The debt to GDP is a leading indicator for default rates.
Debt
Richard Duncan: QE is Debt Cancellation
Very interesting video on what QE really does. It cancels debt and deficits. The only problem is that it destroys the currency as well…
So basically, when governments do QE, they effectively decrease deficits (it doesn’t matter if it is budget deficit, current account deficit or trade deficit, because they all follow the same path. They are correlated to each other). So let’s try to visualize this in the U.S.
As you can see below, whenever QE goes up (blue line goes up), the trade deficit shrinks with a small lag (red line goes up). They effectively cancel debt.
Which means, if the Fed stops QE at this time, the deficit will go up again and the red line will drop. If the Fed were to unwind its balance sheet, deficits will go up even more.
//research.stlouisfed.org/fred2/graph/graph-landing.php?g=19PX
And for Japan: their economy was really sinking due to the Fukushima disaster in 2011, then they started to really print money in 2013-2015 (green chart below) and what happened? Magically, their trade deficit disappears in 2015. So printing money isn’t that bad, only, the Japanese yen has crashed since their money printing started. Printing money will not work if you take everything into account…
U.S. Debt and Gold
Think of this for a minute.
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In 2008, gold was at a bottom of $600/ounce and U.S. debt was $9 trillion. Now debt has doubled to $18 trillion, so you would expect a bottom now at double the gold price, which is $1200/ounce.
Gold will be bottoming out soon on the condition that U.S. debt will not fall. But I’m certain U.S. debt won’t go down as deficits are now starting to crawl upwards.
Look at the latest deficit numbers. Since 2014, deficits went uphill, so you can bet that U.S. debt will continue to increase.
After the Fed meeting this week, interest rate expectations were lowered in the Fed “dot plot”, which led to a surge in precious metals.
Gold demand from China is very robust, this week we saw gold buying again at the high end in Shanghai (50 tonnes). Premiums are robust too, with silver at the high end historically.
APMEX gold premiums are higher.
Oil is starting to bottom out at immense contango. No shale oil company is profitable at this stage, which is also why tax earnings for the government are decreasing, fueling a higher deficit. When oil goes up, so does silver.
Managed money has now gone very short, which will lead to a bounce in gold prices soon.
The GLD ETF has seen increases in stock.
On the currency front, we have seen that the U.S. dollar had a huge surge. I believe this cannot keep going, at some point it will reverse (due to QE4) and that will support precious metals.
Overall, I’m pretty bullish precious metals now.
U.S. Debt Hits $18 Trillion
And here we are, the U.S. debt has almost reached the 18 trillion number.
Say goodbye to $17 trillion.
And debt and gold always go together.
Belgium’s appetite for U.S. bonds is waning
Looks like Belgium has stopped buying U.S. treasuries.
Who is Mysterious Belgium Buyer of U.S. Debt: Jim Rickards and Peter Schiff’s take
Jim Rickards says that the ECB could be buying the U.S. debt via Belgium with money from the U.S. Federal Reserve. The Federal Reserve would print U.S. dollars, gives them to the ECB, that goes through Euroclear and they buy the U.S. treasuries anonymously on the books of Belgium. Watch this extremely interesting video below.
Also Peter Schiff suspects, via his radio show, that it’s the ECB buying U.S. debt via Belgium. He doesn’t suspect it’s the Federal Reserve itself, because that would destroy their credibility of tapering QE.
What is clear is that this is not likely the government of Belgium, or private Belgian capital, that is doing the buying. The numbers are just too large. This is particularly true in the First Quarter of 2014 when the buying averaged a stunning $41.5 billion per month (January was the biggest month with $54 billion). In all likelihood, the only European buyer with a wallet that big would be the European Central Bank (ECB) itself.
Long Term GOFO Rate Hits New Low
If you really think that gold is going to crash, I need to point out one thing and that’s the GOFO rate.
Recently, the 12 month GOFO rate has hit a new low we have never seen since 1989.
Let’s zoom in to 2009-2014: We have a new solid low here.
So not only the short term GOFO rates (1 month to 3 months) are negative now, also the long term GOFO rates are hitting new lows. So there is a tremendous stress building in the gold market. Historically negative GOFO rates are bottoms in the gold price.
This makes me very bullish in gold at this moment. Because gold lease rates are now much higher than the interest rates/bond yields. This indicates to me that the bond market is about to collapse, bond yields will be going higher, because gold lease rates cannot be higher than the corresponding bond yields. Either bond yields will be going up, or gold has to go up. It’s one of the two.
On another note, we see that the Federal Reserve tapering, is actually just talk. Because some entity is buying U.S. bonds via Belgium at a rate of 30-40 billion USD a month, which is exactly how much tapering we have had. The Federal Reserve is throwing sand in our eyes, don’t be fooled. They are propping up the U.S. bond market, artificially lowering the bond yields below the gold lease rates.
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| U.S. debt held by Belgium (Billion USD) |
U.S. Debt
It is interesting to monitor how the public and private debt curves are trending.
Since the crisis of 2008, total credit market debt as a % of GDP has been going down for the first time since history. Private debt was in a debt deleveraging mode (blue graph), while the Federal Reserve’s public debt was in a debt expansion mode (red graph).
If we look at the nominal value of debt, we can see that since 2014, total, private and public debt are all growing again, resuming exponential expansion.
Belgium Buys Another Load of U.S. Treasuries
Thanks to Econoblogger Martin I was reminded that today we have another update on the U.S. foreign debt holders and surprise surprise. Belgium keeps on buying more than $50 billion of U.S. debt, much more than any other country is doing now. If Belgium keeps buying like this, it will hold even more debt than China in a year or so. I’m just wondering where they get the money from.
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| Foreign U.S. debt holders |
Look how much they bought, starting from November 2013.
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| U.S. debt held by Belgium |
I have no idea why they are doing this. That the ECB would buy U.S. treasuries to get the euro down, maybe. But why is Belgium buying so much U.S. treasuries? $50 billion accounts for 10% of Belgium GDP. Can they support this?
We see Belgium’s own public debt has been rising since the crisis. Instead of using the money for servicing its own debt, they buy U.S. debt.
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| Debt to GDP Belgium |
Let’s look at Belgium’s treasury yields. The 10 year is at 2.2%, which is below the 2.7% of U.S. Nothing much to see here, but look what happens in November 2013. Yields on U.S. treasuries are going up. Do you remember what happened then?
Yes, the Chinese came out saying they will stop buying U.S. debt. So who goes to the rescue? Belgium.
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| Belgium 10 Year Yield |
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| U.S. 10 Year Yield |
Probably Belgium is the heart of Europe as Europe started from Belgium. These European people want to support the U.S.
But actually, I think being in U.S. treasuries isn’t such a bad idea at this moment. When stocks collapse, U.S. treasuries are pretty safe.What I’m worried about though, is that the U.S. dollar is now starting to collapse. The dollar cash index is moving towards 70, when Belgium holds all of these U.S. treasuries, it will realize losses on the U.S. dollar currency value. A 10% loss in currency value, means at least a $30 billion dollar loss for Belgium and I heard that they even bought U.S. treasuries that the Russians dumped in March 2014. These are dangerous things to do.
For more info, here is a link to Zerohedge.
Marc Faber: When China Implodes, This Might Be Bullish For Gold
A very important development is happening today in China.
One after another company in China is defaulting on its debt. Marc Faber quotes: “We have a gigantic credit bubble here in China.” Example: Zhejiang Xingrun Real Estate Co real estate developer defaults. Chinese bank defaults.
What this does to the yuan is obvious, the yuan is declining. If it manages to go above 6.2 USD/CNY, you can expect large problems as the China carry trade will halt and many people invested in Chinese structured products will be in the dumps.
Marc Faber confirms this in the next video. He expects Chinese GDP growth to slow 50% from 8% to 4%. You would think that when the yuan drops, Chinese can’t buy that much gold anymore, but Marc Faber has another view on this. The yuan could drop and as a result Chinese gold demand could actually go up due to people protecting themselves from inflation (and defaults) in China.
Correlation Economics (Backup) 