The following chart from the Federal Reserve’s own data pretty much sums up America.
The rate of home ownership and the labor participation rate peaked about 10-15 years ago and it’s been downhill since. Do you have any wonder after looking at this chart why if it “feels” different now? Yes the stock market is up, but could that be a function of all the funny money pumped into the system since 2008? Pumping money into the system was in response to the “peaking” of America, the money (inflation) had to go somewhere, we see the “somewhere” currently as the equity markets.
In my opinion, the housing market which was used as an ATM machine by so many going into 2007 had to give way (as pricing outstretched the ability to carry) and has only tread water back to earlier levels. Interest rates have been zeroed out which has allowed stagnant and even lower incomes to carry more debt. The obvious problem is employment, or the lack of. Jobs, real and good jobs are simply no longer available and not being generated by creating thin air money. If the real economy had jobs available, “it” wouldn’t feel as bad as it does and the rolling social unrest we have been experiencing might not have happened.
Capital “rolls” from sector to sector, it always has and always will. Too much “capital” results in a bubble (or bubbles plural). China’s real estate market qualifies as one of these bubbles in the bursting phase . Their stock market is working on another … for the ages. Last week alone China saw over 4 MILLION new brokerage accounts opened, …while margin debt is escaping the stratosphere! Chinese bubble mania is no different than any before it (except maybe in scope) and as all before it will eventually burst wide open. Why does this even matter? This is important because once it does burst, the money has to go “somewhere”. If you don’t believe China has a manic stock market, the following chart shows how many NEW accounts are being opened, is this a mania?
(Bloomberg/Zerohedge)
…or this?
My point? Quite simply I believe logical and obvious …these Chinese shareholders will soon panic out and look for a new haven, probably a “safe haven”. Hundreds of millions will be looking for a safe place to hide. Will they “default” (pun intended) and run into U.S. Treasuries? Jack Lew can hope but I highly doubt it. Or will they rather choose something more familiar, like gold?
Let me point out the obvious, the Chinese population already has an affinity for gold, this is indisputable. Ask yourself some very basic mathematical questions, like how many Chinese equity investors are there? 100 million? 200 million? More? What kind of balances do they carry in their accounts? The equivalent of $1,000? More? I know you can see where I am going here! What if 50 or 100 million investors with just $1,000 in their accounts were “panicked” into gold? Could the market absorb this? Or would the fractional reserve nature of the gold market be cracked open like a watermelon? I might remind you, the world produces only 80 million gold ounces per year, where will the metal come from?
Before you go off on me and say I am going “pie in the sky”, why does this thought process not make sense? Is my number of possible investors at 50-100 million people too high? Or the account size too high at $1,000? And ask yourself this, if there were a bevy of Chinese retail investors to flood the gold market, might the rising price and scarce availability prompt others around the world to do the same? Do you see? A burst equity bubble in China has the very real ability break the fractional reserve nature of the West’s gold market because the money has nowhere else to go! Gold is the final destination, a familiar and comfortable one at that for the Chinese. Everyday Chinese investors can break it by exposing the flaw of miniscule and fractionally reserved inventory. Please don’t tell me “the Chinese will not buy from COMEX nor LBMA” because the demand will find its way to WHEREVER ANY gold is available, and very fast! What would that do to the “face” of Western finance? Will the West not then be exposed as a fraud if they can no longer meet demand?
Will China be blamed for blowing the lid off the game? Did a sovereign country “do it” or did it just happen by a stampede of “uncontrollably panicked” investors? Could China or Russia or anyone else be blamed for busting the market purposely? Much pain and loss will occur amongst Chinese speculators, I am sure the leadership of China already knows this. They also know the money has to go somewhere and the “somewhere” will expose the very heart of Western fraud. I would think a response of “oops, sorry, but we didn’t do it” might be all that is heard!
Hi Bill,
Always enjoy reading your articles on a daily basis, I do agree that the stock market is ripe for a major correction and gold price will eventually reflect the reality (much higher price). I’m not so sure I agree with the possibility of Chinese retail demand busting comex indirectly by spiking gold demand:
1) If a lot of Chinese equity investors are buying on margin (leveraged), when the market turn sour on them, even the small amount of cash in the accounts could be wipe out.
2) Even if you’re left with a small amount of cash, most people would keep it for the daily necessities (or as a buffer) rather than investing.
3) Comex can change rules as they see fit, they did recently, if I’m not mistaken gold cannot go higher than $100 on any giving day, if comex is cornered who’s to say they won’t change some rules to preclude from getting busted.
4) Chinese government is still in the gold accumulation phase, not sure that they would allow retail demand over national interest, they do have more control over their citizens than the western world.
Bill, thanks for these daily articles, really makes me think.
Kind regards,
Daniel
thank you for reading Daniel! All “rules” will be thrown out the window when this comes to pass.
Home Run – NO – Grand Slam. Reality is difficult to confront. We will hate the world you describe.
just keep your head down and do the best you can.
200 million panicked Chinese investors, another 150 million in the US and untold millions in Europe and Asia; talk about displacement. Why don’t people foresee that when this thing falls apart, there will be riots in the street. Worse than Ferguson, worse than Baltimore.
AND, the trigger doesn’t even have be pulled from within the US…or specifically from under anyone’s control.
I tried to be conservative.
Right on the (pun intended) “money” Bill!
“The money has to go somewhere”.
Fiat ‘money’ is debt based. Created by debt, it will disappear as debt is destroyed along with the wealth of those who hold it.
Remember the first rule of economics; ‘All debt will be paid’.
Either by the debtor or by the creditor. Either with dollars worth pennies, or with pennies worth dollars. It will be paid.
Gold is money. Fiat paper is just that – paper currency.
gold on the other hand does not “disappear” …unless it was being held in Western vaults?
Congrats, Bill. You have become relavant enough that some U.S. Government mis- information specialist is now dumping falsities on your site. The 1878 law related to Legal Tender was about the fiat money we all know as Greenbacks. What JFK authorized in 1963, six months before a large group of professional shooters converged upon Dealy Plaza where George Bush Sr was supervising the Secret Service ( Poppa Bush was not in the Secret Service), was an Executive Order creating Treasury Notes backed by silver in the vaults of the Treasury.
It is irrelevant whether JFK was unaware of fiscal vs monetary policy, or anything else. The facts speak for themselves.
I didn’t think I was wrong but don’t have enough minutes in the day to check/prove him wrong. Sorry, my sloth.
IMO because of the WWW it’s no longer us or them, it’s just all of us that have any degree of info.
It always goes back to the KISS formula.
Keep it simple ______.
When debt takes the system down and it will, the system will implode.
Margin accounts which are at their highest numbers I think in history and now in China as well will be called.
The first hit will be the equity value haircut. Then margins will be called in and that will be the second whammo….
The only survivors that will not be decimated will be those than have liquidated their third party risks.
Pension funds world wide will be underwater.
Real money Gold and Silver will be seen as the only Island of Safety but there will be no physical gold and silver available.
The world will be in chaos financially and the streets will become dangerous places to travel.
You can only Extend and Pretend for so long before reality comes home. For now we live in the world of Convenience until we are forced into the world of Reality and I do not mean Reality TV.
after reading this article and the comments after, I thought of how China began re-arming their police forces in the past few years. The great reset to real money is coming, but a catastrophe must take place first.
first or “during”.