Another week closer to meltdown

We had a great metals week followed by a bad metals week which is to be expected as profit taking and a U.S. dollar bounce back were bound to eat away some of the gains. Does this mean it’s over? Hell no it’s just normal market action and it’s doubtful we will see a massive correction of recent gains considering nothing has changed to make things suddenly better.

The end of last week was a momentous occasion a real bank Failure! We’ve seen many non bank lenders close doors, go bankrupt or get bought in the last year but an announcement that NetBank had filed for bankruptcy was the first failure of a real bank in several decades and definitely a sign that problems are progressing up the food chain.

There are claims that the failure the failure of NetBank is a sign of the instability of the Net banking format and that the “branchless” bank business model is a failure. Is it a good sign or a bad sign that ING another bank of the same model is buying some of NetBank’s assets? The article claims ING is not a good performer compared to its peers and the business model as a whole is not a good performer.


On the U.S. economic front, today’s unemployment report shows the biggest jump of new claims in 4 months signaling further employment weakness.

In other relevant news Vietnam will refrain from buying anymore U.S. dollars in their attempt to keep the greenback strong. They claim the practice has been fuelling local inflation but the haircut they've been taking on the dollars value is just as likely a cause, Qatar move to divested itself of 59% of its dollar holdings in it’s $50 billion sovereign fund is another hit against the dollar

These moves cannot be good for the dollar's value and risks pushing other large dollar holders to follow their lead. A dollar run looks more possible every week, so don’t be fooled by this weeks dollar strengthening, the trend is and will remain downward.
Metals trend continues upward as will energy’s.

In fact, in the time it took me to write this the U.S. dollar has turned back down likely on the employment stats and metals regained their early losses and a bit extra. Don't worry, nothings changed.
PAPER BAD, METAL GOOD

The gold sovereign picture signifies nothing other than I think they are pretty and I'd like a bag of them.

Picking up Pennies

I was at the park with my boys on the weekend and as I crossed the road I saw a scattering of pennies on the ground. Now many people would sneer or make a snide comment that I bothered to bend over and pick them up considering how little a penny is worth. I do this habitually not because I’m that frugal but rather to see what I will find. This time I was quite surprised to find a rather nice example of a 1929 Canadian penny much like the image shown. If not for a recent blemish probably caused by a car driving over the coin on the road it might have been worth grading.

I found it interesting to speculate on how this coin escaped someone’s personal collection or how it managed to survive in circulation. It was an easily leap to believe that some light fingered child took them from home and dropped them, satisfying my curiosity by blaming someone’s else’s kid my mind then sped (crawled more like it) to new speculations to the relative value of this penny.

A little research today showed me that in 1929 Bread was 10 cents/lb, a cabbage 2 cents, coffee 45 cents/lb, round stake 51 cents/lb.

This of course was the end of the 1920’s boom just before the Great Depression and the decade of stagnation that would follow it. Look ahead a few years from the minting date you find beef, eggs, bread, lard, etc usually less than ½ of the 1929 prices. Cash was king in the thirties as low consumer demand, low liquidity, innovation all drove prices down and down. Those who held jobs often did well, they saved and could even buy up the assets from the less fortunate who had suffered unemployment, foreclosures, and hopelessness. People who had debts soon found that the assets they secured their loans with, land, stocks, etc had become worth less than their obligations and they defaulted. Like today’s victims of the housing bust many lost everything.

So what is that penny worth today? Measured by the Bank of Canada’s inflation calculator, similar goods purchased by my penny in 1929 would cost 12 cents today, representing 1200% of inflation or a 3.25% annual reduction in purchasing power of who ever horded that penny.

My penny’s real is worth only 8% of its original buying power

However once you realize that no one has any savings today and when money is spent it's actually money leveraged over the life of a 25y mortgage it would make a 1929 penny's equivelant value 24 cents, making todays penny worth 4% of the origian. Even better over one of those new 40y mortgages it would be about 36 cents, less than 3% or its original buying power. I don’t even care to figure out what a penny on plastic would be with all those minimum monthly payments. So my penny has gone from a real value of 1 cent or ½ a cabbage to next to nothing

What does this all mean?

Inflation is steadily eating away at any fiat money you attempt to save or horde

Fiat money is a scam that does not maintain its value over time.

Credit gives you at temporary consumer purchase “fix’, but unless you are buying a real asset that appreciates over time you are paying far too much and are even lowering you purchasing power more through your own impatience.

The system is not sound and despite claims that it can’t happen, fiat currencies have failed through out history, depressions and hyperinflation have occurred, fiat money will always lose value over time.

Gold and Silver unlike paper assets have always had a value.

Having some silver and gold is only logical given the historical precedents.

Bending over for a penny is really not worth it!

The Fed Panics and Blinks

Ok, I'm gonna start gloating at the water cooler tomorrow, "Oh, Things aren't that bad", "I can't happen in the developed word and certainly not in the U.S.", "but it's the worlds reserve currency" yada, yada, yada, I've heard it all.
"Ha" I'll say "you're all wrong and I was right", Dumb asses!

It's been a couple of rough days since the middle of last week, we've seen the run on Northern Rock in the U.K. with a reported 4 billion dollars withdrawn by clients in the last two days of business despite BOE claims there was no problem and a bucket of liquidity added to the sector.

Added to Northern Rock's troubles are the trouncing stock values of other U.K. banks are taking. Apparently both Alliance & Leicester and Bradford & Bingley have seen their stock values battered in trading today and a sector wide bailout will be needed or there will be failures.

With the worsening housing situation, disappointing employment numbers and the backdrop of U.K. banking chaos, the Fed saw the blood in the water, panicked and cut interest rates by 50pts to 4.75% for the overnight rate and 5.25% for the discount rate. Needless to say the stock market bounced, metals which had be placid all day took off after the Fed annoucement and the Canadian Dollar was up 98.69 vs the greenback at the time of this writing. In fact, every major Currency with the exception of the Yen ran down the U.S. dollar today with the U.S. Dollar Index landing just a blip above 79.

Silver out performed gold a little and the silver gold ratio is closing finally.

Silver was up .20 and Gold was up a solid 7.30

The BOC must be worried about our relative dollar strength and will soon do something to appease exporters, so you can expect the BOC to loosen credit as well. While we have dollar strength buy metals because when the average U.S. citizen begins to seek safe havens like gold to escape currency death, no other fiat currency will keep up. If you are planning a U.S. trip do some part of your currency exchange now. While we will reach U.S. dollar parity this has been too much to fast and I would not be surprised to see some retrenchment before we hit par.

Canadian Banks are relatively safe compared to most of the world, however it would still be prudent to check your depositor insurance caps, move to more than one bank and stash 3-6 months of cash in a home safe or safety deposit box. Should we ever have a run on banks there is simply not enough printed money to cover deposits, most money now is 1s and 0s floating in the ether. Northern Rock's computers crashed during this weeks bank run which would have meant no tellers/ATMS/debit cards. How much cash to you carry day to day.

Future warning signs to watch.

U.K housing could be reaching it's peak

Spain's current account deficit is growing and unsustainable

The possibility China is dumping U.S. treasuries

I told-you-so-ism? soon, very soon.

I’ve been holding off for awhile on whether I should begin to post the “I told you so!” articles. This is not the classic I told you so yet, but it certainly is a “why the hell have you not realized something is happening” post.

The U.S. dollar has not plunged yet like I expected, precious metals have not hit my projections for the year. Still a myriad of other signals are turning my way. Am I happy? No not really, what I’m feeling is anticipation and fear. I’m anticipating a major blow up very soon and this level of anxiousness has left me so fixated on keeping up with the news I’ve been remiss in posting. In fact I’m so amazed at the level of articles and growing panic building in some commentators that I can’t understand why the majority of people out there have still not gotten a whiff of the stench that is the world economic system. Why do I fear? I fear I have not squeezed hard enough and have not put aside enough metals or commodities stocks. I fear I’ve banked too much on the inflationary death of fiat argument and not the deflation cash is king argument. No one can know how this will pan out for sure but at least I’ve tried to do the right thing and inform others. I do know the “all is fine, let’s borrow more and worry later” mentality was wrong, which puts me ahead of the vast majority. Everyone chant, “I’m not the dumbest, I’m not the dumbest”


So what’s been happening? Well we’ve got the credit crunch and yes while the Central Banks of the world have been pumping lots of liquidity to the Banking industry there is still no guarantee that this money will be loaned to the holders of commercial paper. Banks seem reluctant to supply the amount of money needed and each month untold billions will need refinancing. A lot of this paper is not subprime mortgages but packaged credit card, car and other small loans which so far have not seen the default spikes like the mortgage market. In the near future you could see car dealerships, furniture stores, credit cards deals of no payments for 6 or 12 months fall apart for lack of credit, you might even see an inability to get substantial non asset backed credit hit the market. This will kill an economy based on not saving but buying forward against future earnings, retailers and car companies do not have the cash to personally hold all the loans they make and if the market won’t buy up this paper than no sales and a total collapse of the consumer economy. I expect within 2-3 months to have my unsecured credit line pulled, not because my credit is bad but rather credit is too tight to freely dole out to the likes of me. This is the time to put aside some cash, real cash, in safety boxes or home safes. U.S. readers especially saw the run last week at Country Wide and should take this as a warning, if you’ve got savings take 1 or 2 months worth out of the bank and grasp it close to your chest.

If you think there is no credit crunch why do you think Bell Canada is trading $2 below its agreed purchase price in recent weeks? It’s simple, enough people believe that 40 billion dollars in financing is not achievable and the sale will fail. There is a 2 dollar discount build into the stocks price today to offset this risk of buying Bell at this price.

The U.S. housing industry is continuing it’s plunge and 45-50 billion dollars of ARM resets will take place every month for most of the next 2 years. We’ve only seen the tip of this iceberg; unsold houses in the U.S. have reached 3.85 million units. I suspect 5 million is easily attainable and a deflationary spiral could endanger 20 million homes. The end is truly nigh.

There are all sorts of proposed bailouts of homeowners and lenders but I suspect they will help only the institutional players and make virtual debt slaves of the others.

You will note on the side bar the total U.S. debt. As I understood it 8.9 Trillion was the government legal debt cap and while probably not entirely accurate we should see a panicked congress recalled to up the limit within days as it will surpass 9 Trillion in hours of this post. The next cap will probably top out at 10 Trillion and will not hold even as long as the next election.

As for our lovely shinny metals the last 4 trading days have been up 3 for 4 and have gained about 26 dollars on gold and nearly .50 on silver. Silver is still under performing but last week with ratios about 57:1 I made a small purchase.

I also went bottom fishing last week and picked up a couple of junior minors, since my readership is so low and I don’t think any amount of manipulation could actually make be rich I think I will begin to discuss some of the companies I’m holding in future posts. Hell send me your favourites and we can discuss them. Paper assets are still in danger but I sure like a physically backed mine better than a financial backed by lies, junk bonds and fiat dollars. I also jumped back in on energy a number of weeks ago and even with today’s nat gas prices I would encourage everyone to consider these as an addition to metals.

Some day I have no doubt 2000 oz of silver could buy me a farm, until then I intent to accumulate.

Long fall to darkness

The recent bridge collapse in Minneapolis was seen by many as a simple accident or a one off example of poor management but in reality it was a symptom of a profound event that most of the public are blind to, the fall of the American Empire. For many years the U.S. has been burning the candle at both ends, with its endless cycles of spending and debt without ever maintaining the necessities of modern life. The recent collapse is not a one off item or an accident it is a symbol of the systemic rot taking place in U.S. There are estimates claiming that in the U.S. an astounding 73,000 or 12% of all bridges are structurally deficient.
Further 80,000 are functionally obsolete meaning they are not designed for the amount of traffic they currently carry. For years, be it slack highway maintenance or failing to fully fund the corps of engineers, the U.S. government has not been doing its job in maintaining the essential infrastructure of the nation, Minneapolis and New Orleans were just two of the many disasters that the U.S. is destined to suffer for the lack of money and planning.

There are the additional infrastructure problems regarding the power grid, city water supplies, sewage, refinery capacity, poorly maintained or insufficient rail lines and public transit.

Added to this infrastructure mismanagement is U.S. spending on the Iraq war and the normally huge military spending, which continues despite the apparent victory in the cold war. To date, the Iraq war is estimated by the congressional budget office is about 450 Billion That of course is the accounted costs, hidden costs for procurements, mercenaries like Black Water and long term costs of supporting military widows and cripples will add significantly to this stated cost. For decades The U.S. has been spending on its military as if they were on a war time footing and yet they never caught on to the concept of guns or butter but rather thought guns and butter with plasma screens and SUVs thrown in was a long term sustainable proposition; Morons the lot of them.

Peak oil and the dependency on foreign energy is a huge threat and there is no real plan to conserve, innovate, or diversify a means to self sufficiency..3


Another interesting item (as shown on the side bar with the debt clock) is the growing U.S. debt which as you read this sentence will climb by 100,000 dollars. The total debt at the time of my writing is $8.951 Trillion U.S. dollars, the total unfunded liabilities which include expected payouts of Medicare, government pensions etc is estimated by the GAO to be in the neighbourhood of $53 trillion, a staggering figure. For years the U.S. governments have been raiding various trust funds like those for pensions and health coverage, spending the money, not replacing it, and giving the funds IOUs in place of the interest baring vehicles that would make these funds at least partially self funding over time.
The U.S. has a hard choice ahead, renege on promised benefits, or devalue the dollar to the point that they will honour their commitments in word if not in value.

The U.S. has been selling U.S. debt to mostly foreign investors at a rate of over a billion dollars a day for many years. A new twist on this need for daily influxes of cash has been the U.S.’s recent trend of issuing and borrowing money through the Federal Reserve since fewer and fewer foreign suckers in the open market are taking part in treasuries auctions; this is simply printing money and devaluing all existing dollars. This monetization of debt is a sure fire sign of the coming collapse of the U.S. dollar and the ability of the U.S. to maintain it’s pretension of empire for much longer. Recent reports from China hint that they may be willing to use the threat or action of dumping of U.S. debt on the market as an economic weapon against the U.S. Even such threats could panic bond holders and crash the U.S. dollar in a flash of computer controlled trading.

There is also the spreading contagion from the sub prime mess which has reached French, German, and Canadian banks as well as hedge funds as far away as Australia. Estimates I've seen have priced the funds specializing in sub prime debt from about %50 down to virtually nothing like the case of the Bear Stearn's funds. The total losses are not foreseeable at this point since only a tiny number of the holders of these sub primes have announced warnings, there is however going to be a huge out cry in coming weeks as people begin to request redemption of invested funds only to find them frozen by the hedge funds trying to maintain solvency.

The distress has forced the selling of other assets to provide liquidity; the fear a stock crash has prompted Central banks around the world to provide billions in loans to banks so they will not crash the markets with panicked selling. In the last week the EBC, the Fed, the Japanese and Australian Central Banks have injected over 350 Billion dollars into the market in the form of loans to banks. This week South Korea and Malaysia have stated they will do the same to support the market if needed. Of course this is not old money they were hiding under their beds for hard times this is all freshly created money pulled out of their asses and thrown into the market to keep the bubble alive. This is just another inflationary practice which should support the prices of our lovely piles of silver and gold but you should also expect volatility as some organizations sell their holdings to make ends meet in the short term.

If you've watched the markets recently you've seen some hard falls followed by amazing end of days runs which attempt to erase the worst part of the loses, some analysts are claiming this is the work of the Plunge Protection Team a group reportedly put together by the U.S. administration to manipulate the market with the goal to moderate crashes.
How deep their recent interventions are is unknown but it is know that they don't have any real money but they do have the ability to create new money on a whim, more inflation, more bubbles and one more step from fiscal reality

The U.S. is heading for a long fall, which will likely include bankruptcy, a dollar crisis and certainly a diminishment of the roll of America in world affairs. Not unlike Rome did, the U.S. is fighting wars it cannot win with money it does not have and with citizens who no longer have the zeal, belief in righteousness or simple bloodlust required to be big dog on the street, for the most part they are only concerned with bread and Circuses. Rome collapsed by inches as measured by loss of influence, debasement of its money , military setbacks, social decadence, sound like anyone you know? Unfortunately today the markets are intertwined and risk is spread out to the entire world, if the U.S. goes the way it looks to be going everyone will get hurt.

What can you do?

Dump financials, go to cash, minimize debt, try to build up your metal holdings to 10% of your portfolio and hold on. There are still many questions, will banks go under? Will the U.S. Gov manufacture a bailout? Will they allow an orderly deflation or print their way to hyper inflation? Is Canada too dependant on the U.S. to survive their crash? Be defensive, be smart and be attentive, things will move quickly when it starts falling apart.