“No one should be so naïve to think that US growth and the price of assets won’t be impacted by higher interest rates, whether Fed induced on the short end or market driven on the long end. We’ve pulled forward economic activity (autos in particular) and returns in a variety of markets (bonds, stocks, and commercial real estate most notably). Financial conditions will tighten further in 2017 and I include this quote from my friend David Rosenberg, ‘There have been 13 Fed rate hike cycles in the post WWII era, and 10 of these landed the economy in recession and the three that were aborted – the mid 1960s, the mid 1980s and the mid 1990s – were only aborted because the economy either slowed precipitously or there was a financial accident that forced the central bank to the sidelines. There has never been a Fed hiking cycle that ended benevolently’ .. The ECB and BoJ will continue to damage the business model of their banking systems due to negative interest rates and suppression of market rates that has flattened yield curves.”

LINK HERE to the commentary on The Boock Report

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

“The Indian government’s clumsiness in banning R500 and R1,000 notes is certain to lead to an economic and financial crisis. Looking on the bright side, it might lead to the collapse of the Modi government. If that happens, it may delay the same medicine being dispensed by other governments to nations in a similar state of development and tempted to pursue similar objectives .. The expected gains to the state are obvious, and one can see why politicians will favor the deployment of financial technology, such as mobile banking, to achieve these ends .. It appears all countries are going down this digital route .. What’s particularly concerning for the individual is the way nations appear to be ganging up together into an unelected unaccountable super-state .. We are already used to the state controlling the interest we pay and receive on our money. Banning cash increases the depth of this control, with savings and deposits being taxed through negative interest rates. The super-state’s cabal of central banks coordinates managed interest rate policies, either by liaising directly, or through the forum of the Bank for International Settlements. Quantitative easing, the direct control of bond prices through central bank purchases, reduces the risk that the market will challenge central bank policies, at least for the short-term .. Eventually, governments will destroy themselves following these political and economic policies, because the states and their experts delude themselves that they understand economics. They do not wish to understand the reasons why markets free of government interference lead to prosperity, and why government micro-management always ends in tears. Consequently, they do not see the risk to statist domination, because it comes not from private individuals, but from the states themselves. Banning cash will almost certainly speed up the decline of an electronic currency’s purchasing power, because its public rejection has the potential to become instantaneous .. Just watch how the cashless rupee behaves. Compare the potential for price inflation in a cashless economy with the Weimar or Zimbabwe inflations, when cash generally had to be obtained before it was spent. Rudolf Havenstein, President of the Reichsbank in the early-1920s, had the printing-presses working twenty-four hours a day churning out currency notes to meet an escalating cash shortage. Today, not only is access to money instant, but it is to credit as well. Currency collapse could be the greatest threat to planned national socialism. During a currency collapse a state’s liabilities will rise along with everyone else’s .. A prosperous economy is one where individuals keep and invest their wealth productively, as all experience has shown.”
– Alasdair Macleod
link here to the reference

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

JP Morgan: “‘True Believer’ central banks have created unprecedented distortions in government bond markets. Bond purchases and negative policy rates by the ECB and Bank of Japan led to negative government bond yields. Whatever their benefits may be, they also resulted in profit weakness and stock price underperformance of European and Japanese banks. The poor performance of European and Japanese financials was a driver of lower relative equity returns in both regions in 2015/2016.”

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Here is our view of the macro-economic state of the global economy and the risk factors going into 2017.

Overall, we continue to see ongoing adverse risks to investors from the unintended consequences of generally good-intentioned central bank and government policies and regulations arising from the challenges of managing escalating debt and fostering economic growth:

The results of these central bank and government policies and regulations are now being manifested as worsening public and private debt, a stagflationary global economy, an emerging public and private pension crisis, and unsustainable entitlement obligations.

4 pillars of financial repression – negative interest rates (whether in nominal terms or in real terms), forced inflation, ring-fencing regulations and obfuscation – are in turn resulting from the above-mentioned central bank and government policies and regulations.

In turn these 4 pillars are presenting the adverse risks to investors. For investors, the focus then becomes identifying assets (both public and private) and more importantly appropriate risk management in order to meet the investor goals of getting yield, preserving purchasing power and creating wealth.

Let’s look at the results mentioned above which are now being manifested – worsening debt, stagflation, pension crisis and entitlement crisis – as the key factors affecting the global economy and the financial markets heading into 2017:

Escalating Debt & Debt Servicing Costs, Unsustainable U.S. Entitlement Spending, A Slowing Global Economy

The combination of rising interest rates and escalating debt is causing debt servicing costs to escalate. This is putting a damper on global economic growth. Some charts on this are shown below. Central banks have attempted to alleviate the challenge through negative interest rates and forced inflation – 2 of the 4 pillars of financial repression. The debt challenges are not only in the U.S. – in China for example, non-performing loans are now at 15%-20% of GDP levels (according to Moody’s)  .. and in Italy, the non-performing loan numbers may be closer to 25% of GDP levels!

Courtesy of Peak Prosperity

Courtesy of Peak Prosperity

Courtesy of Charles Hugh Smith

Courtesy of Gordon T Long and FRA

On the fiscal challenges driving U.S. debt, entitlement obligations are now at 10% of GDP and rising! This trend is expected to escalate U.S. debt levels, given the trillions in unfunded liabilities obligated towards entitlements.

In addition, corporations have taken out a significant level of debt to use in buying back their equities – it has been estimated that there has been $620 Billion borrowed & used in this regard during the last 12 months alone.

This corporate debt will be a challenge in managing going forward, especially in a rising interest rate environment.

A Stagflationary Global Economy

Given the push by the new U.S. Administration through President-Elect Donald Trump to lower U.S. corporte taxation rates from 35% to 15%, this could be a major positive on the economy and the financial markets. In addition, Japan, Canada, the U.S. and China are implementing or are planning for major infrastructure fiscal-stimulus spending – although it may not be until into 2018 for the infrastructure spending in the U.S. and Canada to be implemented.

Putting all these developments together – the escalating debt challenges mentioned above, rising interest rates, rising inflation and global fiscal stimulus spending in a world of slowing global trade – this is all resulting in a stagflationary environment.

There is rising price inflation, generally being seen in things that people need – food, education, health care, and insurance – versus things where globalization or technological development has significantly brought costs down – electronics, consumer products, outsourced services, etc.

Shrinkflation – smaller food volumes at the same price

Shrinkflation – smaller food volumes at the same price

Courtesy of Charles Hugh Smith

Courtesy of JP Morgan – Inflation and Inflation Forecasts

Courtesy of AEI – U.S. Inflation Breakdown

Hedge fund manager Dr. Albert Friedberg of the Friedberg Mercantile Group:”We are going to see an expansion of the federal deficit, we are going to see long term interest rates going higher, we are going to see a Federal Reserve chase after inflation going higher .. Our forecast, and the direction taken by our portfolios, is for accelerating inflation over the coming months. This phenomenon will take markets and officials by surprise, and I believe that it will change the world we know today. Financial repression will continue to be the order of the day, partly because central bankers will remain in intellectual denial and partly because of fears that rate normalization will bring economic activity tumbling down. The early part of this period of accelerating inflation should prove beneficial to many assets, among them commodities and well financed equities. Coming out of denial — beyond our investment horizon — will be painful and very damaging to debt burdened sovereigns and corporations.”

An Emerging Pension Crisis

The developed world is in an escalating pension crisis – both at the public level & at the private level.  Pension funds are finding it increasing difficult to meet their obligations, given the very low or even negative interest rate financially repressed environment.

Danielle DiMartino Booth – Former Advisor to the Dallas Federal Reserve President: “There is a distinct cerebral pleasure, relief even, derived from lapsing into a state of suspended disbelief .. Add up all our great states and Moody’s math comes up with $1.75 trillion in what will be pension underfunding by the time we’ve said adios to fiscal year 2017. That represents a 40 percent jump from fiscal year end 2015 .. The Federal Reserve is fully aware of the inferno burning under the surface of the nation’s public pension system and the direct effect their interest rate policy has had in exacerbating pension underfunding .. Unlike other countries, whose pension disasters will also be all consuming, U.S. laws allow accounting chicanery that obfuscates the gravity of the degree of underfunding. But have no doubt, these chickens will come home to roost though these manias always last longer than we can envision.”

Here is a table showing underfunding challenges for some corporations:

Investment Environment Implications

Many of the fund managers, economists and industry leaders we follow and interview see the following potentials for the investment environment:

• selective opportunities in equities with the potential for a “Minsky Meltup” (see commentary by FRA’s Co-Founder Gordon T Long below)
• the potential for infrastructure-related and innovation-related investments, including those involving public-private partnerships (PPP)
• the potential for a strong commodity market, especially in base metals and agricultural commodities
• depending on the strength of the U.S. dollar and the unwinding of U.S. dollar denominated corporate debt, the potential for investments in emerging markets, especially those which have a focus in base metal and agricultural commodities
• the potential for a short-term bounce in U.S. Treasury bonds, before going lower for the medium-to-long term trend; this trend is bearish for most bond markets
• the potential for store-of-value assets in safe storage and secure jurisdictions of the world
• the potential for basic businesses with little or no debt, with little or no leverage and with high discounted free cash flows

A risk-mitigated approach to addressing the market, credit and operational risks can help an overall investment strategy. For 2017, we see intensifying operational risks – the war on cash and gold spreading, along with tightening capital and currency exchange controls, new regulations adversely affecting the freedoms in the movement of capital, new and increased wealth taxes at all levels, and adverse changes to rules affecting registered retirement and pension fund accounts.

FRA’s Co-Founder Gordon T Long thoughts on the Outlook into 2017 .. also LINK HERE to Gord’s analysis

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Edelweiss Journal: “After a decade of extreme monetary experimentation, it is now commonly accepted that global fiat money, expansionary money policies and central planning have served to distort the price-finding role of the free market and, as a consequence, the valuation of all assets .. The bifurcation between financial and real economies has grown ever larger, and this has been to the benefit of participants in the financial economy. Precisely because of the scale of this gap between the two, and because of their very different modern natures, a transition back to the real world provides an insurmountable challenge for most who have spent their careers developing skills suited now only to the financial system .. In this scenario, owners of real productive assets, which are genuinely scarce in nature and unavailable to most, seem best placed to prosper. For they do not require liquidity within the financial system, nor to be told what the current price of their company’s shares is. Furthermore it is likely that, in times of real adversity, the best of these businesses will find opportunities to strengthen their position further.”
LINK HERE to the report

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Kenneth Rogoff is a highly respected U.S. economist. In 2011, he received the Deutsche Bank Prize in Financial Economics, and sooner or later he will probably receive the Nobel Memorial Prize. But Mr. Rogoff also belongs to the elite in which voters in the U.S. and elsewhere no longer trust.

I met Mr. Rogoff when he received the Deutsche Bank Prize. At this occasion, he was asked how the huge debt accumulated in the run-up to the financial crisis could be reduced again to a tolerable level. His answer was: through financial repression. With this, he meant a monetary policy aimed at keeping interest rates low while raising inflation, so that government revenues would rise while interest expenses would be depressed. With this method, the U.S. succeeded in reducing the public debt incurred during World War II. When the U.S. entered the war in 1941, federal debt amounted to 49.5 percent of GDP. As a result of the war expenses, the debt ratio rose to 119 percent of GDP in 1946. Thereafter, it fell again to about 57 percent of GDP in 1959. In 1941-1959, the U.S. Federal Reserve kept the interest rate on long-duration government bonds at 2.6% on average. With an average inflation rate of 4.2%, the real interest rate amounted to -1.6%. Thus, negative real interest rates helped cut the government debt ratio by about half between 1946 and 1959. In the early 1970s, the policy-induced depression of real interest rates was labeled “financial repression.”

Since the financial crisis of 2008-09, central banks have been trying hard to boost inflation. Only few of them admit that their true objective is to push real interest rates into negative territory, with a view to easing the debt service burden of their governments. Only the Bank of Japan has committed itself to fix the interest rate on 10-year government bonds at 0% while aiming to drive inflation above 2%. So far, however, neither the BOJ nor other central banks have succeeded in generating financial repression. Inflation has stubbornly remained low.

Economists like Mr. Rogoff conclude from this that nominal interest rates need to be pushed into negative territory if financial repression cannot be created by rising inflation. “To say that negative real interest rates caused by inflation are unfortunate but negative nominal rates are unnatural is to promulgate financial illiteracy,” he wrote in the Financial Times on Oct. 11. For the technocratic economist, it does not matter how the real interest is pushed into negative territory to create financial repression. If inflation does not increase, nominal rates have to decline. And if citizens flee into cash to avoid negative interest rates on deposits, then cash needs to be abolished.

Economists like Mr. Rogoff cannot imagine that for ordinary people, positive nominal interest rates are related to negative rates like water to ice. The drop below the zero line leads a change in the aggregate condition in both cases. In the “fluid,” positive area, economic agents see interest as a reward for the postponement of consumption. The borrower brings spending forward in time and needs to take care that he uses the borrowed money such that he can repay the lender the principal with interest. In the “frozen,” negative area, economic agents see interest as an illegitimate tax imposed upon them by unelected technocrats. They may just tolerate the tax levied through negative real interest rates when it is the result of unexpected inflation. But they resist taxation through negative nominal rates even more than normal taxation, because it lacks democratic legitimacy.

The politics of negative interest rates has backfired. Banks are bleeding, and people rebel against them. Like Mr. Rogoff, central bankers belong to the elite. But they cannot be voted out of office.

However, people can withdraw their trust in the money they create.

Thomas Mayer is the founding director of the Flossbach von Storch Research Institute in Cologne, Germany.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

“While all eyes were on India (as rumors swirled of an imminent gold import ban), The FT reports that China curbed gold imports in the wake of government attempts to clamp down on capital leaving the country, according to traders and bankers.”
LINK HERE to the article

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

“Experience teaches that countries reduce debt relative to their income in five ways: economic growth, substantive fiscal adjustment or austerity plans, explicit default or restructuring of private and/or public debt, a surprise burst in inflation, and a steady dose of financial repression that keeps real interest rates low (usually negative). The last two options — inflation and financial repression — are only viable for debts denominated in domestic currency .. As they have historically in the aftermath of financial crises or wars, central banks have been increasingly resorting to a form of ‘taxation’ that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt. Such policies, known as financial repression, usually involve a strong connection between the government, the central bank and the financial sector. One of the main goals of financial repression is to keep nominal interest rates lower than would otherwise prevail. This effect, other things being equal, reduces governments’ interest expenses for a given stock of debt and contributes to deficit reduction. However, when financial repression produces negative real interest rates (yielding less than the rate of inflation) and reduces or liquidates existing debts, it is a tax on bondholders and a transfer from creditors (savers) to borrowers and, in most cases, governments. Other features of financial repression vary across countries and time. In the past, measures also included directed lending to the government by captive domestic entities (such as pension funds or banks), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and generally a tighter coordination between governments and banks — either explicitly through public ownership of some institutions or through heavy ‘moral suasion’ by officials. In connection with keeping interest rates low, regulatory policies with financial repression features aim to create or expand a captive audience for government debt; Basel III rules fit this mold, as they provide for the preferential treatment of government debt in bank balance sheets.”
LINK HERE to the essay

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

“Trump will be playing a dangerous game if he turns his back on those who had greater hope for the draining of the swamp. There is a euphoria from the entrepreneurial class that tax reform and the lifting of some burdensome regulations will take place under Trump but a massive fiscal stimulus will have to be financed and rising interest rates will place a burden upon the budget plans being discussed. Even Druckenmiller was talking about robust growth fueling a rise in long-term rates. He noted a level of 6%. As previously discussed, DEBT will be the most important factor overhanging any Trump-inspired growth strategy .. Where Druckenmiller discusses NOMINAL RATES my focus will be on REAL RATES. At zero interest rates around the world, monetary policy has been in uncharted territory as central bankers sought to ease the burdens of a global balance sheet recession (Richard Koo). Getting back to interest rates as a signalling mechanism will restore classic fundamentals to a premier position in global macro analysis .. The point of a cashless society has been raised by Larry Summers as a way to deal with his beloved theory of secular stagnation. In a cashless society a central bank could impose NEGATIVE INTEREST RATES of say 3% and not worry about cash being hoarded. Only a fool would keep being charged on deposits and thus there would be a rush to spend every digital cent. So we will continue to monitor the financial repression in India. Interesting that this took place after Raghuram Rajan was replaced as the Governor of the Indian Central Bank.”
LINK HERE to the commentary

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

2016.11.12 – Trump Infrastructure by zerohedge on Scribd

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

GoldMoney’s Alasdair Macleod explains: “President-elect Trump stated in his victory speech that he intends to make America great again by infrastructure spending. Unfortunately, he is unlikely to have the room for maneuver to achieve this ambition as well as his intended tax cuts, because the Government’s finances are already in a perilous state. It is also becoming increasingly likely that the next fiscal year will be characterized by growing price inflation and belated increases in interest rates, against a background of rising raw material prices. That being the case, public finances are not only already fragile, but they are likely to become more so from now on, without any extra spending on infrastructure or fiscal stimulus. So far, most informed commentaries on the prospects for inflation have concentrated on the negative effects of an expansionary monetary policy on the private sector .. Central banks, which have a limited understanding of markets and even less of economics, as we have demonstrated, are only too willing to encourage government deficit spending, because they themselves can provide no other answer. That leaves a U.S. Government, with a debt to GDP ratio already over 100%, going on a spending-spree to rescue a failing economy .. The monetary debasement component that finances an escalating budget deficit will only impoverish the long-suffering actors on Main Street even more, and the additional government bond issues required will drive up the cost of borrowing for everyone. Instead he should be reducing his administration’s overall commitments, and getting out of people’s lives. Take a note out of Silent Cal Coolidge’s book, and become a great President. I wish him luck.”
LINK HERE to the essay

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Jayant Bhandari explains the unintended consequences of India’s financial repression .. India’s government is conducting a war on cash – it banned the use of Rs 500 (~$7.50) and Rs 1,000 ($15) banknotes ..”This pretty much made most currency-in-use illegal. Banks and ATMs are closed today .. Today, there is utter chaos in the market, with only the spontaneously erupted black market available to bypass the ban — most people simply don’t have anything else but the banned currency bills. Some are booking train tickets for future rides and are subsequently canceling them — they can use the banned currency to buy the tickets and can then get legal currency back after ticket-cancellation charges. This is costing people a lot of time, but it is the only way they can stay afloat and buy food. Others are taking different measures, equally desperate .. Huge chaos in the Indian economy should be expected to continue — as India’s government is simply incapable of bringing liquidity back any time soon. Businessmen will waste their time dealing with this nonsensical event, instead of investing and creating wealth. India simply continues to do more and more of what makes it an uneconomical and wasteful place to invest in.”
LINK HERE to the article

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

The Dallas Texas pension fund is in trouble – the mayor there is warning of 130% property tax hikes will be necessary to avoid a collapse of the pension fund .. it’s the unintended consequences of financial repression .. “Over the past year, the biggest casualty to emerge as a result of global NIRP (or close to it) monetary policy have been pension funds, which have had two choices: either suffer losses as yields on new fixed income investments barely cover (and in some case don’t), or scramble for duration (or outright risky investments like junk bonds and high beta stocks) .. So what do pension fund managers do when perpetually declining interest rates continue to drive their funded status lower and lower despite one’s return profile? Well, there is little choice: one has to move further and further out the yield curve in an attempt to match asset duration with that of one’s liabilities. That, or reach for the skies by buying the riskiest assets possible, and pray for a home run.”
LINK HERE to the article

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

LINK HERE to the article

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Dodd-Frank  represents Regulatory Policy that assures  sub-standard credit and job growth in an Era of Financial Repression!

According to Christopher Whalen of Kroll Bond Rating Agency (KBRA) the 2010 Dodd-Frank law represents another “phase-shift” in regulatory policy that implies sub-standard credit and job growth for years to come, regardless of the level of interest rates or open market purchases (QE) of securities by the Federal Open Market Committee (FOMC) and other global central banks.

As a result, low levels of job creation and growth which are exacerbated by deflationary effect of low/negative interest rates, are driving a populist political backlash in the US and in Europe. The “surprise” result in the BREXIT vote this summer is likely to be repeated in future elections because of the ground swell of popular discontent at failed economic policies.

Markets are now starting to price in these risks, as evidenced by the widening gap in cost of dollar funding in the US and EU.

Christopher Whalen of Kroll Bond Rating Agency (KBRA) has just released a presentation discussing this. The presentation makes the following additional key points:

• The “single mandate” for all governments is job growth, both for economic and political reasons. The FOMC pretends to have a “dual mandate,” but in fact the Humphrey Hawkins law makes “full employment” the paramount policy mandate before price stability or stable interest rates can even be considered.

• Since the 1970s, fiat money and the singular focus on full employment has gradually forced interest rates down to zero or below. The secular decline of interest rates, which is the centerpiece of “financial repression,” necessarily also drives deflation by taking income (carry) out of the economic system.

• With negative interest rates, global central banks are depriving the global economy of trillions of dollars in income and thereby fueling a diminution of private capital and economic activity. Low interest rates and QE also lead to bad investment decisions, as in the case of oil, residential and commercial real estate, shipping and other asset classes.

• The fixation of global monetary authorities with targeting employment has significant costs, including a steady level of underlying inflation that undermines consumer purchasing power (thus, today’s discussion of “income inequality”). The single mandate of full employment also facilitates periodic financial bubbles and crises resulting from the manic swings in monetary policy.

To view the presentation, click here.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

“The distortions created by central banks over the past seven years have blunted our navigating instruments. If a storm is approaching, we are unable to see it. We navigate by instruments, valuations, historical precedents, official opinions and reassurances. Even when a gigantic tsunami overwhelms one of the ships in a perversely calm sea, we reject the warning, chalking it up to its conductor’s carelessness. That mighty sterling can collapse 6% in a few seconds says only that the Brexiters made a bad choice. Really? Our senses apprehend that all is not well, but we look around and can’t see it .. Stepping back from the metaphors, I offer that vanishing liquidity (defined as the ability to rapidly execute large financial transactions at low cost with limited price impact) is the lonely indicator of serious trouble ahead. Liquidity to markets is the equivalent of air to humans. And permitting myself one more incursion into the figurative world, air gets thinner, more rarified, the higher one climbs. Historically, bull markets have always been accompanied by rising volumes and rising liquidity. They died when far-sighted, sophisticated sellers overwhelmed the throng of new, enthusiastic, short-sighted buyers. This seven-year-old bull market is different. Precious few buyers with conviction and enthusiasm can be spotted. It’s a lack of sellers that has fortuitously allowed the paucity of buyers to drive up prices. This liquidity constriction is felt in our own skin. Positions that were easy to put on months ago have become increasingly difficult to exit. It now takes five to eight days to get out of positions if we do not wish to noticeably affect prices, compared with one to three days in months past. The loss of liquidity is not an empty term; it’s real .. Not until volume rises significantly above the recent pace will we be confident that risks are being properly priced in and that prices are indeed clearing.” .. Friedberg is bullish on gold, sees the prices as having bottomed out about a year ago .. 
LINK HERE to get the PDF

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

CENTRAL BANKERS CAN’T STOP THE BUSINESS CYCLE

NOR THE DEATH BLOW OF A POST US ELECTION RECESSION

The central bankers are capable of achieving many extraordinary results but not all economic and financial problems can be solved by central bankers. Central Bankers for example have the power to solve liquidity issues, but it is impossible for them to solve solvency issues.  Central Bankers through Financial Repression can transfer risk , however they can’t remove it from the system. Additionally, Central bankers may be able to delay a recession temporarily, but  they can’t prevent the business cycle from running its natural course.

This inability to control the business cycle has the potential to be the unavoidable trigger that brings the great Central Bank Bubble to an end.

The US after eight years is by most comparisons overdue a recession. Unfortunately, the next recession is going to happen when the central bankers are least capable of further attempting to slow the inevitable. The central bankers may have delayed a US recession about as far as they are capable of doing.

A NEARLY PERFECT STORM BREWING

The market technicians of all persuasions are almost unanimously now calling for a major correction.  What is most troubling in their work is that their indicators are not just short and intermediate term measures but critical long term indicators:

• KONDRATIEFF CYCLE: The 55 Year generational Kondratieff Cycle  shows an overdue major downturn with a cleansing of debt as part of the end to what has been termed the “Debt Supper Cycle”,
• DEMOGRAPHIC CYCLES: Harry Dent has done some major  work on Demographic Cycles and cycles overall. I interviewed him for the Financial Repression Authority where you can find the video and he lays out the seriousness of the shifting demographics and how it overlays of many different types of cycles he has studied.

The mal-investment that recessions normally purge as part of a healthy capitalist system has reached such a level that deteriorating real total business investment has diverged from the S&P 500 Index as well as C&I Loans. In our opinion (which we have labeled here), sound business investment has shifted from being distorted to what can now only be described as broken. Corporate profits, sales revenues, margins and EBITDA cash-flow are all falling or are rolling over.

Every recession on record since the end of WWII (but one) has signaled the four warnings outlined here. That one exception had a completely different economic climate than the current one. The chances of a US Recession in 2017 should be considered highly likely.

The problem with the next US recession  is that the magnitude of distortions and leverage in the system will potentially  quickly cascade into a full scale, unmanageable economic problem and likely a full scale protracted recession (or even worse).

A “WHIFF” OF INFLATION

Few market watchers appear to appreciate that inflation tends to rise into and during a recession.

Consumer prices in U.S. rose in September at the fastest pace in five months. The Year-over-Year inflation rate is now the highest it has been since October 2014. Few are yet paying attention.

What this suggests is that the Fed will most likely remain on course for an interest-rate hike this year, immediately following the US Presidential election.

To many this is exactly the wrong medicine for the economy at exactly the wrong time especially when you consider Gross Domestic Income (GDI).  Fed actions would almost assure the recession.

All US Recession discussion (currently “embargoed” by the mainstream media) will become headline discussion immediately AFTER the election, as the blame game then ensues on how the unprecedented negative campaign rhetoric was actually the root cause. This will be the politicos “cover” for massive fiscal spending and increases in the Fed’s balance sheet. Of course it won’t stop the recession nor the financial damage that will ensue.

Don’t say you weren’t warned!

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

FRA is joined by Yra Harris in discussing the impact of the potentially failing Deutsche Bank on the global economy, along with the state of US markets as election day draws closer.

Yra Harris is a recognized Trader with over 32 years of experience in all areas of commodity trading, with broad expertise in cash currency markets. He has a proven track record of successful trading through combination of technical work and fundamental analysis of global trends; historically based analysis on global hot money flows. He is recognized by peers as an authority on foreign currency. In addition to this he has Specific measurable achievements as a member of the Board of the Chicago Mercantile Exchange (CME). Yra Harris is a Registered Commodity Trading Advisor, Registered Floor Broker and a Registered Pool Operator.

He is a regular guest analysis on Currency & Global Interest Markets on Bloomberg and CNBC. He has been interviewed for various articles in Der Spiegel, Japanese television and print media, and is a frequent commentator on Canadian Financial Network, ROB TV.

DEUTSCHE BANK

We don’t know if Deutsche Bank is a buy-in opportunity. It’s based on the fact that the EU and Germany will not allow Deutsche to fail. This extensive systemic risk because of the fact that Deutsche Bank is one of the world’s largest notional derivative books – of about $46T at the end of last year – represents a lot of risk in terms of derivatives meltdown between counterparties. While the ECB balance sheet has grown from €2T to €3.4T in just 18 months, there’s only about €7.5T outstanding Eurozone sovereign debt. It represents a challenge going forward in a very quick period of time, in terms of the overall systemic risk to the European banking system.

Its risk profile is based on Deutsche’s own models, so we don’t really know what the exposure is. It ought to be a higher risk rating than they reveal.

CAN’T LET DEUTSCHE FAIL – WHAT THEN?

It would be extremely difficult to bail Deutsche out or bail it in. If you want to see financial repression, watch what the ECB is doing to the savers in Germany. They’re bearing the bailout of the entire European project. If there was a bail-in, that would cause even more political angst. If that balance sheet grows big enough, no one can escape the EU ever, and the German taxpayers will be on the hook for this forever.

The German government is boxed in. It could go in the direction of a bailout of 100M to potentially a bail-in, as part of financial repression where there’s a wealth confiscation of assets that take place at the capital structure layers, anywhere from bank depositors to senior secure bond holders. It could happen either way or a combination of both. Or you could have both, or have the European Central Bank step in and monetize a lot of the bailout in terms of assistance for quantitative easing programs.

Mario Draghi would like to increase QE, but there’s no chance of that happening. He’s under a lot of pressure, and wants to build that balance sheet up bigger and bigger. Central bankers are running out of tricks and ammo.

The US equity market has now broken out of the uptrend. The equity market is fairly valued, but vulnerable to a sell-off. Wall Street would prefer Hillary, but she will certainly raise capital gains or the holding period in which you can obtain capital gains. People who have been in this market and have long term capital gains will likely sell that which they can before the end of the year, which makes this market vulnerable. Corporations have piled up so much debt that it weighs on this market dramatically. The amount of debt piled on the balance sheets around the world is just enormous.

The markets are vulnerable from the perspective of overvaluation measures and overhanging debt, but also from the potential of helicopter money for doing projects like infrastructure to provide a stimulus to the financial markets as well as the economy. The asset markets will have to go down significantly to some level to prompt fiscal authorities to bring the political will together to create fiscal stimulus. With increasing central bank buying of stocks, that will likely artificially support stock markets.

US PRESIDENTIAL RACE

Trump makes the markets nervous, because they don’t like unknowns translating into high volatility in the markets. Trump might be anti-trade, which could affect international companies, but Clinton might bring geopolitical events that could negatively affect the markets as well.

Several people have laid out the possibility that if Trump pulls out a surprise upset victory on election night, there would likely be calls to say this was Russian tampering and that election results should be put on hold until it could be determined if foreign interests undermined the election. This will likely provide a great deal of social unrest, which could translate into a lot of economic uncertainty. There’s a lot happening outside of North America that could work to propel the US markets higher with a strengthening dollar.

US DOLLAR STRENGTHENING

Last week we saw, for the first time since February, the US dollar move above 97.50 on the dollar index. It’s starting to look like the makings of an upside break-out in the dollar index. When you look at the problems around the world, it’s hard to believe the Euro is still above par. The Yen is still 20% higher on the year. The dollar ought to be higher, but it’s not. The central bankers are working to manage the stability of currencies relative to each other, but overall we’re looking at the decline of purchasing power of money regardless of currency.

This is about global assets – they’re all somewhat in trouble here.

PORTFOLIO CONSTRUCTION AND ASSET ALLOCATION

Treat everything as short term trades. If you can turn it into a profit, go ahead, and go on to the next one. It’s very difficult to say in a medium or long term sense because of the strong tug of war between inflation and deflation type forces. We have strong deflationary forces that are naturally happening in the financial system being counterbalanced by the very inflationary forces provided by central banks. It could go either way in a medium term. It would be difficult to quickly change your portfolio, but perhaps a diversified portfolio in the medium-long term with this short term trading strategy.

Another way is looking at companies with little or no debt, high discounted free cash flow with little or no leverage.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

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Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

FINANCIAL REPRESSION IS NOW “IN-PLAY”!

A FALLING MARKET CANNOT BE ALLOWED – at any cost!

The Central Bankers have clearly painted themselves into a corner as a result of their self-inflicted, extended period of “cheap money”.  Their policies have fostered malinvestment , excessive leverage and a speculative casino approach to investments. Investors forced to take on excess risk for yield  and scalp speculative investment returns, must operate in an unstable financial environment ripe for a  major correction.  A correction because of the  high degree of market correlation that likely would be instantaneously contagious across all global financial markets.

Any correction more than 10% must be stopped. As a result of the level of instability, even a 10% corrective consolidation could get quickly out of control, so any correction becomes a major risk. What the central bankers are acutely aware of is:

• If Collateral Values were to fall with the excess financial leverage currently in place, it would create a domino effect of margin calls, counter-party risk and immediate withdrawals and flight to areas of perceived safety.
• The already massively underfunded pension sector (which is now beginning to experience the onslaught of baby boomers retiring) would see their remaining assets impaired. This could lead to social and political pressures that would be simply unmanageable for our policy leaders.
• A falling stock market is the surest way of alarming consumers and signalling that things are not as “OK” as the media mantra  has continuously brain washed them into believing. In a 70% consumption economy, a worried consumer almost guarantees a further  economic slowdown and a potential recession.

As our western society continues to consume more than it produces, productivity is not increasing at the rate that justifies the developed nations standard of living as well as the current levels of equity markets. A possible corrective draw-down to the degree shown in this chart is simply “out of the question”!  The central bankers acutely aware of this.

MARKETS TEMPORARILY HELD UP

The markets are presently, temporarily held up due primarily to three factors:

• Historic levels of Corporate Stock Buybacks,
• The chasing of dividend paying stocks for investment yield in a NIRP environment,
• Unusual Foreign Central Bank buying (example: SNB)

Professionals, institutions, hedge funds etc have been steadily lightening up on equity markets (or simply leaving completely) leaving the public holding the bag.

It is estimated that the $325B that will leave the US equity markets in 2016 will be replaced by an artificial $450B of corporations buying their stocks. With corporate cash flows now falling and debt burdens triggering potential credit rating downgrades, this game is quickly slowing. The central bankers are aware of this.

TECHNICALS INDICATING AN END TO THE DEBT SUPPER CYCLE

The Market Technicians of all persuasions are almost unanimously calling for a major correction. What is most troubling here is that their indicators are not just short and intermediate term measures but critical long term indicators.

• KONDRATIEFF CYCLE: The 55 Year generational Kondratieff Cycle  shows an overdue major downturn with a cleansing of debt as part of the end to what has been termed the “Debt Supper Cycle”,
• DEMOGRAPHIC CYCLES: Harry Dent has done some major  work on Demographic Cycles and cycles overall. I interviewed him for the Financial Repression Authority where you can find the video and he lays out the seriousness of the shifting demographics and how it overlays of many different types of cycles he has studied.

• ELLIOTT WAVE

The technicians who study Elliott Wave see clear evidence that we are now completing a multi-decade topping pattern in the form of a classic megaphone top.

Chart courtesy of Robert McHugh

The central bankers are aware of this.

• TECHNO-FUNDAMENTALS

I could keep on illustrating the types of warnings we are seeing, but let me share what the central bankers are likely most concerned about regarding Correlation, Liquidity and Volatility ETPs.

The markets have become so correlated (think of this as everyone on the same side of the boat) with asset correlations not only being higher, but the correlations themselves are becoming more correlated. While traditionally rising cross-asset volatility has resulted in volatility spikes, that is no longer the case due to outright vol suppression by central banks. While central banks may have given the superficial impression of stability by pressuring volatility, they have also collapsed liquidity in the process, leading to less liquid markets, a surge in “gaps”, and “jerky moves” that are typical of penny stocks.

The greater the cross asset correlation, the lower the vol, the greater the repression, the more trading illiquidity and wider bid ask-spreads, and ultimately increased “gap risk”, which becomes a feedback loop of its own. Global central banks are now injecting a record $2.5 trillion in fungible liquidity every year – in the process further fragmenting and fracturing an illiquid market which  is only fit for notoriously dangerous “penny stocks.”

“More than $50 billion has poured into low-volatility indexed exchange-traded funds over the past five years or so, in the wake of the 2008-09 market meltdown. There are now 14 “lo-vol” ETFs with assets exceeding $100 million each, and many more with less. Whenever the market hits a pothole, these ETFs enjoy a bump-up in assets.”

Even more concerning are Volatility ETPs (Exchange Traded Products) which are derivative of some underlying asset. Volatility ETFs are particularly strange animals since you’re buying a derivative (ETF) on a derivative (the futures contract) which itself is based on a derivative (the implied volatility of options) and those options themselves of course are derivatives which themselves are based on the S&P 500. Getting the picture? The folks at Capital Exploits warn:

….everyone is on the low volatility side of the boat, because the central banks have managed to create a sense of calm in the markets exhibited by record lows in volatility and  investor have used linear thinking extrapolated well into the future assuming ever greater risk ignoring market cycles and extremes at their peril.

Every time you sell volatility you get paid by the counter-party who is typically hedging the volatility (going long) of a particular position and paying you for the privilege. This is not unlike paying a home insurance premium where the insurer takes the ultimate risk of your house burning down and you pay them for the privilege. The difference however between selling volatility in order to protect against an underlying position and selling volatility in order to receive the yield created is enormous. And yet this is the game being played.

The central banks have managed to create a sense of calm in the markets exhibited by record lows in volatility and for their part Joe Sixpack investor has used linear thinking extrapolated well into the future assuming ever greater risk ignoring market cycles and extremes at their peril.

Again, none of this is going unnoticed by the increasingly worried central bankers.

THE NEXT FED POLICY SHIFT

So what can the central bankers be expected to do? We laid out this road-map at the Financial Repression Authority well over a year ago. We anticipated in our macro-prudential research much of what has now become mainstream discussion:

• Helicopter Money (now openly discussed)
• Fiscal Infrastructure Stimulus (has become part of all candidates election platforms)
• Collateral Guarantees
  • Buying Corporate Bonds – DONE (ECB, BOE)
  • PLUS more on Collateral Guarantees

We now believe the Central Bankers and Federal Reserve specifically is preparing for more in the way of Collateral Guarantees.

We believe it will actually take the form of direct buying the US stock market similar to what the Bank of Japan is  already doing with ETFs.

THE “MINSKY MELT-UP”

My long time Macro Analytics Co-Host, John Rubino concludes in his most recent writing “Flood Gates Begin to Open“:

Individual countries have in the past tried “temporarily higher rates of inflation,” and the result has always and everywhere been a kind of runaway train that either jumps the tracks or slams into some stationary object with ugly results. In other words, the higher consumption and investment that might initially be generated by rising inflation are more than offset by the greater instability that such a policy guarantees.

But never before has the whole world entered monetary panic mode at the same time, which implies that little about what’s coming can be said with certainty. It’s at least probable that a combination of massive deficit spending and effectively unlimited money creation will indeed generate “growth” of some kind. But it’s also probable that once started this process will spin quickly out of control, as everyone realizes that in a world where governments are actively generating inflation (that is, actively devaluing their currencies) it makes sense to borrow as much as possible and spend the proceeds on whatever real things are available, at whatever price. Whether the result is called a crack-up boom or runaway demand-pull inflation or some new term economists coin to shift the blame, it will be an epic mess.

And apparently it’s coming soon.

It is our considered opinion that the monetary policy setters are presently even more worried about the current global economic situation than we are – if that is possible?

This is evident because over the last 14 days Fed Chair Janet Yellen, former Treasury Secretary Lawrence Summers and JP Morgan have all been out talking openly and publicly about the possible consideration of policy changes that would allow the Federal Reserve to buy US equities. These releases must be seen as trial balloons to condition expectations.

Japan and Switzerland amongst others are already doing it (as we previously reported) , while the ECB is also floating its own trial balloon on the same subject.

If you want to know what could create a Minsky Melt-up, this is it!

Here is our latest Financial Repression Authority Macro Map  illustrating what we see unfolding. We believe the dye has been cast!

The US Federal Reserve can soon be expected  to get congressional approval for equity purchases.  

Of course this will take a post election scare and a new congress to receive.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.