Something Changed! – Bill Holter

No doubt “something” changed starting the second half of last year. In fact, in looking at many markets we saw change and reversals. The process took quite some time but global equity markets topped and many are now quickly into bear market (down 20% or more) territory. This is also the case in many credit markets if we exclude most sovereigns.

Cross currency markets have also been in disarray, the most important and telling is the yen/dollar cross closing the week with a 112 handle. Please understand the danger of this, a good portion of the global carry trade is financed by borrowing yen, yen are becoming more expensive and thus harder to pay back. The “harder” part is putting severe strains on the derivatives markets. In many carry trades, the “squeeze” from the “carried” side (the carried asset) is forcing the closure of the currency side, this is creating a negative feedback loop. What was originally borrowed (yen) now must be bought be paid back to the lender.

We have seen this rapid strengthening in the yen AFTER a Fed tightening and AFTER Japan announcing policy of negative interest rates. This was NOT supposed to happen but happen it has! This is a sign of markets overrunning the central banks as the carry trade is beginning to unwind and creating demand for yen. Put simply the central banks are losing control… of what had previously been under COMPLETE control!

We also saw gold move into severe backwardation not only in London but also on the COMEX. This is truly amazing as COMEX is a paper exchange yet their brute force of dilution is not strong enough to keep gold and silver out of backwardation. The next week or two will be very telling as the COT numbers are showing the commercials very short again as they have sold into the recent rallies. The open interest has risen dramatically in both gold and silver as they moved off of 3rd quarter bottoms, can the paper dilution contain them? Will it be business as usual and the metals routed again or has something truly changed?

Another $50 in gold and a mere $1 in silver will take them into official bull markets. In my opinion, we will look back in time to see the last 4 years as corrections in bull markets that started in 2001. With or without a true rule of law we will find out the normal “corrections” were expanded and extended in time via dilution. This dilution will not be discovered in the courts or by the hapless CFTC, it will be obvious when the runs begin and 99 of 100 “owners” find out their metal is not and never was “there”. I do want to say this, we should begin to see the silver/gold ratio begin to drop as it is completely skewed at 80-1 while the mining ratio is under 10-1. Outperformance by silver will be another sign that control is being lost.

The second half of last year also saw a downshift in trade, GDP and velocity/volume. Again, a slap in the face to central banks because their untold $ trillions have been overrun by a deflating credit system (of their own making). It is this “change” that has spurred the recent talk of reversing course on rates and pushing them negative in the U.S.. Talk of “NIRP” was immediately followed by Europe and the U.S. (via Larry Summers) floating trial balloons for doing away with cash.

From a geopolitical standpoint, the East versus West situation also began to speed up the second half of last year. China was admitted into the IMF basket. The U.S. signed the ridiculous Iran and TPP treaties, Russia stepped into the Middle East physically for the first time and now actual shelling of Syria from Turkey has begun. Turkey’s actions are confusing as we have seen both “stand down” orders from the U.S. and they are “NATO allies” at the same time. What will Erdogan do and who is he taking orders from?

To the south of Syria, Saudi Arabia has amassed a substantial part of their military in attack position. Are they doing this on their own or on U.S. orders? The situation is murky as U.S. funded rebels are losing ground to Russian backed forces and Assad is regaining lost real estate. Can Turkey and or the Saudis really attack Russian forces? Russia has announced on several occasions their http://russia-insider.com/en/politics/did-russia-just-threaten-turkey-nuclear-weapons/ri12936 tactical nuclear weapons are not off the table should their forces face slaughter, certainly “deals” have been drawn up behind the scenes right? In my estimation, I believe “borders” and regimes in many Middle East nations will be “re drawn”. I truly believe these “new borders” have already been penciled in, the map only lacks blood to be used for ink.

Another area of shocking change beginning late last year was that of liquidity, or the lack. “Stress” is building in the financial system to the point where individual names have begun to emerge. In particular Deutsche Bank. We could list names of various banks, cities, pension funds, cities, protectorates and even countries …but Deutsche Bank will do as they are THE largest counterparty to the fraud call “derivatives”. They are on record as shouting “no more negative rates” and following by “we need more liquidity NOW!”. This conundrum is illustrated here;

As you can see, global financial stress versus “risk free” Treasury bonds is rising and now to the point where something needs to be done quickly by the central bank community. I also want to point out the obvious here, with all of the past quantitative easings we are back to where we started NEEDING MORE! None of these easings reflated the system for anything other than a short time and each time we require more and more!

So here we are, back to where we were prior to each easing and prior to the fall of 2008 …with one stark difference. The central banks and sovereign treasuries have spent all their bullets and do not have room on their balance sheets to take on more debt. The markets have sensed this moment coming for the last six months. I would also say this moment was sniffed out by world leaders as they posture(d) for position.

Not much if any of the above is new or groundbreaking, just an assessment or overview that collectively many markets and geopolitics have begun rapid change over the last 6-9 months. I do not believe it is any coincidence the G-20 meetings this year are being held in China. The G-20 finance ministers will meet at the end of this week. If I told you I knew what will come out of this meeting I would be lying. In the past, many of these meetings yielded nothing, this meeting is quite different because something, and probably quite radical needs to be done out of necessity!

I would not be shocked by anything. We could see coordinated QE and reflation efforts by central banks. We could see a big devaluation by any or even all of the players including the U.S., China or the whole of Europe. A “coordinated devaluation” would be the equivalent of a “re set” or revaluation higher in the price of gold as these currencies need to devalue against “something”. I do not see this meeting as benign, I will be shocked as some sort of very big policy change(s) is necessary, without it the deflation boogeyman will eat everything in its path and still be hungry for more!

Standing watch,

Bill Holter

Holter-Sinclair collaboration