Doorways And Liquidity?

March 9, 2016

A very curious thing happened overnight in Japan, trading in their 10-year bonds was briefly halted.  This was the result of a selloff that pushed yields from minus 0.10% up to minus .015%.  The price move in the bonds was only .6%, so not a huge move but the circuit breakers were hit and trading stopped.

So why is this a big deal, or is it?  First, the JGB market is second or third largest and most liquid in the world behind US Treasuries and maybe Eurobonds.  This sort of chaotic movement should not happen.  More importantly, I believe the circuit breakers are so "tight" because a panic event cannot be allowed to gain ANY momentum.  Any "momentum in the wrong direction" at this point could easily become self-reinforcing because of leverage or margin used to carry positions today.  Please understand I am not picking on JGB's as the same thing could be said of many if not ALL markets today as markets are so intertwined.  The point we are driving at here is "volatility kills"!

This thought that volatility kills has become the absolute center of ALL financial markets on the planet.  Because everything has become derivatized, the "leverage" has expanded much further than just credit outstanding or margin balances.  You see, derivatives morphed into the tool of choice to "price" or manage markets.  Now, because these derivative markets have gotten so large, volatility cannot be allowed.  Whether it be circuit breakers, "mysterious software" problems or simply pulling the plug, volatility must be tamped down at all costs.

It is no coincidence volatility is rising now as liquidity has begun to dry up.  All you need to do is talk to an institutional bond trader to know this to be true.  Even small $10 million trades or less are tough to move ...and here is the rub.  The "exit door" has drastically shrunk while the population in the room has continually expanded!

If we look at only the credit markets alone, the "room" is inhabited by $7 trillion worth of bonds trading at negative interest rates.  Stating the obvious, this is the largest "greater fool" trade in all of history.  Are bond traders really buying bonds to lock in a negative return?  Do they really believe they will "win" because the underlying currency will gain value even though the stated goal of every central bank is to debase?  No, the only reason a bond trader would purchase a negative yield is because they believe there is a greater fool out there who will purchase that bond from them at an even greater negative yield.

Now you must ask yourself one more question, are negative interest rates the new normal and here to stay?  Logically the answer is "no" because mathematically a system based on negative rates is like a snake eating its own tail.  Practically speaking, negative rates are an accident waiting to happen when someone finally yells FIRE!

Speaking of "doorways and liquidity", if you understood what was meant in my last writing when JP Morgan testified "Gold is money, everything else is credit" then you probably have an idea where we are going here.  The entire system is credit based.  Everything you do, use, consume or even touch on a daily basis had the use of credit somewhere along the way, this even includes your dollar bills in your pocket.  Put simply, we are living in a credit mania.

Gold and especially silver are ridiculously small markets.  "Real" global production is about $80 billion per year for gold and $12 billion for silver.  Unless you have been sleeping or just don't get it, the "stock" of silver and gold has been continually diluted by paper over the last 4 years as a means to control the price.  Now, demand has gotten so great they are having a problem creating even paper gold fast enough to contain the price.  The "doorway" into real gold and silver is very, very minute and will become 100 times smaller than it already is once people with paper receipts find out they hold nothing.  What I am trying to say here is this, on top of current and safe haven demand, will also be demand from those who have already "bought".   In reality they own nothing because their previous purchase was deflected from metal into paper air.

I know the above is not groundbreaking news to many of you but it needs to be reminded once in a while.  The exit door for the massive paper credit buildup is small and getting smaller as liquidity shrinks and leverage grows.  The entrance door for real gold and silver may not even exist once people understand they are the very core to the strong dollar fraud.  You see, "liquidity" has a direct effect on how functional any door is whether it be an exit or entrance.  Not enough shrinks the exit, too much closes the entrance!

As an announcement, many of you have been reading my work for the last nine years.  My work has been found all over the internet on numerous websites.  In the very near future, my work will only be found at in my partnership with Jim Sinclair.  Jim and I plan to do at least once monthly audio question and answer sessions from subscriber questions.  We have a couple of other plans for additional content in the works as well, so please visit our website to keep abreast with the upcoming additions!

Holter-Sinclair collaboration

Comments welcome

Bill Holter writes and is partnered with Jim Sinclair at the newly formed Holter/Sinclair collaboration. Prior, he wrote for Miles Franklin from 2012-15. Bill worked as a retail stockbroker for 23 years, including 12 as a branch manager at A.G. Edwards. He left Wall Street in late 2006 to avoid potential liabilities related to management of paper assets. In retirement he and his family moved to Costa Rica where he lived until 2011 when he moved back to the United States. Bill was a well-known contributor to the Gold Anti-Trust Action Committee (GATA) commentaries from 2007-present.

Gold weakens on global cues and lackustre demand