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US Jobs Report impacts Market

US Jobs Report impacts Market

We experienced a watershed in the financial markets yesterday Friday 3 June 2016, which as usual still needs to be confirmed. A clear sign illustrated the trouble the US economy is in with their jobs report yesterday: Indicating only 38 000 new jobs in May, which is the lowest May in the last 6 years. This resulted in market turmoil with the US$ jerking down against all currencies and Gold jerking up. The US stock market jerked down but recovered most of the drop by the close, as has been happening in the past weeks: The Dow has been dropping daily and by 3pm each day ‘forces’ come in to buy the market back up. There is something ‘artificial’ acting on their markets to keep them aloft – cannot continue much longer.

The US 10 Year Treasury yield plummeted as well, and it is this bond market which is the real risk to the world’s financial system. Here we have a $100 trillion market which has grown exponentially in the last 25 years and which has virtually gone vertical since the 2006-9 crisis.

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The yield closed the week at 1.74% and is now again moving towards it’s post 2006-9 low at 1.5%.

Governments cannot afford interest rates above zero because of the debt levels, and it is all this which is preventing economic growth. As governments around the world compete in lowering interest rates, the Fed in the US continues to threaten with rate increases which many still think cannot happen anymore: Raising rates at this stage goes totally against the trend of the real economy.

The dilemma for the world is that with $230 trillion in debt, higher interest rates are guaranteed to lead to defaults and helicopter money. This in turn will accelerate the currency race to the bottom, leading to hyperinflation and much higher interest rates. 100 year bonds will mature worthless. Long rates will have to turn up later in 2016: 10 Year US Treasury bond yield was 16% in 1980 (Gold peak) to 2% today (similar to record low at the end of WWII). In the next 12-18 months Governments and central banks will continue to keep short rates at zero or negative whilst bond holders (like Japan, China, and Russia) will realise increasingly that bonds will not be repaid and there will be competition to get rid of the rapidly deteriorating value of their paper.

The end game may lead to the biggest financial implosion in history.

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