The director of the CME Metals Group announced her resignation to effective December 11. No further explanation was provided – Reuters link. I’m not one to infer some type of conspiracy theory in connection with this, but it seems rather abrupt. It’s akin to Bernanke leaving the Fed much sooner than anyone expected. The rats are leaving the ship before it sinks.
The collapse began in earnest in 2008. This is why gold soared to all-time highs in dollar terms until late 2011. The effort to push down the price of gold is overt evidence that the systemic collapse, even with the heavy application of money printing, has been ongoing since 2008. The recurring violent hits to the price of gold using fraudulent paper gold is overt evidence that the authorities are becoming more desperate in their attempt to hide any possible market signals that the systemic collapse is accelerating. This is how gold behaved from March 2008 – October 2008. Look what happened then.
Something catastrophic is occurring behind “the curtain.” I would love to have a peak at what is melting down. We can generally speculate that, with the oil, copper and iron ore price collapse, and with emerging market currencies collapsing, there’s been a series of derivatives explosions that have been contained but that are straining the Central Banks’ abilities to keep the system from coming completely unglued. This is also why the price of gold is being contained with brute force.
We have never seen markets behave the way they’re behaving right now, with absolute unpredictability. The overt intervention is a big part of the what we’re seeing on the surface with gold, currencies, credit markets and the primary stock indices. But all indications suggest a high likelihood of several train wrecks occurring at once behind the scenes. The intervention, of course, is keeping the surface indicators from crashing. But the intervention has also destroyed the signal transmission and rational capital allocation mechanisms of the market. Adam Smith’s “invisible hand” has been amputated, if you will.
This is why stocks like AMZN, FB, GOOG and NFLX trade at insane p/e ratios. It’s debatable whether or not AMZN has bona fide economic net income in the first place. I have not looked in depth at the accounting of FB, GOOG and NFLX to assess whether or not their “net income” is a function of GAAP manipulation or if they actually produce real cash flow in excess of all expenses, on and off the income statement. But all of them unequivocally trade at sublimely irrational market caps and they are the primary devices being used to keep the S&P 500/Dow indices propped up.
Another indication of the chaos erupting behind the “curtain” is the melt-down going on the junk bond market. Alhambra Partners wrote a piece in which it asserted that the stunning spike higher in triple-CCC rated junk bonds is indicative of something blowing up in the junk bond market – LINK. But it’s not speculation, it’s a fact. And it’s not “something,” it’s the entire distressed credit asset class.
The asset class itself, like every other financial asset, is horrendously mis-priced thanks to the massive Central Bank intervention. But unavoidable leaks are springing and they are going to turn into torrential floods.
The reason triple-CCC yields are blowing out is that some entity or entities have been forced to sell. Here’s how it works – I know this based on first-hand experience trading this stuff: As you know by now, the bond market has become extremely illiquid. This means that there’s a lack of capital available to accommodate sellers who look to sell at price levels remotely close to where bonds are being quoted.
Everyone (big pension funds, hedge funds, mutual funds, etc) keeps the price marks on the bonds in their portfolio unchanged and holds their breath that a seller never appears who has to sell for whatever reason and forces a re-pricing of the bond issue, which in turn forces a re-pricing of the market. I’ve lived this nightmare as a sell-side junk bond trader running capital positions in triple-C paper.
The fact that triple-C bond yields have blown out so quickly means that sellers have appeared and the yields on these bonds are going to blow out until they become high enough for a bona fide distressed buyer to decide it’s worth the risk to buy some of the paper. We’re not talking 10-20 points below where everyone is marked. Many of these bonds will plummet from the 80’s and 90’s to the 20’s and 30’s before enough capital begins to flow into the market to provide a bid big enough to take on the selling. That’s usually the first step down before it gets even worse.
This dynamic is going to spread to other asset classes within the credit market, like subprime mortgage pass-thru trusts, collateralized debt obligations, etc. This how it began to unfold in 2008. This is why Wall Street banks are now net short corporate bonds. The problem is that this time around the amount of debt of all varieties is a few multiples greater than it was in 2008. And connected to all of this is a preponderance of OTC derivatives. Derivatives that I believe are already melting down behind “the curtain.”
At some point the “collapse dyamic” is going to hit the entire stock market. It already has in several sub-sectors and individual stocks below the surface. We see this in the “cliff-dives” that occur when companies report “unexpectedly” disappointing earnings results. Stocks which were held up with the broad indices thanks to the Fed’s monetary lasiviousness get quickly repriced to downside.
This morning a poll is out from Quinnipiac University which reports that 83% of Americans polled live in fear of another “terrorist attack.” I find this highly troubling because of the amount of power it gives the Government to control the population. I expect to see a stunning degree of abuse of this power, as if the Patriot Act, Homeland Security Act, Detainee Bill and surveillance laws are not horrifying enough.
In late 2003, a colleague and friend of mine and I surmised that we would eventually see things occur in this country that would “blow our minds.” This is in the context of Enron, 9/11 and the highly illegal invasion of Iraq having already occurred. Ponder that for a moment.
The hallmark of an empire in collapse is the imposition of Governmental totalitarianism and reckless attempted military imperialism. Currently the U.S. military is the most dangerous terrorist in the world. Contrary to the view reflected in the Quinnipiac poll, my biggest fear is that the U.S. Government is soon going to turn its reign of terror on its own citizens. History tells us this is what occurs when a powerful economic/political system is in the final stages of collapse.