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IMF Warns of Liquidity Crises
In another ironic turn of events the IMF, who promoted the likes of the US, Japan and ECB to implement and continue with QE and low interest rates, is now warning of serious risks to financial markets because of the resulting leverage (debt) and lack of liquidity in global markets. Indeed the levels of borrowing and financial engineering now are similar to or in excess of that seen before the last 2 financial crises. Published in their Global Financial Stability Report they had this to say:
"Margin debt as a percentage of market capitalisation remains higher than it was during the late-1990s stock market bubble. The increasing use of margin debt is occurring in an environment of declining liquidity,"
"Lower market liquidity and higher market leverage in the US system increase the risk of minor shocks being propagated and amplified into sharp price corrections,"
And it's not just investors, corporations are borrowing more than ever and two thirds are "covenant light" loans similar to those sub prime property loans that triggered the GFC. The graph below shows that the ratio of non-financial corporate debt to asset value has reached 27%, higher than just before the GFC.
Whilst many are enjoying the lower oil price, they warned that distress in the global oil industry could be the trigger for the next crises. Lending to the oil and gas industry reached $450b last year, double the pre GFC peak and new bond issuance graded at `junk' level is nearly 3 times higher at 45pc. The total debt outstanding is now $3 trillion.
Many believe a run on the US dollar like we are seeing now is a sign of an imminent liquidity crisis.
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"Lower market liquidity and higher market leverage in the US system increase the risk of minor shocks being propagated and amplified into sharp price corrections,"
Click to expand...
This is the big risk in today's complex, highly interconnected markets. Positive feedback will amplify any move.
 
A liquidity crisis can easily be solved... just 'print' a metric buttload of virtual digital currency.
SO why the 'shortage of currency?... because there ain't enough $ to back-up the underlying debts
ergo, we don't have a liquidity crisis, we have a SOLVENCY CRISIS

Money Printing will only kill the faith in currency and currency is a useful tool if used correctly. The bad debts and bad lenders need to be cut loose. Cut them loose to save the economy. Otherwise they'll poison us all.

We need to stop calling money printing "QE", that's just a smoke screen that we give voracity to everytime we use it. Start saying 'money printing' and even the man on the street will recognise it as cheating.
 
BofA Merrill Lynch have just released a report revealing that 53% of all global government bonds are yielding just 1% or less. This frightening statistic comes in the same week we have the IMF warning of an impending liquidity crisis (born of an illusion of never ending liquidity) and both the ECB and Bundesbank heads stating that extended low interest rates increase financial stability risks! BofA went on to report that central bank assets (bond etc bought to print money) now exceed $22 trillion the equivalent of the GDP of the largest (US) and third largest (Japan) economies in the world combined.

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To make this even more scary we now in Europe have the situation where a third of all sovereign bonds carry NEGATIVE yields. Yep you have to pay the bank to keep your money As you can see below, Germany is now up to 7 years yielding negative returns!

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If any part of this seems real and sustainable, and can't lead to financial market bubbles then maybe consider the chart below of the S&P500 as but one example

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Chinese Gold and SDR's

Yesterday Bloomberg reported the following:

"China's push to challenge U.S. dominance in global trade and finance may involve gold a lot of gold.

'While the metal is no longer used to back paper money, it remains a big chunk of central bank reserves in the U.S. and Europe. China became the world's second-largest economy in 2010 and has stepped up efforts to make the yuan a viable competitor to the dollar. That's led to speculation the government has stockpiled gold as part of a plan to diversify $3.7 trillion in foreign-exchange reserves.

'China may be preparing to update its disclosed holdings because policy makers are pressing to add the yuan to the International Monetary Fund's currency basket, known as the Special Drawing Right [SDR], which includes the dollar, euro, yen and British pound. The tally may come before the IMF's meetings on the SDR next month or in October, Nomura Holdings Inc. said in an April 8 report."

There can be no doubting the rapacious appetite for gold by China of late, 2013 and 2014 were all time records and we report on 2015 often. But no one knows how much is going to their central bank who only last told the market of a relatively measly 1,054t back in 2009. "Calculated" estimates of 5,000 to 10,000 tonne abound but no one really knows. One thing you could feel reasonably comfortable asserting is it will be a lot and when revealed it will shake the market as it will quickly raise the question of 'where did it come from?'. Many postulate western vaults

You will have seen markets rally yesterday on the news that China lowered its reserve requirement ratio to free up capital and stimulate growth. We posted a must read article today on where all this loose stimulatory monetary engineering is potentially taking us. China may well be ahead of the game.
 
Greek "collateral" damage
Yesterday we posted Bill Holter's "Mother of all Margin Calls" article. It describes the ramifications of changes to collateral needs in a highly leveraged, debt laden world. Now consider we are on the 'eve' of yet another Greece debt repayment deadline. But this time it seems more serious, much more serious. The IMF have very publicly and firmly said they won't allow an extension as they haven't in 30 years. Greece in pilfering local government accounts this week etc are clearly demonstrating they are indeed broke and simply may not have the choice but to default. Both sides are saying a Grexit would be bad but possible. And maybe in our modern world more tellingly, bookies have stopped taking bets on a Grexit as it seems almost certain.
So what does this have to do with that article? Well it is real banks who hold a lot of this debt and it is so called Tier One capital/asset. The writedown of such debt requires an increase in collateral to meet covenants. Greece may not be that big but this is a very very strung out system. Of course the saviour in such a situation may be the ECB using QE to bail out those banks you know, with more debt Our point is none of this is sustainable and it is all starting to feel very much like the final throes. We will leave you with this quote from the last Hoisington Management Quarterly Review:
"Over the more than two thousand years of economic history, a clear record emerges regarding the relationship between the level of indebtedness of a nation and its resultant pace of economic activity. The once flourishing and powerful Mesopotamian, Roman and Bourbon dynasties, as well as the British empire, ultimately lost their great economic vigour due to the inability to prosper under crushing debt levels."
The other economic constant over two thousand years is gold and silver's roles as money, stores of real wealth, safe havens in the ensuing debt fuelled collapses
 
Gold Standard & Bubbles
This week we have seen the IMF join the chorus of warnings from billionaires, financial analysts to other world authorities such as the BIS (Bank for International Settlements which we reported HERE) about the dangers of the financial market bubbles caused by all this money printing and low rate stimulus. We've also seen evidence this week of how the 'bandaids' of derivatives dressed up as collateral are escalating wildly. The GFC was a crisis born of these very same debt derivatives nearly breaking the system and what have we done to fix it? Add more debt through stimulus. You see you can do that when you don't have the forced discipline of a gold standard. When we left that gold standard in 1971 governments around the world all of a sudden could create Fiat currency out of thin air to run continual deficits and get re-elected and Wall Street could come up with more ways to financially engineer leverage into markets. This creates financial bubbles, and bubbles always go pop because they are unsustainable. The graph below tells the story very clearly. Just check out what happens when you leave a gold standard..

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So whilst we don't have a gold standard anymore we still have access to gold. Gold is the world's oldest and most dependable store of wealth. That is why governments of the past used it to back currency and that is why central banks around the world are buying more and more of it (471t just last year) for reserves. If you look at the 5 worst sharemarket corrections we've had in the last 50 years, shares have lost on average 24% and gold gained 38% in each of those years. Gold is your hedge against the bubbles going pop and gold is your store of wealth when currency is created on more debt.
 
Weak to strong in 2 graphs
Long time readers will be all too familiar with our weak (speculative Western 'paper gold' investors) to strong (long term Eastern strategic holders of physical gold) narrative of what has occurred over the last few years. In 2013, the year of the biggest price rout in 30 years, we saw over 900t of gold leave London's vaults for Eastern consumers, a lot of that via Swiss refiners turning the big 400oz LBMA bars into the East's preferred 1kg bars. ETF's and Futures prices crashed the market and the East just hoovered it all up and have not stopped since. According to Swiss Federal Customs in March 2015, gold exports to China almost doubled (at 46t but in reality 76t when you add that via Hong Kong), the most since data started, and India also more than doubled to 72.5t whilst imports into Switzerland climbed sixfold. The Swiss refineries are the world's biggest and are a good barometer of movement. London is where most ETF's and Futures holdings are kept. The graphs below tell the story and again we must include the cartoon that sums it up. The West are buying in to over inflated shares and bonds, whilst the East see this for the Ponzi Scheme it is and are buying the world's safest hard asset.

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2011 Silver Crash 4th birthday!
This week is one many longer term silver investors may not forget. This week 4 years ago saw silver reach an all time high of US$48 (A$44). It is also the same week 4 years ago that saw silver crash to US$35 (A$33)$13 in 3 days. Awful stuff. But before we get the Kleenex out we should remind ourselves that this is the same silver price that started at around US$5 (A$6) at the start of the bull run from early 2000's. For those who bought close to this peak though it is still painful but also demonstrates a good lesson in human behaviour. We people (some may say sheeple) tend to pile in when things are going great. Just look at the sharemarket at present. Global growth is sick, nearly all 'overbought' metrics are screaming, yet shares are on the up. On the other hand check out the graph below which shows all silver bear markets since it was open traded in the 60's. Note the following:
If you look closely, the 1987/93 bear run actually saw its low in 1991 which makes this current market (at 4 years) the longest USD bear run on record
At 68% down from its April/May 2011 high this is the 2nd worst downtrend on record.
Our Aussie dollar has shielded us from a bit of that 68% USD drop but we are still 52% down. We also arguably may have seen the bottom last November (A$17.91) as we are now up 16% on that low.
Why is this good news? Well for those who like buying low and selling high, for those contrarian investors, and for those employing Rothschild's (a bloke who did 'alright' financially) infamous quote of "The time to buy is when there's blood in the streets." this graph may be screaming at you right now. For those who bought in early 2011, just remember any investment in precious metals should be a long term one. At 4 years in, and the rule of thumb of financial planning for a 7-10 year timeline, you have plenty of time to see your investment flourish still And in Aussie dollar terms, the low may well be behind us already and you may take comfort in that, knowing it is only early days on the other side. Throw in a gold:silver ratio over 60% above its modern mean, pricing less than primary production costs, strong demand, and global financial markets strung out far in excess of that prior to the GFC and it looks like the buy of the century

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Decoupling from reality
Last night we posted an excellent article from Time Magazine on a topic we speak of often. It also explains in part the phenomenon playing out right now on the US stock market, and one Bank of America Merrill Lynch described as a "big decoupling in recent weeks between U.S. equity flows and prices". In short we are seeing an exodus of investors from the US sharemarket yet prices still rising to new highs. This exodus, no less than $79b just this year, is at the greatest rate since 2009 and BoFA ML are warning of a correction soon unless new funds start coming in. The graph below says it all. On no level is this sustainable or real and it makes talk of US Fed tightening seem almost farcical. Earlier this week we also learned China is about to start its own Quantitative Easing type bond buying (money printing) program to inject liquidity to stimulate its sharemarket amid falling corporate profits and shore up its $2.6t local government debt problem. So like the prices in the graph below, Shanghai shares have risen 40% this year despite a property slump and, per their National Bureau of Statistics "The operational situation of industrial enterprises remains grave". If you know this is sustainable you should invest everything in shares. If you don't know or actually think it will end badly then you should diversify into proven safe haven investments that generally go up when financial markets crash. Hint in the GFC shares halved and gold doubled.

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Gold sentiment v profit improving
Here's a graph you don't see every day. Bron Suchecki heads up research at Perth Mint and put together the following plot of sentiment versus profitability. For each month over the past 10 years the map plots a point for the percentage return on gold (over the prior 6months) and the percentage change in ounces held (over the prior 6 months), the latter to replicate sentiment (i.e. people are sellers when they loath and buyers when they like). The monthly plot points are then joined into a line for each year. He then places an arrow on December of each year to give an indication ofthe direction of movement over time. You will note it appears to indicate we are heading out of what he calls the "sad corner" into the "happy corner". This graph only tells part of the story as he has used the USD spot price not AUD which, even after the pummelling last week, is still up 4% (and 7.7% for silver) year to date, so Aussies may already be in the "happy corner". But regardless, and as we reported last week on silver, we are still relatively in the lows or at best formative stages of a turn in the market. For anyone who likes to buy low and sell high, and this graph (together with any sharemarket or property equivalent right now) reinforces the 'sheeple' nature of humans to do the opposite, now is certainly looking like a good entry point to start, or for existing holders, to average in.

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What a graph.
It took 7 yrs to go from 2006 (grey = profit & like) to 2013 (yellow = loss & loathed)
Hence the last 3 yrs have been an excellent time to accumulate (loathed & loss stage)
Based on that 7 yr cycle, two years have passed (burgandy & red, leaving another 5 yrs to get to the top right hand corner of the graph which is where we want to be -- at the tip of the grey)
5 yrs is not that long to see our stacks hopefully worth a fortune (at the very least, a lot more than its worth today)
Patience is the name of the game.
Happy stacking
 
Backwardation in gold and silver
We've written about gold and silver having been in and out of backwardation over the last couple of years but it is a concept hard for some to grasp. Bill Holter, as he often does, gives us a simple to understand explanation

"As a question to set the foundation, I ask you this; if you could sell something today for $100 and be contractually guaranteed to beABLEto buy it back 30 days later at $99, would you do it? I hope your answer is not only yes, but you return with "how many times can I do this, it's free money?!". In the real world, this is called arbitrage. Rarely does the condition ever exist on a single exchange, normally when it does exist it happens over two or more exchanges and even time zones. The discrepancy can be miniscule as billions of dollars scan the globe 24 hours a day looking for this situation and lock the profit in until there is no more to be had. Arbitrage is a big business and for the most part,RISK FREE. The condition described above is called "backwardation", the remedy isALWAYSarbitrage.

Please notice I bold [capitalised] printed three words, "able, risk-free, and always". Starting with the first word "able", if we changed that word to either possibly or cannot, the whole equation changes as the trade is no longer risk free and will not ever be done without risk assessment. As I understand it, physical gold is in backwardation in London and silver in Asia. Why has not big money stepped in and arbitraged the "guaranteed" profits out of these markets?

The answer of course is that the profit is not guaranteed. The reason backwardation is persistent is because the fear of not being able to get your metal back 30 days into the future. It is being deemed by the market that gold today (a bird in the hand thing) is more valuable than a "promise" to get it back in 30 days ...because promises are made to be broken! The fear obviously exists of a failure to deliver in the future, there can be NO other explanation why physical gold in hand is more expensive than gold 30 days in the future."
 
Early signs of inflation

Yesterday we saw our RBA cut the interest rate to its lowest level on record as it tries to stimulate growth in our economy, inflation back to their desired levels, and keep us competitive in the spiralling global currency war. One chart (below) just released by Deutsche Bank is indicating however that the 'smart money' is pouring into US inflation funds at a greater rate than any time since the before the GFC. At home we've just seen 13 institutional investors buy over $200m of inflation linked bonds with negative yields essentially on the bet we will see further cuts to below inflation. So what does this mean for gold? Well for a start it is another symptom of a system stretched in desperation to avoid a crash, a crash that would see a flight to the safe haven of gold. Secondly these ultra low interest rates mean the 'cost' of owning a non-yielding asset like gold are minor, especially in comparison to taxed interest on cash deposits. But also these are early signs of a potential return to inflation, and gold loves inflation. Very early days, but a trend to keep an eye on.

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Growing Silver Demand
A key differentiator for silver it's dual price drivers. We are all familiar with its monetary or investment use in the same vein as gold but around a third of mine supply is used in industry, and growing industries at that like solar power, batteries, electronics and medical.
The table below shows that in its key industrial sectors silver demand is forecast to increase by 76 million ounces (2,100 t) per year. Combine this with our earlier news posts on the declining or stagnant supply of silver and it makes for a compelling investment case. If supply growth was stagnant until 2018 we would see that third jump to 40% for industrial use leaving just 60% for jewellery and investment. The investment equation gets even more compelling when combined with the sleeping giant of JP Morgan's market corner, what looks to be another near record year for US Silver Eagles, and the growing threat of a financial markets crash and the ensuing rush to save haven precious metals.

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US NFP bad news is good newsagain
It's that time of the month again when we review the all important US non farm payrolls jobs report the bellwether for the US economy. Headline - 223K new jobs (just below expectations of 228K) and unemployment down to 5.4% (from 5.5%). Reading the headlines you could be excused for thinking there were 2 sets of readings Wall Street mainstream press minions scream 'everything is awesome' and say very definitely, surely, probably this means an interest rate rise in September (as now conveniently too close to June). Others seemed to have looked behind the headline and saw that March was revised down even lower to just 85,000, its weakest since June 2012. This was accompanied by very weak average hourly earnings, up just 0.1% and March revised down also to 0.2%. And whilst the unemployment rate dropped, you can look no further to a yet again higher (highest % since 1977) number of Americans NOT even participating in the labour force at 93.194 million. Easiest way to improve your unemployment rate is not counting those who have given up And don't blame all those rich retiring baby boomers. They were the bulk of new jobs! In fact the vast majority of the 223K new jobs were part time and to over 54's you know, real nation building stuff... There are actually 4m fewer 25-54 aged workers now than just before the GFC. So not surprisingly Wall Street surged on this bad news (especially combined with a raft of poor economic data last week listen here for a summary - https://www.ainsliebullion.com.au/g...ay-ainslie-radio/tabid/88/a/924/default.aspx) as it means rates will stay near zero, the free money game continues, and the bubble is blown up just that little bit more Are you ready for the pop?
 
Another blow to recovery story
Yesterday we discussed Friday's US payrolls and last week Durable Goods Orders as key signs of the supposed Messiah of a global financial recovery, the USA, losing serious steam. In the Weekly Wrap on Friday we discussed the blow out in the US trade deficit which could well turn their already anaemic 0.2% Q1 GDP negative on its revision at the end of the month. One of the key points of the NFP payrolls data was the near, and persistently near zero (0.1%) wage growth. When combining this with the spate of poor retail numbers it should come as little surprise then that wholesale sales are plunging. The graph below puts this starkly into context against what happened before and during the GFC. This will all just likely mean more stimulus and higher share prices and by all means play that game, 'don't fight the Fed' as they say, but logic dictates this is unsustainable and you need a hedge in your portfolio to protect you for what is shaping up to be the biggest crash of our lifetimes.

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Yup, + Janet Yellen admitted that equity markets are too high.
They'll take her out to the woodshed if she keeps speaking the truth like that!
 
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