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Talk Is Cheap

 -- Published: Thursday, 19 March 2015 | Print  | Disqus 

By Bill Holter

Yesterday the Fed made their announcement and deleted the famous word "patient".  I have never seen such a nonsensical frenzy over anything, never mind a single word.  The reaction was everything ...except the dollar was bid.  Sadly, reality has also been deleted as the Fed cannot "go there", if they did and when they do (are forced to), life as we knew it will be history.  Reality is the global economy has stalled.  Most of Europe is in recession, China's growth has stalled and the U.S., even with fudged numbers will not be able to show any growth.


As recent examples, China's real estate crashing at the fastest pace ever, Canada's wholesale trade crashing, the Fed growth model show only .03% growth, housing starts dropped 17% and car sales have turned horrible.  The sovereigns Ukraine and Greece are clearly bankrupt and currencies have already been more volatile than any time in history.  Add to the previous an oil market that has collapsed and clearly a margin call has been issued. 


My topic today of a global margin call is a serious one and one which should be looked at with an eye towards the debt and derivatives markets.  For example, can the oil markets handle a 60% drop in product price without creating some dead and insolvent bodies?  Oil is the largest and most important commodity market in the world with $trillions borrowed to drill, frack, produce, refine and ship to market.  Some of this debt has been impaired and will never be paid back, who will take the losses?  Someone, somewhere MUST take the losses,  ultimately it will be whoever originally lent the capital.  Ah yes, we will hear "but they were hedged".  I would ask how and by whom because as just mentioned, "someone must eat the loss".  The funny thing about debt is this, unless it is paid off, it never goes away and must be accounted for somewhere and by someone or entity.


Oil is just one market.  What about the derivatives on currencies?  Or sovereign treasury securities?  What about stock markets?  I ask these questions because one must question whether any central bank on the planet can ever actually tighten or if any treasury can employ austerity?  Think about this long and hard.  Central banks all over the world have been easing and printing while nearly all treasuries are deficit spending ...and yet here we are with real economies stuck in the mud and financial markets with more leverage and less ability to perform than ever before. 


The above is unfortunately lost on our academics driving the financial bus. While listening this morning to former Fed governor Robert McTeer, he actually said the Fed should just "let 'er rip and raise rates, who's afraid of a quarter point hike in rates after six years of 0%?"  He also said the Fed did not initially lower rates for the stock market but it is a "referendum" on their policy.  A few questions might be in order starting with a one wonder, REALLY?  The Fed does not act to affect the stock market?  Do QE's 1, 2, and 3 come to mind at all?  Weren't the stock markets collapsing and promptly reversed with each QE announcement?  Yes I know, the plunge protection team is a minion of the Treasury, the Fed would never stoop so low...  And what exactly does a "measly" quarter percent hike in rates mean? 


In relation to one quarter point, a quarter point is a 100% increase ...and here's the rub.  Everything from real estate to stocks and of course bonds are "based" or calculated doing an interest rate assumption.  Using an interest rate, one can calculate how much of a mortgage they can carry or how much cash flow from a commercial or rental property is required to carry the note.  As for stocks, PE ratios are discounted off of a base interest rate, a higher rate will generally mean a lower price.  Bonds of course are directly inverse to interest rates.  As I mentioned yesterday, the aspect of "front running" to exit is the problem we will now face.  In other words, if you know or believe a margin call is going to be issued, your natural reaction will be to exit ahead of time ...which creates a problem.


This problem arises because the "exit door" is so small.  What I am trying to say is this, volume has decreased markedly over the last several years and in particular the last year.  How exactly do investors actually exit?  This is not a problem for Mom and Pop, it is a problem for those managing their pension plans.  How will money managers will $billions under management get out?  Who will stand as a buyer?  If you are a seller, there must be a buyer ...but at what price?  Do you see?  Any moves to exit or get out of the way will be self fulfilling in the form of a crash.  More and more leverage has built in all markets as they went higher and higher, but volume has become less and less.  Now, the Fed wants you to believe they will actually raise rates, it is like a lifeguard whistle telling everyone to get out of the water.  But how?


Before finishing, the action of the dollar needs to be looked at.  The dollar has been on a wild tear to the upside.  Higher interest rates would presumably exacerbate this, but, there is a problem with this.  A higher dollar will create more inflation for already inflation stricken countries and also cause financial stress for those short dollars.  Remember, the financial system as a whole has never been more levered than it is now and rarely been under the current stress.  A higher dollar will increase the stress on the financial system to the breaking point, yet with this much leverage nothing can be allowed to fail because it will spread like a virus. 

Talk is cheap as the saying goes, but it is all the Fed can afford to do at this point.  Higher rates cannot be allowed to happen, they certainly cannot be "policy" because it is suicide.  I will be shocked if next move by the Fed is not the exact opposite of what they are talking about currently.  The next move by the Fed in my opinion will be a massive QE4 to try to stop a tsunami of panic engulfing everything financial. 


Bill Holter

BILL HOLTER, Associate Writer, Miles Franklin Precious Metal Specialists

Address: 801 Twelve Oaks Center Drive, Suite #834, Wayzata, MN 55391;

Telephone: 800.822.8080, 952.929.7006; Fax: 952.476.7971

E-mail:; Website:

Prior to joining Miles Franklin in 2012, Bill Holter Worked as a retail stockbroker for 23 years, including 12 as a branch manager at A.G. Edwards. Later, he left Wall Street to avoid potential liabilities related to management of paper assets. In 2006 he retired and moved to Costa Rica where he lived until 2011 when he moved back to the United States. Bill was a well-known contributor to the Gold Anti-Trust Action Committee (GATA) commentaries from 2007-2012.

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