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When capital markets expand, the action is in the
equity markets. When capital markets contract, bond markets are where the
action is; because when credit and debt-based markets reach their limit,
debt, not credit, has the upper hand.
Today’s economists, trapped between the flawed
theories of John Maynard Keynes and Milton Friedman, assiduously avoid the
observations of Carl Menger and the Austrian School
of Economics. But try as they might, the misguided and devoted followers of
Friedman and Keynes can’t escape the results of their misguided
assumptions—today, economies everywhere are drowning in debt.
The inevitable collapse of over-indebted economies
is obvious to all except to those too fearful to confront their demise.
Credit’s excessive gifts have now been spent and exist today only as
constantly compounding debts so large they are incapable of ever being repaid.
The belief that
an expanding GDP can save capitalism is no different than believing more
worshipers of Baal could have saved Chaldea.
SPECULATORS IN THE BULL RING
In their
illusory world of fantasy and finance, central bankers imagine themselves to
be the matadors of the bond
markets, expertly controlling the flow of bonds by fixing the rate of
interest; but, in reality, central bankers are as much victims as the bulls
the matadors stalk; and, like the bulls, their demise is certain.
The real
matadors are not the central bankers. The real matadors are the bond
speculators; and, today, the bond speculators, too, are in danger; for
today’s bond markets are more dangerous than they have ever been.
Pushed to their
limits and of a size heretofore inconceivable, today’s bond markets
pose a danger not only to the speculators and central bankers in the ring but
to the spectators in the stands as well.
In my article, Will the US Devalue the Dollar?, written just as the European sovereign debt
crisis was beginning in 2010, I discussed the quandary of Bill Gross,
founder and co-chief investment officer of PIMCO, the world’s largest
bond fund, and a bond matador of
justifiable repute.
… As Managing Director of PIMCO, the
world’s largest bond fund, Mr. Gross is in the business of buying debt
and betting on the outcome, an avocation that increasingly resembles Russian
roulette.
Spreads on sovereign debt are rising and credit default swaps reflect
the higher premiums being charged to protect against default. Investors such
as Mr. Gross compare risk to reward in regards to debt and when the reward is
believed to compensate for the risk, the bond is bought and the bet is placed.
As we enter the end-game, the odds, as in Russian roulette,
exponentially increase making previous yield curves irrelevant. The trigger
event may be Greece, Spain, the UK, the US, Latvia,
Japan or some other nation. But, one thing is certain, when someone takes a
bullet, all bets will be off. No one can cover what
can’t be covered.
In March 2010, Bill Gross asked the question: What
if – to put it simply – you couldn’t get out of a debt
crisis by creating more debt? The answer to that question will be supplied by the markets—and
soon.
THE BONFIRE IN THE BOND MARKETS
The bond matadors’ 30-year run of luck is
running out. Interest rates have fallen for 30 years making previously-issued
bonds more valuable. But, today, with US Treasury debt close to 0 %, interest
rates can’t go lower and bond valuations can’t continue to rise.
 
In the end game, the bond market will be
capitalism’s final resting place as issues of debt become paramount. In
the end game, credit can no longer induce sufficient growth to cope with
accelerating levels of debt; and when capitalism can’t expand, it
collapses.
Capitalism is like a bicycle. It doesn’t do
well at slow speeds.
We are moving into the end game, the grand
denouement of credit and debt-based markets, the grand finale of the debt
super-cycle, the crack-up boom, the
blow-off Ludwig von Mises predicted would happen as
a result of constantly expanding credit.
THE END GAME AND THE COMING PANIC IN THE BOND MARKETS
David Stockman, author of The Emperor is Naked and Reagan’s former budget director,
is an outstanding observer of America’s problems in the end game.
Recently, Stockman was asked by the editors of The Gold Report, what catalyst
could bring the end game to a final resolution.
The Gold Report: If we are in the final innings of a debt
super-cycle, what is the catalyst that will end the game?
David Stockman: I think the likely catalyst is a breakdown of the
U.S. government bond market. It is the heart of the fixed income market and,
therefore, the world's financial market.
Because
of Fed management and interest-rate pegging, the market is artificially
medicated. All of the rates and spreads are unreal. The yield curve is not
market driven. Supply and demand for savings and investment, future inflation
risk discounts by investors—none of these free market forces matter.
The price of money is dictated by the Fed, and Wall Street merely attempts to
front-run its next move.
As long
as the hedge fund traders and fast-money boys believe the Fed can keep
everything pegged, we may limp along. The minute they lose confidence, they
will unwind their trades.
On the
margin, nobody owns the Treasury bond; you rent it. Trillions of treasury
paper is funded on repo: You buy $100 million (M) in Treasuries and
immediately put them up as collateral for overnight borrowings of $98M.
Traders can capture the spread as long as the price of the bond is stable or
rising, as it has been for the last year or two. If the bond drops 2%, the spread has been wiped out.
If that happens, the massive repo structures—that is, debt owned
by still more debt—will start to unwind and create a panic in the
Treasury market. People will realize the emperor is naked. http://www.theaureport.com/pub/na/13278
WHEN BOND MARKETS CRASH, INVESTORS WILL RUSH
THE EXITS; THOSE NOT ALREADY OUT THE DOOR WILL BE TRAPPED.
BILL GROSS NOW RECOMMENDS GOLD OVER STOCKS AND BONDS
On September 5, 2012, legendary bond trader, Bill
Gross, said the age of credit expansion
is over… Pension funds and individuals and investors that expect 10%
consistent returns to pay those bills are going to be disappointed…the
price of gold will be higher than it is
today and certainly a better investment than a bond or stock, which will
probably return only 3% to 4% over the next 5 to 10 years.
That, perhaps, the best and, certainly, the most
well-known—of the world’s bond traders, Bill Gross, is now
recommending gold over stocks and bonds is extraordinary news. It is news,
however, that will be ignored by most investors, i.e. today’s
ostriches, who have made a living arbitraging the opportunities afforded by
the bankers’ paper markets—for this is the time of the vulture.
… the vulture feeds neither upon the pastures of the bull
nor the stored up wealth of the bear. The vulture feeds instead upon the
blind ignorance and denial of the ostrich. The time of the vulture is at
hand.
p. 5, Time of
the Vulture: How to Survive the Crisis and Prosper in the Process, Darryl
Robert Schoon, 3rd ed., 2012
Bill Gross knows the endgame is not the same game in
which he made his reputation and considerable fortune; and, unlike his
equities counterpart, Warren Buffet, who still believes paper markets will
pay off in the future as they have in the past, Bill Gross is preparing for a
future most investors cannot see and do not expect.
Dancing in the endgame is going to be a bloody affair
GOLD IN THE END
GAME
In the end game, gold is the ultimate hedge as gold
is a hedge against both deflation and inflation. Deflation, characterized by
a collapse in demand, is now in motion; and inflation—and perhaps
accompanied by its virulent stepsister, hyperinflation—is coming.
My youtube video, The Bank of New York, the Fed and
9/11, marks the anniversary of 9/11 by shedding light on
financial transactions involving hundreds of billions of dollars of covert
securities secretly cleared by the Fed in the aftermath of 9/11; and my
economic site, Moving Through the Maelstrom with
Darryl Robert Schoon, is
now free without subscription.
Buy gold, buy silver, have faith.
Darryl Robert Schoon
www.drschoon.com
,
www.survivethecrisis.com
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