TAPERING.....RIGHT!

I have been very busy tending to so many things I have not had much time to post. I plan on doing a chart bonanza in the next couple of days since we have just finished a very good quarter with some drama thanks to Uncle Ben Bernanke and his pals at the Fed. To think they could even hint at tapering! What a joke.

Ben's tapering threat certainly didn't get received well, but he came back and simply suggested that he was kidding!  I think the tapering talk was really forced on him and will be again as the bond market's rates are rising, and we all know that Ben can only do so much.  In fact, we've discussed often how the Fed actually follows the market, I'm guessing this is some of the same.

Speaking of the Fed, let's go back in time and examine just how things were back in the 1920's leading up to the crash of 1929. It may be instructive and entertaining. I've wanted to comment on all the best of Americana given the court rulings of the Supremes and also the case involving a hooded teenager, but alas, I have no time to comment on things that are simply a distraction from investing and trying to figure out what next weakness in the economy will reveal itself. Enjoy the video and look for more posts in the days to come.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

DIVERGENT REALITY - MARKET UPDATE

Somehow, someway, the markets simply keep moving up.  Perhaps they are climbing a wall of worry.  Perhaps stimulus that is coordinated and assisted by loose monetary policy simply keeps all the plates spinning.  At some point, gobs of stimulus will meet the headwinds of a global financial slowdown in Europe, an inflationary overheating and under performing Asia and Pacific Rim, and a flight to safety from risky assets as smarter money says, "screw this".

ISLAND BACKGROUND
Quickly, let's review a little about Cyprus.  The tiny island attempted to create its own niche economy in Europe by becoming a financial haven.  They offered very low tax rates and an even lower concern for the origins of the global cash horde that was being deposited within their banks.  Cyprus become an outsized financial powerhouse and a haven for money laundering.  Russian gangsters like Putin and his crony oligarchs have hidden massive amounts of stolen money in Cyprus.

Bankers were all too happy to take the money and of course, they had to invest in bonds of other Euroland sovereigns.  They purchased a ton of Greek debt, which of course has been a disaster.  Cyprus' financial condition has been a known problem for a while, but clearly, the ECB desired to act.  As little as a month ago, financial and political leaders in Cyprus stated emphatically that bank institutions were fine and depositor money was safe.  This weekend, this all changed as Cyprus posted documents outlining the "bailout" where the ECB would step in and give approximately $10 billion in funds, but it required depositors to kick in a total of about $7 billion.  Now think about this.  This isn't the bank getting crushed.  This isn't some bond holder or stock purchaser, this is someone that was saving and simply putting money away.  Depending on how much you have, you'd potentially pay anywhere from 7% to 12%, in a sense, you just took a pretty big haircut for being dumb enough to save and trust a bank.

LOCKED OUT
Over the weekend, the people started hearing about a bank lock up and started sharing information about the vote about the fate of their money that was going to be held on Monday.  Clearly the upset people took to the street and wouldn't allow politicians to steal their money and give it away.  As I type, political and financial leaders in Cyprus attempt to walk a very small line where they can somehow appease the ECB and global banking syndicate and yet keep their heads as they have awoken a very interested and angry population.  The Cypriot legislative body will attempt to forge a solution that placates the bankers and limits the impact on regular folk that never had anything to do with Cyprus banking institution's purchases of Greek bonds with their deposits.

Don't forget too that the Russians are the ones that will take a huge hit in this "bailout".  Possibly the ECB calculated that the funds were illegally garnered, but my guess is that Putin and his buddies will not take kindly to a 12% or greater haircut of their stash.  The ECB is screwing around with these guy's personal cache of money, they better watch it.

THE GLOBAL BANK DEPOSITOR'S DILEMMA 
Banks essentially removed the "haircut" from bank accounts almost immediately, and therefore the effective "tax" was confiscated.  As a depositor, what would you do now?  Can you trust the bank?  As a citizen in a Euroland country like Italy, Spain, or even Portugal, are you certain that this would not happen to you?  The outright theft of deposits is simply too easy for governments when they can shut a bank down electronically and remove funds before anyone has a chance to prevent it.  The Cyprus example is surely a scary test case.  So what will they do?  We are hearing that there is calm in other Euro countries and no one is rushing to take their funds.  The better question in my mind is WHY AREN'T THEY?  It only takes a few people to start a panic, reasonable depositors should be calmly removing funds.  Do you think they wouldn't do something similar in the United States given extraordinary circumstances?

I've often advocated that you should have some cash on hand in case banks were suddenly inaccessible and you should also couple that with some physical metal holdings like gold, silver, or even palladium.  Make a trip to the bank today and get enough cash to ensure you could make it through a couple of weeks with no problem.  I'll do another follow post about metals, but is there any way this cannot be bullish for them?

INVESTMENT IMPLICATIONS - EMB:TENZ -

Despite what you are told and what we are seeing, the global financial markets don't like this.  US markets somehow keeps levitating, but that divergence is getting way out of bounds of what it should look like.
Take a look here at the EMB:TENZ ratio chart.  Remember, this is a measure of the emerging markets stocks versus the ten year treasury.  Essentially, this is a measure that show when investors desire risk versus when they want safety.  Emerging markets have been really under performing and in a sense, the 10 year treasury is beating on a relative basis.  If investors were feeling risky, they'd want to go long emerging markets.  As you can see in this view, the ratio of EMB:TENZ has been very good at tracking the SPX (black line behind the red/black ratio) and probably even leading it up and down.  Now look what has happened recently.  The ratio has cratered suggesting that investors don't want emerging risk at all.  Despite the risk-off move, SPX continues to power higher.

RISK ON?  RISK OFF?
This is a slightly different look, which might be better.  It is still the same concept charted with the MSCI Emerging Markets Index against the Dow Jones Treasury Index.  I provided a monthly view and I think it shows how strikingly in sync this relationship is.  The only two questions we should be asking is how long can the divergence remain, and which direction will it resolve?

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

ROYALTIES, ZIRP, AND OLD LADIES - NATURAL GAS UPDATE

GIVE ME INCOME
A friend of mine has been blessed to have purchased some mineral rights many years ago.  Before her husband died, he told her to never sell the rights as he "knew" the land was very valuable.

Years after his passing, his words have been revealed to be extremely accurate as the income generated from the leasing of the rights has been a tremendous gift to this widow.  Since she has found that she has become the target of the Fed's war on income generating assets using their ZIRP bombs to destroy her retirement income, the royalty stream has become more important than ever.  Because the mineral right income is so critical to her ability to financially survive, she watches the price of natural gas daily.  I find that I check in on Nat Gas too especially whenever I speak with her.

She called me yesterday to ask about a health insurance policy and we spoke briefly about natural gas and also about how low it had dropped.  I mentioned that it had rebounded and after our conversation I pulled up the graph above.

In my view, it looks like natural gas may have bottomed and could easily hit $4.00 since it exploded through the $3.25 level.  Even the $5.00 2011 level could be within reach.  I had to look at the portfolio killer, UNG as well, it frankly, it looks like it has broken out too and even though I hate it, a conservative look at UNG would suggest a move to $25 would be easy.

MORAL BANKRUPTCY
My examination of natural gas also led me to find this article in Reuters today.
In the article Casualties of Chesapeake's Land Grab Across America, the authors highlight several interesting techniques that Aubrey McClendon, CEO of Chesapeake, has used to lock up parcels of land and mineral rights.  Unfortunately, the firm's approach to becoming the largest mineral right holder and leaseholder in the US has been one that has left several owners feeling they weren't treated fairly.

Specifically, Chesapeake has been said to sign contracts for leases and then many days or weeks later demands lower lease rates.  The main problem with this is that the signed lease effectively locks up the landowner and crowds out any competitor bids.  After the dust settles, Chesapeake returns and turns the tables on the owner threatening to back out completely if they don't accept the lower amount.

Second, when the driller cannot get a landowner to do business they have been using the court and legal system to effectively "steal" the land and minerals from the owners.  In these examples the company uses the notion that the lone landowner cannot deprive neighbors from using their property as they please.  The firm argues that the hold-out landowner is a block to the other owners and therefore uses legal statutes to access their land and drill.  In Ohio, the land is exploited and the landowner receives royalties.  In Texas, the landowner relinquishes their right to control the land as the firm drills AND they also forfeit the royalties!!!

I read about these practices and this only adds to my thoughts that McClendon is simply a bad guy. Recall early this year when it was discovered that he had taken out loans totaling more than $1Billion against oil and gas wells he shared stakes in with Chesapeake.  (This is scary considering losses in his portfolios could be detrimental to the positions of Chesapeake.  We saw some terrible leverage issues with the CFO of Cheniere (LNG) in 2008 as margin calls crushed the company stock).  Additionally we discovered that McClendon also was running a $200 Million hedge fund that traded commodities and had failed to disclose this.   We also learned about the serious corporate governance issues where personal expenses could have been paid for by Chesapeake (and its shareholders).....Tyco anyone?

So, while I think natural gas may be going higher, I'm surprised to see a chart of CHK (Chesapeake) and I'm not convinced that it too is going to new levels.  As I close, let's view the CHK chart and see what might be going on there.


CHK

The chart of CHK shows that there has been a solid gain in the stock since May 2012.  As it has moved higher, volume has fallen dramatically.  Personally, I feel like the bullish move in the stock is done.  IF it trades above $20.50 I believe it could go to $23, but I would expect to see a fall to $16 before we'd ever see a move higher than $20.50.

KEY TRADES
Long natural gas looks good, so I guess if you are stuck with UNG and all it's widow-maker traits, go for it!

Avoid a long CHK unless there is a powerful rise through $20.50.  If there is significant macro weakness a short CHK could work to test $16.

 

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/ 

FREE... ALWAYS COSTS YOU SOMETHING

Check out this awesome video that just makes you want to stand up in pride about the state of our nation.

GET YOUR FREE PHONE





LET THEM TAKE CARE OF ME!
I didn't start looking into this issue due to the "Obama" stuff, but mainly because I saw the "free phone" commercials on television and wanted to know more.  What is scary about the video is that it reveals an attitude of "get what you can, cause its free" and then goes on to reveal the category of eligible candidates ranging from Social Security, Disability, Welfare, and more.

I once did a post that discussed the notion that our government has created an entire generation of experts in welfare programs.  Essentially that many work harder maximizing their benefits and status as receivers of free stuff than they do in actually trying to get on their own.  I recalled the terrible situation in New Orleans where there were literally generations of families on the government dole.

WHAT'S IT LIKE TO BE POOR
"Rather than changing the system and educating the public there, we created a legion of benefit experts that could exploit all of the provisions of social security benefits, welfare benefits and all other types of assistance. 


TOUGH QUALIFICATION STANDARDS
In these tough time where many people are unemployed or underemployed and everyone including states and the government are pinching pennies, I'm sure there are pretty tight controls over who can get these phones, right?  The video below examines the process and criteria for obtaining this wonderful benefit.






EVERYONE IS IN ON IT
The video clearly demonstrates that our society has declined into a full-blown communist system where the entire goal is to get what you can from the government.  Communistic systems are bureaucratic, brutal, controlling, and most of all, corrupt.  Every participant attempts to use the system to maximize their benefit.  This is why you have dependency at the bottom and an extreme level of power and wealth at the higher levels.

In the video, we see that participants take 3, 4, or 5 phones and perhaps even sell them for $20 or $30 when they need cash.  The sales guy doesn't care, he is rewarded to give out as many phones as possible because he only earns when he "sells" the phone.  He doesn't care about qualifying participants and determining if they already receive benefits.  Finally, the cell phone company also wins because they get to bill the taxpayer.  Government program leaders measure the success of the program by counting how many phones are being used, so there is no incentive to crack down on abuse or waste (this is just like the food stamps program by the way).  Government employees are measured in how effective they are at signing people up.  In this system, the only loser if the stupid guy who actually pays his phone bill as he is the one paying for the program.

WHAT ABOUT YOUR BILL?
As I examined my bill last night I really got motivated to write this post.  I am one of the few that still continues to fight the trend and I still retain a home land-line simply for business back-up reasons.  If there were a hurricane, flood, or other emergency, I want to ensure that I have some way to communicate with clients.

Having said that, I will admit that this phone line is barebones and is simply a land line.  The base cost for the monthly service with AT&T is $21.18 a month.  Not expensive, yet not cheap if you think about the fact that this phone is used for 2 or 3 calls a month.

The killer here is that the base cost is not all I am required to pay!  Click on the graphic below and note the details of the bill that includes the surcharges, fees, and taxes.  All in, the "other" expenses total an amazing $12.62 per month!  TAXES AND FEES TOTAL 60% OF THE COST OF THE LINE!!!
Are you kidding?  60% taxes and fees?  This is worse than the taxes for cigarettes, alcohol, or even gasoline!

While the Universal Service Fees for both the state and federal portions are relatively small ($.91 and $.83) they are still adding to a completely insane situation that is clearly out of control.  I am tempted to simply move the number to a service I use that gives me a virtual number and is forwarded to my cell phone.  In a sense, I keep the number and it goes to my other phone.  This costs an all in $5.00 per month.

Finally, when you actually consider that my business requires me to have three cell phones and many other telecom products I find that I am paying a significant amount each month in the form of taxes, charges, and fees.  In total, these charges are well over $100 a month.

In conclusion, watch this last video by Arkansas Congressman Tim Griffin who has tried to pass legislation to clean up the abuse and theft of our money.





So heck, why don't you just get your own, "FREE PHONE TODAY".  The problem with all this free stuff is that it causes us to lose our independence, our ability to foster self reliance, and ultimately, it looks like it has caused us to lose our integrity as well.  There really is a cost for all this free stuff.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/ 

SYSTEMOLOGY / SNAP PHDs

My friend Amy from Slope of Hope wrote the following excellent comment that I knew someone would state, and she is right on.  So instead of posting the comment in the comment section that would never be read, I wanted to respond right here and give Amy her due.  Thanks for making a great point Amy.

AMY'S COMMENT

"I think we need to be careful about blaming "those damned bums on welfare". Most of them want to work. It's not their fault that we're in this mess. We're watching the biggest rip-off in history and many of those 46 million are victims who don't have a clue what's happening."

Amy, you are so right of course.  I don't want to paint the picture that most of these folks are not needing it.  Although with 46,000,000 on the roles, I'm going to guess at least 2% to 5% just aren't deserving like the recent story where the million dollar lottery winner was a participant or the report that 20,000 Wisconsin university students had to be kicked off last year.

My post really is lamenting that we are seriously saying that 15% of our entire nation's population is receiving benefits that help to feed themselves.  15% of people aren't earning enough to buy groceries!  That is really why I track this data each month, I'm of the mindset that this is awful and I completely understand that all of them would probably trade places with Mark Zuckerberg or even Goatmug in a heartbeat.

SYSTEMOLGY PHDS
Going deeper, I'm in fact not blaming any of the people that would actually be enticed to go get some aid and benefit for free, in fact it is a natural by-product of what they been told and sold.  I actually blame our entire system as it is removing the notion that self reliance at any cost is better than taking a hand-out.  Once the stigma is removed for these things you almost create an entire class of people willing to live at that standard of living in order to not have to do anything.  Just think about New Orleans prior to Katrina where you had literally generations of families "working the system".  Was it a good living, no, not one bit.  Could they be blamed, perhaps a bit, but it is what they knew and is where they were trapped.  Could the government system be blamed?  Heck yes, as it was easier and better for the government to give them just enough to keep them in control rather than have to face them, deal with them, teach them, and actually raise them up to be people that could stand on their own.  Essentially the entire system created entire classes of PHDs in systemology or the science of working the system to maximize benefits with little or no work.

This is the vision for government in our day, get funding, provide services, advertise services, grow the budget, provide services, and grow the program.  In this set up, SNAP or CALFresh government employees have misaligned incentives as their success depends on the programs growing bigger and bigger.  What motivation does the Director of SNAP have to get people to be self sufficient and get on to real productive lives?  None!  If they do get financially healthy, the Director of SNAP has less power, reduced funding, and less prestige.

A MINDSET SHIFT
In closing, I also lament the shift in mindset this entire country has begun to undergo.  Would you ever have imagined that a large part of the population in the USA would demand forgiving their student loans and demanding this as some right like the OWS movement?  The government and socialists and Democrats and Republicans have grown government so large that we've begun to see government and regulation as the answer to every problem.  In this country we used to do things without government, now it seems no matter how ineffective government is, we need more government to fix the problems created by the government.  Just ask Congress.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

HOW MUCH DOES $6 BILLION BUY? - FOOD STAMPS

ONLY 46 MILLION ARE NEEDY, 270 MILLION TO GO!
The release of the SNAP data for February highlights that we are still near record usage for foodstamps here in the US.   The month of February panned out with the following details.

46,326,352 of your fellow citizens are using your tax dollars to feed themselves and their families.
The cost to feed these folks was right at $6.160 Billion.  The average family receives about $278 a month.

YTD, actual participation is down 27bps!! ALRIGHT!  Year-over-year usage is still up 4.8%.


SNAP DATA - http://www.fns.usda.gov/pd/34SNAPmonthly.htm

NO REASON NOT TO, GIVE ME MORE!
The improvement in the data is slight, but I am hopeful that this trend continues.  When we examine the growth of the program it is not hard to see how it came about as the economic times have been tough.  At the same time, we have forces within the system attempting to create and increase dependency  on the government.  In 2010, California renamed their foodstamp program to CALFRESH in an attempt to remove the "stigma" of receiving foodstamps.  Is it any wonder we have citizens demanding services and saying that they deserve to be taken care of?  No, we have officials that tell users of programs that it is their right to be served and cared for, that the role of government is to make sure everyone is healthy, full of food, happy, and catered to.  The notion that government is the benefactor of course is a lie.  Government simply crowds out those people that would naturally step in and care for the needy.  Government also is only the middleman that doles out services by taking funds and spewing them out in an inefficient manner.

I don't want government programs to advertise on radio, tv, and print that they have all this "free stuff" and it is very acceptable to receive benefits.  I WANT there to be a stigma associated with living for free, for receiving free food, for having medical care that someone else provides and pays for.  When there is no stigma there is not any attribution that the services are scarce and that there is an expectation that they will only be provided for a short time.  When advertisements scream that the government wants to provide these resources it suddenly conveys that there is no limit to the amount of benefit that can be received and it costs people nothing.  By having a massive entity taking in taxes and distributing services we create an impersonal situation where recipients never see the real cost of the benefits and feel as though they need to maximize the amount they receive in any way.  (Think about having an insurance company pay your medical bills - you have no real idea about the cost, so you use the benefits as much as possible).

The promotion of dependency must stop for the good of our nation, it's poor, and for the ones that are seen as the producers in our country.  If the target continues to be placed on our most successful, we can bet that the incentive to earn and gain will be less great.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

NEW YEAR - SETTING THE TONE - GET PHYSICAL AND PROTECT YOURSELF

Thanks for all of your patience as I have made it through the busiest time of year for my business.  I am beginning the 2012 Outlook and will also do a post on the 2011 Review in the coming days and weeks.  Before we get to that, I want you to take a moment and read or listen to the interview between Jim Puplava and Ann Barnhardt.

Ann Barnhardt was a commodity futures broker that was quite successful that suddenly quit her business in November as MF Global collapsed.  The fall of that company and the theft of client funds to her was the final straw that indicated that our financial system was a complete sham and would result in losses of her customer's money.  With the release of an open letter, she wrapped up the firm and quit the business.

Jim's firm runs the amazing website www.financialsense.com and I highly recommend their work.  As I've mentioned often, Jim's son, Chris Puplava is one of my favorite bloggers and I read him every Friday without fail.

Please use the following link to read the transcript of the interview between Jim and Ann; other than some of the Kyle Bass interviews I've posted, this has to be the best of 2011.
AWESOMENESS - BEST INTERVIEW OF 2011

To hear the interview, you can go to the site and select the player you desire or download it in mp3 format.
HEAR THE INTERVIEW

If you don't want to click away, I have cut and pasted the text of the interview here, please note this is the property of www.financialsense.com and not the work or product of Goatmug.

Transcript for Ann Barnhardt Interview

---

Jim Puplava: Joining me as my special guest on the program today is Ann Barnhardt, formerly of Barnhardt Capital Management. And Ann, you were a commodity broker for eight years and then you formed your own independent brokerage for six years. A couple of weeks ago you made the painful decision to shut your doors because you felt your clients’ money and positions were no longer safe. What led you to draw those conclusions?

Ann Barnhardt: Well, obviously, it was the MF global collapse and more specifically the fall out after the MF Global collapse and the reaction by the CFTC, the SEC and most especially by the Chicago Mercantile Exchange [the “Merc”]. The actions, specifically by the Merc after the MF Global collapse were unprecedented, unfathomable and completely and totally intolerable. The Merc itself basically did the equivalent of sticking a nine millimeter in their mouth and pulling the trigger by not stepping forward, backstopping the MF Global client accounts and at the very least, the Merc should have allowed the MF Global customers to liquidate their accounts and then transfer to other firms. What the Merc did was the worst possible thing—they froze those people out of their accounts and didn’t allow them to liquidate while the markets continued to trade. And I cannot over-emphasize the importance of that, the risk that those people were exposed to in the cattle business (and my forte is cattle. I am actually a cash cattle person. My brokerage business was geared almost exclusively towards livestock and grade. I have a lot of contacts in the cattle industry who didn’t necessarily do their futures business with me but were contacts of mine who did do business through brokers that cleared through MF) who lost tens of thousands of dollars on hedge positions that they wanted to get out of but could not get out of in the week and a half after the MF Global collapse.
This has never happened before. This was a complete breach of fiduciary duty by the Chicago Mercantile Exchange itself to the point that it literally has destroyed the entire paradigm. I got to the point where I could no longer tell my clients that their free cash customer funds, not even exposed to the market place—just their cash sitting in their account, non-margined—was not safe. I couldn’t tell them that their money was safe. At that point it was morally incumbent upon me to get my client out of this completely dysfunctional, basically destroyed marketplace. Get them off of those railroad tracks and get them away from the risk. Now, I didn’t clear through MF, but with the European collapse and knowing what we know about how these financial entities are leveraged in European paper and the cascading nature of all of this I had to act before the proverbial poop hit the fan because if you sit around and you wait until after the poop hits the fan it is too late. You wouldn’t get anybody out. To me, it wasn’t really a painful decision. It was a complete no brainer.

Jim Puplava: In the past, when firms went under customer funds were intact and the exchanges would step in, as you mentioned earlier, to backstop everything to keep customers 100% liquid. And normally, a quick transfer from the bankrupt firm, the bankrupt firm would be immediately replaced. Why do you think they did not allow that to happen this time?

Ann Barnhardt: You tell me. I will use the word again, it is suicidal. What they did was suicidal. So you are absolutely right. Up until last month on Friday, October 31^st, the customer segregation of funds rule was utterly sacrosanct. Even when Refco imploded and imploded quite dramatically in 2005, no customer funds were gone. It was on the prop trading side of the company but the customer funds were there, were accounted for, and it is the onus of the Mercantile Exchange to audit these FCMs [Futures Commission Merchant]. MF Global was under the auspices and under the supervision, of the auditing supervision, of the CME. And I believe that MF was audited not just annually, but quarterly. Also, there is the question of how in the world can the Merc miss the margin being posted. The Merc is supposed to be moving equity and doing margin wire transfers twice a day every day. How could those customer funds be “missing”. They aren’t missing. They were stolen. They were stolen by Jon Corzine and his cadre of associates at MF Global. So yes, again, to your listeners who may not fully appreciate the gravity of this, this has never, ever happened before. Nothing even close to this has ever even happened before and it is the function of the Mercantile Exchange itself—the reason why the exchanges exist is that they stand in the middle of every transaction and they act as the de facto counterparty to every single transaction so that, for example, my clients never had to worry about the credit worthiness of the other individual, whoever it might be, who is on the other side of any trade that they did.
Now, for every buyer there is a seller and it is a one-for-one, zero-sum game; but to ensure the credit worthiness and the integrity of the market, the function of the Mercantile Exchange itself is to stand in the middle of every transaction and be the guarantor. So a year ago when Terry Duffy held a press conference [watch it here] and said never in the history of the Mercantile Exchange has a customer ever, ever lost funds resulting from the collapse of a firm, he was telling the truth a year ago. Everything changed on Halloween of this year though. And that's why I had to shut the doors of my brokerage because I could not in good conscience continue forward knowing that the Mercantile Exchange was no longer going to fulfill their fiduciary duty.

Jim Puplava: In the futures market, which is highly leveraged, if you open up a futures contract you are usually leveraged 10-to-1, so they require an exceptional firm base on which to function. And the major integrity of the whole system is the segregation of customer funds. That was breached by MF Global. And let’s not sugar coat this, Ann, basically management stole all of the non-margin cash, invested it in highly speculative securities and what has astonished me has been the reaction of the exchange and regulators—where is the investigation into Jon Corzine?

Ann Barnhardt: Well that is the point of this. We are now living in a lawless,  Marxist, Communist, usurped, what used to be a representative republic but is no more. This is no longer a nation of laws. This has now transformed into a nation of men. It doesn’t matter what crime you commit. In the case of Jon Corzine, this man has stolen in excess of a billion dollars. I think by the time it is all panned out it is going to be closer to $3 billion of customer funds that he stole. Why did he do it? Is he stupid? Well, of course he’s not stupid. This is a former head of Goldman Sachs. This man doesn’t have a low IQ per se. Why in the world would a man wake up in the morning one day and say you know what, I think I am going to steal all the customer seg funds in this FCM that I’m running, which is the biggest FCM in the country. Yeah, that sounds like a good plan. No. Why would a man like that even engage in a nefarious plot like this? Because he knew going into it he could get away with it. And the reason he could get away with it is he is in tight with the Obama regime. He is one of Obama’s highest fundraisers. Earlier this year Jon Corzine had a fundraiser dinner at his New York City apartment for Barack Obama where it was charged at $35,000 a plate. Okay? He bundled high six figures for Obama in one evening! He is a crony of the regime. This is Marxist Communism. There is no rule of law. And these people, these poor MF customers are just sitting out here helpless to do anything because there is no law enforcement because this is no longer a nation of laws. The rule of law no longer exists. There is no longer justice in this nation. And no nation, no culture, no society can survive if there isn’t a foundation of justice. That is why we are teetering on the precipice of collapse and I foresee civil war coming within the next several years.

Jim Puplava: You know, we had Gerald Celente on this program and he had an account with Lynn-Waldok, which was eventually taken over by MF Global, and he's been trading futures in gold. He had a plan when he built up enough he would eventually take delivery. Well, they stopped him out of his trade, sequestered his margin (or his cash) and forced him out of a trade and closed his account.
[Click here to listen to Gerald Celente's MF Global experience]
So what you are talking about—because the exchange did not backstop and then froze customer accounts—is they forced, would you say, millions if not hundreds of millions of dollars of losses on these customers?

Ann Barnhardt: Absolutely. If we are talking several billion in customer seg funds then the losses that were incurred could easily by the customers in that week, week and a half that they were frozen out could easily, easily get into the hundreds of millions it might even breach into the low billions. No question about that. And yeah, and even with options. You know, I talked to cattleman who have put options on as hedges to put a floor underneath the price of the cattle in case—so imagine this, you buy a put option four months ago, you pay the premium. You post that money. Then this happens, you are frozen out of your account. Your account gets transferred to another firm, without your consent. By the way, none of the customers were allowed any input into this. Their accounts were just sent to RJ O’Brien and other firms like that without their consent. And then once the positions were transferred, even if it was a risk limited position like a long put option, then the new clearing firm called them the next morning after the trade settled and said there was no equity in your account because all that money got stolen. So you are going to have to pay the premium for this put option again. So it's doubling the cost essentially for a lot of these people out here who are dealing in what is supposed to be the very risk limited paradigm of long options. The entire situation could not have been handled any worse. In fact, I would take it a step further. It was handled so poorly I can’t imagine that these people are that stupid at the Merc and at the CFTC and so forth. I can’t believe that the bankruptcy trustee is that stupid. This almost seems like it was so bad that it had to have been nefarious.

Jim Puplava: You know, Ann. You believe that MF Global is just the tip of the iceberg. That there is massive industry exposure to European sovereign debt. In fact, the day you and I are doing this interview the Fed just engineered a major swap with central banks. It was a central bank love fest on Wednesday of group money printing. That tells me that central banks acting in unison the way they did shows they are afraid that there's something big out there that is about to happen and that they are trying to maybe plug a hole in the dyke.

Ann Barnhardt: Well, if anybody out there understands fourth grade arithmetic you know from metaphysical certitude that Europe is done. Europe is mathematically impossible. It cannot be saved. You want to make a start. You even want to make a start at trying to bail out Europe we are talking $25 trillion just to start. And it would then—if you were going to bail out the entirety of Europe—you would now be talking about hundreds of trillions of dollars. Okay, people, there isn’t that much wealth or money on the surface of the earth. The total gross domestic product of the entire planet earth is I think just under $70 trillion. And we are talking about in excess of $100 trillion to bail out Europe? This is now mathematically impossible. These people have so leveraged themselves and so leveraged these governments in these countries giving their brain dead citizenry free hand outs and entitlements that it is now mathematically impossible to save the paradigm. It's not a matter of if the global financial system is going to collapse. Oh, it's going to collapse. You better trust and understand that. It's just a matter of when. And these piddling little maneuvers that these people are making that the Fed is doing. Oh, we are going to give Europe some money. Okay. What I saw this morning, what the Fed is getting ready to do in terms of Europe, is keep Europe going for another seven days. Well, fantastic. Thanks for that. That is literally the brain dead mindset of these politicians. All they are doing is looking to kick the can down the road. At first it was kick the can down another 10, 12 years. Then it is kick the can down the road for another year. And then it was well, let’s kick the can down the road for another few months. Now we're literally to the point where all we can do is kick the can down the road for a matter of a few days. It's not going to make it. I will be very surprised if we make it until Christmas.

Jim Puplava: You know, one would have thought Ann, after the 30 to 40:1 leverage leading up to the financial crisis of 2008, pre-Lehman, that financial firms would have learned. And especially a guy like Jon Corzine that saw Goldman have exposure to AIG with $13 billion in credit default swaps which we bailed him out 100 cents on the dollar. Apparently, this lesson was not learned at MF Global because the leverage, what was the figure? I think it was 100:1—it was just astounding.

Ann Barnhardt: The only lesson that these criminal degenerates learned from the 2008 situation was that they could do anything they want and that pimp daddy government would bail them out. You have to understand, people like Jon Corzine, these are evil, evil people. He went into MF Global looking to rape that company personally for his own good. And that's what the motivation of a lot of these people are. You have to get your heads around this. You have to get your heads around the fact that there are truly evil people in the world who do not give a crap about anyone or anything except themselves, their own personal wealth and their own personal power. And they would sell their grandmother to the Nazis for a nickel without hesitation if they thought they could get away with it. It's the same with people like Jon Corzine, and then we have talked about the fact that Jon Corzine is tied into the Obama regime. And we now know that the government is absolutely stuffed to the gills almost exclusively with this same type of moral degenerate culture. These people that are in the government—not just the Congress and Executive Branch but also in the bureaucracy—they are in it for themselves. They are in it for the money. And two weeks ago when we had the 60 minutes exposé on the insider trading, those of us who have been in the business have known intuitively that that was going on for a very, very long time. We knew that there was front running going on by politicians. A great example of this is someone like Harry Reid. When he entered Congress, Harry Reid had a low six-figure net worth. He now has an eight-figure net worth. And he's never done anything except be a United States Senator. The salary I think of which is something like $170,000 a year. How does that happen? How does a man with $170,000 a year salaried position go from having a six-figure net worth to an eight-figure net worth? That doesn’t make any sense unless he is doing nefarious, illegal, insider trading type deals.
It is obvious what's been going on. You have to start acknowledging these people for what they are, and that is moral degenerates who are basically sociopaths and psychopaths. Meaning they don’t feel any sympathy or empathy for other human beings. The only thing they care about is themselves. They will do anything. They will steal. They will lie. They will cheat. They will lie to your face. They will look in the camera with this tremendous earnestness and lie with fork tongues through their teeth in order to advance their wealth and power. And if we, as a people, don’t get real about this, if we keep having these Pollyanna visions that these people are all on our side and they are really looking out for us. And they are doing the best they can. We will be cork screwed into the ground and this nation will be reduced to a smoldering rubble. You've got to wake up.

Jim Puplava: I would like to go back to MF Global for a second. There is something even worse as you look into the details—it's been hinted and that there could be possible clawbacks. I’m wondering if you might explain that possibility and what a clawback means for, let’s say you had an account at MF Global and, I don’t know, you didn’t feel comfortable with the commodities market—the volatility. So you pulled the money out. There is a possibility they can go after you.

Ann Barnhardt: Oh, absolutely. Clawback is a fairly common tactic in bankruptcies. And what it is is looking at the bankrupt entity and looking at the money that went out of that entity in the time period immediately preceding the collapse. And I don’t know what time frame they would look at MF. I don’t know if it would be 30 days or 60 days or 90 days—I have no idea. But the trustee has in the last two weeks said that yes, clawback is on the table. So what that means is, let’s say for example, you are a savvy individual and you are a good steward of your money. And you are doing business with a firm that clears through MF Global. You are looking at MF Global’s publicly available bond yields. And you see in the six weeks before the collapse that their bond yields spiked parabolically [see chart here]. They went from 6% to 18%. That is a sure, sure sign of massive trouble. And so being an intelligent, informed, aware person who is a good steward of their wealth, what do you do? You say I’m getting out of this company. I am getting my money out of MF Global because something bad is about to happen looking at these bond yields. You can also do the same thing looking at the stock price. You could do the same thing looking at downgrades by the ratings agencies. There's all kinds of ways that you can come to these conclusions.
The other thing is if you're a hedger. If you are a bonafide hedger—if you had positions on and the market moves in favor of your hedge position on the futures side, you don’t leave that equity sitting in your account. What your broker like me does is they wire that money home because you are using that money probably to either offset a cash transaction or to pay down a revolving line of credit. You're not getting any interest on your money sitting at MF Global so you might as well get that equity out of there, send it home and pay down your line of credit so you are not paying interest on that money. So there would organically have been lots and lots of money flowing out of that company in the period immediately before the collapse. Either due to natural hedges, organic in and out functions or due to intelligent people looking at the bond yields and saying uh oh we better get out of here. The bankruptcy trustee can legally claw that money back. Say okay, I am going to go and I am going to dive into your pocket now. And I am going to claw back your money which you, in your responsibility and in your good stewardship pulled out of a company that you knew to be in trouble. Oh yeah, so these MF customers will essentially be raped three times—they will have their cash stolen out of their accounts, they were then locked out of their position so they couldn’t trade and were fully exposed to market risk, paralyzed, unable to do anything for excess of a week. And then, number three rape, is having the bankruptcy trustee come back and literally seize money out of your own personal checking accounts and business accounts and so forth. And clawing it back to feed this bankrupt entity. And you know what the cherry on top of the sundae of all this is? And this is what blows my mind—the bankruptcy trustee, right now, as this is being recorded on the 30^th of November. The bankruptcy trustee is still allowing MF Global to trade proprietarily for itself, for the company proper.
It is unbelievable. The rule of law is dead in this country.

Jim Puplava: You know, adding to this just prior to that was the restructuring of Greek debt, where the derivatives association announced that it was a voluntary restructuring so therefore the bankers didn’t have to pay out on credit default swaps. So what you have here, Ann, I believe is a system where the government is protecting the too-big-to-fail at the expense of the customers. And with it, the rule of law is thrown out to protect Wall Street, what does that say about the integrity of the system? It is no wonder people are losing faith.

Ann Barnhardt: There is no integrity in the system. And let’s make it simple—it is not just about the government protecting the “too big to fail banks". It is about criminal oligarchs as individuals protecting each other. They don’t give a crap about the customers of JP Morgan or you know, Citi or Goldman or anything. What they care about is each other. The Obama regime is protecting Jon Corzine proper, the individual. Because he is one of them. He is one of these criminal oligarchs. And for your listeners who may not remember, Jon Corzine is a former congressman. But immediately preceding MF Global he was the Governor of New Jersey and he just cork screwed Jersey into the ground. It is Chris Christy who beat Jon Corzine to become the governor of New Jersey. So yes, this Republican, Chris Christy, was elected in New Jersey—uber liberal, blue state New Jersey—because Corzine financially destroyed this state. And again, this guy Corzine is former head of Goldman. He is not stupid. You have to stop thinking that these people are just misguided or that there is some sort of a difference of opinion on economic theory. These people are nefariously trying to destroy everything in this country. It's called the Cloward-Piven strategy. Go in and destroy and collapse the entire economy, everything and then rebuild a new Marxist, Socialist, fascist state out of the burning rubble of this destruction. This is intentional. This is nefarious. This is not a function of incompetence. It's a function of malice of forethought and conscientious theft and destruction.

Jim Puplava: What would you advice? I am a long term believer in the bull market in commodities, but how do you play commodities when the futures market is no longer secure? And what does this do to the proper functioning of the markets? In other words, now that you've closed your firm because you don’t believe in the integrity of the system and we just listed a series of reasons why—not honoring contracts, appropriating funds, not allowing trades to go off. Not one investigation, in fact, this goes even further than that. We had Bill Black on the program recently, who helped make prosecutions in the S&L scandal. And at that time, 2,000 individuals went to jail. There has not been one criminal charge brought by the justice department since the 2008 crisis. So given that this is where we are, what do you advise and what will you do personally?
[Listen to Bill Black's tell-all interview on why no one has gone to jail]
Ann Barnhardt: Well get the hell out. Get out of all paper and it's not just the commodities markets. This is going to cascade through everything. It is going to get into the equities. It is going to get into 401ks and IRAs, it is going to get into pension plans and so on and so forth. Total systemic collapse. Get out! I don’t know how I can be anymore plain about this. I say this over and over and over again and then I get scads of emails saying, well I can’t get out of my 401k. Yes, you can. Yes, you can. Take the penalty and get the hell out of there. What would you rather do? Would you rather pay the 10% penalty or would you rather have it all go up in smoke? Because that's what we're staring down the barrel of. Number two, we seem to have this backwards. In terms of what I do, cattle and grain specifically, the futures markets are the derivatives. The futures markets are derived from the actual cash commodity market. Now, I am blessed because my area of expertise is actually in the physical cash market, actual cattle on the hoof. So I have a consulting firm and I'll continue to teach cattlemen how to trade actual physical cattle. But, yeah, to all the people out there listening—you are going to have to get away from paper and get back into physical commodities, the real deal. Anything that is on paper anything that involves a promise or a commitment is no longer valid because as we said there isn’t a rule of law anymore. People can steal from you. Your money can be confiscated. And think how easy now it is to confiscate people’s wealth. Most of our wealth in this society exists as zeroes and ones on a computer server. It takes no effort whatsoever to steal zeros and ones on a computer server. So what I have been telling people is you need to get into physical commodities. And the rule of thumb is if you can stand in front of it with an assault rifle and physically protect it, then it's real—it's a real commodity. That includes food, that includes water, that includes long guns and ammunition. That includes fuel. That includes precious metals—gold and silver coinage. Most especially silver coinage because silver is the metal of barter and transaction and currency. Gold is the storage metal because it's so valuable per ounce. And also, silver is extremely undervalued relative to gold because that market has been synthetically suppressed for the last several years by again, these nefarious actors. So yeah, reallocate into physical commodities.

Jim Puplava: How do you know that somebody like just as we saw in 2008 or recently with MF Global—that is somebody like a Goldman, a JP Morgan that is writing credit default swaps on European debt—how do you know if you have an account with this group that they pledge your assets for collateral or they comingle them with the firm’s assets and then what do you do?

Ann Barnhardt: Oh, exactly. Corzine isn’t alone in this. The reason the MF Global situation happened the way it did is as we eluded to earlier because Corzine had that company just suicidally leveraged. He took those customer funds and then leveraged it into European, sovereign, junk paper at about 100:1 ratio. Massive. Massive leverage. That is why his collateral call was the first one to come and why it took him out because he was so heavily leveraged. Don’t kid yourself. These other entities are doing the same thing. It is just that they are not as heavily leveraged as Corzine was. So yes, the entire paradigm is no longer trust worthy. There is no meaningful government or industry wide regulation and I have been saying this for years. That regulation in the financial industry in the United States both government based and private regulation—private industry regulation—is a monstrous, monstrous joke. The top tier of those organizations are evil, nefarious people. The mid level are halfway stupid, halfway evil who again, are just there to collect their salary paycheck and will say and do anything that they are told and who really don’t understand the business that they are trying to regulate. And then the lower level, the grunts, the actual auditors who go out on site, a lot of those people are super incompetent, affirmative action hires. And yes, I said it and I am not ashamed of it. They are affirmative action hires. They have no business being there doing what they are doing. They are also hiring a lot of kids 15 minutes out of college who are literally reading off the script and couldn’t audit a company if their life depended on it.
So what they do is they send these incompetent people out into the field and into lower management. And then when the poop hits the fan, they blame them. It is absolutely evil and it is a complete joke. And Madoff was the first proof of that. There have been other ponzi schemes since Madoff happened that haven’t gotten as much notoriety, but there was a big one in the futures industry that all of the FCMs were invested in. And the regulatory body of the futures industry the NFA, they audited that Ponzi scheme, they totally missed it. They even admitted that they signed off on it because they really didn’t understand what they were doing. I mean, that is the level of incompetence and evil that we are talking about in terms of these regulatory bodies. The only way to fix this is to shut the whole damn thing down and start from scratch. I am personally looking in the next decade for the emergence of a new exchange within the United States [that is, a replacement of the Chicago Mercantile Exhange]. Word on the street is it might happen in Dallas and I would be fully in favor of that. Start over from scratch.

Jim Puplava: Alright. Well the message: get physical and protect yourself. We have been speaking with Ann Barnhardt, formerly of Barnhardt Capital Management. Ann, I want to thank you for coming on the program and sharing your thoughts.

Ann Barnhardt: Thank you for having me, it's been a pleasure.

Hmmm, an industry pro completely shuts down their business and all they can say is buy physical commodities and get some guns and ammo.  Makes you think that she is a nut job or she really knows something.  I am betting against the former and wagering heavily on the second option.

Please check back soon, I am getting started on the other items as life has finally slowed a bit.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/