great new interview with jim willie [Archive]

Bigjon

6th October 2013, 11:37 PM

http://www.silverdoctors.com/jim-willie-forecast-psychology-rebuttal-to-gary-north/

By Jim Willie, GoldenJackass.com

A rebuttal is warranted. The entire analytic discussion, defense of viewpoints, exposure of corrupted markets, and intriguing human psychology regarding forecasts is covered. It might be enlightening to many folks. It might be entertaining to some. It might be tawdry to a few. Gary North sounds more like a mainstream financial apologist than a sound money advocate. His days at the Lew Rockwell Institute are over. He seems a confused man with a limited comprehension of either the financial system or market developments, who has offered a shallow dispute of the Jackass recent perspective on the USTreasury Bond market. Given his extremely unimpressive analytic ability and dim vision, with a certain blindness extended from a certain perceptual inversion, he will be referred to henceforth as Mr South. Nothing personal, just hard to respect incredibly shallow attacks with no solicitation, surely without recognition of my past correct forecast trail. South is surely a good man, just not a good analyst. His recent essay featuring the Flash Trading and other USTreasury Bond factors was an unsolicited disgraceful assault with hardly a single point of valid substance. It was an extremely unimpressive display. To be sure, High Frequency Trading, also known as Flash Trading, is not skin in the game, and not typical capital at risk. It is a blatant price control practice that produces false levitation in asset prices. The Jackass has a long history of being a team builder. Mr South is not on any team, no longer on the Rockwell team. He has chosen to strike out errantly on his own. Let this article serve as my rebuttal, which should add a good deal more light on the phony USTreasury Bond market which is not well understood for its status as being the greatest asset bubble in human history, not just modern history. It exceeds the housing & mortgage bubble that formed a decade ago, if not from volume, then from scope since it is laced throughout the entire global banking system.

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ERRANT CRITIQUE BY SOUTH

Let’s review some of the specific errant stupidity of Gary South when offering shallow criticism to my last article on “Flash Trading that Hit the USTreasury Bonds” out last week. The points made by South seemed as misrepresentative (bordering on motivated smear) as they were shallow (indicating ignorance). South seems not to comprehend the USTBond market at all in its gradual degradation toward reliance upon monetary crutches for nearly total support.

The Carry Trade features big US Banks borrowing at 1/10-th of 1% and investing in long-term USTreasurys. Unknown to South, the practice began when the 10-year bond yield was south of 2.5% and even at times briefly above the 3.0% level. The evidence of the carry trade was the regular and frequent comments made by USFed Chairman Bernanke, as well as leading Wall Street bank executives. They boasted in 2010 and 2011 about replenishing their balance sheets by means of investing in USTreasurys. Did South miss this? Was he asleep? Wall Street banks never miss an opportunity to apply leverage to any successful trading scheme. Is this fact something that South is unaware of? Is he that obtuse? With the rise in bond yields from 1.6% to 2.9% (not 2.7%), my conclusion is that the carry trade is unwinding. This is Financial Engineering 201, not exactly the basics but still not very advanced. To be sure, the Big US Banks are losing huge amounts of money in their leveraged bond positions. They prefer bond futures, just like they prefer the S&P futures contract, and just like they used to prefer their mortgage bond REMIC invention. Their past track record and preferences are well known to almost any market student. That apparently excludes South! The concept of unwinding leverage with bond introduced the Convexity term. Apparently, South is ignorant of it also, as the bond market will tend to overshoot as it unwinds. Maybe South is unaware of the leveraged Collateralized Debt Obligations that Wall Street devised, which imposed leverage upon the leverage. These corrupt pillars even called it squared leverage. How is your math, Gary?

Heck, South is so obtuse that he probably believes the USTBonds being sold will release new funds directly into the US Stock market, even help to revive the USEconomy. Not sure he believes that, and sure would not want to put words in his mouth (like he did with my work). As the leveraged USTBond positions are unwound, they will not release vast funds into the financial markets or the economy. The reason why is simple. They are spread trades. Maybe South is unaware of spread trades also. As the wrecked spread trades (short the USTBill and go long the USTBond) are unwound, they are big BIG money losers. So to close them out, they must bring money to the table. In futures trading, they are marked to market. They are not carried on the books at book value, which South suggested. Not the futures contracts that Wall Street banks are so fond of, with a 30 to 40 year history. The big banks can conceal their losses only for the USTBonds held without leverage. And ten year maturities are almost never held to maturity, an absurd notion he postulates.

Then we come to the criticism that sale by big banks of USTreasury Bonds is an action that generally reduces liquidity. This is an obvious point of error. Where South misses the point, is that the banks each have internal liquidity requirements. They are (by the Dallas Fed insider’s account) being forced to sell their bonds at losses in order to produce INTERNAL LIQUIDITY, not systemic liquidity. The same insider quote addressed the need to meet capital requirements, the hint of internal individual bank dynamics, not macro system dynamics as he errantly suggested. Being a shoddy student, South misses the hint. Recall that these big US banks are all insolvent. The old adage is Insolvency + Illiquidity = Bankruptcy. Maybe South is unaware of such financial axioms. The insolvent structures lack liquidity. Perhaps the Big US Banks are suffering from USTBond carry trade losses in addition to interest rate derivative losses, together which have rendered deep damage to their capital structure and liquidity. They are being forced to sell in order to raise internal liquidity, to defend not only their own financial integrity but the USDollar. South is thinking macro but the force at work is micro. The big banks within the Federal Reserve system are each struggling within their own broken structures and caved in walls. The entire point about the round robin being played by the USFed and its member Big Banks was missed by South. He seems like a Mr Magoo running over the bushes with his car, myopic if not blind.

South saved his most obtuse and absurd arguments for the Flash Trading. He calls mine an attack on the free market. Not sure where the free market is, surely not USTreasurys, surely not the FOREX currency market, surely not the US Stock market, and surely not the Gold market. Lest one forget, surely not Fannie Mae or AIG or General Motors with all their props. Free market is not at work, surely not with Big US Banks, which a free market would have liquidated years ago for insolvency, if not fraud. Obviously Algorithm Trading is legal, but it is not from entrepreneurs. Wall Street bankers are hardly entrepreneurs, but rather the vampire squid types. Al Capone and Bugsy Moran and Corleone were entrepreneurs also. South claims Algo Trading undermines price rigging, when it is actually a key device used precisely to rig prices, to elevate them. This is utterly basic. It is unclear whether South is suffering from dementia or is just demented. The High Frequency Trading, otherwise called Flash Trading or Algorithm Trading, is not a healthy form of arbitrage. The Wall Street schemers using Algo Trading do not seek out price disparities so much as they stack on phony volume and lift price in a highly disruptive manner than requires the participation of dumb money. Perhaps South can offer an explanation as to why Flash Trading caused a few market seizures in recent years. He might not be aware of the dependence on flash trades for regular supply of dumb money to exploit, like lubrication in the distorted market (not free market).

South concludes that the Jackass forecast of a ramped up QE to Infinity with greater bond purchase volume will be incorrect in the next 12 months. Given the 90% correct track record, and Gary South’s bumbling Y2K call, and his absence from the forecasting risk tables, think twice. The need to contend with growing USTBond volume sales must be addressed. He does not address the selloff in USTBonds by foreign entities (seen in TIC Report), sure to add to sales volume. He does not address the Indirect Exchange in foreign asset acquisitions (seen in Russian Rosneft deal), sure to add to sales volume. He does not address the growing animosity and resentment by the global community for the unilateral monetary policy administered by the USFed for Wall Street and London banker benefit. The global players are diversifying out of USTBonds. He does not address the gathering momentum by the G-20 nations, the BRICS nations, the SCO nations, in developing a non-USDollar alternative. He does not address the mature global alternative (a growing consensus device) being embraced with the Yuan Swap Facility, useful in weaning off the USDollar in trade settlement. In fact, South does not really offer much depth at all in his analysis. He focuses unduly on exclamation points, italics, bold facing, and capitalized words. The Psychology community would say that South focuses on the syntax of things without proper attention paid to the messages. In today’s world, with the ongoing global financial crisis, with the ongoing Weimar monetary policy, with the global rejection of the USDollar, with the great Paradigm Shift, with the extraordinary wealth transfer, with the controversial rehypothecation of Allocated Gold Accounts, such editorial features are well warranted. Perhaps South used some in his wrong Y2K forecasts in 1999.

USTREASURY BOND VS FREE MARKET

Then we come to the South criticism that the Jackass assumes the USTreasury Bond market is not a free market. To claim or assume or even to imply the USTBond market is a free market, or a fair market, or a market that seeks equilibrium is incredibly naive, basically ignorant, and fundamentally stupid. After the Big US Banks were permitted to place any value they wished on assets, the USTBond market soon went into the Grand Toilet of Integrity. About the same time as the FASB accounting rules were suspended, the Flash Trading in the New York Stock Market was exposed. It does not represent entrepreneurs placing money at risk with investments. Given how the practice made up 80% of the NYSE volume, it was clearly designed to maintain high phony share prices. Maybe South was asleep at the office that month? Notice the common 80% again with USTreasurys. The USFed has been buying at least 80% of USTBond issuance for two years running. In some months, the USFed bond purchase exceeds the actual USGovt debt issuance, a point made by competent bond analysts. So a nice easy leap for the Jackass to believe the Flash Trading has jumped from stocks to bonds. It is called connecting dots.

The next big event to influence the USTBond market was the abuse of Interest Rate Swap contracts. The facts in evidence have been presented, and will not be done again for South’s benefit. In the second half of 2010, the Morgan Stanley offices added a ripe $8.5 trillion in interest rate derivatives. The data is according to the Office of the Comptroller to the Currency. The practice was given attention by friend and colleague Rob Kirby, intrepid to the end. Thus the flight to USTreasurys was phony, fabricated, and false in late 2010 and 2011. No free market here. The beached London Whale was about Interest Rate Swaps gone bad, something South might have missed in June 2012. The Jackass (with Kirby) was all over the story, even to dismiss and disprove the JPMorguen claim that the London Whale losses were over the Southern European sovereign bonds. That lie was unmasked easily, since over the quarter in question, all such PIGS bonds rose in value, improved in position with falling bond yields, calm somewhat restored. So no fair market in USTBonds as the derivative machinery was exposed, except to those with poor mental aptitude and shuttered eyes. Maybe South was busy that month critiquing another analyst, and not doing his homework?

Then comes the Quantitative Easing, which is an aberration clearly not inherent to a free market. The USFed has been busy purchasing $80 billion worth of these toxic bonds, along with mortgage bonds, each month. Greater volumes were purchased behind curtains with the Operation Twist, yet another deceptive program to undermine the free market. The theory brought to the table by Catherine Austin Fitts was that the USFed, with their QE3 plan, was trying vigorously to bury and put away the most corrupted and toxic mortgage bonds. The motive was to free the logjam of toxic and fraud-related mortgage bonds, in order to permit the long awaited housing market recovery. The USFed wanted to attract foreign investors. All they succeeded in doing was to attract the Wall Street sponsored private equity funds. The entire USFed QE programs are horribly undermining the free market characteristics of the USTreasury Bond market. It is unclear if South is aware of the private equity fund influence to the supposedly fair market in US Housing. Refer to South. No bond market with the central bank purchasing between 80% and 90% of the USGovt debt issuance is a fair market, not by any definition. It is being supported by rabid applications of interest rate swaps. See the OCC data, there for public viewing, but almost never viewed.

The Jackass logic uses extensions from the recent June TIC Report on USTreasury Bond and other US$-based bond sales. The flow is always dominated by USTBonds. A record month of net dumping by foreign institutions took place in June. Perhaps South is not aware? The Jackass does his homework, but South probably does not. One can add to the bond dumping exercises, motivated by extreme anger over unilateral USFed monetary policy decisions, the Indirect Exchange phenomenon. Foreign central banks and big financial firms are angry over the QE initiatives, for the monetary inflation hitting their shores. The results have been higher prices across the board, in particular for food. Even the food markets are not free markets. The Jackass has been very vocal about the QE effect of rising cost structures, falling profit margins, and businesses shut down, jobs cut. It is unclear whether South regards the QE initiatives as being loaded with stimulus, and whether he notices the capital destruction effect. The Jackass does not care what South sees or does not see, only what he criticizes. The Jackass never has written about a 2014 bond market collapse. Where did Gary South find such a timed reference?

The global USTBond dumping, combined with some diversification from sovereign bonds to gold bullion, aggravated by Indirect Exchange, will continue to put great pressure on the USFed to maintain the bond equilibrium charade. The Indirect Exchange occurs when third parties are given USTBonds in asset deals or certain commodity ongoing purchases. The third parties take the bonds and sell them immediately, requiring the cash. The volume of USFed monetization is going to rise from all these negative factors at work. In 12 months, it will be clear. In fact, within 4 to 6 months it will be more clear the QE volume ramp up, not taper down. Shooting fish in the barrel is not quite what is happening here, a metaphor used improperly by South. In fact Gary South while trying to shoot a special fish of Jackass species, actually fell in the tank. It was not a barrel after all. From the looks of the flailing around, South cannot swim too good, as his scribbles dont qualify as an actual stroke. The Jackass was on a swim team when young, and can swim like a fish. The South review is shallow, ignorant, and full of absurdities that indicate a guy asleep for over three years. He lost his credibility long ago, like in year 2000. The Jackass will stack up his forecast record against South, or anybody else.

STRANGE PSYCHOLOGY ON FORECASTS

For several years, the Jackass has given significant study to the psychology of forecasts. Refer not to the actual content and analysis beyond lodged forecasts, but rather to the mindset of people who react to them before, during, and after the forecast outcomes. It is a truly mindboggling study into the recesses of strange human mental processes. It is full of denigration, denial, and dispute, with refusal to do self-evaluation. Most people regard a correct forecast to be stupid beforehand, then ignored while coming to pass, but obvious afterwards. They do not give credit for the last correct forecast, while denigrating the next probably correct forecast. They do not wish to consider the logic and justification for the past correct forecast or the next new forecast, which is based on the same correct line of thinking. Notice Gary South did not notice the string of correct Jackass forecasts. Instead, he attacks the next forecasts. Ridicule is a regularly anticipated feature of forecast reactions.

People typically do not acknowledge correct forecasts. They might not comprehend them. They might be angry over not foreseeing them on their own, or the dynamics at work. They might wish to ignore them, since personal loss was suffered. Many emails have been received by the Jackass, highly critical and insulting, calling me stupid, on forecasts which eventually came true. Only about three or four emails have ever come from the same insulting people, a sign of integrity. People tend to live within assumptions from which to derive happiness and security. They tend to believe the USGovt and USMilitary take care of the population and protect it. They tend to believe the police forces and the FBI protect us. They tend to believe the CIA seeks out intelligence for national protection. The tend to believe the big banks are deeply committed to capital formation, healthy lending practices, which help to fortify the USEconomy and to create jobs, even good jobs. They tend to believe the financial markets are fair, seek equilibrium, and are self-correcting. They tend to believe the regulatory bodies do their jobs and enforce the rules of fair play. Most of these assumptions and beliefs are not correct. A predatory element has been fostered among the leadership classes, evident in the financial markets, in recent years. A crime syndicate has taken control and taken root. The Jackass noticed it long ago in the early 1990 decade. The Black Monday event in 1987 awakened me to look for additional hidden factors. The Clinton glory years were a study in crime.

Most people do not respect correct forecasts. They resent them and the person who posts those forecasts. They resent past losses from not seeing the same phenomena, from not avoiding the pitfalls that seem so clear in hindsight. Competent and correct forecasts are the opposite of unseen pitfalls. People resent others who implicitly point out their failings and losses associated with the wrecked investments. Curiously, many people will continue on the same path, out of inertia and dedication to an assumption pathway. Many subscribers told me that the housing market had been solid for generations and would never collapse, the ultimate inflation hedge. They did not comprehend the mortgage bond corruption, the MERS title database corruption, the duplicate income flow on bonds. They lost their equity and hate the forecaster, who himself avoided the pitfall, sold his house long ago, and bought Gold & Silver (generally speaking). Most people resent the correct forecasts, since they are committed to their communities, to their businesses, to their pension plans. They are more hostages than participants. They resent the correct forecasts, and the new forecasts, because it places a billboard in front of them which highlights their poorly planned lives, deeply entrenched in a failed system, perhaps even a captive or worse, a disenfranchised person without employment any longer. They do like appreciate exposure of their shortcomings and faulty thought process, if not even somewhat beneficiaries of a worthless education. Several times, the Jackass has heard that such a position behind a forecast could not be true, or else all they learned in college would be false. My response has been that no Economics or Finance courses are offered on corruption. Even my favorite graduate school professor who teaches about bank derivative mathematics refused to offer an additional perspective in his advanced class on the effect of derivative valuation with introduced corruption. He is a great teacher and fine man, a tremendous professional influence on my education and career, but one must wonder what he thought of the London Whale story, and if reminded of the Jackass conversation.

The Jackass belief is that the engrained corrupt element and the distorted markets are the bitter fruit of the Fascist Business Model which flourished in the Clinton-Rubin Admin, and reached climax after 911. Most people do not respect correct forecasts. They resent them, since their coming to pass calls into question the surfeit of baseless assumptions for deriving happiness and security. They resent them, since they find themselves stuck in a world that resembles 1984 and the Brave New World far more than a wondrous New Age and Goldilocks. The Jackass is Henry David Thoreau writing for the Hat Trick Letter in a log cabin at Walden Pond. The site was visited countless times after a bike ride and hike around the pond, sometimes a swim in the deep cold spring-fed waters. Despite losing home equity, despite losing pension funds, despite losing jobs, most people refuse to believe the entire system is corrupted by the leadership classes. But the population is awakening, at a very late stage. As a result, the dire forecasts of systemic failure and the grind toward insolvency and collapsing platforms is seen as very unsavory, all too often an unwelcome insertion into the conversation.

The Jackass forecasts are not designed to make people feel good. They are designed to help people correctly see what is coming in the next few months, so that they can plan accordingly. Most of the forecasts are for extreme disruption and broken structures, part of what can be called mega-forecasts. Most people do not perceive the Paradigm Shift underway. If they did, they were be more scared. They would fear poverty and the Third World as much a lost freedoms and the emerging totalitarian state. There are only so many Gold & Silver lifeboats, and most are taken (a constant wise Voice refrain). The Jackass forecasts will continue to be delivered, tested, and confirmed. When the forced USGovt debt default and restructure comes, and when the Gold Trade Standard is put in place, a countdown will be watched for the end of the Hat Trick Letter. It might be a long countdown, but honestly, there could never be a follow-up act on either forecast call.

SAME CONCLUSION

Permit the Jackass to repeat the conclusion from the same Flash Trading article on the USTreasury Bonds. The major currencies will be forced to scurry like cockroaches in the dark to find and source gold bars for renovation of the currencies themselves. The crumbling sovereign debt serves as flawed foundation for the major currencies. The climax blow will be the conversion of USTBonds and EuroBonds and UKGilts and JapGovtBonds into Gold bullion that kills the current system and opens the door to the new system. With great disruption, the new Paradigm Shift is in progress, unstoppable, but offering hope for a better day, a better system, a more fair system, with participants and savers given a just system. For three decades, Gold has had a nemesis in the USTreasury Bond. The USTBond is dying, a wreck in progress. As the old pillars fall and the new pillars rise, The Price of Gold will be set free. It will reach $3000/oz when the COMEX defaults from empty inventory and Shanghai arbitrage, then reach $5000/oz when the great conversion begins in earnest from USTBonds to Gold bullion, then reach $7000/oz when the Gold Trade Settlement is installed in its full glory. It is written. It shall be done.

THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.