Writing is such sweet sorrow. Sweet as there is no shortage of things to scribble about. Sorrow as the financial authorities have made such a mess of things that there’s no shortage of things to jot down some thoughts about, grand mess ups to reveal repeatedly until we get it. The economy has been on adrenaline for nearly a hundred years and increasingly threatening doses for the previous forty. The crash will be grand and we have to grasp what is happening. If nothing else so that generations to come can learn from the mistakes.
Back from the gigantic picture to the issues of the instant. When will it end? We know kind of how, so we must look daily for the time to approach. Is it on the horizon? Your guess is as good as ours so we’ll consider what we all know. Just when you thought that it was clear sailing ahead for shares and bond certificates, another wrench is thrown into the works. We’ve been targeting here at The Mint on the imminent fireworks in the Bond Markets. Not that we know just how or when the market will collapse, we only know that its collapse, in some form, shape, or form, is approaching. 2 of a profusion of reasons came into focus for us today which we shall now try to pass along.
The 1st and clear problem comes in the shape of collateral backing the bonds that are at present being issued. The second and more vital problem is that most bonds today lack a feasible repayment agreement to repay the bonds. We define a “doable” repayment schedule here at The Mint as one where the borrower pays back what’s due with the future fruit of their works, generally called revenue. The difficulty is that in up to date bond issues, these 2 active ingredients, some would even go as far as to call them irreplaceable as a condition for lending, have been an in short supply.
Take the problem of collateral. There could be assets that were worth a certain quantity in 2006, or perhaps 2008, you can take as your own if you do not get repaid on a bond. The difficulty is that we are approaching the end of 2010. Irrespective of how you look at it, collateral values just aren’t what they were. Banks are demanding money as security. Why? The easy answer is there is not any powerful requirement for the collateral currently. In numerous cases, the world is working thru a surplus of finished products and finding that there’s a dearth of first products (commodities). Most collateral is as finished products. This is a long trend that might take 10-20 years to fix.
Then move on to repayment. Repayment schedules today sometimes involve either refinancing the debt when it matures or selling the asset to satisfy the debt. The second bears the issue of collateral explained above. The previous is dependent on similar or better conditions in future Bond market conditions. And now a 3rd way of repaying a debt has been hot for the previous 2 years. Print money to pay for it!
Sound ludicrous? The repayment schedule for the US Government, historically the trustiest borrower in the debt markets, is to print cash to pay the obligations. Brilliant. The pop in this Bond bubble will blow a torpedo in the side of the existing currency regime, which is founded upon debt. There isn’t any question the currency regime will stop at nothing to save the Bond markets, an impossible job. So we’re about to witness a classic event. The breakdown of the Bond market and currency regime will be equivalent to a finance supernova.
No collateral, no repayment schedule, why write a Bond now? It seems a downtrend has started again in US 30 yr notes and we also read that bond fund inflows have allegedly topped. To finish it off, today we read a reminder from Richard Russell of the DJX Speculation Letters sees a “hard rain ‘coming” in the equity markets and is replenishing his call to desert ship. What does the stock market see? It sees an economy that was built on an unsustainable currency system reliant on ever expanding debt quickly approaching collapse. Hollywood can’t do justice to the events the collapse of the most up-market and complicated world economy to date will force. The disconnects between demand and supply will be amazing.
Gold is first to see these things on the horizon but stocks are catching on. Once the governments and central banking institutions credit is shot by all this money printing, the Bond Market will suck cash in from stocks like Mega Maid sucking the air from planet Druidia in the flick Spaceballs. Cling to your gold, silver, and anything real cause it will be a thrilling ride!
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