Bill Holter

TOO MANY DOLLARS AND YET NOT ENOUGH...AT THE SAME TIME?

March 12, 2015

We have watched, even marveled at how the U.S. dollar has strengthened since last September.  All sorts of theories have been put forth as to "why".  Some have proffered the dollar is the cleanest dirty shirt of the bunch.  Others believe the interest rate differential is kicking in where dollars at least have a positive interest rate versus negative rates elsewhere.  Another theory and one which I have written about in the past and believe to be the main reason for dollar strength is the "margin call" aspect.  In other words, the "carry trade" which was used to leverage all sorts of trades is unwinding and dollars are needed to pay back the loans.  A synthetic dollar short being covered in other words.

Looking back to my writing yesterday regarding the impossibility in my mind of the Fed actually raising rates, the strong dollar also supports this argument.  If the Fed were to raise rates, wouldn't this exacerbate an already immense currency cross problem with (for) the rest of the world?  Wouldn't higher U.S. rates explode the dollar higher (short term) versus foreign currencies?  The answer of course is yes, but with a stronger dollar comes other obvious problems.

The two biggest problems are A.  we still have a trade deficit of close to $500 billion per year, a stronger dollar will only exacerbate this AND destroy what little manufacturing we have left.  And B.  the very problems we just saw with a soaring Swiss franc will be seen in many multiples throughout the dollar lending market.  I might add, as the dollar moves higher and foreign currencies drop, more and much stronger inflation gets exported to foreign soil.  High and rising inflation and its effects on living standards and the human psyche will create massive unrest across Europe and elsewhere.

This last point is an important one, foreigners who have borrowed in dollars have already seen their "loan balance" expand because the dollars cost more to pay back.  Higher U.S. interest rates will only make matters worse.  The strong dollar has had the effect of slowing the global economy as companies (and individuals) are cutting back (employment and consumption) to make ends meet. 

The above is only half of the equation, the other half is described by Alan Greenspan himself.  I personally watched Mr. Greenspan speak in New Orleans last October.  He used the word "tinder"  for a coming inflation several times and spoke of the money supply and reserves of dollars that have been created and parked away on bank balance sheets.  I could only think back to the Texas wildfire as he spoke of "tinder".  The amount of dollars created is like some nutcase piling dry leaves, branches and dead trees in a huge pile, then pouring gasoline on it ...and thinking to himself, "this will keep me warm in winter".  In other words, the "fuel" is there and has already been created for a bonfire of inflation and the financial system blowing up on itself.  But don't worry, it will never catch fire?

Tying these two phenomena together, not enough dollars, yet too many, here is the likely scenario I can see unfolding.  The stronger dollar is putting pressure on the financial system all over the world, something (someone), somewhere is going to "fail".  Our financial system is so interconnected and over levered, it will only take one strategic institution's failure to break the derivatives daisy chain.  Let's call this the "spark".  This spark causes further failures which I am convinced will circle the globe in less than two days.  The forest (economy and financial system) is very dry (weak, fragile), any spark (failure) will create an out of control forest fire which will not be put out until all the fuel is burned and blackened.  

Please remember this, the dollar (and Treasuries) are now "backed" by the full faith and credit of the United States.  This was not the case back in the 1930's, dollars were backed by gold.  The Treasury did not have enough gold to back all of the dollars but for a very large percentage of those outstanding.  This is not even close to the case today.  It remains to be seen if there is any gold at all left but, assuming the gold is left untouched, gold would need to be priced at $100,000+ per ounce to cover our debt and money supply.  I bring this up because "gold will still be gold" no matter what happens financially.   Hold this thought, it ties in with the final logic.    

The stronger dollar is beginning to cause stress both financially and economically.  It is not "official" yet but even with bogus reporting, the West is already in  recession while the East is markedly slowing down.  This brings up a few questions.  With a slowing or declining economy, will the Treasury have the tax revenues to pay total interest and support all of the other largesse?  Of course not, we will just borrow whatever is necessary to keep going on down the road.   What about higher interest rates, will this exacerbate the problem?  Of course.  Tax revenues will drop, "benefits" or spending will rise as will the deficit...and now the federal debt is almost double what it was last time around in 2008.  Do you see where this leads?  Is the "issuer" of dollars stronger, or weaker than it was in 2008?  It's OK, you can admit it.  Weaker.  In this scenario where a higher dollar (the spark) puts so much pressure on financial counter parties who are short the dollar, what will be the Feds reaction to derivatives or other sovereign currency crises?  Does the Fed have to quintuple their balance sheet again?  Or the federal debt double again?  Or will another secret $16 trillion or a multiple thereof be lent out all over the world by necessity?  

Looking at this in the real world, there have already been many markets thrown into upheaval.  The two most important being the FOREX crosses and the oil market.  Oil without a doubt is the largest and most all encompassing market on the planet with the exception of dollars themselves.  Oil has crashed well over 50% in less than 6 months, dollars have risen 25% over this time frame.  Do you think that these percentages when applied to $10's of trillions might add up to a tad more than a tidy sum?  Remember, derivatives is a zero sum game so anything "won" is also "lost".  I believe the spark has already created a fire behind the scenes and some have already been consumed and are dead, but hidden.  Can I know this for sure?  No, but common sense and the amounts involved tell me this is 100% dead on! And there you have it folks, there are too may dollars outstanding ...which were created by too much borrowing of dollars ...  This pushed asset values higher until the world reached debt saturation and led to assets being sold to pay back the debt, asset prices dropped which is causing a global margin call...this synthetic short has created dollar demand to pay these dollars back.  In essence creating a dollar shortage.  Are you still with me after that long and horrible string of sentences?  If you are, then here we are ...facing the global margin call which can ONLY be met by central banks printing more dollars, euros, yen etc. because liquidity is again drying up.  The alternative of course is to let the margin call run its course and take all banks, brokers and insurance companies down.  Oh yes, don't forget the sovereign treasuries and central banks themselves.  It is the solvency of these institution that will ultimately be challenged.

And no, I didn't forget I told you to "hold that thought" for the end.   What I have described to you is the world running around and fetching as much wood and pouring as much gasoline on the pile as possible.  The thought is this, without a spark this is harmless right?   Without going into static electricity, spontaneous combustion, a "gun" or even a BIC lighter for that matter, is it even sane?  Gold and silver do not and will not burn.  Whether it be a wildfire, a derivatives core meltdown, or even a central bank (like the Fed) or a sovereign treasury going upside down, gold will remain money and remain the benchmark against which currencies are measured.  Fiat currencies by definition are "terminal" at their inception.  The "deflation/inflation" debate is a moot point unless argued in terms of real money.   

Regards,  Bill Holter

CURRENCY CARNAGE!

March 12, 2015 

It's early Tuesday morning; in trading terms, just 48 hours from the ten year Treasury yield's post NFP surge from 2.12% to 2.25%; supposedly, signaling an imminent Fed rate hike, despite Janet Yellen having delivered the "most unequivocally dovish FOMC statement in memory" just a week earlier. And oh yeah, prompting the brain-dead MSM - as well as Wall Street, and most PM newsletter writers - to spew a mountain of fallacious reasons why gold is headed below $1,000/oz. And lo and behold, not only is it back down to 2.12%, but with yesterday's blatant PPT stock rebound having been fully reversed already, it's entirely possible the ten year yield will approach the "one handle" in short order.

As for said sub-$1,000 gold prognostications, they by and large emanate from a wide variety of silly, specious "analytical" constructs. Frankly, the only common denominator of their comically misinformed writings - which some admit, and others pretend to ignore - is decidedly bearish "technical analysis" - be it mainstream or "proprietary"; which, of course, is useless given relentless, manipulative Cartel naked shorting. As always, everyone from the most evil Cartel propagandist to the supposedly "beneficent" newsletter writer, claims to be "short-term bearish, but long-term bullish"; ignoring the fact that not only are Precious Metal fundamentals as positive as at any time in our lifetimes - as both competing currencies and financial insurance policies - but the potential catalysts for a sharp, lasting reversal have never been more numerous, or broad. Throw in the fact that the mining industry, as I have loudly anticipated for some time now, is utterly imploding - as depicted by yet another day of all-out mining stock implosion - and my "2015 prediction" of near-term mining industry paralysis has never been more likely. Or, for that matter, that "peak gold" has arrived; with peak silver right behind it, yielding a potentially dramatic production collapse catalyzed by silver prices way below marginal costs, and imploding base metal production.

Back to the 10-year Treasury yield, I've been racking my brain for the past two weeks trying to figure how it could have possibly risen from 1.64% to Friday's high of 2.25% despite a litany of global economic woes; not withstanding Friday's comically fraudulent employment report; which in the big picture of things, only added the final 13 basis points, which have already dissipated, to said yield rally. To that end, in this weekend's "manipulation suicide" Audioblog, here's what I opined on the topic...

"Watching rates rise following Janet Yellen's historically dovish statement last week - let alone, an ongoing collapse in global economic data (including ours) and rapidly escalating Greek crisis, it's hard to make the case that 'someone' doesn't know 'something' about very wicked things this way coming. And if that wicked 'something' involves higher rates - let alone, if purposefully orchestrated - it will unquestionably take down the entire global economy; most of the global banking system; hundreds of heavily leveraged, derivative-exposed financial institutions and Central banks; millions of insolvent holders of adjustable rate loans; and last but not least, dozens of insolvent, debt-laden sovereign nations - including the United States."

Long-time readers know I am a scientist at heart, and a strict believer in Occam's Razor as well. In other words, I don't really believe "someone" knows "something" - so I simply made that comment as an admission that I haven't yet figured the true, logical reason. I mean, I'm well aware that Chinese and Russian Treasury selling has accelerated recently. However, such selling would hardly have been enough - unless done covertly, en masse - to have accounted for the ten year yield's rise from 1.64% to 2.25%. And thus, when I was sent an article yesterday by Mark Grant, a light bulb went off in my head. Not that I know his conclusion to be true, but it makes a heck of a lot of sense.

Which is, that given Monday's (as in, yesterday's) commencement of the ECB's €60 billion per month, (at least) 19 month QE program, the entire "front-running" global investment community is "arbitraging" from a U.S. QE program temporarily on hiatus to the most "sure-thing" investment in history; i.e, European sovereign bond monetization. Hence, this morning's 5,000 year low in average European sovereign yields, as the "currency carnage" highlighted in today's article, and acceleration of the horrific global commodity collapse, prompts investors to anticipate ECB "QE to Infinity," even with yields at or near negative levels. In fact, the hideously "deformed" market machinations of said front-running - to borrow the apt description of the great David Stockman - have so distanced European debt markets from reality, it's hard to believe they actually represent the debt ravaged, economic monstrosities underlying them. To wit, despite the fact that roughly 20% of all European sovereign yields are now negative, the ECB is literally finding it difficult to find willing sellers, who know full well that at least €1 trillion of non-price sensitive buying is coming; and care of ECB, BOE, and SNB "ZIRP" and "NIRP" policies, there simply is nowhere else to generate "yield." And thus, why own U.S. Treasury bonds with a Federal Reserve dithering back and forth about potential (mythical) "rate hikes" when you can simply take decades worth of profits, and re-allocate them to said "sure thing" in Europe? Or, for that matter, Japan, which is also amidst 100%+ government bond monetization, "to infinity."

Of course, said "deformations" of loading a dying Central bank - with a collapsing currency - with zero and negatively yielding bonds of nations with imploding economies; collapsing social stability; and oh yeah, rising political parties seeking to abandon the Euro currency entirely (such as Greece's Syriza, Spain's Podemos, Italy's Five Star Movement, and France's National Front) is perhaps the all-time "recipe for disaster." Not to mention, the very act of debt monetization weakens the Euro further - as well as dozens of other currencies either officially "pegged" to it, or otherwise deeply entrenched in its fortune; like the UK Pound and Swiss Franc, for example. Perhaps NEVER in history has a fiat Ponzi scheme been so poorly conceived and constructed as the Euro; which in our view, is not only guaranteed to fail, but perhaps in the next year or two. And trust us, when Greece inevitably "grexit's" from the Eurozone - which per yesterday's article, is equally guaranteed - the resulting financial and economic carnage will be a site to behold; perhaps, damaging enough to catalyze "the big one" in and of itself, as I predicted two years ago...

"I have zero doubt that - one way or the other - Greece will eventually exit the EuroZone; potentially, providing the "flash point" catalyzing the end of the Western banking system; and with it, financial Armageddon." 

Speaking of carnage, today's article refers to the ongoing, global currency collapse I have written of perhaps more than any "newsletter writer" on the planet; not only predicting it in both this year's and last year's forecasts, but discussing the "final currency war" more than two years ago; a term, by the way, I'm thinking of patenting. Anyhow, to say the currency carnage has dramatically escalated since year-end is perhaps the understatement of the decade; but particularly since the U.S. government committed the aforementioned "manipulative suicide" by publishing such a blatant fraudulent NFP report last Friday.

To wit, in what I last year deemed the "single most Precious Metals bullish factor imaginable," toilet paper currencies the world round are now in utter freefall, as the terminal, nuclear stage of said currency war has arrived, in full force. No matter what corner of the planet one scans, currencies are plunging - rapidly - against the liquidity magnet that the world's unwitting "reserve currency" has become. Unwitting, I note, because the last thing the U.S. government wants - fraudulent "strong dollar policy" notwithstanding - is a strong currency. Remember, the U.S. has more to lose in said "final currency war" than anyone else, given it has already lost the high paying manufacturing jobs it so desperately needs to salvage its dying economy (which, by the way, will NEVER return). U.S. corporate earnings were already declining when the ill-fated dollar surge - and commodity plunge - commenced last Fall; and now, with the horrific translation losses resulting from such, the most overvalued stock market in U.S. history sits on the precipice of an historic collapse. Until, of course, the inevitable "Yellen Reversal" - i.e., overt QE4 announcement - attempts, successfully or not, to hyper-inflate it. Which, if history is a guide, will unquestionably be the Fed's game plan. Not to mention, the ECB's, the BOJ's, and all other Central banks'. And oh yeah, then there's that matter of the potential "BIG BANG" of an official Chinese Yuan devaluation; which as sure as night follows day, is coming. As I have discussed ad nauseum for the past two months, the higher the dollar rises, the more economic pain is inflicted upon China - whose historic real estate, construction, and credit bubble is bursting, whilst it rapidly loses manufacturing market share to global rivals - particularly Japan, as the Yen dramatically collapses against the dollar-pegged Yuan.

Meanwhile, the deflationary hell I warned of in the "direst prediction of all" is hitting the world full force, with the "oil PPT" on the verge of being blown out of the water in just one short - but concentrated - month. And now, with oil traders grossly mis-positioned with massively long "oil PPT bets" - amidst the ugliest supply/demand fundamentals of perhaps any global commodity - the odds of a WTI plunge below 2008's lows (in the $30s) appears more likely than ever. Which, given oil's massive "Achilles Heel" power, may well catalyze "the Big One" all by its lonesome.

As for Precious Metals, I'm not going to harp on the ongoing, historically blatant, desperate Cartel suppression of the past week - notwithstanding today's rise amidst, what do you know, "deflationary" conditions. However, I'll simply highlight what I wrote in last year's "end of the gold 'bear market'"; i.e, that around the world, gold is rapidly rising at varying speeds - with the majority of countries amidst rip-roaring bull market phases; including, for example, Brazil, which reached its all-time high gold price this morning. To that end, a Brazilian reader wrote me yesterday, claiming "I bang the table with friends - who are mostly retired financial executives - with memories of the early 1980s hyperinflation, but most don't recognize gold as a wealth preserver today."

Well, I can't say I'm surprised, given that the same misinformed, brainwashed view is shared by countless millions of supposedly "sophisticated" Westerners. That said, one thing "investors" clearly fixate on is rising asset prices; and thus, it won't be wrong before even the most jaded paper-lovers run en masse to the historical safety of Precious Metals. Just as they did, I might add, during the 2008 and 2011 financial crises. And then, of course, there are the traditional gold-loving cultures; like India, where the Rupee is rapidly approaching 2013's all-time low; and China, where already all-time high demand will go parabolic as pressure on the PBOC to devalue the Yuan mounts like tea in a steaming tea kettle. Let alone, if a collapsing Euro prompts the 550 million global Euro users to trade their rapidly depreciating scrip for the world's only real money.

And thus, what more can we say - other than to PROTECT YOURSELF, and do it NOW! Which, as I edit, just became an even more urgent message - as none other than the White House itself just validated what I wrote in "the most ominous quote of the year"; i.e, that it will NOT TOLERATE a higher dollar. In other words, the countdown to the aforementioned Yellen Reversal" just started ticking dramatically faster.

PROTECT YOURSELF, and do it NOW!

Call Miles Franklin at 800-822-8080, and talk to one of our brokers.  Through industry-leading customer service and competitive pricing, we aim to EARN your business.

 Financial Survival Network

Listen to Andy discuss:

The views and opinions expressed in this e-mail are solely those of the original authors and other contributors. These views and opinions do not necessarily represent those of Miles Franklin Ltd., the Miles Franklin Ltd. staff, and/or any/all contributors to this site.  

Readers are advised that the material contained herein is solely for informational purposes. The author and publisher of this letter are not qualified financial advisors and are not acting as such in this publication. The Miles Franklin Report is not a registered financial advisory and Miles Franklin, Ltd., a Minnesota corporation, is not a registered financial advisor. Readers should not view this publication as offering personalized legal, tax, accounting, or investment-related advice. All forecasts and recommendations are based on opinion. Markets change direction with consensus beliefs, which may change at any time and without notice. The information and data contained herein were obtained from sources believed to be reliable, but no representation, warranty or guarantee is made that it is complete, accurate, valid or suitable. Further, the author, publisher and Miles Franklin, Ltd. disclaims all warranties, express, implied or statutory, including, but not limited to, implied warranties of merchantability, fitness for a particular purpose, accuracy and non-infringement, and warranties implied from a course of performance or course of dealing. The reader accepts information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Past results are not necessarily indicative of future results. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author, publisher, Miles Franklin, Ltd, and their respective officers, directors, owners, employees and agents are not responsible for errors or omissions or any damages arising from the display or use of such information. The author, publisher, Miles Franklin, Ltd, and their respective officers, directors, owners, employees and agents may or may not have a position in the commodities, securities and/or options relating thereto, and may make purchases and/or sales of these commodities and securities relating thereto from time to time in the open market or otherwise. Authors of articles or special reports contained herein may have been compensated for their services in preparing such articles. Miles Franklin, Ltd. and/or its officers, directors, owners, employees and agents do not receive compensation for information presented on mining shares or any other commodity, security or product described herein. Nothing contained herein constitutes a representation, nor a solicitation for the purchase or sale of commodities or securities and therefore no information, nor opinions expressed, shall be construed as a solicitation to buy or sell any commodities or securities mentioned herein. Investors are advised to obtain the advice of a qualified financial, legal and investment advisor before entering any financial transaction.