Friday, 18 March 2022 — Sydney

By Brian Chu Editor, The Daily Reckoning Australia

[6 min read]

• Bailouts of major players show the financial system’s fragility
• Market laughs off anaemic Federal Reserve rate hike

Dear Reader,

Commodities have been rallying quite a bit lately.

Most notably, nickel soared due to the sanctions the West put on Russian natural resources.

Russia is one of the world’s largest producers of nickel. It’s responsible for 8–11% of annual global production between 2017–21, based on data from Kitco and Statista.

You can see in the chart below how nickel went parabolic:

Nickel could’ve gone up even further if not for the London Metals Exchange (LME) halting trade.

But why is any of this strange?

I’ll tell you why.

This is not just a reaction to sanctions. What we are seeing is the turmoil in our current fiat currency system escalating to a new level.

Let me explain…

Bailouts of major players show the financial system’s fragility

The bigger issue is that this isn’t something you would see in a truly free market.  

Market participants drive this financial system by speculating on market contracts. Market volumes from these traders tend to exceed the actual physical exchange of the underlying assets.

In the case of gold and precious metals, there is a case to suggest that central banks and financial institutions are seeking to control the price of precious metals to protect the (perceived) integrity of their fiat currency system.

The aim is to keep the price of gold from rising too much.

You may have seen the occasional sudden spikes up and down — what I view as strange and irregular trading — between the opening hours of major markets.

This system of price control can work but occasionally the market faces a monumental shock that unravels everything.

This occurs when prices rise parabolically, as was the case with nickel.

If a large participant is facing massive losses, the regulators will step in to intervene to prevent market contagion events.

And not surprisingly, US bank JPMorgan emerged to rescue the Chinese company Tsingshan Holding Group, which owed US$8 billion in a margin call for their nickel position.

There are surely a lot of hedge funds and small traders who are probably in a world of hurt after taking a similar position on nickel during this period. Unfortunately, you won’t hear about them as their screw-ups were not as monumental…and therefore not contagious to the broader financial system. As in, they eat their losses like you and me in the stock market.

Last year, you saw this happen with Melvin Capital facing a collapse after it got caught in the short squeeze on AMC Entertainment Holdings [NYSE:AMC] and GameStop Corporation [NYSE:GME].

Basically, same story but different characters and time.

The point I’m making is that these short squeezes followed by market pauses in trading and bailouts of financial institutions that took the wrong side of the bet may be portending the imminent doom of our current financial system.

Yes, it seems like this should have happened long ago and don’t expect it will happen tomorrow.

However, the increasing frequency of such occurrences in recent times shows that the system is near breaking point.

Market laughs off anaemic Federal Reserve rate hike

We can see it another way.

This week, the Federal Reserve announced that it would raise the Federal Funds Rate by 0.25%. This was within market expectations. There was no way they could go harder, especially after Chair Jerome Powell said earlier this month he would back this rate hike and nothing more.

Not long after Powell made that announcement, the price of oil took off further.

Point being? The Federal Reserve just put itself even further behind the ball on controlling inflation.

The markets, therefore, turned their eyes on what the Federal Reserve would do after the March meeting. March was a write-off for them.

The press announcement showed that the Federal Open Market Committee’s game plan in controlling runaway inflation was for rate hikes in every single upcoming meeting for 2022.

Oh, the Federal Reserve is now talking big to control the big bad inflation monster!

The markets were initially spooked by this.

The US markets had opened Wednesday trading significantly up, expecting this anaemic rate hike. The announcement caused the stock indices to give back their gains.

For a short while.

Everything started to bounce back up in the last 90 minutes of trading.

Basically, the markets laughed off the plans of the Federal Reserve. There is already an expectation that not only will it not control inflation but that the Federal Reserve could well be forced to cut rates soon.

It is my belief that the current fiat currency system will die by the inflation it created from its monetary policy. It is now facing this scary prospect and the central banks are unable to do much to stop what is coming.

We are merely watching signs of it falling apart.

I have my suspicion that the final nail in the coffin will likely come from gold, the very thing that the fiat currency system sought to replace.

As to when this will happen, it is hard to predict. It’s a mug’s game to try and put a finger on the date and time.

A better way to do it is to position yourself, like I have been for many years already, for gold to break out of the fiat currency system’s shadows.

I do it with my ‘niche gold’ portfolio. Read here to learn more.

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

The mainstream press cheerfully reported that inflation seems to be ‘levelling off’ That was after January numbers were adjusted upwards, leaving February — still in double digits — looking less awful. Breitbart: ‘Producer Prices Rise 10% for Second Straight Month’:

‘The Department of Labor said its Producer Price Index rose 0.8 percent in February compared with a month earlier. That’s a slowdown from the 1.2 percent month-over-month rise in January, revised up from one percent.’

The stock market roared its approval — with the Dow up almost 600 points yesterday. The US will wage its sanctions war against Russia…not against inflation.

Our subject this week has been the elite’s curious obsession with the Russo-Ukrainian war…and how it connects to the US’s inflationary decline.

Here at the Letter, we have no interest in criticising US foreign policy. It is obviously asinine; we won’t waste our time.

And please don’t waste your time imagining that we are Russian assets ourselves. We are not an agent for the Russian Federation now, nor have we ever been. We’ve never met Mr Putin, and we won’t be giving out any Russian propaganda…at least until the cheque from him clears.

In the meantime, we connect the dots without prejudice. And they lead us to a fuller picture, not only of what is ahead for US inflation…but what is wrong with the ‘liberal world order’ that the US is so eager to promote. But we’ll get to that next week.

Today, we look at the many things that the US sanctions against Russia and military aid to Ukraine will not achieve.

A not-to-do list

They will not protect the US; it is in no way in danger. (Though, it puts itself in danger by confronting Moscow.)

They will not protect our families; they are far, far out of harm’s way.

They will not make us richer; Americans will almost certainly end up poorer.

They will not establish the principle of sovereign independence or the sanctity of borders. Americans don’t care about other countries’ independence; US forces have invaded 70 different countries since its own independence.

They will not save lives; the more aid to Ukrainians, the longer it will take for them to work out a compromise with the Russians…and the more people will die.

Then what? What are we fighting for?

We will answer that question more fully on Friday. For today, we turn to the rock-em, sock-em world of internet chatter for sarcasm and cynicism:

‘The Democrats asked for $10 billion in aid to send to Ukraine. The Republicans upped it to $12 billion. We need all patriots to get on board and up the aid. Why did the Democrats ask for less? Did Putin buy them off? We need to get behind our favorite neo-con war hawks like Lindsay Graham, Mark Rubio and Tom Cotton. Those who don’t are isolationists and Putin apologists. Now is the time for the only thing Republicans and Democrats agree on, foreign policy adventures and WAR!

‘You are either with us, or with the Russians. Anyone trying to understand this conflict, seek out different perspectives, understand the history of the region, seek information counter to the Western media narrative (just listen to the “fact checkers” and shut up) is obviously a Putin stooge who supports the invasion. Anyone sending links to this email chain that questions the logic of trying to start World War 3 (That crazy right wing fanatic Tucker Carlson, being against conflict with a nuclear power, would almost mistake him for an anti-war hippie) and advocates for a diplomatic solution should be automatically put on a list of potential Russian infiltrators.’

Russia, Russia, Russia! Putin, Putin, Putin! And here comes the money! From the same thread:

‘Did anyone note the House passage of the one point five trillion funding bill noticed at 12:30am today for a 1:30am committee vote approved at 2:30am? Almost 3,000 pages of spending to be passed today without prior notice to the balance of Congress. Let’s pass it so we can find out what’s in it! That seems to work out for us pretty well doesn’t it?’

Another ‘Putin stooge’ has his say:

‘Any time there is a crisis such as this, it is a good time for Congress to pass giant spending packages. That is where there is money to be made, where friends can be rewarded, where cash flows can circle back, and political favors can be curried. This is what Congress lives for.’

Pentagon pay day

The Washington elite spent years trying to tag Russia — which has an economy about the size of the Greater New York City area — as a mortal enemy. US meddling in Ukraine politics (including Lindsay Graham’s star performance in Kyiv, when he promised US backing in a fight with Putin) goaded the Kremlin to action.

And now comes the pay day. Here’s The Jerusalem Post: ‘Arms Sales to Europe Skyrocket as Tensions with Russia Reach an All-time High’.

And here’s National Defense Strategy stating the obvious: ‘Next US defense budget will get a boost due to Ukraine invasion: Pentagon comptroller’:

‘A wild card for the months ahead is the trajectory of the war in Ukraine, as the Defense Department may need additional money for FY22 and FY23 if Defense Secretary Lloyd Austin orders further troop deployments to Eastern Europe.’

Whatever it is, the price of defence stocks has gone way up undercover this new threat. Last November, a share of Lockheed Martin would have set you back US$326. Yesterday, it was US$444.

Hooray! Victory!

Meanwhile, prices rise…and time runs out.

More to come…

Regards,

Bill Bonner,
For The Daily Reckoning Australia