The System Is Starting its Final Collapse – Dave Kranzler
Thursday, December 3, 2015
TND Guest Contributor: Dave Kranzler |
The director of the CME Metals Group announced her resignation to effective December 11. No further explanation was provided – Reuters link. I’m not one to infer some type of conspiracy theory in connection with this, but it seems rather abrupt. It’s akin to Bernanke leaving the Fed much sooner than anyone expected. The rats are leaving the ship before it sinks.
The collapse began in earnest in 2008. This is why gold soared to all-time highs in dollar terms until late 2011. The effort to push down the price of gold is overt evidence that the systemic collapse, even with the heavy application of money printing, has been ongoing since 2008. The recurring violent hits to the price of gold using fraudulent paper gold is overt evidence that the authorities are becoming more desperate in their attempt to hide any possible market signals that the systemic collapse is accelerating. This is how gold behaved from March 2008 – October 2008. Look what happened then.
Something catastrophic is occurring behind “the curtain.” I would love to have a peak at what is melting down. We can generally speculate that, with the oil, copper and iron ore price collapse, and with emerging market currencies collapsing, there’s been a series of derivatives explosions that have been contained but that are straining the Central Banks’ abilities to keep the system from coming completely unglued. This is also why the price of gold is being contained with brute force.
We have never seen markets behave the way they’re behaving right now, with absolute unpredictability. The overt intervention is a big part of the what we’re seeing on the surface with gold, currencies, credit markets and the primary stock indices. But all indications suggest a high likelihood of several train wrecks occurring at once behind the scenes. The intervention, of course, is keeping the surface indicators from crashing. But the intervention has also destroyed the signal transmission and rational capital allocation mechanisms of the market. Adam Smith’s “invisible hand” has been amputated, if you will.
This is why stocks like AMZN, FB, GOOG and NFLX trade at insane p/e ratios. It’s debatable whether or not AMZN has bona fide economic net income in the first place. I have not looked in depth at the accounting of FB, GOOG and NFLX to assess whether or not their “net income” is a function of GAAP manipulation or if they actually produce real cash flow in excess of all expenses, on and off the income statement. But all of them unequivocally trade at sublimely irrational market caps and they are the primary devices being used to keep the S&P 500/Dow indices propped up.
Another indication of the chaos erupting behind the “curtain” is the melt-down going on the junk bond market. Alhambra Partners wrote a piece in which it asserted that the stunning spike higher in triple-CCC rated junk bonds is indicative of something blowing up in the junk bond market – LINK. But it’s not speculation, it’s a fact. And it’s not “something,” it’s the entire distressed credit asset class.
The asset class itself, like every other financial asset, is horrendously mis-priced thanks to the massive Central Bank intervention. But unavoidable leaks are springing and they are going to turn into torrential floods.
The reason triple-CCC yields are blowing out is that some entity or entities have been forced to sell. Here’s how it works – I know this based on first-hand experience trading this stuff: As you know by now, the bond market has become extremely illiquid. This means that there’s a lack of capital available to accommodate sellers who look to sell at price levels remotely close to where bonds are being quoted.
Everyone (big pension funds, hedge funds, mutual funds, etc) keeps the price marks on the bonds in their portfolio unchanged and holds their breath that a seller never appears who has to sell for whatever reason and forces a re-pricing of the bond issue, which in turn forces a re-pricing of the market. I’ve lived this nightmare as a sell-side junk bond trader running capital positions in triple-C paper.
The fact that triple-C bond yields have blown out so quickly means that sellers have appeared and the yields on these bonds are going to blow out until they become high enough for a bona fide distressed buyer to decide it’s worth the risk to buy some of the paper. We’re not talking 10-20 points below where everyone is marked. Many of these bonds will plummet from the 80’s and 90’s to the 20’s and 30’s before enough capital begins to flow into the market to provide a bid big enough to take on the selling. That’s usually the first step down before it gets even worse.
This dynamic is going to spread to other asset classes within the credit market, like subprime mortgage pass-thru trusts, collateralized debt obligations, etc. This how it began to unfold in 2008. This is why Wall Street banks are now net short corporate bonds. The problem is that this time around the amount of debt of all varieties is a few multiples greater than it was in 2008. And connected to all of this is a preponderance of OTC derivatives. Derivatives that I believe are already melting down behind “the curtain.”
At some point the “collapse dyamic” is going to hit the entire stock market. It already has in several sub-sectors and individual stocks below the surface. We see this in the “cliff-dives” that occur when companies report “unexpectedly” disappointing earnings results. Stocks which were held up with the broad indices thanks to the Fed’s monetary lasiviousness get quickly repriced to downside.
This morning a poll is out from Quinnipiac University which reports that 83% of Americans polled live in fear of another “terrorist attack.” I find this highly troubling because of the amount of power it gives the Government to control the population. I expect to see a stunning degree of abuse of this power, as if the Patriot Act, Homeland Security Act, Detainee Bill and surveillance laws are not horrifying enough.
In late 2003, a colleague and friend of mine and I surmised that we would eventually see things occur in this country that would “blow our minds.” This is in the context of Enron, 9/11 and the highly illegal invasion of Iraq having already occurred. Ponder that for a moment.
The hallmark of an empire in collapse is the imposition of Governmental totalitarianism and reckless attempted military imperialism. Currently the U.S. military is the most dangerous terrorist in the world. Contrary to the view reflected in the Quinnipiac poll, my biggest fear is that the U.S. Government is soon going to turn its reign of terror on its own citizens. History tells us this is what occurs when a powerful economic/political system is in the final stages of collapse.
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About Dave Kranzler:
I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics. Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund.
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The plan was for a puppet regime that does as it’s told is to be put in Assad’s place. You may know the Saudi Arabian soldiers as a different name… as ISIS. Yes, as you may have heard for some time now, ISIS is a U.S. creation.
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With the U.S out of the way, and economically crippled to the point of being catapulted into the third world over night, nothing will stand in the way of a one world government. The article below by Michael Snyder further highlights the coming downfall of the U.S.
Russia’s Plans to Formally Dump The U.S. Dollar
In September, Michael Snyder wrote::
Russian President Vladimir Putin has introduced legislation that would deal a tremendous blow to the U.S. dollar. If Putin gets his way, and he almost certainly will, the U.S. dollar will be eliminated from trade between nations that belong to the Commonwealth of Independent States. In addition to Russia, that list of countries includes Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan and Uzbekistan. Obviously this would not mean “the death of the dollar”, but it would be a very significant step toward the end of the era of the absolute dominance of the U.S. dollar.
Most people don’t realize this, but more U.S. dollars are actually used outside of the United States than are used inside this country. If the rest of the planet decides to stop accumulating dollars, using them to trade with one another, and loaning them back to us at ultra-low interest rates, we are going to be in for a world of hurt. Unfortunately for us, it is only a matter of time until that happens.
When I first read the following excerpt from a recent RT article, I was absolutely stunned…
Russian President Vladimir Putin has drafted a bill that aims to eliminate the US dollar and the euro from trade between CIS countries.
This means the creation of a single financial market between Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan and other countries of the former Soviet Union.
“This would help expand the use of national currencies in foreign trade payments and financial services and thus create preconditions for greater liquidity of domestic currency markets”, said a statement from Kremlin.
For a long time, tensions have been building between the United States and Russia over Syria, Ukraine, the price of oil and a whole host of other issues. But I didn’t anticipate that things would get to this level quite yet. It is expected that Putin’s new bill will become law, and this is only one element of a much larger trend that is now developing.
You see, the truth is that Russia and China have both been dumping dollar-denominated assets for months. The following comes from a recent piece by Mac Slavo…
Last year Russia began unloading massive amounts of their US dollar reserves. In the month of December 2014 alone Putin sold some 20% of the country’s U.S. Treasurys, a move that further increased tensions surrounding what can only be described as economic warfare between East and West.
Then, as if part of a coordinated effort, this summer it was revealed that China had implemented a similar strategy, dumping half a trillion in dollar denominated assets.
But that’s just the beginning of the end for the US dollar. Amid a major meltdown in Chinese stock markets the People’s Republic sold off billions in dollar assets last week in what was reported to be an effort to stabilize their collapsing financial markets.
And now, as Russia’s economy collapses under the weight of American and European sanctions, including what many believe to be widespread downward manipulation of oil prices, Vladimir Putin is sending a clear signal to the central bank of the world’s reserve currency.
China has the second largest economy on the entire planet, and Russia has the tenth largest. In recent years, these two superpowers have become much tighter. For example, just consider this headline from Sputnik News that I came across just today: “Crippling US Foreign Policy Draws Russia, China Closer Together“.
And I don’t know if you have noticed, but U.S. relations with China have turned rather sour lately. Lots of accusations about spying and trade violations have been flying around, and just this week five Chinese warships were spotted off the coast of Alaska. In the months ahead, expect our relationship with China to continue to unravel.
If China and Russia were to both fundamentally reject the U.S. dollar at some point, much of the rest of the world may choose to follow suit.
So why is that important?
The fact that most of the nations of the world use our dollars to trade with one another creates a tremendous amount of artificial demand for our currency. In other words, the U.S. dollar is valued much higher than it otherwise would be just because it is the de facto reserve currency of the planet.
As a result, we can import massive amounts of products at super cheap prices. When we go to Wal-Mart or the dollar store, we can fill up our carts with lots and lots of ridiculously inexpensive stuff. Our standard of living is way higher than it actually should be.
And because the U.S. dollar is used so widely in global trade, major exporting nations end up with giant piles of our currency which they have been willing to lend back to us at ultra-low interest rates. This has made it possible to fund our massively bloated federal government and to go 18 trillion dollars in debt.
If the rest of the world stops using our dollars and stops playing our game, we will be in a tremendous amount of trouble. The cost of imported products would absolutely skyrocket and our standard of living would go way down.
In addition, the federal government (along with state and local governments) would have to pay much more to borrow money which would rapidly create a gigantic debt crisis.
So Russia knows where they could really hurt us. Most of the “power” that America currently projects around the world is based on having the de facto reserve currency of the planet. If you take our financial power away, we would be far, far less imposing on the global stage. Sadly, the truth is that the U.S. military is rapidly shrinking and has largely been defanged by the Obama administration.
A lot of people that will read this article will not understand this, but it is very, very important to keep an eye on this emerging Russian/Chinese alliance. I believe that it is going to play a critical role in world events during the years ahead.
So do you agree with me or do you disagree?
Now China Can Cause The Death Of The Dollar And The Entire U.S. Financial System
Michael Snyder Continues:
The death of the dollar is coming, and it will probably be China that pulls the trigger. What you are about to read is understood by only a very small fraction of all Americans. Right now, the U.S. dollar is the de facto reserve currency of the planet. Most global trade is conducted in U.S. dollars, and almost all oil is sold for U.S. dollars. More than 60 percent of all global foreign exchange reserves are held in U.S. dollars, and far more U.S. dollars are actually used outside of the United States than inside of it. As will be described below, this has given the United States some tremendous economic advantages, and most Americans have no idea how much their current standard of living depends on the dollar remaining the reserve currency of the world. Unfortunately, thanks to reckless money printing by the Federal Reserve and the reckless accumulation of debt by the federal government, the status of the dollar as the reserve currency of the world is now in great jeopardy.
As I mentioned above, nations all over the globe use U.S. dollars to trade with one another. This has created tremendous demand for U.S. dollars and has kept the value of the dollar up. It also means that Americans can import things that they need much more inexpensively than they otherwise would be able to.
The largest exporting nations such as Saudi Arabia (oil) and China (cheap plastic trinkets at Wal-Mart) end up with massive piles of U.S. dollars…
Instead of just sitting on all of that cash, these exporting nations often reinvest much of that cash into low risk securities that can be rapidly turned back into dollars if necessary. For a very long time, U.S. Treasury bonds have been considered to be the perfect way to do this. This has created tremendous demand for U.S. government debt and has helped keep interest rates super low. So every year, massive amounts of money that gets sent out of the country ends up being loaned back to the U.S. Treasury at super low interest rates…
And it has been a very good thing for the U.S. economy that the federal government has been able to borrow money so cheaply, because the interest rate on 10 year U.S. Treasuries affects thousands upon thousands of other interest rates throughout our financial system. For example, as the rate on 10 year U.S. Treasuries has risen in recent months, so have the rates on U.S. home mortgages.
Our entire way of life in the United States depends upon this game continuing. We must have the rest of the world use our currency and loan it back to us at ultra low interest rates. At this point we have painted ourselves into a corner by accumulating so much debt. We simply cannot afford to have rates rise significantly.
For example, if the average rate of interest on U.S. government debt rose to just 6 percent (and it has been much higher than that at various times in the past), we would be paying more than a trillion dollars a year just in interest on the national debt.
But it wouldn’t be just the federal government that would suffer. Just consider what higher rates would do to the real estate market.
About a year ago, the rate on 30 year mortgages was sitting at 3.31 percent. The monthly payment on a 30 year, $300,000 mortgage at that rate is $1315.52.
If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage would be $2201.29.
Does 8 percent sound crazy to you?
It shouldn’t. 8 percent was considered to be normal back in the year 2000.
Are you starting to get the picture?
We need other countries to use our dollars and buy our debt so that we can have super low interest rates and so that we can afford to buy lots of cheap stuff from them.
Unfortunately, the truly bizarre behavior of the Federal Reserve and the U.S. government over the past several years is causing the rest of the world to lose faith in our currency. In particular, China is leading the call for a “de-Americanized” world. The following is from a recent article posted on the website of France 24…
For decades the US has benefited to the tune of trillions of dollars-worth of free credit from the greenback’s role as the default global reserve unit.
But as the global economy trembled before the prospect of a US default last month, only averted when Washington reached a deal to raise its debt ceiling, China’s official Xinhua news agency called for a “de-Americanised” world.
It also urged the creation of a “new international reserve currency… to replace the dominant US dollar”.
So why should the rest of the planet listen to China?
Well, China now accounts for more global trade than anyone else does, including the United States.
China is also now the number one importer of oil in the world.
At this point, China is even importing more oil from Saudi Arabia than the United States is.
China now has an enormous amount of economic power globally, and the Chinese want the rest of the planet to start using less U.S. dollars and to start using more of their own currency. The following is from a recent article in the Vancouver Sun…
Three years after China allowed the yuan to start trading in Hong Kong’s offshore market, banks and investors around the world are positioning themselves to get involved in what Nomura Holdings Inc. calls the biggest revolution in the $5.3 trillion currency market since the creation of the euro in 1999.
And over the past few years we have seen the global use of the yuan rise dramatically…
International use of the yuan is increasing as the world’s second-largest economy opens up its capital markets. In the first nine months of this year, about 17 percent of China’s global trade was settled in the currency, compared with less than one percent in 2009, according to Deutsche Bank AG.
Of course the U.S. dollar is still king for now, but thanks to a whole host of recent international currency agreements this status is slipping. For example, China just recently signed a major currency agreement with the European Central Bank…
The swap deal will allow more trade and investment between the regions to be conducted in euros and yuan, without having to convert into another currency such as the U.S. dollar first, said Kathleen Brooks, a research director at FOREX.com.
“It’s a way of promoting European and Chinese trade, but not doing it with the U.S. dollar,” said Brooks. “It’s a bit like cutting out the middleman, all of a sudden there’s potentially no U.S. dollar risk.”
And as I have written about previously, we have seen a bunch of other similar agreements being signed all over the planet in recent years…
But do you hear about any of this on the mainstream news?
Of course not.
They would rather focus on the latest celebrity scandal.
Right now, the global move away from the U.S. dollar is slow but steady.
At some point, some trigger event will likely cause it to become a stampede.
When that happens, demand for U.S. dollars and U.S. debt will disintegrate and interest rates will absolutely skyrocket.
And if interest rates skyrocket that will throw the entire U.S. financial system into chaos. At the moment, there are about 441 trillion dollars worth of interest rate derivatives sitting out there. It is a financial time bomb unlike anything the world has ever seen before.
There are four “too big to fail” banks in the United States that each have more than 40 trillion dollars worth of total exposure to derivatives. The largest chunk of those derivatives is made up of interest rate derivatives. In case you were wondering , those four banks are JPMorgan Chase, Citibank, Bank of America and Goldman Sachs.
A huge upward surge in interest rates would absolutely devastate those banks and cause a financial crisis that would make 2008 look like a Sunday picnic.
Right now, the leader in global trade seems content to use U.S. dollars for most of their international transactions. China also seems content to hold more than a trillion dollars of U.S. government debt.
If that suddenly changes someday, the consequences for the U.S. economy will be absolutely catastrophic and every single American will feel the pain.
The standard of living that all of us are enjoying today depends largely upon China. They can bring down the hammer at any moment and they know it.