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A couple of months back the yield on the 10 year Treasury was 1.6% or slightly lower.  In anticipation of the Fed “tapering” the yield, it rose to 2.32% yesterday and 2.43% this morning.  In fact, yesterday alone the yield on the 5 yr. rose 6% (relative, not yield) in one day.  That is THE biggest jump in the 5 year yield EVER.  Another way to put this is that the 5 yr. Treasury lost more value yesterday than any day prior in history.  Something that no one has really talked about (before this is over they surely will) is that the Fed, as owner of more Treasury securities than anyone, got killed to the tune of $115 billion in May.  Please keep in mind that their “equity capital” was only $65 billion.  Gee, I wonder how this will be accounted for.

Another area in fixed income that literally blew up last night was “funding debt” to the Chinese banking system.  Their overnight rates between banks rose to 25%.  Yes, 25% for overnight money…what does this tell you?  It tells me that the Chinese banks don’t trust each other…very similar to what happened here in the U.S. back in late 2008 when no one would lend to anyone else. They wouldn’t lend because they know that they themselves were cooking the books and squeezed for liquidity…so who else was in the same boat with them?  Please understand that the Chinese are sitting atop of a bigger real estate bubble than we ever had, higher interest rates will shut that down and cause “collateral” to evaporate.

I would be remiss if I did not mention derivatives.  These are leveraged bets where $1 or less can control a $100 “bet.”  There are purportedly over $200 trillion worth of debt derivatives outstanding worldwide.  Rates rose yesterday everywhere around the world in violent fashion.  There were huge winners and huge losers in these derivatives.  The winners are smiling now…but if the losers got hit so hard that they cannot pay then the winners are also losers…so is the entire system.  My point is this, we don’t know, no one knows who the losers are but…we do know that they are out there!  “They” are out there everywhere you look, we just don’t know which ones they are and this is the reason that banks during times of stress don’t want to lend to other banks.

And herein lies the problem.  The world runs on credit for everything, everywhere.  If credit slows or God forbid seizes up, everything stops.  Everything as in your employer’s ability to pay you or your grocery store to stock their shelves.  I know this may (shouldn’t) come as a surprise but the food in your grocery store actually comes from farms, ranches and processing plants.  The shelves do seem to “magically” re-stock themselves, but this happens at night while you are sleeping, AND it happens BECAUSE credit is available to move product.  If credit becomes unavailable then so will products and goods.  Please understand this and never forget it.

Ben Bernocchio as you know spoke yesterday about the possibility of “tapering” from the current $1 trillion QE (monetization).  Everything has been sold off since then.  Stocks, bonds, commodities and of course (sarcasm) gold.  The mindset has now become “he who gets out first gets out best.”  This huge movement by the global herd is basically “front running” the announcement that “the party is over.”  This movement is basically the selling of assets by those who borrowed to purchase in the first place.  Quite simply the “carry trade” is unwinding.

This “unwinding” will not ultimately end until the borrowed money and credit (thus the entire system) gets wiped out.  The “last man standing” will unquestioningly be gold.  How do I know this?  Because gold IS money, money that cannot default and is always “trusted” exactly for this reason…it cannot default.  Yes it is “down hard” today and CNBC will parade those who are bearish for your mental consumption.  Just know that as this “unwinding” matures and spreads, fear, REAL FEAR will begin to grow.  As the fear grows, so will demand for physical metal, which was already at record levels prior to this.

To wrap this up I will tell you that when all is said and done, the banking system INCLUDING Central banks and sovereign treasuries themselves will need to recapitalize themselves.  There is only one way to do it.  The price of gold must be marked up to multiples of the current price to make these entities viable again.  We are close to this happening.  I can say that “we are close, very close” because you can see the carry trade beginning to unwind right before your very eyes and the margin calls will only increase from here.