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When Confidence Leaves The System It Could All Come Apart

Bob Chapman
International Forecaster
October 13, 2011

The investment world hasn’t been too excited about “operation twist.” After its announcement the S&P fell more than 14% and worldwide stocks fell some 23%. Commodities were smashed, and silver fell 28% and gold 12%. During this process short dated yields on Treasuries fell close to zero and maintained, as long-term yields fell. That means granny and grandpa will have less to live on and pensions won’t attain 7.5% return to reach their retirement goals. The result is a Dow yielding 2.8% and S&P 2.2%, while the 10-year T-note yields 1.9%. It is not surprising that fund and money managers are reaching for high yield quality stocks. This they believe will provide yield and safety, while waiting for the next Fed innovation. A situation such as this has not existed for 53 years since I left counter-intelligence.

Due to problems in Europe we have seen funds move into the US dollar and Treasury securities as the euro falls and trembles. Germany and France as a protective procedure are printing up D-marks and francs, like there may not be a euro in the near future. The US federal government has just spent $900 billion unaware that austerity should be the name of the game. The enabling super-Congress is struggling to cut $1.4 trillion from the budget on a long-term basis and has to do so by late November. In the meantime the President wants to increase current spending by $447 billion to supposedly provide jobs. Still in the cards is Mr. Bernanke, who has told us several times that he may have to ease monetary policy further. Real inflation is 11.4%, but evidentially Mr. Bernanke doesn’t see inflation – or so he says. Yet he knows the inflation he has created since he took over from Alan Greenspan, has offset the deflation emanating from the real estate industry, which is still ongoing.

If you give up liberty for safety you are doomed and that is where the US economy is headed. It will provide retarded growth and persistently high and higher unemployment. The quest for safety in US Treasuries will prove to be a deception, as the economy continues its degenerative process and inflation not only negates the returns but also guarantees 10% losses. As an aside, this process allows the Fed and government to stay in control and forces you to play their game. That is why they continually attack gold, silver and commodities. They want to make them as unattractive as possible, as an alternative safe investment. What the Fed and other central banks won’t admit to you is that the foundation of the current monetary system is crumbling and these are last-ditch moves and all the insiders know this. That is why the looting of the system has risen to a new level and these elitists involved could care less that you know what they are doing.

As a result of what has been going on republicans took the House majority last year and almost won the Senate. There is a present undertow among Americans to have an incumbent massacre in November 2012. They have come to realize everything out of Wall Street, banking and Washington is a lie. Even if passed they do not believe the Obama jobs legislation will accomplish anything. Wall Street and banking run the country and own Congress and it is their policies that are destroying the country.

We also believe much of the public understands what the debt extension bill was all about. The dismemberment of Social Security and Medicare and the imposition of the enabling Super Congress has been created so that the President can become dictator, just as Adolph Hitler did. In addition, Republicans put roadblocks in front of legislation so Senate Majority Leader Harry Reid simply changed the rules. This is what our elected representatives think about rules and the US Constitution. They do whatever they like and get away with it.

Then there was the famous S&P downgrade of US Treasury debt. The excuse for that, which should have been done years ago, was that Congress had not cut the budgets for Social Security and Medicare deeply enough and if cuts were not to their liking then they would lower the rating again. S&P said nothing about the cuts in war spending. In spite of these prognostications over the past two months long dated Treasuries have hit new highs, befuddling most investors. It is probably because of the Fed and its market intervention. Most did not expect manipulation to happen so quickly. Looking at the long bull market in Treasuries, what is going to happen when 10-year T-notes are at 1% or 1-1/2%? Will investors hold Treasuries indefinitely at virtually no return? Then again with inflation at 11.4% that cannot be a very prudent investment.

There is no question Treasuries are now truly in a bubble, but it could remain that way for some time to come. The attraction, of course, is perceived safety, but we do not see it that way at all, because we see lots of continuing problems and eventually a collapsing currency. In time a great deal of wealth will be lost in these securities, that is why we recommend gold and silver coins, bullion and shares – they are a far better alternative solution. We believe someday the US will default and finally people will understand what we were talking about. The call is a simple one, just look at the economic and financial wreckage in America and elsewhere. A real estate industry that has been destroyed, both residential and commercial; trillions of dollars in equity destroyed; bond and stock markets that are priced far beyond reason; unemployment refuses to fall and economies held up by quantitative easing and stimulus perhaps forever. QE 3 has been underway since June using $300 billion in securities rollovers plus swaps. In addition we also see a fiscal deficit of $1.6 to $2 trillion this year. As a result of QE and fiscal debt we could see total debt for both rise from $1.5 to $2 trillion.

Government, the Fed, banking and Wall Street do as they please enriching themselves, as many Americans starve and investors make little or nothing. Another added negative feature that few think of is that the Treasury’s giant demand for funds crowds other borrowers out of the market, putting upward pressure on real interest rates. We already have seen low rated sovereigns and junk bond purchases dry up and their yields rise. Bond issuance has also fallen dramatically as well. Rates in the US are also reflective of the financial disaster that is Europe. Mr. Sarkozy and Mrs. Merkel tell us Europe’s problems will be settled by the end of October, yes and pigs have the ability to fly. On that news we get a major stock market rally, the euro rises and the dollar falls.

That is on the suppressed anticipation of the end of the European financial problems. If that will be so, why are heavily officially gold, silver and commodity prices rising? It is because the flight to quality continues in spite of criminal activity by governments and central banks. These governments all lie about their statistics as a justification, as to what they are doing, but they fool few. Investors and professionals know what they are up too. Some governments have been looting domestic pension plans over the last several years and that trend will accelerate. It is only a matter of time before the US government and its purchased Congress goes after America’s private and public pension plans. You had best get out now while you can. There will be no second opportunities. Once trapped by law you will end up with government promises that have no intention of being fulfilled. Such policies will have a negative affect on stock and bond markers, gold, silver and commodities will rise and the negative pressures will force nationalization or failure of major banks and brokerage houses.

As far as we can determine the bottom in gold and silver began to be set two weeks ago, they have moved upward, but not as quickly as we had anticipated. The Working Group on Financial Markets has been attacking gold and silver still, but not with the firepower that they are capable of. It looks like a delaying action in anticipation of further EU problems and forming an opportunity to accumulate long positions. We, via the COT commercial net short position reduction, see the big banks anticipating a strong upward move in both metals. We see such moves in spite of higher margin requirements by the criminal CME, owner of the Comex. Government participation in manipulation of the dollar as well as gold and silver as usual emanate from the Exchange Stabilization Fund a subsidiary of the Treasury. Such antics killed off a move in gold to $2,200 and silver to test $50.00 again temporarily. We should see the major move in both metals shortly and by the end of February could see $3,000 gold and $65 to $75.00. It depends in part on events and the government participation in the market. Again, due to the speed of the downward move all small and medium players were again wiped out, as the banks earned large profits having rigged the results along with the government. Gold and silver will prevail and achieve much higher prices in spite of government and banking interference.

As the yield on the 10-year T-bill returns to 2.16%, due to the rise in the market, which at least for the time being reflects movement of funds back into the market from bonds and we see pressure on a number of currencies – some of which is uncalled for. Oil finally moved back up over $85.00 and copper got back to $3.38. The gains in CDS, credit default swaps, were large and we believe much overdone. Even US corporations’ bonds were hit, which we found overdone. Traders and investors threw the baby out with the bath water because of the failure of Dexia, a top 25-European bank. Dexia will be split into two banks, one good and one bad. The citizens of Belgium and France will absorb the losses in the bad bank. Taking the Dexia situation into context and moves we see by the German government we expect all European counties to separately defend their own banking systems. Those that cannot do that will slip into insolvency.

In between the US and Europe we have England, which we believe is in worse shape than the US and EU. They just executed $116 billion in additional money and credit to keep their financial system afloat. Bank of England governor Mervyn King says, “this is the most serious financial crisis we have seen, at least since the 1930s if not ever.” The media deliberately ignores England’s problems in favor of European and US problems.

The ECB has $53 billion in new funds with which they purchased collateralized bank loans. What we see is more liquidity and more inflation with dubious collateral. Next we will see recapitalization for which the price will be dear. Watchers see unfolding events, but they do not understand the gravity of the situation. It could be that over the next year the entire world financial system could come apart. We know that the central banks know that throwing money and credit at the problems do not work, and it is doomed to failure. They kick the can down the road as long as they can and then we will have war to distract the public. The war will be blamed for everything just as it has been in the past, only this time too many people understand the scam and it is not going to work. Confidence has left the system and that situation is going to worsen. Few jobs are being created as job demand increases by 250,000 month and only a little over 100,000 are being created. The elitists won’t accept the purge but sooner or later it will be forced upon them. If you think massive amounts of money and credit work, look at the results of more than $20 trillion being shoved into the system over the past three years. All it did was keep the system from collapsing. Once the bogus liquidity stops so does the system. These people are not fooling anyone, even the semi-educated public. That is why your only safe haven is gold and silver related assets.

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