The Original Gold Bug's Perspective

Let's Put Things In Perspective Author: Jim Sinclair

What fueled both the post 2002 bull market to its heights and provided the fuel for all the bubbles we have experienced was the Bernanke Helicopter Drop of Liquidity, made in Japan.
The technique provided the largest liquidity injection in the shortest period of time. The mechanism was Japan’s intervention in the yen by selling yen and therefore acquiring dollars. The dollars acquired were bank wired to the New York Federal Reserve Bank multiple times a day for deposit in the Japanese Float Account. The manager of the Japanese Float Account is the New York Federal Reserve Bank. The New York Federal Reserve Manager of the Japanese Float Account invested these funds as many times as received, each day, by buying US Treasury instruments across all maturities in the international markets. Since the Japanese intervention at that time was so large, the result was a tremendous (by previous comparisons) growth in international liquidity and a bull market in US treasury instruments resulting in constantly lower interest rates. That bulled the stock market and all the bubbles we have witnessed. There is no practical way to drain that liquidity, but that is another essay in itself. Believe me, I am totally correct in that.
To put Thursday and Friday in proper perspective, consider that the total stimulus provided by this liquidity injection was an average of 70 billion per month. The source of that is past TIC reports covering that period of time. Yes, that was month after month.
If you add to the publicly given figures of both the Federal Reserve and European Central Bank concerning their injection of liquidity on two days, Thursday and Friday of this week, your number will reach approximately 200 billion dollars. That figure does not take into consideration that both the Fed and ECB says they will buy collateralized bonds and instruments thereon (derivatives) in an unlimited amount. We will never know what that numbers is so add whatever it is to the total. It could double or triple that number in a heartbeat. This also provides no practical way to drain the liquidity as reversing the transaction is impossible for the foreseeable future. Both central banks showing a willingness to buy all and every offering of these market-less mortgage collateralized instruments and derivatives have, by definition, no market into which the Fed can sell. This is why there is no practical method of draining this now largest amount of liquidity ever injected into the international monetary system in the shortest amount of time.
On Thursday and Friday of this past week you have witnessed the largest injection of liquidity in the history of man in only two days.
This is as close as you will get in an alarm-less financial world (no crisis is a crisis because you cannot see it) to absolute proof that the financial system has a major challenge. That challenge may have been sparked by sub prime madness, but is now firing all across the interest sensitive credit derivative market that is absolutely ENORMOUS in terms of replacement value. Should this paper giant implode as a weapon of financial mass destruction, then replacement value is a true value. This brand of un-financed, unregulated, paper garbage special performance contracts dependent on the balance sheet of the loser for viability, without standards and therefore without markets, valued as cartoons by mark to model is larger that the entire National Debt of the US (Source: IMF monthly report on derivative numbers).
Injection of massive liquidity on an unprecedented level may calm emotions, however it also may not. One thing is for sure: the problems are not going away and it is the Big Kahuna that the Fed and the ECB are trying to stave off.
There are conclusions evident from the events and reactions to events of Thursday and Friday:
1. Anything and everything at an unlimited amount will be done in terms of creating more paper money in order to keep the financial system liquid to hopefully prevent a meltdown in Over the Counter Derivatives on debt.
2. That puts the last nail in the dollar coffin, most certainly when you know earnings are not going to keep up and less taxes will be paid. The Federal budget will balloon and we will have a negative TIC report.
3. Since it is axiomatic that the dollar rules gold and logical that the Formula rules the dollar, gold will go to and through all the Angels.
4. The US dollar, for starters, is headed to .7200.
5. The equity markets are anyone’s guess as liquidity historically is the grease of the wheels of stocks. Give the perma-bulls liquidity and guess where it goes. In the Weimar Republic as there currency went to zero their stock market went to infinity.

History is being made yesterday and today. It may well not be over even in this time span. The actions of Thursday and Friday are greater even than the Bernanke Helicopter Drop in the two day time period. This event will reverberate through the world financial market for years to come. This is only an indication of what will happen as all this economic sin, instant gratification, profit at any cost economy begins to unwind in the form of the Over The Counter Derivative implosion. Be careful here.