bank, and no one wants to buy the bonds of a nation because no one believes they will be able to pay it back, then you can always print money and create a market for them yourself.

This practice, aka “Quantitative Easing” has been shown throughout history as a often-precursor to hyper-inflation and currency destruction.

This is just the latest in a decades long competition in the “race to the bottom” aka “competitive devaluation” of currencies. Only now, these nations arent competing so much because of concerns over the ability to compete in exports, but because nation-debtors are on the verge of defaulting the world over.

It is now clear that not only the US Central bank has lost its mind, but this phenomenon of Keynesian cult belief systems will continue – pretty much guaranteeing the destruction of paper currencies the world over.

Ultimately, the only currency left standing could be gold. I hope you own some.

ECB Plans to Buy European Bonds to Ease Greek Crisis

By Gabi Thesing, Jana Randow and Simon Kennedy

(Bloomberg) — Stephen Green, head of China research at Standard Chartered Bank in Shanghai, talks with Bloomberg’s Susan Li from Beijing about China’s economy and yuan policy. (Source: Bloomberg)

The European Central Bank said it will buy government and private bonds as part of an historic bid to stave off a sovereign-debt crisis that threatens to destroy the euro.

The ECB wants “to address severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy,” the central bank said in a statement at 3:15 a.m. in Frankfurt. The announcement came less than an hour after European finance ministers unveiled a loan package worth almost $1 trillion to staunch the market turmoil.

Resorting to what some economists have called the “nuclear option,” the ECB may open itself to the charge it’s undermining its independence by helping governments plug budget holes. Four days ago, ECB President Jean-Claude Trichet said bond purchases hadn’t been discussed when members of the bank’s 22-member Governing Council met to set interest rates in Lisbon.

By deciding to “go in and buy sovereign and corporate debt, they crossed a line,” said David Kotok, chairman and chief investment officer at Cumberland Advisors Inc., which manages about $1.4 billion in Vineland, New Jersey. “The line between fiscal and monetary policy gets blurred.”

The euro jumped to $1.2982 at 8:30 a.m. in Frankfurt from $1.2755 at the end of last week.

‘Dysfunctional’ Markets

The ECB said it will intervene in “those market segments which are dysfunctional,” suggesting it views the surge in some of the region’s bond yields as unjustified and that it’s acting to stabilize markets and protect the 16-nation economy.

Investors cited the ECB’s initial refusal to consider asset purchases as one reason for the May 7 rout in global markets, which included U.S. stocks falling the most in 14 months amid concern Greece’s woes were spreading.

After a week in which markets showed growing concern about access to funding, the Frankfurt-based ECB also reversed its withdrawal of emergency steps taken to tackle the global credit crisis, saying it will again offer banks as much cash as they want for terms of three and six months. It will also reactivate a swap line with the Federal Reserve and sell unlimited amounts of U.S. currency for seven and 84 days. The first operations will take place this week.

The central bank acted in concert with governments after markets targeted European economies with the weakest public finances. The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds surged to the highest level since the euro’s 1999 introduction.

Bunds Drop

The ECB’s strategy will hurt German bunds, lift the bonds of Portugal, Greece and Spain and eventually hamper the euro following an initial rally, said David Zervos, a managing director at Jeffries & Co. in New York.

German 10-year bonds fell when European markets opened this morning, sending the yield up 12 basis points to 2.93 percent.

While the euro’s founding treaty bans the ECB from buying bonds directly from governments, it can do so in the secondary market. The ECB said its moves won’t affect monetary policy as the resulting liquidity will be reabsorbed. The bank’s council will decide on the scope of the intervention.

“They are not cranking up the printing presses,” said James Nixon, co-chief European economist at Societe Generale SA in London. “This is a much more targeted, surgical approach. They buy the duff stuff that no one in the market will touch.”

‘Using Every Means’

Bundesbank President Axel Weber said on May 5 that the threat of contagion from Greece’s fiscal crisis didn’t merit “using every means.” Without referring specifically to bond buying, he said “measures that damage the fundamental principles of the currency union and the trust of the people would be mistaken and more expensive for the economy in the longer term.”

The concern is that the purchasing of government debt opens the ECB to the accusation it’s coming to the rescue of fiscal authorities and may need a bailout of its own if the assets turn sour, raising questions about its independence.

An unchecked increase in the amount of money in circulation could also fan inflation, the containment of which is the ECB’s main aim.

The ECB noted that some governments had vowed to accelerate their fiscal consolidation. Spain’s budget deficit reached 11.2 percent of gross domestic product last year and Portugal’s was 9.4 percent. Greece’s was 13.6 percent.

‘Monetizing’ Deficits

“Much will depend on whether or not euro-zone governments quickly follow through on their pledge,” said Marco Annunziata, chief economist at UniCredit Group in London. “If they do not, it will be hard for the ECB to fight off the charge of monetizing excessive fiscal deficits.”

There are signs banks have started to hoard money again.

Overnight deposits with the ECB surged to a 10-month high of 290 billion euros on May 6, signaling banks are wary of lending to each other on concern about counterparties’ exposure to high-deficit countries. The rate banks say they pay for three-month loans in dollars rose the most in almost 16 months on May 7.

While European banks had claims on Greece totaling $193.1 billion at the end of 2009, that number is dwarfed by their $832.3 billion exposure to Spain and the $240.5 billion with Portugal, according to data from the Basel, Switzerland-based Bank for International Settlements.

‘Decisive’ Action

Until today, Trichet had tried to convince investors that volatility in euro-region markets would subside once the Greek government drew on its 110 billion-euro aid package and implemented its agreed austerity plan. After the May 6 meeting of the ECB’s council, he urged other European governments to take “decisive” action on deficits and said Portugal and Spain were “not Greece.”

With the roots of the current crisis lying in fiscal policy, Trichet has had less of a say in fighting the turmoil. Politicians ignored his pleas for a fast aid package and his advice that the International Monetary Fund not be included in any rescue of Greece.

His role began to shift last week when the ECB broke a commitment not to assist individual countries, saying it would indefinitely accept Greek government debt as collateral regardless of its credit rating. Trichet is today set to talk to reporters after chairing a meeting of central bankers in Basel.

Article Source

By MICHAEL GRAY

Federal agents have launched parallel criminal and civil probes of JPMorgan Chase and its trading activity in the precious metals market, The Post has learned.

The probes are centering on whether or not JPMorgan, a top derivatives holder in precious metals, acted improperly to depress the price of silver, sources said.

The Commodities Futures Trade Commission is looking into civil charges, and the Department of Justice’s Antitrust Division is handling the criminal probe, according to sources, who did not wish to be identified due to the sensitive nature of the information.

The probes are far-ranging, with federal officials looking into JPMorgan’s precious metals trades on the London Bullion Market Association’s (LBMA) exchange, which is a physical delivery market, and the New York Mercantile Exchange (Nymex) for future paper derivative trades.

JPMorgan increased its silver derivative holdings by $6.76 billion, or about 220 million ounces, during the last three months of 2009, according to the Office of Comptroller of the Currency.

Regulators are pulling trading tickets on JPMorgan’s precious metals moves on all the exchanges as part of the probe, sources tell The Post.

JPMorgan has not been charged with any wrongdoing.

The DOJ and CFTC each declined to comment, as did JPMorgan.

The investigations stem from a story in The Post, which reported on a whistleblower questioning JPMorgan’s involvement in suppressing the price of silver by “shorting” the precious metal around the release of news announcements that should have sent the price upwards.

It is alleged that in shorting silver, JPMorgan sells large blocks of silver option contracts or physical metal — actions that would bring down the price of the metal — closely following news that would otherwise move the metals higher.

Last week, The Post got a telling e-mail the Justice Dept. sent to a concerned investor. “Thank you for your e-mail regarding allegations that JPMorgan Chase, and perhaps other traders, are manipulating the silver futures market,” the e-mail read.

Telling, indeed, as the concerned investor, in an e-mail to Justice’s Anti-trust division, never mentioned any companies or traders.

Article Source

Ignore the drama headline and just read the facts:

The notional value of derivatives held by U.S. commercial banks increased $8.5 trillion in the fourth quarter, or 4.2 percent, to $212.8 trillion.

Derivatives activity in the U.S. banking system continues to be dominated by a small group of large financial institutions. Five large commercial banks represent 97 percent of the total banking industry notional amounts and 88 percent of industry net current credit exposure.

The precious metals (silver) derivatives of all maturities increased by 37 percent, from $9.29 billion to $12.8 billion. This came principally from increases in the less-than-one-year maturities where the JPM holdings increased 34 percent to $6.76 billion and HSBC holdings increased 58 percent to $4.7 billion. (Despite the radically different percentage increases, interestingly the increases at JPM and HSBC were identical in dollar amounts at $1.7 billion.)

Why is this important to you? Do you remember the 2008 near collapse of the financial system? It was caused by derivatives. The 5 investment banks that comprise 97% of the new derivatives being created are NOT making it less likely we will suffer another massive heart attack in the financial system, they are increasing exposure by an amazing $8.5 TRILLION DOLLARS A QUARTER.

http://www.occ.treas.gov/ftp/release/2010-33a.pdf

Got gold yet??

On April 14th 2008, I was contacted by the staff of Larry Kudlow because he had read an article I wrote “M3 Money Supply & Inflation”  on why gold was the solution to reckless money creation and he wanted to interview me.

I didnt hear much more after that, perhaps because he was posting his interview with Senator John McCain the next day, and I am just not that important (with this I agree). Also, at the time Larry Kudlow was still somewhat poo-poo’ing gold.

Interesting however Mr. Kudlow’s quote today on his personal blog:

“The real winner today? Gold. It’s up about $25, to $1,200. People want real money. They do not trust the debt-laden currencies of Europe and the United States. Or for that matter Japan. Gold is fast becoming, once again, a reserve currency of choice.”

This was exactly what I was saying over two years ago. Well Larry, I guess I was right?

Debt-Deflation-Contagion Panic: It’s a Bloody Mess

By Larry Kudlow (visit his blog here)

Panic has gripped stock markets worldwide over the Greek debt crisis and the threat of a debt-deflation contagion through banks in Europe (primarily) and the U.S. that own the bonds of Greece, Portugal, Spain, and so forth. If these bond asset prices collapse totally, lending facilities would be badly crimped for both the short and long term. And that, in turn, would damage prospects for economic recovery.

The Dow closed today off nearly 350 points. Earlier in the day the Dow was down 850 points, though there is talk of computer glitches and technical problems that may have temporarily undermined trading. Either way, the market is getting creamed as a result of the Greek story.

The real winner today? Gold. It’s up about $25, to $1,200. People want real money. They do not trust the debt-laden currencies of Europe and the United States. Or for that matter Japan. Gold is fast becoming, once again, a reserve currency of choice.

Meanwhile, the EU/IMF bailout package for Greece, which does include draconian budget cuts, contains a 2 percentage point increase in the VAT tax that is anti-growth. Steve Forbes correctly said last night on CNBC that the Greeks should be slashing spending and should move to a flat tax, just like the countries in Eastern Europe. I gave him a Nobel Prize for that.

Market chatter, at least in Europe, is suggesting that the $150 billion bailout is not enough. But it may be that the left-wing union mobs in Athens have caused a major backlash throughout Europe and elsewhere. Despite the mob, the Greek parliament was able to pass legislative approval of the bailout package. This caused a small stock rally for a brief time this morning.

The German parliament will vote tomorrow on this package. Should it be voted down, all hell will break loose again in world stock and credit markets.

And then there’s Britain. The Tories may win a close election tonight and dethrone Labour. But if so, David Cameron & Co. will be a minority government.

I still believe that one of today’s key themes is a global revulsion toward the massive spending and debt programs put in place by the U.S., Euroland, the G20, and the IMF back in late 2008 and 2009. Unwinding these Keynesian mistakes is not an easy thing to do. But financial markets are now exerting discipline on this out-of-control spending and borrowing.

Financial markets don’t like these big-government policies at all. Neither do voters. The markets don’t trust the ability of these nations to service the interest payments on all this new debt. And voters are much opposed to the tax-hike implications of the debt.

In particular, the U.S. and the Western countries in Europe have lurched left in recent years. It’s bad for growth, it’s bad for credit quality, it’s bad for banks, and it smacks of credit-deflation bankruptcy. In short, it’s a bloody mess.