Whom Can You Trust?

Dave Gonigam – November 18, 2011

  • “Entire system” is “utterly destroyed”… Broker shuts down her futures and options business to protect clients…
  • “Short banks, ” suggests Barry Ritholtz, “long mattresses”… is there any trust left in the system?
  • S&P breaks an important level: down. What’s next after 1,225?
  • Goldman takes over the eurozone: Michael Pento on the coming crackup there… and here
  • Canuck reader slams U.S. customs, Yank slams the Canucks… The 5 invokes Rodney King… and more!

   “I could no longer tell my clients that their monies and positions were safe,” a broker named Ann Barnhardt said upon closing her small Colorado firm, “because they are not.”

We were torn today… show a photo of the pre-holiday deep-fried turkey fest going on downstairs?

Or recap the jeremiad Ms. Barnhardt wrote after making the decision to close her firm had gone viral.

The jeremiad won.

   Here’s why: The warning “goes not just for my clients,” Ms. Barnhardt wrote “but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse.”

And with that, we’re reasonably confident the names MF Global, former New Jersey Gov. Jon Corzine and the Greek sovereign crisis of 2011 have ascended to the pantheon of fiat tragedies right alongside such luminaries as Enron, Jeff Skilling and the Asian Contagion.


   “I have learned over the last week that MF Global is almost certainly the tip of the iceberg,” Ms. Barnhardt goes on filling in some insignificant details you may also like to know. “There is massive industrywide exposure to European sovereign junk debt… In short, the problem is a systemic problem, not merely isolated to one firm.”

Ann had the courage of her convictions to close her firm rather than see her clients get cleaned out.

   “You do realize that the theft of customer funds is a first,” writes a peeved MF Global client to the firm. The letter was reproduced by our friend and Vancouver favorite Barry Ritholtz on his blog The Big Picture. (Barry gives no indication of this individual’s identity, except that he used to be a “big swinging Richard” at a major Wall Street firm who now trades his own account and is out $100,000 at MF Global.)”

“Outright crude theft — well, that is indeed a new phase in our culture,” this individual goes on. “Just for fun, I like to speculate on what the oligarchs think will happen once they get all the loot and leave the smoldering remains of a once great country.”

“I bet not many have actually tried to set up a bank account overseas — they will find that no one wants American clients!”

“They will also find that the pittance they looted won’t go too far — maybe a studio apartment on the outskirts of town, a couple of beers and some local hookers — your money is no good here, etc., etc.”

“Most of all they will be aliens who have to line up to get temporary visitor visas, etc.”

Barry’s reaction: “A paired trade: Short Banks, Long Mattresses.”

   You may recall gold bull Gerald Celente lost a bundle at MF Global buying gold futures, expecting to take delivery of actual metal. Whoops. Bill Fleckenstein, whom we’ve also published in our pages, was caught up in it too.

You may sympathize. Many readers do. At least judging by the survey responses we got last month to Project X:

“Wall Street can’t be trusted,” said one. “Neither can Washington. What’s an honest American retiree to do? A $15 trillion unpayable debt, and both Wall Street and the administration are acting like there is no problem.”

“I no longer trust the government, public companies or the financial industry,” says another. “The accounting rules are in shambles and untrustworthy.”

“It seems like the old rules of finance don’t apply anymore,” writes a third, “and I don’t even know whom to trust for advice.” (More from the surveys below…)”

   U.S. stocks are staging a weak recovery this morning — nowhere near enough to put the major indexes in positive territory for the week. The S&P 500 sits at 1,220 — below the key support level of 1,225 that Penny Momentum Trader editor Jonas Elmerraji has been watching closely.

“1,225 has been acting as a barrier above the trading range that stocks were stuck in for most of the late summer,” he explains. “Yesterday’s break of support is not yet a statistically significant move. That said, it could become one.”

“It’ll be important to see whether stocks can still stage a bounce off of their current levels. If they do, we’ve got a nice second chance at low prices for equities. If the demand for ‘the market’ can’t exceed supply here around 1,225, investors should expect more churning to end 2011.”

   Helping the weak recovery today — or at least arresting the decline — is a bigger-than-expected increase in the Conference Board’s leading economic indicators.

They jumped 0.9% in October… and unlike recent increases, this one can’t be chalked up to low interest rates and rising money supply. There’s real economic activity out there this time.

Unfortunately, most of that activity shows up in new housing permits — up nearly 11% from the month before. As if there’s not already a glut of housing out there.

   The dollar index is winding down the week clinging to the 78 level, while the euro sits at $1.352.

For the moment anyway, euro matters have stabilized after Italy’s new prime minister Mario Monti won a confidence vote today in the lower house of Parliament.

For the first time, a Goldman Sachs alum has secured his place atop a European government.

There are others in high positions, too — as helpfully pointed out in this infographic from the London Independent. (Click to enlarge.)

   “The European debt debacle continues to unravel,” says our own Michael Pento, keeping an eye on the long term, “yet many investors fail to recognize the profound ramifications of taking the largest economy on the planet offline.”

“Can there really be any safe haven country when global GDP is on the precipice of a sharp decline? The truth is that Europe, and quite possibly Japan and the U.S., face a recession in 2012 due to a full-blown bond market crisis.”

Mr. Pento considers Greece and Italy harbingers of what’s to come: “Neither country is growing, and their debt to GDP ratios have soared well above 100% and their bond markets are now in full revolt. The sad fact is that their debt levels have become so intractable that both bond markets have now been placed on the life support of the European Central Bank.”

“However, regardless of central bank intervention, interest rates rise to a level in which most of the country’s tax revenue must be used to service the interest payments on the debt. It is at this point where investors fears become a mathematical reality and the country finds paying down the principal of the debt an impossibility.”

At that point, there are only two options: Default or inflate. Mr. Pento believes both Europe and the United States will opt to inflate. “That is why gold is a buy,” he says, “especially when you are fortunate enough to get a pullback.”

   A pullback came after we went to press yesterday. And at last check, gold hasn’t staged a recovery — the spot price is $1,725, near its lows for the month.

Silver has huffed and puffed its way back above $32.

   Demand for the Midas metal is outstripping supply, according to the World Gold Council.

Gold demand grew to 1,053.9 metric tons during the third quarter — a 6% increase from a year ago. Falling jewelry demand was overcome by demand for ETFs, bars and coins.

Supply, meanwhile, couldn’t keep up — totaling 1,034.4 metric tons. And that’s despite a 5% increase in mine output.

The WGC report attributes the growth in demand to — what else? — a flight to safety from the eurozone crisis.

   “A Chapter 11 bankruptcy filing is possible soon,” Dan Amoss warns of American Airlines parent AMR Corp. Six weeks ago, trading in AMR was halted as rumors swirled and shares touched $2. Today, they’re $1.80.

“In theory,” says Dan, “AMR has enough cash to sustain losses and roll over its maturing debts for a few more quarters.” But in reality it has few assets it can put up as collateral in a “debtor in possession” loan.

“Much of AMR’s revenue-generating equipment,” Dan explains, “is already pledged as collateral for existing loans. So in order to maximize the chances of a successful Chapter 11 restructuring — and avoid a tragic Chapter 7 liquidation — management would want to enter bankruptcy with as much cash as possible.”

Readers of Strategic Short Report are already up 73% shorting AMR; Dan’s telling them to hold on for even more gains.

   To our ongoing chronicle of “new taxes and weird fees” we add two more instances of, umm, unconventional revenue-raising measures.

Here in Maryland, the comptroller hopes to shame people into paying back taxes, so he’s posted the names of the state’s top 50 tax scofflaws online.

“The Comptroller of Maryland is serious about retrieving unresolved tax liabilities,” says a statement accompanying the list. “No one is above the tax laws. If you don’t want to see your name posted on our site along with other tax delinquents, be sure to keep up with your tax obligations.”

Combined, the state says the top 50 owe $21 million.

   Then there’s the crackdown on roll-your-own cigarette machines at tobacco shops. It’s a phenomenon most nonsmokers are unaware of — unless they’re in charge of collecting tax revenue.

Ground zero this week is Worcester, Mass. — where rolling your own is the difference between a $2.50 pack of smokes and an $8 pack, as long as you use a variety of pipe tobacco that’s subject to much-lower federal taxes.

So there’s a move in Worcester to ban the machines. It’s a public health thing, you see.

“B. Dale Magee, the city’s commissioner of public health, told the city council Tuesday the machines could lead to an increase in cigarette smoking because they reduce the cost of a pack of cigarettes by about two-thirds,” reports the Worcester Telegram.

The logic: Ban the roll your own machines… people can’t save the money… they’ll stop smoking as much. Easy, peasy.

How much tax revenue Worcester stands to lose, the paper does not say. But we’re sure the thought never even entered the minds of Worcester’s wise stewards.

The feds? They’ve taken their own stand already. Last year, they declared smoke shops with roll-your-own machines are “manufacturers” of tobacco products… and thus must obtain permits and pay taxes on the cigarettes produced.

We’re sure this too is for the sake of the smoking public.

   “During my 40-year carrier in the oil patch,” writes another Canadian reader fed up with the U.S., “I have traveled by air to the U.S. for business and pleasure more than 2,000 times. I have also held a NEXUS card since the beginning of the program, which is issued by the U.S. government and supposedly identifies me as a ‘trusted traveler.’”

“I stopped traveling by air to the US about two years ago. But last month I decided to go to San Diego for pleasure, and, against my better judgment, decided I would fly.”

“After checking in at the airport in Calgary, having my iris scanned to prove I was a ‘trusted’ traveler and proceeding into US customs, we were pre-cleared in Calgary for entrance into the US. I presented myself to the US immigration officer.”

“As I handed him my passport and casually remarked that ‘the immigration hall was not very busy this morning,’ he looked at me with complete disdain and said, ‘I have no interest in having any conversation with you’ and then proceeded to grill me as to the purpose of my visit, my occupation, how much cash I had on me, etc., etc., etc.”

“That is the last time I will ever travel to the U.S. by air. The border guards at land crossing are still ‘reasonably’ pleasant. When they start to act like the border guards in airports, I will stop traveling to the U.S., period.”

“It’s a real shame. The general population in the U.S. seems like most places in the world. The vast majority are really nice people. But [in the airports], the zombies are taking over!”

   “The man from Canada who didn’t like the U.S. Customs officials’ attitudes should look in his mirror,” writes an American reader as if in response. “After a couple of encounters with Canadian Customs officials, it is my firm contention that no one is hired to be a Canadian Customs official unless they swear that they have an undying hatred for America, Americans and anything to do with America.”

“The last time I attempted to cross into Canada, the Canadian Customs jackass tore my truck apart, and after tearing my truck apart and searching me finally told me, ‘Well, I don’t find anything you shouldn’t have, but you are not welcome here in Canada. Go back to the USA, and if you ever come back to Canada, you’ll be arrested and thrown in jail for the rest of your worthless life.’”

“Real friendly those Canadian Customs a-holes.”

The 5: Can’t we all just get along?

   “Your novel booksafe and all the readers’ hiding suggestions,” writes our final correspondent, “are very clever — as long as nobody in the criminal realm is reading or knows somebody who is reading The 5.”

“And of course, we don’t assume any 5 reader will one day become desperate enough to go criminal.”

The 5: We’re always surprised to learn anyone is reading The 5!

There are only a handful of the booksafes left. If you’re still interested, call John Wilkinson at (866) 361-7662.

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. “I’ve already spent most of my retirement these last few years, as my business of 25 years has slowed to nothing,” writes another reader who replied to our Project X survey.”

“My trust in the financial system has been broken; what’s most troubling is my now deceased father was my financial planner. Leaders in America are purposely destroying its morality, allowing its own destruction. I sense the workings of an evil master that wants to control, steal and destroy.”

“My biggest concern,” writes another, “is that our federal government is fundamentally broken, that very few, if any, in D.C. understand or are capable of understanding; that even fewer have the political will to do anything about it; and that even if anyone did have the political will, the electorate cannot and would not be able to accept or tolerate solutions that address the ROOT cause(s) of the problem(s).

“It is far more serious than just trying to fix or patch the economy. It isn’t just the financial system, it is the entire way that our government does business.”

“The financial system,” writes another reader, spelling out his top concerns, “will be so filled with fraud, government intervention and insider trading that an average investor will have no chance to earn a reasonable return from any investment.”

“Picture the next 30 years with no prudent options for investing money: Everything will be high risk and unpredictable except for those who are on the inside.”

The following letter will be sent to Agora Financial readers later today:

By now, I’m sure you’ve heard Addison mention his super secretive “Project X.”

“The project is unlike anything we’ve done before,” he’s explained. “It’s not a newsletter, book, documentary or conference.”

“Instead, it’s a radical new way to help you develop the power and confidence to build lasting wealth.”

Now… for the first time… he’s finally given me the green light to share Project X with you.

Click here to discover what Addison’s been keeping a secret for so long…

Joe Schriefer
Publisher, Agora Financial

P.S. One more thing…

YOUR participation is critical in this project. So after you finally discover what Project X is, we welcome your thoughts on how to improve it.

Tell me what you like about the project. Conversely, tell me what you don’t like.

First though, you need to check out the Project right here.


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