The Phaserl


Why the “Bond King” Is Having Flashbacks of the 2008 Financial Crisis

by Doug Casey, Casey Research:

Investors everywhere are taking cover.

As you probably know, Great Britain stunned the world by voting to leave the European Union on June 23.

The “Brexit,” as folks are calling it, triggered a selloff that wiped $3 trillion from global stocks in two days.

The announcement also shook the currency market. The pound sterling plunged 8% the day after the news broke. It was one of the British currency’s worst days ever. The U.S. dollar, euro, and Japanese yen experienced huge moves too.

It’s now been two weeks since the historic event…and panic is still in the air.

Investors around the world have piled into government bonds, which are widely considered safe assets. Yesterday, the yield on the 10-year U.S. Treasury hit a fresh all-time low. Yields on British, Irish, German, and Japanese 10-year bonds also hit record lows. A bond’s yield falls when its price rises.

Investors have loaded up on gold too. The price of gold has shot up 8% since June 23.

This shouldn’t surprise you if you’ve been reading the Dispatch. Regular readers know gold is the ultimate safe haven asset. It’s preserved wealth through every sort of financial crisis because it’s unlike any other asset. It’s durable, easily divisible, and easy to carry. Its value doesn’t depend on “confidence” in any government. In other words, it’s real money.

After its Brexit-fueled rally, gold is up 29% on the year. It’s at its highest price since March 2014. Yet, this rally is showing no signs of slowing down.

• The SPDR Gold Shares ETF (GLD) just had one of its best days ever…

On Tuesday, investors put $1.3 billion into the fund, which tracks the price of gold. According to Investor’s Business Daily, it was the fund’s third best day ever. It was also the fund’s best day since stocks crashed on August 8, 2011.

Investors have now plowed $15.26 billion into GLD this year. That’s the most of any of the 1,931 ETFs tracked by global analytics and research firm XTF.

• In London, the panic has gotten so bad that several fund managers stopped their funds from trading…

The Wall Street Journal reported yesterday:

Henderson Global Investors, Columbia Threadneedle and Canada Life are the latest fund managers to stop investors pulling their money out against a backdrop of political and economic uncertainty following Britain’s vote to leave the European Union…

The fresh moves by fund companies to suspend redemptions Wednesday came after Standard Life Investments, Aviva Investors and M&G Investments suspended trading on U.K. property funds earlier this week…

This means that half of the 10 largest U.K. property-fund managers have suspended trading temporarily.

In other words, these managers have trapped their investors’ money to keep their funds from collapsing.

• “Bond King” Bill Gross says something very similar happened just before the 2008 financial crisis…

Gross is one of the world’s most well-known investors. He founded Pacific Investment Management Company (PIMCO) in 1971. Under his watch, PIMCO grew into the world’s biggest bond fund. Today, he runs his own bond fund at Janus Capital.

Like us, Gross is worried about what’s happening in London right now. Bloomberg Business reported yesterday:

“It’s reminiscent of Bear Stearns’ subprime funds before the Lehman debacle,” Bill Gross, a fund manager at Janus Capital Group, said on Bloomberg TV. “The system doesn’t allow liquidity to flow into the proper places. If these property funds are just one indication, perhaps there will be others to follow. I think it’s something to worry about.”

The collapse of Lehman Brothers in 2008 helped set the global financial crisis in motion. The S&P 500 went on to plunge 57% in two years. And the U.S. economy entered its worst downturn since the Great Depression.

• Government officials are scrambling to contain the crisis…

Last week, the Bank of England (BoE) pumped £3.1 billion into Britain’s banking system. It pledged to inject as much as £250 billion to stabilize its financial system.

And on Tuesday this week, the BoE announced more “stimulus” measures. It eased special capital requirements for Britain’s banks. Specifically, the BoE lowered how much money banks need to hold as a “buffer.” The move increases the lending capacity of U.K. banks by as much as £150 billion.

Economists at the BoE believe more borrowing and spending will stimulate the economy. As we’ve shown you many times, this won’t work. Casey Research founder Doug Casey explains:

It’s part of the Keynesian view, in which spending and consumption drive the economy. This isn’t just wrong, it’s the exact opposite of what’s true. It’s production and saving that drive an economy. You have to save to build capital, and capital is necessary for…everything. What these people are doing is destructive of civilization itself.

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