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Turk: “We had the same reaction to yesterday’s FOMC statement, Eric, as we did after the meeting last month.  Interest rates continue to inch upwards.  I have been waiting to see whether this would be the result. 

An ostensibly dovish statement from the Fed is nevertheless resulting in higher interest rates.  In other words, since the announcement of QE1 in March 2009, dovish statements from the Fed were bullish for Treasury paper - meaning lower yields - because the Fed's buying of paper was soaking up supply.  However, we are now in a situation where the Fed is buying nearly all of the Treasury's new debt issuance, but interest rates are rising....

Continue reading the James Turk interview below...


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Admittedly, part of the reason this is happening is because the market is positioning itself in anticipation of higher interest rates given the Fed's acknowledgment that its buying of Treasury paper will eventually be tapered, implying that QE will not last forever. 

But there is also another dynamic.  The federal government continues to run horrendous deficits, and given the unwillingness of the politicians to deal with their spending deficits, there is no effort to seriously address the growing debt.  As an indication of how bad things are in Washington DC, the politicians are even playing games with the debt limit, which was the last shred of fiscal discipline being imposed.

So here is the key point:  The supply of Treasury debt - both new issuance and the selling of US paper by foreign holders, as was made clear from the latest Treasury TIC report - is now starting to overtake the paper the Fed is soaking up through its QE program.  It means that the Fed is losing control. 

Because the central planners at the Fed are wedded to their crazy theories, the logical reaction is that the Fed won't taper, but instead will do the opposite.  They will mean buying even more paper and then monetizing it.  In other words, the Fed is going to start moving much more rapidly toward monetization with even greater intervention in markets.  They are now like mice on a treadmill, so look for them to buy more to try to make their theories work.  As a result, the long-term outlook remains clear at this point -- QE has put the Fed in an impossible position that will end badly.”

Turk also added: “Attention has focused on the Fed's announcement yesterday, Eric, so other important events have gone unnoticed.  First, Thomas Hoenig, the Vice Chairman of the FDIC, described Deutsche Bank as being “horribly undercapitalized.”  It is rare for a regulator to speak so candidly, but he didn't stop there.  Hoenig went on to also lambaste UBS, Morgan Stanley, Credit Agricole and Societe Generale for their undercapitalization.

Hoenig then took a swing at all banks by saying that global capital rules allow banks to appear well-capitalized, when in reality they are not because the banks themselves decide the riskiness of their assets.  In other words, Hoenig is saying that bank accounting is unreliable.  This means there are invisible problems hidden in bank balance sheets that we don't even know about which go beyond all of the problems which we do know exist.

Over in Europe, ECB head Mario Draghi said he has an “open mind” about using unconventional measures to save the euro by keeping insolvent banks and over-indebted countries afloat, even though whatever the ECB does “may have unintended consequences.” 

As if that were not enough, Draghi went even further, I guess to drive the point home that he and his central planning buddies in the ECB are going to take Keynesian craziness to its fullest extent by doing what Paul Krugman wants.  Draghi said that ECB “monetary policy will remain accommodative” for as long as it takes, presumably because he sees a happy outcome to this folly.  But here is Draghi's killer punch:  “We are far from any exit.”  That is remarkable!  It signals that the printing presses at the ECB are not going to be turned off any time soon.

As we have been discussing for some time now, Eric, this ongoing financial bust is not going to end well.  Despite all of the upbeat news the Fed tried to sandwich into its announcement yesterday, here is what they didn't tell you, and it is the most important measure about not only how the economy is doing, but how the average man on the street is doing.  Yesterday the Bureau of Labor Statistics reported:  “Real average hourly earnings for all employees fell 0.2 percent in May…”  There would be even an worse decline if the true inflation rate was used to make this calculation.

The bottom line, Eric, is that a storm is brewing, and gold and silver will be the best way to find shelter.  KWN readers around the world should simply continue to buy physical gold and silver each month in a dollar cost averaging program.  This will allow them to take advantage of these lower prices in the metals, which will quickly dissipate as the storm is upgraded to hurricane status.  After an initial recovery in metals prices, a massive surge in gold and silver will begin in earnest as the financial system heads directly into the eye of the hurricane.”

IMPORTANT:  The powerful audio interview with the man who oversees more than $150 billion and is warning about hyperinflation, Rob Arnott, is available now and you can listen to it by CLICKING HERE.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The audio interviews with Rob Arnott, Egon von Greyerz, Gerald Celente, James Turk, John Embry, Dr. Philippa Malmgren, Bill Fleckenstein, Eric Sprott, Rick Rule, Jim Grant and Art Cashin are available now.  Also, be sure to hear the other recent KWN interviews which include Marc Faber and Felix Zulauf by CLICKING HERE.

Eric King

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