2014 was a year of posturing. The U.S. “postured” by trying to lure Mr. Putin and Russia into a war. First it was over Syria and then later over Ukraine. The Russians postured by not taking the bait and buying time. Yes, Russia has suffered with a devaluing currency, lower oil revenues, and an economy running on less than eight cylinders. China has stayed out of the public spotlight during this period but privately stood behind Russia, I will explain this a bit later.
I mentioned “buying time”, by necessity, Russia has done this as a tactic I believe to slow down the implosion of the Western financial system. On the face of it, I know this sounds ridiculous …why would Russia want to prolong the Western system. The answer is very simple, they, nor China were ready. They may not even be fully “ready” now but at least the financial infrastructure is in place for when it does happen.
Over the past year and as a result of sanctions by the U.S., Russia set up their own alternative to the SWIFT clearing system. This was being tested for the last two weeks. The original start date was May 15, 2015, this seems to have been advanced by months as the system may go live without any notice or if Russia were to be isolated from the SWIFT system. The important things I see from this are basically threefold. First, the U.S. has not had enough political capital to kick Russia out as several European nations refused to go this route (it’s cold and they need Russia’s nat gas). Secondly and maybe more importantly, SWIFT can no longer be held as a potential hammer over the head of Russia since they have an alternative. Lastly, the alternative clearing system will at a minimum bleed liquidity and thus more velocity out of the West. In a worse case scenario, the new clearing system may become very attractive and lure a majority or even a super majority of trade participants to abandon the West’s game. Were this to result, the dollar will lose its usefulness and thus its de facto reserve currency status.
We also heard of another announcement over the holidays between Russia and China. They performed “currency forwards and swaps“.
This was done I believe to support Russia and her ruble more than any other reason. You will notice the ruble immediately strengthened nearly 40% on this announcement. The sanctions along with “Mr. Obama” cutting the price of oil in half will not cause Russia to default as they have nearly as much cash foreign reserves as they do debt outstanding. This is very important, Russia has a pristine balance sheet where their debt is only 14% of GDP, compared to the West’s understated debt amounts equaling 100% or more of GDP.
I want to mention the recent explosive move higher in the dollar. It has rallied nearly 15% in six months, and nearly 10% of this in just the last two month. This I believe is the result of the dollar carry trade unwinding. Many commodities including oil were “carried” by borrowing dollars. This was a synthetic short position in the dollar. As the commodities (oil) imploded in price, traders were forced by margin calls to exit positions. The borrowed (shorted) dollars were paid back (covered) and has caused the rally in the dollar.
On Friday, the first trading day of the year, “something broke…somewhere”. For the dollar to move nearly a full one percent higher in a single day is not only a symptom but also a financial killer. The IMF claims there is a $9 trillion carry trade in the dollar. Just one percent of this amount, the carry trade (not to mention dollar based derivatives in the $100’s of trillions), amounts to $90 billion! Let me put this in perspective for you. On Friday alone, “someone made” $90 billion and “someone” also lost $90 billion. This means there will be huge margin calls for Monday morning.
For a little more perspective as long as we are speaking of mas o menos $100 billion, the Treasury went another $100 billion in debt on Dec. 31st.. This number of $100 billion also fits nicely into the gold market, this happens to be just about the amount of gold which is produced from ALL of the worlds mines in a FULL YEAR! Do you see the comparison here? The Treasury borrowed in just one day, an amount equal to annual global gold production …at current prices. We should also be seeing margin movement of about this much on Monday because of the FOREX price action on Friday.
Lastly, it needs to be pointed out that gold was the number two “currency” on the planet last year as it dropped just over 1% versus the dollar. This means what exactly? It means gold rallied just about as hard in foreign currency terms as the dollar did! Oh, and let’s not forget about the multi thousand ton “paper anvil” the COMEX has thrown around the neck of gold. Even with “instantly and freely” created paper supply of gold, the price has held over the last year to trade at near parity with the dollar. Now that volatility has and is exploding in nearly all asset classes, we may soon see why the CME has instituted “collars” on the precious metals.
Volatility in today’s world is a systemic killer, let me explain this before finishing. Looking at volatility moves in the dollar, oil and many stock and bond markets leads me to believe there are huge margin calls and unfunded positions behind the scenes. Some very strange events have taken place, a perfect example would be 10 yr. Spanish bonds issued by an obvious bankrupt trading under 1.5%. The dollar move on FOREX these past weeks tells me one of two things, either something blew up …or the move itself blew someone up. The action we have witnessed is not normal and certainly not sustainable because of the derivative losses created. When you add the puzzle piece of what Russia and China are doing together, it tells me they are “readying” for the derivative daisy chain to break. China is preparing the yuan to ascend to reserve currency status while Russia is preparing the clearing infrastructure mechanism. As for the West, “bail ins” have been legislated into law over the last year for a reason. They know “it” is coming. The latest act of Congress which saddles FDIC with broken banks busted by derivatives should also tell you something …they know it’s coming! Laugh this off if you like, whether the West is ready or not, the East has been preparing and will be.
Regards, Bill Holter
Thank you Bill, and welcome to a brave new year! Those with any skin left in the Wall street casino game, will have to put on a “brave” face!
Canadian heavy oil is now trading below $35 a barrel and the immediate future looks VERY dim. Since the tar sands heavy oil require $80 per barrel to break even!
There are soooo many black swans circling overhead at the moment, anyone of which will break this global economic camels back. Getting fairly drafty living in a house of cards!
Oh well, got the fire crackling away and about to put on some popcorn, sit back and watch it unfold. Been prepping for this for years. Bring it on. Good luck everybody.
derivatives have blown up, we now watch the carnage.
Switch on over to c-span and really see a show…house and senate swearing it.
I’m not quite sure what to say…God help us all and get here soon while their are a few of us left to stand beside you.
this could be the very last Congress to lie with their hands on the bible?
Agreed Out yet what is the first legislation the Senate is looking to put forth? Yep, Keystone XL pipeline. Made no sense to do this BEFORE the oil meltdown and now that it has, they make it a priority. Watched an interview with Greg Palast and he lays out exactly what the XL pipeline is about, hint, think Koch brothers. I swear we are represented by the stupidest/crookedest people the US has to offer.
yes.
Seems to me that there are probably only a few entities (no people) who could absorb a $90 billion hit.
…Unless it would be the US taxpayer.
Excellent article Bill, TY. My instincts tell me now that the Repubs have won the election they will be more than willing to meld their legislation to align with the Neo-cons(whom Obama has surrounded himself with) to put more sanctions on Russia. If these Congressional asshats could, they would freakin sanction bombing Iran now with no compunction at all to please AIPAC so how can one expect they will do anything but what our war-mongering govt. wants them to do.
pretty big hits …several days in a row.
sadly yes.
Will Russia’s current action cause the loss of world reserve currency status for the USD and then the “solution” offered will be the SDR? Or, will the IMF in its “wisdom” declare the Forex wars too destabilizinng and call for the introduction of the SDR which will lead to loss of reserve currency status?
Either way, gold, silver, copper, lead…
it is possible the world will not accept SDR’s in a “show me the gold moment”.
I’m better prepared than 99% of all Americans, but still want more time to get ready…usually. However, if the crooked world of high finance is going to have that moment, it might as well be now. Please let it arrive soon.
should have been 15 years ago in a lawful world.
So what now……
My guess is that desperate times means desperate actions.
Watch carefully for something to happen that takes our focus away…
What that will be will likely be seen soon enough.
This is no conspiracy theory.. This is simply how you distract people away from whatever it is you do not want them to notice.
The elephant in the room is the SIZE OF THE DEBT.
Pretty hard to hide that much longer so that is why I am saying something big is coming.
God help us…
lock it and stay loaded!
Always enjoy your thoughts Bill.
Perhaps this is disrespectful as the comments section is not really meant to function as a message board, but I wonder if you saw the recent CME announcement that they will now offer a 1-kilo gold contract.
The press release says the product will help the Asian markets with “price discovery” over and over again, almost like it was meant as a stick in the eye of everyone waiting for the existing 400 oz contacts to “default”.
As an outsider to the industry, I am unable to read between the lines on these press releases for anything that would be interesting to the more knowledgeable. Of course the Asians won’t likely read about the product in English so who knows what will be said about it over there…
Is this just more of the same kind of paper they are already pushing in North America? I wonder why the Asians would even allow such a vehicle to trade in their markets. They mention physical delivery a lot too, but in principle their current paper products all offer it too.
http://bit.ly/1tEyAMJ
I had not seen this, if the 400 oz. were to default, so would the kilo contract in my opinion.
English is the primary dominant language for business for Singapore, Dubai, Hong Kong, and most important of all, India. (India has more English speaking people than the entire population of US.) Not quite sure where you get the idea that press releases written in English don’t get looked at in Asia.
Good to know.
My comment was more to get at the idea that things are written for certain audiences and so things that might get said to one group won’t get said to another.
As an example Israel used to demand that Arafat denounce bus bombings in Arabic and not just in English when he spoke to the western media. Not to invite comment on Israel vs Palestine with my example, but I realized when I heard this that there are more ways then I had thought to keep people believing one thing or another.
“derivatives have blown up, we now watch the carnage.”
I fear that you are correct Bill. How long until the mess washes ashore? Can’t be long in my opinion. I enjoy your articles and your sense of what is happening via the same. I would love to live next door to you and have access to all of your knowledge and wisdom, not to mention the survival instincts that will soon be needed. Your community is fortunate to have you there – even though they may not even know it, YET! Blessings again. Bob
thanks Bob, I believe the speed of the breakdown when it hits will be virtually overnight because of computers and leverage.
Hello Bill,
I’m interested in your opinion of specifically which market or commodity might first react to a meltdown.
Recently the grains have moved up somewhat shocking many commodity specialists because of the supply figures.
Many say this moved is a result of major grain purchases by China.
Could this perhaps be a “prepper” move on a national level?
yes, any nation filling their stockpiles with low priced grain would make sense.
Would not be the first major historical world financial shift I have seen lead by the grains.
Bill, maybe you can address this sometime. I don’t understand the logic behind the bail-ins. The derivative exposure that the banks have is multiple times their assets, so even if they bailed in all their depositors’ money it wouldn’t cover a derivative meltdown.
Plus, the whole system is a CON-fidence game in fiat ponzi schemes. Everything is about soothing the populace to have confidence in the banking system above all else. Once they pulled a bail-in then everyone would lose confidence in holding money in the banks and not do it anymore so they are doomed that way also. What is the point?
correct Mark, derivatives (the tail) can swallow the system (the dog) whole in one giant bite. When it goes down for real, everything including currencies will be worth nothing.
Great as usual Bill….
Regarding bail-ins….I am open to any input here.
I have a Scottrade account where I am vested heavily in mining and energy stocks since 2010. After 2011, they had dropped 70% including some big hits late 2014. They have been coming back some now though, and I am down 50% now.
Are broker accounts safer than regular bank accounts against bail -ins? I fear they are not unless I held the certificates myself which I do not. I would like to wait to see my mining shares come back more but am getting nervous that I could possible lose it all or a large % if there are bail-ins.
So I could sell them all tomorrow for a total 50% loss since 2011 and use that fiat and buy more physical (which I have alot already). Or I could wait it out as I am seeing that rally in my miners I have long been waiting for happening right now. It may do so well that within a month I could gain that 50% back as I have gone from 70% down to 50% down in just this last weeks time.
Any input on this here Bill and/or anyone please?
order your certificates out.
Hey Bill it was said that Citi Bank wrote the budget legislation. Notice that two years before the crash of 2008 we has a goldman sacs Secretary of Treasury(who threatened congress to get the bail out), then exactly two years later there was a crash. Now we have a Citibank Secretary of Treasury who was in place for 2yrs and have now forced congress to do the Bail-ins. Citibank just also added 9Trillion to their derivatives exposure, and made them #1 surpassing JP Morgan. We need to see how much more will be added in the coming months because I believe this is it!
#1 in the U.S. but #2 behind DeutscheBank.
Hello Bill,
you are stating in a sloppy manner that Europeans refuse to support the US, because “well, its cold in winter, and they need the gas”.
As a European more a German citizen, I have to point you to the fact, that in a conflict Germany and Europe would get the first hit in a nuclear conflict, as the main location of milit. infrastructur of the US stays here.
And secondly, this winter is one of the warmest in history, but really, this is cynical.
I respect your writings, but this is a bit to short to put us in the corner of traitors, cuz we want to avoid being wiped out while you are watching the show over there.
So critical pretenting, to see and know it all, but blind on at least one eye.
With the best wishes.
my apologies but the supply of gas from Russia definitely enters into the thinking.
Just one thought here Bill. The US congress knows they are bankrupt….so why not back stop the TBTF derivative debts….it wins them rich friends in the short run …and besides, whether the debt is 18 T, or 25T …..whats the difference? They’re bankrupt regardless.
yes, exactly correct OZ.