LINK HERE to get the PODCAST in MP3

FRA: Hello welcome to FRA’s Roundtable Insight .. Today we have Yra Harris. He’s an independent trader, successful hedge fund manager, global macro consultant, trading foreign currencies bonds commodities and equities for over 40 years. He was also CNE Director from 1997 to 2003. Welcome Yra.

Yra Harris: Well Richard thanks for having me.

FRA: So we begin today with the discussion with what you’ve been writing about “Feeding the Ducks When They Quack”. Can you elaborate?

Yra Harris: You know it comes from the trading floor .. it was always said that when the retail customers came in or any customers who were buying at the top or selling at the bottom,most the time they would come chasing the market and the tongue in cheek attitude,the ducks are quacking feed them and give them what they want. It’s just a trader’s term. It has a derogatory side to basically that the public is always wrong, but you know being a foreign currency trader I learned that wasn’t necessarily the case because, yes, there always has to be winners and losers, but a lot of times you can be opposite the side of the central banker orsomebody doing a massive hedge. So there was room for the public to be more right than the banks believe it or not .. but in this regard as long as the Central Banks are buying and this is what I’ve failed to understand since what we saw in Japan. Of course, once the United States embarked upon quantitative easing, the first blush was actually that the long end of the curve yields went higher because the people who had hedges were afraid that there’s massive infusion of liquidity in the system. Then we’re going to have inflation, if not inflation we’re going to have a greater growth .. So people were actually selling the long end of the curve and were getting steepening, but then when they commenced upon more buying nobody was willing to take on the Central Bank, the Fed. And there were no sellers, sellers disappeared because as I talked about ad nauseam and Rick said over the last 10 years when he would interview me and that basically, you couldn’t make any money. And then the hedgers disappeared because why hedge? You knew that the bank was there compressing yields and essentially when they embarked upon QE2, there became no need to hedge. And as I’m going to write on the blog tonight, I’m going to pick up on Chris Whalen’s wonderful piece that he wrote the other day. I have it sitting on my desk and the Fed doesn’t hedge, the ECB doesn’t hedge because when you have a printing press what do you need to hedge for. If you have the ability to create money whenever you deem that you need it. So why should you hedge? Chris Whalen really beautifully talks about the dynamic hedges that disappeared from the market, which is again another part of the reasons that we are in such a low volatility environment. So that’s what my attitude has been. When the banks come calling you have a natural buyer .. I always thought that the Chinese if they were looking to liquidate some of their treasury portfolios for future inflation, it was time for them to do that and do the ducks are the Fed and all the central banks and their quacking is when they’re buying. So you should be feeding them and when they ran the 10-year, it was Central Banks as much as anything that ran the 10year over the summer down to 1.35/1.36 again. Anybody who needs to unload Treasuries should have been unloading them to the buyers that existed. That’s the purpose of that wisecracked comment “to feed the ducks”.

FRA: And so for 2018, do you see rising interest rates across the entire U.S. yield curve or just a steepening with the low end not moving much?

Yra Harris: I don’t like to make solid predictions like this that I did in the blog last time because some of the people I’ve met who are retired successful business people, who love to discuss markets. When I look across the board and all the readings I’ve done in putting into action really what Chris Whalen talks about .. there is going to become a breakpoint and that’s when there is no longer a Central Bank adding to the global liquidity structure through QE. So now that the ECB is down to 30 billion and the Fed is actually taking out 20 billion a month and the Japanese of course are curtailing their buying, they have been curtailing their buying anyway because there’s just not enough paper for them to buy. And they could have a greater impact or as great an impact by buying far less than they have traditionally been buying or been recently buying I should say. I’m looking for the curve to steepen. I think as I read Jay Powell and I’ve done a lot of research lately and going back to the recent release of the FOMC discussions from 2012. I think Jay Powell will go to maybe 1.75 to 2 percent on the Fed funds, but from all he has talked about in his discomfort with the size of the FOMC balance sheet that you might see them increase Boockvar’s quantitative tightening, which will put upward pressure on the long end of the curve. So I don’t think that they’re willing at this point in time until they really see wage inflation for whatever reason they’re going to hold real yields at neutral, zero. So if inflation is 1.8 and you’re 1.75 on the short end and so they’ll keep those in. If they keep the real yield at basically zero, then they’ll stop there. And then all the pressure will be for long end yields to rise. Now a lot of people say well that’s going to kill the economy. No it’s not. If the yield curve starting to steepen out, the stock market I think will take an original sell-off, but I think it will be the opportunity to buy back in equities because steepening yield curves are not historically negative  equity markets. In fact they’re actually positive because it reflects the fact that the Fed is kind of a neutral and somewhat accommodative, but not crazy so you know that’s my scenario. And I think as I said we’re going to go to 3-4. That’s my call for the 10 year at the end of the year. And if that puts the curve at 1.5, so be it. So that would be a fairly steep curve .. That’s what I’m looking for. And a lot of it is based on the fact that as the Fed says to do quantitative tightening, there will be more private sector or market participants who are buying. Who’ll have to step into the void to replace the Fed and they’ll have to hedge. Chris Whalen’s wonderful work is that dynamic hedging will slowly creep into this market and will make an impact on the long end yield.

FRA: Will that be an impact that does anything to the bond bull? What are your thoughts on Bill Gross’ assessment of the end of the bond bull? What will happen to the 10-year and 30-year bonds?

Yra Harris: I’ve been a big fan of Bill Gross. I was a big fan of Paul McCulley. You know they did some great work, but Bill Gross wrote a piece three or four years ago. It was interesting because anybody who’s a global macro trader and in bonds. Certainly, those who partake in bond markets. Bill Gross wrote a piece .. I have great respect for him. In a way, he hasn’t done well over the last few years and he’s kind of struggled .. He wrote a piece saying that maybe he was just lucky. But you know what we talk about it was the end of the bond bull. And then today he’s out saying well you know he expects rates to be 2.8 by the end of the year on the U.S. 10 year Treasury Bond. We’re at 2.57 today in the morning. With everything that’s going on in the world, that’s not much of a call. So that’s the way I’m looking at it. Is it the end of the great bond bull? I don’t know. I’ve got a lot of other things that I’ll look at to put this in because it’s all about context. Everything is about if you don’t have context and perspective you really don’t have much of anything anyway. So that’s what I’m watching. And I believe it. I have great respect for Bill Gross. I have great respect for Jeff Gundlach, as a big thinker. I think they’ll get Europe wrong because they’ve never bothered to read The Rotten Heart of Europe. These people have never read it .. So it’s nice that the Fed stepping back. I think Jerome Powell will vote to shrink the balance sheet. I think that’s where his comfort zone is. And I think Jerome Powell as I stated in the blog last night, where he actually talks to market participants unlike all the governors, who seem to be very insular and just a giant echo chamber. He is a governor, but he seems to want to actually talk to real market participants. In that regard I think he’s a little leery of the flattening that’s taking place, he doesn’t want it to continue. And if he really thinks it’s true, then it’s time to really increase the shrinking of the balance sheet. And I think that will get us a steeper curve.

FRA: And speaking of Europe where do you see the ECB policies going? Monetary policy?

Yra Harris: Well good question. There are things that scare me over in Europe. We talked about the upcoming election. In Italy, in the failure of the Germans to put together a government, these are things that need to scare people because things are not smooth there. And Draghi is in a terrible situation. And again, I will call anybody out on the carpet and anybody who you want to put on and discuss this because it needs to be debated. These people throw out things like the ECB has a has a single mandate, it’s inflation that’s baloney. Mario Draghi in July 2012 told you forget about the inflation mandate, the mandate is securing the existence of the Euro currency and the preservation of the EU. And if you don’t understand that you really need to go in and lock yourself a library and start reading and put the perspective together for yourself. That is what this is about. And so what happens now? Berlusconi is out. And meanwhile Berlusconi and the the Northern League and Fivestar who are not very enamoured with the ECB nor with Brussels are all pushing for various things about the Italian economy. Berlusconi was out yesterday talking about a flat tax and how good it will be. So they’re all playing off the Trump theme, but with Italy running 136 % debt to GDP ratio. And I know your listeners you know in the realm of the Financial Repression Authority understand this. It’s an enormous number that’s way beyond Rogoff danger of 90 % when countries get themselves in trouble and that ratio isn’t even shrinking. I think Italian 10 year yields were down to 1.7 percent. So the amount of money, the amount of the budget that goes to paying interest rates is probably historical in Italy recovering even at debt because of the manipulated actions of the ECB. Imagine if rates start to go higher there. So this is going to be very interesting to watch. Berlusconi has basically woken up to and I’ve never been a great fan of his, but what he has woken up to is this flat tax idea is he knows that Europe cannot afford to do anything to harm Italy. It is because of that massive balance sheet that Draghi has built up. And again, who bears responsibility? Who bears responsibility for that massive amount of sovereign and corporate debt on the book the ECB. Jerome Powell told told me, in a direct question that I asked him over a year ago, that don’t worry they have a printing press. Well it’s interesting because the Italians who have really been crushed by the Euro in this whole situation. They’ve been crushed because the Italians are famous for making financial mistakes. And they used to be able to bail themselves out of course by depreciating the currency the Lira, but they don’t control the currency anymore. So now they have to do the so-called internal devaluation, which is basically financially repressing workers because you have to keep wages low because you feel you can retain or attain some type of competitive advantage. If you can’t appreciate the currency something has to give. Of course it’s wages. I’d be lying if I told you I wasn’t. I am scared because Berlusconi is going to force it as I say he’s going to call the question. He’s going to call the question. Or he’s going to make somebody call the question and he’s going to look them in the eye and go, “What are you going to do to us?” We saw that you wouldn’t let Greece go. That you bent over a thousand ways and the Italian situation being the third largest economy in the EU, it’s too big and the IMF, they blew their wad with Greece. And they have to be very careful here about push-backs from other parts of the world because they were not happy that they infact got involved in the Greek situation because Greece is part of Europe. Europe is a major developed country. What are you bailing out Greece for? It should’ve been the EU’s situation. And Italy is just too big and Berlusconi with his flat tax is basically, to me, is calling the question: This is how I’m going to stimulate the economy and if you’re going to fight me out it well you’re going to bear the brunt of what do you do. Toss us out? We know you can’t do that because you didn’t ask Greeks out. So we get a free run here. So this gets very interesting as we go forward.

FRA: But will the German credit card be strong enough to make the EU successful?

Yra Harris: That is the $64 trillion question. The question is will the Germans stay the course. What will they get for it. You know this is politics. That’s right. That’s why we don’t study economics. We study political economy because this is the politics of nature .. Merkel she gave a new year’s speech was a joke I thought it was my kindergarten teacher admonishing me about something in the way she talked to the German people and she accepted responsibility. But this goes into what is being spun by the mainstream media. It’s not conspiratorial. That’s a fact. I read the FT front to cover, I have for 35 years already. And the spin is that the AfD and even the Free Democrats did better because people were angry at Merkel for the immigration. And they’re angry because they’re the most financially repressed people in the world because you have 2.5%or maybe 3% growth. You have inflation approaching 2% in Germany and you have the two year shot yielding negative 60 basis points. So they’ve been getting crushed in the effort to bail out Italy and all the others. So these are all things plaguing Europe and look if the German citizens acquiesce and say: OK we agree to a transfer union, we will run in a massive trade surplus of the current account surpluses and we’re willing to transfer money to Italy to help them. We will see you know it if they go that route. Fabulous I’ll go short so many bonds you won’t know what hit you and I’ll buy you know other things. But I’m very skeptical and my skepticism is being actualized by the fact that we’re now almost four months from the German elections and Merkel has yet to form a government.

FRA: Given the potential in Europe for being the epicentre of perhaps the next financial crisis as Peter Boockvar mentions, could we see international capital flows come from Europe and elsewhere to the U.S. markets especially as you mentioned there could be pressure on the long end of the yield curve with the movement into equities. So maybe the financial crises outside of the U.S. spurring capital flows to the U.S. .. plus the tax competitiveness that Trump has created from the new tax bill.

Yra Harris: That was the scenario that everybody painted for 2017 that we know never played out .. this could be the year .. when I look at the Euro currency chart and right now I have a neutral view to the Euro. In fact, I’ve been writing about I think the Euro it bore the angst about Trump and the dollar last year and Trump’s trade agenda. So money flowed into Europe and the Euro gained 13 to 14 % against the dollar, but also gain 10 % against the yen. I think that’s a problem for Europe .. I think the Chinese are unhappy with the weakness of the yen. I think the Koreans whose currency is the Won is really strong, are unhappy with the forced weaknesses because of the policies of Kuroda .. I think that the dollar is going to go lower but on a broad basis. Otherwise, I don’t think the Euro is going to do much this year. I’m not looking for a big rally in the Euro from here I think it’s kind of played out. I think it has Draghi concerned because he doesn’t need a strong Euro. He likes to point to the strong Euro as a statement about the effectiveness of ECB policy, but that’s to placate the Germans anyway, which is a big part of what he has to do. He is on very dangerous ground here and he knows it because he fights well. The last meeting, Jens Weidmann, who is the president the Bundesbank, who sits on the Executive Council of the ECB, they’re voicing their concern and others are joining to get the quantitative easing program has gone too far. So it’s a very difficult time. We’ll see what happens. Last year I thought the dollar was going to lower with Trump, especially with the industrialists, Mark Fields, who was the CEO of Ford at the time when he famously said in February of 2017 that immigration is the mother of all trade barriers. And from that day on the dollar reversed course from strengthening Will we go back down there? No, but I think that 123 area which I will tell you goes back to the range of the week of July 23rd, 2012 when the Draghi, of course, made his famous speech about no taboos and will do whatever it takes. I think that week it was around 120-70 in the Euro and ended up to close I think around 123-80 ..

FRA: For 2018, do you see some type of commodity bull market especially in precious metals and agricultural commodities?

Yra Harris: Yes it’s a great question. It’s a hot topic for a lot of people right now. Yes, I think people are looking to purchase hard assets because our commodities are using securitization like the Chinese are so famously good at securitizing copper whatever. They’re leveraging themselves up, they’re securitizing anything and everything .. I think they are right that commodities have been on the low end of the cycle. So it’s now time and we know that there’s going to be a lot of money with the velocity of money has disappeared. I’m looking for an increase in velocity as the Fed starts to unwind its balance sheet because there’s this money that was tied up at the Fed. The Fed grew its balance sheet because of reserve situations that pile up that these are going to be released. Ben Hunt had made that point for the last year and a half and I applaud him for that I think there’s some validity to it .. we heard the same story last year. I was looking for the Trump inflation, I’m watching very closely to see if now Trump proceeds down that path of being able to get a bipartisan deal on an infrastructure program of significance for the U.S. So there’s a lot of things in play here. The Chinese with their nose know we talked about before when they first announced it about three months ago that they were doing the Yuan-gold-oil interest in arbitrage that helped play it. It is interesting to start to see that we were getting some movement in the commodity sector across a broadly based basket.

FRA: And your sugguestion to the Swiss National Bank would be that they sell their equities and go to hard assets?

Yra Harris: I would say that .. They made their portfolio increased 55 billion with money that was printed in order for them to keep control of their currency. They printed a massive amount of Swiss Franc which they’ve converted to other currencies which they bought equities and they’ve done so well so the paper profit 55 billion last year equal to eight percent of their GDPall through the creation of money in order to keep the Swiss Franc weak, which they’ve managed to weaken against the Euro last year also by about 10 percent even though the Swiss itself held against the dollar was a little bit stronger .. But I would be looking to swap out, but I know they are caught because if they do that the Swiss will gain in value and have been trying to prevent it. I guarantee you that this will be some of these great dissertations on what the Swiss National Bank did .. I think we’ve covered the Swiss as well as anybody, in fact, I did see something that came out from the Ludwig von Mises Institute this morning really discussing in greater detail everything we’ve discussed the Swiss. If I was a Swiss I would for the sake of Swiss citizens start to be moving out of some of that.

FRA: And you gave them the Alchemist Award of the Year.

Yra Harris: Yeah, they definitely get the Alchemist Award of the Year, the ultimate cryptocurrency.

FRA: And finally your thoughts on Larry Lindsey as Fed Vice Chair?

Yra Harris: Oh you making me go down that path. I’m a big fan of Larry Lindsey. I have a lot of respect for Larry and I respect him for exactly why Trump probably won’t pick him is because Larry Lindsey answers. Larry Lindsey is an exceedingly bright analyst. I went back and read some of his old Fed speeches. In fact, I look at the piece in 1996 when he really was not in favour of, or he thought that the markets were ready to exuberant equity markets and they were doing a disservice to hold rates even though he voted with the majority. There was only one dissenter that was Gary Stern from the original Minneapolis bank. But he speaks his mind and he speaks his mind so forthrightly that he even took on the Bush White House when he was a member of that White House as the head of the Council of Economic Advisors and said that their numbers and what the Iraq war would cost in 2003 were way too low. And you know he got sent out into the hinterlands .. He bore all of this to the administration and was sent out to the wilderness, but he spoke his mind and he proved very prescient and he was right. So he tells you he speaks his mind. I think that Donald Trump would fear Larry Lindsey as a role because he’s talked about to be vice chairman which is usually a passive role. Donald Coleman was Vice Chairman to Greenspan and Donald is exceedingly bright, but he knew his place and the same with Stanley Fischer. Vice Chairs’ don’t like to buck, but  Lindsey in my estimation will be a bucker of that he will not sit quietly and he will voice his opinion, and it will be heard. And I think that he would overpower Jerome Powell. It’s just my opinion. I don’t know anything else, but it’s what I feel about it. As much as I would love to see it I am a heart to heart money person, I believe that responsible policy is what holds and what’s needed in a fiat currency world. And I think Larry Lindsey would bring that to the table, but I’m not sure that Trump White House is not looking for that type of person. So we’ll see. That will surprise me and I’ve been right on every Fed pick when people where saying it was going to be Gary Coleman, I vote no chance. In 2013, when it was supposed to be Larry Summers, I stood tall and said there’s no chance it’s going to be Larry Summers because I believe that Lizzie Warren was going to block Larry Summers .. we got Janet Yellen which is not bad, I think Yellen played as good a hand as she possibly could with what she was dealt. And I think she’s done a very good quality job. So we’ll see. I’ve been pretty good with this so because it’s not just economics, it’s politics. And let me end by to ask you a question because you’re pretty astute on monetary affairs. So yesterday the St. Louis Fed put out a very short paper title “FOMC Dissents. Why some Members Break from Consensus”. They talked about the way the Fed Board has voted. The St. Louis Fed did a study of the vote of the Fed Board. OK so they looked at the voting patterns. Since 2005 in what has been a major historical period for central banks. Major historical period around the world especially with the Fed. How many dissents have there been by the governors, not regional presidents FOMC governors to any vote. How many dissents over the last 12 years?

FRA: A low number or zero?

Yra Harris: Zero. Can we think about that? Can we think about the power of that in the most turbulent period of central banking? The amount of dissents by FOMC governors has been zero. That should leave us all speechless. I have nothing else to say.

FRA: That’s a great insight and words of wisdom from Yra Harris. Yra how can our viewers learn more about your work?

Yra Harris: They can head to the blog https://yragharris.com/ or all the podcast that I’ve been so honoured to be able to do and to be selected for the FRA, the Financial Repression Authority which have been great. What I blog Notes From Underground is free. All of a sudden the level conversation, the responses to the blog is amazingly high level. I am so honoured by that because the discussion is great .. People read it have serious questions .. It allows me to think and put my thoughts together and put it out there and get feedback from very intelligent people so it helps my training in that way. So it’s not you know so many things in this world today are about validation. People need to be revalidated, that’s the problem of social media. You go to be validated. I’m a Marxist. I need dialectical discourse. And so we are getting it. So people should absolutely go and by The Rotten Heart of Europe .. It’s not my book. It’s written by the brightest guy in Europe. Bernard Connolly. People need to read this book. Europe is going to take center stage in so many different ways. You need to know who the actors are so that you are not blindsided or held captive by a narrative spun by the insiders .. understand what’s going to take place or who’s involved.

FRA: We will have a link to that on the transcript on the website and also a link to your site. and a link to Chris Whalen’s Article that you referenced as well.

Yra Harris: Oh yeah. I sent him an email about how great it was. It’s a great article. Thank you.

FRA: Thank you very much Yra. Thank you.

Chris Whalen’s Article

Yra highly recommends reading The Rotten Heart of Europe – send an email to rottenheartofeurope@gmail.com to order

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.

Article: In his forecasts for 2018, David Rosenberg, chief economist and strategist at Gluskin Sheff warned his clients – and our readers – that they should “enjoy the next 12 months” because contemporary market conditions, characterized by investor complacency, volatility, high valuations and a tight labor market, are eerily similar to 1988, 1999 and 2006 – years that immediately preceded major market reversals.

In his note, Rosenberg wondered whether the Fed will “remain a serial bubble blower.”

“The elephant in the living room remains the central banks,” Rosenberg wrote. “The prevailing view is that balance sheet tapering will be mild and that Jerome Powell will prove to be a dove. This may well be the most important psychological driver for the market — that a new and inexperienced Fed will not take the punchbowl away in the coming year.”

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.

“Conventional wisdom says we need more inflation to deflate away the value of of debt on the books. As of November 30, 2017, Treasury Direct reported public debt as $20.59 trillion. That includes $5.67 trillion in debt we owe to ourselves (think Social Security). At higher rates of inflation, interest on the national debt would soar .. What a hoot! Despite massive amounts of QE the Fed could not hits its inflation target using its own measure of inflation as a definition. Somehow they magically believe that setting a higher target will in and of itself cause inflation .. Imagine what 6% mortgages would do to home price affordability .. Throw conventional wisdom in the ash can. In practice, the more debt and leverage the Fed stuffs into the system, the lower interest rates must be to support that level of debt .. Another round of debt deflation. a currency crisis, or both is in the cards. Timing is the only issue. It’s far too late to believe anything reasonable can be done about the mess the Fed has created .. Do yourself a favor, buy gold. It’s a strong favorite to soar when faith in central banks comes into question.”

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.

“There was a very important article published on-line at Project Syndicate by the highly regarded William White. The piece, titled, The Dangerous Delusion of Price Stability, raises several important issues regarding the central banks belief that ‘low inflation is also a sufficient condition for sustained growth.’ White cites the inability to acknowledge that there are many various sources for disinflation. Sometimes there are demand shocks while at other times supply shocks such as when previous controlled economies unleash a massive labor force on the global economy. The effort to fight disinflation keeps interest rates low even when the cost of capital ought to rise in order to prevent a situation of excess capacity on a global scale. By keeping borrowing costs too low the entire financial system increases borrowing which leads to a feedback loop of having to sustain low interest rates. As White said: ‘True, as a matter of arithmetic, deflation increases the real [inflation-adjusted] burden of debt service. But if debt levels are at ONEROUS HEIGHTS AS A RESULT OF EASY-MONEY MONETARY POLICIES, [emphasis mine] it is not obvious that the solution to the problem is still more easy money.’

Policy makers need to wean themselves off the inflation-targeting nature of global monetary policy. Please read the White piece as it sets the agenda for so much of what we will face in 2018. Along with White’s piece is the need to remind ourselves of the warning from Mr. Zhou from the Bank of China: There is far too much complacency as debt-to-GDP ratios rise, creating the environment for a Minsky Moment. As interest rates rise the massive increase in debt on corporate, government and personal balance sheets will have to be serviced. Will there be enough growth to satisfy creditors? The Bernanke FED was an experiment in preventing the onset of deflation as experienced in the 1930s but while the portfolio balance channel boosted asset values the Bernanke plan had no exit strategy. Enjoy the calm as we head into a new year.”

Notes From Underground: Yields Increase But Watch Out, Take Care, Beware

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.

Germany Joins French-led Moves to Regulate Bitcoin at G-20 Level

LINK HERE to the Bloomberg 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.

This Vader Grows Asset Bubbles Then They Burst. Central Banks Have Repeated The Same Mistake Of 2003-2007. $8.3 Trillion Central Bank Intervention & Only $2.1 Trillion GDP Growth….

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.

In a recent paper – The Macroeconomics of De-Cashing, Alexei Kireyev of the International Monetary Fund advises abolishing cash without having the citizens aware of the process.

IWF De-Cashing 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.

“The ‘dark money’ comes from central banks. In essence, central banks ‘print’ money or electronically fabricate money by buying bonds or stocks. They use other tools like adjusting interest rate policy and currency agreements with other central banks to pump liquidity into the financial system.”

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.

“If I was ‘Darth Vader’ of the financial world and decided I’m going to do this nasty thing and create deflation, I would do exactly what the central banks are doing now” the billionaire told CNBC Tuesday.

Druckenmiller: Central banks are financial world’s ‘Darth Vader’ from CNBC.

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: Hi, welcome to FRA’s Roundtable Insight ..

Today, we have Dr. Lacy Hunt. He’s an internationally recognized economist and the Executive V.P. and Chief Economist of Hoisington Investment Management Company, a firm that manages over $4.5 billion USD and specializing in the management of fixed income accounts for large institutional clients. He also served in the past as Senior Economist for the Federal Reserve Bank of Dallas, where he was a member of the Federal Reserve System Committee on Financial Analysis. Welcome. Dr. Hunt.

Dr. Lacy Hunt: Nice to be with you, Richard.

FRA: Great. I thought we’d have a discussion on a variety of topics relating to the economy and the financial markets. You recently mentioned that you thought this was the worst economic expansion recovery in U.S. history since 1790. Wow. Can you elaborate?

Dr. Lacy Hunt: If you calculate the average growth rate in the expansions since 1790, this is a long-running expansion, but it’s the slowest and in the last 10 years the household sector lagged very, very badly. The rate of growth in real disposable household income per capita is only 0.9 percent per year. And in the last 12 months, we’re up only 0.6 percent per year. So it’s a long-running expansion, but it’s been a poor expansion. There are certainly problems with some of the earlier data, but this appears to be the slowest expansion since the turn of the 18^th Century and our households are the main problem for the growth rate lag.

FRA: And do you point a finger for this cause as primarily on the Federal Reserve or do you see structural changes happening to the economy?

Dr. Lacy Hunt: I think that the main element suppressing growth is the heavily leveraged U.S. economy. We have too much public and private debt, and this debt does not generate an income stream for the aggregate economy. As a result of the prolonged indebtedness, which is on the verge of going much higher because of problems in the governmental sector, the economy is now experiencing very poor demographics. We have a baby bust, a household formation bust, and the lowest birth rate since 1937. These demographics are exacerbating the problems because we have too much of the wrong type of debt and thus the velocity of money has been falling since 1997. Velocity this year is only 1.43 percent, which is the lowest since 1949. Furthermore, the debt creates a situation where monetary policy capabilities are asymmetric. In other words, a lot of action is needed to provoke even a muted impact on the economy, whereas the slightest monetary tightening goes a long way in depressing economic activity. So the root cause of this underperformance is extreme indebtedness.

FRA: And what about the Federal Reserve? How has it undermined the economy’s ability to grow?
Dr. Lacy Hunt: The Fed’s most serious mistake was made in the 1990s up until 2006 during which they allowed the private sector to become extremely over-indebted with the wrong type of debt. And, in essence, I think that quantitative easing, through the push for higher stock prices, created more problems than it has solved for the economy. QT caused the corporate executives to switch funds from real capital investments into financial investments through the paying of higher dividends, buying shares of their own companies, and buying back their shares from others. While this type of action does produce a higher stock market; it doesn’t generate a higher standard of living. And so, Federal Reserve policy has not improved the economy, although it certainly has well served components of the economy.

FRA: And due to that do you think that there’s been too much financial investment versus real economy investment in terms of diverting the economic financial resources away from the real economy?

Dr. Lacy Hunt: I think that’s the principal problem. Business debt last year reached a record high relative to GDP. As I said earlier, Fed policies have created a higher stock market but have not generated an improved standard of living. When the Reserve undertook quantitative easing, it was a signal to the corporate executives that the Fed preferred and would protect financial investments. But that meant financial assets were preferred over real side investments. And so QT is intermingling with the growth-depressing effects of too much debt. And the debt levels are getting ready to move substantially higher in our governmental sector. Government debt is already approaching 106 percent of GDP, a record high with the exception of a brief period during World War II. And by 2030, federal debt will be approximately 125 percent of GDP. For a long time, we’ve known about the issues that would inflate the entitlements — such as the prior-mentioned demographic problems — but there is an increasing likelihood that new federal programs with expenditure increases will further accelerate the growth in federal debt. I think there is clear evidence that increases in federal debt at these high levels relative to GDP over any measurable length of time, reduces economic activity. Thus, the multiplier is not a positive but negative figure, or otherwise exactly what economist David Ricardo hypothesized in his 1821 work. I have looked at the relationship between per capita changes in real GDP and government debt per capita and the relationship is negative, not positive. And so, we’re trying to solve an indebtedness problem by taking on more debt. You can get intermittent spurts of economic activity and inflation, but ultimately the debt is a millstone around the economy’s neck.

FRA: So would you say that we have migrated to a sort of financial economy?

Dr. Lacy Hunt: Let me give you a couple of examples. There’s so much liquidity in the financial markets, particularly the stock market, that a lot of the economic news is constructively interpreted even when it’s unconstructive. Virtually the world believes that the United States is experiencing large job gains and the idea that such productivity may be incorrect is hardly considered. But the rate of growth in payroll employment on a 12-month basis peaked at 2.4 percent in early 2015 and for the last 12 months, has sunk to 1.4 percent. What is even more critical — if you look at just the expansions and don’t include the recessions since 1968 – is that the average growth in employment in an expansion year was 1.9 percent. And in the last 12 months, we are half a percentage point under that figure. Yet, given these numbers, there is an erroneous perception that the employment gains are strong. And this view undermines the improvement in the standard of living. And because of the liquidity and the need of some investors to fully participate in the rising stock market, investors tend to overlook other important developments. If we go back to the 12 months ending November of 2015, real average hourly earnings were up about 2.5 percent. And in the latest 12 months, real average hourly earnings gained a miniscule 0.2 percent. The liquidity tends to push the focus away from the more realistic interpretation of the economy for certain types of assets.

However, the weak performance overall and the deceleration in some of the indicators that I just referred to is not unnoticed by the bond market. So, we have a dichotomy in which the stock market is strongly up but the long-term bond yields are down. Now, the short-term yields are up because they are under the control or heavy influence of the Federal Reserve. The Federal Reserve is in the process of raising the short-term rates and winding down their portfolio. They sold 20 billion dollars of government agency securities in October and November, pushing up the short-term rates. Erstwhile, the long-term rates — which look at some of the more important economic fundamentals — are actually declining.

Another element not in the public understanding, since the Federal Reserve no longer produces this sort of monetary analysis, is a very sharp slowdown in the money supply’s rate of growth, bank loans, and within important credit aggregates. Last year, the M2 money supply was up 7 percent. In the latest 12 months, it decelerated to less than 4.5 percent. The rate of growth in bank loans and commercial paper, which topped out on a 12- month basis about 9 percent, is now under 4 percent. So the Fed is raising the short-term rates, reducing the monetary base, and causing a tightening in the financial side of the economy. Some investors understand what is happening and yet it’s not in the general psyche because such monetary analysis is increasingly rare.

However, another more public indicator is the very dramatic flattening of the yield curve. And when the yield curve flattens in such a way, first of all, it’s a symptom that monetary restraint is beginning to bite. Now, the slowdown in money supply growth and the bank credit flattening of the yield curve will occur well before there is any noticeable impact on a broad array of economic indicators or long lags in monetary policy. But when the yield curve starts flattening, that intensifies the effect of the monetary tightening because it takes away or, at the very least, greatly reduces the profitability of the banks and all those that act like banks. Banks make a profit by borrowing short and lending long. When those spreads recede, bank profitability is hurt, particularly for the higher, riskier types of bank loans since not enough spread exists to cover the risk premium. So the banks begin to pull back, further intensifying the restraint pressing on economic growth. To the vast majority of investors, we have an economy that is apparently doing well, but in fact there are elements right beneath the surface that strongly suggest to me that the outlook for 2018 is considerably more guarded than conventional wisdom implies.

FRA: And do you see the potential for an inverted yield curve in the near future?

Dr. Lacy Hunt: I’m not sure that we will have to invert because the economy is so heavily indebted and the velocity of money is its lowest since 1949. Now, a number of people have pointed out that we typically invert before a recession and historically such inversions have been the case most of the time — but not always if you go back far enough in time — and you should since this is not a normal economy. For example, money supply growth since 1900 has averaged about 7 percent per annum, whereas, currently, the rate of growth in M2 is about 36 percent below the long-term average, indicating a very weak growth rate. And the velocity of money is lower than all of the years since 1942 — with the exception of 7 years — and the economy has never been this heavily indebted. And so the yield curve could possibly approach inversion, but it may or may not occur or stay there very long because at that stage of the game, the flattening of the yield curve will greatly intensify all the other effects — the reduction in the reserve, monetary, and credit aggregates, as well as the weakness in velocity. And when this reduction becomes apparent, the Federal Reserve will not be able to reverse gears quickly enough to ameliorate the impact produced upon future economic growth.

FRA: So do you still see a secular low in bond yields on the long into the yield curve remaining in the future sometime?

Dr. Lacy Hunt: The lows have not been seen. The path there will remain extremely volatile. We will have episodes in which the long yields rise. My attitude is that the long yields can go up over the short run for any number of causes. While many elements work out of the system in the long end, yields cannot stay up.   When yields go up — especially now that the yield curve is flattening — this intensifies monetary restraint, which puts downward pressure on commodities. This puts upward pressure on the value of the dollar and cuts back on the lending operations. Something I think has been somewhat overlooked in general euphoria over the strength of economic indicators, is the that commercial and industrial loans for all of the banks in the United States are now only up one-tenth of one percent in the last 12 months. There are forward-looking elements that have historically been very important for signaling that change is ahead. They don’t tell us the timing — timing is always difficult — but they are flashing signals that should be observed.

FRA: And as this plays out, do you see monetary policy and fiscal policy is changing, like will we get fiscal policy stimulus? Will there be a change in monetary policy and how will that look like?

Dr. Lacy Hunt: Here’s my attitude: the new federal initiatives, whether tax cuts or infrastructure or otherwise will not provide a boost to the economy if they are funded with increases in debt — that’s where we’re at. And by the way, it’s been that way for some time. If you go back to 2009, we had a one-trillion-dollar stimulus package that was said to be inflationary and was going to boost economic growth, but yet we still had this very poor expansion and little inflation except for intermittent bouts here and there, largely from highly-priced inelastic goods. All the while, the inflation rate has trended lower.

For example, when President Reagan cut taxes, government debt was 31 percent of GDP and now that’s 106 percent on its way to 120-125 percent. And so if you go back and if you read Ricardo’s great article in 1821, he was asked whether it made a difference as to whether the Napoleonic wars were financed by taxes or by borrowing. Ricardo said that, theoretically, either way private sector activity was going to be suppressed. Now we have a lot of evidence, including some that I produced, that the government multiplier is negative, not positive, over a three-year period.  Thus, the tax cuts may work for a very short while, but not on balance. And if the tax cuts were revenue-neutral and financed by reductions in government expenditures that would be a positive since the evidence shows tax multipliers are more favorable than expenditure multipliers. Such a theoretical proposal would provide greater efficiency for private sector spending and government spending. There’s also evidence that you would lower the cost of capital, but that’s not what we’re talking about is it? We’re talking about a debt-financed tax cut and we’re not talking about a revenue-neutral infrastructure plan, just as we were not talking about a revenue-neutral stimulus package in 2009. We’re talking about the debt-financed variety of tax cuts and at this stage of the game, this will make us more vulnerable, except for a few fleeting instances.

I will say this: when you have a debt-financed infrastructure program or tax cut, there will be pockets within the economy that will benefit, but the aggregate economic performance will not benefit and so fiscal policy, as I see it, is not really going to be helpful. The risk is that the debt buildup will add to the problems. There is extensive academic research indicating that when government debt rises above 90 percent of GDP for more than five years, this trend will reduce the economy’s growth rate by a third. Remember, we’re at 106 percent debt to GDP and there’s evidence these higher levels of debt have a non-linear effect. In other words, we use up growth at a faster pace. And there’s a lot of evidence from the available data that we’re even losing a half of our growth rate from the trend. For example, GDP has risen at 2.1 percent per capita since 1790. The latest 10 years produced a reduction to 1.0 percent. And so we should have lost only seven-tenths or come down at 1.3 over 1 but we didn’t and this is a consequence that we have to deal with. We’re not in a position to ignore the debt levels. Fiscal policy can be talked about, we can debate about it, and we can proclaim its benefits, but I don’t see them in the current environment just as I didn’t see them in 2009. I would change my tune if they were revenue-neutral, but that’s not the issue here.

To me, inflation is a money-price-wage spiral not a wage-price spiral as with the Phillips curve. The way inflations begin is by money supply growth acceleration not being offset by weakness in velocity, which shifts the aggregate demand curve inward. Remember, the aggregate demand curve is equal to money times the velocity by algebraic substitution as evidenced in all the leading textbooks on macroeconomics. So you have declines in the money supply and velocity, which will make the aggregate demand curve shift inward over time. This shift gives you a lower price level and a lower level of real GDP. It doesn’t happen every quarter or even every year, but it’s the basic trend. Thus, monetary policy is in the process not of decelerating money supply growth and by a significant amount. If the Fed adheres to their schedule of quantitative tightening, I calculate M2 will grow by the end of the first quarter – it’s currently running around four and a half percent – and the year over year growth rate will be down to less than 3 percent. And so monetary policy is taking steps to lower the reserve monetary and credit aggregates, and these actions will further flatten the curve because they can press the short rates upward. But I think the long-term investors will understand that the inflationary prospects on a fundamental basis are weakening not strengthening.

FRA: And do you see these trends as being exacerbated on the emerging government pension fund crisis? Could there be more debt used to solve that like for bailouts? Do you see that potentially happening?

Dr. Lacy Hunt: Well the main problem with government debt is that we’re going to have approximately one million folks a year reach age 70 in the next 14 to 15 years and we’ve known that this was coming, but we didn’t prepare for it. We’ve made a lot of promises under Social Security Medicare and the Affordable Care Act and government debt will have to be used to fund the entitlement benefits — I don’t see any other way around it. Another overlooked problem is that the actual federal fiscal situation is much worse than these surface numbers. For example, in the last three years, the budget deficit worsened each year. If you sum the budget deficits for 2015, 2016 and 2017, the sum is 1.2 trillion, but a lot of what was previously called “outlays” have been moved off budget — we call them investments (such as student loans) and there are other examples. The actual increase in federal debt in the last three years is 3.2 trillion. So the budget deficit is actually greatly understating what is happening to the level of federal debt which wasn’t always the case. Furthermore, the deficit was made worse by a 2015 bipartisan deal between Congress and the White House. And while neither party is blameless — they both agreed on the deal — yet it doesn’t change the fact that the federal situation is deteriorating and at a much worse rate than the deficit numbers themselves indicate.

FRA: And what about for state and local jurisdiction locales, in terms of their government pension funds? Could there be federal level bailouts at that level?

Dr. Lacy Hunt: Again, what are they going to bail them out with? You’re going to have to sell Federal Securities. And one of the multipliers on new sales of Federal debt is negative, not positive. Forget what was taught you in your macroeconomic class 30, 20, or even 15 years ago. When I was in graduate school, I was taught that the government multiplier was somewhere between four and five percent. Now, it looks like the multiplier is at best zero and even possibly slightly negative.

FRA: Great insight as always. How can our listeners learn more about your work, Dr. Hunt?

Dr. Lacy Hunt: We put out a quarterly letter as a public service. Write to us at hoisingtonmgt.com and we’ll put your name on the subscription list. We don’t spam you with marketing so please go ahead and subscribe.

FRA: Okay, great. Thank you very much for being on the Program, Dr. Hunt. Thank you.

Dr. Lacy Hunt: My pleasure Richard. Nice to be with you.

Submitted by Boheira Manochehrzadeh

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FRA: Hi, welcome to FRA’s Roundtable Insight .. Today we have Yra Harris. He is an independent floor trader, successful hedge fund manager, a global macro consultant trading foreign currencies, bonds, commodities and equities for over 40 years. He was also the CME director from 1997-2003.

Welcome Yra.

YRA HARRIS: Thank you Richard. It’s good to be back with you – It’s been a while.

FRA: Great. I thought today we would start off our discussion with Janet Yellen’s presentation and her statements – Your thoughts?

YRA HARRIS: Well, the conference went just as I thought it would be. Of course, as usual, she handled herself well. She discussed some certain issues, but didn’t give much away. And more importantly she didn’t trap her successor, Jay Powell, to any type of situation. She has been gracious and thoughtful and so she continued in that vein. She didn’t really tell us much. Again, she was struggling to understand the lack of inflation and that will continue to plague her because they just don’t truly understand where the inflation is as the Fed measures it. That’s all we have to go in is the way they measure it. How any of the rest of us measure it at this point in time really is meaningless because we’re not driving the markets in that regard.

FRA: Did she set any expectations for future interest rate hikes?

YRA HARRIS: I’m not sure, maybe a couple, she was kind of reticent. I heard one of the media economists talking about it today saying that Greenspan understood with the technological innovation, going back to 1996, that he thought it was going to have an impact on supply-enhanced growth period so he was reticent to raise interest rates and that was a good thing. But every Austrian economist I know worth their weight and those who are not in the Neo-Keynesian new model will tell you that that was exactly what caused all the problems, was that Greenspan was reticent to raise all the rates even though the return on capital was rising significantly. And that’s when you need to start raising rates because then you head off any type of excess capacity developments which of course we saw by 1997-1998, we had a massive overcapacity situation which started the Asian Contagion. She is kind of settled with this too because she talked about that with the tax cut and the fiscal policy today which was good, not in any type of derogatory way, but she is worried about maybe the increase in debt, but she’s hoping that if this tax cut is stimulative it will be supply-side leaning and we will get greater productivity growth which she said would be the good type of growth that she wants.

So we will see.

FRA: What about the U.S. yield curve? Do you see continued flattening of the yield curve or potential inversion going into next year?

YRA HARRIS: Well again, they tried to pin her on that new version. People have to be specific. I am using the 2-10 yield curve. When the 2-10 inverts, there is danger ahead for a lot of asset classes. People will say, “Well, not so fast”, but I will be the first one to tell you because I’ve looked at this for 35 years as part of my trading paradigm that I developed for myself and I can’t time it. I have a study here that was done in 2003, it is right here I keep it in my drawer and it’s exactly on this. It was done by an intern of mine who is very highly qualified and it was written in July of 2004 titled, An Investigation into the Relationship between Changes in Yield Curve and the Performance of Stock Indices. So we’ve looked at this. It is so difficult to time. I can’t tell you when the results going to be, but I’m going to tell you just like in 2007 when then yield curve inverted, it was only by 6 basis points, we know what followed. In 2000, the yield curve inverted, we know what happened then. In 1979-1981, of course that was a forced inversion by Volcker as he was ringing inflation out of the system, but we know what happened then. This time, I can’t tell you. We’ve discussed this, you and I, for quite a while. We’ve been right in many ways about it and I’ve warned with what the central banks are doing that this is a wild card. I can’t tell you what the impact is going to be. It was interesting when Yellen discussed the yield curve today. She didn’t talk about the effects from other central banks and I think that’s a huge part of the flattening that is going on.

FRA: Yes. And about that…Do you see the ECB, Bank of England and Bank of Japan having their yield curves affected?

YRA HARRIS: Well for the Bank of Japan, Kuroda tried to give us a different spin on it thinking that maybe they were going to put an end to it, but as soon as the dollar/Yen softened off of that, I forget what the exact phrase was, it was from a speech in Switzerland in mid-November where he used certain language that spooked the market, but then he walked it back of course. You see that the dollar/Yen got weak today and then dollar really fell off after the Fed’s action. Tomorrow (Thursday, December 14^th, 2017) we have an ECB meeting, an SNB meeting, Bank of England meeting and the Bank of Mexico – They are all in play here. I think Kuroda’s term that he used in November was reversal rate. It was a new term. We hadn’t heard it and myself included. I thought maybe they are thinking about ways that they can finally start to get out of this, but then he walked that back. They’re not going anywhere. And as I was talking with Rick Santelli the other day, I wasn’t on T.V. with him, but I had a tea and he had a cup of coffee and we were just talking about that and it’s different, unlike the U.S., when the U.S. started down the path of tapering when Bernanke stopped being afraid of his own shadow and stopped being plagued by the Taper tantrum and they actually announced how they were going to do it, it was a monthly reduction in the amount of what they were going to purchase and they were going to end it over in less than a year. They went from $85 billion to zero, where they weren’t purchasing any new stuff, in a fairly quick period, but the market new what they were going to do. The ECB is totally different. We know that they are cutting from $60 billion to 30 billion starting January 1^st, but they’re not reducing it after that. So Draghi is going to be buying $30 billion instead of 60 billion, but he has already told us he is extending it out to September. So we know we are going to get $270 billion new buying with whatever else they are buying in Europe all of next year. And the Bank of Japan does have some latitude there because of the yield curve control. There is not change coming.  I think Draghi has a very grave problem on his hands. You saw it today where the Italian bonds actually got hit even with whatever they are buying because now we know there is going to be an Italian election on March 4^th and this is going to be a very contentious election because right now the polls have the Lega Nord and Five Star Movement leading. So this market knows there is an election coming. But more importantly for Draghi is Merkel, And Richard you and I have talked about this before the election that she is not going to be as strong – And she’s not. She is very weakened right now and the German elites, the nomenclature or the thinkers, are so afraid of a new election, but meanwhile it is 3 months’ time from the election and no new governments have been formed yet. It’s a caretaker government. And Merkel offered, because she was pressured to do so, the SPD (Social Democratic Party of Germany), who swore that they weren’t going to go into coalition and now they’re negotiating for coalition, but she’s phenomenally weakened. This is a very important thing for Draghi because she has been his bodyguard. Whatever he wanted to do, Merkel was willing to deflect criticism. Now that she’s in such a weakened state with the Italian elections, he’s in no position to do anymore tightening or hawkish statements. I’m looking for tomorrow to be excessively dovish.

FRA: Any updates on the gold currency cross exchange rate you’ve written about recently that gold is being restrained from positive real yields?

YRA HARRIS: Right now, the 2 year yields dropped a little bit today, so we’ve about neutral right now using the 2 year on inflation. Real yields are probably about zero, but global real yields are exceedingly negative. That’s why I said gold will perform well against all currencies because global short-term real yields are very negative. In the U.S. they are neutral, but the interesting thing is the dollar is not getting a bit. This defies most things that anybody has looked at this and traded on it and analyzed it. The United States dollar should be screaming right now based on what we saw during the Reagan years because you’re getting a fiscal stimulus package via tax reform and rising interest rates. These are two variables that are very positive for currency and yet nothing. This is really starting to get interesting and forcing me to think because something is wrong here.

FRA: And today Yellen made some statements about Bitcoin, everybody is talking about Bitcoin. She mentions it is not legal tender – Your thoughts?

YRA HARRIS: Well it’s not legal tender, but it definitely should be legal tender. We have talked about Bitcoin before and again I’m far more interested and I’m on record for over a year saying that I’m more interested in the blockchain technology and the concept of it buying Bitcoin, to my own detriment, but I’m with guys like  Druckenmiller – I can only trade what I understand. I went through the dot-com bubble and I couldn’t understand them. I didn’t understand when people were talking about burn rates of money and my common response was that I’m a child of middleclass parents – We don’t burn money…You’re going to have to help me better than this. So I’m watching it and it’s intriguing. I wonder whether it’s going to affect gold. Some people think it affects gold because it moves potential gold buyers into another alternative, but as I wrote last week, hell has frozen over when I find myself in agreement with Alan Greenspan. Greenspan just didn’t understand and you cannot create value out of nothing. I know tech people tell me that it’s not nothing and that there is a process here that we can probably find in David Ricardo’s labour theory of value. You have to mine it so there is some value, but I agree with Greenspan about that where you just cannot create value out of nothing although I would’ve asked him the question…Then that would make the Swiss Franc the oldest cryptocurrency in the world because it’s so secretive, so if that’s the definition of crypto is being secretive and basically finding it under the radar. They’ve been doing this for a long time and we’ve watched them for 3 years create value out of nothing by printing Swiss Francs so I’m voting the Swiss Franc as the cryptocurrency of the year. If you actually look at the SNB stock price, it almost mirrors that of Bitcoin – It’s such a dramatic rise this year.

FRA: Do you think that a government-based digital currency or cryptocurrency, if we can call it that, will allow private-based cryptocurrencies like Bitcoin and others to coexist?

YRA HARRIS: I really can’t answer that. Janet Yellen was very good in her answer when somebody asked her if the Feds are looking into it and she said, “Other central banks are. When we said we are looking at it, are people doing research? Yes. But we are looking at digitized money, not cryptocurrencies and there’s a big difference.” And she was very good at explaining that difference. I think that we are going to get digitized currencies…Why? Because people like Larry Summers, Kenneth Rogoff and others have wanted to get electronic money because then they would have greater control over what you and I do. So when you go to financial repression rather than us pulling our money out of the system and hoarding it, they would force us to use an electronic currency which they can control. Then they would hope they can restore velocity to the money which is why Larry Summers said to get rid of the $100 bill because it’s much harder to hoard currencies with smaller denominations because if you’re hiding them under your mattress, it doesn’t take that much money to give you sleepless nights. You can only hold so much currency in smaller denominations.

FRA: And to allow for easier implementation of negative interest rates through monetary policy.

YRA HARRIS: Yeah. Marvin Goodfriend, who has written very extensionally on negative interest rates, that’s right because that’s the whole thing. I’m going to go to negative interest rates and I’m going to force you to keep your money in the system rather than anyone with a brain says, “Negative interest rates? I’m going to pull my money out of the bank.” Because if you have negative interest rates for 10 years and we’re at -2%, I’m going to lose 20% of the value of my currency. Then people pull it out of the bank and do other things with it such as investing in gold and other things. It gets very interesting.

FRA: Exactly. And finally, I’m just wondering about your thoughts on the geopolitical scene in terms of Saudi Arabia and Russia with what’s happening in Saudi Arabia and any new developments on meetings and more discussions between Saudi Arabia and Russia.

YRA HARRIS: I have looked at this for quite a while and I stated the last time around that there was major event that took place on October 4^th and that’s when the Saudi King, not the crowned prince, Mohammad Bin Salman, the king himself went to Russia for the first time ever. I’m always interested in the events that are first-time-evers because there is always a reason for it. Dixon going to China was amazing event. So the king went to Russia. On those two days he was there, oil traded down to about 49 dollars and then over the next 8 weeks it went all the way up to about 60 dollars. Is this happenstance? No, I don’t think so. I think that major shifts are taking place in the world. You’re seeing it in the mid-east, and Russia is very involved with this because the Obama administration leaped them into a bigger role in Syria which has now given them the primary role. So there are all types of things that are taking place. There are shifting sands, no pun intended, and we have to pay attention.

FRA: Great insight Yra as always. How can our listeners learn more about your work?

YRA HARRIS: You can go to YraGHarris.com and Notes from Underground, which is where I blog, will pop up. They can follow me and register to receive it for the very expensive price of free. And again I don’t talk trades to people, I try to explain to you where I think the next opportunities are going to be from a trader’s perspective because I always have to wear two hats: as a trader and as an investor. And they are radically different.

FRA: Great. Thank you very much Yra for being on the program show again. Thank you.

YRA HARRIS:  Well Richard, at this time we’re in I hope I was able to “shed some light”.

Transcript written by: Daniel Valentin <daniel.valentin@ryerson.ca>

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“The gradual acceptance of digital currencies, with major exchanges about to launch bitcoin futures trading, may prompt some oil producing nations to ditch the US dollar in crude trade in favor of cryptocurrencies, an oil analyst says.”

LINK HERE to the article

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“Stanford economists Edward S. Shaw and Ronald I. McKinnon coined this term. In short, it means governments essentially use the private sector to service debt ..

Financial repression is also useful for governments to control capital and have its citizens consume the bulk of domestic government debt.”

LINK HERE to the Forbes Article

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“High-quality credit can at times take the place of money when its liquidity, perceived return, and safety of principal allow for its substitution.

When the possibility of default increases and/or the real return on credit or liquidity decreases and persuades creditors to hold classical ‘money’ (cash, gold, bitcoin), then the financial system as we know it can be at risk (insurance companies, banks, mutual funds, etc.) as credit shrinks and ‘money’ increases, creating liquidity concerns.

Someone asked me recently what would happen if the Fed could just tell the Treasury that they ripped up their $4 trillion of T-bonds and mortgages.

Just Fugetaboutit! I responded that that is what they are effectively doing. “Just pay us the interest”, the Fed says, “and oh, by the way, we’ll remit all of that interest to you at the end of the year”.

Money for nothing – The Treasury issuing debt for free. No need to pay down debt unless it creates inflation. For now, it is not. Probably later.”

Bill Gross Investment Outlook: Investment Potpourri

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“Now comes Bitcoin. The Judiciary Committee of the United States Senate is currently working on Bill S.1241 that aims to criminalize deliberate concealment of property or the control of a financial account. The bill was submitted in June, and the law would change the definition of ‘financial account’ and ‘financial institution,’ and thus also cover digital currencies and digital exchanges. Who is pushing it? None other than California’s Senator Dianne Feinstein, who maintains that the bill is needed to update existing money laundering laws because of terrorists.

This means that the miners of Bitcoin will become a ‘bank,’ .. .

.. They can shut down Bitcoin in the blink of an eye by simply defining anyone who is a miner to be a financial institution.

The bill will change the definition of “financial institution” in Section 53412 (a) of Title 31 , United States Code. The text will read:

“An exhibitor, a redeemer or a cashier of prepaid access devices, digital currency or a digital exchanger or a digital currency.”

The regulation will remove the anonymity of Bitcoin and other cryptocurrencies defeating this idea that there is an alternative-financial-universe separate from government.”

Bitcoin to be Declared a Financial Institution — Beware!

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Crypto Surge Sparks Establishment Panic: Bans, Crackdowns, & Fatwas As Bitcoin “Undermines Governments, Destabilizes Economies”

LINK HERE to the developments

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FRA: But would governments necessarily allow private-based cryptocurrencies to coexist with government-based cryptocurrencies?

Danielle DiMartino Booth: I would have to say no. What we have seen with the parabolic thousand point increase, and we are at a thousand points at 8:26pm EST on November 29th, Bitcoin crossed the $10,000 mark and it didn’t even take it 12 hours to go across the $11,000 dollar mark. What we are witnessing is clearly a bubble that is going to implode on its own weight. I think that we can all hopefully agree on that; we are all adults in the room. But I think that central bankers know good and well that once these cryptocurrency bubbles burst, laying in their wake will be a very refined technology that allows central bank cryptocurrencies to rise up where they have left off. To your question, do I think that they will be allowed to coexist? – I think not.

FRA: So you see a phasing out or an abolishing of Bitcoin and other types of private-based cryptocurrencies?

Danielle DiMartino Booth: I hate to inflammatory words like abolishing, but you could certainly see a sequence of events whereby if the Bitcoin bubble ends up bleeding into other overvalued asset classes that then bleed into an economic contraction leading to recession, and then causing the central banks of the world, starting with the Fed, to go back to the zero-bounded interest rates. Once we get to that point, and I hope we don’t, I hope that our new chairman, Jay Powell, is going to say, “You know what, zero-interest rates didn’t work. We are not going to go back there.” But if we get to the point where we are back to zero-interest rates or worse, negative interest rates, the next logical step for central bankers is the eradication of cash and controlling our buying which can only really be done electronically with this emerging cryptocurrency technology.

LINK HERE to the interview

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“The fear on a lot of people’s part is that the central banks and central governments are not going to just stand still. They’re either going to issue their own blockchain currency and require their citizens to use only that Cryptocurrency or that they will try to ban or outlaw the existing Cryptocurrencies as an extension of the financial repression.”

LINK HERE to the interview

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“The UK Treasury has now said it intends to begin regulating the virtual currency, which has a total value of £145 billion, to bring it in line with rules on anti-money laundering and counter-terrorism financial legislation.”

LINK HERE to the article

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The Federal Reserve’s Vice Chariman of supervision, Randy Quarles, warns that digital currencies like Bitcoin pose “serious financial stability issues” as they grow… “Today, the vast majority of our payments by volume and value are processed by regulated financial institutions. In the U.S. payment system, digital currencies are a niche product that sometimes garners large headlines. While these digital currencies may not pose major concerns at their current levels of use, more serious financial stability issues may result if they achieve wide-scale usage.”

LINK HERE to the article

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