MARTENSON
REPORT NEWSLETTER FOR ENROLLED MEMBERS
How
This Will Play Out
Tuesday,
April 19, 2011
Executive
Summary
· Why
downward pressure on the US dollar is building
· What
to expect when the Fed "ends" quantitative
easing in June
· The
factors most likely to cause a major breakdown in the
dollar
· What
you should do to protect against a dollar collapse
· Why
time is your most precious (and depleting) asset right
now
Part
I: The Breakdown Draws Near
Things
are certainly speeding up, and it is my conclusion that
we are not more than a year away from the next major
financial and economic disruption.
Alas,
predictions are tricky, especially about the future
(credit: Yogi Berra), but here's why I
am convinced that the next big break is drawing near.
In
order for the financial system to operate, it
needs continual debt expansion and servicing.
Both are important. If either is missing, then
catastrophe can strike at any time. And by 'catastrophe'
I mean big institutions and countries transiting from a
state of insolvency into outright bankruptcy.
In
a recent
article, I
noted that the IMF had added up the financing needs of
the advanced economies and come to the startling
conclusion that the combination of maturing and new debt
issuances came to more than a quarter of their combined
economies over the next year. A quarter!
I
also noted that this was just the sovereign debt, and
that state, personal, and corporate debt were additive
to the overall amount of financing needed this next
year. Adding another dab of color to the picture, the
IMF has now added bank refinancing to the tableau, and
it's an unhealthy shade of red:
Banks
face $3.6 trillion "wall" of maturing debt:
IMF
(Reuters)
- The world's banks face
a $3.6 trillion "wall of maturing debt" in
the next two years and must
compete with debt-laden governments to secure financing,
the IMF warned on Wednesday.
Many
European banks need bigger capital cushions to restore
market confidence and assure they can borrow, and some
weak players will need to be closed,
the International Monetary Fund said in its Global
Financial Stability Report.
The
debt rollover requirements are most
acute for Irish and German banks,
with as much as half of their outstanding debt coming
due over the next two years, the fund said.
"These
bank funding needs coincide with higher sovereign
refinancing requirements, heightening competition for
scarce funding resources," the
IMF said.
When
both big banks and sovereign entities are simultaneously
facing twin walls of maturing debt, it is reasonable to
ask exactly who will be doing all
the buying of that debt? Especially at the
ridiculously low, and negative I might add, interest
rates that the central banks have engineered in their
quest to bail out the big banks.
Greek
T-Bill Sale Fails to Allay Fear
Greece's
Public Debt Management Agency paid a high price to
sell €1.625
billion of
13-week Treasury bills at an auction Tuesday, amid
persistent speculation that the country will have to
restructure its debt.
The
4.1% yield paid by Greece, which means it now pays
more for 13-week money than the 3.8% Germany currently
pays on its 30-year bond,
is likely to increase concern over the sustainability of
Greece's debt-servicing costs.
Greek
debt came under heavy selling pressure Monday after it
emerged that the country had proposed extending
repayments on its debt, pushing yields to euro-era
highs.
Greek
two-year bonds now yield more than 19.3%,
up from 15.44% at the end of March.
With
Greek 2-year bonds now yielding over 19%, the situation
is out of control and clearly a catastrophe.
When sovereign debt carries a rate of interest higher
than nominal GDP growth, all that can ever happen is for
the debts to pile up faster and faster, clearly the very
last thing that one would like to see if avoiding an
outright default is the desired outcome. How
does more debt at higher rates help Greece?
It
doesn't, and default (termed
"restructuring" by the spinsters in charge of
everything...it sounds so much nicer) is clearly in the
cards. The main question to be resolved is who is
going to eat the losses -- the banks and other major
holders of the failed debt, or the public? I think
we all know the most likely answer to that one.
"Contagion"
is the fear here. With Ireland and Portugal
already well down the path towards their own defaults,
it is Spain that represents a much larger risk because
of the scale of the debt involved. Spain is now
officially on the bailout watch list, because it has
denied needing a bailout, which means it does.
Spain
is now at the 'grasping at straws' phase as it pins its
hopes on China riding to the rescue:
European
officials are hoping that the bailout for Portugal will
be the last one, and debt markets have broadly shown
both Spain and Italy appear to be succeeding in keeping
investors' faith.
Madrid
is hoping for support from China for
its efforts to recapitalize a struggling banking sector
and there were also brighter signs in data showing its
banks borrowed less in March from the European Central
Bank than at any point in the past three years.
(Source)
If
Spain is hoping for a rescue by China, it had better get
their cash, and soon. As noted here five weeks ago in
"Warning
Signs From China,"
a slump in sales of homes in Beijing in February
was certain to be followed by a crash in prices. I just
didn't expect things to be this
severe
only one month later:
Beijing
March New House Prices Plunge 26.7% M/M
BEIJING
(MNI) - Prices
of new homes in China's capital plunged
26.7% month-on-month in
March,
the Beijing News reported Tuesday, citing data from the
city's Housing and Urban-Rural Development Commission.
Average
prices of newly-built houses in March fell
10.9% over the same month last year to
CNY19,679 per square meter, marking the first
year-on-year decline since September 2009.
Home
purchases fell 50.9% y/y
and 41.5% m/m,
the newspaper said, citing an unidentified official from
the Housing Commission as saying the falls point to the
government's crackdown on speculation in the real estate
market.
March
Home Transactions in 30 Major Cities Fall 40.5% Y-o-Y
Housing
transactions in major Chinese cities monitored
by the China Index Research Institute (CIRI) dropped
40.5% year-on-year
on average in March,
a month when home buying typically enters a seasonal
boom period.
Transactions
rose month-on-month in 70% of the cities monitored,
including five cities where transactions were up by more
than 100% on a month earlier, secutimes.com reported
on Wednesday, citing statistics from the CIRI. [CM note:
month-on-month not useful for transactions as volumes
have pronounced seasonality]
Beijing
posted a decrease of 48% from a year earlier; cities
including Haikou, Chengdu, Tianjin and Hangzhou saw
drops in their transaction volumes month-on-month,
according to the statistics.
Meanwhile, land
sales fell 21% quarter-on-quarter to
4,372 plots in 120 cities in the first quarter of 2011;
1,473 plots were for residential projects, the
statistics showed.
The
average price of floor area per square meter in the 120
cities dropped to RMB 1,225, down
15% m-o-m,
according to the statistics.
Real
estate is easy to track because it always follows the
same progression. Sales volumes slow down, and
people attribute it to the 'market taking a breather.'
Then sales slump, but people say "prices are
still firm," trying to console themselves with what
good news they can find in the situation. Then sales
really drop off, and prices begin to move down. That's
where China currently is. What happens next is also easy
to 'predict' (not really a prediction because it always
happens), and that is mortgage defaults and banking
losses, which compound the misery cycle by drying up
lending and dumping cheap(er) properties back on the
market.
In
that report back in March, I also wrote this:
If
China enters a full-fledged housing crash, then it will
have some very serious problems on its hands.
A
collapse in GDP would surely follow, and all the things
that China currently imports by the cargo-shipload would
certainly slump in concert.
This
is another possible risk to the global growth story that
deserves our close attention. How this will impact
things in the West remains unclear, but we might predict
that China would cut way back on its Treasury purchases
if it suddenly needed those funds back home to soften
the blow of an epic housing bust.
If
a more normal ratio for a healthy housing market is in
the vicinity of 3x to 4x income, then China's national
housing market is overpriced by some 60% and certain
major markets are overpriced by 80%.
Which
means that the entire banking
sector in China is significantly exposed.
(...)
The
reason we care if China experiences a housing bust is
the turmoil that will result in the global commodity and
financial markets as a result. Everything is tuned to a
smooth continuation of present trends, and China
experiencing a housing bust would be quite disruptive.
If
Spain is hoping for a big cash infusion from China
and/or Chinese banks, it had better get its hands on
that money quick. China is barreling toward its own
full-fledged real estate crisis, which will drain its
domestic liquidity just as surely as it did for the
Western system, and probably even more quickly, given
the stunning drop-offs in volumes in prices.
However,
I should note that the United States housing market hit
its peak (according to the Case-Shiller index) in July
of 2006, and it was a year and a month before the first
cracks appeared in the financial system, so perhaps
there's some time yet for Spain to cling to its hopes.
The
larger story here is how a real estate slump in China
will impact global growth, which absolutely must
continue if the debt charade is to continue.
Who
Will Buy All the Bonds?
With
Japan now focusing on rebuilding itself, and China
seemingly now in the grips of a housing bust that could
prove to be one for the record books, given the enormous
price-to-income gap that was allowed to develop, it
would seem that the financing needs of the West will not
be met by the East.
One
important way to track how this story is unfolding is
via the Treasury International Capital (TIC) report that
comes out every month. The most recent one came out
on April 15th and was quite robust, with a very large
$97.7 billion inflow reported for February (the report
lags by a month and a half).
On
the surface things look 'okay,' although not especially
stellar, given a combined US fiscal and trade deficit
that is roughly twice as high as the February inflow.
But digging into the report a bit, we find some
early warning signs that perhaps all is not quite right:
Net
foreign purchases of long-term
securities totaled
a lower-than-trend $26.9
billion in February,
reflecting $32.4 billion of foreign purchases offset by
$5.5 billion of domestic purchases of foreign
securities. Inflows slowed for both Treasuries and
equities with government agency bonds and corporate
bonds posting outflows.
When
including short-term securities,
the February data tell a different story with a
very large $97.7 billion inflow.
Country data show little change in Chinese holdings of
U.S. Treasuries, at $1.15 trillion, and a slight gain
for Japanese holdings at $890 billion. It will be
interesting to watch for change in Japanese Treasury
holdings as rebuilding takes hold.
(Source)
Only
$26.9 billion, or 28%,
of that $97.7 billion, was in long-term securities,
reflecting a trend first outlined for us in our recent
podcast interview
with Paul Tustain of BullionVault
whereby fewer
and fewer participants are willing to lend long.
Everybody is piling into the short end of things, not
trusting the future. The concern here is that when
interest rates begin to rise, financing costs will
immediately skyrocket, because too much of the debt is
piled up on the short end.
Also
in the TIC data cited above, we need to reiterate that
it is for February, and the Japanese earthquake hit on
March 11. The next TIC report will be somewhat more
telling, but even then only partially, and so it is the
report for April (due to be released on June 15) that
we're really going to examine closely. Our prediction is
for a rather large dropoff due to Japan's withdrawal of
funds.
With
the Fed potentially backing away from the quantitative
easing (QE) programs in June, the US government will
need someone to buy roughly $130 billion of new bonds
each month for the next year. So the question is, "Who
will buy them all?"
Right
now, that is entirely unclear.
Budget
Fiasco
Sadly,
the budget 'cuts' proposed so far in Washington DC are
too miniscule to assist in any credible way, and they
practically represent a rounding error, given the
numbers involved. The Obama administration has proposed
$38 billion in spending reductions. (I hesitate to call
them 'cuts' because in many cases
they are merely lesser increases than previously
proposed).
Congress
OKs big budget cuts — bigger fights await
April
14, 2011
WASHINGTON
– Congress sent President Barack Obama hard-fought
legislation cutting
a record $38 billion from
federal spending on Thursday, bestowing bipartisan
support on the first major compromise between the White
House and newly empowered Republicans in Congress.
The
Environmental Protection Agency, one of the Republicans'
favorite targets, took a $1.6 billion cut. Spending for
community health centers was reduced by $600 million,
and the Community Development Block Grant program
favored by mayors by $950 million more.
The
bipartisan drive to cut federal spending reached into
every corner of the government's sprawl of domestic
programs. Money to renovate the Commerce Department
building in Washington was cut by $8
million.
The Appalachian Regional Commission, a New Deal-era
program, was nicked for another $8
million and
the National Park Service by $127 million more.
For
the record, these
'cuts' work out to ~$3 billion less in spending each
month,
or less than the amount the Fed has been pouring into
the Treasury market each
business day for
the past five months.
The
fact that a major write-up on the budget finds it
meaningful to tell us about specific $8 million cuts
(that's million with an "m")
tells us that we
are not yet at the serious stage in these conversations.
After all, $8 million is only 0.0005% of the 2011
deficit, and even the
entire $38 billion is just 2.3% of the deficit and
slightly under 1% of
the total 2011 budget.
How
much is $38 billion?
· Less
than 2 weeks of new debt accumulation (on average)
· About
2 weeks of Fed thin-air money printing, a.k.a. QE II
In
other words, it's a drop in the ocean.
It
is this lack of seriousness that is driving the dollar
down and oil, gold, silver, and other commodities up.
It is the reason we will be watching the TIC report for
clues that foreign buyers and holders of dollars are
getting nervous about storing their wealth with a
country that is increasingly seen as unable or unwilling
to live within its means. It explains why the IMF has
been finger-wagging so much of late.
Somehow
the US federal government managed to increase its
expenditures by 30% from 2008 to 2011, but is now
struggling to reduce the total amount by just 1%.
That,
my friends, is an out-of-control process, and the 1% in
'cuts' is simply not a credible response to a very large
problem.
Conclusion
There
are two entirely, completely, utterly different
narratives at play here. One of
them is that the economy is recovering, policies
are working, and the vaunted consumer is either back in
the game or close to it. The other
is that the world is saturated with debt, there's
no realistic or practical model of growth that could
promise its repayment, and the level of austerity
required to balance the books is so far beyond the
political will of the Western powers that it borders on
fantasy to ponder that outcome.
If
we believe the first story, we play the game and
continue to store all of our wealth in fiat money. If we
believe the second, we take our money out of the system
and place it into 'hard' assets like gold and silver
because the most likely event is a
massive financial-currency-debt crisis.
The
IMF, the World Bank, the BIS, and numerous other
institutions with access to $2 calculators have finally
arrived at the conclusion that there's still 'too much
debt' and that it cannot all be
paid back. And they are now alert to the idea
that the predicament only has two outcomes: either the
living standards of over-indebted countries will be
allowed to fall, or the global fiat regime will suffer a
catastrophic failure.
China
is unlikely to ride to the rescue of the West, although
it may have some time yet to help out a few of the
smaller and mid-sized players, such as Spain.
In
Part II of this report, How
This Will Play Out,
we explore in detail the likely triggers for a financial
breakdown, what market signals to watch for, and what
individuals can do to defend themselves against such a
collapse. The risks are now higher than at any time
since I began analyzing this predicament. I invite
you to plan accordingly.
Part
II: How This Will Play Out
Meanwhile...
Inflation
continues to climb in every market except the United
States, which tells us that US
inflation statistics are probably wrong.
In a global economy where the dollar is the world's
reserve currency, and given the fact that the dollar is
down roughly 8% over the past year, it is practically
impossible for inflation to be higher
everywhere besides the
US.
In
Europe, the highest monthly gain in inflation in the
record series was just recorded:
Euro
Zone Posts Record Monthly Inflation
April
15, 2011
LONDON—A
record monthly increase in euro-zone
inflation unexpectedly
pushed up the annual rate to a
29-month high in
March, a move that is likely to strengthen expectations
that the European Central Bank will further tighten
monetary policy further this year, official data showed
Friday.
The
euro zone's inflation rate rose to 2.7% from 2.4% in
February, the highest level since October 2008 when the
rate was 3.2%, the European Union's Eurostat agency
said. Economists were expecting no change from the
preliminary March estimate of 2.6%.
"The
ECB's fear that an upswing in headline inflation will
sooner or later seep through into core inflation, is
threatening to become reality," said Peter Vanden
Houte, an economist at ING. "We
think that two more rate hikes this year are already a
done deal."
On
a monthly basis, a seasonal increase in prices for
clothing and footwear, and higher costs for transport
fuel and heating oil, led to a 1.4% jump in the
consumer-price index after a 0.4% rise in February. It
was the sharpest monthly increase since records began in
1996, Eurostat
said, and also topped economists' predictions of a 1.3%
rise from a month earlier.
Inflation
is heating up in China, too:
China's
inflation surges in March
April
15, 2011
China's
inflation jumped to a
32-month high in
March and the world's second-largest economy grew
rapidly despite official efforts to cool politically
sensitive prices, fuelling expectations of more interest
rate hikes and other controls.
Consumer
prices rose
5.4 per cent over
a year ago, driven by 11.7
per cent surge in food costs,
data showed Friday. That was up from February's 4.9 per
cent and a setback for communist leaders who say taming
inflation is their priority this year and have raised
interest rates four times since October.
Meanwhile,
the US continues to publicly fret about deflation being
the larger concern. Well, at least Fed officials do,
even as ordinary people and municipalities struggle with
the reality of sharply higher food and fuel costs.
Regardless of the truth of the matter, what is clear is
that the European Central Bank (ECB) and China are busy
hiking interest rates, which will put further downward
pressure on the dollar.
To
QE, or not to QE, that is the question:
We
are all speculators now, and our only job is to
try to figure out if the Fed is going to end QE or not.
If it does, then I have
predicted that a rather extraordinary
liquidity/deflationary crisis will rapidly ensue,
dragging down every asset class in its wake. If it
doesn't, then we will continue to plod down the path of
steadily rising
inflation and weakening fiat money.
There
is rancor and division in the troops at the Fed, with
many officials stating that they are ready to end QE
hard and sharp at the end of June.
Taking
the other side, Bernanke has just recently come out and
said "maybe not:"
Bernanke
May Sustain Stimulus to Avoid ‘Cold Turkey’
End to Aid
April
19, 2011
Federal
Reserve Chairman Ben S. Bernanke may
keep reinvesting maturing debt into Treasuries to
maintain record stimulus even after making good on a
pledge to complete $600 billion in bond purchases by the
end of June.
The
Fed chief’s top two lieutenants said this
month the
economy and inflation are too weak to warrant
[even]
the start of a monetary-policy reversal.
Investors and economists including David Kelly at
JPMorgan Funds see that as a signal the Fed will keep
its balance sheet at current levels by replacing about
$17 billion a month in
maturing mortgage debt with Treasuries.
Ending
the reinvestment policy and the $600 billion [bond
purchase] program at
the same time would be like quitting stimulus
“cold turkey,” said Kelly, who is based in
New York and helps oversee $400 billion as chief market
strategist at JPMorgan. “It does make sense to
reinvest for a while,” he said. “Then they
could watch how bond yields react to that.”
Well,
at least they are using the right metaphor -- that of a
junkie quitting his habit -- to describe the debt
injections. Sad, but accurate.
This
confuses things quite a bit, but is not unexpected, as
many doubted that the Fed would be able to simply stop
its average daily $4.4 billion
liquidity injections to the market. We can be
certain that this trial balloon by Bernanke is being
floated because of some back-channel pressure or
difficulties the Fed has been made aware of.
For
now, I think we
should bet on "sort of" as the answer to
whether or not QE will end in June.
For now. Later on, I fully expect
some other sort of monetary excess to be announced,
once it becomes clearer that the economic misfires of
Japan and China will be coming at an especially poor
time for a globe awash in maturing debt.
How
This Will Play Out
There
is a major ideological battle playing out at the Fed
right now that we could characterize as a war between
those who think that money should still have some sort
of meaning in our lives and Bernanke (et al.), who
apparently think money should be debased, handed out
preferentially to the well-connected, and generally
printed up without regard to anything but his
quasi-erudite rationales.
After
handing out literally trillions of dollars in free money
to everyone from Wall Street wives to a Libyan owned
bank operating out of Bahrain (from
another scathing Matt Taibbi article),
the Fed has made a complete mockery of the idea that
money has value and is worth slaving after and
accumulating.
Quite
a few people have figured this out and have decided to
park their money somewhere besides in the obligations of
a reckless central bank, also known as Federal Reserve
Notes, a.k.a. the dollar. Gold and silver come to mind,
the charts of which are exceptional examples of what can
happen when faith in a currency wanes.
When
the end-game comes for the US dollar, it will be an
incredibly turbulent period for all the major fiat
currencies of the world. The general theme, though, is
easy enough to spell out: Living standards will fall.
The
dollar is closing in on a very critical area, and it is
one of the things I track most closely for clues about
where we are headed.
If
it breaks below the ~71-72 area, there's a very
strong chance that it will fall a lot further.
Everything that we import will go up in price
correspondingly, no matter what the BLS and Fed say
about 'core' inflation.
The
signal that we'll be looking for to tell us that we've
entered the next significant down
leg (or period of adjustment, if you prefer) will
be the combined move down in both the dollar and
Treasurys at the same time.
While
we are still straddling the fence between whether this
will all end in a massive
deflationary collapse or an inflationary conflagration,
our money is still heavily parked on the side of
inflation.
But
the United States is an exceptional country. After all,
where else could you have your
credit rating and interest rate lowered on the same day?
I
maintain my view that this will all play out in the bond
and currency markets, with stocks just there for show
and gold signaling where we are in the narrative of
decline.
Unless
the US and other advanced economies undertake the hard
work of self-imposed austerity the alternative is some
sort of a financial accident.
My
timing for the next down leg is
within a year almost certainly, and within the next 3-4
months as a distinct possibility I base
this on the various pressures centered around the end of
June for the US, happening right now for Japan,
currently unfolding in Europe, and accompanying China's
remarkable real estate plunge. That is a tremendous
convergence of pressures, and 'relief' will come in the
form of another crisis that will be triggered by
something surprising.
The
various pressures are:
· A
$1.6 trillion, 10.8% of GDP federal deficit (and no
credible plan for reducing it via spending cuts)
· Continued
monetary printing by the Fed (which will continue for
2.5 more months)
· Spiking
inflation throughout the world, fueled by a combination
of 'too much money' and legitimate shortages/tightness
in the oil and grains markets
· Europe
and China hiking rates while the US maintains its 'zero
percent blowout special'
· China
entering the first phases of what could be a magnificent
housing bust.
· A
failure of consumer credit to pick itself up off the
floor and take the baton from the federal government.
· Brent
crude at $123.34 and WTIC crude oil at $109.33 (Friday,
April 15th close)
· Guaranteed-to-fail-eventually
interest rates on Greek, Irish, and Portuguese sovereign
debt
· Supply
chain disruptions from Japan rippling across the globe
What
You Should Do
Now
is the time to seek safety over
returns. I personally have parked all of my
liquid assets in either cash (or cash equivalents such
as short-term Treasury money-market funds), gold, and
silver. Even if we trusted the stock market (and many
don't anymore, for good reasons), if you hold a general
stock portfolio consisting of index or mutual funds or
other aggregated abstractions, this would be a good time
to either take that money off the table by selling
stocks, or (if taxes or trust considerations prevented
such a move) by protecting the value of those stocks by
using various forms of portfolio insurance, such as
puts, covered calls, and maybe shorts. Specific holdings
in selected industries, especially energy, food, or
water, seem to be good bets at this point, because
inflation still has the upper hand for these items.
So
cash, cash equivalents, gold, and
silver are where I am positioned at the moment.
If
you have not yet bought any gold or silver, or you don't
yet have a core position of physical precious metals in
your possession, you should hold your nose regarding
prices and buy some. This may seem like a horrible time
to buy either because of how over-bought and
over-extended they are. I understand that, and it makes
buying right now feel quite difficult. If you do buy
now, there's a strong chance that values will
temporarily move down below your purchase price in the
future (especially if QE 'sort of' doesn't do the trick)
and you'll have to be mentally prepared for that.
However, trying to time the PM markets is notoriously
difficult, and over the long haul, say five to ten
years, I have few doubts about the continued upward
performance of these metals. And there is no time to
lose.
I
should repeat that when I bought PMs back in 2003 - when
prices were several times lower than they are now - it
was an incredibly hard thing to do. I
was told I was nuts, that they were "too high"
and "due for a fall," and I had to mentally
ward off a hundred reasons why it was a poor idea ("you
can't eat them"..."they pay no
interest"...etc). The bottom line is that it's
always hard and it never seems like a good time to buy
gold and silver. But I have absolutely no regrets about
those purchases, and the day will come when you'll feel
much the same, even if you buy at today's prices.
If
you already own physical PMs and are thinking of adding
more to your holdings, here I would suggest simply
sitting on your hands and watching the markets very
closely for a while with the goal of waiting
until after June 30 to see what transpires.
Along
with the financial moves, I have an ongoing aggressive
program of investment, but it is entirely centered on my
house and community. Solar
additions, soil amendments, garden expansions, edible
landscaping, a shallow well, additional personal
preparations, and supporting the start-up of a local
organic farm are the things towards which my personal
capital have recently gone.
In
keeping with my past advice, any similar such changes
that you are currently considering should be moved out
of the consideration phase and into action(s). I have no
clue as to when the next down-leg in this story will
commence, which is why I favor action. It could happen
in ten years, but it might happen next week. Who knows?
What
I do know is that when the next down-leg does begin,
your options and opportunities will narrow considerably
and things will be more expensive and/or difficult to
source. In this story, it is better
to be a year early than a day late.
If
your plans include moving, selling a house, or making
big improvements to your current house, I would strongly
recommend putting those plans into high gear.
Conclusion
I
remain convinced that the
pressures forcing the world back towards a financial and
economic precipice remain as large as they’ve ever
been. The combined effects of a struggling Japan and a
soon-to-be preoccupied China along with a suddenly
hawkish Fed come at an especially awkward time, given
the massive financing needs of the advanced economies.
We
will continue to watch both the dollar and Treasurys for
clues that the combined efforts of the federal
government and the Federal Reserve have finally placed
the dollar, the fiscal condition, and the future of the
United States onto a new a steeper path downwards.
If
the Fed stops printing and deflation re-gains a
toehold in the markets, the rout will be spectacular.
Tens of trillions in new and maturing debt require ample
liquidity or defaults, and spiking interest rates will
drag down everything from weak countries to strong
companies.
But
if the Fed keeps printing,
the dollar will continue to experience rather strong
downward pressures. Eventually, if that goes far enough,
it will be revealed to a critical mass of market
participants that the US Treasury market is not the
safest collection of assets in the world, but instead a
rather toxic heap of paper that needs and deserves a
rather dramatic discount.
My
advice remains constant. Use this time to get as many of
your personal preparations squared away as you can.
Whether the next event comes wrapped up as an admission
that Saudi Arabia is maxed out, or it is a financial
detonation in the bond markets courtesy of a match
struck against the rough edge of a deteriorating Chinese
housing market, the result will be the same.
Those
at the margins (countries, people, and companies) will
get into difficulty first, more faith will be lost in
our faith-based money system, the economy will stumble,
and the crisis will extend quite a bit further towards
the center than it did last time.
I
am sorry to sound so bearish and melodramatic, but this
view stems from the observation that none of the
structural or fundamental elements that sparked the
first round of difficulty have been addressed. There is
still too much debt (only now parked over on public and
central bank balance sheets), energy is still depleting,
and the cash demands of existing claims on wealth
continue to expand exponentially even as the engines of
wealth production are coughing and sputtering.
The
more that you can become insulated from rising food,
fuel, and other commodity hikes, as well as from the
possibility of more serious supply chain disruptions,
the better. One strategy is to simply 'pre-buy' things
that you would have bought over the next year
regardless. The worst that could happen is that their
prices fall and you overpay now for things that you
could get cheaper later. The 'best' that could happen is
you insulate yourself from rising prices and secure
needed items that might even become unavailable at a
future point.
Taken
all together, the signs I am reading suggest that the
next break in the markets and/or financial system is
drawing near.
Let's
hope I am wrong and plan as if I am not.
Your
faithful information scout,
Chris
Martenson
ChrisMartenson.com
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2006-2011, CMAL LLC. All Rights Reserved.
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