The Turn Is Upon Us



“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”
~ Charles Dickens

By Catherine Austin Fitts

Subscribers have read and heard a lot on the Solari Report over the last two years about the coming turn in the bond market. So it is not a surprise that it is finally here. The Fed continues to jawbone about raising interest rates. However, at some point they are going to really raise them. When this happens, the divergence between those who can print dollars and those who cannot print dollars (but have borrowed quite a lot of them) will grow.

I worked on Wall Street during a bond bear market. Most people in financial markets have only lived through one really bad patch – the bailout period. They don’t really know what a bear bond market is like. The thirty-five year bull market in bonds financed a lot of centralization and piled up trillions into the interest rate swap derivatives market. Which makes rising interest rates a whole new experience.

Add to the unusual circumstances the significant downsizing of staff and inventory by large financial institutions after the passage of Dodd Frank. To get a sense of the tensions in the bond market, see my Solari Report, The Meaning of Negative Interest Rates with Don Coxe or my commentaries, The Race to Call the Top and A Compliment to PIMCO’s New Leadership.

One of the things to understand this time around is that liquidity can and does go away. We are facing markets in which bids dry up:

“While crises look different, the anatomy of how they play out does have common threads. When a crisis starts, investors try to protect themselves. First, they sell the assets they believe are at the root of the problem. Second, they generally look to put more of their money in safe havens, commonly selling riskier assets like credit and equities and buying safer assets by putting deposits in strong banks, buying Treasuries or purchasing very safe money market funds. Often at one point in a crisis, investors can sell only less risky assets if they need to raise cash because, virtually, there may be no market for the riskier ones.” (emphasis added)
~ Jamie Dimon, JPMorgan Chase, 2014 Annual Report

Bond funds have reason to be concerned about liquidity. What happens if investors redeem funds and these funds have no buyers for their bonds? (Bond Funds Get Crazy for Cash)

This turn in the bond market will have a dramatic impact on the role of government. The growth of the bond market reflects many decades of governments issuing bonds and then spending the proceeds. As interest rates fell, governments were able to issue more bonds and pay less. But, now that process is reversing.

What will the world look like with governments borrowing less and spending less while having to pay more for what they have already borrowed? What will the world look like when some governments go broke, default on their debt or go bankrupt?

If Greece defaults on its upcoming IMF payment on Tuesday or fails to rollover its sovereign bills, this may soon ring the bell.

Currently, the response of large investors, financial institutions and corporations is to re-engineer the global legal and regulatory system to serve the G-7 establishment in navigating this turn. This is what the Trans-Pacific Partnership (TPP) and related agreements are about: an effort by top-level players to gather a much larger share of cash flows and assets while protecting their existing assets.

This will speed up the integration of new technologies such as robotics and artificial intelligence, permitting trillions in the bond market to be shifted into the equity markets without labor inflation (see my recent commentary, $ Robots).

All of this will leave more than a few government pension funds and retirement liabilities in a pickle.

Hence, it helps to have Pope Francis out spinning that such policies are essential to save the planet and to compensate for the harm done by mass consumerism and personal selfishness (see my commentary Pope Francis: Care for Our Common Home).

Take note: the Pope makes no mention of the Catholic Church integrating such policies into their own money management.

Very few people realized that the House of Representatives was passing the Trans-Pacific Partnership on the second vote last Thursday. This was because the media was focused almost entirely on the Charleston Shooting. The shooting failed to increase racial tensions as a result of the Emanuel AME Church congregation’s display of one of the most powerful and courageous acts of leadership in American history. This was followed by an outpouring of love and consciousness in the Charleston community and throughout the country.

My good friend John Edward Hurley ran a Confederate museum in Washington for a time. One evening he was lecturing at the Smithsonian Museum on Southern Culture. At the beginning of the lecture, a young man in the audience impatiently asked him how this topic could possibly be relevant to him, a Yankee leading a modern life. John Edward pulled himself up into a regal stance, looked long and hard at the impatient fellow and said, “Young man, culture is the integration of the divine in everyday life.”

Bond traders should take note. There are solutions. They require, however, moving beyond the lies of political clones, beyond the fear-mongering of media pundits, and beyond the greed of the G-7 money men who would replace and police us with robots.

Solutions require looking to the real leadership in America and to the power of America’s faith in the divine, in humanity and in our future.