This article was written by Bill Holter and originally published at Miles Franklin
The world is about to if not already feeling a “squeeze.” I bet by reading the title you thought this would be about gold and silver squeezing the shorts? This is certainly happening now with the good part yet to come when it turns out that the metal does not even exist to be delivered but…No, the “squeeze” that I am talking about is just everyday life and what is already happening now and what will happen if Syria goes live and the U.S. faces off with Russia and China.
For better than 2 months now interest rates have been moving higher…very quickly. This is not just a U.S. phenomenon, on balance. Interest rates have gone up everywhere. We also watched the price of oil break through $100 to the upside amidst decent supply and demand that was surely not even close to off the charts. Now it has breached $110 on the upside based on the fears of a Syrian conflict. Both of these, higher interest rates and higher oil prices will hit the common man harder than anything except maybe food prices.
Going one step further, we also have watched for the last 60 days as gold went higher versus all of the major currencies …even as the major currencies trounced the emerging currencies. The Brazilian Real, Indian Rupee, South African Rand, Indonesian Rupiah and others have outright cratered in purchasing power over (and from before) this last 60 days. (As a side note, in terms of the emerging currencies, gold and silver have had rallies of up to and over 30% in just the last 90 days, will this maybe add more to their physical demand?).
So the “squeeze” is already on and has been in the emerging economies, now as interest rates and oil go higher, the squeeze will intensify…and spread to those of us in the “leading economies.” …Then you have to wonder what a Syrian conflict would mean. Will it push prices higher? I have heard forecasts of $125 per barrel spoken of…even $150 per barrel. What if these numbers are wrong?
Let’s look at a couple of scenarios. Let’s assume that that interest rates and oil stay right where they are now, how “good” was the global economy 3 months ago with $90 oil and 10 yr. Treasuries at 1.6%? Should the economy be getting better or worse with the current and higher interest rates and oil price? What if interest rates and oil went even higher from here? …To say, 4% and $125-$150 per barrel?
I will tell you that the “growth numbers” we were fed up until 2 months ago were bogus in the first place because inflation was certainly higher than what the “official” numbers were. Using correct inflation numbers to lower the “nominal” growth rates to the “real” growth rate would have turned real growth negative. In other words, we were ALREADY in a global recession. Higher interest rates and higher oil from here will only deepen the recession and turn it into a full blown DEPRESSION!
I mentioned the other day that if the Syrian conflict is not just a 3 day fly by where we drop some bombs and go home, rather a conflict with Russia …that China could control our fate without sending one soldier nor 1 piece of hardware. I received quite a bit of feedback on this that overwhelmingly said “China would never dump Treasuries because it would not be in their self-interests.” Really? Why do you think rates have already spiked? Because Mom and Pop sold their bonds? Or Hedge funds? No, sovereigns far and wide sold…are including China.
China has the ability with the stroke of a pen or push of a button to outright destroy our Treasury market. But…but…but the Federal Reserve would buy all of these bonds and hold interest rates down. Um, maybe, maybe not but if this were the case then how many dollars would it take to purchase a pound of coffee, barrel of oil or…an ounce of gold. The dollar would outright crash as hard as or harder than the emerging currencies are right now. Of course China will act in their best interests and of course they don’t want to shoot themselves in the foot…but. Would they maybe show their displeasure with us by selling “just a little” as a shot across the bow? Or, they may even think “he who sells first, sells best” in the case of a bankruptcy which the United States most assuredly is.
Another wild card (and another discussion) which we will get to see very quickly is whether or not a decision has already been made by the G-20 with regards to abandoning the dollar for settlement of trade. If this decision has been made, China as will everyone else become and even bigger seller of Treasuries which will put more pressure on either interest rates, the value of the dollar or both. Higher interest rates, higher inflation and higher oil…which one of these won’t affect you negatively?