Long-time readers know I’m an avid reader, with my favorite genre being “historical fiction” i.e., the incorporation of historical events into fictional stories. Some of the best such writers are Ken Follett, Sebastian Junger and Edward Rutherford but unquestionably, the genre’s god is James Michener. Over a 60-year career, Michener wrote 36 novels including 12 brilliant works of historical fiction. I have read ten of the 12 already with my current focus on Texas.
In such works, monetary references are omnipresent, given money’s prominent role in all societies. For example, Michener’s commentaries date back thousands of years and invariably, show the same reverence for gold and silver and disdain for unbacked currencies; the latter of which, always fail. Of course, it’s not only historical fiction where such references arise, starting with the bible itself. Writers as diverse as James Clavell (Shogun), Stephen King and of course, Ayn Rand discuss the virtues of gold and silver ubiquitously having thoroughly studied history. That’s what makes them the world’s best authors and why we analyze their works long after publication.
To that end, I have been a student of such references for a decade, starting with the below passage about an Indian emigrant to Trinidad in Michener’s Caribbean, which I noted upon reading it in 2005. At the time, I was writing an “initiation report” on the Precious Metals sector trying to convince Wall Street firms to hire me as a sell-side analyst covering large-cap mining stocks, given my belief in a bright future for gold and silver. None, of course, would do so and too bad, because at the time the prices of gold and silver were $430/oz. and $7/oz., respectively.
How to treat grave robbers – When the wife of my great-grandfather died, he buried her wearing all her gold and silver, and an English official protested: ‘ But you’re throwing away a fortune’, but he replied: ‘She brought me a fortune, and I would not like to see her in another world poorer than when she came to me.’ Three days later, when the police came to the Portugee Shop to inform him that grave robbers had dug into her coffin and taken all the precious metals and the jewels, he said: ‘They were hers. She spent them as she though best.’ But when some of the jewels surfaced in the Trinidad bazaars sometime later, he made careful note of who had them and of how they had obtained them, and shortly after that several men were found dead…one by one.
-James Michener, from Caribbean
And thus, before I commence today’s extremely important topic, I thought I’d share a passage I read in Texas this morning – of the collapse of the Texan dollar in 1837, shortly after it declared itself an independent Republic.
…but always the limiting factor was the strangling lack of currency, and when the distressed nation, swamped with debt, tried to salvage itself by printing two million dollars’ worth of ‘red-back bills’ supported by no collateral except the government’s word and faith, citizens evaluated the issue realistically. On the first day it was issued, a dollar bill was worth fifty cents, a few days later thirty cents, then ten cents and four cents, until it bottomed out at an appalling two cents.
-James Michener, from Texas
Yes, you can add the Texan dollar – i.e., the “red-back” – to the long list of failed American currencies – along with the late 1700s “Continental,” the Confederate dollar, and Abraham Lincoln’s Northern “greenback” – which was itself nearing hyperinflation when the South fortuitously surrendered. In other words, for those that think “it can’t happen here,” think again – as not only will it inevitably do so, but it already has.
And with that apropos segue; let’s start with the most dire financial topic imaginable the possibility that inevitable fiat currency failure turns imminent. All of the “ingredients” are in place and as we wrote in yesterday’s “Most Damning Proof Yet of QE Failure,” appear dangerously close to coalescence. In it, we discussed a Fed desperate to prevent the widespread “realization of reality” that the U.S. economy is NOT recovering and this morning’s market action only validates this thesis further.
And once again, we cannot emphasize enough that this issue is global in nature; and sadly, irreversible – with regions as diverse as China, Japan, and Europe at large simultaneously faced with the ominous prospect of economic implosion. To wit, the Bank of Japan’s desperate defense of Nikkei 14,000 amidst the “Land of the Setting Sun’s” worst economic quagmire in decades, the accelerating collapse of China’s $23 trillion “shadow banking” bubble, and the relentless march toward the Euro’s inevitable breakup irrespective of the ECB doing “whatever it takes” to prevent it.
In Wednesday’s “2.6%, ‘Nuff Said,” we discussed how the Fed blatantly lied about the amount of QE it executed in 2013; and that, until last month, it had not “tapered” by even a cent. In other words, tapering was always a propaganda stunt utilized in concert with strict market control of stocks, bonds, currencies, and Precious Metals – to convince the masses that the Fed actually had an “exit strategy” and, of course, that the U.S. economy is materially “recovering.” Such control prominently features tight, low volatility trading ranges for both the dollar and U.S. Treasuries; in the latter case, between 2.6% and 3.0% for the benchmark 10-year Treasury yield. In January’s “3.0%, ‘Nuff Said,” we said the upper band of this range was protected by “worse than expected” economic data; which since, has been validated in spades. Conversely, lower rates enable “better than expected” numbers, as the Fed – and its partners, the PPT and ESF – started to hubristically it could push rates back down at will.
Unfortunately, an unexpected “gap” in their armor has emerged; i.e., the fact that despite the fact the Fed was supposedly tapering, downside interest rate momentum has picked up speed. In other words, the market appears to be “calling out” the Fed’s tapering strategy; in essence, assuming it not only will cease tapering but increase QE due to a rapidly weakening economy, irrespective of fraudulent economic statistics such as the “unemployment rate,” which was dramatically exposed by last week’s NFP report, and discussed in “Three Numbers: +288,000, +234,000, and -806,000.”
To wit, such blatant, desperate interest rate manipulation has been front and center the past three days; i.e., since Janet Yellen’s Wednesday Congressional testimony when she averred “a high degree of monetary accommodation remains warranted…as many Americans who want a job are still unemployed.” Precious Metals, as always, were attacked viciously following this massively PM-bullish statement. However, TPTB have been decidedly less successful in staving off bond market speculation.
Yesterday, the Fed clearly utilized the ultra-thin overnight markets to spike rates back above the 2.6% “line in the sand,” as you can see at the left of the below chart. However, rates again fell below 2.6% in the morning prompting the Fed to create the sharp upward spike midday under the guise of a poorly subscribed 30-year Treasury auction. Mind you, since the Fed has monetized essentially ALL such auctions since the commencement of QE3’s in January 2013, the only difference between “good” and “bad” auctions is the amount of fraudulent bids posted by captive “TBTF” banks. In other words, the Fed can create the impression of “strong” or “weak” Treasury demand with a few arbitrary keystrokes; an exercise in lunacy given the fact they themselves were overtly absorbing nearly all new issuance. However, what was particularly comical about the “terrible 30-year auction” was that just a day earlier; the Treasury reported a very strong 10-year auction! In other words, our sense that “something” changed in the Fed’s manipulation strategy this week was validated…
…and no more so than this morning, when again, the 10-year yield fell below 2.6% briefly before “miraculous” buying came out of nowhere to push it back up again; supported, as always, by prototypical “dead ringer” support of the “Dow Jones Propaganda Average”…
And thus, for the eleventh time in the past three months – and seventh day in a row – the 2.6% “line in the sand” was defended. Frankly, the only place I’ve seen such maniacal intervention is in Precious Metals, such as the current upside “lines in the sand” at the key round numbers of $1,300/oz. and “battlefield $20 silver,” respectively. In fact, this morning’s rate spike – which as I write, is already fading – was that much more blatant, as it coincided with a much worse than expected JOLTS survey depicting far less job openings than anticipated.
And thus, TPTB’s potentially lethal quandary as we’re now reaching a point where no “recovery,” “deflation,” and “de-escalation” propaganda is no longer being believed. Yesterday’s Draghi press conference was a perfect case in point; as after several months of claiming the ECB is on the verge of launching a $1.4 trillion QE program, he was finally forced to put some substance behind such “whatever it takes” promises. We have postulated that the only reason he’s waited this long is because the U.S.-led PPT has been able to prop up European stock and bond markets. However, with the European economy in shambles, the pressure to not only “save” the continent but preserve the ECB’s credibility has reached a boiling point. And thus, Draghi’s potentially infamous answer to when overt ECB QE will commence; i.e., “the Council is comfortable with acting in June.”
As for Precious Metals, it was another week of Cartel infamy; as seemingly, it’s lust to “kick the can” that last mile has never been more powerful. Watching them attack paper gold and silver last week – amidst horrific GDP and employment data – was bad enough. However, this week was even more blatant, given the only significant “news” was “Whirlybird Janet” hinting at “QE to Infinity.”
Clearly, the upper echelons of the banking crime syndicate are in a state of escalating fear; but fortunately, their ability to hold prices down is limited by the fact that physical metal is in short supply; particularly silver, which in our view is more undervalued than at any time in history. Between its comically unsustainable price – by our estimate, 25%-35% below the cost of production, an historically low valuation relative to gold and plunging production resultant of accelerating depletion and sharply reduced capital expenditures…
…amidst surging global demand…
…it’s only a matter of time before silver (and gold) overcome maniacal Cartel suppression which inadvertently has created the most oversold technical condition in their history – as discussed in “charts even we can appreciate”…
I love all this stuff that Andy is writing, but I just have one question (a neophyte’s). What would be the benefit of the Fed keeping yields above 2.6%? I completely understand them trying to keep it under 3%, and especially keeping yields as low as possible, which would supposedly mean there’s a lot of demand for their bonds, right (as we all know, they’re creating the demand) and that government borrowing costs are low.
But I don’t understand why they would want to raise yields, which would seem to mean low demand. Help!! Thanks Andy.