Today a 40-year market veteran sent King World News an incredibly important piece that discusses a system-wide bail-in and global financial meltdown. This piece exclusively for KWN also covers what is happening in the key markets, including energy, gold, silver and stocks.
By Robert Fitzwilson of The Portola Group
May 4 (King World News) – In recent trading days, the “bond kings”, Bill Gross and Jeff Gundlach, have been calling attention to the German Bunds. Gross called it “the shorting opportunity of a lifetime”, while Gundlach concurred pondering a possible 100-to-1 leveraged bet against the debt instruments. Almost on cue, the Bunds dropped precipitously in price….
Continue reading the Robert Fitzwilson piece below…
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It is not just German fixed income that is selling off. Below is a chart showing the going rates for the 10-year and 30-year U.S. Treasury bonds. The lower right portion of the chart tells us that something very important could be unfolding and confirming that interest rates are not just heading higher in Europe, but elsewhere around the globe. The bulk of the issued German Bunds are of the 10-year and 30-year duration.
Since Mr. Gross and Mr. Gundlach are the two most influential thought leaders in the fixed income arena and will not shy away from employing extreme forms of leverage on their bets, a panic out of fixed income by they and their colleagues could be in the offing.
The 1970s
The term “Bond Vigilantes” was coined by Ed Yardeni in the late 1970s. We did not have runaway central banks in that period and interest rates did rise dramatically as the “Vigilantes” demanded higher pre-inflation returns to offset skyrocketing consumer prices. In the current era, the central banks have employed seemingly unlimited capability to neutralize bond investors demanding higher coupons. Shorting bonds in anticipation of higher yields has been excruciatingly painful, catching even the pros wrong-footed.
The crucial question is whether or not the Bond Vigilantes are finally off the ropes and the central banks are going down for the count. In the old days, prize fights did not have a set number of rounds. The fighters went until one of them went down. In the battle between the central banks and the markets, we have endured a seemingly endless fist fight. Perhaps that is about the change.
The catalyst could be the Greek default. Then again, it could simply be that investors have had enough of negative interest rates, bail-ins and the attacks on cash. We will soon see.
Collapsing interest rates caused holders of fixed income to reap abnormal profits. Rising interest rates will not only cause great volatility, but will shred profits for those still complacently holding outsized holdings of notes and bonds. Credit quality considerations were shoved aside ,particularly in the high-yield and sovereign debt markets.
Catastrophic Losses And The Star Permformers
The effect of rising rates and a return to people factoring in quality to their decision making process will result in catastrophic losses. That will result in collapsing insurance company assets and explosive deterioration in already bloated government deficits at all levels to name just a few of the consequences resulting from a secular rise in interest rates.
While rising rates were causing losses in the fixed income market last week, the star performers were light sweet crude oil and the HUI mining index. Crude advanced about 3.25% while the HUI advanced nearly 4%. The advance for the HUI was particularly impressive given the vicious attacks on the prices of gold and silver.
While the central bank algos and their computers are relentlessly and illegally focused on suppressing gold and silver prices, money continues to flow into the miners. Perhaps the recognition that lower oil prices are having the expected beneficial impact on operating costs for the mining companies is finally being widely acknowledged.
System-Wide Bail-In And Financial Meltdown
The smart strategy continues to be to acquire deeply undervalued assets such as energy and precious metals while minimizing exposure to longer-term fixed income. Cash should also be maintained away from the banks and mostly kept in high-quality short-term fixed income. The drums are beating for a variety of assaults on cash. Holding large amounts of cash in order to scoop up assets in the event of a financial meltdown might provide painful in the event of a system-wide bail-in.
As for stocks, the underpinning of the rise in recent years has been corporate buyback programs. Unless top-line growth improves and interest rates remain low, that prop will be taken away. We will then find out who has been metaphorically “swimming without a bathing suit” when the buyback funds recede. We suspect that the landscape will look more like a nudist colony than Coney Island. This is why stock selection based upon rising sales and earnings remains the key. ***Also, KWN has just released Rick Rule's remarkable audio interview and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
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