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The events of the last ten days are surely for the
history books. The story must be told through a prism of the epic battle between
inflation and deflation. The Jackass hates the parlance, since each term is
abused. Inflation is the expansion of the monetary supply, while deflation is
the decline in that supply. The Powerz would prefer
that the public misconstrue what inflation is, so that they can continue to
exploit it for their private gain and control of entire banking systems. The
US Federal Reserve would prefer that the public remain clueless on the
inflation threat, by citing the deflation threat in a manner to justify their
Weimar-like hyper inflation. They have expanded the
US$ money supply through USTreasury debt
monetization severely, to the tune of $2 trillion in two years. That is bigtime inflation!! The downstream consequence is a fast
notable rise in the cost structure across the entire global economy, complete
with loud outcry. The reaction has been to protect against the price
inflation (higher costs) and bond deflation (lost value) by the widespread
purchase of both Gold & Silver (bonafide safe
haven).
GOLD/OIL RATIO SPIKES UP
Three
price directions have been vividly clear in the past few weeks.
- The Gold price has hit record high levels in
several major currencies
- The Crude Oil price on West Texas has plunged
to multi-month lows
- The Silver price has stayed stable at a still
elevated level.
Notice
the Gold/Oil ratio over the past three years in the above chart. The ratio
has returned to a post-Lehman high level. The extremes are back. The financial sector damage, dislocation,
and abuse are evident in the crumbling sovereign bond market, the wrecked big
US bank stocks, and the discovery of Gold as the true safe haven. Do not
be fooled by the knee-jerk pied piper response to flee the frying pan and
find the fire, as investors moved from stocks to USTBonds.
They are sheeple in boats led by a powerful
application of leverage by siren calls to the rocks ashore. Last week, it was
mentioned the gigantic $9.1 trillion additional Morgan Stanley application of
Interest Rate Swaps. They exploit the artificially low short-term USTBill yields and create phony demand in long-term USTreasurys like the 10-year and 30-year maturities. The demand is artificial but felt with
impact in a TNX approaching the magic 2.0%. When it reaches the milestone,
shrill calls will come of an asset bubble. The investor community
incorrectly believes that actual money is flowing into USTBonds
as safe haven. They are fooled by the powerful Interest Rate Swaps applied by
the big US banks, the agents of the Syndicate. The only massive asset bubble
in existence is the USTreasury Bond. It loudly
proclaims USEconomic recession also, just like
Chairman Bernanke's admission following the FOMC meeting this week. More
still, the chart contradicts the myopic focused Deflation concentration that
ignores the monetary inflation consistently and errantly. They earn their
Knucklehead label every passing day, from being half blind. My contention is
that none of them is very intelligent.
Aside
from the grand deception, the markets, the pundits, the investors, and the
analysts, all blessed by eyes and ears and clipboards are realizing the
record price level for Gold. The Deflationist crowd and the Wall Street hive
cite instability, uncertainty, and shaky confidence, all true, but off the
mark. The actual motive and thrust behind the record Gold price are:
- Endless chronic 0% official interest rates in
the United States, England, and Europe. The nil rate
is the traditional trigger and sustaining force for the Gold market.
- The crumbling fortress of sovereign bonds,
broken on the peripheral nations, the deep damage working its way to the
core of USTreasurys and UKGilts
through Italy and Spain, despite the sheep-like retreat into USGovt bonds. Watch out for France!!
- The utter wreckage of the big US banks, kept
afloat by the generous FASB accounting rules since April 2009, insolvent
to their core, under siege from both toxic mortgage assets and bond
investor lawsuits, under Basel II strain on reserve management, and
suddenly finding themselves grossly under-capitalized after showing
unwillingness to recapitalize when their stock shares were much higher
last year.
- The witness of the Euro Central Bank putting up
another EUR 850 billion to bail out Italian and Spanish Govt debt, after several bailouts of Greek debt
fixed nothing and only served to apply patches amidst continual bank
redemptions.
- The general sense that fiat money is losing its
value, its meaning, and public confidence, as central
banks are observed in the HariKari
Keynesian Monetary exercise ritual, having lost their prestige and
credibility, but seen still as the last hope. Every action they take
debases the currencies further and lifts the Gold price.
The
USTBonds and UKGilts will
most assuredly continue their rallies toward 2.0%, proof positive of a broken
manipulated controlled market having no bearing on reality. That reality
extends from an historically unprecedented flood of
debt securities supply, rampant price inflation, strained auctions, and heavy
reliance upon the USFed for the last resort bid.
The entire world has been watching the US central bank print money, buy debt,
and avert the disaster of failed auctions that has plagued other major
industrialized nations lacking the luxury of counterfeit money operations. A strong ugly rub has hit the UKEconomy and European Economy. Their central banks print
money to cover their deficit, to redeem toxic sovereign debt as last resort,
and to stimulate their swooning economies. The end
result in stronger price inflation in the United Kingdom and European
Union. They cannot pawn off their newly hatched debt to China and other
export nations that accumulate toxic paper. Check the Big Mac hamburger combo
index to monitor price inflation. It is $8 to $9 in the US, but $15 to $18 in
the UK and EU. It is only $5 to $6 in sunny/rainy Costa Rica.
The conclusion, evident in the Gold/Oil
chart, is that Inflation and Deflation are both running hard & fast, each
strong & durable, both evident & ugly. My harping disrespectful criticism of
the deflation camp with all their half-blind observations and blockheaded
conclusions and mindnumbing errant forecasts has
been steady and well deserved. The best description of the current situation
is the collision of high pressure zones against low pressure zones. The high
pressure is the result of thrust by central banks of monetary expansion that
has actually wrecked the USFed balance sheet, and
the EuroCB balance sheet. Each is the shameful
owner of worthless mortgage bonds and sovereign bonds respectively, that
nobody wants, that will never recover in price. The low pressure is the
result of a powerful push by falling housing prices and big bank balance
sheet insolvency. The banks are making a transition from insolvent Zombies to
undercapitalized Dead Made Men. They are soon to be recognized as dead. They
are agents of the Syndicate, and thus guaranteed for slush fund income from
multiple sources.
An
aside, notice the $24 spread between the West Texas and the Brent crude oil
price. This too is evidence of the massive interference in energy markets by
the Wall Street and hedge fund players. Nobody mentions it, but it is
glaring. Blame is put on Libyan oil supply shortages. But the US gamers are
pushing down crude oil in support of the USDollar.
They also hope that the lower energy costs can aid the flagging USEconomy. The energy costs are important to be sure, but
they are dwarfed as a factor by the powerful housing market decline and bank
insolvency problems that plague the nation. They will not go away. US
industry is largely gone. Dependence upon home equity backfired and killed
the USEconomy.
S&P500/GOLD RATIO SPIKES DOWN
Since
the end of July an epiphany has taken place. The entire Western world has
awakened to reality. The gold analysts have been yelling in the crowded
theaters that recession is worsening badly and noticeably, even that the last
recession never ended. Their warnings were largely ignored. As a group, we
pay little heed to the falsified Consumer Price Inflation and its equally
corrupted cousin the Consumption Deflator Index or whatever the heck they
call it. How about queer CPI twin? In the last few weeks, ever since the USFed had firmly put a stake in the ground about No New
Quantitative Easing, the USEconomy has shown broad
signals of resumed decline. A realization has finally come that the USEconomy is as crippled as the USGovt
political apparatus. The dysfunctional officials, the corrupt bankers, and
the compromised sell-side analysts have been calling the USEconomy
in slow growth erroneously for two years. It has been in at least a Minus 5%
recession for the last two years, a horrible outcome from the supposed stimulus
and debt relief programs. The data is bad across the board, from ISM
manufacturing to ISM service, from Jobs growth to Jobless claims, from
durable goods orders to business investment, from Big Business demand to
Small Business credit.
The
banking leaders prefer to put a Confidence spin on everything, from inflation
expectations to the business confidence toward capital investment. The USFed even purchases the TIPS bonds, which are supposed
to provide an accurate reflection on the bond market after consideration of
inflation. So the CPI is corrupted, then the TIPS are doubly corrupted!! The
keys are business incentives, removal of regulatory burdens, and an
initiative to bring back industry from Asia. The US leaders from all sectors
are incredibly dimwitted with respect to capitalism and job creation. They
have no clue. Our cast of leaders
still believes the key is a strong stock market, which the USEconomy has grown dependent upon rather than industry.
They also believe the key is to put sufficient cash in consumer pockets,
unaware than investment is required. They are so misguided as not to be too
concerned about the source of cash dispensed. So if consumers are handed
money from the USGovt, by means of debt extensions,
that is ok. It offers a fleeting effect, nothing more.
The S&P/Gold ratio has plunged
again, to levels similar to early 2009 in the months following the Lehman
Brothers failure,
and what can best described as the death of the US banking industry. That
industry has not recovered in capital or lending capability. They are mere
twisted casinos struggling to recapitalize under the relentless strain of a
housing bear market and lawsuit siege, working the USTreasury
carry trade to its conclusion, riding the Interest Rate Swap wave on surfboards
bearing a South Manhattan brand. The USEconomy is
stuck in recession, now accelerating downward in what could better be
described as an inflationary extreme recession. Bear in mind that what the USGovt identifies as an official recession is a Minus 6%
recession or worse, since they lie on the price inflation by at least 6% in
real adjustments. Recall the Jackass forecast made last December and January
that most of the perceived growth to be seen by summer 2011 will actually be
mislabeled price inflation. It is much worse than my forecast, since what
they call flat growth is actually a powerful recession. Much more stimulus,
much more USGovt deficits, much more bond floods,
much more currency debasement are coming.
The most important featured message from
the FOMC meeting and Bernanke's speech was that he painted a powerful
recession picture. He admitted the recession in clear terms. He promised 0%
rates for two more years, an admission of failed policy and wrecked system.
No central bank in history has ever admitted such failure indirectly. It was not enough, as stocks will resume
a powerful downward trajectory, seen in stark fashion on Wednesday. The stock
market will decline until the USFed announced a
broad new QE3 with features directly to support the failing US Stock market.
That decision will also be unprecedented. Gold senses it and rallies into
breakout territory.
My
firm forecast is that QE3 will be announced. The so-called QE2.5 powered by
the positive effect on mortgage bonds that releases $25 to $40 billion per
month will prove woefully inadequate. Mortgage rates are falling, rendering
bonds more valuable. The USFed exposes its own vested interest in lower bond
yields, the likely master hand behind the Interest Rate Swap lever. The
QE3 needs another $1.0 to $1.5 trillion, as the mortgage benefit will be
shown as inadequate. My firm belief is that the next QE3 will be admitted to
provide strong S&P stock support. The USFed
might declare the stock market to be a vital element that supports the USEconomy and confidence levels. The other more hidden
motive for QE3 is to prevent USTreasury auction
failures. Low bid action at 3.0% yields will be worse at 2.0% offered. The
QE3 will be seen as a necessary evil, an urgently needed alternative, a
perilous road that must be taken. Worse still, QE3 will be taken with full
knowledge that QE3 will not stimulate the USEconomy
at all. The discredited and defensive USFed will
look for moral support at Jackson Hole at the end of August. From the banker
bunker will come QE3, just like QE2 which was also
fully denied until urgently required. In
fact, that QE3 will be intended to boost stocks will be obvious to all, the
main priority being to stabilize the financial markets on a global level.
Foreign central banks will pressure the USFed,
despite the risks. In doing so, the USFed will
admit that they have routinely being intervening in the US Stock market.
GOLD RECOGNIZED AS BEST SAFE HAVEN
So
the debt crisis is flourishing, as contagion has spread to Italy, Spain, and
the United States. The broken nature of the Southern Europe sovereign debt is
manifested in higher bond yields. The broken nature of the USGovt debt is manifested in ultra-low bond yields,
evident of a massive liquidity trap, and excessive reliance upon Interest
Rate Swaps. So the sovereign bonds are being ruined, both by grand losses in
Europe and forced participation in an asset bubble in the Untied
States. So the price inflation is rising worldwide,
the unfortunate but unavoidable consequence of the USFed
monetary expansion in hyper inflation style.
Observe the next 3-step breakout process in the Gold price in staircase
action. It should be followed by consolidation, but that consolidation phase
will most likely feature a Silver price breakout. Gold fights the political
wars, but Silver rides through the broken phalanx on a white horse to capture
outsized gains. This time will be no different. Some mistakenly expect Silver
to be regarded as an industrial metal. It is that, but it is much more. It is
not replaceable in industry. It is expanding its role as both a reserve asset
and a household saving vehicle. Silver will follow Gold in this round, as
they are inextricably linked through history. As colleague Andy Hoffman said,
"Gold & Silver will go no
offer soon!" The Jackass could not agree more. Eventually the Silver
metal will not be available at any price from profound shortage, and Gold
will be scarce since central banks scramble to recapitalize their wrecked
currencies. At that time, even the Sprott Fund will
not both to source the silver in an expanded fund offering. Well, maybe they
will try, just to expose the extreme silver shortage!!
Hack
analysts, compromised fund managers, and otherwise clueless mavens trot out
their favorite arguments against Gold. The are propaganda shills. Their claims are vacuous, vapid,
and empty. They claim that no significant price inflation exists to undermine
the asset valuations. They must believe the 3.0% CPI nonsense, or must not
notice all the fast rising prices, led by food & gasoline &
insurance. All components of the CPI are higher than 3% in the real world.
Also, the substitution of falling home prices (inclusion) for rising rent
prices (exclusion) was timely. Their other goofy point claimed is that Gold
offers no yield. Neither do short-term USTreasurys,
UKGilts, or EuroBonds!!
Besides, selling gold option calls does provide an interest yield, as Warren
Buffet can verify. He owned 129 million ounces once upon a time early in the
2000 decade. He bought the white metal on advice from Hank Greenberg at AIG,
earning a nice hefty yield of several percent per month. He frequently
mentions Gold offers no yield, but he knows better. He lies.
Better than any advantage, Gold offers
preservation of value in an era when all major currencies are being horribly
debased.
The Euro Central Bank is printing money to cover the Greek Govt bonds, and lately the Italian and Spanish Govt bonds, their newest debasement project. The Bank of
England is printing money to cover wrecked banks, and soon to cover riot
damage. Not only is Gold on fire, but London is on fire also. Its streets
look worse than Athens ever did. The USGovt and USFed are printing money to pay for a runaway $1.5
trillion chronic deficit, the Fannie Mae cesspool, the AIG black hole, the
endless sacred wars, and misdirected economic stimulus. Soon the USGovt can be expected to relieve a million homeowners of
their mortgage burdens, a desperate maneuver. Toss more broken planks on the
bonfire. Witness systemic failure in the United States, which is Greece times
100. To be sure, Gold & Silver win on all counts versus fiat paper money,
whose bonds have been exposed as toxic. The entire modern currency system
rests upon the broken sovereign debt foundation. It is being exposed.
REALITY CHECK
In
conclusion, consider some cold water on the face. The USDollar is not the safe haven currency
any longer. The Swiss Franc has risen by an astonishing 42% in the last
12 months. Money and paper-based assets are fleeing for safety in Europe.
They find Switzerland, where paper is king and gold is missing. The Asians
are finding safety closer to home. The Japanese Yen currency has returned to
the stratosphere over 130 in recent weeks. In just the last week, despite an
incredible $50 billion in FOREX intervention by the Bank of Japan, the Yen
currency has returned to 76.43 in the popularly reported US$/Yen after touching
79, which translates to 130.8 in US$ terms after going below 127. Therefore,
the limp-wristed BOJ intervention over a week ago failed in a single day. The huge BOJ intervention late last week
failed in less than a week, a loud victory for Gold in a critical skirmish.
Central banks the world over are angry at having to react to a broken
discredited desperate USFed. The Swiss Franc and
Japanese Yen upward moves serve as ample evidence, contrary to the beliefs by
naive observers and investors who maintain that the USDollar
is ultra-dominant.
A
parting note for those who believe the Chinese are backward militarily. They
are not. They are well funded by export surplus wealth. They have
demonstrated an ability to hack into Sandia Labs and make off with weapons
schematics. They have demonstrated an ability to knock out telecomm
satellites. They have a strong blue water naval fleet, from the infusion of
Japanese technology. Furthermore, by 2015 they should have some modern
aircraft carriers, of catamaran design for greater stability and speed. A
brief glimpse for the benefit of those who believe naively that the USMilitary exerts full spectrum dominance. To be sure,
the USMilitary might is awesome, but it will be
challenged. Look for a New Policeman in the Persian Gulf. The Saudis have
already cut the deal.
THE HAT TRICK LETTER PROFITS IN THE CURRENT
CRISIS.
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Jim Willie CB, editor of the “HAT TRICK LETTER”
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