January 6, 2015
2014 was a year of posturing. The U.S. "postured" by trying to lure Mr. Putin and Russia into a war. First it was over Syria and then later over Ukraine. The Russians postured by not taking the bait and buying time. Yes, Russia has suffered with a devaluing currency, lower oil revenues, and an economy running on less than eight cylinders. China has stayed out of the public spotlight during this period but privately stood behind Russia, I will explain this a bit later.
I mentioned "buying time", by necessity, Russia has done this as a tactic I believe to slow down the implosion of the Western financial system. On the face of it, I know this sounds ridiculous ...why would Russia want to prolong the Western system. The answer is very simple, they, nor China were ready. They may not even be fully "ready" now but at least the financial infrastructure is in place for when it does happen.
Over the past year and as a result of sanctions by the U.S., Russia set up their own alternative to the SWIFT clearing system. This was being tested for the last two weeks. The original start date was May 15, 2015, this seems to have been advanced by months as the system may go live without any notice or if Russia were to be isolated from the SWIFT system. The important things I see from this are basically threefold. First, the U.S. has not had enough political capital to kick Russia out as several European nations refused to go this route (it's cold and they need Russia's nat gas). Secondly and maybe more importantly, SWIFT can no longer be held as a potential hammer over the head of Russia since they have an alternative. Lastly, the alternative clearing system will at a minimum bleed liquidity and thus more velocity out of the West. In a worse case scenario, the new clearing system may become very attractive and lure a majority or even a super majority of trade participants to abandon the West's game. Were this to result, the dollar will lose its usefulness and thus its de facto reserve currency status.
We also heard of another announcement over the holidays between Russia and China. They performed "currency forwards and swaps".
This was done I believe to support Russia and her ruble more than any other reason. You will notice the ruble immediately strengthened nearly 40% on this announcement. The sanctions along with "Mr. Obama" cutting the price of oil in half will not cause Russia to default as they have nearly as much cash foreign reserves as they do debt outstanding. This is very important, Russia has a pristine balance sheet where their debt is only 14% of GDP, compared to the West's understated debt amounts equaling 100% or more of GDP. I want to mention the recent explosive move higher in the dollar. It has rallied nearly 15% in six months, and nearly 10% of this in just the last two month. This I believe is the result of the dollar carry trade unwinding. Many commodities including oil were "carried" by borrowing dollars. This was a synthetic short position in the dollar. As the commodities (oil) imploded in price, traders were forced by margin calls to exit positions. The borrowed (shorted) dollars were paid back (covered) and has caused the rally in the dollar.
On Friday, the first trading day of the year, "something broke...somewhere". For the dollar to move nearly a full one percent higher in a single day is not only a symptom but also a financial killer. The IMF claims there is a $9 trillion carry trade in the dollar. Just one percent of this amount, the carry trade (not to mention dollar based derivatives in the $100's of trillions), amounts to $90 billion! Let me put this in perspective for you. On Friday alone, "someone made" $90 billion and "someone" also lost $90 billion. This means there will be huge margin calls for Monday morning.
For a little more perspective as long as we are speaking of mas o menos $100 billion, the Treasury went another $100 billion in debt on Dec. 31st.. This number of $100 billion also fits nicely into the gold market, this happens to be just about the amount of gold which is produced from ALL of the worlds mines in a FULL YEAR! Do you see the comparison here? The Treasury borrowed in just one day, an amount equal to annual global gold production ...at current prices. We should also be seeing margin movement of about this much on Monday because of the FOREX price action on Friday.
Lastly, it needs to be pointed out that gold was the number two "currency" on the planet last year as it dropped just over 1% versus the dollar. This means what exactly? It means gold rallied just about as hard in foreign currency terms as the dollar did! Oh, and let's not forget about the multi thousand ton "paper anvil" the COMEX has thrown around the neck of gold. Even with "instantly and freely" created paper supply of gold, the price has held over the last year to trade at near parity with the dollar. Now that volatility has and is exploding in nearly all asset classes, we may soon see why the CME has instituted "collars" on the precious metals.
Volatility in today's world is a systemic killer, let me explain this before finishing. Looking at volatility moves in the dollar, oil and many stock and bond markets leads me to believe there are huge margin calls and unfunded positions behind the scenes. Some very strange events have taken place, a perfect example would be 10 yr. Spanish bonds issued by an obvious bankrupt trading under 1.5%. The dollar move on FOREX these past weeks tells me one of two things, either something blew up ...or the move itself blew someone up. The action we have witnessed is not normal and certainly not sustainable because of the derivative losses created. When you add the puzzle piece of what Russia and China are doing together, it tells me they are "readying" for the derivative daisy chain to break. China is preparing the yuan to ascend to reserve currency status while Russia is preparing the clearing infrastructure mechanism. As for the West, "bail ins" have been legislated into law over the last year for a reason. They know "it" is coming. The latest act of Congress which saddles FDIC with broken banks busted by derivatives should also tell you something ...they know it's coming! Laugh this off if you like, whether the West is ready or not, the East has been preparing and will be.
Regards, Bill Holter
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Andy Hoffman's Daily Thoughts
SO HOW DID 2015 START?
January 6, 2015
Lately, keeping up with the exploding headlines has been as difficult as George Jetson keeping up with Astro on the treadmill. The reason, of course, is that without a question, "2008 is back, with one temporary factor." That factor, PPT-supported stock markets, looks as close to being overwhelmed by the "unstoppable tsunami of reality" as ever; and when it does, Central banks will NOT be able to save them with new money printing schemes. Unless, of course, "reverse" is defined ashyper-inflating asset values, destroying whatever remaining fiat purchasing power - and societal trust in government - that still remains. And speaking of hubris, the PPT has now become so pervasive, even economically illiterate Congressman have started to actually condone it, publicly! My friends, if this doesn't depict the top of an historic bubble, I don't know what does.
In Friday's "direst prediction of all," we described how massive, historic industrial overcapacity caused by 44 years of money printing; financial engineering; and misguided policy, has doomed most commodities to potentially decades of low prices - hyperinflation notwithstanding. Not to mention, collapsing currencies; an historic, global depression; and the horrifying social and geopolitical ramifications of such. Well, just one trading day into 2015 - which by the way, coincides with the "Shemitah" seven-year crash cycle, which will get much press from "wave theorists" in the coming months; each of these trends has exploded upward, portending the "unspeakable horrors" we wrote of three months ago. Frankly, it's difficult to imagine the "big one" not commencing in 2015; and if it does so NOW, we'd be equally unsurprised.
So how did 2015 start, you ask? Well, the first "top story" of perpetual MSM cheerleader Yahoo! Finance was "China December factor PMIs suggest economy cooling further, more stimulus expected." LOL, "cooling further" is perhaps the biggest understatement of economic history, asfreefall is a far better depiction of the Chinese economy. Meanwhile, with Americans still sleeping off their hangovers, yet another energy-based commodity, the Turkmenistan manta, was devalued 18% against the dollar; whilst the "Land of the Setting Sun" rang in the new year by publishing a report depicting its lowest-ever birth rate and highest ever death rate, as the "demographic hell" we wrote of 2½ years ago appears set to destroy whatever aspects of the once-great Japanese economy, if any, Abenomics inadvertently spares.
Next, the West awoke to plunging oil prices, as WTI crude nearly breached $52/bbl, enroute to its lowest close since Spring 2009. Essentially all commodities were consumed by the aforementioned deflationary vortex, with the CRB commodity index falling to within 14% of its 2008 spike lows. Equally ominously, the "dollar index" surged to 91.2, a level not seen since 2004-05, looking very much like it will explode to levels last seen at the turn of the century. And no, dollar "bullishness" is decidedly NOT due to U.S. economic strength; but conversely, fear of economic collapse - which is causing global capital to flee to the most liquid asset classes. In other words, as we deemed it four months ago, the "single most Precious Metal bullish factor imaginable."
In fact, the deformation of capital markets caused by implied Central bank "puts," yielding "front-running" of "QE to infinity" the world round, caused European sovereign yields to hit a new all-time low on the day's first trading day - including, for the first time ever, negative yields on the German five-year bond. And this, as the Euro crashed below the 2012 "whatever it takes" low like a hot knife through butter, to its lowest level since 2005! Worse yet, that was before Saturday'snews that, as the Miles Franklin Blog predicted, Greece's "anti-austerity" Syriza party intends toovertly default on the majority of Greece's €400 billion of debt. Which is probably why Greek CDS' are now predicting a 66% chance of this cataclysmic event; which, we might add, I long ago claimed to be my #1 "potential catalyst" of said "big one."
In other words, the European Union - and the trillions of debts and derivatives tethered to it - could implode within months, as the "snap elections" that will likely put Syriza in power are just three weeks away. And the "fun" is just getting started, as holding my PHYSICAL gold and silver, all I could do was laugh when Mario Draghi gave a year-opening speech of the ECB'sdesperation to step up QE to combat "deflation," whilst leading German politicians spoke of how a "GrExit" from the Euro currency would be "manageable." Yeah, "manageable" - just like the Bernanke's May 2007 pronunciation that "the effect of the troubles in the subprime sector on the broader housing market will be limited, and we (the Federal Reserve) do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."
I mean, we're just two years removed from Europe's near implosion due to PIIGS contagion; yet, here we are, with Europe's debt levels dramatically higher, its economy dramatically weaker, its currency plummeting, and the global economy on the verge of depression! But don't worry, Goldman Mario will do "whatever it takes" to save the Euro - and "believe me, it will be enough." And by the way, not only did Friday's Euro plunge push Euro-price gold up to €992/oz, putting it within striking distance of the key €1,000/oz level the Cartel has been defending for 18 months, but gold in the Euro-pegged Franc surged to CHF1,192/oz, up a whopping 6% since "Lady Macbeth" Thomas Jordan spearheaded an historic propaganda campaign - last month - to convince the Swiss that gold was, essentially, a "barbarous relic."
And then it was time for U.S. markets to open. Global commodity and currency markets were plunging; the aforementioned "GrExit" crisis in full bloom; and nary a shred of positive news was to be seen. Yet, those darn "Dow Jones Propaganda Average" futures were higher, and the Fed was staunchly defending the 10-year Treasury yield at the 2.2% level we pegged 2½ months agoas its last gasp "line in the sand" against universal realization of the "most damning proof yet of QE failure." Gold, of course, was stopped by a typical "Sunday Night Sentiment" algorithm - despite it not being a Sunday; followed by typical "2:15 AM" and COMEX opening raids, to start the year off "in style."
Backing up a bit, I read an article this weekend by financial journalism's most enigmatic figure, the UK Telegraph's Ambrose Evans-Pritchard - who over the years, has combined some of the sector's keenest insights with some of it the most idiotic drivel imaginable. To wit, this quote from his latest article, the "year of dollar danger to the world"...
"America's closed economy can handle a surging dollar and a fresh cycle of rising interest rates. Large parts of the world cannot. That in a nutshell is the story of 2015.
Tightening by the US Federal Reserve will have turbo-charged effects on a global financial system addicted to zero rates and dollar liquidity."
Agreed, as I have long maintained a surging dollar would destroy the world - and frankly, is doing so as I write. However, maintaining the fallacy of mythical tightening from a "patient" Fed at some ambiguous "considerable time" in the future demonstrates a total dissociation with economic reality. Moreover, claiming America's economy is "closed" is even more ridiculous; let alone, that the holder of history's largest debt edifice, exploding higher as we speak (like the record $100 billion added on 2014's last day alone), can sustain a "fresh cycle of rising interest rates!" I mean geez, America has the world's largest trade deficit, highest debts, and most overvalued currency in global history. Not to mention, its economy is in freefall, its geopolitical position has never been more threatened, and its only job-producing industry of the past decade - shale oil - is collapsing.
Anyhow, once "trading" opened at the world's most impervious, closed economy, the horrifying economic data parade commenced anew; and frankly, how anyone doesn't realize the U.S. is plunging toward depression is beyond us. The PMI Manufacturing Index declined, the Chicago PMI plunged, and construction spending "unexpectedly" declined; after which, the 10-year yield plummeted to 2.10%, closing at 2.12%, near its lowest level since the Fed's "tapering" propaganda scheme commenced nearly two years ago. By day's end, oil and commodities were at their low tick of the past five years; the dollar at its high tick; and gold and silver higher, albeit capped by prototypical "Cartel Herald" algorithms at the time-honored "cap of last resort" at EXACTLY 12:00 PM, at the Cartel's three-month "line in the sand" at $1,200/oz, whilst China announced another staggering week of physical gold imports. Conversely, despite the vast array of global doom and gloom, the PPT goosed the Dow Jones Propaganda Average to a token 10 point, year-opening gain via prototypical "dead ringer" algorithm - "hail mary" rally and all.
Yes, this is how 2015 started; and in our view, the trends of the year's opening days will goparabolic in the not-too-distant future; perhaps, a LOT sooner than most can imagine. Which is why now, more than ever, the ownership of real money - trading well below the cost of production - is imperative. And when we say real money, we are talking about the only assets to proven themselves throughout history; and certainly not, by the way, new-fangled "digital currencies like Bitcoin - which started 2015 by plunging 13%, to its lowest level since last February's Mt. Gox spike lows.