Awaiting ECB Stress Test – Good One

This coming Sunday will see the results of the ECB’s stress tests. Eagerly awaited by some, feared by others.
Well it appears the only reason there was support for the European peripheral bond markets over the weekend was the fact that they were closed! From the opening this morning the trading theme was, “risk-off”. The talk was that initial weakness came from Spain’s, Bono’s (after last weeks poor auction tap), Portugal’s PGB’s and Italian, BTP’s. 10yr spreads were +17, +15 and +13bp respectively. At this stage the rumours were HF selling, PIMCO (rumoured again) the suspension in trading of shares in Italian bank Monte De Paschi obviously did not help. 
Regardless, it is becoming more apparent we are in a risk off mode and that is unnerving the markets; especially when bonds are supposed to be a safe-haven!

US Prosecutors Continue to Destroy World Economy


The greatest problem with prosecutors in the USA, they are totally ignorant of the implications that result from their attempt to win at all costs. Attacking foreign banks and threatening them to be disbarred from conducting transactions in US dollars is driving the world into a no choice situation where we will see a one world currency sooner rather than later. Prosecutors think they can have power, but all they are doing is destroying the world economy. Transactions will need to be done in any currency other than dollars.

The demands on Standard Charter may force up to 8,000 small business operations in UAE alone to be shut down. This is turning into throwing out all small to medium-sized companies as large banks only deal with big companies. Job growth comes from the small to medium-sized companies and they are the ones being wiped out.

Arthur Burn’s Advice During Recession ’75 – Cut Deficit & Taxes


Arthur Burn’s testified before Congress on the economic crisis – the first to unfold in the new Floating Exchange Rate system that began in 1971. Keynesian Economics as practiced by government was dead anf taxes had risen to outrageous;y the 90% level until the first tax cut by Kennedy. Burns delivered his recommendation during the recession of 1975 that still remains sound advice today, which is too late now. The second tax cut by Reagan finally restored the American economy and long-term growth.


The unions at that time in 1975 as always wanted to increase government spending and hand it to them as they demand today. Burns warned that would lead to ruinous inflation and it certainly did. Inflation soared into 1980 with gold and then Volcker responded raising interest rate to excessive levels. Today, we have increased spending, but we have excessively high taxes and worst yet, they are hunting capital and shutting down the world economy faster than it took to create it after World War II. The insane passage of FATCA is just wiping out international capital at such an alarming rate.

I met with the Treasury in the early 1980s warning that the crazy hike in interest rates would cost the government tremendously and that the national debt would rise from $1 trillion to $6 by 1990.

Today, we are imploding and they are trying to hide the numbers including things which are illegal to boost economic activity in Europe. Just legalize everything from drugs to prostitution and gambling and tax it all to increase the collapsing GDP. Why not count divorce settlements as new income and really boost GDP. Let’s not forget allowances we hand kids or spending money at college. Hey, that’s all income, why should family mean anything when government needs money?  We can only play games so long.

Replacing the Dollar

1864$10CompoundInt - Table


The conspiracy crowd keep swearing the dollar has to collapse and remain clueless that the world is in serious trouble. The impact of debt is far worse outside the USA than inside yet their myopic vision blinds them to the truth. Taxes are so high in Europe and this renders it is impossible to grow the economy out of recession. Debt use to be debt and the theory was it would be less inflationary to borrow than to print. However, after 1971, debt became merely currency that paid interest as it began in the 1860s. The dollar is now the reserve currency and not even the USA can prevent that – there is no alternative !!!!!!!!

It is now MORE inflationary to borrow than to print for now the currency just pays interest. You trade markets and post TBills as collateral. So TBills are now cash paying interest. Moving toward electronic money to collect even more taxes will divide the economy with a greater division between above and below ground. If you could not borrow on government paper, then government could not sell it. So they are trapped in a doomed system that cannot be sustained and the press is controlled to ensure the public remains blind, deaf, and dumb about the crisis.


Many insurance companies and pension funds buy government debt for it is considered “riskless”.  We are facing a monumental crisis of tremendous proportion. However, this is NOT about the dollar, it is about global debt and taxes. We have reached the peak of the bell curve that Art Laffer articulated correctly, which the socialists hated. The higher the taxes the lower the growth and the greater the debt. Rising interest rates expand government debt. Government debt defaulting takes down all pension funds. This is a huge problem. We are not in a position to handle the massive uprising when people wake up and realize they have been really living a dream.


I am working on the solution that will be put out shortly. There are those proposing a gold back SDR. Good luck. Been there done that. We are way beyond that and besides do you really want the IMF to be in charge of money creation? That will be worse – an unelected dictatorship.


We are headed into the abyss where we will have to create a new reserve currency among nations that is debt free. We will be forced to end government borrowing and the Age of Karl Marx will then, and only then, come to an end. This is moving toward Atlas Shrugged.

The Bond Rally & Bubble

UBCBT-Y 10-19-2014


A lot of people have been writing about Bill Gross leaving PIMCO and connecting that with us and our forecast that there is a coming bond collapse. I cannot comment on any client or who is a reader or not. Unlike the NSA, I believe in privacy.

That aside, there has been talk of a couple of large HF’s reversing short delta positions. The whispers have been highlighting PIMCO! Lots of rumors of blood on the street. The problem with PIMCO is the fact that here we had $2 trillion fund without diversification. It becomes akin to the potential S&L Crisis of the late 80s, where real estate declines and the lack of diversification dooms the industry.

This is the direct result of OVER REGULATION. Hedge Funds developed offshore because you could not hire a fund manager to make your decision. You had to decide bonds, equities or commodities and then have the expertise in each area as to what to select. This resulted in specialized funds that perform well only when the specialized sector of their focus performs well. Consequently, a bond fund may be huge in a 31 year bull market, but it can implode in a bear market.

Here is our famous perpetual 30 year futures contract that we recreated back to the beginning of the United States – 1798  The bonds have peaked in 2012 encountering resistance at the 1814 channel and the 1888 channel as well as the 1981 channel. This is Bond Bubble we are warning about. We saw the high 31.4 years from the 1981 low. Short-term rates may still fall to new lows in the final bubble, but it appears the long-term rates may not. The central banks are scared what will happen by raising rates. It is not the stock market they need to save, what happens to bonds? What if PIMCO’s $2 trillion had to be liquidated?

Just as most traders had written off the bond markets and pricing in rate rises for US, UK and Canada, this week saw an about turn! Bank Of England’s Weale talked of rate rises being delayed but at the expense of sharper rate rises, “when they come”! Swiss government trimmed growth economic forecast on Euro-Area. Oil also had a rough week on these concerns with prices the lowest since June 2012.

Bickering between Prime Minister (Antonis Samaras) blaming the leftist party, SYRIZA, for destabilising the economy soon saw Greek 10′s trade through the 7% level and hitting 9% by weekend (Stocks lost 11% in two days). ECB’s response was to cut the haircut it applies on bonds submitted by Greek banks as collateral to borrow funds! This move freed an extra 12Bln Euro’s “in theory…” Greek 10yr have lost 8 points this week from 98 to 90! Obviously, the Greek curve flattened aggressively as the July/17′s lost 200bp and 10yrs lost 110bp.

All this did not set a solid foundation for the OAT auction in France. The result was not great, but then this is the first time in a while that French bonds have been hit in as OAT 30yrs widened 10bp to Bunds.

Spanish auction result was also poor not even covering the full size with 10′s snapping 22bp wider to Bunds. BTP’s (Italian government bonds) were the next target; 10yr +26bp to Bunds.

10yr US treasury notes yield fell to 2.09%, their lowest since June 2013. Volume on Wednesday was 5x’s the usual daily volume in cash 10′s.

The standout technical picture was of Bunds (Germany) mirroring the JGB (Japan) move of 16 years ago! 10yr Bunds hitting 0.718bp (JGB low was 0.72bp).

Even the Fed felt they had to respond on movements this week, stating they are “assessing” the outlook for the US economy in light of current turmoil in financial markets. These comments led to the conclusion the Fed should delay possible rate rises until the second half.

Deflation concerns are particularly pronounced in Europe and Japan.

The NYT talked of rifts within the ECB during the financial crises in Cyprus, with Jens Weidmann apparently calling privately for ECB assistance to at least one of Cyrpus’ struggling banks to be curtailed. If the NYT really does have a full series of minutes from May 2012 that would include Mario Draghi’s whatever it takes speech! I wonder if that was why they decided to comment???


Comments from Canada on Abuse of Taxes


COMMENT: Hi Martin, on the recent post about out of control government I can attest to at least 3 cases in the last 6 months. I work for a large coop FI and deal with people from all walks of life. Recently I had: 1) client was refused a permit after 4 months of applying for permits to do modest renos. Was told by city staff that since he had a few trees on his lot they needed a cash deposit of 21 k to assure the trees would not be damaged. My client was shocked and said he negotiated it down to 12 k. How the hell do they come up with the number ?
2) another client was forced by the city to install a new water meter outside of the house. The city then ran the new meter back to the date in 2006 the client bought the house and sent him a bill for $ 12 k saying he did not pay enough before. The client was charged 1% / month plus fees until we refinanced his house to pay it just last week. The clients know of other people that experienced similar issues although those bills were smaller.
3) if a tree in your property has the roots rupture a pipe, the city no longer provides $ 3000 to the homeowner to reduce the major cost of fixing the leak and replacing the pipe

Very heavy handed and blatant abuse
And people think Canada is different ? Maybe you can run Socrates view on the canadian market and Quebec separation which in my view is inevitable

As always thanks for your efforts to help us stay on top of what is really happening out there

REPLY: Yes, the Quebec separatist movement will heat up again after 2015.75. Governments are absolutely dead broke everywhere. Examples are coming in from New Zealand, Australia, Japan, every country in Europe, and Russia. The press is not covering this in a connect-the-dot manner. They may report a single incident, yet remain blind to the trend.