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#851 2017-03-05 19:44:14

AinslieBullion
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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

US Debt Ceiling Looms

March holds a few of the larger known 'elephants in the room' for global sharemarkets – the Fed rate hike, the US debt ceiling and the Netherlands elections.  As of Friday night that became two with Yellen all but cementing a Fed hike happening on 15 March.  Markets seem to take it in their stride as it was already largely priced in.  Yet again gold held firm when such news would normally see it drop.  And let us stress, these are the known knowns, there are a plethora of known unknowns lingering too.

We discussed the Netherlands election last week so that leaves the US $20 trillion debt ceiling limit being hit on 15 March.  Whilst it is largely expected that Treasury Secretary Steven Mnuchin will enact "emergency measures" that could see the government survive until August by delaying the reinvestment of assets in various government pension funds plus some accounting shuffling tricks, it only delays the inevitable.   We've been down this road before but in 2011 it was strung out so long that Standard & Poor's downgraded the government's Triple-A credit rating after Congress and the White House deadlocked for weeks negotiating a budget deal, and the Treasury came within a whisker of defaulting.  Gold and silver rallied strongly.

The lead up to next Wednesday's deadline is looking scary and the graph below is one you should take special not of.  The IRS is in the process of paying out tax returns at this critical juncture meaning cash reserves are being drained just before they may be drastically needed.

111111debt%20ceiling%20cash.jpg

David Stockman, the ex Reagan administration budget director who we spoke of last week, had this to say recently about this situation:

"I think what people are missing is this date, March 15th 2017.  That's the day that this debt ceiling holiday that Obama and Boehner put together right before the last election in October of 2015.  That holiday expires.  The debt ceiling will freeze in at $20 trillion.  It will then be law.  It will be a hard stop.  The Treasury will have roughly $200 billion in cash.  We are burning cash at a $75 billion a month rate.  By summer, they will be out of cash.

Then we will be in the mother of all debt ceiling crises.  Everything will grind to a halt.  I think we will have a government shutdown.  There will not be Obama Care repeal and replace.  There will be no tax cut.  There will be no infrastructure stimulus.  There will be just one giant fiscal bloodbath over a debt ceiling that has to be increased and no one wants to vote for."


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#852 2017-03-06 20:07:46

AinslieBullion
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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

Visualizing The US Debt Ceiling (In $100 Bills)

The United States owes a lot of money. For now, there is no debt ceiling - it has been suspended - but in 10 days that changes, and who knows what happens then.

For some context as to just how much money the US owes - and what the debt ceiling looks like - Demonocracy is back...

One Hundred Dollars
20170305_debt1_0.jpg

$100 - Most counterfeited money denomination in the world.
Keeps the world moving.

Ten Thousand Dollars
20170305_debt2_0.jpg


$10,000 - Enough for a great vacation or to buy a used car.
Approximately one year of work for the average human on earth.

One Million Dollars
20170305_debt3_0.jpg

$1,000,000 - Not as big of a pile as you thought, huh?
Still, this is 92 years of work for the average human on earth.

One Hundred Million Dollars
20170305_debt4_0.jpg

$100,000,000 - Plenty to go around for everyone.
Fits nicely on an ISO / Military standard sized pallet.

The couch is made from $46.7 million of crispy $100 bills.

$100 Million Dollars = 1 year of work for 3500 average Americans
20170305_debt5_0.jpg

Here are 2000 people standing shoulder to shoulder, looking for a job.
The Federal Reserve's mandate is to maintain price stability and low unemployment.
The Federal Reserve prints money based on the assumption that increasing money supply will boost jobs.

One Billion Dollars
20170305_debt6_0.jpg

$1,000,000,000 - You will need some help when robbing the bank.
Interesting fact: $1 million dollars weighs 10kg exactly.
You are looking at 10 tons of money on those pallets.

One Trillion Dollars
20170305_debt7_0.jpg

$1,000,000,000,000
The 2011 US federal deficit was $1.412 Trillion - 41% more than you see here.

If you spent $1 million a day since Jesus was born, you would have not spent $1 trillion by now...
but ~$700 billion- same amount the banks got during bailout.

One Trillion Dollars
20170305_debt8_0.jpg

Comparison of $1,000,000,000,000 dollars to a standard sized American Football field.

Say hello to the Boeing 747-400 transcontinental airliner that's hiding in the back. This was until recently the biggest passenger plane in the world.

You can see the White House with both wings to the right.

"My reading of history convinces me that most bad government results from too much government." - Thomas Jefferson

US Debt Ceiling - $20+ Trillion in 2017
20170305_debt9_0.jpg

Statue of Liberty seems rather worried as United States national debt is soon to pass 20% of the entire world's combined economy (GDP / Gross Domestic Product).

Here are some cool quotes from cool guys in the past saying the right things about the future and in a sense predicting today:

"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them." - Thomas Jefferson

If the national debt would be laid in a single line of $1 bills, it would stretch from Earth, past Uranus.

122.1 Trillion Dollars
20170305_debt10_0.jpg

$122,100,000,000,000. - US unfunded liabilities by Dec 31, 2012. We have not upgraded the graphics for 2017 because it simply is pointless. The US government has no plan for fixing unfunded liabilites. This number is so far out there that it is uncomprehensible to most readers but a few mathematicians.

Above you can see the pillar of cold hard $100 bills that dwarfs the WTC & Empire State Building - both at one point world's tallest buildings. If you look carefully you can see the Statue of Liberty.

The 122.1 Trillion dollar super-skyscraper wall is the amount of money the U.S. Government knows it does not have to fully fund the Medicare, Medicare Prescription Drug Program, Social Security, Military and civil servant pensions. It is the money USA knows it will not have to pay all its bills. If you live in USA this is also your personal credit card bill; you are responsible along with everyone else to pay this back. The citizens of USA created the U.S. Government to serve them, this is what the U.S. Government has done while serving The People. The unfunded liability is calculated on current tax and funding inputs, and future demographic shifts in US Population.

Note: On the above 122.1T image the size of the bases of the money stacks are $10 billion, and 400 stories @ $4 trillion.

"It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world." - Thomas Jefferson



"This is when you need to remember that when a nation's economy collapses, the wealth of the nation doesn't disappear, it only changes hands."

Government Waste: Missing Money Infographic does a great job showcasing the Trillions lost through miss-management.



Source: Zero Hedge


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#853 2017-03-06 21:12:52

Ipv6Ready
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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

When you consider

US GDP is 18 trillion USD. 122 trillion unfunded debt (even though that is made up figure) it is only 7 times earnings, not a lot in the context to have unfunded .


WTB 4 to 6 grams of pure gold. Don't care if it is coin, bar or granules. Near spot, suits anyone who has been tempted to open a certicard or just have some granules to make a ring

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#854 2017-03-07 00:01:43

Gullintanni
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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

Ipv6Ready wrote:

When you consider

US GDP is 18 trillion USD. 122 trillion unfunded debt (even though that is made up figure) it is only 7 times earnings, not a lot in the context to have unfunded .

Here in NZ there are plenty some people with mortgages that are approaching 10-12X their income,and they must not be considered a major default risk if they have scored the mortgage.

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#855 2017-03-07 19:33:49

James
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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

Gullintanni wrote:
Ipv6Ready wrote:

When you consider

US GDP is 18 trillion USD. 122 trillion unfunded debt (even though that is made up figure) it is only 7 times earnings, not a lot in the context to have unfunded .

Here in NZ there are plenty some people with mortgages that are approaching 10-12X their income,and they must not be considered a major default risk if they have scored the mortgage.

Aside from the question of a safe multiple of debt to  GDP or personal income - a basic reality check is required.  Downward movement in  GDP or personal income happens (eg recessions/economic crises happen) , so debt multiples become unsupportable at times (ie lenders liquidate loans). It's highly unrealistic to suppose that loans will always be extended or that recessions will never happen again in the future.

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#856 2017-03-07 20:01:45

AinslieBullion
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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

OECD – "Disconnects" & "Financial Vulnerabilities"

The OECD yesterday released their latest global economic health check titled "Will risks derail the modest recovery? Financial vulnerabilities and policy risks"

So first, by modest recovery they have retained their estimates of world GDP growth with 2017 at 3.3% and 2018 at 3.6%.  With China at 6.5% and India at 7.3% the 'rest' are all in the 2's and 1's.  Hence 'modest'…

But the crux of the report is that even this modest growth is highly susceptible to market shocks that could derail it entirely.  Their list is extensive but is summarised as "disconnect between financial markets and fundamentals, potential market volatility, financial vulnerabilities and policy uncertainties could derail the modest recovery."

The reference to disconnect was principally targeted at a market that is supported by central bank stimulus through record low interest rates and QE money printing, which whilst the latter is halted in the US, it is still full steam ahead in the EU, Japan and China.  On this:

"Significant financial vulnerabilities arise from the overreliance on monetary policy in recent years, which has led to an extended period of exceptionally low interest rates, rising debt levels in some countries, elevated asset prices and a search for yield. In advanced economies, some countries have experienced rapid house price increases in recent years, including Australia, Canada, Sweden and the United Kingdom. As past experience has shown, a rapid rise of house prices can be a precursor of an economic downturn. House price-to-rent ratios are at record highs in several countries and above long-term averages in many others. Although there has been a slower accumulation of household debt in recent years, mortgage-debt-to-income ratios remain high in many countries."

Yes, Australia gets a first place mention for our property market, but its not property alone.  Vern Gowdie of the Daily Reckoning pointed out on Friday our GDP growth is being fuelled off debt on these record low interest rates:

"We're told our $1.6 trillion economy 'grew' by 2.4% over the past 12 months…give or take, that amounts to an increase of $40 billion in economic activity.

Australia's total debt — public, private and corporate — at the start of 2016 was near $6 trillion.

Currently, our total debt is estimated to be $6.2 trillion…an increase of $200 billion in 12 months.

Going a further $200 billion into the red 'bought' us $40 billion in economic activity. It's now taking $5 of debt to produce $1 of GDP 'growth'."

That is pretty straight forward maths.  But back to the OECD.  They also highlight the dangers in currency volatility given we are seeing the disconnect of a US Fed tightening whilst the aforementioned are still full on easing.  We've written before of the elephant in the room of how China responds to a Fed hike induced USD surge (a must read).  As the OECD says:

"The recent interest rate rises have been associated with sizeable exchange rate movements, with the US dollar appreciating rapidly against the euro and yen, and a number of emerging market currencies have faced market pressures. Financial market expectations imply that a large divergence in short-term interest rates between the major advanced economies will open up in the coming years. This raises the risk of financial market tensions and volatility, notably in exchange rates, which could lead to wider financial instability."

They are also particularly concerned about Emerging Market fragility off the sheer amount of non performing loans and loans vulnerable to those currency volatilities:

"The rapid growth of private sector credit and the relatively high level of indebtedness by historic norms is a key risk in some countries, notably China, fuelled by favourable financial conditions amid low global interest rates. These high debt burdens, particularly of non-financial companies, leave economies more exposed to a rapid rise in interest rates or unfavourable demand developments. At the same time, a turning of the credit cycle is leading to a rise in non-performing loans, particularly for India and Russia, potentially exposing a misallocation of capital during the upswing and creating pressures on the banking system. In China, the high share of non-performing and "special-mention" loans reflects to a large extent borrowing by state-owned enterprises."

Finally, as we are seeing here in Australia time and again, and in reference to the anti globalisation / anti establishment disenchantment factor, governments are too afraid to make the hard choices to address all this:

"Uncertainties in many countries about future policy actions and the direction of politics are high. News-based measures indicate global policy uncertainty increased significantly in 2016, rising particularly sharply in some countries. Many countries have new governments, face elections this year, or rely on coalition or minority governments. More generally, falling trust in national governments and lower confidence by voters in the political systems of many countries can make it more difficult for governments to pursue and sustain the policy agenda required to achieve strong and inclusive growth. Rising inequality and growing concern about the fairness of society may also help to undermine trust and confidence in governments. These tensions lead to less predictable outcomes, including on progress in implementing policy reforms."

The take away is that yes growth could continue to stumble along and everything could be ok.  But sharemarkets are currently priced at 'awesome' growth levels, and there are a number of unintended but seemingly inevitable consequences to unwinding the very stimulus that got us there and that could come home to roost at any moment.  So play the stimulus game, but make sure you have your hedge or insurance safe haven in play for when it goes wrong….


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#857 2017-03-08 19:45:33

AinslieBullion
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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

What happens after the March US rate hike?

Gold and silver, along with shares, are seeing downward pressure as the market becomes more convinced the Fed is going to hike rates next week.  ALL eyes are on tomorrow night's US non farm payrolls employment figures.  Anything but a shocker (and lead indicators indicate this isn't on the cards) would cement a March rate hike in.

That is a catch twenty two for many as on one hand it reinforces the 'everything is awesome' narrative but on the other hand it is raising the cost of debt when stupendous amounts of debt is what fuelled the perception of the very same 'awesome'.  As we reported yesterday the OECD are predicting subdued growth (circa 3.5% against 20 years of 4+%) but with a very big caveat of 'but that could all unravel because of inherent "financial vulnerabilities"').

Jim Rickards recently wrote of his views for Money Morning.  Here's what he had to say:

"….markets are now pricing in nearly a 75% chance of a March rate hike. My estimate is now 90%.

But there's a big difference between the dynamics behind my view of a rate increase and the market's view. In effect, markets are saying, 'The Fed is hiking rates, therefore, the US economy must be strong.'

What I'm saying is: The Fed is tightening into weakness (because they don't see it), so they will stall the economy and will flip to ease by May.

My view is the US economy is fundamentally weak [by the way… last night the Atlanta Fed dropped its Q1 GDP estimate yet again to just 1.2%... Jim's right], the Fed is tightening into weakness. By later this year, the Fed will have to flip-flop to ease — via forward guidance — for the ninth time since 2013. Stocks will fall, while bonds and precious metals will rally."

Another thing not openly discussed is the end of tenure for a number of members on the US Fed, all of whom will be replaced within Trump's presidency.  Rickard's explains:

"Something else to remember going forward is that Trump will have a minimum of three, and perhaps as many as four or five, chances to appoint members of the Fed board of governors, including a new chairman in the next 10 months. I expect these new governors will be dovish based on Trump's publicly-expressed preference for a weaker US dollar.

The Senate will definitely confirm Trump's choices. So get ready for an extreme makeover at the Fed, with the likelihood of easy money, more inflation, higher gold prices and a weaker US dollar right around the corner.

That combination of Fed ease (due to slowing) and Fed doves flying into the boardroom on Constitution Avenue in Washington will give gold prices in particular a major lift in the second half of the year."

Rickards has a lot more cred than many of the so called analysts out there.  Agree with him or not, but he certainly makes sense if you look at it objectively.


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#858 2017-03-09 19:46:17

AinslieBullion
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The Great Credit Illusion

We discussed recently that Australia's GDP growth over the last year came at the cost of $5 in new debt for every $1 of GDP growth.   Well it's not much better in the world's biggest economy, the US.  Official figures for 2016 show that in just that one year the US added $2.51 trillion in new debt, taking their total credit to a new record high of $66.1 trillion. What did they get for that $2.5 trillion in new debt?  Just $632 billion in additional GDP… yep $4 of new debt for every $1 of new economic growth.  Against the official GDP for 2016 of $18.86 trillion that also takes total credit to GDP to an eye watering 350%.

The thing is, since the GFC when that figure got to 380% and then went pop, it has stayed relatively level.  That is now rising again... 

11111debt%20v%20gdp%20us.jpg
11111debt%20to%20gdp%20q4%202016_0.jpg


Many will know of Bill Gross (aka the Bond King) who headed PIMCO, the world's largest bond fund, for many years.  He summed up the danger in this situation in his latest news letter:

"In 2017, the global economy has created more credit relative to GDP than that at the beginning of 2008's disaster. In the U.S., credit of $65 trillion is roughly 350% of annual GDP and the ratio is rising. In China, the ratio has more than doubled in the past decade to nearly 300%. Since 2007, China has added $24 trillion worth of debt to its collective balance sheet. Over the same period, the U.S. and Europe only added $12 trillion each. Capitalism, with its adopted fractional reserve banking system, depends on credit expansion and the printing of additional reserves by central banks, which in turn are re-lent by private banks to create pizza stores, cell phones and a myriad of other products and business enterprises. But the credit creation has limits and the cost of credit (interest rates) must be carefully monitored so that borrowers (think subprime) can pay back the monthly servicing costs. If rates are too high (and credit as a % of GDP too high as well), then potential Lehman black swans can occur. On the other hand, if rates are too low (and credit as a % of GDP declines), then the system breaks down, as savers, pension funds and insurance companies become unable to earn a rate of return high enough to match and service their liabilities."

We discussed this in different detail in today's Weekly Wrap and its worth a listen.

Credit as you know is a result of fractional reserve banking where $1 deposited is turned into around $10 in credit on the assumption not everyone will ask for their $1 back at once.  Bill goes on:

"While the recovery has been weak by historical standards, banks and corporations have recapitalized, job growth has been steady and importantly – at least to the Fed – markets are in record territory, suggesting happier days ahead. But our highly levered financial system is like a truckload of nitro glycerin on a bumpy road. One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault. It happened in 2008, and central banks were in a position to drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system. Today, central bank flexibility is not what it was back then. Yields globally are near zero and in many cases, negative.  Continuing QE programs by central banks are approaching limits as they buy up more and more existing debt, threatening repo markets and the day to day functioning of financial commerce.

Don't be allured by the Trump mirage of 3-4% growth and the magical benefits of tax cuts and deregulation. The U.S. and indeed the global economy is walking a fine line due to increasing leverage and the potential for too high (or too low) interest rates to wreak havoc on an increasingly stressed financial system. Be more concerned about the return of your money than the return on your money in 2017 and beyond."

Gold and silver are the oldest form of money in the world and if (and only if) you hold physical metal you have no 'fractional' issues nor any counterparty risk at all.


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#859 2017-03-12 19:37:14

AinslieBullion
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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

Beware the Ides of March

In a spooky correlation with the infamous Ides of March (15 March) this week promises to be one to remember with the US Fed March meeting, US debt ceiling and the Netherlands elections all happening around that auspicious date and all taking on 11th hour news.  Indeed Theresa May was talked out of nominating 15 March for triggering Article 50 to start the Brexit because of 'that' date…

Friday night saw the non farm payrolls print an expected strong 235,000 new jobs and unemployment at just 4.7% essentially baking in the cake a rate rise on the 15th US time.  But the market reaction reflected the fact that whilst that headline number was strong we again saw weaker than expected average hourly earnings, rising just 0.2% (and remember last month was just 0.1%).  Gold actually rallied back up over US$1200 on the print rather than fall as expected.  This was helped along by Trump's Treasury Secretary Steven Mnuchin talking up currency manipulation threats ahead of the G20 and driving down the USD.

And as Business Insider reported on Friday that same Treasury Secretary has put the House on notice about the debt ceiling:

"In a letter to House Speaker Paul Ryan sent on Wednesday, Treasury Secretary Steve Mnuchin "the outstanding debt of the United States will be at the statutory limit" at midnight on March 16. At that point, Treasury will have to utilize "extraordinary measures" for the federal government to keep paying its bills.

Mnuchin told Ryan at that point "Treasury will suspend the sale of State and Local Government Series (SLGS) securities" "until the debt limit is either raised or suspended.""

And finally to the Netherlands where just days before an election where the anti Islam, anti immigration, anti EU Freedom Party was starting to lose its lead in the polls, we had the blow up in tensions between Turkey and the Netherlands putting a full gust of wind in Geert Wilders party which is now widely expected to emerge as the largest party in an election with no outright majority leader.

Gold has rallied after the last two Fed rate hikes and historically rallies on the sort of uncertainty the debt ceiling and political uncertainty possibly present this week.  It will be interesting to see how this all unfolds and what impetus a Wilders win in the Netherlands may provide to Le Penn in France.


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#860 2017-03-13 19:32:03

AinslieBullion
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Trouble Ahead in Europe

The EU situation seems to get more interesting by the day.  Moments ago the UK Parliament passed legislation handing PM May approval to start the Brexit process via Article 50 which she has flagged she will do toward the end of this month.  Some analysts explained the market's almost immediate rebound after the Brexit vote as 'the market sold like Brexit was an event when it's really a process'.  Well that process just got real so it will be interesting to see how the UK and EU deal with reality.  Already the Scottish first minister has stated her intention to take Scotland to another independence (and hence stay in / return to the EU) referendum next year.

Over to the Netherlands and as we reported yesterday tensions have boiled over with Turkey increasing the chances of far right Wilders' Freedom Party forming government in a couple of days time.  The more likely outcome will be a protracted process of forming coalitions adding more uncertainty to markets. The broader implication however is last night Turkey, in retaliation, stating the $3b EU immigration deal is now off, meaning they could unleash around 2 million more middle eastern immigrants into the EU.  That could well see even more support not just for Wilders in Netherlands but, more importantly, Marine Le Penn in France next month and more pressure on Merkel in September in Germany.  Germany matters less in a sense in that if France leaves the EU under Le Penn it is game over for the EU. 

Interesting times ahead to be sure.


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#861 2017-03-15 19:56:05

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Gold Surges But AUD Spoils the Party… For Now

As widely expected the US Fed raised rates last night.  In a combination of the classic 'buy the rumour sell the fact' and what was perceived to be a slightly more hawkish stance going forward gold (up $25), silver (up 55c), bonds and shares all surged on the news.  The only loser of the night was the USD, and in a big way which saw our AUD soar over the 77c mark and wipe out all the gains in Aussie gold and most of it in silver.  We also saw the incumbent party prevail in the Dutch elections with the Freedom Party come in a distant second.  That could have been negative for gold but it wasn't.  The resulting relief rally in the Euro no doubt added to the USD woes last night, and added to gold's rally.

So the big question remains… just how long will this Aussie dollar remain so strong?  It may be a little instructive to look at our sister story of Canada (Canadia to Mr Abbott).  Like us, Canada experienced a wonderful mining boom courtesy of China.  Like us, China has experienced a rampant property market in part due to Chinese investment and record low interest rates fuelling speculation.

In the last two days we have seen another couple of warning signs about how this could end.  Firstly, courtesy of Fairfax yesterday:

"The Reserve Bank is considering tighter bank lending standards amid concern about how the financial system would handle a collapse in housing prices, beginning with Brisbane apartments.

The Bank's assistant governor (financial system) Michele Bullock told a business event in Sydney that the Reserve Bank was particularly uneasy about the "looming oversupply of apartments in Brisbane in particular, and possibly in some parts of Melbourne".

"There are indicators that, in the event of a downturn, there might be systemic issues for the banking system," she said.

"The worry is what happened in the United States: a big downturn in housing prices and negative equity. Hopefully what we've done with strengthening the resilience of the households and the banks means they can withstand that sort of thing if it happened."

"But what we saw from the global financial crisis has made us more focused on the fact that just because one institution doesn't look to be doing anything particularly risky, it doesn't mean that if you aggregate it with the others the end result won't look quite risky."

It is local investment speculators more than Chinese investors that has fuelled our property bubble, all fuelled by cheap credit.  Indeed investors now account for over half of all housing loans in Australia, the highest ever save for the peak last year.  The RBA know that if they raise rates they could not just risk popping the bubble but could be adding costs to all these loans to a point, in a near zero wage growth environment, they could become unserviceable.  To wit the RBA said…

"We don't want households to find themselves in a situation where they have to emergency sell or whatever because they can't afford it any more."

BUT, and this is the big but, they also know the underlying economy and that belligerently strong AUD could do with lower rates.  They are stuck.  For now.

Also yesterday, the BIS (Bank for International Settlements, or 'the central banks' central bank) flagged Canada as joining China in their recession 'danger zone' measure of the gap between Credit and GDP.   Have a look below who is next… Australia.  That rebound in GDP last quarter may have saved us but you've read enough by now to know that may not last.  At some stage our massive private debt burden will come home to roost.  Gold in USD is on the up.  Whilst we may not be enjoying that ride here yet, a 77c AUD does not feel like a permanent feature….

BIS%20credit%20to%20GDP%20gap.jpg
Source:

Last edited by AinslieBullion (2017-03-15 19:56:33)


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#862 2017-03-16 20:17:38

AinslieBullion
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What Happens When the Rug's Pulled?

As we discussed in today's Weekly Wrap the Fed was a little elusive this week about when they might look to reduce the $4.5 trillion of US Treasuries they bought to print all that money from 2009. Whilst the US Fed stopped it's QE program at the end of 2014, the Bank of Japan (BoJ) and European Central Bank (ECB) have gone hard since, to the tune of US$200b/month currently.  No one seems to talk about the more opaque China but even on rough estimates they dwarf all.

QE%20fed%20boj%20ecb.png

There is no doubt all this money printing saved the world from the GFC fully playing out.  Few understand just how close it got to being a LOT worse before central banks jumped in and bailed out the system.  So what happens when you inject that much money into the 'system'?  Who are the winners?  The graph below goes a long way to explain the Brexit, Trump, One Nation, and Euro far right phenomenon.  It has enriched Wall Street and left Main Street behind.

QE%20asset%20growth.png

But it begs the much bigger questions of:

What happens to all those financial assets when its turned off (whilst the BoJ is not flagging any reprieve the ECB is due to stop QE this December); and
When will all those $trillions of freshly injected money see inflation take off (as Economics 101 says it must)
The cynical title of the next graph probably answers 1….

MSCI%20v%20QE.png

Especially in the context of world growth …

MSCI%20v%20gdp%20sep16.jpg

And as for 2., well that is clearly just starting to play out now, for despite the Fed maintaining that inflation is only just near its 2% target and manageable (and again extensively covered in today's Weekly Wrap) there are very clear signs of real inflation and more concerning stagflation as it is happening in a near zero wage growth and weak economic growth environment.

The big bogey is that all this cheap money has seen $60 trillion of global debt added since the GFC, ironically a crisis brought of too much debt.  Removing this support sees the cost of that debt increase at a time that the wage growth and the economic growth are not there to support it.

Rather than taking the medicine at the GFC, central banks have arguably created a much bigger monster and spent all their ammunition doing so.  There may be no silver bullet next time.

We are going to break tradition here (but it's a Friday and you have all weekend….) and provide the following addendum to today's news for you to read if you wish.  It is somewhat technical and long but we think it essential reading to gauge a bit more of what we've just said.  It's courtesy of Doug Noland's Credit Bubble Bulletin and is only part of a much longer piece (here if you want to read the whole thing).  If there is one takeaway, please note the constant comparisons with the amount of debt taken on last year compared to just prior to the GFC.

"New Fed Q4 Z.1 Credit and flow data was out this week. For the first time since 2007, annual Total Non-Financial Debt (NFD) growth exceeded $2.0 TN – a bogey I've used as a rough estimate of sufficient new Credit to fuel self-reinforcing reflation. Based on some nebulous "neutral rate," the Fed rationalizes that it's not behind the curve. Robust "money" and Credit growth argues otherwise. A Bloomberg headline from earlier in the week: "Taylor Rule Suggests Fed is About 12 Hikes Behind."

Though not so boisterous of late, there's been recurring talk of "deleveraging" – "beautiful" and otherwise – since the crisis. Let's update some numbers: Total Non-Financial Debt (NFD) ended 2008 at $35.065 TN, or a then record 238% of GDP. NFD ended 2016 at a record $47.307 TN, an unprecedented 255% of GDP. In the eight years since the crisis, NFD has increased $12.243 TN, or 35%. Including Financial Sector (that excludes the Fed) and Foreign U.S. borrowings, Total U.S. Debt has increased $11.422 TN to a record $66.079 TN, or 356% of GDP. It's worth adding that the $2.337 TN post-crisis contraction in Financial Sector borrowings was more than offset by the surge in Federal Reserve liabilities.

For 2016, NFD expanded $2.117 TN, up from 2015's $1.929 TN - to the strongest growth since 2007's record $2.501 TN. Household borrowings increased $521bn, up from 2015's $384bn, to the strongest pace since 2007's $947bn. Household mortgage borrowings jumped to $248bn, up from 2015's $129bn. On the back of an unusually weak Q4, total Business borrowings declined to $724bn last year from 2015's $812bn (strongest since '07's $1.117 TN).

The Bubble in Federal obligations runs unabated. Federal debt jumped $843bn in 2016, up from 2015's $725bn increase to the strongest growth since 2013's $857bn. It's worth noting that after ending 2007 at $6.074 TN, outstanding Treasury debt has inflated more than 160% to $16.0 TN. As a percentage of GDP, Treasury debt increased from 42% to end 2007 to 86% to close out last year.

Yet Treasury is not Washington's only aggressive creditor. GSE Securities jumped a notable $352bn in 2016 to a record $8.521 TN, the largest annual increase since 2008. In quite a resurgence, GSE Securities increased almost $1.0 TN over the past four years. Treasury and GSE Securities (federal finance) combined to increase $1.194 TN in 2016 to $24.504 TN, or 132% of GDP. For comparison, at the end of 2007 Treasury and Agency Securities combined for $13.449 TN, or 93% of GDP.

The unprecedented amount of system-wide debt is so enormous that the annual percentage gains no longer appear as alarming. Non-Financial Debt expanded 4.7% in 2016, up from 2015's 4.4%. Total Household Debt expanded 3.6%, with Total Business borrowings up 5.6%. Financial Sector borrowings expanded 2.9% last year, the strongest expansion since 2008.

Securities markets remain the centerpiece of this long reflationary cycle. Total (debt and equities) Securities jumped $1.50 TN during Q4 to a record $80.344 TN, with a one-year rise of $4.80 TN. As a percentage of GDP, Total Securities increased to 426% from the year ago 415%. For comparison, Total Securities peaked at $55.3 TN during Q3 2007, or 379% of GDP. At the previous Q1 2000 cycle peak, Total Securities had reached $36.0 TN, or 359% of GDP.

The Household Balance Sheet also rather conspicuously illuminates Bubble Dynamics. Household Assets surged $6.0 TN during 2016 to a record $107.91 TN ($9.74 TN 2-yr gain). This compares to the peak Q3 2007 level of $81.9 TN and $70.0 TN to end 2008. Q4 alone saw Household Assets inflate $2.192 TN, with Financial Assets up $1.589 TN and real estate gaining $557bn.

With Household Liabilities increasing $473bn over the past year, Household Net Worth (assets minus liabilities) inflated a notable $5.518 TN in 2016 to a record $92.805 TN. As a percentage of GDP, Net Worth rose to a record 492%. For comparison, Household Net Worth-to-GDP ended 1999 at 435% ($43.1 TN) and 2007 at 453% ($66.5 TN). Net Worth fell to a cycle low 378% of GDP ($54.4TN) in Q1 2009. In terms of Credit Bubble momentum, it's notable that Net Worth inflated over $2.0 TN in both Q3 and Q4."


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#863 2017-03-19 19:22:42

AinslieBullion
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What Happens After the Fed Rate Rise?

So the Fed raises rates last week and gold surges… what gives?  History is what.

Any reader, or in particular listener to the Weekly Wrap, will know the US economy is hardly on an economic tear, it's mild at best (the Atlanta Fed just revised down Q1 GDP estimate to just 0.9%...).  The problem is that history shows that after previous rate hikes economic growth slows.  The graph below shows that when this done in a low growth environment, as the US is currently experiencing, a recession has occurred within 3 to 9 months.  For fun, try and spot when a rate hike has not preceded a recession or crash? 

Fed-Crisis-Chart-GDP-Rates-030717.png

Last week Business Insider Australia ran an article titled "The Fed's 3rd rate hike could be bad for stocks" based on the '3 Steps and a Stumble' adage familiar to many on Wall Street.  This adage came about from the historic phenomenon of shares selling off after the 3rd rate hike in a cycle (as a reminder that happened last week…).  From that article, and referring to the graph below:

""The S&P 500 has endured significantly below average results from 1 to 12 months after 3rd rate hikes in 11 events back to 1955," they wrote in a note on Tuesday. "Six (more than half) of those hikes occurred within a year of a major cyclical top for stocks (1955, 1965, 1968, 1973, 1980, 1999)."

The only exception was in 2004, when stocks continued to rally for another three years before the Great Recession [GFC].

"Hikes are generally bad for stocks, somewhat bad for the US dollar, and bullish for 10-year yields and commodities [gold & silver]," Leveroni and Tian said.

"Will rate hikes derail stocks this time around? In a general sense, yes. Is there a deterministic formula or trigger for precisely when? Probably not.""…. You just need to be ready.

3-Steps-And-Stumble.png


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#864 2017-03-21 19:43:31

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Re: Ainslie Bullion - Daily news, Weekly Radio and Discussions

Gold Surges, Shares Fall – Déjà Vu?

Last night we saw a couple of recent records broken.  US shares fell more than 1% in a session for the first time in 110 days, ending its 'bullet-proof' run, one of the longest in decades.  Whilst most headlines are blaming the standoff in the GOP house on the health care bill flagging future problems ahead for Trump getting his tax cuts through likewise, it was probably also in part due to the spectacular fall of the USD, down the most in 2 years last night.  The Dow slumped 1.24% (and now 500 points lower than its recent high) and the S&P500 down 1.24% whilst the USD sank below 100 for the first time since the election. 

Gold jumped 1.6% (1.8% in AUD) and silver up 1.5% (1.7% in AUD) and back up through its 50 day MA. 

Whether it is the events of yesterday or just more of the repeat of financial market trouble and precious metal strength after a Fed rate hike we've seen before.  Reading our previous 2 articles you know full well the size of the debt issue and the effects of higher costs of debt (courtesy of rising rates) will have.  The last Fed rate hike was not unanimous by the way.  Minneapolis Fed President Kashkari dissented on the rate hike.  His dovish comments in the press yesterday no doubt added fuel to the uncertainty in the market.

Regardless today promises to be a hard day on the Aussie (and Asia more generally) sharemarkets and the actions after previous hikes could spell more trouble to come.


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#865 2017-03-22 20:00:06

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Bullion Demand Falls – or Did It?

There has been a little alternative press lately about the drop in physical demand for gold and silver.  That seems a bit at odds with the price movement but it is missing 2 essential factors.  One, it ignores Chinese demand, and secondly it ignores gold bought to back the 'paper' gold ETF trades. 

But it does appear to be correct from a bullion sales in the west perspective (to the end of February) and gels with our experience at Ainslie Bullion over that period.  The following chart however puts a few 'barometers' of western demand (i.e. US Mint coin and Perth Mint sales) over that period (versus the same last year) against the well regarded proxy for TOTAL Chinese demand (in via Hong Kong and Shanghai) of the Shanghai Gold Exchange withdrawals.  PS…. Watch out for our Sunday morning email for more on this.

east%20v%20west%20Feb17.jpg

Percentages only tell half the story too.  That Chinese demand was 179 tonnes of gold, a record for that month.  To put that into perspective that equates to two-thirds of global gold monthly mine supply.  February 2016 saw 107.6 tonne by comparison, a 71.6 tonne increase this year or 2.3m oz.  To put that into further perspective the above decreases in US Mint and Perth Mint gold sales total around just 67,806oz, a fraction of 2.3m.

Secondly, in last week's Weekly Wrap, we reported the "World Gold Council released their end of February figures showing total holdings in gold-backed ETFs and the like rose 4% or 90.6 tonne to 2,246.1t from January and the value of $90.7bn was up 8% with the strengthening price."

So what is the takeaway? Well for a start the data is to the end of February and doesn't capture the risk off sentiment that entered the market this week.  But moreover we are reminded of Warren Buffett's famous quote:

"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful"


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#866 2017-03-23 20:28:37

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US Debt Ceiling or Debt Target?

With very little press or fanfare, on Wednesday, the temporary suspension of the debt ceiling negotiated by Obama just 16 months ago ended.  No one probably thought it possible they could add $1.4 trillion in just that time but they did and now the US government is unable to go into any more debt until the debt ceiling is raised.  The so called "emergency measures" accounting tricks can buy them some months but already, the U.S. Treasury has less cash on hand than Apple or Google. 

Trump's first budget, for all its headline grabbing cuts, included big increases in defence and still presents a deficit and hence more debt.  That's not a new thing however… the US has run continual deficits since 1969.  The graph below shows the lead up to the now famous 2013 debt ceiling fiasco that saw government employees go unpaid, offices shut down and credit agencies downgrade the biggest economy in the world.  That graph indicates that Clinton delivered a surplus but there is debate this was courtesy of some clever accounting shuffling and was still in deficit in real, conventional terms.  Either way it is a small blip on what has been a staggering story of borrowing today at the expense of future generations, future generations that will at some stage wear the day of reckoning.

debt-limit-history-data-for-web-2013-updated-rjr-chart1_large.jpg

From Bloomberg:

"Euphoria has been pervasive in the stock market since the election. But investors seem to be overlooking the risk of a U.S. government default resulting from a failure by Congress to raise the debt ceiling. The possibility is greater than anyone seems to realize, even with a supposedly unified government.

In particular, the markets seem to be ignoring two vital numbers, which together could have profound consequences for global markets: 218 and $189 billion. In order to raise or suspend the debt ceiling, 218 votes are needed in the House of Representatives. The Treasury's cash balance will need to last until this happens, or the U.S. will default.

The opening cash balance this month was $189 billion, and Treasury is burning an average of $2 billion per day – with the ability to issue new debt. Net redemptions of existing debt not held by the government are running north of $100 billion a month. Treasury Secretary Steven Mnuchin has acknowledged the coming deadline, encouraging Congress last week to raise the limit immediately."

After the argy bargy we saw last night with the far right Freedom Caucus over the healthcare bill, that 218 votes is by no means a done deal.  Republicans control 237 seats in the house and the Freedom Caucus numbers 29, that leaves 208 for the mathematically challenged…

In 2013 the government had to decide on paying interest on their enormous debt pile or their workers.  With credit ratings at stake they chose the former.  That interest bill is far bigger now with around $3.6 trillion MORE debt since 2013.

Trump's love of tweets means we can be reminded of his position in the 2013 debt ceiling debate when he tweeted "I cannot believe the Republicans are extending the debt ceiling — I am a Republican & I am embarrassed!"  It will be interesting to see his reconciliation of that in a couple of months time when his government runs out of money…

Everyone seems to love Obama.  He was charismatic to be sure, but he also accumulated a staggering amount of debt delivering record level deficits buying such popularity.  I have no doubt I would be enormously popular with my friends if I borrowed heaps and lavished them with goodies.  I would however leave my kids with a debt bill that may well see them homeless on the streets.  In its very essence this is what governments are doing to us all now.  But don't expect it to stop until it's out of their control.

I read once "The debt ceiling should be called the debt target, and they hit it every single time."


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#867 2017-03-27 20:44:30

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Beware Gold ETF's

There is a time to trust the system and a time to protect you and your family's future.  This isn't a 'big brother is coming to get you' statement but merely one of practical reality.  Exchange Traded Fund (ETF) ownership of gold sees a potentially costly combination of trust in the system and laziness.

Forbes last week ran an article titled ´GLD vs. Physical Gold: Which Is The Better Investment Now?'.  Their conclusion was clear… physical gold.  We wrote about some of the pitfalls of owning gold through ETF's back in June last year and you should read it here if you have forgotten or missed it.

But Forbes raise some other details that we will summarise below.  They use SPDR Gold Trust (GLD) as the example given it is by far the biggest and most popular ETF for gold.

You cannot request physical delivery unless you own more than 100,000 shares ($1.2m worth) and even then there is a clause allowing them to settle your request in cash.
An advantage for ETF's is you can employ leverage with options – but then that of course introduces risk not available with bullion.
Stating the obvious, but ETF's introduce counterparty risk.  As they put it: "While gold ETFs can be a fine investment, they come with a lot of counterparty risk inherent in their chain of custody. And this risk will only grow commensurately with systemic uncertainties.

Think about it: If you own GLD, you must rely on a counterparty to make good on your investment. If the fund's management, structure, chain of custody, operational integrity, regulatory oversight, or delivery protocols break down, your investment is at risk."

Breaking down that chain of custody – "When you invest in GLD, you buy shares through an Authorized Participant, which is usually a large financial institution responsible for obtaining the underlying assets necessary to create ETF shares.
When it does so, it is buying shares in the fund's trustee, the SPDR Gold Trust. The trustee then uses a custodian (HSBC) to source and store the gold for it."  To make it worse there is also the use of 'Sub Custodians' which HSBC can outsource to, adding yet another layer of counterparty risk.  But it would be all underwritten yeah?...

"There are no written contractual agreements between sub-custodians and the trustees or the custodians, which means if a sub-custodian drops the ball, the ability of the trustee or the custodian to take legal action is limited.
This leaves the trustee on the hook for any negligence. But trustees don't insure the gold for gross negligence; they leave that to the custodian, who secures limited general insurance coverage for the contents of the vaults. The value of the gold in the vaults is likely to be much greater than this limited policy would cover.

What this all boils down to is that if anything happens to any of the counterparties, you're the one who loses. And you have zero recourse."

But HSBC is one of the world's biggest banks so you should be in safe hands, right?
"Here's a look at HSBC's Rap Sheet:
fined $1.92 billion for violating laws designed to prevent money laundering and other illegal financial activity
allowed drug traffickers to launder billions of dollars in the US, and billions more across borders to countries facing sanctions, including terror-ridden Libya
admitted to gross violations of the Bank Secrecy Act, including failure to establish and maintain an effective anti-money-laundering program, failure to establish due diligence, and involvement in the laundering of over $881 million
accepted $15 billion in cash across the bank's counters in Mexico, Russia, and other countries
paid a $275 million penalty to settle with the Commodity Futures Trading Commission for manipulation of benchmark rates used in the foreign exchange markets
fined $470 million for abusive mortgage practices during the 2008 crisis
faces criminal investigations in the US, France, Belgium, and Argentina for helping wealthy clients across the world evade hundreds of millions of pounds worth of taxes"
As we wrote last year ETF's are not a 'free ride' either.  GLD comes at an annual cost of around 0.4% plus you have brokerage fees in and out.  You don't need to hold gold for long before the buy/sell spread for physical becomes cheaper than holding an ETF.  But to be frank, this is semantics as we are talking about protecting your wealth in an event that could see financial markets fall over 50%.  As for physical gold lets leave with that article's thoughts:

"Gold funds like the GLD ETF clearly don't offer the level of safety people expect, especially during times of economic downturn or other financial turmoil. This is why serious investors who are looking to put protections in place for their portfolios prefer gold bullion.

Gold bullion refers to specific pieces of physical metal held in your name and title. It is not a paper proxy for gold, but the real thing—and you own it outright.

When you own gold bullion, you can never suffer a default. There's no counterparty to make good on a paper contract. Once you buy gold bullion, it's yours, and it doesn't require the backing of any bank, government, or brokerage firm.

Physical gold offers advantages that GLD can't. In addition to hedging risk, gold also has specific physical attributes that make it highly valuable, and is an excellent wealth and portfolio diversifier. No other asset has all of these intrinsic financial traits."


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#868 Yesterday 19:11:50

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An Insolvent US Fed – Closer Than You Think?

We often write of QE, bond yields v prices, and the Fed's balance sheet assuming at least a basic understanding of such things.  We acknowledge that might not always be the case so when we come across a well constructed explanation it is worth sharing verbatim to make sure we are all on the same page.  The following is courtesy of Simon Black of Sovereign Man who many will know.  Even the more financially literate may not have thought this through like Simon explains….

"September 10, 2008 was one of the last "normal" days in the world of banking and finance.

That afternoon, the US Federal Reserve published its routine, weekly balance sheet report, indicating that the central bank had total assets worth around $925 billion.

Just a few days later, Lehman Brothers filed for bankruptcy, kicking off the most severe economic crisis since the Great Depression.

And almost immediately the Fed launched a series of unprecedented measures in a desperate attempt to contain the damage.

They called it "Quantitative Easing", which was a fancy way of saying the Federal Reserve was printing money and giving it to the banks and US government.

When the commercial banks needed to sell their non-performing toxic assets, the Fed printed money to buy that garbage.

When the US government needed to borrow trillions of dollars to bail out failing companies, the Fed printed money and loaned it to Uncle Sam.

By January 2015, the size of the Fed's balance sheet had more than quadrupled to $4.5 trillion.

It was an astonishing increase; the Fed had essentially conjured more than 3.5 trillion dollars out of thin air.

In exchange for all at printed money, the Fed had purchased a bunch of assets, including about $2.4 trillion worth of US government bonds.

This ranks the Fed as one of the top owners of US government debt, just behind the Social Security trust funds.

In fact the US government owes more money to the Federal Reserve than to China, Japan, and Saudi Arabia combined.

Now, remember that interest rates were at historic lows during the time that the Fed was buying up all that US government debt.

From the start of the financial crisis in September 2008 until the day the Fed's balance sheet peaked in January 2015, the average yield on the 10-year US Treasury was about 2.6%.

That's close to where the 10-year yield is today; just last week it was 2.62%.

This is where things quickly get out of control.

If you don't know anything about bonds, there's just one important principle to understand: as interest rates go up, bond prices go down.

Just like shares of Apple or Exxon, bonds are financial securities.

Investors pay a certain price for bonds just like they pay a certain price for Apple stock. And just like stock prices, bond prices go up and down.

Think about it like this: let's say you own a government bond that pays $25 per year in interest.

That $25 per year is set in stone. It's a contract.

And today, the market price for that bond is $1,000.

So, in very simple terms, an investor is paying $1,000 for the bond's $25 annual income stream.

That works out to be a 2.5% annual return (not including maturity).

At the moment, investors are happy to receive 2.5% because that's the current rate across most of the market.

But let's say tomorrow the Federal Reserve jacks up interest rates to 10%.

Everything changes. Investors can now make 10% just holding money in a bank account.

The bond you own, however, still pays $25 per year. That hasn't changed.

So if you want to sell it, you'll have to slash the price; no investor will pay $1,000 to earn just 2.5% from the $25/year income stream.

Investors can now get 10% elsewhere in the market.

So in order for your bond's $25/year income stream to match the 10% return that a potential buyer can receive elsewhere, you'll have to drop your price to just $250.

In other words, the price of your bond has dropped 75%, from $1,000 to $250.

This is an extreme and simplistic example, but it paints the picture: when interest rates rise, bond prices fall.

So let's go back to the Federal Reserve and its $2.4 trillion government bond portfolio.

The Fed recently raised interest rates. And they claim they'll continue to raise rates for the next 1-2 years.

But as we discovered earlier, as the Fed raises rates, the value of their bonds will fall… and the Fed will suffer "unrealized losses".

This is a gigantic problem because the Fed can't afford to suffer any losses.

Since the start of the financial crisis, the Fed has whittled down its capital buffer to almost nothing-- right around $40 billion.

This means that the Fed can only afford to lose $40 billion before going bust.

$40 billion might sound like a lot.

But considering the Fed has $2.4 trillion in government bonds, and $4.5 trillion in total assets, $40 billion is nothing-- just 0.9% of the Fed's total asset portfolio.

So if bond prices fall by just 0.9%, i.e. interest rates go up just slightly, the Fed will be insolvent.

This is already happening: as interest rates have risen, bond prices are starting to fall.

And based on the Fed's own data, they're already sitting on $14.2 billion in net unrealized losses.

So a big chunk of their tiny $40 billion capital buffer has already been wiped out.

As interest rates continue to rise, the rest of that $40 billion will vanish, at which point the Fed will be completely bankrupt.

And the US government, which itself is totally insolvent, won't be in a position to bail them out.

Look, I'm an optimist. I think these are exciting times and that there's a ton of incredible opportunity around the world.

But it would be seriously foolish to ignore the looming insolvency of the world's most systematically important central bank.

Two words: Own gold."


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#869 Yesterday 20:57:28

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Bravo.  Very good article even for a simple minded man like me.  Makes complete sense. Wow!


www.chinesemedals.com  Here is our website. We do collect, but we also sell what we collect, to folks like you, all over the world.

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