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437: US shock in 2013 - meltdown

07-18-2012 team

US Bond Bubble: The US bond market bubble continues to increase in size. Treasury yields slid to a record 0.577% low 15 July. The bubble will pop soon – releasing a wall of money that will lead to rampant inflation – all the warning signs are there.

Printing Money- QE3: The Fed printed $2.3 Trillion of money to buy back bonds – inject gigantic amounts of money into the banking system in the USA. Meanwhile the US bond market is about $75 Trillion in size – including derivatives. That’s $1 mln worth per US family of four people. When investors sell these bonds – this money will be released and before and during the ensuing dollar crash, everyone will want to spend it on assets, goods and services. Offload their dollars for assets. This will ultimately lead to massive inflation. It’s an accident waiting to happen, it’s just that no-one seems to realise or want to talk about it. Almost no-one can seem to see this risk. They seem to think everything will continue on like it did before, just as they did before the dotcom bubble popped in 2000, the US real estate bubble popped in 2007 and the stock market popped in 2008.

Panic: Once panic sets in, and the government can no longer print money – they will have to jack up interest rates to prevent a massive run on the dollar – then economic collapse will occur as no-one will be able to afford to pay the revised up interest rates. It’s now getting very close to the time when this bond market bubble pops and it will have very serious – dire – consequences. What we mean is that the yields will rapidly reverse and interest rates will sky-rocket in relative terms.

Big Bubble: The US bond market bubble is bigger and more dangerous than both the dotcom bubble and the US real estate bubble. The yields are so ridiculously low it defies comprehension – it really “must” be a bubble if one looks at risk objectively. This is the bubble no-one wants to talk about. This is the clearest bubble since the US real estate prices doubled in 4 years. This debt bond bubble has taken 32 years to form – since 1981 – and it’s about to pop.

Shock: It only needs one last shock or loss of confidence in the US economy to cause flight and panic to set in. We think the most likely time for this is some time just after the US Election Nov 2012 – likely sometime 2013. It just needs a few failed bond auctions, weakening of the US dollar and possible war with Iran or a downgrade of the US by Fitch or S&P to trigger this bubble to pop quickly and interest rates to go skywards. It will happen quickly, just like it did for Greek and Spanish rates.  

Flight To Gold: At this time, there will be a flight to the only thing that retains value over time – gold and silver. There are no alternatives left because everyone is printing money. Even the Swiss Franc is linked to the Euro. Oil prices will rise in dollar terms and the global economy by then will be hammered into recession. It’s been five years since the last one – another one is due. Trillions of dollars of fiat printed money did not work – it created an illusion of growth without any fundamental underlying growth. Tax revenues have dropped and debts have risen with savers being destroyed by inflation with governments manipulating inflation numbers to make things seem less bad than they actually are. The Fed says inflation is 1.5%, but its really more like 6% - just ask any shoppers in the US. The drought in the US will start feeding through to prices. Gas prices have risen 70% in the last 4 months because of the scorching weather and switch from coal to gas. These prices will start feeding through as well by year end. Once the Fed finally loses control, panic and fear will lead to gold skyrocketing.

The Bond Bubble: Let’s analyze the bond bubble. As nations around the world have struggled with rising commodities prices and inflation – and the aftermath of the financial crash of 2008, there has been a flight in the last few years to safety. The perceived safe haven has been the dollar, particularly as Europe has struggled with austerity, high debt levels and recession in southern Euro nations. The Arab Spring also shook out a lot of cash from the wealthy elite that that found its way into the dollar as a safe haven. But this is not based on wisdom. It’s based on old beliefs about the US economic empire and military might. Investors have this mindset that what has happened in the last 50-70 years will continue moving forwards. But this time it’s very different. There have been a series of bubbles that have burst only to be re-inflated in other directions – to create an even bigger problem and bigger bubble.

Dot-Com: First of all we have the dot-com bubble that went pop in 2000. A period of adjustment took place, but 9/11 in 2001 created panic and the Fed knee-jerked and jacked down interest rates to prevent a recession. New York property prices sky-rocketed – this spread across the nation.

Real Estate: This cheap money fuelled a spectacular real estate bubble that went pop when oil prices also skyrocketed – oil supply could not keep pace with demand just before the China Olympics. Rather than let the market take care of itself – letting the weaker banks fail and the strong banks taking over the weaker ones, the US (and UK) governments stepped in and propped up the worst failed banks like AIG, Freddie Mac, Fannie Mae, Citigroup, Bank of America and Northern Rock – they part nationalised them. They rewarded the weak and hammered the strong.

Bond Market: Then they proceeded in printing trillions of dollars to inflate the economy and try and create jobs. This strategy has miserably failed. Even after printing $2.3 Trillion – unemployment is still at 8% in the USA – or more like 15% when you add all the people on food stamps and benefits. This social experiment has been very costly, destroyed savers and pensioners in the process – and created inefficiencies and zombie banks. But worst still, it has created an illusion of some kind of US recovery when in fact the underlying fundamentals are appalling – and the bond bubble has just got larger and more pronounced because of the Fed’s manipulation of the markets. They have forced down rates by printing money (or creating money out of thin air) to buy their own T-bills. International investors have until now let them get away with this – but this will shortly end we believe.

Massive Deficits and Debts: Lets explain some fundamentals of the USA’s endemic problems that are now too big to solve:

Looks Like A Ponzi Scheme: The only way the Fed can keep this show on the road is to print money to buy its own debt. It’s like a giant Ponzi scheme. It’s only possible because investors seem to accept this practice because there is no better option elsewhere. But when these investors finally find a better home for their money because the dollar starts to crash – then interest rates will skyrocket over 5% and the bond bubble will pop – then a financial and economic meltdown will rapidly start that will create huge unemployment and a further sharp down-leg in US property values.

Smart investors: They know exactly what will happen – they might only account for 5% of investors though – many of them own large quantities of bonds and are ready to sell quickly when the bubble starts to pop – they will be the first ones out. The real action is likely to start early 2013 – still got a short while left. Things will be relatively quiet with the main focus on Europe until just after the US elections when the main US turbulence will start. We expect gold prices to hang around $1600/ounce all year – until early 2013 when they will move sharply higher when the action starts. Expect them to start shifting higher end July though.

Crisis Timing: We’ve been warning of the crisis for a few years now – and all these negative outcomes are coming together just after the US Elections – when everyone wakes up to the fact the US economy is in a dire strait and will plunge into an obvious recession. Expect more rich US people to arrive in London with their dollar cash hoards to buy up West London property – the city has grown by 800,000 in 8 years – 10% - it’s getting very crowded and they sure aren’t UK citizens. The American’s will be joining soon – along with the French, Italians, Spanish, Greeks and Russians.

We hope this article has helped you in your investment insights. The bottom lines is – be very careful investing in bonds, the dollar and the US economy at this time – it won’t look as good for a long time – it’s on a high just before the US election.

Options: The real safe havens are Canada, Norway, London, Switzerland, Singapore and Monaco – possibly Australia – that’s about it. And it certainly isn’t the US dollar and bonds.









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