Tail Events, Isolation, New Normal
The year 2012 has started out in strange ways. While celestial forces augur for rare tail events, the assurance of man-made events that stretch far into the extreme tail of probability are not only very likely but will be of a type to reflect the change in the global balance of financial power. The Paradigm Shift mentioned over the course of the last two to three years is at work, having moved into a higher gear. The gold is moving from the West to the East, along with the power. We will not see the process reverse in our lifetime. The sanctions set against Iran have been devised by a former global leader nation that is beset by insolvency, fraud, and lost integrity. The backfire has consolidated forces into a more fortified position against the USDollar. Trade increasingly is not being settled in US$ terms. The new normal is of a caravan file of broken cars and trucks sputtering down the road, using the false fuel of hyper monetary inflation and the offensive paint of phony financial accounting.
PREPARE FOR RARE DAMAGE OF TAIL EVENTS
In the probability world, a tail event is described as an occurrence far out in the small numbers of probability, extended on the tail of the curve of likelihood. In the quality control domain, the battle cry used to be Six Sigma, meaning the tolerated defect rate goal would be six standard errors, a rate in no way achievable. A quick check of the probability tables unmasks the lofty goal as one defect part off the assembly line in every 1.013 billion items. That is Six Sigma on the normal bell-shaped curve. However, in the world of phony finagled finance, such rare events are indeed occurring, seen in Black Swan formations. As the sovereign debt spreads, it has become clear that Italy, Spain, France, and many other nations suffer from the sinking pressures that national securitized debt brings. The contagion of vanished equity in the banking system will spread to London, New York, and Germany, in whose nations numerous banks will fail. It will be extremely difficult for the USDollar to ward off such powerful storm damage, and remain as the global reserve currency. See the Cauchy distribution in the graphic, which when the degrees of freedom grow unbounded, approaches the Gaussian normal.
IRAN SANCTIONS BACKFIRE INTO ISOLATION
In the last two weekly articles, the backfire was described regarding Iran sanctions, as foreign nations were forced to react or else permit higher costs to filter into their economies. The USGovt actions have galvanized a response, led not by Iran but by China. The raft of bilateral accords juiced by currency swap agreements has provided a significant buoyancy in the global trade framework, a highly complex system. It dictates the flow of USDollars in obvious ways, but it also dictates the formation of reserve banking systems in more subtle ways. See the announced a swap facility by Brazil and China in 2007. See a similar swap facility announced by Russia and China in 2010. The big trade winds were changing direction. In the last month, Japan and China announced a swap facility to bypass the USDollar in trade settlement. The Jackass concluded that the a powerful climax comes to bring a sunset. The USDollar might be relegated into irrelevance, as it is left to defend itself in the open fields without the Saudi oil cloak. Note the parallel to the COMEX, which as a market will also be relegated into irrelevance.
The Petro-Dollar itself is in danger. The Persian Gulf has a new Protectorate in China. Vast expansion of port facilities and distribution systems using the UAE as a hub for European and African trade have been established. It includes critical structural work required for trade, banking, currency, and gold management. Furthermore, the actual Dollar Kill Switch had to be devised, with confirmed connection to the OPEC oil trade. My source has informed me that the switch is finally in place and ready. It will be pulled when the crisis reaches the next stage. The numerous defiant gestures by China, Iran, Russia, India, and Japan paint the billboard in big bold letters. The workaround of the USDollar is moving fast apace. What we are witnessing is the end of the Petro-Dollar in slow steps, like the recent Saudi-China refinery deal. The crowning blow might have been announced this week, as India will pay for Iranian oil in gold bullion. Gold for oil sounds like a historical point in time.
Backfire extends to Europe, where the absence of Iranian oil supply will cause some extreme problems. A German source with great contacts wrote yesterday, "The Persians are cutting off oil shipments to Europe, effective immediately, which will kill Greece, Italy, and the other Club Med deadbeats. The West with their sanctions led by the Americans screwed itself royally. The Asians and others are dis-engaging from the Western banks as fast as they can. Expect to see more wild fluctuations in the Gold and Silver prices continue. Until this week, the Gold forces did not know how weak the Anglos already are. They have hardly any firepower left." Difficult decisions will be made. The foreign motive nourished to seek alternatives is at high pitch. The real loser will eventually be the USDollar, whose Petro-Dollar defacto standard is being washed away.
NEW NORMAL OF HYPER MONETARY INFLATION
The phrase New Normal is a transparent attempt by financial icons in the private sector to put a face of legitimacy on a system bound in the USDollar and its mismanagement. The $trillion bond monetization is matched by $trillion frauds. The term was coined by Mohamed El-Erian, from the PIMCO helm. Bond fraud followed by TARP Fund fraud, followed by Financial Accounting fraud, followed by Mortgage Contract fraud, followed by the grand sequence Quantitative Easing to wash value out of the USDollar, followed by more unilateral decisions on sanctions against Iran. It makes for a travesty. Yesterday the USFed released more directives. So the USEconomy is stuck in a weak reverse gear. The accommodation will extend until year 2014, regarding which Bill Gross of PIMCO warns of financial repression. Holding the benchmark interest rate at near 0% for three more years is a testament to central bank failure. No departure from the 0% rate can be done. The USGovt debt service requires it, demands it, and will default without it.
Remember the Green Shoots of USEconomic recovery in 2009. Remember the Exit Strategy later in 2009. Remember 0% was for just six to nine months, an emergency policy. Remember how Quantitative Easing was to be temporary in 2010. Remember how the 0% accommodation was to last until 2013, announced early this year. The Jackass dismissed it as nonsense. Tragically, the reality is more simple. The 0% rate (ZIRP) and the heavy hand of monetized bond purchase (QE) are permanent or else the system falls apart and collapses. The ZIRP and QE are worn as badges of failure and dishonor. The tragic fact from the world of economics, is that 0% and bond purchase kills capital, diminishes the economy, puts business asunder, ruins jobs, and causes federal deficits to grow. They are not stimulus, but rather financial formaldehyde.
GOLD & SILVER READY FINALLY TO RUN
For the last several weeks, the 1650 level had been defended vigorously. Newly placed dubious positions might be in the process of being overrun. My sources inform that in November an important team was assembled, well funded and determined, with a mission to set the gold market on a proper footing and true course in terms of value. They intend to force the cover of huge short positions in retreat, to oblige outsized drainage of the COMEX. Watch for a faster drain to GLD inventory from the backdoor. They want the USDollar to compete fairly. The Iran grappling hooks seem not to find the soft matter of the allied fortress walls. They have been tossed aside, while new alliances form in defiance.
The USDollar ship of sea is adrift, soon a derelict vessel, its main deck built of a rotting sovereign debt system. The East is working feverishly to build the alternative system. Look for barter to be its backbone. By the Ides of March, it should be more clear. Any controlled demolition of PIIGS debt and bond writedowns will make for quite the event to watch. The upcoming funding needs of Italy are an order of magnitude greater than the bond market or the Euro Central Bank can manage. The game breaker events are nigh. The world might be soon coming full circle, after the Petro-Dollar is pushed aside.
The US-based silver production in October 2011 was 30% below the same month in 2010. It went from 117 metric tons to 81.4 metric tons. In contrast, the American Eagle silver coin production is on a strong upward course since 2007. The current US silver demand is 117% of the current domestic production level, in deficit. The USMint will have to import silver, or shut down. The newly assembled Eastern team is at work in the silver market as well. Their objective is to cause a cover of the large short positions here too, even if a faster drain to SLV inventory takes place from the backdoor. The method is simple, coming from illicit (but not illegal) shorting of the shares.
THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.
Jim Willie CB
Editor of the "HAT TRICK LETTER"
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January 26, 2012
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