The holidays are certainly upon us with many of us already having had our fill of turkey. The coming weeks may be filled with many friends and family, food and memories but of course the holidays can also bring stress, not unlike some of the topics in this month’s newsletter. I usually pick one topic and write in depth about that; however, this month I am giving a few updates on several topics that I have written about in previous issues of our newsletter. I value your time in reading our newsletter and would like to make mention, that if you have been a regular subscriber you should make sure to read the last topic in this month’s newsletter discussing the year-end discount. With that said, let’s review moves the Fed could make in response to European Central Banks latest policy updates.
Does The European Central Bank See Financial Disaster?
A chilling 58 page white paper, published recently by the European Central Bank (ECB), serves as what should be a huge wakeup call. They wrote “Covered deposits and claims under investor compensation schemes should be replaced by limited discretionary exemptions to be granted by the competent authority in order to retain a degree of flexibility.” To translate the legalese jargon, the ECB wants to remove bank insurance and be able to use your money if needed (or a Bail In is what it is called) and replaced that insurance with the ECB making up its own criteria to replace your money. Since they know this would cause concern, the ECB wrote more describing the timeline; “During a transitional period, depositors should have access to an appropriate amount of their covered deposits to cover the cost of living with five working days of a request.” This explicitly says they will determine what amount of your money is appropriate, and they will let you know within 5 days of your request. They have complete control of a person’s hard earned money. Previously the ECB wrote in their May 2016 Financial Stability Review, that the EU Bail In tool is ‘welcome’ as is.
Can you imagine The Federal Reserve in conjunction with the FDIC announcing you can’t withdraw your money? You have to request it in writing and they will let you know in 5 business days whether they think your withdrawal reason is plausible or not. Sounds crazy? Well get ready. All of the Bail In laws and models in the United States were taken directly from the ECB already. Is this the next step for the U.S.?
Since the ECB is writing this, it should be enough of a factual concern for each one of us that some impeding financial storm is in the near horizon and the ECB is “gearing up” for it.
If you remember last summer the Debt Ceiling was hanging over the head of President Trump and his administration. With Congress not working together, President Trump struck a deal with the Democrats in providing hurricane relief, since FEMA was quickly running out of money during September in the aftermath of Harvey and Irma. A nearly $8 Billion hurricane relief bill was passed and what was tied to that bill was a three-month extension of government funding and an extension in the Debt Ceiling. Many Republicans wanted much longer since they initially proposed an 18-month extension, which would mean Congress wouldn’t have to vote on the Debt Ceiling issue until after the 2018 mid-term elections.
Now that time is upon us again. The hard date is set just around the corner of December 9th. Congress is already under pressure debating a tax cut, but before law makers go home for the holidays they will have to agree upon an extension or a Debt Ceiling increase. Republicans know they can’t pass an increase in the Debt Ceiling without Democratic votes. Recent Congressional votes have shown votes have been cast down party lines, even a few Republicans breaking party lines and voting against President Trump’s plans. Even though both parties have previously said they would not default on our debt obligations, getting that accomplished each time shakes the Treasury Bill market causing cracks in the dam. The numbers are obvious and articles are coming out to prove that our debt is unmanageable and will never go down.
Bonds Going Bust?
When market bubbles pop investors watch stocks. Most investors might be looking in the wrong direction. Although there are a few signs that the stock market is overvalued and could correct, the signs in the Bond Market are screaming bubble. The Bond market which doesn’t get as much attention as stocks has tripled in size since 2001. Bonds have exploded in popularity over the long run. The total value of global stocks now exceeds $64 Trillion. In comparison global bonds are over $100 Trillion, with U.S. Treasuries being the largest component that make up almost $40 Trillion.
We have been watching a growing trend that is being confirmed in the news that the bubble in bonds is here. Both “Bond Kings” Bill Gross and Jefferey Gundlach said last week on CNBC that bonds are in a bubble. Keep in mind this is their baby, their area of expertise. Let’s create the picture. Post 2008 The Federal Reserve created over $4 Trillion to inject into the system to get the economy out of a massive recession. Over 75% of those funds went into buying U.S Treasuries during this artificially low interest rate environment. We are moving into an inflationary environment and in this environment, inflation forces bond yields higher. As a result of this bond markets adjust downward to compensate for the fact that future interest payments will be worth less in real terms. So higher bond yields equals bond prices lower. Lower bond prices says the bond bubble is in serious trouble. The four largest bond markets the U.S, Japan, Germany, and the U.K. all are saying that this market is VERY worried about rising rates. Another indicator of a bond bubble is looking at the Producer Price Index (PPI), which measures the prices wholesalers are charging for goods and services. The PPI is spiking in China, Europe Japan, and the U.S. It has broken out of its post-2008 downtrend.
Wise investors are already exiting the bond market. Many investors are sounding the alarm. According to Fox Business News, last week $6.4 Billion of funds flowed out of the U.S. Bond market, the 3rd largest outflow in history. In addition JP Morgan reports investors shorting the bond market is now at a record 70%. Recently, the 2-year Treasury yield surged to its highest level since October of 2008. Traders now see there is an 87% chance that the Fed fund future markets are pricing in a quarter of a point rate hike in December. Investors now see the Fed adherence to the Philips Curve, an economic theory which says: lower unemployment should bubble up as inflation. The environment is confirming and forcing the Fed to raise rates, which is what I have said will happen for the last two years and now we are here. Raising rates forces investors to sell their positions in U.S. Treasuries. The Fed is confronting a far more dangerous backdrop in the bond market as it gears up to further raise interest rates, since Central Banks have already sold their massive positions in Treasuries and now it is the Feds turn. This just creates two problems now. A bubble in the largest market in the world, and who is going to buy enough Treasuries to continue to support our debt?
U.S. Government Pension Ponzi Scheme Using Treasuries
There is a bill before Congress that would allow struggling multi-employer pension funds to borrow from the U.S. Treasury to remain solvent. This bill would create a new office within the Treasury Department called The Pension Rehabilitation Administration. The funds would borrow for 30 years (really buy a 30 year T-bill) at low interest rates. This would fix all the underfunded pensions and drive money into buying U.S. Treasuries. This bill would also fund the program called the Pensions Benefit Guaranty Corporation (PBGC). Remember the PBGC? It was created in 1974 to have the government fund unfunded pensions. It subsidized Enron’s pensions and others. In 2005 it was in debt by $23 Million which has since increased to its current $76 Billion debt. So the government is going to bail out the entity, the PBGC, which bails out pensions. But now we need to create another government entity to Bail Out, the Bail Out entity. The whole idea is crazy. This is a “Bernie Madoff,” government planned, pensions Ponzi scheme. A Bail Out! Anyway to force money into the Treasury market to prop up our spending. It is just another disturbing confirmation that our country is way off course financially. I will keep you up to date on this as needed.
Last month’s newsletter titled “Black Gold for Yellow Gold, The Trade That Changes The World“, is one of the most important newsletters I have ever written. If you haven’t read it, I highly suggest doing so, as it is something every American should know as this will be the start of the change coming for the U.S. Dollar. China has intricately set up a detailed plan to put everything in place to launch the Petroyuan. While China has been playing chess, America has been playing checkers not paying attention to our debt and the sell off our U.S. Treasuries.
China, by years end, will launch the trading of the Petroyaun. All of their systems have been set up and tested as of last summer and already 6,000 trading accounts are in place to be able to buy and sell oil contracts outside of the dollar on a global level for the first time since 1974. This obviously will compete with the U.S. Dollar and we unfortunately will now see our world reserve status being challenged if not derailed in time.
Next year, Saudi Arabia’s state owned oil company Aramco will launch the largest IPO in history. They have now confirmed it will launch in the second half of 2018 and could raise between $100-$300 Billion. According to a Bloomberg article last week, China is the oldest and largest client of Saudi Arabia. Aramco is now currently in talks with petrochemical conglomerates that are building some of the world’s biggest plants in China to process and expand more imports of sulfurous sour crude bought from Aramco. Rongsheng Petrochemical Co. is building a $24 Billion refinery in Zhenjiang province. Hengli Group is planning another refinery in the Liaoning region. Aramco has ambitious plans for China since it is pursuing a partnership with China’s National Petroleum Corp. to buy stake in its 260,000 barrel-a-day refinery. Since Aramco is pursuing China, and China has wanted to be able to buy into the IPO, my prediction is you will see this relationship forged through this agreement of China having a Private Placement in owning the first and largest stake in Aramco. This will be done before the actual IPO of lat next year. Once this is accomplished, China will then have major control in the Petroyaun. I also believe we will see China make a historic announcement that their currency is fully backed by Gold. This is their end goal since they have already said the Petroyaun is convertible to Gold.
Year End Discount
If an investor wanted to “time the market” to be able to get the best price outside of the normal market fluctuations, that only happens once a year. We are now at the threshold of this time. I have seen a year end discount in my industry for 22 out of the 25 years that I have been in the precious metals industry. What generates this is an inventory tax. Wholesalers are people just like you and I. They try to avoid having to pay excess taxes. They would rather discount their inventory and create a positive cash flow going into the New Year, rather than have a larger tax liability. There is no set pattern to this. I have seen the discount start the first week in December and last to the end of January. I have also seen it happen during the days between Christmas and New Years. The discounts are sometimes only 2-3% yet sometimes as large as 28-30%. After the discount time ends, historically everything adjusts as if there wasn’t a discount to be taken advantage of. The products that get discounted varies from hour to hour, and day to day. Availability is changing rapidly as getting “those deals” is at times fast pace. There is no way of knowing what products will come available, at what price, and when. As wholesalers go through their inventory they release lists daily and sometimes multiples within the hour.
If you have thought about starting to invest in Gold and Silver then your timing is excellent. I would suggest you call one of my representatives and get some detailed education on the various markets and then if you want to move forward you now have a strategy that is tailored to you. Then as the products become available you can take advantage of this once a year discount.
Now is the Time to Protect Your Wealth
We have a lot of existing clients that have already invested in precious metals. Obviously the stock market has done phenomenal this year. With conflicting views, some say this market rally will go on for a few more years. Another group of investors, a group that has close to 30 billionaires, say 2018 is going to be very challenging at the least. Some of them in that group who are avid investors, say 2018 is going to see a horrific market crash. I have many clients calling our company currently that are getting a sense that the stock market is overheated and don’t want to go through a market correction similar to 2008. Their gut, (I call it my spirit) is speaking to them to get more gold and silver in their portfolio. If this speaks to you then you should also make a call today to one of our representatives. They will listen to your concerns and develop a plan to compliment your existing portfolio.