FINANCIAL REPRESSION: How to Lift Markets by Stealth Lowering of the Regulatory Risk Hurdles

There are many ways to raise market prices but none is easier than relaxing regulatory rules originally enacted to protect the unsophisticated and unsuspecting.  Historically, events associated with financial crisis have normally resulted in new regulations intended to avoid another similar crisis.  Today the reverse is practiced to keep markets rising and avoid the unwinding of excessive and pyramiding debt leverage.

Let’s examine four major regulatory pillars that rose from the ashes of financial destruction and which today, as part of Financial Repression,  have been removed or minimally “neutered” by regulators.

1. US Anti Trust Laws – The 1890 Sherman Act
2. US Bank Reserve Requirements –
3. US Separation of Banks and Financial Institutions – The Glass-Steagall Act
4.  Mark-To-Market Derivative Valuations

You will notice in the graph below that all four regulatory reversals were changed which resulted in rising profits for the Financial Markets and Wall Street, while Main Street and the US Middle Class was left in the wake.

US ANTI TRUST LAWS – The Sherman Act

Approved July 2, 1890, The Sherman Anti-Trust Act was the first Federal act that outlawed monopolistic business practices. The Sherman Antitrust Act of 1890 was the first measure passed by the U.S. Congress to prohibit trusts. At the time individuals like John D Rockefeller and his Standard Oil corporation had taken control of industries and had almost uncontrollable power over pricing, potential competitors and politicians.

Up until Ronald Reagan took control of the White House these laws were rigorously enforced as witnessed in the late 70’s by the breakup of AT&T into  the Regional RBOCS and even the decade long attempt by the justice department to breakup the then dominant technology leader, IBM. Major corporations were under fire until the early 80’s when a more relaxed lassie-fare attitude crept in with pro-corporate sentiment. That is when the graph above begins and when the stage was set for what has resulted in blatant Crony Capitalism today dominant players controlling the Media, Military-Industrial Complex, Big Pharma, The Security-Surveillance Complex etc.

US BANK RESERVE REQUIREMENTS  – Removal of Reserve Requirements for MM, CD, Time Deposits & Foreign Deposits. 

The Federal Reserve requires banks and other depository institutions to hold a minimum level of reserves against their liabilities. Currently, the marginal reserve requirement equals 10 percent of a bank’s demand and checking deposits. A money market account is a savings account that allows a limited number of checks to be drawn from the account each month and just after the 1987 Financial Crisis the regulatory banking reserve requirements for Money Market accounts was summarily removed. Then effective 27 December 1990, a liquidity ratio of zero was applied to CDs and time deposits, owned by entities other than households, and the Euro currency liabilities of depository institutions. Deposits owned by foreign corporations or governments are now currently not subject to reserve requirements.

These are profound changes to the banking industry which fostered major increases in leveraged lending.

SEPARATION OF BANKS & FINANCIAL INSTITUTIONS – The Glass-Steagall Act

The Glass-Steagall Act, also known as the Banking Act of 1933 (48 Stat. 162), was passed by Congress in 1933 and prohibits commercial banks from engaging in the investment business. It was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression.

The Gramm–Leach–Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, is an act of the 106th United States Congress (1999–2001). It repealed part of the Glass–Steagall Act of 1933, removing barriers in the market among banking companies, securities companies and insurance companies that prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company. With the bipartisan passage of the Gramm–Leach–Bliley Act, commercial banks, investment banks, securities firms, and insurance companies were allowed to consolidate. Furthermore, it failed to give to the SEC or any other financial regulatory agency the authority to regulate large investment bank holding companies. The legislation was signed into law by President Bill Clinton.

A year before the law was passed, Citicorp, a commercial bank holding company, merged with the insurance company Travelers Group in 1998 to form the conglomerate Citigroup, a corporation combining banking, securities and insurance services under a house of brands that included Citibank, Smith Barney, Primerica, and Travelers. Because this merger was a violation of the Glass–Steagall Act and the Bank Holding Company Act of 1956, the Federal Reserve gave Citigroup a temporary waiver in September 1998. Less than a year later, GLBA was passed to legalize these types of mergers on a permanent basis. The law also repealed Glass–Steagall’s conflict of interest prohibitions “against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank”.

This was the official  start to anything goes in the banking industry until it imploded in 2007-2008 with the financial crisis predicated on banks no longer owning the loans it peddled and made more money on its “prop desks’ which Dodd-Franks subsequently attempted to stop.

MARKET-TO-MARKET – Derivative Valuations

Mark-to-market or fair value accounting refers to accounting for the “fair value” of an asset or liability based on the current market price, or for similar assets and liabilities, or based on another objectively assessed “fair” value. It was done away with during the financial crisis on a “temporary crisis basis”.  It has never been reinstated.

Fair value accounting has been a part of Generally Accepted Accounting Principles (GAAP) in the United States since the early 1990s, and is now regarded as the “gold standard” in some circles. Mark-to-market accounting can change values on the balance sheet as market conditions change. In contrast, historical cost accounting, based on the past transactions, is simpler, more stable, and easier to perform, but does not represent current market value. It summarizes past transactions instead. Mark-to-market accounting can become volatile if market prices fluctuate greatly or change unpredictably. Buyers and sellers may claim a number of specific instances when this is the case, including inability to value the future income and expenses both accurately and collectively, often due to unreliable information, or over-optimistic or over-pessimistic expectations of cash flow and earnings.

It it any wonder that Wall Street financial asset “pushers” never want to see it again!

THE OTHER SIDE OF THE COIN – Strangling the Competition

We could have cited other examples of how relaxed regulatory requirements have been a boon for Wall Street, Banks and Financial Intermediaries. We would be amiss not to point out that in fact the use of regulatory laws (versus removing them), in the form of “Regulatory Arbitrage” has become a mainstay for corporations to stymie competition andn “build mots” around their business models. This is done through massive lobbying efforts as a corporate strategic imperative.

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

Financial repression, misinformation increasingly the principal tools of central banks

SOURCE: FINANCIAL POST: MidasLetter | August 22, 2016

Wading through the muddle of the United States Federal Reserve Bank’s minutes from the last Federal Open Market Committee meeting released on Wednesday, August 18, 2016, is not light summer reading. The text is rife with windy, repetitious, looping jargon that requires reading and re-reading.

Financial repression, or the practice by governments and their agents of reducing government debt by reducing interest rates paid to savers and devaluing currency over longer terms essentially shifts the burden of repayment onto the backs of the public. First described by economists Carmen Reinhart et al in a paper entitled “The Liquidation of Government Debt“, financial repression is described thus: “Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks.”

That, coupled with confusing and excessively verbose and conflicting media statements, serve to bamboozle the investor marketplace into a state of suspended animation, where bold moves are neutered and throttled capital velocity ensure becalmed markets.

The practice has taken on new and significant meaning for individual investors, since the advent of quantitative easing and “negatively yielding” government bonds, which are now seen as threats to overall financial stability. The proliferation of new capital means competition for assets in markets that are meant to drive prices higher, which massively distorts asset valuations overall.

In the modern context, evidence of collusion among the G7 countries in repressing financially their own captive domestic audiences is visible in the communications originated by government institutions and parroted by mainstream financial media outlets.

After collectively pumping US$150 billion into the world inventory of government-fabricated capital in the last quarter, it appears the mood has suddenly shifted, and a consensus arrived at seeking to assuage the concerns of investors in sovereign debt and associated derivatives who are increasingly worried about debasement and the spread of “negative yields.” (Their term for “investment fees.”)

A series of press releases and mainstream news articles last week was remarkable for the apparently coincidental shift in tone and accidental alignment on messaging.

The European Central Bank, for example, issued a communique stating that the Brexit “level of stress had been contained, with no evidence of disorderly price movements.” The bank further opined that “fiscal policy stance was expected to be neutral in 2017, after being slightly expansionary in 2016, and also highlighted the need for full and consistent implementation of the rules of the Stability and Growth Pact, both over time and across countries, in order to maintain confidence in the fiscal framework.”

Wading through the muddle of the United States Federal Reserve Bank’s minutes from the last Federal Open Market Committee meeting released on Wednesday, August 18, 2016, is not light summer reading. The text is rife with windy, repetitious, looping jargon that requires reading and re-reading to ascertain its intended meaning. One might go so far as to surmise that it’s designed not to be read.

A distillation of the intended meaning is thus akin to the interpretation of hieroglyphics or cave paintings from a lost civilization.

So it’s no surprise then that media sources stuck with the same limitations arrive at disparate conclusions as to what information is contained in the minutes.

The Wall Street Journal, for example, discerned the insinuation for a potential interest rate hike in the fall. “The Fed’s Wednesday release of minutes from its July 26-27 meeting suggested a rate increase is a possibility as early as September, but that the Fed won’t commit to moving until a stronger consensus can be reached about the outlook for growth, hiring and inflation.”

Bloomberg, meanwhile, concluded that January 2018 is the soonest that a rake hike is possible.

Confused? You’re supposed to be. How else to quietly liquidate the unprecedented massive government obligations into the public interest while pretending that all is well?

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

“Financial repression is a historically continuous process. Once governments are no longer able to finance their expenses with the means at their disposal, they always avail themselves of the financial repression toolbox. In view of the intractability of today’s situation, in which mountains of debt have long grown beyond the threshold of comprehensibility and structural deficits are obvious, savers have to be cautious. What can investors do? They should acknowledge that their wealth is under threat and obtain information on potential alternatives.”
– Ronald-Peter Stoeferle
LINK HERE to the article

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

Overlooked at Jackson Hole – Kansas City Federal Reserve paper: “With these advantages in mind, the paper describes three methods by which the zero bound on interest rate policy can be unencumbered completely. The three methods in turn would: i) abolish paper currency; ii) introduce a market determined flexible deposit price of paper currency; and iii) provide electronic currency (to pay or charge interest) at par with deposits, with or without the provision of paper currency as in (ii) above. Each method is assessed for its effectiveness, technological requirements, institutional modifications, potential for expedited implementation, and acceptability with the public at large.”
LINK HERE to the paper

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

FRA Co-founder Gordon T. Long discusses with John Rubino

John Rubino is author of Clean Money: Picking Winners in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, January 2008), and author of How to Profit from the Coming Real Estate Bust (Rodale, 2003). After earning a Finance MBA from New York University, he spent the 1980’s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.

GOVERNMENT INTERFERENCE

“Governments are acting like they don’t think they can handle a garden variety equities bear market anymore.”

You’re seeing central banks all of a sudden become among the biggest buyers of equities in the world. It’s one thing to buy bonds and intervene in the interest rate markets, but another to buy equity. This is governments buying the industrial capacity of the world and from an Austrian Economics point of view, this is catastrophically dangerous.

“If the central banks of the world own all the major equities, then they get to direct investment by those corporations, and that’s a recipe for something that isn’t capitalism anymore”.

“Market based economies are the only method of organizing a society that’s been proven to work, to generate progress, and pull people out of poverty, and we’re actively doing away with that.”

HEDGE FUND PROBLEMS

If you look at the hedge funds, you get a sense of how distorted our markets are. They’ve been under-performing, for example, the S&P 500. You could buy an ETF that charges next to nothing, and do better than the average hedge fund. You’re seeing big institutions pull money out of hedge funds and start buying ETFs and a lot of brand name hedge funds are folding or scaling back, and this is a really difficult time in that market. It’s not going to get better any time soon because governments are distorting markets more and more progressively by buying stocks indiscriminately, or forcing interest rates down to artificially low levels, and generally messing around with the price signalling of free markets.

A lot of the heavy hitters are shorting everything in sight and a big part of the reason is that they don’t trust the markets anymore. The people who have been worried about the market for years now have some high powered money on their side and assuming they’re right again, things are going to get interesting in the coming year.

Besides private placements, hedge fund money is also flowing into emerging markets stocks and bonds, and that’s a direct result of these developed markets being distorted by government actions.

CHANGES IN THE EQUITY MARKET 

Corporate share repurchases involve hundreds of billions of dollars, but the flow into equities is slowing down dramatically. Corporations have hit the point where they can’t borrow anymore, and they’re starting to be punished for borrowing so much money to buy back their stocks. Buyback announcements are going down at the same time that corporate equity issuance is going up, for the first time since 2010 or so. At the same time, corporate insiders are selling stock at a rapid pace. These are things that usually precede bear markets or at least dramatic corrections in share prices.

“Somewhere in the US government there’s an agency that’s buying stocks aggressively right now. They just don’t tell us because they lie to us in ways some other central banks don’t lie to their people.”

On the one hand you have everything that relates to market valuations and rational behavior on the part of private sector actors pointing to a bear market, but you also have governments and central banks with effectively unlimited funds buying aggressively. That along with terrified foreign capital flowing into the US are two things, that if you are shorting the US market, you’ve got to be worried about. There are big forces contending, but we’ve never been here so we can’t say anything with certainty except that chaos is the inevitable result.

This is an incredibly hard time to manage money because it’s not about the fundamentals anymore. If those are your only tools, then you’ve got a real problem.

“I don’t envy professional money managers and I think that for most of them, this is going to end really badly… It’s highly unlikely that you’re going to make a perfect set of decisions when you’re still learning about this new world.”

THE MARKET IS NO LONGER A MARKET

“There’s not a single financial market that isn’t manipulated in some way by someone.”

There’s no actual free market that you can point to and participate in. This goes on until these guys run out of ammunition, when we don’t accept these fictitious fiat currencies as having some intrinsic value. As long as we’re willing to be fooled in that way, then governments have ammunition to continue to manipulate the markets. This could go on for a while, or blow up overnight; there’s no way to tell the timing.

People are starting to pick up on the fact that governments are trying to devalue their currencies, but it’s making more and more sense for people to move some of their fiat currencies into things that governments can’t make more of. That’s been gold and silver, lately. The gold and silver miners have been reporting phenomenally good numbers. You’re seeing precious metal miners report really low cost numbers and dramatically higher profit numbers, and they are almost alone in having this kind of a trend.  It doesn’t mean they won’t have a big correction going forward, but it does mean that there are suddenly healthy businesses, and that’s a good place to be when you’re worried about the health of rest of the world.

We are now printing over $200B a month between the ECB, the Bank of Japan, and the Bank of England lately. What they’re doing is they’re rotating it. 95% of the world’s currencies are Bank of Japan, the Sterling, the Euro, and the Dollar, and if you can rotate them around there’s nowhere to run, other than hard currencies and outside that gain. Its called the Bernanke Doctrine of “Enrich-Thy-Neighbor”.

Almost everything in Keynesian economics is short term with terrible long term consequences. We’re living in previous Keynesian economists’ long term now and we’re suffering the consequences of previous policy mistakes. The guys in charge now are making bigger and bigger policy mistakes that we a few years from now, or our kids, will have to deal with.

“The idea that tweaking systems in the short run to keep it in a fictional equilibrium is all you need to do if you’re a government running an economy, is profoundly mistaken.”

Abstract by: Annie Zhou a2zhou@ryerson.ca

Video Editing by: Min Jung Kim http://minjung.kim@ryerson.ca

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.

Charles Hugh Smith*: “The only possible output of extreme wealth inequality is social and economic instability. What happens when extremes of wealth/power inequality have been reached? Depressions, revolutions, wars and the dissolution of empires. Extremes of wealth/power inequality generate political, social and economic instability which then destabilize the regime. Ironically, elites try to solve this dilemma by becoming more autocratic and repressing whatever factions they see as the source of instability. The irony is they themselves are the source of instability. The crowds of enraged citizens are merely manifestations of an unstable, brittle system that is cracking under the strains of extreme wealth/power inequality .. Unlimited policing and financial repression will unleash a destabilizing tsunami that will threaten the integrity of the Empire and the Deep State itself.”
link here to the essay

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

“‘You can pay me now . . .” counsels the sensible mechanic promoting Fram oil filters in the old-time advert, ‘ . . . Or pay me later,” interjects his pricier associate, as he tinkers with the broken engine of a customer who has ignored the advice. Central bankers should take heed. Dirty oil and artificially priced financial markets have much in common. Both can destroy engines eventually — and in the case of central banking it is the motor of the real economy that is at risk .. A negative effect of zero lower bound yields and interest rates can be observed. Investment — an important source of productivity growth — has never returned to the norms seen before the global crisis .. Corporations are using an increasing amount of cash flow to buy back shares as opposed to investing for growth. In the U.S., more than $500bn is spent annually to boost investors’ incomes rather than future profits. Money is diverted from the real economy to financial asset holders — where in many cases it lies fallow, earning little return if invested in government bonds and money markets .. Historic business models with long-term liabilities — such as insurance companies and pension funds — are increasingly at risk because they have assumed higher future returns and will be left holding the short straw if yields and rates fail to return to more normal levels. The profits of these businesses will be affected as will the real economy. Job cuts, higher insurance premiums, reduced pension benefits and increasing defaults: all have the potential to turn a once virtuous circle into a cycle of stagnation and decay. Central bankers are late to this logical conclusion. They, like most individuals, would prefer to pay later than now. But, by pursuing a policy of more QE and lower and lower yields, they may find that the global economic engine will sputter instead of speed up.”
– Bill Gross*
LINK HERE to the op-ed
LINK HERE to an alternative source

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

FRA Co-founder Gordon T. Long discusses with Catherine Austin-Fitts about the future of the global economy, along with providing insight on recent events and potential expansion into space.

GLOBAL DEBT FOR EQUITY GAIN

It’s equity for debt swap. Since WW2 we’ve been on the debt-growth model, growing the economy by issuing more government debt.

“We have literally evolved an infrastructure and a leadership of people who don’t understand or have never participated in markets.”

They don’t understand market economies; they don’t understand understand command and control economies. We’ve literally been living off debt growth, and that debt growth is slowing. Part of the challenge of being in a debt-based economy is that people get out of alignment. There’s no better example than what’s happening with student loans. We’re literally watching an entire industry make more money off their borrowers’ failure than their borrowers’ success.

When you’re integrating very complex equity at fantastic speeds, equity builds a much more aligned model between the parties. We’re definitely coming into a debt-for-equity swap worldwide.

A PERIOD OF INSTITUTIONAL REFORM: WHO LEADS?

We have two challenges: the leadership we developed over the last 50-70 years don’t know how to work in a world where capital is dear and you have to optimize, particularly fundamental economics. The other problem is that there are two ways to do an equity for debt swap: one is on a managed process where you realign bottom up, the other is where you write everything down.

“Are we going to crash out the equity markets or are we going to foreclose and bankrupt everybody? There’s two ways to go.”

THOUGHTS ON BREXIT

“I think one of the reasons that they wanted to get out is in fact not to get away from Germany and France, but to get away from the US and US domination in Europe.”

England is very concerned about where the United States will go if it continues to push the interpolar model, particularly if it continues to push a new cold war with Russia. They want to make sure that as that process pushes out and we switch from a unipolar to a multipolar world that they are in control of British policy and can’t be roped or tricked into anything.

“If you look at how the Americans have managed their financial system in the last three decades… the Americans are basically developing a brand of organized crime.”

Asia and China are also becoming more important to the Commonwealth, and they’re finding themselves in too many conflicts of interest positions between what the US wants to do and what they can do globally through the Commonwealth. Their relationship with China is very old, very long, and very deep. They basically own and control and run the offshore payments in Asia.

GEOPOLITICS: 3RD QUARTER

We’re going through a long term rebalancing of the relationship between China and the United States. For two decades China has been building its manufacturing capacity and economy by taking Chinese savings and lending that to the US, which would use it to hand out government cheques that would be used to buy Chinese goods. Now the reality is that China needs to diversify away from that, and they’re using their economic progress to finance other areas around the world. Now they’re building their own consumer economy.

“We’re also watching tremendous concern because much of the push and growth in the economy comes from Asia. If China slows down, what’s that going to do to the global economy?”

There are tremendous issues in productivity. Real productivity growth is slowing down in the G7 countries and globally. Asian per capita incomes are merging towards the G7 per capita incomes. If you take a slowing productivity growth along with a slowing increase in the labour pool, you’re not watching the kind of inflationary growth we’ve had for the last thirty years. The problem the establishment has is the way they have really radical productivity growth is through technology, which is highly inflationary.

“The more they implement things that give them productivity growth the more deflation they get. And that really conflicts with the fact that they want to continue siphoning off huge amounts of money.”

It’s one of the reasons you’re seeing more and more push for invasive control.

SPACE-BASED ECONOMY

There is a huge amount of money going into “underground base infrastructure” and evidence that we took the space program dark. There is a tremendous emphasis on reinvesting in space, both on government and private sides.

“I ultimately came to the opinion that the reason we proceeded with the Europe GAAP was to create sufficient capacity to become a multiplanetary civilization.”

If you’re going to become a multiplanetary civilization, then you really do need to centralize much more in the financial system to umbrella more than one economy. Our entire society is repositioning and making a massive investment in space.

“We have locked up enough technology to really deal economically with whatever we’re dealing with. The problem is if no one trusts the government, if no one trusts the leadership, how’s that going to work?”

BLOCKCHAIN TECHNOLOGY

Mr. Global wants a digital currency, and part of the reason is that if you want to create a global currency, you have to drive transaction costs dramatically down to reach into the emergent markets and the frontier markets.

“I think the blockchain is going to be instrumental to building very low cost digital global transaction systems.”

You can radically reduce a financial system out of very cumbersome payment systems. Before the Brits voted for Brexit, the Bank of England was doing very significant work looking at blockchain and what it could do.

“How it rolls out is anybody’s guess, and I think it’s going to be very organic.”

CLOSING REMARKS

The fundamental issue is that we live on a planet where the government system is unclear and invisible to us, and we’re seeing more and more secrecy related to more and more of the economy. And secrecy leads to privilege and privilege leads to corruption. If you’re in the financial system you’re aware of the extent of the corruption, and there’s no way to heal that problem without transparency.

“The more we can bring transparency to what’s going on, the more we can delete a lot of very expensive and harmful privilege and what it’s doing to our environment and what it’s doing to our economy and what it’s doing to our personal freedoms.”

Abstract by: Annie Zhou a2zhou@ryerson.ca

Video Editor: Min Jung Kim  minjung.kim@ryerson.ca

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.

What is Financial Martial Law and how could it be imposed here in the UK?

SOURCE: MoneyWeek: Tim Price  01/08/2016

“Financial martial law” is a term I first began using privately in the summer of 2015. It was an evolution of another term – financial repression – that was in vogue at the time. Both refer to the steady and what I believe to be the deliberate erosion in your financial freedom of action – perhaps your personal freedom as well. But there was a key difference.

What is Financial Fepression?

Financial repression is an expression that applies mainly to interest rates. Specifically, it’s what happens when governments, through their central banks, keep interest rates artificially low. The policy is good for governments but it’s disastrous for savers and investors.

It’s easy to see why governments would use financial repression. A policy of ultra-low interest rates makes it cheaper for the government to borrow (issue new bonds) or refinance existing debts. The policy of financial repression exists because governments are some of the largest debtors in the world. Ultra-low interest rates via financial repression make large annual deficits and total debts more affordable and politically acceptable.

Financial Martial Law vs Financial Repression

How is financial martial law different from financial repression? As I began to research the topic last year, it became clear to me that financial martial law was potentially a much more powerful and destructive weapon than financial repression. Why? There are three reasons.

First, financial martial law introduces the element of negative interest rates to the discussion. It is one thing to earn very little interest on your savings; it is quite another to face the prospect of having to pay a bank in order to keep your money on deposit. Yet this is exactly what authorities began proposing last year.

Since then, over $11trn in government bonds have been sold at a negative yield. In Switzerland, government bonds of all durations (from short-term to very long-term) have a negative yield. In Germany and Japan, bonds up to ten years in maturity trade with a negative yield. The trend is alarming.

Financial Martial Law in the UK

Here in the UK, the global trend of negative bond yields has dragged ten-year gilt yields below 1%. For pension funds and savers, the vanishing yield on gilts not only makes earning any income harder, it limits your financial freedom of action. That’s why negative rates are a key component of financial martial law: just like a curfew or a roadblock, they restrict the choices you can make with your money if you’re looking for a safe way to earn income.

The second reason financial martial law is far more powerful than financial repression is that it makes it harder for you to get your money out of the bank in a crisis. The precedent here was set in Cyprus in 2013. Certain depositors in Cypriot banks were “bailed in” to help recapitalise the banking sector. In simple terms, they had their savings confiscated.

I hasten to add that under new European Union banking regulations, the “bail in” is now the law of the land. This new law came into effect on 1 January 2016 and is called the Bank Recovery and Resolution Directive (BRRD). It was intended to prevent future taxpayer-funded bailouts of banks like we saw in the last financial crisis.

But what you and other UK citizens may not know is that under the law, you are considered a “creditor” of the bank. While you may enjoy deposit insurance on your savings with the bank, the global financial regulators have taken clear steps to make you pay the next time the banks need more capital (to offset loan losses or bad investments).

While I personally am not a fan of “bail outs” – I believe the free market, not the monetary authorities, should choose winners and losers – BRRD and other regulations like it are part of financial martial law. Quite simply, if you can’t get your money out of the bank when you want – if your money can be taken from you without your permission – then it’s not your money any more. This is financial martial law.

The War on Cash

The third element of financial martial law goes far beyond anything imagined by mere financial repression. It’s the war on cash. I’ve written a whole book on the subject. But in simple terms, it’s the final assault on your financial freedom of action when all other methods fail.

This story unfolds a little more each day. But in principle, the war on cash is about forcing you to use a digital currency that can be taxed, tracked, controlled, and inflated away in order to get you to spend it faster. Only recently has technology made this level of micro-economic coercion possible. But I believe it will be one of the final stages of financial martial law, imposed in the next crisis as a way to prevent a run on banks.

Whether you’re an investor, a saver, a pensioner, or simply a free citizen who believes in the right to earn and spend your money as you see it, financial martial law is a direct threat to your freedom. It’s my goal, in the London Investment Alert, to help you preserve as much of your freedom as you can, through a sound analysis of the current situation and helpful advice on how to position yourself ahead of the introduction of financial martial law. It won’t be easy. But nothing worth doing ever is! Click here to find out more about the London Investment Alert.

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.

It’s Called Financial Repression, and Governments Around the World Are Doing It
Countries are adopting policies to encourage or require savings to be lent cheaply to the government

The Bank of Japan took special measures last week to help its banks access greenbacks. Above, the central bank in Tokyo last month.

SOURCE: Wall Street Journal By JAMES MACKINTOSH Aug. 1, 2016

The money markets are screaming about a global shortage of dollars. Financial stress indicators are flashing yellow. The Bank of Japan on Friday took special measures to help its banks access greenbacks, and interbank borrowing rates for dollars are at the highest level since 2009.

In the 2008 and 2011-12 panics, the money markets acted as a warning of a credit crunch, as trust between lenders and borrowers broke down. This time, though, the signs of stress are a result of something else: The campaign by governments to direct financing to themselves, limiting access by the private sector.

In the U.S., there are legal changes under way in the money markets, which is prompting money to shift from “prime” funds, which buy short-term debt issued by companies, to instead buy short-term debt issued by the U.S. Treasury.

This is merely the latest example of what academics call financial repression, a broad category of government policies adopted to encourage or require savings to be lent cheaply to the government. Repressive policies were the norm in Western markets for decades following World War II. That was until the financial liberalization was begun by Margaret Thatcher in the U.K. and then-President Ronald Reagan in the U.S.

New rules since the Lehman Brothers failure have again tightened the screws on lending to the private sector, while favoring government financing in multiple, complex ways, most obviously through exempting banks from holding capital against government debt.
There are, of course, good reasons for most of the restrictions on the financial sector, including on money funds. Don’t forget that, after Lehman, the U.S. government bailed out the money markets with a guarantee against losses.

The aim of the overhauls is to prevent a repeat of the panic selling of prime funds, akin to a bank run. The most eye-catching rule will stop institutional funds from offering an unchangeable $1 net asset value for each dollar on deposit. This is designed to reduce the psychological impact of “breaking the buck,” or falling below $1, which can lead to widespread withdrawals.

All money funds also will be given an option to restrict or impose a fee on withdrawals when a fund’s easy-to-sell assets are depleted. This makes explicit that in times of stress it might be impossible to access one’s money. This has prompted assets in prime funds to drop below $1 trillion for the first time this century.

So far, so sensible. But there is a wrinkle. Money funds that buy government paper are exempt from the new rules, on the basis that Treasury bills are always easy to sell and there is no risk of default. The rule makers seem to have forgotten the near default in 2010 and the downgrade of the U.S. debt rating, not to mention the accidental failure to pay some Treasury bills in April 1979 due to paperwork backlogs.

The effect of the exemption is that money has poured in to government funds as investors worry that they might not always be able to access cash in prime corporate funds.

Carmen Reinhart, a finance professor at Harvard University’s John F. Kennedy School of Government, says governments across the developed world are interfering more with private flows of cash as their financing needs soar. Directing money to the state at the same time as the central bank keeps interest rates below inflation to boost growth amounts to a subsidy of the government by savers, a hidden tax.

“The way we have revamped regulation has clearly favored government debt,” she said. “The regulation creates the captive audience, and the monetary easing creates the ‘tax.’ ”

Outside Iceland, Greece and Cyprus, the West remains far less financially repressed than in the 1950s or 1960s, when capital controls meant Britons couldn’t take more than £50 ($66) out of the country, while Americans were still forbidden from investing in gold.

But subtle rules funnel more bank and insurance-company savings to government paper, by assuming it is always easy to buy and sell and will never default. Accounting shifts have encouraged corporate pension plans out of volatile stocks and into bonds, and several countries have grabbed assets from state pension funds.

There is hope. Financial repression is on the rise, but savers still can avoid it. Prime money-market funds might look less attractive under the new rules, but the economic reality of what they own remains unchanged, as do the risks. Just because a fund can now suspend withdrawals or impose a fee in a crisis doesn’t mean that under the old rules money would have magically been available.

Other options remain open, too. While rates may be low everywhere, cash still can be sent abroad and pays more in some countries. Finally, anyone worried enough about financial repression to want to avoid government paper entirely can switch into gold. So long as that remains an option, financial repression isn’t complete.

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.

Cumberland Advisors’ David Kotok provides an insightful analysis on the nature of money, cash & the trend towards negative interest rates in bond around the world .. “The characteristics of cash include the value of its purchasing power. ‘Store of value’ is one of money’s prime attributes .. With little inflation in the price level and mostly stable prices, the ‘medium of exchange’ function becomes very reliable.” .. with negative interest rates, this “norm” changes .. “When the interest rate is zero or less than zero, which alternative is more desirable? In our view, it is cash. The risk rises in the negative-interest-rate security. The longer the maturity and the deeper the negative rate, the higher the risk associated with that instrument. That is the trade-off of negative interest rates versus cash.” .. Kotok sees bond risk rising – “Our conclusion is that bond risk is rising. At Cumberland Advisors we are repositioning portfolios gradually in both taxable and tax-free bond accounts. We do that by altering the composition of the bonds to have more defensive characteristics and by shortening duration.”
LINK HERE to the essay

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

CB’S “ALL IN” ATTEMPTING TO HALT THE LOOMING GLOBAL RECESSION

CENTRAL BANKERS FIGHTING AN UNPRECEDENTED GLOBAL SLOWDOWN

The mainstream news sources seem determined to ignore the extent of the global slowdown in trade. Whether exports, imports, industrial production or whatever your preferrred metric, the facts are undeniable. Nevertheless, the mainstream media chooses to refuse to cover it. It begs an obvious question of – why?

What needs to be understood about the global economic slowdown is that it stems from economic activity in the two engines of world activity which are now stalled. China and America (“Chimerica”) are slowing rapidly as a result of an inability to fundamentally sustain their current credit expansion rates. Desperate attempts by both countries have been unsuccessful in altering the downward trajectory which is steadily gaining momentum.

A POTENTIAL GLOBAL RECESSION – Act Now Or Persih

The Central Bankers of the world are acutely aware of this fact and know how devastating a global recession would be in the current highly indebted and over leveraged financial environment. Though Central Bankers programs have been unsuccessful they have fully understood since the year beginning market drawdown that they must act – and fast!

The US Economic Output Composite Index illustrates how the time had come in Q1 2016 relative to previous intervention programs.

CALL TO ACTION – Failed Central Bank Policy Dictated “More of the Same!”

The Central Bankers reacted and reacted forcefully beginning in Q1. They have taken “liquidity pumping” at $180B / month to levels more than double those during QE3 with more promised to soon come from the BOE, ECB and BOJ.

GLOBAL CENTRAL BANKERS – Clearly a Coordinated Global Response

The Bernanke “Enrich-thy-Neighbor” Doctrine is now in full bloom as the central banks in a coordinated sequential manner are implementing furthger policies to dramatically increase global liquidity.

ILLUSTRATION: BERNANKE’S ” ENRICH-THY-NEIGHBOR” DOCTRINE IN “FULL BLOOM”

A POTENTIAL MARKET COLLAPSE- Act Now Or Persih

As former Federal Reserve Governor Kevin Warsh said on CNBC, the Fed is not “Data Dependedent” but rather “Market Dependent”! Central Bankers are reacting to the market for fear of an errosion in collateral values underpinning massive excess financial leverage. They had to act or crumbling collateral values associated with a “Rehypothecation” implosion would quickly engulf the markets.The markets have been signalling major technical reversals are ahead since early 2016. The Central Bankers had little choice in their mind but to undertake the programs they did.

“HEAD & SHOULDERS”

OUR “M’ TOP

We have laid out our expectations of an “M” top since near the market bottom in early 2009. As shown below we have completed our “M” top and one of two courses will now be followed. The market will begin a protracted secular Bear Market OR the Central Banks will flood the world with liquidity thereby artificially lifting the markets.

The following chart illustrates that the Central Banks’ globally coordinated liquidity pumping policy to stop the markets from following is presently working.

This would suggest that our “M” top will now “morph into a ‘fractal'” of the Megaphone pattern we have seen since the Dotcomm Bubble burst in 2000. This will final leg will be the Minsky Melt-up we have also suspected still lies ahead.

IT WON’T WORK – 7 Years of Unintended Consequences are Coming Home to “Roost”!

The Central Banker actions will temporarily work but the Credit Cycle has turned which will quickly make their efforts futile.

Expect a resulting Currency Crisis to dominate the financial markets in 2017.

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.

New Economic Thinking .. With the power of modern computing being harnessed into increasingly small & portable devices, what do digital platforms mean for the entrenched global economy? As technology catches up with our theories of information in the marketplace, much of the predominant ideology is being re-opened for examination. Perhaps we could now leave central planning to the machines as Oscar Lang envisioned, & if so, then what would that mean for models for the firm & production? Who reaps the fruits from all this, & how are they distributed? .. Nick Johnson (Head of Platform at Applico, author of the new book Modern Monopolies, & the world’s first Pokémon Go Master) provides us with an insightful overview of what the future might hold for this immense power we all carry in our pockets .. 15 minutes

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.

“World markets are in the midst of something on a frighteningly grander scale than the financial crisis .. Tens of Trillions of sovereign debt have become trapped in speculative melt-up dynamics, as central bankers, derivative traders, speculators and safe haven buyers all battle to procure precious bonds. And I don’t believe it’s coincidence that the world’s largest derivative players are seeing their stock prices suffer under intense selling pressure. Meanwhile, sinking bank shares heighten market fears, which only feeds the dislocation and reinforces the dynamic imperiling the big derivative operators .. Brexit could easily have spurred a problematic ‘risk off.’ Instead, a globally super-charged sovereign debt dislocation/melt-up has completely overwhelmed the markets. The disappearing supply of sovereigns and resulting evaporation of yields – coupled with the prospect of endless QE – have led to a generalized risk market short-squeeze and unwind of hedges. This worked to solidify the notion that corporates and EM would now provide the primary source of yield for a freakishly yield-desperate world. And with visions of over-abundant liquidity and ultra-low corporate borrowing costs as far as the eye can see – replete with M&A boom and buybacks forever – it has become possible to overlook a lengthening list of fundamental factors overhanging equities markets.”
– Doug Noland
LINK HERE to the essay

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

Wall St for Main St interviews Jim Puplava .. discussion on why Puplava thinks gold & gold stocks have rebounded so much since December, & about negative interest rates – how it is very good, in his opinion, for gold & gold stocks .. Puplava thinks financial repression & NIRP are forcing people looking for income into stocks & that’s preventing stocks from crashing .. 38 minutes

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

FRA Co-founder Gordon T. Long is joined by Mish Shedlock in discussing the details of Brexit, the BoJ, the current state of Illinois and much more.

Mike Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

SOCIAL UNREST AND BREXIT

“Key take away from Brexit is one thing, voters are fed up.”

What’s unique about Italy is that it’s a lot of individual people buying bank bonds and they can literally lose everything. Furthermore social unrest in the US explains the rise of Donald Trump and the popularity of a socialist, Bernie Sanders. This explains why Clinton, Sanders, and Trump are all against the Trans-Pacific Trade Partnership. It is a 5500 page document, there is absolutely no way it is simply about free trade. Free trade can fit on a napkin; it doesn’t take 5500 pages to enforce a free trade agreement. Make no mistake the TPP is about much more.

“Brexit is not the cause, it is the symptom.”

Speaking of real household income, the top 5 % have done very well, the top 20% have done good, but the bottom 80% have done horribly in comparison and this all began in 1971 when Nixon took the US off the gold standard. This is the same time when you had an explosion in credit, an explosion in corporate profits; all of this began at the same time. People are not blaming the Fed or the public union, they are blaming free trade when in fact we started losing manufacturing jobs long before NAFTA. The number of people it takes to build anything is dramatically lower and this began well before any of the agreements happened. The politicians can’r make accurate decisions because they don’t get it, they are a part of the wealthy class; they are exempt from Obamacare and rules and regulations that the ordinary citizen abides to. They live in their own isolated world and they just don’t get it.

“The EU isn’t about free trade, just look at the carve outs they have on France for agriculture. Everyone in Europe pays more for agriculture just to protect the inefficient French market.”

Then we had all these warnings that the UK was still going to have to abide by the migration rules of the EU if the UK wanted to work out any trade agreement, don’t these arrogant politicians realize that this is exactly why the UK left? Then if you look at bilateral trade, the UK has most of its trade with the rest of the world; the UK runs a huge trade deficit with Europe and especially Germany. Because of this the UK has the upper hand in negotiations due the bilateral balance of trade it has with the rest of Europe.

LABOR REPORTS

There is certainly a story behind the numbers they are putting out. The household survey numbers have been bad for 4 straight months; meanwhile there is this volatility in the establishment survey. We need to see another month or two of both surveys and maybe we will see a new trend.

Throughout America, people are working multiple jobs because companies do not want to hire them full time and provide them full time benefits. Another example, New England nursing homes are facing problems keeping staff because of their 24/7 operations. Workers cannot live off of one salary and so they are working 2-3 jobs.

STATE OF ILLINOIS

“Every 5 mins somebody is leaving Illinois.”

The people leaving the most are the millennials and those a little bit older. It is a sad environment, property taxes here are totally out of this world, and in Illinois you down own your own home because of property taxes. The solution without a doubt is bankruptcy. The Chicago public school system is bankrupt, period. All that needs to happen is recognition of that fact but it is not even possible to declare bankruptcy because Illinois doesn’t allow it.

JAPAN STICKING WITH THE OLD

“Japan is a bug in search of a windshield.”

I believe people are increasingly questioning whether central banks have things under control. Japan just doesn’t get it; they are trying to work something that hasn’t worked for 30 years. The only thing they know how to do is print more money and push liquidity out. But the bigger problem is central banks can fix liquidity but they can’t fix solvency.

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.

Ronald-Peter Stöferle, Managing Partner & Investment Manager at Incrementum discusses with FRA Co-founder Gordon T. Long,  the key points of his recent 2016 report, “In Gold we Trust.”

Ronald was born 1980 in Vienna, Austria, is a Chartered Market Technician (CMT) and a Certified Financial Technician (CFTe). During his studies in business administration and finance at the Vienna University of Economics and the University of Illinois at Urbana-Champaign, he worked for Raiffeisen Zentralbank (RZB) in the field of Fixed Income/Credit Investments. After graduation, he participated in various courses in Austrian Economics.

In 2006, he joined Vienna-based Erste Group Bank, covering International Equities, especially Asia. In 2006, he also began writing reports on gold. His six benchmark reports called ‘In GOLD we TRUST’ drew international coverage on CNBC, Bloomberg, the Wall Street Journal and the Financial Times. He was awarded 2nd most accurate gold analyst by Bloomberg in 2011. In 2009, he began writing reports on crude oil. Ronald managed 2 gold-mining baskets as well as 1 silver-mining basket for Erste Group, which outperformed their benchmarks from their inception. In 2014 he published a book on Austrian Investing

“One of the main aspects of the report is that we are in a bull market again.”

Gold Price Target for June 2018: USD 2,300

Hedge fund managers and investors were buying gold and mining shares a couple of months ago and now we are entering what the Dow Theory calls ‘the public participation pace.’ $2,300 USD is our long term target which is based on the fact we are expecting rising inflation rates. Right now we have a tremendous global slowdown and the strong USD has further fueled this slowdown.

It is confirmed however that gold is rising in every currency. And this is a strong sign for a bull market. The world believed that the Fed would hike interest rates but that didn’t happen and now with the Brexit we will definitely be in this current interest rate environment for longer, the US may even implement negative interest rates.

“The one obvious thing in the midst of this all is that central banks are really good at finding excuses for not raising rates’ now their excuse is Brexit.”

The strength of the dollar has had enormous consequences for commodities. There is a very high negative correlation between the strength of the USD and the health of commodity markets. Furthermore we have seen the effects in emerging markets that are highly dependent on a cheap dollar, the rising dollar acted as a rate hike.

Expansion of Central Banks Balance Sheet: 2007 vs 2015

“There have been rumors about helicopter money and I am almost certain it will be implemented.”

With monetary experiments, central banks have been engaging into an all-or-nothing gamble, hoping it will eventually bring about the long promised self-supporting and sustainable recovery. The central banks‘ leverage ratios and the sizes of the balance sheets relative to GDP have enormously risen in the aftermath of the 2008 financial crisis. Lastly it doesn’t help Bank of Japan (BoJ) has taken this insanity several steps further than their peers have managed; the ECB has been comparably conservative, but is currently doing its best to catch up.

5,000 Years of Data Confirm: Interest Rates Have Never Been as Low as Nowadays

“The longer interest rates stay this low, the more fragile the system will become.”

Negative interest rates are one of the last hopes to which policymakers cling. Meanwhile 5 currency areas (government bonds valued at more than USD 8 trillion have negative yields to maturity). When the centrally planned bubble in bonds finally bursts, it will be abundantly clear how valuable an insurance policy in the form of gold truly is

“Lose-lose situation for central bankers.”

1. The long-term consequences of low/negative interest rates are disastrous (e.g. aggravation of the real estate and stock market bubbles, potential bankruptcies of pension funds and insurers)
2. Normalizing interest rates would risk a credit collapse or rather a recession

Trade-weighted US Dollar Index (lhs) and the Effective Federal Funds Rate (rhs)

“A strong dollar undoubtedly has consequences for the manufacturing industry, while a strong USD is also deflationary.”

The Fed wants a weaker dollar, but this doesn’t happen in one day, it is a process. We are making a really strong case for a recession happening in the US and it will have global consequences. A recession is a very normal thing; it is akin to your need for sleep. It is a way for the system to replenish.

“If the Fed fails with the normalization of interest rates, the already crumbling narrative of economic recovery could collapse.”

We are comparing this year’s oil prices to last year’s and last year the big plunge in oil prices started in July, so just do to that we will have rising inflation rates. But it is not only this there are many factors that indication rising inflation rates. The fact that gold and mining shares have done so well since the beginning of the year is indicative that inflation is going to be a big topic.

Value of Gold Production vs. Volume of ECB and BoJ QE purchases 2016

“Gold has to be physically mined, its global supply is exceedingly stable – holding it provides insurance against monetary interventionalism and an endogenously unstable currency system”

At a price of USD 1,200 per ounce, the ECB would have bought 4,698 tons of gold in the first quarter of 2016 (which is more than 6 times the value of globally mined gold). If the European QE program is continued as planned, it would be equivalent (assuming prices don’t change) to the value of 21,609 tons of gold (~12% of the total stock of gold of 183,000 tons ever mined). Adding the volume of the BoJ: the equivalent would be 39,625 tons of gold in 2016

Incrementum Inflation Signal

“In the Long Term: If Currencies Depreciate, Gold Should Appreciate.”

It is a guide for investment allocations in our funds – depending on the signal’s message we shift allocations into or out of inflation-sensitive assets.

• Proprietary signal based on market-derived data as a response to the importance of inflation momentum
• Shorter reaction than the common inflation statistics
• For the first time in 24 months the Incrementum Inflation Signal indicates a full-fledged inflation trend is underway

Closing Remarks

“The market is a pain maximizer.”

In poker you have to bring some chips to the table and it’s no coincidence that China is massively buying gold. Not only has the central banked, but individuals as well. Central bankers just don’t like talking about gold. They pretend that it’s just lying around in the basement. I think we are already in the early stages of an inflationary pattern, but it is important to never rule out a deflationary event. Going forward we should prepare for much more government intervention and intervention from central banks. We are seeing that the medicine doesn’t work yet they will continue to give doses of it.

“In this current global monetary experiment that we are in, it just makes sense to hold gold.”

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.

“Our forecast, and the direction taken by our portfolios, is for accelerating inflation over the coming months. This phenomenon will take markets and officials by surprise, and I believe that it will change the world we know today. Financial repression will continue to be the order of the day, partly because central bankers will remain in intellectual denial and partly because of fears that rate normalization will bring economic activity tumbling down. The early part of this period of accelerating inflation should prove beneficial to many assets, among them commodities and well financed equities. Coming out of denial — beyond our investment horizon — will be painful and very damaging to debt burdened sovereigns and corporations.”
LINK HERE to get the Report in PDF

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

FRA Co-Founder Gordon T.Long and Jeffrey Snider, Head of Global Investment Research at Alhambra Investment Partners discuss earnings, the Chinese Yuan, Japanese Yen and the falling credibility of central banks.

As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. Jeff joined Atlantic Capital Management, Inc., in Buffalo, NY, as an intern while completing studies at Canisius College. After graduating in 1996 with a Bachelor’s degree in Finance, Jeff took over the operations of that firm while adding to the portfolio management and stock research process.

In 2000, Jeff moved to West Palm Beach to join Tom Nolan with Atlantic Capital Management of Florida, Inc. During the early part of the 2000′s he began to develop the research capability that ACM is known for. As part of the portfolio management team, Jeff was an integral part in growing ACM and building the comprehensive research/management services, and then turning that investment research into outstanding investment performance. As part of that research effort, Jeff authored and published numerous in-depth investment reports that ran contrary to established opinion. In the nearly year and a half run-up to the panic in 2008, Jeff analyzed and reported on the deteriorating state of the economy and markets. In early 2009, while conventional wisdom focused on near-perpetual gloom, his next series of reports provided insight into the formative ending process of the economic contraction and a comprehensive review of factors that were leading to the market’s resurrection. In 2012, after the merger between ACM and Alhambra Investment Partners, Jeff came on board Alhambra as Head of Global Investment Research.

EARNINGS

“It is no doubt that earnings have been under-performing.”

What’s even more concerning is that not even is the top line falling off, but the cash flow is falling dramatically and this impacts credit along with everything else. With no earnings and no cash flow it puts us in a high risk environment. The only thing that has been holding up the market has been excessive corporate buybacks which has come out of cash flow, and to a lesser degree, borrowing. But to borrow is tough when you don’t have the cash flow to justify the credit ratings.

“How long can buybacks continue to support a market which is standing on a fundamentally flawed premise?”

We have had 4 to 5 quarters of falling revenue but the US market seems to ignore it. At some point reality has got to set in. But it is also important to note that trade problems are a systemic factor to the decline in earnings. China’s imports are down 17% year over year, but these imports are coming from basically the emerging markets and commodity markets. They have also borrowed upwards of 9 trillion USD in the last 7 years that has suddenly gotten very expensive for them, I think there is more pain to come.

CHINESE YUAN

“The health of the Yuan is tied into the global economy and the fact that the global economy is stumbling.”

Less growth in China combined with less growth around the world again increases financial risk which fuels more reluctance to funnel dollars into China; it has become a vicious cycle. The Chinese have no choice but to continue going in one direction, they are in a rock in a hard place. As the Chinese Yuan has been falling, the Yen has been rising in strength. This has become a huge issue for Japan to add to their already lost list of issues to deal with. A fracture is likely around the corner, China and Japan cannot go long without devaluing the Yen.

The markets are reassessing what central banks can actually do. And what markets found was that central banks aren’t actually as powerful as everyone believes them to be and Japan is a perfect example of that. No matter what the BOJ does that Yen continues to move on up. It fits into the paradigm of the economy, the financial risk, everyone reevaluating what central banks are capable of etc. The markets are reevaluating central banks because they see that a tight money environment despite efforts from central banks to fuel stimulation.

“Some major European bank stocks are indicative of an incoming banking crisis. We see already low interest rates around the world getting lower with each passing day; this is indicative of tight money conditions. Low rates are not stimulating.”

TROUBLING MATTERS OF DEBATE

“Most troubling thing to me currently is that there are not many answers available.”

What I see is an unstable global currency regime which we are completely unprepared for. There is no solution that has been presented that would allow for a stable currency to take over Euro dollars which clearly doesn’t work. Generally the central banks can fix liquidity problems, but they cannot fix solvency problems. We see that the credit cycle has turned from non-performing loans so on and so forth.

The idea behind QE for Japan, America and Europe was to kick start a robust recovery. Now that central banks has lost credibility as well as support.  Then you have all the unintended consequences that come with almost zero money. We have nearly zero price discoveries and risk is greatly mispriced.

“Policy makers and economists have simply run out of ideas.”

Desperation is a big role of why markets are reevaluating central banks. If we go back 20 years where Alan Greenspan was a genius and he didn’t even do anything, all he did was talk and he made a career out of not talking. No matter what he did he was taken as a genius. Whereas 20 years later, Janet Yellen sounds like a fumbling idiot no matter what she does. All her actions come across as desperate because the credibility has been blown away. The Fed has been forced into action and by being forced into action it has only highlighted what the Fed can’t do.

“Resource allocation is the main benefit of price discovery; it is the life blood of the economy. The more we damage price discovery the more fatal situations will become.”

We need to look at this as an opportunity in the long run. Now that the power of central banks has come to surface and credibility has been shot, it in turn opens the door to credible solutions. The fact of the matter is that the economy is nothing like what it should be and people know that something is wrong and change is needed.

ABSTRACT WRITER: Karan Singh karan1.singh@ryerson.ca

VIDEO EDITOR: Sarah Tung  sarah.tung@ryerson.ca

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.

Gordon T Long & Charles Hugh Smith have written many an article & hosted many videos & podcasts highlighting the escalating bubble in student loan debt & the escalating cost of higher education. Artificially held down interest rates have contributed to many of the factors causing this bubble .. repressed low interest rates have enabled many students to borrow increasingly massive levels of money – in essence overvaluating the benefits of a college education ..

“Once upon a time in America,” says professor Sajay Samuel, “going to college did not mean graduating with debt.” Today, higher education has become a consumer product — costs have skyrocketed, saddling students with a combined debt of over $1 trillion, while universities & loan companies make massive profits. Samuel proposes a radical solution: link tuition costs to a degree’s expected earnings, so that students can make informed decisions about their future, restore their love of learning & contribute to the world in a meaningful way .. 12 minutes

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.