With the 10 and 30 year T-bonds setting new all-time record lows today of 1.39%, and 2.45% respectively, we thought it was apropos to bring back Jim Willie’s June 9th Hat Trick Letter, in which the Golden Jackass predicted the 10 year would head towards 1%, and stated that a massive T-bond rally was imminent, from which Treasuries would finally fail, and send gold soaring. The rally in T-bonds has occurred precisely as predicted. Is the subsequent collapse and soaring of gold (and silver) imminent?
By Jim Willie, GoldenJackass.com
The USTreasury Bond might be a Tower of Babel, but when it begins to fall, it will produce a vast powerful gigantic Black Hole. The process has already begun, as junk bonds are being cast aside.
Like with astronomy, the star is dying, the core being USDollar, the revolving part the USTBonds.
As the bond rally continues, will a collapse occur before the 10-yield hits 1.0% ??
- The unspoken effect of ZIRP is the powerful ongoing destruction of capital
- As equipment goes off line further, the USEconomy will weaken further, a vicious cycle
- The official Zero Percent Interest Policy is the calling card of the Gold Bull Market
- The USTBonds will fail from their own success, unleashing the Gold Price
Man-made financial phenomena imitate nature, but more importantly they are subject to the powerful laws of economic nature. The Wall Street financial engineers have built vast structures, which tragically are crumbling and soon will fall to the ground. Vast illusory wealth will be lost, never truly garnered. The fiat currency system has required tremendous efforts not only to build the financial skyscrapers ever higher each year, but also to provide support structures that prevent their topple. With the aid of the subservient press, an illusion of wealth, prosperity, and stability has been fashioned and defended. It is all being blown away by the powerful storms known as the global financial crisis. The term has even earned an acronym for the popular lexicon GFC. My alternative view is that the global monetary war is in full swing, World War III with the USDollar at the epicenter of the conflict and pecuniary violence. A few years ago in June 2005, the Jackass penned an obscure article entitled “Financial Market Physics” just for amusement. Thanks to Vronsky and his intrepid work, the Gold-Eagle archive still lives (for old article CLICK HERE). In it was described momentum, pendulums, traction, leverage, resistance, support, inertia, coiled springs, meltdowns, high versus low pressure differentials, flow dynamics, imbalances, and the infamous black hole. The final concept is of extreme relevance today.
My objective is to explain how the crumbling USTreasury Bond tower has an effect on the ground. Last article dealt with the inevitable collapse of the tower, since its support buttress in the Interest Rate Swap has begun to rupture. My best source claims a trigger mechanism has been pulled from deep within the USTBond/IRSwap system managed by JPMorgan. The collapse is assured. It cannot be stopped. It will continue until its conclusion. In the wake of the collapse are dynamics on the ground, at the site of the tower. A grand black hole will be formed, complete with tremendous power to suck down all assets. The process has already started, sucking down weak sovereign bonds and junk corporate bonds. My purpose will be to describe the process from the top down, then the bottom up, as lost faith in all things paper gathers like a gigantic storm that covers the entire earth. The great power is seen an the following image, a great piece of Photoshop work in itself. Money vanishes in the hole. Notice how in the past few years, grand bank aid has come, $trillions tosses at the banking structures. Yet they are still insolvent, in ruins. The money went into the Black Hole, which should include Fannie Mae and AIG in a wider focus.
The tremendous power in nature for similar anomalies can be seen in a gorgeous water hole, whose location could not be verified with a little research. Also the awesome beauty of the inter-stellar black hole has been captured probably by the Hubble telescope. The intense gravitational field traps all matter, all wave elements (such as transmissions), even light itself. Black Holes in nature occur when a star dies, its mass collapses, to produce a gravitational field beyond what can be managed in a stable system. That star is the USDollar core and revolving USTBond system, which are collapsing. Some scientists believe alternative universes lie on the other side of such voyages through the eye. The water that descends into the hole goes into the ecosystem, recycled, maybe purified, only to emerge elsewhere on the other side. If only the Western bankers could be forced to travel through the astronomical eye, suffer the crush, and emerge in another world far enough away not to harm the population. Could the light flashes be dragon breath on each side? The poles could be viewed as producing future Gold demand.
JUNK BOND RELEASE VALVE
The top has many forces. The impaired higher risk bonds are shed like yesterday’s trash with newspaper wrappers (prospectus filings). In the Hat Trick Letter May report, the topic of widening junk bond spreads was exposed. Mistakenly in my view, the Seeking Alpha author describes the junk bonds as offering good value, only because their yields are higher than before. Those yields will go higher still, much higher, corresponding to much lower values. In the process of shedding the high risk bonds, investors will turn to the supposed safe haven of USTreasury Bonds. The author points out that in the last month alone, the situation has worsened. He wrote, “As I mentioned in a recent article, high-yield spreads to Treasuries, as measured by the BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread, recently reached a new high for 2012, now at 7.17%, up 123 basis points in the past month alone.” It has risen 17 basis points so far in June alone, in only three active trading days. If still rising, the junk bond value continues to fall. He went on to compare to historical levels, without paying much attention to the acute risk of the spread widening considerably further. The junk spread can move fast, as seen in the last crisis chapter. It went from 3.73% in January 2006, to 5.92% in December 2007, to 21.8% in December 2008. It could repeat such exaggerated moves in the current crisis. See the Seeking Alpha article (CLICK HERE). The multi-year chart shows the early stage of another eruption.
A closer view was given just a couple weeks ago. Notice the divergence process underway, as the junk bond yield index moves up and up, but the USTBond index moves down and down. In the last couple weeks, my forecast of a 1.5% USTBond yield on the 10-year came true. That was one of the easiest calls in my memory. The trajectory on the junk yield (in blue to the sky) continues to go higher, while the trajectory on the USTreasury yield (in brown like feces) continues to go lower. Next will come the more mainstream corporate bonds, tomorrow’s potential junk bonds, which will be sold off in favor of the USTBond for perceived safety. We are already starting to hear the chorus on the favorable performance of USTreasuries, the lone winner in the crowd. The financial press anchors and analysts simply do not comprehend that the USTBond is the final asset bubble, how its rise means the failure of other assets, how the implosion has its epicenter powered by 0% by the USFed itself. The faith shown to the USFed has become a more desperate hope. Ignored has been the 30-year USTBond. If its yield goes from 2.65% currently to 2.0% as is likely, a ripe 15% profit can be gathered. Not bad in today’s ugly climate.
THE PRIMARY QUESTION WITHIN THE CRISIS SETTING SHOULD BE: WILL THE SYSTEM IMPLODE BEFORE THE 10-YEAR YIELD REACHES 1.0% ???
DISTORTED MONEY MANAGEMENT
An interesting little exchange occurred this week between the Jackass and Tyler Durden, the crack analyst editor at Zero Hedge. My point was that he misses the point of capital destruction from the ZIRP policy of enforced 0% as official rate. He argued two excellent points that did sink into the stubborn Jackass brain stem. Artificially low interest rates enable consumers to spend improperly and unwisely. The setting was prepared by an unusually enlightening debate between Rick Santelli and Gary Kaminsky on CNBC, the official Wall Street public address system wall with loudspeakers. They argued that the now status quo financial repression identified by low interest rate and QE environment are not good for the USEconomy. How true!! But this spout of wisdom occurs in the mainstream. Santelli cannot be suppressed, too smart, too experienced, too outspoken. Durden wrote, “Borrowing and saving are really about whether to consume more now or later (or more later and less now). We agree with Professor Antony Davies that these decisions are best left to individuals, and not the Nanny State Fed. Each person’s judgment of what is best for them is replaced by the Federal Reserve’s judgment and the free market interest has become a thing of the past (for now). Lower rates don’t mean more spending; they mean more spending now and less in the future.” See the Zero Hedge article (CLICK HERE).
Low interest rates far below where they belong encourage a new car that should not be bought, a boat that should not be bought, those items of jewelry (or furniture or lawn ornaments) that should not be bought. They even encourage a bigger house that should not be bought. Many such purchases end up in a liquidation sale, a yard sale, a repo sale, or a foreclosure sale much later after the spending high wears off and the bill is due. Great bottom up argument by Durden. The larger point in parallel is that artificially low interest rates bring about a misallocation of capital, far beyond the misjudged consumer spending.
The second excellent point made by Tyler Durden was that inadequate capital investment has led to a decline in corporate profitability, due to a deteriorating capital base. The working capital of big Western firms, perhaps to some extent in Japan also, has resulted in a dilapidated aging asset base that produces a declining cash flow. An absent capital expenditure (CAPEX) reinvestment will lead to amortization and depreciation to the point of no return. See the disaster in Venezuela where Chavez has driven their petroleum business down hard, well over 25% to 30% lower output. Economist David Rosenberg used to be a favorite economist of mine, but he embraces the nonsense about a recovery when the USEconomy has been stuck in a semi-permanent recession of minus 3% to minus 5% for four years running. Despite that errant position, Rosey pointed out earlier that corporations are forced to spend the bulk of their cash on dividend payouts, courtesy of ZIRP which has collapsed interest income. They must also replenish flagging pension programs subject to lofty forward views. Companies have less to invest in new equipment, new workers, and research & development. In other words, the business sector cannot invest properly in their own main product lines. Ultimately, the corporate profit margins suffer from neglect and age, like an old car. The USFed sponsored 0% rate shifts capital allocation equations, so that ever less cash is going into replenishing asset bases. In many cases the threshold of useful asset life has been crossed. Job cuts and the savings involved cannot breathe renewed life into any business. Besides, most companies are already cutting into the bone. Once the depreciation and amortization cliff is reached, the cash flow will be much worse. See the Zero Hedge article (CLICK HERE) for an excellent survey of capital investment, working capital, debt reduction, R&D, acquisitions, stock buybacks, dividends, and more.
The problem is as diverse as it is perverse. The low mortgage bond yields, coupled with cratering commercial paper, has attacked the corporate sector. It does not produce the cash flow from stored cash anymore. Compare to a human body whose heart pumps much less blood within the circulatory system, and the body slowly starves of oxygen. The artificially low USFed ZIRP policy of zero percent interest rate has resulted in a disaster of mammoth proportions. Corporations and fund managers, including pension funds, have made decisions to accept higher risks since the safe USTBond complex has offered such paltry returns. The risk has backfired since 2007 in a big way. Having lost their core, they direct their remaining assets into USTBonds which earn tiny interest, but are seen finally as safe. The USGovt is not a good business investment, a grandiose money loser. A rally is occurring in bonds for USA Inc, which is losing $1.5 trillion per year, a horrible investment. Again, more misallocation of capital as funds chase the USTBond Tower of Babel. The fund managers have gone from risk ON to risk OFF, as the economic and financial worlds hurtle toward implosion and systemic failure. On the consumer household side, the low 0% rate has hit savers too. They cannot live off savings income. Retirees are the new poverty stricken class, forced to choose between food or medication, sometimes opting for dogfood. The fact of economic life not reported by the financial anchors and supposed expert analysts is that the official 0% acts to suppress economic activity, not to stimulate it. It is a gigantic wet blanket. The collection of savers has twice the volume as consumer loans. The interest income is twice that of interest paid. Therefore the USEconomy grinds slower.
PRIVATE PENSION FUNDS
A jet assist will be given to the Black Hole swirl when the USGovt makes its next horrendous decision on treatment of private pension funds. The mass of 401k, IRA, and Keough funds enjoys a tax deduction benefit on much of the incoming investments from the payroll side. That might soon end with a forced directive by the USGovt in all its limitless short-sightedness, if not stupidity, surely desperation. They must find buyers of USTBonds, just like Japan twenty years ago. Japan forced all public pension funds, postal also, into Japanese Govt Bonds, even though they earned squat for interest. The same will happen in the United States. The discussion has been tossed around for months, a very tempting concept indeed. Imagine the $16 trillion in US retirement funds being redirected in part into USTBonds. Just attacking the personal 401k, IRA, and Keough funds would bring a cool $2 trillion at least, maybe more. They would declare the tax benefit as lost on new income entering the private pension funds, unless they purchased USTBonds. A more extreme decision would be to force old money in the funds to exit their stock investments and enter USTBond investments instead. Even if only on the margin of new entering funds, the effect would be huge. A backfire on the stock market would occur, to be sure. If the extreme option were declared law, then the stock market effect could be another 10% sudden decline or worse. My point is that forced personal pension funds into USTreasury Bonds would add considerable new force to the Black Hole that sucks capital from the system, and pushes it into the natural toilet.
CAPITAL DESTRUCTION FROM 0%
For some reason, after considerable observations, the Jackass has been unable to find more than one or two other analysts that pay any attention whatsoever to the very important effect of 0% official rate. The Capital Destruction effect is profound and damaging. Few if any economists or financial analysts seem to comprehend that a sustained 0% rate kills capital. The dynamic is simple, mentioned every third or fourth public article by the stubborn Jackass. As 0% prevails for the return on money, the investment community pursues alternatives to the empty USTBond savings window. The investors seek out investment alternatives like commodities, while others rely upon the commodity sector as a hedge against inflation. Whichever the point of view, the result is that commodity prices rise and the cost structure rises. The brunt is felt in higher industrial feeder system costs, and higher household costs like with food and utilities. The profit margins shrink for businesses, and for the diverse business segments. The final product price cannot keep pace with a rising pattern, not with the intense competition in China, as well as Japan and the entire Pacific Rim. Product prices cannot rise to maintain a constant profit margin. So capital dies in a vicious cycle as the USEconomy weakens further with each passing month.
As the profit margins are reduced, entire businesses along with certain business segments shut down. They take their equipment off line. They retire their capital. In some cases after a period of time, they liquidate their equipment in order to raise needed cash. The result overall is a destruction of capital, a retirement of capital, a shrinking of the economic capital base. This is the biggest blind spot in the collection of American, British, and Western European economists. They believe the ZIRP is a stimulus. It is a stimulus only to speculation, which has turned on its masters to destroy their ill-fated elaborate but flimsy structures. ZIRP has systematically been destroying working capital. The standing permanently declared 0% monetary policy assures an endless recession, and no recovery ever. Worse, the free cost of money distorts all financial markets, all asset pricing, everything. It is an epitaph on monetary rule.
The ZIRP will continue forever, or until the USGovt debt default, or until the systemic failure signaled by the JPMorgan major losses. The two major reasons why no Exit Strategy is available to the USFed and USDept Treasury are that 1) USGovt borrowing costs would rise to uncontrollable levels, adding to already unmanageable deficit levels, and 2) the Interest Rate Swap control apparatus would implode, leading to $100 trillion in losses or more. So the Zero Interest Rate Policy will go on forever, until the USTBond Tower of Babel falls, or until the entire financial structure based on the fiat USDollar collapses. Arguments to the contrary are both baseless and have been proved wrong by events of the last four years. No recovery, no remedy, no liquidation, endless war, deficits to the sky. Systemic failure awaits.
GOLD RISE DURING SYSTEMIC BREAKDOWN
The official ZIRP is the calling card of the Gold Bull Market. What commodities are for investments and hedges in the tangible arenas, Gold & Silver are to the financial arena. As long as the Zero Percent Interest Policy is in force, the Gold Bull Market will persist and thrive. The ZIRP assures that the inflation adjusted real interest rate, like with the 10-year bond or 30-year bond, will remain negative. Take the 2.5% yield or 1.5% yield, subtract the actual price inflation of 7% to 9% in order to arrive at a negative 6% interest return in real terms. The negative real rate has persisted for over ten years, and assures an ongoing Gold Bull Market. It requires repeating. The official ZIRP is the calling card of the Gold Bull Market.
The battles on the ground are more full of intrigue. One should never lose sight of the sinister motive to disrupt nations, to enable overthrow of tyrant leaders, with the side benefit to capture their gold as booty. The raid in Libya of 144 tons, the raid in Greece of 112 tons, cannot be dismissed as asterisks when they might have been the primary objective. The Arab Spring saw other gold released from vaulted bases, like in Tunisia, a story long forgotten. The capture of gold bullion in movement from political instability occurs on the periphery of the black hole. Almost no central bank gold remains from any major country, as almost none is left in any central bank vault. The Bank of England attracted attention several months ago by sending into circulation very old gold bars, easily identified by markings. Switzerland has a different problem, caught in their own web of deceit and fraud. They have been ransacking private Allocated accounts for years. Von Greyerz has pointed out how investors wishing to transfer their gold bars find themselves wrestling with bullion bankers who do not any longer have the bars in possession. Proof is the new serial number stamps on bars, whose dates make liars out of the bullion bankers, since those dates are newer than the accounts. The bars held are a few years younger than the initial investment time frames. Only the smaller countries seem to have gold, along with Russia and China and India. These small countries are vulnerable, subject to raids.
The SPDR Gold Trust will be the final gold victim of the black hole forces. It has been dubbed the central bank of gold bullion bankers. It recently saw a reduction in bar volume equal to the amount that was just increased in the Sprott Gold Fund (symbol PHYS). The Sprott Funds are loaded with integrity, as honest as the GLD fund is dishonest and corrupted. As the flight to true safety increases, money (in form of gold bars) will fly out of the GLD corrupt corner caves. The hapless clueless dumbfounded GLD investors will be holding paper certificates in their empty hands. They will pursue legal avenues, replete with lawsuits, seeking clawbacks from emptied vaults. In time, the GLD share price will be 20% to 30% below the gold spot price. The proof lies in its price discount relative to spot. Take the GLD quoted price today at 158.9 per share and compare to the gold spot price of 1637 per ounce. Factor in the 10:1 ratio, and arrive at a hefty 3.0% discount of GLD to spot gold price. The Sprott Funds typically have a notable premium in price since they actually purchase the gold bars. The SPDR Gold Trust relies heavily upon paper certificates, and permits routine and frequent short raids out its back door that drag down the share price.
My position has been laid out clearly in recent weeks. The biggest factor behind the gold price (with corrupted paper futures discovery aspect) is the Eastern Coalition. Their grand raids have resulted in 5000 metric tons pulled out of New York, London, and Swiss banks, and sent East, principally China, but not exclusively China. Their motivated raids are intended to weaken the Anglo bankers to the point that they are rendered toothless to defend their massive naked short positions. My excellent reliable gold trader source has pounded the table for over a year, that the gold cartel is net short over 20 thousand tons from improper illicit illegal usage of Allocated accounts. Their nightmare is only beginning.
The gold price can be viewed apart from the background wartime battles, which have left plenty of blood on the fields, offices, and delivery ramps alike. The JPMorgan troubles have underscored the vulnerability of the USTBond complex, and exposed the Interest Rate Swap as a reinforcement device. The truth is slowly emerging. The declared JPMorgan losses are soon to exceed $20 billion. CEO Dimon has admitted the Delta Hedge strategy that manages the Interest Rate Swaps has gone somewhat out of control. His tormented elite financial engineer staff cannot even estimate the losses. During the lifting of the curtain to show the world the vast machinery at work creating a facade of safety and security in the USTreasury Bonds themselves, money moves into Gold. During the last few weeks, anyone with an IQ greater than the Bush family can notice the USEconomy is hurtling into a recession. All indicators scream recession. With strained facial expressions and almost apologetic tone for reporting a more truthful picture, the financial news networks cannot avoid the reality of a recession. They report the dire stream of economic news with sheepish regret.
The USTBonds will benefit from the recession outlook, but talk has already begun in two important messages. First, that the strong performance of the USTBonds signals a recession and widespread damage to the USEconomy, along with even greater USGovt deficits. Second, that the USTBonds might be the only successful investment in town. The latter speaks directly to my point of the USTreasury Bond sucking all capital, inducing sales of all asset classes, and purchasing the US sovereign bond since it is the supposed safe haven, the only asset that is not losing value. The USTBonds will fail from their own success, as instability enters the base while the Tower of Babel goes higher. Again, the biggest question in my mind is whether the 10-year USTBond yield (the TNX) will reach the next important target of 1.0% before the systemic breakdown. My intermediate target of 1.25% will be achieved, but only after the USEconomy is recognized by the dumbest people in the room, the USGovt stat rats. As the USTBonds continue to rally, the Gold price will rally alongside it. Eventually, the USTBonds will be regarded as toxic paper, the cause of a Black Hole, subject to severe default writedowns in a debt restructure. Then Gold will rise without competition, unimpeded by a phony USTreasury safe haven.
THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.
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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. For personal questions about subscriptions, contact him at [email protected]