All Risk Off Markets ready to rally...

Treasuries and Dollar are done with their consolidations (see this previous post Bank of the United States of America is approaching critical mass)…SP500 resistance WALL held this attempt solidly so far. Lots of long wicks on currency candles over the last few days. EURO basis swap reversed and is even more negative again today.

The dollar action is VERY damaging to the continued health of any bullish action in risk assets. What’s more is that all the US Treasuries have completed the consolidations that I posted earlier in the week…that is also very bad for Risk assets…with all the interest in getting dinosaurs out on TV touting dollar debasement and real assets…you could not get a much more inverse signal.

Peter Schiff has never gotten anything right when it comes to a trading call or the Dollar. He has made one or two macro calls that setup his reputation…but when we have major dollar liquidity issues and the guy still promotes a crash of the dollar despite it being clear that credit is being destroyed at a much faster pace than any central bank can print or replenish, he is clearly out of touch with reality or has written one too many books and is not allowed to change his thesis publicly.

Also, please reread this post: Black Friday…Black Monday…either way the Jig is up… Things have gone pretty much as expected. Actions by the our financial engineering team and central bankers have demonstrated that things are much worse than they are admitting publicly and also that they are not in control.

Why don’t they use unemployment to population ratio for the rate calculation? What kind of BS is it to use the unemployment to workforce as the ratio?  I guess its easy to understand really, WORKFORCE is an engineered number and can easily be changed at a whim to facilitate achieving a particular target. Without this movable variable, the government numbers might actually have to stand up to close inpsection and we certainly would NOT want that. At this rate, the workforce can shrink by anoher 5 million jobs, the population can increase and the unemployment rate will actually continue to drop dramatically. What a scam!

I also suggest that everyone hear this interview: Ann Barnhardt

The Brick Wall or Wrecking ball?

I remind of over the MAJOR overhead resistance that we are appoaching here…getting interesting and dollar is behaving nicely, given the new 270 billion emergency lending from ECB to IMF…something looks like it is afoot…resistance comes in at 1265 to 1271 on the ES futures.

A few Charts of our markets...

A general comment…I post a single view and risk perspective...

Given that I also keep my trading approach similar, the more options you have the worse you trade. I would like my readers to know that I am short…yes, indeed I am, and today was not my favorite day of all time...however, I am very happy with the gifts that I get and today was likely one. Additionally, my performance for the month, this month alone, for pools ended up double digits positive…Ofcourse, the numbers would have been better without today but I think next month will not be a snoozer for anyone and I am prepared.

Yes, I am quite pessimistic here and I think history has a precedent for being extremely pessimistic when these types of things happen. The Australian Dollar has made an epic move today (multi sigma)...one that usually is reversed highly dramatically. The euro could not get follow through on its ramp...we will see how it continues to play out - I am not optimstic. The markets are at major resistance. I can be early, but usually my trades are successful and often very highly so…I have no waffle room in the way I do things…either it works or it does not.

One thing we know for sure, December will not likely make it easy for most market participants.

I would like to make another comment, I make no apologies for laying it on the line…on a day like today, it is easy for the pot to call the kettle black…so, indeed, I had been the recipient of such messages. However, as I have said many times before, I can manage being wrong much better than flipping my view or taking a bunch of unnecessary losses. What is going on in this economy and with the powers that be in the system is something that I take very personally, I do use my blog to talk about it. I depise the abundance of misinformation and the distortions propogated by the mass media and populists that get people setup in just the wrong position at just the wrong time, over and over again. What is happening in this system is beyond trading, it is much more dangerous and I seek to discuss those issues on these pages.  I do not pretend to be perfect, nor do I aim to sell a trading information service. I simply provide my best views (what are often wrong) to you. I appreciate your readership and I enjoy writing on this blog even when things are challenging. For me those moment are the most important because is then that you can learn something and also then that you can see the character of all. I seek to be humble and I base my views and trading systems on the premise that I will be wrong, in doing so, I believe that successful results are and have been much easier to attain.

I encourage all in the trading business to do the same. Don’t have a wishywashy approach - take a stand. It is much easier to adjust when one does so. This trade and my view is now much higher probability of playing out that at any point previously…it takes work to make sure that you are aligning yourself and views in that manner…Though I will not be championing the success of my view (which I have high confidence in, incidentally) on this blog, I am confortable humbly addressing the challenges of it so far, and wanted to do so publically.

The height of blasphemy, idiocy and financial alchemy

The fact is that the Fed and their minions are at it again...desperately pushing their drugs on a string trying to facilitate their bankrupt cronies at the expense of the markets, the taxpayers and the financial system. It seems hard to imagine that an effort supposedly engineered to provide stability could be so stupidly engineered as accomplish exactly the opposite. Essentially today the Fed is doing EXACTLY what it did to accelerate the panic in the markets in 2008. They did not save the markets at all really because what they did do, however, was make the next problem...yes the one we are having now, 10X (10 times bigger) than the one they supposedly attempted to cure. So, if you were a normal human being and realized that your efforts resulted in a significantly greater problem than the one you would probably look at what you did that exacerbated it. Well, in the case of the Fed, what exacerbated the 2008 debacle was trying to cure credit problems with lots more credit. The fed is doing it again once again in replay mode, only this time in 3D. So, the result will be a total catastrophe. There is no other option.

Here is a press release:

Today, the Bank of Canada, the Bank of England, the European Central Bank
(ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank
are announcing coordinated measures designed to address the continued
elevated pressures in U.S. dollar short-term funding markets. These
measures, together with other actions taken in the last few days by
individual central banks, are designed to improve the liquidity conditions
in global financial markets. The central banks continue to work together
closely and will take appropriate steps to address the ongoing pressures.
Federal Reserve Actions 

The Federal Open Market Committee has authorized a $180 billion expansion
of its temporary reciprocal currency arrangements (swap lines). This
increased capacity will be available to provide dollar funding for both
term and overnight liquidity operations by the other central banks.
The FOMC has authorized increases in the existing swap lines with the ECB
and the Swiss National Bank. These larger facilities will now support the
provision of U.S. dollar liquidity in amounts of up to $110 billion by the
ECB, an increase of $55 billion, and up to $27 billion by the Swiss
National Bank, an increase of $15 billion. 

In addition, new swap facilities have been authorized with the Bank of
Japan, the Bank of England, and the Bank of Canada. These facilities will
support the provision of U.S. dollar liquidity in amounts of up to $60
billion by the Bank of Japan, $40 billion by the Bank of England, and $10
billion by the Bank of Canada.

All of these reciprocal currency arrangements have been authorized through January 30.

Examining this press release, one can see that this essentially describes the liquidity action that the Fed took today. What's more the objectives are stated to provide short-term and overnight funding, what they omit is the "for our ponzi scheme" part. Moreover, the objective here really is to provide dollars to intermediates to make available for insolvent and dubious counterparties that would go broke with out them. What this means it that in order to allow operations say for Society Generale they required access to a certain amount of dollars, that they lacked the capability or credibility to purchase those dollars. As we know, everything is available for a price, however, when you are not a particularly good risk and desperately need a particular security/asset to ensure you can meet basic obligations and need desperatey to remain credible...the price goes up. That also happens when the natural result of too much credit defaulting creates an accute shortage in supply of NON IOU dollars.

What is happening here is that the entities whose way over leveraged balance sheets have grown even bigger and more obtuse over the last 2.5 years are now getting a handout from the central banks, who are all going to tell us that they are only taking pristine collateral for such access. Do you believe them? The Fed is buying third rate mortgages and has been buying bankrupt hotel debt...yeah right!

So, if we were to examine what occurred in the above press release, you would realize that the only thing missing is the dates. And they would be: Release Date: September 18, 2008, For release at 3:00 a.m. EDT.

What happened next? Well clearly for these institutions to panic to this degree, their actions had the exact opposite effect than intended...Everyone was left asking "just how much worse are the problems than we were being told?" Recognize the similarity? The market dropped 350 points on the S&P500 thereafter in less than a month. The Fed could not print or inject enough dollars in then, they most certainly will not be able to now. Will the same thing happen this time? My opinion is that probabilities favor the same type of result and will likely be part of an even bigger decline than 2008 because this time the Fed and its buddies are going in much bigger and they are seeking to give money to even more stretched and insolvent bankers and once again reward incompetence. They themselves are incompetent, so, I guess I can not blame them for not being able to recognize it in others...especially their cronies.

If the Fed was a poker player, they showed their hand...we now know they are scared...and now its the market's turn. I, somehow thing the market is a better poker player.

Bank of the United States of America is approaching critical mass

If anyone is curious as to where the markets go next…go look at other sovereign bonds for comparison. I think there is only one way this resolves: the other sovereigns sell off  and get higher yields, the US bonds get lower yields and rally…and incidentally, the dollar shortage intensifies.

Fed panics, ECB panics, China panics...

It won’t work and the spike won’t last long...

Previous charts are broken that I posted - obviously…but the larger pattern is not….it would not surprise me in the least if we to get a hard reversal (ala in the TARP announcement reaction in 2008) and close RED or very nearly entirely reverse this intervention reaction for today or tommorrow.

What I am thinking at this point is that the downgrades of the US banks (especially certain ones like BAC) and stress on the European banks triggered an emergency reaction…the implications are that the wound will still be there after the bandaid is put on…this will not heal so fast…the blood is in the water…yet now a large contingent of the market is now long or stopped out of their shorts yet again…perfect conditions for a signficant reversal.

All is not what it seems…and, moreover, the government seems now to be in the business of instigating economic data that allways comes in a few standard deviations above expectations for every announcement. I wonder what the real numbers look like?

If China is on drugs…many western markets are apparently taking meth

China’s announcement this morning is just plain NOT good news. China is in the middle of record defaults…it is in the middle of a clear recession and reducing reserve requirements is just plain not bullish. Who does China think they are JP MOREgan or Bank of Merrill Lynch Countrywide in America. Just what we need now in China, even more loans people can not repay. In china people commit suicide over their inability to repay loans because they have no bankruptcy statues there and the consequences for not paying your obligations are so high. The only answer I can come up with regarding the Chinese action is that they are on drugs…and they must be in a panic not to mention a heap of trouble.

People apparnetly just don’t want to pay the piper…they want to offer the piper more money than they can afford to pay him.

I have never seen such bad excuses for people to be optimistic. This is certainly absolutely not a reason to be optimistic…its one to be pessimistic. China’s policy action is a prime example of the lure money amplification and failure of modern financial engineering...this changes nothing other than the magnitude of the drop in the markets to come and demonsrates the sheer panic with in leadership.

Very bearish action as stops are blasted...

We can see in the charts below that these very highly watched patterns have resulted in yet another highly frustrating result. In an era where people are continuously focused on managing losses rather than profits, this behavior is should be expected. The action in the euro was especially unhealthy…I have often referred to the over use or reliance on stops as a driver of sub par performance…people who are trading in this style are producing absolutely horrid results…which I have shown a sub sample of below. The managers in the list are trading systematically and are struggling mightily because they are approaching the problem entire from the wrong direction. Meanwhile, for this month alone, I am up significant double digits…I think this points to that when everyone trades the same and additionally when everyone wants to avoid risk…the create new risks.

Black Friday…Black Monday…either way the Jig is up!

The world has officially lost its way…our leaders must be convinced the solution to unwanted pregnancy is more pregnancy, since they clearly operate under the assumption that the solution to too much debt is more debt. To wit, in Greece a new fad has been emerging for those with too little money, medical care, drugs and hope whereby they distort use the concept of social welfare to the point that they willingly seek to infect themselves which HIV in order to obtain more of money, medical care, drugs and hope from a broke government no less. We are witnessing the perversion of society by unsound money.

What I expect to hear is more desperate ideas postured as solutions to our woes, both financial and social. The reality, however, is quite different to what our leaders are apparently perceiving. They may actually feel like they are giving critical life support to the patient…however, the reality is that all these fools are trying to do is resuscitate the addict by injecting more heroin. The inevitable result is that the patient will drown, overdose or simply fail to respond at all, given the very advanced progression of the addiction. We will hear about Sarkozy and Merkel coming up with something, the ECB another, the Fed yet another and the IMF something even more exotic. However, no treatment can really be effective for a dying addict under the supervision of his drug dealer. Especially, when the dealer is desperately trying to keep his addict alive only that he may extract the last bit of money and energy from him when he survives.

IT IS TOO LATE…any postive reactive pops to these harebrained schemes will be extremely short lived…as our fearless leaders are now the equivalent of people with sticks swiming with 20+ foot hungry sharks with very large teeth. They can make a lot of noise, but their shouts are hollow, their sticks are weak and their bones are brittle.

Germany can not get any more credit…it has already reduced itself to the equivalent of its patients by diving into well over 300% debt to GDP when you look past all their fuzzy accounting. Germany is broke, France is even more broke, England is broke - the biggest economic powers that were believed to be solvent have been destroyed from within by their catastrophic leadership. They are NOW finished. Completely finished. Things are bout to get VERY ugly for them…and THEY are supposed to bail out the ECB and weak members?

Anyone who wants to believe in the myth of China is free to do so to their own peril. Spain, Ireland, Belgium, Greece, Hungary, Yugoslavia, Ukraine, Poland and nearly all the remaining countries near the borders of continental Europe are TOTALLY insolvent and the whole system is supported by lies backed by accounting fraud. Yet we are certainly not told this in the news. Instead the mighty Germans, French and the European Council have been desperately struggling to convince anyone who will listen, not so much that they are solvent, but that their member banks are fine and in a manageable condition. They are telling the story much too often and much too loudly to be believed. All of this effort that has been forthcoming over the last years from France and Germany, not to mention the ECB, has been specifically designed to hide the absolutely horrid condition of their commercial banks and financial infrastructure and the failure of their regulation and policies.

It is the same everywhere, none of the leadership want to let their rich friends drown in their own waste. They are constantly trying to clean it up at the expense of their constituents and countries assets. This is also just what has been happening in the US as well, however, the US situation is far more managable. Leverage via direct money amplification, however, was not possible for the Europeans, so they imported vast amounts indirect money amplification via exotic products and financial engineering. They ate it up like Piranhas attacking their prey. The European banks did not even look at what they were eating…they just gorged themselves seeking the panacea of maximum money amplification.

Any further efforts by these idiot drug pushers are likely to continue with the same results. Giving Italy 600 billion Euros, at this point, after they have been forced to issue large amounts of debt at above 6 to 7% is simply ridiculous and will fix nothing. These guys are burning the money before it even hits the ground after being dropped from the helicopter. The more money they throw at the problem, the greater the greater panic they will create. Italy will still have to come up with 40 billion euros a year on the new heroin, in addition to all the very expensive heroin they previous bought. There is no masking that interest rates are going MUCH higher for nearly everything, with the likely exception of US Treasury bonds. There is NOTHING that Lagarde, Barosso, Van Rumpoy, BURNanke, Merkel, Sarkozy or anyone else can do about that. And that will imminently create the condition where the patient either dies from its overdose or resorts to methadone treatment and seeks out anti-leverage currency rather than credits.

To the Merkel, Sarkosy, Barosso, Van Rumpoy, Bernanke, Summers, Bush and Obama team, I complement you for your absolute professionalism and extreme skill with which you have been totally inept and destructive. I will not shed one tear or waste one sympathetic thought on you as you acquire your just place in the dustbin of history…which can not happen fast enough in my opinion.

Feeding the beast what has made him sick will satiate it for a moment and certainly kill it in another.

Ron Paul speaks - listening?

My view is that people are about to start listening…when the results of inept leadership are spread all over their lives in the form of a blown up economy, lost jobs and an unstable banking system…people will start demanding the truth rather than BS from the rest of these rediculous politicitans. Below is a eerily similar analysis from the UK at the ECB as to Ron Paul’s:

Our system is based on destruction not creation…what’s next?

The movements in the markets are simply a fractal extrapolating the momentum from its source. For roughly 30 years or so the world has been in an accelerated growth cycle. This growth would seemingly be creative and based on creation of new products, capabilities and/or services. In reality the growth has occurred based on a very large and subtle undercurrent of destruction. It is based on a grand financial engineering experiment which is now in its last phases and infecting as many as it can with its disease.

Sustainability and balance has not been the focus, rather exponential growth has been the myopic goal…and there is but one result from long-term exponential growth - DESTRUCTION. You can see it in our world now every day, we have come up with more and more creative ways to destroy the quality of our life than ever before. As a result, our growth has fittingly occurred with an under pinning of imperialism, militarism, financial warfare (via credit and other products) - all essentially destructive mediums used for the expansion of an exponential growth financial engineering experiment - nuclear power and derivatives are just a few examples of the tools of this agenda.

Even though during this time, Apple created the iphone, totally new platforms for computing and we build vehicles to travel to the edge of the our solar system among many other tremendous accomplishments, we created these accomplishments on the back of the earth and shoulders of the masses. Essentially rather than contributing to the earth and to people in general, we have instead chosen to steal from both. That condition manifests itself right now in the markets, most market activity is NOT people managing profits it is from people forcibly managing destruction of their wealth.

Given that this is the case, what can expect right now? From my point of view, the strongest part of the destruction is about to begin. The dollar rally is in its infancy and everyone is already calling tops and trying to re short and re short it. Same for the EURO in reverse. This type of activity is just one of the symptoms of our destructive global activity and will fuel futher destruction. The reality is that the forcible management of portfolios via the destruction of them has only just begun. Ironically, the panic will get much stronger as the destruction continues to grow - even more ironically doing so in "exponential" fashion. So, I am expecting a VERY VERY strong move up on the dollar. Of course, that will most likely ravage the asset markets and slam the debt markets too.

But there we go, the fearless leaders do not know what else to do and are essentially watching from the sidelines until the destruction has taken its course…then maybe they will come up with something. The one thing can be sure of, is that any idiot like BURNanke and Barrosso who think that they can solve over leverage with more leverage will only come up with more and more destructive ideas.

More to come…regardless of the state of things I do think that the unwind of the power forces behind these destructive agendas will create new possibilities to create a much better and more sustainable world. In that spirit and with hopes that we get opportunity sooner rather than later, I wish everyone a healthy and happy thanksgiving.

Anti Dollar Propogandists scream loudly and Dollar reacts accordingly...

The dollar is making new swing highs on this move up and will count as "broken out" if it can close at or above current prices as I expect it will. The rhetoric and the ridiculous amount of misunderstanding about how the financial system works continues, with the blatant and simplistic view that "precious metals are the only real money” rationalizations for Gold @ $10,000. Accordingly, you can imagine how the dollar market feels about the loudly voiced commentary talking its badly positioned book. The dollar, of course, reacts by going up and it is going to continue to do so - destroying populists, simpletons and fools who practice the art of trading based on misinterpretation and fundamentals. The reality is also that if one were to get this absolutely essential part of the equation wrong there will likely not be enough compensation for that complacent error in other positions to make up for the oversight. Sure, French bonds yields may go through the roof and that is good if you are short the bonds - but if you get the dollar wrong you most likely have a lot of other stuff wrong and the results will show it. Rarely if ever will the simplistic dollar/gold/silver propaganda touted by so many from the Basses to the Paulsons to the Ice Crap Asset Management and the Durden result in the trades they are looking for…many of whom are beginning to remind me of the Whitney Tilson that Zerohedge so publicly disparaging.

I suggest a look at the ZeroHedge Gold propaganda and the Gold and Silver Bears (as invented by Turd Ferguson) poppycock that is being bantered about over there. Hey when your name is Turd Furgeson - should it be surprising if you promote ideas of similar nature?

Consider the following articles:

• IceCap Asset Management: The Return Of The Dollar
• Guest Post: Is Gold Still The Answer For Investors?
• The Silver Bears Are Back With Part 8

Then consider the following chart:

What if the super committee is not so super…or committed?

Well, this is an interesting question…right? If the US can not cut the budget then the dollar will be toast - right? Just Slammed? If the world sees the US get another downgrade, the dollar will be even more toastier. Right? (grammatical error intended BTW)

The interesting thing about this, is that Kyle Bass (and apparently his staff), Paulson (and his staff), Sprott and many others like them are waiting breathlessly for this day because its the day that proves that fiat money is dead. Its the day that will set the trend of gold and silver back on the path to the stratosphere. Its the event that will prove the dollar is not worth the paper its not printed on. Right? Those 200,000 pounds of nickles that Bass has been accumulating will increase in value very rapidly as their silver component goes through the roof…Right? …and Sprott the genius charlatan will be gleefully toasting because his physical silver position will be so perfectly positioned, right? Its the day that will send rates through the roof…right?

Wrong. From my perspective, if the rating agencies do downgrade the dollar that’s just fine for the dollar. If the super committee fails to cut or come to a consensus, that’s just cool too. If they do come to a consensus…its fine for the dollar too. If pretty much anything happens here - which includes nothing, the result will be a stronger dollar. I know its totally counter intuitive, should’nt a downgrade of the US be a downgrade of the dollar and spell destruction for the currency? The difference is that a downgrade of the dollar and cuts by the super committee equal less currency and less money amplification via credit creation. There is but one result from that equation: less dollars equals more valuable and scarce dollars. When you add to that equation that a downgrade of the dollar IS ALSO ESSENTIALLY A DOWNGRADE of every corporation (not to mention country) in the world - certainly in the U.S.. Who is worse off, them or the government? So, the result will create an aversion to corporate debt, municipal debt and other sovereign debt and an attraction to US debt. Anyway you cut it, the dollar will fall in supply because the FED and the government are trapped - not to mention that they have millions of people ready to burn down any building where decisions to spend people's future earnings on interest payments and bailouts to banks and other special interests are made. This is why the FDIC will not honor its agreements they way people expect them to…they will be unable to do so. They can do nothing. The FED can essentially only watch relatively helplessly, with their credibility totally shattered and their power dissipating faster than a Perrier water in the Sahara - until they can build some cover with which to dive in and bailout their buddies and play poker with their politician enablers again. This will be no easy task, nor will it happen quickly.

I love it, most everyone who believes that sound currency is equal to an asset backed currency or that precious metals are insulation against political, policy and monetary instability is setup to play the dollar collapse on precisely what is happening here…trouble is - they will be totally wrong. The next question is, if they are totally wrong about this…what might be happening with their other faulty analyses - say perhaps Japanese or other bonds in nations that can actually print money? The results might just NOT be what are expected either.

Too Big to Fail...Too Little to Save...Too Small to for Accounting Control Fraud. The next MF Global Awaits...

There you have it, Mr, BURNanke has presided over an era where precisely the opposite of everything he says is what it does, precisely the opposite of everything he and his minions predict happens and precisely the opposite of what is marketed to the public is actually done.

The single biggest result out of the crash of 2008 was that it was deemed publicly that no institution could be allowed to become too big to fail. Yet lets look at what happened...nearly every large institution got bigger and the financial industry went on a consolidation binge. It is no coincidence that this occurred since, while the BURNanke guy was trumpeting the exact opposite publicly, he was making sure that there were very accomodative rules and regulations in place to allow the insolvency of institutions to hidden behind the single largest occurrence of accounting control fraud in history - dwarfing 2008 by comparison. If one just wants to see it in living proof, then all one needs to do is go a few BURNanke town hall meetings back, at which time, he proudly asserted that American institutions had very little risk and exposure the the European sovereign debt debacle. I accused him of deliberately lying...I think that it is patently clear that the guy had to know that using exotic insurance and leverage schemes the banks have a ton of exposure and now they have way more to worry about than just exposure to declining prices. They have to worry about how they are going to continue perpetrating there accounting fraud sham without getting caught and destabilising the entire system. What is happening now is that the accounting fraud is now actually causing the perpetrators not to trade with each other because they know everyone else is lying about their books just like they are.

JP MOREgan and Goldman TAX are the prime risks of this condition and they are both insolvent by the way...BAC and many others are already toast and they are having a lot of trouble moving what assets they have left that look like they have any value around to make their books look remotely solvent. Goldman and JP have, however, directly attempted to interfere with regulation and government to such a degree that they think they can always come up with a way to coverup nasty business deals with officially sanctioned accounting frauds. They have made the most use of the rules that allow them to maintain significantly higher leverage ratios than they report and marks that make their books look far more solvent than they actually are. Given the disaster we went through in 2008 why would it be desirable for us to do 2008 at 10x now?

The real question is if institutions were too big to fail in 2008 why were they allowed directly under BURNanke's supervision to become so much bigger and systematically imperative and risky? I think the answer is quite simple. It is much easier to commit subterfuge and obfuscation based accounting control frauds at a few institutions with large and complex books and portfolios than at thousands of small ones...so, BURNanke and officials have deliberately and by specific design created a framework which is designed to allow solvency to be visible without actually truly being existing. Remember, that the Fed essentially not that long ago reduced the reserve requirement fro banks to 1%. That is truly stunning when you think about it...if we all wanted our money from the bank that only 1% of it really exists in reserve. That would be shocking enough that no reasonable businessman would ever seek to run his business that way and would immediately shut it down. But that is the least of it. 1% is not low enough for the banks or the Fed so they have come up with more money amplification scams via all sorts of crazy products and techniques to reduce the actual amount of money on reserve to way less than the 1% they are supposed to have and which is woefully insufficient to inspire confidence when stress is introduced into the system. So, here we are again solving the problem of too much debt with more debt. This is exactly like the heroin addiction that I have previously mentioned. A heroin addict first attempts to solve his need by using more than he did before and repeats the pattern over and over until he either dies via overdose or checks into rehab for anti-heroin heroin - namely methadone. We are at that stage with our money amplification addiction, overdose or rehab and the requirement for both is anti-amplified money money - pure and simple fiat cash - unleveraged! Think about that for a minute. This essentially means that banks need to get to 70 to 80+% in reserve. This likely means that assets need to fall in similar fashion to this reserve level rising in order to cure the patient. In this case, the global financial system.

I think that its very important to understand that the entire financial system is connected by two core themes: very high performance incentive based compensation and the tentacles of massive leverage that underpins the banking activity and miraculous revenue streams that banks have been pursuing. The result of this type or arrangement is that bankers have the capability to generate significant payouts with other peoples money - namely the backstop of public option.

Good ole Lloyd is doing god’s work by getting ready to pass off his losses to US and Jamie Diamondust is doing the same. These guys have both made tons of money running organizations built completely on a foundation of deception and accounting fraud. We are about to see just the extent of it as JPM and Goldman have to start to factor in the counter party into all their insurance scams and their short premium books.

MF Global was no accident and the implications are clear as I presented in my CME post. Someone is and was holding a gun to the CME's head and their actions have been clearly motivated by the fact that the problems going on are systemic. Thus these problems create a quandary when trying to figure out how to respond to them. The reality, however, is probable that MF Global is not an isolated situation and that rampant pledging of client assets as collateral is embedded and hiding in the system. As people return to the theme of being more interested in the return of their money than the return on their money they will chase US Treasuries into negative yield. We can certainly expect the stress of that pressure to force these assorted ponzi schemes out into the open.

Lest you think this whole process has to take a long time to play out...I would prefer that you see it as a light switch. The switch has flickered and will likely be turned off imminently. That is the liquidity and money amplification switch - when that is off - its game over. It will be fast. You will find the whole financial system breaks and suddenly rules you expected to be followed will be reinvented before your eyes. You will see this in many terrible ways - like for example when you attempt to go Bank of America and withdraw cash or wire money.

My recommendation, the one I have given to all my clients and friends and I have done myself, is to take plenty of cash out of the bank NOW and keep it somewhere safe...which in this case is anywhere but a bank. A safety deposit box is usually at a bank and a bank is not a safe place for your money at this time. If exogenous stresses occur (and they should be expecting them) you will see Banks closed or schedules and rules changed to try to slow the progression of the death by overdose that the financial system is in the troughs of.

Also, as an interesting side effect to all these assorted issues…if any of this does come to pass, many people will be caught unprepared, they will take that to the voting booths with them and as I have indicated previously, in the case of a financial calamity, Ron Paul stands highly increased odds of being elected president…I see no reason that the scenerio and outcome has changed.

Kyle Bass is even more foolish than I thought..

This weekend, the EU and the IMF effectively went all?in with a bad hand in the highest stakes game of financial poker ever played with the world. We believe the agreement released was nothing more than a Potemkin agreement in order to placate bond investors. In the end (and there will be a reckoning for many countries) nations, including the United States, need to dramatically cut spending and get their fiscal balances in order. Unfortunately, our elected officials are on the hamster wheel of electoral cycles and are not able to make tough decisions like this as they would likely not be re?elected without a “sea change” in public opinion towards government spending and deficits. We are therefore on the path to significant currency devaluation around the world that will likely result in significant inflation. We increased our holdings of gold on Monday morning as well as taking other steps to position ourselves for the most likely outcome over the next few years. Interestingly enough, based upon the market reaction in the last 36 hours, it seems the law of diminishing returns applies to bailouts as well. - Kyle Bass 

"Buying gold is just buying a put on the idiocy of the political cycle. ... Capitalism without failure is like Christianity without Hell. You have to have atonement for ridiculous levels of spending both the US and Europe have gone through. The spending idiocy of the world is going to catch up to itself. And that's where we are today.” - Kyle Bass

Yes, VERY smart people can be quite foolish...

When someone misunderstands so fundamentally the rules of the game that they think they are able to rationally and intentionally position themselves precisely 100% in the wrong orientation with regard to a trade - it is truly spectacular. The ability for smart peopel to position themselves in this manner is usually attributable to a fundemental misunderstanding or incorrect premise. This does not mean all their trades will be wrong…hoever, if the fundemental understanding can be so signifcant - as is the case with Eric Sprott for example, the whole outcome and their process is likely to be effected. The situation has not materially changed over recent history…Silver is down not far from 50% from its highs while gold is up a little bit over the same timeframe and both are about to get toasted…fundemental misunderstandings have led to pyramiding and what will likely turn into catastophic bets on Silver and a just plain very bad ones (not to mention extremely popular) on gold. The reality right now is that people see hedges everywhere, but NONE of those hedges should be trusted…the safest trade is the risk trade…shorting Japan while being long tons of silver and gold is not my idea of a great hedge...

Kyle Bass has topped the impression that I had…while he clearly has some knowledge and facts behind his thesis, he seems definately seems to be in an egoist trade and more importantly misunderstands the results of the outcome. He obviously is in control of the world and has made his billions (many of which he is likely to lose by the way) and, it seems to me, has lost his passion for truth and integrity. Passion, truth and integrity might have actually had something to do with the reasons he was able to pull off his first success. Look, I see the same thing in my own activity, I am most likely to suffer volatility or losses after a very strong performance. In August and September, I made higher returns that most managers make in a few years or even a career…and that kind of success sets you up for complacency and in many cases failure. This is something, that as a manager, you have to be highly scared of. Money is powerful, it is a mirror and it can compel you do the exact wrong thing at the exact wrong time - simply because you think you have it to do it with and complacency to back it up. Kyle is coming off a massive and long-term trade in which the complacency high takes very long to dissipate. Paulson was too. As a manager, I am always the most scared after huge successes because that’s exactly when you can not and should not trust yourself…its at those times you need to be prepared for exactly the opposite of what your superficial emotions and ego tell you should and will happen. I can tell you now - these guys are immature, fickle and unprepared. Their trading books and reputations will be the victims of their ego and complacency.

Kyle may not have the commitment to hold his trade for the length of time required to make it profitable - which very well may be never but more than likely 5 to 6 years of devastating violence against it. During this time, his investors will abandon him, his followers will go from praising him to hating him and his AUM will follow a similar fate. The good news for Kyle is that some of his money will likely be held in some accounts somewhere that he will be able to squirrel away. I suspect, however, that Kyle will be one of those rags to riches to rags story's we see in the movies. He has married this trade and will hold it until its too late to liquidate…then he will hold until he is forced to let go - probably losing most of his fortune as he scrambled to double down. What is funny is that Tyler Durden of Zerohedge is so impressed with Kyles ridiculous and merit less anlaysis…Kyle is flat out wrong. If he is right about a few of the ideas that he speaks about,  should then be obvious that the result of less bailouts and more debt will be more and more aggressive asset sales. I am sorry to point out to all the Eric Sprott’s and Kyle Bass that Gold and Silver are a primarily holding of large banks and sovereign’s - they are assets and will be sold with abandon to cover margin calls…My long-term target for Silver remains in the single digits and when this comes to pass, as it most certainly will - the results of superficial and egoistic analysis will become apparent in many forms - sadly in the purchasing power of the investors that Mr. Bass trades and in the reputations of those who bet the farm on a stupid concept that everyone believes so publicly must go the way that it seems superficially it should go. We saw this recently with our Wall Street Journal Triangles and we continue to see it in huge malinvestments and misunderstandings like Kyle’s, Sprott’s, Paulson’s and many others.