Tag: banks

Explaining the gold crash

I think it is important to always take the various conspiracy theories of the gold bugs with a grain of salt.  That being said, the massive 7-sigma crash in gold prices was obviously not the result of normal supply and demand, and given the lengths that the central banks have gone to prop up the banks over the last five years, the idea that they might crash one little market  to protect the massive short interest of a few key banks barely even registers as a conspiracy theory proper.

There’s been a recent huge draw down of physical gold
at the New York COMEX and at the JP Morgan Chase depository. Look at
the physical market draw down on the charts below. It has taken a
drastic plunge…. If the inventory runs out and one cannot meet deliveries then it has to be bought on the open market. Not only that but it could cause a run up in prices that would hurt the shorts in the market.

So what to do?

The only way out of this dilemma for the market controllers would be to devise a plan that would collapse the market and trip up all the stops at the correction lows in gold of 1525 thereby setting off the stop loss orders under this important market low.  And what if the plan included a way to stop the physical market from purchasing gold under 1525 while that correction was underway? That would be brilliant.

And how can that happen?

They have to hatch a plan and carefully orchestrate it in a series of events that takes the gold market by completely by surprise and force players out of their long positions.

Read on for today’s lesson in market manipulation and allow me to relay my speculation about what transpired last week.

A successful ambush usually involves surprise. And the surprise requires a carefully orchestrated setup. So now let’s get a look at how the crash was prepared.

The FOMC minutes from the last meeting were due for release during last week. But a funny thing happened. They got released EARLIER than expected. It was all a big mistake and the FED let the SEC and the CFTC know right away that the error had occurred. And lo and behold, despite the FED’s transparency and newly crafted reputation for delivering timely and accurate reports, there happened to be some language we didn’t get updated on until the FOMC minutes were released. The notes say that several members have been discussing cutting back on the stimulus. That was strike one. It got the gold market thinking that stimulus cuts might be coming.

Strike one called by the umpire.

Surprise number two appears.

A bombshell was released from news sources. It was reported that Cyprus would have to sell 400 million Euro’s of gold as part of the bailout package of raising money for their failed banking system. Gold prices came down to 1550 on the news and the day passed by. Even though Cyprus bankers tell us the next day that they didn’t discuss selling any gold, market jitters remained with Friday just around the corner.

This was strike two.

Now we need a strike three and you’re out.

Gold is a nervous market to begin with as a lot of people have already lost a lot of money in the last six months. With Gold at 1550, all that is needed for the market to drop is to get one more push where all the stops are.  This price level was just below the 2 year low of 1525.

With the setup in place the final pitch was ready to be delivered.

The interesting thing is that the bankers knew it was going to happen.  They were all informed.  How can I say that?  Because I was told as much by one of them two weeks ago. But neither he nor I realized the full extent of it.  I just assumed he was talking about a technical drop down to support around $1500, not a crash of this magnitude.

Either way, it represents an obvious buying opportunity for those more interested in long-term stores of value rather than short-term investments, assuming that the link between paper prices and physical prices haven’t been severed.  So, be sure to say, “thank you, Ben,” when you take advantage of the Bernanke discount to place your next order.

Still too big to jail

The banks are still above the law:

Money laundering by large international banks has reached epidemic proportions, and U.S. authorities are supposedly looking into Citigroup Inc. (C) and JPMorgan Chase & Co. Governor Jerome Powell, on behalf of the Board of Governors of the Federal Reserve System, recently testified to Congress on the issue, and he sounded serious. But international criminals and terrorists needn’t worry. This is window dressing: Complicit bankers have nothing to fear from the U.S. justice system.

To be on the safe side, though, miscreants should be sure to use a really large global bank for all their money-laundering needs.

There may be fines, but the largest financial companies are unlikely to face criminal actions or meaningful sanctions. The Department of Justice has decided that these banks are too big to prosecute to the full extent of the law, though why this also gets employees and executives off the hook remains a mystery. And the Federal Reserve refuses to rescind bank licenses, undermining the credibility, legitimacy and stability of the financial system.

Considering that the banks can get away with laundering drug money and committing large scale mortgage and deed fraud with impunity, what makes you think they won’t get away with taking as much of their depositors’petty creditors’ money as they decide they need?

They’re going to need a bigger bank

Glenn Reynolds observes that the Federal Reserve is worried about the growing lack of confidence in the banking system. But they don’t seem to have identified the primary threat, which is the one they have created themselves through their own actions.

IN RESPONSE TO ELIZABETH’S POST ON CYBERWAR THIS MORNING, I should note that when I was down speaking at the Atlanta Fed, they told me that cyberwar is one of their biggest worries — not so much something that would bring the banking system down as something that would render it untrustworthy, which in some sense is worse, or at least harder to fix.

The problem is that the Fed’s fractional reserve banking system is, quite literally, a confidence game.  And cyberwar isn’t the real issue, the real issue is that events such as MF Global, the refusal to arrest and convict John Corzine, the deposit heist in Cyprus, and the fact that people are finally beginning to realize that the money they have deposited in the banks is not legally theirs have already undermined the necessary confidence to a considerable degree.

Quite simply, the money isn’t there, it has never been there, but now everyone knows it, not just the sort of freaks and geeks who read dry, dusty tomes like The Theory of Money and Credit for pleasure and make a habit of perusing the latest H.1 report.

The fractional reserve system worked beautifully as long as depositors believed that while one bank or another might fail, their money would remain safely within the system and be accessible to them. But the advent of the “too big to fail” banks necessarily destroyed that confidence because the four largest banks in the system, JP Morgan Chase, Bank of America, Citi, and Wells Fargo now account for 43 percent of all of the deposits in the system.  If they were permitted to fail – and all four appear to be insolvent due to the worthless assets they are still keeping at ludicrously inflated values on their balance sheets – their creditors and shareholders would be severely affected. And that won’t be permitted by Congress because their creditors and shareholders happen to be the wealthiest and most Congressionally influential people in the nation.

We learned from TARP that the taxpayers would be levied before the creditors and shareholders would be permitted to suffer losses. The Cyprus actions have now made it clear that depositors will be robbed if necessary too. And that is why it is impossible for Americans to have confidence any longer in their banking system.  The Fed will almost surely respond to this lack of confidence in the customary manner: by instituting domestic capital controls and cracking down even more severely on the use of currency that is nominally legal tender. But these actions will only serve to confirm people’s doubts and hasten the inevitable system failure.

I wrote back in 2008 that Congress had to let the banks fail if they wanted to save the system.  They unwisely didn’t.  They did manage to buy a little time instead, but that time is now running out.  Sooner or later, financial gravity always prevails.

This should go over well

More news out of Cyprus:

With banks confiscating up to 80 percent of uninsured
deposits over 100,000 euros ($130,000) and the country facing a deep
economic crisis, Cyprus has forgiven loans to politicians and companies
while others are generally being required to pay in full, media reports
said, setting off fury on the island country. The Greek newspaper Ethnos and the website 24h.com.cy said that
loans to Members of Parliament from the three major political parties
and other officials in the public administration from the Bank of Cyprus
and Cyprus Popular Bank (Laiki) will be written down or off.

Not a bad deal.  The correct conclusion by the average Cypriot, I would imagine, is that there is no reason they should not insist on all of their debts being written off as well.

UPDATE: Forget Spain and Italy. CANADA could be next:

As part of the 2013 budget in Canada, the Minister of Finance tabled the Economic Action Plan 2013 which included the newest buzzword ‘bail-in’.

Source: budget.gc.ca/…/… Page 145
“The Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.”

This is why you won’t have time

A lot of people are assuming that they’ll have sufficient warning of the next stage in the banking crisis to act to protect their savings, their pension funds, and their investments.  But the recent events suggest you won’t, because as the following chart from Zerohedge makes clear, those who are managing the crises are very good at keeping things under wraps until they’ve gotten their own money out of danger, which requires making sure that everyone else is still doing business as usual.  After all, the markets cannot be exited without the greater fools to be left holding the bag.

In looking at this chart of depositor outflows, remember that the news of the imminent banking collapse and subsequent deposit heists were a complete shock to most people earlier this month.  But not, quite clearly, everyone.

The suggestions were right out in public a month before. “There have also been suggestions that private depositors with investments of more than 100,000 euros should be obliged to endure a “haircut”.” –   BBC, Feb 15, 2013

But they won’t be sufficient to inspire most people to action, given that the suggestions will be viewed as nothing more than remote possibilities until they actually happen.

Inflation vs Deflation IX

Nate posts his first post-Cyprus response:

It is with no small amount of sadness that I must now face the fact that I am not going to get out of this debate without having to explain mal-investment.  It appears in order to counter Vox’s deflation via credit reduction claim… it is absolutely necessary.

Ok so M1… TSM2… Z1…  what is it?

As I stated before…  you’ve already answered that question for yourself.  Vox can write poetic and convincing lines about the esoteric nature of credit money… and he can explain how the paper just represents a claim on this or that…  and none of it will change the fact that when you hear about what’s going on in Cyprus… you have a primal urge to run to the bank and get all of your cash out.  You want the cash.

That’s because the cash you want is money.  For now.

The debit card is very convenient.  No question.  But by now you are probably looking at it with much more cynical eye than you were a month or so ago.  Good.

Read the rest of it there.

Cyprus: curiouser and curiouser

First, one of the EU’s finance ministers suggested that the bank raids are not going to end with Cyprus.

Savers in the eurozone could see their bank accounts raided in the struggle to shore up the single currency, a senior EU official warned last night. The Cyprus rescue package – under which bank customers will have a chunk of their cash seized to bail out troubled lenders – could become a template for dealing with other creaking banking systems, Jeroen Dijsselbloem suggested. The remarks from the head of the eurozone’s finance ministers contradicted days of assurances that the Cyprus bank deposit raid was a ‘one off’.

Second, it appears that the news of the big 40% cash grab from uninsured depositors, (those with over EUR 100k in the bank), may be more than a little misleading, which may account for the strange silence from Russia over the last few days.  Zerohedge notes a Reuters report and postulates that the hot money which is supposedly the focus of the heist may already be well off the island.

As it turns out, these same oligrachs may have used the one week hiatus period of total chaos in the banking system to transfer the bulk of the cash they had deposited with one of the two main Cypriot banks, in the process making the whole punitive point of collapsing the Cyprus financial system entirely moot.

From Reuters: “While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.”

No one knows exactly how much money has left Cyprus’ banks, or where it has gone. The two banks at the centre of the crisis – Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus – have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia’s Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks’ largest depositors.

So while one could not withdraw from Bank of Cyprus or Laiki, one could withdraw without limitations from subsidiary and OpCo banks, and other affiliates?

In other words, the idea that the situation has somehow been successfully resolved is not only ludicrous from a structural perspective- at most it would amount to one more round of successful can-kicking – but may not even be the case with regards to postponing the inevitable crisis and crackup.

Cyprus: bank heist round 2

This time, sans the Cypriot parliament as EU plays its usual card of asserting “if you jokers can’t vote the way we tell you, we’ll just declare that voting is unnecessary“:

So having learned that Parliament would not approve a deposit levy in the name of a “tax”, and that the government was deeply opposed to forcing citizens and other depositors in its banks to bear losses without the bondholders being wiped out first as one would expect in the capital structure, Germany, the ECB and rest of the EuroThieves did something innovative.

They simply ignored Parliament and came up with a scheme that didn’t require a vote. We’ll see how this works out for them.

This, incidentally, is exactly what happened here with GM.  It was blatantly unlawful to protect the UAW’s pension fund, which had no senior standing while trashing senior bondholders.  The government did not care and did it anyway — and the courts permitted it.

This has been the repeated means by which you are stolen from.  When you enter into an investment, whether you make a deposit in a bank or buy a bond or something else, you are buying into a capital structure in a given place with a given and declared level of both risk and potential reward.  You price that risk and your willingness to enter into the transaction with the full understanding of where you are in that capital structure.

When that is unilaterally changed retroactively you are being stolen from. 

Period.

One can’t help but notice this is an even worse deal for the Russians than the one that had them announcing their new permanent Mediterranean fleet, and it doesn’t have the support of either the Cypriot people or their parliament. I wouldn’t get too excited and start going long the euro; contra the financial spin this situation is far from resolved.

The Euro has failed

So much for the idea that the EU and its euro would lead to more economic freedom rather than less.  Time finally ran out on what was always a vast con. Cyprus passes a law installing capital controls, thus prohibiting money transfers out of the country:

While it is unknown if the Cypriot parliament will agree to, and enact into law, the Troika-demanded deposit haircuts, after the shocking vote of mutiny against Merkel earlier this week that saw not one politician vote for the Europe suggested deposit tax levy (and even the ruling party abstained), a vote which will once more take place tomorrow, moments ago Cyprus became the first Eurozone country to officially implement governmental capital controls into legislation. At this point it had no choice: whatever happens with the deposit haircut, or with everything else, it is now inevitable that the local Cypriots will do all they can to pull as much money from domestic banking system as possible following the complete loss of faith and trust in banks, which is why the government had no choice but to intervene with its own “controls.” Sadly, this marks a milestone in the development of the Eurozone – it’s all downhill, and accelerating, from here.

Nor is the banking debacle limited to Cyprus any longer, as Spain has announced its intention to steal from Spanish depositors:  “the Spanish Minister of Finance & Public Administration announced this week a tax or bank levy (probably 0.2%) to be imposed on bank deposits, without details on which deposits will be affected or timing.”

It is time for the disastrous Euro experiment to end.  Now.  Bring back the Deutsche Mark.  Bring back the Franc.  Bring back the Lira.  The Euro has failed.

UPDATE: The news out of Cyprus just keeps getting better.

“According to the rapidly shifting plan, depositors with
the biggest local bank, Bank of Cyprus, may see losses up to 25%…. Cyprus’ second largest bank, Cyprus Popular Bank, aka Laiki bank, where it appears the bulk of Russian cash is stored, will fare far, far worse with
deposit haircuts up to a stunning 70% on the table, and that is after
capital controls ease enough to allow for the deposit withdrawals!”

The EU pulls out the gun

Steal or die are the current orders from Brussels:

Our foreign correspondent Richard Spencer is in Nicosia. He, along with Bruno Waterfield, Tom Parfitt and Alex Spillius, explain the implications of the ECB’s liquidity cut off. They write: The European Central Bank will switch off the cash life support taps for banks in Cyprus wiping out £1.7 billion in British savings after next Monday unless the island signs off on a radical debt-cutting programme with the eurozone and International Monetary Fund.

Unless a deal is in place the euro’s central bank will withdraw “emergency liquidity assistance” leading to the immediate collapse of the two largest Cypriot banks and a financial crash in Cyprus. Cypriot banks are totally reliant on the ECB for funding and have taken over €9.1 billion in an emergency programme to ensure cash does not run out.

However, the Cypriot Parliament, courtesy of their Russian-instilled spines, is insisting that it will not approve any “deposit haircut”.  Next week could be interesting.

On a tangentially related note, those of you waiting for the next entry in the Inflation/Deflation debate need to relax and be patient.  In addition to all the excitement of the Cypriot affair, I’ve been finishing up the new Selenoth ebook that will be published soon, (next week if all goes smoothly), as well as addressing an amount of game-related business.  While the debate is important, it has not been a priority this week.