The world is awash with “promises”. Nearly everything we think of as
having “value” is because of a promise behind it. A few examples;
your bank accounts, retirement funds, bonds and even the dollar bills
in your pocket. Your bank account for example, once you deposit the
money it is no longer yours. You can argue this if you wish but we now
know this is true for sure after recent “bail in” legislation’s passed
throughout the west. When you deposit funds into a bank, it then
becomes “their money” held for you …they “owe” it to you. Do not take
this lightly, lawmakers around the world have made this the new
reality. A little known fact, in 1845 Britain passed banking law that
made depositors (unsecured creditors), this is still precedent to this
day. When you deposit money you “accept a liability” from your bank and
are classified as an unsecured creditor. In other words, “get in line
with everyone else”!
Same thing with many retirement accounts. Think about Social
Security. When you get your annual statement form, it comes with an
asterisk. This is to inform you they “might need to reduce
benefits”. With any retirement account you are relying on the custodian
to make payments to you upon retirement. Think about state and
municipal retirement accounts promising the good life, they are nearly ALL
underfunded. Meaning there is not enough money in there to make
(promised) future payments unless some sort of magically higher returns are
realized. These are underfunded by the TRILLIONS of dollars!
Bonds are an obvious asset class where a “promise” is relied on.
Dollars on the other hand seem the most misunderstood by the public while being
the biggest leap of faith in all asset classes. Dollars rely on the
“full faith and credit” of the U.S. government (a bankrupt entity) yet the
populace sleeps through the night secure knowing they own dollars. ALL
non backed, fiat currencies in the past have failed. The dollar is the
widest spread and widely owned fiat the world has ever known, its failure
will be spectacular upon arrival!
I wanted to point out the above “promises” as a basis to speak about trust
or confidence. The financial world turns on the axis of “trust”.
This trust was nearly broken in 2008 and is the reason the Federal Reserve
needed to secretly lend $16 trillion all over the world. If the Fed had
not come up with these funds, failures would have spread and trust would have
been broken amongst the banks/other financial institutions and even
between the central banks themselves! The Fed’s largesse worked and
trust was maintained.
Now, I believe we are set for another “test” of trust. We have gone
five+ years with QE this and QE that, the reality being outright
monetization. In fact, central banks today are buying more sovereign
bonds than are even being issued. The public and even the professional
funds have backed away from the debt markets, you can’t blame them because the
interest received does not even cover inflation not to mention a risk
premium. Globally the pace of trade and business activity is slowing or
even declining which will bring to a head the difficulties in meeting debt
service and other “promises”.
I ask, what will happen when inevitably “trust” begins to wane?
Or even fully break? It is at this point the system goes into “The
Great Call”. Margin call? Of course, because nearly everything
financial has leverage behind it but there is more to it than this. The
“call” I am speaking of is for contracts of all sorts to “perform”. In
particular I am thinking “derivatives” contracts will be called on to perform
their contractual duties.
All in all, there are over $1 quadrillion worth of
derivatives outstanding. The problem with this is the “tail” is bigger
than the dog. In other words, the amount of derivatives outstanding dwarfs
the total amount of money outstanding and thus the ability to “pay” and make
good on the contracts. The other side of this coin are contracts
promising to deliver something. Here I am thinking both gold and
silver. There are far more (100-1 or more) obligations outstanding than
there are ounces or kilos available to deliver. This is a default
just waiting to happen.
If you listen to the Harry Dents of the world, the dollar will be the safe
haven and where all fear capital will go. In a world based on
nothing but trust and promises, will fear capital really pile INTO
a currency based ONLY on trust and promises …when “trust” is exactly
what is come into question. Actually, it can be said the dollar was
originally set up in 1971 on a “never pay” model. The dollar (and
bonds) only promise to pay “more dollars” and nothing else. This game
worked for many years, now it looks like the Saudis after doing many deals
with both Russia and China may be set to transact in currency other than
dollars. Are they displaying confidence?
The Chinese are now net sellers of U.S. Treasuries. Ask yourself
this question, if China could sell all of their Treasuries and turn it all
into gold, silver, oil, copper and other real tangible assets (without
destroying the Treasury market or making gold and silver go no offer), would
they? I say yes, they absolutely would love to be out from under their
Treasury position. Apologetic others might say China is comfortable, we
will soon see.
Because confidence is the only thing at this point holding the game
together …and its fickle nature, it is important for you to think this
through. What will be standing when confidence breaks? Can banks
globally survive “runs” when depositors come calling? Can commodity
exchanges deliver all they promise? Can borrowers “borrow more” if they
cannot redeem past issues with new debt? This is where we are headed
both systemically and globally!
Before finishing I want to tie two connected thoughts together.
First, the great Paul Craig Roberts said last week he feared precious metals
could be suppressed forever. I received MANY fearful e-mails regarding
this thought process. Mr. Roberts would be entirely correct if it were
not for one small detail, REAL gold and REAL silver must be available to
deliver. Otherwise the game comes to an end and the fraud is
exposed. He is entirely correct, “price” can be jammed or rammed with
enough “margin” posted. Dan Norcini once upon a time had it correct
when he said, nothing will unnerve the shorts more than the longs
standing for delivery …and making a call for the product. I would like
to remind you, COMEX currently has only 11.7 tons of gold for delivery.
This is roughly $400 million. If I were short, this paltry sum would
not add to my confidence.
Another thought going hand in hand with this is where we are now versus
2008. Back then we were within overnight hours of the entire system
coming down, this is fact. What has changed since then?
“Nothing”, but in reality quite a bit. Nothing has changed from the
standpoint of “tools used”. We have not altered or changed anything
that “got us to the brink”… only done more of it! We have far more debt
and more derivatives outstanding now. In fact, central banks and
sovereign nations have even sacrificed their balance sheets to prolong the
game. It has worked …so far. The only problem is the entire
arsenal of the central banks have already been tried and failed to provide
the real economy with any stimulus. The result has been capital pushed
into financial markets and blowing the bubble(s) far larger than they
were. Now, we have far larger markets with far more leverage than 2008.
These will need to be met with central banks and sovereign treasuries with
weaker balance sheets and almost no ability to borrow in an effort to
reflate. It is a recipe for disaster.
We already know the sovereign debt markets are very thin on the bid side
as liquidity has dried up. We also know equity markets are displaying
horrible internal breadth. China is actually nearing a 1929 scenario
and will be there shortly if they cannot steady. Confidence is a fickle
girl, if it breaks, then we go back to the 2008 scenario and we’ll find out
just how powerful the central banks really are. I believe the coming
“Great Call” cannot nor will be met and only then will we see what is left
standing. It is imperative here and now to position yourself in assets that
do stand on their own, everything else will be a broken promise!
Standing watch,
Bill Holter
Holter-Sinclair collaboration
Comments welcome! bholter@hotmail.com
