NIA Report: S&P Downgrades US Debt Rating

 

S&P just announced late this evening that they have downgraded the U.S. debt rating from AAA to AA+ with a negative outlook.

 

NIA is absolutely shocked by this. What shocks us is just how long it took them to make this downgrade. Just like how S&P and Moody's didn't downgrade subprime CDOs until the mortgage-backed bonds they held were practically worthless, S&P waited for U.S. debt obligations to reach five times GDP and for the U.S. dollar to lose 84% of its purchasing power over the course of a single decade. The U.S. was a hair away from defaulting on its debt this week if the debt ceiling wasn't raised, yet it still had a AAA rating.

 

NIA believes that a AAA rating should be reserved for countries that have budget surpluses, low levels of debt that could easily be paid off without printing money, and low levels of inflation. The U.S. had a cash budget deficit last year of $1.3 trillion, but once you include increases to unfunded liabilities, our real budget deficit was approximately $5 trillion. Even if Americans were taxed 100% of their income it wouldn't be enough to balance the budget.

 

It is hard to imagine a fiscal situation worse than this, but the credit ratings agencies have justified giving the U.S. a AAA rating based on the dollar's status as the world's reserve currency and the Federal Reserve's ability to monetize our deficits and debts by printing money. If it wasn't for our printing press and the world's willingness to accept and hoard the dollars we print in return for the real products and commodities they produce, the U.S. credit rating would be junk.

 

S&P claims that their reason for downgrading the U.S. debt rating at this time is because, "the differences between political parties have proven to be extraordinarily difficult to bridge". According to S&P, it is because our two political parties are so far apart that we weren't able to pass a bill with anything but modest spending cuts. The reality is, the Republicans and Democrats aren't far apart at all. Neither parties are serious about cutting spending and the underlying fundamentals of both their proposed bills were exactly the same. The Republicans that American tea party supporters elected to office have broken their promises to make major spending cuts and have accomplished absolutely nothing positive since entering office.

 

Our country just had an unbelievable opportunity to dramatically cut government spending in a last ditch effort to prevent hyperinflation. Instead, our government passed a bill to raise the debt ceiling that had no real spending cuts at all. The mainstream media tried to spin the bill into being a victory for U.S. tea party supporters due to the purported "spending cuts" that it contained. The truth is, government spending is set to rise every single year until the dollar is worthless. The $2.1 trillion in phony spending cuts are only tiny reductions to large spending increases and none of them will begin until early 2013 when we will need to once again raise the debt ceiling. Even if the government in early 2013 decides to follow through with them, rising interest payments on our national debt will mean substantially larger budget deficits than what are projected today.

 

Credit ratings agencies have absolutely zero credibility left and we believe that with hyperinflation coming soon, credit ratings will become a thing of the past. To capitalize on this, on May 23rd NIA suggested to you put options in the only publicly traded pure credit ratings play, Moody's (MCO). On May 23rd with MCO trading for $37.90, NIA suggested to you MCO November 2011 $35 put options at $1.98. MCO today closed at $32.88 and our MCO put option suggestion finished the day with a last trade of $5.20 for a huge gain of 163% in a little over two months. NIA is very pleased that we figured out the #1 most profitable way to capitalize on the major fundamental shift that is taking place in this industry and as far as we are aware, NIA is the only organization in the world that suggested MCO puts in recent months.

With the stock market down big in recent weeks, NIA believes that this evening's news is already mostly factored into stock prices. With the Fed Funds Rate having been left near zero for over two years, the world is flooded with excess liquidity of U.S. dollars and there is no chance of the stock market crashing like in late-2008/early-2009. In fact, the recent downward move in the stock market means the Federal Reserve is likely to soon implement additional monetary inflation measures and will leave the Fed Funds Rate near zero permanently.

 

The GDP was already on its way to becoming negative in the second half of 2011 and if the U.S. wants to avoid a debt default later this decade, it needs the Federal Reserve to print enough money to see at least 5% annual nominal GDP growth. It's not just the Federal Government that needs GDP to grow, but most cities and states will default on their debts if GDP doesn't grow rapidly. Cities and states don't have printing presses so unless the U.S. government wants to bail them all out like the European Union is bailing out Greece, Portugal, and Ireland, it needs to create GDP growth even if that means the Federal Reserve eliminating interest payments on the $1.6 trillion in excess reserves held by banks and taxing banks who don't lend the money.

 

NIA prays that Americans don't make the mistake of buying U.S. Treasuries as a safe haven, as they are now the riskiest asset of all. If U.S. Treasuries rally next week, it will only be temporary and will be followed by the largest and sharpest reversal in history with a crash in Treasury prices and an explosion in yields like never seen before. Most Keynesian economists will likely forecast rising Treasury prices despite the U.S. debt crisis, because they claim the bond markets in other countries are tiny compared to ours and there simply is no other place to park safe haven money. In our opinion, there is no reason to own the fiat currency denominated bonds of any country or company. Gold and silver are the only true safe havens and it is our belief that by the end of this year, the U.S. public will begin investing into gold and silver in droves as they realize that although we avoided a debt default for now, a debt default by inflation is still on its way. The largest ever short-term rally in precious metals and mining stocks is ahead.

The $1 Billion Armageddon Trade Placed Against The United States

Someone dropped a bomb on the bond market last Thursday – a $1 billion Armageddon trade betting that the United States will lose its AAA credit rating.

In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world.

The massive trade wasn’t placed in bonds themselves; it was placed in the futures market.

The trade was for block trades of 5,370 10-year Treasury futures executed at 124-03 and 3,100 Treasury bond futures executed at 125-01.

The value of the trade was about $850 million dollars. In simple terms, if that was a direct bond buy, no one would be talking about it.

However, with the use of futures, you have to have margin capacity behind the trade. That means with a single push of a button someone was willing to commit more than $1 billion of real capital to this trade with expectations of a 10-to-1 return ratio.

You only do this if you see an edge.

This means someone is confident that the United States is either going to default or is going to lose its AAA rating. That someone is willing to bet the proverbial farm that U.S. interest rates will be going up.

 

I believe what happened is a debt-ceiling deal was done in Washington and leaked to a major proprietary trader. Everyone knows the debt negotiations in Washington have been an extreme game of brinkmanship between political parties, but now someone knows how that game played out.

This had the hallmarks of one of the largest bond shops in the world knowing something the rest of the market didn’t.

The number of shops or even central banks that can take on this level of market risk is extremely small. Some that come to mind are hedge fund manager John Paulson, Bill Gross’s PIMCO, and the U.S. and Chinese central banks.

Paulson already scored big – about $6 billion big – on a similar trade years ago when he bet against subprime mortgages, the investments that helped bring down Lehman Bros. and many other investors.

Whoever was behind it wanted a trade on ASAP, and didn’t care about the ripples they would cause.

You can see how this trade caused fear to be unleashed in the market once it got out and the implications hit by looking at U.S. Treasuries. People who were long 30-year Treasuries panicked as they saw the huge short put on the futures market, and started to unwind their long exposure.

What you, as investors, should do now is look at the bond exchange-traded funds (ETFs) that provide a positive rate of return when U.S. Treasuries drop in value. Yields are going up sooner rather than later, if the person behind this Armageddon trade is correct.

Russia Joins China In Rejecting U.S. Debt, Buys Gold Instead

China, the largest foreign holder of U.S. debt, has been concerned about the safety of its U.S. treasury debt holdings for years.

In March 2009, Chinese Premier Wen Jinbao warned Washington that "We have lent a huge amount of money to the U.S.  Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried."

Premier Jinbao's  was right to worry about the safety of China's U.S. debt holdings.   Since March 2009, the U.S. debt has increased by more than $3 trillion and Congress is now being pressured by the Federal Reserve and the Treasury to increase the national debt limit by another $2 trillion.  The parabolic increase in U.S. debt, along with recent downgrade warnings on U.S. debt from the credit rating agencies, must be keeping the Chinese up at night.

click to enlarge

On Saturday, the Wall Street Journal reported that Russia also decided that holding U.S. debt has become too risky.  In comments to Dow Jones, Arkady Dvorkovich, chief economic adviser to Russian President Medvedev, said "The share of our portfolio in U.S. instruments has gone down and probably will go down further."  According to the Wall Street Journal, Russia has already reduced its holdings of U.S. debt from $176 billion last fall to $125 billion in April of this year.

Besides diversifying into other currencies such as the Canadian and Australian dollar, Russia has also been substantially increasing its purchases of gold.  Recent reports from the World Gold Council and IMF show that Russia recently bought 50 tons of gold bringing its total gold holdings to almost 670 tons.

If Russian economic advisor Dvorkovich looks at the above chart of U.S. debt, he may well decide to run to the exits and dump all of Russia's U.S. debt holdings.

The United States has truly entered the Bizarro stage of national finance.  As the exponential increase in U.S. debt moves the Nation ever closer to a debt crisis, Fed Chairman Bernanke and Treasury Secretary Geithner are predicting dire consequences if Congress does not increase the U.S. debt limit. 

Should it really be a surprise that two of the world's biggest holders of U.S. debt are heading for the exits?

http://goldandsilverblog.com/russia-joins-china-in-rejecting-u-s-debt-buys-gold-instead-0269/

Silver Sell-Off, Record Low T-Bill Rates And Inflation

Peter Schiff discusses the important issues within our economy in his weekly video blog. Peter Schiff is the CEO of Euro Pacific Capital. In the first segment of this video Peter addresses the recent sell of in the silver market. This is important information for anyone who is loosing sleep over their silver investment.

No Buyers For Treasuries aka "Toxic Waste"

by: Bob Chapman

We believe there will be something similar to a QE3 by another name and the Fed will probably have to create some $2.5 trillion to buy Treasuries, Agencies, and toxic waste and perhaps inject funds into the economy. Japan certainly won’t be a buyer and probably will be a seller. China has indicated that they won’t be purchasers in the future either. The question also arises concerning the continued purchase of these securities by countries in the oil producing Gulf States, which are in turmoil. The three countries make up 45% of Treasury purchases. As we pointed out in previous issues the second half of 2011 should be monstrous. Even if the fed buys all the Treasury and Agency bonds they’ll still have to deal with a lower dollar and high inflation. Then there is high unemployment and raging gold and silver prices. There is also the question of US debt, federal, state and municipal debt, along with wars in the Middle East and North Africa. How many US Treasuries will Japan have to sell and how deeply will its slowdown effect American industry?

As you can see America has much to contemplate.

The creation of monetary inflation will last at least two more years. Its end will only come when the Fed takes its foot off of the pedal. Like almost zero interest rates this policy cannot be allowed to stop. The system cannot function without it. The whole concept of throwing money at a problem simply doesn’t work and the elitists know this only too well.

Monetary and fiscal creations are not the only mistakes being made by the Fed and our Congress. US and world markets are being subjected to non-stop manipulation. This corruption has destroyed all free markets. Stock and bond markets are supported and gold, silver and commodities attacked. Fortunately markets now recognize what the elitists are up too and each time they interfere they lose a little more power. It points up that a criminal syndicate is running our country. These tactics are used to extend the looting period allowing further harvesting of elicit profits. The US and many other nations have been allowed to live beyond their means for many years and that condition is being brought to a conclusion. This, of course, is very true of the US due to the dollar being the world’s reserve currency. That is changing, as nations want this unfair advantage ended, especially in view of the fact that the American government and financial community have so abused their privilege.

The profits of the military industrial complex continue to flourish as we have war after war. We notice that both parties are willing to cut spending on Social Security and Medicare, but they refuse to cut military spending, the most expensive item on the budget at 26%. Our government has billions for Fannie Mae, Freddie Mac, Ginnie Mae, the FHA, the FICA and the worthless SEC and CFTC, but no cuts for the average American.

As zero interest rates rule one form or another of money and credit creation continues as it has for the past 11 years. The game is the same, it is just the name has changed. The process of wealth destruction is still in progress and only the select few get to keep their ill-begotten riches. The Fed’s balance sheet over the next 1-1/2 years should reach over $5 trillion.

On this process real interest rates will creep higher, toxic securitized mortgage bonds will fall lower, as the housing market sinks to new lows not able to break out of its death spiral.

We find it of great interest but not surprising that the $5 trillion mortgage bond fraud, after three years, has no prosecutions, or even a civil suit. This smacks of evidence that the Fed made some kind of sub-rosa deal with bond buyers, particularly in Europe, to cover their losses. In addition, we believe the Treasury and the SEC were in on the criminal fraud.

We see Warren Buffett doing the same thing that the Chinese are doing and that is dumping US dollars. He has been going to Asia and India to buy companies. This is how they both bet against the dollar. Buffett even says, “I would recommend against buying long-term fixed-dollar investments.” He says over the next 20 years the dollar will lose its value. This is also what we have been preaching over the past 11 years, and that the preferred investment should be gold and silver coins, bullion and shares. Professionals are concerned about the trade deficit and the balance of payment’s deficit, along with the continual creation of money and credit by the Fed. Then there is the horrible budget deficit and the rampant inflation the government continues to lie about.

Even PIMCO, as we all now know, has sold US Treasuries and even shorted them in anticipation of higher real interest rates. Bill Gross, CEO, calls the US a serial abuser of finance deficits with a ridiculous budget. He, like many others, has lost faith in the Fed and the government to run a proper government fiscal and monetary policy. Bill called it the new normal. We call it the road to fiscal and monetary perdition. Confidence is gone and well it should be. We lost confidence in 1960; it obviously takes others longer.

In our minds there is no question the dollar is going lower, perhaps 40% or 50% lower versus other currencies in general. In just the last 15 years it is 50% lower. In the last 40 years it is 98% lower. At this juncture it is our opinion that the Treasury and the Fed want the dollar lower in order to become more competitive. If they are going to do that they had best end their 60% plus reliance on foreign oil and start pumping America’s vast oil and gas reserves. They will also have to end free trade, globalization, offshoring and outsourcing in order to bring those 430,000 firms that have moved to foreign countries.

As the dollar falls against other currencies, all currencies continue to fall versus gold and silver. Over the past 11 years, annually, nine major currencies have fallen more than 20% on average versus gold and silver. If the dollar over the next several years were to lose its status a world reserve currency costs for foreign goods would rise exponentially. The only reason the dollar isn’t lower is that many other currencies have the same problems the dollar has in varying degrees. The dollar is very weak versus the euro at $1.46. Yet, the eurozone countries are exploding in debt and six of their members are candidates for insolvency. Japan, the UK, and parts of Europe have the same problems the US has - a hangover from using the Keynesian economic model. As a result of this misguided policy in ten years federal debt will be close to $20 trillion, up 75% from today. Is that anyway to fiscally run a country? The answer is obviously not. This is why the Fed has to buy 80% of Treasury and Agencies and it is why there is no end in sight to America’s fiscal and monetary problems. Just about everything is being done incorrectly, which tells us again this has been done deliberately in order to bring the US, UK and Europe to their knees economically in order to force the people in these countries to accept World Government. The experiment again is not going to work and chaos and war will again envelop the world. You had best be prepared.

How can investors be positive about dollar denominated investments, when S&P warns government that they had best get their financial house in order or they will lose their AAA rating. They placed the US outlook as negative. The US has to address medium and long-term budgetary problems over the next two years and if they don’t the rating will fall and the US will no longer be the world’s reserve currency.

Monetary policy cannot continue to augment, aid and abet such a profligate fiscal policy, which can easily be changed by cutting military spending by 50% to 13% of the budget. That is not easy to do with the military-industrial complex, Wall Street and banking running the country. Their greed knows no end.

We just saw over the past three years a credit crisis and a crisis of confidence for both the government and private debt sectors, which still hasn’t been permanently addressed. Many major financial firms are still insolvent and carrying two sets of books. If you did that you would end up in jail.

The Fed has become a liability in its quest to protect its owners, the banks, and not the overall economy. It is instrumental in destroying debt quality and continues to destabilize the monetary base. There is no effort to cut military spending only Social Security and Medicare, which retirees and future retirees paid for, but those funds were stolen over the years.

How does any Fed call allowing mortgage debt to expand by $8 trillion or by 115% over six years? They the banks and brokerage houses knew exactly what they were doing and what the consequences would be. Banks employed leverage of 70 to 1 when 9 to 1 was normal and it is still 40 to 1. Obviously the bankers have learned nothing from their failures. In addition, besides us, how could rating agencies and professionals not recognize a Ponzi scheme? That is because S&P, Moody’s and Fitch were part of the criminal enterprise. How could a credit system double debt, most of it was of very poor quality and expect that there would be no fall out? They knew the consequences and did it anyway. In the aftermath there has been no civil litigation and no criminal prosecutions. Why is this? It is because these criminals have bought most of Congress and the court system.

read more at: theinternationalforecaster.com

Where Were You On Super Bowl Weekend?

compliments of: tfmetalsreport.com


I was in Vegas with my friend, Sweetness. He and I gambled too much. Drank too much gin and played a little golf.

Where were you? Did you watch the game? Perhaps you had a party? Maybe you're not an american football fan so you spent the weekend relaxing and catching up. Either way, like me, you had no way of knowing what was going on behind the scenes.

My next question is: Where was Ben Bernanke? Where was Tim Geithner? Where were the rest of the Fed governors and the heads of the TBTF banks? We may never know, though history one day may record their actions for posterity.


Why do I ask and why was February 4, 2011 so important? In hindsight, it is clear that 2/4/11 was the day that the Fed's hand was forced. A critical moment in time had come. The ruinous implications of the Fed's quantitative easing policy had been made clear. That weekend, both the dollar index and the long bond were moving toward critical, long-term support. Both could not be saved and a decision had to be made.

Sometime over Super Bowl weekend it was decided. Your monetary "officials" chose to preserve their own power at your expense. Why do I say this? Three months on, it's clear that the decision was made to support the long bond at all costs, to the detriment of the dollar. The global reserve currency was sacrificed on the altar of low interest rates and the maintenance of the Fed/TBTF/Govt ponzi. Because of this decision millions, even billions, of people will suffer. The inflation that is coming will spark food shortages and protest. This unrest may/will lead to war. All of this so that the Fed can maintain their power, the TBTF and primary dealer banks can remain afloat and the bankrupt U.S. government can continue printing and spending money, thereby allowing elected officials to escape the scrutiny that would come from actually leading. Neither history nor The Almighty will judge their selfish and cruel actions well.

Here are the charts that prove this out, beginning with the dollar or, as we call it here, the POSX.

As you can see, post 2/4 the dollar actually rallied for a week. It has since declined by almost 8%.

The critical chart on 2/4 was the U.S. Long Bond. The "long bond" is a futures contract on the 30-year U.S. treasury bond. This contract has been in an uptrend for nearly 29 years, from a bottom in 1982. The trendline lays somewhere around 114 to 115, depending upon how accurately you draw it. This was an important topic back in February. For example, here's a thread from 2/9/11:
http://tfmetalsreport.blogspot.com/2011/02/santas-pillars.html
With the decision made to let the dollar die in order to preserve The Ponzi, the long bond suddenly reversed and has since traded much higher.

 

Let's judge the practical, short-term impact of this decision by looking at our three favorite dollar-destruction hedges. First, here's crude:

 

Oh, that's right. The politicians want you to believe that its the oil companies and the evil, scawy specuwators that are driving oil higher. Anything to deflect the blame from themselves.

Now look at gold:

If you haven't yet protected yourself and purchased "wealth insurance" by buying gold, its OK. There's still time. But, if your normalcy bias and blind faith in the status quo keep you from buying some in the future in the face of all the evidence that the dollar is dying, you are the proverbial fool who deserves to be separated from his money.

Lastly, take a look at silver. As we know, silver is also being propelled by some, shall we say "enhanced", fundamentals. Regardless, this performance is stunning and reflects a grass roots, everyday-citizen demand for protection against fiat destruction. My advice is to get some, and take delivery, while you still can.

 

Finally, the intention here is not to say that the demise of the dollar is imminent. The death of the dollar is similar to that of a terminally-ill, cancer patient. There will be good days. There will be moments of hope. The dollar will bounce, probably from the area around 72. The long bond will peak and consolidate in the area around 124. The PMs will correct again soon giving you another buying opportunity. In the end, however, the fate of the dollar was sealed over the weekend of Super Bowl 45. The Packers won but we all lost. For the Steelers, there's always next year. For us, nothing but an uncertain and perilous future.

Read this article and more at tfmetalsreport.com