Two days ago Reuters reported the 3 month “Euribor” went into negative interest rate territory . In this missive I will try to make sense of this as to “why or how” this could happen. I do not believe there is an answer other than the madness and insanity of being locked in a “short squeeze” room with the exits being blocked.
Over the last three years we have seen gold trade many times in backwardation, James Turk has reported this again is occurring in London. The only explanations for this is that market participants either need gold now for whatever reason and will pay a premium to get it …or, they fear not receiving gold contracted for in the future. The bottom line is this, for backwardation to occur, the “current” gold must be in short supply for some reason. I believe this is what we are seeing in Europe, “collateral” is in shortage and a short squeeze has pushed pricing into a Twilight Zone without logic.
After gold backwardation came the next head scratcher which began last year where various bonds, bank accounts and even mortgages being written with negative interest rates. How do any of these make sense? You “pay” the sovereign or even corporate borrower to lend money to them? Or a bank pays you to borrow money on a house or property? Think about the incentives here. Wouldn’t it be better to just take your money out of a bank or broker to avoid the negative interest and just bury it in a hole somewhere? How about banks lending at negative interest rates for a home, wouldn’t the bank be better off NOT making the loan and instead just sitting on the reserves? Here is David Stockman’s current take.
A similar situation to this happened years ago in Switzerland (and again currently) where interest rates went negative as people wanted assurance “of” principal rather than “on” principal. The fear of currency devaluation was so great, capital piled into the “hard currency” francs. This is NOT what is happening today in Europe, no one is accepting negative yield just to own the euro “for safety” as it has already crashed versus the dollar and more so versus gold. What I believe has happened is the system has fewer and fewer doors where the exists are being blocked and collateral withdrawn.
It is only a matter of time before we see depositors burying actual currency notes, they are also converting into precious metals but the paper exchange subsidy still holds, for now? Not only is the ECB withdrawing collateral via “QE”, individual depositors are purchasing German sovereign debt and withdrawing it from the market. Take the Greeks for example, they fear their own banks and know they are not safe, they fear depositing in German or other banks because their deposits may be frozen or worse, confiscated. So what is their option for “safety” in this paper room? Direct purchases of sovereign debt!
Now, “interbank” lending has gone into negative interest rates which is beyond lunacy. Banks which are theoretically run by “smart” people are paying to lend and of course willfully being paid to borrow. The only explanation I can come up with is that collateral has become so scarce that a short squeeze has resulted. Any institution that needs collateral is forced to pay the market rate which now includes locking in a guaranteed loss. Business in Europe has become so poor, no one can, much less wants to borrow anything. “Debt saturation” is where we came from in 2007-08 and further down the rabbit hole to where we are now, inverted interest rates on ALL levels …now even between “pros”?
I view what is now happening as “eating into the bone”. Debt has become so highly priced, locking in guaranteed losses is now seen as “wisdom”. When viewed in history, the current mania will not be seen as a tribe or nation gone mad, it will be seen as the entire human population losing sight of their senses and allowing the lunatics to run the insane asylum. I have no idea what the event will be to wake up the world but the event is out there and its realization will be akin to awakening from a nightmare in a cold sweat.
“Debt is better than money” is becoming the current belief in the world. In fact, with negative interest rates it can be said the world now values debt greater than money. This cannot be so because of the simple fact that actual paper notes can be held out of the system and not “discounted”. How can owning debt today which promises less currency in the future be worth more than more currency today? The fear of loss is so great that currency itself is being discounted versus debt. If you think this through, it says “everything is worth nothing” because the currency itself is bad and losing confidence. Maybe this is why we are seeing a push from all around the world to go “cashless” and fully digitize? This would be closing and locking the only remaining door other than making precious metals illegal. The only way for this to be “normal” is if the lunatics are running the asylum …they surely are!
Hi Bill, We are in “bizarre world”. Anyone who
thinks with logic is looked at as a fringe lunatic.
Look at today’s S&P up 12 handles @ 11:30am. This
with housing numbers that fell off a cliff.
This market is being fueled by printed money, the
Fed has not stopped liquidity flow, how else can these
markets continue to rise on poor economic data.
As long as the Fed has ink and paper I’m convinced
this bizarre (freak) show will continue.
correct Steve.
Hi Bill,
Great article as usual, reminds me of my repo trading days (in a previous life), it’s hard to fathom “lending” money at a negative yield for GC (general collateral), the only time I saw low yield (not negative) was on a specific bonds that were squeezed (“special”). Totally agree with you’re logic, why do a reverse repo at a loss if you don’t need the collateral, might as well keep the cash and earn nothing, hence the only logic is a urgent need for collateral.
It’s like finance upside down! mathematically speaking that cannot hold very long, something as to give to come back to “normal”.
In the mean time keep I will on stacking gold.
God bless,
Daniel
thanks Daniel.
Excuse me while my head explodes trying to comprehend how the hell all of the debts that already exist in the world today can ever be paid back since the amount of said debts is far far greater than the amount of “money” that even exists in the world. Add on top of that that the “money(?)” we use (fiat currency) are instruments of debt in and of themselves upon creation is very ironic. And even more insane is the fact that even more debt is created every freakin day on top of the already unpayable existing debt!!
Much respect for all that you do…
Danny
more debt HAS to be created every day or the system implodes.
Bill- Great analysis -AGAIN! If I’m not mistaken, it was none other than Pres. Ronald Reagen who, when asked about Russian power, mentioned that they were not to be feared since we can count on a system based on a LIE to fail. I think that means ANY lie, as you have shown above.
Thank you!
yes.
Bizzaro! Insane! Paying someone to borrow your money.
Talk about the tail wagging the dog!
Little wonder why the ECB and German central bank are attempting to foment a banking sector panic and bank run in Greece. To protect the 10 year bund from sliding into negative territory.
There is no shortage of european collateral, just a drastic shortage of UNENCUMBERED collateral!
Monetary capital control is beginning to gather more attention, as you say “closing the door” on actual fiat paper cash. The Canadian government will cease issuing any and ALL paper checks. Direct digital deposit ONLY. The Canadian “penny” no longer exists in physical form, since it was considered “expensive” with no practical “value” in transactions. The penny is what the dollar is based on, since it takes 100 of them to make a dollar! It has indeed become a bizarro world!
yes, “unencumbered”.
Can the “encumbered” vs “unencumbered” part be explained in English for mortals? Aren’t also both of them (whatever those are) still “debt”, encumbered or not? Sorry for asking something simple or obvious if it is. Thanks.
no problem, “borrowed against” or “free and clear”.
Bill,
Very good article! It’s clear NIRP = (CASH/LABOR has Negative! Value) or better yet CASH=TRASH because when the biggest debt bubble in history implodes so does the CASH that back stops it.
It’s a shame very few people understand the difference between CASH & MONEY. If they did, as soon as NIRP began real money like Gold-Silver wouldn’t any longer be available.
Regards
thanks Colonel
So what happens when they do make Pms illegal? I don’t see any reason they wouldn’t try to do that also, since all other things have been tried to maintain their fiat system? Thx.
this may or may not happen, this is why you must hold some metal outside of the country.
Bill I am fairly certain that you do “have an idea what the event will be to wake up the world”
Those temporary backwardations which have been occurring since 2008 will one day become permanent.
It’s inevitable.
Why would anyone sell their gold and buy an equal amount of futures contracts to earn the interest, when trust in the system is rapidly vaporising. That is…would you get your gold back on expiry.?
It is innate in the human psyche that gold and silver are money and regardless of ridiculous bids no one but an idiot will sell.
Small gram gold bars and junk silver coins will be very useful one day.
permanent backwardation is the end.
Are Rockefellers and Rothschilds running the asylum Bill?
ya think?
I like this headline from Zerohedge today:
“Worst Macro Data in 6 Years Sends Stocks Soaring To Record Highs”
Also from yesterday:
“Listening to Goldman Sachs for advice on how to run the economy is like listening to Dracula on how to run a blood bank.”
yes
“Worst Macro Data in 6 Years Sends Stocks Soaring To Record Highs”
I literally just told this to my friend working on the computer beside me. His response was “I’ve told you before, I don’t care”.
The average person doesn’t know or care how the markets function, they just blindly trust their financial advisers at the bank. No hope.
… but he will…
What scares me is that the average person thinks today’s situation is the norm, they will not understand that after the collapse will be the reality, that the last few decades were a fabrication. They will want a return to the good ol days and might turn on PM holders.
very possible.
Bill: many thanks for a a good chuckle; they are few and far between these days. After negative interest rates, the next step(may be too obvious,as some have suggested, would be bail-ins in some form, although I don’t see how THEY can pull this off without massive civil unrest.
bail ins will certainly trigger unrest.
If bail-ins only involve uninsured deposits in a few of the large banks, as the law currently allows, there should be no massive civil unrest. The vast majority of people do not have hundreds of thousands of dollars in those banks or in any bank for that matter. In the case of the Cyprus bail-ins the vast majority of the people lost no money. Only those over 100,000 euros lost money. Was there massive civil unrest in Cyprus when it turned out that most people WOULD NOT lose any money? The answer is no. Only the minority of people were upset. The odds are very slim that insured depositor’s money will actually be taken. Insured deposits are in a way “sacred”. Plus there is plenty of low hanging fruit. The government will also print money (bailouts) at the tax payers expense before they would start taking insured deposits. There are good reasons why all of the bail-ins and bail-in plans exclude insured deposits.
it’s all good then?
Of course things are not all good, Bill. Did I say it was? Just stating things as they currently are.
more than just “the minority” will be devastated.
The majority will be destroyed through inflation aftwerwards
umm, yes.
Some food for thought, to all who read this Bill.
http://www.youtube.com/watch?v=JFXyzqHl4sE
We are ceaselessly being herded toward the slaughter house.
Get up. Time for action. Rise up! Do something. Anything!
Let’s see now, I borrow 100,000 against my farmland while agreeing to pay back 95,000 in one year. But during the year the lender creates 700,000 in derivatives against the land.
In a year I go in to pay off note, but am offered another yr and 90,000 payoff.
I think I better read the fine print very, very closely.
yes, and wear your glasses for the really fine print!
“This cannot be so because of the simple fact that actual paper notes can be held out of the system and not “discounted”. How can owning debt today which promises less currency in the future be worth more than more currency today?”
You answered that yourself – the buyer of “negative yield” debt need “risk-free” or IG debt as COLLATERAL.
Craven yield-seekers and cashflow junkies are living in a world from which yield has been expunged by central banks and governments. They’re utterly desperate: since they can’t get higher returns on their “investments” or benefit from real economic growth (read: INFLATION) they have no choice but to lever up. And debt is going through the roof, as is the need for collateral.
The thing they fear the MOST is some zombie entity (government, stock, bank, corporation…) somewhere actually, unavoidably and incontestably going bankrupt and being SEEN to do so.
yes, insolvency MUST be hidden at all costs.
How will we know a Black Swan has landed if no banker can admit it and no newspaper will report it?
when the public gets bailed in and can clearly see blood coming from their mouth?
@Mike et al
What many are saying is a black swan will actually be a vulture picking at the corpses of the Western democracies and the middle classes that have long been its backbone. All of this for a Keynesian bankster dream that is an absolute nightmare for everyone else.
In language simple enough for even a banker to understand, a vibrant, productive, and sustainable economy needs savers AND spenders in approximately equal amount. It does not need just spenders and to hell with savers. The savers create more wealth than they consume and put the rest into various interest bearing investments, such as CDs, savings accounts, money market accounts, and very short-term bond funds. This forms the bedrock foundation of our economy. This saved money is then loaned to others who use it to create new companies, expand established companies, and buy new or repair older equipment to enhance production and productivity. All of this activity creates the jobs that then creates the demand in the economy. Without the demand, production does not matter because no one will be buying what is produced. Without production, demand will not be satisfied. This is a “cooperative effort” and not anything that can be commanded from ON HIGH.
Those running the USSR thought that the economy could be commanded to do whatever was politically expedient. This proved to be incorrect, yet here we are 24 years after the collapse of the USSR, doing virtually the same things with banking and the economy. We have the data from that experiment, folks. We KNOW that this approach does not work. We do not have to keep repeating failure after failure in the misplaced hope that it will somehow magically transform itself into success. It won’t.
At least one definition of insanity is to do the same things in the same ways over and over while expecting a different result. If the Keynesian economic model worked in the REAL world, Japan would not be in the horrible economic and financial condition it is now in after 25 years of this nonsense. The Western democracies are all headed in this same direction because they are all using the same defective play-book. This would be fine if the play-book contained a winning strategy but it doesn’t. It is a losing strategy that is based on multiple premises that have been proved to be false.
the USSA.
Hi Bill:
For those who like science and gold… like me…. Here’s some newly discovered uses for gold in nano technology.
https://www.youtube.com/watch?feature=player_embedded&v=QorK2X7GsVU
thanks Rich, so gold really isn’t useless?
This morning I was thinking to myself before even reading the few posts above.
The thought came to me on just how good some are at hiding the true facts of debt and fragility of the system as a whole.
I want to believe that everything has a limit.
You know that old saying. Too much of a good thing is usually a bad thing.
The actions being taken by some financials institutions seems to be ones that will lead many of their clients to eventual default.
It appears to me that some would rather ignore risks in order to enhance returns.
One has to believe that insurance companies must be taking risky bets in order to achieve some sort of reasonable return of investment.As I understand it they can only function if they get a reasonable return on their assets.
On another note it seems you cannot go through the cashier at any store without them offering you an application to their branded credit card..
I always decline by stating that I have no credit cards and do not want any because I have given up my passport to Slavelandia.
That always opens the door for me to give them a 5 second sound bite on why debt can take you down.
MSN reporting this am that progress being made on Greece issue.
Heard that one before…lol
everything is fine Rich, just relax!
Thanks Bill. I must admit that I have bumped up against my Peter Principle level trying to understand your article. I’m going loony just trying to wrap my head around the world’s lunacy.
I understand the feeling, imagine trying to write about it?
I’m a little late here, but I have a question that belongs with your offering above. As long as you are in the mood to ponder the imponderable, please comment on this question: If manipulation can go on without a challenge from any authority, why can’t “a cartel” whip up an algorithum
that will increase the price of gold and/or silver?
they can.
Then: Why not?
think it through, ALL the way through and tell me what you come up with. I will reply with my answer afterwards.
I was hoping you would discuss this topic in one of your daily articles – Maybe?
My reply – Short story:
Manipulate Down – All eyes wide shut – no foul – you are free to go.
Manipulate Up – Apprehension – arraignment – trial – hoosegow.
Have a gentile weekend and may the Lord watch over you and yours.
OK, will try to do “why no cartel to the upside” one day this week. God Bless you and yours!
YOU are the man! Love your blog.
thank you Bob.
Bill, a very disturbing piece of news has emerged over last couple of days that JPMorgan has built up a massive physical silver horde. And they most likely will use it over summer to do 1 final smackdown of enormous proportions of fraudulent “paper silver” prices – before the derivatives dam eventually breaks by September-October and washes up the entire world.
Regardless of the summer smackdown or fall implosion theory, the JPMorgan silver hoarding story in & of itself is very disturbing. Will it be possible for you to address it in some extent in an upcoming post this coming week? Thanks.
it is only about $1 billion worth of silver.
Jamie Dimon is a silver stacker, LOL!
Summer sale on silver coming? 10%, 25%, 50%?
What are the PM gurus saying?
Do we even know or can it ever be truly verified if
JPM’s supposed super stack exists other than on paper?
55 million ounces is not a super stack.
Assuming this is real physical silver, do you think that’s all they could manage to find/add as of late? Are they in heavy stealth (panicky?) accumulation mode, considering Dimon’s latest doubtful remarks about the economy/markets? There’s still appears to be no noticeable silver shortages out there?
Let’s suppose they could easily get their hands on more, why would they stop at 55 million or even bother in the first place? Is this enough to control the “market” (isn’t that partially what the fake silver chart is used for? and related data?) or is this for an endgame scenario for them to try and survive the global financial implosion – silver gets revalued/remonetised at unimaginable levels higher?
it’s less than $1 billion, if they were trying to really amass size, I doubt they would do the major part on the COMEX as their inventories would not support it.
Bill, concerning bail ins, I would enjoy an article giving your opinion of various financial vehicles and instruments listed in order of their vulnerability.
when this baby goes down, it’s ALL vulnerable.
What do you think of Bix Weir’s claim of vast gold in the Chocolate Mountains and Grand Canyon (and lost Egyptian city too? lol he loses lots of credibility with that) as per his interview with Dave Kranzler? IMO he is probably overstating it but there is likely some additional gold we are not aware of as a result of some historical plundering. Based on the annual mining shortfall there must be gold beyond what the western central banks claimed to have had, otherwise it would have blown up already.
similar to Karen Hudes.