January 22, 2015
As you now know, Europe is set to announce a new QE program. I wish these money printing rocket scientists would call it like it really is, outright monetization but then again the average non thinking person might ask questions? The leak yesterday said the size would be 50 billion euros per month, or more (it turned out to be 60 billion). Thinking about this from a far away view, we can glean a few hilarious aspects.
First, let's look at "size". If the program is "only" (more was expected) 60 billion euros per month, this will amount to around 720 billion additional euros outstanding a year from now. From a "money perspective", this amount is far less than the QE 3 the Fed just publicly (privately maybe not) ended and smaller than the current Japanese operation. The markets may view this as "smaller than hoped for", I of course have a different perspective. If we add up the production of all gold globally from the mines, we come to a ballpark number of a whopping $100 billion. Compare this to the (newly devalued) figure of 720 billion euros and we can round this off to just over $900 billion. So, in just one year, Europe will create nine times the amount of trash currency as the entire world creates of gold ...in one year! The ECB plans to purchase this amount of debt for two years, nearly $2 trillion worth!
Going just a step further, let's look at this $100 billion worth of gold which is produced annually. I am going to tell you that as far as the "world" is concerned, there is NO new gold produced! How can I say this? All you need to do is look at how much gold just China and India combined take off the markets each year. The answer is "all of it"! Actually, that's not true unless we add the phrase "and then some"! So from a size standpoint, Europe is proposing to create nine times the amount of currency as new gold is produced, yet none of the gold even hits the market to add to the current stock. Yes I know, there will be those amongst you who say this is wrong. But is it really wrong if 100%+ of new gold supply gets devoured and vaulted by China and India never to see the light of day again? Yes it is "stock" but it will never in our lifetimes "flow"!
Let's now look at few of the other "little snags" in this European brainchild. First, can Europe handle more debt collectively and what about the ones who cannot? The ECB is proposing a "one for all and all for one" strategy when it comes to responsibility to this debt, will the Germans agree to this? What will happens when push comes to shove and countries with no financial wherewithal just shrug their shoulders when they cannot make the debt service payments? Does this mean that Germany becomes the "one for all"? Wasn't it just a couple of years ago the PIGS debt was on the verge of collapse and rates were skyrocketing? Have they really healed their balance sheets or do they now have MORE debt and HIGHER debt ratios? Are we to believe they are now safer? One last thought, the ECB is the central bank to Europe, should they really be prompting their flock into issuing more of the poison that caused the problem in the first place?
Another question becomes, what about Greece? Will the ECB purchase their bonds? What if Greece's elections finish and the winning party decides to hold the ECB ransom "restructure our debt or we will default ...or just take our ball and leave"? How is this going to be handled? Another aspect going back to "size" is that the 720 billion euro QE will be three times or more the size of current issuance, isn't this the reason the Fed was more or less forced to stop QE ...because they were taking too much collateral out of the system? Will this force banks to purchase lower credit quality debt in their reserves or does it just mean interest rates all throughout Europe will be negative? Does this mean investors will "pay" interest to insolvent deadbeat nations like Portugal, Spain and Italy amongst others? I know it sounds quite strange to have to pay interest on your lent money to an insolvent entity, but this is where we are headed!
While we are on the topic, what about "negative interest rates"? To begin with, if you think about it negative interest rates cannot last forever or even for a long time because it means the lenders in the end will lose all their money. (From a humorous standpoint, maybe this is a good thing because at least they lose all their money "slowly" rather than all at once!) Also from a Mother Nature standpoint, only the very best money does not need to pay interest, all the rest do and the interest rate is decided by the risk of creditworthiness and strength of currency. In this instance, they are all the same sloppy currency but Greece is not Germany even if they do both begin with a G. If negative interest rates were normal, borrowers would end up with everything and lenders would become extinct.
Also, wouldn't this hurt the banking sector in another way than just making collateral impossible to find? Wouldn't the smart ones just go into their bank and withdraw everything and hoard the cash which wouldn't require the constant haircut of negative rates? What does this say about velocity?
All of the above questions and thoughts were things the Swiss have thought about for years. The "commonality" was a problem for them and they decided not to join the EU in the first place. Now, the Swiss National Bank has looked at this current scheme and decided to cut their losses. Why should they continue to purchase euros if they know the official policy is to debase and ultimately ruin them? The Swiss have made a decision, my topic for tomorrow will be "The 'neutral' Swiss seem to have chosen sides" as they announced a new renmimbi hub based in Zurich. Do you think they might have known about this last Thursday when they pulled the plug (peg) on the euro?
One more question or two before we finish, why does Europe even need to do this now anyway? Hasn't their currency already substantially weakened versus the rest of the world and grossly versus the Swiss? Isn't this "REALLY" what QE is all about? Weakening your currency faster than your neighbor so you can steal his market share of exports?
In reality, Europe is playing Russian roulette with a fully loaded gun! Their currency is already weak, yet they want it weaker. They are already broke, yet they want to become broke(r). Rates are already substantially negative but apparently not negative enough. Good (if you want to call it that) quality collateral is already scarce, yet they want to take more from the banking and shadow banking systems. Germany is already not in such a good mood as to what has already been done, yet the ECB wants to rub salt in the wound of the very core of Europe.
In my opinion, this announcement of QE is a very bad choice and very poor experiment. QE has not worked anywhere else in the world, why will they be any different? Before they even announced this they had already received two very important and fully negative votes. The Swiss have abandoned them and gold has exploded higher and broken out to the upside. Maybe they are more fearful of the market hearing Mr. Draghi say "we were just kidding"? He has promised this bazooka for several years and jawboned the markets higher each time it looked like full out collapse was imminent. Now they will fire this so called bazooka, the worst possible immediate outcome would be for their markets to spasm downward in response. Speaking of "response", isn't it curious the ECB "leaked" 50 billion euros yesterday? I am here to tell you, they floated that trial balloon because they were fearful of the response. When the market didn't go spastic, they upped it another 10 billion for good measure! The ECB is in a panic, otherwise no "leak" would ever have appeared. They have lost control, they know it, it is only a matter of time before the markets realize it.
We have already experienced huge volatility which has certainly made some participants insolvent. As I see it, this new episode lays the track towards even more volatility. High volatility in a system that's quite low on liquidity and quality collateral in the first place is a toxic recipe. This will definitely not end well though it may end very abruptly when it does!
Regards, Bill Holter
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Andy Hoffman's Daily Thoughts
January 22, 2015
In last month's "death by deflation," I discussed how fiat currency schemes always yield parabolic debt growth, strangling economic activity and inevitably yielding mass defaults. And as today's unprecedented fiat Ponzi is global, not a nation has been spared - nor its municipalities, corporations, or individuals. And clearly, theparabolic debt growth stage has commenced. Subsequently, in "the direst prediction yet" - which fittingly, was my first article of this horrible new year - I noted how the combination of unprecedented money printing, market manipulation, and financial engineering has created the highest degree of industrial, mining, and oilfield overcapacity in history; which sadly, could take decades to work through, yielding unfathomable amounts of layoffs, bankruptcies, and defaults.
One by one, the Central bankers that created this problem are realizing this; or at the least, attempting to whitewash their legacies ahead of the collapse of history's largest Ponzi scheme. First, "Maestro" Greenspan, who essentially invented modern hyperinflation, said "effective demand is dead in the water, and the effort to boost it via bond buying has not worked." And this, on October 29th, before the historic currency, commodity, and crude oil crash commenced. For the record, I said the same thing three weeks earlier; but hey, better late than never. For that matter, he also espoused that "gold is still,by all evidence, a premier currency, which no fiat currency, including the dollar, can match"; and this, 48 years after writing "Gold and Economic Freedom," in which - as a disciple of Ayn Rand, no less - he concluded that "in the absence of the gold standard, there is no way to protect savings from confiscation through inflation." Talk about better late than never!
And now, in an interview that received essentially zero media attention, Greenspan's counterpart at the Bank of England, Mervyn King, admitted to his abject failures as well. King, who was Governor of the BOE from 2003-13, overlapped the disastrous post- "tech wreck" policies of Greenspan, and post-2008 crisis policies of Bernanke, before being replaced by Goldman Sachs alum Mark Carney. Like Greenspan, King was clearly attempting to re-write the record books - in claiming "we have had the biggest monetary stimulus the world has ever seen, and still have not solved the problem of weak demand. (Thus), the idea that (further) monetary stimulus is the answer after six years doesn't seem (right) to me."
Whether Greenspan or King ever believed their own BS is a question we'll never know; although given Greenspan's background, I tend to doubt it. As for King, I know little of him other than the disastrous results of his policies; and thus, he may well be a brainwashed Keynesian like Ben Bernanke, Janet Yellen, Mario Draghi, and Shinzo Abe; or perhaps, a conniving, power-hungry sociopath like Greenspan. Irrespective, the fact the rats are running from the ship should tell you just how close the end game is; as clearly, these twin monsters are smart enough to realize "weak demand" is winning the day, whether they understand why or not. And said "weak demand" is spreading like Ebola - as demonstrated by today's news that IBM's revenues plunged at their most rapid pace since the Lehman crisis; and worse yet, the entire global economy, indollar terms, has plunged by an astonishing $4 trillion in just the past six months. And this,before the ramifications of the historic currency, commodity, and crude crash have even been realized! Analysts at Societe Generale described this economic holocaust as the "deflationary vortex," and we couldn't agree more.
And yet, despite the propagandist pontifications of "deflationists" the world round, gold and silver are soaring whilst most asset classes are plunging; as exemplified by today's (Tuesday's) markets - manipulation irrespective - in which gold and silver rose by $17/oz and $0.25/oz, respectively - whilst the CRB Commodity Index plunged 2.4%, to within 10% of 2008's spike bottom low, and crude oil plunged another 4.7% One by one, the "deflationary vortex" is drawing everything near it into its path; which is probably why the 10-year Treasury yield plummeted to a new multi-year low of 1.78% this afternoon. Jon Hilsenrath - I mean Janet Yellen - wants us to believe the Fed is "on track" for rate hikes "later this year." However, now that the "final currency war" has gone nuclear - read, Switzerland last Thursday, and the ECB tomorrow - the odds are far better of the Fed reducing rates to negative territory. Just wait until corporate America starts begging for it, and the financial markets scream for "NIRP" and "QE" to infinity; likely within months, if not weeks.
Not only are Precious Metals surging, but doing so in historic fashion - despite some of the most maniacal, desperate Cartel resistance ever - such as today's blatant capping when gold attempted to breach the key round number of $1,300/oz at exactly the 12:00 PM "cap of last resort." And this, with oil prices and Treasury yields in free fall - whilst "miraculously," the "Dow Jones Propaganda Average" bottomed at exactly the PPT's "ultimate limit down" level of -1.0%, subsequently surging for no reason other than manipulation - particularly ahead of tonight's pathetic State of the Union address; which under the category of "famous last words" was titled, I kid you not, "the shadow of crisis has passed!"
By the way, Obama plans to memorialize the "(Miserable) State of the Union" by proposing new, onerous taxes on the rich - which is exactly why, among other reasons, we have been screaming for people to cash out of government-sponsored retirement plans like IRAs, as soon as possible. I mean, if we're going to be the Socialist States of America, it's inevitable tax rates will catch up with those of Canada and Europe; again sooner rather than later. Yes, America, we are destined for 50% taxes on the Federal level; and thus, IRAs will be eroded by "tax inflation" in the same manner dollars are destroyed by Whirlybird Janet's printing press.
Of course, when I speak of Precious metals surging, it's not in dollar terms where the action's really at - despite a massive 14% surge since the Cartel orchestrated "Sunday Night Sentiment" raid, in the immediate aftermath of the Swiss "no" vote seven weeks ago. No, it's in foreign currencies, care of an historic "dollar surge" which - as I have discussed ad nauseum - is NOT due to U.S. political or economic strength; but instead, a global flight to liquidity in anticipation of worldwide financial vaporization. To that end, I have been writing of the catastrophic ramifications of such horrific currency volatility (read, crashes) for years - deeming it the "single most Precious Metal bullish factor imaginable."
In last month's end of the gold "bear market", I wrote of how gold not only was the world's second best performing "currency" last years, but in many nations outperformed nearly all asset classes. This dynamic, which secular Americans fail to comprehend, is driving historic levels of physical PM demand across the globe; including Europe, where the world's most widely utilized currency is in freefall - and just wait until Draghi really turns on the printing presses, possiblytomorrow. I first wrote of this 2½ years ago, when few people even cared - in "dollar-priced gold." However, today's global financial mindset appears to have turned 180 degrees, as the surge in Precious Metals in non-dollar terms is becoming "front and center" news.
To wit, as I write Wednesday evening, Yen-priced gold is less than a half-percent from its all-time high - yielding stark validation of one of my top 2015 predictions, that the early stages of hyperinflation will emerge in the "Land of the Setting Sun." To that end, Euro and Rupee gold are just 18% and 19% from their all-time highs, respectively. And take a wild guess what today's "big winner" was - across all global assets classes. Yep, the Swiss Franc-priced gold "Lady Macbeth" Thomas Jordan (Chairman of the SNB) so passionately despises; which despite the Franc's so-called "strength," will shortly blow through previous records like a hot knife through butter. After all, for all the hype, Switzerland is still just a piddling nation kowtowing to New York/London interests, amidst a horrific, expanding depression; whose credibility has been dramatically comprised - along with its balance sheet. As for Chinese Yuan priced gold - which along with Rupee priced gold, is the world's most important market - I'll just leave that for tomorrow's Audio blog, given its momentous (and massively PM bullish) fundamentals.
All things considered, the key takeaway of this article should be, unequivocally, that 44 years of unadulterated money printing - combined with unprecedented engineering of "weapons of mass financial destruction" - has created a "deflationary vortex" that is rapidly eating away TPTB's best laid fiat plans, much as the Muriatic Acid I put on my driveway ate through the thickest, ugliest oil stains. In other words, the irreversibly debt-strangled, overbuilt world musthorribly implode - with the only remaining questions being when and how; and oh yeah, whether Central bank hyperinflation will enable the losses to be only real in nature - as opposed to real and nominal. At this point, it's almost laughable to believe Precious Metals have anymaterial downside - in any currency; as overwhelmingly, the evidence suggests an historic physical shortage is more likely - and perhaps, imminent.
And by the way, keep your eye on the five PM closed-end funds - GTU, CEF, and SVRZF run by the Spicer family; and PSLV and PHYS by Sprott Funds. Two years ago, I rightfully warned that the Cartel would drive their prices well below Net Asset Value to prevent Stefan Spicer and "Admiral Sprott" from executing secondary offerings, entailing massive physical gold and silver purchases. I still maintain that any "paper PM investment" defeats the purpose of protecting one's assets, but I still watch their trading to see how "strong" or "weak" the Cartel appears. To that end, I'm happy to say that after two years of unparalleled miserable performance, the massive discounts to NAV, or Net Asset Value, are starting to dissipate - with PHYS actually trading at a premium for the first time in recent memory. In other words, not only is physical PM buying exploding, but paper PM buying as well. Frankly, how anyone could find a reason to not buy precious metals now - with the global financial system on the precipice of collapse - is beyond me.
And before I go, in my last article before Thursday's fateful ECB meeting - and perhaps, Sunday's cataclysmic Greek elections - the entire Miles Franklin Blog team thanks you for the kind words, and intelligent discussions, in our chat areas. Even when times appeared their darkest, the feedback was overwhelmingly positive. And now, as the "end game" finally appears to be at hand, the solidarity I witness on the site is a sight to behold. Please continue to use the sight liberally, and tell your truth-minded friends, family, and colleagues about it. I fully expect traffic to increase dramatically in the coming years - and in the alternative media, any place where financial truth is spoken - and wisdom bequeathed - is truly worth following