Tag Archives: commodities

Government Money Corrupted Science and Technology, by Doug Casey

When the government’s paying the bills it calls the tune and the recipients dance, especially those who receive the most: the big high tech firms and defense contractors. From Doug Casey at caseyresearch.com:


Editor’s note: In yesterday’s Dispatch, we spoke to Casey Research founder Doug Casey about his outlook on green energy, and how endless bureaucracy and government “funny money” are destroying the sector.

Today, we continue our Conversations With Casey, as Doug explains the threat of the scientific technological elite amid a growing tech bubble.

Read on to hear why this problem isn’t going away, and why he “wouldn’t touch tech stocks with a 10-foot pole”…


Daily Dispatch: Now that we’ve come full circle back to technology, we’d like your take on something that President Dwight D. Eisenhower said in his farewell address in 1960. Most people remember his warning about the “military-industrial complex.”

But he gave another warning, too, about how the “public policy could itself become the captive of a scientific technological elite.” What did he mean by that?

Doug Casey: Yes, that was a wonderful speech. He made two points that people have forgotten. Everyone knows and quotes his sage comments on the military-industrial complex. Those were spot on.

But nobody mentions the point he made about the threat of the “scientific technological elite.” Eisenhower points out, quite correctly, that it was no longer a question of a genius working solo in his laboratory to make discoveries.

Even in his day, which is to say over 60 years ago, there was a huge amount of government money flowing into science and technology. Now it’s almost all government money, directly or indirectly.

Continue reading

Doug Casey on Gold Breaking Through $1,400… and Four Ways He’s Positioned

Doug Casey is bullish on gold and commodities. From Casey at internationalman.com:

International Man: Recently, gold broke through the $1,400 barrier for the first time since 2013. What do you make of this?

Doug Casey: It’s long overdue.

The thing to remember here is that since the crisis of 2008, not just the US but all of the major governments in the world—the Japanese, the Chinese, the Europeans, and all the little countries too—have been printing up money hand over fist. Gold hasn’t really responded so far.

All that new money has gone into the stock and bond markets, and certain areas of the real estate markets. Now interest rates are once again down to their all-time lows, and about $13 trillion of bonds have negative yields—something that should be metaphysically impossible. Money is finally starting to filter down into commodities. All of which are extraordinarily depressed right now.

The recent move in gold has grabbed everyone’s attention. But all the commodities are going to move higher. There’s a lot of fear building up, and that always drives gold prices.

I’m bullish on gold. I don’t think this is a false start.

It last peaked in 2011 around $1,900. Gold is going back to at least its previous high, and that goes for all the other commodities as well.

International Man: You mentioned there’s a lot of fear building up. What do you mean by that?

Doug Casey: A lot of people are starting to recognize that in today’s world you don’t really own anything.

Stocks in your stock account are just another liability of the brokerage firm. If your broker goes bust, you’re out of luck for anything beyond the amount for which you’re insured. You’re just another unsecured creditor, like the broker’s landlord. You really don’t own the stocks in your stock account—at least in any secure way.

When it comes to commodities, the bust of MF Global under Corzine a few years ago proved that you really don’t own the money in your commodities account either. It used to be than an account with a clearing broker was sacrosanct. That’s no longer the case.

International Man: Recently, gold broke through the $1,400 barrier for the first time since 2013. What do you make of this?

Doug Casey: It’s long overdue.

The thing to remember here is that since the crisis of 2008, not just the US but all of the major governments in the world—the Japanese, the Chinese, the Europeans, and all the little countries too—have been printing up money hand over fist. Gold hasn’t really responded so far.

All that new money has gone into the stock and bond markets, and certain areas of the real estate markets. Now interest rates are once again down to their all-time lows, and about $13 trillion of bonds have negative yields—something that should be metaphysically impossible. Money is finally starting to filter down into commodities. All of which are extraordinarily depressed right now.

The recent move in gold has grabbed everyone’s attention. But all the commodities are going to move higher. There’s a lot of fear building up, and that always drives gold prices.

I’m bullish on gold. I don’t think this is a false start.

It last peaked in 2011 around $1,900. Gold is going back to at least its previous high, and that goes for all the other commodities as well.

International Man: You mentioned there’s a lot of fear building up. What do you mean by that?

Doug Casey: A lot of people are starting to recognize that in today’s world you don’t really own anything.

Stocks in your stock account are just another liability of the brokerage firm. If your broker goes bust, you’re out of luck for anything beyond the amount for which you’re insured. You’re just another unsecured creditor, like the broker’s landlord. You really don’t own the stocks in your stock account—at least in any secure way.

When it comes to commodities, the bust of MF Global under Corzine a few years ago proved that you really don’t own the money in your commodities account either. It used to be than an account with a clearing broker was sacrosanct. That’s no longer the case.

You don’t really own the money in your bank account, at least beyond the insured amount. The 2013 Cyprus crisis proved that. Instead of bailing out the banks, they were “bailed in” by customer accounts. The fractional reserve banking system, combined with a debt-heavy economy, guarantees there will be another wave of bank failures. Governments will follow the Cyprus model. Depositor’s funds are at risk.

More people are starting to realize that you actually don’t own any intangible assets in today’s over-financialized world. Security is an illusion.

That’s why there’s going to be a movement to gold. As I’ve said many times in the past, but it bears repeating, gold is the only financial asset that’s not simultaneously somebody else’s liability. It’s the “go to” asset in an unstable world.

International Man: The Fed capitulated earlier this year and ended its tightening cycle. The next stop seems to be more money printing. What does this mean for gold?

Doug Casey: Well, the more fiat money that’s created, the higher prices are going to go. That absolutely includes gold.

The big X factor is the huge amount of debt in the world, which is once again at new all-time highs. Mortgage debt, student loan debt, automobile debt, credit card debt, government debt, and corporate debt. The US dollar itself is a form of debt. It’s been this country’s major export for two generations now.

All that debt can be sustained with interest rates at 0% or 2%, but if—or rather when—interest rates eventually go up, a lot of that is going to be defaulted on. That will redirect people’s attention to an asset that can’t be defaulted on, such as physical gold.

International Man: If gold is merely a “tradition” as central banks like to pretend it is, why are central banks buying record amounts of it?

Doug Casey: Well, to start with, I’m always skeptical about the figures reported by governments. Not all central bankers are buying gold; it’s essentially just the Chinese and the Russians. Central bankers aren’t rocket scientists; they’re just government employees who’ve weaseled themselves into a position where they’re over paid, get to wear $1,000-dollar suits, and go to ritzy meetings. They have no understanding of economics, despite degrees from prestigious schools. They’ve been brought up on Keynesianism, and a lot of them are Marxists.

Central banks are really just engines of inflation. They really serve no purpose except to allow governments to extract capital from their populations indirectly by printing currency. As opposed to honestly—insofar as taxation is honest—by confiscating the money directly from citizens.

My hope is that over the next 20 years most of these central banks will go bankrupt. The Federal Reserve’s published balance sheet is loaded with trillions of dollars of ultra-low interest rate bonds. When—not if—rates return to even normal levels they’ll have hundreds of billions of negative equity. But I expect rates to go to the levels of the early 80’s and beyond.

Hopefully the Fed and other central banks will go bust and disappear. They’ll certainly go bust. As to disappearing, that’s not a prediction, just a fond hope. Banking and money should be left to the market, not an arm of the State.

Let me re-emphasize that the Russians and the Chinese have been buying a lot of gold in recent years.

Now, why are they doing that?

The major asset of the world’s central banks is US dollars. Even though central bankers aren’t rocket scientists, they recognize that the dollar is the just the unsecured asset of a bankrupt government, the US government.

So the Russians and the Chinese are trying to lighten up on dollars and go to gold. Other governments and central banks will too. It’s only convenient for everyone to use dollars out of habit, and because most everything is priced in dollars today.

But countries like Russia, China, and Iran don’t like to use dollars, because any time they transfer dollars—even between themselves—those dollars must clear through New York. The last thing that any of these countries want to do is use the currency of their adversary, or perhaps their enemy.

But what’s the alternative?

They don’t want to use renminbi and rubles, which are illiquid paper currencies. They don’t trust each other, or each other’s currencies. They certainly don’t want to use dollars. As a result I think the whole world is going back to gold. That will take the gold price to much higher levels. Remember, there are probably only about six billion ounces above ground, and the supply grows less than 1.5% per year from new production. That’s not much, considering that there are about 7.5 billion people in the world.

International Man: How are you positioned to profit?

Doug Casey: I’m doing several things.

Number one is buy gold coins every time I get a chance. However, I no longer buy large one-ounce gold coins. I only buy smaller, generally quarter of an ounce, gold coins. Things like Sovereigns, with a small numismatic value.

That’s because I’ve noticed, in several countries now, that if you have something that looks like it might be a Maple Leaf or a Krugerrand, they’ll open up your briefcase and check it out. It’s happened to me where they’ve mistaken silver coins for gold coins.

You should be buying physical gold coins, but preferably ones that look like pocket change.

Number two, you should have physical gold in storage in an offshore account. SWP Cayman, a precious metals storage company in the Cayman Islands, offers a convenient low-cost way to do that. There are others, but very few institutions will touch American accounts anymore, because of US regulations and reporting.

Number three is to speculate on gold indirectly. I’ve always been very big in mining stocks and they’re very cheap right now. When they run, the whole group can generally go 1,000%. I’m very involved in mining exploration and development stocks in particular at the moment.

The last thing, and this is not for most people, is the futures market. I use it by selling puts, buying calls, or just being long futures.

Those are the basics on how you play gold. You should mainly buy gold for safety, out of prudence, and for insurance. But I believe it will also be quite profitable in the years to come.

 

Consensus Forming: China Heading Back Into Financial Crisis, by John Rubino

At the end of debt binges, there is a massive increase in speculation, because that’s one of the few uses of borrowed funds that still offers the prospect (always overstated) of a positive return. Such is the case now in China. From John Rubino at dollarcollapse.com:

China’s historic post-2009 debt binge flew largely under the radar — fooling most observers into thinking the global economy was recovering rather than just re-leveraging.

Now Beijing is back at it, borrowing over $1 trillion in this year’s first quarter, buying up commodities and creating the illusion of global growth. But this time the scam hasn’t gone unnoticed. Reporters, editors and money managers seem, at last, to be catching on. Some representative headlines: [see original article for links]

George Soros warns of credit crisis in China

Chinese cities dive back into debt to fuel growth even as defaults rise

China debt climbs to US$25 trillion

China’s banks cut bad debt buffer as profits flatline

Doug Noland, meanwhile, goes to the heart of the problem in last night’s Credit Bubble Bulletin:

I recall an early-1998 Financial Times article highlighting the explosive growth in Russian ruble and bond derivatives. Not only had the “insurance” market for risk protection grown phenomenally, Russian banks had become major operators in what had evolved into a huge speculative Bubble in Russian debt exposures. That was never going to end well.

There was ample evidence suggesting Russia was a house of cards. Yet underpinning this Bubble was the market perception that the West would not allow a Russian collapse. With such faith and the accompanying explosion in speculative trading, leverage and a resulting massive derivatives overhang, any break in confidence would lead to illiquidity, panic and a devastating bust. Just such an outcome unfolded in August/September 1998.

From a recent Financial Times article: “The [Chinese] market for pledge-style repos — short-term, bond-backed loans — is currently bigger than the stock of outstanding debt”. Within this undramatic sentence exists the potential for a rather dramatic global financial crisis. And, to be sure, seemingly the entire world has operated under the assumption that Chinese officials (and global policymakers in general) have zero tolerance for crisis – let alone a collapse. So Credit, speculation and leverage have been accommodated – and they combined to run absolute roughshod.

The Financial Times article includes a chart worthy of color printing and thumbtacking to the wall: “China’s Use of Bonds as Loan Collateral Rises Sharply”. The pink line shows “Onshore Market Bonds” having almost doubled since mid-2011 to about 40 TN rmb ($6.17 TN). The Red Line – “Pledge-Style Repos” – has ballooned four-fold since just early 2014 to surpass 40 TN rmb. So basically, in this popular market for inter-bank borrowings, borrowing banks have pledged bond positions larger than the entire market as collateral for their (perceived safe) short-term borrowing needs.

To continue reading: Consensus Forming: China Heading Back Into Financial Crisis

Do Any of the Current Rallies Pass “The Sniff Test”? No. by Charles Hugh Smith

From Charles Hugh Smith at oftwominds.com:

But you can’t tame the monster of speculative, legalized looting and financialization.

Everything from iron ore to copper to the Baltic Dry Index to stocks to bat guano is rallying. The problem is not a single rally passes “the sniff test:” is the rally the result of changing fundamentals, or is it merely short-covering and/or speculative hot money leaping from one rally to the next?

Every one of these rallies is bogus, a travesty of a mockery of a sham of price discovery, supposedly the core function of markets. What shift in fundamentals drove this rally? Higher profits? No, profits are declining, especially once the phony adjustments are stripped away. Is the global economy strengthening? Don’t make us laugh!

To continue reading: Do Any of the Current Rallies Pass “The Sniff Test”? No.

Debt, Deterioration, Deflation, Depression, and Disorder Are Here, by Robert Gore

A SLL article discussed “The Economics of Debt, Deterioration, Deflation, Depression, and Disorder.” Instead of individual postings that confirm the presence of all of the above, self-explanatory titles are linked to the articles for those who want all the gory details. By the way, one of the reasons you read SLL is because the above referenced SLL article was posted November 17, 2014, when the Dow and S&P highs were still in the future and economists and Wall Street seers were projecting strong growth and investment gains in 2015. If you have to wait for the headlines to figure out what’s going on, you will, assuredly, always be a day late and a dollar short. The headlines and links:

Can We See a Bubble If We’re Inside the Bubble? by Charles Hugh Smith

No Hiding From Debt Slump, by Lisa Ambramowicz at Bloomberg

Saudi Debt Risk on Par With Junk-Rated Portugal as Oil Slides, by Ahmed A. Manatalla and Abigail Moses at Bloomberg

Crude Falls Below $30 a Barrel for the First Time in 12 Years, by Mark Shenk at Bloomberg

Copper Breaks $2 Level, Sags to Six-Year Low As Barclays Cuts Forecasts on China, Joe Deaux and Eddi Van Der Walt at Bloomberg

Crop Surplus Is Bad News for America’s Farms, by Alan Bjerga and Jeff Wilson

Maybe Valuations Do Matter, from The Burning Platform

OK, I Get it, this is Going to be a Mess: Standard & Poor’s Lowers Boom at Worst Possible Time, by Wolf Richter at Wolf Street

Amazon And The Fantastic FANGs——A Bubblicious Breakfast Of Unicorns And Slippery Accounting, by David Stockman at David Stockman’s Contra Corner

And this was only a representative sample of articles!

 

 

 

What Will China Dump Next, After Treasuries, to Keep Control? by Wolf Richter

From Wolf Richter at wolfstreet.com:

“Practically boundless” future capital outflows.

“Beneath all of the financial turbulence there lurks, in my view, a credit crisis; I fear the worst now,” UBS economic adviser George Magnus told Bloomberg TV today. The reform agenda “has stalled,” he said, and “things are looking much bleaker for China going forward.”

And so on Monday, we got another flavor of it.

The Shanghai Composite index plunged 5.3%, to 3016, down 15% so far this year. The Shenzhen Composite fell 6.6%. Hong Kong’s Hang Seng fell 2.8% to 19888, below 20000 for the first time since June 2013, and down 30% from its April high.

Everyone had hoped that China’s “National Team” would jump into the fray and bail everyone else out, but it didn’t. And the People’s Bank of China didn’t offer any big new remedies either. But it did stabilize the yuan after it had dropped 1.5% against the dollar last week, and about 6% since mid-August.

In Hong Kong, interbank yuan lending rates broke all records since the Treasury Markets Association started compiling the data in June 2013, with the overnight Hong Kong Interbank Offered Rate spiking 939 basis points to 13.4%.

And copper did it again, ratting on China’s real economy. Copper goes into anything from skyscrapers to smartphones. China is the world’s largest copper consumer, accounting for over 40% of global demand. And on Monday, copper dropped 2.6% to $1.97 per pound, the lowest level since May 2009.

Buffeted by, among other things, fears about slowing demand from the industrial sector in China, oil plunged – with WTI down 6.1% to $31.13 a barrel

To prop up the yuan and counter the impact of capital flight, China had dumped $510 billion of foreign exchange reserves last year, drawing them down to a three-year low of $3.33 trillion. And that was just the beginning.

To continue reading: What Will China Dump Next?

Junk-Bond Risk Gauge Jumps as China Meltdown Adds to Energy Rout, by Sridhar Natarajhan and Michelle Davis

From Sridhar Natarajan and Michelle Davis at blomberg.com:

Premium on high-yield debt approaching most in three years

The goal is to `avoid land mines’ with oil at 12-year low

Junk-bond investors coming off their first losing year since 2008 are in the crosshairs again, as a stock-market meltdown in China and a plunge in oil prices cloud the outlook for debt sold by the least credit-worthy companies.

The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, surged as much as 21 basis points to 516 basis points, rising toward the highest mark in three years. The average borrowing costs for the riskiest portion of the high-yield market surged to 18.4 percent, Bank of America Merrill Lynch index data show, a level not seen since 2009.

“The whole world’s interrelated and you can’t get around that,” said Andrew Brenner, head of international fixed income for National Alliance Capital Markets in New York. “High-yield’s going to be under pressure just because oil’s under pressure. And you’re having this whole risk-off situation.”

The price of crude has plunged 10 percent this week and touched its lowest level since 2009, pushing the relative yield on energy-company debt to more than 13.5 percentage points, Bloomberg indexes show. The industry, which is clocking its worst performance on record, makes up about 15 percent of the junk-bond gauge.

‘Pointing Negative’

“With commodities, there are 10 things that can go right or wrong, and right now almost all of them are pointing negative,” said John McClain, a portfolio manager at Diamond Hill Capital Management Inc., in Columbus, Ohio, which oversees about $17 billion. “You want to avoid land mines in this market. You don’t want to be a hero. It’s not a time to reach.”

The People’s Bank of China cut the yuan’s reference rate against the dollar by 0.5 percent on Thursday, the biggest since Aug. 13, two days after a surprise devaluation. The Shanghai Composite Index tumbled 7.3 percent before trading was halted by new circuit-breakers that some criticized for exacerbating declines.

Later, the nation’s regulator said it was suspending the circuit-breakers.
China’s central bank further spooked the market when it announced that foreign-exchange reserves posted the first annual drop since 1992, spurring concern that capital flight from the world’s second-largest economy is accelerating.

To continue reading: Junk-Bond Risk Gauge Jumps 

Now Comes The Great Unwind—-How Evaporating Commodity Wealth Will Slam The Casino, by David Stockman

Happy New Year! From David Stockman at davidstockmanscontracorner.com:

The giant credit fueled boom of the last 20 years has deformed the global economy in ways that are both visible and less visible. As to the former, it only needs be pointed out that an economy based on actual savings from real production and income and a modicum of financial market discipline would not build 65 million empty apartment units based on the theory that their price will rise forever as long as they remain unoccupied!

That’s the Red Ponzi at work in China and its replicated all across the land in similar wasteful investments in unused or under-used shopping malls, factories, coal mines, airports, highways, bridges and much, much more.

But the point here is that China is not some kind of one-off aberration. In fact, the less visible aspects of the credit ponzi exist throughout the global economy and they are becoming more visible by the day as the Great Deflation gathers force.

As we have regularly insisted, there is nothing in previous financial history like the $185 trillion of worldwide credit expansion over the last two decades. When this central bank fueled credit bubble finally reached its apogee in the past year or so, global credit had expanded by nearly 4X the gain in worldwide GDP.

Moreover, no small part of the latter was simply the pass-through into the Keynesian-style GDP accounting ledgers of fixed asset investment (spending) that is destined to become a write-off or public sector white elephant (wealth destruction) in the years ahead.

The credit bubble, in turn, led to booming demand for commodities and CapEx. And in these unsustainable eruptions layers and layers of distortion and inefficiency cascaded into the world economy and financial system.

To continue reading: Here Comes The Great Unwind

Dislocation Watch: Getting Run Over on Third Avenue, by Pater Tenebrarum

This is a good article that amplifies some of the points made in Crisis Progress Report (14): Global Margin Call. From Pater Tenebrarum at davidstockmanscontracorner.com:

It has become clear now that the troubles in the oil patch and the junk bond market are beginning to spread beyond their source – just as we have always argued would eventually happen. Readers are probably aware that today was an abysmal day for “risk assets”. A variety of triggers can be discerned for this: the Chinese yuan fell to a new low for the move; the Fed’s planned rate hike is just days away; the selling in junk bonds has begun to become “disorderly”.

Recently we said that JNK [a junk bond ETF] looked like it may be close to a short term low (we essentially thought it might bounce for a few days or weeks before resuming its downtrend). We were obviously wrong. Instead it was close to what is beginning to look like some sort of mini crash wave:

To be sure, such a big move lower on vastly expanding volume after what has already been an extended decline often does manage to establish a short to medium term low. There are however exceptions to this “rule” – namely when something important breaks in the system and a sudden general rush toward liquidity begins.

As we have often stressed, we see the corporate bond market, and especially its junk component, as the major Achilles heel of the echo bubble. One of its characteristics is that there are many instruments, such as ETFs and assorted bond funds, the prices of which are keying off these bonds and which are at least superficially far more liquid than their underlying assets. This has created the potential for a huge dislocation.

We would also like to remind readers that it is not relevant that the main source of the problems in the high yield market is “just” the oil patch. In 2006-2007 it was “just” the sub-prime sector of the mortgage market. In 2000 it was “just” the technology sector. Malinvestment during a boom is always concentrated in certain sectors (in the recent echo boom the situation has been more diffuse than it was during the real estate bubble, but the oil patch is certainly one of the most important focal points of malinvestment and unsound credit in the current bubble era).

To continue reading: Dislocation Watch: Getting Run Over on Third Avenue

Crisis Progress Report (14): Global Margin Call, by Robert Gore

A tedious ritual this time of year is lengthy Review and Preview articles, in which financial publications and websites highlight the year’s winning picks, acknowledge the losers, and prognosticate about the coming year. Does anybody read them? Probably not. The only way SLL’s Review and Preview will get read is if it’s short, so here goes. The year 2015 in review: SLL pretty much got it right (see Debtonomics Archive for confirmation). Preview of 2016: things will get much worse. There, that’s out of the way.

The global economy has been sucked into the event horizon of the black hole of debt. The world does not enough assets and cash flows to service $225 trillion in debt, or almost three times gross world product, and sustain economic growth. Most financial assets are somebody’s debt, an increasing percentage of which is impaired, and mounting debt service is taking a larger share of cash flows. Consequently, trend growth rates are declining, with some countries already in recession (e.g., Canada, Russia) or depression (Brazil).

This is the margin call phase of debt contraction. When speculators employ leverage, they put up some percentage of the initial speculation, called equity, and borrow the rest. The loan is secured by the speculative asset. If the price moves against a speculator and equity shrinks, the lender will demand that the speculator put up more money (or “margin,” hence the term margin call). If the speculator is unable to maintain the required equity, the lender liquidates the collateral-asset.

Here we have the dynamics of debt contraction writ small. The initial extension of credit supported a speculation; the price moved in the undesired direction; the creditor restricts credit to the speculator; the speculator, creditor, or both sustain losses, the speculator has less money, and so will the lender if it shares in the loss. The loss may have ripple effects throughout the economy if one or the other or both curtail future speculation, lending, or consumption.

The most leveraged sector of the economy receives the first margin calls. There’s always a story that supports the rush to grant unwise extensions of credit. In 2006, the story was that house prices never go down. In 2014, the story was China, whose perpetual hyper-growth would supposedly fuel a commodities and raw materials supercycle. When the Chinese economy slowed last year, miners, oil drillers, and other raw materials companies that had borrowed heavily to fund expansion for the Chinese market got the margin call.

Cash-strapped borrowers facing margin calls have only two options: borrow more or sell assets. Behind almost every graph showing a vertiginous drop in the price of an asset are leveraged sellers trying en masse to repay their loans. Such drops in a number of commodities were dismissed at the end of last year in various Reviews and Previews as isolated and aberrational, but they were the first margin calls. SLL said at the time: “The future is now. The carnage in the oil sector, where a glut has knocked over a third off its price in less than five months, is not an aberration, but a harbinger—the shape of things to come across sectors and around the world.” (Oil Ushers in the Depression, 12/1/14).

These margin calls have commodities and raw materials producers on the ropes. In the debt-based global economy, there is no way a margin call in a large sector will stay contained to that sector. Most assets are either encumbered with debt or are in fact debt. When a significant part of the interconnected debt matrix runs into trouble, it spreads to the rest of the matrix.

The prices of debt issued by commodity and raw material producers have crashed and their debt has been downgraded by the ratings agencies. The margin call is rippling; the yield spread between junk bonds and US Treasury benchmarks has widened for all issuers. Last week a junk mutual fund and a junk hedge fund, faced with mounting losses and customer withdrawals, refused to honor further redemption requests for an indefinite time period. They cited fire sale prices for junk debt and illiquidity: the failure of the market to provide deep enough bids for them to unload their positions. However, the liquidity they were counting on is funded by debt. When debt contracts, that pool gets shallower and eventually evaporates, usually just when sellers are stampeding to get out.

Evanescent liquidity in financial markets is funded at close to the Federal Reserves microscopic interest rate target on federal funds, now between zero and twenty-five basis points, or one-quarter of one percent. This week the Fed will most likely raise its target rate twenty-five basis points. That raises the cost of doing business for leveraged speculators, which will impair liquidity to an unknown extent. Many are treating the Fed’s hike as a defining moment for financial markets and the economy. David Stockman, with whom SLL is generally in agreement, said: “Yes, the end of the bubble does begin on December 16th.

While the Fed may finally mark up the cost of credit to leveraged speculators this week, they are following, not leading, credit markets, which have already marked up the cost of credit, and by a lot more than twenty-five basis points, to leveraged speculators in oil, natural gas, coal, iron ore, aluminum, steel, container ships, railroads, trucks, factories, infrastructure projects, buildings, and more. The Fed move may be the coup de grâce for stock prices, which for most companies are already well off their highs, but with all due respect to Stockman, the end of bubble arrived over a year ago.

There may be an interesting twist to this margin call and debt contraction. Usually debt supports long positions in assets. Figures indicate a preponderance of speculative short positions in the gold, and to a lesser degree, silver futures markets. Leverage can fund short positions as well as longs. Claims have been made that central banks and the banking industry have a vested interest in suppressing the prices of precious metals and have in fact done so. This, so the argument goes, has created a massive imbalance between the amounts shorted on paper in the futures market and actual physical precious metals available for delivery.

SLL does not dismiss this speculation because it may be right. If so, those leveraged speculators who are short the precious metals could get caught up in a margin call reflecting the general contraction in debt and fall in asset prices. In the reverse of the usual situation, they would have to close out their positions, buying either futures or the physical metals. We may see some spectacular short-covering fireworks, sending the prices of precious metals explosively higher while everything else is going down. This is conjecture, not a bet-the-ranch proposition. SLL has been bullish on the precious metals for some time, and this may be yet another reason for bullishness.

Baron Rothschild, a 19th century member of the banking dynasty, is credited with saying: “The time to buy is when there’s blood in the streets.” Since then, speculators have tried to catch falling daggers, rationalizing that financial losses already sustained by other speculators amounted to “blood in the streets,” but usually only impaling themselves. Rothschild meant that one should wait to buy until there is literally blood in the streets, crimson rivers of it. Full-bore bear markets and depressions are accompanied by wars and tectonic political shifts, even revolutions. During these troubled times, most of us should stick with cash, provisions, firearms, and some precious metals, reduce or eliminate debt, and avoid speculating from either the long or short side. However, nothing lasts forever and eventually the financial landscape will be dotted with screamingly cheap survivors of the carnage. When to dip a toe in the investment waters? Follow Baron Rothschild’s advice.

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