Bill Holter

(N)egative (I)nterest (R)ate (P)olicy

December 9, 2014

Negative interest rate policy (NIRP) has arrived to the U.S. for large deposits at commercial banks.  This is something we have already seen in Europe over the last few months and a sign (at least to me) that stress is again building.  As of January 1st, bank capital will be classified differently making some large and very mobile deposits at large banks a potential liability and thus not profitable.  This is being done because of the "mobility" of these deposits, the worry is the potential speed of flight capital if (when) it begins to run.

Let me explain what I mean by "stress" and you can decide which one fits the best if not a combination of "all of the above".  First, the real economies of the Western world are again slowing and in many cases declining again.  Remember, this is happening even though fiscally, deficits are being run everywhere and monetarily, loose policy runs rampant.  As the real economy continues to slow, "more power" is being screamed from the helm to the engine room.  "More," as in more debt, more liquidity and more of what created the problem in the first place.  This explanation is fairly obvious.

Two other and less obvious explanations for NIRP are "velocity" and "making preparations."  Looking at velocity, it continues downward with no signs whatsoever of reversing.  Money is being printed by the trillions but it's not making it onto the streets.  The money is piling up at banks who are hoarding the cash and making a "risk free" (really?) return by carrying the deposits at central banks.  This works well for the banks and the central banks themselves ...but not so much for the real economy as actual "flowing" money feels tight and scarce.  As far as the real economy is concerned, credit policy is anything but loose.

The other aspect is that many large deposits (over the FDIC limits) are very "mobile".  By this I mean they can move quickly.  So quickly in fact that back in 2008 there were "electronic" and overnight bank runs which no one saw ...except the banks.  Banks "borrow low and lend high," this is how they earn profits.  They traditionally borrowed via deposits and then turned around and lent these deposits out at a higher rate to earn a spread...banking 101 if you will.  But 2008 exposed a flaw in this model, as soon as even the whiff of a rumor of weakness at a bank would arise, this "hot money" would move to safer ground.  Whether this safer ground was another bank or even Treasury securities made no difference, the result was a bank(s) being left unfunded.  Their capital ran away and they were left with too many loans and assets (impaired?) carried by not enough capital.

I know the above explanation was very simplistic, I did this so you could understand the "what or why" the Federal Reserve is changing the banking rules ...they see something coming and are trying to prepare the system ahead of time.  I believe they see another crisis dead ahead and are trying to position banks where they have less hot and mobile money in their funding's. 

The problems as I see it are several fold.  The days leading up to Jan. 1st may see some hiccups if enough money does in fact move elsewhere.  Also, if this scheme does "work," money moves and actually begins to turn velocity around, hyperinflation could be a very real result.  Fiat money is a very funny duck as it is strictly based on confidence, there is no way to tell at what point this confidence will turn once it starts to move.

The biggest problem as I see it could be a break in confidence, one which is caused by the perception of "something else is better".  If banks actually start to charge for holding balances, depositors will have to make some sort of decision.  They can move to another institution which blesses them with either no interest or less negative interest.  They can also buy Treasury securities or even stocks ...or any other number of assets.  This would initially levitate markets even more because of the flow ...but what happens when some "leakage" starts?  What happens when some depositors decide to buy "stuff," any kind of stuff as a form of savings?  What happens if included in this stuff are commodities and other monies such as gold and silver? 

This then brings the actual currency into question.  If you cannot earn interest on anything then the comparisons of apples to apples will begin.  The question will arise, which is better, a $20 bill or 6 pounds of copper?  Which would you prefer twelve $100 bills or one ounce of gold?   Can a painting really be worth $100 million?  What does this say about the value of $100 million?  These questions are being asked every day, all day, all around the planet...but there will be a difference.  The difference being, more money will be forced to make these decisions.  "More money" because of the Fed's January 1st edict! 

I am not here to tell you that I understand all of the ramifications or fallout, I do not.  What I do know is banking, the way it has been done even after morphing over the last 20 years is changing.  With this change will come consequences, some seen...some not.  The financial system has never been as leveraged as it is today, this is a fact.  Another fact is, leverage "forces" the actions of participants in ways they would not prefer during crisis.  Leverage will force some who would like to buy...to sell.  Leverage will cause a solvent someone today into insolvency tomorrow morning.  Not to pick on JP Morgan (though they more than deserve it), they hold some $70 trillion worth of derivatives, so does Deutschebank, does this qualify as "leverage?"  When the next panic comes, we are now too leveraged systemically for the current system to survive, but I digress.

The grand scheme problem as I see it is the "push-pull" effect.  The central banks need to push money out and into the system.  This would aid the real economy and bolster "asset" prices.  Their catch 22 is they cannot make the decision "which" assets are levitated in value because they do not control which direction the money they have pushed will go.  Ideally, the money will stay within the box and continue playing with other paper assets.  Once they bleed into real assets really gets going, it will be noticed and attract other attention ...and into other real assets.  They must create more money and more liquidity to keep the paper game going, it is exactly this debt and liquidity creation which will end up making the decision to flee ...to safer assets.  In the end, the definition of "safer" will be not only what counts but the exact cause of the crisis.  The central banks are collectively trying as hard as they can to reflate, if they get their wish they will lose their currencies...pretty simple! 

Lemmings for the Ages

December 8, 2014

Where to start on this Monday morning amidst myriad "horrible headlines" from around the world? How about the damning quote from one of the world's most manipulative criminal powerful organizations, the "Central bank's Central bank" itself -the "Bank of International Settlements." Their latest quarterly report was just released, containing perhaps the most prophetic comments imaginable of the imploding global financial situation - which we assure you, with their abundance of inside information wasn't published for "show"...i.e., "the highly abnormal is becoming uncomfortably normal" and "there is something vaguely troubling when the unthinkable becomes routine."

So the stock markets of recessionary economies rising to record highs; and bond yields of bankrupt nations, municipalities and corporations to record lows; whilst real money plunges against dying fiat currencies like the dollar is just "highly abnormal?" How about impossible in freely-traded markets - which commenced their exodus from the Western world at the turn of the century, permanently disappearing after 2008. In other words, news flow that historically catalyzed violent negative stock market reactions - and positive PM flows - have been turned 180 degrees by market rigging, yielding previously unfathomable headlines like Zero Hedge's this morning, that "China equities Surge, Japan closes Green on Horrible Economic Data, as Oil Tumbles to Fresh Five-Year Lows." Then again, the story directly below it reads "We've habituated to a Rigged, Fraudulent Market"; and below that, "Even the BIS is Shocked at how Broken Markets have Become" - from which the aforementioned quote was gleaned.

Or how about the headline below that, that "NIRP arrives in the U.S., as TBTF Banks tell Customers to Move their Cash or be Charged Fees?" Which, for the layman, means even the largest institutional clients of JP Morgan, Citibank and Bank of America, to name a few, will now be charged for the "privilege" of holding deposits in insolvent institutions that can "bail them in" at any point. In other words, yet another example of those "barbarous relics," gold and silver, yielding more than bank accounts with NONE of the risk.

Then, of course, there's the next headline - that "oil prices collapse to new cycle lows"; conveniently, aside "BP set to slash hundreds of jobs." This morning alone, oil is down another 2+%, to levels not seen since 2009 - whilst the "dollar index" has convincingly breached its Fall 2008 highs, exploding against essentially all currencies as financial fear accelerates. In turn, sovereign bond yields are plunging to new record lows, front running the worldwide "QE to Infinity" schemes the terminal stage of all fiat Ponzi schemes bring.  

To that end, we cannot be more emphatic of the dire ramifications of what was discussed in last week's Audioblog, "crashing oil and currencies, America's death knell." Regarding the former, there aren't words to describe the political and economic cataclysm that will result from Saudi Arabia declaring war on high-cost energy production, amidst imploding worldwide economic activity. To wit, U.S. shale oil producers are largely financed with high-yield debt enabled by six years of ZIRP monetary policy - to the tune of $210 billion - were massively cash flow negative at $100/bbl. oil, so take a guess how they're doing today, at $64/bbl!   As for the latter, the entire world is scrambling into the supposed "safe haven" status the dollar holds as the world's de facto "reserve currency," as history's largest "liquidity vacuum" gains strength amidst a proliferation of depression-like economic data - such as McDonalds reporting its biggest sales decline in 12 years; Chinese imports imploding; and what's this, the U.S. "Labor Market Conditions Index" plunging precipitously, just one day after the biggest lie of an NFP employment report in history. Yes, the "lemmings" are racing towards their financial deaths at an historic pace, care of the market manipulation that has "turbo-charged" their natural instinct to "buy high and sell low." Heck, even the MSM is starting to recognize that "all economic data are lies," per this morning's top story at head financial cheerleader Yahoo! Finance. As you can see, they still haven't fully embraced reality in saying "since the recession." But rest assured they shortly will - and then some.

Sitting right next to the Belgium repatriation article is Koos Jansens' discussing another massive withdrawal from the Shanghai gold exchange - which, for all intents and purposes, suggests Chinese gold demand will end 2014 above 2013's record level. As will Indian silver imports, U.S. Mint Silver Eagle Sales - and likely, Royal Canadian Mint Silver Maple Leaf sales. In fact, the only major demand category set to end the year below 2013's record level are Indian gold exports - but only because last year's onerous import tariffs have caused a significant amount of official to shift to the unreported rapidly growing black market. Now that the banker-friendly Congress Party has been unceremoniously swept out of office, it's only a matter of time before those tariffs are eliminated, just as the "80/20" gold import/export rule was last week. And by the way, even withthe 10% import tariffs still in place, Indian gold imports have exploded higher in the past two months even as the "dreaded" trade deficit has surged, and the worthless rupee plummeted. As I write, rupee-priced gold is just 24% from its all-time high - and we assure you, as it inevitably approaches the hallowed level of 100,000 Rupees/ounce, demand from the world's most voracious gold lovers will go "off the charts."

And this is as the mining industry is on the verge of the same type of production paralyzing consolidation the energy industry is about to undergo - as demonstrated by Steve St. Angelo's latest analysis of the silver industry - depicting the world's largest producers owning the world's lowest cost mines with a third quarter breakeven level of nearly $20/oz. And this, after massive cost cuts that leave no other options but mine closures and production paralyzing mergers. And oh yeah, silver prices are a full $3/oz. lower in the fourth quarter than they were in the third - just in time for year-end reserve revisions - which in our view, will be so catastrophic, it's difficult to believe anyone won't realize how dire the production outlook has become. Again, on the "Miles Franklin Silver All-Star Panel Webinar" we hosted in mid-October, it was predicted that at current prices - let alone, if base metals continue to weaken, which they since have - silver production declines of 25%-50% are not out of the realm of possibility over the next 3-5 years. As for gold production, it likely won't decline that much; but certainly, enough to make a significant impact in a market where demand already exceeds supply. Irrespective of the exact numbers, we all agree that both "peak gold" and "peak silver" are "baked in the cake." So are the ramifications of extremely challenging exploration conditions and more than a decade of Cartel price suppression - creating the potential possibly imminently for history's most "perfect" financial storm.

Back to today's principle theme, never in history have so many been so thoroughly brainwashed by propaganda - care of the most sophisticated "weapons of mass financial destruction"; i.e., off-balance sheet derivatives, "dark pools," high frequency algorithms, "shadow banking," and the complete abdication of regulatory safeguards, as the world's "TBTF" banks effectively "partner" with the government. True, the vast majority of the "99%" no longer even participate in stock, bond, or real estate markets having "lost their shirts" in the 2000 and 2008 crashes, as well as the two-decade decline in real employment, wages and net worth. However, for those that still do, the lure of ever-rising stock and bond markets has created history's largest-ever "buy high" wave; surpassing, in our view, even the 2000 internet-mania top.

To wit, both stock and bond valuations, objectively, are trading at all-time highs; and this, amidst the weakest global financial conditions of our lifetime. Central banks have become so brazen in their manipulations, that several - including the Japanese, Israeli, Danish and, yes, the Swiss - have openly admitted to monetizing equities. The rest do so covertly - perhaps, owning as much as half of the world's equity capitalization. However, given the trend toward ignoring any semblance of conservatism, it shan't be long before the Fed, ECB, and BOE, among others admit the same; or better yet, initiate formal equity monetization schemes. After all, what could possibly go wrong?

Last week's failed Swiss referendum was a direct vote for the printing press - and specifically, the emerging "common knowledge" that "QE to Infinity" and rising stock markets must go hand-in-hand. This weekend, the Japanese citizenry holds perhaps the last remaining hope to even slow the inexorable plunging of lemmings into the financial sea, when Shinzo Abe's "snap election" gives them the option of nixing "Abenomics" before the Yen completely, and permanently implodes. Given the utter collapse of the Japanese economy and inflation surge caused by the 40% (and counting) Yen plunge Abenomics has caused; let alone, that this is Abe's second failed attempt to "save" Japan's economy with money printing, one would think the Japanese would be smart enough to run as far from Abe as possible, as fast as they can. However, amazingly, it appears he will convincingly win - again, as the manipulated, hyper-inflating stock market - despite a horrifying, expanding recession - gives a false signal of "success."

In our view, a "vote of confidence" in Abe will be as damning a statement for the Yen's outlook as the Swiss "no" vote was for the Franc. One by one, the "lemmings for the ages" are impaling themselves on the altar of money printing - whilst their only financial protections, physical gold and silver are slowly but surely removed from the store shelves. Only the when and how of the "big one's" commencement remains to be seen; and until then, the few that see reality for what it is have a unique opportunity to save themselves.

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