Another Mint Classic which unfortunately (or fortunately if you are short the major indices) is current again. Enjoy:
12/1/2010 Portland, Oregon – Pop in your mints…
Writing is such sweet sorrow. Sweet because there is no lack of things to write about. Sorrow because the financial authorities have made such a mess of things that there is no lack of things to write about, grand errors to expose again and again until we get it. The economy has been on adrenaline for almost 100 years and increasingly dangerous doses for the past 40. The crash will be grand and we must understand what is going on. If nothing else so that future generations can learn from the mistakes.
Back from the big picture to the problems of the moment. When will it end? We know more or less how, so we must look daily for the time to approach. Is it on the horizon? Your guess is as good as ours so we will consider what we know. Just when you thought it was clear sailing ahead for stocks and bonds, another wrench is thrown into the works. We have been focusing here at The Mint on the upcoming fireworks in the Bond Markets. Not that we know exactly how or when the market will collapse, we only know that its collapse, in some way, shape, or form, is imminent. Two of a myriad of reasons came into focus for us today which we will now attempt to pass along.
The first and obvious problem comes in the form of collateral backing the bonds that are currently being issued. The second and more important problem is that most bonds today lack a viable repayment plan to pay off the bonds. We define a “viable” repayment plan here at The Mint as one where the borrower pays back what is due with the future fruit of their labors, commonly known as income. The problem is that in recent bond issues, these two key ingredients, some would even go so far as to call them indispensable as a condition for lending money, have been a in short supply.
Take the question of collateral. There may be assets that were worth a certain amount in 2006, or even 2008, that you can take as your own if you don’t get paid back on a bond. The problem is that we are approaching the end of 2010. No matter how you look at it, collateral values just aren’t what they used to be. Lenders are increasingly demanding cash as collateral. Why? The simple answer is there is no strong demand for the collateral at present. In many cases, the world is working through a surplus of finished goods and finding that there is a shortage of primary goods (commodities). Most collateral is in the form of finished goods. This is a long trend that could take 10 to 20 years to correct.
Then move on to repayment. Repayment plans nowadays generally involve either refinancing the debt when it matures or selling the asset to satisfy the debt. The latter bears the problem of collateral described above. The former depends on similar or more favorable terms in future Bond market conditions. And now a third way of repaying a debt has been all the rage for the past two years. Print money to pay for it!
Sound ridiculous? The repayment plan for the US Government, traditionally the most creditworthy borrower in the debt markets, is literally to print money to pay the debts. Brilliant. The pop in this Bond bubble will blow a torpedo in the side of the current currency regime, which is based on debt. There is no question that the currency regime will stop at nothing to save the Bond markets, an impossible task. So we are about to witness an epic event. The collapse of the Bond market and currency regime will be the equivalent of a financial supernova.
No collateral, no repayment plan, why write a Bond now? It appears a downtrend has begun anew in US 30 yr notes and we also read that bond fund inflows have apparently peaked.
To top it off, today we read a reminder from Richard Russell of the Dow Theory Letters sees a “hard rain ‘comin” in the equity markets and is renewing his call to abandon ship. What does the stock market see? It sees an economy that was built on an unsustainable currency system dependent upon ever expanding debt quickly approaching collapse. Hollywood cannot do justice to the events that the collapse of the most sophisticated and complex global economy to date will bring about. The disconnects between supply and demand will be tremendous.
Gold is the first to see these things on the horizon but stocks are catching on. Once the governments and central banks credit is shot by all of this money printing, the Bond Market will suck money in from stocks like Mega Maid sucking the air from planet Druidia in the movie Spaceballs.
Hold on to your gold, silver, and anything real cause it is going to be a wild ride!
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