US RATING AGENCIES: A FORMIDABLE WEAPON OF MASS DESTRUCTION

The debt is like a crazy aunt we keep down in the basement. All the neighbors know she´s there, but nobody wants to talk about her.
~ H. Ross Perot

Dear Mountaineers,

This week, European policy makers unveiled an unprecedented loan package and a program of bond purchases as they spear-headed a global drive to stop the sovereign-debt crisis that had threatened to shatter confidence in the euro. Jolted into action by last week´s slide in the euro and the soaring bond yields in Portugal and Spain, the 16 Euro nations agreed to offer financial assistance worth as much as 750 billion euros (US$ 962 billion).

The European Central Bank now appears officially and irrevocably devoted to counter ‘severe tensions in certain markets´ by purchasing government and private debt. This is where the borders between socialism and communism become extremely blurry. This package was created on the backs of taxpayers, on the basis of more debt, more deficits, more "easy money" and a lot more big brother.

Clearly, these measures will not solve the actual problems. These measures are not about solving problems, but merely about buying time. Admittedly, this ‘grand plan´ has provided for a nice lift in global financial markets after one of the worst single-day corrections in global stock markets last week. However, these measures provide no sustainable improvement.

Furthermore, it has become very apparent and visible for all to see -- if they only looked hard enough -- that the current state of relief is in the hands of American rating agencies. I promised to comment on this aspect of the current Greek debt crisis in last week´s Update. And so I will.

First of all, keep your eyes on the pea!!

In the midst of all the financial and political gyrations we are faced with these days, it has become almost impossible to focus on what is relevant, to phase out the noise. Yet, that is exactly what is required under these circumstances. It appears a bit like keeping your eyes on the pea while a nifty and street-smart con artist does his "magic" in the world famous shell game.

Particularly in the context of the latest sovereign default and currency crisis in Europe, I am of the opinion that our attention is craftily being diverted from what really matters. To sum things up right from the start, you need to realise that no matter what diversions are employed, no matter how big and bad the financial and economic issues appear to be in any other parts of the world, the global financial system hinges on the sanctity and health of the US financial system.

To understand what is happening in international financial markets -- stock markets, currency markets, commodity markets, gold -- you need to "keep your eyes on the pea", on the US and its currency.

Whether you like it or not, the global financial system is always but a mirror image, a reflection of what is happening in America. This has to be your starting point. If you are looking at the Greek debt crisis from a Greek or European perspective, you are missing half of the story (and the more important half!). If you are evaluating the topic of "Chinese currency manipulation" only from a perspective of trade balances, you are missing the true and relevant story.

The US dollar is at the epicenter - NOT the Yuan, NOT the Euro, and certainly not the Greek

As long as the US Dollar is able to remain the unchallenged global reserve currency and as long as US Treasury paper can retain its position as the number one reserve asset, the US currency, the US deficits, the US debt, and US Treasury auctions will be the most interesting variables to watch. When any of those elements -- the underpinning pillars of the global monetary system -- gets further out of whack than it already is today, you should expect another diversion, another crisis, another sovereign default SOMEWHERE ELSE.

On May 11th, a powerful group of international financial gurus, bankers, central bankers and politicians gathered here in Zurich. This gathering entailed the who´s who of international finance. Amongst them, the likes of Herb Stein (managing director of the IMF), George Soros or Masaaki Shirakawa were present. The meeting was not publicized much. In fact, it went largely unnoticed by the mainstream press, even though it was held under the ominous title of "High-Level Conference on the International Monetary System, Zurich".

That, dear Mountaineers, is exactly what is at stake today: the international monetary system. The current financial crisis threatening to spread in Europe and beyond is not about Greece. It is not about Portugal. It is not about the Euro. It is about the international monetary system and its number one world reserve currency. The people meeting in Zurich knew that full well.

Take special note of some of the opening comments made by Phillip M. Hildebrand, Chairman of the Governing Board of the Swiss National Bank:

"Conferences on the international monetary system are held with great regularity, particularly in the wake of financial crises. It is therefore not surprising that the recent crisis has brought renewed attention to the functioning of the international monetary system.

"But as Herb Stein noted more than 40 years ago, it is not easy to define the international monetary system. Where does the international monetary system end and domestic economic policy begin? Did the recent crisis have its roots in shortcomings of domestic policies or in shortcomings of the international monetary system?"

Mr. Hildebrand then went on to state the following -- the most important section of his introductory speech to the conference:

"Arguably, much of the debate surrounding the international monetary system boils down to the following question: How sustainable is an international monetary regime, in which one national currency serves as the international reserve asset? Over the past few decades, this question has been examined under different perspectives.

"A first perspective was the so-called ‘Triffin dilemma´, discussed in the context of the Bretton Woods fixed exchange rate regime. This discussion highlighted that increasing indebtedness of the reserve-issuing country would in time undermine the very confidence that forms the basis for the reserve asset status.

"A second perspective refers to the alleged ‘exorbitant privilege´ of the reserve-issuing country. It highlights the asymmetry in the adjustment to shocks, as the reserve-issuing country has the privilege of not being under much pressure to adjust to current account deficits, at least over the short and medium term. It is worth noting that part of Keynes´ goal in setting up the IMF was to try to create symmetry between the need to adjust for both deficit and surplus countries."

Coming from the lips of someone like Phillip Hildebrand, this is dynamite! You should be aware that we are in the midst of a growing global currency war, one that has considerable implications and the potential for large-scale collateral damage.

America will defend its currency´s #1 status AT ALL COST

The conference was organized partly around a sequence of panel discussions. The most noteworthy, from my perspective, was chaired by Mr. Soros. It examined ways to improve the supply of reserve assets. The questions discussed included the following:

Is a diversification of reserve assets desirable, and if so, should it be actively promoted? Is there a greater role for SDR´s in the international monetary system, and if so, what reforms would be required to give SDR´s a greater role?

What these discussions are about is a complex and critical issue: How can we establish alternative stable reserve currencies PEACEFULLY? Can we construct an alternative to the US dollar without destroying the current monetary system...and without aggravating America?

Clearly, the trust and creditworthiness of America is directly linked to the stability of the Greenback. At this point, it is the linchpin (possibly the last) of America´s financial survival. Without it, its huge debt load and rapidly growing deficits can no longer be financed. That is what recent events boil down to.

And this is the background -- the underlying story -- behind the recent downgrade of Greek ratings. As soon as Europe finally gave in to the pressure and pursued the Keynesian path of spending to support Greece and the EURO, Moody´s already announced the next "possible downgrade" -- this time Portugal. This is not happening by coincidence. And, this is not the outcome of an objective and measured rating process.

To better explain this, I need to discuss a topic that has been discussed increasingly over the past few months, at least on the internet: US Treasury auctions in distress.

US Treasury auctions in distress

Historically, investors have sought safety from financial market gyrations in US government bonds (T-Bills and T-Bonds). These assets were assumed to hold virtually no risk of default and, contrary to cash or gold, offered a yield. Recently, the safety of the dollar had increasingly come under questioning. And, this loss of trust had started gaining momentum and had considerable effects on several US Treasury auctions.

 

Treasury auctions take place regularly as a method of financing America´s debt. In other words, government debt (T-Bills / T-Bonds) are sold to public and private investors. The higher the trust in America as a debtor, the lower the interest rates that the creditors will demand. In other words, a ‘damaged good´ will not be accepted at the same advantageous price.

Over the past few months, largely unnoticed by the mainstream media, US Treasury auctions were faced with increasing distress. The US Treasury found it increasingly difficult to finance America´s growing debt -- or explained differently, to sell its T-Bills in the market.

With a US$ 1.35 trillion 2010 budget deficit, a $12.3 trillion federal government debt and $63 trillion in unfunded liabilities, the fiscal condition of the US has come into question and foreign interest in US Treasuries declined. In late March, it was reported that the 10-year US Treasury Note yield had increased by 30 basis points and that foreign holders of 10-year Notes were selling in record numbers.

Reports of US Treasury auction distress first appeared around December of last year in an article by Eric Sprott and David Franklin entitled "Is it All Just a Ponzi Scheme?". A more recent analysis of 4-week Treasury auction results by OmniSans Investment Research suggests that US Treasury auctions were far more distressed than had been generally recognized.

Here in the Mountain Vision Update, we have repeatedly pointed toward the ugly specter of a ‘debt trap´. Once the markets started pushing up interest rates, it would become VERY, and possibly TOO, expensive for America to finance it soaring deficits. This was particularly the case when the trust in the US dollar was crumbling and alternative (competing) currencies -- primarily the euro AND gold -- were seen as safer stores of wealth.

And this is precisely where US rating agencies have come into play!

US rating agencies - weapons of mass destruction IN ACTION

Generally, the understanding is that central banks can and do directly manipulate short-term yields on government debt paper by adjusting interest rates. However, the yield on longer-term debt is considered outside the influence of central banks. They are set by the market. So goes the common assumption. However, that doesn´t prevent central banks or government from ‘interfering´ in the markets with more ‘creative´ tools and strategies.

In this context, the price action on Treasury bonds since December is worth taking a closer look at. Whenever the European debt ‘crisis´ peaked via another downgrade or ‘negative outlook´ proclaimed by the US-based ratings agencies, the US dollar rose and T Bond yields fell (with the reciprocal rise in prices). On the other side, whenever the debt ‘crisis´ seemed to be lessening or the European/IMF bailout seemed imminent, the opposite happened.

That process peaked (at least thus far) over the last week of April as Greek debt was downgraded to ‘junk´. T Bond yields turned on the proverbial dime and soared over the last three days of the week. The trade-weighted US Dollar index (USDX) hit its 2010 high the day after the Greek downgrade to ‘junk´.

But here lies the problem for the markets and for the US ratings agencies´ influence over them. Greek debt has already been downgraded to ‘junk´. Yes, it can be downgraded further, but junk is junk to the markets. Below a certain level, it is not touched by the world´s major investment institutions.
The only way forward for the ratings agencies is to downgrade OTHER European sovereign debt (Spain, Portugal, Italy, Ireland) to junk status. In reality, the sovereign debt of EVERY nation is in fact ‘junk´. Furthermore, rating agencies themselves are not trustworthy. Ever since the subprime crisis, the legitimacy of their work, if not their existence, has been in question.

Their actions should really speak for themselves, at least for anyone willing to admit the ‘crazy aunt in the basement´ quote. US rating agencies themselves have junk status at best. The harder these rating agencies push, the greater the risk of that fact dawning on the markets!!

Implications and conclusions

The sovereign default risks of countries like Iceland, Dubai and now Greece have been able to divert the attention away from the doldrums of the Greenback to some degree, but not completely.

The US faces HUGE fiscal challenges that need to be financed. Several of the US states are in worse condition than Greece or any of the other European countries. In fact, the California bankruptcy dwarfs the Greek debt crisis no matter which scale you use. Consequently, while Europe seems to be in a tough corner at this point, and while European leaders are hardly acting in unison (if at all), the American debt keeps growing, and the financing will not get easier. At some point, something will give.

Possibly, there will be more diversions. Possibly, the Euro will crumble further...and before the Greenback. However, ultimately, we know the true story behind the global propaganda. The true story revolves around the Greenback and the global monetary system in its entirety.

The alternative solution -- the wealth preservation safety pin to this scenario -- has signaled this clearly. Gold keeps rising. The market is starting to notice the true story. It will not be bamboozled much longer. Nor should you.

At this point, please accept my apologies. I hate sounding sales-ish here. However, this is not a sales pitch. This is my conviction and sincere recommendation: BUY GOLD, PHYSICAL, AND STORE IT AWAY SAFELY.

I have myself added heavily to my holdings of physical precious metals over the past few weeks, mostly gold bullion coins in the form of Krugerrand, American Eagles and Canadian Maple Leafs. I am using the Global Gold Program for that purpose. However, there are other options that, depending on your needs and objectives, will work too, as long as you make sure that you are the OWNER OF PHYSICALLY ALLOCATED METALS, not the holder of yet more paper and promises...

Keep your eyes on the pea!!

Sincerely,

Your "Swiss Mountain Guide"

Frank R. Suess

RON´S PANORAMA -- BORING INTERNATIONAL LIFE INSURANCE LOOKS GOOD IN TIMES OF MARKET TURMOIL

Are you tired of market manipulation and Wall Street flash trading that threatens your wealth and has already wrecked the portfolios of many investors? You might like to learn about international life insurance planning, which can achieve, among other things, asset protection, privacy, tax efficiency and global investment flexibility.

Carefully structured annuities and life insurance policies can still provide solid wealth preservation. Such programs draw on the special treatment given to life insurance and annuities by the laws of many jurisdictions, including both the U.S. and Switzerland.

Over the past twenty years, offshore life insurance solutions and annuity policies have grown increasingly popular among investors around the world as the financial mechanics and advantages become more widely understood. In particular, investors from countries with unstable political or highly litigious systems have sought safety in international annuities.

Swiss annuities have been known and used by sophisticated investors for many years as one of the world´s best asset protection, retirement and currency diversification vehicles. Minimum investments are generally low, in many cases just 50,000 Swiss francs. Even the smallest policies offer an attractive combination of low risk and high potential for profit.

Ron´s Panorama is contributed by Ron Holland and offers economic, financial and social considerations for Americans, from an American - with a somewhat Swiss perspective. Ron is a retirement expert and consultant, who works out of Zurich and is a contributing editor to the Mountain Vision Newsletter.

NEWS BRIEFS

Moody´s Now "very likely to downgrade Portugal"!?!?

"We have sent a signal that it is possible, and I have to say, statistically, there is a very strong likelihood that if we put it on a review for downgrade then we follow through with a downgrade," Anthony Thomas, vice president at Moody´s Sovereign Risk Group, told Reuters.

Moody´s said it could downgrade Portugal´s Aa2 ratings by one, or at most two, notches, citing "the recent deterioration of Portugal´s public finances as well as the economy´s long-term growth challenges," especially due to low competitiveness.

However, Thomas said the downgrade was not completely certain and the agency was planning to meet Portuguese authorities to discuss its austerity programme, including a decision last week to bring forward some measures to this year from 2011.

Go to Story

No Bear Market of US Treasuries After All...Well, Not After the Latest Moody´s Announcement at Least!

Just six months after the committee of bond dealers and investors that advises Treasury Secretary Timothy Geithner raised the alarm over record U.S. debt sales, treasuries are the securities everyone needs to own.

It appears that, at least for US treasury sales and auctions, the Greek disaster is paying off already. The cost to hedge against rising yields as measured by the so-called ‘payer skew´ in options on interest-rate swaps has fallen about 90 percent from a record high in October, Barclays Plc data show. At about four basis points, the measure, which the Treasury Borrowing Advisory Committee flagged as a warning sign in November, is back in line with the average before credit markets seized up in August 2007.

Go to Story

America to the Rescue!?!? Fed Intervenes in European Debt Crisis

America comes to the rescue. Europe just can´t stand on its own feet. That´s the tenor of this New York Times article. It starts off as follows: "After months of quietly watching from the sidelines, the United States finally intervened in the European debt crisis on Sunday night."

The intervention, which also involves the central banks of England, Switzerland, Canada and Japan, is part of a colossal package intended to quell the restive credit markets with a show of force and resolve that American policymakers had quietly believed was lacking. The package has two other elements: about US$ 950 billion in loan guarantees from the European Union, and a decision by the European Central Bank to intervene in the bond markets through a series of refinancing operations.

As discussed earlier, it would appear that America had been "intervening" all along! This is, in our opinion, another masterpiece of currency warfare and information management. And, quite obviously, the masses are eating up the script with the usual naïve faith in big newspapers.

Go to Story

Taleb: Piling on More Debt Won´t End the Global Crisis

The only way for the world to say goodbye to the credit crisis is for governments to lower their debt levels, says New York University Professor and author, Nassim Taleb.

"The crisis came from debt and you don´t escape it with more debt," Taleb says.

"We´re in a situation where we had a patient who we discovered had cancer a year-and-a-half ago and all we´ve been giving the patient is painkillers. The tumor is getting worse because we are transforming private debt into public debt and public debt is not manageable."

The Obama administration should work to convert its massive public debt into equity or else generations will end up paying for it, Taleb told Bloomberg.

"That´s immoral," Taleb says.

Go to Story

Highjacking the Financial Crisis for More Consolidation, Centralization, Regulation - a Socialist´s Dream Come True

The Daily Bell provides some interesting comments on an article by economist Paul Krugman and on the fact that the financial crisis is repeatedly highjacked by socialist politicians and multinational corporate interests for an increasing move toward more consolidation and centralization. This development is most pronounced in America and Europe, and it will continue, like it or not.

Go to Story

Fed´s Probing JP Morgan Trades in Silver Pit

Federal agents have launched parallel criminal and civil probes of JPMorgan Chase and its trading activity in the precious metals market, The Post has learned.

The probes are centering on whether or not JPMorgan, a top derivatives holder in precious metals, acted improperly to depress the price of silver, sources said.

The Commodities Futures Trade Commission is looking into civil charges, and the Department of Justice´s Antitrust Division is handling the criminal probe, according to sources, who did not wish to be identified due to the sensitive nature of the information.

Go to Story

Bill Clinton Agrees!?!? The Crisis Originated in Our Leaving the Gold Standard...

A brief video worth watching, at least for entertainment:

In an interview hosted by the Peter G. Peterson Foundation during their 2010 Fiscal Summit, Bill Clinton made some interesting (and unexpected) comments. The interview focused on the SEC´s case against Goldman Sachs. However, for us the most notable segment of that (admittedly confusing) interview was the following:

"There´s a bigger problem here. Which is, too much of our growth in the last decade was in finance. Ever since we left the gold standard, which was necessary for economic management purposes...[he then babbles a bit, possibly surprised himself by his slip of mind or his mouth and continues]...ever since then economic inequality has increased..."

Go to Story

The Greek bailout - Blessing or Curse?