China, the Dollar and Sovereign Debt

Quite a few observers are suggesting that China could/will bring the U.S. down by suddenly dumping its dollar-denominated Treasuries and Bonds, thereby creating a mass exodus from the delicately-perched $US, dramatically raising bond yields and thereby interest rates in general, resulting in a global economic crash and a “reset” in currency values and a realignment of world powers. As the second largest holder of $U.S. sovereign debt (the Federal Reserve has now moved into the #1 position), it is certainly plausible for the Chinese to do this. But in my view this scenario, at least as a deliberate action, as opposed to a reaction to some other external trigger, is extremely unlikely. Why would the Chinese rock the boat unless the perceived benefits outweighed the associated costs (such as loss of the remaining value of their $U.S. denominated paper assets, crippling of their export-oriented manufacturing base, etc.)?

However, our financial system is increasingly perched atop an unstable ledge. Interest rates are held artificially low by constant central bank backstopping of sovereign debt in an attempt to keep the economy (and banks!) from collapsing. Remember, bond yields are inversely related to bond prices! The U.S. Federal Reserve, for example is pumping at least $85 Billion a month into Treasuries, bonds and other debt instruments. The resulting super-low-interest rate environment has created a mad scramble for investments that have a higher rate of return than the 1% or 2% available from traditional “safe” investment vehicles. Middle class savers can either join this scramble into increasingly higher-risk ventures or be savaged by returns lower than inflation. Those funding their own retirements are finding that even $2 Million savings earns a paltry $40,000 in annual interest. Meanwhile, stock markets have surged to record highs and sovereign debt yields, even for Italy and Spain, have declined. All this is taking place while outstanding sovereign debt continues to accumulate. The chart below shows the deteriorating European debt situation.

 The divergence between the actual situation and the financial pricing of risk in bonds and securities is increasing. As recently as last week, S&P downgraded France's credit rating. Did this cause French bond yields to rise? Of course not. They are stuck at a nice 2.2%. In layman terms, everything is increasingly out of whack in the financial, investment and monetary world. Price discovery is dying. Manipulation of interest rates and other markets is forcing money where money shouldn't be and forcing risk to be mispriced by a large margin. New bubbles are forming.

The Chinese and most everyone else with big money on the table know this but are riding out the trend supported by ever-increasing central bank intervention variously labeled as stimulus, quantitative easing, monetary aggregate adjustment, etc. So the Chinese seem to be preparing for that day, whether they, the Chinese, or some other event triggers a run from sovereign debt and the affected currencies, say, the Euro, the British Pound, the Yen and the $US. They have been purchasing large amounts of gold and entering into increasing numbers of Renminbi/Yuan currency swaps with other nations in an apparent move to initiate the internationalization of their currency as a possible prelude to eventual reserve currency status for their currency. 

Perhaps a rapid transition in mind-set is not imminent but some unexpected trigger could cause a rush for the exits at any time. It's really a state of mind as well as a collective assessment of when the end of the rope is reached for central bank printing actions. Most folks know none of this is repayable, after all, and the wiser ones are warily eying the exit doors for signs of  mass exodus. I suspect that the Chinese are in that category. They have too much to lose to be the last ones out the door.

Failure of Keynesianism

Those who have studied the history of the Great Depression typically split into two groups. Those who think government tinkering (easy money) helped to create the bubble and further tinkering made it deeper and last longer versus those who posit that the problem was insufficient tinkering, stimulus, etc. Ben Bernanke seems to believe that a lot more Keynes is needed. Too bad that Keynes's followers seem incapable of such ardour during the so-called good times when governments and society is supposed to run surpluses in preparation for the bad times.
Anyway, we are continuing to run deficits and stimulate and print like crazy and I think this time round we will finally understand that Keynesian approaches don't solve any real problems of financial over-indulgence, impropriety, manipulation and outright fraud. In the end, only hard work, reduced expectations, lower consumption consistent with individual and national revenues and production are the key - reality, in other words, not smoke and mirrors. We are watching this grand experiment around the world, not just here in Canada and the U.S. And I thought I wasn't really into spectator sports!

Governments increasingly propping up markets

The U.S. has been increasingly funneling money into a broad class of risk assets via the Federal Reserve's POMO and Quantitative Easing actions. POMO's are running 2 to 3 times a week lately. Thus, for example, in spite of continuing  equity fund outflows, stock prices continue strong and bond prices are close to major highs as the Federal Reserve now has purchased and holds about as much in U.S. Treasury Securities as Japan.

Now Japan has announced that it too will get into this game by allowing the Bank of Japan to purchase a broad class of assets, including ETF's.

What a spectacle!  Governments using taxpayers' future money (they are just printing it up for now) to buy mortgage securities, bonds (their own, especially), stocks and derivatives! I'm pretty sure this will all end up very, very badly. And we thought that central state control and manipulation was the preserve of the old Soviet Union and China . . .

Mutual Fund Equity Outflows

Recently, in spite of attempts to talk the economy up (see my previous post), various indicators are highlighting increasing stress in monetary, financial, equity and real estate. A potentially very serious problem relates to the 3 plus month consecutive outflow from equity funds which seems not to have been reflected in actual stock price levels. This begs the question of who, then, has been buying or how have the markets managed to stay level. A good commentary on this issue from Zerohedge here suggesting manipulation, HFT, etc., although I personally believe that the federal Reserve/Treasury, through its agents, are also supporting the markets at crucial times as well.

Precious Metals Manipulation Entering Rough Waters?

The gold/silver manipulation game may be entering another stage as it appears that the increasing difficulty of securing physical delivery is leading to extraordinary measures by the London Bullion Market Association Banks (LBMA) to obtain bullion and to further obfuscate trading, delivery and inventory data - see LBMA Closes Off Public Access To Key Bullion Bank Trading Data

Gold Acting as a Currency

As markets and currencies gyrate, gold seems to be getting steadily firmer, even against the surging $US. Yet many commodities are well off their peaks. That's because many around the world are looking upon gold as not just a safe haven but as the premier currency of the world, one which central banks can't debase through reckless printing, monetization, quantitative easing or whatever euphemisms are in vogue to arbitrarily create more and more of any given currency.

That is not to say that certain Central Banks, Treasuries and their agents haven't tried to manipulate gold lower. They have and they are but with less and less success. But as more of the world's citizens seek out physical gold, the manipulation of the paper gold markets becomes less effective. It may, in fact, be creating a potential slingshot move for gold at some point.

Anyway, the "barbaric relic" is acting more and more like the most senior currency out there and slowly gaining the respectability that comes with it.

Massive Interventions and Manipulations

The world financial and securities trading systems are increasingly being characterized by massive interventions and manipulations. If governments or government agencies are doing it, it's called "intervention". Coupled with rising fear and uncertainty regarding the stability of the world's financial systems, this has resulted in increasingly chaotic and volatile market conditions with wildly gyrating markets.

 Unfortunately, again, none of these interventions and bailouts address the root causes of the problems which include debt, fraud and mismanagement on a broad scale across most nations. We continue to fight the symptoms and to attack the markets themselves in a form of shoot-the-messenger syndrome.

While much breast-thumping continues from world capitals about new regulations governing banks and market players, existing rules are not being enforced. Governments themselves openly break their own rules that were established for good reason in the first place.

My advice to retail investors: Stay away! You cannot compete with governments and hedge funds with massive resources and instant computerized trading capability creating an increasingly frenetic and schizophrenic marketplace. I get the feeling that a series of collapses will occur in a number of markets because everything is so artificial with normal markets pushed, pulled, constrained or strangled. Free markets are basically gone for the time being. Governments are the worst offenders in all this, beginning with the so-called zero-interest policy (ZIRP) which robs the world's middle-class savers who can either toss the dice in the increasingly casino-like stock and bond markets or park their savings in cash to take a loss after taxes and inflation.

The beneficiaries of most of these ill-conceived policies, on the other hand, comprise the irresponsible, incompetent and fraudulent. It seems clear to me that only a major collapse in a number of markets would finally force governments to their senses. Sad.

Markets Turning Unstable Again

The markets are showing signs of volatility and instability again. Don't pay attention to the American spin about a typo causing the problems. Well before the alleged typo at 2:30PM EST, the Asian and European markets were all over the place, oil was down sharply and gold was up in spite of amazing US dollar strength. The Canadian dollar was down 4 cents before trimming losses to 3 cents for the day. I won't even get into ballooning CDS spreads on European sovereign debt. Oh, and look at the Euro, courtesy of Zerohedge. These are all signs of markets in disarray.

The world's central bankers have a lot of tigers by the tails and things seem to be coming unglued once again. The potential Greek default is only one scene in the show. Massive debt worldwide, private and sovereign, combined with huge leverage, derivatives, bubbles created by artificially cheap money and years of lies and manipulation are slowly backing the banksters and their obliging central banks into a tighter and tighter corner. However, lest you think that they won't find a temporary way out yet again, please remember something I learned many years ago - "A politician up a tree is a very resourceful creature". It applies equally well to central bank governors and especially Wall Street. These folks have managed to put off the day of reckoning many times already. Can they do it again?

Gold and Silver Manupulation Hits Mainstream Media

With a delay of several days, the MSM is finally beginning to report the story on the whistle-blowers charging manipulation of the gold and silver markets. See this story published today in the New York Post Business Section.

Wall Street Credibility

Continuing with last week's revelations on creative accounting practices hiding the true position of America' premier banks, many more mainstream media sources are registering their dismay. For example, see here for a MarketWatch article.

Gold and Silver Fraud Revelations continue

rganFurther to the bombshells regarding silver and gold manipulation which were aired at a recent hearing of the CFTC (The U.S.  Commodity Futures Trading Commission), today Adrian Douglas and Harvey and Lenny Organ divulged another bombshell regarding the near absence of physical precious metals in the vaults of ScotiaMocatta (ScotiaBank, Canada). Listen to the King World News interview.