The argument of “stock versus flow” has been debated from many angles and across many asset classes. The most heated may be in the gold and silver bullion categories. I’ve written on this topic before and I’m sure I will again but for this exercise I want to talk about U.S. stocks.
Zero Hedge put out a piece on Monday reporting that JP Morgan says liquidity has dropped 40% in the S+P E mini contract. The study looks at “depth” of both bids and offers, this is now drying up, in fact, the ramp upwards was performed on continually lower volume. Not exactly a confidence builder as volumes dried up out of, well, lack of confidence. Without spending a whole lot of time on this, suffice it to say “liquidity is the blood of life” as far as the markets are concerned. Without it or when liquidity decreases, accidents tend to happen. “Accidents” in this case are when the markets move violently which affects a good part of the $1.4 quadrillion in derivatives. Big moves in either direction can affect the standing of these derivatives as for every winner there is a loser. The problem arises when a loser is so crippled they cannot perform (pay) on their losses.
The above is a very basic synopsis of the “what,” the important thing right now is the “why.” Why is volatility increasing? Why has volume and liquidity decreased so much? There are two basic reasons, first the global economy is slowing at a time when debt is a bigger percentage of financing than ever. Debt service must be paid whether good times or bad. It just happens that right now we are seeing a global slowdown which leaves less free cash flow available whether it be a sovereign, corporation or individual …money is tight so to speak. Secondly, the Fed has reduced their “free money spigot” called QE by $75 billion per month down to only $10 billion per month. This is slated to drop to zero next month.
I guess the best way to explain this is the financial system got “used to” an extra $85 billion per month sloshing around. By no longer providing this, the Fed, even though not actually tightening credit conditions …are tightening credit availability. What we now see happening is the economy must stand on its own without any help from the Fed, it’s not working very well and this is what the markets are telling us.
Shifting gears just a little bit, we recently saw as a reaction to the lessening QE, a stronger dollar. Scared capital sought safe haven and did so into the dollar out of “habit” because that’s the way it’s always been. Fear capital has always (during our lifetimes) fled into the dollar because the U.S. had a history of a strong rule of law and stable politics. Do we still have a strong rule of law? Are we politically stable as we once were? I personally don’t think so but this topic is for another day.
What I think we will soon see is this “fear capital” will soon leapfrog the dollar altogether and arrive as a bid into gold and silver. Gold and silver have no “politics” and the rule of law is “whoever possesses it holds value.” Simple right? Yes, but think this through all the way. We are headed through the gates of hell if (when) the Fed must announce another round of QE. QE is pure monetization, deep down everyone knows (and have known all along) that QE will not work and is nothing more than printing money out of thin air. It hasn’t worked, it won’t work and it can never work. All it did was buy “cover” or time in the hopes of something coming along to magically fix the mathematically unfixable problem.
The “problem” as I have said all along is one of solvency rather than liquidity. This I believe will be understood whenever the next QE is announced. The “solvency” I am talking about here is that of the Fed and the U.S. which is why the “safety” of the dollar will be shunned on the next go round. I wrote years ago that “all roads will lead to gold and silver.” This is as true today as when I first wrote it back in 2008 …with the exception the “road” is now much much shorter!. The road is shorter because every “tool” in Ben Bernanke’s (now Yellen’s) toolbox has already been taken out and used …to no avail. People “wanted” to believe they would work because of the alternative if they did not. The Chinese were content to sit back and let us play the paper games while they filled their vaults with our gold, how much do you suppose is left? You will know the answer when one day our markets do not open for “business as usual.” No tools, no White Knights, no flight into dollars …no more “benefit of the doubt.” We have lived in a “benefit of the doubt” world for quite some time, once this runs out, capital will arrive to that last asset standing of no doubt …real money.
Bill,
I have enjoyed reading your articles on gold and silver. I think we are approaching the end game now. From the work of Koos Jansen, and the actual statements of Chinese banking officials, it now seems certain that China has bought up thousands of tons of gold and that the PBOC is aiming for 8500 tons. It also seems very likely that the PBOC is getting a lot of their gold from the western central bank vaults. The question is not, why are the Chinses doing this, but why are the western central banks selling to them? From reading your articles I would say that the Chinese are certain that the dollar is doomed and holding gold is the thing to do. However, if the PBOC were to buy a 1000 tons of gold every year on the open market then the price of gold would go up and up. The western central banks fear that this would undermine the confidence in the dollar, and the international monetary system, leading to its collapse. To prevent this the western central banks have agreed to sell the PBOC gold from the western vaults. The problem is that this is a finite supply of gold and it is now almost gone. Meanwhile, the Fed was hoping that QE would restart the economy and then there would be no reason for people to turn away from the dollar to gold and silver. However, the situation has developed to the point where QE is ending but the economy has not revived, and at the same time the gold is all gone to China. So what happens next? The Fed will announce QE4 in January because there is nothing else they know how to do. Then, as you say, “we are headed through the gates of hell”. The world will, in disgust, turn from the dollar to gold, only to find there is none available. Then they will turn towards silver. The Chinese will be one step ahead of them. Once the gold runs out the Chinese will then quickly take all the silver by demanding delivery from the COMEX on all the silver contracts they hold. China’s huge stash of gold and silver will then become immensely valuable and the world will find there is no gold or silver to be had anywhere. Does that pretty much summarize the situation? Thanks for all of your efforts at educating the rest of us.
we are being sold out from within our ranks.
I’ve often wondered that myself Mark, why is the Fed selling the gold? Could they really have been so stupid to believe that QE would revive the economy and then everyone would start demanding treasuries again? And then gold would be once again shelved in some closet again for another 40 years? They actually believed in exponential growth in a finite world? If so then they are dumber than I thought. I had given them some credit for being ahead of the financial pack. Evil, sure, but not dumb. But if this is the case, and they actually believed QE would work and were willing to give up Americas future, then they are either monumentally stupid or evil. I’d prefer stupid.
Both?
Bill,
Spot on again!
In summay, Fed and USA FUBARED !!!!!!!
thanks Farrell
“Big moves in either direction can affect the standing of these derivatives as for every winner there is a loser. The problem arises when a loser is so crippled they cannot perform (pay) on their losses.”
Derivatives are terribly susceptible to what is known as a “cascade failure”. This is a feedback loop wherein failure very quickly begets more and more failure. This is what happened to Lehman Bros, AIG, and MF Global. AIG was saved because it was a nexus for a huge number of derivatives that on failing would have collapsed the entire world derivatives system… and every other financial asset as well. I believe that this will happen one day and that when it does it will happen so suddenly that by the time TPTB find out about it, it will be over and done. THE END
Got gold and silver?
Yes Ed.
Bill,
As you said, nothing was going to stop this, and here it is already.
China, 20 other countries initiate new Asian bank.
http://news.yahoo.com/china-21-other-countries-initiate-asian-bank-025611214.html
yes, and Mr. Putin was also boisterous today.
nothing will stop it because the world collectively knows they have been screwed by “the never pay model”.
Bill,
I sit here and watch banks make money off of me at 3.5% Many strapped Americans pay like 9% or 15% living on credit cards) I get good loans….when I give them my money I get .4%…. I watch my job make me work 30% harder for less purchasable money…… my silver coins go down in value. This is the middle class. How long can these criminals steal from us? We must BELIEVE that an honest monetary system can exist. But who will run it? 2 partners can barely co-exist. Lets face it the Chinese are not tanking the U.S. because they are Criminals also. They cut up their prisoners ALIVE…take out their organs, sell them on the Worldwide healthcare market and chuck the bodies in 50 gallon drums. So are these dudes gona now run the goddamn monetary system… the Chinese government? …. Instead of Obama(THE NARCISSIST) and The Bush Family Network(jEB BUSH AND THE TWIN TOWERS/911 TRUTH MOVEMENT)with Dickhead DICK Cheney from Haliburton? All these people in power are criminals….. Or are Jim Rickards pals at the I.M.F. gona run an honest Gold and Silve backed World Currency with no FIAT worldwide dilution scam????… I think Miles Franklin should run the global currency. We should make Ranting Andy President and you vice president! What is the middle class to do………….? We are disgusted out here with the running of this titanic….. I can’t wait for the system to BLOW UP.
Andy can be President and Vice president by himself …vote for Andy!