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Something Very Wicked This Way Comes

Namely: certain & severe crisis when the bond bubble bursts
Wednesday, August 27, 2014, 8:17 PM

Executive Summary

  • How sovereign debt is becoming larger and more mis-priced each year
  • Why corporate borrowing is accelerating, but only being used for non-productive means
  • Junk bonds have never been priced so low (ever), indicating a complete denial of risk
  • Today's record bond prices are supported by near-historic low (i.e. extremely tenuous) levels of volume
  • Why, mathematically, nearly no-one will be able to exit unscathed when this overinflated market rolls over

If you have not yet read Is Part 1: I Blame The Central Banks available free to all readers, please click here to read it first.

Italy: Insanity On Display

Let’s look at one of the sovereign entities that has piled on the debt to staggering levels. In this case: Italy.

This can serve as a template for understanding the rest of the insanity that exists in the global sovereign bond market.

The rules for lending to a nation should be roughly the same as lending to an individual. You’ve got some measure of the country's credit-worthiness that needs to be taken into account, plus an assessment of its income.

After all, the future principal and interest payments have to come from future income. If there’s too much debt compared to income, then there’s an increasing risk that the debt servicing payments not only will not be made, but cannot be made.

Italy’s sovereign debt has been expanding enormously as the government borrows and spends. Its national debt finally cleared more than $2 trillion euros early in 2014:

Italy's public debt hits record 2.1072 trillion euros

Apr 14, 2014

(ANSAmed) - ROME, APRIL 14 - Italy's massive public debt hit a record 2.1072 trillion euros in February, the central bank reported Monday. The amount was up 17.5 billion euros since January, the Bank of Italy said.

The European Commission has criticized Italy's 2014 budget for not doing enough to bring down debt, around 132% of gross domestic product (GDP).

As a result it has put Italy under "specific monitoring" over its "excessive macroeconomic imbalances", which include high debt and poor competitiveness, as part of an in-depth review.

(Source)

Italy raked up significant debt at a far faster rate than its underlying economy was growing, leading to a steadily rising debt-to-GDP ratio as seen in this next chart... » Read more

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The Trouble With Natural Gas

The current 'bonanza' isn't nearly as good as promoted
Monday, August 25, 2014, 8:56 PM

One of the areas where there's an overblown amount of overtly politicized and outrageously propagandized information is shale natural gas (NG).

The US, for obvious geopolitical reasons, would love to supply Europe with NG and cut out Russia. But as we'll soon see, the basic facts just don't back up that desire just yet. » Read more

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Off the Cuff: Housing Insanity

Why should this bubble end any differently than the last?
Thursday, August 21, 2014, 12:54 AM

In this week's Off the Cuff podcast, Chris and Brian Pretti discuss:

  • Housing Bubble 2.0
    • How quickly we forget the errors of our ways...
  • China's Impending Massive Implosion
    • A bubble of historic proportion
  • An Investing Cycle vs A Demand Cycle
    • Things will collapse after the greatest fool buys in
  • Lack Of Good Options
    • Asset bubbles everywhere, not just in housing
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The Rise Of The East

5 billion vs 1 billion
Wednesday, August 20, 2014, 12:05 PM

Executive Summary

  • The West is extremely vulnerable to financial and currency de-stabilisation through precious metals
  • Access to energy supplies will be the real weapon used in the battle over Ukraine (and future geo-political wars)
  • Why sanctions against Russia will not succeed
  • The East is mobilizing to become less dependent on the West

If you have not yet read Is Part 1: Ukraine: A Perspective from Europe available free to all readers, please click here to read it first.

Russia’s strategy towards Ukraine appears to be to ensure NATO is excluded from Ukrainian territory, the irony being that if NATO members hadn’t interfered with Ukrainian politics in the first place the current crisis would not have occurred. As it is, at a minimum she will seek to secure Donetsk and Luhansk and force the Kiev government to drop any ambitions to join the EU economic bloc.

The fact that NATO is divided between on the one side the US and UK plus all its ex-communist members and on the other the great European welfare states, requires there to be two distinct levels of Russian strategy. They must not be confused with each other, one macro and the other micro.

Macro-Geopolitics Linked To Gold

At the higher level there is the geopolitical clash with the US. This is not just a matter of Ukraine, but it is rapidly becoming the Shanghai Cooperation Council versus America. The US is also embroiled in territorial disputes between its allies and China over mineral rights in the South China Sea. The Middle-East now sells more oil to China than the US, and by leaving the US sphere of influence will fall increasingly under the SCO’s spell. Presumably, America has woken up to the threat to its hegemony from the powerful alliance that is the SCO, together with the loss of Pakistan and India into that sphere of influence. It goes further: even Turkey, a long-standing NATO member, plans to defect to the SCO, apparently a personal project of Recep Erdoğan, the recently re-elected Prime Minister.

American-initiated actions against Russia will probably be kept by Russia and the SCO in this big-picture context. It will be treated as an attack against an SCO member, speeding up integration and trade agreements designed to exclude the US dollar as a settlement medium. In this context the SCO members already appear to have agreed on the need to increase gold ownership as an undefined part-solution to replace the US dollar as the currency standard. In other words, the rush to acquire above-ground gold stocks will continue, and China through her refiners is processing and keeping increasing quantities of African-sourced gold as well as her own which would otherwise have gone to the West.

The Russian central bank has been adding to her monetary gold reserves and officially now has more than China (though China is known to have substantial holdings of bullion not currently declared as monetary reserves). All mine output is likely to be absorbed by the State. Russia has continued to build her gold reserves at a time when it could be argued by western analysts that she needs to hold on to all her foreign currency, given the prospect of escalating sanctions. The truth is that... » Read more

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Neil Lockhart | Dreamstime.com

Is A Global Housing Bubble About To Pop?

Warning signs abound from China to the U.K.
Tuesday, August 19, 2014, 12:40 AM

Looking past all of the major events transpiring in Ukraine, Iraq, Ferguson, and other hotspots, there's still plenty of worrisome smoke emanating from the global economic engine compartment.

The most recent installment comes from what appears to be abundant signs of bursting housing bubbles in several major markets. » Read more

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Off the Cuff: The Age Of Limits

Our choice: how hard do we want to slam into them?
Thursday, August 14, 2014, 6:47 PM

In this week's Off the Cuff podcast, Chris and Charles discuss:

  • Limits To Growth
    • Our current system is acting as if they don't exist
  • Financial Chicanery
    • All the smoke & mirrors can't hide the fact it's a zero sum game
  • False Stability
    • The current calm will end when the central banks fail
  • Energy, Energy, Energy
    • In the end, ownership/access to energy is all that matters
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The End of Dollar Dominance?

Loss of reserve currency no longer an idle threat
Monday, August 11, 2014, 7:24 PM

Dollar Daze

One thing that is absolutely crystal clear at this point is that Putin and Russia consider the US and its dollar hegemony to be a parasitic anachronism that no longer serves anybody besides the US.  Putin has made many direct comments to that effect and then followed them up with concrete deals struck in ways that bypass the dollar entirely.

Here's what he said back in 2011, well before any of the recent action started: » Read more

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Anthony Aneese Totah Jr | Dreamstime.com

Off the Cuff: Jittery Markets

Things are looking more & more "toppy"
Thursday, August 7, 2014, 1:18 PM

In this week's Off the Cuff podcast, Chris and Mish discuss:

  • Russian Retaliation
    • Putin announces sanctions against food from the West
  • Jittery Markets
    • Have we seen the top?
  • The Danger In Bonds
    • That's where the real carnage will come
  • The Age Of Bubbles
    • We live in it, though it may be ending
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Prepare For The Bear

The data make a clear case the long Bull run is ending
Wednesday, August 6, 2014, 10:35 AM

Executive Summary

  • The underappreciated impact of the Fed's current tapering
  • Get ready for corporate profits to start rolling over
  • Why record margin debt is such a big danger
  • The myth of de-leveraging
  • Why the data make a clear case the long Bull market is ending

If you have not yet read Is Part 1: Is This Decline The Real Deal? available free to all readers, please click here to read it first.

In Part 1, we looked extremes in valuations, sentiment, leverage and complacency, and how these make the Bull case for further advances in stock prices difficult to make without drawing this time it’s different parallels with previous asset bubble tops.

In this Part 2, we’ll look at how the fundamentals of the Bull case have been weakened or threatened, and determine whether indeed we are witnessing a key moment of direction-reversal in the markets.

The Federal Reserve’s Tapering of Quantitative Easing

Everyone who follows the financial news is aware that the Federal Reserve has tapered its unprecedented Quantitative Easing bond and mortgage buying program from $85 billion a month to $25 billion a month, and has made noises about ending the program entirely by October of this year.

Observers see two primary consequences of the end of QE:

1.  Interest rates, no longer suppressed by Fed bond and mortgage buying, will likely tick higher from historic lows.

2.  The support for stocks and other risk assets provided by QE will end, removing a key prop under stocks.

It’s clear that interest rates—shown here by a commonly used proxy for interest rates, the 10-year Treasury bond yield—have hit bottom, and while they might bounce along the bottom for some time, they don’t have much room to decline even if “risk-off” buying of Treasuries pushes the T-bill yield lower.

In other words, even if Treasury yields fall as investors flee ‘risk-on” assets such as stocks for the safety of Treasuries, this doesn’t necessarily translate into... » Read more

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Meanwhile In Iraq, The Situation Grows More Dangerous

World oil prices & regional stability at high risk now
Monday, August 4, 2014, 7:29 PM

As if there wasn't enough to concentrate on given all that's happening in Ukraine between Russia and the West, and in Gaza between the Israelis and the Palestinians, the situation in Iraq has been taking some decidedly worrisome turns of late.

As ever, we keep our eye on this hot spot because of its special importance to the world supply of oil, any loss of which will rapidly lead to much higher prices. » Read more