Are Storm Clouds Brewing Without Us Realizing It?
What is the Federal Reserve up to? Do they see a huge storm on their radar they are not telling us about?
The banking/investment world has changed radically since the repeal of the Glass-Steagall Act allowing banks to merge with Wall Street investment firms.
I recently asked, “Will The Next Bank Bailout Bankrupt America?” and followed it with “The New York Fed Would Make The Godfather Proud!”. The huge casino/banks are in control of the Fed, and they have shown they will do anything, including breaking the law, to protect their banks at the expense of US taxpayers.
Subscriber Alex E. wrote and asked Chuck Butler and me a question:
“I thank you for your recent newsletters. I have a question that perhaps you two Giants of Finance might be able to answer for me.
If the FED is currently financing the Repo Market with “Not QE”, would the fact that $66 Trillion in Bonds coming due this year, especially those rated BB or lower, not be the cause? I had read somewhere that the amount of bonds coming due this year and next was going to severely test the limits of the financial system.
Would the Fed just be trying to front run this thing, get ahead of the disaster-in-waiting so to speak, or am I just a card-carrying member of the Conspiracy Theory Group?”
When it comes to the complicated inter-relationship between the casino banks, the Fed and the bond market, sometimes I feel like the “Jolly Green midget” as opposed to a giant of finance. My go-to expert on the Fed is Chuck Butler. I asked him to help me sort out Alex’s concerns.
DENNIS: Chuck, do you feel Alex has a legitimate concern? How do you address his concerns?
CHUCK: Yes, I certainly do! Thanks for sending this my way Dennis!
A few years ago, after giving a conference speech, I sat in on an old acquaintance’s presentation. His name is Porter Stansberry. Porter can be “far out there” at times… But his warning made my spider sense tingle. He talked about all the corporate debt that existed, and let me remind you that this was a few years ago, imagine what he would say now!
In essence, what we have coming our way soon, is an onslaught of corporate bonds maturing. There’s no way on earth that these bonds will be put to bed, paid back in full, and the corporations go on their merry way… There’s just too much debt! And it will have to be rolled, which means that new loans will be needed…
I wouldn’t put it past the casino wall street banks to fund the corporations using their reserves that they’ve piled up, thanks to the Fed, and their never-ending money printing.
DENNIS: Let me make sure I understand this. I too heard Porter talk about all the corporate debt. Many took advantage of the low interest rates to borrow money, pay dividends and buy back stock. I wrote about how many were not borrowing to invest in their business; (which would create additional profit to pay off the bonds) but rather reward their stockholders and Wall Street. Now those notes are coming due.
I presume the casino banks would rather “extend and pretend” as many of these loans as possible – as opposed to writing them off at a loss. I’m sure much of this debt is lurking in a lot of bond funds that were touted as being much safer than they really are.
What happens when they roll over? I would assume the new bonds would be rated by the questionable ratings agencies.
CHUCK: As you say, the ratings agencies should deal the corporations a big blow, with junk bond ratings, etc. but… when was the last time we saw the ratings agencies really do THEIR JOB!
It’s all about saving the dollar, Dennis…. The Gov’t, Fed, Treasury and casino banks will do everything and anything to save the dollar, so they can’t have a real messy corporate bond market, for that would instill fear in the currency traders and they would sell dollars.
DENNIS: If investors are holding some of the higher yield bond funds, wouldn’t those defaults bring down their net asset value and make it tough to recover for quite some time?
CHUCK: Yes, it would, but I doubt it would just be the junk bond funds. If there is anything that sounds like a “bond market collapse” investors will try to liquidate which could cause a huge liquidity problem in the entire market.
DENNIS: Wolf Street recently reported about two Irish real estate bond funds that blocked redemptions. While the funds were “open-ended”, offering investor daily liquidity, the funds were unable to sell the assets to meet the withdrawals. Could that happen here?
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CHUCK: Wall Street would try to avoid that but I’ll never say never. In 2007 who would have thought they would destroy free market interest rates, and most every pension plan and 401k in the country to bail out the banks?
DENNIS: I recently quoted you in an article about the US Dollar being knocked off its perch as the world reserve currency.
What happens to the country if/when that happens? How would investors protect themselves as they see their currency depreciate?
CHUCK: In a messy corporate bond market scene, I would see gold being the preferred investment. And the U.S. Gov’t can’t have that happen, period.
|We as Americans NEED the dollar to remain the reserve currency of the world, and gold is the number one threat to that status.|
When I used to give several presentations a year, I would take questions from the audience. Your question, “what happens when the dollar is no longer the reserve currency?” was on the top of the list.
I explained that Americans would lose their ability to run up deficits like they do, in other words live beyond their means…. The ability to fund our military would be stressed badly. The costs of commodities would skyrocket… I used the cost of gas as my example… Gas in the U.S. costs $2.50 a gallon, and in the U.K. when you convert the liters to gallons, it’s about $7.50… (the numbers vary, but you get the picture). Their currency was devalued by the rest of the world and their country suffered.
I also discussed when I was a young lad and the Beatles came to America on the Ed Sullivan Show. The TV showed pictures of where the Beatles came from, Liverpool, U.K. Those pictures were so depressing, and I was a young lad living on the edge of poverty, and thought that! I explained the U.K. had once possessed the reserve currency of the world, and it took them over 50 years to recover!
I hope this explains what I feel is going on here with the repos and the casino banks. Thank you for letting me say my piece!
DENNIS: Chuck, it explains it but wow! Thank you for your time.
CHUCK: My pleasure Dennis
Dennis here. While I don’t consider myself a giant of finance, I feel a bit of common sense should be used for those trying to protect their life savings. I want readers to understand this is my personal bias.
Last year I wrote, “The Bond Market Is Nuts!”. What Chuck just outlined for us is the hidden risk that came from corporations borrowing money at super low interest rates and using much of the money to prop up their stock prices. Now some $66 trillion is coming due.
I pulled up my fixed income offerings from my online broker.
Why would anyone buy a 10-year AAA corporate bond when they can buy an FDIC insured CD paying more interest? If you drop down to A bonds, they are paying 2.64% versus 2.25% for a CD. If you bought a $10,000 A bond it would pay you $264 interest annually, $39 more than a comparable CD at 2.25%. Why take any default risk for the small increase in yield?
Bond funds are touted as safe because of diversification. While a single bond can default, the chances of the whole basket defaulting is slim. What about factoring in 5-10% default if you are holding BBB bonds or lower? How would a run on the junk bond funds affect those with A or higher ratings?
The ratings agencies are supposed to protect the consumer not defraud them. In the 2008 mortgage crisis we learned how unethical the ratings agencies really are. How do we know the bonds are even close to rated properly?
Personally, I am sleeping better at night holding gold and laddering short term Certificates of Deposit until we see the fall out of the $66 trillion bond cloud looming on the horizon. Alex, I think your concerns are valid, thanks for alerting us all!
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On The Lighter Side
I hope everyone had a wonderful Valentine’s Day. Time seems to be flying, it seems like Christmas was just over. Football season is over, baseball spring training has started and we are enjoying watching our favorite hockey team, The Tampa Bay Lightning.
When we lived in Tampa, we had season tickets and got to know several people in the organization. We were there when they won their only championship and it was a blast. They are a small market team playing against a lot of big boys and faring well so far.
As of last week, Boston had the best record in the league and Tampa moved up to the second spot. Boston won 8 of their last 10 games and Tampa still managed to inch closer to them. Tampa had the best record last year and were blown out in the first round of the playoffs. Hopefully they will fare better this year.
Winter storms are nailing much of the country, it is a good time to be in the Arizona desert. The northern climates do their gloating when it is blistering hot in the middle of the summer.
I enjoyed interviewing Chuck Butler this week. He sent me some senior citizen humor, commenting, “If we can’t make fun our ourselves, then who can we make fun of?” I decided to share a couple…
BECOMING A SENIOR
Barb was lying in bed one night. Larry was falling asleep but Barb was in a romantic mood and wanted to talk. She said: “You used to hold my hand when we were courting.”
Wearily he reached across, held her hand for a second and tried to get back to sleep.
A few moments later she said: “Then you used to kiss me…”
Mildly irritated, Larry reached across, gave her a peck on the cheek and settled down to sleep.
Thirty seconds later she said: “Then you used to bite my neck…”
Angrily, Larry threw back the bed clothes and got out of bed.
“Where are you going?” Barb asked.
“To get my teeth!” he replied.
And my favorite:
DOWN AT THE RETIREMENT CENTER
80-year old Bessie bursts into the rec room at the retirement home. She holds her clenched fist in the air and announces, “Anyone who can guess what’s in my hand can have sex with me tonight!!”
An elderly gentleman in the rear shouts out, “An elephant?”
Bessie thinks a minute and says, “Close enough.”
Until next time…
“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken
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