Marc Faber was the first voice in the financial world to use the term "QE to infinity," years before it was announced by the Fed. He felt at the time that stocks would rise with the Fed's endless showers. He now feels that the Fed's easing is "priced in" to the U.S. stock market, and he sees trouble ahead during the second half of the year.
The stock market bubble in the United States peaked in March of 2000 and then collapsed. The Fed lowered interest rates to 1% allowing credit to flow freely to consumers and the money supply exploded higher. This caused a resurgence in the stock market, but was felt at an even greater scale in the real estate market creating a bubble of massive scale. People felt that the worst was behind us and with the storm now in the rear view mirror it was only blue skies ahead.
In 2008 we found out that the Fed's euphoria was only an artificial facade and all markets collapsed as reality began to sink in.
Since that point we have seen an unprecedented combination of global central bank liquidity injected into the financial system in combination with governments around the world running massive deficit spending in order to try and "stimulate" the global economy. This has caused a resurgence in the stock market and more recently in the U.S. real estate market (many global real estate markets never corrected - see the incredible chart of London real estate prices below), but was felt at an even greater scale in the bond market creating a bubble of massive scale. People feel today that the worst is behind us and with the storm now in the rear view mirror there are only blue skies ahead.
Many people feel that what occurred in Europe from early 2010 to the summer of 2012 was the peak of the sovereign debt crisis. What they do not understand is Europe was only a side show for the coming main event.
The true crisis will come when central banks lose control of either interest rates or inflation. They cannot control both simultaneously forever. It has always been my assumption that when put to the test, central banks will always choose the road of higher inflation in the short term in order to push back the reckoning day. The reckoning day now represents 70 plus years of global debt build up at every level; consumer, business, government, that should have occurred in 2000 and 2008, and now will be far, far, more painful when it finally arrives. The following shows the Fed's guiding artificial hand of QE trying with all its might to keep the stock market from collapsing:
The true crisis will come for the four pillars that represent the major developed nations of the world; the United States, the U.K., Europe, and Japan. It has been my assumption over the past 18 months, which I have documented here in endless detail, that Japan would be the first to crack. It could just as easily be one of the other three regions, but the fundamentals for Japan are by far the worst (ironically, when looked at as a whole Europe is the best).
Over the past few weeks we have seen in Japan a preview of the scenario I have been describing since the world was "saved" by central banks in 2008. Japan is trying to weaken its yen by flooding their system with printed currency (QE), buying assets of all sorts from government bonds to stocks. This program worked to perfection from late 2012 to the middle of May; the yen fell in value 20% plus against the major currencies around the world (check number 1) and the stock market soared by 70% based on the new found strength in exports (check number 2). The following is a real Economist cover from the month of May:
This was exactly the scenario the Bank of Japan wanted. It is the exact same scenario that every central bank has wanted (and has received) since the massive global QE programs have begun in 2008.
Then something very unexpected happened in Japan; government bond yields began to surge. The 10 year government bond yield rose from close to 0.40% to over 1.0% in just a matter of days. This is a serious problem as rising yields will bankrupt the government quickly, a topic I have discussed in detail in the past.
The equivalent move in the United States would be if the 10 year treasury moved from around 2% where it is today to 5% (this is coming). While I could write a book on what this will do to the U.S. economy (besides bankrupting the government itself with skyrocketing interest payments), just briefly imagine what it will do to the real estate market as mortgage rates move from the high 3% range today to well over 7%.
Interest rates moved up significantly around the world over the past two weeks when Bernanke uttered the word "taper" during his most recent testimony. The 10 year treasury rate yield had its highest one day rise in 19 months touching 2.21%.
This is the true crisis, which has not even begun yet. We have not begun to atone for the sins of pushing forward the bill of 70 years of debt accumulation. It is almost time. Unlike during the financial crisis of 2008, this time when we enter crisis the central banks and the governments around the world will already be "all in." Saving the bond markets will prove far more difficult that saving the stock market in 2000 or the real estate market in 2008 because the size of the government bonds markets are enormous in comparison to both. Bond prices falling will create losses on the balance sheets of pensions, insurance companies, banks, and the average person's 401k just as stocks and real estate losses do. The following shows the size of the U.S. government bond market (red) in comparison to the U.S. stock market (blue).
This comes at a time when investors are most optimistic about the future than at any other point in history. Valuations are reaching insane levels in almost every asset class across the board just before they will collapse. The the time to be most afraid is when others are most optimistic. As I have discussed since the year began, cash will soon be the most desired asset class on the planet. Make sure you have some before the rush begins.
I have long stated that when the bull market in precious metals ends and we reach the mania stage, it will be silver's upward paper price movement that will provide the ultimate form of shock and awe.
The reason for this is due to simple supply and demand. Throughout history there has always been about 10 times more silver available in the earth's crust to mine than gold. This simple dynamic created a historical gold/silver price ratio that was about 10 to 1 going back thousands of years. For example, throughout history if the price of gold was $1,387 then the price of silver would be about $138. Today that ratio is at 62 to 1 with gold at $1,387 and silver at $22.21. We will come back to that in a moment.
Over the next few decades I believe that ratio will find a way to move back to balance. Notice that I use a very long term horizon (decades) when saying that ratio will move into balance, and the reason for that is because it takes years from when a new mine first goes into planning to when the first ounces are pulled from the ground.
So what happens if there are investors or industrial producers who want to purchase the silver immediately, and they cannot wait years for when a mine begins to produce?
At that point you must look at what is currently available above ground for supply. This is where the story gets interesting.
In 1950 the 10 to 1 above ground supply ratio for gold and silver was still in place, which can be seen in the chart below. There were about 10 billion ounces of silver available above ground compared to only 1 billion available for gold. Fast forward to today and something incredible has happened. There is now currently 6 billion ounces of gold available above ground with only 1 billion ounces of silver available.
Silver is now 6 times more rare than gold in terms of what is available above ground. This is what is available for both investors and industrial companies to purchase immediately.
In addition to the current above ground supply, you must look at the new annual supply which comes from mining, scrap, and government sales. The following supply and demand figures come from The Silver Institute.
Total 2012 Supply: 1048.3 million oz
Mining: 787 million oz
Silver Scrap: 253.9 million oz
Government Sales: 7.4 million oz
This new supply is taken off the market through multiple forms of demand, the largest of which is industrial use. The industrial uses for silver range from electronics to solar panels and the number of uses is growing rapidly. For more on industrial uses see the following article from The Silver Institute.
Total 2012 Demand: 1048.3 million oz Industrial: 456.9 million oz
Photography: 57.8 million oz
Jewelry: 185.6 million oz
Silverware: 44.9 million oz
Producer Hedging: 41.5 million oz Coins: 92.7 million oz Investment: 160 million oz
The last two, coins and investment, are what you probably think of first when you imagine silver demand, but it is only a small fraction of what takes the total new supply off the market every year.
So with new supply being taken away immediately, we are back to the treasure chest of the 1 billion ounces remaining above ground available to purchase.
With the current silver price of $22, that means that the entire above ground supply of silver can be purchased for $22 billion dollars.That is a spec of dust in the current financial world we live in.
To help put that in perspective, the Federal Reserve is adding $45 billion of new money to financial system every month. Other central banks around the world are engaging in similar programs. A conservative estimate would say that about one quarter of the new money that is created around the world every single month would completely wipe out the entire available silver supply on the planet. China or a large hedge fund could wipe out the entire physical silver supply with a simple keystroke.
This is an accident waiting to happen.
Tomorrow morning I am going to wake up and purchase silver when the markets open in the United States because sentiment levels are at historic lows. Next month if sentiment levels and prices remain low I will purchase more, and the month after that I will purchase more. My hope is that the artificial and temporary paper price of silver continues to go lower. In fact, I hope it collapses again back to single digits.
One morning we will wake up to find out that the enormous amount of paper currency around the world (the size of the water supply in every ocean around the world) was introduced to the physical supply of silver (the size of a small toy boat in a bath tub). At that point you will see a price surge unlike anything you have see in history.
When will it occur? I have no idea. Every day it does not is a gift to accumulate more. When the market figures this story out the paper price will have almost no relevance and purchasing physical silver and taking delivery will literally be impossible for a long period of time.
Above ground silver is 6 times more rare than gold and the price of silver is 62 times less expensive than gold. Try and think of an asset that is lower in price today than it was in 1980. I bet you have trouble. Silver is currently 60 percent lower today than its 1980 price with 4 times less silver available.
Keep accumulating on a steady plan and hope for lower prices.