People continually ask “when” will it happen? For the last 6 months we have responded “it is happening right before your very eyes”! In fact, as of this morning 52% of global markets are now down over 20% from their highs and qualifying as bear markets. Please understand the financial backdrop these weakening markets are falling into. Bluntly, the world is facing a giant margin call that cannot be met.
Liquidity had become extremely tight even as markets made their high water marks. It is this lack of liquidity which threatens to become a self reinforcing flash crash to hell via margin calls. “Don’t worry” they say, central banks will come to the rescue. There is one fundamental problem with this line of thought, the value of the issued currencies themselves. There is zero mathematical way to service and pay off current debt with current currency values … currencies must be massively printed and thus devalued if they are to pay off the mountains of debt! Central banks created the problem, they will not be the solution. Rather, their demise will be part of the solution.
Looking at the backdrop that a revolving door of “buy the dip(pers)” on CNBC assure us is the right thing to do, the list is many and for the most part the issues are carved in stone.
Obviously number one on the list are the levels of consumer, corporate, state and sovereign debt. By any measure, we have never been at current levels. Then we have the current unfunded pension problem. This is not just a US problem, it is a $400 trillion mathematical sinkhole seen worldwide.
We can of course add in “valuations”. Current valuations of everything from stocks, bonds, real estate or nearly everything considered an “asset” are at levels not supported by anything including common sense. A move back to the mean would be considered a crash … but pendulums (markets)rarely work that way. Markets almost always overshoot fair value in both directions up and down. The problem which few talk about is markets have “become” the economy. A huge bet was made in belief higher asset values would produce a “wealth effect” and the real economy would levitate. This only bought time but now time is up, declining markets are now eliciting a reverse effect. We are witnessing the end of a global Ponzi scheme where no new money is entering and players are beginning to leave.
Remember, fear is a far greater emotion than greed!
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One very important area to address is the latest trade issues with China. They have spent years setting up trade deals/routes, clearing facilities as an alternative to SWIFT, financing facilities and of course buttressing their reserves with physical gold. China’s imports of US goods dropped 25% from last November so tariffs are obviously beginning to bite.
Now for the reason I am issuing this warning, last week we found out Huawei’s CFO was arrested in a Canadian airport over violating US sanctions on Iran . I cannot stress how important/dangerous this event is! First, is a Chinese citizen running a Chinese company bound by US law? Not to mention the “timing” of her arrest which occurred while Presidents Trump and Xi were meeting in Argentina. Mr. Trump says he was not aware of the arrest at the time. I don’t know which would be more troubling, whether he knew of the arrest and lied or had no clue the arrest was taking place?
Please consider the ramifications here. This is the equivalent of the CFO of Microsoft being arrested in Thailand, thrown in jail without bail awaiting extradition to Beijing! China will retaliate in violent fashion if she is not released and profuse apologies not given publicly. The bottom line is this, we have weaponized the SWIFT system at the very same moment global players are already questioning the use of dollars for trade… Did they really need anything else as a dollar disincentive?
Also understand the connection between trade, GDP and thus cash flow …versus the ability to service the outsized debt. At the very moment more cash flow is needed, this action on trade will act to turn off the spigot! What we now face is a credit freeze up like 2008-09 with no white knight waiting in the wings with a fire hose of needed liquidity.
…And the Fed will again raise rates this month and continue to shrink their balance sheet? This would all be hilarious if it didn’t mean our way of life as we “knew” it will be destroyed.
To finish, do we get a bounce and some relief? Markets are very oversold and short term they are certainly due a bounce, but do we get it? It does not matter because the debt (mathematically unpayable in current currency values) is already in place …and debt does not ever go away until it is either paid, restructured or defaulted. The financial snake has already taken its tail into its mouth and has been swallowing for six months or more already. The only question is how long it will take for marginal players to make the decision the snake will in fact eat itself, and liquidate their positions … or alternatively receive margin calls and be forced into liquidation?
This is NOT the time to be a deer in the headlights! We will look back and see this final chapter as one where a massive flight from “liability” took place. The problem of course is that most all assets either are liabilities themselves or have values bid up via liabilities (loaned capital). All past financial panics were best survived by hiding in “cash”. Today, this sector is comprised by a dichotomy where one side is purely liability of a central bank or has no liability at all. The non liability side (gold and silver) also has a rocket booster attached in the form naked sales. Trolls for years have laughed at this fact as it did not matter …until it does. The amount of REAL gold and silver available for delivery is now miniscule at the very moment in time a position of non financial liability is mandatory!
COMEX represents a registered gold inventory of a whopping 4 tons. A cash call by China will expose the fractional reserve nature of our ENTIRE SYSTEM!
The coming crash is a mathematical certainty and one that historians will ask in the future “what were they thinking”. While CNBC parades clown after clown to tell you this is a buying opportunity, I would simply advise DON’T BE STUPID and use your own common sense! We lived through the biggest super cycle of credit the world has ever seen …how do you think this ends?
Written by Bill Holter for 24h Gold ~ December 14, 2018.
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