Balance Sheet Liquefaction And The Race For Precious Metals

The Fed seems to be stuck because of housing market weakness and its associated mortgage backed securities.  The repo market appears to be where the stress is most threatening, though hidden from view. These trillion dollar daily transactions are the lifeblood of world financial markets.

Furthermore, the size of global financial markets has become so large that their downfall would severely threaten the underlying economy.

The Fed can only supply the much needed repo market collateral through deficits, hence the need for war to stimulate the economy and lending interest.   They have apparently lost the ability to taper with the last fumbling attempt.

Out of Control Money Printing

Money may not be flowing into the economy in direct proportion to the unprecedented recent money supply expansion, but it is making it into equities as is evidenced by all-time highs.

This provides useful behavioral cover. Even though a small portion of individual investors hold stocks, the perceptual cues from such stock rises remain a crucial confidence enabler.

Banks currently care most about leveraging their credit via capital markets — and the resulting higher asset prices — not about their unused reserves or traditional lending practices.

If the Fed Were to Exit

An exit by the Fed would likely result in the immediate collapse of stocks and all the derivatives associated with that enormous bubble as 2.2 trillion in marginalized credit has been injected into the capital markets.

This would once again necessitate huge bailouts and monetary expansion. It would also mean that the next round of monetary expansion would probably occur via more conventional lending channels.

The larger issue once all the 2.2 trillion in leveraged and marginalized credit begins to unwind, is that the markets will then see the mother of all flows away from paper and into any and all remaining physical assets. This will be the shot heard round the world to herald the end of the long deferred fiat monetary experiment.

How the Banks Fleece Their Customers

Still, before that moment arrives, the banks must be prepared by doing precisely what you, dear reader, are likely already doing. They are buying as much hard assets as they can, in the form of gold, silver and life preserving supplies, before that traumatic day dawns.

Evidence for this comes in the form of aggressive sell recommendations and manipulative pressure on market prices. This allows the banks to take assets from clients at discounted prices.

They can also sometimes use buy recommendations to generate a price spike whereupon they initiate downdrafts and buy back on the resulting dips. This phenomenon is quite noticeable in precious metals futures where bullion banks like J.P. Morgan Chase still maintain a very large concentrated silver short position.  They are also now controlling a large concentrated long position in gold.

All of this underscores the precious metals’ eventual return to their previous monetary or investment status, without them needing to circulate as currency.  Of course, silver’s return will probably be that much more violent since its substantial underlying industrial demand will squeeze the large users.

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