The next 10 years will be very unlike the last 10 years

Came across this creative youtube clip the other day and I thought I would share it with you.

Don't agree with all of it, but there are some interesting points made which I do agree with.

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Capital Account: William K. Black on MF Global and Jon Corzine Culpability

Capital Account's Lauren Lyster interviews Bill Black over Jon Corzine & the MF Global scandal on the day Corzine, former CEO of the now bankrupt MF Global, testifies on Capitol Hill.

Corzine claims he is clueless about how and where the possible $1.2 billion dollars of his client's money is missing.

How has all of this happened three years after the financial crisis when Wall Street was supposed to be reined in? Capital Account explains the MF Global issue.

Capital Account also explores how the golden boys of Wall Street have their Goldman tentacles spread over the MF Global case and that the head of the CFTC - MF Global's regulator - has recused himself from the MF Global probe because he worked with Jon Corzine at Goldman Sachs.

Capital Account interviews William K. Black, a former regulator who during the Savings and Loan crisis oversaw more than 10,000 criminal referrals, 1,000 felony convictions, and where hundreds of bankers went to prison.

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Are alarm bells sounding in the financial community about CIBC and Royal Bank?

Back in August, the website Zero Hedge sparked a debate about the soundness of Canadian banks.

The issues raised about Tangible Common Equity (TCE) were quickly dismissed by Canadian authorities, but the issue has been raised again with a slight twist.

In a post tonight, Zero Hedge strikes again zeroing in on something called Re-hypothecation which lies at the heart of the whole MF Global scandal.

In investment banking, assets deposited with a broker will be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital).

Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds.

In the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated.

By 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system.

Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation.

In its quarterly report, MF Global disclosed that by June 2011 it had repledged (re-hypothecated) $70 million, including securities received under resale agreements.

The off-balance sheet treatment means that the amount of leverage (gearing) and systemic risk created in the system by re-hypothecation is staggering.

Re-hypothecation transactions are off-balance sheet and are therefore unrestricted by balance sheet controls. Whereas on balance sheet transactions necessitate only appearing as an asset/liability on one bank’s balance sheet and not another, off-balance sheet transactions can, and frequently do, appear on multiple banks’ financial statements.

What this creates is chains of counterparty risk, where multiple re-hypothecation borrowers use the same collateral over and over again.

Essentially, it is a chain of debt obligations that is only as strong as its weakest link.

With collateral being re-hypothecated to a factor of four (according to IMF estimates), the actual capital backing banks re-hypothecation transactions may be as little as 25%. This churning of collateral means that re-hypothecation transactions have been creating enormous amounts of liquidity, much of which has no real asset backing.

So what does all this have to do with CIBC and Royal Bank?

With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.

Engaging in hyper-hypothecation have been

• Goldman Sachs ($28.17 billion re-hypothecated in 2011),
• Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets),
• Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging),
• Oppenheimer Holdings ($15.3 million),
• Credit Suisse (CHF 332 billion),
• Knight Capital Group ($1.17 billion),
• Interactive Brokers ($14.5 billion),
• Wells Fargo ($19.6 billion),
• JP Morgan($546.2 billion),
• and Morgan Stanley ($410 billion).

That's right, CIBC and Royal Bank have over $125 Billion of collateral backing up its derivatives book which is actually client collateral!!!

When the crunch came for MF Global, their clients collateral was seized and is now gone. It is being suggested that MF Global's bankruptcy has already set off a chain of events which not even all the world's central banks can halt.

Back in August, Canadian banks defended themselves against the concerns of TCE. And anyone looking through the balance sheet of Canadian banks could turn up no alert signals.

Was it because hundreds of billions of dollars worth of debt exposure was off the books?

Reuters is reporting on the MF Global Re-hypothecation scan here. It explains the whole issue very well. From the article:

A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.

After reading all this, do you feel safe with your money at CIBC or Royal Bank?

Look for lots of interest in Canada to be generated by this latest Zero Hedge post.

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Deflation Before Inflation? - Mike Maloney

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Ron Paul, unlike the average US Presidential politician, lays out exactly what he will do

Ron Paul's latest ad in his quest for the Republican Presidential nomination in 2012.

Is there any doubt why this man makes the establishment uncomfortable?

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Fri Post #2: Jon Stewart and the secret $7.7 Trillion bank bailout

Last night Jon Stewart explored the US Federal Reserve's secret $7.7 Trillion bailout of the banks that was revealled last week.

The US Federal Reserve basically provided free loans of $7.7 Trillion to wall street banks so that they could turn around and buy US Treasuries and made a profit on the interest difference - about $13 Billion (a profit which comes off the backs of the US taxpayers, of course).

This is how the Federal Reserve is helping banks make money in this massive liquidity squeeze.

Stewart's comedy piece is perhaps one of the most succinct analysis of what is wrong with the US Federal Reserve and how they are raping the American Taxpayer.

The clip cannot be embedded here so follow the link above or click here to watch it (clip link is via Canada's Comedy Network. Not sure if it is viewable outside of Canada. Canadians cannot watch clip on US's Comedy Central so you may have to source the clip if you are outside Canada).

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Fri Post #1: Vancouver Sun - 'We’ve been down this path before'

Frank Giustra is a Vancouver business executive with interests in the mining and filmmaking industries, and a noted philanthropist.

Yesterday, in the Vancouver Sun, he had an OpEd piece about the massive bailout in Europe this week.

That sentiments like his are now appearing in the mainstream media demonstrate the turning tide for public opinion on precious metals.

For your consideration...

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We’ve been down this path before

As civilizations mature, they tend to make the same mistakes. We are in the middle of one of those mistakes right now

The type of economic restructuring both America and Europe need is so difficult and painful that, even if the current political systems were functioning, it would still take many years and the kind of courage and sacrifice that does not seem to exist.

“What has been will be again, what has been done will be done again; there is nothing new under the sun.” Ecclesiastes 1:9

If, as an investor, you are looking at the U.S. and Europe, and are confused by the barrage of sombre news relating to economic issues — such as stubbornly high unemployment, collapsing housing prices, soaring government-debt levels, waning consumer confidence and a precarious banking system — I don’t blame you. As far as I can tell, so are the legions of experts, media and politicians, those we have traditionally trusted to explain such complex economic and financial matters to us. And why have all the herculean efforts to save us from these maladies failed so miserably, despite the fact that we seem to be drowning in remedies?

It seems as though America and Europe are going down for the count. As Canadians, we have a solid financial system and a stable government that functions as it was designed to do. And yes, we Canadians can take comfort that we are somewhat shielded from the profligate and irresponsible policies of our American and European friends, but given their sheer size and our inter-connectedness, we can’t completely escape the collateral damage when the stuff eventually hits the fan.

As the above Ecclesiastes quote (generally attributed to King Solomon) suggests, history is replete with examples of repetitive behaviour. Observing the behaviour of today’s policy-makers, I suspect this quote is as valid today as it was more than two millennia ago.

We are in an unholy mess and however loudly the sane few may plead, the chances it will get turned around without disaster striking are slim indeed. The type of restructuring both America and Europe need is so difficult and painful that, even if the current political systems were functioning, it would still take many years and the kind of courage and sacrifice that does not seem to exist. One of these days, some unforeseen event, akin to the child in Hans Christian Andersen’s The Emperor’s New Clothes declaring “But he isn’t wearing anything at all!” may serve as the tipping point that brings the entire financial system to its knees.

To get a proper understanding of the current situation, we should start by ignoring all the noise propagated by the experts, media and elected officials.

Our global financial system is based on the very simple and fragile concept of confidence. So you can’t really blame the policy-makers and politicians for not telling the public the “entire” truth; feeding us constant reassurances, peppered with a little mendacity. And to make things worse, it’s just human nature for us, the recipients of this information, to reject the idea that the worst can happen, hence our willingness to find reassurance in the misinformation we are fed. But folks, the worst CAN happen.

I doubt the citizens of Imperial Rome ever considered that their empire, which stretched from the Atlantic Ocean to the Caspian Sea, would eventually collapse on itself from the sheer weight of effort and resources needed to maintain it, or that 16th-century Spaniards ever thought their high standard of living, sustained by the plundered riches of the New World, would disintegrate once the supply of gold dwindled.

Or that the upper-class 19th-century Brits leading up to 1918 ever fathomed that the sun could cease to set on lands ruled by the British Empire. History has shown that when great nations mature and over-extend themselves, they revert to the paths of least resistance: borrow and/or print money. They all did it and they all failed; this time will be no different.

If Einstein’s definition of insanity — doing the same thing over and over again and expecting different results — holds true, we should move to have all of America’s and European policy-makers locked up in padded cells.

This hubris — holding on to time-worn ideas about what made a nation great in the first place, but ignoring the hard sacrifice that went with it — has prevailed throughout history and is as relevant today as it was for every great nation that came before America and the European Union.

Still, the “experts” continue to reassure us that America was built on a foundation of entrepreneurial spirit; we can get ourselves out of any mess. (At least the Europeans know better than to preach such fantasy.) I sense that some of those ideas don’t hold up as well as they once did, especially as the world outside of America has become highly competitive.

At some point in the evolution of a great nation must come a time when the simple math of mounting debt, lack of productivity and printed money plays havoc with ingrained beliefs. This is one of those times in history.

Therefore, as much as I would love to provide solutions to this mess-in-waiting, I would rather give some thoughts as to how to protect yourself.

Consider the following precaution as a condom for your portfolio or savings: protection against STDs (savings’ total destruction).

The bottom line is that the money needed to bail out Europe and to fund America’s spiralling debt and future unfunded obligations is in the tens of trillions. IT DOES NOT EXIST. It has to be created by printing money in massive quantities, and despite all the rhetoric you will hear against such policies, in the end it’s the path of least resistance. Printing money is an invisible tax on savings, much easier to initiate, than, say, raising taxes or cutting back on services and entitlements.

However, there is a lag on its negative effects, a perfect policy tool for elected officials who inevitably kick the can down the road to future governments. Policy-makers in most democracies live in a 24/7 campaign mode, which prevents them from making difficult, long-term and most certainly unpopular decisions. Simply said, we operate in a system not conducive to decisive action.

Witness last week’s dismal failure by the U.S. Congressional Super Committee to reach agreement after months of bitter negotiating on what was essentially a ridiculously minuscule reduction of the deficit over the next decade and you get the picture.

There will be a quantitative easing three (QE3) in the U.S. and the European Central Bank (ECB) will eventually follow suit in printing money in American-style amounts, despite Germany’s resistance to date.

If the world continues to print money, currencies will be debased against “tangible things” such as gold, farmland, exclusive real estate, rare art and collectibles, select equities to list a few. Therefore, having your savings invested in cash, bonds, money and markets, could mean a complete destruction of those savings by runaway monetary inflation.

Having said that, timing is an issue you must weigh carefully. There is a chance that another financial crisis such as we experienced in 2008 would cause the value of real assets to go down and, by definition, make cash holdings more valuable for a short period of time, until further “printing” reverses the trend once more.

I would recommend owning plenty of gold and, depending on your available resources, select real estate and collectible art, which works well for wealth preservation, and having an adequate pool of cash, which would only be used to acquire additional “real assets” in the event of another crisis.

It’s your wealth, your life savings; you are the only person who can protect it.

No one else really cares.

Wake up and smell your future.

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Thurs Post #2: Concern over Canadian bank exposure to overleveraged consumers

One refrain you have heard constantly during the inflating of our housing bubble in Canada is that 'Canada is different... Canadian banks did not lend money to those who couldn't pay it back.'

That, as this blog as insisted over and over again, is a crock.

Our banks permit liar loans - loans where a self-employed person can 'declare' their annual income to qualify for a mortgage.

Our banks offer cash back for mortgages (as much as 7%) which effectively means we have zero down mortgages. You can take out a mortgage, receive 7% back (which covers the 5% down payment) and this allows you to be PAID to buy a house.

And most significantly, CMHC is absorbing all lender risk.

Take away CMHC and there is no way twenty-something couples would qualify for a 5% down mortgage at the same rate as people with money.  Without access to this easy credit, the housing bubble would collapse.

As these measures have pushed up home values, Canadians have pigged out on an orgy of debt from HELOC's and credit cards fueled by the value of their houses.

Now, according to a report by Moody’s Investors Service, concerns are being raised about Canadian bank exposure to overleveraged consumers.

Observers are asking a question that would have been almost unthinkable a year ago: Would the big banks take a hit if the debt crisis spread here and consumer defaults spiked?

The biggest single asset on Canadian bank balance sheets is residential mortgages, more than 30% of which are insured by the Canada Mortgage and Housing Corp., essentially shifting the risk of default onto the shoulders of the government.

But banks also hold substantial uninsured assets such as credit card debt, and that leaves them vulnerable.

According to David Beattie, Moody’s analyst and author of the report, the Royal Bank of Canada is the most susceptible with 24% of its total managed assets made up of uninsured loans. Next is Bank of Nova Scotia at 21%, CIBC at 20%, Toronto-Dominion Bank and National Bank of Canada both at 18%, with Bank of Montreal the most protected at 14%.

“Canadian household debt as a share of personal disposable income stood at a record 150.8% at the end of June this year.” said Mr. Beattie. “We are concerned that, while taking advantage of low interest rates, consumers are also taking on debt the may not be able to service when rates inevitably go up.”

We haven't begun our downturn yet. And people have no idea how closely tied Canadian mortgage debt and consumer debt is.

As the Financial Post notes, the European debt crisis is already having a negative impact on the global economy.

The fear is that a significant rise in unemployment could leave many households unable to meet their obligations despite the record low interest rates.

Analysts are uncertain how Canadians would react in such a situation, whether they would stop paying their mortgages — as many Americans did when U.S. economy collapsed three years ago — or whether it would be credit card debt or auto loans that would take the hit.

Another area of uncertainty is the makeup of the banks’ consumer loan portfolios. There is limited detailed information on the various categories of loans, making it difficult to guage Canadian banks’ true exposure.

Certainly this blog suspects that if real estate turns in Canada, the resulting fallout will be catastrophic.

Perhaps that's when the ruling federal Conservative government in Canada moved heaven and earth to protect the real estate industry when the US market started going under in 2006.

We've had the zero down, forty year mortgage. The ability to raid the RRSP fund for down payments. The Home Reno Tax Credit. Emergency interest rates. First-time buyer’s closing cost credit. Regulations that permit liar loans. Regulations that permit zero-down payments with cash back from mortgage lenders. And CMHC increasing loan value on their books from just over $100 million to well over $700 million while assuming all lender risk.

Cheap credit, artificially supressed interest rates and government policy have attempted to fuel and protect the real estate boom in the hopes the Great Global Recession would pass before the impacts him home in the Land of the Maple Leaf.

In short our government gambled... much like the Trudeau government gambled on oil in the 1970s.

If it blows up... it is going to be really, really ugly.

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A great video presentation by Chris Martenson

In this video Chris Martenson, economic analyst at http://chrismartenson.com and author of 'The Crash Course', explains why he thinks that the coming 20 years are going to look completely unlike the last 20 years. In his presentation he focuses on the so-called three "Es": Economy, Energy and Environment. He argues that at this point in time it is no longer possible to view either one of those topics separately from one another.

Since all our money is loaned onto existence, our economy has to grow exponentially. Martenson proves this point empirically by showing a 99.9% fit of the actual growth curve of the last 40 years to an exponential curve. If we wanted to continue on this path, our debt load would have to double again over the next 10 years. By continually increasing our debt relative to GDP we are making the assumption that our future will always be wealthier than our past. He believes that this assumption is flawed and that the debt loads are already unmanageable.

Martenson explains how exponential growth works and why it is so scary that our economy is based on it. In an example he illustrates how unimaginably fast things speed up towards the end of an exponential curve. He shows that an exponential chart can be found in every one of the three "E's" for instance in GDP growth, oil production, water use or species extinction. Due to the natural limitations on resources, Martenson comes to the conclusion that we are facing a serious energy crisis.

This energy predicament is namely that the quantity of oil as well as the quality of oil are in decline. He shows that oil discoveries peaked in 1964 and oil production peaked 40 years later. Martenson also shows how our return on invested energy is rapidly declining -- the "cheap and easy" oil fields have already been exploited. In 1930 the energy return for oil was 100:1 or greater. Today it is already down to 3:1 and newer technologies such as corn-based ethanol only provide a 1.5:1 return. Martenson predicts that the time in between oil shocks will get shorter and shorter and that oil prices will go much higher.

Not only oil but also other natural resources are being rapidly used up as well. At the current projected pace of use, known reserves for many metals and minerals will be gone within the next 10 to 20 years. The energy needed to get these non-renewable resources out of the ground is growing exponentially. So we live in a world that must grow, but can't grow and is subject to depletion. The conclusion out of all this is that our money system is poorly designed and that we need to rethink how we do things as quickly as possible.

After finishing his presentation Chris Martenson answers questions regarding a rise in efficiency, alternative technologies and oil prices. He also responds to questions regarding electricity, shale gas, gold, silver, platinum, palladium, and uranium and the race for global resources.

This video was recorded on November 16 at the Gold & Silver Meeting 2011 in Madrid.

Martenson talks about Gold and Silver in the Q&A just after the 1:01 mark.

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Wed Post #2: Inevitable - Part Deux

Back on March 8, 2010 we posted that the swirling economic ill winds continue to blow strong in Europe and we ignore what is going there at our own peril.

We wrote that there was an inevitable shift occurring in the great economic crisis of 2008 - 2010 (now 2011).

The first wave caused individual people and companies to face bankruptcy. The looming second wave now threatens entire governments.

Sovereign Debt is the key issue of this decade.

And unlike the Russian financial crisis of 1998, in which Russia was allowed to default on their debt, or the Argentine economic crisis of 1999-2002, when Argentina declared default in 2002, the main players in the European Debt Crisis - the PIIGS nations - will not be allowed to default.

The reason that European Sovereign Debt cannot be allowed to fail and default is because the five largest US banks hold trillions of dollars of credit default swap Over The Counter (OTC) derivatives guaranteeing that garbage debt against failure.

If European Debt is allowed to fail, the Western financial world implodes.

Ergo... Sovereign Debt cannot be allowed to fail.

That is why this blog has been such a staunch proponent of precious metals. The only way to stop the implosion of the Western financial world is to engage in Quantative Easing to infinity.

Today is seems we can now clearly see the inevitable starting to play out.

Early this morning Forbes wondered aloud if a big European bank come close to failing last night?

European banks, especially French banks, rely heavily on funding in the wholesale money markets. Did a major bank have difficulty funding its immediate liquidity needs?

The question was asked because last night The US Federal Reserve, the Bank of England, European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada moved in a coordinated action to provide liquidity to the global financial system.

Peter Schiff summarized what these actions mean:

Today’s unprecedented announcement by the world’s most powerful central banks was a loud and clear bell ringing to buy precious metals. The move, disguised as an attempt to help the fragile state of the global economy, is in reality a move to prop up failing banks in Europe and the US.

By reducing interest rates paid for dollar swaps, central bankers are in effect increasing the quantity of global dollars in circulation.

This is the pure definition of inflation: increasing the money supply. And today it was increased profoundly.

Schiff contends this may be one of the most important economic events of the year.

As Goldman Sachs made all too clear today, this is merely the beginning as more and more inflationary actions have to be undertaken by central banks to save banks from being crushed by untenable debt loads.

Whether they succeed in overturning the deflationary tsunami is unknown. What is certain is that they will bring fiat currencies to the verge of viability (and beyond) in trying.

Q.E. to infinity has begun.

Sovereign Debt cannot be allowed to fail as the US dollar will weaken, inflation will rise, and Gold/Silver will soar.

It is as inevitable as the fate of this mouse...

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Wed Post #1: An interesting proposal for Silver Miners by Eric Sprott

Eric Sprott, and Sprott Asset Management, had an intriguing message for Silver mining companies in his latest update.

Since we focus on Silver investing on the blog, you might find it it worthwhile reading.

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Silver Producers:
A Call to Action

By: Eric Sprott and David Baker

As we approach the end of 2011, the silver spot price has admittedly endured a tougher road than we would have expected. And let’s be honest – what investment firm on earth has pounded the table on silver harder than we have? After the orchestrated silver sell-off in May 2011, silver promptly rose back to US$40/oz where it consolidated nicely, only to drop back below US$30 within a two week span in late September.

The September sell-off was partly due to the market’s disappointment over Bernanke’s Operation Twist, which sounded interesting but didn’t involve any real money printing. Like the May sell-off before it, however, it was also exacerbated by a seemingly needless 21% margin rate hike by the CME on September 23rd, followed by a 20% margin hike by the Shanghai Gold Exchange – the CME’s counterpart in China, three days later.

The paper markets still dictate the spot market for physical gold and silver. When we talk about the "paper market", we’re referring to any paper contract that claims to have an underlying link to the price of gold or silver, and we’re referring to contracts that are almost always levered.

It’s highly questionable today whether the paper market has any true link to the physical market for gold and silver, and the futures market is the most obvious and influential "paper market" offender.

When the futures exchanges like the CME hike margin rates unexpectedly, it’s usually under the pretense of protecting the "integrity of the exchange" by increasing the collateral (money) required to hold a position, both for the long (future buyer) and the short (future seller). When they unexpectedly raise margin requirements two days after silver has already declined by 22%, however, who do you think that margin increase hurts the most?

The long buyer, or the short seller?

By raising the margin requirement at the very moment the long contracts have already received an initial margin call (because the price of silver has dropped), they end up doubling the longs’ pain – essentially forcing them to sell their contracts. This in turn creates even more downward price pressure, and ends up exacerbating the very risks the margin hikes were allegedly designed to address.

When reviewing the performance of silver this year, it’s important to acknowledge that nothing fundamentally changed in the physical silver market during the sell-offs in May or mid-September. In both instances, the sell-offs were intensified by unexpected margin rate hikes on the heels of an initial price decline. It should also come as no surprise to readers that the "shorts" took advantage of the September sell-off by significantly reducing their silver short positions.

Should physical silver be priced off these futures contracts?

Absolutely not. That they have any relationship at all is somewhat laughable at this point. But futures contracts continue to heavily influence spot prices all the same, and as long as the "longs" settle futures contracts in cash, which they almost always do, the futures market-induced whipsawing will likely continue. It also serves to note that the class action lawsuits launched against two major banks for silver manipulation remain unresolved today, as does the ongoing CFTC investigation into silver manipulation which has yet to bear any discernible results.

Meanwhile, despite the needless volatility triggered by the paper market, the physical market for silver has never been stronger. If the September sell-off proved anything, it’s the simple fact that PHYSICAL buyers of silver are not frightened by volatility. They view dips as buying opportunities, and they buy in size.

During the month of September, the US Mint reported the second highest sales of physical silver coins in its history, with the majority of sales made in the last two weeks of the month.

Reports from India in early October indicated that physical silver demand had created short-term supply issues for physical delivery due to problems with airline capacity.

In China, which reportedly imported 264.69 tons (7.7 million oz) of silver in September alone, the volume of silver forward contracts on the Shanghai Gold Exchange was more than six times higher than the same period in 2010.6.

It was clear to anyone following the silver market that the physical demand for the metal actually increased during the paper price decline. And why shouldn’t it? Have you been following Europe lately? Do the politicians and bureaucrats there give you confidence? Gold and silver are the most rational financial assets to own in this type of environment because they are no one’s liability. They are perfectly designed to protect us during these periods of extreme financial turmoil.

And wouldn’t you know it, despite the volatility, gold and silver have continued to do their job in 2011.

As we write this, in Canadian dollars, gold is up 23.4% on the year and silver’s up 6.8%. Meanwhile, the S&P/TSX is down -12.3%, the S&P 500 is down -5.1% and the DJIA is up a mere +0.26%.

So here’s the question: we think we understand the value and great potential in silver today, and we know that the buyers who bought in late September most definitely understand it,… but do silver mining companies appreciate how exciting the prospects for silver are?

Do the companies that actually mine the metal out of the ground understand the demand fundamentals driving the price of their underlying product?

Perhaps even more importantly, do the miners understand the significant influence they could potentially have on that demand equation if they embraced their product as a currency?

According to the CPM Group, the total silver supply in 2011, including mine supply and secondary supply (scrap, recycling, etc.), will total 1.03 billion ounces.

Of that, mine supply is expected to represent approximately 767 million ounces.

Multiplied against the current spot price of US$31/oz, we’re talking about a total silver supply of roughly US$32 billion in value today. To put this number in perspective, it’s less than the cost of JP Morgan’s WaMu mortgage write downs in 2008.

According to the Silver Institute, 777.4 million ounces of silver were used up in industrial applications, photography, jewelry and silverware in 2010.

If we assume, given a weaker global economy, that this number drops to a flat 700 million ounces in 2011, it implies a surplus of roughly 300 million ounces of silver available for investment demand this year.

At today’s silver spot price – we’re talking about roughly US$9 billion in value.

This is where the miners can make an impact.

If the largest pure play silver producers simply adopted the practice of holding 25% of their 2011 cash reserves in physical silver, they would account for almost 10% of that US$9 billion. If this practice we’re applied to the expected 2012 free cash flow of the same companies, the proportion of investable silver taken out of circulation could potentially be enormous.

Expressed another way, consider that the majority of silver miners today can mine silver for less than US$15 per ounce in operating costs. At US$30 silver, most companies will earn a pre-tax profit of at least US$15 per ounce this year. If we broadly assume an average tax rate of 33%, we’re looking at roughly US$10 of after-tax profit per ounce across the industry.

If GFMS’s mining supply forecast proves accurate, it will mean that silver mine production will account for roughly 74% of the total silver supply this year.

If silver miners were therefore to reinvest 25% of their 2011 earnings back into physical silver, they could potentially account for 21% of the approximate 300 million ounces (~$9 billion) available for investment in 2011.

If they were to reinvest all their earnings back into silver, it would shrink available 2011 investment supply by 82%. This is a purely hypothetical exercise of course, but can you imagine the impact this practice would have on silver prices?

Silver miners need to acknowledge that investors buy their shares because they believe the price of silver is going higher. We certainly do, and we are extremely active in the silver equity space. We would never buy these stocks if we didn’t. Nothing would please us more than to see these companies begin to hold a portion of their cash reserves in the very metal they produce. Silver is just another form of currency today, after all, and a superior one at that.

To take this idea further, instead of selling all their silver for cash and depositing that cash in a levered bank, silver miners should seriously consider storing a portion of their reserves in physical silver OUTSIDE OF THE BANKING SYSTEM.

Why take on all the risks of the bank when you can hold hard cash through the very metal that you mine? Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals. And it serves to remember that thanks to 0% interest rates, banks don’t pay their customers to take on those risks today.

None of this should seem far-fetched. One of the key reasons investors have purchased physical gold and silver is to store some of their wealth outside of a financial system that looks increasingly broken.

The European banking system is a living model of that breakdown. Recent reports have revealed that more than €80-billion was pulled out of Italian banks in August and September alone. In Greece, depositors have taken almost €50-billion out their banks since the beginning of 2010.13 Greek banks are now completely reliant on ECB funding to stay afloat. The situation has deteriorated to the point where over two thirds of the roughly 500 billion euros that banks have borrowed from the ECB are now being deposited back at the central bank.

Why? Because they don’t trust other banks to stay afloat long enough to get their money back.

Silver miners shouldn’t feel any safer banking in the United States. Fitch Ratings recently warned that the US banks may face severe losses from their exposures to European debt if the contagion escalates.

There’s very little at this point to suggest that it won’t. The roots of the 2008 meltdown live on in today’s crisis. We are still facing the same problems imposed by over-leverage in the financial system, and by postponing the proper solutions we’ve only increased those risks.

We don’t expect the silver miners to corner the physical silver market, and we know the paper games will probably continue, but the silver miners must make a better effort to understand the inherent value of their product.

Gold and silver are not traditional commodities, they are money.

Their value lies in their ability to retain wealth in environments marked by

• negative real interest rates,
• government intervention,
• severe economic uncertainty,
• and vulnerable banking institutions.

Silver’s demand profile is heightened by its use in industrial applications, but it is the metal’s investment demand that will drive its future performance.

The risk of keeping all of one’s excess cash in a bank is, in our opinion, considerably more than holding it in the more enduring form of money that silver represents. It’s time for silver producers to embrace their product in the same manner their shareholders already have.

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Tues Post #2: Metro Vancouver Real Estate achieves a 'New Paradigm'

If you have followed the topic of real estate bubbles, you have seen the above graph (click image to enlarge).

Titled 'The Main Stages of a Bubble', it is a representation of the stages that all bubbles (real estate or otherwise) travel through.

As we watch our Real Estate bubble in Vancouver, one has to wonder if we are now approaching the end of the third stage of the bubble process; the Mania Stage.

The Mania Stage has four basic phases: Enthusiasm, Greed, Delusion and New Paradigm.

Many real estate bears, salivating in 2008/2009 that the bubble might have been bursting, thought we had seen the end of the Mania Phase.

But watching events over the past 18 months, many will surely say the current market qualifies as delusion bordering on a new paradigm.

Have we indeed made that transformation?

How else to describe the belief by some economist's that the 'threat' of a bubble forming in Metro Vancouver has dissipated?

A Conference Board of Canada report released today quotes senior economist Robin Wiebe as saying not only has “the threat of a bubble largely dissipated” in Metro Vancouver “but, really, there never was one.”

See? There never was a bubble. Our market has achieved a New Paradigm.

Perhaps this explains why, in the current mania, we see the asking price of this Shaughnessy Mansion almost double from $17 million to $31 million.

Or why we see this downtown Penthouse condominium, which sold last year for $18.1 million recently relisted for a stunning $28.8 million (click on image below to enlarge MLS screenshot of listing).

The chutzpah for these types of increases is emboldened by the belief we have achieved that 'New Paradigm'. And the new paradigm viewpoint has been further reinforced with the proliferation of articles, like this one, explaining why the influx of Chinese money won't dissipate.

For those who study Bubbles, it has always been difficult to truly appreciate how pervasive and engulfing the Mania Phase can be.

People still look back at Holland's tulip mania in the 1600's with a sense of bewilderment. Long considered the first recorded speculative bubble, the peak of tulip mania saw single tulip bulbs selling for more than 10 times the annual income of a skilled craftsman.

Peering back across the gossamer waves of time, it's often difficult to comprehend how the enthusiasm for tulip bulbs could beget the all-consuming greed that leads to the delusional prices which then entrap a nation into believing that somehow a new paradigm could be created in the price of tulips.

By the time our current situation bursts, residents of the Village on the Edge of the Rainforest will be experts on just how a inexplicable Mania can completely grip a populace.

People will say "it's just real estate" the same way we now look at them as "just tulip bulbs."

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Tues Post #1: In Australia they've started blaming the buyers for "unrealistic expectations"

When we hear or see auctioneering we always think of insolvency.

But in Australia it is commonplace to put your home up for auction before giving a mandate to estate agents. The auction of houses and land is not considered as a last resort.

In the Land of Oz, over 85% of real estate is sold by auction.

And no day is more important on the Auction calandar than the last Saturday at the end of November - the last weekend of spring in the Southern Hemisphere and traditionally the most popular day to buy and sell real estate via auction.

Known as 'Super Saturday', this particular day is considered the high point of the real estate sales year and is significantly hyped.

Anticipation was keen for this year's 'Super Saturday' as property owners and real estate agents had hoped the lead-up hype would jolt what has been a lifeless market so far this year into action.

But it wasn't just property owners and real estate agents who were looking forward to 'Super Saturday'. Those hunting for real estate 'deals' were out in force.

But 'deals' of desperation were not forthcoming as the slumping Australian market is not quite at that point yet.

With clearance rates for residential properties in Sydney and Melbourne way below expectations, buyers kept a tight grip on their wallets and only about half of all homes being put to auction sold under the hammer.

It lead the Australian news to proclaim Super slow sales on real estate market's 'Super Saturday'

It shouldn't come as a surprise. With articles proclaiming that many current homeowners are facing a problem of negative equity as a result of declining Aussie real estate values, potential buyers have become vultures. Who wants to catch a falling knife?

And an interesting dynamic is developing.

The failure of last weekends 'Super Saturday' is prompting auctioneer's to blame the potential buyers.

"Buyers were being unrealistic about property prices, auctioneer Damien Cooley of Cooley Auctions said. "We're seeing a lot of cases where an agent may quote a price such as mid to high $400,000s and buyers are turning up expecting to pay in the low $400,000s. A year ago buyers would have automatically felt they had to pay five to 10% more than what was being quoted."

Oh the horror!!

But buyer aprehension is justified.

According to SQM Research, an independent property advisory and forecasting research house which specialises in providing accurate property related advice, research and data to financial institutions, property developers and real estate investors, the Aussie real estate contraction is far from over.

"The tide hasn't turned," SQM Research director Louis Christopher said. "The worst is still in front of us. There is a huge overhang of stock for the market to work through and it is going to get worse before it gets better."

I wonder how long it will take the Real Estate industry here to blame 'unrealistic buyers' when our market turns and the bidding wars become a distant memory?

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Mon Post #2: Ron Paul explains how America shifted away from 'debt' money after the Civil War and can do it again

Ron Paul continues to lay out his platform calling for the end of the Federal Reserve and returning America to sound monetary policy.

"We know what to do - we did it once after the Civil War period, we went from a paper standard back to the gold standard, and the event wasn't that dramatic. But today the big problem is that both the conservatives and liberals have an big apetite for big government for different reasons, therefore they need the Fed to tie them over and monetize the debt. So if you don't get rid of that appetite it's going to be more difficult, but the transition isn't that difficult. You have to get your house in order; you have to balance the budget, you have to not run up debt, and you have to promise not to print any more money..."

"I am quite convinced that the system we have will not be maintained - that's what these last 4 years was all about, and that's what the turmoil in Europe is all about. The question is are they going to move toward a constitutional form of money. or are we going to go another step further into international money - instead of having an international gold standard based on the market, are we going to go toward a UN, IMF standard where they are going to control with the use of force another fiat standard. I consider that a very, very dangerous move."

Paul's comments come a day after more secret Fed bailouts were publicized.

Bloomberg reported yesterday that Secret Fed Loans Gave Banks $13 Billion.

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

Is there anyone who still really believes we shouldn’t be taking a closer look at the Federal Reserve’s activities?

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Mon Post #1: Events in Europe, QE and Gold/Silver

To say that we live in interesting times is nothing short of an understatement.

Sovereign Debt will be the issue of this decade and the situation with the PIIGS (Portugal, Ireland, Italy, Greece, Spain) in Europe dominates the headlines again this past weekend.

A stunning article appreared in the UK newspaper, The Telegraph, which reported that Britain's Foreign Office has given instructions to embassies and consulates to begin contingency planning to help expats should the crushing debt of the PIIGS collapse the Euro.

Even more incredibly, a senior minister has revealed that Britain is now planning on the basis that a Euro collapse is not just a possibility, but that it is only a matter of time.

A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time. “It’s in our interests that they keep playing for time because that gives us more time to prepare,” the minister told the Daily Telegraph.

Meanwhile Société Générale (SocGen), a large European Bank and a major Financial Services company that has a substantial global presence, has come out its Multi Asset Portfolio Scenario/Strategy guide wherein the French bank makes the simple case that the worse things get, the stronger the response by global central banks will be.

"A major liquidity crisis should not occur this time, as we think we are on the eve of major QE in the UK, US and (a bit) later on in the EZ."

How big will QE3 be?

According to SocGen, the Fed will preannounce it in the January 2012 FOMC statement and that the monetization will last from March 2012 until the end of the year and will buy a total of $600 billion.

Many analysts believe the actual total will be well greater, probably in the $1.5 trillion range as the Fed will finally say "enough" to piecemeal solutions and grab the bull by the horns.

What really stands out is SocGen's investment advice:

"Buy gold ahead of QE3 as money creation has a strong impact on prices... Gold is highly sensitive to US QE, as every dollar of QE goes into M0, triggering the debasement of the USD."

SocGen sees Gold going to $8,500/oz so as...

"to catch up with the increase in the monetary base since 1920 (as it did in the early 80s)."

Older readers will recall that was a time when Gold went from $35/oz to $850/oz.

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What we cannot seem to see

I read a great quote today:

"Many of the world’s financial and economic woes since 2008 began with the bursting of the biggest bubble in history. Never before had house prices risen so fast, for so long, in so many countries..."

That's how a recent Economist article, 'House of Horrors 2: The bursting of the housing bubble is only half over', begins. And it makes a statement that few in Vancouver truly understand. It bares repeating:

"Never before had house prices risen so fast, for so long, in so many countries"

Vancouver's house prices are not a reflection of inherent value. They are a by-product of a world-wide debt phenomena that was deliberately created. Click the image below to enlarge and read a critical quote uttered by economist Paul Krugman on August 2, 2002:

In America, US President George Bush almost singlehandedly, through cheap rates, lax regulation, government housing subsidies, presidential boosterism and financial engineering, managed to get the home ownership rate to 70% as part of a deliberate strategy in expand the economy. A bubble was created BY DESIGN.

In Canada, Prime Minister Stephen Harper added fuel to the bonfire.

In the last six years we’ve had more pro-real estate initiatives than in the quarter-century prior to that.

We've had the zero down, forty year mortgage. The ability to raid the RRSP fund for down payments. The Home Reno Tax Credit. Emergency interest rates. First-time buyer’s closing cost credit. Regulations that permit liar loans. Regulations that permit zero-down payments with cash back from mortgage lenders. And most significantly, CMHC absorbing all lender risk.

Cheap credit, artificially supressed interest rates and government policy have fuelled this real estate boom.

You must understand this... our sky-high real estate prices are not a reflection of real value but a by-product of a deliberate strategy to create a bubble and inflate the economy.

In many countries the bust of the boom created by these policies have started. But as the Economist notes:

"The bust has been much less widespread than the boom. Home prices tumbled by 34% in America from 2006 to their low point earlier this year; in Ireland they plunged by an even more painful 45% from their peak in 2007; and prices have fallen by around 15% in Spain and Denmark. But in most other countries they have dipped by less than 10%, as in Britain and Italy. In some countries, such as Australia and Canada, prices wobbled but then surged to new highs. As a result, many property markets are still looking uncomfortably overvalued."

Many here think that because our bubble has not burst yet that we are not really in a bubble and that our housing prices are not artificially inflated, but are a reflection of 'true value'.

They are wrong. We ARE in a credit inflated bubble, a bubble that is part of a world wide phenomena. And that bubble is unsustainable.

As the Economist concludes, the worldwide housing bust is only half over and the full impact is yet to begin in many countries.

Canada is one of those countries.

We are, as the Economist notes, "more overvalued than America was at it's peak."

Unfortunatly most of us cannot seem to see that.

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Who will bail out the US Federal Reserve?

Came across an interesting editorial by James Rickards, senior managing director of Tangent Capital and author of the book 'Currency Wars'. Rickards asks some interesting questions about how the US Federal Reserve funds itself.

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From Occupy Wall Street to the halls of Congress there is anger at bailouts orchestrated by the U.S. Federal Reserve. These bailouts have not been limited to banks but include brokers, money market funds and foreign corporations. The Fed has released details grudgingly and some disclosures were forced by the Dodd-Frank legislation. Gradually the bailouts have been revealed as if a veil were slowly being drawn to display a densely formed mosaic. The bailouts have enriched stockholders, bondholders and CEO’s while unemployment remains at depression levels and forty-six million Americans survive on food stamps.

But what if the Fed itself needed to be bailed-out? The Fed may be a central bank, but it is still a bank with a balance sheet and capital. A balance sheet has two sides consisting of assets and liabilities. The Fed’s assets are mostly government securities it buys and its liabilities are mostly the money it prints to buy them. Capital consists of the assets minus the liabilities.

The Fed has capital of about $60 billion and assets approaching $3 trillion. If the Fed’s assets declined in value by just 2 percent, that decline applied to $3 trillion in assets produces a $60 billion loss—enough to wipe out the Fed’s capital. A 2 percent decline is not unusual in today’s volatile markets.

The Fed is well aware of this problem. In 2008, the Fed met with Congress to discuss propping up its balance sheet by issuing its own bonds as the Treasury does now. By getting permission from Congress to issue new Fed Bonds, the Federal Reserve could tighten monetary conditions when the time came without having to sell the bonds on its books and realize losses. Sales of the new Fed Bonds would replace sales of the old Treasury bonds to reduce the money supply. This way, the losses on the old Treasury bonds would stay hidden.

In 2009, Janet Yellen, now a member of the Fed board, went public with this request in a New York speech. Regarding the power to issue new Fed Bonds, Yellen said, “I would feel happier having it now.” Yellen seemed eager to get the program under way, and with good reason. The Fed’s looming insolvency was becoming more apparent by the day as it piled more leverage on its capital base.

This bond scam was shot down on Capitol Hill, and once it failed, the Fed needed another solution quickly. The answer was a deal struck between Treasury and the Fed that did not require approval from Congress.

The Fed earns huge profits every year on the interest received on Treasury bonds the Fed owns. The Fed normally pays these profits back to the Treasury. Behind closed doors, the Fed and Treasury agreed that the Fed could suspend the repayments and keep the cash. The amount the Fed would usually pay to the Treasury would be set up as an IOU.

Now as losses on future bond sales arise, the Fed does not reduce capital, as would normally occur, instead they increase the amount of the IOU to the Treasury. In effect, the Fed is issuing private IOUs to the Treasury and using the cash to avoid appearing insolvent. As long as the Fed can keep issuing these IOUs, its capital will not be wiped out by losses on its bonds. Corporate executives who played these kinds of accounting games would be sent to jail. Americans might be outraged to know that the Treasury is a public institution while the Fed is privately owned by banks, so this accounting sham is another example of bilking the taxpayers to enrich the banks.

The United States now has a system in which the Treasury runs huge deficits and sells bonds to keep from going broke. The Fed prints money to buy those bonds and loses money owning them. Then the Treasury takes IOUs back from the Fed to keep the Fed from going broke. This arrangement resembles two drunks leaning on each other so neither one falls down. Today, with its 50-to-1 leverage and investment in volatile securities, the Fed looks more like a poorly run hedge fund than a central bank.

Even this Treasury lifeline to the Fed may not be enough in the long run. If the Fed begins a new round of money printing and the Treasury continues with trillion-dollar plus deficits, there may come a time when even the credit of the Treasury and Fed are called into question and the money printing circus grinds to a halt. At that point the Fed could “phone a friend” at the IMF and be bailed out by a kind of IMF funny money called “special drawing rights” or SDR’s, or the Fed could use its nuclear option and go back to the gold standard using the gold in Fort Knox. Given the limited amount of gold and the huge amount of paper money that would have to be backstopped, the new gold price would be $7,000 per ounce or higher. These kinds of spikes in the price of gold during money crises have happened before – in 1930’s and the 1970’s. Those crises were forty years apart and the last one was forty years ago so a new crisis in the near future would be right on time.

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