Following the ECB’s flat out admission that Europe is amidst the same economic, financial and demographic abyss facing Japan, the inevitability of the “end game” of fiat currency collapse became eminently clearer. Another ugly NFP report depicted America’s rapidly deteriorating labor market, and the expanding Chinese re-hypothecation scandal further exposed the potentially historic risks stemming from what once was – but no longer is – the world’s “growth engine.” No matter where one looks, economic trends are decidedly negative; thus, dramatically increasing the likelihood of the next 2008-style crisis occurring sooner rather than later; particularly in light of unprecedented Central bank fueled asset bubbles. In our view, severe global imbalances represent the “most dangerous economic environment of our lifetimes;” including, an historic undervaluation of precious metal prices.
It’s difficult to find a starting point this fine Monday morning, so let’s start with this morning’s “top story” on MSM cheerleader Yahoo! Finance – of how the UK is rapidly becoming a “tax haven,” competing with the Cayman Islands and other financial “luminaries” to steal major multinational companies. Actually what caught my eye first was that the company utilized as the “poster child” of this trend was none other than Rowan, an offshore drilling contractor I covered as a buy-side and sell-side analyst from 1995 to 2005. Back then, a tough Texan named Bob Palmer was Rowan’s CEO; who in fact, led the company from 1972 until his retirement in 2004, when he was named “Chairman Emeritus for Life.”
Several times, I had the privilege of speaking with him in his Houston offices, where the company had been headquartered since its inception. Palmer wore a cowboy hat and leather boots and his office was decorated with the heads of dozens of exotic animals he had hunted throughout the world. Thus for all intents and purposes, he – and Rowan – was as “non-British” as you can find. Sure, they had some North Sea drilling operations, but the fact that Rowan moved its headquarters to London two years ago has little to do with that nuance. Instead it was the tax windfall Rowan received when its effective tax rate dropped from 35% in 2011 to 3% in 2012, which ultimately will settle in around 20%. Better yet, two of the other drillers I covered back then – ENSCO and Noble Corp – are doing the same as well as dozens of other multinationals.
In my view, nothing bespeaks the expanding global imbalance between the “1%” and the “99%” more than this burgeoning “tax war”; as in a world where the supposed “superpower” is running annual deficits of a trillion dollars, how on Earth can it allow its few significantly profitable companies to not pay material (or in this case, essentially any) taxes? Such deficits have to be funded somehow; and thus, they are foisted onto the “99%” via inflation and tax increases. Worse yet, the fact that nations as supposedly “powerful” as the UK – itself, a long dead superpower – feel the need to take such desperate actions to lure a handful of new jobs and tax revenues should tell you all you need to know about the state of the global economy; as frankly, such “company poaching,” at the expense of global tax revenues is akin to the self-defeating currency dilution inherent in the ongoing, expanding “final currency war.”
As for the 99%, the hits keep coming; and last week’s ECB announcement will only destroy them more. Just as the lower taxes Rowan pays will be recouped from draconian policies targeting individual taxpayers, reducing interest rates below zero will force the 99% to subsidize government borrowing. That is assuming none are smart enough to withdraw their capital from the system, and store it in the form of real money. Let’s face it, interest rates are heading to the Japan-like ZERO bound – across-the-board; as per what we wrote in last month’s “Most Damning Proof Yet of QE Failure,” mirrored beautifully by this weekend’s fantastic article by Michael Pento, the world is starting to realize global “QE to Infinity” is unavoidable.
Sure, hyper-inflation will cause rates to soar when said “end game” inevitably arrives; but until then, sovereign treasuries will be forced to issue exponentially rising levels of debt, which will be primarily monetized by Central bank printing presses, which must maintain record low interest rates to prevent default. Then there’s the matter of widespread bank insolvency, which is why the Fed maintains ZIRP amidst a so-called “recovering” economy, and the ECB is re-instituting its LTRO and SMP bailout programs. Think we’re kidding? Than pray tell, what was St. Louis Federal Reserve President James Bullard referring to this morning, when he averred the Fed “shouldn’t be intervening all the time in markets?”
Moreover, historically indebted citizens and corporations – amidst an expanding global recession, no less – has caused loan demand to dramatically contract. Sadly, as these trends expand in the coming depression, the “vicious loop” connoted above will push rates down further; even in imploding nations like Spain, which believe it or not, now sports treasury yields lower than the United States.
Of course, I’m speaking only of nominal rates; as the only place “deflation” can occur in a fiat Ponzi scheme is asset prices – particularly after they’ve been inflated to bubble-like valuations by unfettered money printing. As Bill Fleckenstein succinctly puts it:
Deflation is the worst joke in the world. If we were going to have deflation, we would have had it in 2008, 2009, and 2010. We didn’t. If the stock market goes down, that’s not deflation. If the real estate market goes down, that’s not deflation. If most everything goes down against your currency, that’s deflation.
–King World News, June 5, 2014
The problem is, items we “need versus want” have decidedly risen against fiat currencies from the worst third world nations to “king dollar” itself. To wit, McDonalds just reported its seventh straight month of negative same store sales representing the longest such stretch in its 74-year history. And yet, global food prices are at or near all-time highs in most categories – with U.S. food indices up a whopping 20% in the past five months alone. Meanwhile the prices of copper – i.e. “Dr. Death” – and iron ore, perhaps the two most industrially sensitive commodities are in freefall; whilst the commodity that contributes the most to consumer price inflation – crude oil – remains near multi-year highs. With global government inflation calculations as understated as at any time in history, real rates are dramatically lower than real rates; and not only are savers prohibited from earning a return on their capital but are having it systematically stolen by inflation. Comically, the ECB claims “low-flation” threatens Europe’s financial stability; when in fact, its policies have caused (“massaged”) European CPI inflation of 35% since the Euro’s inception at the turn of the century. For that matter, does anyone see the “low-flation” Draghi so fears in the chart below?
Meanwhile, as company after company and country after country reduces usage of the dying dollar, TPTB have resorted to history’s most aggressive campaign of money printing, market manipulation and propaganda to mask the system’s terminal illness; and enrich the “1%” at the expense of the rest. Even Wall Street cheerleaders like Deutsche Bank are warning of “full blown mania”; as care of the PPT, market volume and volatility have been virtually eliminated, enabling valuations, margin borrowing and investor complacency to zoom past the previously “unassailable” highs of 1929, 1999 and 2007. Hmmm, what a “coincidence” that seventy years elapsed between 1929 and 1999; but just eight until 2007 and seven since.
Wherever one looks, the signs point to an inevitable market implosion; although this time around, I’d place the odds of massive real losses caused by a 2008-style crash as equal to that of a Zimbabwe-like hyperinflation. Here we see the largest percentage of speculative small-cap stocks trading above their 200 DMA in the past 20 years.
And here, European stocks rising for 45% over the past three years, whilst corporate earnings have cumulatively declined by 15%.
And finally, the most damning charts of all starting with the nearly 100% correlation between Fed monetization and the S&P 500 yielding the same dislocation between stocks and reality as in Europe – particularly since late 2011, when sovereign nations nearly collapsed under the weight of surging debt. Trust us, it’s no coincidence that the Fed’s “QE3,” Japan’s “Abenomics,” and Draghi’s promise to do “whatever it takes” occurred shortly thereafter; nor, for that matter, that precious metals commenced a “mysterious” three-year plunge shortly thereafter. Since then, the U.S. national debt has risen from $14.1 trillion to $17.6 trillion; and we ask, why do you think gold and silver prices are down 35% and 60%, respectively, over this period?
In today’s historically manipulated markets, stocks and bonds have never been more overvalued; and gold and silver never more undervalued, with both metals trading well below their respective costs of production. Ultimately, “something’s gotta give” and when it comes to “Economic Mother Nature,” she always wins. That said, the PM Cartel has been running the show in recent months; which is why we find it interesting that they – i.e., the “commercials” – have been dramatically reducing their short positions in recent weeks; in gold’s case, to its lowest net short position (63,000 contracts) since February’s price lows. As for silver, the short covering has been even more dramatic; with today’s net short position of a measly 9,000 contracts at its lowest level since last summer’s price lows. For what it’s worth, of course.
By any measure imaginable, from the blindly qualitative to the empirically quantitative, the disparity between economic reality and manipulated markets has never been wider or the worldwide economic environment more universally dangerous. This is why we have personally put the vast majority of our savings in the only asset class proven to have protected wealth over the millennia, and why we believe the time is now to consider doing the same. Remember, once the “end game” of massive currency devaluations commences, if you haven’t already protected yourself it will be too late.