05/01/2017 - Former Federal Reserve Chairman Alan Greenspan: What Is Trump Going To Do When Inflation Hits
Greenspan thinks U.S. President Donald Trump has a math problem with his budget .. Greenspan says that interest rates will have to rise because of very large budget deficits if big programs are not cut .. Interest rates and inflation will go up right along with it.
05/01/2017 - Frank Shostak: Central Bank Policies Are Leading To Economic Instability
“Increases in money supply lead to a redistribution of real wealth from later recipients, or non-recipients of money to the earlier recipients. Obviously this shift in real wealth alters individuals demands for goods and services and in turn alters the relative prices of goods and services .. Central bank policy amounts to the tampering with relative prices, which leads to the disruption of the efficient allocation of resources.”
04/30/2017 - Hedge Fund CIO Eric Peters: What Central Banks Have Done Is “Stunning, Unprecedented”
“Since 1955 we’ve experienced uninterrupted annual inflation. It’s a stunning fact, unprecedented. To an economist in 1955, the coming 60yr inflation would have appeared less probable than a catastrophic meteor impact .. We created history’s greatest volatility-suppressing machine, and it delivered breathtaking stability .. Minsky taught us that stability begets instability. And it stands to reason that our volatility-selling machine will break one day. We saw a glimpse of this in 2008-09 .. But volatility suppression at the lows is much easier in many ways than at the highs. In a crisis, our central banks simply go full-throttle. At the highs though, they seek the unattainable, which is perfect economic balance in a world that is inherently unstable – they attempt to crystallize the entire ecosystem. Which is as arrogant as it is impossible.”
04/28/2017 - David Rosenberg: The Bond Market Is Reacting To The Facts On The Ground
The stock market is at a critical juncture, and it may be time reduce risk, strategist David Rosenberg says .. He predicts economic growth will slow even more as the Federal Reserve resumes its tightening policy.
“The reckoning will be which market has the story right: Is it the stock market that is de facto pricing in double-digit earnings growth or is it the Treasury market with the 10-year yield at 2.3 percent? .. The bond market is really pricing in a completely different nominal GDP growth world .. The bond market is actually reacting to the facts on the ground. The facts on the ground are this: Year-over-year growth on a nominal GDP cycle already peaked at 4.9 percent. We have never before in the post-World War II period ever have seen year over year nominal GDP growth peak below 5 percent. That happened two years ago.”
04/28/2017 - Governments Keep Spending, Now Addicted To Cheap Interest Rates
“This is a confidence game .. Back in 2007, the Fed only had to worry about its policy and the contracting economy. The problem they created is that government just keeps going like the Energizer Pink Bunny – it never stops spending regardless of the level of interest rates .. The Fed cannot neutralize the fiscal spending of government .. Government has become addicted to cheap interest rates. If rates go back just to 5%, we are looking at a fiscal deficit explosion the Fed cannot overcome .. The crisis has to hit before a politician would ever act. Once the crisis begins, you cannot restore confidence. The whole thing will have to play out. Moreover, the crisis in Europe helped to send capital to the USA easing the economic pressure here. This is why the USA is holding up the entire world economy right now and a stiff wind will blow over the European banking system. I seriously doubt that anyone can stop the next crisis and whatever they do will then be seen as a failure.” – Martin Armstrong
04/28/2017 - Incrementum Advisory Board Meeting Minutes: Central Bankers Cannot Afford To Let Risk Assets Decline
Heinz Blasnik:
“If I may add a quick point, I’m not actually as long-term bearish on gold as Frank. I’m just saying that many of the short-term macro economic drivers for gold do not look supportive, but the gold price is strong anyway. And I believe that these macro economic factors will probably become supportive in the not too distant future and that the market is already discounting this view. So I’m actually quite positive on the gold price in the medium to long-term. And I’m not even negative in the short term because the demand is there and the price is holding up. There is one more aspect to this, the assets that are most vulnerable to a sharp slowdown in credit and money supply growth are stocks and junk bonds because these assets have become the most expensive on the back of the expanding money supply. And if there is upheaval in these risk assets we will have problems in the banking system and regardless of what the money supply is doing people will look to gold because it’s the one asset that is not dependent on promises and is an effective hedge against trouble in the banking system.”
LINK HERE to download the Meeting Minutes
04/28/2017 - Dr. Albert Friedberg: Bullish On Risk Assets, Federal Reserve Will Only Shrink Its Balance Sheet When It Sees Accelerating Inflation
LINK HERE to the Quarterly Conference Call – MP3 Podcast
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From the Quarterly Report
“In sum, we see a global expansion gathering strength and being liberally financed by politicians, politically influenced bankers and academics with little feel for reality. It is these academics who are now floating the idea of raising the inflation target to 4% from 2% on the pretext that it will be easier to achieve negative real rates without having to breach the zero-interestrate bound — the next time they are called on to save the world!
There is good reason to believe, then, that we are still early, that the bull is proceeding as it always has, confounding the great majority of experts, defying the well-armed but uncritical skeptics and taking its sweet time. So what is needed is patience (don’t switch lanes — you will always regret it), blindness and deafness (to experts’ concern about valuations, presumed political gridlock, Brexit, etc.) and discrimination (persist with active managers, for their time has come).”
LINK HERE to the latest Friedberg Quarterly Report
04/27/2017 - Macquarie’s Research Team: Financial Repression Is Here To Stay As Governments Run Out Of Options
“Today’s financial repression is set to last for decades (and possibly forever) as policymakers are seeking to keep government funding costs low .. – that’s according to a new report from Macquarie’s economics research team. Since the financial crisis, central banks around the world have embarked on an unprecedented monetary policy experiment. Interest rates have been pushed down to artificially low levels in an attempt to stimulate economic growth and stave off a deep financial depression. Unfortunately, while these policies have worked to some degree, they have also punished savers. This is the very definition of financial repression .. Macquarie argues that governments have made an implicit fiscal policy choice by pursuing this strategy .. Artificially low-interest rates have imposed a tax on savings while at the same time keeping funding costs low, allowing for more borrowing on favorable terms. With this being the case, the analysts argue that rather than signaling a global slump, low bond yields reflect a conscious policy choice to minimize public debt funding costs .. As Macquarie’s analysts point out, financial repression is a headwind to real GDP growth as it involves a transfer of wealth from savers to debtors (in this case the government). Japan is a real-life example of how ineffective this policy really is. Savers have responded to financial repression by increasing the household savings ratio, which has resulted in weekly consumption growth and anemic economic growth.”
04/26/2017 - Dr. Marc Faber: Indebted Western World Economies Are More Fragile Than Ever Before
Marc Faber thinks there will be 20 – 40% pull back in the markets, we are still in the Trump euphoria stage. He goes on to say that Trump will beg Janet Yellen not to raise interest rates and to keep on printing. Tax reform will not really help the U.S. The U.S. and western economies are terminally sick. The Debt loads are huge and the economic conditions are more fragile than ever before.
04/26/2017 - The Roundtable Insight: Richard Duncan On A Recipe For Disaster
Richard Duncan is the Chief Economist at Blackhorse Asset Management in Singapore. He is the author of numerous books including, The New Depression: The Breakdown of the Paper Money Economy, and The Dollar Crisis: Causes, Consequences, Cures, an international bestseller that predicted the current global economic disaster with extraordinary accuracy. Since beginning his career as an equities analyst in Hong Kong in 1986, Richard has served as global head of investment strategy at ABN AMRO Asset Management in London, worked as a financial sector specialist for the World Bank in Washington D.C., and headed equity research departments for James Capel Securities and Salomon Brothers in Bangkok. He also worked as a consultant for the IMF in Thailand during the Asia Crisis.
Richard has appeared frequently on CNBC, CNN, BBC and Bloomberg Television, as well as on BBC World Service Radio. He has published articles in The Financial Times, The Far East Economic Review, FinanceAsia and CFO Asia. He is also a well-known speaker whose audiences have included The World Economic Forum’s East Asia Economic Summit in Singapore, The EuroFinance Conference in Copenhagen, The Chief Financial Officers’ Roundtable in Shanghai, and The World Knowledge Forum in Seoul. He runs a blog called https://www.richardduncaneconomics.com/ where he has a video newsletter service called Macro Watch, which is available to our listeners at a 50% discount using the code word: authority
I coined the term ‘Creditism’ to describe an economic system driven by credit creation and consumption, in contrast to Capitalism, which was driven by investment and savings. Creditism replaced Capitalism when money ceased to be backed by gold nearly five decades ago. But Creditism requires Credit growth to survive. The evidence presented in this video suggests that Creditism is in crisis globally because Credit is no longer increasing fast enough to drive global growth, even with record low interest rates. It is not possible to understand the global economic crisis without taking account of the exhaustion of Creditism.”
– Richard Duncan
Current Creditism trends:
Once we stopped backing money with gold in 1968, the nature of our economic system changed very profoundly. Credit growth became the driver of economic growth. When we were still on a gold standard, there were constraints as to how much credit could be created, but after we stopped backing money with gold, all those constraints were removed and credit absolutely exploded. Total credit or total debt in the United States first went through one trillion dollars in 1964, and now it’s 66 trillion.
So it’s expanded 66 times in just over 50 years. This extraordinary explosion of credit in the US has completely transformed the global economy. It ushered in the age of globalization, it allowed countries like China to be revolutionized from a very poor, developing country, to the second largest economy in the world. What I’ve seen is even adjusted for inflation, every time credit has risen by less than 2% in the US going back to 1950, the US goes into a recession. And the recession doesn’t end until we get another big surge of credit expansion. So it’s crucial to be able to forecast credit growth if you want to be able to understand what’s going to happen in terms of economic growth. And it’s been very weak since 2008; we’ve now hit the point now where the private sector, the households, are so heavily in debt that they just can’t continue taking on new or additional debt to make credit expand enough to drive the economy.
So this is the real point: once credit started to contract in 2008, the global economy began to spiral into a new great depression. And it was only the expansion of government debt that prevented that from occurring. US government debt has more or less doubled since 2008, it is roughly $19 trillion now. It was the expansion of government debt that kept total credit expanding, and that prevented the world from collapsing into a depression.
The key as to what is going to happen next to the US economy and the global economy is interest rates. Interest rates are crucial to the future of Creditism as I call it. Going back to 1980, interest rates in the United States have gone down very steadily.
The 10-Year US Government Bond Yield in the early 80s was as high as 15% and now it’s gone down to around 2.2% today. And as the interest rate fell, this made borrowing more affordable, so the Americans were able to afford more debt. They became increasingly indebted, and we can see this by looking at the ratio of total debt to GDP in the United States. Now when I talk about total debt or total credit, I mean all the debt in the country. The government debt, the household sector debt, the corporate debt, financial sector debt, all debt. In 1980, it was only around 150% total debt to GDP, now it’s about 350%. So as credit expanded, the credit growth drove the economic growth in the United States. And as the US economy expanded, US imports from other countries grew, and that drove the global economy.
As interest rates have fallen, Asset prices have gone up. The stock market, property market, bond prices, they’ve all gone higher as interest rates have gone lower. The best measure of total wealth in the United States is household sector net worth.
Household net worth is now $90 trillion, it’s gone up by 60% since the post-crisis low in 2009. The reason this wealth has expanded is that the government and the fed took very aggressive action to reflate the global economy after 2008. The fed and the central banks around the world had interest rates to near 0% and reflated the global economy.
Going back to 1950, the ratio of wealth to income has averaged about 525%. During the property bubble, this ratio went up to about 650%, and of course, the property bubble blew up, and the ratio went back down to its normal level of about 525%. But now this ratio has once again expanded and is now at its back at its all-time peak level at 650% once again. And this is telling us that asset prices are very high, and the stock market is very expensive, property prices are expensive. And that means interest rates now begin to move higher, then asset prices are very likely to fall. So we’re seeing a situation now where interest rates are the key, because if interest rates move higher then credit is going to contract. That’s going to throw the economy into a severe recession, and on top of that asset prices would have a very significant correction or crash, that would cause a negative wealth effect, and that would also cause a US economy and the global economy to go back into severe recession, or worse.
The US budget deficit
When the government borrows money it tends to push up interest rates. For instance, if the government doesn’t borrow anything then there’s less demand for money and interest rates will be lower. But if the government were suddenly to borrow $3 trillion, then that would suck up all the money available in the economy and that would push interest rates to very high levels. So when the government borrows more, it tends to push up interest rates. This is assuming all else is unchanged, but over the last many decades, something very important has changed. Once the Bretton Woods system broke down in 1971, the United States discovered they could run very large trade deficits with the rest of the world. This is important because it means the US will have very large capital inflows. When the US has a large trade deficit, it will have an equally large amount of capital inflows coming into the country to finance that trade deficit. The larger the capital inflows are, the easier it is to finance the government’s budget deficit at low interest rates.
In 2006 we had about $800 billion in capital inflow, and that was enough to finance the entire government budget deficit that year a few times over. So these inflows are very important financing the budget deficit at low interest rates. If Trump is successful in his promises to cut taxes and increase government spending, then it’s going to make their budget deficit considerably larger.
The Capital Inflows are the mirror image of the Current Account deficit. When the Current Account Deficit grows larger, the Capital Inflows also grow larger, making it easier to finance the budget deficit. But, when the Current Account Deficit shrinks, Capital Inflows also shrink, making it more difficult to finance the budget deficit at low interest rates.
President Trump’s plans to force US companies to bring their factories back to the US, to renegotiate trade deals and/or to impose trade tariffs on China and Mexico would all cause the US Current Account deficit to shrink. A smaller Current Account deficit would cause the capital inflows into the United States to shrink, too. Less capital inflows would mean less demand for US government bonds. That would push up interest rates and pop the asset price bubble. So, we must keep a close eye on the US Current Account Deficit because it will determine the size of the capital inflows.
What Could Cause Inflation to Rise?
Inflation has fallen since the early 1980s because increasing trade with low wage countries has pushed down US wages and the price of consumer goods. Now, however, if the US imports less from low wage countries, the price of manufactured goods will rise, US wages will rise, and inflation will rise. Forcing companies to bring their factories back to the United States or imposing trade tariffs on imported goods would cause inflation to increase. Increased government spending could also cause inflation to pick up.
The Undesirable Consequences of Eliminating the Trade Deficit
If the US reduces its imports, the global economy will shrink. If the US eliminates its $1 billion a day trade deficit with China, China’s economy could collapse into a depression that would severely impact all of China’s trading partners, and potentially lead to social instability within China and to military conflict between China, its neighbors, and the US. Additionally, if the US Current Account deficit returns to balance, the global economy will suffer from insufficient Dollar liquidity, which could cause economic stagnation or worse. A reduction of imports from low wage countries would cause US inflation to rise, which would push up US interest rates. The elimination of the Current Account deficit would cause a sharp reduction in capital inflows into the US, which would also cause US interest rates to rise. Higher interest rates would cause credit to contract and a sharp fall in US asset prices, which could cause the economy to go into recession. It could also cause a wave of credit defaults in the US and around the world, potentially leading to a new systemic financial sector crisis.
Moving Forward
The US could stimulate the economy “the old fashion way” by increasing military spending and starting a war, or they could invest in 21st century industries and technologies. We could invest a trillion dollars over the next 10 years in developing renewable, green, solar energy. And if we did that, we could then re-structure the entire US economy, and induce a new technological revolution that would be so profitable, that we would pay off these investments many times over. We could grow out of this crisis, rather than collapsing into a new great depression.
Conclusions
The proposals outlined thus far by President Trump suggest that:
More about Macro Watch
Macro Watch is a video newsletter published by Richard Duncan. Every two weeks a new video is uploaded describing something important going on in the global economy, and how that’s likely to impact asset prices. Macro Watch monitors and forecasts credit growth and liquidity to measure and anticipate economic growth. You can subscribe to Macro Watch at https://www.richardduncaneconomics.com/ where you can save 50% with the discount code: authority
LINK HERE to download the MP3 Podcast
Summary by Jacob Dougherty jdougherty@Ryerson.ca
04/24/2017 - John Mauldin On The Pension Fund Crisis
“Many, perhaps most, current city and state workers simply aren’t going to get anything like the pension
benefits they have been led to expect” .. Fred Sheehan: ‘We are promised… is the haphazard refrain often encountered when the reduction of pension claims is mentioned. Promised or not, one distinguishing feature of non-federal government spending commitments stands out: only the United States has a printing press. States cannot print money. They can earn returns on their pensions’ invested assets, they can sell city hall, lay off the public works department, and tax, but an underfunded pension plan can only pay claims with dollars that exist.’ .. This list of options is actually too generous. Sell city hall? That presumes someone will buy it. Lay off the public works department? Not good for property values. Raise taxes? Right, on all the people in those houses without sewage service .. Repeat Sheehan’s last line and burn it into your brain: ‘An underfunded pension plan can only pay claims with dollars that exist.’ No one gets anything if the money isn’t there, and in a disturbing number of places it isn’t.
We know that pension plans typically have only 40–50% of their assets in equities, something like 40% in bonds, and the rest in real estate and alternative asset classes. How do you get 8% from that mix? Keeping 40% in bonds at 3% (if you’re lucky) means everything else has to make 15%. Marc Faber, who is even better at scaring people than I am, points out something that should be obvious but apparently is not: Pension plan funding ratios have been declining even as financial markets have posted impressive gains: ‘I find the deteriorating funding levels of pension funds remarkable because post-March 2009 (S&P 500 at 666) stocks around the world rebounded strongly and many markets (including the US stock market) made new highs. Furthermore, government bonds were rallying strongly after 2006 as interest rates continued to decline sharply.’
Like state and local pension obligations, US federal government pension obligations are also basically unfunded. They are expected to come from future tax revenues. Those obligations are the bulk of the over $100 trillion in unfunded liabilities that show up in the estimates of how much the United States is really in debt. That money is going to have to come from somewhere. But just as the United States will never default on its actual debt, I truly don’t believe we will default on US government pension obligations.”
04/23/2017 - Central Banks Have Bought A Record $1 Trillion In Assets In 2017
LINK HERE to the article and source of images
04/23/2017 - Accommodative Monetary Policy Is Encroaching On Fiscal Policy
“We believe that the ECB is presently using monetary policy in effect to conduct fiscal, as well as monetary policy. Elected politicians should be up in arms; that they are not would imply either that they do not understand this or that they simply accept it. This may provide an interesting pointer as to the future of the EU itself .. Private-asset QE purchases by the ECB is a big deal, because the selection and execution of these asset purchases benefits some elements of the private sector at the expense of others .. The absence of any objection from the vast majority of eurozone governments implies acceptance of this usurpation of power by the ECB. Perhaps this portends a pathway to federalization among those countries (unlikely to include Germany) who have chosen happily to acquiesce.”
by Gordon Kerr, John Butler, with Enrico Colombatto,
04/23/2017 - Allianz’ Mohamed El-Erian On Financial Repression
Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg View columnist, discusses global economic risks with Tom Keene and Francine Lacqua at the IMF and World Bank meetings. (Source: Bloomberg)
04/21/2017 - Alan Greenspan: Stagflation Is Here And Rising, “It’s A Fiscal Issue” Former Fed Alan Greenspan discusses U.S. entitlements growing 9% a year and that no one wants to attack that. On Stagnation he says we have a slow growth economy where you end up with inflation and slow growth just like the 70s.
04/21/2017 - Adam Andrzejewski: The Open-Government Movement – How Posting All Public Spending Online Can Transform U.S. Politics
“Sunlight is said to be the best of disinfectants; electric light the most efficient policeman,” wrote Louis Brandeis in 1914. Today, the Freedom of Information Act and internet make it possible to post online all spending at the federal, state, and local levels. This kind of radical transparency can transform U.S. politics.
Since 2011, American Transparency, a nonprofit, has built and operated OpenTheBooks.com, the largest private repository of U.S. public-sector spending. The ultimate goal: post “every dime, online, in real time.” To date, OpenTheBooks.com has captured 3.5 billion government-spending records, including nearly all disclosed federal government spending since 2000; 48 of 50 state checkbooks; and expenditures in 60,000 localities across America.
04/21/2017 - Richard Duncan: The Return Of Crowding Out Threatens Your Wealth
“It has long been understood that when the government borrows excessively, it pushes up interest rates and crowds out the private sector .. the government’s demand for money will exceed the supply of money from capital inflows and Quantitative Easing. The resulting drain of liquidity is likely to put upward pressure on US interest rates and downward pressure on US asset prices .. Crowding out is back. Liquidity is already negative. Any policy that would make it even more negative could cause a very significant correction in the stock market and the property market, where prices are already very stretched. A combination of policies that produced a much larger liquidity drain would almost certainly cause asset prices to CRASH.”
HEADS UP – we just interviewed Richard and the interview podcast will be posted up shortly ..
04/20/2017 - Patricia Healy: Taxation Of Municipal Bonds In The U.S.? Heavily Indebted Governments Are Desperate For Revenue
“Tax-exempt municipal bonds play an important role in our building of infrastructure – we see the results every day in roads and bridges, airports, mass transit systems and affordable housing, hospitals and universities. Tax exemption results in lower interest expense for issuers, thus reducing property or other taxes and fees for residents .. Some lobbyists have suggested that everything is on the table, including taxation of municipal bonds .. The fear that municipal bond interest will be taxed has been one factor contributing to the muni–Treasury ratio’s being higher than average. Additionally, Treasury bonds may have lower yields than usual due to their attractiveness in a world of low-to-negative interest rates. They may also be benefiting from a flight to quality .. We do not think municipal bonds will lose their tax-exempt status .. If certain deductions are not allowed at the personal and corporate levels, municipal bonds will be one of the few tax breaks that remain. However, it is clear that the exemption is in play and that there are folks fighting hard for its continuation.”
04/20/2017 - Ontario Canada Announces 15% Tax On Foreign Property Buyers; Saying No To Accepting China’s Capital Outflows
“The government will ban speculators from ‘assignment flipping’ in the pre-construction housing market. The move is targeted at investors who put deposits on multiple units at pre-construction prices — typically in condominiums, but sometimes in new subdivisions — then sell the title for profit before the building is complete, a process known as assignment .. Anyone who buys real estate in Ontario will have to reveal their citizenship and place of residence .. What this really means is that as two of China’s favorite targets of capital outflows shut their doors to more Chinese ‘investment’, the local oligarchs will simply have to find a new willing recipient. We expect that cities along the US West Coast – not to mention Warren Buffett, who as we reported earlier this week is now selling US houses to Chinese buyers – will be more than delighted to greet China’s trillions in capital outflows with open arms.”
04/20/2017 - Martin Armstrong: Central Bank Quantitative Easing Programs And Government Spending To Determine Inflation/Deflation In Assets And In Consumer Prices
“One of the greatest monetary experiments in financial history has been the global central bank buying of government debt. This has been touted as a form of ‘money printing’ that was supposed to produce hyperinflation. That never materialized as predicted by the perpetual pessimists. Nevertheless, the total amount of Quantitative Easing (QE) adding up the balance sheets of the Fed, the ECB and BOJ is now around $13.5 trillion dollars, which by itself is a sum greater than that of China’s economy or the entire Eurozone .. The withdrawal of the Federal Reserve (Fed), the European Central Bank (ECB) and the Japanese central bank from the QE programs will lead to an increase in yields on the bond markets sending the financing costs for the states higher. This is predicated upon the notion that people will continue to buy government debt. Governments have increased their spending sharply because interest rates were effectively zero and the central banks were buyers. Now comes the moment of truth .. Here comes the problem. The governments continue to borrow. With the central banks no longer buyers, then interest rates can rise faster than anyone expects because they will have to entice fresh buyers. If that fails to materialize, then we come to the Sovereign Debt Default crisis .. The negative effects of the balance sheet shortening of several central banks will mutually reinforce each other in 2018 and help to bring the financial crisis to a head for 2018-2020 .. The shrinking of the balance sheets represents the continued deflationary trend from a real economic expansion trend. The government will be competing for cash in an ever growing tighter economy. This will serve to demonstrate the unintentional impact of this entire unorthodox monetary policy experiment .. The inflation will be asset inflation – not demand inflation. So hold on – this is going to be the craziest ride in monetary history of human kind.”
The End of Quantitative Easing – Perhaps Now It Will Be Inflationary?
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