THE MONEY HAS TO GO SOMEWHERE
by Bill Holter, Miles Franklin
The following chart from the Federal Reserve’s own data pretty much sums up America.
The rate of home ownership and the labor participation rate peaked about 10-15 years ago and it’s been downhill since. Do you have any wonder after looking at this chart why if it “feels” different now? Yes the stock market is up, but could that be a function of all the funny money pumped into the system since 2008? Pumping money into the system was in response to the “peaking” of America, the money (inflation) had to go somewhere, we see the “somewhere” currently as the equity markets.
In my opinion, the housing market which was used as an ATM machine by so many going into 2007 had to give way (as pricing outstretched the ability to carry) and has only tread water back to earlier levels. Interest rates have been zeroed out which has allowed stagnant and even lower incomes to carry more debt. The obvious problem is employment, or the lack of. Jobs, real and good jobs are simply no longer available and not being generated by creating thin air money. If the real economy had jobs available, “it” wouldn’t feel as bad as it does and the rolling social unrest we have been experiencing might not have happened.
Capital “rolls” from sector to sector, it always has and always will. Too much “capital” results in a bubble (or bubbles plural). China’s real estate market qualifies as one of these bubbles in the bursting phase . Their stock market is working on another … for the ages. Last week alone China saw over 4 MILLION new brokerage accounts opened, …while margin debt is escaping the stratosphere! Chinese bubble mania is no different than any before it (except maybe in scope) and as all before it will eventually burst wide open. Why does this even matter? This is important because once it does burst, the money has to go “somewhere”. If you don’t believe China has a manic stock market, the following chart shows how many NEW accounts are being opened, is this a mania?
My point? Quite simply I believe logical and obvious …these Chinese shareholders will soon panic out and look for a new haven, probably a “safe haven”. Hundreds of millions will be looking for a safe place to hide. Will they “default” (pun intended) and run into U.S. Treasuries? Jack Lew can hope but I highly doubt it. Or will they rather choose something more familiar, like gold?
Let me point out the obvious, the Chinese population already has an affinity for gold, this is indisputable. Ask yourself some very basic mathematical questions, like how many Chinese equity investors are there? 100 million? 200 million? More? What kind of balances do they carry in their accounts? The equivalent of $1,000? More? I know you can see where I am going here! What if 50 or 100 million investors with just $1,000 in their accounts were “panicked” into gold? Could the market absorb this? Or would the fractional reserve nature of the gold market be cracked open like a watermelon? I might remind you, the world produces only 80 million gold ounces per year, where will the metal come from?
Before you go off on me and say I am going “pie in the sky”, why does this thought process not make sense? Is my number of possible investors at 50-100 million people too high? Or the account size too high at $1,000? And ask yourself this, if there were a bevy of Chinese retail investors to flood the gold market, might the rising price and scarce availability prompt others around the world to do the same? Do you see? A burst equity bubble in China has the very real ability break the fractional reserve nature of the West’s gold market because the money has nowhere else to go! Gold is the final destination, a familiar and comfortable one at that for the Chinese. Everyday Chinese investors can break it by exposing the flaw of miniscule and fractionally reserved inventory. Please don’t tell me “the Chinese will not buy from COMEX nor LBMA” because the demand will find its way to WHEREVER ANY gold is available, and very fast! What would that do to the “face” of Western finance? Will the West not then be exposed as a fraud if they can no longer meet demand?
Will China be blamed for blowing the lid off the game? Did a sovereign country “do it” or did it just happen by a stampede of “uncontrollably panicked” investors? Could China or Russia or anyone else be blamed for busting the market purposely? Much pain and loss will occur amongst Chinese speculators, I am sure the leadership of China already knows this. They also know the money has to go somewhere and the “somewhere” will expose the very heart of Western fraud. I would think a response of “oops, sorry, but we didn’t do it” might be all that is heard!