So after wild gains yesterday - particularly in Silver), both Silver and Gold plunged dramatically today. Silver was down over $2 per ounce while Gold dropped over $100 intraday.
Algo driven liquidations followed Ben Bernanke's testimony before congress as he implied that QE3 is off for now. As the cascading price triggered the $1700 sell limits, Gold fell all the way to $1685 then reversed back over $1700.
The fundamental elements driving Gold/Silver remain the same and I note that even more dats is coming out confirming China's move away from the US Dollar.
Today the US Treasury department released its adjustment to foreign purchases of US Treasury bond holdings. This bi-annual exercise updates the monthly reports.
A great many naysayers have been expecting the revision to show that China has in fact been building up its US Treasury stake (following the now traditional transfer of UK purchases to China), contrary to the reports that they have been dumping those Treasurys.
The reality is that China has indeed been dumping its US exposure.
China sold over $100 billion in Treasurys in December alone (bringing its total to $1152 billion,down 12% from its June total of $1307 billion.
This means the US will be forced to rely ever more on domestically funded purchases of USTs... which means Primary Dealers and the Federal Reserve.
The biggest surprise from the data is that, contrary to previous speculation, Russia has not been dumping its Treasurys.
In fact the country's holding of $150 billion are the same as they were back in June, and over $60 billion more compared to the pre-revised number.
The key element here is that unless the US finds substitute demand for it's Treasurys, the only remaining buyer will be the entity that already has the largest holding of US paper - the US Federal Reserve.
The American's are monetizing their debt.
How much longer before other nations start to follow China's lead?
Did you ever play Monopoly as a kid and, as the designated banker, succumb to the temptation to simply remove some money for yourself if you were strapped for cash?
Wouldn't it be great if you could do that in real life? Solve your money problems by simply creating more cash for yourself?
That's basically what the United States is doing.
As CNSNews.com notes, at the close of business on Tuesday the debt of the US federal government exceeded $15 trillion for the first time - with the largest single owner of the publicly held portion of that debt being the US Federal Reserve.
Over the past year, as the Federal Reserve massively increased its holdings of U.S. Treasury securities and entities in China marginally decreased theirs, the Fed surpassed the Chinese as the top owner of publicly held U.S. government debt.
In its latest monthly report, the US Federal Reserve said that as of Sept. 28, it owned $1.665 trillion in U.S. Treasury securities. That was more than double the $812 billion in U.S. Treasury securities the Fed said it owned as of Sept. 29, 2010.
Meanwhile, as of the end of this September, entities in mainland China owned $1.1483 trillion in U.S. Treasury securities, according to data published today by the U.S. Treasury Department. That was down slightly from the $1.1519 trillion in U.S. Treasury securities the Chinese owned as of the end of September 2010, according to the same Treasury Department report.
Thus, at the end of September 2010, the Chinese owned about $339.9 billion more in U.S. Treasury securities than the Fed owned at that time. By the end of September 2011, the Fed owned about $516.7 billion more in U.S. Treasury securities than the Chinese owned.
Perhaps the most astonishing statistic is that since Barack Obama has been President, the US debt has gone from $10,626,877,048,913 on January 20, 2009 to $15,033,607,255,920 as of yesterday. That's a stunning increase of 41.5%, or $4.4 trillion.
No wonder the US Federal Reserve is now the largest holder of debt. Who else, besides the ones who are printing the currency, is there to buy it?
"The 2008 financial crisis was a financial earthquake whose depth and breadth we still do not understand nor appreciate."
Faithful readers will recognize this oft-repeated statement which I never tire of re-stating.
In Europe the continued insolvency of the PIIGS (Portugal, Iceland, Ireland, Greece and Spain) continues. And as wrangling continues about how Greek bailout #2 is to proceed, the European Central Bank and Germany are at polar opposites on what to do.
And as the rancor over what to do heats up, Eurogroup President Jean-Claude Juncker has made some interesting comments.
The Eurogroup is a meeting of the finance ministers of the eurozone. And Juncker has just attempted to deflect and redirect attention from the internal problems of Greece within Europe to the financial troubles of the United States.
How?
Well Juncker has continued the theme we highlighted yesterday with China's credit rating agency Danong and said that which no one wants to say publicly:
"Not withstanding the euro zone's problems, the deficit and overall debt in the U.S. and Japanese economy are substantially higher than in Europe. The debt level of the USA is disastrous. The real problem is that no one can explain well why the euro zone is in the epicenter of a global financial challenge at a moment, at which the fundamental indicators of the euro zone are substantially better than those of the U.S. or Japanese economy."
As this blog has stated repeatedly... the defining issue of the next decade is going to be all about sovereign debt.
Not just in Europe, but all over the world... particularly in the United States.
If you ever have any doubts about what looms on the horizon in the months ahead for Vancouver Real Estate (in general) and the North America economy (in particular), bookmark today's post and refer back to it.
Last week, after the U.S. debt panel failed to agree on measures to create more than $4 trillion in budget cuts over the next 10 years, BNN spoke to David Stockman, the former Director of the U.S. Office of Management and Budget under President Ronald Reagan.
If there ever was a proponent of the current measures to repair the American economy, you would figure an architect of Reagan's trickle down economics would be it.
You'd be dead wrong.
Stockman spoke about the American situation and where America goes from here. He has a stark analysis of his country's situation.
You will not find a more succinct and insightful analysis of the current economic situation in 12 minutes anywhere. Click here to see the interview, and I highly encourage you to watch the full clip before it cycles off BNN's archive list.
You will have no doubt, after watching this, about the direction that the economy will ultimately follow.
A couple of quickly transcribed excerpts:
"It's just a further confirmation that we have a total paralysis/stalemate in our fiscal governance process, the whole process is in denial... What is actually happening is that Washington will be ADDING $350 Billion to next year's deficit (instead of cutting). They will extend the Bush tax cuts, they are going to extend the so called external tax patch - that's $60 Billion - they're going to extend a lot of the tax credits - that's 10's of Billions of dollars - what's more they're going to extend unemployment insurance for another year - that's another $60 Billion... and it gets worse from there.
We're really rolling the dice thinking that somehow we can borrow another $5-6 Trillion - that's really what's baked in the cake - and that somebody's going to buy all these bonds. The fact is the only buyer on margin all of these bonds, hundreds of billions a month, is the Federal Reserve, in this so-called QE2. But it's just out and out money printing, monetization, and when they stop I think there is going to be a real day of reckoning in the global bond and currency markets because there is no indication anyone in Washington recognizes the gravity of the situation."
Stockman goes on the suggest both the Democrats and Republicans are completely unable to grapple with the breadth and depth of cuts that are needed combined with the massive amount of taxes that have to be increased. As a result America is...
"... drifting towards the wall waiting for the bond market system to wake up and take action. I don't know when that is going to happen, it may be in the next months, it may be in the next years, it may take longer but sooner or later there is going to be a day of reckoning."
Stockman then discounts those who believe the Reagan era of 'trickle down economics' is a solution to the current problem.
"I think the Fed went off the deep end in the 90s and especially in the last 4 or 5 years with very easy monetary policy of low, low interest rates that were inappropriate and encouraged businesses and the household sector to massively leverage up, that led to the crisis in 2008 and we're still only begining to dig our way out of that... We're going to have a significant day of reckoning here, there is no recovery."
The most chilling part is Stockman's assertion that the bond market is going to force America's hand before long.
As I said yesterday, this is EXACTLY the fear expressed by former US Federal Reserve Chairman Alan Greenspan.
We are seeing the effects of what happens when the bond market does this. Just look at Ireland, Iceland, Spain, Portugal and Greece.
Are you ready for double digit interest rates yet? They're coming.
Of course naysayers will simply dismiss this as yet another post from a disgruntled bear blogger fearmongering about interest rates.
In the December issue of its Financial System Review, the Bank of Canada warned Thursday that the risk of another global economic shock is rising and Canadians may not be prepared for it.
And in a veiled hint that the Bank of Canada won't shield Canadians they way they did after the 2008 crisis, the Bank said "Canadians won't be spared another shock because during the current period of tough economic times, they have continued to take on debt."
How can that be, Mr. Carney? How could be possibly suffer? I mean... you will slash interest rates to dirt so the impact won't be felt, right?
Apparently not.
"Developments since (June) suggest that the vulnerability of the Canadian household sector has increased."
"The probability of an adverse labour market shock materializing is judged to have edged higher in recent months, owing to the downward revision... to the outlook for the global and Canadian economies."
Sal Guatieri, senior economist with BMO Capital Markets, said in a commentary the review suggests the bank won't resume increasing rates until the global economy picks up and Europe's credit crisis ebbs.
"However the bank is also cognizant of the risk to household finances (and the economy) of keeping rates too low for too long. This suggests it has every intention of guiding rates back toward more normal levels at the earliest opportunity, which in our view, is likely in May."
Hiking interest rates come May? Is this why Carney issues another direct warning to Canadians by saying:
“Households bear ultimate responsibility for ensuring that they will be able to service that debt in the future.”
Umm... why do you say that Mark? Are you getting ready to hand us debt serfs out to dry?
What about our 'sound Canadian banks', if I can't pay my debts, won't that hurt them?
Well it seems the BOC goes to great lengths to warn that the potential for harm to our 'sound banks' this time around might be severe.
Carney suggests that high household debt this time around is going to get kicked by high interest rates. This will affect Canada's banks 'as borrowers lose their ability to make debt payments.'
Now why would Carney hike interest rates this time around when he didn't in the last crisis?
The source of the problems all stem from from other countries, the bank said.
(Ahhh... time to start connecting the dots... see Stockman's comments above re: bond vigilantes wrath being unleashed on the United States)
The BOC forsee's the very real possiblity of a global trade war. It also foresee's the looming threat of much higher interest rates.
Carney see's them coming. He's warned you time after time and given you almost a year's advance warning.
The good news?
Re/Max was far more effective in manipulating the P/R machine two days ago and got far more coverage in the press to convinced you that Real Estate everywhere in Canada can only go up, up up (at least 10% next year) and that interest rates are going to stay low for a while.
Thus, if you are smart, it should be easy to dump your massively leveraged real estate on some simpleton or wealthy Asian and prepare for what's coming.
Jarislowsky offered his thoughts on the next lurking financial disaster.
"In Canada the hardship still lies ahead. Our houses are still 20 to 30 per cent above normal levels, salaries are shrinking and a lot of Canadians are heavily indebted. There’s a lurking disaster, to the extent that you have reduction of purchasing power and we are just not saving hardly anything as a nation. That’s pretty bearish. I think things are going to get a hell of a lot worse. We still have a trade deficit today despite the fact that commodity prices are incredibly high. I hope I’m wrong but I think Canada is on the edge of a lot of trouble."
What drivel, eh?
You can either connect the dots or you can dismiss Stockman, Carney and Jarislowsky et al as wanker renters who live in their parents basements while hiding behind their computers to dump on real estate investors.
If you do dismiss them, tho, don't say you weren't warned.
For the past few weeks the blogosphere has been debating the 'real' purpose of QE2.
The underlying sentiment? That QE2 has nothing to do with stimulating the economy but is, in fact, a covert way for the US Federal Reserve to monetize the debt.
Of course... that line of thinking is just wack-o, tin foil hat wearing, blathering... right?
Well last night a stunning bit of information hit the blogosphere.
Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, posted a stunning commentary on it's website.
Titled Recent Decisions of the Federal Open Market Committee: A Bridge to Fiscal Sanity?, the Dallas Fed has publicly admitted that "The math of this new exercise is readily transparent: The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt."
This is a stunning admission.
Selected passages from Fisher's statement:
As is our tradition, I can only account for and speak for myself and the Dallas Fed, not for anybody else or any other Bank or for the Federal Reserve’s Board of Governors. Today, I will provide a précis of the analysis of the nation’s economic predicament I presented to the FOMC last week on behalf of the Dallas Fed, summarize the arguments I made with regard to the course of monetary policy, and then provide a personal perspective on the decision made by the committee as a whole.
In his speech in Jackson Hole, Wyo., in August, Chairman Bernanke had asked all of us to consider the costs and the benefits of further accommodation. My response was that I was skeptical about many of the presumed benefits of further asset purchases. I was more certain of some of the potential costs.
One cost is the risk of being perceived as embarking on the slippery slope of debt monetization. We know that once a central bank is perceived as targeting government debt yields at a time of persistent budget deficits, concern about debt monetization quickly arises.
also worry about the risk of our being perceived as using quantitative easing and buying copious amounts of financial assets above and beyond the ordinary bounds of the Federal Reserve’s System Open Market Account as “the new normal” for implementing monetary policy. Everything we know from monetary history tells us that in times of crisis, we should open the floodgates—this has been the practice of central bankers since the 19th century. This is what monetary theorists might call Bagehot 101, after the British patron saint of central banking, Walter Bagehot. We did it in 2008 and it worked to pull us from the maw of financial panic and economic ruin. But it did not seem to me last week to be a time of panic or crisis. I suggested that were we to act by throwing more money at the economy under these more benign circumstances, the markets might come to expect more, that quantitative easing could become like kudzu for market operators—expectations of continued Federal Reserve purchases of Treasury securities as normal operating procedure might grow and grow and be terribly difficult to trim once they take root in the minds of market operators.
I might understand the case for accommodation if serious deflation were a clear and present danger. As I pointed out by citing the trimmed mean and through my anecdotal reports, it is not. I would add for this audience here today that this is thanks to Ben Bernanke’s adroit leadership in engineering the liquidity measures implemented during the Panic of 2008-09 and by avoiding the policy errors of the 1930s. Because of what we did in staring down panic and its aftermath, neither M2 money growth nor inflation has fallen off the cliff.[2] And while nominal growth is less than desired and is very painful, nominal income is growing, however incrementally, not shrinking.
Then there is the issue of exit policy. The more we engage in a policy of asset purchases that moves us further out the yield curve—and the more we laden our balance sheet with price-sensitive assets—the greater the likelihood of realizing a loss on our holdings.
In sum, I asked that the FOMC consider that we might be prescribing the wrong medicine for the ailment from which our economy is suffering. Liquidity and abundant money are not the binding constraints on the economic activity we wish to see. The binding constraints are uncertainty about income and future aggregate demand, the disincentives fiscal and regulatory policy impose on ridding decisionmakers of that uncertainty, and the reluctance, given those disincentives, of those who have the power to create jobs for our people to invest in undertakings that would create them.
The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed. I could not state with conviction that purchasing another several hundred billion dollars of Treasuries—on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities—would lead to job creation and final-demand-spurring behavior. But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed.
My perspective, as with those of all other members of the FOMC, was given a thoughtful and fair hearing at the table. After deliberation, the majority of the committee concluded that under current and foreseeable conditions, the better approach was to purchase $600 billion in Treasuries between now and the end of the second quarter of next year, on top of the amount projected to replace the paydown in mortgage backed-securities. The math of this new exercise is readily transparent: The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt.
As I said, a stunning admission.
One of the presidents of America's Federal Reserve Banks has just admitted that the United States Federal Reserve has set about to monetize next year's entire issuance of debt.
I will be stunned if the immediate response is not a gigantic spike in precious metals later today.
I have a feeling today is going to be one of those 'bookmark' days in history.
Do you smell that? Do you smell that?... QE2 son... Nothing else in the world smells like that. I love the smell of QE2 in the morning... The smell... you know, that gasoline smell... the whole economy. It smelled like... victory. Some day this recession is gonna end...
“The Federal Reserve is now a government within a government. It is totally out of control. Congress doesn't control it. It's funded by the banks and we either have constitutional government or we don't."
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