The Bankers’ Last Arena

In September 2012, in my article Gold versus Bonds, I wrote: In the end game, the bond market will be capitalism’s final resting place …when capital markets expand, the action is in the equity markets; when capital markets contract, bond markets are where the action is.

On June 7, 2015, The Financial Times’ John Authers observed: This has been a very dramatic week…. The real action was in the bond markets…the cost of borrowing, the cost of money within Germany over the long term more than doubled in the space of four trading days.

On the same day, CNNMoney warned: Pay Attention To The Chaos In The Bond Market – Bond Market Selloff Continues

That hissing sound you just heard is more air coming out of the bubble in the global bond market. From Germany to the US, fixed income

prices tanked last week, sending yields way up…Investors are yanking cash out of the fixed income market. Government bonds experienced a sixth-straight week of outflows, according to Bank of America Merrill Lynch. Emerging market debt, a big beneficiary of extremely low U.S. interest rates, suffered the biggest outflow in nearly five months.

The same week, Michael Snyder in Investors Start To Panic As A Global Bond Market Crash Begins, asked:

Is the financial collapse that so many are expecting in the second half of 2015 already starting?

Many have believed that we would see bonds crash before the stock market crashes, and that is precisely what is happening right now. Since mid-April, the yield on 10 year German bonds has shot up from 0.05 percent to 0.89 percent. That much of that jump has come this week. Just a couple of days ago, the yield on 10 year German bonds was sitting at just 0.54 percent. And it isn’t just German – bond yields are going crazy all over Europe. So far, it is being estimated that global investors have lost more than half a trillion dollars, and there is much more room for these bonds to fall. In the end, the overall losses could be well into the trillions…

And on June 11^th, FXStreet wrote: …government bond prices across the globe continue to tank, sending yields higher, leading to a cumulative loss of [$1.2 trillion] in last three months…The bond route is spearheaded by the German bunds..A similar move is seen in French, Italian and Spanish yields…In Asia, the picture is similar to the one seen in the Eurozone. Yields have jumped in Indonesia..in South Africa..in Turkey..in Mexico..and in Australia…

Under the topic, THE END GAME AND THE COMING PANIC IN THE BOND MARKET, in Gold versus Bonds (September 2012) I wrote:

The bond matadors’ 30-year run of luck is running out. Interest rates have fallen for 30 years making previously-issued bonds more valuable. But, today, with US Treasury debt close to 0 %, interest rates can’t go lower and bond valuations can’t continue to rise.

We are moving into the end game, the grand denouement of credit and debt-based markets, the grand finale of the debt super-cycle, the crack-up boom, the blow-off Ludwig von Mises predicted would happen as a result of constantly expanding credit.

David Stockman [Reagan’s former budget director] and outstanding observer of America’s problems in the end game..was asked [May 2012]: ‘What catalyst could bring the end game to a final resolution?’

David Stockman: 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. 

THE PANIC IS BEGINNING

PARADIGM SHIFTS AND INSTITUTIONAL FAILURE

When paradigms shift, what was once believed true is no longer believed, new questions take the place of old answers and institutional failure becomes commonplace when traditional solutions no longer provide the requisite answers.

We are now in the final stage of the end game. I described this process in September 2008 in my article Gold & The Collapse of Paper Money. In that article, I referred to Professor David Hackett Fischer’s The Great Wave, Price Revolutions and the Rhythm of History(Oxford University Press 1996), a seminal work that places today’s economic crisis in a far greater and far more significant context:

According to Professor Fischer, waves of rising prices have interrupted long periods of stability throughout history. These great waves are often accompanied by unexpected disasters, extreme social upheaval and always end in economic collapse. 

Such great waves last from 80 to 160 years and their appearance spells the end of epochs and eras. Great waves marked the end of the feudal era, as it did the end of the renaissance and the enlightenment; and soon, the current great wave that began in 1896 will end the era of “Victorian equilibrium”, an era that began with the reign of England’s Queen Victoria.

During each great wave throughout history: …Food and fuel led the upward movement. Manufactured goods and services lagged behind. These patterns indicated that the prime mover was excess aggregate demand, generated by an acceleration of population growth, or by rising living standards, or both. 

… Prices went higher, and became increasingly unstable. They began to surge and decline in movements of increasing volatility. Severe price-shocks were felt in commodity movements. The money supply was alternately expanded and contracted.

Financial markets became unstable. Government spending grew faster than revenue, and public debt increased at a rapid rate…Wages, which had at first kept up with prices, now lagged behind. Returns to labor declined while returns to land and capital increased. The rich grew richer. Inequalities of wealth and income increased. So did hunger, homelessness, crime, violence, drink, drugs, and family disruption.

…This was a time of lost faith in institutions. It was also a period of desperate search for spiritual values…Young people, uncertain of both the future and the past, gave way to alienation and cultural anomie…Finally, the great wave crested and broke with shattering force in a cultural crisis that included demographic contraction, economic collapse, political revolution, international war and social violence.

Today, another great wave is cresting and, once again, is about to break, resulting in a cataclysmic crisis of demographic contraction, economic collapse, political revolution, international war and social violence that will end the current paradigm, clearing the way for the new and better paradigm to come.

About these cataclysmic and transformative crises, Professor Fischer writes: Each crisisimproved the condition of ordinary people. It has also enlarged ideas of human dignity, freedom, and the role of law. This tendency has become more powerful in each successive wave.

The world’s oldest book, China’s I Ching (The Book of Changes) offers a perspective on today’s crisis that supports Professor Fischers’ ultimately positive outlook:

The Flood, hexagram 59: Being swept by a flood is blessed…What seems like a disaster proves to be a blessing. The protagonist is inundated by a rush of water, an irresistible and apparently destructive force. But this destructive force proves beneficial, sweeping him up to a height he could not have reached on his own.

Rediscovering the I Ching, Greg Whincup, Doubleday & Co. 1986

We asked for signs

Signs were sent

But then we wondered

What they meant 

THE BIG RESET

The Big Reset: War on Gold and the Financial Endgame (2014) by Willem Middlekoop tells the history of gold in a remarkably clear and insightful manner. But Middlekoop’s proferred conclusion is but the central bankers’ currently hoped-for wet dream in an end game they don’t control.

Middlekoop’s powerfully conclusive writing implies the success of the bankers’ ‘big reset’, i.e.  a new global reference currency, is virtually assured, a fait accompli, needing nothing more than its implementation to make the next version of the bankers’ bogus banknotes a viable reality. 

Such a monetary reset, if successful, would give new life to the bankers’ now dying paradigm of credit and debt thereby allowing bankers to continue living like parasites off the indebting and productivity of others.

The idea that humanity controls its destiny, however, is hubris, a modern superstition, a bastard byproduct of the now fading industrial age. That we are responsible for our destiny—the inexorable result of our free will—does not mean we control what that destiny will be.

Power is no more control than credit is money

This is as true for bankers as it is for humanity. It is a truth, however, that bankers do not yet understand; for if they did, they would not behave as they do. 

In The Great Wave, Price Revolutions and the Rhythm of History, David Hackett Fischer writes: In the United States problems of economic understanding have been compounded by the effect of economic prosperity. The Japanese in WWII spoke ruefully of ‘shoribyo’ or ‘victory disease’. The Greeks called it ‘hubris, and thought it always ended in the intervention of the goddess Nemesis. That lady makes her appearance when wave-riders begin to believe that they are wave-makers, at the moment when the great wave breaks and begins to gather its energy again.

THE MOTHER OF ALL PARADIGM SHIFTS: THE UNIVERSAL RESET

In May 2007, sixteen months before the 2008 financial crisis, I wrote in Subprime America infects Asia and Europe:

It’s spring 2007 and the sun is shining in the US, backyard BBQs are being cleaned in anticipation of summer’s use. A severe financial crisis, however, is in the offing; a crisis as unexpected as the Golden State Warriors’ last minute streak to the NBA playoffs.

An unexpected financial crisis, however, will be much more consequential than Don Nelson’s magical resurrection of the Warriors’ NBA hopes. There, at least, the Warriors will have a fighting chance. But because most people don’t know a financial crisis is in progress, they will have little chance of survival. This summer, America’s subprime CDOs are coming home to roost, and not just to the US.

[Note: Six weeks after I wrote those words, on June 23, 2007, The New York Times reported: Bear Stearns pledged up to $3.2 billion in loans yesterday to bail out one of its hedge funds that was collapsing because of bad bets on subprime mortgages.]

The unexpected financial crisis I predicted in 2007 isn’t over.  Today, in synch with David Hackett Fischer’s great wave, it, too, is about to crest and crash bringing to an end all that credit created.

The underlying crisis, however, isn’t about bond markets, excessive levels of credit and aggregate debt or the inability of central bankers to revive economic growth. Today’s crisis is part of a far larger paradigm shift—a universal reset that is about to transform humanity and life on Earth

In 1981, in Buckminster Fuller wrote:

Humanity is moving ever deeper into a crisis which has no precedent. It is a crisis brought about by evolution being intent on completely integrating differently colored, differently cultured, and intercommunicating humanity, and by evolution being intent on making integrated humanity able to live sustainedly at a higher standard of living for all than has ever been experienced by any.

This unprecedented crisis now in motion includes cataclysmic earth changes, e.g. record heat, record cold, record rains, floods, drought, eruptions and earthquakes. The universal reset, needed and timely as it is, will not be easy nor will survival be assured.

The outcome, however, is preordained. A better world is coming.

Today’s accelerating earth changes are noted daily on my news blog at www.drschoon.com.  My current Dollars & Sense video is titled, US Politics: The Illusion & The Truth, i.e. Politics for Dummies & the Dispossessed, see  https://youtu.be/TtldcZrayz0.  

Buy gold, buy silver, have faith.

Darryl Robert Schoon

www.drschoon.com

www.survivethecrisis.com

With US$4.8 trillion in assets — or about the size of Japan’s economy — no one manages more money than BlackRock Inc. So, it’s worth paying attention when the firm says it’s time to cast aside its trusted models for assessing risk in bonds.

The gyrations gripping the world’s fixed-income market are so great that it’s almost impossible to make sense of them on a historical basis. In Germany, for example, yields on 10-year securities have surged from almost nothing in late April to about 1 per cent last week — a move so swift that some strategists are likening it to a once-in-a-generation event.

“The German bund market is incalculably volatile,” said Scott Thiel, BlackRock’s deputy chief investment officer for fundamental fixed income in London. “It doesn’t make sense to measure it in traditional respects.”

Across Europe, investors are ripping up their old models to analyze the US$100 trillion global bond…..continue reading HERE

DEFLATION RULES! – because periodic recessions, necessary to rebalance the economy after periods of growth, cannot be put off forever by the short-term expedient of printing money. The result of such corrupt and evasive practices is that the deflationary forces build up to catastrophic and overwhelming proportions leading to economic collapse and depression. This is the point that we have arrived at now. Why can’t governments keep the game going indefinitely by printing more and more money? – because the debt grows and grows until it becomes apparent even to dull-witted bond / Treasury holders that they are never going to get their money back, so they start selling and the selling snowballs into an avalanche, driving interest rates through the roof. Bond and stockmarkets crash and the economy sinks into a dangerously deep depression, all because governments stubbornly refused to do the right thing all along, and interfered with and obstructed normal market forces, culminating in their idiotic and ruinous QE, ZIRP and now even NIRP.

Of course, the mainstream financial media are trying to portray the recent trend of rising interest rates as a sign that the economy is recovering, saying that it is increasing demand in the economy that is driving rates up. If this is so then why is the Baltic Dry Index, which is a measure of shipping rates, at rock bottom depression levels, and why are commodity prices near to their 2008 – 2009 crash lows?? No – the reason that rates are going up is that bond holders have finally seen the writing on the wall and woken up to the fact that governments around the world not only have no intention of honoring their debts, but are incapable of doing so, even if they wanted to, so why should they hold on to piles of ultimately worthless paper that don’t even yield anything in the here and now? This is why bond and Treasury prices have been dropping, and notwithstanding any short-term bounce to alleviate the short-term oversold condition, look set to go into a self-feeding downward spiral that will drive rates sharply higher, turning the Fed into an impotent bystander. All this looks set to happen with a rapidity that will surprise many people and catch them off guard, particularly those who complacently assume that the long uptrend in many stockmarkets is set to continue forever.

Alright, so what is set to happen and what will drop and what will go up? Bond, commodity and stockmarkets look set to crash, with the rising rates associated with falling bond prices ripping the rug out from under the stockmarket. A wild “dash for cash” would be the result of this that will drive the dollar to possibly dizzying heights, like 2008 on steroids. Eventually, after this “swansong” rally, the dollar will crash and burn, especially when China – Russia roll out their gold backed new world reserve currency, an event which could trigger a war. Gold and silver will likely get caught up in this maelstrom and drop to new lows, despite imminent positive seasonal factors, but will later emerge into spectacular bullmarkets, and it will be important for any investors wanting to buy physical gold and silver to aim to do so ahead of the crash bottom, because after the turn it will be almost impossible to buy physical, and also to keep in mind that governments can be expected to pass laws enabling them to forcibly steal your gold and silver – so give some thought to where you are going to store it.

Our tactics therefore involve 2 main planks – cash: the US dollar, and bear ETFs, in bonds on any bounce and in stocks immediately. The more daring may consider out of the money Puts, and you should “swing until you hit”, rolling into the next series until the plunge occurs. We hold off buying the Precious Metals sector until this last takedown has run its course, which will likely see gold drop to the $850 – $1000 area and silver to about $10. Then we come out “guns blazing” because the ensuing rally in gold and silver is likely to be spectacular, dwarfing what occurred in the late 70’s.

Let’s now quickly review some relevant charts.

We start with the 13-year chart for TLT, which is a good long T-Bond proxy. On this chart we see that despite the recent sharp drop, predicted on the site in the last Bond Market update, it still hasn’t broken down from its long-term uptrend. The later stages of its bullmarket advance were of course fuelled by ZIRP, but since interest rates can’t go much below 0, it is pretty obvious that this bullmarket has run its course, especially with rates looking set to rise in the face of Sovereign defaults. It is therefore expected to break down from this long-term uptrend to enter a bearmarket.

Next yields. Yields have risen sharply over the past couple of months as bonds have dropped in price. This is a

process that looks set to continue, even if we see a short-term pause, and to accelerate…

The Baltic Dry Index, which measures shipping rates, is at rock bottom economic depression levels, indicating that global trade is weak and contracting, with the risk of more trade wars. This is a sign of deflation at large…

Likewise the commodity index chart shown below hardly indicates a robust world economy…

The US dollar is now at a very interesting juncture. In March its parabolic uptrend peaked and it burned out temporarily. At the time and soon after we had thought that it was done, and would go on to drop away, but given the prospect for a mass exodus from bonds and stocks, it looks set to become the beneficiary of a massive “dash for cash” that could drive another strong dollar rally. Technically, this is certainly possible as it is still above a rising 200-day moving average which means that arguably its trend is still up, and the reaction of recent months has allowed its earlier overbought condition to completely unwind.

Looking at recent dollar action in more detail on its 1-year chart (dollar index) we see that a consolidation Triangle may be forming above its rising 200-day moving average, which is now coming into play and could power another major upleg from here. This of course would be bad news for commodity prices, including gold and silver which would be tipped into another downleg.

Bondmarkets are expected to enter a confirmed a bearmarket soon, the first for many years, triggered by a wave of selling ahead of Sovereign defaults leading to more steep rises in interest rates. This will cause bloated stockmarkets to crash and commodities to drop further. The torrent of funds liberated as a result of this selling can be expected to flow into the US dollar, sending it sharply higher again. If this scenario prevails then the way to go for investors is cash and bear ETFs, with the eventual aim of switching into Precious Metal sector investments as they approach downside targets, for the ensuing rally in gold and silver should be massive. Physical metal purchases should be made ahead of the bottom, as physical will likely be very hard to source hard after the turn.

Some analysts seem to think inflation is making a big comeback. Their reasoning: Interest rates have started to move higher, hence, inflation is lurking out there.

But they’re clueless. They are confusing declining bond prices (rising interest rates) with normal times — and the world is about as far away from normal times as I am of becoming the next Pope.

Yes, interest rates all over the globe are starting to rise, and bond prices are sliding — most notably in Europe.

But that doesn’t mean inflation is coming back. It’s not. In a minute I’ll show you the evidence as to why.

Interest rates are rising and bond prices are falling because the SOVEREIGN DEBT CRISIS is rapidly approaching. 

That final point in time — the final reckoning — where the majority of investors begin to realize that Europe, Japan and the biggest debtor of them all, the U.S., are patently bankrupt … will never make good on their debts …

And instead, will do everything they can to chase, track, tax and seize your wealth to help them keep their heads above water.

Which is precisely why the Western socialist governments of this world — Europe, Japan and the U.S. — are all acting like caged animals …

 Raising taxes, throughout Europe … a new proposed second hike in the sales tax in Japan … Obamacare here and behind the curtain in Washington, even more income tax hikes coming.

Spying on citizens — yes, it’s still going on. To track your money, to tax it more, and not too far in the future, to nationalize and confiscate it.

Enacting extensive capital controls throughout Europe, where in France, for instance, you can no longer conduct any business in cash, and where you cannot take out of the bank more than 1,000 euros at a time. Similar controls exist now in Greece, Cyprus, Italy and even Spain.

 Where economists like Harvard University’s Ken Rogoff and Citibank’s Willem Buiter are traipsing the globe telling governments it’s time to abolish cash and replace it with electronic currency.

 And where governments are now so wrought with troubles that financial repression of their people is not enough and instead, they are moving to distract them by playing games with other countries.

Hence, the rising tide of wars around the world, from terrorism to outright international conflict. Where just recently Ukraine’s President Petro Poroshenko warned his country to “prepare for a full-scale Russian invasion.”

Where China is ready to duke it out with Japan and other countries, including the United States, in the South China Sea.

Where the number of separatist, anarchist and neo-Nazi groups in Europe are at an all-time high.

This is NOT the stuff of solid economic growth 
and certainly not a formula for inflation. 

To the contrary, it is the stuff of dying empires …

Of deflationary contractions. Of hoarding and burying wealth.

So much so that stock and commodity market trading volumes are less than half what they were in 2007 and 2008.

Yes, all these things will eventually positively impact gold. But not because of inflation. But because empires of the West are dying.

If you don’t believe the picture I paint for you above, as to the evidence that there’s no inflation, all you have to do then is simply look at the facts on the ground …

 The year-over-year change in U.S. retail sales peaked way back in July 2011, and has been declining ever since.

 U.S. consumer confidence, measured by the widely respected polls of the University of Michigan, remains well below its peak in 1999.

 Quarterly U.S. GDP has been in declining mode since 1999 and this year’s first quarter GDP declined a whopping 0.7 percent.

 U.S. industrial production has declined since June 2010, with factory orders plummeting for eight straight months including a 0.4 percent decline in April.

Those are just the gross economic figures that support the fact that there is no inflation on the horizon. Now turn to the markets, and the most inflation-sensitive of them all… commodities.

 Gold has now broken support at the $1,180 level. Its next move, perhaps after a bounce or two:  below $1,100.

 Silver too is cracking, now dangerously positioned to fall below $14.50, then even lower.

 Copper is starting to slide once again, falling to the $2.70 level, with lower prices ahead.

 Platinum and palladium, both weak at the knees.

 Oil, unable to get back above $65 a barrel, and now poised to move lower again. Natural gas, barely above multi-year lows.

 The grain markets, all weak. Soybeans, sliding. Corn and wheat, ready to slide again from multi-month and multi-year highs.

 Coffee, cocoa, sugar, all looking very weak.

 And more.

The U.S. dollar, near multi-year highs and about to take off like a rocket again. In itself, a major deflationary warning.

Prepare for inflation, as these blind analysts would have you do, and you will be on the wrong side of the markets.

Prepare for more deflation with inverse commodity ETFs and the like, and by staying invested in mostly U.S. dollars where they will buy you more and more over the next several months …

And you will protect and grow your wealth.

And last, but certainly not least, when the time is right — not too far off in the future …

You will be able to buy gold and silver on the cheap, when everyone else is dumping them …

Not recognizing that the real crisis is in government, which is when gold and silver truly shine.

I rest my case.

Best wishes and stay safe …

Larry

The turmoil in the European bond market demonstrates that the theory that interest rates will not rise and are in control of central banks is dead wrong. Despite the ECB’s policy to buy in government debt to inject cash into the markets, one would think that the bonds would have a firm floor of support. The price action is starting to show that the Emperor has no clothes.

Our energy models clearly peaked in February, both on the Weekly and Monthly levels. February was the highest monthly closing while intraday the high formed in April, but not on a sustainable level.

The heavy losses in the bunds are most significant, for this was the market the European money focused on, assuming the euro would break the holder would get Deutsche marks. The euro is not going away easily because if it fails, tens of thousands of bureaucrats in Brussels will be out of work. Merkel mistakenly thinks Germany needs the euro and is prepared to sacrifice her own country for a failed idea, which should have remained as a simple trade/economic union rather than a political one.

While the price of government bonds dropped sharply sending yields upwards, the interest rate on German government bonds rose to just below the level of one percent. At the April high, the German 10-year government bonds traded with a yield of almost zero percent. This was insane. Clearly, the peak in a bubble suggested that selling the bunds and buying 10-year U.S. Treasuries would be a great trade.

Some observers view the price fall as a result of the ECB’s controversial monetary policy. In the fight against an assessment by the ECB to lower inflation, the central bank had launched a number of measures. Most recently, the ECB in March bought a total of billion in government bonds. They made the April high. The ECB proudly thought they conquered the market achieving the desired objective of an inflation rate of just under two percent.

Many assumed that they should rally with the ECB buying bonds and that produced the April high. While many investors followed the ECB buying bonds, there was no one left to take the market higher. With everyone long, the only path was down.

What is happening everywhere is that liquidity is drying up. This “lack of liquidity” makes such extraordinary price movement possible. On Wednesday, Mario Draghi told investors after the last interest rate decision: “One lesson is that we must get used to periods of greater price fluctuations.” That was a clear statement, in which he actually admitted his policy has failed.

This is how Big Bang starts to unfold. This is the bubble in government; what we are seeing is the market place (free markets) will take interest rates higher, even against the policies of the central banks. Government debt is uncontrollable from the central bank level. They do not create the debt, governments do that and there is no rational management concern within the political mechanism. Consequently, we have seen the peak in government in both markets and confidence.

We may yet see the rush to the short-end in the classic flight to quality, driving the short-term interest rates very negative as we move into October, but that should then be the final rally. What comes after will be interesting patterns that require the majority to be wrong, for that is the fuel that propels the economy and markets. For many people, this may be the most difficult period to trade. 

So, no worries. The majority of people will never follow this site. The majority will read what they want to believe, and will never to try to challenge accepted beliefs, such as not understanding how bonds can decline despite the ECB buying them. They will read the popular news sites, and listen to the talking heads of TV mainstream. Traditionally, they will lose their shirts, and that will contribute to the rising civil unrest. It is like when they introduced Prohibition. They said outlawing booze would eliminate crime and make jails obsolete. That was up there with the sales pitch to sell the euro – eliminating foreign exchange fees will make Europe boom.