Tag Archives: credit bubble

America’s Supernova: The Final Stage Of Collapse

I started observing the slow-motion train-wreck in process in 2001 – a year removed from my perch as a junk bond trader on Wall Street and living several thousand miles away from NYC and DC in the Mile High City, where the view is a lot more clear than from either coast.

The United States has been in a state of collapse for several decades.   To paraphrase Hemingway’s flippant description of the manner in which one goes bankrupt, it happens in two ways:   slowly then all at once (“The Sun Also Rises”).

The economic decay was precipitated by the advent of the Federal Reserve;  then reinforced by FDR’s executive order removing gold from the citizenry’s ownership, the acceptance of Bretton Woods, and the implementation of what is capriciously termed “Bretton Woods Two” – Nixon’s disconnection of the dollar from the gold standard.  If you study the monetary and  debt charts available on the St. Louis Fed’s website, you’ll see that post-1971 both the money supply and the amount of debt issued at all levels of the system (public, corporate, household) began gradually to go parabolic.

I would argue the political collapse kicked into high-gear during and after the Nixon administration, although I know many would argue that it began shortly after the Constitution was ratified in 1788.  At the Constitutional Convention, someone asked Ben Franklin if we now had Republic or a Monarchy, to which Franklin famously replied, “a Republic, if you can keep it.”

Well, we’ve failed to keep the Republic.  Now the political, economic and financial system is controlled by a consortium of big banks, big corporations, the Department of Defense and a handful of very wealthy individuals, all of which are ruthlessly greedy and misanthropic.

The current political and social melt-down is nothing more than a symptom of the underlying rot – rot that was seeded and propagated by the implementation of fiat currency and a fractional banking system.  The erection of the Fed gave control of the country over to those with the authority to create paper money and issue debt.

And now the political and social clime of the country has gone from ridiculous to beyond absurd.  James Kunstler wrote a must-read piece which captures the essence of the Dickensian  societal caricature that has sprung to life before our very eyes (Total Eclipse):

What do you know, long about Wednesday, August 16, 2017, House Minority Leader Nancy Pelosi (D-Cal) discovered that the United States Capitol building was infested with statues of Confederate dignitaries. Thirty years walking those marbled halls and she just noticed? Her startled announcement perked up Senator Cory Booker (D- NJ) who has been navigating those same halls only a few years. He quickly introduced a bill to blackball the offending statues. And, of course, the congressional black caucus also enjoyed a mass epiphany on the bronze and stone delegation of white devils…

…Just as empires tend to build their most grandiose monuments prior to collapse, our tottering empire is concocting the most monumentally ludicrous delusions before it slides down the laundry chute of history. It’s as if the Marx Brothers colluded with Alfred Hitchcock to dream up a melodramatic climax to the American Century that would be the most ridiculous and embarrassing to our posterity.

I would urge everyone to read the entire piece, which I’ve linked above.   And now for America’s coup de grace, it has offered up “president Trump,” which by the way not any worse than the alternative would have been.  Rather, it’s another symptom of the cancer beneath the skin.

Empires in collapse are at their most dangerous to the world when they are on the brink of imploding.  I was discussing this with a good friend the other day who was still clinging to the brainwashing we received in middle  school history classes that “America is different.” This just in:  America is not different.

The Financial Times has written a disturbing – yet accurate – accounting of the current turmoil facing the White House and the world (America Is Now A Dangerous Nation):

The danger is that these multiple crises will merge, tempting an embattled president to try to exploit an international conflict to break out of his domestic difficulties…Mr Gorka’s flirtation with the idea that the threat of war could lead Americans to rally around the president should sound alarm bells for anyone with a sense of history…Leaders under severe domestic political pressure are also more likely to behave irrationally.

In commentary which reinforces my view presented above, the FT article closes with:

A final disturbing thought is that Mr Trump’s emergence increasingly looks like a symptom of a wider crisis in American society, that will not disappear, even when Mr Trump has vacated the Oval Office. Declining living standards for many ordinary Americans and the demographic shifts that threaten the majority status of white Americans helped to create the pool of angry voters that elected Mr Trump. Combine that social and economic backdrop with fears of international decline and a political culture that venerates guns and the military, and you have a formula for a country whose response to international crises may, increasingly, be to “lock and load”.

The current “everything bubble,” fueled by the creation of massive amounts of fiat money and debt issuance is America’s “supernova.”  It’s the final explosion of fraudulent currency printing and credit creation.   I sincerely hope that when the pieces hit the ground, there will be enough material with which the original Republic can somehow be reconstructed.

 

Western Central Bank Fear Of Gold Is In The Air

Ballooning open interest, heavy fix selling, aggressive post-settlement selling, flash crashes – this all seems a lot of bother. Perhaps the Other Side is afraid of something. – John Brimelow from his Gold Jottings report

Wednesday  evening at 7:06 EST, at one of the least liquid trading periods of the 23 hour trading day for Comex paper gold, a “motivated” seller unloaded 10,777 August gold contracts into the CME’s Globex trading system, knocking the price of gold down $9 in 25 minutes.  There were no obvious news or events reported that would have triggered any investor to dump over 1 million ozs of gold with complete disregard to price execution.

Rather, the selling was the act of an entity looking to push the price of gold a lot lower in “shock and awe” fashion.  The 10.7k contracts sold were just the August contracts.   There was also related selling in several other contract months.  To be sure, the total number of contracts unloaded included  hedge fund selling from stop-losses triggered in the black boxes of momentum-chasing hedge funds.

In addition to the appearance of frequent, strategically-timed “fat finger” flash crashes, the open interest in paper gold on the Comex has soared by 23,000 contracts since last Friday. This added 2.3 million paper gold ounces to the Comex open interest, which represents nearly 27% of the total amount of alleged physical gold ounces sitting Comex vaults.   In fact, the total paper gold open interest on the Comex is 455,605 contracts, or 45.5 million ounces of gold. This is 530% more paper gold than the total amount of gold reported to be sitting in Comex vaults.

The dramatic rise in open interest accompanied gold’s move in price above the 50 dma.  It’s typical for the bullion banks on the Comex to start flooding the market with additional paper contracts in order to suppress strong rallies in the price of gold.  Imagine what would happen to the price of gold if the regulatory authorities forbid the open interest in Comex gold contracts to never exceed 120% of the total amount of gold in the Comex vaults.  This is unwritten “120% rule” is de rigeur with every other commodity contract except, of course, silver.

The “flash crash” and “open interest inflation” are two of the obvious signals that the western Central Banks/bullion banks are worried about the rising price of gold.  The recent degree of blatant manipulation reflects outright fear. I suspect the fear is derived from two sources.  First is a growing shortage of physical gold that is available to deliver into the eastern hemisphere’s voracious import appetite.  Exports from Swiss refineries have been soaring.   India’s appetite for gold has not been even slightly derailed by the 3% additional sales tax imposed on gold.

Speaking of India, the World Council has put forth a Herculean effort to down-play to amount of gold India has been and will be buying.  After India’s 351 tonnes imported in Q1, the WGC tried to shove a 90 tonne per quarter forecast down our throats for the rest of the year. India’s official tally for Q2 is 167.4 tonnes.  Swing and a miss for the WGC.  Now the WGC  is forecasting  at total of 650-750 tonnes for all of 2017.

The WGC forecast is idiotic given that India officially imported 518.6 tonnes in 1H and 2H is traditionally the best seasonal buying period of the year AND a copious monsoon season means that farmers will be flush with cash – or rupees, rather – which will be quickly converted into gold.  Two more swings and misses for Q3 and Q4 and the WGC is out of excuses for why India likely will have imported around 1,000 tonnes, not including smuggled gold, in 2017.  This aggressive misrepresentation of India’s gold demand reeks of propaganda.  But for what purpose?

Back to the second reason for the banks to fear a rising price of gold:  the inevitable collapse of the largest financial bubble in history inflated by Central Bank money printing and credit creation.   The trading action in the gold and silver markets resembles the trading activity in 2008 leading up to the collapse of Lehman and the de facto collapse of Goldman Sachs.

One significant  difference is the relative effort exerted to keep a lid on the price of silver.   In early 2008, with the price of silver trading between $17 and $19, the open interest in Comex silver peaked at 189k contracts (Feb 29th COT report).   Currently the open interest is 206k contracts and it’s been over 240k.    In late 2008, the Comex was reporting over 80 million ozs of “registered” silver in its vaults. “Registered” means “available for delivery.” There were thus roughly 3 ozs of paper gold for every reported ounce of physical gold available for delivery.  Currently the Comex is reporting 38.5 million ozs of registered silver. That’s 5.3 ozs of paper silver for every ounce of registered silver.

As you can see, the relative effort to suppress the price of gold and silver is more intense now than in 2008.   Given what occurred in 2008, I have to believe that fear emanating from the western banks currently is derived from events unfolding “behind the curtain” that are worse than what hit the system in 2008.

Orwell’s Theorem: The Opposite of Truth Is The Truth

All propaganda is lies, even when one is telling the truth. – George Orwell

A reader commented that the number of corporate lay-offs in America is escalating, yet the unemployment rate seems to keep going lower.  Part of the reason for this is that the 2008 collapse “cleansed” corporate america’s payrolls of a large number of workers who are eligible to file for unemployment benefits.

The Labor Force is derived from the number of people employed + the number of people looking for work.  To continue receiving jobless benefits during the defined period in which fired workers can receive them, they have to demonstrate that they are looking for work.  Ergo, they are considered part of the Labor Force.  Once the jobless benefits expire, they are removed from the Labor Force unless an enterprising Census Bureau pollster happens to get one on the phone and they answer “yes” when asked if they are/were actively looking for work.   Those who do not qualify for jobless benefits more often than not are removed from the Labor Force tally.  This is why, last month for example, over 600,000 people were removed from the Labor Force.

Reducing the Labor Force de facto reduces the unemployment rate.  Thus, there’s an inverse relationship between layoffs and the unemployment rate.  It’s an Orwellian utopia for the elitists.

Today’s stock market is a great example of the “opposite of truth is the truth” theorem.   It was reported by Moody’s that credit card charge-offs have risen at to their highest rate since 2009 – LINK.  This means that defaults are rising at an even faster rate, as finance companies use accounting gimmicks to defer actual charge-offs as long as possible.  A debt that is charged-off has probably been in non-pay status for at least 9-12 months.

The same story has been developing in auto loans. The 60+ day delinquency rate for subprime auto loans is at 4.51%, just 0.18% below the peak level hit in 2008. The 60+ day delinquency rate for prime auto loans is 0.54%, just 0.28% below the 2008 peak. In terms of outright defaults, subprime auto debt is just a shade under 12%, which is about 2.5% below its 2008 peak. Prime loans are defaulting at a 1.52% rate, about 200 basis points (2%) below the 2008 peak. However, judging from the rise in the 60+ day delinquency rate, I would expect the rate of default on prime auto loans to rise quickly this year.

Now here’s the kicker: In Q3 2008 there was $800 billion in auto loans outstanding. Currently there’s $1.2 trillion, or 50% more. In other words, we’re not in crisis mode yet and the delinquency/default rates on subprime auto debt is near the levels at which it peaked in 2008. These numbers are going to get a lot worse this year and the amount of debt involved is 50% greater. But the real problem will be, once again, the derivatives connected to this debt. It would be a mistake to expect that this problem will not begin to show up in the mortgage market.

Amusingly, the narrative pitched by Wall Street and the sock-puppet financial media analysts is that the credit underwriting standards have only recently been “skewed” toward sub-prime. This is an outright fairytale that is accepted as truth (see Orwell’s Theorem). The issuance of credit to the general population has been skewed toward sub-prime since 2008. It’s the underwriting standards that were loosened.

The definition of non-sub-prime was broadened considerably after 2008.  Many borrowers considered sub-prime prior to 2008 were considered “prime” after 2008. The FHA was the first to pounce on this band-wagon, as it’s 3% down-payment mortgage program enabled the FHA to go from a 2% market share 2008 to a 20% market share of the mortgage market.

Capital One is a good proxy for lower quality credit card and auto loan issuance. While Experian reports an overall default of 3.3% on credit cards, COF reported a 5.14% charge-off rate for its domestically issued credit cards. COF’s Q1 2017 charge-off rate is up 48 basis points (0.48%) from Q4 2016 and up 100 basis points (1%) from Q1 2016. The charge-off rate alone increased at an increasing rate at Capital One over the last 4 quarters. This means the true delinquency rates are likely surging at even higher rates. This would explain why COF is down 17% since March 1st despite a 2.1% rise in the S&P 500 during the same time-period.

To circle back to Orwell’s Theorem, today the S&P 500 is hitting a new record high. But rather than the FANGs + APPL driving the move, the push higher is attributable to a jump in the financial sector. This is despite the fact that there were several news reports released in the last 24 hours which should have triggered another sell-off in the financial sector. Because  the stock market has become a primary propaganda tool, it’s likely that the Fed/Plunge Protection Team was in the market pushing the financials higher in order to “communicate” the message that the negative news connected to the sector is good news.  Afer all, look at the performance of the financials today!

Days like today are great opportunities to set-up shorts. Most (not all) of the ideas presented in the Short Seller’s Journal this year have been/are winners.  As an example Sears (SHLD) is down 39% since it was presented on April 2nd.   I’ll present two great short ideas in the financial sector plus a retailer in the next issue.  You can learn more about the Short Seller’s Journal here:  SSJ Info.

An Impending Economic And Financial Disaster


You’ve probably heard/read a lot lately about the VIX index. The VIX index is a measure of the implied volatility of S&P 500 index options. The VIX is popularly known as a market “fear” index. The concept underlying the VIX is that it measures the theoretical expected annualized change in the S&P 500 over the next year. It’s measured in percentage terms. A VIX reading of 10 would imply an expectation that the S&P 500 could move up or down 10% or less over the next year with a 68% degree of probability. The calculation for the VIX is complicated but it basically “extracts” the implied volatility from all out of the money current-month and next month put and call options on the SPX.

The graph above plots the S&P 500 (candles) vs. the VIX (blue line) on a monthly basis going back to 2001. As you can see, the last time the VIX trended sideways around the 11 level was from 2005 to early 2007. On Monday (May 8) the VIX traded below 10. The last time it closed below 10 was February 2007. The VIX often functions as a contrarian indicator. As for the predictive value of a low VIX reading, there is a high correlation between an extremely low VIX level and large market declines. However, the VIX does not give us any information about the timing of a big sell-off other than indicate that one will likely (not definitely) occur.

In my opinion, an extremely low VIX level, like the current one, is signaling an eventual sell-off that I believe will be quite extreme.

The true fundamentals underlying the U.S. economy – as opposed the “fake news” propaganda that emanates from uncovered manholes at the Fed, Wall Street and Capitol Hill – are beginning to slide rapidly.   The primary reason for this is that the illusion of wealth creation was facilitated by the inflation of a massive systemic debt and derivatives bubble.  Government and corporate debt is at all-time highs.  The rate of debt issuance by these two entities accelerated in 2010.  Household debt not including mortgages is at an all-time high.  Total household debt including mortgages was near an all-time high as of the latest quarter (Q4 2016) for which the all-inclusive data is available.  I would be shocked if total household was not at an all-time high as I write this.

The fall-out from this record level of U.S. systemic debt is beginning to hit and it will accelerate in 2017.  In 2016 corporate bankruptcies were up 25% from from 2015.   So far in 2017, 10 big retailers have filed for bankruptcy, with a couple of them completely shutting down and liquidating.    Currently there’s at least 9 more large retailers expected to file this year.   In addition to big corporate bankruptcies, the State of Connecticut is said to be preparing a bankruptcy filing.

The household debt statistics show a consumer that is buried in debt and will likely begin to default on this debt – credit card, auto, personal, student loan and mortgage – at an accelerated rate this year.  The delinquency and charge-off statistics from credit card and auto finance companies are already confirming this supposition.

In the latest issue of the Short Seller’s Journal, I review the VIX and the deteriorating consumer debt statistics in detail and explain why the brewing financial crisis will be much worse than the one that hit in 2008.  I also present a finance company stock and a housing-related stock as ways to take advantage of the crumbling consumer.   You can find out more about subscribing to the Short Seller’s Journal here:  Subscription information.   There’s no monthly minimum require and subscribers have an opportunity to subscribe to my Mining Stock Journal for half-price.

I look forward to any and every SSJ. Especially at the moment as I really do think your work and thesis on how this plays out is being more than validated at the moment with the ongoing dismal data coming out, both here in the U.K. and in the U.S.  – U.K. subscriber, James

 

Is Gold Signaling The Next Financial Crisis?

Gold and silver have been sold down pretty hard since April 18th. But the structure of the weekly Commitment of Traders report, which shows the long and short positions of the various trader classifications (banks, hedgers, hedge funds, other large investment funds, retail) had been flashing a short term sell signal for the last few weeks. The net short position of the Comex banks and the net long position of the hedge funds had reached relatively high levels. Except Thursday (May 4th), almost all of the price decline action was occurring after the London p.m. gold fix and during the Comex floor trading hours, exclusively. This tells us all we need to know about the nature of the selling, especially given the enormous amount of physical gold currently being accumulated by the usual eastern hemisphere countries. The table to the right  calculates the Comex banks’ paper gold positioning going back to 2005.  As you can see, currently the net short position and the net short position as a percent of total open interest has reached a relatively high level. This typically happens when the banks engage in raiding the Comex by unloading massive quantities of paper gold in bursts in order to trigger hedge fund stop-loss selling. It serves the dual purpose of pushing down the price of gold and providing a relatively riskless source of profits for the banks.

This is the cycle that has repeated numerous times per year since 2001. This time, however, more than any other time since 2001, the sell-off in the price of gold is counter-intuitive to the collapsing financial and economic condition of the United States, specifically, and the entire world in general. The likely reason for the current price take-down of gold is an attempt by the elitists to remove the batteries from the “fire alarm” mechanism embedded in a rising price of gold. An alarm that lets the populace know that there’s a big problem that will hit the system sooner or later; an alarm that lets the public know systemic failure is beyond Government and Central Bank Control.

A similar manipulated take-down of the price of gold and silver occurred in the spring of 2008, ahead of the great financial crisis. Gold was pushed down to $750 from $1050 and silver was taken down from $20 to $10. This price decline was counter-intuitive to the collapsing financial condition of the U.S. financial system, which had become obvious to anyone not blinded by the official propaganda at the time. Of course, after the financial collapse occurred and was addressed with money printing, the price of gold ran up to an all-time high.

It’s likely that a similar situation is taking place now. Only this time around all “assets” are in price-bubbles fomented by record levels of fiat money creation and the interminable expansion of credit. The debt portion of this equation is getting ready to hit the wall, the only question is timing. This explains the parabolic move in the price of Bitcoin. Bitcoin is nearly impossible to manipulate. Once the western Central Banks lose the ability to manipulate the price of gold in the derivatives markets, the price of gold and silver will go on their own parabolic price journey – one that will leave the price of Bitcoin in the rear view mirror.

If you are interested in getting unique, insightful gold/silver market analysis and mining stock investment ideas ahead of the market, subscribe to the Mining Stock Journal.  You can get more information about this here:  MSJ subscription info.

On The Home-Stretch To Collapse

The warning signs are there but very few look for them or want to see them. But it’s a dynamic in which once you see it you can’t “unsee” it. A teacher I know told me this morning that Colorado school districts are quietly cutting staff across all districts. The only reason this would be occurring is that the State is projecting a decline in tax revenues. The only reason tax revenues would be declining is because economic activity is slowing or contracting. And Colorado supposedly has one of the more “vibrant” State economies.

The soaring level of “hope” that, for some unexplainable reason, accompanied the election of Trump is now crashing. The so-called “hard data” which somewhat measures the level of economic activity never moved higher in order to justify the optimism – an optimism tragically seeded in ignorance. As an example, the Kansas City Fed released its economic survey today. The composite index crashed from 20 to 7. Not surprisingly, Wall Street snake-oil salesmen – otherwise known as “economists” – were expecting a reading of 17 on the index.

As for individual components of the index, the average workweek and number of employees dropped; the production component of the index fell precipitously; and new orders collapsed. In fact, new orders expectations fell below the pre-Trump level. The six-month outlook metric – aka the hope index – plunged to its lowest level since November.

The truth is that all of the regional Fed economic activity surveys were largely driven by “hope,” which registered in the form of new orders for goods that will sit on the shelves of car dealers and non-food retailers and in the form of “expectations” about the level of economic activity in six months.

But there has not been any follow-through in form of actual growth in economic activity to justify the unrealistic level of “hope.” Real disposable income and the real level of retail/auto sales have been declining on the way to a tail-spin plunge. Any pulsations in final retail sales and home purchases have been fueled by the parabolic issuance of sub-prime quality debt. In fact, an increasing percentage of home purchases are from aspiring flippers. We are at the point in the cycle, just like 2007-2008, in which many of these flipper purchases will never end up with end-users and instead will land on bank balance sheets.

Auto sales through the end of March were down 10% since the beginning of 2017, resulting in the steepest decline in auto sales since 2009.  New car inventory at some of the biggest auto dealers around Denver is spilling over into the giant parking lots at vacant malls as OEMs push overproduction onto the dealer network.   Once the debt capacity of those still buying pick-up trucks at record incentive pricing hits the wall, the auto industry will see a spectacular cliff-dive.  The Government is too broke to provide the “cash for clunker” safety-net put in place in 2010.

In addition to trillions in printed (electronically generated) currency, the Fed has been able to fabricate the illusion of economic growth with an enormous amount of credit creation.   Credit is debt-issuance.   The part about debt that is conveniently overlooked by economists is that borrowed money behaves like printed money until it has to be repaid. The problem is that most debt created in the U.S. is never repaid.  For instance, the level of outstanding Government debt has been increasing every day since before Nixon closed the gold window.  This is not “debt” in the traditional sense of a loan that gets repaid.  This is money printing.

Consumer  and corporate debt levels have been rising in parabolic fashion and are at all-time highs.  Given that large chunks of this debt will never be repaid, just like in 2008-2009, the issuance of this debt is the same as printed money.  Amusingly, though not surprisingly, the Fed stopped reporting the total amount of debt outstanding in the system (Government + Corporate + Household) on March 25, 2016.  On that day the total debt outstanding was $63.5 trillion.  It’s likely well over $65 trillion by now.   That debt, until it’s repaid, is no different that printed currency.

This would be great in a pretend world in which debt could be issued to borrowers ad infinitum.  It would be the proverbial money tree on which free lunches blossomed for everyone forever.  Unfortunately, debt can not be issued in increasing amounts to eternity. Currently it would appear as if the non-Government borrower segment of the debt statistic has reached its borrowing capacity.   It happens gradually then all at once.   The United States is getting close to the “all at once” stage.

This is why the Deep State has resorted to the last stage of history’s Empiric life-cycle curve:  when all else fails start a war…

 

Bank Loans Take A Dive: It’s The Economy, Stupid

I am compelled to correct a report posted on Zerohedge about the cliff-dive going on in commercial, industrial and consumer loans.  The report in ZH suggested the plunge is connected to two possibilities:  1)  this one from a Wall Street sleazebag from Barclays: “it is possible that companies have shifted from the loan to the bond market, and are selling more bonds to lock in cheap financing before rates rise, while not encumbering assets with issuing unsecured debt;” and 2) political uncertainty connected to Trump.

The first possibility could have some small amount of legitimacy except that if you parse through all the data available at the Fed, you’ll see that bank credit has plunged across the entire spectrum of U.S. business (I used size of loan as the proxy). Smaller businesses do not have access to public credit markets and thus the first explanation is the typical apology for a negative economic report that we would expect from a Wall Street con-artist. The second possibility is part of the anti-Trump narrative found in the fake news reports coming from the ignorant.

“It’s The Economy, Stupid”

That quote was created by James Carville as one of Bill Clinton’s campaign slogans in 1992. Those words ring even truer today. A primary example is the restaurant industry numbers discussed above. “Hope” and “confidence” do not generate economic activity. And “hope” is not a valid investment strategy. A better guide to what’s happening to economic activity on Main Street is to see what banks are doing with their lending capital. I borrowed the two graphs below from the @DonDraperClone Twitter feed (click to enlarge):

Commercial bank lending is a great barometer of economic activity. The top graph above shows the year over year percentage change in commercial and industrial loans for all commercial banks. You can see that the rate of bank lending to businesses is falling doing a cliff-dive. These are primarily senior secured and revolving credit loans that sit at the top of the capital structure. If bank lending is slowing down like this, it means two things: 1) the ability of businesses to repay new loans is declining and 2) the asset values used to secure new loans will likely decline. In fact, it is highly probable that the tightening of credit by the banks is a directive from the Fed. Yes, the Fed.  Despite its public commentary suggesting otherwise,  the Fed knows as well as anyone that the economy is tanking.  This is why the Fed can’t hike rates up to a level that would bring real interest rates up to at a “neutral” level (using a real price inflation measure, Fed Funds needs to be reset to at least 6%, and likely higher, to get the real rate of interest up to zero).

The only reason the Fed might “nudge” interest rates higher next week is for credibility purposes. Everyone knows inflation is escalating, which makes it difficult for the Fed to keep interest rates so close to zero. In addition, a rate hike now, even though it will be insignificant in magnitude, will give the Fed room to take rates back to zero when the public and Congress begin to scream about economy.

The second graph shows the year over year percentage change in auto loans. The implications there are fairly self-explanatory. Auto sales are slowing down because the “universe” of potential prime and subprime rated car buyers, new and used cars, has been largely exhausted. In fact, with the default rate on subprime auto loans beginning to hit double-digits, the next phase in the automobile credit market will likely be credit implosion crisis.

The above commentary was an excerpt from the latest issue of the Short Seller’s Journal.

Goldman to Trump: Situation Assessment, Government Bail-ins, Precious Metals Threat: Systemic Collapse

A guest post from Stewart Dougherty. Stewart included some thoughts in his email to me that I thought should be shared as a preface to his essay:

——————–

Hi Dave:
Some pretty heady stuff, particularly the part about the Fed’s balance sheet being a lie. (I am 100% convinced of this, but cannot prove it, at least not yet.) And remember, Bernanke was caught issuing $10 trillion in swaps to foreign banks, all of which was supposed to remain a complete secret. It is not as if they haven’t been caught doing what I am saying they are still doing, to an even larger degree.

I’ve stated that the “conversation” is imagined, intuited and fictional, so the small living parts of the shredded Constitution might actually protect my freedom of speech; wouldn’t that be amazing.

I believe “government bail-ins” is fresh terminology … people hear about bank bail-ins all the time … but they don’t hear about government bail-ins, which are going to affect far more people and are inevitable. (As I’ll explain in Part 2, government bail-ins are not going to be about taxes … tax increases are too slow, and oftentimes don’t even work.) Since it’s new, the term government bail-ins might gain a lot of attention.

——————–

Despite Goldman’s avid support for Hillary Clinton, fewer than three weeks after the election, Gary Cohn, the number two executive at Goldman Sachs met privately at Trump Tower with the President-elect. Ten days later, he was named to one of the most powerful financial positions in the world, Director of the National Economic Council of the United States of America.

As they say, knowledge is power, and power is knowledge; both open doors, ears and minds when they decide to. What could Cohn have said to Trump that resulted in his near-immediate hire? Using the Inferential Analytics methodology, we have synthesized a message a visitor of Cohn’s stature might have conveyed to Trump on November 29, 2016. And while it is inferred, intuited and fictional, the following transcript is deeply grounded in the nation’s current and prospective fiscal, financial, monetary and economic situation.

The Visitor: “I appreciate your invitation and it is a pleasure to meet with you today. Permit me to convey Lloyd’s congratulations. He would like to assure you that you have Goldman’s full support going forward.

“Our time is short, so I will give you a very high level situation assessment. Thousands of person hours and millions of dollars’ worth of research and analysis stand behind each of the themes I will touch on, and we can provide additional details if you wish. As one of the U.S. government’s closest financial allies for decades, particularly when it comes to the placement of the nation’s sovereign debt, we have a deep understanding of the financial dynamics at work. When I use the term “we,” it is because Goldman and the United States government have been close business partners for many years.

“As you correctly stated to the American people during your campaign, the situation is not good. It is containable at this time, but only if we continue to run substantial deficits and create large sums of new dollars, in other words, debt. With all due respect, we believe the U.S. government is going to need our help as never before in the coming months and years.

“I will briefly touch on nine topics. There are others we could discuss, but these tell the most important part of the tale. They are: 1) Deficits; 2) Debt; 3) Reporting; 4) War; 5) Perception; 6) Stocks; 7) Money Creation; 8) Currency; and, 9) Precious Metals.

“As you may know, I started my financial career as a Comex trader, and Lloyd began his as a gold dealer at J. Aron, which was acquired by Goldman. We both have extensive experience in the Precious Metals markets, and believe they are going to be of incalculable significance in the near future. I will review this topic later.

“All I ask is that you not shoot the messenger. Much of what I tell you is troubling.

“First, the deficits are structurally non-containable. The OMB itself confirms this, projecting escalating deficits for the next 50 years, with not one year of surplus during that entire time. The aggregate deficit during the next decade alone will be at least $10 trillion. If there is a slowdown or recession, it will be greater or even much greater. The deficits can only be reined by a massive political reset and wholesale reneging on the entire social contract, including Medicare, Social Security, public pensions and welfare. Such a reset would result in an economic collapse. Therefore, it is not feasible, although it could be forced upon us by endogenous or exogenous events that would take the situation out of our hands.

“The debt has gone vertical, rising from $10 to $20 trillion in eight years. Obama created more debt than all other presidents in the previous 230 years, combined. This amount does not include the federal government’s net, unfunded liabilities, which are an additional $150+ trillion, and growing by trillions per year on a GAAP accounting basis. Please understand that his shadow, unfunded debt is net of projected tax receipts; in other words, it is completely out of control.

“Debt is now increasing at an accelerating rate, with $1.4 trillion added last year alone. This debt can never be paid in future dollars having value anywhere even close to today’s, but for now at least, we are still able to peddle it. We do know that for us to successfully distribute the debt in the future, interest rates will have to go higher, which will compound the fundamental deficit and debt problems. Otherwise, we will have to print money on a scale never before seen, which will further damage the value of the dollar. There is a limit to how badly currencies can be damaged; they can and do go into freefall. Several are, as we speak.

“The so-called economic recovery has been false. The Obama administration, with the full support of the Fed created $10 trillion in counterfeit dollars and threw them at the economy, funding everything including non-stop wars, Food Stamps, a vast expansion of government, subsidized Obamacare, solar panel cronies, fund-raising and golf trips, you name it. It’s all included in the nation’s deliberately and, frankly, fraudulently inflated GDP. We understand; it had to be done, and we helped make it happen by being expert debt pushers.

“Some like to think that we can grow our way out of the deficits and debt, but our analysis disagrees. Assume 4% GDP growth. Given an $18 trillion economy (ours is not, as explained above, but let’s say it is), 4% growth means a GDP increase of $720 billion in Year 1. Let’s say the federal government is able to collect in taxes 25% of the gross GDP increase, a wildly optimistic assumption. That would produce $180 billion in incremental revenue. But the structural deficits, as reflected by the increases in debt, exceed $1 trillion per year. Even 4% GDP growth will hardly make a dent in the fiscal hemorrhaging. And to prime the pump for such growth, the government will have to spend a few hundred billion dollars per year on infrastructure spending and the like. This will fully negate the incremental taxes. So we have to dig a deeper fiscal hole for the privilege of digging an ever deeper fiscal hole.

“This leads to topic #3, Reporting. At this point, out of necessity, virtually every government economic statistic ranges from being “massaged” to outright false. GDP is particularly misleading. If we deducted government deficit spending and the multiplier effects it creates, the United States economy would immediately collapse. If that were to happen, we cannot credibly forecast a scenario that would restore it to growth. Economically, it would constitute an existential event.

“Obviously, we cannot openly admit the reality of the situation, or even let it become known. Therefore, the government must doctor the reports. Given the interrelationships among economic reports, we now have to lie about everything. If we just lied about certain metrics, say, GDP and employment, then the other metrics, if not similarly fabricated, would contradict the fabricated reports. We would be unable to explain the inconsistencies and contradictions. We have to lie about unemployment, GDP growth, retail sales, wages, money supply, the cost of Obamacare subsidies, current deficits, current debt, the true fiscal trajectory of Medicare, Medicaid and Social Security, government pension underfunding, projected deficits and debt, and all the rest. When it comes to false reporting, we’re in a box; there’s no alternative to it.

“This is one reason why the Alternative Media are so dangerous to us, and why we need to eliminate them. There are many talented analysts in that domain. They know the truth, and that we’re not telling it. The fact is that fake news comes from us, not them, as they are revealing to a growing army of citizens.

“In addition to false reporting, there is War. War is just like the Fed; it is never audited. This deliberate lack of oversight is how $6 trillion can go missing at the Army, alone. The Army’s missing funds are a small portion of the total amount that has disappeared into the military spending vortex. War spending is critical to topline GDP, and we can play a lot of non-detectible games with it. The saying, “War is the health of the state,” was coined for us. If we stopped fighting wars, GDP would crater. Wars are a necessary constant going forward, even if we have to invent them.

“This brings us to Perception, one of the most important factors of all. In reality, the economy and dollar have become a confidence game. We know that if confidence in an inherently dysfunctional system is lost, only a reset plus time can restore it. But as we discussed earlier, a reset is socially, politically and economically impossible. If the 200,000,000 U.S. citizens currently dependent upon the government to some degree were deprived of even a fraction of their payments, economic and social entropy would result. In fact, the people want more, not less. Free college; free or massively subsidized health care; a $15 minimum wage; the list goes on. Politicians have told them they can have these things, so there is a vast disconnect between popular expectations and fiscal reality.

“Stock market indices are one of the few tools we can use to create positive perceptions. We have successfully created a false perception of economic health by taking stocks to new highs. We have also deliberately engineered a “wealth effect,” which has artificially spurred spending and GDP, and boosted the so-called “animal spirits.” Doing these things has disguised reality and bought us a lot of time.

“But the real reasons we have manipulated stock markets higher go further. First, without a levitated stock market, the pension funds would collapse. Which would ripple through the economy in a massively destructive way.

“Second, federal, state and local governments need the capital gains-related tax revenue produced by the artificially propped-up stock markets. Dow 20,000 will produce a 2017 tax windfall, which is required to offset the damaged economy’s tax shortfalls. The stock markets are a crucial money machine when it comes to tax generation.

“Now to money creation, which takes us deep into the Dark Side. To fund the massive deficits and levitate the stock market, we have had to create trillions of new dollars. But if the actual amount were revealed, confidence in and the value of the dollar would collapse. So we have to lie about this, too. The Fed’s balance sheet is actually trillions more dollars than what is reported.

“We inject newly digitized currency into the system by crediting trusted, proven collaborators such as the BOE, BOJ and Bank of Israel with dollar amounts that can range into the trillions, depending upon circumstances. These collaborators use a portion of these credits to buy our stocks and bonds, in accordance with strict timing, allocation and dollar amount instructions. They funnel the remainder of the funds to trusted, third-party actors, including hedge funds, merchant banks and dark pool operators, providing them, too, with specific deployment instructions. Therefore, the buying comes from many different markets and locations, which makes it look normal and legitimate.

“What exists is a small club of trusted players who deploy enormous sums of money, all of it counterfeit and undocumented, to support the positive perception, healthy GDP and strong stock market agendas. This money costs our partners nothing; we create it for them, out of nothing. The fact is that management of the dollar is far more clandestine than any of the operations conducted by the CIA or NSA, and the Fed is the most secretive and sophisticated intelligence agency on earth. Geo-financial hegemony is its mission, and dollars are its spies, operating, misdirecting and deceiving from the shadows every minute of every day, all over the world.

“While a large and increasing number of citizens now demonstrate broad skepticism about government institutions, they still have blind faith in the statistics reported by the Fed. Which is upside down, because the Fed’s figures are the most dishonest of them all. It proves the power of propaganda, particularly when billions of dollars are spent on it. If the Fed were subject to audit, which of course it deliberately and necessarily is not, none of this would be possible. And if the true size, composition and deployment of the Fed’s balance sheet were known, the entire global financial system would implode.

“That is the situation, in a nutshell. As you can see, it is fragile and untenable. We can continue to manage it in the current context, but if the context were to change, even in small ways, it could all come down. We have to prevent that at any cost because if it does come down, even our most sophisticated computer simulations cannot posit a scenario by which it could be propped back up.

There is a subtle knock on the office door. Trump realizes he is out of time. He says to his guest, “I understand what you have said, and need you to come back and finish.” They arrange for the visitor to return in three days, December 2nd. Trump asks, “So we can move as fast as possible then, please give me a brief outline of what we will discuss.”

The visitor responds: “Most people do not think about these issues at all, but the sophisticated ones do. We have deliberately misdirected that cohort’s attention. We have distracted them with talk of bank bail-ins and other financial gossip to keep their thinking off of what is actually a much more profound and necessary outcome: government bail-ins. We have before us a complex, four dimensional puzzle, in which the puzzle pieces represent events wrapped in time. Both the controlling elite and the people are putting the puzzle pieces in place as fast as they can, because they know their futures depend on it. The side that first completes and comprehends the puzzle will win; the other side will lose. Two of the most important puzzle pieces are currency and precious metals, both swaddled in time. Which is running out for one side or the other.”

[To be continued in Part 2]

Stewart Dougherty is the creator of Inferential Analytics (IA), a forecasting method that applies to events proprietary, time-tested principles of human instinct, desire and action. In his view, forecasting methods not fundamentally based upon principles of human action are unlikely to be reliable over time. He is a graduate of Tufts University (BA) and Harvard Business School (MBA), is a 35+ year veteran of the business trenches and has developed IA over a period of 15+ years.

Historic Market Blow-Up Is Brewing

I was chatting with a good friend who works at a pension fund. He said that pensions are historically overweighted in stocks right now. But it looks like the latest push higher in the stock market is coming from hedge funds, who apparently missed a large portion of the “Trump rally.”   We determined that the best reason to invest in stocks for both pension and hedge funds is “to avoid looking like an idiot.”

That’s it – that’s the “fundamental” justification for investing in stocks right now is because everyone else is and if your portfolio on Dec 31 is underweighted in stocks you’ll look like an idiot.

That stocks are more overvalued now than at any time in history except maybe 1999 is unequivocally undebatable.  However, if the GAAP accounting standards in force in 1999 were applied to current earnings, both the Dow and S&P 500 would be at record valuation levels.   I discuss this in more detail in the latest Short Seller’s Journal.

So, chasing stocks higher to avoid looking like a moron makes a lot of sense, right? Currently I can’t find evidence that the Fed is printing money to fuel this stock market so I have to believe that it has relaxed credit standards to enable banks, hedge funds and mutual funds (yes, many mutual funds now have the ability to tap credit lines) to borrow money with which to chase stocks.

Debt/credit behaves just like printed money until the debt has be repaid.  So creating credit is de facto printing.  But, what happens when debt defaults begin to pick up?  This is beginning to happen now in mortgage, auto and credit card debt.  Again, I provide proof of concept in the Short Seller’s Journal.

This is perhaps the most dangerous market – both stocks and bonds – in history.  It’s the largest money bubble in history that has been blown by the Fed, in conjunction with the ECB, BoE, BoJ and PBoC.   Silver Doctors/News Doctors invited me on to its Metals & Markets weekly podcast to discuss why 2017 could witness an historic market collapse:

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Party Like It’s 1999: The Stock Market Is A Propaganda Tool

The degree and level of propaganda now flowing from the Establishment and the Establishment-controlled mainstream media is on par with that of the old Soviet Politburo or German Third Reich.   In fact, I’d confidently propose that this point is incontestable.

With modern technology and regulations which have made Fed operations and accountability tragically opaque, I have zero doubt that the Fed and the Government have managed to turn the stock market into another propaganda tool.  Studies have shown that, over the short term, the direction of the stock market and consumer sentiment measures are highly correlated.

Thus, pushing the stock market a lot higher is a mechanism that can be used to influence the public’s sentiment and willingness to spend.  This is critical after an election in which the political party controlling Capitol Hill changes and – more important – during the holiday shopping season.

Without question the U.S. economy is beginning to quickly crumble.  If you “peel away” the manipulative techniques applied to the economic reporting it reveals that every segment of the economy is now contracting.  Even the factory orders report for October released  yesterday – which showed a 2.7% gain over September – is still down 2.3% YTD vs the same YTD period in 2015.  Strip away the transportation component and it’s down 2.7%.

With interest rates on the long end up over 100 basis points in a very short period of time, the Fed’s balance sheet has taken a big hit. It currently owns over $4 trillion in Treasuries and mortgage securities. Assuming an average duration of 10 years on its holdings, the market value of the Fed’s balance sheet has dropped 8.4%, or approximately $320 billion. As of this past Thursday, the Fed’s balance sheet showed $46 billion in book equity. If the Fed were forced to mark-to-market its fixed income holdings, the Fed’s net worth would be significantly negative – close to $300 billion negative. Think about that: the only thing backing the value of the U.S. dollar right now is the U.S. military and a Central Bank with a massive negative net worth.  – excerpt from IRD’s latest Short Seller’s Journal

Market intervention in this manner is an attempt to convince the public that the economic system is healthy and will be even healthier in the future.  As such it’s another subtle propaganda tool – a perception management device.   If the Fed were step away from the market, the stock market would rapidly re-price to reflect the true underlying economic reality.  In short, stocks would crash and concomitantly gold and silver would soar.

The Fed injected billions into the system in late 1999 ahead of Greenspan’s Y2k scare. It led to the biggest stock market blow-off top of all-time.The current market is quite similar, only the economic and financial fundamentals underlying both the public and private sectors of the system are far worse than they were in 1999.

The ONLY thing that can explain the move in the stock market since around 2:00 a.m. EST after the election is massive Fed stimulus in some form – either direct cash injections done in a format that won’t show up on the Fed’s balance sheet or a massive spike up in the availability of short term credit lines made available to banks and extended to hedge funds. There is no other explanation.

Today for example, the stock market is spiking higher AND bond prices are higher/yields lower. This makes absolutely no sense and can only be explained by official intervention of some sort.

Gold and silver will “sniff” this out and at some point I expect to see gold begin to move a lot higher and the dollar sell-off precipitously. I also expect that the Chinese are going to send their response to Trump’s inimical overtures on Twitter by accelerating their sale of U.S. Treasuries.

lf the same GAAP accounting standards used in 1999 to measure corporate earnings – the standards having been relaxed more almost every year since 2000 to enable companies to report higher GAAP earnings – were applied to today’s earnings numbers, we would see that the current stock market is by far the most overvalued in history.

This will not end well.