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What Everyone Needs to Understand About Our Markets, Debt, and Empire

Stock-Markets / Financial Markets 2014 Sep 08, 2014 - 04:18 PM GMT

By: Submissions


Raymond Matison writes: Every day there are numerous well written financial reports authored by highly experienced and well recognized analysts employed by large and prominent brokers as well as numerous well regarded investment advisors.  Over the years many have built respectable careers in following and recommending bond, equity and precious metal investments that have been profitable to their clients.  It is a system based on merit; and analysts with profitable recommendations thrive, while money losers soon find themselves employed elsewhere.  Working for such firms, requires writing reports on the state of the industry, individual companies, and making recommendations even at a time when investment opportunities are scarce, overvalued, or there is not much new to report.

To take a more concrete example, fundamental analysts of the precious metals industry continue to scrupulously discuss proven reserves, mining costs, new discoveries, country political evaluations, supply and demand estimates including every possible nuance that an excellent analyst is expected to review.  Despite the professionalism and integrity of such analysts, their recommendations have little merit at this time.

Equally visible are the highly expert precious metal technical analysts and chart interpreters who study and analyze a multitude of price charts forming an opinion on the likely direction of precious metal markets, or individual precious metal stocks. Unfortunately, similar to that of fundamental analysts, their opinions have little merit at this time.

To a large extent, a similar description of fundamental and technical analysis is repeated by those following the bond and equity markets.  These analysts are experienced, solid and capable, but the conclusion of their efforts is the same – it has little merit at this time.

Why is this so?!  It is because in the context of manipulated markets, neither fundamental nor technical analysis matters.  Such analysis cannot provide the investor a credible investment valuation, nor a sound investment recommendation, or an opportunity for a profitable trade or speculation.  Manipulation can break every predictable chart pattern, and vitiate every fundamental consideration.

How can one have the audacity to claim that any single market segment is manipulated?  That follows from the broader fact that all markets have been manipulated over the last several decades. One can easily claim this manipulation with conviction, since it is the level and direction of interest rates that determines the direction of, and the stability of the bond and stock market.  If the Federal Reserve can announce at one their meetings (as they have) that the interest rate level will be kept at some low level for several years, or until the unemployment level will decline to a certain point – that is the Fed’s tacit announcement, admission and confirmation statement of market control, or manipulation.  Thus, all bond markets are manipulated. Of course the Fed has been even more creative than simple interest rate setting through additional programs including the QE’s, ZIRP, operation twist, money creation, use of derivatives such as CDS, REPO’s, and other measures.

Since the bond market is multitudes greater in size than the stock market, the latter has the potential to be manipulated even more easily.  The value of equity securities is often measured by discounted value of future dividends, earnings, or cash flow.  Since this value is dramatically affected by the discount rate, and that rate is derived from Fed policy, then the logical conclusion is that stock markets also have been manipulated – even without the use of futures contracts.

The precious metals market being the tinniest of these markets is thus manipulated most easily. When bond interest income is reduced to the bondholder from a lower interest rate palette, gold should become relatively more attractive to own.  However, since an advancing gold price would signal a weakness in the dollar currency this cannot be allowed, and therefore gold also must be steadfastly manipulated.

In the bond market credit quality of an issuer can change over time, which then affects pricing.  In the equities market, revenue and earnings growth of companies can change in unanticipated ways which of course will also affect its stock price.  As these prices change daily in the marketplace one may conclude that the markets are free and not manipulated. But what we see is the illusion of a free market.  In reality, it is a controlled market where security price changes occur within the larger frame of controlled interest rates, and other market controlling policies.  Thus, in a real sense, truly free market capitalism and free markets themselves have not existed for decades.

What has the manipulation of recent years to lower interest rates wrought? Among other things, the reduction of interest rates has permitted our federal debt to grow rapidly, yet be serviced.  That means that we can still “afford” to maintain our expenditures in welfare, healthcare, military, and elsewhere.  However, once interest rates start to rise, these are not sustainable and will require dire, forced reductions.

The truly bad news of low interest rates is that trillions of dollars in pension fund assets held by insurance companies, and money managers for corporations, municipalities, and unions are not earning their actuarially established, original funding assumptions – all because of lower manipulated interest rates.  As a consequence, those pension funds are becoming increasingly underfunded over time, and will not be able to pay off their liabilities at face value. This is a tragic loss of unimaginable scale, impoverishing millions of people who are depending on pension income for their future livelihood. When interest rates do start to rise, the pension assets necessarily must decline in value continuing the malaise. 

These interest rate policies are publicly announced, and money managers play the game within the context set by the Fed.  Thus, while fundamental research of municipal, state, corporate, and federal bonds may dictate one investment recommendation, the existence of limits or direction of interest rates announced and set by Fed policy for the future may elicit the opposite investment decision.  So money managers try to do their best in the context of a controlled market.  Because of the contrived circumstances, investment decisions are now more frequently based on the expected monetary policy changes rather than expected changes in economic growth or profitability.

In equities markets, fundamental analysis of the overall economy and opportunities for earnings growth of companies when compared with overall market prices would surely now dictate a lower market valuation.  However, being assured in the continuing action of Federal Reserve accommodation, a money manager committed to managing their fund’s assets must make the decision to continue to be invested substantially in equities markets.  Remember that even in Germany during the 1920’s as money printing was exploding and inflation was accelerating, their stock market reflected increasingly inflated revenues and earnings resulted in a positive stock price performance for several years.  The conservative option of selling equities by money managers to hold cash under present circumstances is not viable, since the market can be manipulated for a longer time than the fund can remain operational without registering a positive fund performance.  So these false investment signals ultimately do not bode well for the citizen with bond or stock assets under management.

Federal debt is already at a level where under any assumptions of taxation that debt is not repayable. That is to say that (just dealing only with federal debt, excluding our massive unfunded liabilities) a debt of nearly $18 trillion can never be paid off when national tax income is under $3 trillion from which the cost of programs that “cannot” be reduced must be first subtracted.  Indeed this debt cannot be paid off even assuming dramatic inflation levels.  For example, if the country were to experience inflation of 50% per year for three years, the value of that federal debt would be eroded through inflation to an equivalent of under $3 trillion over that short time span.  However, the increased price level (1.5x1.5x1.5 = 3.4 times) would have destroyed the consumer economy and tax collection.  Reflecting that higher level of inflation, future federal budgets would rise astronomically, and resulting deficits would rise over $3 trillion – which at that time would be impossible to finance.

Contrariwise, if inflation is not promoted and deficit spending is reduced as if to signal a return to responsible government spending and budgeting, the nation’s economy would quickly experience a deflationary depression resulting in high unemployment, low tax collections, bank failures, severe market declines, and a likely government bond default. As a result of these two undesirable choices, politicians will likely do nothing, and lax monetary policy will continue maintaining the current bond, stock market bubbles – until they crash from outside influences.

This crash may be precipitated by the weakening of the petrodollar, which eviscerated angry countries are combining to exit or topple.  It could be started by another country asking to repatriate its gold held in the U.S., and its request being rejected. The decline could be started by another rise in the debt ceiling for federal debt.  It could be the results of our next national elections that implode the market.  And one should not exclude the possibility that the Fed will eventually be forced to raise interest rates, precipitating a market rout (remember that an increase in interest rates will decrease market values of both stocks and bonds through the discount mechanism).  Since the world is well interconnected, we should not exclude the spillover from a predictable European Union economic, banking, sovereign, or currency failure.  Global contagion from a bursting Chinese economic and credit bubble are also possible.  It may be precipitated by opening of actual operations of the newly BRICS formed development bank capitalized with $100 billion in order not to be dependent on the IMF bank, or the advent of the Shanghai Cooperation Organization, a new and growing precious metals market in the east. The implementation of the BRICS payment system as an alternate to our SWIFT funds transfer system is also a good candidate. In that context the action of some unfriendly sovereign investment funds could practice financial warfare undermining our markets. And could not the increasingly risky geopolitical maneuvering in the Middle East and Ukraine start the avalanche?  These reasons are not all inclusive, and indeed the market crash most likely will be caused by something that is not a current consideration. However, the fact that there are these numerous individual reasons for severe economic disruption, each with a non-zero probability of occurrence, which together can produce a global systemic failure, is enough to register grave concern.  Finally, it may well be simply the increased awareness and understanding of these risks by an increasingly large portion of the global population that precipitates the unavoidable avalanche.

So what is it that you need to know and understand about the bond, equities, and precious metal markets?  We know through the public announcements of the Fed, that all financial markets are manipulated. These market manipulations must be maintained to promote the “wealth effect” of believed benefits to the economy of rising markets.  Contrariwise, falling markets would reduce confidence in an economic recovery and trigger consumer actions which would produce economic contraction.  So despite any minor short term changes in direction of monetary policy, the major mover of such policy has to continue supporting the continuation of market bubbles. These ebullient markets will continue until they can be propped up no more, or the bubbles are burst by outside influences.

We know also that you could previously only buy oil, or conduct international trade only with dollars.  The leaders of Iraq and Libya did not survive in trying to sell oil for Euros, or trying to establish a gold-based currency which would have challenged the petrodollar status.  However, Iran has thus far survived the sale of oil to India for gold, while Russia and China have recently reached a huge natural gas agreement in rubles and yuan, completely avoiding the US dollar. 

Since fiat currencies are not backed by tangible assets and can change in value dramatically or crash, it may become more difficult to buy oil with any fiat currency in the future.  The price of oil in terms of gold has varied dramatically over years, as geopolitical events can occur quickly and affect market oil price more rapidly than an adjustment in the price of manipulated gold.  However, the price of oil in terms of gold has not changed much over decades, reverting to a consistent value of approximately fifteen barrels of oil for one ounce of gold. Given current trends it is likely that gold will become even more acceptable as money to purchase oil in the future.  

As a practical example of oil price consistency consider that 50 years ago one could buy a gallon of gasoline for a 1964 silver quarter.  One can still buy a gallon of gasoline today – for today’s fiat currency value of that silver quarter.  Thus in terms of real money, the price of oil and gasoline has not changed much in 50 years, nor have the oil producing countries increased their real prices to adjust for a depleting reserves. 

Contrariwise, the price of gasoline has risen from a 1965 coined quarter which does not contain silver, to nearly $4 per gallon – a 16 times increase in that 50 year period.  Said in another way, today’s currency of one dollar has diminished in purchasing value 16 times, to 1/16 its value of 50 years ago – a reduction to just 6% of its original value.  Since neither bond nor stock markets have been able to produce financial gains of a scale to offset the loss in currency value on an after tax or inflation adjusted basis, one is forced to conclude that the system is working to the disadvantage of those average citizens saving or investing in fiat currency or financial markets.

Since without oil or gas, our civilization would collapse quickly, it argues for sovereign countries and individual citizens to own gold – the money (not currency) that can and will be able to buy oil and other goods in the future.  So in this economically and financially manipulated environment no fundamental or technical analysis will help you make proper investment decisions.  However, neither fundamental or technical analysis, nor an advanced economics degree from a prestigious business school is needed - just common sense - to understand the functioning of our present monetary system, and the accommodation by the Federal Reserve to unaccountable government spending resulting in the impoverishment of our citizenry.  

The manipulated equities and bond markets may continue to provide additional market gains for an unpredictable time period, as the intentional expansion of fiat money and credit continues globally.  Specifically, with respect to the bond markets it is worthwhile recalling that interest rates remained low for years during the 1930’s as long term government bonds yielded below three percent.  So there is a precedent for low interest rates to continue for an extended period of time, and it can last for a while longer this time also.

So what is it that we must understand about our federal debt and our global empire? The bond and equities markets must be propped up in value, with the vigor of a real threat to national defense.  Because if these markets decline in an uncontrolled way, it will precipitate a decline in the value of our fiat currency, disrupt the global trade in oil, raise interest rates, and destroy the ability to finance continuing budget deficits or service government debt. That in turn would lead to the demise of empire. Therefore, no energy, expense, financial warfare, or geopolitical move including physical warfare will be spared in order to protect these markets and its currency.

Also, once the systemic failure of the markets starts, present gains in bonds and stocks will evaporate quickly.  At that time the value of our currency will suffer a significant loss of purchasing power.  By comparison, today’s precious metals prices are gifts. The people, ordinary citizens of India, China, and Europe have always looked to own gold to provide protection from adversity.  It is only the lack of frequent or harsh economic experiences historically that has contributed to the overall low interest of Americans as it relates to precious metal ownership.  Any credible doubt about the dollar remaining the global world reserve currency, or declines in bond and equity markets will promote greater demand for physical precious metal ownership both in the U.S., and due to our global financial interconnectedness - worldwide. Financial instrument manipulation of precious metals markets will eventually be overcome by increased global demand for physical precious metals, raising prices dramatically.

The scale of human tragedy that will be unleashed by continued buildup and eventual release of pressures of this financial earthquake will astound the world.  And the ensuing worldwide tsunami affecting currencies, energy and food supplies (to just highlight three items) will result in a conflagration so all-consuming that the death statistics related to WWI and WWII and the great Chinese famine of the late 1950’s may suddenly become minor by comparison. 

There are citizen descendants of the Roman Empire living in Italy today. Likewise there are citizen descendants of the British Empire living in England today.  That is to say that people overall survived the fall of those empires.  Accordingly, there will be citizen descendants of the U.S. Empire living in America in the future.  But as these previous declining empires all did have severe struggles and changes of government leaders, America’s decline also will bring about dramatic economic hardships, political struggles, changes in welfare programs, and leaders.

America will never become a physically conquered country, not with thousands miles of ocean separating continents, and hundreds of millions of firearms owned by its citizens. However, with insurmountable debt and trillions of unfunded liabilities, the sun on this empire is setting.  What is so vexing is that we have not been conquered or undone from without, but we have allowed our elected political and government leaders to do this to us.  We the people, through a decreasing interest in politics, but with a dramatic increased interest in social and entitlement programs have allowed dishonest politicians to be elected and rule.  These politicians have neither enacted the will of the people nor have fulfilled their oath to uphold the Constitution.  Instead, over the decades they have steadfastly promised unaffordable entitlements just to get reelected, and in that process have undermined the country and its future.  The truly sad part of this calamity is that we ourselves have allowed this to happen.  We must remember not to allow the people who created this calamity to be part of the solution or in the government of the future.

Raymond Matison

Mr. Matison is a U.S. patriot who immigrated to this country in 1949. With a B.S. in engineering physics, an M.S. in Actuarial Science, work in the actuarial field, and as a financial analyst at Legg, Mason Inc., Lehman Brothers, and investment banking at Kidder Peabody, and Merrill Lynch provides a diverse background for experience.  First-hand exposure to fascism, socialism, and communism as well as the completion of a U.S. Army military intelligence course in the 1960’s, have inspired a continuing interest in selected topics in science, military, and economics.

Copyright © 2014 Raymond Matison - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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