Random Thoughts from an Organized Mind

Wednesday, April 29, 2015

A week later, Janus' Gross' trade shorting German Bunds has already paid off big.

Gross: German 10yr Bunds = The short of a lifetime. Better than the pound in 1993. Only question is Timing / ECB QE
— Janus Capital (@JanusCapital) April 21, 2015

Biggest Inventory Build In History Prevents Total Collapse Of The US Economy

http://www.zerohedge.com/news/2015-04-29/biggest-inventory-build-history-prevents-total-collapse-us-economy

In other words, if US inventories, already at record high levels, and with the inventory to sales rising to great financial crisis levels, had not grown by $121.9 billion and merely remained flat, US Q1 GDP would not be 0.2%, but would be -2.6%.

Our take:
The Fed continues to jawbone about "normalizing interest rates", i.e. raising interest rates to normal levels (historically 5-6%), from current near-zero levels.

FAT CHANCE is my retort. There is no way in Hades Janet Yellen will raise rates for the following reasons:
1) the economy is weakening, effectively into another recession, irrespective of whether the technical definition of a recession is negative GDP growth for two consecutive quarters. One could argue the US has been in a recession since 2008, even if it officially ended in June, 2009.

In any case, central banks don't raise interest rates when an economy sinks into recession because it further stagnates economic output. At least if they don't wish for the pitchforks to come out, and if congress wants to get re-elected. For those who argue the Fed is independent, you need to wake up.

2) Debt levels, whether national government. state, local, and household levels, have never been higher. Imagine interest rates on mortgages, student, auto, student, credit card debt rising. Servicing that debt becomes more problematic. Austerity measures kick in, households hunker down, and the economy would further sink.

Of course, the Fed would probably monetize more debt, plunging us further into debt.

In fact, as Austrian school of economists have purported, Keynesian economists will always choose the debt monetization route in a pinch, solving nothing and merely extending the debt rabbit hole.

Which leads to my next forecast: the Fed will re-institute QE in a reversal of policy stance of tapering. As the saying goes: QE to infinity!

Few are pointing to more QE, but history shows bankrupt governments and central planners always choose MOAR DEBT, as long as they are in power. Spend today, worry about tomorrow later.

3) With a weakening economy, and a soaring dollar (at least relative to other fiat foreign currencies), US exports are getting clobbered (due to US exports being more expensive in other weaker foreign currencies). This will kick in beggar-thy-neighbor currency devaluation wars, as Japan's Abe is committing financial hara-kiri by destroying the yen, and the EU is turning on the Euro QE spigot. Hence, the Fed will debase the dollar in a misguided attempt to make exports more competitive. The upshot is a sovereign central bank cannot weaken a currency by raising rates. Weakening a currency requires more printing and lowering rates.

The take away is more volatility, more money printing, more spending, more geopolitical strife, and more social unrest domestically.

How does that affect holders of gold and silver? With real (i.e. inflation-adjusted) interest rates negative, keep accumulating physical precious metals.

Despite Fed rhetoric of raising rates either in June or October, the bond yield curve is handicapping a 2016 timeframe. I'm in the camp the Fed will NEVER be able to raise rates intentionally, because it would further stagnate the economy.

But I am acknowledging that the bond vigilantes will at some point emerge and force market rates higher as the participants realize the US government is insolvent and a high credit risk. Its IOU's will never be repaid, and we will have our own Greek default moment. Obviously, this points to the US Treasury bubble bursting, bringing down everything with it, including a stock market bubble. Bond market collapse = soaring bond yields (i.e. interest rates) = equities collapse.

Everything collapses in a liquidity bidless meltdown, except of course, gold and silver, the only sound money which has held its value for 6000 years.

The overarching question becomes when this will happen. Only God knows. Betting against the stock market is a foolish endeavor, as equities could melt up in a world of competitive currency devaluations. In other words, investing in companies can be a very good hedge against currency debasement. The problem is it works well when it works well--until it stops working when hyperinflation outstrips rising markets. Kinda like leveraging up works extremely well in a rising real estate market, but it is disastrous when the music stops (see 2008 financial crisis).

Meanwhile, happy stacking!

5 Minute Speech that Got Judge Napolitano Fired from Fox News

https://youtu.be/UgGnBCDfCLM

Tuesday, April 28, 2015

The First Rule Of Holes

http://www.zerohedge.com/news/2015-04-28/first-rule-holes

It's Official: Being Poor Makes People Unhappy

http://www.zerohedge.com/news/2015-04-28/its-official-being-poor-makes-people-unhappy

Two choices: legislation redistributing wealth, or revolution distributing poverty

http://www.sovereignman.com/trends/two-choices-legislation-redistributing-wealth-or-revolution-distributing-poverty-16826/

The $18bn arms race helping to fuel Middle East conflict

The rapidly escalating arms race from the "civilized" world to the middle east is reaching unsettling proportions.

http://www.theguardian.com/world/2015/apr/23/the-18bn-arms-race-middle-east-russia-iran-iraq-un

Gold surges: World's 'biggest pawnbroker' makes deal

Even though analysts assess the gold swap from Venezuela to Citicorp as the reason for gold's recent surge, I believe it will be bearish mid-term for gold. Now Citi has the physical gold to rehypothecate to manipulate prices lower via the paper COMEX exchange. This should give accumulators more opportunities to buy the dip in gold prices. Have some dry powder.

As an aside, the late Hugo Chavez must be rolling over in his grave. He worked hard to become the first leader to repatriate his country's sovereign gold, and now his successors are pawning it away.

On a more insidious note, bankrupt oil-exporting countries have been forced to sell their family jewels at discounted prices, whether these assets are drilling rigs or gold bullion. There is destructive price suppression in the energy markets as well as the precious metals mining markets. Extraction companies and state governments are either going out of business or panic selling their treasured assets in order to keep the lights on.

http://www.cnbc.com/id/102623775