The Truth Slips Out!

September 27, 2011

  • True statement, false prophet? No time for wishful thinking, says a financial talking head. Too bad he might be a hoaxter…
  • Because it worked so well here: Europe pursues its own TARP bailout
  • Lessons not learned: U.S. banks up their derivatives exposure 37% since the 2008 panic. How to prepare for when it all blows up again
  • Buying with both hands: Rick Rule, John Embry, Byron King weigh in on gold and silver’s recovery
  • Drones: Not just for the Pentagon… Odyssey Marine’s record find… Readers take issue with the readers who took issue with our editors… and more!

   “This economic crisis is like a cancer,” Alessio Rastani told the BBC yesterday. “If you just wait and wait, thinking this is going to go away, just like a cancer it is going to grow and it’s going to be too late!”

Mr. Rastani was commenting on yet another Euro bailout plan. The same one that has markets rallying worldwide this morning.

“This is not a time right now for wishful thinking,” says Rastani, “that governments are going to sort things out… The savings of millions of people are going to vanish.”

   We’d never heard of Rastani. Turns out neither had the BBC.

For the purposes of the interview, they described him as an “independent trader.” But this morning, bloggers have linked Rastani to the Yes Men — a group of “culture jammers” who’ve pulled off assorted stunts for the last decade.

Earlier this year, the Yes Men created a fake website in which General Electric promised to donate its entire $3.2 billion federal tax refund. The Associated Press (AP) fell for it.

For their part, the Yes Men issued a statement saying Rastani is not one of them, but they applaud his honesty.

   Forbes then tracked down the now potentially fictional Rastani in London.

“I’m not an institutional trader,” he told them, insisting he’s the real deal. “I trade my own money, my own account. That’s what I always wanted to do. I like the idea of not having a boss. I did work for one institution, but I realized I want to do it for myself.”

The incident speaks volumes about people’s desire for “truth”… or judgment… doesn’t it? Either way, we like the way the mysterious man, whomever he may be, thinks.

“When the market crashes,” Mr. Rastani asserts, “if you know what to do, if you have the right plan set up, you can make a lot of money…”

Hear. Hear.

   The “risk trade” is back on, thanks to the aforementioned euro rescue plan of which Mr. Rastani is so skeptical. The Dow has crested 11,300. The Russell 2000 is up 3% this morning.

What exactly is it that has traders so excited?

According to CNBC, eurozone leaders are talking about taking their bailout fund — formally known as the European Financial Stability Facility (EFSF) — and applying leverage. It currently totals €440 billion, an amount that’s enough to keep Greece, Portugal and Ireland afloat… but nowhere near enough for Spain and Italy, the two biggest PIIGS.

“We’ve heard as much as an eight to one leverage (ratio), depending on how much capital comes from the EFSF,” CNBC reported.”

Does that make your head spin? It’s supposed to. Does it sound like something fraught with danger? It is.

“It’s a creative way,” says our short strategist Dan Amoss, “to transfer the losses on PIIGS debt to every owner of assets denominated in euros. This has been the plan of most EU officials all along: find some method to socialize credit losses in a complex fashion that the average saver or voter doesn’t understand.”

“It looks like things are unfolding (slowly) along the lines of the TARP and Fed bailouts in the U.S.”

   Lest you think that these leverage games are confined to Europe, a new report from the Office of the Comptroller of the Currency will quickly disabuse you of the notion.

It reveals U.S. banks have $249 trillion of exposure to derivatives — futures, forwards, swaps, options and assorted credit instruments. Among those are the credit default swaps they wrote for the European banks, whose considerable risks we’ve documented extensively.

Four banks alone account for 94.4% of that total:

These are totals as of June 30. For comparison’s sake, we examined the figures from three years ago — June 30, 2008. That is, the last quarterly report before the “global financial crisis” got into full swing.

Total U.S. bank exposure then was $181.7 trillion. In three years, the figure has grown 37%.

To answer the persistent question of recent weeks, “Is it 2008 again?” we can answer in regard to the too-big-to-fail banks: No.

It’s worse.

For the moment, only presumed hoaxters can make such pronouncements in the hallowed halls of media outlets like the BBC. Consider this your window of opportunity to prepare for when reality hits. Dan Amoss has a six-part plan to help you get ready. You can review it right here.

   With the risk trade on, gold is staging a modest recovery. At last check, the spot price was $1,652.

Because the euro is rallying, the dollar index has fallen to 77.6. But by the reckoning of Kitco, less than one-third of today’s increase in gold can be attributed to dollar weakness… so there’s real demand out there.

Silver is also recovering, to $31.71.

   “My bigger accounts have very, very large cash positions,” says our friend Rick Rule, “and I am going to use this as an opportunity to diversify more of my cash into bullion or bullion-related instruments.”

“What we are seeing in the markets right now is exactly the type of psychotic break, the type of nonfundamental-related volatility, that has over the last 20 or 30 years given us the entry points that have, in fact, built our track record.”

   “The really astute [buyers] are using this opportunity to gobble up all of the physical metal they can get their hands on,” adds John Embry, chief investment strategist for Sprott Asset Management.

John is among those who believe the increase in margin requirements was engineered by the “powers that be” to scare people away from gold and gold stocks. “I know the other side reads everything we say and there was a growing bullish consensus when the HUI [gold stock index] broke out over 600 less than a week ago.”

“I think they taught us a lesson: ‘Boys, this is a small market too and we can do what we want with it in the short term.’ They just thrashed these [mining shares] and they got a lot of selling by the latecomers and the people who don’t really understand why they own this stuff.”

   “Gold and silver are precious metals,” says our own Byron King, “and they’re ‘precious’ for a reason.”

“So why were people ditching gold and silver? To raise cash, of course. The flight to the dollar. To preserve capital, out of fear of more market tumbles. To meet margin calls. To have cash in the accounts with which to buy back in later.”

“Still, is now the time to part with gold and silver — particularly if you own physical metal? Looking out, say, five or 10 years, what would you rather have? An ounce of gold? Or 17 or 18 crisp, new $100 bills on which the ink is still wet? (And I believe that, in 10 years, there will be a LOT of wet ink on a LOT of new bills, if you get my drift!)”

“Right now gold and silver are ‘up’ for the year. They’re up for the past two years, three years, five years and even 10 years. When you have to sell something — for the margin call or whatever — you sell what’s up and what’s liquid. It’s another way of describing that old concept in economics that troubled times cause great assets to pass from weak to strong hands.”

For more guidance from Byron that will steel your courage and give you “strong hands,” check out his latest in today’s Daily Resource Hunter.

   It turns out drone aircraft are big business beyond U.S. shores.

For the last week and a half, we’ve chronicled the staggering growth in the use of unmanned aircraft by the U.S. military.

Drones numbered only 60 10 years ago… growing 100-fold to 6,000 last year. Airstrikes carried out by drones averaged only 11 per year in the middle of the last decade. In 2010, the total was 118.

Now comes word the U.S. and Turkish governments have struck a drone deal: “We have agreed in principle,” says Turkish Prime Minister Recep Tayyip Erdogan. “Negotiations will continue” on matters such as the number of aircraft, and whether they’ll be purchased or leased.

Big business: An MG-1 Predator drone

Delivery is set for June of next year. Turkey wants the drones to hunt down Kurdish rebels.

   From an investment angle, there’s no such thing as a drone “pure play.” But there’s something very nearly as good.

The major U.S. manufacturers of drones are Northrop Grumman and General Atomics. Drones make up only a small part of their bottom line.

But one of the key materials that go into drones opens up a different opportunity: A miner and refiner of a specialty metal like beryllium — incredibly lightweight, but incredibly strong.

A Pentagon report labels beryllium “essential for important defense systems.” That’s because it “possesses unique properties that make it indispensable in many of today’s critical U.S. defense systems, including sensors, missiles and satellites, avionics and nuclear weapons.”

Byron King has zeroed in on a Canadian-traded company that’s a leader in both the mining and refining of beryllium. Today, it announced the signing of a drilling contract to prove up one of its prime properties, located in the Western U.S. Shares can still be had for under a quarter each… but probably not for long, as Byron details here.

[Ed. Note: Half-price membership to Byron’s premium advisory, Energy & Scarcity Investor, is still available for the next four days. But as of midnight this Friday, the offer comes off the table. Act here.]

   A tip of the hat to our friends at Odyssey Marine — who’ve uncovered the largest stash of underwater precious metals ever.

Two hundred tons of silver worth $232 million lie aboard the wreckage of the SS Gairsoppa — a British cargo ship sunk in the Atlantic Ocean by a German U-boat in February 1941. The ship was hauling the silver from Calcutta to Liverpool to help fund the war effort. Among a crew of 85, only one sailor survived.

The Gairsoppa, as seen 14,000 feet below the ocean surface

Odyssey located the wreckage last summer. “Given the orientation and condition of the shipwreck,” says senior project manager Andrew Craig, “we are extremely confident that our planned salvage equipment will be well suited for the recovery of this silver cargo.”

And Odyssey is assured of being well remunerated. Before setting out to search for the vessel, it signed an agreement with the British government: In exchange for taking on the risk of looking for the Gairsoppa, Odyssey will collect 80% of the silver’s value.

That’s a far better outcome than Odyssey is having with the Black Swan find.

   “The more I look, the more I listen, the more I salivate to buy things — very specific things,” writes a reader agreeing with Chris Mayer’s assessment of the market yesterday. “Do I like this market? No, but there is opportunity… all over the place.”

“I thought of buying silver again at $20.00 when it was $45.00. I sold. And I’m waiting. I couldn’t afford gold, but maybe at $1,000, who knows? Don’t know that demand will let either one get close to those levels.”

“Long-term Treasury bonds, five years from now, I know which side I am going to play, and a position I am going to build over the next few years. It’s all Monopoly money anyway…”

“If you’re careful and watch your backside, playing both sides of the coin, you could set up a heck of a solid foundation for the future.”

The 5: For advice on doing just that, read Chris here.

   “What a sanctimonious pig!” declares a reader of the fellow reader who unloaded yesterday on Patrick Cox. “There are lots of folks out there like me who have led incredibly healthy lives with good natural diet and plenty of vigorous exercise who have very serious health issues that develop.”

“We cannot control our genetics, nor serious accidents. I haven’t had a cold or flu since ‘85 yet have been involved in two separate disabling accidents that have resulted in heart damage that caused heart attack and stroke. Add in a bout of cervical cancer and one would think I’m terribly unhealthy. How much is nurture and how much nature? My dad and his two brothers all had prostate cancer. Is it genetic?”

“Yes, many people simply do not take care of their health, but there are a lot of us who work hard to stay healthy.”

   “Yum! Brands and other companies who own fast-food restaurants are heavily lobbying the administration to allow their franchisees to take food stamps instead of cash,” writes a reader looking at the issue from a different angle.

“That should ensure we have a never-ending supply of obese diabetics with heart disease to bankrupt our health ‘care’ system. Those ‘poor folks’ eat better than many hardworking citizens who pay taxes. Just watch them at the supermarket checkout counters.”

   “In Australia a couple of years ago,” adds another reader, “a prominent group of doctors threatened to stop treating smokers because their health problems were self-inflicted and they should know better, they argued.”

“Everyone jumped on the bandwagon and it soon became a hot topic of discussion in public circles, and even considered as government policy. Until someone mentioned if they were going to stop treating smokers, they should stop treating obese people as well, for exactly the same reasons.”

“The threats vanished overnight.”

“Funny how smokers don’t really represent a large enough voting block, but the fatties sure do.”

“Love the daily newsletters.”

   “I was shocked at the video of the NYC Police pepper-spraying those hapless protesters,” writes our last correspondent. “How can any rational person say the action was ‘appropriate’??”

“There should be criminal charges assessed against that police officer(s) for what they did. It’s a crime!! How do we fight this??”

The 5: We’re not sure, but we see that similar protests are popping up in Los Angeles and Chicago. Still more are planned in other big cities.

The New York Times has dismissed the protesters as a “noble but fractured and airy movement of rightly frustrated young people.” At this stage of the game, we’re starting to wonder if there’s more to it than that.


Addison Wiggin
The 5 Min. Forecast

P.S. The Australian dollar has weakened nearly 6% in the last month against the U.S. dollar — a move our currency trading specialist Abe Cofnas saw coming.

“Global uncertainty can send the Aussie to parity again,” he wrote on Aug. 24. Indeed it has, and then some. He recommended put options on the FXA, the Aussie dollar ETF.

This morning, he recommended collecting 65% gains. Not bad for a month’s work.

Strategic Currency Trader is currently available for a generous discount off the regular membership fee. Check it out here.


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