05/15/2017 - Martin Armstrong: The Coming Central Bank Crisis
“I have warned that whenever a government creates a solution to any crisis, that solution becomes the next crisis. This is what I have called the Paradox of Solution.The unfolding of the exit of the central banks from the Quantitative Easing monetary policy will become a much more serious threat to the financial markets than anyone suspects .. The real problem lies with the European Central Bank (ECB) and the Japanese central bank and when they exit their Quantitative Easing programs, their economies are not the reserve currency and lack a solid bid from international capital. The end of QE will lead to a sharp increase in yields on the bond markets, and thus the financing costs for the states will explode far more rapidly today than at any time in past history. It is also possible that other sectors of the financial system, such as the stock markets and the foreign exchange markets in peripheral economies to the USA, will be cast into turmoil experiencing great difficulties without the financial support of the central banks .. The crisis emerges when governments, who are the ones who have been subsidized since 2008, find no bid for their paper. This will really send rates upward at a rapid pace .. The balance sheets of both the Japanese central bank and the ECB are unlikely to follow the Fed just yet. A withdrawal of the ECB’s purchases of securities could produced the most widespread damage in Europe since the Dark Ages.”
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.
05/12/2017 - The Roundtable Insight – Alasdair Macleod On How The International Coordination Of Monetary Policies Has Increased The Potential Scale Of The Next Credit Crisis
FRA is joined by Alasdair Macleod in a discussion of international monetary policies, particularly China and the Eurozone.
Alasdair Macleod writes for Goldmoney. He has been a celebrated stockbroker and Member of the London Stock Exchange for over four decades. His experience encompasses equity and bond markets, fund management, corporate finance and investment strategy.
INTERNATIONAL COORDINATION OF MONETARY POLICIES
The business cycle that the banks are trying to manage isn’t actually a business cycle, but a cycle of credit created by the banks themselves. Assuming you have an economy working with sound money, under those circumstances there can’t be what we call a business cycle because everything is random. You get creative destruction of businesses which are ill-founded. When they go to the wall, they do so on a random basis. There’s no cyclical behavior. Then the central bank comes in and feels that the economy isn’t performing strongly enough so it encourages the banks to create credit. Suddenly you have extra money going into the economy. Instead of people having to make a choice, they can have both. The creative destruction you see in an economy gets postponed, and accumulates the whole time under the hood. Eventually what happens is that the excess credit in the economy has to come to a halt.
The cycle of credit is what creates what we believe to be a business cycle. Central banks coordinate their stimulation of the economy to stop the economy from overheating. The effect of this is that they all do the same thing at the same time.
EFFECT ON CURRENCIES AND GOLD
It depends on the stimulation an individual central bank gives to its economy. On top of that, you’ve got what people actually do with the currency and the cycle is basically the change in purchasing power of the currencies the whole time. Underneath this you get an accumulation of debt that never gets washed out on this credit cycle. When you raise interest rates to the point where the economy suddenly shudders to a halt, you start lowering interest rates to try and expand the quantity of money in the economy to prevent people from going bankrupt. Generally central banks succeed in that, but the effect of this is to defer the destruction of debt which is completely unproductive. This rolls into the next cycle, and every time it just gets bigger and bigger. Then you look at statistics and you see the amount of debt built up has increased immeasurably, so the next financial crisis will be worse than the last one.
The protection the ordinary person has against fiat currency losing its purchasing power is to hold some money in gold. You want to be able to use this money when paper currencies either lose most or all of its value. In that sense, gold gives the most protection. If you want to insulate yourself from the collapse of the paper currency, then gold is the only thing you can use. Maybe silver, but silver has been demonetized. The only sound money in the market at the moment is physical gold.
You ask yourself, to what level would the Fed fund’s rate have to rise to trigger the next credit crisis, and that level is in the region of 2.5%. The credit cycle is really comprised of stimulation, inflation, and having to destimulate. You destimulate to the point where you collapse things, because there’s no fine line between slowing things down and creating the next crisis. You can’t just slow things down because it’s not enough of a response to kill price inflation; if you raise interest rates a bit, the market thinks the central banks are too afraid and then continue to advance purchases and dispose of money in favor of goods. The only way the central banks can stop this is to raise interest rates to the level where we change our behaviour.
The central banks raise interest rates to the point where the collapse occurs, then they crash interest rates and chuck money into the economy to ensure nobody goes bust. The idea that the central banks think they can manage what they think is a business cycle is just completely bizarre. Governments are effectively stuck in a debt trap as well. What we’ve got to look through is next time, is how much money does the Fed have to write an open cheque for this time, and what will be the effect on the Dollar. The Dollar, after all, is the currency to which other currencies tie themselves, and if the Dollar falls we all fall. This time around it will be considerably worse than last time.
TIMING OF NEXT CRISIS
The whole situation has become quite unstable. In Europe, there’s a movement of money away from the banking system and into principally Germany, Luxenberg, and the Netherlands. These banking systems are, as far as large depositors are concerned, safe relative to the banks in the Mediterranean countries. The flight of capital from these weaker countries has hit record levels. The ECB is sitting on the situation and saying it’s not a problem, but the ECB has the eventual liability for the settlement system which is reflecting these imbalances. The total imbalance is in the region of 1.3T Euros. The important part is that the statistics coming out of the Eurozone indicate that there’s economic recovery going on. If there’s economic recovery going on, why do we have the continuing flight of capital?
Lots of people would say that China is a problem. What it’s now trying to do is deflate a bubble in the domestic market while inflating another bubble as it’s indulging in infrastructure spending. The annual spend on infrastructure is now in the order of $750B equivalent. That’s why you’ve got the demand for commodities coming out of China. But China finds that the wealth funds have been frontrunning her by buying commodities. This credit is getting more difficult for central banks to manage, and whole situation is becoming very unstable.
EFFECT OF USD INTERPOLITICALLY
If you pick up on China’s view as to what America is dong, you get a very different view from what’s reported in mainstream media in the West. The Chinese have worked out that America gains a huge amount from exporting the Dollar for value. They take it one step further and say that when Americans to raise funds, they encourage those Dollars back by destabilizing the region those Dollars have gone to. We’re now in a situation where Trump has been elected, but one of the problems he has is that he can’t raise any money because the debt limit has been reached and it’s not being extended. So how would you extend the debt? The Chinese would say that you destabilize a region where the Dollars are, and those Dollars are going to come flooding back. How do you get Congress on your side? You play the patriotic card and threaten to wage war with North America. No American can actually go against the idea of patriotism, so he got the extension up to October. This also explains why Trump moved from peace-making to warmonger in the space of less than 100 days.
Iran is also likely to be targeted later on this year, when Trump wants to increase the budget deficit after October, because the Middle East is one of the areas where there are lots of Dollars owned.
The Shanghai Cooperation Organization is set up by China and Russia, which started as an intention and security agreement and morphed into an economic unit. The idea is that the whole of Asia would become a free trade area. Between them, they are creating an industrial revolution throughout the most populous continent in the world. We’re talking about 40% of the world’s population suddenly having an industrial revolution that will link the whole continent. This is also impinging on Europe. It takes roughly two weeks to get a container from Beijing to Madrid right now, and it will be cut down. Compared to shipping by sea, which takes three weeks, you can see how the investment in these rail communications is massive. All the capital investment that is going to create this industrial revolution in Asia has to be financed, which is why the Asian infrastructure investment bank was set up by China and Russia jointly. All that infrastructure development has to be financed, and London is the center from which it is going to be financed. As far as the Chinese and Russians are concerned, they don’t want America to be involved at all. New York is completely frozen out of this for the reason that everything they do is reflected in bank balances back in the American banking system; they don’t want American interference or Dollars. London, working with Hong Kong, is how this is going to be financed. The big, big game is no longer Europe, it’s the whole of Asia.
EFFECT ON EXCHANGES IN SHANGHAI
China has been trying to promote the Yuan as an international trade settlement currency. It’s got a long way to go; the Dollar dominates this market. But one way they can promote the Yuan is by ensuring there are efficient financial markets that would allow people to do with the Yuan what they do with the Dollar. One of the things they have done at the outset is to set up a Yuan-gold contract in the futures market in Shanghai, settled in physical gold. We now have another thing that has been postponed: an oil contract in Yuan, that could result in oil priced in gold. America’s response to this is to be seen, but it’s clear that the future major economy in the world is going to be the whole of Asia.
In order to promote the Yuan at the expense of the Dollar, there has got to be some form of a gold conversion for trade purposes. Only when that happens can the Dollar be knocked off its pedestal as the major trade settlement currency.
There will be a point where China offers a gold option on trade settlements. If you want to do it at a gold price it has to be a far higher level, so the Chinese would move toward a higher level. But they don’t want to destabilize the world economically, so they’re reluctant to do it. As things evolve, they’re getting closer toward having to take that decision. To an extent it depends on what America does. China owns an awful lot of US Treasuries, which will have to be written off at some stage. Either America stops them selling, in which case China simply waits for them to mature and doesn’t reinvest their proceeds, or China forces the pace. We’re getting closer to the point where some decision has to be taken.
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.
05/12/2017 - IMF Proposes Capital Levy On Bank Accounts In Europe; Also, IMF Encourages Germany To Raise Property Taxes
“The International Monetary Fund (IMF) .. has told Germany it should raise its property tax, cut social welfare contributions and invest more to reduce income inequality .. The IMF argues for higher taxes on property are in fact necessary and that the government should demand higher wages .. Years ago, Italy simply imposed a tax on money in one’s account. This was called a ‘capital levy’. This was a one-time charge as an exceptional measure to restore the sustainability of the debt. The IMF is also suggesting that measure be invoked to help the coming Sovereign Debt Crisis. .. The IMF has already calculated how much the measure would cost every Eurozone citizen:
‘The amount of the tax would have to bring the European sovereign debt back to the pre-crisis level. In order to reduce the debt to the level of 2007 (for example in the euro area countries), a tax of about 10 percent is needed for households with a positive asset.’ .. As you can see, there is NEVER any discussion about reducing taxes or the size of government. The solution is always to raise taxes and to not even look at the old Italian trick of a 10% seizure of all cash in your account.”
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.
05/10/2017 - Yra Harris And Rick Santelli: Lessons From Japan & Implications Of France’s Vote
“The global markets have been lulled into an eerie calm–think Minsky—as the recent Dutch and French elections have driven the anti-euro populists back underground. I caution that the economic situation still remains a very serious concern as President Draghi continues to build the ECB balance sheet in an effort to bail-out the fiscally weak states of Italy, Spain, Portugal, France and others. Italy is still a major concern as the non-performing loans plague its domestic banks. Add in that Italy has a debt-to-GDP ratio of 136% and it will take the entire EU to backstop the Italian financial system. I WARN ALL READERS THAT THE GLOBAL DEBT SITUATION IS FAR MORE PERILOUS THAN GLOBAL EQUITY MARKETS REFLECT .. The world’s central banks have been busy adding liquidity to the financial system, which provides the backdrop for a Minsky Moment for complacency in the realm of ZIRP creates instability below the surface. We do not fight markets and therefore have not been sellers of equity markets by battling the power of central bank liquidity creation. But as geopolitics calm markets will return to focus on the fragile financial situation created by mountains of debt.”
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.
05/08/2017 - Martin Armstrong: Central Banks Accelerate Buying Of Equities In Efforts To Implement Their Monetary Policies
Martin Armstrong: “I wrote about that explaining that the central banks have been buying equities since 2014. The Swiss National Bank posted its latest 13-F holdings showing it has been buying equities at a stepped up pace during the first quarter 2017. Their total equity holdings have now reached $80.4 billion, up $17 billion from the $63.4 billion at the end of 2016 .. The central banks are trapped. Lowering interest rates to virtually zero reduced their yield on reserves and they cannot sell off government securities. The only viable hedge is US treasuries in the bond world against the chaos of the Eurozone. That offers no diversification just more government debt. The ECB owns 40% of European government debt. The Swiss are buying US equities as a hedge against the Euro and political unrest. This is not manipulation. They lost a fortune trying to maintain the peg the franc with the Euro. They cannot use pegs, so the only alternative to just buying US Treasuries is private equities .. The central bankers understand what our model is warning about. As confidence continues to decline in governments, the central banks can go bankrupt UNLESS they too diversify out of government bonds .. Granted, nobody wants to talk about this yet in public. This is NOT manipulation.”
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.
05/08/2017 - Dr. Marc Faber: Are High Home Prices [Driven By Repressed Interest Rates] Turning American Millennials Into The New Serfs?
“They are concerned about political correctness, about having the latest-model iPhone and the number of likes their photos receive and how many followers they have on Facebook. But most of all, they are concerned about extracting as much as possible from the government in the form of subsidies and other kinds of benefits. It is a generation that avoids hard work (such as on the factory floor), and is content to work part-time in bars and restaurants, and to live carefree .. It is also the generation whose major contribution to civilization may be the invention of ‘retirement before working’ .. Needless to say, this concept of retirement before working has been fostered and encouraged by governments, which, with their generous transfer payments, make it more economical for some people not to work .. Therefore, compared to the boomers it is only natural and completely understandable that the millennials’ drive for achievement and thriftiness are inferior to the one that their parents had. But can the relative decline of the financial condition of the millennials be satisfactorily explained by their less entrepreneurial spirit? .. ‘The spirit of risk-aversion is also infecting corporate America. The once lavish budgets companies devoted to research and development are now spent on legal compliance and human resources.”
FRA Commentary: The pillars of financial repression like repressed interest rates has resulted in high asset and real estate prices .. this is shaping the views by millennials in many ways – we will explore these ways with Charles Hugh Smith in an interview discussion this week.
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.
05/07/2017 - Alasdair Macleod: International Coordination of Monetary Policies Has Increased The Potential Scale Of The Next Credit Crisis
“This article gets to the heart of why central banks’ monetary policy will never succeed.The fundamental error is to regard economic cycles as originating in the private sector, when they are the consequence of fluctuations in credit .. Monetary inflation transfers wealth from savers and those on fixed incomes to the banking sector’s favored customers. It has become a major cause of increasing disparities between the wealthy and the poor .. The credit cycle is a repetitive boom-and-bust phenomenon. The bust phase is the market’s way of eliminating unsustainable debt, created through credit expansion. If the bust is not allowed to proceed, trouble accumulates for the next credit cycle .. Today, economic distortions from previous credit cycles have accumulated to the point where only a small rise in interest rates will be enough to trigger the next crisis. Consequently, central banks have very little room for manoeuver for dealing with future price inflation .. International coordination of monetary policies has increased the potential scale of the next credit crisis, and not contained it as the central banks believe .. The unwinding of the massive credit expansion in Greece, Portugal, Italy, Spain and France following the creation of the euro is an additional risk to the global economy .. Central banks should desist from using monetary policy as a management tool for the economy .. An economy that works best is one where sound money permits an increase in purchasing power of that money over time, reflecting the full benefits to consumers of improvements in production and technology. In such an economy, Schumpeter’s process of ‘creative destruction’ takes place on a random basis. Instead, consumers and businesses are corralled into acing herd-like, financed by artificial credit. The creation of the credit cycle forces us all into cyclical behavior that otherwise would not occur.”
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.
05/07/2017 - Central Banks Injected A Record $1 Trillion In 2017 – “It’s Not Enough”?!
“The latest weekly report by Deutsche’s Credit Strategist Dominic Konstam finds something even more troubling: $1 trillion in central bank liquidity YTD – or roughly $250 billion per month – is not enough .. Konstam’s conclusion is that there are two outcomes: either asset prices drops, or central banks will ultimately be forced to inject even more liquidity .. The bottom line, however, boils down to the following chart first shown by Citi last September, demonstrating that the marginal cost of central bank liquidity injection is now negative…
… and is located in the lower right quadrant, something both markets and policy makers realize.
Which means that when stocks realize just how insufficient the record $1 trillion in central bank liquidity has become, central banks – which have stepped into every single market correction over the past 7 years with some ‘liquidity supernova’ – will, for the first time since the financial crisis – be out of tools… something Janet Yellen appears to have realized some time ago.”
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.
05/06/2017 - The Roundtable Insight: Yra Harris On The Bond, Currency, Equity and Commodity Markets
FRA is joined by Yra Harris to discuss the current state of bond, currency, equity, and commodity markets.
Yra Harris is a recognized Trader with over 40 years of experience in all areas of commodity trading, with broad expertise in cash currency markets. He has a proven track record of successful trading through a combination of technical work and fundamental analysis of global trends; historically based analysis on global hot money flows. He is recognized by peers as an authority on foreign currency. In addition to this he has specific measurable achievements as a member of the Board of the Chicago Mercantile Exchange (CME). Yra Harris is a Registered Commodity Trading Advisor, Registered Floor Broker and a Registered Pool Operator. He is a regular guest analysis on Currency & Global Interest Markets on Bloomberg and CNBC.
Yra highly recommends reading The Rotten Heart of Europe – send an email to rottenheartofeurope@gmail.com to order
BOND AND CURRENCY MARKETS
We’re just coming off a Fed meeting in which they called the first quarter transitory, which means they’re not worried about it, yet they made no change to the current policy of maintaining the Fed balance sheet. The $4T will remain at $4T, and whatever expires will be renewed by the purchasing of whatever duration expires by the new instrument. With the Fed raising rates, even though GDP turned out to be low, there are other elements that are slowing down. Right now, if the Fed was looking to start unwinding its balance sheet, which would mean a dynamic act of actually starting to sell some of their assets, the first move would be for the curve to start to steepen. A lot of potential buyers would step back, and market would say ‘show me what you’re going to be doing’. You’re going to have others trying to front run the Fed, because the Fed model says there should be no problem. But what the Fed doesn’t model is the effect on the marketplace, and they’re hoping the marketplace allows them to do this. What the Fed is worried about is whether the market will be cooperative with what they want to do. It’s why they don’t want to acknowledge any pre-program. It’s the same problem the ECB has. A lot of people front run the ECB, and the market tries to rush ahead of it.
If the Fed tries to unwind by an aggressive type of action, which is selling the debt to unwind in a quicker way, the long end of the curve will go up higher than the short end in the immediate period, because the market will race ahead of them. We don’t know how the curve ought to be steepening in that environment. With the Fed doing nothing but raising rates, the curve has actually flattened quite a bit.
It’s interesting how the US 2-10 curve, the ‘investor’s curve’, just mirrors the German 2-10 despite negative rates in Germany. These two just continuously mirror each other. Ultimately, if the Fed is too aggressive in unwinding the balance sheet, that’ll tip us into a very flattening curve, which will fly in the face of what we think should happen. There’s going to be all sorts of things here because the market is going to set the tone. If the Fed were to actually embark upon an unwinding, the market will then set the tone unlike QE. Right now the curves are telling us that the Fed is a little too aggressive, and that’s why it’s flattening.
Everything is ‘transitory’. The Fed is not going to do this in a vacuum. If Marine Le Pen wins the election and throws the entire financial system into turmoil, the Fed has to change their perspective too. So we have a lot of things in play here. Yellen will be very reticent to raise rates too quickly; they want to see more from Trump and Congress before they get more aggressive.
OTHER FACTORS THAT COULD INFLUENCE USD AND BOND MARKETS
In the first quarter, central bank buying totaled a trillion Dollars in assets. The amount of liquidity is huge. The Dollar and all currency markets are all relative value plays. Even if everyone is moderately up, some are doing better and offering a higher return, but the US equity market is close to what we may discern as full value based on historical metrics. In a fairly stable world, the US is not where we should be chasing assets right now. The Mexican Peso and stock market is probably the most undervalued asset class in the world. People are pushing India as a great place to invest, but India has a lot of enormous infrastructural and political problems that they’re trying to work on.
The best place for investment right now is Germany. If the Germans agreed to do whatever it takes to hold the EU project together, you’ll experience some inflation in Germany but the currency will be weak. On the other hand, if things got so bad that the whole EU project fell apart, you’re buying Germany with a low currency. If it were to pull out for some reason, German assets would convert to Deutschmarks. Germany could be bullish on assets, and you get the use of a weak currency. We get a cheaper currency with a much stronger economy. This is not an easy world to invest in. The political risks are phenomenally great; Italy is still a massive problem for Europe, Greece has not gone away, and there’s no trade in Japan’s JJB.
When you look at how central banks have single handedly destroyed the bond market, you don’t have to look very far. The Fed may be too self-confident, but their models have no respect for market reaction and they still think they can extract themselves with very little pain. If they deem to shrink their balance sheet, they’re going to find out the pent up power of the market and its ability to cause them a lot of pain.
THE GLOBAL MINSKY MOMENT
At the end of the day, interest rates aren’t high enough to attract people into leaving the comfort zone. They won’t let interest rates go high enough to ease some of this burden, so people take comfort in the equity market. Minsky must be spinning in his grave that we’ve gotten to this point and it’s so controlled by the central bank. The central banks have created a global Minsky moment because everyone is complacent. It’s everything approaching the Minsky moment because where are you going to go? There is a cost to everything; just because you don’t see it today doesn’t mean it won’t pop up tomorrow. This is all the outcome of central banks not knowing when enough is enough. QE1 in the US was absolutely needed to prevent a mass liquidation of US assets, but after that it stopped making sense. QE2 and QE3 were totally unnecessary and has created this mess that we are now in.
SILVER-COPPER RATIO TO EQUITY MARKET
Gold has depreciated against silver significantly over the last few weeks, while the equity markets have been holding up pretty strong. Usually silver tends to outperform because it also has industrial usage. Copper has a tendency to outperform the other metals when the equity markets are doing well, because people correlate it to the economy. Copper has been dramatically outperforming silver over the same period, which is highly unusual when the equity markets are holding.
The Chinese have gigantic warehouses full of commodities, which wreaks havoc on that market. You do hear some bad things about what’s happening in the Chinese economy. If that’s the case, commodity prices may come under pressure as some of the lenders call the collateral and start pushing it on the market to raise some cash to secure loans.
INVESTMENT POTENTIAL OF COMMODITY ASSET CLASS
The agricultural sector is a good sector to be in. We have massive crops around the world and prices are relatively strong historically. We’ve had a bit of a rally in the agricultural products in the last few weeks, but it’s something to pay attention to. You should take a look and see if there’s an opportunity for you. The one thing that we’re sure of is that China and India need grain, end of story. As their income levels move up, agricultural products and higher protein products are in demand.
The great thing about the commodity market, unlike the commodity markets which are manipulated, is that farmers and miners react to price. The markets do work.
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.
05/05/2017 - Dr. Thorsten Polleit: The Fed Is Causing A Recurrence Of Boom And Bust
“It is Fed that is causing a recurrence of boom and bust. It initiates a boom through its easy money policy. In an attempt to reign in the excess it has created, the Fed at some point turns the boom into bust. To fight the bust it returns to an excessive monetary policy. The result is not only a volatile economy, but also an unsustainable build-up of ever greater amounts of debt on the part of government, consumers and corporates — making the final bust extremely costly .. The takeaway from the Austrian monetary business cycle theory is this: Either the boom goes on, and interest rates continue to remain at very low levels. Or interest rates move back to normal, and the boom turns into bust. An ongoing boom, accompanied with a return to normal interest rates, however, is the least likely scenario. If the Fed has learned from its most recent past, it wouldn’t be surprising if US interest rates will remain lower for longer.”
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.
05/05/2017 - Chris Whalen: Investment World Is Skewed By The Latest Round Of Monetary Policy Experimentation By The Fed
“We live in an age of asset bubbles rather than true economic growth. The investment world is skewed by the latest round of monetary policy experimentation by the Fed, including years of artificially low interest rates and trillions of dollars in ‘massive asset purchases,’ to paraphrase former Fed Chairman Ben Bernanke .. These bubbles are caused and magnified by supply constraints, not an abundance of credit. Whether you look at US stocks, residential homes in San Francisco or the dollar, the picture that emerges is a market that has risen sharply, far more than the underlying rate of economic growth, due to a constraint in the supply of assets and a relative torrent of cash chasing the available opportunities .. Likewise with the dollar, the image of the financial markets is one of constraints rather than policy ease. Since the middle of 2014, the value of the dollar against major currencies has risen sharply, suggesting a shortage of liquidity or at least a relative preference for dollars vs other fiat currencies .. Regards the prospect of a dollar drop, Megan Greene tells us on Twitter that ‘Only way I see it in the short-run is if everyone else gets in trouble and the Fed opens swap lines w other CBs to supply QE #unlikely’ .. We hear all of that, but can’t help but ask the question. All things do come to an end, including the seeming ability of the FOMC to painlessly levitate the fortunes of heavily indebted nations on a sea of easy dollar credit. This works really well when the dollar is strong, otherwise not so much.”
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.
05/04/2017 - Kyle Bass: “All Hell Is About To Break Loose” In China
Danielle Park: “Advised and led by their US trained finance types, China has followed the same hide-your-debts-playbook that brought down Enron, Worldcom and global financial markets in 2001-03, as well as Bear Stearns, Lehman and global markets again in 2007-09. The difference this time is the unprecedented scope and scale: China is a whole country, the world’s largest population and the second largest economy. The main benefactor of credit-fueled cash flows from the west over the past 15 years, China forgot that credit expansion is a finite cycle and spent like a drunken sailor throughout. Now it’s left holding a leverage on leverage bomb of unprecedented proportions, with sketchy debts oozing out of every crack and crevice .. We should expect that the liquidity and solvency problems there will be felt though highly connected world markets. This is a necessary part of the great cleanse and reset so needed to reboot asset prices and the economy. So, long-run positive, but short to medium term dangerous for capital.”
Kyle Bass: “Some of the longer-term assets aren’t doing very well .. As soon as liabilities have problems – meaning the depositors decide to not roll their holdings – all hell breaks loose.” .. The wealth management products, or WMPs, have swelled to $4 trillion in assets in the last few years, he says., on a $34 trillion banking system .. “Think about this – in the US, our asset-liability mismatch at the peak of our subprime greatness was around 2%! … China’s mismatch is more than 10% of the system.”
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.
05/03/2017 - The Roundtable Insight: Megan Greene On The Current Status Of The European Economy
Tonight’s podcast includes some insight on Europe’s current economic and political states, and how it translates into current economic trends. We have seen the rise of the anti-European and anti-EU mindset all across Europe. This movement not only impacts European politics, but the entire state of the European economy as well, and has direct influence over Western economics in terms of trade agreements, investments in the European market, and the value of our currencies.
Megan Greene, an accomplished economist with a specialty in European economics, explores what Europe needs at the moment and what is most likely coming up in the European economy.
FRA: Hi, welcome to FRA’s Roundtable Insight. Today we have Megan Greene. She is [the] Managing Director and Chief Economist of Manulife Asset Management. She’s responsible for forecasting global macroeconomic and financial trends, and analyzing the potential opportunities and impacts to support the firm’s investment teams around the world. Formally, she was with Roubini Global Economics, where she had a focus on the Eurozone, and she also holds a Masters [degree] in European politics from Oxford University. So, quite a focus on Europe and we would like to explore Megan’s thoughts on Europe. Welcome, Megan.
Megan Greene: Thanks for having me.
FRA: What are your thoughts, what’s happening in Europe? The political situation there, the rise of anti-Europe parties, how that all affects what’s happening as far as the economics and the financial situation of the Eurozone and the European central bank?
Megan: Sure. So I would say, first of all, that the far greatest risk coming out of Europe for this year, probably the next year (too) is the political risk. Europe has an incredibly busy election schedule over the next year-the next election coming up is actually in France. It’s coming up quite soon; their two-round presidential election. It seemed at first very likely that it would be a runoff in the second round between the right-wing populist national front’s candidate, Marine Le Pen, and the independent candidate Emmanuel Macron. But more recently, actually, two other candidates had a lot of momentum and those are the right candidate Fillon, and the communist candidate Melenchon. This matters in large part because Le Pen and Melenchon both are running on a platform that’s very anti-European, very populist, and both have said in some form that they would like to renegotiate France’s relationship with the Eurozone, and potentially hold a referendum to see if France might want to leave the Eurozone. There is a chance that the second round of that election could be a “Le Pen, Melenchon” runoff, and that would be a market event for sure; it would be dramatic. More likely is still a “Le Pen, Macron” runoff, and it does seem most likely that Macron will end up winning. Even if Le Pen, the most anti-European candidate won, there’s a parliamentary election at the end of this year, and it seems very unlikely that her party would do well in those elections. It does seem that parliament would still be controlled, in which case it might be very difficult for Le Pen to actually have a referendum on France’s membership in the Eurozone. Even if they had a referendum, actually, the most recent opinion polls suggest that the French would vote to keep France in the Euro(zone). I don’t think that it’s very likely that, first of all, Le Pen would win, but secondly, that even if she did, that France would go ahead and exit the Eurozone. It’s a very low probability event, but such a high impact event-it’s something worth looking at.
The much bigger risk of a Le Pen win isn’t actually exiting the Eurozone, it’s just a series of bank runs starting in France but maybe spreading a bit wider. That would obviously have implications on the markets. Even bigger as a risk for the Eurozone than the French elections, I think, are the Italian elections which are due to be held by March of next year. It’s possible they might be held early…but probably not before the fourth quarter of this year. In any case, according to most opinion polls, the populist, anti-European five star movement isn’t in the top slot. It’s unlikely in an Italian election that the five star movement would actually win in absolute majority. They would have to find coalition partners and that won’t be easy given their ideology and the ideologies of the other political parties in Italy that might want to form a coalition with them. So even if the five star movement were to win the Italian elections, it’s not totally clear if they would make it into government. But if they did make it into government, they said that they too would like to have a referendum on Italy’s membership of the Euro(zone). Unlike in France, Europe is much less popular in Italy so it does seem plausible that if there were a referendum in Italy that Italy could end up choosing to leave the Euro(zone), and that would be dramatic-to have Europe’s third-largest country leaving the European project, that could really pose an existential challenge for the Eurozone. So those are two countries that could end up following in the footsteps of the UK in terms of leaving the European project.
Scotland is another country that could end up, actually, leaving the EU in its attempt to leave the UK. Its hopes given, of course, how pro-European Scotland is would be to rejoin the EU but they might end up having to get in the back of the line. That’s one concern. And then of course one issue that has been at the forefront of European risks since the beginning of the crisis, the global financial crisis, is Greece. Greece hasn’t been solved by any stretch of the imagination, it’s just garnering a lot less attention from the markets these days. Whereas before, the real concern was that there would be a stand-off between Greece and its creditors, and Greece would end up leaving the Eurozone almost by accident. Now, it’s very different. It’s very clear that the Greek government will just end up caving every time its creditors ask new reforms of this government, and just recently they came up with a deal for another round of funding to ensure the government is signed up to what the creditors demanded. The problem now is that creditors themselves can’t agree on what they want, so the IMF would really like to see Greece have debt relief, which is necessary in my view. The other creditors, particularly Germany, don’t want to commit to debt relief now, particularly not in advance of the German elections coming up. If they don’t come up with a solution, the IMF could end up leaving the bailout program in which case there is a real risk that Germany, and more recently the Netherlands, has said that they wouldn’t participate without the participation of the IMF. If these countries don’t participate, then the bailout program would fall apart. Greece would have no means for funding, and could end up leaving the Eurozone, not because it was specific strategy on the part of the government or even on the part of the creditors, but again, almost by accident. There is a risk that you could have some EU and Eurozone breakup, even though the risk isn’t as high as it once was.
In terms of the actual economy in the Eurozone, in aggregate, I think that the Eurozone is roughly a 1.5% growth economy, but again that’s in aggregate so it masks the big divisions between the core countries like Germany and the weaker countries like Greece and Portugal, and Italy as well. Data has been looking better; much as in the US, much of the confidence data has looked good, a lot of the soft data, the PMI data for example, has been really improving. It’s the hard data that’s not looking as great so things like industrial production, new factory orders, that hasn’t really come in yet. Lending is actually expanding, so we might expect some improvement of the hard data such that there is a sustainable economic recovery in the Eurozone. That recovery can only really be so strong as long as the approach remains that if all the weaker countries doing all the adjusting and all the core countries just carrying along as they always had. Evidence in that is Germany’s current account surplus which continues to hit new record highs every month. Germany and other core countries aren’t adjusting at all and the weaker countries continue to cut their wages and pensions. In Greece’s case at least, we haven’t seen much wager-pinching growth, and they continue to try to increase their national savings as a percentage of their GDP to match Germany’s again, and that just means there’s not a lot of consumption or investment happening in the weaker parts of the Eurozone. That really cuts off any avenue towards domestic demand, it means that most of the Eurozone is relying on exports for growth. There is an economic recovery happening in the Eurozone, it’s just muted by the fact that it’s all the weaker countries doing all the adjusting and none of the stronger ones. I think that we can expect that to continue in the absence of any major policy change, so I think the Eurozone in aggregate will continue to be a 2% growth economy.
In terms of what the ECB is doing, the ECB would love to normalize monetary policy but it’s just taking them a while because the recovery is so weak and because inflation isn’t coming in. I think that the ECB will probably announce a tapering of their QE program at the end of this year, and at the end of next year, they might have to wait until the beginning of the following year. The ECB is very much going in the footsteps of the US in trying to very, very gradually normalize monetary policy. I think that if some of these political risks I mentioned materialize, then it’ll be incredibly difficult for the ECB to hike rates in to that for sure. There are other risks, in the banking sector for example, particularly in Italy, that might make it really difficult for the ECB to tighten monetary policy.
FRA: You mentioned earlier on bank runs, could those be initiated from a catalyst of something other than one of the countries pulling out, like Italy or France, pulling out of the European monetary union? Would it be other factors potentially, in terms of the bank runs?
Megan: Yeah, you could see bank runs happening as a result of financial instability in in of itself. Particularly in Italy, there are a lot of banks that are still requiring recapitalization, non-performing loans in Italian banks. Portuguese, Irish, Greek, even French banks are really elevated and it used to be that they would work at their non-performing loans by creating bad banks because they can’t create the same bad bank that they used to be able to. That’s no longer a solution which means that none of these countries really know what to do with the massive heap of MPL’s that are sitting on their balance sheets, and so if you see those non-performing loans start to be realized and turned into defaults you could end up having a real scare.
The Eurozone has made some progress on institutional change in terms of creating a banking union, but they haven’t gotten all the way there yet so rather than saying they have a banking union I’d say they have a loose banking federation. There’s still no risk sharing in terms of banks in Europe so that means that not only is there not a common deposit guarantee in Europe, but I do think that if any country that has a big bank that really needs to be wound down. Now, governments aren’t allowed to step in and bail them out, and I think that wounding down a big bank is absolutely politically toxic for any leader so faced with that choice, most leaders would just break the rules and completely undermine the banking union and that in itself could spark off bank runs as well.
FRA: Do you see the potential for a move towards a fiscal union in terms of creating an actual European bond or just conducting fiscal policy across the entire Eurozone?
Megan: I think part of a fiscal union is needed, though I don’t think we need, for example, a common fiscal authority. I think we do need to see asset class in Europe that is liquid and deep enough to withstand any sudden stops, so I do think they need to create mutualized debt like a Eurobond. But then actually I think that the private sector can go ahead and step in rather than having a fiscal authority. If we had a capital markets union, I think that that could go a long way towards achieving what a public fiscal union could achieve and I think that’s necessary because I just don’t think that there’s any political will either in the core or in the periphery to actually have a fiscal authority and have everyone sign up to the same rules. So I think that it’s unlikely and would be a waste of political capital to try to create a fiscal authority.
One way of explaining what I think that the Eurozone needs is a mutualized debt so a Eurobond, but then in terms of the private markets governing cross border investments and exposure, it’s a bit like our credit card companies like VISA and MasterCard, that’s mutualized debt with no real central authority to manage it. There is some precedent for, I think it’s possible, but I don’t think it’s possible to see a full fiscal union with a single fiscal authority. Unfortunately, Eurobonds aren’t at all on the agenda now. It would require several more acute crises, and existential crises in the Eurozone to get the core members and the peripheral members to sign up for it, but particularly Germany because Germany doesn’t really see why they should accept other countries’ risk, and they’re worries about creating a moral hazard by going ahead and mutualizing bonds. So I think it’s very unlikely, but I do think that we need Eurobonds eventually for the European project to stay together.
FRA: And actually just recently this week US president Donald Trump made some comments on the dollar that it was too strong and so there was some movement on the dollar going lower; pushing the euro higher. Could that be a trend, and if that were to happen, if the euro would strengthen, could that cause global havoc and the countries’ struggle on their economy and debt burden?
Megan: Well, I think that’s its really unlikely that the general trend will be that the dollar weakens, I think that it’s much more likely that the dollar ends up a bit stronger even though the US president is trying to talk down the dollar at the moment. It’s really hard to conceive of a situation in which it’s in the US government’s best interest to see the dollar depreciate. The only scenario I can really think of is if there were huge problems in other economies, and the US fed opened up slop lines with other central banks to essentially fund their QE program so the Bank of Japan and the ECB, and the Bank of England. I think that’s really unlikely. We have seen the dollar weaken a little bit but the general trend is for the dollar to strengthen and that’s relative to a basket of currencies but that includes the Euro. I think generally the Euro will be weaker. Also, we will have movements, depends on your time frame of course, but I think if the French election results in Macron at the helm of government, then I think that the Euro could strengthen off the back of that. But if Le Pen were to win for example, I think the Euro would weaken off the back if that, so it will depend to some degree of political developments and in the long term, I do think that the Euro will probably weaken relative to the dollar. Not so much necessarily because of the factors that mean the Euro should be weak but in large part because of what the US and the fed are doing.
FRA: Given these political developments, do you see Germany continuing to bear the debt of the rest of Europe in terms of transferring its current account surplus to the less fortunate states of the union…or could it be that Germany considers on leaving the Eurozone?
Megan: I think that Germany has really been taking on risk through the target to balance this at the ECB, so the target to imbalances is now at record high, or higher than they were back in 2012, when there were much greater concerns about countries leaving the Eurozone. That’s largely because of Italy, actually, so it’s largely because of German investors pulling out of Italy. Now that only becomes a problem if a country actually leaves the Eurozone and that seems unlikely, I think. It’s certainly not my base case scenario over the next couple of years. Otherwise, Germany isn’t really funding everybody else’s debt, but I do think that there is a discussion about whether it’s really in Germany’s best interests to stay in this project. I think that it definitely is. Germany benefits from an artificially weak currency because it is connected to so many weaker countries, and that’s been really helpful for Germany given that their growth model has been pretty reliant on exports for the past several years so the domestic demand now stand for a slightly larger percentage of GDP than it has in the past, but its only really slightly larger. Germany is still dependent on exports for growth. If Germany were to go ahead and leave the Eurozone, it would probably see its currency appreciate massively and that would completely undermine its entire growth model so it would have to come up with an entire new model and that’s not really in Germany’s best interests so I do think it’s in Germany’s best interests to stick in the Eurozone.
I will say that I’ve spent a lot of time talking to the EU governments and my argument with them has always been that Germany always had a very high national savings rate, and so they’ve had a really low national investment rate, which hasn’t really served them well. I mean they’ve invested in Greek government bonds, and Portuguese retail, and Irish property, which (those investments) turned out to be really bad investments. It also means that German investment domestically has been really low, so Germany suffers from chronic underinvestment and as a result their roads are in bad shape, their bridges are in bad shape, so my argument has always been that maybe the German government should encourage domestic investment and that would boost Germany’s growth, and that would also trickle out and help the growth of the rest of the Eurozone. The German government’s response to me every time is to ask me why they should care about growth, which as an economist you can imagine, seems like a weird question but according to them, they don’t have incredibly high growth but they have a really high standard of living and very low unemployment. In their view, growth is kind of an Anglo-Saxon obsession and they’re doing just fine. So this approach to growth in Germany, and this approach in the entire region whereby Germany does the same as its always done and everybody else tries to look more like Germany, I think that’s here to stay for a number of years.
FRA: Interesting. And what are your thoughts on the UK and Brexit, how that’s playing out, and could there be any changes between now and the next two years after they receive their Article 50 notice like a few weeks ago?
Megan: I think there are still some that are hoping that the UK will take back triggering Article 50. I spoke with the guy who wrote Article 50, John Kerr, and he says you can and he intentionally left wiggle room in it. I think it’s very unlikely that the government will do that given that they’re acting on a mandate that was given to them by the people. Also if they were to go ahead and revoke it, they probably would have already damaged their relations with the rest of the EU given that they’re negotiating to leave.
I did a lot of consulting on Brexit and testified in the House of Lords, and before Brexit I would’ve said that the worst possible option was the UK going for a so-called “hard Brexit”, which means leaving the single market all together. Now, I think that’s no longer the worst option, I actually think it’s the most likely option. The prime minister has said that’s what they’ll pursue. I think there’s a worse option out there which is that after two years of negotiating, both their divorce from the EU and their new relationship with the EU, they actually don’t have any agreement on what their new relationship with the EU should be, at which point the UK would just kind of stumble out of the EU. They would have to rely on the WTO for their trade relationships. The problem with that is that right now the WTO has relatively robust rules and some credibility, but in two years from now it actually might not, so, you could conceive for example the US government trying to implement a border adjustment tax which is most likely illegal according to WTO rules. Having the WTO turn around and say, “Well, that’s illegal you can’t do that” and the US administration could just reply by saying well, “We don’t care anyhow”. That would completely declaw the WTO. That’s just one example and there are a number of potential trade policies coming out of the US in particular that could really undermine the WTO, so the UK’s plan is to actually rely on WTO rules so that at the end of two years the WTO might be severely undermined by then, in which case, that’s a terrible plan for the UK. I think that’s the worst scenario.
The only way, I think, that the UK could actually have a deal at the end of two years is if they cut and paste it from somewhere else. Two years is not a lot of time to negotiate their divorce from the EU first, and of course not much will get done before the French elections, and then the German elections in September, and then the Italian elections in March, so, there will have to be breaks in negotiations. They’ll have to negotiate the divorce and then they’ll have to negotiate an entirely new relationship-that’s a lot to do in two years. If they can cut and paste a new relationship from somewhere else, they might be able to pull it off. One way to do that is to copy the deal that Canada and the EU struck: the Ceta deal. The problem with that is that it doesn’t include anything on services and more than half of the UK’s economy is services so they’d have to write an entire new chapter to cover services, and that in itself could take two years. That’s problematic. There’s one other option that’s currently being discussed behind closed doors in the UK and that’s to copy the deal that the EU just struck with the Ukraine which does include services so that is really feasible. It is mainly being talked about behind closed doors because the UK doesn’t want anyone to realize that they’re trying to follow the Ukraine as a model. That is one option but it’s too early to say whether really is possible or not but it’s something that they’re looking at.
FRA: Finally, just wondering your thoughts on the investment environment, what this all means, not mentioning any specific companies or securities, any thoughts on asset classes or types of investments that could make sense in Europe given all the scenarios, assuming there could be some investments that could make sense regardless of all the different scenarios like whether Germany stays, whether they pull out and different countries leaving, the effect of political parties getting elected. And would it make sense for Europe in general now from a contrarian perspective? Perhaps like German corporations or German real estate, if they were to pull out their currency would appreciate, but if they stay in there could be more inflation generated to ease to burden of debt across the Eurozone. Your thoughts?
Megan: German real estate certainly is one potential opportunity but generally I would say given even all the risks that I’ve highlighted particularly the political risks, I think that the most likely scenario over the next year or two is that we go through all these elections and actually in the end we just have the status quo, which would be market-positive. I’m hesitant to get too excited about that because I do think that there are real restraints on the economic recovery in Europe because of the politics as they currently stand, so the status quo means that would continue. Still, I think that would be a risk on development in which case given that you have the ECB continuing to ease now and I think that they’ll continue to maintain accommodative monetary policy going forward, and you have the fed in the US tightening actually, that does means that there might be opportunities and equities in Europe generally so I do think that that is one place that investors could look. In terms of banks in Europe, there are some real problems in terms of the health of bank balance sheets particularly in Italy, Portugal, even France, but banks are incredibly cheap so there might be some valuable investments there. Generally I do think that the valuations for companies in Europe will go up so I would say that European equities are probably a good opportunity now.
FRA: Great. Great insight. How can our listeners learn more about your work?
Megan: You can follow me on twitter, its @economistmeg to not only see what I write myself but to also see my commentary on the latest, greatest in Europe and the rest of the world.
FRA: Great, thank you very much for being on the show and again, thank you.
Megan: Pleasure, thanks for having me.
Abstract by Tatiana Paskovataia, tatiana-p28@hotmail.com
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.
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.
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.
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.”
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.
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.”
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.
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.”
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.
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
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.
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.”
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.
04/28/2017 - Dr. Albert Friedberg: Bullish On Risk Assets, Federal Reserve Will Only Shrink Its Balance Sheet When It Sees Accelerating Inflation
“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).”
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.
05/15/2017 - Martin Armstrong: The Coming Central Bank Crisis
