Here’s the latest update from the collaborative effort between The Daily Coin and Investment Research Dynamics, AKA the Shadow of Truth:
“We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,” – Fed Chairman, Ben Beranke – May 17, 2007.
“You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.” – Fed “Chairman,” Janet Yellen – June 27, 2017
The falling price of oil did not garner any mainstream financial media attention until today, when U.S. market participants woke up to see oil (both WTI and Brent) down nearly $2. WTI briefly dropped below $43. The falling price of oil reflects both supply and demand dynamics. Demand at the margin is declining, reflecting a contraction in global economic activity which, I believe the data shows, is accelerating. Supply, on the other hand, is rising quickly as U.S. oil producers – specifically distressed shale oil companies – crank out supply in order to generate the cash flow required to service the massive energy sector debt load.
I am quite surprised by the rapid fall of oil (WTI basis) from the $50 level, because I concluded earlier this year that the Fed was attempting to “pin” the price of oil to $50:
The graph above is a 5-yr weekly of the WTI continuous futures contract. Oil bottomed out in early 2016 and had been trending laterally between the mid-$40’s and $55. I read an analysis in early 2016 that concluded that junk-rated shale oil companies would implode if oil remained in the low $40’s or lower for an extended period of time. Note that some of the TBTF banks who underwrote shale junk debt were stuck with unsyndicated senior bank debt (i.e. they were unable to find enough investors to relieve the banks of this financial nuclear waste). Thus, the Fed has been working to keep the price of oil levitating in the high $40’s/low $50’s, in part, to prevent financial damage to the big banks who have big exposure to shale oil debt.
The problem for the Fed is that it can’t control the global supply of oil. There’s too many players. With oil pinned in that trading range, U.S. oil companies have been pumping out oil as quickly as possible. The oil drilling rig count has risen for 22 weeks – Oilpro.com – the longest consecutive streak since 1987. Rising production from the U.S. and elsewhere is keeping global stockpiles high, especially relative to demand. As a result, you get chart of the price of oil that looks like the one above. Oil is now well below both the 50/200 dma plus the RSI and MACD are pointing straight south, indicating a high probability of lower prices for awhile. Also, note the rising volume in conjunction with the falling price. This is indicates that market participants have been and continues to be better sellers.
The Fed is thus unable to pin the price of oil to $50 on a sustainable basis. Why? Because it has no control over the global supply and demand, which prevents control the price of oil for any meaningful period of time (just ask OPEC about that). Similar to the Fed’s price-management of oil, the Fed has been keeping gold pinned under $1300 since early November in an effort to prevent a rising price of gold from undermining the dollar’s reserves status and signalling the escalating economic and financial distress in the U.S. This is despite rising demand for physical gold coming from numerous eastern hemisphere countries. As long as the Fed (and western Central Banks) can continue delivering physical gold into the massive demand vortex in the eastern hemisphere, it can somewhat successfully manage the price.
Also similar to oil, the Fed has no control over the supply and demand of gold, except to the extent that the Fed/western Central Banks are still holding gold that can be leased out or custodial gold that can be hypothecated for the purpose of enabling a continuous flow of physically deliverable to gold the east. But the difference between oil and gold is that the supply of mined gold is relatively fixed (and has been over a long period of time). At some point the western Central Banks will run out of access to enough gold that can be delivered to buyers who paid to settle their purchases upfront. At that point, the chart of the price of gold will look like the recent graph of Bitcoin, Ethereum, etc.
This brings up a quick point about the cryptocurrencies. When the U.S. blocked Iran’s access to the SWIFT trade settlement system, India began to pay for the oil it imports from Iran with gold. These were very large-dollar transactions. We have yet to hear any reports of sovereign nations using Bitcoin or other cryptos for payment to settle trade agreements. For me, this highlights yet another difference between the use of gold as a currency vs the cryptos. I want to make it clear that I’m not in the anti-cryptocurrency camp, but I do believe that, ultimately, precious metals (gold and silver) are much more functional as a form of money than the cryptos. Bitcoin debuted for peer-to-peer transactions in 2009. Gold has functioned for this purpose for over 5,000 years. My preference in this situation is to bet big on the form of money that has pedigree.
Phil Kennedy of Kennedy Financial invited me onto his podcast to discuss the latest FOMC comedy show, gold, silver, mining stocks, cryptocurrencies and the housing market.
One/some/several “entities” decided at 9:38 a.m. this morning that it was necessary to dump 14,315 contracts of paper gold. This is just the August contract. In total a lot more was unloaded. This represents 1.43 million ozs of gold. The Comex is only showing 900,000 ozs of “gold” as “registered,” or available for delivery in June, July and August (assuming all of that gold is actually sitting physically in the Comex vaults as reported). If we make that generous assumption, 531,000 ozs of paper gold was naked shorted.
The news report or event that triggered this sudden need to unload / naked short 40.5 tonnes of paper gold beginning at 9:38 a.m. EST is not clear. The mainstream financial media is attributing the dump in gold to the “anticipation of Comey’s testimony.” But this is patently absurd, if not a complete insult to the public’s intelligence. The market has known all week that Comey was testifying this morning and it was generally know what he would say.
This is what the price action in the gold market looked like before the huge paper dump onto the Comex – Asia/India buying physical gold and driving the price higher, London/LBMA selling paper gold and driving the price back down:
With all the frenzy connected to the parabolic rise of cryptocurrencies, one has to wonder why the western Central Banks are concerned with controlling the price of these block-chain based digital currencies. If the Comey testimony was a reason to push down the price of gold, why were the “flight to safety” cryptos left alone?
This is a rhetorical question, but the relative threat – and therefor the legitimacy as a competing form of money – that each represents to the dollar-based reserve currency system is a hint. For some reason the “wizards” behind the BIS curtain are not concerned about the cryptos…
Just like the Dutch Tulip Bulb bubble, internet stock bubble, and the mid-2000’s financial asset bubble, the current stock market is no longer a price-discovery mechanism. It has deteriorated into a venue in which Central Bank-manufctured liquidity – in the form of printed currency and credit creation – has flooded into the system, enabling investors to chase the few stocks rising in price at the highest velocity (click to enlarge, graph on the left sourced from Jesse’s Cafe Americain).
The drivers of this modern day Dutch Tulip phenomenon are the so-called “Five Horsemen” stocks – AAPL, AMZN, FB, GOOG,MSFT. To that grouping I toss in TSLA. Among all of those bubble stocks, TSLA has become, by far, the most disconnected from any remote intrinsic, fundamental value. AAPL alone is responsible for 25% of the YTD gain in the Dow and 13% of the YTD gain in the S&P 500. AAPL’s revenues and operating income have declined over the last three years (2014 to 2016). More often than not, even on days when the S&P/Dow are red, most if not all of the Five Horsemen + TSLA seem to close green.
Eventually, the music will stop and this “no-price-discovery-possible” market will become a “can’t find a seat” market. The abruptness and rate of decline will be breathtaking. Perhaps only matched by the outflow of capital from the cryptos by “investors” who leveraged up their cryptocurrency holdings to throw more “money” at TSLA.
The good news is that a lot of money can be made shorting stocks. Since April, stocks like IBM, GS, SHLD, BZH and GE presented in the Short Seller’s Journal as shorts have outperformed the SPX/Dow. SHLD is down 47% in 7 weeks – a home run. BZH is down 18% in three weeks. In the next issue, a “funky” financial stock will be featured that has the potential to drop at least 50% over the next 12 months if not sooner.
No one knows what event will trigger the stock bubble collapse. One possibility is the ongoing financial implosion of the State of Illinois. In stock bubble periods, all news is imbued with “the glass is half full.” As an example, Illinois’ credit rating was reduced recently to BB+/Baa3. That is a junk rating. But the media characterizes it as a “the lowest investment grade” rating – i.e. the “glass is half full.”
Both rating agencies never downgraded Enron to junk until it was weeks from Chapter 7 bankruptcy. Illinois is on the brink of financial disaster. See this article as an example: Illinois Owes Billions. This problem is absolutely dwarfed by Illinios’ public pension problem, which Illinois underfunded by a couple hundred billion (officially about $130 billion but that’s not on a true mark-to-market basis).
When the music finally stops, the perma-bubble bulls will be looking for that proverbial “seat” in all the wrong places. But the next stampede of capital will be out of stocks, bonds, cryptos and “investment” homes and into physical gold, silver and mining stocks.
Paul Craig Roberts and Dave Kranzler
In a series of articles posted on www.paulcraigroberts.org, we have proven to our satisfaction that the prices of gold and silver are manipulated by the bullion banks acting as agents for the Federal Reserve.
The bullion prices are manipulated down in order to protect the value of the US dollar from the extraordinary increase in supply resulting from the Federal Reserve’s quantitative easing (QE) and low interest rate policies.
The Federal Reserve is able to protect the dollar’s exchange value vis-a-via the other reserve currencies—yen, euro, and UK pound—by having those central banks also create money in profusion with QE policies of their own.
The impact of fiat money creation on bullion, however, must be controlled by price suppression. It is possible to suppress the prices of gold and silver, because bullion prices are established not in physical markets but in futures markets in which short-selling does not have to be covered and in which contracts are settled in cash, not in bullion.
Since gold and silver shorts can be naked, future contracts in gold and silver can be printed in profusion, just as the Federal Reserve prints fiat currency in profusion, and dumped into the futures market. In other words, as the bullion futures market is a paper market, it is possible to create enormous quantities of paper gold that can suddenly be dumped in order to drive down prices. Everytime gold starts to move up, enormous quantities of future contracts are suddenly dumped, and the gold price is driven down. The same for silver.
Rigging the bullion price prevents gold and silver from transmitting to the currency market the devaluation of the dollar that the Federal Reserve’s money creation is causing. It is the ability to rig the bullion price that protects the dollar’s value from being destroyed by the Federal Reserve’s printing press.
Recently, the price of a Bitcoin has skyrocketed, rising in a few weeks from $1,000 to $2,200. Two explanations suggest themselves. One is that the Federal Reserve has decided to rid itself of a competing currency and is driving up the price with purchases while accumulating a large position, which then will be suddenly dumped in order to crash the market and scare away potential users from Bitcoins. Remember, the Fed can create all the money it wishes and, thereby, doesn’t have to worry about losses.
Another explanation is that people concerned about the fiat currencies but frustrated in their attempts to take refuge in bullion have recognized that the supply of Bitcoin is fixed and Bitcoin futures must be covered. It is strictly impossible for any central bank to increase the supply of Bitcoins. Thus Bitcoin is standing in for the suppressed function of gold and silver.
The problem with cryptocurrencies is that whereas Bitcoin cannot increase in supply, other cryptocurrencies can be created. In order to be trusted, each cryptocurrency would have to have a limited supply. However, an endless number of cryptocurrencies could be created that would greatly increase the supply of cryptocurrencies. If entrepreneurs don’t bring about this result, the Federal Reserve itself could organize it.
Therefore, cryptocurrency might be only a temporary refuge from fiat money creation. This would leave gold and silver, whose supply can only gradually be increased via mining, as the only refuge from wealth-destroying fiat money creation.
For as long as the Federal Reserve can protect the dollar by bullion price suppression and money creation by other reserve currency central banks, and as long as the Federal Reserve can keep the influx of new dollars out of the general economy, the Federal Reserve’s policy adds to the wealth of those who are already rich. This is because instead of driving up consumer prices, thus threatening the US dollar’s exchange value with a rising rate of inflation, the Fed’s largess has flowed into the prices of financial assets, such as stocks and bonds. Bond prices are high, because the Fed forced up the price by purchasing bonds. Stock prices are high, because the abundance of money bid prices higher than profits justify. As the US government measures inflation in ways designed to understate it, the consumer price index and producer price index do not send alarm systems into the markets.
Thus, we have a situation in which the Fed’s policy has done nothing for the American population, but has driven up the values of the financial portfolios of the rich. This is the explanation why the rich are becoming more rich while the rest of America becomes poorer.
The Fed has rigged the system for the rich, and the whores in the financial media and among the neoliberal economists have covered it up.
I want to show two quotes from commentators in related areas of financial analysis because they illustrate the difference between truthful commentary and unmitigated idiocy.
Yesterday, James “Mc” wrote in Bill Murphy’s nightly “Midas” report:
“The sexiness of Bitcoin, Tesla, Netflix, and hundreds of other techie things will become FAR less sexy in a good old fashion economic crash. Reality will quickly set in, and real stuff, made by real people will prevail. As history has shown everything else becomes superfluous. Millennials, or even Gen-Xer’s for that matter have never experienced truly hard times. Many will be shocked to learn when TSHTF a plumber is far more marketable than an IT guy. Bartering with Bitcoin might prove problematic.”
I doubt there’s anything with that statement with which anyone could dispute. Murphy prior to that made the valid points that Central Banks and sovereign nations will never incorporate Bitcoin into their currency reserves like they do with gold. The point being that, while Bitcoin is accepted as a form of currency by its users, it is not considered a wealth storage asset.
It would be tough to classify James’ comment as propaganda or fake news. Gold is the world’s second oldest form of money (silver is the oldest). Bitcoin may or may not become a passing fad but it certainly has not stood the test of time. Its use can be eliminated by shutting down the global power grid.
Here’s an example of propaganda, fake news and unmitigated idiocy from Citicorp’s “respected” strategist, Tom Fitzpatrick:
“…markets ultimately will be driven by the economic backdrop rather than by headlines. US labor and housing markets remain robust and should continue to drive growth. European growth is picking up. China remains stable in our view despite recent volatility.” LINK
China remains “stable?” I doubt anyone would disagree that China has fomented the second biggest debt and asset bubble in the world, with the U.S. bubble the largest, and its financial system rests on the precipice of systemic collapse resting on a pyramid of debt and derivatives that requires a flood of printed money and credit creation in order to defer the inevitable financial and economic implosion. That’s the truth, in contrast to Fitzpatrick’s moronic assertion.
As for the remark that the U.S. labor market is “robust.” My guess is that a majority of the 95 million working age people (37% of the working age population) in the U.S. who are no longer considered part of the “labor force” would have a different set of adjectives to describe the labor market here (they would also have a set of adjectives to describe Fitzpatrick that would make some blush).
A “robust” housing market? Total home sales are running two-thirds of the long run average and about 50% the last peak in sales. This is despite a steady long term growth in the population. Furthermore, in order to for a home to sell, in general buyers have to resort to using a 0-3% down payment mortgage and use at least 50% of their monthly income to service the mortgage. An oversupply of housing in New York City and Miami is beginning to crush those two housing markets, a dynamic that will soon spread to most major metro areas across the country. Flippers and “investors” were about 35% of all home sales in 2016.
These are unequivocally NOT the attributes of a “robust” housing market, not to mention the fact that the even the monthly manipulated home sales data series published by the Government and the National Association of Realtors have been trending lower this year. Tom Fitzpatrick’s remarks embody the attributes of Wall Street propaganda, outright fake news and total unmitigated idiocy. I hope you get rich selling lies and feel good about it, Tom.
There’s been a lot of debate over the meaning and significance of the parabolic move in Bitcoin. Allhambra Investments’ Jeffrey Snider has come the closest to the truth by equating the Bitcoin move as the manifestation of Gresham’s law.
While this encapsulates the Bitcoin frenzy, beneath the surface represented by Bitcoin is an even bigger movement of bad money (fiat currencies) piling into physical gold that is occurring in the eastern hemisphere, specifically in India and China. The evidence of this movement in the form of a higher price expressed in dollars is being hidden by the continuous intervention in the western gold market implemented by the western Central Banks using paper gold derivatives.
The point of this is that the price of Bitcoin is behaving the way price of gold would be behaving in the absence of manipulation. The rush into both is a rejection by the market of the continuous devaluation of fiat currencies that is occurring from the trillions of paper currencies that have been created since 2008.
At some point, and there’s not anyone who can predict when, Tom Fitzpatrick’s fake news and unmitigated idiocy will be exposed for what it is as global financial markets and economies crash and money that is pulled out of bubble assets floods into the safety of physical gold and silver. At that point the Central Bank effort to suppress the price of gold and silver will fail.
It’s been occurring slowly since 1971 (and really since 1913) and will at some point happen all at once. Have a great Memorial Day weekend and try to enjoy what you can, as much you can, while you still can.