Dear Extended Family,

Never in economic history has there been a night like tonight. I am writing later than usual because of the enormity of all the converging forces. The euro reaches for $1.60, the Middle East oil producers are in shock, and the IMF tells the world to “plan for the worst.”

The reason this missive is late is because I am reverberating at the speed of the disintegration. These cursed OTC derivatives and their makers, who incidentally made the international banking community rich beyond your wildest dreams, are now unwinding at lightening speed.

Do you think any entity with any OTC derivative now has faith in the paper?

This paper is $550 trillion plus dollars in notional value. The horrible fact is that in bankruptcy notional value becomes real value with the capacity to destroy the world financial system.

The above is no wild assumption. It is hard, cold fact.

1. Expect currency intervention to slow down the rise of the euro.
2. Intervention has never worked. It will not now. In fact, it will backfire so fast that the effort will be abandoned, making things even worse.
3. Intervention in currency, the dollar, will only provide the capacity for other central banks, oil producers and holders of high risk long US treasury paper to diversify out in huge amounts of decaying dollars at singular prices.
4. I could go through a tome on how intervention works, but accept that any rise in short rates will break the bank immediately. Intervention in the euro/dollar is another practical impossibility except as a bluff.
5. There is no practical solution to today’s TERMINAL problems and that means you are up to your eyeballs in alligators.
6. You must protect yourselves.
7. Gold is going to $1650. In all probability my major error will be in forecasting a price that is much too low for gold.
8. The ratio spread long the major gold producers, short the juniors, is going to kill the math whizzes that think they are in the captain’s seat. The reason is the only value still in precious metals shares lies in the best junior issues these geeks have been hammering.
9. The prayer that a junior with quality assets has is that the illegal short position is enormous.

This is it!

Your concerned friend,
Jim

Dear Jim,

Thank you for your hard work. You helped me open my eyes!

Below is an article from the Financial Times saying that John Lipsky is telling states to PLAN FOR THE WORST.

Those guys have the data and they know more than anybody else with regards to what is going on, yet they can't tell people or it will create a panic!

Best regards,
CIGA Christopher

IMF tells states to plan for the worst
By Krishna Guha in Washington
13 2008 02:00 Financial Times

Governments might have to intervene with taxpayers’ money to shore up the financial system and prevent a “downward credit spiral” from taking hold, the International Monetary Fund said on Wednesday.

John Lipsky, the IMF’s first deputy managing director, said: “We must keep all options on the table, including the potential use of public funds to safeguard the financial system.”

The statement by the senior IMF official marks the second radical policy intervention from the IMF this year. It had previously called on governments to consider using fiscal policy to offset the impact of the credit crisis on growth.

Mr Lipsky said: “I fully recognise an appropriate role for public sector intervention after market solutions have been exhausted.”

He urged policymakers to “think the unthinkable” and prepare now for what they would do if the worst case scenarios materialised and “low probability but high impact events” threatened to jeopardise global financial stability.

He warned of the risk that a “global financial decelerator” could take hold, in which rising defaults and margin calls from lenders triggered forced asset sales, driving down the value of collateral and forcing further forced sales.

The IMF deputy managing director’s comments make it clear that the fund is open in principle to the possibility of taxpayer-funded intervention in the market for mortgage securities as well as intervention to save individual banks from bankruptcy.

Mr Lipsky warned: “The risks of further escalation of this crisis are rising and decisive policy action will be needed.”

The statement by the senior IMF official marks the second radical policy intervention from the IMF this year. It had previously called on governments to consider using fiscal policy to offset the impact of the credit crisis on growth.

Mr Lipsky said: “I fully recognise an appropriate role for public sector intervention after market solutions have been exhausted.”

He urged policymakers to “think the unthinkable” and prepare now for what they would do if the worst case scenarios materialised and “low probability but high impact events” threatened to jeopardise global financial stability.

He warned of the risk that a “global financial decelerator” could take hold, in which rising defaults and margin calls from lenders triggered forced asset sales, driving down the value of collateral and forcing further forced sales.

The IMF deputy managing director’s comments make it clear that the fund is open in principle to the possibility of taxpayer-funded intervention in the market for mortgage securities as well as intervention to save individual banks from bankruptcy.

Mr Lipsky warned: “The risks of further escalation of this crisis are rising and decisive policy action will be needed.”

More…