Bill Holter

The Fed "IS" the Problem!

October 21, 2014

As I wrote yesterday, markets have become schizophrenic and volatility has exploded.  It is obvious the uncertainty regarding "QE" (monetization) is at the heart of this renewed volatility.  I do want to mention and remind you of past crashes and vicious bear markets, they ALL have seen big volatility (in both directions) prior to the collapse.  1929, 1987, 2000, 2008 ...they all experienced big swings in the market prior to the big declines, this is what I believe we are experiencing now.

Before getting to my topic "the Fed IS the problem," I want to remind you how we have gotten here.  Back in 2008, we had both fiscal and monetary stimulus as the policy response to dysfunctional markets and a shrinking economy.  You might remember Hank Paulson talking about his "bazooka" TARP plan while the Fed was lowering rates furiously and even lending $16 trillion secretly.  They threw the proverbial kitchen sink at the problems.  The problems did not go away nor were they fixed, they were only postponed.  The postponement date now seems to be upon us as the end of another QE nears ...or another round must begin.  Can the U.S. Treasury pump more fiscal stimulus without spooking the bond market and exposing insolvency?  Who will buy another "1 off" stimulus plan?  If the answer is "no one" then it will fall solely on the shoulders of the Fed.  Do you see where this goes?

The Fed is literally backed into a corner.  They have to reflate the system yet they themselves are stretched more than any monetary entity in history.  They are levered at nearly 80 to 1.  This means the Fed can only withstand a 1.25% loss on total assets before their capital is wiped out.  I have a question for you, do you really believe the Fed has not ALREADY lost 1.25% on total assets?  Please remember, they "absorbed" the "crappy" assets after the 2008 debacle.  They were buying bonds from banks in order to get the assets off of the books of the banking system ...so that the system itself could pretend to still be solvent.  Do you remember when some of these assets were offered for sale and the auctions immediately pulled because the bids were coming in UNDER .20 cents on the dollar?  Do you suppose on their entire book of business there actually is any equity left? 

The answer of course is no, the Fed is most probably already insolvent and has been since their last white knight, "lender of last resort" exercise.  What I am trying to point at here is there cannot be another crisis like 2008 because there is no longer anything left big enough to reflate the system.  The Treasury doesn't have the might and neither does the Fed.  Herein lies the problem, everyone has looked to the Fed since 2008 to save the system.  Everyone has relied on the Fed to create "the bid" so to speak, the saying "the Fed's got your back" comes to mind.  But here they are with a severely crippled balance sheet, a history of 4 rounds of QE (plus the secretive $16 trillion) and ...the markets are beginning to test them again.

Understand what I mean by "testing."  The markets are throwing a temper tantrum and want "more" liquidity, can the Fed really do it?  Yes, technically yes they can but only by wrecking an already wrecked balance sheet.  The next question is what happens if it doesn't work?  What happens if the selling does not abate?  What happens if the markets actually realize that QE has done very little to reflate the real economy and all of the accounting tricks have been used up?  What happens if speculators go on the attack and call the Fed's bluff?  Who will step up and save the Fed? 

No one of course will or is able to rescue the Fed.  Possibly the Chinese "could" rescue the Fed, but would they?  I believe you already have your answer by Chinese actions over the last 5 years.  They have set up currency swaps all over the world and signed trade deals directly with U.S. friends and foes alike, they have been preparing for this for a very long time.  There are of course even bigger problems for the Fed than just what happens here in the U.S., they must support all banks far and wide within the "dollar system."  Immediately, 4 German banks currently come to mind.  The European stress test out at the end of this week will be an interesting whitewash.

I mentioned above that there cannot be another crisis like 2008 ...which is why you have seen markets do things over the last 3 years they have never before done in history.  The entire game has been rigged and the charts painted to preach the picture of "control."  This is now changing, "something" is and already has obviously changed.  "Control" is definitely beginning to slip away, otherwise you would not see this much volatility.  You see, volatility is now a very VERY bad thing because of the amount of derivatives outstanding.  Outsized volatility can very easily turn a (so called) solvent bank today ...insolvent by tomorrow morning.

The main point I am trying to make here is that the solvency of the Fed itself will be questioned during the next crisis ...which looks to already have begun.  Either the Fed gets these markets calmed down or "under control" ...or, I believe the markets will begin to question the Fed's "all-encompassing power."  The Fed "IS" the problem, my only question is when will speculators take them on?  Another announcement of further QE will probably do the trick. 

A New Hope

October 20, 2014

Long-time readers know I am the ultimate Star Wars fan. In my view, George Lucas is the Albert Einstein of movie-making; and joining with Disney has only made the franchise stronger. One of my favorite Star Wars creations is the recently completed, seven-season animated serial "Star Wars-Clone Wars" - of which, I woke up Sunday morning at 3:00 AM to watch the final seven episodes.

Star Wars' creators clearly have very strong political views - in my view, quite similar to the majority of Miles Franklin Blog readers. They, too, fear the power, ruthlessness and corruption of big government; and equally so, its ability to influence constituents with propaganda - as exemplified by this memorable scene of Senator Amidala averring "so this is how liberty dies...to thunderous applause." Ironically, life does in fact imitate art in countless situations. Thus, to say the world - particularly, the viciously controlled financial markets - are amidst an epic battle of good versus evil, does not necessitate even a modicum of hyperbole. I wrote of this two years ago in "Gold Wars"; and today, more than ever, believe the "evil Empire" is under siege by its minions in a war it cannot win. History tells us fiat currencies cannot mathematically survive; and this time around, no matter how powerful TPTB's weapons of money printing, market manipulation and propaganda will be no different. Thus, whilst this Ponzi scheme's end game will be horribly painful, we are eminently hopeful of what the "other side" will bring - when the good that is physical gold and silver reclaims its throne as the "once and future king" of the monetary realm.

We strongly maintain our view that said "end game" has commenced, and Friday's pathetic manipulative countermeasures accomplished painfully little. "Technicians" will call it a "dead cat bounce" - but frankly, given last week's carnage, said bounce was pitiful, particularly as it had nothing to do with "technicals" but a flat out PPT/Fed/Cartel attempt to end an atrocious week on a positive note. Friday's stock gains have largely been reversed; and led by Europe - where ironically, the ECB's QE program commenced this morning, stocks are plunging anew. Commodities and Treasury yields are falling as well, with the benchmark 10-year Treasury yield back down to 2.16%, en route first to last week's 1.9% low - and thereafter, Japanese and German-style levels below 1.0%.

As for the Cartel, just how obvious could Friday's DLITG or "Don't Let it Turn Green" algorithms have been? This morning, prices have reversed as well, with gold back up to the past month's $1,245-$1,250 "line in the sand" range - preparing for its inevitable explosion into the realm of valuation reality. As for silver, if anyone still has any lingering doubts as to where it should be trading, look no further than last week's extremely enlightening "Miles Franklin All-Star Silver Panel Webinar."

As for "news," the hits keep coming. On Friday, China announced its third "backdoor QE" program of the last two months - this time, to the tune of $32 billion. Today, the ECB commenced its "whatever it takes" QE program, despite the head of Germany's Bundesbank saying flat out that it won't work! Here in the United States of Economic Lies it was reported Friday that "consumer confidence" - at least, according to government generated propaganda - hit its highest level since July 2007. No really, I mean it! The government actually claims that despite collapsing corporate earnings - such as this morning's IBM catastrophe; imploding retail sales, industrial production and labor participation; record low Presidential and Congressional approval ratings - just two weeks before the mid-term elections, no less; ISIS; Ebola; the Cold War; the California drought; a rapidly vanishing real estate market; record high consumer debt; record low consumer savings; and a four-decade low in real median income, consumers are as "confident" as at the top of the 2003-2007 real estate and equity bubbles. Too bad the government doesn't realize fear has never been higher; which in my 25 years of market experience represents the polar opposite of confidence. Of course, now that the government is proposing that its insolvent mortgage arms, Fannie Mae and Freddie Mac, should loosen their lending standards, I'm sure "confidence" will skyrocket further.

Zero Hedge

 

Anyhow, as the "ides of October" continue careening said manipulations toward their inevitable hideous ends, don't forget for a second that "as QE goes the market goes with it." Ultimately, markets will run screaming from increased QE - as appears to be occurring in the doomed continent of Europe as we speak. But until that time - likely, sooner rather than later - Central banks will do everything in their manipulative power to milk the system of every last drop of wealth and "kick the can" one more mile. Frankly, I can't wait to see Whirlybird Janet attempt the "two step" at the FOMC's October 29^th meeting - just six days before the mid-term elections, and likely, amidst the ugliest financial and market environment since the 2008 crisis.

Zero Hedge

Remember, it's not our opinion that the global financial system will collapse but a mathematical

fact. And whilst we hold out hope for mankind's adaptive ability, it won't matter a whit until we get to the "other side" of currency collapse. In this case, "good" will certainly trump "bad" when fiat currency is destroyed; and conversely, gold and silver re-emerge as critical monetary assets. However, if you don't hold them before the end game commences, you may NEVER be afforded another opportunity to protect your assets. And for those wise enough to act, we hope you'll give Miles Franklin a call at 800-822-8080 and give us a chance to earn your business!

 

 

Andy Hoffman joins Kerry Lutz of the Financial Survival Network to discuss U.S. retail sales, the Dow Jones Propaganda, currencies crashing around the world, the dollar index not "strong" and gold and silver.  To listen to the interview, please click below.  

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