Jim Willie: The Monster Spleen

USTBonds: The Monster Spleen

The USTreasury Bond rally over the last few months has been celebrated. Some call it a contradiction of the Standard & Poors debt downgrade of USGovt debt. Some hail the rally as proof that the USDollar remains respected as global reserve currency. Some regard it as a sign of bond market health in general. Some claim the US remains the safe haven. These are all errant views to the extreme, held by cheer leaders of the system, distractions from reality. The United States is stuck in a powerful recession, with huge federal deficits set to expand further. The USTBond is in strong rally mode because the United States is in the process of systemic failure, leading ultimately to some form of official debt default. The Greek Govt Bond yield rises from its fractured insolvent ruined status. The USTreasury Bond yield falls from its fractured insolvent ruined status also. It is a Black Hole, attracting funds from productive chambers of the USEconomy and pulling them into the dark place loaded with federal deficits. TheUSTBond is the expanding spleen that removes the life blood from the body economic. The organ serves as a reservoir, whose size must be contained.

The blood (tainted money) in capitalist systems has been circulating for two years throughout the economies, spreading toxins through the veins. More money thrown at the problem has accomplished nothing except to raise the cost structures, to retire working capital, to raise the government deficits, and to raise the demand for USTBonds. The only proper medical thermometer is Gold, with its Silver handle. Prepare for a repeat episode in a powerful rebound like in 2009 as four enormous destinations are presented: 1) bank bond redemptions, 2) bank recapitalization, 3) economic stimulus, and 4) debt monetization. The monetary growth will be absolutely astonishing and staggering.

HORRIBLE CONSEQUENCES OF USTBOND RALLY

For a valid remedy to be embarked upon, the nation’s industrial base must return to US shores, and the nation’s biggest banks must be liquidated. Both are mandatory pre-requisites for any recovery. The priority has changed once again from the summertime. The USGovt favors short-term stimulus, alongside long-term restraint, a total deception to continue. Stimulate the economy and deceive on future projections. Important factors prevent the bond rally from doing anything but consuming the entire nation in an indirect confiscation of wealth. Consider the horrible realities behind the USTreasury Bond bull market, signals of ruin.

USTreasury Bond is the sanctioned approved asset bubble. The USTBond will be the last asset bubble. The USGovt approves of its expansion, since they believe it confirms legitimacy of the debt. The bubble is proof positive of failed monetary policy, failed fiscal policy, failed economic policy. The USTreasury Bond market is not a safe haven.

The bond rally grew from extreme Interest Rate Swap abuse. The kickstart earlier this year came from such leveraged instruments. The additional $9 trillion in 1Q2011 by Morgan Stanley from derivatives, 85% of which are typically IRSwaps, never seemed newsworthy. The hidden tool borrows at 0% and buys at the long maturity end, to create artificial demand for the USTBonds themselves.

The Fed Valuation Model has become a deceptive tool to assess valuations. It proclaims stocks are cheap according to Price Earnings Ratio that integrates the ultra-low interest rates. This model is a embarrassment. The earnings projections are lofty and exaggerated. The stock market is vulnerable to a 20% decline on a constant basis.

The US Federal Reserve intentionally has spewed devious deception about Quantitative Easing III. They wish to build political support for the massive expansion of the money supply. They wish to attract deep channels from stock funds to fund the gigantic USGovt deficits, at a time when Q4 federal deficits are due to rise by $1 trillion, in keeping with past years. Significant demand must be grown and developed, even if all-consuming. This failed central bank continues to apply liquidity in high volume in treatment of a grotesque insolvency problem.

Improper cost of money has been present for over a decade, now at a climax in artificial low amount. The entire USEconomy, cost of capital, and payout for asset risk have been distorted to the extreme, inducing speculation. The wrongly priced money element ripples throughout the entire system, pushing the distortions and false values into almost every corner.

The US Federal Reserve trades blame for failure with the USGovt, in particular the USCongress. They are both failed performers. The central bank franchise system has run its full course, at a dead end. The gargantuan federal deficit will surpass $2 trillion next year (the fiscal year just started). The Bernanke Fed has declared it has no more tools to use, a spent arsenal, and foresees yet another recession. They point the finger at the USGovt for fiscal restraint, not yet austerity since harmful to jobs.

The USEconomy suffers a damper effect from nil interest granted to savers. Almost twice as much volume is devoted to savings and to consumer loans. They receive less in interest payouts for their savings, less for the risk taken, less for erosion. Productive elements are discouraged. The stimulus to the financial sector is preferred, badly oversized, while the industrial sector became undersized. The source of legitimate income is inadequate to foster any recovery.

Inter-bank market lending has dried up both in the US and Europe, as the corporate bond market has been crowded out. Banks distrust each other, since toxic assets are loaded in self-evaluated balance sheets. The corporate bond market is denied. The capitalist engine for business expansion has sputtered. The corporations see little prospect for expansion within the United States, where taxation and regulation are deemed oppressive. The main expansion is of federal deficits, which must be accommodated. All else dries up like a desert pond.

This is not Japan redux, but much worse, since the US has a trade gap and lacks an adequate industrial base. Japan forced investment from postal pensions and federal worker pensions, in order to sustain demand in a Jap Govt Bond, stuck with low yield. Unlike Japan, the USTBond cannot persist. The yawning USGovt deficits grow in mammoth volume. The US bond bubble must find additional funds, and will depend upon debt monetization, the manifestation of hyper-inflation. The USTBond bubble has finite life span, unlike Japan.

Watch the canaries led by Morgan Stanley. Not only is Morgan Stanley seeing a sharp decline in its stock price and rising Credit Default Swap debt insurance, so is Goldman Sachs. The CDSwap market is quite sophisticated. This market accurately foretold of the 2008 disaster, led by Lehman Brothers. Prepare for a repeat on US soil. But Europe has 20 Lehmans lurking. The financial structures of Europe and the US are interconnected.

GOLD TARGETED BUT FIRM
In September, the COMEX officials raised Gold futures margin requirements in a falling market, a repeat episode of what occurred in the first week of May. Notice, in keeping with the theme of this article, that the COMEX decided to leave USTBond margins intact even though an obvious bubble. The Commitment of Traders shows very little if any abandonment by Speculators in Gold. It also shows a stunning drop in the net short position by Commercials. That adds up to a firm foundation for a potential V-shaped recovery in the Gold & Silver market, which the Jackass admits was much worse than expected. Sadly, most US financial markets lack honesty and freedom from constant interventions, even ambushes.

A strong ugly 25% decline in late 2008 and early 2009 resulted in the Gold locomotive downshifting into second gear. Rewards were huge for those who showed patience, or bought into the engineered decline. In the late summer 2011, a move of greater than 20% to a record $1900 high was canceled. The gold decline led by the paper futures market was a retreat to a still high gear, that merely removed the summer gains. The comparison to 2008 is loaded with propaganda and inaccuracies. Behind the curtains, important players are being removed from the game, or legs cut off, setting the stage for future gains. The strong established uptrend is clear. The Gold price has returned to the middle range of the stable upchannel. Gold is preparing for destinations being stuffed with massive new money. The next round will be universal in broad monetary expansion. Gold is ready to jump quickly back toward the $2000 level. Notice the potential for a technical rebound that could be extremely quick, very exciting. A strong rebound move is likely from $1680 to $1820 in a flash, since no resistance is evident. The sudden move might take your breath away.

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Jim Willie CB Editor of the “HAT TRICK LETTER”
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October 4, 2011

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