Many who will read this work have been sitting patiently waiting for the house of cards to collapse. For me personally, I confess the current maniacal financial bubble has gone on much longer than I ever imagined. What did we miss? Are we wrong or just early? In my opinion, we were early, mathematically correct yet the “rules” changed. For my part, I can say that I missed just how much “leverage” could be used to extend the game. In the current instance, we are not even talking about garden variety leverage. We live in a world where leverage is leveraged, leveraged again and again and again. We have personal, public and “private” (OTC) leverage. The garden variety leverage is bad enough as is sovereign leverage, but the real problem are derivatives piled on top of derivatives with collateral which in many cases no longer even exists. Too much leverage in the past has always led to burst bubbles. All bubbles eventually burst …and it looks like this one is bursting now.
While I originally thought about talking of Venezuela and Ukraine today, and making a comparison and wondering which one will bankrupt first, it dawned on me …the current bubble is busting right now! From a big picture standpoint, the Fed was forced to stop QE because they were taking too much collateral from the system. The baton was then passed to Japan because the Germans said “nien” to the ECB. QE3 started in Sept. 2012 …which is exactly the point in time where the world of asset valuations was turned further upside down. Call these last two years the “last gasp” or whatever you’d like, the world does not have the ability to reflate any further and in fact, the “bubble of all bubbles” looks to be deflating piece by piece, let me explain this.
Oil is arguably the most important commodity on the planet from a financial standpoint. Oil has collapsed in price by over 40% in less than 3 months. There are many repercussions from this, oil exporting nations are watching as their coffers run dry and the economic activity from lower prices means lower individual employment. From a financial standpoint the oil derivatives outstanding have already killed someone (we just don’t know who yet) and the “underpinning” of the dollar has been weakened. My last point needs an explanation. The dollar is otherwise known as the “petrodollar” because petro revenues have been for years recycled back into dollar assets, lower oil revenues means lower recycling. This action had already begun while oil was still over $100 per barrel as less demand for dollar assets was evident. Now, on top of less “willingness” on the part of petroleum exporters to recycle, they have less (or none) to recycle. No problem because the Fed will just monetize you say? Think again!
Look what is currently happening. The reflation of the reflation of U.S. real estate is failing. Oil has deflated 40%+++. High yield credit is in an outright crash and already at record “wides” to Treasuries. The euro and yen have deflated drastically …even against gold. The Chinese stock market dropped over 5% last night, this is like a 900 point drop in the Dow. They changed their “collateral rules” and now only AAA and AA credits can be used as collateral. While speaking of China, let’s not forget their shadow banking system which has basically now been frozen solid. Commodities across the board have been hammered lower while growth rates across the globe (except of course the U.S. as we lie about every economic report) have either slowed drastically or turned negative. The “reflation” is clearly failing! There is no way around it, we are watching a credit contraction unfold.
Yet, gold has bottomed? How could this be? Gold surely should be close to or even under $1,000 if you listen to the Dent’s and Armstrong’s of the world? Let me put this together for you. Everything is “controlled”. By “controlled” I mean “price.” The price of everything is controlled. I could have said “hidden.” The “hiding” process began in 2008-09 when the Fed took all sorts of toxic (insolvent) paper on to their balance sheet. They did this to hide their values. Yes, they did this to get liquidity into the banks but in my mind their primary reason was to get these assets off the market so they could not be used as “comps” are in real estate. They carry these on their books at par when they could not even get .18 cents on the dollar when they tried to sell them. Do you see? This is where the scheme kicked into high gear.
Back to gold, how could it possibly be going higher if all of a sudden asset values are declining or deflating? First, gold has also been “priced”. Gold, more than any other asset (except silver) HAD to be “priced.” It had to be suppressed because the numbers on the thermometer had to be altered to foster confidence. As you know, I absolutely believe gold’s price has been “made” on the paper markets. Nothing else could explain a falling price with increasing and greater demand than supply. If other markets are being lost control of, then so are gold and silver, they are only moving away from being controlled and towards a natural price.
It looks like to me that “confidence” if it is not broken yet, will very soon because control is being lost in too many of these markets. Was the price drop in oil a “control” measure by the U.S. to punish Russia? I believe yes, this was “our” plan but not “THE” plan. As I wrote a week ago, we may have thought it was our bright idea but I am sure the new Chinese/Saudi relations are as big of a factor, if not greater. Because so many different markets now begin to tell a story opposite of the “official” story, it tells me that “control” is now beginning to slip. If you doubt this, think to yourself ”why have we had extraordinary measures” for six years? Why are we still six years later talking about recovery? What happened to the “expansion” phase? It’s like the Dutch boy with all of his fingers and toes in the dike, leaks are springing up everywhere and with each one more control is lost! If I am correct and this is true then we will either see massively convulsive markets or an outright closure and re set of prices.
Please remember this, volatility will create more volatility just as a small fire or fires in a dry forest will spread and create more fire. Volatility will create losses and losses will create bankruptcies. It is these bankruptcies which will turn winners on the other sides of trades …also into losers.
Quite simply, we have lived through the greatest Ponzi scheme of all time where leverage of over 100 to (probably 1,000 to one when all is said and done) has been employed for control. The recent volatility suggests that control is finally being lost. If this is true and I firmly believe it is, we are on the doorstep of the worst financial panic event in all of human history. The sad part is the humanity. Only a small percentage of the global population ever even played in this game but everyone will be affected by it!
Bill
What do you think of Richard Russell’s change of heart ? He feels that the Stock Market will explode upward until 2016. http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/12/9_Richard_Russell_On_God,_Gold_%26_Historic_Trading_In_Markets.html
I saw it, it could happen in a hyperinflation. I personally think something will break first…and then the hyperinflation.
Bill,
“…If this is true and I firmly believe it is, we are on the doorstep of the worst financial panic event in all of human history…” – I believe you hit the nail on the head with this statement.
I am worried about those 1 billion rounds of hollow points bought by Homeland Security. I’m afraid they will be used soon.
I think it’s more like 2 billion. They added an extra billion in case the first billion didn’t work!
Big crack in the oil derivatives market appeared this morning. Phibro (117 year old commodities trading company) has called it quits after failing to find a buyer. It will now begin liquidating it’s assets. The blood is beginning to flow in the gutters of Wall street! This will lead to much more pain across the entire credit market. Which oil comapnies have been using to persue stock buybacks to artificially boost their stock value.
yes, a global credit contraction.
When the US dollar closes under 87 for two consecutive days…it’s over. Gold will be $1,300+ when this happens.
Another great writing….
Thanks.
-Rodger-
thanks Rodger, it’s already over.
Bill, thanks for another great article. You can just “feel” that something is about to happen. The thing that scares me the most is what will TPTB come up with to distract the masses as the global financial disaster is unfolding?
BTW, the Germans likely said “Nein” to the ECB….
Who knows Al? Surely got to be big though.
Good stuff, Bill. I wish you and Andy had time to write more.
thanks, I don’t, I am a little burned out and need the Christmas break.
Like a lot of readers of this blog, I was waiting for that one catastrophic event to happen that would set things off. Bill’s articles makes a good point about how it’s all happening right now before our eyes – one piece of bad news at a time.
“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”
― Ernest Hemingway, The Sun Also Rises
…until you wake up one day………
Another super article Bill. I think Ebola will be back in January after the Christmas shopping (More DEBT Accumulation) season is over. Then by the time the “Big Event” financially Hits – TPTB can begin to impose medical martial law to control the “useless eaters”. Again, another great article Bill.
I have never read anything of Armstrong or Dent but it appears to me that that have been correct and Holter wrong, when it comes to the direction of price for Gold.
If price is important then it is about the same for gold as it was back in 2009 !!!
For those who live in a dollar centric world the price is currently looking a little bit promising.
However the trend is still down ( refer any monthly chart), no need to buy yet.
Bill,
Excellent article today. As I write this the price of WTI crude has dropped to $60.51! I share with you the thought that many people will suffer, and most of them will have no idea what is happening. It doesn’t seem like it will be long now until the loss of control is total.
Mark
Thank you Mark.
Bill,
I hope this is it. If you can recall Atlas Shrugged, the book BEGAN with the feeling of “something isn’t right” in the air. It’s been that way here in the US for a while now. I’d rather go through hell and get to the other side while I’m young enough and able enough to protect my family, but I do fear what that other side will look like too. Did they ever slip in that provision of the new budget deal that banks were pushing hard for, where they can flow derivatives trading through their FDIC insured subsidiaries?
they should have let it go in 2008…or even 2001 for that matter.
Bill, I agree w/you that US doesn’t have any/much gold left and potentially China, maybe in concert w/Russia, could buy enough PM to cause a force majeure at COMEX. However, I have a nagging feeling China wants to run the same PM ponzi scheme by continuing PM leasing scheme that US has done all these years. My only concern about going all in on PM’s is China could implement the same fractional reserve PM schemes as US has done for years…once they have bought all the gold from the West. what do you think about that though? Attached is GATA article outlining my thoughts above. http://gata.org/node/14844
I disagree, once they have the bulk of the gold, they will want it to be to expensive for anyone to catch up to them.
Apparently USA has 8942 tons of gold left ?
There is likely 180,000 tons sitting around in vaults allover the world.?
China will possibly introduce a gold backed RMB ?
For every ounce sold there is a buyer in both the paper and physical markets.
Zero sum games
But he who has the most gold wins in the end.
do you really believe the U.S. has 8,942 tons (they claim less than 8,400) left? If so, the owner of a very famous circus spoke of you over 100 years ago.
Hence the ?.
I don’t know. I don’t care.
Maybe USA has more PM than they let on?
That gives speculators the opportunity to spend time trying to guess what they have.
AND THERE YOU HAVE IT …”I don’t know and I don’t care. Maybe the USA has more than they let on?”. Really Smurf? REALLY? More? This is on of THE most important “fundamentals” of all, how much the gold the US has. Without knowing this you cannot form a “dollar price” for gold. The “opportunity” as you say for “speculators” is to play in a rigged casino where paper contracts with ZERO relation to real gold sets the price. Great opportunity!
New lows in german bund : 0,666% : still on track in 2015 to less than 0,1%…
a ridiculous yield in a fiat currency.
Do you think another consequence of driving down the oil price is to force small oil producing countries with gold reserves such as Venezuela to sell or lease gold reserves to back their falling currency? What other small oil producing countries have gold reserves and bankruptcy problems? If you run out of gold just force another pawn to restock your vault.
yes this is possible but even an extra 1,000 tons would not last even 6 months at the current offtake rate.