Bill Holter

Paying It Back ..."What's In Your Wallet?"

December 4, 2014

While wondering what to write about today I remembered seeing something that was shocking even though I was aware of it.  I have not paid much attention recently to 10 yr. yields in the Eurozone.  The non-logical yields had just slipped through the cracks of my cognitive memory.  The story I read pointed out the various countries in Europe where their 10 yr. yields were trading below U.S. rates, in some cases, WELL below.  I knew many Eurozone countries were below U.S. rates but the vast majority?

For example, the rates in Germany, Belgium, Italy, Spain, Ireland, Denmark, Sweden, Austria, France and the UK are all trading with yields lower than U.S. Treasuries.  The only two with yields higher are Portugal (3/4% higher) and Greece (a basket case).  Looking at this from a broad perspective, it should tell you several things.  First, either the U.S. is underpriced or the Eurozone is overpriced.  Another way to look at this is either market participants are currently making a bet the U.S. is more "risky" or Europe is "safer" by comparison.  Of course the same could be said about the currencies themselves, maybe market participants feel the Euro will do better in the future versus the dollar?  This really does not add up though as the dollar has been strengthening and the euro weakening.  Is it because there is fear of deflation in the Eurozone which theoretically should cause interest rates to drop?  Or maybe "growth" estimates?  I might be on to something with these two?

Let's walk this "insanity" through to see why it makes no sense.  Let's assume the market participants are correct and the U.S. will grow faster than Europe (I do not make this assumption personally because both are on the same Titanic).  There is one question which is not entering the equation, this question is the one of "solvency."  In other words, will the issuer of the bonds have the ability to pay back the interest and principal?  What I am saying here is "risk" has absolutely zero input to the pricing of all of these bonds!  Do you really believe Spain will remain solvent?  Or Italy?  France?  Or whomever?  Remember, these countries have no ability whatsoever to "print" the euro currency, they can only borrow more to pay current retiring obligations.  It is the same thing in the U.S. but at least we know that enough dollars are always readily available via the Fed.  Maybe this is it?  This is why "deflation" is the expectation in Europe?  They can't print as fast as we can?   

But hold on a second, deflation?  How would any of these sovereigns be able to pay their outsized debt loads back during an outright deflation?  The answer of course is "they can't," because individually no Eurozone country has the ability to print, which is a core problem.  Let's look a little further at the "deflation" question as it does pertain to gold and silver.  Of course, deflation is the reason put forth by the Harry Dent's of the world as to why PM prices are down and will collapse ...  So we assume the deflationists are correct, what happens to the currencies of these countries (including the U.S.) who have such low interest rates because inflation is "too low"?  This is THE question, what happens to the currencies?  If sovereign after sovereign fall to boogeyman of deflation, they go bust or "restructure" their debt somehow, right?  And we are to believe the currencies issued and backed by their "full faith and credit" will remain the same value ...or somehow strengthen?  Really?

Let's take Spain for example but it could be anyone.  Spain's economy just plain stinks.  Real estate is glutted and has crashed, unemployment, particularly of younger workers is 25% or more.  They are already in recession ...again.  Looking out past the end of your nose, they will default.  What sense does it make to invest for 10 years in a piece of paper promising less than 2% per year?  Oh, and the promise is ...to give you back more pieces of paper which MUST be inflated just to pay current obligations, forget about future ones!  This is not even logical.  

Let's compare this situation to that of instead putting your money into ounces of gold.  I will do this exercise in dollars for sake of ease (mentally) for me.  If you invest $1,200 today into a U.S. Treasury you will get back 2% per year for the next 10 years. Assuming you compound this money into some more "safe" Treasuries along the way, maybe your total return will be 23-25%, so you get back a total of let's say $1,500.  Compare this to purchasing one ounce of gold at $1,200 (even though you cannot purchase gold or silver at paper spot).  You have "risk" here as opposed to the Spanish bonds because "gold might go down," right?  You don't get any contract explaining what you will receive.  In fact, you won't receive anything over the 10 years.  So in owning gold instead of Spanish Treasuries, you assume risk your gold "might go down" AND you don't even get any interest as compensation for your risk!  (What I just did by the way is give you the spiel Warren Buffet and the other elite misdirectionists will give you).

Now for the reality.  Gold doesn't pay interest, it isn't "FDIC" insured, it is not legal tender (except at foolish face values), and it isn't guaranteed ...but the Spanish bonds ARE all of these.  They pay interest, backed by the sovereign government of Spain, any bank will accept them as deposit, payment or collateral.  ...But who guarantees Spain?  Germany?  Who guarantees Germany?  The U.S.?  Because we have all these reserves of gold which we can't give back to Germany?  Sorry for the rant, I hope you get my point?

What I am trying to say here is the "sovereign bond" markets don't make any sense at all.  The various yield curves are out of whack and don't make sense.  This market is now larger than $100 trillion!  The principal can never be repaid in current currency values and if interest rates ever normalize to 6%, neither can the interest.  Think about it, can the world's sovereigns really support over $6 trillion of interest payments annually?  The problem in a nutshell is this; the global bond market is now THE biggest bubble in the history of history.  It was so much fun "spending" the borrowed money, it always is ...but the hard part is paying it back!  ...And this is exactly where we are now.

We have been at a crossroads for several years now as to "how" will all of this be paid back.  In Europe there was (past tense) waffling between austerity and (U.S./Japan) "pedal to the metal" policy, this is no longer because each effort at austerity was met by "oops" market temper tantrums.  None of the current Western sovereign debt can or will be paid back in current currency values, this is mathematically so.  What we are watching now is nothing but "dancing."   

Think about this for a moment, have you ever had anyone who owed you money, "dance" while explaining they'll "have it next week?"  This is where we are today.  Yes, sovereigns have borrowed to pay interest and roll debt over for years, and it worked ...but we have hit the ceiling so to speak twice now.  First, we hit the ceiling prior to 2000 when debt built up to unsustainable levels...the answer of course was lower rates.  Then another reflation (debt party) took place and we are again at unsustainable levels but rates can go no lower.  The answer?  Hyper inflate and devalue currencies as there are no other options.  The only way to "pay" is to not pay ...in current values.

Let me finish by mentioning the "deflation" option which is no option at all.  If by "mistake" deflation does take hold, all fiat currencies will be deemed worthless because the issuing sovereign will have bankrupted.  In other words, the currencies will still end up busted and we will experience hyperinflation by another road.  With either inflation (printing) or deflation (defaults), all fiat currencies will bust.  Do you hold or save these?  As the advertisement says, "what's in your wallet?" 

Inevitable Upcoming Silver Shortage

December 3, 2014

Yesterday, the Cartel did everything imaginable to enforce their time-honored "rule" that "all great PM days must be followed by horrible ones." And this is in an environment of accelerating global currency collapse - i.e., the "single most precious metals bullish factor imaginable" - and a renewed plunge in industrial commodities like crude oil and base metals. Yet, with all their huffing and puffing - particularly on hapless mining shares - gold closed at the Cartel's $1,200 "line in the sand," while silver was unchanged; which in our view, was very positive trading action. Let alone, this morning's surge back to Monday's highs, as I write at 11:00 AM EST.

Regarding the accelerating worldwide currency conflagration, I cannot help but chuckle at relentless predictions of a dollar index plunge to 50 and below. To that end, I have all but screamed that such an event was essentially impossible, with 150 more likely before the global fiat Ponzi scheme collapses. In other words, whilst the dollar will dramatically decline versus items of real value, the "reserve currency" will act as the penultimate "safe haven" as the system collapses - until inevitably, the ultimate safe havens of gold and silver take over. This is exactly what is occurring today - with currencies across the globe losing purchasing power so rapidly, it is almost comical to forecast "deflation"; especially when the standard Central bank response to a strengthening currency is debasing it - which is exactly what the Federal Reserve will be shortly forced to do with the dollar. Not to mention, as the U.S. economy plunges deeper and deeper into recession.

I mean, think about it. Europe and Japan are in such dire political and economic situations right now, the slightest catalyst could tear them to shreds. To wit, Japan just announced its suicidal "Abenomics II" policy a few weeks back - but yesterday, reported a record 16^th straight month of declining real wages. In Europe, today's composite PMI disappointment depicted an entire continent either in, or on the verge of recession; and don't forget those PIIGS, whose ever-escalating debts await their inevitable default. At tomorrow's ECB meeting, Goldman Mario will no doubt give one of his most dovish speeches yet; which is probably why the Euro - and by extension, the Swiss Franc - is on the verge of taking out its "whatever it takes" low of July 2012, when the entire Spanish banking system was bailed out. To that end, when the U.S. government data cookers can no longer even pretend we are "recovering," do you reallybelieve Japan and Europe will not completely fall apart?

Which, I might add, is EXACTLY what is occurring as we speak. To wit, in all the hullaballoo about the Swiss referendum, does anyone recall that an incredible nine U.S. economic reports were below expectations on Wednesday - and in some cases, like New Home Sales, massively so? Yesterday, the only material economic data was, can you believe it, a "better than expected" construction spending number up 1.1% versus the expectation of 0.5%. However, as usual, the internals told the true story, as without an unprecedented 19% surge in government construction activity - you know, producing ZERO income paid for with printed money - the number would have been dramatically negative.

Of course, yesterday's worst "horrible headline" was the tabulation of horrific "Cyber Monday" sales - which, combined with the four-day "Black Friday" weekend retail catastrophe suggests this year's holiday shopping may actually plumb the depths of the 2008 crisis. Which is why yesterday's "dead ringer" algorithm on the "Dow Jones Propaganda Index" - its 25^th straight - so blatantly shouts PPT to the world; which as you can see here, isn't so sanguine about the economic outlook.

This morning, the mirage of U.S. economic "recovery" was dealt additional body blows as 1) the MBA's weekly refinancing index plunged by an astonishing 13%; 2) November unit labor costs - i.e., wages - unexpectedly plunged 1.0%; 3) the PMI services index printed at its lowest level since April; and 4) the ADP employment report massively missed expectations, producing its lowest November print since 2010, and first November decline since - drum roll please - 2008, amidst the worst financial crisis since 1929. Frankly, I can't wait to see what the BLS data cookers publish on Friday, given not only accelerating economic weakness, but an "unfriendly" birth/death model month which typically generates a modest negative number. Better yet, given that the vast majority of purported 2013 "job" gains were retail-related, amidst the worst retail environment since 2008, how can the BLS possibly continue to purport retail job growth at all? Let alone, the more likely scenario of job contraction! Which, I might add, is all but guaranteed the second the holiday season ends.

Laughably, the MSM - before today's ADP nightmare - was "whispering" of a blowout NFP report Friday (just as they did last month and last week regarding Black Friday sales); based primarily on, get this, "delivery drivers hired on a seasonal basis by parcel service delivery companies like FedEx and UPS." As if wasn't fraudulent enough that the BLS counts part-time, minimum wage jobs as the equivalent of full-time manufacturing jobs, they are apparently giving full "job credit" to someone hired as a truck driver on a six-week contract! Moreover, you can "bet the ranch" that come January, they'll somehow find a way to "defer" or "mute" the impact of the associated seasonal layoffs.

And now, today's main event, extending yesterday's discussion of exploding global silver demand - per this graph depicting an astonishing 145% increase in silver demand over the past two years (based on Indian imports and sales at the U.S. and Royal Canadian Mints), whilst paper silver prices were trashed nearly 50% by the Cartel.

Frankly, with each passing day, I'm more astonished as to how long the Cartel has been able to keep their suppression scheme going; particularly with the financial world's "Achilles Heel," silver. Global supply is so unbelievably tight, it could conceivably be bought out by one wealthy individual on any given day; and yet, the Cartel has managed to push prices well below the cost of production, amidst the most PM-bullish environment of our lifetimes.

Since 2008, shortages have occurred in the retail pipeline an astonishing five times - as demand has surged and supply stagnated. Moreover, as discussed in last month's "Miles Franklin All Star Silver Panel Webinar," not only is peak production no more than a year or two away (at just a few percent above current levels), but scrap supply has been plummeting - as will hedging supply, if any still exists. And now that industrial commodities of all types are plunging - including base metals like copper, zinc and lead, whose mines produce the vast majority of the world's silver - my ongoing forecast of a 25%-plus production decline is looking more and more realistic. And this, as silver investment demand, most likely explodes!

Of course, all this is occurring in an environment of essentially non-existent silver inventories, as shown in the two below charts. First, we have the dramatic withdrawals from exchanges, such as this year's 16% plunge in COMEX eligible silver inventories and an astounding 77% plunge in Shanghai Futures Exchange inventory - the latter of which, as part of a 90% decline since the April 2013 "alternative currencies destruction" raids.

And secondly, perhaps the most important chart a silver investor or potential silver investor could possibly imagine; i.e., total global silver inventories. As you can see, the last time this chart was updated - from no less than the most anti-silver propagandist around, the CPM Group's Jeffrey Christian - was in 2009, when just 500 million of total above ground resources were estimated. This chart includes ETFs, and since 2009 the largest of these the JP Morgan-operated SLV, supposedly increased its inventory by a piddling 200 million ounces. In other words, just 700 million ounces or so - or to be conservative, one-plus billion ounces, the vast majority of which, like mine, will NEVER be available for sale. A billion ounces is worth a whopping $16.5 billion as I speak, or less than half what the Fed was printing each month this year. And again, most of this silver will NEVER be available for sale - or at the least, until its well into triple digits. 

And thus, we ask how on Earth can a sensible investor - let alone, one fearful of the direction the world is heading - not consider physical silver at the current, historically suppressed prices. Let alone, as the "inevitable, upcoming silver shortage" looms. We don't know, but here at Miles Franklin, we are not only helping the public protect itself in kind but doing so personally.

Andy Hoffman on Butler on Business - December 2, 2014

December 4, 2014

Andy Hoffman joins Alan Butler from the Butler on Business show to discuss holiday retail sales, unemployment, the stock market,  oil prices, gold and silver.  To listen to the interview, please click below.  

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