first majestic silver

Whatever It Takes

June 8, 2014

Since today’s theme is unmitigated Central bank failure, let’s start with a picture that tells a thousand words – of how the “Land of the Setting Sun” is on its last legs and where America, Europe, and the rest of the world’s fiat currency anchored economies must inevitably go. Frankly, if Japan’s government wasn’t viciously lying about “deflation,” it’s “misery index” would be dramatically uglier than depicted below; and for that matter, any Western government publishing realistic inflation and GDP measures. No amount of money printing, market manipulation and propaganda can prevent this inevitability; and following yesterday’s historic ECB decision to deploy negative interest rates – among other suicidal “emergency measures” – the path to currency ruin has never been clearer.

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Worldwide the economic collapse that commenced not in 2008 but 2000 is accelerating exponentially; and if not for the unprecedented money printing, market manipulation, propaganda and accounting chicanery – which in turn, has enabled “the 1%” to benefit from unparalleled bubble valuations in paper securities – we’d be already amidst a crisis making 2008 pale in comparison.

Frankly, “the Big One” is happening right now, essentially everywhere. All one has to do is look. Take Japan, for instance; where Abenomics’ goal of “higher inflation” has occurred only in things we “need versus want” to survive like food and energy. Sure the (manipulatively suppressed) CPI is hitting multi-year highs, but yesterday’s report that wages fell for the 23rd straight month loudly underscores how rapidly Abenomics is destroying what’s left of Japan’s economy. Meanwhile, China’s composite PMI (manufacturing plus services) contracted last month at its fastest pace since February 2009 (i.e. the heart of “Global Meltdown I”), signaling the “second weakest degree of optimism since the series began in 2005.”

In fact, the “need versus want” concept we first discussed two years ago has never been more evident on a worldwide basis. To wit, food and energy prices are soaring everywhere, as exemplified by the U.S. Foodstuffs Index surging 20% since year-end. Yet, the Baltic Dry Index is down 90% from its 2008 high, whilst industrial commodities from lumber to copper to iron ore are plunging in freefall manner. The “evil troika” of Washington, Wall Street and the MSM do their best to either ignore or propagandize such horrific trends; but in the end, “economic mother nature” cannot be denied. Regarding iron ore, David Stockman’s description of what’s occurring in China will chill even the most ardent optimist’s bones; and as for “Doctor Copper” – which we discussed last month – as it goes, so does any remaining hope of recovery.

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Here in the States, today’s punk NFP report underscores a rapidly dying, hopelessly indebted economy – in which 50% of workers earn less than $27,000/year, 25% of adults have not a penny of savings, and 70% believe the 2008 crisis has not ended – which is probably why the personal savings rate is near all-time lows, whilst subprime student, auto and home equity loans are exploding.

To wit, the BLS followed up last month’s April NFP farce – which we described in “Three Numbers: +288, +234, and -806” – with an even more pathetic May report, depicting a 217,000 job gain (in line with “expectations”), comprised principally of 205,000 phantom jobs from the “birth/death model.” You know, the BLS algorithm that assumes rapid – yet unreported – growth of small businesses despite statistics screaming otherwise.

Better yet, the 217,000 purported “jobs” compared to the 145,000 depicted by the BLS’ household survey and 179,000 from Wednesday’s ADP report; not to mention, the fact that most “diffusion indices” reported declining employment components in May, whilst Challenger reported 53,000 mass layoffs in May versus 40,000 in April. And of course, when one digs down deeper, the NFP’s internals could not have been uglier. Once again the “unemployment rate” remained at multi-year lows whilst the labor participation rate remained at a 35-year low; and of the 217,000 “jobs” created, 116,000 emanated from the three lowest paying categories – education/health, leisure/hospitality (i.e. waiters and bartenders), and temporary help. And for the coup de grace, this morning’s “propaganda du jour” highlights how this month’s “job gains” have finally recouped all those lost in 2008-09. Unfortunately – and notwithstanding the aforementioned regarding the fact that most such “jobs” are either fictional or of low quality – 12.8 million people have left the labor force since then. Putting such propaganda into perspective, roughly 140,000 people per month have left the labor force since the “bottom” in early 2009, essentially equaling the new “jobs” created. In other words, if the BLS properly accounted for the true level of “employment,” we would have seen a roughly ZERO print every “Jobs Friday” for the past five-plus years. David Stockman, who lately has been on fire in the economic truth department, highlighted the true NFP horror yesterday of just how wide the gap between employment reality and propaganda has become.

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Sadly, today’s NFP tragedy – yielding plunging Treasury yields (i.e., the “most damning proof yet of QE failure”) and the third straight COMEX-opening “cap and attack” following massively PM-bullish developments – isn’t even close to the ugliest news; as in our view, what the ECB announced yesterday – i.e., it has been compelled to follow up on Draghi’s July 2012 promise to do “whatever it takes” to save the Euro – represents a major breakdown in Western Central banks’ ability to slow the global economic collapse. This of course, was their decision to take money printing to a whole new level of lunacy – in officially introducing Europe to the previously fabled world of negative interest rates or “NIRP.”

Long-time readers know we predicted this as far back as July 2012 and again last May. In other words, while said “evil Troika” trumpets “recovery,” “tapering,” and all other manner of propaganda, we discussed the impossibility of meaningful economic expansion within a fiat currency Ponzi scheme in its terminal stages. Today, the global economy is unquestionably at its low point of our lifetimes; and nowhere is this more evident than the European Union experiment where debt and unemployment have never been higher, nor the prospects for improvement.

As discussed in yesterday’s audio blog – “The Death of Europe,” the ECB not only reduced its benchmark lending rate to “TBTF” banks from 0.25% to an even more pathetic 0.15% and its “marginal lending facility rate” (whatever that is) from 0.75% to 0.40%, but took its deposit facility lending rate from 0.00% to negative 0.10% – among other, equally horrifying “emergency measures.” Essentially, said TBTF banks will be charged 0.10% to park the funds they borrow at 0.15%; so according to “Goldman Mario’s” supreme wisdom, said banks will now race to lend such funds to a dead broke historically unemployed society – in turn, yielding exponential economic growth, as well as unicorns and lollipops for all.

Unfortunately all the public will wind up getting is a “pass through” of the ECB’s negative deposit rates to their own accounts (that is, if the banks don’t eat the losses, cutting further into their already weak balance sheets) – which we assure you, will not cause increased borrowing and spending. If anything, it will cause depositors to withdraw funds from the banking system; with no doubt, some of such funds finding their way into the real money that is gold and silver.

And the “punch line” to this historic episode of Central bank foolishness you ask? Well, consider this. Simultaneous with the institution of negative interest rates, the ECB is bringing back the miserable failure that was the €1 trillion LTRO or “Long-Term Refinancing Operation” scheme of 2011-12. To this day, Europe’s banks holding hundreds of billions of these essentially zero interest “loans” to prevent them from failing; and yet, as we learned last year, when Germany’s largest bank Deutschebank was revealed to be “horribly undercapitalized”; and last month, when Portugal’s largest bank Espirito Santo was revealed to be in “serious financial condition,” they remain cumulatively in critical condition. This is probably why another €400 billion of such loans are now being offered to terminate in September 2018 (assuming the ECB doesn’t “roll them over” perpetually). Thus, why anyone would believe that making it more onerous for banks to hold capital will buttress the banking system is beyond me; nor how such banks, desperate for liquidity amidst a collapsing European economy would materially increase their cumulative lending activity.

Better yet, the ECB claimed it is “intensifying preparations” to buy ABS or asset-backed securities; which, in layman’s terms means they are preparing to announce flat out QE. Then again, they simultaneously announced they will no longer be “sterilizing” SMP purchases; which again, in “layman’s terms” means QE! To wit, SMP was an ECB QE program utilized in 2010-11, which was supposedly ended when it decided to “sterilize” sovereign bond purchases with equally-sized liquidity drainage. In other words, like the Fed’s “Operation Twist” – this purported to “sterilize” the purchase of (significantly more economically sensitive) long-dated treasuries with the sale of short-term treasuries. The only problem, of course, is that in maintaining “ZIRP” or Zero Interest Rate Policy, it simultaneously committed to purchase infinite amounts of short-term treasuries as well – which by the size of the Fed’s $4.5 trillion balance sheet, it most certainly has. And thus, just as Operation Twist’s inherent sterilization was cancelled by ZIRP, yesterday’s removal of sterilization from the SMP program essentially constitutes a new QE program aside from the aforementioned ABS purchases that are being “intensely prepared.”

In the big picture, the ECB’s unprecedented monetary stimulus has been the same unmitigated failure as the Fed, BOJ, and all other post-2008 Central bank efforts. Yesterday’s ECB announcements will only accelerate global debt and inflation growth; and frankly, there’s no better way to depict this than the fact that the Euro actually rose yesterday – no doubt, as the entire world anticipates the next – and potentially terminal – round of the “final currency war.” Watching Irish treasury yields fall below those of U.S. treasuries yesterday puts a decided exclamation point on the aforementioned global expectation of “QE to Infinity”; as like the BOJ, the ECB nears the end of its arsenal of money printing schemes.

Consequently, we have never been more bullish about the prospects for precious metal prices; particularly given the historically dire state of global PM mining. Trading well below the all-in cost of production – and in many cases, the variable cost of production as well – gold and silver production is set to accelerate its plunge into oblivion – as highlighted by this mainstream article. Frankly, I don’t believe it will ever recover, and as global PM demand continues to inexorably rise, it’s just a matter of time before the inevitable end game of irreversible physical shortage arises.

Andrew ("Andy") Hoffman, CFA joined Miles Franklin, one of America's oldest, largest bullion dealers, as Media Director in October 2011. For a decade, he was a US-based buy-side and sell-side analyst, most notably as an II-ranked oil service analyst at Salomon Smith Barney from 1999 through 2005. Since 2002, his focus has been entirely on precious metals, and since 2006 has written free missives regarding gold, silver and macroeconomics. Prior to joining the company he spent five years working as an investor relations officer or consultant to numerous junior mining companies.

With gold stolen by Conquistador Francisco Pizarro from the Inca Empire in 1532, Spain financed its conquest of Europe.
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