Posted: Dec 07 2008 By: Jim Sinclair Post Edited: December 7, 2008 at 3:31 pm
Filed under: General Editorial
Dear Friends,
Let’s put on our practical thinking hats. I am inviting opinions from both our academic reader as well as those that believe answers are more accurate when derived by the “follow the money” concept.
The Fed says and statistics support that the majority of the $8.5 trillion in funds injected into the economy in many ways was to protect the US financial community. This has given comfort to the establishment intellectuals that there is no inflationary implication as a result of this massage and unprecedented liquidity injections.
Follow the money approach
The US Federal Reserve made $8.5 trillion available to Wall Street and other entities with OTC derivatives in their inventory. These “assets” have the potential for causing bankruptcy.
It is claimed that the majority of these funds will not have an inflationary impact because of the huge amount of T bills, bonds and note sales that will offset the inherent liquidity injections.
The main buyer of the Treasury instrument issued was China.
China sold US Agencies and as a courtesy bought US treasuries, claiming no negative impact on US financial plans.
The inviting question is who got sterilized? Sterilization impacts the entity that buys the T-bills.
The conclusion then is that it is China, not the USA that received the sterilization process tool. The Chinese, being no fools, offset this process by selling US Agency instruments.
It follows that the USA got the liquidity but not the sterilization, leaving all those funds locked and loaded to fulfill Dr. Milton Friedman’s accurate statement that inflation is monetary, not demand-pull or cost- push motivated.
The Fed figures say sterilized, but it is totally false when the “follow the money process” is utilized to understand the action.
China however did remain relatively dollar neutral as the product of selling agencies to buy T-bills.
Therefore the final answer is that $8.5 trillion that is unspecialized has been injected into the US monetary system.
Where is the Beef?
When the Fed buys OTC derivatives say from AIG, Fanny and Freddie and guarantees them against loss or keeps them on their balance sheet, the Fed becomes the principal counterparty as the loser to each OTC held or guaranteed.
It is reasonable then to assume that a non-performing OTC derivative instrument becomes a performing asset as long as it is held or guaranteed by the US Federal Reserve. The Fed would need to be responsible for the obligations of the losing counterparty to the special performance obligation.
If these defunct instruments are now functional it is reasonable to assume that bailout entities were losers in the specific performance contracts known as OTC derivatives. There has to be one or a daisy chain of winners out there of $8.5 trillion, either paid out or held as a full value position
Who are they?
Now let’s look at the assumption that the $8.5 trillion is not a factor because the intellectuals state that all it does is fill a black hole of losses.
You own a junior gold that has been under attack by naked and pool short sellers. Mr. Oliver has done the work of god to make cold calls to major stockholders (discovered in required filings) informing them of his opinion that the entity is overpriced at zero.
I now come to your house informing you that I feel sorry for you and hold the naked and pool short seller in contempt, therefore here is a check for the difference between your cost and the present market value.
Does that fill a black hole of losses or put you back in business? It puts you back in business with your wealth factor reestablished.
What intervention factor will start the flow of the absolutely unsterilized $8.5 trillion dollars of liquidly into the business section?
The answer is significant FISCAL STIMULATION through Quantitative Easing (aka wild-ass money printing) will trigger the dollar’s death by inflation of the currency unit. When road, schools, special education, music, athletic, teacher’s salaries, the no child left back, road building and local infrastructure building providers are granted Federal contracts with Federal guarantees of borrowing, they go to the bank. What bank against a Federal fiscal stimulus contract or guarantee will fail to lend up to 90% of the required funds?
That will open the barn door of liquidity.
This is followed by inflation then hyperinflation (a currency event not an economic event) in the midst of a recession so deep it threatens to be the second Great Depression.
The dollar declines below .72 and gold moves above $1024 on its way to $1650. What would make Alf Field’s technical projection of the price of gold at $3000, $5000 or even $10,000 correct?
The answer to that question is also easy: $8.5 trillion in government bailouts and direct cash injections as fiscal stimulus while quantitative easing throws money in the street for people to pick up (Bernanke and the famous Electronic Helicopter Money Drop Defalcation fighting speech will do the trick).
Obama will be cheered as saving the US economy for at least one year while the equity markets gets its 1930 rally for a year.
Keep in mind that the grease of the wheels of the equity market has been and always will be LIQUIDITY for a short to medium term rally.
Weekend Events
Republic Windows and Door Corporation got a surprise on Friday when it furloughed all its workers as a result of Bank of America calling their cash flow, plant and equipment based loan.
This morning and all weekend the employees are marching around the facility demanding their severance pay and reimbursement for vacation days earned after only a 3-day notice.
The Federal Warrant Act demands employees get 60 day notices or get paid for 60 days pay when furloughed.
The workers are after Bank of America and the assets of the firm to meet their legal demand.
As a side note the company does not have the funds for severance payment or its contribution to employee’s health insurance.
Most employees’ health insurance was up for renewal now.
The Bank of America was asked to extend the company loans for severance and health insurance. Their reply was “you have to be kidding.”
Christmas Shoppers Publicly Warned
The warning was given not to rob Christmas presents for their children in this difficult business condition.
To assume that present day workers will quietly go to soup kitchens or live as hobos is madness.
Soon stealing a loaf of bread for your family will be a capital crime.
Respectfully yours,
Jim
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