Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

[EJ]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

This explains the Fed's move so close to U.S. elections. It also explains why gold has been rising in all currencies versus only the USD.

We'll get the $1 trillion plus dollar global stimulus by the end of Q3 as I forecast July 11, 2012.

Here comes Global Stimulus 3, right on schedule.

Sept. 7: First China committed $158 billion in fiscal stimulus to boost public spending on make-work programs.

Sept. 13: The Fed committed $240 billion aimed at the housing market with a commitment to go beyond six months "if the labor markets do no improve," which is like saying "I'm going to keep hitting this screw with a hammer until it goes in." The QE is restricted to ASB purchases, not U.S. Treasury bonds.

Sept. 20: Today the Bank of Japan committed $125 billion in asset purchases, including government bonds.

That leaves the ECB and "others" with ten days and $523 billion to go.

My bet? The ECB comes in above $300 billion and "others" altogether at $200 billion, more or less.

$4 trillion stimulus from Q4 2008 to Q1 2009. Third try's a charm or is this the end of the road for coordinated global stimulus?

[Polish_Silver]

Re: Less corrupt government

How will you distinguish between a political ad and news story? That problem was the logical basis of the supreme court decision.

[littleshark]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

That leaves the ECB and "others" with ten days and $523 billion to go.

My bet? The ECB comes in above $300 billion and "others" altogether at $200 billion, more or less.

Didn't the ECB do essentially do their QE, committing to buy sovereign debt if asked? I know I needs to be triggered by a bailout request, but are you saying you think there will be something in addition to that?

[EJ]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Didn't the ECB do essentially do their QE, committing to buy sovereign debt if asked? I know I needs to be triggered by a bailout request, but are you saying you think there will be something in addition to that?

They have made a series of statements but as of yet have made no firm commitment.

Being the most bureaucratic of the lot, and having been back from the summer holiday only a few weeks, you have to give the Europeans more time than the workaholic Japanese and Americans to do the necessary operational work to execute a EU-wide stimulus. Let's give them until the end of next week.

[jabberwocky]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I continue to be somewhat surprised that you seem to imply that the Fed will not take increasing share of the treasury market in the future to suppress US gov't yields. I see nothing in Bernanke's actions or beliefs that precludes this. Once the system fractures, there is no limit to intervention, and the mirage of rule of law in the US can be maintained as long as the powerful write the laws.
If it is the case that complex systems are not "logic" systems, administered perturbations will result in irreversible, unpredictable outcomes, and surely our financial markets are now "admiministered".
I can imagine the Fed declaring, or, at least covertly promising, that it will buy every treasury forever, until, of course, forever comes!

[EJ]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I continue to be somewhat surprised that you seem to imply that the Fed will not take increasing share of the treasury market in the future to suppress US gov't yields. I see nothing in Bernanke's actions or beliefs that precludes this. Once the system fractures, there is no limit to intervention, and the mirage of rule of law in the US can be maintained as long as the powerful write the laws.
If it is the case that complex systems are not "logic" systems, administered perturbations will result in irreversible, unpredictable outcomes, and surely our financial markets are now "admiministered".
I can imagine the Fed declaring, or, at least covertly promising, that it will buy every treasury forever, until, of course, forever comes!

There has been much confusion in the markets for the entire period since 1998 when I started writing on this site.

In 1999 I kept being told that we were in a bull market in stocks. I kept explaining in response that the bull market ended in 1995 when the market morphed from bull to bubble, reaching its critical point in March 2000 when I issued my sell warning.

Similar deal from 2002 until late 2007 when I issued my second sell warning. I kept being told of a bull market in housing. I explained that the bull market ended in 2002 when housing became a bubble that started to collapse in 2006 as I said it would.

Now the confusion is over the UST market. Even clever guys like Jeffrey Gundlach are confused.

He refers to the UST market as a bull market.

It is not a bull market, but it's not a bubble, either. The term "repression" is also inaccurate and delusional.

The UST bull market ended in 2001. From 2001 until the crash in the market for securitized mortgage bonds the UST market was manipulated by rate policy and accelerated foreign UST sales. Since Q2 2009 when short rates effectively hit zero prices of UST have been fixed by policy across the yield curve. Not coincidentally that is when foreign central banks became net gold buyers.

None of this is surprising. It is as the Fed said it was planning to do under these circumstances. The shock for me as I saw this all developing starting in the late 1990s was that the Fed had so little interest in preventing the circumstances that demanded a deflationary collapse fighting policy down the road.

Cultivation of asset bubbles followed by radical Fed and fiscal intervention after bubbles has been my theory since 1998 when this site was started after I figured out that this is the logic of our political economy.

That's why I sold stocks in early 2000 and bought long-term Treasury bonds that fall then gold in the summer of 2001.

Since early 2005 when I first debated guys like Mish and Denneger about deflation I have tried to explain the philosophy of the Fed and Congress. Granted it is not easy to get your head around these policies if you are a rational person. Part of the task of forecasting in this environment is to think like a crazy person but without becoming one.

After Greenspan tried and failed in 1994 he justified future inaction by applying fundamentalist free market philosophy. Under the Clinton administration Greenspan found it to be too politically unpopular to halt asset bubbles. The Fed decided consciously to not try to prevent bubbles and crashes.The Fed convinced itself that it could manage the macroeconomic aftermath of the crashes that inevitably follow asset bubbles.

In 2010 I re-enforced the point I made about the Fed's use of its balance sheet to prevent deflation.

Door Number Two Revisited – Part I: Re-inflation theory and practice

In theory, the balance sheet of the Federal Reserve can be expanded infinitely.”
- Alan Greenspan, 2005

Yes, they actually believe this. I have met them -- Bernanke and Yellen and Summers and, yes, even Volcker believes this. I can tell you that they believe every word that they have written about all of the ways that a central bank and government can manage the aftermath of a credit bubble as if nothing happened and we can all go merrily on our way. Loony stuff, but never underestimate the ability of members of an entrenched power group to talk each other into crazy ideas.

Next month I meet Jamie Dimon and Simon Johnson. Simon is one of the good guys, of course. It will be fun to talk to him. The reason for meeting Dimon is the same as for meeting Summers. It's important aspect of my work here to understand how the guys we do not agree with are think, especially when they have their hands on the steering wheel and foot on the gas pedal.

In 1998 I decided that they were going to let the bubbles rip then pop. The Fed and Congress will use every trick in the book to try to get the economy going again.

They do not think of themselves as fixing bond prices or manipulating rates, or selling U.S. foreign policy determination to alien foreign powers.

They think they are heros for preventing a deflationary depression by "shaping the yield curve."

It's insanity, of course, but it's important to remember that the original act of insanity was allowing the U.S. economy to become leveraged on mortgage debt to nearly 100% of GDP.

They will try and try and try until eventually the Fed and the U.S. runs out of credit and the UST market implodes.

To me it appeared inevitable that if the Fed encouraged asset bubbles that the U.S. economy was going to wind up on monetary and fiscal life support and just as inevitably this effort will fail.

Heavy on the word "eventually."

We took our positions for the eventuality of a U.S. currency and bond crisis more than a decade ago.

The Janszen Scenario is about how -- and possibly when -- the Fed and U.S. run out of credit trying to support the over-indebted U.S. economy to prevent its collapse into a deflationary depression.

In Part II of this article, which I plan to publish tomorrow, we look into one of three ways that the U.S. runs out of credit while trying to prevent a deflationary depression.

The U.S. economy has been running on borrowed money and borrowed time since 2009.
Japan's economy has been similarly "assisted" since 1992. Can the U.S. do the same?

I asked Larry Summers if he thought there was a limit to the amount of leverage that the U.S. economy could take on and still function. He didn't really answer the question. But the question wasn't formulated in a way that kept him from avoiding an answer. A corollary question that perhaps I'll put to Dimon, and word more cleverly so he has to answer, to see what he'll say, is whether there is a theoretical upper limit to the Fed's balance sheet. Is it $10 trillion? $100 trillion? $1,000 trillion? The answer should be interesting. All in the subscriber area, of course.

[rlskaggs2003]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

CI: You show QE as beefing up the assets side of the household balance sheet, for those who have financial assets. What about net worth overall?
EJ: Peak to trough we're talking about a $16 trillion decline in household net worth from $68 trillion to $52 trillion. As of Q2 2012 households made back $10 trillion of that; now its off $6 trillion from the peak.

There are roughly 118 million households in the U.S. Unless my math is off, $62 trillion equates to an average household and NPO net worth of a little over half million dollars per household. Unless there's a bunch of NPO's with really strong balance sheets, I have trouble believing avg household NW is truly this large. I wonder if the methodology used to estimate NW has been consistent over the time period shown above.

[rogermexico]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

This nuanced interpretation of gold's function in a currency crisis is critical to get right because it suggests how the latest episode in the life of gold as a monetary asset is most likely to end. Rather than by government confiscation as gold fanatics warn, I have argued since 2001 that the most probable endgame is for global monetary crisis to force the U.S. to re-open the gold window, a concept I explain in detail later, with gold turned in by U.S. citizens voluntarily to increase U.S. holdings from 8,133 tons today to enough to truly back the full faith and credit of the U.S. Treasury.

My prediction has been and remains that there will be no vilification of gold, no confiscation of gold and no unavoidable punitive taxation when the gold window opening is imminent and US GOV has decided that gold is the new money. Remember, right now gold is still the enemy, and even if it is acknowledged by TPTB that gold will become the new money eventually, the fiction that it will always be the enemy must be maintained.

When the gold window is imminent, it will be in the interests of those who want to peg the out of control dollar to gold to get as many dollars for the gold as possible - the reverse of the current posture. The more dollars or UST per gold ounce, the more debt is covered by the gold, correct?

This will mean that the gold peg must be set higher than the market clearing price of gold absent the window re-opening. This means the ultimate price will be high.

The UST or Fed or whoever holds the gold (makes no difference as the dynamics are the same) will want to possess more of this newly valuable gold than what they have at the time. Do you suppose it would be efficient to go house to house with a metal detector or to depend on patriots ( a la Korea) to donate the gold in private hands? Will black helicopters fly? Will gold profits be taxed at 90% to punish you for holding what is now the new basis for money? Would this tax alone motivate you to turn it in or sell it or to simply go to greater efforts to hide it to avoid the taxation? Would any of these goldbug inspired maneuvers put much more gold in the treasury to back the new gold pegged dollar? NO.

The government or Fed will buy your gold. The price will be at a modest discount to the remonetization price and will likely be at least equal to if not higher than the market determined spot price at the time.

Why will you sell it to them?

Because if you accept the price offered the taxes will all be waived.

That is the one sure way the government can collect the most gold that is in private hands without screwing or disincentivizing itulipers or the goldbugs or the law abiding citizens, or the seret hoarders or the 1% who increasingly hold gold and like any sane person desire to minimize their taxes. So you, John Paulson, George Soros and grandma with a Kugerrand will all be incentivized to turn in your gold. And at a reasonable price that is discounted relative to the remonetization price but higher than you would get in the market after accounting for taxes at current rates.

There's my prediction. Let's see how close it comes to fruition. I think this will happen in the next presidential term.

* Could tax rates also be raised punitively to assist in this "confiscation"? Sure, but it will not matter because you will sell most of what you have to avoid it under the terms and time window offered, and what small core position you retain you will not sell....

[jneal3]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

The Janszen Scenario is about how -- and possibly when -- the Fed and U.S. run out of credit trying to support the over-indebted U.S. economy to prevent its collapse into a deflationary depression.

In Part II of this article, which I plan to publish today or die trying, we look into one of three ways that the U.S. runs out of credit while trying to prevent a deflationary depression.

Is this (BOPI) one of the gauges on the dashboard tracking when we run out of credit? Seems to have taken an ominous turn of late...are foreigners pulling capital out of the US, or is this just the Fed's QE crowding out buyers?

[jabberwocky]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Thank you, and forgive my comment. The difficulty I often times have, is with the relative lack of precision in words over time, while maintaining stricter control over statistics, even though we all know the latter are inadequate representations of reality at best, and frauds at worst.
I, for one, do not think the prime actors in this sordid drama "believe" what they preach. Surely, a coterie of "usefull idiots" do, but not the central players. Praising J. Yellen, for example, for recognizing the debt problem over 30 years is damning with faint praise. The history of paper inflations, including China's episodes in the distant past, is one of inevitable collapse. It is shocking to me how this can be ignored by academics.
The paralysis that I, personally,feel (aside from my physical decrepitude!), is whether, and when, to jump from one side of the ship to the other, as we sink. Dare I eat a peach? Should I buy more gold now? Or will GS engineer a fall as soon as I do? And will the entity be a fraud?
As for Fed balance sheet expansion, what is to stop them from doing it "off balance sheet"? They have allowed fraudulent mortgages to infect said balance sheet without hesitation. There is no limit save ultimate economic failure. No idea when that happens, however. Trajedy followed by farce.

Keep up the good work.

[Chris Coles]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Yes, they actually believe this. I have met them -- Bernanke and Yellen and Summers and, yes, even Volcker believes this. I can tell you that they believe every word that they have written about all of the ways that a central bank and government can manage the aftermath of a credit bubble as if nothing happened and we can all go merrily on our way. Loony stuff, but never underestimate the ability of members of an entrenched power group to talk each other into crazy ideas.

By pure chance this evening we have had a major public interview of Mervyn King on Channel 4 News. That interview absolutely confirms your theory. Everything is about maintaining the credibility of the banking system. King, (as we must assume every other central banker), believes that by taking the road they are on they will eventually bring the economy back to long term stability.

As it will be probably well past midnight here before you get the part 2 up EJ, I shall have to wait til tomorrow to comment further.
http://www.channel4.com/news/sir-mer...news-interview

[Southernguy]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

In summary: if the very rich are, increasingly, hoarding gold, gold shall not be confiscated. Unless the theory about the US (and most of the rest of the world as well) is governed by and for the rich is wrong. Insofar the theory seems to be the only possible explanation for whatīs happening, be it economic bubbles, crises and of course wars.
I donīt buy the explanation that those who allow bubbles to grow are "fools" or "ignorants".
I think that they simply make money for them or their patrons in every situation. When bubbles inflate they make money, when bubbles deflate they make money. They do so by buying assets at discounted prices. Then they inflate a new bubble: they make more money. Etc., etc.
So, when the time comes that gold prices go sky high they shall be already hoarding big amounts of it. Why would then "their" government expropiate gold? And that is, by the way, the explanation, in same path by central banks, why gold price shall be so high.
For us, the "small fry" just find some clever and honest economic analyst, as EJ, and try to survive; and eventually make some money.
By the way, the coal miners play, apart from the wild volatility is doing quite well. Keep buying in what I see as "dips".

[shiny!]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

My prediction has been and remains that there will be no vilification of gold, no confiscation of gold and no unavoidable punitive taxation when the gold window opening is imminent and US GOV has decided that gold is the new money. Remember, right now gold is still the enemy, and even if it is acknowledged by TPTB that gold will become the new money eventually, the fiction that it will always be the enemy must be maintained.

When the gold window is imminent, it will be in the interests of those who want to peg the out of control dollar to gold to get as many dollars for the gold as possible - the reverse of the current posture. The more dollars or UST per gold ounce, the more debt is covered by the gold, correct?

This will mean that the gold peg must be set higher than the market clearing price of gold absent the window re-opening. This means the ultimate price will be high.

The UST or Fed or whoever holds the gold (makes no difference as the dynamics are the same) will want to possess more of this newly valuable gold than what they have at the time. Do you suppose it would be efficient to go house to house with a metal detector or to depend on patriots ( a la Korea) to donate the gold in private hands? Will black helicopters fly? Will gold profits be taxed at 90% to punish you for holding what is now the new basis for money? Would this tax alone motivate you to turn it in or sell it or to simply go to greater efforts to hide it to avoid the taxation? Would any of these goldbug inspired maneuvers put much more gold in the treasury to back the new gold pegged dollar? NO.

The government or Fed will buy your gold. The price will be at a modest discount to the remonetization price and will likely be at least equal to if not higher than the market determined spot price at the time.

Why will you sell it to them?

Because if you accept the price offered the taxes will all be waived.

That is the one sure way the government can collect the most gold that is in private hands without screwing or disincentivizing itulipers or the goldbugs or the law abiding citizens, or the seret hoarders or the 1% who increasingly hold gold and like any sane person desire to minimize their taxes. So you, John Paulson, George Soros and grandma with a Kugerrand will all be incentivized to turn in your gold. And at a reasonable price that is discounted relative to the remonetization price but higher than you would get in the market after accounting for taxes at current rates.

There's my prediction. Let's see how close it comes to fruition. I think this will happen in the next presidential term.

* Could tax rates also be raised punitively to assist in this "confiscation"? Sure, but it will not matter because you will sell most of what you have to avoid it under the terms and time window offered, and what small core position you retain you will not sell....

This is logical and makes perfect sense, so it will likely not come to pass for those reasons. I've continually overestimated the intelligence or good intentions of those in charge.

[rogermexico]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Ha Ha Ha

I see your point but we must be careful of contra-contrarianism. Just because you are paranoid does not mean they are not out to get you.

Just because it makes sense does not mean it won't happen in this world that so often makes little sense.

I propose this scenario because I assume that in the big ways they will be mad, and in the small ways they will be lucid.

The same way EJ assumes that earnest attempts to do what really should be done will not be made, but within the framework of continuing to do the wrong thing in the largest sense, they will still behave in a manner that is logical and goal oriented with respect to this wrong plan that they have. That is Kremlinology vis a vis FIRE and the US Govt.

Likewise, my assumption is that TPTB will continue on a path that they do not necessarily see as inevitably leading to gold remonetization, yet they will indeed continue on that path, and when they get to the point where they see that it is inevitable that this is the destination, they will then act in a rational manner to make it work out the best way for themselves, i.e., in a way that gets them the most gold.

The fact that it will not be what gold bugs or doomers predict will have nothing to do with them desiring to prove such people wrong or to punish them, and therefore the fact that it may work out well for holders of gold will only be an accident, and a sign of neither approval not reproach.

These actions will be a force acting on gold holders, not a plot that treats holders of gold as good or bad or anything other than a source of gold.....

[metalman]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

No, it will depend entirely on who is doing the asking.

Imagine if it happened this year. How many Patriots do you think would be volunteering their gold for the Marxist, Muslim El Presidente Hussein Obama?

how many? zirp... er...i mean zilch.

in 2022?

this guy... distant memory...

after war & inflation & no video games to play?

our leader then?????