Posts Categorized: Bill Holter

Posted by & filed under Bill Holter.

Dear CIGAs,

The question of our title is very important, “Did the FINAL WAR just start?”.  If you polled Americans on this question, 99.9% would answer “no” if you took out the Middle East.  Last week I wrote “The Rumblings of War” regarding the IMF rebuffing China’s entry into the SDR.  This was followed up by “The shot heard ’round the world” on Tuesday commenting on China’s surprise devaluation.  The purpose of this writing is to show you YES, we are in fact at war!  Rather than “tell” you we are at war, I feel it is better to point out a few dots, connect some of them and then ask a few questions which might help you understand the war that is in fact being waged.  If you can answer some of the questions then connecting dots and forming your own conclusions will be easier.

As our backdrop, we are “told” the world is in recovery from the very bad experience of 2008.  Since then, various central banks have monetized debt on a massive scale, led by the Federal Reserve of the U.S..  Undoubtedly, the greatest “export” from the U.S. has been dollars themselves and financial products known as derivatives.  For the most part, the world spun merrily until last fall when Saudi Arabia decided to increase production and lower prices.  This was presumably done at the request of the U.S. and meant as a tool to injure Russia’s energy sector, economy and financial system.  Can the petrodollar which became accustomed to $100 oil be supported with sub $50 oil?  There are two sides to this coin, yes the consumer of oil saves but doesn’t lower oil price mean less liquidity in the system?  Doesn’t it mean lower velocity and less demand for dollars?

Moving along, did anyone really wonder “why” or what (or better yet, WHO) was behind China being put off for acceptance as a component of the SDR?  Then just two trading days later, China devalued their currency in a surprise move…followed by two more devaluations!  Remember, the U.S. has been prodding China to strengthen their currency and has gone so far as to call them a “currency manipulator”!  Now we see China doing the exact opposite of U.S. requests (demands?).  World markets have been shaken, and at a time when liquidity is quite tight.

A stronger dollar since last fall has acted as a constant and nagging “margin call” to the world which has contributed to the lack of liquidity.  Have the Chinese finally said “fine, you want to issue a margin call to the world, we will help you issue it.  Let’s see what happens to your financial system when the margin call fails to be met?”.  Do you see what I am getting at here?  The Chinese are now forcing the dollar higher by devaluing their own currency.  They understand the dollar is nothing more than a debt instrument, are they attacking and intending to destroy the dollar with its own strength?

Follow this through, a stronger dollar will decrease our exports and slow our already slow or negative economy. A too strong dollar can actually undermine itself and even kick off a derivatives chain explosion. Our banks and brokers are very thinly capitalized, can they withstand losses in derivatives caused by a currency crisis?  Can they withstand the losses from failed counterparties unable to pay?  Do you see?  A currency crisis “caused” by China could be a calamity.  China has already accused Citadel (Ben Bernanke’s new employer) of creating the crash in their equity markets, is a currency crisis retaliation for their equity crash and public shaming by the IMF?  If you understand how the Chinese think and also understand the works of Sun Tzu, Jim and I ask if China’s strategy is …  “In order to destroy the dollar permanently make it stronger temporarily.”? 

Another area to look at is gold and silver.  Supplies have recently gotten very tight, not just for retail in the U.S. but all over the world.  Has production slowed or have buyers stepped up their hoarding?  Or, have Western central banks reduced their “dis hoarding”?  Whatever it is, something in the supply/demand dynamics has definitely changed …and it has not taken much money to do it!  Are these separate events or are they tied together somehow?

This is where it gets weird or some might say “coincidental”.  Did anyone see the explosion at the Chinese port city of Tianjin yesterday?  https://www.youtube.com/watch?v=_92WaPxeqCs  “Yesterday” being one day after China devalued their currency?  I am no rocket scientist and cannot say for sure, but does this not look like a nuclear explosion?  Can someone out there explain to me in simple terms how a chemical explosion could look like this?  As for the word “coincidence”, the CIA says there is no such thing as a coincidence!

Speaking of coincidences and I have permission to pass this along to you.  Jim Sinclair wrote just a few days ago for the first time in many a moon, he said “gold has very limited downside from here and could move to $2,000 as an initial stop”.  Do you believe it was a coincidence that he speaks now?  No, he was called and was “told” by the same people who guided him in 1980 at the market top.  Do you believe it was a coincidence following Jim’s writing, the IMF shunned China followed by the shot heard ’round the world of a yuan devaluation …three times?!!!  …not to mention an explosion that could be seen from space!  My mind is made up, no it is not any coincidence at all. 

or months I have been suggesting Mr. Putin would drop a “truth bomb” revealing all sorts of false flag events and fraud perpetrated by the U.S..  I still believe this is to come and now even more likely.  Why more likely?  Because the financial sparring between East and West may have taken a very serious turn yesterday and I seriously believe a tactical nuke was set off.  If this is the case, China will provide proof and they will retaliate.  I believe the smoldering stages of what was a financial/technological/trade war have now become hot and the first shot was fired.  I truly do ask for comments regarding what happened in Tianjin.  Please do not send me opinions, I would like to hear exactly why or why not the explosion was nuclear.  I will believe a tactical nuke until someone proves to me it was not.  May God help us all with what comes!

Standing Watch,

Bill Holter
Holter-Sinclair collaboration
Comments welcome!
bholter@Hotmail.com

Posted by & filed under Bill Holter.

Dear CIGAs,

The shot just heard ’round he world (for those with ears to listen) was a surprise 2% devaluation by the Chinese of their currency the yuan.  I have spoken to many whom I respect to hear their opinions and theories.  This is a very important move by China and one which will affect the entire financial world.  Getting this “completely right” may be quite tough, but getting it mostly right is imperative.

Let’s begin by making a comparison.  I have in the past compared today’s China and the U.S. to the last great global bubble and deflation centered around the U.S. and Great Britain.  China is today’s up and coming financial and productive economy while the U.S. has lived off the fat as the reserve currency and entered decline as Britain did 80+ years ago.  In the early 1930’s, “competitive devaluations” were used to beggar thy neighbor and steal market share of trade.  This, along with tariffs (Smoot-Hawley for example) were put into place.  International trade collapsed just as it is beginning to again today with clear evidence.  The global economy lives on trade and will also die by it (or lack of!).

So why the devaluation?  First, it needs to be said China does not think like the West does.  They are not full blown capitalists and any edict from Beijing, right, wrong or indifferent will be followed almost blindly.  To a large extent they are still a “command” economy but have moved toward allowing capital to find its highest and best use.  This also comes with the baggage of speculation which often times produces bubbles.  No doubt malinvestment has occurred in stocks, real estate, commodities, production and yes, DEBT.  The picture is not very different from that of the U.S. back in the second half of 1929 (with the exception of a few short seller “executions”).

The Chinese move certainly argues against any rate hike in the U.S..  In fact, the yuan has risen over the last 5+ years, this has been desired by the U.S..  I can only assume a devaluation is not desired.  Any further devaluations can be viewed as against U.S. desires and a direct shot back at the “IMF and friends”.  Though the devaluation is much smaller than the Swiss earlier in the year, losses into a very levered and illiquid global market will need to be absorbed.  How this is done will be interesting as China just issued margins calls on many markets.  China also has made capital flight more difficult recently, some of the world’s hot real estate markets will (already are”) feel the pinch.  Again, remember the backdrop is a very illiquid world right now! 

China has lowered rates and eased monetary policy several times recently.  They have outlawed short selling and done whatever they could to stem the meltdown in their markets to no avail.  Devaluing is the next logical choice but already we see the bandwagon of reaction where Russia, India and Thailand are all considering devaluations of their own, the currency war is going into overdrive.  This is not so much about currencies as it is about market share of trade.  The problem is this, the global “pie” of GDP and thus trade is beginning to shrink.  Liquidity (remember the IMF recently warned of this) is tightening everywhere which means cash flows are shrinking.  The ability to meet debt service requirements are becoming more difficult in a world saturated in debt. 

In essence, China’s debt bubble is popping and along with it comes deflation.  This devaluation, though small (for now) aims to “export” some of the deflation to their trading partners.  The current move should not be seen as a one off move, it will not be and further devaluations can be expected.  China is simply doing and will do what “is good for China”.

I believe China asked for inclusion in the SDR basket while believing it would not happen.  They have already set up trade banks, credit facilities, currency swaps and even clearing systems not to mention wooing new trade partners.  Their rebuke however should not be taken lightly.  Even if China did not expect to be included, their public rebuke now gives them a public reason to do what is good for China.  China can no longer be blamed for anything they do in their own self interest.  This would include moving away from trade in dollars and also changing partners.  It would also include the massive sale of U.S. Treasuries and dollars themselves.  I would not be shocked to hear of oil, China, Saudi Arabia and “renminbi settlement” all in the same sentence shortly!

If I am correct and this is not a one off devaluation, much of the world’s population will shortly sniff out some of the ramifications.  Remember, China invented paper currency and are professionals at blowing them up, their people are students of history and know this.  A full out stampede into gold (and silver) before their currency gets devalued again and again may very well start.  The Western banks are short paper gold, owing gold contractually, China knows this and knows it is THE Achilles Heel to the dollar.  If the Asian population were to go on the rampage buying physical metal and created a vacuum of availability, the West will be shown to be naked.  Could Washington accuse China of “busting” the exchanges?  Is the very stubbornly high open interest in silver of Chinese origin?  I believe we will find out that yes, it is and has been for well over a year.  (My “Kill Switch” theory now might make batter sense but a topic for another day).

Please understand this, China fully understands consumers in the West are tapped out.  They can see through the bogus numbers Washington produces and the wonks on Wall St. continually tout.  They understand the Western system is built entirely on debt as in I OWE YOU!  And they understand the system was set up originally as an “IOU nothing” system!  They understand “it’s over”.

I do believe China wants to assume “a” if not THE reserve currency status in the future.  They know they possess more gold than the U.S..  Would it not make sense to devalue your currency and even make it undervalued for the start of a new system for competitive reasons?  Yes I know, they do not have enough gold to back the yuan currently …at current price.  Will they pull a page out of FDR’s playbook and revalue gold higher since they are the largest hoarder in the world?  Could they confiscate from their loyal citizens to leapfrog their holdings even further?  Remember, the tried and true way(s) out of deflation are to print, devalue (versus neighbors AND gold) and of course go to war.  Whether you want to believe it or not, we are now at war both financially and technologically.  Unfortunately, financial and trade wars often times turn into hot wars.   China just fired a shot heard ’round the world for those listening and it was not a celebratory shot by any means!

To finish, could it be China knows this will end in a complete collapse of the financial markets AND real economies of the world, in particular of the West?  They already have the largest productive capacity in the world.  Are they going to devalue their currency so it is “competitive” when the reset occurs?  Have they stripped the West of their gold reserves leaving China with the greatest “monetary” hoard on the planet?  Could there be a better position to be in than having the most “money” and greatest productive capacity …with a middle/lower class of your society numbering in the hundreds of millions needing “stuff” to truly enter the 21st century? 

I will leave you with this graphic from Visual Capitalist: 

clip_image001

In a world levered to the gills and no ability to grow out from under, which is better to have?  Assets or liabilities?   Lots of questions with answers soon to be revealed I believe!

Standing watch,

Bill Holter
Holter-Sinclair collaboration

Posted by & filed under Bill Holter.

Dear CIGAS,

Last year at this time, I wrote and asked readers who owned shares in gold and silver producers to send their companies a letter. I ask that you do this once again.  Please don’t believe I am under any delusions whatsoever because herding cats is a near impossibility. Almost no one dislikes gold and misunderstands their own product more than the current management in the mining industry.  However, doing nothing will certainly accomplish nothing, doing something at least has a “chance” albeit slim.  Below is a letter I plan to send to each producing mining company and precious metals mutual fund that I own personally. Gold and silver prices have been diluted by paper contracts to the point where no money can be made producing gold, and an industry wide loss producing silver.  Years ago, Rob McEwen of Goldcorp decided to withhold the sale of gold production to be held in their treasury until prices were higher.  THIS is exactly what needs to be done now as a counterbalance to the unbacked paper contracts being sold to dilute and depress prices. The COMEX and naked shorts need to be starved for metal, the strong physical demand is doing this slowly while the mining industry could do this very quickly.

Please, copy and paste the below and sign with your name to any producing mining companies you have investments in. Also, do the same for any gold mutual funds you may own and ask the money manager to contact their holdings with this same letter. Government has an incentive to keep metals prices down and the lapdog regulators are allowing it to happen.  Price manipulation is illegal, if the authorities will not fix it, hopefully the industry itself has sense enough to finally do something!  I’m not holding my breath on this one.

Standing watch,

Bill Holter
Holter-Sinclair collaboration

———————————————————

Suggested letter to your gold producing company, by Bill Holter.

Dear Sirs,

I am a believer in hard money and as such am an investor in mining shares, your company being one of them. As you well know, hard times have hit the producers of both gold and silver. Gold and silver prices have been forced down, capital, either debt or equity is very scarce for our industry and share prices are back to the levels they traded at when gold was under $400 more than 10 years ago.

Much evidence has been uncovered by GATA (Gold Anti Trust Action committee) over the last 15 years showing how gold and silver prices have been suppressed and continually manipulated yet we’ve heard not a sound from the industry itself. Many mining concerns pay dues each year to the World Gold Council which at the very best seems to be an antagonist to gold and silver, at worst a Trojan horse. I know of no other industry which does not promote their own product nor protect it from outside malicious pricing practices. This needs to change and the most logical catalyst is from within the mining industry itself.

It makes no sense at all to expend labor and capital to lose money, especially when your product is a finite resource and will not ever replenish. If working harder and digging more ore was an answer then I would be cheerleading the machines. The fact is, the more that gets dug up in the current environment the more money is lost and precious ore forever wasted. As a shareholder I ask that any product over and above expenses be withheld from sale until free and fair prices are present.

The facts are well documented, global demand is and has outstripped supply of gold and silver for many years …yet the prices are dropping. Your “product” is being diluted by paper sales of “representative metal” while the board of directors do nothing at all. Actually, the mining industry itself is aiding the suppression scheme by delivering metal. This can only start one company at a time, why not our company? Why do we deplete our ore reserves and not receive fair value for our capital and labor?

Whether this proposed action is taken or not remains to be seen. Shortages of metal will occur sooner or later as physical demand and backwardation will eventually take the metals higher in price by multiples. Hopefully our company still has reserves left to be sold at fair profit margins. Many companies will not be in existence within a couple of years unless those with the fiduciary responsibility to protect our companies and shareholders …also protect our product from fraudulent dilution.

Best regards, _________.

Posted by & filed under Bill Holter, General Editorial.

My Dear Extended Family,

After today’s news on Greece getting financial aid, the imminent demise of the Euro in terms of market expectations is behind us. That being true, the dollar rally is now challenged. With the dollar rally challenged the general commodity market decline should decelerate and end.

As a result of all the above, the downside in the price of gold is very modest here while the upside of the first rally back into the bull market takes gold above $2000. Timing from here may be quite compressed.

Standing watch,
Holter-Sinclair collaboration

Posted by & filed under Bill Holter.

Dear CIGAs,

I would like to add a little clarity. There have been questions such as “if the Chinese sell Treasuries and interest rates go up, isn’t that bad for gold?”. Simply put, the market place WILL generate interest rate levels, NOT the Fed. The Fed can and has pegged interest rates but they only follow the trend in the market and can only set rates over short periods of time. Yes, rates have been pegged too low for too long …and the result? Central banks all over the world are being forced to buy sovereign treasury debt issuance because the private sector is turning their noses up to zero percent bonds. In other words, global monetization. (The inverse of this situation is the suppression of gold and silver prices. This will end the moment real metal is no longer available to deliver. Investors are gobbling up underpriced supply just as fast as they are shunning overpriced debt).

As for the meme that higher rates are bad for gold, I would urge you to look toward history. Interest rates went higher and higher throughout the late seventies’, so did gold. Higher interest rates from here will mean only one thing, the central bank is losing control of the corralled credit markets. Higher rates will destroy the synthetic markets of derivatives and result in cascading failures, insolvencies and bankruptcies. Ask yourself a question, if the Fed (and other central banks) were to lose control and the credit markets were to enter into a panic, what exactly would you want to have? The answer of course is “money,” that is not nor has any liability to anyone or anything. China and Russia now have the ability to “force” this loss of control of credit markets onto the Western central banks. Do you think they are aware of this situation? Do you believe they are accumulating gold because it is “pretty” too look at? Are you afraid of higher interest rates?

Bill Holter
Holter -Sinclair collaboration
Comments welcome!  bholter@Hotmail.com

Posted by & filed under Bill Holter.

The Rumblings of War

Dear CIGAs,

Shock of all shocks, the IMF announced the Chinese yuan will not be admitted into the SDR until at least Sept. 2016.  http://www.bloomberg.com/news/articles/2015-08-04/imf-says-more-work-needed-before-yuan-reserve-currency-decision  What exactly does this mean?  I can tell you the gold community is so shell shocked and fearful at this point, it “must be bad for gold”, right?  Going back a couple of weeks, China announced they had accumulated another 600 tons or so of gold to the near panic of precious metals investors.  This announcement would be used as another shot at taking price down because the Chinese “don’t like gold as much as we thought”.  This was the prevailing sentiment.

What I think happened was China played “good boy” with the West and lied about their gold holdings.  They announced enough gold to allow them into “the club” but not so much as to “offend” or intimidate anyone in the West.  Their announcement was clearly bogus as they are importing 600 tons every three months …and we are to believe it took them six years?  China had requested both “publicly and officially” to be included in the SDR.  They were publicly humiliated with this move by the IMF.  The Chinese are a very proud people, public humiliation would be last on my list of aggressions toward them!

Make no mistake, they will retaliate.  I believe just as the IMF did this while China is having market problems and during a period of weakness, China will return the favor to the U.S.  …at a very inopportune time for us.  When our markets are convulsing, probably this fall, you can expect one of two responses from the Chinese.  They will either come public with a true and VERY LARGE number for their gold holdings, or they will threaten to and actually dump some Treasury securities/dollar holdings…or both!  I believe their response will be timed to hit us just as in a boxing match, when we are tired, down or vulnerable …for maximum effect.

Whether you want to believe it or not, the U.S. is in a financial war with nearly the rest of the entire world.  To not include a rising China into the SDR makes no sense and is an impossible feat in the long term unless China decides it is not their desire.  I see no upside whatsoever to this action.  Does it “buy time” and postpone the inevitable?  Maybe not.  The action of poking the hornets nest may actually accelerate the collapse!

  There are other possibilities but looking at the two retaliatory options mentioned above, what could result?  First, were China to come clean and “admit” they have 10,000 tons of gold (or MUCH MORE), the yuan would immediately strengthen and move into the dollar’s territory as a settlement currency.  Markets would quickly do the math and understand if China has this much gold …where oh where did it come from?  China could even do an audit publicly and count the bars out in the open surroundings of their Olympic stadium in a “we’ve shown you ours, now you show us yours” fashion!

The other possibility comes with an “option A or B” for the Fed.  If the Chinese decided to sell some of their Treasury holdings, could the Fed sit idly by?  Option A, the Fed could let the market absorb the dumped Treasuries and allow interest rates to rise and watch as bond prices crater.  This is not much of an option, especially in a world where all prices are generated and created “officially”.  On the other hand, option B would be FORCED MONETIZATION!  The Fed could decide they had to buy any and all Treasuries offered by China.  I believe this is exactly what the Fed will decide they MUST do. 

Not coincidentally, the Chinese know this.  They also understand by using this tactic, they will be forcing the Federal Reserve to create an “exit door” especially for …and because of them.  This is the reverse of the old story, if you owe the bank $1 million they own you, if you owe $1 billion then you own the bank.  You see, in this instance the Chinese have a direct lever on our credit markets.  It would be bad enough if they could control our interest rates which they certainly can now influence.  What makes this really bad is they can FORCE the Fed to either monetize or face the immediate collapse of credit markets and thus all markets.  As I mentioned above, the Chinese will not do this until the time is right.  The time will “be right” when our markets display weakness.  They will smile while doing this and politely (publicly) restore honor and dignity.

Before finishing and as long as we are talking about financial “war”, let’s briefly look at Russia.  The U.S. and NATO are now crossing some very red lines in the sand when it comes to both Ukraine and Syria.  Trainings and war games are taking place in western Ukraine while the U.S. is and has authorized airstrikes (with Israeli assistance) against Syria.  Mr. Putin has said in no uncertain terms he will not allow the slaughter of Russians in Ukraine.  He has also stated numerous times he will not stand by idly should allies Syria or Iran be attacked http://www.zerohedge.com/news/2015-08-04/russia-ready-send-paratroopers-syria  .  These are all very real sparks in the dry tinder of current geopolitics. 

The question you need to ask yourself is this,  do you really believe the current fairy tale pricing of assets, ALL ASSETS will hold during a financial war with China?  Or during a real war with Russia?  This is not fear mongering, it is what’s on our dinner table!

Standing watch,

Bill Holter
Holter-Sinclair collaboration
Comments welcome!  bholter@hotmail.com

Posted by & filed under Bill Holter.

Dear CIGAs,

It is not often I write something as important as what follows.  It was said after the last crash that “no one could’ve seen it coming”.  This was not so back then and is not so today.  If you were looking for the truth in 2007, the average investor had ample warning from many sources warning of what was to come.  The warnings are now much louder, far easier to hear and coming from some mainstream and even “official sources”.  Are you listening?
After the biggest financial and social crash in history occurs, “they” will say you were warned!  Who are “they” and how exactly were we warned?  For several years and in particular the last 12 months, the IMF (International Monetary Fund) and the BIS (Bank for International Settlements) have been issuing warning after warning.  They have truly warned us as I will show you.  Do I believe they did this out of the goodness of their hearts?  No, I believe it has been in “c.y.a” fashion followed by their laughter because the sheep have and will sleep through it all until it’s too late.

Thanks to Larry White from www.Lonestarwhitehouse.blogspot.com a full listing of the recent warnings has been compiled and logged.  I had seen each one of these over the last year and have even commented on a couple of them but it never really registered with me there were so many.  Normally I try not to “link” articles to death, this one is different because it is important you see how many and just how in depth the warnings have been!  I will asterisk the three most important articles in my opinion, there have been 16 such warnings over the last 12 months! 

July 2014 – BIS  –BIS Issues Strong Warning on “Asset Bubbles”

July 2014 – IMF –Bloomberg: IMF Warns of Potential Risks to Global Growth

October 2014 – BIS –“No One Could Foresee this Coming”

October 2014 IMF Direct Blog — What Could Make $3.8 Trillion in global bonds go up in smoke?

October 2014 IMF Report –“Heat Wave”-Rising financial risk in the U.S.

********December 2014 – BIS –BIS Issues a new warning on markets

December 2014 – BIS —BIS Warnings on the U.S. Dollar

February 2015 – IMF – Shadow Banking — Another Warning from the IMF – This Time on “Shadow Banking”

March 2015 – Former IMF Peter Doyle – Don’t expect any warning on new crisis -Former IMF Peter Doyle: Don’t Expect any Early Warning from the IMF –

*******April 2015 IMF – Liquidity Shock –IMF Tells Regulators to Brace for Liquidity Shock

May 2015 BIS – Need New “Rules of the Game” –BIS: Time to Think about New Global Rules of the Game?

June 2015 BIS Credit Risk Report –BIS: New Credit Risk Management Report

June 2015 IMF (Jose Vinals) –IMF’s Vinals Says Central Banks May Have to be Market Makers

*******BIS June 2015 (UK Telegrahph, no blog article) –The world is defenceless against the next financial crisis, warns BIS

July 2015 – IMF – Warns US the System is Still Vulnerable (no blog article) –IMF warns U.S.: Your financial system is (still) vulnerable

July 2015 – IMF – Warns Pension Funds Could Pose Systemic Risk (no blog article) –IMF warns pension funds could pose systemic risks to the US

And there you have it in black and white!  You have been warned!  MANY TIMES in fact…and from the most inside and official of sources!  Yet on a daily basis we hear from our own mainstream press, Washington and Wall St. …don’t worry be happy!  These are very real articles with well thought out and cogent logic.  They are not to be ignored!

One piece by the BIS last October talked about the “no one could have seen it coming” meme we heard so often back in 2008-09.  THEY see it coming and have been telling you for over a year!  Please understand this, the BIS is the central bank for central banks.  No one knows the inside situation (particularly in derivatives) better than they do.  If you don’t believe me or others who have worked so hard to get the warnings out, listen to what both the BIS and IMF are telling you.  They have gotten out in front of this and will only say “we tried to warn you” after the fact.

As a chuckle to finish, below is a photo of me and CIGA Dave in front of the BIS headquarters after deciding to heed their warnings personally!
clip_image002

Standing Watch,

Bill Holter
Holter-Sinclair collaboration
Comments Welcome!  bholter@hotmail.com

Posted by & filed under Bill Holter.

Dear CIGAs,

The world is awash with "promises".  Nearly everything we think of as having "value" is because of a promise behind it.  A few examples;  your bank accounts, retirement funds, bonds and even the dollar bills in your pocket.  Your bank account for example, once you deposit the money it is no longer yours.  You can argue this if you wish but we now know this is true for sure after recent "bail in" legislations passed throughout the west.  When you deposit funds into a bank, it then becomes "their money" held for you …they "owe" it to you.  Do not take this lightly, lawmakers around the world have made this the new reality.  A little known fact, in 1845 Britain passed banking law that made depositors (unsecured creditors), this is still precedent to this day.  When you deposit money you "accept a liability" from your bank and are classified as an unsecured creditor.  In other words, "get in line with everyone else"!

Same thing with many retirement accounts.  Think about Social Security.  When you get your annual statement form, it comes with an asterisk.  This is to inform you they "might need to reduce benefits".  With any retirement account you are relying on the custodian to make payments to you upon retirement.  Think about state and municipal retirement accounts promising the good life, they are nearly ALL underfunded.  Meaning there is not enough money in there to make (promised) future payments unless some sort of magically higher returns are realized.  These are underfunded by the TRILLIONS of dollars!

Bonds are an obvious asset class where a "promise" is relied on.  Dollars on the other hand seem the most misunderstood by the public while being the biggest leap of faith in all asset classes.  Dollars rely on the "full faith and credit" of the U.S. government (a bankrupt entity) yet the populace sleeps through the night secure knowing they own dollars.  ALL non backed, fiat currencies in the past have failed.  The dollar is the widest spread and widely owned fiat the world has ever known, its failure will be spectacular upon arrival!

I wanted to point out the above "promises" as a basis to speak about trust or confidence.  The financial world turns on the axis of "trust".  This trust was nearly broken in 2008 and is the reason the Federal Reserve needed to secretly lend $16 trillion all over the world.  If the Fed had not come up with these funds, failures would have spread and trust would have been broken amongst the banks/other financial institutions and even between the central banks themselves!  The Fed’s largesse worked and trust was maintained.

Now, I believe we are set for another "test" of trust.  We have gone five+ years with QE this and QE that, the reality being outright monetization.  In fact, central banks today are buying more sovereign bonds than are even being issued.  The public and even the professional funds have backed away from the debt markets, you can’t blame them because the interest received does not even cover inflation not to mention a risk premium.  Globally the pace of trade and business activity is slowing or even declining which will bring to a head the difficulties in meeting debt service and other "promises".

I ask, what will happen when inevitably "trust" begins to wane?  Or even fully break?  It is at this point the system goes into "The Great Call".  Margin call?  Of course, because nearly everything financial has leverage behind it but there is more to it than this.  The "call" I am speaking of is for contracts of all sorts to "perform".  In particular I am thinking "derivatives" contracts will be called on to perform their contractual duties.

All in all, there are over $1 quadrillion worth of derivatives outstanding.  The problem with this is the "tail" is bigger than the dog. In other words, the amount of derivatives outstanding dwarfs the total amount of money outstanding and thus the ability to "pay" and make good on the contracts.  The other side of this coin are contracts promising to deliver something.  Here I am thinking both gold and silver.  There are far more (100-1 or more) obligations outstanding than there are ounces or kilos available to deliver.  This is a default just waiting to happen.                                                              

If you listen to the Harry Dents of the world, the dollar will be the safe haven and where all fear capital will go.  In a world based on nothing but trust and promises, will fear capital really pile INTO a currency based ONLY on trust and promises …when "trust" is exactly what is come into question.  Actually, it can be said the dollar was originally set up in 1971 on a "never pay" model.  The dollar (and bonds) only promise to pay "more dollars" and nothing else.  This game worked for many years, now it looks like the Saudis after doing many deals with both Russia and China may be set to transact in currency other than dollars.  Are they displaying confidence? 

The Chinese are now net sellers of U.S. Treasuries.  Ask yourself this question, if China could sell all of their Treasuries and turn it all into gold, silver, oil, copper and other real tangible assets (without destroying the Treasury market or making gold and silver go no offer), would they?  I say yes, they absolutely would love to be out from under their Treasury position.  Apologetic others might say China is comfortable, we will soon see. 

Because confidence is the only thing at this point holding the game together …and its fickle nature, it is important for you to think this through.  What will be standing when confidence breaks?  Can banks globally survive "runs" when depositors come calling?  Can commodity exchanges deliver all they promise?  Can borrowers "borrow more" if they cannot redeem past issues with new debt?  This is where we are headed both systemically and globally!

Before finishing I want to tie two connected thoughts together.  First, the great Paul Craig Roberts said last week he feared precious metals could be suppressed forever.  I received MANY fearful e-mails regarding this thought process.  Mr. Roberts would be entirely correct if it were not for one small detail, REAL gold and REAL silver must be available to deliver.  Otherwise the game comes to an end and the fraud is exposed.  He is entirely correct, "price" can be jammed or rammed with enough "margin" posted.  Dan Norcini once upon a time had it correct when he said, nothing will unnerve the shorts more than the longs standing for delivery …and making a call for the product.  I would like to remind you, COMEX currently has only 11.7 tons of gold for delivery.  This is roughly $400 million.  If I were short, this paltry sum would not add to my confidence.

Another thought going hand in hand with this is where we are now versus 2008.  Back then we were within overnight hours of the entire system coming down, this is fact.  What has changed since then?  "Nothing", but in reality quite a bit.  Nothing has changed from the standpoint of "tools used".  We have not altered or changed anything that "got us to the brink"… only done more of it!  We have far more debt and more derivatives outstanding now.  In fact, central banks and sovereign nations have even sacrificed their balance sheets to prolong the game.  It has worked …so far.  The only problem is the entire arsenal of the central banks have already been tried and failed to provide the real economy with any stimulus.  The result has been capital pushed into financial markets and blowing the bubble(s) far larger than they were.  Now, we have far larger markets with far more leverage than 2008.  These will need to be met with central banks and sovereign treasuries with weaker balance sheets and almost no ability to borrow in an effort to reflate.  It is a recipe for disaster. 

We already know the sovereign debt markets are very thin on the bid side as liquidity has dried up.  We also know equity markets are displaying horrible internal breadth.  China is actually nearing a 1929 scenario and will be there shortly if they cannot steady.  Confidence is a fickle girl, if it breaks, then we go back to the 2008 scenario and we’ll find out just how powerful the central banks really are.  I believe the coming "Great Call" cannot nor will be met and only then will we see what is left standing.  It is imperative here and now to position yourself in assets that do stand on their own, everything else will be a broken promise!

Standing watch,

Bill Holter
Holter-Sinclair collaboration
Comments welcome! bholter@hotmail.com