Despite the expected kneejerk reactions in the currency markets to the [expected] results of the French presidential election Sunday, Gold and Silver look surprisingly resilient this morning. The markets where "fear" should be at the forefront of traders psyche are the US Dollar and the US Treasury markets.
The US Dollar has been all down since it's large gap higher on the open Sunday evening. Clearly traders have taken the opportunity to unload some more of their Dollars at a nice price near the key USDX 80 Mendoza line.
As for US Treasuries, the 10-year hit another multi-month high since they bottomed in the Spring of 2009, and the dawn of the US Federal Reserves Crutch Program better known as Quantitative Easing. The 10-year Treasury was yielding a meager 1.84% this morning.
The US Dollar and US Treasury market are the Mother of ALL Bubbles. It is not a matter of "if" these two mega bubbles will burst, but "when". The pin is closer to the skin than many might have you believe.
Guest Post: The Treasury Bubble in One Graph
Submitted by Tyler Durden on
05/07/2012 10:40 -0400
Submiited by John Aziz of Azizonomics,
What are the classic signs of an asset bubble? People piling into an asset class to such an extent that it becomes unprofitable to do so.
Treasury bonds are so overbought that they are now producing negative real yields (yield minus inflation):
That’s right, after taking into account inflation, many investors in treasuries are standing over a drain and pouring their money down it.
And so America’s creditors are now getting slapped quite heavily in the mouth by the Fed’s easy money inflationist policies.
I propose (much, I am sure, to the consternation of the monetarist-Keynesian “print money and watch your problems evaporate” establishment) that this is a very, very, very dangerous position. And I propose that those economists who are calling for even greater inflation are playing with dynamite.
See, while the establishment seems to largely believe that the negative return on treasuries will juice up the American economy — in other words that “hoarders” will stop hoarding and start spending — I believe that negative side-effects from these policies may cause severe harm.
There is the danger of a bursting treasury bubble. What would happen if America’s creditors decide they want to liquidate their positions? After all, they’re getting slapped in the mouth , and the Fed is promising to continue with the zero interest rate policy until at least 2014.
And we know for sure that even before real rates on treasuries turned negative that China were selling:
The Fed has been picking up the slack, and will have to continue to do so for the forseeable future (the private domestic and international markets have no reason to increase purchases assets with a negative real rate of return).
This means that to keep the Treasury’s interest payments low, the Fed will have to start printing more money, which brings us to the second danger: the danger of runaway inflation.
Bernanke might well believe he can do this without triggering runaway inflation. He might point to his track record of tripling the monetary base without triggering hyperinflation.
But inflation has stayed (relatively) low for one reason: the money he printed isn’t circulating. The primary dealer banks are holding the money as excess reserves. Can this last?
I doubt it. As I noted last month:
So, does the accumulation of excess reserves lead to inflation?
Only so much as the frequentation of brothels leads to chlamydia and syphilis.
Excess reserves are only non-inflationary so long as the banks — the people holding the reserves — play along with the Fed-Treasury game of monetising debt and trying to hide the inflation . The banks don’t have to lend these reserves out, just as having sex with hookers doesn’t have to lead to an infection.
But eventually — so long as you do it enough — the condom will break.
This trend of amassing excess reserves (done, lest we forget, as a stability measure to protect primary dealers against another shadow banking collapse) is closer to going to sleep upon a bed of dynamite.
But inflation is only the most obvious risk.
The greatest danger is illustrated here:
America — for most of last century exporter and creditor to the world now runs the biggest trade deficits the world has ever seen.
Let’s not forget that these creditors that U.S. monetary policy is now slapping in the face produce most of our consumption, much of our military hardware, and most of our oil.
Of course, many neocons seem to believe that this position is sustainable; that America can slap her creditors in the face all she likes because she has thermonuclear weapons and can tell the rest of the world to go and bite the big one.
Not so fast.
As VeteransToday noted in December:
“Surprise, Surprise, Surprise”, to quote Gomer Pyle. The secret spy mission to create photographic proof of Iranian nuclear intentions has gone horribly wrong.
China is the country of origin for many, many of the semiconductors used by the US Military. It was most likely that China provided the hardware with the secret backdoor that allowed the Iranians to seize control of the Stealth drone while the drone was on a secret CIA mission over Iran.
Working together, they captured a state of the art US Military stealth aircraft.
What this means to all US Military personnel serving anywhere in the world? It means that control of any electronics system in any type of platform, can be seized and used against the military that launched it.
I don’t doubt America still has great technological and infrastructural advantages over her Eurasian creditor rivals. But do we really want to test the limits of our power? Do we really want to try and provoke a trade war with China and the other Eurasian nations (who of course are testing the petrodollar reserve to its limits by creating their own reserve currency agreements) by obliterating the value of their dollar-denominated assets?
So now we know, beyond a shadow of doubt that U.S. Treasuries are in a historic bubble.
We know that to some degree the Federal Reserve and Ben Bernanke are guilty of stoking up this program by buying U.S. Treasuries (artificial demand) and thus constricting supply. We know that this is screwing America’s creditors who happen to produce a lot of America’s consumption, components, military hardware, energy and resources. We know that these nations are using increasingly violent rhetoric regarding their relationship with the United States (Putin for instance described America as a parasite), and are activating agreements to ditch the dollar as the reserve currency.
Do we really want to continue in this vein? Do we really want to continue screwing our creditors by forcing them to accept negative real rates on their investments? Do we really want to risk the inflationary impact of continuing to print money to monetise debt (and hiding the money in excess reserves, thereby temporarily hiding the inflation). Do we really want to find out if all those Chinese semiconductors in our military hardware have backdoors that allow America’s enemies to shut down American military hardware?
I’d call that playing dice with the devil.
The Gold Report: David, you have talked and written about the effect of government-funded, debt-fueled spending on the stock market. What will be the real impact of quantitative easing?
David Stockman: We are in the last innings of a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble.
Quantitative easing is making it worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector—both erroneous steps in my view. The federal government is not getting its financial house in order. We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon.
TGR: What should the role of the Federal Reserve be?
DS: To get out of the way and not act like it is the central monetary planner of a $15 trillion economy. It cannot and should not be done.
The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. The yield curve signals nothing anymore because it is totally manipulated by the Fed. The very idea of "Operation Twist" is an abomination.
Capital markets are at the heart of capitalism and they are not working. Savers are being crushed when we desperately need savings. The federal government is borrowing when it is broke. Wall Street is arbitraging the Fed's monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year treasuries at a yield of 200 basis points, capturing the profit and laughing all the way to the bank. The Fed has become a captive of the traders and robots on Wall Street.
TGR: If we are in the final innings of a debt super-cycle, what is the catalyst that will end the game?
DS: I think the likely catalyst is a breakdown of the U.S. government bond market. It is the heart of the fixed income market and, therefore, the world's financial market.
Because of Fed management and interest-rate pegging, the market is artificially medicated. All of the rates and spreads are unreal. The yield curve is not market driven. Supply and demand for savings and investment, future inflation risk discounts by investors—none of these free market forces matter. The price of money is dictated by the Fed, and Wall Street merely attempts to front-run its next move.
As long as the hedge fund traders and fast-money boys believe the Fed can keep everything pegged, we may limp along. The minute they lose confidence, they will unwind their trades.
On the margin, nobody owns the Treasury bond; you rent it. Trillions of treasury paper is funded on repo: You buy $100 million (M) in Treasuries and immediately put them up as collateral for overnight borrowings of $98M. Traders can capture the spread as long as the price of the bond is stable or rising, as it has been for the last year or two. If the bond drops 2%, the spread has been wiped out.
If that happens, the massive repo structures—that is, debt owned by still more debt—will start to unwind and create a panic in the Treasury market. People will realize the emperor is naked.
TGR: Is that what happened in 2008?
DS: In 2008 it was the repo market for mortgage-back securities, credit default obligations and such. In 2008 we had a dry run of what happens when a class of assets owned on overnight money goes into a tailspin. There is a thunderous collapse.
Since then, the repo trade has remained in the Treasury and other high-grade markets because subprime and low-quality mortgage-backed securities are dead.
TGR: Walk us through a hypothetical. What happens when the fast-money traders lose confidence in the Fed's ability to keep the spread?
DS: They are forced to start selling in order to liquidate their carry trades because repo lenders get nervous and want their cash back. However, when the crisis comes, there will be insufficient private bids—the market will gap down hard unless the central banks buy on an emergency basis: the Fed, the European Central Bank (ECB), the people's printing press of China and all the rest of them.
The question is: Will the central banks be able to do that now, given that they have already expanded their balance sheets? The Fed balance sheet was $900 billion (B) when Lehman crashed in September 2008. It took 93 years to build it to that level from when the Fed opened for business in November 1914. Bernanke then added another $900B in seven weeks and then he took it to $2.4 trillion in an orgy of money printing during the initial 13 weeks after Lehman. Today it is nearly $3 trillion. Can it triple again? I do not think so. Worldwide it's the same story: the top eight central banks had $5 trillion of footings shortly before the crisis; they have $15 trillion today. Overwhelmingly, this fantastic expansion of central bank footings has been used to buy or discount sovereign debt. This was the mother of all monetizations.
TGR: Following that path, what happens if there are no buyers? Do the governments go into default?
DS: The U.S. Treasury needs to be in the market for $20B in new issuances every week. When the day comes when there are all offers and no bids, the music will stop. Instead of being able to easily pawn off more borrowing on the markets—say 90 basis points for a 5-year note as at present—they may have to pay hundreds of basis points more. All of a sudden the politicians will run around with their hair on fire, asking, what happened to all the free money?
TGR: What do the politicians have to do next?
DS: They are going to have to eat 30 years worth of lies and by the time they are done eating, there will be a lot of mayhem.
TGR: Will the mayhem stretch into the private sector?
DS: It will be everywhere. Once the bond market starts unraveling, all the other risk assets will start selling off like mad, too.
TGR: Does every sector collapse?
DS: If the bond market goes into a dislocation, it will spread like a contagion to all of the other asset markets. There will be a massive selloff.
I think everything in the world is overvalued—stocks, bonds, commodities, currencies. Too much money printing and debt expansion drove the prices of all asset classes to artificial, non-economic levels. The danger to the world is not classic inflation or deflation of goods and services; it's a drastic downward re-pricing of inflated financial assets.
TGR: Is there any way to unravel this without this massive dislocation?
DS: I do not think so. When you are so far out on the end of a limb, how do you walk it back?
The Fed is now at the end of a $3 trillion limb. It has been taken hostage by the markets the Federal Open Market Committee was trying to placate. People in the trading desks and hedge funds have been trained to front run the Fed. If they think the Fed's next buy will be in the belly of the curve, they buy the belly of the curve. But how does the Fed ever unwind its current lunatic balance sheet? If the smart traders conclude the Fed's next move will be to sell mortgage-backed securities, they will sell like mad in advance; soon there would be mayhem as all the boys and girls on Wall Street piled on. So the Fed is frozen; it is petrified by fear that if it begins contracting its balance sheet it will unleash the demons.
TGR: Was there some type of tipping that allowed certain banks to front run the Fed?
DS: There are two kinds of front-running. First is market-based front-running. You try to figure out what the Fed is doing by reading its smoke signals and looking at how it slices and dices its meeting statements. People invest or speculate against the Fed's next incremental move.
Second, there is illicit front-running, where you have a friend who works for the Federal Reserve Board who tells you what happened in its meetings. This is obviously illegal.
But frankly, there is also just plain crony capitalism that is not that different in character and it's what Wall Street does every day. Bill Dudley, who runs the New York Fed, was formerly chief economist for Goldman Sachs and he pretends to solicit an opinion about financial conditions from the current Goldman economist, who then pretends to opine as to what the economy and Fed might do next for the benefit of Goldman's traders, and possibly its clients. So then it links in the ECB, Bank of Canada, etc. Is there any monetary post in the world not run by Goldman Sachs?
The point is, this is not the free market at work. This is central bank money printers and their Wall Street cronies perverting what used to be a capitalist market.
TGR: Does this unwinding of the Fed and the bond markets put the banking system back in peril, like in 2008?
DS: Not necessarily. That is one of the great myths that I address in my book. The banking system, especially the mainstream banking system, was not in peril at all. The toxic securitized mortgage assets were not in the Main Street banks and savings and loans; these institutions owned mostly prime quality whole loans and could have bled down the modest bad debt they did have over time from enhanced loan loss reserves. So the run on money was not at the retail teller window; it was in the canyons of Wall Street. The run was on wholesale money—that is, on repo and on unsecured commercial paper that had been issued in the hundreds of billions by financial institutions loaded down with securitized toxic garbage, including a lot of in-process inventory, on the asset side of their balance sheets.
The run was on investment banks that were really hedge funds in financial drag. The Goldmans and Morgan Stanleys did not really need trillion-dollar balance sheets to do mergers and acquisitions. Mergers and acquisitions do not require capital; they require a good Rolodex. They also did not need all that capital for the other part of investment banking—the underwriting business. Regulated stocks and bonds get underwritten through rigged cartels—they almost never under-price and really don't need much capital. Their trillion dollar balance sheets, therefore, were just massive trading operations—whether they called it customer accommodation or proprietary is a distinction without a difference—which were funded on 30 to 1 leverage. Much of the debt was unstable hot money from the wholesale and repo market and that was the rub—the source of the panic.
Bernanke thought this was a retail run à la the 1930s. It was not; it was a wholesale money run in the canyons of Wall Street and it should have been allowed to burn out.
TGR: Let's get back to our ballgame. What is to keep the U.S. population from saying, please Fed save us again?
DS: This time, I think the people will blame the Fed for lying. When the next crisis comes, I can see torches and pitch forks moving in the direction of the Eccles building where the Fed has its offices.
TGR: Let's talk about timing. On Dec. 31, the tax cuts expire, defense cuts go into place and we hit the debt ceiling.
DS: That will be a clarifying moment; never before have three such powerful vectors come together at the same time— fiscal triple witching.
First, the debt ceiling will expire around election time, so the government will face another shutdown and it will be politically brutal to assemble a majority in a lame duck session to raise it by the trillions that will be needed. Second, the whole set of tax cuts and credits that have been enacted over the last 10 years total up to $400–500B annually will expire on Dec. 31, so they will hit the economy like a ton of bricks if not extended. Third, you have the sequester on defense spending that was put in last summer as a fallback, which cannot be changed without a majority vote in Congress.
It is a push-pull situation: If you defer the sequester, you need more debt ceiling. If you extend the tax expirations, you need a debt ceiling increase of $100B a month.
TGR: What will Congress do?
DS: Congress will extend the whole thing for 60 or 90 days to give the new president, if he hasn't demanded a recount yet, an opportunity to come up with a plan.
To get the votes to extend the debt ceiling, the Democrats will insist on keeping the income and payroll tax cuts for the 99% and the Republicans will want to keep the capital gains rate at 15% so the Wall Street speculators will not be inconvenienced. It is utter madness.
TGR: It is like chasing your tail. How does it stop?
DS: I do not know how a functioning democracy in the ordinary course can deal with this. Maybe someone from Goldman Sachs can come and put in a fix, just like in Greece and Italy. The situation is really that pathetic.
TGR: Greece has come up with some creative ways to bring down its sovereign debt without actually defaulting.
DS: The Greek debt restructuring was a farce. More than $100B was held by the European bailout fund, the ECB or the International Monetary Fund. They got 100 cents on the dollar simply by issuing more debt to Greece. For private debt, I believe the net write-down was $30B after all the gimmicks, including the front-end payment. The rest was simply refinanced. The Greeks are still debt slaves, and will be until they tell Brussels to take a hike.
TGR: Going back to the triple-witching hour at year-end, if the debt ceiling is raised again, when do we start to see government layoffs and limitations on services?
DS: Defense purchases and non-defense purchases will be hit with brutal force by the sequester. As we go into 2013, there will be a shocking hit to the reported GDP numbers as discretionary government spending shrinks. People keep forgetting that most government spending is transfer payments, but it is only purchases of labor and goods that go directly into the GDP calculations, and it is these accounts that will get smacked by the sequester of discretionary defense and non-defense budgets.
TGR: I would think to unemployment numbers as well.
DS: They will go up.
Just take one example. According to the Bureau of Labor Statistics monthly report, there are 650,000 or so jobs in the U.S. Postal Service alone. That is 650,000 people who pretend to work at jobs that have more or less been made obsolete and redundant by the Internet and who are paid through borrowings from Uncle Sam because the post office is broke. Yet, the courageous ladies and gentlemen on Capitol Hill cannot even bring themselves to vote to discontinue Saturday mail delivery; they voted to study it! That is a measure of the loss of capacity to rationally cognate about our fiscal circumstance.
TGR: In the midst of this volatility, how can normal people preserve, much less expand their wealth?
DS: The only thing you can do is to stay out of harm's way and try to preserve what you can in cash. All of the markets are rigged or impaired. A 4% yield on blue chip stocks is not worth it, because when the thing falls apart, your 4% will be gone in an hour.
TGR: But if the government keeps printing money, cash will not be worth as much, either, right?
DS: No, I do not think we will have hyperinflation. I think the financial system will break down before it can even get started. Then the economy will go into paralysis until we find the courage, focus and resolution to do something about it. Instead of hyperinflation or deflation there will be a major financial dislocation, which means painful re-pricing of financial assets.
How painful will the re-pricing be? I think the public already knows that it will be really terrible. A poll I saw the other day indicated that 25% of people on the verge of retirement think they are in such bad financial shape that they will have to work until age 80. Now, the average life expectancy is 78. People's financial circumstances are so bad that they think they will be working two years after they are dead!
TGR: Finally, what is your investment model?
DS: My investing model is ABCD: Anything Bernanke Cannot Destroy: flashlight batteries, canned beans, bottled water, gold, a cabin in the mountains.
TGR: Thank you very much.
David Stockman is a former U.S. politician and businessman, serving as a Republican U.S. Representative from the state of Michigan 1977–1981 and as the director of the Office of Management and Budget under President Ronald Reagan 1981–1985. He is the author of The Triumph of Politics: Why Reagan's Revolution Failed and the soon-to-be released The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy.
Stockman was the keynote speaker at last weekend's Casey Research Recovery Reality Check Summit. This event featured legendary contrarian investor Doug Casey, high-end natural resource broker Rick Rule, New York Times bestselling author John Mauldin and 28 other financial luminaries. Over the three-day summit, they provided investors with asset-protection action plans and actionable investment advice. And even if you were unable to attend, you can still hear every recorded presentation in the Summit Audio Collection. Learn more here.
Streetwise - The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
_________________________
The US Dollar has been all down since it's large gap higher on the open Sunday evening. Clearly traders have taken the opportunity to unload some more of their Dollars at a nice price near the key USDX 80 Mendoza line.
As for US Treasuries, the 10-year hit another multi-month high since they bottomed in the Spring of 2009, and the dawn of the US Federal Reserves Crutch Program better known as Quantitative Easing. The 10-year Treasury was yielding a meager 1.84% this morning.
The US Dollar and US Treasury market are the Mother of ALL Bubbles. It is not a matter of "if" these two mega bubbles will burst, but "when". The pin is closer to the skin than many might have you believe.
Guest Post: The Treasury Bubble in One Graph
Submiited by John Aziz of Azizonomics,
What are the classic signs of an asset bubble? People piling into an asset class to such an extent that it becomes unprofitable to do so.
Treasury bonds are so overbought that they are now producing negative real yields (yield minus inflation):
That’s right, after taking into account inflation, many investors in treasuries are standing over a drain and pouring their money down it.
And so America’s creditors are now getting slapped quite heavily in the mouth by the Fed’s easy money inflationist policies.
I propose (much, I am sure, to the consternation of the monetarist-Keynesian “print money and watch your problems evaporate” establishment) that this is a very, very, very dangerous position. And I propose that those economists who are calling for even greater inflation are playing with dynamite.
See, while the establishment seems to largely believe that the negative return on treasuries will juice up the American economy — in other words that “hoarders” will stop hoarding and start spending — I believe that negative side-effects from these policies may cause severe harm.
There is the danger of a bursting treasury bubble. What would happen if America’s creditors decide they want to liquidate their positions? After all, they’re getting slapped in the mouth , and the Fed is promising to continue with the zero interest rate policy until at least 2014.
And we know for sure that even before real rates on treasuries turned negative that China were selling:
The Fed has been picking up the slack, and will have to continue to do so for the forseeable future (the private domestic and international markets have no reason to increase purchases assets with a negative real rate of return).
This means that to keep the Treasury’s interest payments low, the Fed will have to start printing more money, which brings us to the second danger: the danger of runaway inflation.
Bernanke might well believe he can do this without triggering runaway inflation. He might point to his track record of tripling the monetary base without triggering hyperinflation.
But inflation has stayed (relatively) low for one reason: the money he printed isn’t circulating. The primary dealer banks are holding the money as excess reserves. Can this last?
I doubt it. As I noted last month:
So, does the accumulation of excess reserves lead to inflation?
Only so much as the frequentation of brothels leads to chlamydia and syphilis.
Excess reserves are only non-inflationary so long as the banks — the people holding the reserves — play along with the Fed-Treasury game of monetising debt and trying to hide the inflation . The banks don’t have to lend these reserves out, just as having sex with hookers doesn’t have to lead to an infection.
But eventually — so long as you do it enough — the condom will break.
This trend of amassing excess reserves (done, lest we forget, as a stability measure to protect primary dealers against another shadow banking collapse) is closer to going to sleep upon a bed of dynamite.
But inflation is only the most obvious risk.
The greatest danger is illustrated here:
America — for most of last century exporter and creditor to the world now runs the biggest trade deficits the world has ever seen.
Let’s not forget that these creditors that U.S. monetary policy is now slapping in the face produce most of our consumption, much of our military hardware, and most of our oil.
Of course, many neocons seem to believe that this position is sustainable; that America can slap her creditors in the face all she likes because she has thermonuclear weapons and can tell the rest of the world to go and bite the big one.
Not so fast.
As VeteransToday noted in December:
“Surprise, Surprise, Surprise”, to quote Gomer Pyle. The secret spy mission to create photographic proof of Iranian nuclear intentions has gone horribly wrong.
China is the country of origin for many, many of the semiconductors used by the US Military. It was most likely that China provided the hardware with the secret backdoor that allowed the Iranians to seize control of the Stealth drone while the drone was on a secret CIA mission over Iran.
Working together, they captured a state of the art US Military stealth aircraft.
What this means to all US Military personnel serving anywhere in the world? It means that control of any electronics system in any type of platform, can be seized and used against the military that launched it.
I don’t doubt America still has great technological and infrastructural advantages over her Eurasian creditor rivals. But do we really want to test the limits of our power? Do we really want to try and provoke a trade war with China and the other Eurasian nations (who of course are testing the petrodollar reserve to its limits by creating their own reserve currency agreements) by obliterating the value of their dollar-denominated assets?
So now we know, beyond a shadow of doubt that U.S. Treasuries are in a historic bubble.
We know that to some degree the Federal Reserve and Ben Bernanke are guilty of stoking up this program by buying U.S. Treasuries (artificial demand) and thus constricting supply. We know that this is screwing America’s creditors who happen to produce a lot of America’s consumption, components, military hardware, energy and resources. We know that these nations are using increasingly violent rhetoric regarding their relationship with the United States (Putin for instance described America as a parasite), and are activating agreements to ditch the dollar as the reserve currency.
Do we really want to continue in this vein? Do we really want to continue screwing our creditors by forcing them to accept negative real rates on their investments? Do we really want to risk the inflationary impact of continuing to print money to monetise debt (and hiding the money in excess reserves, thereby temporarily hiding the inflation). Do we really want to find out if all those Chinese semiconductors in our military hardware have backdoors that allow America’s enemies to shut down American military hardware?
I’d call that playing dice with the devil.
_________________________
--
Posted Wednesday, 2 May 2012 |
| Source:
GoldSeek.com
By Toby Connor, GoldScents
Now that we have confirmation that Bernanke has broken the dollar rally I'm confident in calling April 4th an intermediate bottom (B-Wave bottom) in the gold market. Gold should now be entering the consolidation phase of the next C-wave. I expect a test of the all-time highs sometime this summer as the dollar moves down into its intermediate cycle bottom.
That being said I have no interest in a 15% rally in gold. The real money will be made as the mining stocks exit their bear market, re-enter the consolidation zone between 500 and 600, and move up to retest the old highs. It's not inconceivable that we could see a 30-45% gain in mining stocks over the next 2 1/2 months.
Sentiment in the mining index has reached the same levels of bearishness that were seen in the fall of 2008. That black pessimism drove a 300+ percent rally over the next two years. I have little doubt this time will be any different.
Now what we need to see is a change in character. We need the mining stocks to stop generating these sharp bear market rallies and transition into the wall of worry type rally that characterizes a bull market. So far that is exactly what is happening. The miners are rallying very hesitantly, and as long as this continues it will camouflage the move and keep sentiment depressed. That's exactly what we need to happen to drive a long sustained rally back up to the old highs.
The problem with the rocket launch type rallies we've seen over the last year and a half is that they swing sentiment very quickly to the bullish side and we run out of buyers.
As long as the bottoming process proceeds gradually I think there's a very good chance the HUI could break back above the 200 day moving average, and possibly test the 600 level by mid-July.
So far all of the pieces are starting to fall in place to initiate the very early stages of what I think will eventually become another huge momentum move similar to what happened in silver and gold last year. This scenario may well culminate in a parabolic blow-off top sometime in late 2014 as the dollar moves down into its next three year cycle low.
A "paralyzed" Federal Reserve Bank, in its "final days," held hostage by Wall Street "robots" trading in markets that are "artificially medicated" are just a few of the bleak observations shared by David Stockman, former Republican U.S. Congressman and director of the Office of Management and Budget. He is also a founding partner of Heartland Industrial Partners and the author of The Triumph of Politics: Why Reagan's Revolution Failed and the soon-to-be released The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy. The Gold Report caught up with Stockman for this exclusive interview at the recent Recovery Reality Check conference.
By Toby Connor, GoldScents
It
may not seem like much happened yesterday, but a very important event occurred.
Yesterday the dollar index breached 78.65. The reason that is significant is
because 78.65 marked the intraday low of the prior daily cycle. A penetration of
that level indicates that the current daily cycle has now topped in a left
translated manner and a new pattern of lower lows and lower highs has begun. Any
time a daily cycle tops in a left translated manner it almost always indicates
that the intermediate cycle has also topped.
In this case it would indicate that the intermediate dollar cycle topped on week two and should now move generally lower for the next 10-12 weeks, bottoming sometime in late June or early July, about the time Operation Twist ends.
In this case it would indicate that the intermediate dollar cycle topped on week two and should now move generally lower for the next 10-12 weeks, bottoming sometime in late June or early July, about the time Operation Twist ends.
Now that we have confirmation that Bernanke has broken the dollar rally I'm confident in calling April 4th an intermediate bottom (B-Wave bottom) in the gold market. Gold should now be entering the consolidation phase of the next C-wave. I expect a test of the all-time highs sometime this summer as the dollar moves down into its intermediate cycle bottom.
That being said I have no interest in a 15% rally in gold. The real money will be made as the mining stocks exit their bear market, re-enter the consolidation zone between 500 and 600, and move up to retest the old highs. It's not inconceivable that we could see a 30-45% gain in mining stocks over the next 2 1/2 months.
Sentiment in the mining index has reached the same levels of bearishness that were seen in the fall of 2008. That black pessimism drove a 300+ percent rally over the next two years. I have little doubt this time will be any different.
Now what we need to see is a change in character. We need the mining stocks to stop generating these sharp bear market rallies and transition into the wall of worry type rally that characterizes a bull market. So far that is exactly what is happening. The miners are rallying very hesitantly, and as long as this continues it will camouflage the move and keep sentiment depressed. That's exactly what we need to happen to drive a long sustained rally back up to the old highs.
The problem with the rocket launch type rallies we've seen over the last year and a half is that they swing sentiment very quickly to the bullish side and we run out of buyers.
As long as the bottoming process proceeds gradually I think there's a very good chance the HUI could break back above the 200 day moving average, and possibly test the 600 level by mid-July.
So far all of the pieces are starting to fall in place to initiate the very early stages of what I think will eventually become another huge momentum move similar to what happened in silver and gold last year. This scenario may well culminate in a parabolic blow-off top sometime in late 2014 as the dollar moves down into its next three year cycle low.
Now
is the time to invest in this sector as it struggles to transition from a bear
market back to the secular bull trend. The time to enter is at the very
beginning when no one believes. This is when the really big money is made. If
you wait till your emotions give you the all clear, half the move will be
over.
Most traders are going to jump back into the general stock market or tech stocks. You have to be smarter than that. The stock market, including tech, have already generated a massive move out of the October bottom. That kind of move usually leads to a multi-week, or month, consolidation. The odds of another 20 to 30% rally in the stock market are very slim.
The odds of a 20 to 30% rally as the mining stocks resume the secular bull trend are extremely high.
The combination of extreme downside momentum and irrational human nature has created the kind of oversold conditions and extreme undervaluation that generates an opportunity that only comes around once or twice a decade.
The $10 one-week trial for the premium newsletter will be available for the rest of the week. Click on the subscribe link on the right hand side of the homepage.
Most traders are going to jump back into the general stock market or tech stocks. You have to be smarter than that. The stock market, including tech, have already generated a massive move out of the October bottom. That kind of move usually leads to a multi-week, or month, consolidation. The odds of another 20 to 30% rally in the stock market are very slim.
The odds of a 20 to 30% rally as the mining stocks resume the secular bull trend are extremely high.
The combination of extreme downside momentum and irrational human nature has created the kind of oversold conditions and extreme undervaluation that generates an opportunity that only comes around once or twice a decade.
The $10 one-week trial for the premium newsletter will be available for the rest of the week. Click on the subscribe link on the right hand side of the homepage.
__________________________
-- Posted Sunday, 6 May 2012 | Share this article| Source: GoldSeek.com A "paralyzed" Federal Reserve Bank, in its "final days," held hostage by Wall Street "robots" trading in markets that are "artificially medicated" are just a few of the bleak observations shared by David Stockman, former Republican U.S. Congressman and director of the Office of Management and Budget. He is also a founding partner of Heartland Industrial Partners and the author of The Triumph of Politics: Why Reagan's Revolution Failed and the soon-to-be released The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy. The Gold Report caught up with Stockman for this exclusive interview at the recent Recovery Reality Check conference.
The Gold Report: David, you have talked and written about the effect of government-funded, debt-fueled spending on the stock market. What will be the real impact of quantitative easing?
David Stockman: We are in the last innings of a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble.
Quantitative easing is making it worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector—both erroneous steps in my view. The federal government is not getting its financial house in order. We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon.
TGR: What should the role of the Federal Reserve be?
DS: To get out of the way and not act like it is the central monetary planner of a $15 trillion economy. It cannot and should not be done.
The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. The yield curve signals nothing anymore because it is totally manipulated by the Fed. The very idea of "Operation Twist" is an abomination.
Capital markets are at the heart of capitalism and they are not working. Savers are being crushed when we desperately need savings. The federal government is borrowing when it is broke. Wall Street is arbitraging the Fed's monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year treasuries at a yield of 200 basis points, capturing the profit and laughing all the way to the bank. The Fed has become a captive of the traders and robots on Wall Street.
TGR: If we are in the final innings of a debt super-cycle, what is the catalyst that will end the game?
DS: I think the likely catalyst is a breakdown of the U.S. government bond market. It is the heart of the fixed income market and, therefore, the world's financial market.
Because of Fed management and interest-rate pegging, the market is artificially medicated. All of the rates and spreads are unreal. The yield curve is not market driven. Supply and demand for savings and investment, future inflation risk discounts by investors—none of these free market forces matter. The price of money is dictated by the Fed, and Wall Street merely attempts to front-run its next move.
As long as the hedge fund traders and fast-money boys believe the Fed can keep everything pegged, we may limp along. The minute they lose confidence, they will unwind their trades.
On the margin, nobody owns the Treasury bond; you rent it. Trillions of treasury paper is funded on repo: You buy $100 million (M) in Treasuries and immediately put them up as collateral for overnight borrowings of $98M. Traders can capture the spread as long as the price of the bond is stable or rising, as it has been for the last year or two. If the bond drops 2%, the spread has been wiped out.
If that happens, the massive repo structures—that is, debt owned by still more debt—will start to unwind and create a panic in the Treasury market. People will realize the emperor is naked.
TGR: Is that what happened in 2008?
DS: In 2008 it was the repo market for mortgage-back securities, credit default obligations and such. In 2008 we had a dry run of what happens when a class of assets owned on overnight money goes into a tailspin. There is a thunderous collapse.
Since then, the repo trade has remained in the Treasury and other high-grade markets because subprime and low-quality mortgage-backed securities are dead.
TGR: Walk us through a hypothetical. What happens when the fast-money traders lose confidence in the Fed's ability to keep the spread?
DS: They are forced to start selling in order to liquidate their carry trades because repo lenders get nervous and want their cash back. However, when the crisis comes, there will be insufficient private bids—the market will gap down hard unless the central banks buy on an emergency basis: the Fed, the European Central Bank (ECB), the people's printing press of China and all the rest of them.
The question is: Will the central banks be able to do that now, given that they have already expanded their balance sheets? The Fed balance sheet was $900 billion (B) when Lehman crashed in September 2008. It took 93 years to build it to that level from when the Fed opened for business in November 1914. Bernanke then added another $900B in seven weeks and then he took it to $2.4 trillion in an orgy of money printing during the initial 13 weeks after Lehman. Today it is nearly $3 trillion. Can it triple again? I do not think so. Worldwide it's the same story: the top eight central banks had $5 trillion of footings shortly before the crisis; they have $15 trillion today. Overwhelmingly, this fantastic expansion of central bank footings has been used to buy or discount sovereign debt. This was the mother of all monetizations.
TGR: Following that path, what happens if there are no buyers? Do the governments go into default?
DS: The U.S. Treasury needs to be in the market for $20B in new issuances every week. When the day comes when there are all offers and no bids, the music will stop. Instead of being able to easily pawn off more borrowing on the markets—say 90 basis points for a 5-year note as at present—they may have to pay hundreds of basis points more. All of a sudden the politicians will run around with their hair on fire, asking, what happened to all the free money?
TGR: What do the politicians have to do next?
DS: They are going to have to eat 30 years worth of lies and by the time they are done eating, there will be a lot of mayhem.
TGR: Will the mayhem stretch into the private sector?
DS: It will be everywhere. Once the bond market starts unraveling, all the other risk assets will start selling off like mad, too.
TGR: Does every sector collapse?
DS: If the bond market goes into a dislocation, it will spread like a contagion to all of the other asset markets. There will be a massive selloff.
I think everything in the world is overvalued—stocks, bonds, commodities, currencies. Too much money printing and debt expansion drove the prices of all asset classes to artificial, non-economic levels. The danger to the world is not classic inflation or deflation of goods and services; it's a drastic downward re-pricing of inflated financial assets.
TGR: Is there any way to unravel this without this massive dislocation?
DS: I do not think so. When you are so far out on the end of a limb, how do you walk it back?
The Fed is now at the end of a $3 trillion limb. It has been taken hostage by the markets the Federal Open Market Committee was trying to placate. People in the trading desks and hedge funds have been trained to front run the Fed. If they think the Fed's next buy will be in the belly of the curve, they buy the belly of the curve. But how does the Fed ever unwind its current lunatic balance sheet? If the smart traders conclude the Fed's next move will be to sell mortgage-backed securities, they will sell like mad in advance; soon there would be mayhem as all the boys and girls on Wall Street piled on. So the Fed is frozen; it is petrified by fear that if it begins contracting its balance sheet it will unleash the demons.
TGR: Was there some type of tipping that allowed certain banks to front run the Fed?
DS: There are two kinds of front-running. First is market-based front-running. You try to figure out what the Fed is doing by reading its smoke signals and looking at how it slices and dices its meeting statements. People invest or speculate against the Fed's next incremental move.
Second, there is illicit front-running, where you have a friend who works for the Federal Reserve Board who tells you what happened in its meetings. This is obviously illegal.
But frankly, there is also just plain crony capitalism that is not that different in character and it's what Wall Street does every day. Bill Dudley, who runs the New York Fed, was formerly chief economist for Goldman Sachs and he pretends to solicit an opinion about financial conditions from the current Goldman economist, who then pretends to opine as to what the economy and Fed might do next for the benefit of Goldman's traders, and possibly its clients. So then it links in the ECB, Bank of Canada, etc. Is there any monetary post in the world not run by Goldman Sachs?
The point is, this is not the free market at work. This is central bank money printers and their Wall Street cronies perverting what used to be a capitalist market.
TGR: Does this unwinding of the Fed and the bond markets put the banking system back in peril, like in 2008?
DS: Not necessarily. That is one of the great myths that I address in my book. The banking system, especially the mainstream banking system, was not in peril at all. The toxic securitized mortgage assets were not in the Main Street banks and savings and loans; these institutions owned mostly prime quality whole loans and could have bled down the modest bad debt they did have over time from enhanced loan loss reserves. So the run on money was not at the retail teller window; it was in the canyons of Wall Street. The run was on wholesale money—that is, on repo and on unsecured commercial paper that had been issued in the hundreds of billions by financial institutions loaded down with securitized toxic garbage, including a lot of in-process inventory, on the asset side of their balance sheets.
The run was on investment banks that were really hedge funds in financial drag. The Goldmans and Morgan Stanleys did not really need trillion-dollar balance sheets to do mergers and acquisitions. Mergers and acquisitions do not require capital; they require a good Rolodex. They also did not need all that capital for the other part of investment banking—the underwriting business. Regulated stocks and bonds get underwritten through rigged cartels—they almost never under-price and really don't need much capital. Their trillion dollar balance sheets, therefore, were just massive trading operations—whether they called it customer accommodation or proprietary is a distinction without a difference—which were funded on 30 to 1 leverage. Much of the debt was unstable hot money from the wholesale and repo market and that was the rub—the source of the panic.
Bernanke thought this was a retail run à la the 1930s. It was not; it was a wholesale money run in the canyons of Wall Street and it should have been allowed to burn out.
TGR: Let's get back to our ballgame. What is to keep the U.S. population from saying, please Fed save us again?
DS: This time, I think the people will blame the Fed for lying. When the next crisis comes, I can see torches and pitch forks moving in the direction of the Eccles building where the Fed has its offices.
TGR: Let's talk about timing. On Dec. 31, the tax cuts expire, defense cuts go into place and we hit the debt ceiling.
DS: That will be a clarifying moment; never before have three such powerful vectors come together at the same time— fiscal triple witching.
First, the debt ceiling will expire around election time, so the government will face another shutdown and it will be politically brutal to assemble a majority in a lame duck session to raise it by the trillions that will be needed. Second, the whole set of tax cuts and credits that have been enacted over the last 10 years total up to $400–500B annually will expire on Dec. 31, so they will hit the economy like a ton of bricks if not extended. Third, you have the sequester on defense spending that was put in last summer as a fallback, which cannot be changed without a majority vote in Congress.
It is a push-pull situation: If you defer the sequester, you need more debt ceiling. If you extend the tax expirations, you need a debt ceiling increase of $100B a month.
TGR: What will Congress do?
DS: Congress will extend the whole thing for 60 or 90 days to give the new president, if he hasn't demanded a recount yet, an opportunity to come up with a plan.
To get the votes to extend the debt ceiling, the Democrats will insist on keeping the income and payroll tax cuts for the 99% and the Republicans will want to keep the capital gains rate at 15% so the Wall Street speculators will not be inconvenienced. It is utter madness.
TGR: It is like chasing your tail. How does it stop?
DS: I do not know how a functioning democracy in the ordinary course can deal with this. Maybe someone from Goldman Sachs can come and put in a fix, just like in Greece and Italy. The situation is really that pathetic.
TGR: Greece has come up with some creative ways to bring down its sovereign debt without actually defaulting.
DS: The Greek debt restructuring was a farce. More than $100B was held by the European bailout fund, the ECB or the International Monetary Fund. They got 100 cents on the dollar simply by issuing more debt to Greece. For private debt, I believe the net write-down was $30B after all the gimmicks, including the front-end payment. The rest was simply refinanced. The Greeks are still debt slaves, and will be until they tell Brussels to take a hike.
TGR: Going back to the triple-witching hour at year-end, if the debt ceiling is raised again, when do we start to see government layoffs and limitations on services?
DS: Defense purchases and non-defense purchases will be hit with brutal force by the sequester. As we go into 2013, there will be a shocking hit to the reported GDP numbers as discretionary government spending shrinks. People keep forgetting that most government spending is transfer payments, but it is only purchases of labor and goods that go directly into the GDP calculations, and it is these accounts that will get smacked by the sequester of discretionary defense and non-defense budgets.
TGR: I would think to unemployment numbers as well.
DS: They will go up.
Just take one example. According to the Bureau of Labor Statistics monthly report, there are 650,000 or so jobs in the U.S. Postal Service alone. That is 650,000 people who pretend to work at jobs that have more or less been made obsolete and redundant by the Internet and who are paid through borrowings from Uncle Sam because the post office is broke. Yet, the courageous ladies and gentlemen on Capitol Hill cannot even bring themselves to vote to discontinue Saturday mail delivery; they voted to study it! That is a measure of the loss of capacity to rationally cognate about our fiscal circumstance.
TGR: In the midst of this volatility, how can normal people preserve, much less expand their wealth?
DS: The only thing you can do is to stay out of harm's way and try to preserve what you can in cash. All of the markets are rigged or impaired. A 4% yield on blue chip stocks is not worth it, because when the thing falls apart, your 4% will be gone in an hour.
TGR: But if the government keeps printing money, cash will not be worth as much, either, right?
DS: No, I do not think we will have hyperinflation. I think the financial system will break down before it can even get started. Then the economy will go into paralysis until we find the courage, focus and resolution to do something about it. Instead of hyperinflation or deflation there will be a major financial dislocation, which means painful re-pricing of financial assets.
How painful will the re-pricing be? I think the public already knows that it will be really terrible. A poll I saw the other day indicated that 25% of people on the verge of retirement think they are in such bad financial shape that they will have to work until age 80. Now, the average life expectancy is 78. People's financial circumstances are so bad that they think they will be working two years after they are dead!
TGR: Finally, what is your investment model?
DS: My investing model is ABCD: Anything Bernanke Cannot Destroy: flashlight batteries, canned beans, bottled water, gold, a cabin in the mountains.
TGR: Thank you very much.
David Stockman is a former U.S. politician and businessman, serving as a Republican U.S. Representative from the state of Michigan 1977–1981 and as the director of the Office of Management and Budget under President Ronald Reagan 1981–1985. He is the author of The Triumph of Politics: Why Reagan's Revolution Failed and the soon-to-be released The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy.
Stockman was the keynote speaker at last weekend's Casey Research Recovery Reality Check Summit. This event featured legendary contrarian investor Doug Casey, high-end natural resource broker Rick Rule, New York Times bestselling author John Mauldin and 28 other financial luminaries. Over the three-day summit, they provided investors with asset-protection action plans and actionable investment advice. And even if you were unable to attend, you can still hear every recorded presentation in the Summit Audio Collection. Learn more here.
Streetwise - The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
_________________________
5/3/2012
the mogambo guru
I recently had a revelation of sorts, distilled from my merely noticing what happens when passing by my neighbors, out on their stupid lawns, playing with their stupid kids, or washing their stupid cars, or just doing something stupid.
I am sure that you wonder how I can tell that they are stupid. Easy. I've been telling them to buy gold, silver and oil, for so long, and to such little effect, even in the face of such enormous gains accruing to those who followed such Fabulous Mogambo Advice (FMA), that one can only conclude that they are stupid or deaf.
And I know they are not deaf because when I helpfully say to them "Hey, you drooling moron! Buy gold, silver and oil stocks or kiss your stupid, ugly butt goodbye!", where by "ugly" I mean "big", they always reply, all huffy, "Who are you calling a drooling moron, you moron?", thus proving that they can, indeed, hear.
Anyway, being the friendly, peach-of-a-helpful guy that I am, as I pass by them in my snazzy Mogambo-Mobile, I always honk the horn several times to get their attention, and then we exchange the usual pleasantries, usually along the lines of them saying to me "Shut up that stupid horn, you dumb Mogambo bastard!", with me responding by cheerfully reminding them of their many, many errors, delivered along the lines of "I told you that your economic hell was going to happen, you lowlife cretin of a moron, because the Federal Reserve is creating so much excess money and credit!"
If I don't think that they are near enough to actually hit my car with anything, I can go slow enough to manage to throw in a little free history lesson for them, too, as in "And if you had bought gold, silver and oil when I told you to, then maybe you would be wealthy by this time, instead of just being older, uglier, fatter and (as far as I can tell) even stupider now than you were when you were too damned stupid to buy gold, silver and oil like I told you to, way back when, which was, QED, pretty damned stupid of you, and a complete waste of my Precious Mogambo Time (PMT)!"
They, of course, voice their displeasure at my reminding them of what imbeciles they are, mostly by engaging in making crude gestures, shouting rude profanities and flinging pet excrement at me, all of which are low-class behaviors that you would naturally expect from morons that are so, as previously postulated, stupid.
To be accurate, and just to set the record straight, my idiot neighbors only act hateful and cruel because they foolishly think that I am NOT carrying some kind of weapon that might "accidentally" fire, usually in the direction of somebody being hateful and/or cruel to me, and who is, obviously, asking to have their middle finger shot clean off.
But as to stupidity, if you want a frustrating afternoon, trying explaining the simple idea that the continual creation of a larger money supply leads to price inflation, even though Milton Friedman famously said -- long enough ago that they should have heard of it by now! -- that "Price inflation is always and everywhere a monetary phenomenon."
So, I honk my horn at these boneheads, and I disdainfully huff in my haughty condescension that they deserve what they get for ignoring Friedman, and ignoring the enormous increases in the money supply created by the evil Federal Reserve, a lot of which was used to buy the $5 trillion of new Treasury debt issued by the evil Obama spendthrift administration in the last 3 years!.
So, I mean, you would think that some, or at least one, of these proletariat halfwit neighbors of mine would have been impressed with Friedman's profound economic truism, especially considering the fact that nobody has disproved it yet!
Nor has anyone even found any time in history where such increases in the money supply did NOT produce inflation in prices, which of course hurts the poor by making things cost more.
As to the economy today, in case you are wondering on the edge of your seat what will happen, pull your chair up here closer to me so that you can look deep, deep into my eyes, and thus be impressed by my Awesome Mogambo Sincerity (AMS).
Perhaps then you will understand the terrible enormity of what is happening because the evil Federal Reserve created, and is still creating, so much excess money and credit for the last 25 years, and maybe that explains why the soundtrack to this Fabulous Mogambo Essay (FME) sounds so spooky and foreboding, a sonic mishmash with crashing, clashing horns making your skin crawl at the horrible dissonance, but not quite able to disguise the sound of ravenous wolves and government-employees unions approaching, one to eat you, and the other to eat your wallet.
If you don't hear the soundtrack on your computers, it is bad news for those of us who are both paranoid and have no idea how computers or soundtracks work. I figure that it means that the government is censoring me, crushing me under its hob-nailed boot heel, to keep me from giving you the vital, VITAL advice to buy gold, silver and oil as protection (and enormous wealth-generation!) against the raging price inflation that will rain down upon us because of the foul Federal Reserve.
In fact, the vital, VITAL information to buy gold, silver and oil, distilled, as it is, from thousands of years of history, is so important (as indicated by the repeated use of the word "vital" over and over, which I use to make myself feel important) that I expect secret government agents to take action against the spread of this Immortal Mogambo Message (IMM) at any secon.
Copyright © 2010 MogamboGuru.com. All rights reserved.
_________________________
Serial Bubble Blowers
05/05/12 Baltimore, Maryland – The shrinking dollar is a modern problem. The U.S. dollar has been shrinking since the inception of the Federal Reserve — the very crew assigned the task of maintaining its value. Of late, the decline is accelerating at an alarming rate.
For many Americans, the suggestion that the dollar is losing value is unthinkable — even unpatriotic. The problem is not simply a lack of understanding about the nature of wealth and investment used to sustain it.
Our policy makers and economists make no distinction between wealth created through savings and investment in the real economy versus “wealth” created in the markets through asset bubbles brought about by credit policies.
When I tell people this, I feel like I’m addressing a meeting of folks who want to lose weight at the local burger joint. We as individuals — and as a nation — are addicted to cheap, easy credit. What the government gives, we’ll take. We spend at a high level, and we want to accumulate wealth on the same fast track.
Forget hard work, we’d rather our house go up in value like magic! Traditionally, economists recognized that it took time to build an estate. People and countries could build wealth slowly. Those days are far, far behind us. Now we are at the mercy of what I call serial bubble blowers.
All the U.S. economy’s so-called improvements stem from one main reason: all economic growth during the “recovery” since 2001 can be traced to a seemingly endless array of asset and borrowing bubbles.
First, we saw the stock market bubble, then the bond bubble, then the housing bubble, then the mortgage refinance bubble, then the commodities bubble. Now another bond bubble approaches.
In between, we haven’t seen a single sign of stable, sustained growth. And that makes sense; consumer spending has been surging in excess of disposable income for years. That’s not real growth.
Right now, Washington thinks that another round of stimulus will solve the problem. That’s like saying that overeating will eventually lead to serious dieting. Consumer spending isn’t juicing the economy.
Meanwhile, since the government is broke, all the borrowing they do to fund stimulus, tax cuts, and anything else to save the economy puts us at the mercy of foreign investors. If and when they decide to slash their investments in U.S. dollars or Treasury securities, we’ll have a crash landing worse than anything we’ve seen yet.
It’ll be far worse than Lehman Brothers’ collapse, far worse than 2008’s aftermath.
We depend on foreign investors for everything. Be they private, institutional, or governmental, we need them. If the dollar’s fall frightens foreign owners, they will sell from this immense stock of dollar assets.
But how big are these foreign holdings? You rarely hear about this on financial news channels, so you probably don’t think it’s a big deal. In fact, it’s a big fat deal.
We’re sitting on $15.4 trillion in debt. How is it going to get paid? And by whom?
Back before 1970, foreigners held a 5 percent slice of U.S. public debt. Today foreigners hold nearly half the pie. And the government owes a bunch of it to itself — $4.6 trillion — including what it’s borrowed from the Social Security trust fund.
Is Washington at all alarmed? While the end of 2011 did culminate in near-monthly government shutdown threats, we expect the debt ceiling to go on being raised as it was under every presidency since, well, 1917, when we had a World War to finance.
At last count, it’s been raised 74 times. And lest you believe the crisis came to a head in the Obama administration, we’d like to point out that he’s only raised it three times so far. Famed fiscal conservative Ronald Reagan raised it a whopping 18 times. So you see borrowing to spend is everyone’s favorite game.
Darn all the consequences.
_________________________
Key near-term number to watch in Gold is $1646
Key near-term number to watch in Silver is $30.50
Got Gold You Can Hold?
Got Silver You Can Squeeze?
It's NOT Too Late To Accumulate!!!
What are you waiting for?
No comments:
Post a Comment