The Greek population is in constant revolt with another 48 hour national strike underway against ever expanding announcements of economic austerity though to date little of which has actually been implemented and therefore risks at the very a least a delay of the latest tranche of Euro 12 billion in what has now become a permanent flow of funds from core Euro-zone to Greece and other peripheral eurozone countries, therefore tax payers of core Europe and to a lesser degree Britain are being taxed to pay for the unwillingness of the PIIGS to pay their bills.

Core Euro-zone countries are effectively being black mailed by Greece to finance Greece’s public budget deficit and the interest payments due on the ever expanding debt mountain, none of which that the Greece population are having to bare the consequences of, for were they then Greece would have gone bust Iceland style a year ago. The facts are that IF Greece were not being financed as a consequence of being within the Euro-zone then all of the middle class of Greece would have already been swiftly wiped out, as the value of earnings, savings and assets would have collapsed along with the Greek economy as a consequence of the markets immediate adjustment to the true level of debt and inability to ever repay.

Some argue that a short- sharp shock Iceland style would prove better in the longer run but there would be blood in the streets perhaps even revolution that would be infinitely worse for the Greek population than what is taking place today as international trade would literally seize up overnight due to the inability to make payments on goods and services and if a country can no longer import foods, then all that would be left would be food aid being shipped in Africa style to prevent starvation.

Therefore the Greeks life style is being subsidised by hard working tax payers elsewhere, and those demonstrating on the streets of Greece are mostly delusional or represent subversive interests such as the communist party that are banking on profiting from debt crisis chaos, for if Greeks actually got what they are asking for i.e. an exit from the Euro and debt default, then the Greek population would soon, perhaps within 24 hours come to regret the outcome as all roads would lead to instant bankruptcy with all of its consequences. So all this talk of the Greeks wanting to leave the Euro-zone is a load of nonsense, for what the Greeks really need to worry about is Greece being kicked out of the Euro as it continues to act as a funding black hole that is currently costing core euro-zone tax payers Euro 100 billion per year that they will never get back.

If Greece were ejected from the Euro-zone then there would soon be an exodus of Greece’s best and brightest workers as they sought earnings in hard currency such as the Euro rather than be paid in worthless Zimabwe-esk Drachma’s. Something that the Euro-zone politicians may be considering behind close doors in a desperate attempt to save the Euro currency from collapse.

The Greek Trojan Horse Full of Debt

Greece landed its debt filled Trojan horse economy onto the shores of the euro-zone in 1999, following which as if by magic a high interest rate high risk economy immediately became a low interest rate low risk economy. How did Greece achieve this apparent miracle ?

By perpetuating state sponsored fraud as the country proceeded to hide the true extent of public spending, debt and liabilities from the markets and European Central Bank as there was no longer a currency market that would reflect the real state of the economy which allowed Greece to secure funding for the state and its private sector at low interest rates that did not reflect the actual risk of default and debt burden.

The Greek government were not doing anything different than what most of the higher paid working population engages in, where fraud is endemic, be it government economic statistics or the 60% or so of of tax payers that evade the majority of taxes resulting in highly paid doctors paying taxes that can be less than typical public sector nurses.

Off course the Greek population can argue that most of the blame lies with their bankers, which is true, because the bailout is for holders of Greek debt which is mostly held by european bankster’s. But the same holds true for every other country that has seen its politicians dump all of banking sectors losses and liabilities onto the backs of tax payers that has put every western country onto the path towards bankruptcy. But the Greeks by virtue of euro-zone membership have decided not to bare the responsibilities for their debt (public and bankster’s) but for tax payers of other nations to take on both the liabilities of their banks and the Greek state, else the Euro dies. Therefore Greece is effectively black mailing core euro-zone nations into making funding available whether or not they actually implement any of the economic austerity plans as Greek politicians are likely to succumb to the greater weight of voters than follow through on demands from core euro-zone financing countries, after all what does most of the Greece population care, their money is safe against hyper-inflation, whilst they continue to evade taxes and the state runs a large budget deficit, instead letting the tax paying suckers of mainly Germany and France pick up the bill.

Which means the tax payers of Germany and France are effectively trapped into a lose, lose situation, where the only solution is for either collapse of the euro currency (savers wiped out) or for total political, economic and monetary union which means permanent financing of states such as Greece by means of internal transfer payments as occurs in nation states where wealthier areas are taxed to subsidise the poorer areas (UK example – London / South East subsidises most of the rest of the country).

Risks of PIIGS Sovereign Debt Default

Joining Greece are the other european bankrupting nations to varying degrees that are collectively referred to as the PIIGS (Portugal, Ireland, Italy, Greece and Spain), though a few others such as Belgium should also be included in the list as the risks of actual default vary between nations of the Eurozone as the below graphic illustrates the probability of actual default within the next 3 years, though this does not mean that we will have to wait for 3 years for countries such as Greece that are permanently tottering on the brink of default.

Britain and other european nations outside of the Euro-zone whilst having the ability to print money and inflate their debt away at a steady pace are still at a risk of bankruptcy and actual debt default if they could no longer service their external debts i.e. that which is denominated in a foreign currency courtesy of their bankster’s, which therefore puts Britains risk of default at somewhere between Germany’s 13% and France’s 25%.

Sovereign Debt Default Contagion Risk

To illustrate how severe the current crisis is, Greece’s debt is now rated at worse than that of Pakistan, though Pakistan’s debt never threatened a collapse of the global financial system. Greek government 1 year debt is yielding 20% and 2 year at 30%, that is a sign of markets discounting default i.e. the bond markets are pricing in a Greek debt default which is hitting the Greek banks hard and risks wiping them out and acting as a contagion to other european banks.

All that the European Union has done is to throw good money after bad by wasting 100 billion euros and pushing Greek debt up from 260 billion euros to 330 billion euros, as if a greater debt burden would somehow prevent bankruptcy which I warned over a year ago was inevitable and the solution to the crisis remains the same for the Euro to effectively split into two.

11 May 2010 – E.U. $1 Trillion Bailout, Detonates Nuclear Option of Printing Money to Monetize PIGS Debt).

Financing albeit shrinking annual PIGS deficits over the next few years will still mean that ALL of these countries debt burdens will be HIGHER in 3 years time, i.e. Greece’s debt burden is expected to rise from 120% of GDP to as high as 150% of GDP. How is that a solution for the debt crisis? How will that prevent eventual debt default ? Answer – It won’t!

The ONLY solution is for the Eurozone economies to GET their economic houses in order which means cut the deficits and total debt as a % of GDP which can only be achieved through economic growth which means public sector spending cuts and reform of economies to generate economic growth that means LESS E.U. and national regulation as touched up on in the article Solving Britain’s Economic Crisis Through Micro Business Capital Investments and Credit (31st Mar 2010). However when a country has a debt burden of 120%+ of GDP at interest rates of 5% or higher the inevitable result is still debt default.

EURO II ?

This, first of a series of money printing debt monetization bailouts puts the Euro firmly on a trend towards high inflation as are all fiat currencies, i.e. the fundamentals of the Euro block composed of many small weak economies that cannot devalue internally against highly competitive strong economies will still remain. The only possible solution is for a Euro II, i.e. split the Euro into two currency blocks one for the weak that suffer higher inflation and interest rates and the more competitive countries as part of the Euro II block (could just be Germany on its own?) which would act as a safety valve in times of economic crisis that demands internal currency devaluations.

The mainstream press predominantly focuses on the bottom line numbers of by how much are each countries banks exposed to Greek government debt, without fully understanding the total exposure is about 100 times greater as a function of the $600trillion+ derivatives market that gambling prone British banks are more exposed to in terms of per capita then virtually any other nation on the planet.

Forget the official UK statistics of £1 trillion of public sector debt, total actual debt and liabilities are in excess of £11 trillion and the fools in Coalition Government are now contemplating Britain borrowing money in the name of UK tax payers to throw into the Greek black hole!

For instance the mainstream broadcast press smugly declares that British banks exposure the Greek government debt is just £2.5 billion. However throw in the derivatives exposure that also includes Portugal and Ireland and then the figure jumps to at least £350 billion with a figure approaching £800 billion or about 60% of GDP as the default contagion would not stop with Portugal as soon Spain and Italy would also follow their PIIGS brethren over the cliff, which would be enough to trigger a collapse of the global banking system as the earlier article ( Nov 2010 – Global Sovereign Debt Default Bankruptcy Bailout and Contagion Risk Analysis) illustrated the risk each country on its own posed to the global financial system if one were to default on their debts.

The November 2010 analysis treated Greece and Ireland as being on life support pending inevitable bankruptcy with Portugal not far behind that combined present a contagion risk factor to the global financial system of about 22%, an eventuality that the worlds financial system could survive, if only it could be halted to the peripheral euro-zone which it would not as soon Spain and Italy would join the collapse as their bonds are dumped sending interest rates soaring towards where Greece debt currently trades, which would be more than enough to bring about a collapse of the Euro-zone and within hours of which a collapse of the whole global financial system including that of the United States as all fiat currency is dumped for hard assets i.e. an hyperinflationary collapse event and NOT Deflation as the ivory tower academics that populate the mainstream press would lead you to believe (see Inflation Mega-trend Ebook FREE DOWNLOAD).

Inflation is the ONLY Solution to the Debt Crisis and Next Phase of the Mega-Trend

The Inflation Mega-Trend ebook of January 2010, concluded that the ONLY solution to the unfolding global debt crisis was for governments to print money and inflate their way out of debt . What we have seen over the past 2 years is just the first phase of the Inflation Mega-trend in the inflating of asset and commodity prices.

Phase 3 of the Inflation Mega-trend (Phase 2 consumer prices) will be governments INFLATING WAGES, which is completely contrary to everything you hear in the central bank propaganda pumping mainstream press, the next phase of the Inflation Mega-Trend will be for central banks to inflate the wage price spiral, which will result in an acceleration of inflation.

Whilst many may argue that many aspects of UK public debt are linked to inflation such as benefits and state wages and pensions, and not forgetting that some 25% of gilts are indexed. Lets leave aside for the moment that real inflation is a good 2 to 3% above the official inflation indices for Britain and most western economies, if not higher. What people tend to forget that PRIVATE debt is at many multiples of public debt, therefore governments in acting to boost the economy in nominal terms by reducing the debt burden on the private sector that is in a far indebted state i.e. bringing total debt and liabilities to about £11 trillion (more than X10 official public debt statistics), then the indexation argument goes out of the window.

This has major ramifications for depositors who are already subsidising the debtors (both public and private) each year to the tune of at least 3% on CPI (after tax).

Why can’t those who STILL pump out deflation nonsense realise this inflation wage price spiral reality?

Again. I need to reiterate that the rise in asset and commodity prices over the past 2 years is to all intents and purposes just Phase 1, Phase 2 is consumer prices (well underway in the UK), Phase 3 is wages and then off go down the road of the feed back loop the end result will that bond holders and savers will be wiped out, along with the debt.

What this means for Greece ?

Greece cannot inflate so they have no choice but to leave the Euro to enable them to inflate EVERYTHING , i.e. prices, and wages, that is the only way they will be able to STEAL from all of the bond holders and savers as they STEALTH default on their debt by means of high inflation which is the path that the UK and US are upon for a decade long inflation mega-trend.

The ONLY reason why they are being prevented from defaulting and leaving the euro-zone is because banks of other european countries are not strong enough to withstand such an event.

What a Greek Debt Default Will Mean for the UK Economy?

There is no firewall between Britain and Europe if Eurozone banks start to go bankrupt then so will most of Britain’s banks, the only protection savers will have is to protect their deposits by abiding by the compensation limits. Where the economy is concerned the government via its central bank (BoE) will print money to inflate the economy to prevent recession, hence the most probable outcome is continuing stagflation of high inflation and very low economic growth, as governments such as the UK aim to buy time.

Credit Crisis Phase 3 Conclusion

The credit crisis that began in August 2007 when the credit markets froze is not over, far from it, the Lehman’s bankruptcy was just phase 2 of the credit crisis where increasingly over the past 18 months we have seen Phase 3 manifest itself in the bankruptcy of whole countries with Greece, Portugal and Ireland to all intents and purposes bankrupt, only being kept afloat to prevent bankruptcy of the banking system and the larger Eurozone countries namely, Spain, Italy, then France and Germany itself.

The time horizon for the manifestation of the inevitable debt defaults can only be guessed as it depends on how much tax payers money will be thrown at the bankrupt states before the sovereign debt default contagion spreads from country to country. Readers should be under no illusion that bankruptcy of whole countries is inevitable, where even if countries such as Britain, Germany, France and the United States do not default on their debts, there will be a very heavy price paid in loss of purchasing power of earnings and savings as covered at length in the January 2010 Inflation Mega-Trend Ebook.

However depositors need to immediately focus themselves on protecting themselves against nominal loss of deposits as would occur when states go bankrupt and bank deposits are only honoured upto the compensation limits.

Once you have achieved this first emergency step of protecting your wealth in nominal terms then you can purse the second strategy of protecting your wealth in real terms which I have covered at length in 3 ebook’s and ongoing newsletters (ALWAYS FREE), and continue to do so on an ongoing basis in articles that can be quickly viewed at walayatstreet.com

Off course there are also major implications in the costs of compensating depositors, which as we have seen will ultimately fall onto the back of tax payers at the rate of approx £85 billion for every 1 million customers across each banking group, a potentially huge bailout cost that could literally doubles Britians public debt virtually over night. So the governments response would be similar to 2008, which would be to inject capital into the bankrupting UK banks the cost of which would be 1/10th that of making good on depositor guarantees but this would be likely restricted to fully UK banks rather than the likes of Santander.

The risk that European Union is trying to balance is that of systemic risks of a disorderly Default of Greece and resulting collapse of the global financial system, with first in line being the PIIG’s then the larger euro-zone countries such as France and Italy and then countries such as the UK and ultimately the United States will be hit all with-in accelerating trend with little time for professionals let alone ordinary people to react.

Therefore readers should not be under any illusion that the debt default would be halted with Greece, because once it starts it would soon spread to the other PIIGS within a matter of weeks if not days, Portugal would go next, then Ireland and then Spain, with other debt dominos soon falling such as Belgium.

This would bankrupt virtually every European bank whether or not they are exposed to PIIGS debt due to counter party risks, though unfortunately at this point in time the coffers of countries such as Britain, France and Germany are empty after a series of bailouts and huge public sector deficit spending programme’s will mean they will not be in any shape to 100% guarantee bank issued debt or even retail deposits, instead savers are running a serious risk of actual loss of nominal value of their savings on funds deposited in excess of the £85k limit across banking groups.

European Bank Run Contagion Risk

The Greeks have already set the ball rolling by withdrawing their funds out of their banks during May and June as a consequence of their exposure to Greek Government debt, soon to be followed by Banks across Europe if not already in the process of desperately attempting to pull their funds out of Greek banks ahead of an inevitable debt default, and then from other PIIGS banks and financials, that’s banks of Portugal, Ireland, Italy, and Spain as well as Greece on rising default contagion risks.

The problem with the banking sector lies in the hidden exposure to the over the counter derivatives market that won’t become apparent until there is an actual credit event such as Greece defaulting its debts, triggering claims on credit default swaps issued by banks and insurance companies as occurred following Lehman’s bankruptcy in 2008 which brought down the worlds largest insurer AIG. Therefore Greece defaulting could quite easily collapse the whole banking system given that derivatives exposure could result in a crisis that is a100 times larger than the nominal value of the amount of debt defaulted upon.

Over the past 3 years, Santander and other foreign banks have been allowed to run amok amidst Britain’s retail banking sector as a consequence of an incompetent regulator and a desperate Labour government eager for anyone to take on the responsibility of restructuring a string of bankrupt UK banks which allowed Santander to gobble up a string of small to medium sized UK banks such as Bradford and Bingley, Abbey and Alliance and Leicester, which now pose a real risk to UK depositors as compensation licences have been consolidated therefore now instead of protection of 4X £85k, there is just 1X £85k across the banking group.

One can measure the rising contagion risks in the credit default swaps market, where the price of insuring against Santander bonds against default has been steadily on a rise since March 2011. This increasing risk is also manifesting itself in the yield of Spanish government debt that has hit an 11 year high of 5.75% on 10 year bonds, which stands nearly 3% above German Bund’s, a financing level that is not sustainable for Spain, let alone a further surge in yields that would follow a Greek debt default.

The rise of euro-zone default risks, risks another credit markets freeze as the banks of countries such as Britain that do not face default by virtue of its ability to print money and inflate, increasingly pull the plug on financing of euro-zone banks much as occurred following the freezing of the credit markets in August 2007. Similarly UK retail customers would also be wise to limit exposure to euro-zone banks, especially of peripheral nations (PIIGS).

Breaking Up the PIIGS Banks

It is my opinion that at some point in time (if the banking system survives the current crisis) the British Government will force PIIGS banks such as Santander to sell off their British banking arms so as to ensure contagion risks to Britain’s banking system are reduced, that is really the only solution to prevent a run on the UK banking system as occurred in September 2007 with Northern Rock and threatened to occur in Sept 2008. A break-up of the banks in itself would trigger a major credit market event, therefore it is probably going to take place in secret behind closed doors to prevent financial panic, i.e. British banking arms will be floated under the pretense of raising capital, which on balance would be seen as a market calming measure.

UK Safe Retail Banks List

The following table lists Britain’s major retail banking groups (separate licences) in terms of the percentage probability that your deposits above the UK compensation limit of £85k and Euro-zone banks 100,000 (current £/E £86k) would be secure in the event of a series of euro-zone debt defaults starting with Greece and that the crisis is contained to these smaller peripheral euro-zone countries i.e. Greece, Portugal and Ireland, if Spain comes under real risk of default then that would require a revaluation of this list as banks such as Santander would come under far greater pressure given exposure to Spanish government debt.

The government backed National Savings tops the list at virtually 100% depositor safety ranking, as if NS&I goes bust so will have the the whole British financial system. Readers may be surprised to find out that Britain’s safest commercial retail bank is owned and operated by the supermarket Tesco, next to follow are HSBC and Co-op, with Spain’s Santander offering a 50/50 bet on the safety of deposits over £85k. The rest offer an increasing probability of loss of deposits that would take place amidst a sovereign debt crisis induced banking crisis. The government owned Northern Rock is probably 99% safe at this point in time but it is being primed to be sold off as are the share holdings of other high risk major retail banks such as RBS and the Lloyds group.

There are other smaller safe banks such a Yorkshire Bank which is owned by the National Australia Bank Group.

Depositors Protect Yourselves From Potential Banking Crisis

UK bank depositors need to prepare for what will probably follow the Greece debt default contagion snowballing across Europe’s financial system, especially as you are receiving a pittance in interest on even the best deposit accounts of less than 2.5% after tax which does not match the risks of loss of funds in excess of £85k. UK bank account holders have been receiving mail shots from their banks over the past 6 months informing them of the protection of their deposits upto a value of £85,000 per individual customers across the banking group. This should not be treated as junk mail but rather banks laying the ground work for the real risk of defaulting on deposits over compensation limits as a consequence of the bankruptcy of peripheral Euro-zone countries starting with Greece. Remember Greece going bankrupt is not a question of IF but rather when.

Therefore savers with amounts deposited above the guaranteed limit need to ensure that they have measures in place well ahead of a banking crisis to ensure that they survive one both in terms of the ability to transact business as well as ensuring total funds exposed are LESS than the £85k banking limits at the time of a bank run.

Scare Mongering ?

Am I scare mongering? Try asking those that were locked out of their savings accounts when the Icelandic banks went bust during October 2008. The banks froze UK customers out of their accounts on the 7th of October 2008. My analysis of 2nd October 2008 had warned that small countries such as Iceland were at risk of going bankrupt, with Iceland’s bankruptcy preceded by some 24 hours earlier by Iceland Going Bankrupt?, – “savers should at the first opportunity seek to repatriate their savings to a 100% UK bank as the consequences of a country going bankrupt could render guarantees meaningless”.

Steps You Need to Take Now !

The situation is literally critical with a possible default imminent and bank runs probable even if Greece is bailed out again as a consequence of future inevitable default due to the ramping up of Debt burden (Debt/GDP).

1. Ensure that you have at least 2 current accounts across banking groups and at least one with a safe bank such as HSBC.

2. Next make a list of all of your deposit / bank accounts, with the amounts on deposit.

3. Now group your accounts by banking sector group (see list at end of this article as a guide).

4. If you are anywhere near the £85k limit with any banking group then move those excess funds immediately!

5. Consider transferring funds to your spouse so as utilise their compensation limit across a banking group.

6. Ensure you have procedures in place so that you can at short notice transfer funds from high risk banks to lower risk banks so as to limit the fallout from any banking system crisis. For instance open an NS&I Direct Saver account NOW (pays 1.75% gross), then use this during an unfolding sovereign debt crisis event to transfer your cash to as this is the safest deposit account available for UK depositors (Max £2mill, Min £1). Again do this now as you may not be able to do so during a debt crisis event due to high demand for the account.

Instant Access Savings Accounts with Lower Risk banks

• NS&I – 1.75%
• Tesco – 2.90% (includes 1.65% bonus for 12 months)
• HSBC – 0.75% (includes 0.5% bonus if you do not withdraw in a calendar month)
• SMILE (Co-op) 0.25%

Higher Risk banks

• Santander – 3% (includes 2.5% bonus for 12 months)
• Barclays – 1.25% (includes 0.35% bonus when you do not withdraw in a month).
• ING Direct – 2% (includes a 1.6% bonus if you do not withdraw in a month)

All accounts pay significantly less than current CPI Inflation of 4.5%.

7. Do not have ANY savings are fixed deposit exposure to banks that do not fall under the UK Financials Services Compensation Scheme.

8. Limit exposure to PIIGS banks, that is Greece, Ireland, Spain, Portugal and Italy as these are at the most risk of going bust thus triggering a lengthy process for savers having to wait for compensation. Remember that if Spain comes under pressure following perhaps Ireland and Portugal joining Greece, then the risks posed to Santander depositors will also significantly rise.

9. Keep enough in cash to cover at least 1 months expenditure, (I keep 2 months worth of cash).

Savers Paying For Low Risk

Savers preparing to cut their risk by switching banks will be disappointed to learn that the safest banks also pay the worst interest rates on deposits, typically less than 2% gross and often below 0.5% on instant access accounts, similarly the highest risk banks pay the best rates (typically 3%), which is further evidence of a market that is geared towards the risk of default and therefore higher risk banks are more desperate to attract retail deposits.

Britain’s Slow Stealth Debt Default

Off course the system is designed so that you can never win, to keep up with inflation and tax you will need to be in receipt of interest of at least 5.4%. Instead the banks are offering you a pittance WITH the risk of default, so frankly your being treated like fools, suckers by the banks and government as you finance bank losses, liabilities and government deficit spending.

The fact is that Britain is BANKRUPT, it can never repay its current debt in real terms or cover future liabilities with future economic output, its just that we don’t know it, this bankruptcy is manifesting itself in HIGH inflation that is the process for transfer of wealth from workers and savers as the price for stealth bankruptcy . It’s the reason why your savings buy less than a year ago and the reason why your pay buys less than a year ago despite going up a few percent.

There is only one way to escape from this decade long losing streak and that is to realise that approx 50% of the value of your savings will be wiped out over the next 10 years, so it is not the case that your savings are protected but rather they are guaranteed to lose approx 50% of their current value, so you have to learn to take risks with your capital, in which respect the Inflation Mega-trend Ebook (FREE DOWNLOAD) as well as the more recent ebook’s, contain strategies for protecting and growing your wealth in REAL TERMS.

Capital Safety in Index Linked Savings Certificates

One low maintenance high safety cash investment product that comes to mind is the NS&I index linked certificate, which has recently been re-introduced after being suspended due to high demand in June 2010. The returning product now pays 0.5% interest + annual change in the RPI index (currently 5.2%) TAX FREE for upto a total of £15k per issue per individual. In my opinion there is NOTHING on the market that can beat the NS&I in terms of return AND safety of capital, and even more so for higher rate tax payers.

Again no matter what happens to the inflation rate, your capital is 100% secure in real terms, and at the minimum guaranteed a return of 0.5% per annum, so even if deflation took place you would still receive a positive return of 0.5%. The certificates can also be cashed in early (after 1 full year), with little loss of indexation+interest. However these certificates are not suitable if you may require your funds within a year as you will not receive any indexation for inflation.

Banking Groups

Note whilst banking groups may have multiple licences as a consequence of mergers and takeovers, however they also may be in the process of merging licences so for ultimate safety one should remain focused on banking groups.

LLOYDS BANKING GROUP (2 licences)

• Lloyds TSB Bank
• AA Savings
• Bank of Scotland / HBOS
• Birmingham Midshires
• Capital Bank
• Cheltenham & Gloucester Savings
• Halifax
• Intelligent Finance
• Saga

SANTANDER GROUP

• Santander bank
• Abbey National
• Asda Savings
• Alliance and Leicester
• Bradford and Bingley
• Cahoot
• Moneyback
• Honycomb

Nationwide Building Society

• Nationwide Building Society
• Cheshire Building Society
• Derbyshire Building Society
• Dunfermline Building Society

BARCLAYS GROUP

• Barclays Bank
• Standardlife Bank

HSBC GROUP

• HSBC Bank
• First Direct
• Marks and Spencer Financial

ALLIED IRISH GROUP

• Allied Irish Bank
• First Trust

CITI GROUP

• Citibank
• Egg

CO-OPERATIVE GROUP

• Co-operative Bank
• Britannia
• Smile
• Unity Trust Bank

RBS Group

• Royal Bank of Scotland
• Nat West Bank
• Direct Line Savings
• Lombard
• The One Account
• Drummonds
• Ulster Bank

Additional comments

• Foreign Banks under UK FSCS Scheme – ICICI (India), First Save (Nigeria)
• Small business are covered by the FSCS on the basis of 2 of following 3 conditions – upto a turnover of 6.5 million, less than 50 employees, balance sheet total not more than £3.26 million

Banks not under the UK FSCS.

• ING Direct, Tridos – Dutch
• Anglo Irish, Bank of Ireland – Ireland

Don’t delay! Act today to form and implement a quick personal savings protection contingency plan, otherwise you may wake up one day to find yourselves locked out of your funds Iceland style, or worse lose deposits over £85k across banking groups.

Stock Market Trend

The stock market continues to track the conclusion of my last analysis (13 Jun 2011 – Stocks Bear Market Rally is Over Mantra About to Get Busted Again?) for an imminent bottom to be followed by the stock market carving out a base into late June / Early July, so no new analysis is warranted at this point in time.

Yes there is a disconnect between the stock market and economic perceptions, but that is nearly ALWAYS the case, well at least 70% of the time, which is why price trumps economics and the mainstream noise. Though don’t forget that investing in the stock market is at the best of times high risk, so it is never a case of treating stocks as an alternative to bank deposits even if the banks look set to default, as banks going bankrupt would also wipe out their respective stock prices.

Source and Comments: http://www.marketoracle.co.uk/Article28957.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2011 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem’s forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook’s – The Inf lation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

First and foremost, the parameters have changed in just a few short years. Government debt has increased substantially in the last few years. This debt and the debt of the last 10 years has been serviced at very low interest rates. In fact, its been serviced at historically low interest rates. When interest rates were higher in the 1990s, the overall debt load was significantly lower. John Hussman explains:

Moreover, in order to adequately evaluate the existing deficit, it is essential to recognize that this figure reflects interest costs that are dramatically less than we can expect as a long-term norm. Consider the chart below. The blue line represents interest on the gross Federal debt at the average of prevailing 10-year Treasury yields and 3-month Treasury yields. Presently, this figure is comfortably low, thanks to the depressed level of interest rates. In contrast, the red line shows what the interest service would be at a 5.2% interest rate, which is the post-war norm.

For debt service costs to skyrocket, interest rates only need to rise marginally. Think about it like this. There is $14 Trillion in debt. In theory, every 1% rise in interest rates could equate to an extra $140 Billion in interest service costs. Tax revenue in FY 2010 was $2.38 Trillion. Clearly, a continued rise in rates will have a highly inflationary impact. As we’ve said before, the Fed will have to monetize more as a result of higher rates and the Fed will have to monetize to keep rates low.

Furthermore, rising rates will certainly have an impact on an economy that is only three years into a de-leveraging cycle. When rates started to rise in the early 1940s, consumers and businesses already endured more than a decade of de-leveraging. Rising rates in 2003-2007 didn’t hurt the expansion because consumers were euphoric about housing and willing to borrow. Yet, this time around we are only a few years into the de-leveraging cycle and tons of mortgage rate resets are dead ahead.

Simply put, rising rates are a death sentence for an over-indebted nation. It cripples the economy’s ability to grow out of its debt burden. Moreover, it leads to default or hyperinflation, which basically means a doomed currency. Now, we do have a massively huge bond market so I am not suggesting rates are going to spike over a few weeks or a few months. This is something that will happen slowly but the market is already taking notice.

After rising over $200 in sustained fashion, Gold corrected via a “running” correction. This type of correction occurs when a market is very strong and it precedes another impulsive advance. Because of the recent correction, Gold isn’t so overbought. Also the COT data shows a reduction in both open interest and speculative long positions.  

Gold is in position to accelerate to new highs and then higher highs during the first half of 2011. Gold and Silver have already had a great run, but the best may be straight ahead. In our premium service, we are constantly working to find our subscribers the best stocks to profit the trends that lie ahead of us. If this interests you then we suggest you consider a free 14-day trial to our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

I have warned that a debt crisis of a magnitude we have never experienced before is approaching. States and municipalities are going bankrupt along with the Federal government. Economists foolishly applaud sub-3% growth in GDP when it took a $1 trillion budget deficit to produce. There is some serious misunderstanding of the fundamentals of our economy right now, and this is going to create some crazy volatility.

States are in horrible shape; suffice it to say that they are going to encounter a major crisis soon. What people don’t realize is that states received billions of dollars in aid as part of the American Recovery and Reinvestment Act of 2009. The influx of government money encouraged states to ignore structural debt issues. In fact, expenditures in states grew in 2009 and 2010 while general fund spending was down both years. In other words, states revenues have still not recovered to pre-recession levels, which means states have been relying very heavily on Uncle Sam. States have also increasingly turned to the bond market (up over 20% from 2009) to fund their budget gaps. These are nothing more than delay tactics.

In all likelihood there will be cuts in pensions. Citizens may pay lip service to how they want austerity, but when they are faced with proposed reductions in their entitlements, you will see how quickly they change their tune. My best guess is that civil unrest will result with the inevitable entitlement cuts. Think of it this way. Baby Boomers are relying on Social Security, which very conservatively is $10 trillion in deficit. At the same time their government pensions are in danger, Boomers must pay ever-increasing property taxes on their homes, which of course, most Boomers viewed as a savings account. To add insult to injury, the Fed brought interest rates down so low that Boomers can’t get a reasonable return on their savings. All I can say is that Boomers as a whole are going to get hit extremely hard by this crisis. Our government is going about this the wrong way- they should not continue to issue interest-bearing debt in a debt crisis. This is just plain nuts.

In the real world, it’s obvious that anyone whose debt is greater than their income shouldn’t be borrowing anymore.  Anyone in this situation who borrowed money at interest to “stimulate” their finances would be laughed at. The borrower is not getting wealthy, the credit card company is. Why our leaders can’t make the connection with our government finances is quite surprising. Foreigners hold our debt, meaning interest payments are stimulating their economies. Lowering interest rates doesn’t guarantee banks will lend or that people will borrow. During the Great Depression, interest rates fell right with the economy into the abyss. Helicopter Ben is purportedly an expert of the Great Depression, yet he conveniently ignores this fact. Where is the stimulus lower interest rates would bring? Where are the jobs? Is it time we rethought useless theories that are not applicable in the real world?

There is no way out of this crisis because states cannot print their way out of this, only the Federal government can. Every potential outcome of this crisis I have considered is bad. For example, if China listened to the U.S. and allowed its currency to rise relative to the dollar, it would effectively decrease the value of their U.S. bond holdings. In other words, a rising RMB risks a sell-off in U.S. Treasuries, as well as other American assets held by the Chinese. Be careful what you wish for.

I don’t know what else to say except that this is pretty obvious crisis to predict. The government has dug itself into a deep hole, and all the predictions of economists and professionals concerning the effects of stimulus have proven to be dead wrong. The lack of common sense in our country will lead to our downfall. Real estate is still in serious trouble, and this will adversely affect banks and municipalities. The sell-off in the bond market is going to make deflationists look like amateur forecasters very soon, while, of course, increasing the burden of our debt. People are starting to realize what I’ve always said:  the Fed ultimately has no control over the bond market. The foundations of the debt crisis are already very strong. It is only a matter of time before the debt crisis starts wreaking havoc.

Source: State Debt Crisis Approaching

Government finances have reached a point where default and/or bankruptcy is unavoidable. After all, we’ve already started to monetize the debt. The inflection point is when total debt reaches a point where the interest on the debt accumulates in an exponential fashion, engulfing the government’s budget. When this occurs at a time when the economy is already weak and running deficits, there essentially is no way out.

Significant runaway inflation and currency depreciation result from a government that essentially can no longer fund itself. It starts when the market sees the problem and moves rates higher. The government then has to monetize its debts to prevent interest rates from rising. Let me explain where we are and why severe inflation is unavoidable and likely coming in the next two to three years.

In FY2010, the government paid $414 Billion in interest expenses which equates to 17% of revenue. When you account for the $14 Trillion in total debt, that works out to be 2.96% in interest. In FY2007, total debt was $8.95 Trillion, but the interest expense was $430 Billion and 17% of revenue. That accounts for an interest rate of 4.80%. Luckily, rates have stayed low for the past two years.

However, in the next 24 months the situation could grow dire. At least $2 Trillion will be added to the national debt. At an interest rate of only 4.0%, the interest expense would be $600 Billion. Even if we assume 7% growth in tax revenue, the interest expense would total 22% of tax revenue . An interest rate of 4.5% would equate to 26% of the budget.

As far as what level of interest expense is the threshold for pain, Russ Winter writes:

Once interest payments take 30% of tax revenues, a country has an out of control debt trap issue. When you think clearly about it, this just makes sense, as the ability to dodge, weave and defer is pretty much removed, as is the logic that it will be repaid in a low-risk manner. The world is going to be a different place when the US is perceived to be in a debt trap.

Is there anyway out of this? Either the economy needs to start growing very fast or interest rates need to stay below 3% until the economy can recover. Clearly, neither is likely. As you can tell from the calculations, interest rates are now the most important variable. If rates stay above 4% or 4.5% for an extended period of time, then there is no turning back.

Judging from the chart below, the secular decline in interest rates is likely over. It is hard to argue with a double bottom, one of the most reliable reversal patterns.

In 2011 and 2012, the Fed will have two new problems on its hands. First, the Federal Reserve will be fighting a new bear market in bonds. They will be fighting the trend. They didn’t have that problem in 2008-2010. Furthermore, the interest on the debt will exceed 20% of revenue, so the Fed will have to monetize more as it is. Ironically, the greater monetization will only put more upward pressure on interest rates, the very thing Captain Ben and company will be fighting against.

As you can see, there is really no way out of this mess, which also includes the states, Europe and Japan. This is why Gold and Silver are acting stronger than at any other point in this bull market. They’ve performed great when rates were low but are likely to perform even better when rates start to rise. This is why we implore you to at least consider Gold and Silver. We’ve created a service that offers professional guidance so that traders and investors can protect themselves and profit from this amazing bull market. Consider a free 14-day trial to our service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

Source: Brian Sylvester of The Gold Report 08/23/2010

Addicted to Profits Newsletter Writer David Skarica has an addiction that might just benefit you. David is addicted to making himself and his subscribers money. In this exclusive interview with The Gold Report, David predicts that the U.S. economy will decline very slowly, describing the process as “Chinese water torture.” David says any precipitous market drop will be pre-empted by further quantitative easing. And this, he says, will be bullish for gold. He also names some companies that might help folks suffering David’s sweet affliction.

The Gold Report: You said in a recent Addicted to Profits newsletter that your indicators “are not really screaming ‘bear.’” What are your indicators, and what has led you to believe that?

David Skarica: Part of it is sentiment, and part of it is the monetary outlook. And part of it is the cycle of the stock market.

On the sentiment side, I watch a few indicators: Investors Intelligence and the American Association of Individual Investors (AAII). Essentially, these are sentiment polls. Right now, Investors Intelligence levels are showing very high bearish readings, much like the AAII reading in late July showed more bears than bulls. In late June, early July, one AAII reading had the most bears since the 2008–2009 bottom. Investors Intelligence showed something similar. A few weeks ago it showed the highest number of bears since April 2009, which, of course, was the start of the bull market and rally.

To get a bear market, you need panic and people selling. But if people are already bearish, it is very difficult to get that selling pressure.

In the monetary outlook, at any point now the Fed is going to start more quantitative easing. That’s usually very positive for equities. Then what people have to remember is that everyone’s likely to get really bearish on the economy. We had a really great unwinding of leverage in 2008, and I don’t see that occurring again. I will talk about that with my third point. That is why I don’t see a huge amount of downside in stocks. Even if the S&P were to drop to 900, that is when quantitative easing would really begin, big time.

Part of my analysis in a book I have coming out in November (The Great Super Cycle: Profit from the Coming Inflation Tidal Wave and Dollar Devaluation, John Wiley & Sons), examines the last three secular bear markets: between 1900 and 1920, the start of 1929 to 1949, and 1966 to 1982. Those were all 15–20 year periods when equities went sideways. There are usually two big bear markets, and they happen in the first half of the secular bear market. The examples were 1907 and 1914, 1929 and 1937, and 1970 and 1974. In the second half of the bear market, more muted moves occur in the stock market, combined with much higher inflation. That’s where I think we are.

The rally we’re seeing in the stock market is very similar to the 1908 or 1975 rallies, and those were followed by long-term trading ranges rather than big dips. The low of 666 on the S&P that was reached last March will probably hold, but inflation adjusted, we actually could go lower. If we get a drop of another 10%–15% in current levels in the stock market, they’re going to come in with quantitative easing, which will actually probably lift stock prices, even if it doesn’t help the economy.

TGR: You’re saying that if the market starts to dramatically slide, the government is going to come in with some more money to prop up the economy again. But America doesn’t really have any money.

DS: They’re going to print it.

TGR: Won’t that just prolong the inevitable?

DS: What will happen in this cycle is very similar to what happened in the late 1940s or in the early 1980s. In those cycles when the bear market ended, the Fed and the government raised interest rates and the money supply dropped. Everything dropped in price, and that cleansed the system. But I just don’t think they’re ready to do that yet. If you look at interest rates, we’re coming off a secular low. That tightening cycle has to be the end. I don’t see that occurring for quite a while. The Brits had to do this after the Second World War when the pound ceased to be world’s reserve currency. They essentially devalued way into the early 1980s, a 35–40 year period. There’s no reason why the U.S. can’t slowly devalue over that long as well.

TGR: What’s your near-term market outlook, David?

DS: That is really difficult because if you had talked to me in late June or early July, I was really bullish because of the terrible sentiment we saw. I still have a muted bullish outlook here. One chart I have in my newsletter compares the 1907–1909 period with the current period. The 1907–1909 period saw almost a 50% drop over a two-year period followed by a very strong reaction rally, followed by consolidation like we saw recently, followed by a second move higher. If that correlation continues, it means we would be at the top of the market in the first or second quarter of next year, and the S&P would rally to about 1,300.

In the very short term, we could see one more drop in the fall before we rally, but I really think those lows of May–June are going to hold. We could see a pullback. But after that pullback, we will be headed higher because of the quantitative easing.

What people have to understand is that this is a global market. Don’t be so focused on the U.S. market. If you look at Turkey, the market there has actually broken above its 2007–2008 pre-crisis high. Brazil and India are within a few percentage points of their respective pre-crisis highs. When the U.S. market broke down to new lows in late June, all of the Asian markets essentially held their lows and some went higher.

TGR: But if the U.S. continues to print money, doesn’t it risk losing its status as the world’s reserve currency?

DS: I think that’s a question of when it’s going to happen and not if. This is why it will lose its status: about 75% of its debt is short-term oriented, meaning two to seven years in duration. That means that if you run a deficit of $1.2 trillion a year over the next five to seven years, you’re going to rack up $5–$7 trillion dollars in debt. And you’re going to have to roll over about $8–$9 trillion of the current $13 trillion in net debt. That means you’re going to need between $10 and $15 trillion to cover the debt. They’re going to do that by printing money.

TGR: Doesn’t it get to a point where they’re not going to repay their debt?

DS: I think they’ll repay it because they can just print money to repay it. It’s not like in Argentina where you have to do a partial default because some of your debt is issued in another currency. They can just print the money and repay it. I don’t think default is ever a problem.

The real risk is more in these unfunded liabilities. You’re going to see what happened in Japan happen in the U.S. They’re going to raise the taxes and the outlays on Social Security and then reduce the amount you receive. That is more where I see the risk rather than in defaulting on foreign debt.

TGR: So you don’t believe a massive crash is imminent in the U.S. economy.

DS: I think what you’re seeing today is what’s going to continue; it’s going to be more depressing, like Chinese water torture.

TGR: You mentioned earlier that some of the foreign markets continue to do quite well despite the economic problems in the U.S. What will the role of these emerging markets be in tomorrow’s economy?

DS: I think their role is consumption. We can talk about how their per-capita GDP is much, much lower, but most of these economies do not have the huge personal or federal debt load that the U.S. has. This is where the emerging consumer is going to come from. You have 3.6 billion people in Asia as opposed to 300 million in the States. If you can generate one-twelfth of the per-person buying power of the U.S, the total dollar amount is going to be equal.

I still think the U.S. is going to play a really important role in the new global economy—global finance. That’s where the U.S. can really serve; it can still be a source of capital for these markets and help these companies raise money. There’s definitely a role for U.S. corporations going ahead, and obviously technology corporations—you know, Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT)—these are still top-tier companies. Let’s face it, the iPhone is a real niche brand, and as Asians get richer, they’re going to want that sort of consumer product.

TGR: What are some companies you like with some strong emerging markets assets?

DS: I really like Petrobras (NYSE:PBR). I like oil companies that are outside of the United States because Americans have no regulation, and then a disaster happens, and then they overregulate like crazy. I think you want oil companies that have most of their properties outside of the U.S. I really like Petrobras for that reason, and the Canadian oil company Suncor Energy Inc. (NYSE:SU; TSX.V:SU), which is an indirect play on China and rising commodity prices going forward.

TGR: Do you mostly like Petrobras because it owns the big Tupi oilfield?

DS: Yes, in Tupi they have one of the largest offshore oilfield discoveries in the world. Most of their properties are either offshore Brazil, or they are in the South Pacific. Brazil and China are becoming unique partners in that Brazil is basically exporting raw materials for China, and Brazil buys some of the produced goods back from China. So, a lot of Petrobras’ oil is going to be served directly to China.

TGR: And what is it about Suncor you like?

DS: It’s in the Canadian oil sands. President Obama once called it “dirty oil.” After what happened in the Gulf, it doesn’t look so dirty anymore. It’s right next to the U.S., but you’re not at the whim of U.S. environmental regulations. Politically, you’re very stable. When you’re up in the oilfields of Canada, that’s about as safe as you get.

That stock has gone nowhere for a while, and because of that there’s been valuation compression. So it’s become a pretty good value play as well.

TGR: What does the stagnating U.S. economy mean for gold?

DS: It means there are going to be higher gold prices because you’re getting increased inflation, and gold is a hedge against that. Because the value of the dollar is going to decrease, there’s going to be more consumer demand for gold in the United States.

Also, in deflation, consumers get really worried and they hoard gold. That happened in the early 1930s before they made gold illegal to own, so deflation or inflation is really positive for the gold price because people are going to try to hedge with owning gold under those circumstances.

TGR: You’re not really a gold bug, but you’re certainly bullish on gold.

DS: Well, one thing I really believe is that the gold bull market usually ends when the Dow-to-gold ratio—the number of ounces of gold it takes to buy one share of the Dow—goes about 1.5-to-1. That’s what happened in 1932; that’s what happened in 1980. Right now we’re still 8-to-1, 9-to-1. There’s a long way to go.

TGR: Do you have a price projection for gold?

DS: I am really conservative in my price prediction, but last year I was thinking we would go to $1,100–$1,200, which we did. I would say by the end of 2011, I’d be pretty happy with $1,500 gold. But because quantitative easing might start again, I wouldn’t be surprised if it was a lot higher than that.

TGR: How are you playing gold in this environment?

DS: I really like the equities, and the reason is because if you look at the ratios like the XAU-to-gold or the HUI-to-gold stocks, the XAU-to-gold usually roughly trades historically at 20% of the price of gold. So if gold is $1,000, then the XAU should be at 200. Well, right now the XAU is just over 175, and gold is $1,220. If you took away the financial crisis, this is the lowest all-time ratio of stocks to gold, lower than when they bottomed in 2000.

This tells us that if gold goes over $2,000, then the XAU should be trading at 400. Well, $2,000 in gold is about a 67% gain from $1,200, but 170 to 400 on the XAU is about a 150% gain from the current gold stock prices. I think the equities have more leverage, if they go back to their historical valuations.

TGR: What are some equities you like?

DS: I really like Eldorado Gold Corp. (TSX:ELD; NYSE:EGO). I have to put Kinross Gold Corp. (TSX:K; NYSE:KGC) in there after their most recent takeover.

TGR: You liked Kinross’s deal for Red Back?

DS: They overpaid, but I know some guys who know those properties, and I think they’re really going to expand the resources on those properties. With gold at $1,500 and an expanding resource base, that would look good in retrospect. Sometimes you have to let these things play out. If you look at Agnico-Eagle Mines Ltd. (NYSE:AEM; TSX:AEM), they did a lot of takeovers in the mid-2000s—and Agnico is another one I like. Agnico lagged for quite a number of years, and then all of a sudden when some of these things started coming to fruition, Agnico was like shot out of a cannon.

I really like these companies with some resources and some production that is expanding. An example of that would be New Gold Inc. (TSX:NGD; NYSE.A:NGD). They have one property in production and one property that they’re going to put into production. Another company I really like is Aberdeen International Inc. (TSX.V:AAB).

TGR: Which is effectively a mining mutual fund.

DS: Yes, it’s a mutual fund that has control over a lot of their investments, meaning they know what’s going on in all their investments because they were in on the original financings. It’s even better than a fund right now because the net asset value of Aberdeen is more than a $1 per share, but it’s trading at $0.40. When the junior market gets good again, it’s going to make up for that deficit in the net asset value.

If you buy something like the Central Fund of Canada Ltd. (NYSE.A:CEF; TSX:CEF.A) right now, you’re going to pay a 5%–10% premium on the gold assets in the fund. With Aberdeen you’re paying a 60% discount. Aberdeen is a great way to diversify in all these junior companies. I know the guys behind Aberdeen. They’re really smart, and they have a history of putting together deals such as that at Consolidated Thompson Iron Mines Ltd. (TSX:CLM), and Avion Gold Corp. (TSX.V:AVR; OTCQX:AVGCF), companies that have real resources and that will go into production.

TGR: You mentioned Avion Gold. It’s putting out some decent production numbers in Mali.

DS: Avion is the old Nevsun Resources Ltd. (TSX:NSU; NYSE.A:NSU) property in Mali. The problem you get with some of these properties is a lot of these guys just don’t drill the right zone; you need the right geologist. Because of their management and their geologists, Avion is running this mine in Mali a lot more efficiently and a lot more profitably than Nevsun did. Avion has pulled back from $0.80 to the mid-$50s, and it looks like it’s going to consolidate down there for a while.

They have cash flow now because they produced over 8,700 ounces of gold in July. Plus there is the possibility of more value coming from their exploration projects.

TGR: What about small caps in West Africa?

DS: Xtra Gold Resources Corp. (OTCBB:XTGR) is in Ghana; that’s a very interesting country for gold production: a) it’s very stable, and b) there are tons of producing mines—Newmont and all of the large companies are there.

TGR: That’s where Red Back’s Chirano gold mine is.

DS: Exactly, that’s where Red Back is, and they’re probably going to be drilling more aggressively to expand the resource in the coming months. I like Xtra as a play in Ghana. That’s pretty undervalued in the $1.20–$1.30 range. I don’t want to throw numbers around, but I just think they’re going to be drilling more. They’re going to be able to further expand the resource in Ghana because they’re right near a Newmont property.

TGR: Going back to Aberdeen, it also owns Largo Resources Ltd. (TSX.V:LGO). Are you familiar with them?

DS: Yes, I know Largo. I didn’t write my newsletter for a year or two, and I worked for Largo. Largo is another company I like longer term because of the assets that they have in Brazil and the Yukon. But if you’re someone who’s a junior investor and just starting out and you’re interested in these deals, I think the more prudent way of owning them is through Aberdeen. Even though I like those companies and those companies are on my list, as a small individual investor you’d want to own those through Aberdeen.

TGR: I suppose it’s like a basket of commodities.

DS: It just spreads the risk around, and you’re getting it at such a deep discount to net asset value. But by owning it through Aberdeen, if one of these companies goes down, then you know it’s only one of their investments. It’s not going to be the end of the world.

TGR: Let’s talk about silver for a minute. Silver has traditionally traded at about a 15-to-1 ratio to gold. What do you see happening with silver throughout the rest of this year and through 2011?

DS: I really like silver’s chart. I would say in 6–12 months’ time it will look better than gold because it hasn’t broken out yet. Like we saw when gold finally broke $1,000, you get this kind of outperformance jackup. Right now, silver is seeing huge resistance in the $18–$21 range. It really looks like silver is building momentum to break out in the spring. When you’re in the up cycle for precious metals, silver is essentially a more elaborate precious metal play. Silver outperforms on the upside and underperforms on the downside. It goes up faster, but it also falls faster.

TGR: What are some small-cap silver plays you like?

DS: That’s a tough question. There are very few of them in the small caps. I like Fortuna Silver Mines Inc. (TSX:FVI; Lima Exchange:FVI) because I like its model. It has a silver-producing property that I visited in Peru, and then it has this Mexican property that they’re going to put into production. It’s got cash flow, it’s got potential from another producing property to come, and technically I really like that chart. They’re building a big base in the $2–$2.50 range. I think when Fortuna comes out of that, they’ll come out quite aggressively.

TGR: Surely that silver chart has you liking other silver plays.

DS: Actually, my favorite silver junior is probably Paramount Gold and Silver Corp. (NYSE.A:PZG; TSX:PZG), which also has projects in Mexico. They’re actually on the AMEX so Americans don’t have to get a broker to buy them on the Pink Sheets.

Paramount is a good opportunity right now because unfortunately they were on the Russell, but they got kicked off because they don’t have a head office in the United States. Their head office is in Ontario. They had to absorb all that selling because they got kicked off of the Russell.

I really like them because they took over Ex-Cal, and on top of that they’re going to build this property in Mexico. They have this advantage of a secondary property from a takeover and have the potential to really expand the property that they have in Mexico. On top of that, they have enough cash to basically drill as much as they want to expand this resource.

And they’re next to Coeur d’Alene Mines Corp.’s (NYSE:CDE; TSX:CDM) Palmarejo silver mine, which they got when they took over Palarejo Silver and Gold for $1.1 billion in 2007.

TGR: What about some others?

DS: Kiska Metals Corp. (TSX.V:KSK) is one I really like; it’s the old Rimfire management. Rimfire was one of my favorite junior companies over the last two years, and they took over Geoinfomatics. As for their Whistler property, what they’ve essentially done in the last six to nine months—it hasn’t been very sexy—but they’ve essentially done an induced polarization survey to look at Whistler’s geology. That’s going to allow them to really expand the resource at a rapid rate once they start drilling again. We’ve seen consolidation on this stock in the $0.70–mid-$0.80 range. I think that this patient approach is going to lead to higher prices going forward.

The nice thing about them too is that they have optioned properties to other companies, so you’re going to see a lot of potential in spinning off these other properties. I really like Kiska here.

TGR: Thanks, David. We appreciate your interesting insights.

At the tender age of 18, David Skarica became the youngest person on record to pass the Canadian Securities Course. Skarica, a Canadian and British citizen, is the author of Stock Market Panic! How to Prosper in the Coming Bear Market, (1998), which provided thought-provoking arguments on why this great bull market will end in the most vicious bear market of all history. He is also the author of The Contrarian Who Saved the World, which explains how markets work. His new book, The Great Super Cycle: Profit from the Coming Inflation Tidal Wave and Dollar Devaluation, will be published by John Wiley & Sons in November.

In 1998 Skarica started Addicted to Profits, a newsletter focused on technical analysis and psychology of markets. From 2001 to 2003, Stockfocus.com ranked Addicted to Profits third out of over 300 newsletters in terms of performance. He is also the editor of Gold Stock Adviser and The International Contrarian services, which focus on gold and global investing. Dave has also been a contributing editor to Canadian MoneySaver and Investor’s Digest of Canada.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Aberdeen, Avion, Kiska, Fortuna and Largo.
3) David Skarica: I personally and/or my family own shares of the following companies mentioned in this interview: Aberdeen, Kiska, Agnico-Eagle, Eldorado. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Source: Barbara Templeton and Karen Roche of The Gold Report 5/26/10

http://www.theaureport.com/pub/na/6390

Replacing most of Europe’s colorful notes and various coins less than a decade ago, the euro is on the brink of extinction, according to Trader Tracks’ Roger Wiegand, sharing news and views of Euroland’s critical condition with Gold Report readers in this exclusive interview. Roger says the euro at $1.20 is the “line in the sand where big trouble will start. . .and that’s dangerously close.” On the other side of the world, he sees China doing well now, but doesn’t pin his hopes on China as the engine for global economic growth as so many others do. In fact, he says things there are “fraying a bit on the edges.” So, is there a white horse waiting in the wings to lead the world back to economic good health? Read on. . .

The Gold Report: You put a rather provocative quotation in a recent Trader Tracks. It says: “The destruction of a currency does not follow a straight, predictable course. . .like a cancer, the disease breaks out anew because inflation cannot be cured through monetary and fiscal measures alone; it requires a fundamental change in social and political attitudes and this change usually does not occur until complete monetary chaos forces a change.” The quotation credit reads, “G. Carl Wiegand, ‘The Great Inflation: Germany,’ 1923.” Two questions: First, is Carl Wiegand among your ancestors?

Roger Wiegand: He’s not. I found that particular quote in a book, Golden Insights. It was written by James U. Blanchard III out of his Gold Newsletter of many years ago. He’d put together a collection of his favorite quotes, and that particular quote was among them. I thought it intriguing that the quotation came from someone with my surname, and it was a very interesting quote.

TGR: Very interesting indeed, and it leads right into the second question: What do you think of Carl Wiegand’s observation in light of the euro’s troubles and what’s happening in the European Union now?

RW: I think the statement was very appropriate for what’s going on in Europe today. We’ve been doing a lot of writing on this lately, and based on latest information Germany has become the engine of Europe. Its share of the huge Euroland rescue package will come to between $154 billion and $185 billion in loan guarantees. It’s going to be mostly German money and savings that was going to have to do it—their credit.

Chopper Ben (Federal Reserve Chairman Ben Bernanke), Timmy the G (Treasury Secretary Timothy F. Geithner) and the New York banksters turned up the heat and the German Parliament approved that ridiculous package in mid-May, contrary to Chancellor Angela Merkel’s urging lawmakers to reject the whole deal. They think they can blunder through to help the euro. They cannot. Germany goes down with the rest. I think the German people are very angry about this. They don’t want to be Europe’s paymaster.

I said back in 2003 that Euroland (i.e., the European Union); the European Central Bank and the euro would fail. Now it’s coming true. It’s in writing, seven years ago. I said that because I thought it was ridiculous idea for a group of countries with major cultural differences and languages, disparate economies that don’t match up at all, with their abilities to buy and sell and obtain credit being so different. There was no way to achieve parity to reach a point where they could participate as equal members. Germany is expected to save all its neighbors and it cannot.

TGR: Do you expect to see the return of guilders and schillings, pesetas, francs and marks as one outcome from all of this?

RW: Yep. Absolutely. It won’t happen overnight. It would be too much of a big changeover at once. There may be a “mini-euro,” a higher-quality currency probably established by Germany, running alongside the current euro. I contend that Germany will be the first to bail out of the European Union and abandon the euro. I have said numerous times that the German mark probably would come back, run in parallel with the euro, and eventually the euro would just be cancelled out as a currency in Germany and they would use the old marks.

TGR: And then other former European currencies might follow?

RW: They very well could. The survivors who still remain in the European Central Bank with the euro may, in fact, try to keep it together. But without the German credit, and with all the problems they’re going to face, I really don’t understand how it can keep going. The debt is just overwhelming. Basically, Italy, Portugal, Spain and Greece are pretty much broke; they have no hope of paying their debt. To my understanding, Spain’s debts are 24 times larger than Greece’s. That’s a pretty big mountain to climb. So yes, I suspect that what would happen is if Germany drops out and they go back to their own old currency, the rest of the countries will, too.

TGR: Despite the vote in the German parliament, do you project that Greece and potentially Spain and Portugal will ultimately default on their sovereign debts?

RW: I think they will. There’s no way Greece can pay anything back. They have nothing going for them. They have a tourism industry, but very little manufacturing. I saw a comment the other day that said Greece hadn’t balanced a budget since 1893 or 1898. How in the world they managed that is beyond me.

TGR: So, suppose Greece defaults. And then assume, with Spain and Portugal teetering on the edge, the euro then plummets dramatically unless they start to inflate their way out of it. At what point does everyone abandon the euro and move to safer currencies? Say the U.S. dollar?

RW: There are two big numbers to watch. First would be the euro at $1.20, and that’s dangerously close. Everybody considers $1.20 the line in the sand where big trouble will start; it’s a major, major support number. The other number would be when the euro is at parity with the U.S. dollar, which would be 20 points lower. Keep in mind that one point with the euro is $1,250 the same as the Swiss franc, in currency trading. So, those are the key numbers.

TGR: What happens if the euro goes below that $1.20?

RW: Everything starts coming apart. Keep in mind, too, the euro and the U.S. dollar are supposedly the two reserve currencies of the world, with the U.S. dollar being dominant at about 80% to 85% of all reserves. The euro has a much smaller position, but it is a pretty big deal. Not all of the European population lives in Euroland, of course, and the Swiss and the Brits (the UK) still use francs and sterling—but also remember that Europe has 850 million people in contrast to 330 million in the U.S.

The Swiss franc, incidentally, trades almost point-for-point with the euro because Eurolanders surround the Swiss. The Swiss don’t want a large disparity between the two currencies to mess up export/import, in comparing prices, and in a variety of domestic things.

TGR: Speaking of import/export, let’s turn for a few minutes to the other side of the world. Many people have pinned hopes on China as the savior that would lead us from the depths of recession back into the promised land of global growth. You’re commentaries have been suggesting China’s bubble is about to burst and dash these hopes. What signals do you see that lead to your conclusion?

RW: China’s GDP is in a race to the moon, running between 8% and 11%, which is beyond the pale. It’s just too far out. It’s growing too fast. A major sell-off in the SSE—the Shanghai Composite Index—was one warning sign. It did come back, but it told us that things are fraying a bit on the edges.

Then, in the first quarter of 2010, Hong Kong real estate went up 23%–23% in four months, and it’s even higher now. I spent 25 years in real estate, and I know that is not sustainable. You can’t have prices rising that quickly. They’ve got a bubble; there’s no question about it. Some of the prices they’re paying for properties are just staggering. The last time we saw that was in 1989 in Japan, and we know what happened in Japan in 1989. The market just crashed.

As you know, the Chinese government is a command-and-control operation. Actually, they’ve been doing a pretty good job, but it’s so large and they’re a fairly new at being capitalists (along with being communists). To cool down the real estate situation, they’ve been tightening credit; no longer offering financing for third homes, for instance. They’re requiring more money on down payments for first and second homes.

Another factor that is making it difficult for the Chinese economy is the fact that the United States has broken down to the extent that it has. American consumers are no longer using homes as ATMs for the purchase of Chinese products. Not so long ago, 25% of all exports leaving China went to the U.S. A good portion of that is gone now.

Many have said that organic growth within China could sustain its increasing GDP, because 100 Chinese cities each have populations of more than a million people. That’s true, but how high is high? Trees don’t grow to the sky.

I am not the only one anticipating problems in China, either. Earlier this month in a Bloomberg TV interview in Hong Kong, Gloom, Boom & Doom Report publisher Marc Faber said that it’s likely to crash sometime in the next nine to 12 months.

TGR: If China’s growth has in fact peaked—and is about to turn south—is anyone waiting in the wings to lead the world back toward global good health?

RW: Three countries that I can see that are the strongest as of this date are Canada, Germany and China.

TGR: Didn’t we just rule China out?

RW: Major market shifts can take longer than we expect. China is doing exceedingly well right now. They’ve got a tremendous amount of cash, which they’re trying to offload, the biggest portion being U.S. dollars and U.S. bonds. They’re desperately trying to get rid of that paper and trade for hard goods. That would be crude oil, oil-related service companies, stocks in good companies, properties, copper mines, gold mines, silver mines and base metal mines.

They’re shopping in Venezuela for oil and oil services. They’ve got three big new oil-related operations in Nigeria. They’ve been buying oil properties in Libya. They’ve made some deals in Peru and Chile, and they’re working on a couple more in Australia. The list goes on.

TGR: Okay. On to Germany and Canada.

RW: Germany’s got a big overload and we know what their problems are. We just reviewed that. As for Canada, the major thing is that they avoided getting involved in a lot of the risky trading and debt that their American counterparts did. Canada has five large banks; that’s pretty much it, and they were prevented by law and rule from engaging in that kind of trading in derivatives. It kept them out of trouble, and they’re in pretty good shape.

TGR: So Canada may be the knight on the white horse.

RW: That’s the way I view it, and that’s what we’ve been talking about in our letter. In our speeches in Canada at the shows and conferences, we’ve said numerous times that the Canadian economy is the best of all. The banks are in the best condition. The currency is very sound and rising. Canada’s primary negative is a manufacturing slowdown in Ontario and Quebec. This is minor, though, compared to the great things Canada has going for it in commodity-related markets and finance.

TGR: Moving south, we’re hearing and reading that the employment situation in the U.S. is improving, but you have a different view. In Trader Tracks, you’ve indicated a current jobless rate at 24% and forecast it rising to 35% within three years. What makes your outlook so grim?

RW: Why am I grim and at odds with the happy Pollyanna people in Washington? We have two different sets of numbers. Those numbers pretty much track mine at John Williams’ shadowstats.com—and he worked in the government and consequently worked on that data. I follow a simple rule of thumb: take the official unemployment number and multiply times two. That pretty much matches up with what John says. In other words, if Washington says that nationwide unemployment is at 9.9%, multiply times two and round it up to 20%. John’s report a week or so ago was about 22%.

TGR: Okay, it’s not the facts that are changing so much as the figures that go with the facts.

RW: That’s correct.

TGR: You’ve also said you expect major market mayhem before the end of July. Could you describe more specifically what you see, and tell us why?

RW: I am not alone in my forecast. Many others are saying the same thing. Stocks are up about 80% from March of 2009. It’s gotten very peaky. The markets have normal technical shifts. The Lehman meltdown in 2008 hit the market so hard that for 30 to 60 days, nothing seemed to behave normally on the trading cycles and calendar. I expected it to self-correct, but it has not. That period just fell off the trading calendar. Consequently, the old “sell in May and go away” shifted to July.

Our next short-term call is that the big funds will have pushed the market up, sold into strength, taken their profits and be out of the way by Memorial Day weekend. Then the selling begins. It will continue at a very heavy rate probably for one to two months. Six negative events are converging this month and next. First is housing. We can expect another three to five years of falling prices. Some Alt-A loans—not subprime but those based on slightly blemished credits—are going to fail and foreclose. One report said there will be two million of these.

Number two: commercial real estate has hit the wall. Vacancies are climbing. A few months ago, General Growth Properties, the owner of 158 malls, filed for bankruptcy for about $28 billion. That’s in a breakup in court right now. Good shopping centers in the U.S. are in trouble. I have never seen a big mall close, but some people have told me they have seen two of them. That’s a major event in my view. So, commercial real estate, REITs, and the life insurance companies that gave them all the money will take a big hit as related group.

TGR: A lot of shoes dropping here.

RW: We’re just at number three, the auto business. The only thing that propped it up was all the free cash from the government, “cash for clunkers” and some of the other programs. The spring auto sales that will be reported after Memorial Day won’t be good.

The next hit’s coming when the banks have to report about what’s happening with credit cards on their financial statements. Look for $40 billion in credit card debt to be written off in June and July. That’s not my forecast; I think it may have come from prominent banking analyst Meredith Whitney. That’s number four.

That brings us to number five. Remember the TARP plan, which bailed out the big New York banks? All these banks have done was to gather in cash from the taxpayers, rearrange the balance sheets—the deck chairs on the Titanic—and then march forward saying everything was super duper. And it’s not. I saw Meredith Whitney on a TV show a couple of weeks ago, saying that the bad loans they’re still holding are four times worse than what got them in trouble the last time. That does not bode well.

And finally, number six was the big surprise—what’s going on in Euroland.

TGR: Yikes. Harmonic convergence turned upside down.

RW: Yes. Arch Crawford—publisher of Crawford Perspectives and Wall Street’s best-known astrologer, according to Barron’s—has mentioned the date of July 26. He said it’s the worst day astrologically and technologically that he can see on charts in 10,000 years. I asked him at a conference how bad that was and he said, “It’s so bad I can’t imagine what could happen”—you know, World War III, Iran invasion, complete systemic economic crash, or whatever. I am not of the view that something like that will happen, although it could. We don’t know. I just think we’ll have a long, slow sink in the mud, and this is going to be a very hard recession-depression that will continue for another three to five years. So, it’s going to be tough, but keep in mind the fact that in the 1930s, as bad as it was, three out of four people still had a job—so 75% were employed.

TGR: A glimmer of hope. Let’s talk about some companies. Your latest Trader Tracks lists a number of companies in the news lately for one reason or another, and our readers would certainly appreciate your viewpoint on some of the developments they’ve read about. We saw a broad spectrum of companies represented in there—from rare earths to precious metals. Can you talk about some of the companies you’re following?

RW: Sure. I find Rare Element Resources Ltd. (TSX.V:RES) attractive because they’re safely located in the United States; they’ve got some rich deposits; in their reserves they have the basic rare elements the U.S. defense industry needs to operate. They must have those minerals. As you know, 90% of those kinds of minerals are located in China. The U.S. Department of Defense is probably a little uneasy about that. There really aren’t that many companies for that particular field, but we find that Rare Element is one of the top selections. And we also like them simply because of where they are, what they have, and what’s moving forward in their business plan.

TGR: It was clear in Trader Tracks that you were pretty stoked about Newmont Mining Corporation (NYSE:NEM) being involved with Bear Lodge in Wyoming, but within the last couple of weeks, Rare Element announced that Newmont won’t be exercising its option on a 65% interest in the gold and base metals at the Sundance Venture on that property. Also, all of Newmont’s 327 wholly owned claims outside the venture will transfer to Rare Element. What’s the significance of this development, in your view?

RW: I suspect the project turned out to be too small for Newmont. Some of these really big operators—Barrick Gold Corporation (NYSE:ABX; TSX:ABX), AngloGold Ashanti Ltd. (NYSE:AU; JSE:ANG; ASX:AGG; LSE:AGD), BHP Billiton Limited (NYSE:BHP; PKSHEETS:BHPLF), Rio Tinto (LSE:RIO; NYSE:RTP; AUS:RIO), Newmont, etc.—have to operate on such a scale that it’s difficult for them to find a project with the reserves necessary to really warrant the large investment they put in up front. They’d prefer to be involved with projects with sufficient reserves to pay out for 40 or 50 years. I’m not sure, but with the Rare Element project, I think Newmont was just looking for a bigger deal. You know, they go worldwide looking for bigger deals.

TGR: Turning to silver briefly . . . any juniors that you’ve got an eye on?

RW: We like First Majestic Silver Corp. (TSX:FR; OTCQX:FRMSF). Its income keeps going straight up in a steady line and they keep finding more and more silver. It’s among the companies I call junior intermediates. They have done well; they’re good managers. It’s easy to cut through reserves pretty quickly, so one thing they have to do with these mines when they start to run and operate at higher volumes is to keep the reserves coming. First Majestic has done well, in that they keep adding to reserves. So, we like First Majestic.

TGR: How about in the gold arena?

RW: There’s Eastmain Resources Inc. (TSX:ER). We know the management; we know the geologists; we know what they’re doing. One thing I’d emphasize about Eastmain is that they’re in Quebec, and that’s probably one of the best mining-friendly locations anywhere in the world. They give them tax breaks. They have trained employees; they’ve got geologists. They have shipping; they’ve got rail. They have all the ingredients to run a good mine, and if you’ve got management as good as we see in Eastmain, expect their drilling program to be successful. We think they’re going to find some fine deposits, and considering the infrastructure in Quebec—water, power grid, roads and so on—things bode well for the stock.

TGR: In light of what you said about Quebec, any other companies there you’d like to mention?

RW: Clifton Star Resources Inc. (TSX.V:CFO) has done exceedingly well. We have been in and out of its stock several times, and it’s been very good to us—numbers in the neighborhood of 30% to 40%, 70%, maybe 140%. A big shareholder sold out recently, taking huge profits, but the stock is solid. They’ve got a fantastic partner; they’re exceedingly well capitalized; they’ve got $4 million to $5 million worth of ore mined, in a pile on the ground. It just has to be reprocessed. So, it’s a good opportunity; it’s a good company.

TGR: Any other comments on companies in good locations?

RW: Pediment Gold Corp. (TSX:PEZ; OTCBB:PEZGF; FSE:P5E) comes to mind, although at this point I have to say at this point I’m not up to snuff on Pediment’s news. We know the management, though, and I am going to meet with their president and geologist to get caught up on the latest things when we’re in Vancouver at the June 6-7 conference. Again, though, this is a company with smart management in a good location. They’re operating in a rather mountainous region, which makes it more expensive and difficult. But these are smart people. They know what they’re doing, and they’ve got the capital. We think they’re going to do quite well.

TGR: That’s the World Resource Investment Conference?

RW: Yes. In fact, I’m scheduled for a keynote speech on the second day, covering several topics—taxes, devaluation and the divergence between gold and silver and the shift of precious metal shares away from the general stock market. I’m also running a short workshop on my business, Trader Tracks. And finally, I’ll be delivering a speech that isn’t on the agenda, speaking on behalf of Endeavour Silver Corp. (NYSE:EXK; DBF:EJD; TSX:EDR), which is another one of the companies I follow.

TGR: Have a great time in Vancouver, Roger, and as always, thanks so much for your thought-provoking commentary.

Roger Wiegand—aka Traderrog—produces Trader Tracks to provide investors with short-term buy and sell recommendations and give them insights into political and economic factors that drive markets. An insatiable reader, he digests a variety of domestic and international publications, with the economic, political, monetary and market news and commentary woven into his opinions and analyses. After 25 years in real estate, Roger has devoted intensive research time to the precious metals, currency, energy and financial market for more than 18 years now. His varied background—which also includes graphics, writing, editing, sales, marketing, commercial printing, consulting and trading—helps shape the view he shares. In addition to Trader Tracks, Roger pounds out a weekly “Rog’s Corner-After The Bell” column for Jay Taylor’s Gold, Energy & Tech Stocks newsletter. For other essays, visit websites such as Kitco and, of course, The Gold Report. Roger is a frequent speaker at The Cambridge House Resource Conferences, the latest in the string being the World Resource Investment Conference at Vancouver coming up June 6–7. Visit Roger and Jay’s website at webeatthestreet.com. Tel: 718-457-1426 Claudio Bassi, Manager cbassi@miningstocks.com.

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DISCLOSURE:
1) Barbara Templeton and Karen Roche of The Gold Report conducted this interview. They personally and/or their families own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: First Majestic, Pediment, Eastmain and Rare Element.
3) Roger Wiegand: I personally and/or my family own shares of the following companies mentioned in this interview: None.

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OVER-ARCHING SOVEREIGN DEBT CRISIS

by Jim Willie CB February 23, 2010

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Jim Willie CB, editor of the “HAT TRICK LETTER”

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

Neither the US financial press nor the US bank leaders take the sovereign debt crisis seriously. Even the USCongress seems totally unaware of the growing global intolerance for government debt out of control. The issue is rollover of short-term debt, size of the overall debt burden, borrowing costs to sustain the debt, annual deficits that accumulate further debt, and size of debt versus economic size. The United States projects a certain degree of arrogance that foreigner must continue to finance the USGovt debt at a time when the evidence gathers on loud suspicious activity in the USTreasury auctions. The US travels down a road to debt default also, as the mask of corrupt USTBond management is removed. The plight of Europe will strike the United States and United Kingdom, as contagion is ripe. The claim of containment incites laughter. The Euro currency has finally begun to stabilize, which will make all the more apparent a global bull market in the Gold price. The Gold price in almost every major currency is rising. In the US$ it will be last.

USTREASURY AUCTION BID RESULTS

Analysts have noticed the drop-off in Indirect Bids, which means central banks participate less. Analysts have noticed the lack of identification of Direct Bids, which means the USGovt is lying through their teeth as they monetize the debt. Analysts have noticed the new ledger item called Household as bidder, which reeks of accounting fraud in creation of a catch-all category. The USFed and USDept Treasury can no longer hide their enormous monetization of USGovt debt. Some reports mention that bond professionals are extremely anxious about the results of recent USTreasury auction. A huge jump in the Direct bidders took 24% of the auction supply. The apparent lack of transparency behind this group has increased speculation that the USFed could be directly buying its own auctions, so as to prevent both an auction failure and a sudden rise in yields. Safe haven, my foot!

Indirect bidders is widely viewed as the most important category. It defines the success or failure of the auction, since foreign central banks are entered from this category. A 30-year bond auction came in with a pathetic 28% bid as Indirect, far below the 36 to 40% levels seen across year 2009. This is worth watching for establishment of trend before billboard alarms (AMBER ALERT) are made. The Direct bid ratio (in yellow) looks fishy. The USFed & USDept Treasury would use this category to attempt to hide the elephant in the living room, calling it an extra oversized sofa. Failure to identify these mythical bidders will fuel speculation of devious concealment of monetization, far greater than the official Quantitative Easing programs that are heralded as coming to an end in mid-March. The ugliest deception is the usage of the Household category to pretend that Fannie Mae and its fat gang of sewage treatment managers are actually buying USTreasurys. Press networks are oblivious to the con game. See past Hat Trick Letter member reports for details, fully cited and analyzed.

A napkin argument is relevant here. The foreign accumulation of new USTreasury debt is tiny compared to what USTBond debt is issued and auctioned. Nobody seems to be capable of primary school mathematics, once graduation to Wall Street and USGovt service is achieved. If new debt is five times what foreigners are buying, then after factoring the domestic bond fund absence like PIMCO (they hate bonds nowadays), one can quickly conclude that the USFed/Treasury tarnished tagteam are monetizing 60% to 80% of all new debt issuance. Isolation is here, but must be more fully recognized.

USTREASURY DEFAULT RUMBLINGS

The Greek tragedy has an American conclusion. It is written in stone, but US leaders and the US population are blinded by a generation of dominance and privilege, turned hegemony. Like a tsunami, the tragedy will strike the WashingtonDC shores and rip its financial seawalls. A sequence is at work, with Southern Europe next in line, then England, finally the United States. The financial foundation data demands it. The denials ignore reality. The isolation of the USGovt debt finance machinery, and exposure of its abused Printing Pre$$ assure a default event, or at least a path to such a default. It will probably not be recognized any more than the 911 coup d’etat over eight years ago by the security establishment.

Little do the US bankers and leaders seem aware, but the Greek crisis will circle the globe and strike America. The initial gong was Dubai, actually with a prelude in Iceland that smacked both British and Dutch banks. Dubai hit home, since it meant the credit crisis had struck again, the problem not resolved. In fact, nothing has been resolved, as all things debt related are greater in magnitude and suffering from worse leverage. The PIIGS nations of Europe are all soon to be swept away and forced to suffer the shame of debt default, a return to former domestic currencies, and steep currency devaluations, amidst considerable contract adjustments. The sovereign debt crisis will be be confined to the smaller European nations. It will spread to the United Kingdom and the United States, the greatest debt and bond offenders. They have abused debt in sustenance of financial asset bubbles kept aloft in grandiose juggling acts. They have abused debt to preserve relics of an empire long faded. What we see is a fiscal crisis of the Western world. The faulty foundation for the Euro currency and EU economies is the crux of the current problem under the microscope, since no mechanism exists for a bailout of any government by the European Union, other member states, or the European Central Bank. Short of withdrawing (or being expelled) from the European Union, the only options for Greece are to reduce the deficit, default on government debt, or receive a bailout. No decision will be quickly or easily reached. As stated before, German leaders will pretend to offer assistance, attach difficult conditions for aid, and walk away when not met. They want expulsion and an end to $300 billion in annual welfare for wrecked nations carried in the South, a grand impairment to the German savings and standard of living.

The flaws of chronic government deficits, expanding government functions, and fractional banking have resulted in what Niall Ferguson of the Financial Times calls the fractal geometry of debt. Most Western economies are vulnerable, including the largest, as contagion is ripe. The Keynesian approach has very possibly run its course, without recognition by those who continue to pull its debt levers and expect similar effects as seen 20 years ago. For two years, the Hat Trick Letter has claimed a painful systemic cycle is in progress in a global restructure of monetary and banking systems. Governments find themselves helpless to promote growth, as the hallowed multipliers are out of gear altogether. Stimulus rings hollow. Globalization has rendered the older industrialized economies vulnerable, with their higher wages, pollution control costs, and regulatory burdens. The increasingly common practice of pushing sovereign debt to short-term scheduled rollovers has begun to backfire. Clinton & Rubin started that trend, now in backfire mode.

Debt default, just like for businesses, tends to occur when debt rollover cannot be refinanced. As the crisis intensifies inside Europe, the USDollar rises. Funds are in migration away from the Euro currency wherever possible. The rising US$ exchange rate actually weakens the prospects for a USEconomic recovery, where re-industrialization is urgently needed. That is correct. The US must rebuild its factories and promote export businesses, a reform nobody in the USCongress or Wall Street dare mention. The higher US$ exchange rates translate to a double edged sword, higher export prices from the US producers and higher cost structures to the foreign economies. See the commodity index in Euro terms. The bankers and politicians in Europe must halt the Euro decline, or else face rising systemic costs across the European Union economy. The stimulus for exporters with a lower Euro has a backfire to control, with costs. Their price inflation at all levels is rising fast. Watch the Euro stabilize.

RECOGNITION OF HIGH US DEBT RISK

USGovt debt is a disaster, not the least a safe haven. The new 2010 budget is projected even by White House estimates to exceed 100% of GDP within two years. The long-run projections of the US Congressional Budget Office suggest that the US will never again run a balanced budget, as in NEVER. Both this year and last year, the federal deficit is near 10% of GDP, the size of the national economy and new standard measure of limited tolerance. Heavy debt burdens, in addition to diverse insolvency (in households, federal, banks, and trade) create a tremendous drag on economic growth. Two main forces prevent higher USTreasury Bond yields. Purchases of USTreasury and USAgency Mortgage Bonds by the USFed and USDept Treasury in major monetization operations is the domestic solution. Purchases of the same bonds by Chinese, Japanese, British, and OPEC nations is the foreign solution. With the mid-March plan to halt the USGovt official Quantitative Easing program, and the outright sales by the Chinese of USTreasurys, the ISOLATION HAS BEGUN. The risk stands squarely with the USDollar. JPMorgan will secretly continue to buy USTBonds and control long-term rates the usual way, by force, by usage of Interest Rate Swaps, their secret weapon. Not only USTreasurys in a bubble, they are the most corrupted market.

Last week Moodys Investors Service warned that the Aaa credit rating of the USGovt should not be taken for granted. The premier rating will come under pressure in the future unless additional measures are taken to reduce chronic budget deficits. Niall Ferguson wonders about the clarion call by Larry Summers, who asked the quintessential question before he returned to work for the Obama Admin. Summers appropriately asked, “How long can the world’s biggest borrower remain the world’s biggest power?” Upon reflection, the sovereign debt crisis of the West has begun in Greece, the birthplace of Western civilization. Soon it will traverse the channel to Great Britain, the home of the last great Empire. The crisis will reach the last bastion of Western power, on the other side of the Atlantic. The United States will face a steady stream of powerful shocks to its sprawling Empire, supported in recent years by deep bond fraud and military aggression, not a good combination. The global reserve currency will not prevent the credit crisis from hitting USGovt debt. My forecast is for a technical USTreasury default, without full recoginition, even while the USGovt is given a triple-A rating out of largesse mixed with intimidation. Refer to coerced debt forgiveness.

Taleb advises a short of USTreasurys. He points to a broken USGovt fiscal condition, reckless bank leadership, and a situation actually worse than a year ago (not better). Nassim Taleb, author of “The Black Swan” advises the entire planet earth should invest against the USTreasury Bonds, and to anticipate their decline. He was specific, that as long as Bernanke is USFed Chairman and Lawrence Summers is White House economic adviser, the Obama Admin will conduct policy in a manner to bring a path to ruin for USTreasurys. In the last two years, the USFed and USGovt have lent, spent, or guaranteed $9.66 trillion to lift the USEconomy from the worst recession since the Great Depression, according to data compiled by Bloomberg. The results have hardly even achieved stability. Conditions have deteriorated enough to result in annual $1.5 trillion budget deficits, mostly inherited from the past administration. Taleb said, “Deficits are like putting dynamite in the hands of children. They can get out of control very quickly. The problem we have in the United States, the level of debt is still very high and being converted to government debt. We are worse off today than we were last year. In the United States and in Europe, you have fewer people employed and a larger amount of debt. Democracies cannot handle austerity measures very well. We are going to have a severe problem.” He referred to cutting USGovt spending, without mention of the endless wars and grandiose siphons of funds by Wall Street and the Pentagon. Fiscal spending cuts are to occur in the Second Half, as in year 2012.

The litmus tests of USTreasury deep instability are A) the recognized monetization of USGovt debt, B) the size of the USGovt deficits, and C) the inability for the USEconomy to recover from insolvency. All three tests are in the process of failing here and now, raising attention for eventual default. As a result, Moodys issued a statement on the USGovt debt rating. It should be junk bond B level grade. Some claim that none of the major debt rating agencies will downgrade the USGovt debt. It could happen. Moodys stated, “The ratios of general government debt to GDP and to revenue are deteriorating sharply, and after the crisis they are likely to be higher than the ratios of other Aaa rated countries. If the current upward trend in government debt were to continue and become irreversible, the rating could come under downward pressure. The trend and the outlook would be more important than any particular level of debt.” The more likely outcome is a serious decline in the USDollar after a more clear certain path for Europe. A repaired, reformed, renewed smaller Euro currency would be the potential death knell for the USDollar. The European continent will consolidate, an event certain to return attention to crippled USGovt and USEconomic financial conditions.

EURO CURRENCY UNCERTAINTY

The continent of Europe has never been more uncertain in its future in at least three decades. The European Monetary Union had a flawed plan for shared common currency usage, whose failure was forecasted (not by the Jackass) by critics to its architecture upon its birth in 1989. In the last several weeks, the plight of the deeply indebted and broken insolvent Southern European nations has dragged down the Euro currency. Uncertainty abounds on eventual debt rescue for Greece. For hereditary genetic reasons, for national welfare backlash reasons, for systemic design deficiency reasons, the Euro will not face ruin, but instead face consolidation. Germany leads the process, and will force out Greece, then Italy, later Spain & Portugal. Their nationally marked Euro Bonds have been trading at non-German levels for over two years. Such is a clear indication of multiple Euros masquerading as a common currency, inviting arbitrage and breakdown.

The Euro currency chart shows signs of stability. The stochastix have been oversold for two solid months. The price action in the last two weeks seems to loudly indicate stability in the Doji Stars, marked by open and close nearly equal, but with noisy intraweek high and low. The technical traders in the vast FOREX pits have started to cover their massive shorts. The attempt to establish the Euro as the basis of a new carry trade will be interrupted by the Germans, who will let Athens go. The Greeks will not be able to make interest payments. The nasty fact of life is that Greek Govt debt is scattered all over banks in Germany, France, England, and Switzerland. So expect powerful ripple effects to debt default and bond writedowns. A key to watch is riots. The Gold price will rise in US$ terms when the Euro shows signs of a leveling process. One warning signal to keep an eye on is the 20-week moving average crossover of the 50-week moving average. The Doji Stars oppose the MA Crossover, the former hinting of a rally upward, the latter hinting of a continued leg down to the 130 level.

A predictable aberration is evident. Whenever the USTreasurys look like they are on the brink of a meaningful breakdown, a Stock decline occurs, and funds flow heavily into USTreasurys. Last week, the Gold/Euro price chart showed an early breakout. The Gold price in Euro terms should be interrupted when the Euro achieves some stability. The beginning of a rally in Gold in all currencies seems underway, a movement kicked off by the European debt problems. The Gold breakout in Euro terms is possibly soon to be joined by breakouts of Gold in British Pounds, Gold in Japanese Yen, and Gold in Swiss Francs, with the Gold breakout in USDollars last. When the surge is universal, Gold will be perceived as a currency in full direct competition with the tainted fiat paper currencies! The critical lack of gold bullion in the London metals exchange sets the stage for numerous events shrouded in breakdown, and a broadly rising Gold price. Do not be fooled by a correction in the Gold price in US$ terms. It is rising across foreign currencies, in an environment of extreme gold bullion shortage. The end of the Q1 gold price correction is near. Many investors sense nothing happening in the gold arena. Not true! The entire foundational structures for the fiat monetary system are crumbling under the financial market floors. The support pillars are fragile and weak if not vanished and missing. The Powerz keep the game going mainly to perpetuate their trillion$ frauds further. Reform and remedy is not their plan. The objective is theft and pillage to the end.

VULNERABLE EUROPEAN BANKS

A Pan-European sovereign debt crisis is unfolding, appreciated in Europe, minimized in the United States. After removing mountains of ruined bonds from private banks, government debt risk is extremely acute. A trade took place, transferring risk from big banks to the government balance sheets. In the process, sovereign debt has weakened dangerously even as the debt problem has been amplified. The implicit leverage has effective been increased, but without benefit of the natural firewalls installed at financial institutions. Furthermore, and worse, European banks have an order of magnitude more assets than their economic size. A default cascade comes, as leverage is out of control. A run on private banks is assured. For at least Europe, it is game over as debt is not resolvable and tolerance is nil. The Greek chapter might be a diversion from the core problem soon to erupt. Excess liabilities and leverage make for a witch’s brew. The de-leverage process will knock many structures to the ground. Europe has a recent history replete with riots in urban streets, more than anywhere in the western world. Expect riots across all Southern Europe. Instead of a domino effect like what was feared by the Lehman collapse, a domino effect is at risk of slamming sovereign debt on a global basis. The process is beginning. See the mammoth private bank assets, which easily eclipse their national economic sizes. Leverage is enormous in Europe, just like in the United States and England. Notice several Greek banks with adjusted leverage of nearly 90 times, whose assets are nearly 30% of the Greek GDP. Thanks to Reggie Middleton for an excellent graph, and an excellent point to make.

DOOMED SOVEREIGN ALCHEMY

A leading bank analyst believes that ultimately, sovereign alchemy will fail. Egon von Greyerz is manager of the Matterhorn Asset Mgmt fund. He said, “When we look at the world economy today, wherever we turn, we see a wall of risk. And sadly this is an insurmountable wall of risk with risks that are totally unprecedented in history. There has never before been a potentially catastrophic combination of so many virtually bankrupt major sovereign states (US, UK, Spain, Italy Greece, Japan, and many more) and a financial system which is bankrupt but is temporarily kept alive with phony valuations and unlimited money printing. But governments will soon realise that they are not alchemists who can turn printed paper into gold. The consequences of the global financial crisis are potentially catastrophic.” He describes an era coming to a close. The era was identified by a grand illusion, that governments through their central bankers could create prosperity from virtually unlimited money creation, vast expansion of debt, and migration away from industry. It will end in disaster. See “Sovereign Alchemy Will Fail” on the Matterhorn website (CLICK HERE).

Von Greyerz makes several key points. Investors have ignored the risks of excessive debt. They have bid up the stock and bond markets, even reduced the important spreads in bonds versus government type. He wrote, “All the so-called experts have declared that it is impossible to identify the problems in the financial system in advance. For example, Greenspan, Bernanke, Geithner, other central bankers, and government officials as well as Blankfein of Goldman Sachs and many bank heads have all stated that they could not see it coming. Either they are lying or they are stupid. Sadly, it is most likely the former… The plight of the US states is just as bad. Out of 50 states, only 4 are expected to have a balanced budget in 2010. Up to 40 states, including California, New York, Florida, Illinois, Michigan, Ohio, North Carolina, and New Jersey, are virtually bankrupt. It took almost 200 years for US Federal debt to reach $1 trillion which it did in 1981. In 2009 the debt increased by $1.9 trillion in just that year to $ 12.4 trillion. In the next ten years the US debt is forecast to reach $ 25 trillion.” Debt is accelerating, typical of any bubble. Its finance will be impossible.

The policy choices are all bad, since bankers and politicians (owned by bankers) have backed themselves into the corner. What remains are ‘Lose-Lose Options‘ clearly. Governments must continue to borrow and print money or they can reduce government spending. Each choice leads to ruin. Proposed austerity programs forced upon European nations are better described as Poison Pills, the outcome of which is a death spiral in debts and economic recessions. The travesty is seen with imposed national deficits forced upon Greece, and soon Italy & Spain, below the 3% level. Not one single country within the EU is below the 3% limit versus GDP, not even Germany. And the effect of the austerity programmes will lead to such a major contraction of the economies that tax revenues will collapse, further exacerbating the plight of these countries.

The alternative for governments, within the crumbling European Union and the deteriorating United States, is to print or borrow more money. Against a backdrop of rising deficits, rising unemployment, and persistently insolvent banking systems, they have no choice. The end game will be paved by hyper-inflation, worse than even what is seen today. Von Greyerz wrote, “Both the UK and the US are set upon a course of self-destruction. We will see trillions of pounds and dollars printed in the next few years. But the only buyers of these government securities will be the US and UK governments. The rest of the world will dump their holdings which will result in both the dollar and the pound dropping precipitously and interest rates rising substantially.. The effect of a collapsing currency will be a hyper-inflationary depression. This is the inevitable outcome for the UK and US, and there is sadly no action that the governments of these countries can take to alter this course.”

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

Yesterday I interviewed friend and colleague Dave Skarica, of addictedtoprofits.net. We discussed Treasuries, the Sovereign Debt bubble, the US Dollar,  Gold and Gold Stocks. Enjoy!

Last week I interviewed Todd Harrison, founder and CEO of Minyanville. The main topic of our conversation was currencies and how action in the currency market (specifically the US$) could be a trigger for the next phase of this crisis, which has also morphed into a socioeconomic crisis. We talked about the chances of a US$ rally. Todd is not a raging gold bull, but not really a bear either. He said there is a 20% chance Gold will continue on to $4,000/oz. “It is in the probability spectrum” he said.

Bespoke’s post is below:

The monthly budget statement was just released today, and in November the federal government took in $133.6 bln and spent $253.9 bln.  This works out to $1.90 going out for every $1.00 coming in.  Believe it or not, this is actually an improvement from October when the ratio was $2.3 going out for every $1 coming in!  Over the last 12 months alone, the Federal government has racked up a deficit of $1.4 trillion.  Needless to say, this pace of spending versus income can’t keep up forever, and today’s lousy 30-year auction is an indication that investors aren’t too keen on locking up their funds in long-term IOUs from Uncle Sam right now.

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