Hat Trick Letter – únor 2011

Over a year ago, the incompetent clowns in the USGovt claimed that Social Security would be positive until year 2015. Late in 2010, the first negative month was registered, where payouts exceeded incoming revenue from FICA taxes. Despite the USGovt using the funds, equivalent to tax receipts, the SS payments by individuals is not tax deductible. Massive cutbacks are coming to the broken and pillaged SS system. Added pressure has been put on the USDept Treasury. A nasty portrait of the broken fund can be painted. The Social Security Admin will run at a deficit this year in 2011. It will continue to run in the red until its trust fund is drained by about 2037, according to USCongressional budget experts. That is a bad joke, since the trust fund has been gutted by annual borrowing. The first deficit was recorded last year, but USGovt accountants still here and now project it would post further surpluses for a few more years before permanently falling into deficit in 2016. In the current year alone, Social Security is projected to pay out $45 billion more in retirement, disability, and survivor benefits than it collects in payroll taxes, according to the non-aligned Congressional Budget Office. If the temporary payroll tax cut is factored in, the shortfall this year will be $130 billion.

The Washington Post made a conclusion. They wrote, „Social Security has built up a $2.5 trillion surplus since the retirement program was last overhauled in the 1980s. Benefits will be safe until that money runs out. The $2.5 trillion surplus, however, has been borrowed over the years by the federal government and spent on other programs. In return, the Treasury Department has issued bonds to Social Security, guaranteeing repayment, with interest. Got that? The Treasury does not have $2.5 trillion to pay to the Social Security Trust Fund, and the Treasury is in hock for $14 trillion. Further, there is no end in sight to additional deficits, meaning a climbing debt load for the Treasury. There is no way this entire thing does not explode at some point. Either Bernanke starts to print like Robert

Mugabe or the government is going to have to cut back big time, including on SS benefits. Former Treasury Secretary Robert Rubin was not kidding when he wrote the debt crisis could explode at any minute. It is starting already. That screeching noise you here is the debt balloon stretching to its max. You know what happens next.“ The USGovt official deficit will be aggravated by the net SS payouts.

PLANS ARE BEING DRAWN UP FOR PATHWAYS TO ENABLE STATE BANKRUPTCY. CHANGED LAWS WOULD LEAD TO RENEGE ON EMPLOYEE PENSION OBLIGATIONS. DENIALS OF MUNI BOND DISASTER SHOULD BE TAKEN AS CONFIRMATION.

Plans are being constructed to permit the states to declare bankruptcy. The main victims would be pensioners and investors in state bonds. Senator John Cornyn from Texas has asked the US Federal Reserve about the possibility of crafting a bill allowing states to go bankrupt. Policy makers are working behind closed doors to enable the states to dolare bankruptcy and escape crushing debts, including the pension obligations to retirád public workers. Unlike cities, the states are barred from seeking protection in federál bankruptcy court. Any change that such status would require passage over Constitutional hurdles, since states are considered sovereign. This is curious, since the federal government tramples over the same Constitution on security matters, which former President Bush (Jr) and narco baron once called „nothing but a God-damned piece of paper.“ Suddenly, the paper has merit and value. Many states have deep structural problems, like insolvent pension funds, that have obstructed funds from being devoted to essential public services like education and health care. Some members of Congress expect it just a matter of time efore a state seeks a federal bailout. The other alternative is bankruptcy, which would permit a state to alter its contractual promises to retirees. Retirees would clearly not recese promised pensions, but also state bond investors would suffer major losses, the so-called haircuts. Bond investors would find themselves at the back of the line as unsecured creditors. Fears of rendering the municipal bond market unstable on the path to state bankruptcy has brought a new wrinkle to the financial crisis.

One architect was Newt Gingrich, an advocate for legislation to allow states to file for bankruptcy. The immediate consequence is allowing them to renege on pension and health benefit obligations. This maneuver seems part of the hidden trapping to the Obamacare. Tyler Durden speculated a couple months ago, „Obviously what this means for equity investors in assorted muni investments is that a complete wipeout is becoming a possibility, as in Meredith Whitney prediction. Everyone was quick to mock and ridicule, but it is about to come back with a vengeance.“ Up to $3 trillion in muni bonds have a high probability of being given the same treatment at General Motors. Investors would face severe losses. Proponents claim some states are so burdened that the only feasible way out may be bankruptcy and restructure.

DAVOS SUMMARY, DIRE WARNING VERSUS UNFOUNDED OPTIMISM. EXTREME PERSPECTIVES WERE PRESENTED AT THE CONFERENCE, BUT THE ROSY SCENARIO SEEMED TO PREVAIL. LEVERAGE AND RISK ARE STILL DEEPLY ENGRAINED IN THE SYSTEM. LOOSE MONETARY POLICY HAS GROWN AN ORDER OF MAGNITUDE WORSE. A DIVERGENCE FROM REALITY WAS THE DAVOS THEME, A WINTER RETREAT FOR THE BANKERS AND BRETHREN, THOSE RESPONSIBLE FOR THE GLOBAL MELTDOWN, THE HIGH PAID AND THE IDLE RICH. THE CONFERENCE WAS AN EXERCISE IN DENIAL, DELUSION, AND PRIVILEGE.

The World Economic Forum in Davos Switzerland offered a nice winter retreat for a couple thousand banker the world over, some utter criminals. That is not an exaggeration any longer. The special Davos magazine given at hotel check-in featured an article by Robert Rubin, former US Treasury Secretary in the Clinton Admin. It has been called the Davos Warning aptly. He is perhaps the among the top 5 greatest financial fraud criminal in modern US history, and architect of some of the most destructive restructure avoidance practices at the same time. He is an insider’s insider, an elite puppeteer in control of the USDept Treasury still. The people who are operating behind a president, do so under instructions by Rubin. The connections are numerous to Rubin, like the director of the Office of Mgmt & Budget, the former OMB director, the head of the National Economic Council, the former NEC head, the former chief of the White House Council of Economic Advisors, and more. Rubin is formerly a Goldman Sachs superstar and head of their London gold office. He is co-Chairman of the Council on Foreign Relations.

The essay from Rubin in the Davos magazine reads like a desperately written piece of advice tossed from the lifeboat after he left the ship. His Keynesian badge of failure showed, as he called for more USGovt spending. He hopes the outlays can be reversed in two or three years, after the USEconomy resumes proper course of growth. He is dreaming, and his readers probably recognize the Hail Mary pass before the buzzer. Growth is non-existent. He cannot recognize the failure of the Keynesian applications, US style, nor the delays in debt restructure he so steadfastly insists upon. The second part of the article offers a significant account of the systemic failure in the United States, in short what went wrong. Rubin wrote the following, excerpted and assembled. He must recognize that his policy of kicking the can down the road has run out of time, as the can went nuclear. He clearly no longer believes the can be kicked further, since too big and too toxic. Rubin has delivered a dire warning. The United States is in extremely deep financial and economic trouble, where the crisis will explode sooner or later, with or without action taken. That is his message.

SHRINKING (OR VANISHING) BUSINESS PROFIT MARGINS ARE THE STORY FOR THE SPRING & SUMMER. WHIRLPOOL ANNOUNCED THEIR PROFITS PLUNGED, DUE TO A 100% RISE IN INPUT COSTS. THE SQUEEZE IS ON, AND POWERFULLY SO. THEIR STORY WILL BE REPEATED BY COUNTLESS COMPANIES, EVEN IN EUROPE.

The price inflation scourge has finally hit the news headlines, billboards, main stages, and stock market, but not yet the CPI. The first recognized sign was higher food prices, which will be made worse at least in the SouthWest United States after a damaging freeze. The threat of profit margin collapse is here at last, with recognition spreading across the stock market in the form of individual company quarterly statements. The Jackass has been warning for two months of the big profit squeeze. In parallel, households will feel the squeeze in the form of shrinking discretionary spending funds after the higher costs for food & fuel are factored in. Major publications like the Wall Street Journal are focusing on precisely what the Jackass said they would, higher revenues (topline growth), cited as benefits from price inflation. The WSJ has begun to discuss the encroaching problem. They wrote, „But beneath the surface lurks a fresh worry: For many companies, the cost of raw materials is rising at a faster pace than revenue. Blame it on soaring prices of everything from cotton to copper and corn. That has squeezed profit margins more markedly than many analysts anticipated, and is serving as a worrying sign for future earnings.“ Exactly and finally acknowledgment, my realized forecast. Next on the earnings parade is a vanishing act and earnings plunge. Look for 2011 S&P 500 earnings per share (EPS) will come much lower than prevailing consensus. Companies like Proctor & Gamble, Ford Motors, and Kraft Foods have openly mentioned the cost rise effect. The Hat Trick Letter featured Whirlpool along the same theme. Adam Parker, the chief equity strategist at Morgan Stanley, has warned of potential disappointment on the earnings front if the cost factor bites harder into profit margins.

Gross believes the debt limit debate could spark a bond market crisis. The battle over raising the borrowing limit threatens to throw the debt market into a tailspin. The efforts to reduce spending have failed, all expedient response to the ongoing chronic powerful economic recession. The spending commission was a farcical exercise, its report ignored immediately, its findings mere empty platitudes. A political battle has raged over the debt limit. Gross said, „It is the wrong way to do it. Obviously, I am all for a move to a balanced budget over time. But this is like imposing the death penalty for shoplifting. The signal it gives to countries that hold Treasurys is that their assets are hostage to a rogue Congress. That is the message it sends. It is unacceptable. The Treasury market will sell off as this gets more press and with more invective. Investors like us, we sell now.“ Battle lines are drawn, and battle cry arguments are laid out. Republicans claim that bond investors will set off a Greek-style financial crisis in the United States if the national debt grows without bound. They demand deep spending cuts. The Obama Admin claims that if the debt ceiling is not raised in time, bond investors will flee USTreasurys and create a larger meltdown than the last one. The opinion of Gross matters, since global creditors must think in simile terms. The change in power over the House of  Representatives came with a pledge to cut federal spending and the national debt. They are helpless to bail water out of a sinking ship of state. Some past history could serve as prologue. Another standoff occurred in 1995 between the Clinton Admin and Republicans in the USCongress. The federal government shut down for 26 days over a three month period since the two sides failed to pass a budget. That caused nervous investors to dump USTreasurys, lifting the yield on the 10-year USTreasurys from 5.52% to 6.46% quickly.

Gross has taken action, based on his soured view, and has sold USTreasurys within the PIMCO fund. Notice the dramatic shift in strategy with reduced USGovt debt holdings. His success with mortgage backed securities was impressive, the obvious beneficiary of insider information on USGovt purchases of MBS bonds using the USFed actions. His next act seems to be large scale selling of USTreasurys into the bubble, at high prices. The January update reveals the huge change in USTreasurys, down from 22% in December to 12% in January in percentage of assets, a steep $24 billion drop (shown as rose oval). PIMCO is essentially selling into the QE2 with the USFed as buyer. Cash levels have surged in the process, from a 7% short position to a 5% positive position. The one blemish on the Total Return Fund is the current heavy load of municipal bonds. It held $238.5 billion in January, down only $17.4 billion since October. Its USTBond type holdings are a shadow of thein former volume, while mortgage bonds have begun to turn down. The left side scale applies to the individual asset holdings.

A PROMINENT CHINESE ECONOMIST ADVISES THE COUNTRY TO SELL ITS $500 BILLION IN G.S.E. HOLDINGS BEFORE QE2 COMES TO AN END. WATCH FOR A POSSIBLE IMPORTANT BOND RUN COULD BEGIN SOON, WHOSE FIRES MUST BE CONTAINED UNDER THE USGOVT ROOF. CONCURRENTLY, RUMORS SWIRL THAT THE CHINESE S.A.F.E. FUND SUFFERED HALF A $TRILLION IN LOSSES FROM FANNIE MAE BONDS.

CHINA OPENLY CALLED FOR PLANS TO EXPAND ITS GOLD & SILVER RESERVES. IT HAPPENS THAT CHINESE SOVEREIGN WEALTH FUNDS ARE SIZEABLE INVESTORS IN THE G.L.D. FUND. THE TRADE WAR HAS MADE A TURN TOWARD HOSTILE, WITH SABER RATTLING DIRECTED AT THE MOST VULNERABLE POINT OF THE USDOLLAR REGIME, ITS PAPER BASIS AND ABSENT FOUNDATION OF GOLD.

Bloomberg has reported that China central bank adviser Xia Bin urged the country to increase its gold and silver reserves, according to the Economic Information Daily. In an interview, Xia urged China to steadily increase its holdings of gold, silver, and other precious metals. He said, „Holdings of gold and silver can help establish the Yuan as an international currency by increasing China’s final payment capacity.“ Last month, he gave a similar message, urging diversification of their massive $2.85 trillion foreign exchange reserves away from US$-based bonds, and an increase in gold reserves as a long-term strategy in order to achieve global standing for the Yuan. They wish to establish the Yuan as a currency used for payment and settlement in international trade. China claims Gold holdings at 1054 tonnes, only 1.6% of total reserves, a tiny amount compared to most other nations. With tight supply and raging demand, and central banks having become net buyers, any new marginal demand in Beijing coming from diversification out of their USDollar holdings and into Gold would make a noticeable impact, leading to higher gold prices. The reference to silver by Xia was important. It marks the first time that a central bank advisor or official has spoken about diversifying currency reserves into Silver. The unique white metal, Silver is gaining acceptance as a monetary metal, not just a industrial

commodity. In fact, the Chinese formerly used silver as currency for most of their history, like most of the world including ancient Greece. Investment demand for silver has been prevalent in recent years. The cental banks are awakening to the monetary role of silver. By the way, my sources tell that the Chinese Govt has 5x to 10x as much Gold in reserves as they reveal, sort of a national strategy secret.

THE CHINESE ARE BUYING G.L.D. SHARES IN ORDER TO DEMAND THE GOLD BULLION UPON QUICK REDEMPTION, ACCORDING TO THE LONDON DEEP THROAT. THEY ARE BYPASSING THE EXCHANGES, A MANEUVER THAT WILL DIRECTLY WAGE WAR WITH THE GOLD CARTEL. NEXT THEY JUST LET IT BE KNOWN THAT THEY WILL DRAIN THE S.L.V. FUND OF ITS SILVER. THE CHINESE HAVE INTENSIFIED THE CONFLICT. ONE MUST WONDER IF H.S.B.C. IS OPENING THE DOOR FROM HONG KONG TO CHINA FOR GOLD BULLION ACCESS.

Another hat tip to King World News, an intrepid channel for high quality news developments. The same Deep Throat gold broker contact out of London updated King World News on the extremely large scale Asian buying. They have been accumulating both Gold & Silver. Through the London source, Eric King has learned the following. The Chinese, are buying staggering amounts of physical gold. The news has just gone into the mainstream media. The Financial Times was months behind King World News in reporting this information. The Asians, particularly the Chinese, want physical gold and they want it tomorrow. So the Chinese have a new method. They are now planning to buy tremendous amounts of the Exchange Traded Fund GLD. They will then tender the GLD shares for immediate delivery of the gold. This bypasses all of the rules like at the COMEX that limit delivery. King believes there is no limit as to how much they can buy from the ETF GLD. There is no metal. Asia has opened the market to the retail public, met by massive fresh new orders to buy both gold and silver. Pressure will come to the only source available to meet COMEX demand, as the GLD inventory will be drained. By the way, these sovereign sources through their buyers can also purchase shares in SLV and stand for delivery. It is possible you may see that in the future (which was just confirmed).

Notice the usage of the term sovereign sources, which means the ultimate purchaser source might actually be the SAFE or other Chinese sovereign wealth funds. Couple the new GLD strategy to obtain gold with the Dollar Swap Window in Europe, useful for converting discounted PIGS sovereign debt into Gold bullion with the assistance of the IMF. The Chinese are broadening their assaults of the Western gold fortresses.