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We’re
not there yet, but it’s getting closer and closer. To what do we refer?
Paying the tab for all the reckless spending by our governments and
bureaucracies of course, because the day of reckoning in this regard is
indeed getting closer and closer by
the second
based on exploding debt levels both in America and abroad. Because ‘we
the people’ will never be able to pay back all the debt our politicos
and bankers continue to borrow / pile up on our behalf, and eventually the
game of pretend and extend will stop when the cost of printing new money
rises past a critical mass that deficit spending will no longer be able to
hide. But still, such knowledge does not answer the question
‘when’, does it.
But
is the ‘when’ really that important in the bigger picture in
knowing it’s coming at some point in the foreseeable future. Perhaps
not if one is not concerned, right? Of course for these types, who are also
likely heavily indebted and would suffer if the cost of money were to rise
dramatically, such worries will not come until it’s too late because
that’s their nature – don’t worry be happy is their motto.
But for the rest of us who prefer to remain well grounded in our views, and
realize that such an outcome (profoundly rising interest rates) would cause
an equally profound dislocation in both the fiat currency and real economies,
it’s important to realize what’s coming, where obviously paying
down debt should be the first thing one should be doing these days.
Because
although the debts of governments and key institutions seen as systemically
crucial in maintaining the status quo might receive further bailouts in the
future, over-indebted individuals will most likely not, nor would a Jubilee be declared either as long as central
bankers are still pulling politician’s strings. So again, for the
individual, paying down debt should be central in one’s financial plans
right now because interest rates could begin rising uncontrollably sooner
than even the pessimists think, meaning such an outcome could grip the macro
later this year as world events spin out of control. And in the case of the
US, as unthinkable this might be to most, this would be when the sovereign
debt market begins discounting the eventuality of a breakup of the empire – again –
believe it or not.
What’s
more, when it happens, which would be marked by a breakdown in the Treasury
market past the containment current monetization practices provide
(don’t kid yourself, QE3 will quickly follow the end of QE2 in June),
the situation could quickly spiral out of control much like it has in
periphery economies, such as with the PIGS. Because let’s face it, the monetary base is growing out of control
to this day in spite of assurances from central authorities everything is
‘just fine’. And what most call inflation, where really what they
are referring to is the price increases caused by the real inflation (money
printing), looks set to soar if something is not done, which is why the ECB
will actually raise rates as early as next week
despite the fact such a move will cause further stress to periphery members.
In
this light then, in case you didn’t know, the message here today is pay
down your debts if you can, and eliminate them entirely if possible. Because
if you don’t, not only do you risk suffering through an increasing
burden while the larger economy is stuck within a stagflation quagmire, what’s worse, if our
self-serving governments / bureaucracies are not reined in on their monetization practices, the situation could get right out of
control. What does this mean? While outright hyperinflation is not likely on a global
scale and with so much debt already in place (the bond markets would not
allow for it in theory), certainly shades of this condition are possible,
with future price increases making present hikes looking tame in comparison.
Exactly
what would be accomplished by raising rates while continuing to flood the
system with daily liquidity injections is beyond me past our price managing
bureaucracy’s desire to fool the people and keep the party going, but
surely this will end badly anyway, as strategy this hair-brained is bound
have happen. Because one way or another the required true tight money condition will find it’s way
into the market and greater pain will be felt with of all the delays and
extensions of a business cycle gone wrong, where our hollowed out
economy’s (the product of mal-investment in fiat currency systems) will
need profound realignment and cleansing before a regenerated and sustainable
system would emerge, with smaller organizational frameworks. (i.e. the
central bank led globalization model will be replaced with more localized economies.)
In
the meantime however, the good guy / bad guy routine the Fed and ECB will
play moving forward (ECB plays the hawkish role to keep the dollar weak)
should continue to buoy the equity complex for some time, perhaps even into
summer as suggested in our last commentary, increasingly choppy as the price
action might be. Myself, I don’t see how the present cycle can be
maintained that long with factors like deteriorating internals, inter-market
relationships, and sentiment conditions increasingly non-supportive of such a
move, however again, if our central planners can keep the dollar ($)
declining until then, which appears quite possible (if not likely) from a
technical respective (the $ needs one more wave down to complete the larger
count), hey, who am I to argue. What’s more, this would allow the
present cycle in Treasury yields (TNX) to reach a previously discussed
Fibonacci resonance related target before correcting that would signal the
likelihood of further gains later on. (See Figure 1)
Figure 1
 
And
make no mistake about it, once the channel on the long bond is broken to the
downside interest rates across the entire curve will need to rise in the US
(and world), where this would signal the end of $ hegemony status, and the
$’s rein as the world’s reserve currency. And you should know
this is scheduled to happen later this year, perhaps beginning as early as
the summer, which would be the catalyst for cycles to top out in equities as
well. So, don’t be fooled by recent strength in the bond market. This
is simply a reflection of the uniformed moving assets into Treasuries fearing
trouble in the equity complex on top of the regular monetization schedule. Again, this will be
signaled once the long bond breaks down, which would force Bernanke to
abandon his foolish double talk and begin raising rates at the bank level.
(See Figure 2)
Figure 2
So,
in the end it will be all about the $, as it begins to fall uncontrollably as
foreigners abandon US assets in fear of currency risk. And again, although a
period of weakness in equities beginning in earnest as early as late spring /
summer (the process is beginning already, but near term weakness in the $
would delay profound equity market[s] weakness) might postpone the $ crash
until late fall / next year, the important thing to know is it’s
coming, and like the banana republic the US really is, it will forced to
raise short rates to defend the currency, which will usher in not only
considerably higher volatility in financial markets, but also, much higher
precious metals prices as well.
Unfortunately
we cannot carry on past this point, as the remainder of this analysis is
reserved for our subscribers. Of course if the above is the kind of analysis
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