by Jim Willie CB February 17, 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.

The subprime debt issue of 2007 blossomed into a global credit crisis. Likewise, the Dubai sovereign debt issue will blossom into a global sovereign debt crisis in similar pathogenesis. The start and end points are located in the Untied States and Untied Kingdom. With the global climax come disruption, restructure, and chaos. The subprime mortgage problem was grossly under-estimated. The Hat Trick Letter called it the beginning of an absolute bond contagion, a global credit market collapse correctly forecasted. Central bankers, led by the clueless USFed Chairman Bernanke, minimized the degree and depth of the credit crisis, and made every conceivable wrong forecast. His reward was reappointment, since his service to the syndicate has been steadfast, loyal, and inventive. Every phase of global finance has entered a crisis mode, as the financial structures are coordinated, linked in complete fashion by the tightening noose using a US$ brand of rope.

The Dubai debt collapse represents the start of a global rotation of government debt collapse. Dubai has more than $385 billion in additional debt that has not been disclosed yet, so claims an informed source. Furthermore, Kuwait is among other Persian Gulf nations with major debt problems, soon to become clear in a liquidity crunch. The sovereign debt eruption in Greece will be followed by Italy, Spain, Portugal, and even France. The German wellspring will not rescue Greece, despite all spun political niceties. German leaders walk a delicate tightrope, one requiring that they say all the right things politically about support, but where they will at the eleventh hour not provide much debt provision. They must serve up demands that cannot be met, leaving Greece to default. In the process, a European Playbook will be written, a manual to be used immediately with the rest of the F-PIIGS nations. One must include France in the Club Med losing beachfronts that must be carved off the European core. In the twelfth hour, Paris will be granted a reprieve, and permitted to serve as German squires. They do after all come to the table with a sizeable nuclear arsenal in pocket.

DOLLAR DEATH DANCE, PART II

Recall my great vicious circle of debt shown two months ago, whose crises begin in the US & UK. The debt ripples will end in the AngloSphere also, with a US$-centric global monetary crisis and their own sovereign debt defaults. Monetization of USGovt debt will soon be isolated, in full view, and serve as the focal point of perception in a global monetary crisis. The Direct Bids are already attracting too much attention to the Wall Street Paperhangers who highjacked the USDept Treasury. The Dollar Death Dance began in autumn 2008 with the US$ exchange rate rising. The US$ rallied because its foundation cracked, broke, and died. The liquidation of massive credit derivative contracts signaled the demise of the US domination, but in a queer manner, the settlement in such contracts primarily in US$ terms. So the global reserve currency rallied hard with vigor, Uncle Sam a dancing dead man. Thus the Dollar Death Dance. Fast forward a year and a half. The Greek debt problems sound like a gigantic echo from Dubai. At first, so-called financial experts dismissed the importance of the Dubai problem. They called it managed well. It has only started. Next came the connection with the Greek debt problem. The link is a global intolerance for excessive debt that has no future prospect of eventual payment. Talk is steady of default for both UKGilt debt and USTreasury debt, denied vigorously, too vigorously. All of Europe will be reconstructed soon enough. After the Greek resolution occurs, Italy will next be expelled from the European Union. By resolution is meant expulsion, debt default, sale of discounted sovereign debt, return to former currency, rewritten commercial contracts, decisions for which banks to fail or preserve, and a massive devaluation of the reinstated currency. We are witnessing not just the consolidation of Europe, but the second phase of the Dollar Death Dance. Anyone who believes the USGovt finances are better than those of Greece, or Italy, or Spain, or Portugal is as bad a student of economics and finance as Benny Bernanke and Timmy Geithner. They remain in office only to serve the syndicate.

The Dollar Death Dance part II began in December 2009 with the loud Dubai gong. The US$ rallies again because fiat currencies are all dying. The Competing Currency War is brisk, more like a Reverse Beauty Pageant. As monetary crisis comes full circle, pushed by gargantuan government deficits on a global basis, the US$ will again resume its powerful decline. The Enronization of US financial structures is gradually being exposed, replete with false accounting, diverse hidden tentacles, and prolific slush funds. The credit climax will be a global shock wave, a grand restructure of financial structures, tremendous disorder & chaos, dislocations of important supply chains, and enormous challenge. Prepare! Gold, silver, and platinum will be survivors left standing!! They have been offered in recent weeks at heavy discount in U$ terms, but quite the opposite in Europe. Only the dimwits are discouraged by the phony posted paper gold & silver prices.

The US is an oversized Third World nation. It ranks poorly relative to other nations in its debt structure and exposure. The United States is in worse condition than almost all nations in the Western world, equally bad as those in Europe currently denigrated in crisis mode. Left to finance its own debt, the USGovt would suffer an immediate cave-in. It has the Printing Pre$$ at its disposal, and a USMilitary to expose to creditors, thus creating an unstable system. The US has an 80% debt/GDP ratio, easily to hit 100% next year. The US wanders and wallows with puffed chest of arrogance, yet besides Greece, the US is worse off than all the PIIGS nations criticized as basket cases so readily.

The PIIGS nations are Portugal, Ireland, Italy, Greece, and Spain. The chart shows the latest annual fiscal deficit as a percentage of GDP on the vertical scale, and the total debt as a percentage of GDP on the horizontal scale. The PIIGS nations are all in the risk-filled upper right quadrant. Notice the often criticized socialist nations of Scandinavia in the lower left strong quadrant, nowhere near as innovative as Wall Street and London. The healthiest nation on display is tiny Luxembourg, alone to the lower left. The United States is Greece, but with monuments of betrayed forefathers like Washington, Jefferson, Madison, Adams, and Lincoln, buttressed by vast money trees and shrill press trumpets.

CRISIS AS THE NEW NORM
What makes the current sovereign debt crisis more acute, and more a lock to come full circle across the globe and settle with an even grander shock to the Untied States is the collection of arenas in full crisis. In fact, one can safely claim that all financial arenas are in crisis, and therefore crisis is the new norm. The swine flu virus seems to have become an aborted mission, with current investigations of the World Heath Organization and national centers for disease control, after a massive profiteering by big pharmaceutical firms. The SWIFT bank has refused to cooperate with the US bankers on shared information, as the war on terror seems to be losing its flare based in creative writing. The Swiss banking system is in the midst of an unprecedented hemorrhage of funds, a shocking amount exiting each week. Goldman Sachs is on the hot seat not only for its AIG pressured fraudulent tactics, but now again for its concealed misrepresentation of European sovereign bonds. My sources tell me that Goldman Sachs has yet more even larger embarrassment lying ahead with criminal implications.

Central bankers have cajoled a mountain of funds from banks, called euphemistically excess reserves, when they are actually Loan Loss Reserves parked inside the USFed chambers. The big banks have almost zero reserves to handle their impaired loans and credit assets. So the USFed essentially covers up its own insolvency by attracting big bank reserves that will soon be urgently needed. The USFed is next considering a hike in such reserves, thus strangling the USEconomy further. The USFed data shows a Monetary Multiplier that fell to a record low of 0.809 in mid-December, a virtual collapse. The multiplier calculates the amount of money that an initial deposit can be expanded with a given reserve ratio, the multiple of held reserves disseminated as loans. Money is being tightly held, not even lent as fast as produced. Commercial paper has shrunk by $280 billion since October 2009. Bank credit has dropped from $10.844 trillion to $9.013 trillion since November 25th, a stunning 16.9% drop. It has been on a decline since June. The broad M3 money supply is contracting at over 5% pace.

The inflation adjusted annual M3 money supply rate of change signals a strong downturn in USEconomic activity. A double-dip recession would worsen the USGovt deficits, a concept not fathomable. The leading indicator is well established in modern economic history, and a reliable signal for a double-dip recession. The above graph of year-to-year change in real M3 versus annual change in payroll employment displays a forward shift in M3 by six months. Doing so highlights the embedded correlation between money supply contractions and delayed employment pullbacks. The January 2010 real M3 declined an estimated 5.2% versus January 2009, following an annual contraction of 3.3% in December 2009 and 0.3% in November. This is a harbinger for economic recovery? Hardly, except to those commited to propaganda artistry and federal funds diversion. Conclude that another recession lies ahead.

Freddie Mac will begin takeovers of a raft of delinquent mortgages. The move appears to be a follow-up to the Christmas decision to enable unlimited Fannie & Freddie credit lines. The USTreasury will be buying failed mortgages, after the USFed basically ruined its own balance sheet with toxic bonds. What has occurred over two decades is abuse of Fannie & Freddie as the central clearinghouse for numerous gargantuan federal fraud programs spanning three decades, valued in theft well over $3 trillion. The Powerz had to nationalize Fannie & Freddie. They are not just mortgage programs. Their supply cannot be shut off without disturbing the largest syndicate fraud channels in the history of mankind, well placed under USGovt finance operations, no exaggeration. Answering questions where the money went would bring about an extreme shift in US perceptions, probably full global recognition of the syndicates in charge, resulting in calls for a new system to administer to the US population.

The USEconomy slides further into a masked depression, still not recognized, as morale is on the decline. Moves toward cost savings and improved productivity are backfiring. Worker morale is a sneaky undermine to productivity. The January official Jobs Report hid some deep wounds. Meanwhile, home foreclosures and home loan delinquencies continue unabated with new records, and bank credit remains on a strong decline. No recovery in sight. The tragedy of home foreclosures continues unabated except by moratoriums imposed. The national tragedy continues. Federal home loan modification programs continue to be intentionally inadequate. The key is mortgage bond fraud coverup. Forecasts call for much worse foreclosures in the current 2010 year. David Rosenberg expects a further decline in home prices, and a second stage of economic recession. He forecasts 50% of US households will be insolvent on home loans by end 2011. Rosenberg is chief economist and strategist at Gluskin Sheff & Assoc in Toronto. He is one of my very few respected economists. Small businesses are not in recovery. They are cutting capital spending. National economic statistics do not capture small business activity properly. Their optimism is at the historical low of the past four recessions.

The fiscal and political plight of California worsens. Look for their state bond yields to reach at least 2009 high levels. USGovt assistance seems at best too little too late. The biggest state in the nation offers major clues to the plight of the states. The seven most crippled US states compare worse to some European nations, but with 35% of its national population involved. Given the PIIGS nations are small, the Untied States is hampered by a much larger looming state problem than what unfolds in Europe. The states in the crisis list are California, Florida, Illinois, Ohio, Michigan, North Carolina, and New Jersey. Each basket case state has a population above 8 million people. Each state has been forced to borrow more than $1 billion dollars, to pay for unemployment benefits. Each state currently registers broad unemployment over 15%. Each state is a large net importer of energy sources.

No Macro Economic Report is provided this month in the Hat Trick Letter for paid subscribers, since the entire global financial system is stuck in crisis mode. Details for the crisis situation can be found in the Crisis Coverage Report in the February Hat Trick Letter. The system is not so much hurtling over a cliff, like my previous metaphor of a locomotive train long past crossing the cliff’s edge. The system is more like busy creating numerous huge airpockets of insolvency, so many that eventually the entire nation suffers an historically unprecedented descent into a MASSIVE SINKHOLE of its own making. It will then find itself squarely in the Third World. The main questions are A) whether the foreign creditors pull the rug out, or B) whether the US Supreme Court renders a great decision regarding requisite disclosure of the US Federal Reserve to unmask its corrupt core, or C) whether the deteriorated state indeed permits the descent into a sinkhole constructed by Economic Mother Nature.

NON-EXISTENT EXIT STRATEGY

Heat rises from the debate of a USFed Exit Strategy from 0% interest rates to mask a broken banking system, and from massive money growth to enable monetized ustreasury bond purchases. Once more is seen the return of the ‘Second Half Myth’ as talk has begun of the USFed hiking interest rates in the second half of 2010. Far enough away to forget, close enough to be imminent, always forgiven when wrong, with new wrong revisions given. Chairman Bernanke is stuck in a policy corner. He must be aware. There is a great difference between being a bad economist and a stupid humanoid. A formal interest rate hike would torpedo the already weak vulnerable housing market, when mortgage rates have been creeping upward. A reduction in the USFed balance sheet would drain the system of funds, when lending is sparse, unresolved loan losses litter the balance sheets, and banks still hold massive toxic bonds and actual home inventory. The entire banking system depends heavily upon a cornucopeia of liquidity facilities, without which the system would have ground to a halt many months ago. Soon money market funds will augment the demand for USTreasurys for bubble maintenance, as redemptions become difficult to receive for trapped investors. Worse, a rate hike would pop the USTreasury Bond bubble the USFed has manufactured and add greatly to absurdly cheap borrowing costs on the USGovt debt. The good Chairman, Secretary of Inflation, would never agree that in September 2008 the US financial sector died. What he accomplished since then is vast pumping of blood through a dead corpse, with plenty of lateral drains directed to Wall Street firms. To expect an Exit Strategy to succeed is to demand a dead man to walk without the gigantic crutches and vast intravenous lines attached.

USGovt spending and tax revenue are diverging. The path is actually a pathogenesis, not sustainable. A monetary crisis comes, accompanied by a sovereign debt crisis. The Untied States will not be spared. Focus on war is the ruin on the exterior, while destructive focus on inflation is the ruin from within. Witness the climax of the Fascist Business Model, a final chapter. The status of USGovt finances reads like a Banana Republic. Often a picture is 1000 times more clear than any concisely written paragraph. The red line is spending. The blue line is tax revenue. Bubbles approach their climax before the bust by demanding an exponentially increasing amount of money. The USTreasury Bond is no different, whose securities finance the yawning USGovt debt. Both are manifested bubbles. The difference between spending and revenue is deficit, and the USGovt will rack up well over $1.5 trillion in fresh 2010 deficits despite claims last year to the contrary, all false.

ENDORSEMENT OF ENGRAINED FAILURE

When a system reaffirms itself with an endorsement of grand errors and corruption, it guarantees its failure. Identify the endorsements of failure. The signature of the Obama Admin is no change. Nations often are given opportunities to change course. The Untied States with these important decisions, has chosen to maintain the path of ruin, to seal it with approval, institutionalizing further its banker devotion, even after fraud has been exposed, failed policy recognized, and participants identified. At the end of the road lies a USMilitary dictatorship and USTreasury default, my ongoing unswerving forecasts. Both might be disguised. The complete lack of moves toward reform or true remedy, in my view, serves as an EPITAPH on the imperial tombstone. We just see bigger funding lifelines to the same big financial locations that caused the problems. The USEconomy is dying and is simply not going to recover, stuck in deterioration mode, lifted only by USFed steriods and Congressional adrenalin. Next comes shock. The important decisions of endorsed failure:

Ø Approval in October 2008 of the TARP funds totaling $700 billion to be distributed like a vast slush fund to Wall Street banks, with Goldman Sachs in charge of dispensation and first in line for reception. It was extortion by any other name.

Ø Selection and confirmed appointment of Tim Geithner as Treasury Secy in January 2009. The syndicate continues its stranglehold, enabling easier continued coverup of grand frauds.

Ø Decision made at several points in time to continue the wars in the Middle East by the West Axis. The USCongress approved the sacred status of war, instead of rebuilding the US economic structures. Still nobody searches for the missing $50 billion from the Iraq Reconstruction Fund.

Ø Empty Economic Stimulus Bill signed into law in February 2009, when it was only a set of important plugs to the massive state budget shortfalls. In this sense, the bill was merely a grand band-aid patch applied to a hemorrhage wound, not even a tourniquet.

Ø Blessing given to the relaxed accounting rules offered by the Financial Accounting Standards Board, approved by the USCongress, effective in April 2009. The rule change enabled big banks to declare any value for assets they wished, according to any model they chose, without scrutiny, without any connection to reality of markets.

Ø Confirmed reapointment of Bernanke as Chairman of US Federal Reserve in late January. Bernanke was confirmed by the weakest vote (70 – 30) in the history of the USFed. Threats of calamity accompany calls for full disclosure of the USFed itself. A NO vote would have signaled an unseating of the USFed as center for the financial syndicate. The US Supreme Court is next in line for a crucial vote.

GOLD BREAKS OUT IN EUROPE

Nobody can dispute that Europe has captured global attention with the threat of sovereign debt defaults, a string of them potentially. While the asylum directs attention of the paper gold price in US$ terms, pushed down by incredible naked shorting of futures contracts at a time when never the COMEX nor LBMA metals exchanges have been in possession of less gold & silver metal in inventory, the real story is the Gold price in Euro terms. It has broken out past €800. A runup should continue for around an 18% move, like to the €940 to €945 range. What a strong uptrend in Euro terms, a strong moving average uptrend, and strong stochastix index! The strength of the Gold price in Euro terms should continue until the Germans establish clarity with the New Core Euro. They will order the financial butchers to carve off the PIIGS fat, leaving the Central Europe core without the basket case nations that boast busted housing bubbles, busted banking systems, outsized federal deficits, heavy import needs, and capital requirements impossible to meet. When the New Core Euro is clear, then the surviving form of the Euro currency will rise and rise and rise, certainly challenging the USDollar. Only then will the Euro push toward 200/US$ in its exchange rate.

The Gold price in US$ terms, despite the hue & cry, is hanging on well. It maintains support above the $1050 price. It has succumbed to two powerful downdrafts, aided to be sure by selling golden paper. In fact, the suppression of the paper gold price has resulted in production ironically of physical metal placed by honest brokers as margin collateral. See margin calls and forfeited collateral. Its long-term 50-week moving average remains in uptrend. In the last week, gold investors have been treated to a bullish stochastix crossover in the making. When the New Core Euro is clear, watch the US$ DX long-term decline resume, and do so powerfully. The globe will face the worst monetary crisis in history, with epicenter the USDollar. The sovereign debt defaults will come full circle, the start being September 2008, the conclusion an attack on the USTreasury Bond. The USGovt debt is unsustainable, growing worse, and will eventually break. Pure financial physics. Gravity will sink the US Ship of State and its imprisoned economic flotilla. The global reserve currency in the USDollar stands as the biggest travesty in the history of global finance.

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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

FULL CIRCLE OF GOVT DEBT DEFAULT

by Jim Willie CB December 16, 2009

home: Golden Jackass website

subscribe: Hat Trick Letter

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.

The continuation of the bank dominoes took 14 months, but it occurred. The initial destructive impact craters were carved in the United States and England. To be sure, major damage was done to assets in Spain and Greece and other smaller nations in the last year, but their banks had remained insulated. The discredit and death of the central bank franchise system showed first clear evidence in September 2008 on Wall Street. The unique mysterious aspect of banking systems is how they cannot be rebuilt once they turn insolvent. They rot in place, a process accelerated by rotten ethical values, euphemistically called moral hazard. To be sure, much so-called money flows through the dead rotten parts, but nothing becomes resuscitated except balance sheets. And besides, those balance sheets only look better due to accounting rules changes that deviate from mark to market (reality). The distortions magnify and turn cancerous. See the outsized mortgage bonds with no value at all. See the foreclosed homes withheld from the market for sale in bloated bank inventory. See the big bank balance sheets with large entries of idle money sitting in the US Federal Reserve. The dirtiest American secret in the banking world is not monetization of bonds. It is that US banks are deeply insolvent and would have suffered a worse fate in the last year if not for extortion from TARP funds as well as rescue funds coming from syndicate contraband accounts. See the Raw Story article and reference to the United Nations Office on Drugs & Crime (CLICK HERE).

INITIAL BANG

Focus on the bank impact craters, not the assets within those bank portfolios tied to bonds and properties. The US housing market turned down, and the mortgage finance bubble burst. The primary victims were Lehman Brothers, Fannie Mae, and AIG, which all died. Fannie and AIG remain in the Intensive Care located south of the Black Hole down yonder under the USGovt tent. To say they have not died is pure denial at best and stupidity at worst, since they continue to generate grandiose losses, as most rotting dead bodies do. The process is called advanced cadaver decomposition, accelerated by the wondrous financial engineering acid reflux. The tales of destruction in dead banks from the initial bang extended to the AngloSphere as Northern Rock, Royal Bank of Scotland, and HBOS effectively died. It remains to be seen if the venerable Lloyds is an empty shell prone and a cave-in also. Nevermind the details of the many death spirals. Focus on the dominoes and their sequential steps in magnificent wreckage. Marvel at the total lack of recognition by the official spokesmen for financial reality at the USDept Treasury, Wall Street analysts, London analysts, and European analysts. They never comment on sovereign debt insurance or default. Both are covered in the December Hat Trick Letter.

One must inquire why the blindness. The main reasons are many, but two stick out from the aerial view. The bank leaders and their supporting cast are attempting to accomplish the impossible. They strive to revive a dead entity, drained of structural integrity, lacking in motivation to function in capital formation, devoid of vibrant liquidity flow, and directly attached to the syndicate strongholds where the drain continues. They live and operate within their Dome of Fiat Perception, whose major layer is the Dome of American Perception. Unfortunately, those working within the American fence posts suffer the greatest blindness, the tragic effect of engrained arrogance after years of incredibly broad bully tactics and criminal abuse. For those sleepy brain-dead in denial of criminal abuse, a challenge. Just identify where the prosecutions are for multi-trillion dollar bond fraud in global export of toxic mortgage bonds and their derivative brethren, perpetrated by protected Wall Street firms! If one cannot identify, please sit down and be quiet, since clearly integrity was perhaps checked in at the corporate gate in exchange for a paycheck. Wall Street prefers to call the fraud mere errors of judgment. And a murder spree at a shopping mall is an firearms accident! A closer examination can detect continuity in the Treasury Secy post, and in the Securities & Exchange Commission, both still showing Wall Street pedigree. They strive to keep the lid on Wall Street legal matters, and do a great job.

DELAYED SECONG BANG

Finally, the harsh reality from the weight of gravity and the passage of time resulted in a second bang. One can always question the motivation of the Dubai World default, and the fact that it occurred when the USDollar was badly oversold. One can question the wisdom to attempt to force Abu Dhabi to cover the bad debts or assumptions that it would cover the bad debts. One can point to a hidden motive to ruin Iranian assets and trade routes, since they own 30% of Dubai properties and benefit from restricted product shipment through Dubai corporations. Regardless, the aerial view is most important. The biggest victims are the London and European banks heavily exposed to Dubai debt. The Powerz prefer to call it a rally on the USDollar from seeking the safety and security. But to the rotten ramparts of the US financial core? HARDLY!! Instead what happened was that the British Pound and Euro currency fell during an expected retreat after a realization of upcoming declared losses. The US has fortified a false front from accounting marked to fantasy that produced a stock rally and recent culmination in the most fraudulent Non-Farm Payroll report in modern history.

The November Jobs Report was dismantled in several pages of the Hat Trick Letter Macro Economic Report just posted, a grand convenient fiction. The easy dismissal has escaped the mainstream lapdog US press. It included Birth-Death Model fictional adjustments (gigantic for past revisions), constant unstable seasonal adjustments, to begin with. Dismissal included weak TrimTabs data, flagging USGovt tax revenue data, a surprise downturn in ISM service sector data, and still prevalent Challenger Gray & Christmas large site job cuts to make a mockery of the ballyhooed report. So the USDollar rally occurred, give them credit, since they needed it to avoid major losses upon the US$ DX futures option expiration. The Powerz got their onions squeezed in a vise and short hairs clipped on the gold futures options expiration three weeks ago, but they avoided a second massacre on the DX expiration last week. Now the US$ has stalled at the downtrend line.

The second bang was not so important in providing a lift in the Dead Man Walking Dollar, as it was in signaling a resumption in the dominoes. The central bank system has its next shock in store. The downgrades to government debt for Greece, Spain, and Portugal given last week by ratings agencies signal upcoming debt related earthquakes. In the United States, the game is known innocuously as Extend & Pretend. The Europeans are gifted in the same chicanery. The entire banking system in Spain has kept housing inventory, whether from foreclosures or ruined projects, at still elevated prices, stubbornly refusing to mark them down the necessary 30% or 50%. As a result, Spain has a wide gap between bid and offer, and a huge inventory sitting idle, a stalemate that leads to sinkholes.

THE NEXT BIG BANG

The second bang from Dubai is the most important destabilizing debt event in 14 months, but minimized in the United States. The US press hardly even mentions the downgrades across European on sovereign debt. The US press actually boasts that the financial markets are handling the Dubai situation very well, and might be past it already. What incredible denial, but much expected. The second bang signals the beginning of sovereign debt defaults, several of them, and the reshaping of Europe, both with the European Union and the Euro currency. The movement toward a Parliamentary European Union might soon be dead on arrival. The split of the Euro currency is soon to become a reality, a forecast made months before the Persian Gulf debt default forecast. The prudent action is to put the Lisbon Treaty on hold while member nations default on sovereign debt.

Spain‘s Govt default will soon default. The reality of proper accounting for property writedowns and the corresponding bank debt losses will have a calamitous effect. Over 20% unemployment and the powerful recession in progress will ensure a Spanish Govt debt default. But the immediate fireworks are seen in Greece, where the Premier Papandreou has shown defiance. He will not permit the nation to undergo the mindless reckless coerced IMF restrictions and guidelines, with the workers of Greece suffering. The past record of such IMF strictures results in permanent crippling of nations, with too many precedents to fill a single page. Something very unusual comes to Greece in response to official defiance, something unprecedented yet powerful and unpleasant. Riots will return to Athens, with much greater force and intensity, and spread across Europe. But the spillover of emotions will lead to much bigger events. The momentum of Spanish and Greek defaults will kill the European Monetary Union, and thus the EU itself. The re-emergence of the Deutsche Mark is assured, except it will be called a variant of the Euro. The codenames to date are the Core Euro or the Nordic Euro. It will become the official currency of Germany and certain stronger Central Europe nations with a trade surplus. If France manages to be included in the Core, it will be a miracle and pure gift. The Germans will need squires to carry their bags, an expedient perhaps. Effects from the currency on trade export will leave France reeling but Germany struggling.

AFTERSHOCK BANGS

Once the cracks in Europe are broken wide open, the minor European nations will fall like flies trapped in a hot summer window. The Baltic States are weak and will no longer be carried. But the bigger and more visible tragedies will be seen in Eastern Europe. A curious malformation was constructed in recent years. The Eastern European nations attempted a reconstruction, with new industrial development. However, they went too far on the mortgage side, emulating Europe, England, and the United States. In doing so, they mixed in a deadly potion on the mortgage finance formula. The nations of Hungary, Poland, and Czech Republic used cheap Swiss funds in the mortgage funding, and will probably all default on sovereign debt. The base Swiss interest rate of 1.5% pumped money into Eastern European homes. Their local currencies each fell around 40% to 60%, making for a total disaster for Swiss bankers. Translated mortgage losses are in the 70% to 80% range. In fact Swiss bankers are struggling to achieve their equilibrium after deep damage in three aspects: toxic US bonds, devastating Eastern European mortgages, and threats to private bank accounts. The aftershock bangs to the Baltic States and Eastern Europe will set up a powerful additional event that will be seen as a climax.

CLIMAX TO EUROPEAN BANGS

At least one major European nation will suffer the ignominy of a sovereign default. By this time, Spain and Greece will have been wrecked, along with Portugal, possibly Italy also, and maybe even Ireland. The prime victims to close the process of sovereign debt default will include France and the United Kingdom. Considered untouchable, these nations will succumb to the wretched financial foundations that befall them. France unfortunately has too many similarities to Spain, which debtors cannot overlook any longer. The United Kingdom unfortunately has too many similarities to the United States, which debtors cannot overlook since the UK cannot print money like the Americans to buy more time, or draw upon clandestine sources of funds. The UK will run out of time. With the French and British defaults, the game goes ballistic and enters the TWILIGHT ZONE.

RUN ON THE USDOLLAR

Some might look at a dangerous run on the USDollar and a severe decline being the primary requirement for a rise in the gold price. It is true that for a long time the most heavily correlated factor for gold rising has been the US$ falling. A negative correlation has been vividly clear. More importantly though, a transition has begun in the last few months. The most important factor for gold has become, and will continue to be the falling value of the major currencies, all the major currencies, not only the USDollar. One must exclude the Japanese Yen in such an argument, since its 0% interest rate has rendered the Bank of Japan a neutered central bank. Watch the BOJ now, as it actually defends against profound damage from a rising Yen currency in the unprecedented process of an unwind to the grandest carry trade ever connected to financial engineering machinery. In fact, a handoff from the Yen Carry Trade to the Dollar Carry Trade is exactly what the USFed and USDept Treasury wish to interrupt. Never in history has a carry trade been installed to drain the vitality of the global reserve currency, to force and retain a near 0% interest rate, and to enable a continued falling value in the US$.

The most important factor for Gold, worth repeating, has become, and will continue to be the falling value of the major currencies. The entire gaggle of currencies is in deep trouble from government sponsored debasement. The entire gaggle of central banks is in deep trouble from discredit to their franchise system. Gold will rise in a powerful manner from the debasement of the major currencies, in particular the USDollar, the Euro, and the British Pound. The process of currency destruction will involve rotations. The events of the last month have shown that severe losses by London and European banks, from Dubai debt default, bring about an indirect lift in the USDollar. It occurred from a selloff of the British Pound and Euro currency, whose banks are lined up for new profound losses. The Powerz portrayed the Dubai events as a flight to security in the USDollar. If so, why is the long-term USTreasury Bond yield rising? The concept of retreating to a currency, the US$, with trillion$ federal deficits, an insolvent banking system, and an economy struggling under the weight of 25% homeowners insolvent on their home loans, IS TOTALLY LUDICROUS. Soon the counter concept of retreating from a currency into Gold will be better understood.

The next confusing events will probably bring about a decline in the Euro currency from imminent and actual default in at least two European Union member nation government debt securities. That is at least two European national sovereign debt defaults. The Euro should decline from such severe events, amidst uncertainty, at least initially. Later, when the European Monetary Union fractures with a shattering deafening blow, the new central core of the Euro currency will be revealed. When that historic event occurs, essentially the revival of the Deutsche Mark, the USDollar will resume its decline in a powerful manner. Gold will then rise in response powerfully in US$ terms. During the monetary earthquake with European government defaults, the gold price will rise powerfully in Euro terms. After the introduction of the new Core Euro currency, the gold price in Core Euro terms will stabilize, with a handoff given to the gold rally in US$ terms. Such will be the nature of the rotation phenomenon. Mainstream analysts will make errors all along the way to promote the false notion of flight to US$ safety and security, when none exists. A flight out of paper fiat currency is the key, and flight into Gold is the major mega-trend that has begun to occur and will continue to occur. Those naysayers might want to examine the gold accumulation by the major savers of the world, who happen to be the major creditors to the USGovt and thereby the major supporters to the USDollar, namely China. They plan to increase their gold holdings six-fold in the next several years. Central banks in aggregate have turned to accumulation in the last several months.

THE MAIN EVENT IS USTREASURY DEFAULT

No forecast invites more private anger, insults, dismissive comments, and generally negative email than my forecast made in autumn 2008 of a USTreasury Default. The climax of the string of global sovereign defaults will be the government debt default for the USGovt, in the USTreasurys. Events in the last year support the forecast. Federal deficits are rising dangerously, over a trillion$ annually. The Greenspan-Guidotti criterion for debt default has long ago been triggered, even assuming the USGovt OWNS ANY GOLD. It does not. Rather it owns clear ledger items called ‘Deep Storage Gold’ that is not deep in underground vaults, but deep in mountain ore deposits, not yet mined, kept very secretive. The short-term USGovt debt is over $2 trillion, closer to $3.5 trillion if immediate debt finance is counted, as in the next 12 months. The Stimulus Bill was a travesty, more wasted funds and opportunities. The TARP Fund was an $800 billion slush fund, clouded still in secrecy. The foreign wars are a sacred big money loser, with more deficits associated. The competent economists like former USFed Chairman Volcker warn that structural reform is non-existent in the USEconomy and financial sector. Volcker further warns that derivatives have done great harm, and contain no value, only a shift of financial rents. The Global Paradigm Shift is in full force since the spring months, led by the twin concepts of diversification out of US$-based reserves, and of the movement to establish an IMF basket currency as an alternative for international commerce and transaction settlement. The end of the US$ for crude oil sales has been written on the walls. The end to the US$ credit card with unlimited balance is soon to end.

Those people who act as naysayers, even to offer private criticism for the USTreasury Default forecast, seem never to grasp the above arguments, all of which have absolutely zero precedent. They did not foresee many important events, each of which were important Hat Trick Letter forecasts come true. 1) They did not foresee the insolvency of the US banking system. 2) They did not foresee the broader breakdown and wreckage in the mortgage finance industry beyond subprime. 3) They did not foresee the severe whacking to the British Pound. 4) They did not foresee the nationalization and insolvency of fraud ridden Fannie Mae. 5) They did not foresee the downturn and endless US housing bear market decline. 6) They did not foresee the heralded end of the Petro-Dollar, as in exclusive US$ usage for crude oil sales. 7) They did not foresee the Persian Gulf debt shock wave. In fact, they do not foresee anything except the sound of their own voices. THEY WILL NOT RECOGNIZE THE USTREASURY DEFAULT, MOST LIKELY TO COME AS A FORCED DEBT WRITEDOWN WITH DEEP CREDITOR LOSSES. We are in historically unprecedented times. Look for a new USDollar to be used inside the United States fence posts, since the USGovt does not control contracts conducted globally. The devaluation of the US$ will come full circle, and lead to an implosion internally.

TRIGGER EVENT, INSOLVENT USFED !!

The US Federal Reserve is under fire. Many in the USCongress wish to force audits of its balance sheet. Many in the USCongress wish to determine what it does with hundreds of billion$ in USGovt funds. Many citizens in the United States wish to understand its everyday operations and where its loyalty lies, let alone how it manages to fail at both its primary functions. Its defenders cannot come to grips with how the US$ has fallen over 98% in value since its inception. Its defenders cannot come to grips with how the USEconomy is stifled by near 20% unemployment (when those without work are counted). Its defenders cannot justify, or even permit true statistics, regarding the powerful monetization of US$-based official bonds. We are witnessing the Weimar-ization of the USFed and the USTreasury Bond and the USDollar. Once again, American economists ignore history, choose to rewrite it, and ignore the path leading to increasingly damaging cycles. This cycle is systemic, not a business cycle, not a credit cycle, and it contains a cliff much bigger and deeper. The train wreck in progress will culminate in a USTreasury Default.

Put aside the growing debt of the USGovt for a moment. Put aside the growing balance sheet of the USFed for a moment. Put aside the dogmatic belief that the USFed can print money to alleviate financial problems for a moment. Put aside the shifting sands notion that the USDollar will remain the safe haven for a moment. Instead, consider two important notions, monetization and balance sheet. The USFed has been monetizing USAgency Mortgage Bonds in the US credit market, in fact a colossal amount held by foreign central banks. The USFed has been monetizing USTreasury Bonds both by the domestic primary bond dealers, taking their unsold inventory merely one week after auctions. The cash value from foreign mortgage bonds serves as a monetization tool for foreign USTreasury bidding at the same auctions.

Lastly, just look at the USFed balance sheet and its ratio makeup. The USFed is bond buyer of last resort. In expanding its balance sheet, newly acquired assets have terrible quality. The USFed might actually be insolvent here & now due to rising mortgage bond purchases. Half their balance sheet is mortgage bonds. If they are worth just 6% less in true value, the USFed is broke. My conclusion is that the USFed is $100′s of billions in the red. Nobody seems to care, believing they can just print money and eliminate their insolvency. It aint that simple.

The US Federal Reserve is killing itself by massive purchases of badly impaired assets, often the toxic assets almost no banks or investors want. Sure, it is also debasing the USDollar in doing so. The most dangerous assets under heavy accumulation are the mortgage backed securities issued by Fannie Mae and Freddie Mac. Demand for them is nonexistent. In the process the USFed has ruined its balance sheet. The ruin has occurred in just the last 12 months. Instead of acting in its historical role as the ‘lender of last resort‘, the USFed has on its own expanded its mandate to become the ‘buyer of last resort.’ The end result is powerful, as they are a Substandard Junk Bond Warehouse. The destruction of the USFed balance sheet is apparent from the following chart with data, prepared by BusinessInsider.com. See the light blue Fed Agency Debt in the upper right, the cancer that grew upon their balance sheet. Their true value is an order of magnitude lower than book value maintained by the august body. This central bank is walking dead.

Two major billboards must be written and read. 1) The USFed is insolvent. 2) The USFed is dangerously over-leveraged. According to its latest report, the US Federal Reserve owns over $1 trillion of mortgage backed securities, equal to 45.6% of the entire portfolio. One year ago mortgage backed securities were under 1% of its total assets. Actually the number was 0.6%, to make a 76-fold increase in toxic mortgage bond assets on the USFed balance sheet. The credit market actually believes the USFed stepped in and helped the system. But in doing so, they killed themselves. Just like other major banks such as the Wall Street firms, the USFed is very highly leveraged. The USFed carries $2157 billion of debt on $52.8 billion of capital, producing a leverage ratio of 40.8 to 1 ratio. Think over-leveraged, insolvent, and dead, but not yet declared dead. They might actually resign their commission contract with the USCongress, and thereby force a USTreasury Default!!

Here is where the insolvency risk screams out in obvious manner. Its listed mortgage bonds are 19 times greater than its capital, equal to 5.3% in inverse. So therefore, if the true value of these toxic assets is actually 6% lower than their recorded book value, the US Federal Reserve capital is depleted, effectively rendering it insolvent. It stands to reason that if Fannie Mae is insolvent, if Freddie Mac is insolvent, and if monetization supports their bonds, while the market shuns them, then the true value of the mortgage backed securities with their brand is less than 94.7% of their book value. Therefore one might safely conclude that on a strict accounting basis, the USFed is effectively insolvent. My simple guess is that the USAgency Mortgage Bonds on the official USFed balance sheet are worth perhap 30% to 50% less than cited on their books. That would leave the USFed insolvent by 15% to 25%.

One might wonder of motive for the USFed to offer big banks an interest yield on assets held on account. The reason might be to shore up its broken toxic balance sheet and fight off their own insolvency. The USFed remains liquid because banks continue to provide it with funding. Few if any questions come regarding the US Federal Reserve liabilities. The USFed is insolvent, just like the USGovt, just like the Social Security Trust Fund, just like the FDIC, just like US banks, just like US homeowners, and just like US leadership!!!

THE LEGITIMATE & TRUE SAFE HAVEN

That valid haven has been gold & silver for thousands of years. It will continue to be the safe haven. The major global currencies are being horribly debased as major governments fight off insolvent banking systems. In doing so, they have set up conditions for a string of sovereign debt default incidents. They will occur like a string of dominoes arranged in a global circle. The process was begun in the US and UK with broken banking systems and extraordinary measures to deal with it, like bank aid packages, stimulus packages, and liquidity facilities out the ying yang. The naive crowd thought the process ended when the US, UK, and Europe responded with official government rescues and aid, complete with certain nationalizations of key banks and financial institutions. Dubai defaults demonstrate the process continues for credit market crises. No climax has come, but the future holds plenty.

During the rotational lifts and fades of the major currencies, the one constant has been and will continue to be gold & silver. Notice today Tuesday December 15th, the Euro currency is down 130 basis points to the 145.3 area, but gold is flat on the day and silver is flat on the day, almost no change in each. Other warning signs remain, as the crude oil is back over the $70 mark and the 10-year USTNote yield has reached 3.6% in a recent rise. The so-called USDollar rebound has occurred with a rising long-term USTreasury yield, a contradiction for any claim of a flight to safe haven. The only lift for any US$ counter-trend rally come from walking atop the broken structures of other major currencies. The grand rotation during defaults will lift the Gold & Silver prices tremendously. Watch the back door vulnerability. As central banks and sovereign debt securities undergo a powerful unprecedented siege, their defense of the Gold-Dollar balance beam will vanish. British and European weakness does not translate to USDollar strength, not with destroyed finances for the USGovt and an insolvent balance sheet for the USFed. It instead translates to strength in the Gold & Silver bastions for monetary integrity.

THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.

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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!