From Paul Mylchreest's latest Thunder Road Report
Death march: approaching a new financial system
If you are reading this, you are probably a member of what the sociologists would term middle class (albeit at the upper end). This is precisely the segment of society which is poised to come off worst from what is coming. Here is a very disturbing idea. As this crisis develops, if you are an equity portfolio manager and you want to outperform the market, you are going to have to position your portfolio so that it benefits most from your own wealth destruction and that of your family, friends and colleagues. Almost everybody is going to lose and there aren’t many places to hide. This is deeply unpleasant but you can blame the central planners. I’ve written about my own investing, e.g. gold and silver, equities in terms of Maslow’s Hierarchy of Needs, etc. In this Thunder Road Report (below) and going forward, I will discuss this middle class theme and highlight positions I have in individual stocks, etc. The only good thing that can come out of this is a rise in awareness. It’s just awful.
In government bonds, the natural inflow of funds is approaching the end of the road – although there is probably one more short-lived and “wrong-footing” move downwards in the yield on the 10-year US Treasury. Increasingly, the flow of funds into government bonds is merely a direct reflection of newly created liabilities (debt) on the balance sheets of central banks like the Fed, ECB and Bank of England. Long-term US Treasury bonds are in their highest ever supply and at their highest ever price/lowest ever yield. Just another example of our “upside down” world.
Brief aside: besides (or maybe in conjunction with) inflation/currency devaluation, there is one other way the US could extinguish the Federal debt (US$15.8 trillion dollars when I just checked the real time national debt clock) just like that…gone! Used in isolation, almost nobody would suffer! And some people (probably less than 1%) would gain…and boy would they GAIN! Do you know what I’m talking about? Got any? Don’t know if it’ll happen, but at least it would cheer my wife up. She is still trying to work out how I could have forecast the Great Financial Crisis and made so little money out of it?
“You knew Fannie Mae was bust, you should have made millions.”
At least she didn’t add “you idiot”. She’s nice like that.
Meanwhile the price of the only financial asset with zero counterparty risk in the biggest global debt crisis in history has been “locked down” for months. There is a reason. It must move in volume to where there is an insufficient quantity prior to the denouement of the current financial system. A new system is coming with a bigger role for gold. You see “the man” isn’t stupid, even if some of his acolytes are. He has a plan. But there’s one “person” who could make things difficult for “the man”, so he had to be brought “onside” first.
Dr Kurt Richebacher was the publisher of “The Richebacher Letter” until his death in 2007. Paul Volcker commented that:
“Sometimes I think that the job of central bankers is to prove Kurt Richebächer wrong.”
Ain’t going to happen. Richebacher himself sagely remarked that:
“The only cure for a bubble is to prevent it from developing.”
Well it’s far too late for this financial system. Ten years ago, before the debt bubble became catastrophic, the free market could have resolved this issue. But Greenspan, the “Great Architect”, had to create yet another bubble in real estate and the “point of no return” was left far behind.
Then the helicopter-flying monetary psychopath took over and he is creating the bubble to end all bubbles in MONEY itself.
Cue a great comment from Damon Vrabel in “Harvard Lobotomies And The Disgrace Of The Economics Profession”:
“The truth is that economics has been designed to completely hide the monetary system that hovers above the economy. Economics assumes money is just a medium of exchange floating through the economy to facilitate a free market and generate wealth. At times that has been true, but today it’s probably the biggest lie of modern history.”
Let’s take most people’s current favourite “safe haven”, the mighty United (Socialist) States of America. This is the chart of the debt in the economy (total Credit Market Debt Outstanding) since the current Kondratieff cycle began.
There She Goes - debt in the US economy (US$bn)
Imagine telling people that you’d set up a Ponzi scheme and asked them to invest in it. They’d be very offended that you could take them for being so stupid. But you only need to look out of the window, or in the mirror. Salaries, pensions, mortgages, savings, etc. are all paid in…MONEY. And nearly everybody is “all-in.”
The Euro, or its purchasing power anyway, is clearly finished if they try to keep the system together, but what about the dollar?
The songwriter, Noel Gallagher, formerly of Oasis and now with his High Flying Birds, commented
“There’s only one boy in this country who scares me and that’s Lee Mavers.”
Raoul Pal, of the Global Macro Investor, said in May 2012 that:
“All that is left (to buy) is the Dollar and Gold”
I f-----‘ love reading Raoul Pal’s stuff when I can get hold of it, which is incredibly difficult. He grew up (at least for a few years) near where I did and not far from Lee Mavers. I can’t recommend his work highly enough. I don’t disagree with him on much, but I do disagree with his view on the dollar (although he might be bullish on the dollar just from a trading perspective and he’s been right since May).
The two remaining “sacred cows” preserving the US dollar as the world’s reserve currency are:
- The belief that the Chinese will continue to buy US Treasuries; and
- The US dollar will maintain its monopoly on world trade.
Regarding number one, the Chinese have been sellers since the end of July 2011 (note the date). With regard to number two, have you noticed how China has set up currency swaps with nearly all of its trading partners? Have you noticed how Iran has been excluded from the SWIFT system and has begun selling oil to some countries in currencies other than dollars?
China has been preparing for dollar devaluation for nearly a year now, but hardly anybody has noticed. While everybody frets about the Euro, the dismantling of the US dollar’s reserve currency status is occurring within plain sight. I think a deal was done between the US and China in late Summer or early Autumn of last year. Have you also noticed how Ben Bernanke has used just about every unconventional method of monetary policy he’d discussed in his earlier writings on preventing deflation…bar one big one? Dollar devaluation. Let me repeat that, dollar devaluation.
We are heading into a truly mega-financial crisis. This is (another) classic “I hope I’m wrong, but…” report. I think the crisis is going to result in the transition to a new financial system as the current one implodes. Best guess is that it will be either happening, or perfectly obvious that it’s going to happen, within 6-12 months, i.e. within our investing time horizon.
This report connects a lot of dots and analyses each one of them. The dots include:
Dot - Loss of US AAA credit rating in August 2011
Dot - China lashes out at US “addiction to debt”
Dot - Peak in Chinese holdings of US Treasuries
Dot - China starts selling US Treasuries
Dot - Surge in the gold price in August 2011 followed by steep decline
Dot - Lock down of the gold price (using “paper gold”) ever since
Dot - Movement of large quantities of physical gold from London to Asia (notably China)
Dot - Collapse of MF Global
Dot - Radio silence on China being a currency manipulator
Dot - Exter’s Pyramid playing out in front of our eyes
Dot - Iran excluded from SWIFT system
Dot - BRICS countries signed the Master Agreement on Extending Credit Facility in Local Currency and the Multilateral Letter of Credit Confirmation Facility Agreement
Dot – US granted China a 6-month extension on sanctions for buying Iranian oil (India already had one)
Dot - Revisiting Bernanke’s old speeches on deflation
Dot - Operation Twist
Dot - Comments by World Bank President, Robert Zoellick
Dot – BIS proposal to upgrade gold to a zero risk weighted asset in line with sovereign debt as part of Basel III
Dot - Comments by Robert Rubin (“consigliere” to the elite)
Dot - Recent meeting between Kissinger and Wen Jiabao
Dot - Why debt deflation now would paradoxically precipitate hyper-inflation
Dot – Demise of the middle class (theme)
Dot - Putting all of the above in the context of the fourth (and ongoing) price upwave of the last 1,000 years
Dot - How each of the three earlier price upwaves came to an end.
Full report below: