1987 And Market 'Accidents' Waiting To Happen

"Marc Faber noted recently, "markets will punish the interventionists one day," and while we are already seeing 'accidents' occurring in JGBs, Gold, EM debt, and now US Treasuries; US equities remain immune. However, given the current uncertainty of macro-economic data, high-leverage, fear of rising interest rates, and instability of currency markets, all of the same conditions that led to the 1987 crash are now present in financial markets. Does this mean the markets are going to crash? Certainly not; but the conditions may be right for another 'market accident' to happen.



Correlation is not causation...



correlation is not causation...





It's different this time...

The following quotes from the Fed's research paper entitled "A Brief History of the 1987 Stock Market Crash With a Discussion of the Federal Reserve Response" - embedded below - were listed as the primary causes of the 1987 crash...

"During the years prior to the crash, equity markets had been posting strong gains. Price increases outpaced earnings growth and lifted price-earnings ratios; some commentators warned that the market had become overvalued"

"Importantly, financial markets had seen an increase in the use of “program trading” strategies, where computers were set up to quickly trade particular amounts of a large number of stocks, such as those in a particular stock index, when certain conditions were met."

"The macroeconomic outlook during the months leading up to the crash had become somewhat less certain. Interest rates were rising globally."

at  http://www.zerohedge.com/news/2013-07-06/1987-and-market-accidents-waiting-happen

JP Morgan Vault Gold Drops To New Record Low; Brinks Gold Plunges By 24% In One Day

"Last week we defined the golden sentiment rule as "anything that isn't off the chart soon will be." This will happen in a "perfectly sustainable" fashion, where increasingly more paper gold is shorted to record levels even as actual physical holdings held by official Comex vaults continues to drop. For one particular reason why the price of paper gold may be at 3 year lows, we will provide some formerly classified perspective shortly in a post. But in the meantime, and while we await the weekly CFTC commitment of traders report (delayed until Monday due to the July 4 holiday), we are happy to report that the JPM disconnect between the epic delivery requests and its reported gold holdings (for which the "Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness") reconnected modestly, and as per the latest Comex update, another 6.8k ounces of gold was pulled from JPM's 1 CMP world's biggest gold vault, dropping its total gold inventory to a fresh record low.



Perhaps even more notable is that on Friday, that "other" depository, Brink's, saw 24% of its entire registered gold holdings, or 133k ounces, quietly get withdrawn. This, together with the moves in JPM and HSBC inventory, meant that total Comex gold holdings dropped by 116K ounces to a new low not seen for the first time since 2006.



Finally, for that all important marginal source of paper gold supply or demand, ETFs,the two largest ones (GLD and IAU) have now retraced 50% of their "holdings" gain since the fall of Lehman.





Someone more inquisitive than us may wonder: just where is all this gold being "withdrawn" to..."

at http://www.zerohedge.com/news/2013-07-06/jp-morgan-vault-gold-drops-new-record-low-brinks-gold-plunges-24-one-day

The Chart That Housing Bulls Don't Want You To See

"It is hard to square the economic circle of homebuilder/REIT-related equities falling (given concerns about the higher-rate environment) with a broad equity market rally as much predicated on the re-blowing of a real-estate bubble as any other real fundamental basis. The conundrum is perhaps even greater when we note that in spite of an unprecedented surge in mortgage rates, pending home sales surged in the most recent data. However, as the following chart makes all too clear, home sales lag mortgage rates with a very high level of correlation and it appears, we suspect, that this most recent surge in home sales (extrapolated by those of that bias to mean that the housing recovery is sustainable even with higher rates already crushing affordability) is merely a pulling forward of activity and will lead to a significant softening in coming months (especially relative to expectations) should the taper-tantrum in bonds remain.







Charts: Bloomberg"

at http://www.zerohedge.com/news/2013-07-06/chart-housing-bulls-dont-want-you-see

Both Registered and Total Gold Fall To New Lows At the Comex

"Prior lows have marked meaningful market trend changes.

Stand and deliver.

 

at http://jessescrossroadscafe.blogspot.com/2013/07/both-registered-and-total-gold-fall-to.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+JessesCafeAmericain+%28Jesse%27s+Caf%C3%A9+Am%C3%A9ricain%29

Rail Traffic Remains Consistent with Weak Economy

"If rail traffic is any indication of current economic strength (and it has been a superb leading indicator for years), then we’re looking at continued softness in the US economy.  The latest reading on intermodal traffic came in at -1.5% year over year and brought the 12 week moving average to 2%.  That’s about right in line with overall economic growth and consistent with a growing, but sluggish economy.
The AAR has more details on this week’s report:

"The Association of American Railroads (AAR) reported mixed weekly rail traffic for the week ending June 29, 2013, with total U.S. weekly carloads of 281,367 carloads, up 1 percent compared with the same week last year. Intermodal volume for the week totaled 249,673 units, down 1.5 percent compared with the same week last year. Total U.S. traffic for the week was 531,040 carloads and intermodal units, down 0.2 percent compared with the same week last year.
Five of the 10 carload commodity groups posted increases compared with the same week in 2012, led by petroleum and petroleum products, up 26.6 percent. Commodities showing a decrease compared with the same week last year included grain, down 13.8 percent.
For the first 26 weeks of 2013, U.S. railroads reported cumulative volume of 7,217,899 carloads, down 1.5 percent from the same point last year, and 6,270,438 intermodal units, up 3.6 percent from last year. Total U.S. traffic for the first 26 weeks of 2013 was 13,488,337 carloads and intermodal units, up 0.8 percent from last year.”
Chart via Orcam Investment Research:

 

at http://pragcap.com/rail-traffic-remains-consistent-with-weak-economy

China Radio: "The U.S. And Europe Have Always Suppressed The Rising Price Of Gold"

"Sometimes, such as after pervasive liquidations in precious metals (or is that AAPL? Has it become clear yet that with widespread "quality" collateral shortages, gold and AAPL stock have become unexpected and almost interchangeable collateral replacements) it is easy to lose sight of the forest for the trees. A forest, in which the New York Fed is procuring (through the open market) the rehypothecated gold that the Bundesbank demanded for repatriation in January; in which JPMorgan's gold holdings have plunged by 75% since said stunning Bundesbank announcement and hit new record lows on a weekly basis paradoxically just as the price of spot gold keeps sliding ever lower; and in which China is importing unprecedented amounts of gold and adding more and more each month. So let's do a quick refresh on the forest, shall we.

Here is what we discovered in September 2011, as part of Bradley Manning's trove of declassified US cables. From Wikileaks:

3. CHINA'S GOLD RESERVES

"China increases its gold reserves in order to kill two birds with one stone"

"The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): "According to China's National Foreign Exchanges Administration China's gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB."

And now for some empirical trees.

While we don't know how much of the several hundred tons that Jens Weidmann has demanded for delivery from Liberty 33 has already been purchased and/or delivered, we know one thing: since publishing the Wikileaks disclosure China has imported nearly 2,000 tons, and just under 1,500 tons since January 2012...



... and that Chinese gold imports in 2013 continue to surpass those from 2012 "despite" the violent slide in the gold price - almost as if unlike E*trade momentum chasing babies, China buys more the lower the price drops.



In other words, China - pragmatic as always - decided to call the "rising gold price suppression" bluff of the US and Europe and do the only logical thing that takes advantage of an artificially suppressed gold price: buy hand over fist.

As for everyone else selling their (mostly paper) gold over fears that this time, unlike the previous two, Bernanke will actually stop monetizing debt and in the process eliminate all concerns of monetary collapse, China is happy to wave it in (and why not: it is only a matter of time before the taper makes way for the untaper).

Finally, we concluded our previous post looking at recent gold technicals with the following rhetorical question:

Someone more inquisitive than us may wonder: just where is all this gold being "withdrawn" to...

Rhetorical, because we have a very good idea where this gold is going."

at http://www.zerohedge.com/news/2013-07-06/china-radio-us-and-europe-have-always-suppressed-rising-price-gold

Gold & A Global Financial System In Complete Turmoil

"On the heels of continued chaos in global markets, today acclaimed money manager Stephen Leeb spoke with King World News about the gold and silver smash and what investors should expect going forward.  Leeb also talked with KWN about one country in Europe that is getting very serious about its gold..."

at   http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/7/5_Gold_%26_A_Global_Financial_System_In_Complete_Turmoil.html

Faber - Brace For Financial Destruction & Sovereign Defaults

"Eric King:  “We’ve been talking about the one quadrillion dollars of derivatives here at KWN recently, Marc.  Does the sheer amount of derivatives risk the danger of a 2008 style collapse?  Is that (risk) still out there?”

Faber:  “Yes.  If you look back at 2007, before the crisis occurred, and today, the level of credit in the world has increased.  The imbalances have also increased. 

 

And the sovereign credit of countries has essentially diminished in quality.  Now we have a huge bond market rally because of artificially low interest rates, but I think the next stage in the rolling crisis that we will have will be sovereign defaults.”

 

at http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/7/6_Faber_-_Brace_For_Financial_Destruction_%26_Sovereign_Defaults.html

Does Debt Matter?

“Does Debt Matter?” is the question posed by The International Economy to 20 commentators:“The recent scrutiny of the popularized version of the Rogoff-Reinhart thesis (that growth plummets when debt exceeds 90 percent of GDP) makes clear there are no simple formulas for determining the risks in the level of a nation’s debt. …Can a realistic guide be fashioned for determining whether a nation’s debt has reached a danger zone? Or are countries from here on expected to pursue fiscal reforms only if and when a crisis sets in?”

My response:

          Yes, debt matters.   I don’t think I know of anyone who believes that a high level of debt is without adverse consequences for a country.  There is no magic threshold in the ratio of debt to GDP, 90% or otherwise, above which the economy falls off a cliff.    But if the debt/GDP ratio is high, and especially if the country’s interest rate is also high relative to its expected future growth rate, then the economy is at risk.  One risk is that if interest rates rise or growth falls, the economy will slip onto an explosive debt path, where the debt/GDP ratio rises without limit.  In the event of such a debt trap, the government may have no choice but to undertake a painful fiscal contraction, even though that will worsen the recession.  (The resulting fall in output can even cause a further jump in the debt/output ratio, as it has in the periphery members of the eurozone over the last few years.)  

          None of that means that austerity in the midst of a recession is a good idea.  Reinhart and Rogoff never said it was, either in their research or in their policy advice. Rather, as Keynes said, the time for fiscal austerity  is during the boom, not during the recession.  Indeed, a good reason to reduce the debt/GDP ratio during a boom is precisely to create the space for budget deficits during downturns.

          No; countries should not be told “to pursue fiscal reforms only if and when a crisis sets in.”   Rather, high-debt countries should take advantage of periods of growth to eliminate budget deficits before a crisis sets in, so that they do not find themselves in a debt trap.  The time to fix the hole in the roof is when the sun is shining.   Most European countries failed to take advantage of the growth years 2002-2007, to strengthen their budgets, and are now paying the price.    The Greeks spectacularly failed to do so, with the result that they have had to go up on the roof to attempt to fix the hole during a thunderstorm, a task that is unpleasant, difficult, dangerous - and probably impossible.  

 

          If you want to identify some research that has misled politicians, go for the papers suggesting that  fiscal contraction is not contractionary and that it may even be expansionary.   It is true that sometimes a country may have no alternative to fiscal contraction;  but that does not mean it is expansionary, especially if the currency cannot be devalued to stimulate exports.

          The United States also failed to take advantage of the growth years 2002-07 to run budget surpluses.   But fortunately our situation is completely different from Greece’s:  our creditors are happy to hold dollar bonds, even at rock-bottom interest rates.  They are not imposing on us short-term recession-inducing fiscal austerity.   We should not impose it on ourselves while the economy is still weak.   Instead, we should take steps now that will restore fiscal discipline in the future."

 

at  http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2013/07/04/does-debt-matter/

Have Central Bankers Lost Control? Could The Bond Bubble Implode Even If There Is No Tapering?

"Are the central banks of the world starting to lose control of the financial markets?  Could we be facing a situation where the bond bubble is going to inevitably implode no matter what the central bankers do?  For the past several years, the central bankers of the planet have been able to get markets to do exactly what they want them to do.  Stock markets have soared to record highs, bond yields have plunged to record lows and investors have literally hung on every word uttered by Federal Reserve Chairman Ben Bernanke and other prominent central bankers.  In the United States, it has been remarkable what Bernanke has been able to accomplish.  The U.S. government has been indulging in an unprecedented debt binge, the Fed has been wildly printing money, and the real rate of inflation has been hovering around 8 to 10 percent, and yet Bernanke has somehow convinced investors to lend gigantic piles of money to the U.S. government for next to nothing.  But this irrational state of affairs is not going to last indefinitely.  At some point, investors are going to wake up and start demanding higher returns.  And we are already starting to see this happen in Japan.  Wild money printing has actually caused bond yields to go up.  What a concept!  And that is what should happen - when central banks recklessly print money it should cause investors to demand a higher return.  But if bond investors all over the globe start acting rationally, that is going to cause the largest bond bubble in the history of the planet to burst, and that will create utter devastation in the financial markets.
Central banks can manipulate the financial system in the short-term, but there is usually a tremendous price to pay for the distortions that are caused in the long-term.
In Bernanke's case, all of this quantitative easing seemed to work well for a while.  The first round gave the financial system a nice boost, and so the Fed decided to do another.  The second round had less effect, but it still boosted stocks and caused bond yields to go down.  The third round was supposed to be the biggest of all, but it had even less of an effect than the second round.  If you doubt this, just check out the charts in this article.
Our financial system has become addicted to this financial "smack".  But like any addict, the amount needed to get the same "buzz" just keeps increasing.  Unfortunately, the more money that the Fed prints, the more distorted our financial system becomes.
The only way that this is going to end is with a tremendous amount of pain.  There is no free lunch, and there are already signs that investors are starting to wake up to this fact.
As investors wake up, they are going to realize that this bond bubble is irrational and entirely unsustainable.  Once the race to the exits begins, it is not going to be pretty.  In fact, the are indications that the race to the exits has already begun..."

at http://theeconomiccollapseblog.com/archives/have-central-bankers-lost-control-could-the-bond-bubble-implode-even-if-there-is-no-tapering

Interest Rates Spike Again

"This morning’s employment report looked good enough on the surface to rekindle talk of an end to the Fed’s debt monetization program. So in addition to buying stocks at the open, traders began their day by dumping bonds. The 10-year Treasury yield is up by over 8% in early trading, to almost 2.7%.



Now the question is, which of these two opposing forces — rising employment and rising interest rates — predominates. Specifically, are rising interest rates a sign of systemic health or an arrow aimed at the heart of an overleveraged society? A few things to look for: recalculations of the deficit in light of spiking interest costs, comparisons of US and Japanese yields and speculation about what this means for Japanese rates — followed by dire analyses of Japan’s future borrowing costs — and last but not least, a growing concern for the hundreds of trillions of dollars of interest rate derivatives that now have one counterparty deeply in the red..."

at http://dollarcollapse.com/interest-rates-2/interest-rates-spike-again/

Gold, Financial War & The Fed’s Dangerous Exit Strategy

"With the United States celebrating Independence Day, oil still trading over $100 a barrel, and continued uncertainty in the Middle-East, today King World News interviewed the director of international economics at the Council on Foreign Relations in New York.  Dr. Benn Steil warned KWN about the Fed’s exit strategy, and also spoke about China’s large hoard of U.S. dollars, and their massive accumulation of gold.

Eric King:  “What we are looking at right now is a financial war between the U.S. and China.”

 

Dr. Steil:  “That’s right.  In the 1940s the U.S. was the world’s largest international creditor, and Britain was the world’s largest international debtor.  Today, China is the world’s largest international creditor, and of course the United States is the world’s largest international debtor. 

 

And it’s fascinating to see that the United States today takes the same position in terms of identifying the flaws in the global monetary architecture that Keynes and the British took in the 1940s.  For example, former Treasury Secretary Tim Geithner, in 2010, proposed imposing caps on persistent current account surpluses.  Of course that was aimed at disciplining Chinese economic behavior....

“This was exactly the sort of position that Britain was taking in the 1940s, Harry Dexter White and the FDR administration condemned.  So where you stand depends on where you sit at the time.”

 

Eric King:  “This is also a quote (from Dr. Steil) ‘At present, the United States has no need to accommodate calls for it to sacrifice its exorbitant privilege (having the world’s reserve currency) to some vague vision of the global good.  It will only waver when the market initiates a clear shift toward alternatives.”  What about that (Dr. Steil)?”

 

Dr. Steil:  “Well, in the 1940s there was a deal to be done between the United States and Britain.  It was a harsh deal, and it was an imbalanced deal as I explained, but nonetheless it was a deal to be done.  Britain needed financing to get through the war, and the Americans needed British acquiescence to make the dollar the global unit of account. 

 

But the situation with China today is not the same, and let me give you just one little anecdote to illustrate this:  In 1956, the Eisenhower administration forced the British out of (the) Suez (Canal) by threatening to withhold emergency IMF support. 

 

Now, the United States, at the time, could afford to provoke a sterling crisis at no cost to itself because in 1956 U.S. holdings of British securities amounted to only one dollar per U.S. resident.  Now, compare that to today, where Chinese holdings of U.S. securities amount to over (a remarkable) $1,000 per Chinese resident.

 

So China cannot afford to provoke a dollar crisis today because it would be hurting itself at least as much as it would be hurting the United States.  And that’s why there is really not, in my view, a deal to be done right now between the United States and China to remake the global international architecture ... As you quoted, China has a vast stash of dollar-denominated assets, and it doesn’t want to do anything that would undermine the global purchasing power of this hoard.  So they are in quite a bind.”

 

Eric King:  “What about the Chinese accumulating so much gold?”

 

Dr. Steil:  “No doubt they are, and one reason is that they view gold as being a potential alternative reserve to the U.S. dollar.  Gold, similarly to the U.S. dollar, tends to do well in a crisis, and can play a similar role to the U.S. dollar when a country gets into financial difficulties.”

 

at http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/7/4_Gold,_Financial_War_%26_The_Feds_Dangerous_Exit_Strategy.html

 

19 Reasons To Be Deeply Concerned About The Global Economy As We Enter The 2nd Half Of 2013

"The following are 19 reasons to be deeply concerned about the global economy as we head into the second half of 2013...
#1 The velocity of money in the United States has plunged to an all-time low.  It is extremely difficult to have an "economic recovery" if banks are not lending money and people are not spending it...

#2 The fall of the Egyptian government threatens to bring even more instability to the Middle East.  In response to the events in Egypt, the price of oil rose to more than 101 dollars a barrel on Wednesday.
#3 Every time the average price of a gallon of gasoline in the United States has risen over $3.80 in the past three years, a stock market decline has always followed.
#4 As the world becomes increasingly unstable, massive citizen protest movements have been rising all over the globe...

The protests have many different origins. In Brazil people rose up against bus fares, in Turkey against a building project. Indonesians have rejected higher fuel prices, Bulgarians the government’s cronyism.
In the euro zone they march against austerity, and the Arab spring has become a perma-protest against pretty much everything. Each angry demonstration is angry in its own way.

#5 The European sovereign debt crisis is flaring up once again.  This time it is Portugal's turn to take center stage...

From Greece to Cyprus, Slovenia to Spain and Italy, and now most pressingly Portugal, where the finance and foreign ministers resigned in the space of two days, a host of problems is stirring after 10 months of relative calm imposed by the European Central Bank.
Portuguese Prime Minister Pedro Passos Coelho told the nation in an address late on Tuesday that he did not accept the foreign minister's resignation and would try to go on governing.
If his government does end up collapsing, as is now more likely, it will raise immediate questions about Lisbon's ability to meet the terms of the 78-billion-euro bailout it agreed with the EU and International Monetary Fund in 2011.

#6 It is being projected that Italy will need a major EU bailout within six months.
#7 Bond investors are starting to panic.  In fact, even prominent firms such as Pimco are seeing investors pull massive amounts of money out right now...

In June, investors pulled $9.6bn from Bill Gross’s flagship fund at Pimco, the largest single month of outflows at the fund since Morningstar records began in 1993, the investment research firm said.

The outflows came after investors pulled $1.3bn from the fund in May, which marked the first outflows since December 2011.

Overall, a whopping 80 billion dollars was pulled out of bond funds during June.
#8 Central banks are selling off staggering amounts of U.S. Treasury bonds right now.
#9 U.S. mortgage bonds just suffered their largest quarterly decline in nearly 20 years.
#10 We continue to buy far more from the rest of the world than they buy from us.  The U.S. trade deficit for the month of May was 45.0 billion dollars..."

at http://theeconomiccollapseblog.com/archives/19-reasons-to-be-deeply-concerned-about-the-global-economy-as-we-enter-the-2nd-half-of-2013

People Want Physical Gold and Silver in Their Hands-Tom Cloud

"Hard asset expert Tom Cloud has spotted a clear trend with “the lions share” of his 2,000 high net worth clients.  Cloud says, “I had a client the other day who liquidated a several million dollar position in an ETF because he said it’s time to put gold and silver in my hand. . . . People, the wealthier they are, want to get physical gold and silver in their hands.”   Cloud is far from alone in his observation.  Cloud reports, “I was talking to a major wholesaler last week, when the price was going down, and I asked how many orders have you had today?  He said 560.  I asked how many have sold to you?  He said 20.”   Cloud says delivery times for gold and silver bullion are unusually long.  When supplies of precious metals are plentiful, Cloud says, “It would be in my hand in three to five days. . . Now, depending on the product, it’s two and a half to six weeks.”  Cloud says the only two other times supply has been this tight was “1980 and 2008.”  Cloud contends, “Supplies are tight and fear is high.  I see it getting worse this fall.”  Join Greg Hunter as he goes One-on-One with Tom Cloud of CloudHardAssets.com."

at http://usawatchdog.com/people-want-physical-gold-and-silver-in-their-hands-tom-cloud/

4 Factors that Make the Global Economy More Sensitive to Future Crises

"I liked this piece by Philippe Bacchetta and Eric van Wincoop at VOX regarding the causes of the global great recession.   In it, they discuss the factors that led to the crisis and why it was so globally widespread.  This section, in particular, jumped out at me:

“There were also several factors that made the global economy more sensitive to a global panic:

• First, credit was tighter due to the financial crisis, making firms more vulnerable when hit with lower demand and lower profits.
• Second, there was limited scope for monetary policy as interest rates were already approaching the zero lower bound.
• Third, there were constraints on countercyclical fiscal policy due to increasing debt levels and new fiscal rules.
• Fourth, economic integration, although incomplete, had substantially increased in previous decades.

The first three factors generate vulnerability to a self-fulfilling panic in general, while the last one generates particular vulnerability to a panic that is global in nature.”

The interesting thing is that none of these factors have actually gone away.  In fact, you could argue they they are all major constraints going forward.  The private sector, although de-leveraging, is much more leveraged at present than it was in the early 2000′s when the seeds of the crisis were sowed.  Second, central banks are already at the zero lower bound and have been for years.  The arsenal to combat future problems is limited at present.  Third, global debt to GDP has risen substantially in the last decade and remains a major political constraint with regards to expansion of future fiscal policy.  And lastly, the global economy is only becoming more and more interconnected.  And that means that a crisis in one country is much more likely to influence the global economy.
Although we’ve slipped out of the great recession one could easily argue that we’re more vulnerable to future crises than ever."

at http://pragcap.com/4-factors-that-make-the-global-economy-more-sensitive-to-future-crises

The Federal Reserve Is Paying Banks NOT To Lend 1.8 Trillion Dollars To The American People

"Did you know that U.S. banks have more than 1.8 trillion dollars parked at the Federal Reserve and that the Fed is actually paying them not to lend that money to us?  We were always told that the goal of quantitative easing was to "help the economy", but the truth is that the vast majority of the money that the Fed has created through quantitative easing has not even gotten into the system.  Instead, most of it is sitting at the Fed slowly earning interest for the bankers.  Back in October 2008, just as the last financial crisis was starting, Federal Reserve Chairman Ben Bernanke announced that the Federal Reserve would start paying interest on the reserves that banks keep at the Fed.  This caused an absolute explosion in the size of these reserves.  Back in 2008, U.S. banks had less than 2 billion dollars of excess reserves parked at the Fed.  Today, they have more than 1.8 trillion.  In less than five years, the pile of excess reserves has gotten nearly 1,000 times larger.  This is utter insanity, and it will have very serious consequences down the road.
Posted below is a chart that shows the explosive growth of these excess reserves in recent years...

This explains why all of the crazy money printing that the Fed has been doing has not caused tremendous inflation yet.  Most of the money has not even gotten into the economy.  The Fed has been paying banks not to lend it out.
But now that big pile of money is sitting out there, and at some point it is going to come pouring in to the U.S. economy.  When that happens, we could very well see an absolutely massive tsunami of inflation.
Posted below is a chart that shows the growth of the M2 money supply over the past several decades.  It has been fairly steady, but imagine what would happen if you took the hockey stick from the chart above and suddenly added it to the top of this one...

The longer that the Federal Reserve continues to engage in quantitative easing and continues to pay banks not to lend that money out to the rest of us, the larger that inflationary time bomb is going to become.
In a recent article for the Huffington Post, Professor Robert Auerbach of the University of Texas explained the nightmarish situation that we are facing...

One reason that the excess reserves grew to an extraordinary level is that in October 2008, one month after the financial crisis when Lehman Brothers went bankrupt, the Bernanke Fed began paying interest on bank reserves. Although it has been 1/4 of 1 percent interest, this risk free rate was not low compared to the Fed's policy of keeping short-term market rates near zero. The interest banks received was and is an incentive to hold the excess reserves rather than lend to consumers and businesses in the risky environment of the major recession and the slow recovery.
The Bernanke Fed is now facing a $1.863 trillion time bomb, they helped to create, of excess reserves in the private banking system. If rates of interest on income earning assets (including bank loans to consumers and businesses) rise, the Fed will have to pay the banks more interest to hold their excess reserves..."

at  http://theeconomiccollapseblog.com/archives/the-federal-reserve-is-paying-banks-not-to-lend-1-8-trillion-dollars-to-the-american-people

Consumer Metrics Institute: Recovery is a Sham

"The Consumer Metrics Institute is generally a pretty subdued bunch, as befits their job interpreting economic statistics for money managers and other economists. But lately they’ve been sounding, well, apocalyptic. Here are a few snippets from their analysis of the US GDP revision released this morning:
On the government’s questionable use of inflation to arrive at real GDP:

For this set of revisions the BEA assumed annualized net aggregate inflation of 1.26%. In contrast, during the first quarter (i.e., from December to March) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) rose by 2.10% (annualized), and the price index published by the Billion Prices Project (BPP) rose at an annualized rate of 5.35%. As a reminder: an understatement of assumed inflation increases the reported headline number — and in this case the BEA’s relatively low “deflater” boosted the published headline rate. If the CPI-U had been used to convert the “nominal” GDP numbers into “real” numbers, the reported headline growth rate would have been a much more modest 0.96%. And if the BPP index (which arguably best reflects the experiences of the American consumer) had be used as the “deflater,” the economy would have been reported to have been contracting at a -2.30% annualized rate.

On falling US imports:

But once again that bad news was more than completely offset by an even larger drop in imports — which now added +0.06% to the headline number after removing -0.32% in the prior report. Since this mathematical “addition” to the headline number can be the consequence of decreasing domestic demand for foreign goods, it is arguably a sign of a weakening economy. It may also be merely a sign of softening commodity prices.

And the big one, plunging incomes:

And as mentioned above, real per-capita disposable income took another hit: it is now reported to have dropped by an annualized $796 from quarter to quarter. Real per-capita disposable income is now down $209 annually from 1Q-2011 — a full two years ago..."

at  http://dollarcollapse.com/the-economy/consumer-metrics-institute-recovery-is-a-sham/

Unprecedented Wealth Destruction & Volatility Has Now Begun

"On the heels of another wild week of trading in global markets, today one of the top economists in the world warned King World News that market participants should expect violent and unprecedented trading in key markets going forward.  Michael Pento, founder of Pento Portfolio Strategies, wrote this exclusive piece for KWN. 

Pento: “I have warned investors in the past that the Fed’s rapid expansion of credit would cause the U.S. economy to enter a period of unprecedented volatility between inflation and deflation.  This would lead to violent moves in most markets, especially interest rate sensitive investments.  That time has now arrived...."

 

at http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/6/30_Unprecedented_Wealth_Destruction_%26_Volatility_Has_Now_Begun.html

John Hathaway - Five Absolutely Spectacular Gold Charts

"In our opinion, the severe pressure on gold prices since April 16, 2013 has been caused by a coordinated bear raid orchestrated by large bank trading desks and hedge funds.  The method used was naked shorting of gold contracts on the futures exchange (Comex), which means that physical gold was never sold, only paper.  Gold was rarely, if ever, delivered to a buyer.  Trades were settled in cash.

The notional amounts of the transactions on many days exceeded annual mine production, absurd on the face of it.  The motive was most likely to break the gold price for profit.  The result is that short positions of these traders are higher than at the bottom in 2008 (chart below), after which gold rallied 167% and mining shares 256% (basis XAU).

 

Traders exploited and exaggerated the technical vulnerability of gold in our opinion simply because it was possible to do so.  Because the gold futures market offers deeper capacity than almost any other physical commodity market, it was a perfect target for bonus seeking traders who have also profited (some of which are now being prosecuted or investigated) in the manipulation of Libor and Foreign Exchange rates.

 

The price decline in paper gold has been met with a surge in physical demand worldwide.  The most dramatic image is the disparity between paper and physical gold, which is depicted in the chart below showing the premiums over paper gold prices paid in China for physical.

 

While China is by far the larger market, U.S. coin sales are exceptionally strong as well, surpassing volume at the 2011 price peak by 23%.  The conclusion we draw is that the paper market has severely mispriced gold on the downside. The physical market indicates a shortage of gold at the same time the paper market is extremely short.

In April 2013, Dutch banking giant ABN Amro notified clients that they would no longer be providing physical delivery of precious metals including gold.  Claims would be settled in cash with account balances adjusted by the prevailing bid prices “offered by merchants.”????  The bank explained that new custodial relationships would no longer allow physical “extradition.”

 

at  http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/7/1_John_Hathaway_-_Five_Absolutely_Spectacular_Gold_Charts.html

Gold Price and Market Instabilities

"• Central Banks Dumping U.S. Treasuries at Fastest Pace Since 2011 Budget Crisis
• Market Turmoil Reflects Shifting Sentiments and Systemic Distortions
• Underlying Fundamentals for Gold and Silver Remain Extremely Strong
• Gold Remains the Most-Solid Hedge Against Looming Dollar and Inflation Crises..."

at  http://www.shadowstats.com/article/no-537-gold-price-and-market-instabilities