Tuesday, May 18, 2010


Remember the computer from the movie War Games --- the WOPR?  Remember how it just wanted to play a game?  In playing the game the computer began automatically ratcheting up the security protocol for the US and it perceived the game was real and couldn't differentiate between the two.  Well WOPR just kicked up the alarms a few notches!

If you weren't at Defcon 4 or 5 you better be now.  The Germans made some unilateral decisions that might be the sudden catalyst for upsetting the finely tuned ponzi scheme that all central banks have been playing for the last few decades, but really moving all their chips in over the last 14 months.

The decisions made by the Germans attempt to do a number of nutty things but they essentially are trying to ban speculation of government bonds.  They also attempt to ban shorting of their top 10 financial institutions and insurers and ban on naked CDS.

HAVE THE GOVERNMENTS LEARNED NOTHING?  It was the shorts that have uncovered and discerned all of the lies in the credit and equity markets.  It is the shorts that continue to uproot the misdirection and over leverage in banking and government debt.  It is the shorts that provide liquidity and fodder for bulls when the markets turn around.  As we witnessed when outlawing shorts is implemented there is typically a brief move upward followed by a complete meltdown.

When word of the ECB and IMF bailout surfaced last Monday word hit the street that German citizens rushed (not walk) to gold and silver dealers and quickly bought out domestic supplies.  The Germans have the strongest economy in Europe and if there was an actual referendum on whether to bail out the Greeks or other nations it would certainly fail.  And this point is crucial.  Have you noticed that all participants in this world crisis are unwilling (citizens that is).  Did you get a proxy statement in the mail regarding your desire to have the United States provide $50 Billion to the IMF (we are 17% of the IMF funding)?  No, your dollars are being spent and national sovereignty and representative government is being usurped.  Congress appropriates funds not some IMF, the FED, or the Treasury!  You are witnessing the disconnect between the ruling class and those that are being ruled.  In the US we like to claim that we are free, but clearly use of our tax dollars to support an island in Southern Europe does not benefit us nor is there a likelihood of repayment.

What would cause the Germans to buy gold?  I think those citizens know that the Euro cannot last given the pressures that are mounting.  Several nasty things can happen as a result of the one-sided decisions made by the Merkel led government in Germany.

First, Germany's sovereign debt may drop significantly in value as traders and portfolio managers attempt to exit positions related to their country debt.  Look for US Treasuries to go higher in value and yields to continue to drop.
We'll see European stocks drop and also we'll ultimately see German banks drop significantly.  Any rational investor must be asking what the German government regulators are seeing on German balance sheets and what is causing them to strike out at short sellers.  Look for these very institutions that are being protected to get hammered as people exit positions in fear.

Of course the dollar will rise.  Large banks in the US will get hit although larger US firms that pay dividends may go down less as there will also be a flight to safety.  Think utilities and telecom here.

Global contagion is a real possibility here.  In the 30's the 2nd collapse in 1934 was caused by the failure of a German bank - by the way, that drop in the stock market lasted for a couple of years and amounted to an almost 70% drop.  In the depression there was also a move by world governments to create protectionist schemes and make decisions that impacted other nations unilaterally.  (Sound familiar?)

I'll post more, but you've been warned and I hope as usual that I'm just being alarmist.


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