"Destroyers seize gold and leave to its owners a counterfeit pile of
paper." —Ayn Rand
Why don't we start things off a tad differently this evening? Let me
relate to you all a parable from the Book of Quantitative Easing where all is
good and noble in the world of government oversight, the most widely used
oxymoron in the history of mankind.
Granny Smith, now in her late nineties, wakes up one morning and finds
that her dear husband for nigh-on seventy years has gone on to meet his
Maker. But alas, as distraught as one would expect her to be, she is covertly
delighted because, well, old Egbert Smith was not exactly the man she married
and being forced to change his diaper and his bedsheets each night had grown
both tiresome and difficult.
When the lawyer had finished probating the will after eight meetings that
could have been just as effective with one, it was learned that Granny was in
possession of a sizeable pool of capital, on the order of US$5,000,000. She
immediately ordered a meeting with that nice young man from the bank that
"smiles at me and always smells good" in an effort to determine
what she should do with her money.
You see, for the past fifty years, husband Egbert handled the family
finances because, well, women were not expected to understand money. But
prior to marriage, Granny had a job in a bank and was quite proficient in
helping "customers" (as opposed to "clients") understand
how the bank was trying to screw them. She understood fully the "Power
of Compounding" long before some wannabe-evangelist-cum-motivational-speaker
windbag decided to sell a million copies of his latest (plagiarized) book.
However, I digress. . .
She enters the mahogany-walled offices of the bank CEO with her handbag
full of post-it-note reminders of just how he is going to try to make
her $5,000,000 work for him instead of her and sits down in the
largest, plushest, most expensive, high-backed chair in banker history.
"Five mil is a lot of money" is the opening salvo of this former
drug-dealer-car-salesman-turned-bank-CEO as he shows her a chart of the five
top banks' CD (certificate of deposit) rates. "The range for a 5-year CD
is minus 0.23 to minus 0.29 with the our bank, highlighted in yellow.
Remember, we value your money," he says and then asks his "administrative
assistant" to fetch them some tea and cookies. "And I want you to
know that safety is paramount."
Granny Smith looks at Mr. Bank CEO and says, "Forgive me, Mr. Morgan,
but I am an old lady trying to understand your business so please describe to
me what is meant by the minus sign before those figures."
"Well, Mrs. Smith, it's pretty simple. We protect your money from
thieves and corporate raiders and the government so that you can live the
rest of your life stress-free."
Granny looks up at him quizzically from a half-knitted tea cozy and two
very intimidating needles as she says, "Well thank you, but what I meant
to ask was what return I will have on my money if I deposit it at your bank
in your government-insured Certificate of Deposit?"
At this point the banker starts fiddling with his tie and perspiring
heavily as he goes on for another fifteen minutes about "global
uncertainty" and "government guarantees" and "bank
safety," and at the exact moment he decides to launch into his
"final close," to get $5,000,000 cash into his bank, which
desperately needs to shore up the $6 billion in bad car loans, little Granny
Smith interrupts him with this, the most innocent of all questions: "Mr.
CEO, if I give you and your wonderful bank all of my five million
dollars, how much will I get back after five years?"
Now choking on the ramifications of a truthfully answered question, Mr.
Bank CEO pivots into the "You-don't seem-to-understand" defensive
formation, followed by yet another twenty minutes of diatribe.
At this point of the early evening, Granny has been transformed from an
"innocent and quite defenseless elderly lady" to "totally
pissed off and ready-to-rumble granny-goon," and decides to ask the
banker the ultimate question. Holding a Hewlett Packard financial calculator
in her left hand while pointing one of her knitting needles at his throat
with her right, she snarls "How much freakin' money do I get back on
September 12, 2024, if I give you my $5 million today?"
The banker stands up; he straightens his tie; he wipes his brow; and he
says to the now openly hostile granny, "$4,290,435, my dear, but with
the full safety and security of our bank."
Granny: "So, let me get this straight. I give you five million
dollars today and five years from now, when I’m 103, you give me back less
than i started with???"
The banker CEO smiles bravely and says, "Welcome to the New World
Order, Mrs. Smith."
She grabs her bag, rising quickly from the high-backed chair, and says
with the utmost of decorum, "Welcome to the World of f-you, Mr.
Banker." And leaves the building.
And so ends the first parable.
Why, pray tell, would anyone in their right mind, let alone a fiduciary
entrusted with the prudent stewardship of client capital, ever buy a
financial instrument from a high-risk institution (remember subprime?) that
guarantees a negative yield to maturity? Now, I don't pretend to be a balance
sheet genius, nor do I profess to understand all the financial engineering
that is practiced these days but it seems to me there is a checklist of
possible reasons. Here are but a few:
- You have borrowed money from the financial institution
and they demand you put up collateral in the form of a bond yielding
negative returns. In other words, they layer a second level of
"fees" on you, jacking up your effective cost of borrowing to
inflated levels;
- Your financial institution uses government securities as
a reserve requirement in order to soften the interest expense to the
government. Since the government regulates your financial institution,
they are forced to play ball and the added inconvenience is passed along
to the customer,
- You are a professional money manager that sees rates
going from –1% to –2%, thus opening up a potential capital gain in the
price of the bond. As there is an inverse relationship between yield and
price, declining yields are accompanied with rising price, hence the
rationale for playing the "Greater Fool" game. The early idiot
sells the useless bond to a bigger idiot and banks the gain;
And finally,
- You were walking to work this morning and were hit on
the head by a falling quote machine thrown by an incensed gold trader
and were senseless when you made the decision to buy a bond that ensures
that you will lose money.
I am sure there are many, many more reasons someone buys a
negative-yielding financial instrument, and reasons that are quite possibly
more sophisticated than the ones listed above. The point I make is that when
you really think about the symptoms of a collapsing global banking system,
one needs look no further than the 65% of all global bonds that are
delivering a negative yield.
Strong economies are found in regions and countries that are sporting
strong balance sheets, just as strong companies are able to cover interest
costs from existing cash flow with ease. After several decades of
mercantilist behavior fully supported by governments across the globe, with
the exception of those countries (Russia, China, Cuba, Zimbabwe, and now
Venezuela) that attempted to function under socialist/communist systems of
government, we have now arrived at the ultimate tipping point, where
government spending now not just exceeds, but dwarfs, tax receipts.
In the case of China, where the shadow banking system cloaks much of their
toxic debt, they do not have the additional burden of entitlements, which are
the Achilles heel of the American government, military, and banking system.
Whenever I look around and try to find a country living within its means, I
am hard-pressed to find one. Maybe the Sultan of Brunei could offer lessons
as his country sports the lowest debt-to-GDP (gross domestic product) ratio
on the list, and while Japan is the worst offender, their total debt at $9
trillion pales in comparison to United States' $19 trillion debt load. What
the U.S. dollar bulls fail to take into consideration is that the
entitlements of Medicare, Medicaid and Social Security have to be added to
that figure, and the reason they don't is that they can't figure out the
numbers.
Falling into the realization category of The Emperor's New Clothes,
I contend that we are today at the precipice of a massive drop in global
living standards brought on by the final reconciliation of debt. Individual
citizens who take advantage of generous lending practices and pile on layer
after layer of debt always encounter that point in time where bankruptcy
arrives first slowly, then suddenly (thanks to Ernest Hemingway), because
cash flow from earnings or dividends and interest falls disastrously short of
cash outflow.
At that point, assets must be sold to reduce debt, and while individual
citizens can sell things like homes or automobiles or cottages, governments
can only sell land. And as any politician knows (think the Greek Islands),
the mere mention of carving off a piece of Hawaii or Vancouver Island to pay
down someone else's obligation is certain career suicide. Hence, and with
good reason, governments are moving—no racing—to get the trillions upon
trillions in toxic bonds to a negative yielding setup, because just as
interest expense is a charge upon the government income statement, interest earned
(by negative yielding bonds) is a credit. In this manner, there suddenly
exists an accounting function whereby debt becomes an asset, and in this manner,
the deadbeat global central banks and criminally compromised treasury
departments are able to prolong the largest Ponzi scheme in history.
I further contend that the public is coming to the realization that the
smartest people in the room are rarely politicians and never central
bankers. However, the best communicators in the room from a political
perspective are those who can speak to the masses in a language and style
foreign to most educated people (think Donald Trump). After fifty or so years
of movie star orators like Ronald Reagan, Bill Clinton and Barack Obama,
public perception within the lunch-bucket crowd has now swayed away from
"slick" and is gravitating to "blunt" with factual
accuracy in the message a mere bonus.
I refer to this growing malaise of disenchantment and unrest as being
rooted in one word—mistrust. That mistrust is going to manifest itself
within large pools of investible capital fleeing the 10-year safety-net
investment strategy, where every 10% drop is met with Fed intervention and
jawboning, winding up in alternative investments such as gold and silver. We
have already witnessed the impact of the Millennials and GenY-ers on
cryptocurrency deals in 2013–2017 and then cannabis deals from 2013–2019. The
moves in those two sectors were mind-blowing because, as a generation, with
thanks to the wonderment of social media, their access to timely information
allows them to move in swarms, not unlike bee colonies, chasing deals in
mob-like fashion while exiting with the same virulence.
This impulsiveness is the reason we are getting such wild swings in
everything, and no better example of that than in the recent June–September
advance in silver from $14.50 in late May to $19.75 on Sept. 4. It took three
months for silver to get through $17/ounce, but only three more weeks to peak
at $19.75, as the last $2.75 was a wholly new breed of investor arriving into
the precious metals markets. Having never been laid out by the bullion bank
traders before, they were like sheep being sent to the corral, and just as
quickly as they inhaled every share of GDX and GDXJ above $30 and $42
respectively, bludgeoning their way in, today they are all bludgeoning
their way out. Same drill over at the Crimex; late longs in silver and
gold are being beaten like rented mules.
I sounded the alarm back in June, when gold first attempted to surmount
the five-year resistance at $1,350–1,375 and while I stand behind the
reasoning, I was overly cautious and exited the GLD call options, NUGT, and
JNUG way early. I kept 100% positions in the GGMA portfolio in physical gold
and silver and held on (for dear life) as the GDX and GDXJ positions screamed
ahead until late August, when I sold 50% positions in the $30 and $43 range
(GDX and GDXJ respectively), with the balance jettisoned on Sept. 4.
Also sold at or near the top was Great
Bear Resources Ltd. (GBR:TSX.V; GTBDF:OTC) (at $9.02) for a 292% profit
from Jan. 2. So, between the leveraged and non-leveraged trades, the GGMA
portfolio is ahead 163% for the year and is sitting on a 53% cash position,
looking for a reentry point to the unleveraged miner ETFs as a starter,
followed by the leveraged ones (including GLD and SLV calls) if and when we
get to a deeply oversold position.
Now, I’ve had a number of people message me with congratulatory
salutations on some of the trades but make no mistake about it: I am
terrified to be without positions in the GDX and GDXJ, or, as they say,
"flat and nervous." In fact, I feel more anxiety being
underinvested and cashed up than I did when I was fully invested and down
15%.
On that note, let me clarify. We are finally in the throes of angst
that accompany all bull markets in their early stages. My favorite is silver
for all of the reasons you have been reading for the past forty-six months,
since I opined in December 2015 that we had just ended the 2011–2015 bear
market and were about to embark on a brand new bull, one that would (and
will) change fortunes and lifestyles for all on board.
That opinion has not changed. In fact, for reasons well documented in this
publication and others, conditions are ripe for a hyperinflationary
conflagration that will, based upon the sheer magnitude of scurrilous
counterfeiting of sovereign currencies around the world, make 1921 Weimar
Germany look like a tea party. There is only one sanctuary for savings in a
world of monetary madness, and that sanctuary absolutely must reside
outside of the banking system, because the tattered tentacles of Deutsche
Bank are intertwined with the shadow banks in Shanghai, which are, in turn,
part of a global labyrinth of debt and collusion and intervention and fraud.
I will repeat analogy from years past. When you visit a pig farm, you see
brown pigs and white pigs and pink pigs and even mottled pigs, but at day's
end and the bell is sounded, every pig in the sty sullies up to the feeding
trough regardless of color. Similarly, banks can be from the United States or
the UK or China or Brussels; they all depend on "fiat" (decree or
mandate) and when this growing mistrust of the system finally embodies itself
in the daily decisions of investors around the world, all banks will topple,
regardless of their locale. At that point, and fear explodes, there will be
simply not enough gold and silver to satiate demand. Where infinite and
urgent demand meets limited and tightly held supply, pricing chaos ensues.
That is what I expect, and that is why I am "flat and nervous."
I close out the week by reminding you all that despite what you are being
fed about a "new paradigm" and that "it's different this
time," take one look at the COT Report and realize that the 33,130
contracts covered during the last COT reporting period probably involved a
$30–40 per ounce clip that represents 100 ounces per contract or $100-125
million in profits taken by bullion banks from the pockets of investors and
speculators. At the top in very early September, I counted no fewer than
fifty articles in the blogosphere that finger-wagged their conviction that
the forces of good had finally and convincingly defeated the
"cartel" and it was now "safe" to ignore the bullion
banks and go "all in."
It is late in the Friday trading session, and with the weakness in today's
session in silver, it has now corrected back to a level where, while not
egregiously oversold yet, it represents a decent reentry with a small amount
of capital into the SLV December $18 calls at $0.42 for a trade to $2.50 by
expiry. I will probably be bidding for 25% positions in the GDX at $26.50 and
GDXJ at $36 on Monday morning, after which I will overmedicate myself and
take a bold swipe at the diabolical duo of NUGT and JNUG. Edging one's toe
into the waters has always served me well because averaging up is a
far wiser strategy than averaging down. (Just ask my bank manager,
accountant, psychiatrist and pharmacist).
[NLINSERT]
