“‘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.

OtterWood Capital’s Christine Hughes explains the absurd concept of negative interest rates & what they are doing to the global banking system .. 7 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.

The Financial Repression Authority is joined by Ellen Brown, a well renown author and advocate of financial reforms. FRA Co-founder, Gordon T. Long sits with Ellen to discuss a myriad of topics including the TTIP, Monsanto, Blockchain Technology, and bank bail-in’s.  Ellen Brown is an American author, political candidate, attorney, public speaker, and advocate of alternative medicine and financial reform, most prominently public banking. Brown is the founder and president of the Public Banking Institute, a nonpartisan think tank devoted to the creation of publicly run banks. She is also the president of Third Millennium Press, and is the author of twelve books, including Web of Debt and The Public Bank Solution, as well as over 200 published articles. She has appeared on cable and network television, radio, and internet podcasts, including a discussion on the Fox Business Network concerning student loan debt with the Cato Institute’s Neil McCluskey,  a feature story on derivatives and debt on the Russian network RT,[6] and the Thom Hartmann Show’s “Conversations with Great Minds.” Ellen Brown ran for California Treasurer in the California June 2014 Statewide Primary election.

TRANS-ATLANTIC TRADE AND INVESTMENT PARTNERSHIP (TTIP)

The Transatlantic Trade and Investment Partnership (TTIP) is a proposed trade agreement between the European Union and the United States, with the aim of promoting trade and multilateral economic growth. The American government considers the TTIP a companion agreement to the Trans-Pacific Partnership (TPP). The agreement is under ongoing negotiations and its main three broad areas are: market access; specific regulation; and broader rules and principles and modes of co-operation

The controversial agreement has been criticized and opposed by unions, charities, NGOs and environmentalists, particularly in Europe. The Independent describes the range of negative impacts as “reducing the regulatory barriers to trade for big business, things like food safety law, environmental legislation, banking regulations and the sovereign powers of individual nations”, or more critically as an “assault on European and US societies by transnational corporations”; and The Guardian noted the criticism of TTIP’s “undemocratic nature of the closed-door talks”, “influence of powerful lobbyists”, and TTIP’s potential ability to “undermine the democratic authority of local government”

Kangaroo Court

A weaker element of this trade agreement is the ISDS, an investor dispute which is a ‘guaranteed kangaroo court.’ Corporations whose profits have been hurt by some actions of government can take these local governments to court. But it is not a true court; moreover it’s a panel of 3 lawyers who are paid by the corporations. The issue is that these corporations can sue the government but the government cannot sue the corporations. It is a one way street, in which these corporations do not have to pay attention to legal authorities. It is a court set up for the betterment of the corporations. Furthermore they can not only sue for their lost profits, but they can also sue for lost projected future profits.

“This is not government by the people for the people; rather it is government by the corporations and for the corporations.”

MONSANTO AND THE TTIP

“Monsanto can now start a factory in Europe, which goes completely against what Europeans have been fighting for years. This agreement squanders everything Europeans have achieved in this sort of protection.”

One of the goals of these agreements is to enforce the world to use our rules rather than the rules of the BRICS.  As soon as Gaddafi started talking about his gold backed banking system for northern Africa he became a target. Saddam Hussein did the same thing that was going to take euros for oil which is counter to the whole petro dollar. History shows that anybody who steers away from this system becomes a target. If you go through the banking, the ones that control their own creation, Venezuela, Brazil, and Russia etc. are facing high waters. Furthermore there is not enough money in the system because of the nature of the system, where banks create the money and charge interest.  But ideally you need a central authority that can put some money out there. I think the national dividend is a great idea, the Swiss just had a referendum but it didn’t pass. Nonetheless it’s great for them to consider this at all.

“The money shouldn’t be coming from us, from our elected representatives, or from our central banks which should be representing us, but they don’t; they only represent themselves. The Federal Reserve isn’t there to serve our interest; they are there to serve the banks.”

BLOCKCHAIN TECHNOLOGY

The blockchain is seen as the main technological innovation of Bitcoin, since it stands as proof of all the transactions on the network. A block is the ‘current’ part of a blockchain which records some or all of the recent transactions, and once completed goes into the blockchain as permanent database. Each time a block gets completed, a new block is generated. There is a countless number of such blocks in the blockchain. Blocks are linked to each other in proper linear, chronological order with every block containing a hash of the previous block. To use conventional banking as an analogy, the blockchain is like a full history of banking transactions. Bitcoin transactions are entered chronologically in a blockchain just the way bank transactions are. Blocks, meanwhile, are like individual bank statements. Based on the Bitcoin protocol, the blockchain database is shared by all nodes participating in a system. The full copy of the blockchain has records of every Bitcoin transaction ever executed. It can thus provide insight about facts like how much value belonged a particular address at any point in the past.

Block chain technology can definitely revolutionize the banking system. It is important to understand that at this point, nearly all alternatives are better than what we currently have in place. The banks haven’t been able to come up with a valid plan because they don’t have the money; they are creating lots of money only to give off the appearance.

“Banks create money on their books in response to our request for a loan.”

We now know that we basically create the money. When we take out a loan, the bank takes your IOU and turns it into money, and that’s where money comes from. We, the borrower are the ones monetizing our own IOU; the bank merely just makes it official.

BANK BAIL-IN

“We are moving towards a cashless society.”

The argument for going cashless is this whole monetarist theory that there is specific amount of money in the system, and the central banks control the money that’s out there by playing with interest rates. They lowered the interest rate to zero and still we have deflation, and now the theory is to lower it below zero which clearly makes it worse. That means you’re paying money to keep your own money in the bank.

The reason people are waking up now is because they have been screwed. The balance is tipping; the people who are suffering are beginning to wake up to the reasons why.

Abstract Writer: Karan Singh karan1.singh@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.

 

The former CEO of AIMCO presented at the IPCM 2016 conference in Montreal this month .. he emphasizes that long term economic prospects are better than the forecasts suggest” & that “pension plans can earn a better return by providing patient capital to commercialization of new technology” .. the message – pensions talk about investing for the long run but focus on the short term results & avoid making interesting investments (to avoid headline risk in the short run), they’re doing their members a great disservice & impeding much needed economic growth.
LINK HERE to get the PDF
LINK HERE to Leo Kolivakis’ summary of the conference

2016 06 13 Montreal LdB

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 Peter Boockvar in discussing the aftermath of Brexit and the effects on the future economy.

Peter is the Chief Market Analyst with The Lindsey Group, a macro economic and market research firm founded by Larry Lindsey.

Prior to joining The Lindsey Group, Peter spent a brief time at Omega Advisors, a New York based hedge fund, as a macro analyst and portfolio manager. Before this, he was an employee and partner at Miller Tabak + Co for 18 years where he was an equity strategist and a portfolio manager with Miller Tabak Advisors. He joined Donaldson, Lufkin and Jenrette in 1992 in their corporate bond research department as a junior analyst. He is also President of OCLI, LLC and OCLI2, LLC, farmland real estate investment funds.

Peter graduated magna cum laude with a B.B.A. in finance from George Washington University.

BREXIT

The shock is going to lead into some chaotic-type thinking, but while this is a gigantic inconvenience and reason for continued economic slowdown, over time the UK will adjust and trade with Europe the same way Norway and Switzerland does. For the rest of Europe, this raises the question of other countries deciding to leave.

“I think having the Euro is something they want to be a part of, but that is a major risk, no question.”

This is also exposing a lot of fault lines within the EU with bureaucracy and the pushback against the “ruling class”. The failure of the EU in Brussels to address the refugee problem is a major concern, but immigration was a short term emotional decision.

“Certainly, if it wasn’t for the immigration issue,  I think it’s pretty obvious that they would’ve voted to remain.”

EU BANKING STRUCTURE

“On a bank to bank basis, they’re being crushed by the ECB and the negative interest rates. That’s the biggest threat to the European banking system, and their overleveraged banking sheets with too many nonperforming loans. Not the UK vote.”

We should remember what the underlying fundamentals are that we’re faced with every day. That is, slowing economic growth globally. In the US that is falling earnings, falling profit margins, a loss of credibility on the part of all central bankers and the Fed. On top of this is an asset price bubble over the last six years that leaves us with no margin of safety in order to face all these headwinds.

The European Union can adjust to it, because this is a gigantic wake-up call and they have two choices: they either let this bleed away or they say, you know, we have to change our ways, and some things for the better may come from that.”

“The global growth story remains very challenged, asset prices remain very expensive, and central bankers have lost credibility. Those are the risks that people should be mostly focussed on right now.”

China’s been slowing for years. Who doesn’t know that China’s going through challenges? Even the Chinese stock market is down 50% from where it was in 2007. It’s still part of a broader picture of slow growth.

DOLLAR AND YIELD

Past the very short term knee-jerk reactions – sell the Euro, sell the Pound – the Dollar has its own issues. The Fed is stuck at 37½ basis points throughout this economic cycle. They likely won’t raise rates until the expansion after the next recession. So it’s easy to sell other currencies to buy the Dollar right now, the Dollar has its own issues.

“The fair answer to that question is which is going to be the currency left standing? And the only answer to that is going to be gold and silver, and that’s obviously being reflected today. The dollar is getting a knee-jerk bounce here, but I’m not a believer in a strong Dollar because I think it itself is facing major headwinds.”

The Fed isn’t raising interest rates, and the US economy is slowing. Going from current growth to recession is not that far of a leap. The determinant of that is what asset prices do, actually. If the S&P500 goes back to 1800, then the odds of a recession increase.

The reason the stock market is used as the swing factor is because the last two recessions were led by a decline in asset prices, tech stocks, and housing prices. We have our third bubble in front of us. Tt’s mostly been manifested in credit markets, but if you do get a decline in asset prices, as it reprices to the global economic reality, that in itself could tip us over. In the US, the consumer is the only thing keeping us from a recession, and a decline in asset prices could tip the consumers over from a psychological standpoint.

LOOKING FORWARD

“The Fed has no policy right now… They were so clear on how they were going to ease, and they’ve been in the clouds on how they’re going to exit… they’re stuck, they’re trapped, and they essentially are writing policy with their fingers crossed.”

The US growth will likely continue to slow, we saw durable goods today that were very weak, we saw core capital spending within that is at a five year low, at a level last seen 10 years ago, and this was before the greater unknowns now coming out of Europe. Growth will continue to slow and asset prices will continue to decline.

In an election season and campaign, this is when peoples’ voices are heard. Where that goes socially, who knows. It’ll depend on a lot of different things. People are making their voices heard, and hopefully the ruling class is listening.

“I think the whole commodity space has bottomed out. I think investors need to look where it is most painful to look. That remains emerging markets that have already gone through a five year bear market and have much better valuations than the rest of the world.”

In Europe right now, you’re going to see carnage, but there’s probably going to be some opportunity there. There might be opportunities in the UK where selling is occurring due to the weaker pound.

“I’m very nervous about the US stock market, which happens to be one of the most, if not the most, expensive in the world.”

Abstract by: Annie Zhou a2zhou@ryerson.ca

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.

Incrementum’s Ronald Stoeferle & Mark Valek, the managers of the Incrementum funds, have released the In Gold We Trust report, one of the most comprehensive & most widely read gold reports in the world .. this year includes a detailed discussion of gold’s properties in terms of Nicholas Nassim Taleb’s “fragility/ robustness/ anti-fragility” matrix, as well as close look at the last resort of mad-cap central planners that goes by the moniker “helicopter money”.

LINK HERE to get the PDF

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

FRA Co-founder Gordon T. Long is joined by Graham Summers in discussing

Graham Summers, MBA is Chief Market Strategist for Phoenix Capital Research, an investment research firm based in the Washington DC-metro area.

Graham’s sterling track record and history of major predictions has made him one of the most sought after investment analysts in the world. He is one of only 20 experts in the world who are on record as predicting the 2008 Crash. Since then he has accurately predicted the EU Meltdown of 2011-2012 (locking in 73 consecutive winners during this period), Gold’s rise to $2,000 per ounce (and subsequent collapse), China’s market crash and more.

His views on business and investing has been featured in RollingStone magazine, The New York Post, CNN Money, Crain’s New York Business, the National Review, Thomson Reuters, the Fox Business, and more. His commentary is regularly featured  on ZeroHedge and other online investment outlets.

RECENT HISTORY REPEATS ITSELF

What we’ve seen since 2009 has been kind of this grand delusion. We did have a bit of a recovery from 2009-2011 where the economy and the financial markets snapped back from the very deep recession in 2008. But since about 2012, the real economy hasn’t really progressed. What you’re actually seeing is a financialization of the economy in the sense that asset markets have boomed but real economic activity has stagnated. Throughout this time we have central banks engaging in massive monetary programs which have effectively been a transference of private debt onto the public sector’s balance sheet.

The very policies that bankrupted Wall Street and resulted in the 2008 crisis, those policies have now been shifted onto the public sector’s balance sheet. And as a result of this, most countries are sporting worse fundamentals from a debt to GDP perspective and when the next crisis hits, we’re going to see a severe cycle of default begin, that will eventually be sovereign. The real fireworks have yet to fit.

“If you want to use 2008 as a proxy, we’re currently in the late 2007-early 2008 stage of the cycle.”

LEVERAGE BUBBLES AND CENTRAL BANKS

“Everything post-2009 has effectively been academic central bankers implementing what their economic models suggest would work, but what works in an Excel spreadsheet doesn’t work in reality a lot of the time.”

If you simply want to refer to leverage bubbles, Lehman Brothers was leveraged 30:1 when it went bankrupt. You now have the Fed leveraging something like 70:1, the European central bank is leveraged at nearly 30:1, so you now have central banks sporting leverage ratios on par with Wall Street. To those that say it’s different because the Lehman Brothers couldn’t print currency, central banks have gone bust throughout history. The US Federal Reserve is the third central bank the US has had, and there’s no reason a central bank cannot go broke, because whether you’re going for a hyperinflationary collapse or a deflationary collapse, it’s the same thing. It’s the loss of actual value relative to nominative terms.

“The issue we believe is going to start unfolding is because central banks have spent so much money… propping the markets up over the last 6-7, we’re going to see some sort of implosion.”

Even if central banks engage in what we would call nuclear levels of intervention going forward, that in of itself would result in some kind of systemic event. You can’t have trillions of dollars of intervention without things breaking. We actually had a taste of this in April 2013, when the Bank of Japan launched the largest QE program in history, their famous Shock and Awe program. They announced their program equal to almost 25% of Japan’s GDP, and when they did this there was a brief period in the following week where the Japanese government bond market almost broke and had to be halted several times.

“Even if one were to say, well, we can’t have central banks go bust, they’ll just do a larger program, the problem is eventually the program becomes large enough that either you run out of assets to buy or the system simply can’t handle it.”

We had a brief taste of that with Japan. If central banks go nuclear when the next crisis hits, we’ll probably get another taste of it. They’ll probably close the stock market, to be honest, but how exactly the details will play out remains to be seen.

The other thing to consider is that the political landscape has changed. At some point there’s going to be a popular revolt where people don’t put up with central banks’ meddling to the level they are. There’s a lot of things in the air about how things will play out, but we’re very close to the edge.

THE 2008 TRADE SETUP

“You have to find these kinds of easy ideas for people to latch onto. You can talk about leverage, you can talk about complicated sort of financial metrics, but the reality is that you have to put it in terms that people are going to grasp and helps them realize what’s happening.”

We see an opportunity similar to 2008 today in terms of the discrepancy between economic realities and asset level pricing.

“The idea is that when something breaks and the asset prices begin to readjust to more in line with economic levels, you’re going to see a sharp move… During periods like that, you can see a very large return if you position properly.”

If you compare the S&P500’s GAAP earnings to the S&P levels today, earnings are back to where they were in 2012 but the stocks are 70% higher. Just that alone, for stocks to fall back in line with their actual earnings, you can see a very large percentage collapse.

IS THE FED BUYING STOCKS TO PROP UP THE MARKET?

What we do know financially is that the futures markets have a program through which central banks can buy stocks. We also know that the Swiss National Bank and the Bank of Japan directly intervene in the stock market.

“It’s not a far stretch to assume that the Federal Reserve is also playing around with this, and it makes perfect sense.”

We know they’re intervening in the markets on a regular basis. Somebody is trying to hold the markets up. Whenever the markets begin to break down on a very aggressive fashion and they hit a key inflection point, for some reason ‘buyers’ move in very aggressively and start buying the heck out of the market. Real buyers don’t do that. When an institution puts in an order to buy stocks, they put in these orders over a span over a couple weeks because they don’t want to adjust the price and lose the value.

We also have some corporate buybacks driving the markets higher, cash flows are flowing, and buybacks should be halting. Retail investors have been selling, and so far the only buyers are corporate buybacks and some form of intervention from central banks.

ECONOMIC TURNING POINTS

It’s very hard to find these turning points. Investors have been crushed so many times by central bank interventions that they’re loathe to put a lot of money into the markets and go hard short. Your average investor, when the market turns against them and they’re short, it’s very hard for them to sit on that position. If you actually look at investment fund managers, the ones who can and want to go short don’t want to because they’re afraid they’ll be crushed by central bank interventions.

At which point does the actual selling begin? It’s impossible to guess, but what you can do is look at the warning signs, the selling pressure, but the specifics are impossible to guess.

INVESTMENT STRATEGIES FOR THE FUTURE

US Treasury yields have had a significant breakdown. Globally we now have $10T of bonds with negative yields, but Treasuries still remain positive.

“From a financial and economic perspective, the US is on at least a sound a footing as Europe and Japan.”

That begs the question of why our Treasuries rallying instead of pushing their yields lower. It’s likely that there’s going to be a move in Treasuries that’s going to have yields falling to all-time lows.

There’s a big question as to whether the dollar is about to begin another leg up in a bull market, or if it’s just going to continue to consolidate. Something happened in the last four months where the dollar really sold aggressively. A theory is that the Fed formed the Shanghai Accord to devaluate the dollar in order to prop the markets up. Since QE300, stocks and the dollar have been in a trading range.

If another round of serious deflation hits, will gold sell-off with the commodity complex or will it hold up? Currently in the last year, we see gold and the dollar rallying, which doesn’t often happen. The question is whether gold will become a fair trade or if it would be a commodity trade.

“The S&P500 is just a couple of percentage points away from all-time highs, but based on earnings and other fundamentals it could fall over 40%. To us, it seems the downside potential is higher than the upside risk.”

Abstract by: Annie Zhou <a2zhou@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.