OtterWood Capital’s Christine Hughes explains the absurd concept of negative interest rates & what they are doing to the global banking system .. 7 minutes
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07/02/2016 - Christine Hughes: The Absurd Concept Of Negative Interest Rates
06/30/2016 - Ellen Brown: WHAT YOU NEED TO KNOW ABOUT THE TRANS-ATLANTIC TRADE AND INVESTMENT PARTNERSHIP (TTIP)
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
06/30/2016 - Leo de Bever: Investing Opportunities for Pension Funds
Leo de Bever:
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
06/27/2016 - Peter Boockvar: BREXIT: “THIS IS ALSO EXPOSING A LOT OF FAULT LINES WITHIN THE EU WITH BUREAUCRACY & THE PUSH BACK AGAINST THE ‘RULING CLASS’!
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
06/26/2016 - Incrementum Liechtenstein: In Gold We Trust Report – 2016 Edition
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”.
06/22/2016 - Graham Summers: “DURING THE NEXT CRISIS ENTIRE COUNTRIES WILL GO BUST!
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>
06/18/2016 - How Future Generations Will See Today’s Financial Repression
How Future Generations Will See Today’s Financial Repression
If you were to look around you (during your trip to the future) and perhaps wander into a college class on economics, chances are you would soon encounter a lecturer talking about the “Great Economic Collapse” of the early 21st century. In other words, talking about where we are right now.
When those lecturers talk about the Great Economic Collapse (in our imaginary future), chances are that the single most critical aspect of their discussion will boil down to this: how is it possible, they will ask, that the people alive at that time did not notice what was taking place all around them?
How is it possible, they will ask their students, that the public of that era (our era) sat back in total stupefaction while…
* Multiple banks, financial agencies and even government regulators not only did nothing to prevent the “bad paper” collapse of 2007—the one immortalized in The Big Short movie—but, in many cases, actually participated in the fraud, and profited handsomely from such participation?
* Faced with overwhelming evidence of the culpability of key banks and conspirators, the democratically elected government of the day not only did nothing but, astonishingly, went one step further and declared most of the bad actors “too big to fail” and then handed them billions of dollars shortly—and appropriately—before Christmas, dollars which had been entrusted to them by the public?
* Shortly thereafter, the Federal Reserve (an agency no more “federal” than Federal Express)—working in conjunction with other so-called central planners around the globe—in full view of the wide-eyed public, intervened in the interest rate market and basically hijacked it, usurped it, and bent it to their will, which ushered in an era of ultra-low rates that not only failed to generate any obvious benefits for Main Street, but paradoxically, rewarded the corporations, banks, and already-rich to a degree that was literally beyond imagination.
Faced with overwhelming evidence that their policies were not working for the intended purpose—and, in fact, were creating new and dangerous market distortions—these same central planners not only stubbornly continued the madness and mayhem, but they also actually took it to a new level. (ZIRPs, or zero interest rate policies, morphed into NIRPs, or negative interest rate policies, in most parts of Europe.) Didn’t Einstein once say that the essence of stupidity is repeating the same action over and over and expecting a different result?
During this same period, the only entities jumping for joy under these regimes were the trading houses (borrowing at zero means making a profit on any investment yielding more than zero!) and the corporations, which discovered that by borrowing at low rates to buy back their own stock, they could reduce their “float” (make less stock available) and therefore drive up the price of the remaining stock, making themselves look clever (even though THEY WERE NOT) and earning massive executive bonuses in the process. (It is my often-stated view that historians of the future will look back at quantitative easing as a mechanism to benefit the banks and ultra-rich, and little else.)
Nor can it be said that the public of the era (our era) was not offered objective information with which to make sense of this. During these troubled times, any brave soul who would have googled the term “financial repression” would have learned that all these strange measures, taken as a whole, were simply part of what governments “do” when they get in deep trouble and need to bail themselves out at the expense of the very same electorate who foolishly gave them power in the first place!
EXTRACTED FROM: The Coming Great Pension Collapse—How, Why, Where
06/15/2016 - Richard Duncan: CHINA’S HARD LANDING HAS ALREADY BEGUN!
The Financial Repression Authority is joined by Richard Duncan, an esteemed author, economist, consultant and speaker. FRA Co-founder, Gordon T. Long discusses with Mr. Duncan about the current Chinese situation and the ramifications being imposed on the global economy.
Richard Duncan is the author of three books on the global economic crisis. The Dollar Crisis: Causes, Consequences, Cures (John Wiley & Sons, 2003, updated 2005), predicted the current global economic disaster with extraordinary accuracy. It was an international bestseller. His second book was The Corruption of Capitalism: A strategy to rebalance the global economy and restore sustainable growth. It was published by CLSA Books in December 2009. His latest book is The New Depression: The Breakdown Of The Paper Money Economy (John Wiley & Sons, 2012).
Since beginning his career as an equities analyst in Hong Kong in 1986, Richard has served as global head of investment strategy at ABN AMRO Asset Management in London, worked as a financial sector specialist for the World Bank in Washington D.C., and headed equity research departments for James Capel Securities and Salomon Brothers in Bangkok. He also worked as a consultant for the IMF in Thailand during the Asia Crisis. He is now chief economist at Blackhorse Asset Management in Singapore.
Richard has appeared frequently on CNBC, CNN, BBC and Bloomberg Television, as well as on BBC World Service Radio. He has published articles in The Financial Times, The Far East Economic Review, FinanceAsia and CFO Asia. He is also a well-known speaker whose audiences have included The World Economic Forum’s East Asia Economic Summit in Singapore, The EuroFinance Conference in Copenhagen, The Chief Financial Officers’ Roundtable in Shanghai, and The World Knowledge Forum in Seoul.
Richard studied literature and economics at Vanderbilt University (1983) and international finance at Babson College (1986); and, between the two, spent a year travelling around the world as a backpacker.
THE CHINESE FINANCIAL CRISIS
“China’s economy resembles a spinning top that is running out of momentum. It is wobbling and gyrating erratically.”
China is really just running into a brick wall. If they continue to have more and more credit growth, it will only exaggerate their problem. This is essentially the nature of China’s current problem. A stock market crash, diminishing returns on credit, a plunge in imports, capital flight and currency volatility are all signs that China’s great economic boom is now coming to an end. In all probability, this is just the beginning of what is likely to be a very protracted economic slump.
China’s economy need not collapse into a Chinese Great Depression to produce a global economic crisis, although the possibility of economic collapse in China cannot be ruled out. The 17% contraction in Chinese imports last year was already enough to tip the global economy into recession. The consequences of this economic hard landing in China will be felt in ever corner of the world.
CONSEQUENCES OF INCREASING CREDIT IN AMERICA
Despite the efforts of quantitative easing, it did not help or facilitate much benefit to China. This is largely due to the fact that China’s economy is so large. There is a large gap between how much China produces and how much China consumes. From 2005 to 2014, China invested $4.6 trillion more than it consumed. If we look at aggregate financing it reveals a much more detailed story of the credit growth situation in China. Since 2009 credit growth has been significantly slowing, and once this began, so too did nominal GDP growth begin to decline.
“China is increasingly misallocating and wasting credit.”
During the last 25 years in China:
If credit growth in China continues to grow then by 2021, total credit growth in China will be more than the peak credit growth the US had back in 2008.
- The Gross Output Value of Construction increased by 134 times, growing at an average annual rate of 21%.
- Building Area Under Construction increased by 33 times, at an average annual rate of 15%.
- Steel Production increased by 12 times, at an average rate of 11% growth per year. Consequently, China now has 50% of global steel capacity.
- Cement Production increased 12-fold, growing by an average annual rate of 11%. During just three years (2011 to 2013), China produced more cement than the United States did during the entire 20th Century. China now has 59% of global cement capacity.
On the other hand many would believe that if China devalued the yuan, it would bring in more capital investment, but this is not the case. If they had one big devaluation it would make china much more competitive in the global economy. The trade surplus will soar and bring in more money into china. But at the same time China’s trading partners would not be pleased because China already has a large trade surplus with the rest of the world. So too devalue further only to make the already large trade surplus even larger would be unfair by anyone’s standards.
FALLING FOREX RESERVES
“Rather than the reserves shrinking, the more important thing to note is that they have not been growing.”
The buyers who are absorbing the treasuries being sold at are really people just fleeing negative interest rates. Rather than take a negative yield, they would rather buy US treasuries at a pathetic 1.7% on a 10yr. The reason China’s forex reserves are falling is because Chinese people want to sell Chinese yuan and buy dollars. And with these dollars they want to buy treasury bonds.
I do expect there to be a steady depreciation in the yuan coming in the near future. But much of this depends on what happens to the dollar. It is very clear that if the dollar goes up, the yuan is going to go down and this is a problem because the more the yuan goes down then the cheaper the Chinese goods will become compared to the US. Therefore making it more difficult for the fed to reach its mandate of 2% inflation.
JOB CREATION AND SUSTAINMENT IN CHINA
The green shows that China’s’ economy made up 13% of the global economy. But Chinese household consumption made up only 9% of global consumption, while investment made up 24.4% of global investment. This is mind boggling because its telling of investment in all kinds of structures which create jobs.
“If global investment and Chinese investment grow at the same rate as they are now, then within 10 years; Chinese investment will make up 60% of global investment. Of course this is not possible, it just won’t happen, so the investment is going to have to slow. “
What Chinese authorities are telling is that they are consequently going to move from investment driven growth into consumption driven growth, but this again is just not possible because if you begin laying off factory workers, then these people will consume less, not more. If investment slows as it must, then consumption will also slow. So in order to have any growth at all, Chinese spending will need to sharply increase.
“For the rest of the world it does not matter how much China’s economy is growing by, but that matter is how much their imports are growing by.”
When Chinese imports are growing, china then becomes a significant driver for global economic growth. But last year Chinese imports contracted by a staggering 17%. Brazil is now suffering the world depression in 100 years because commodity prices have crashed due to lack of Chinese demand. The effects of this import contraction are clearly being felt and it will be global. All around the world we are seeing a rapidly growing backlash against free trade and the rise of anti-free trade candidates on both the right and the left.
“We need to push up wages in the manufacturing industries around the world. Currently the average wage rate globally is $8/day, and there are hundreds of millions of people who would be happy to work for $5/day. We now live in a global economy, we are very much interconnected and we have to find a way to increase wages in the manufacturing sector.”
Karan Singh karan1.singh@ryerson.ca
Sarah Tung sarah.tung@ryerson.ca
PLAY VIDEO: https://youtu.be/3Om-VhDG08g
06/15/2016 - Yra Harris: Financial Repression Is Distorting Risk Profiles
Yra Harris makes the analogy: “Alfred E. Neuman of Mad Magazine fame would ask, ‘What, Me Worry?’ The other side of the equation would be Arthur Fonzarelli from the television show, ‘Happy Days.’ who would stutter before ever admitting that he was WRONG. The world’s central banks are a reflection of these two icons. It seems that Yellen, Draghi and Kuroda all suffer from both views. They have nothing to worry about and they certainly cannot admit to being wrong. The central banks are under attack from investors and traders for pursuing quantitative easing and negative yields even though the efficacy of such programs is certainly in doubt.” .. Harris points out how the balance sheets of the Federal Reserve, the European Central Bank & the Bank of Japan have reached significant proportions of the total amount of outstanding government debt – this has led to massive distortions in all asset classes .. “Well, the master theoreticians may want to lend an ear to seasoned practitioners and STOP THE PRESSES. Rescind the negative yields and let the markets have a greater hand in setting the price of bonds. BUT THAT WOULD MEAN THAT THE WORLD’S CENTRAL BANKS AND THEIR MODELS MAY HAVE TO ADMIT THE POSSIBILITY OF BEING WRONG. The first rule of being in a hole is (of course) stop digging. But the ECB and BOJ are doing the exact opposite: They continue digging. The ECB now is buying corporate debt, which is resulting in multinational firms issuing EURO-denominated instruments knowing there is a ready buyer and is pushing corporate bond prices to absurd levels. Again, central bank policy has broken the pricing mechanism of the global debt markets. It is not the $10 TRILLION of negative-yielding sovereign debt that WORRIES me but the $40 TRILLION of money being forced into assets that are not priced to the risk profile they carry. The number of quality voices speaking about the negative outcomes from FED policy should raise concerns from the world’s bankers, but instead we get Alfred E. Neuman.”
06/15/2016 - Paul Singer: Central Bank Macroprudential Monetary Policies Are The Sole Support In The Developed World
“In the absence of pro-growth policies on the fiscal side, the sole support in the developed world has been monetary policy. There’s been a more or less universally practiced set of monetary policies consisting of zero and now negative interest rates and so-called quantitative easing — various forms of asset buying. It started out as all bond buying, but now it’s leaked into equities. The result of all that — I call it monetary extremism — is that the economies have held up and had some growth, but that growth has been tepid, with the biggest gains going to those who own financial assets while wage growth has been stagnant.
The cure for the crisis — for the debt crisis, the financial crisis — has been deemed by the developed world governments to be more debt. There has not been a deleveraging .. I think it’s a very dangerous time in the financial markets.”
– Paul Singer
06/14/2016 - Avoiding Financial Repression: Commerzbank Considers Hoarding Billions In Cash To Avoid Negative Interest Rates
Commerzbank, one of Germany’s biggest lenders, is examining the possibility of hoarding billions of euros in vaults rather than paying a penalty charge for parking it with the European Central Bank, according to sources familiar with the matter .. “Such a move by a bank part-owned by the German government would represent one of the most substantial protests yet against the ECB’sultra-low rates, which have been criticised by politicians including Finance Minister Wolfgang Schaeuble.”
06/14/2016 - Financial Repression Is Causing More Risk Taking To Maintain Returns
Articles highlight the trend by investors to take more & more risk in an attempt to get the same investment performance returns as many years ago when bonds easily provided those returns .. hedge funds are looking towards Australia where many Australians manage their own pension savings in an attempt to offer investor returns .. “Hedge funds who introduce complex trading strategies to mom and pop investors and massive pension funds – what could possibly go wrong there?”
06/09/2016 - Erik Townsend: “YOU EITHER ACCEPT FINANCIAL REPRESSION AND YOUR WEALTH WILL ERODE, OR YOU BECOME A SPECULATOR!”
FRA Co-founder Gordon T. Long is joined by Erik Townsend in discussing what it means to be an American entrepreneur and his perspective as a global traveler, along with the impact of the upcoming election.
Erik Townsend is a retired software entrepreneur turned hedge fund manager. Throughout his career, Erik has capitalized on his ability to understand complex systems and anticipate paradigm shifts far in advance of the mainstream. By the mid-1980s, Erik had invented an approach to distributed system design that is now widely known as Service-Oriented Architecture (SOA). In 1992 Erik founded the Cushing Group, a boutique consultancy focused exclusively on bringing advanced distributed application computing technologies to market. The Cushing Group’s work with Wells Fargo Bank in the early 1990s paved the way for Wells Fargo to become the world’s first Internet Bank by early 1995. After selling the Cushing Group to Ciber, Inc. (NYSE: CBR) in 1998, Erik briefly engaged a well-known investment bank to manage his assets, but was profoundly disappointed with their services.
Erik has become a passionate world traveler. He moved to Hong Kong in 2009 to get a better perspective on changing global economics. While living in Hong Kong, several hedge fund professionals he met there observed that through his own passionate trading activities, Erik was “already doing all the work of running a hedge fund except for picking up the phone and calling a lawyer and turning it into a fund”.
Erik eventually took his Hong Kong friends’ advice to heart, and founded Fourth Turning Capital Management, LLC in 2013. Through that asset management company, he launched a Global Macro-strategy hedge fund in July 2013. In February 2016, in a joint effort with Nathan Egger, Erik launched Macro Voices, a new weekly financial podcast program which will target professional finance, high net worth, and other “sophisticated” investors who desire financial content at a level of sophistication and complexity above what the retail investment-focused podcasts on the Internet presently offer. Erik continues to live a very international lifestyle, and presently has homes in Hong Kong, Mexico and the United States.
AS AN ENTREPRENEUR
Being an American entrepreneur was kind of a hero story. It was understood in America that the people who launch small business and innovate new ways of doing things are the heroes that make America strong, and made it what it once was. It’s in decline, unfortunately. In 2008 I wanted to get back into technology entrepreneurship, bur there were barriers to entry and it was so easy to watch the reckless monetary policy and get into trading instead. The government is desperate and doing crazy things. We’re in very unprecedented times, and if you can understand that picture, it’s not too hard to be successful in trading. It’s much easier to make money by understanding how reckless the government is being.
“I help rich people get richer while watching the country that I’m very proud to be from, in my eyes, fall apart at the seams. Being an entrepreneur was a much more responsible and honorable thing to do with one’s life.”
There’s a huge financial incentive to trade markets and take advantage of the huge inefficiencies that are created by reckless actions of government.
TECHNOLOGY IN ENTREPRENEURSHIP
“I don’t know that entrepreneurship is necessarily stronger in other places, compared to what the United States used to have.”
There is no place that begins to compare with what America used to be. We see America in decline today. It’s gone from being head and antlers above the rest of the world down to still one of the better countries. I don’t know that there’s anything that’s dramatically better in terms of opportunities for entrepreneurs starting their own companies.
“I think that Americans who don’t travel a lot have no idea how much things have changed.”
Technologically, every place was behind the United States. But that was during the 80s. Today, America is run down and broken. The systems in the United States don’t work very well. Asia is shiny and new.
For example, Hong Kong’s octopus card. It has an RFID chip in it and can be used on every form of public transit as an electronic cash card. This was in service and working in 1997. That was 19 years ago and there’s nothing like it in the United States today. Gigabit internet is standard around most of the world now, yet it’s next to impossible to find. Hundred megabit is “unheard of fast” in the United States, but that’s really slow service in most of the world now. What makes this infuriating is that all of the underlying technology that makes this possible was invented in the United States.
“Why is it that the United States is last in terms of adoption of technology that we ourselves invented? I think it’s the failure of government. They have created so many barriers to entrepreneurs taking technology and using it to change society for the better that entrepreneurs are going and doing it elsewhere where governments are cooperating with them.”
That said, the way things are done elsewhere is according to procedure with no deviation from the standard policy. The way Americans think and innovate is still culturally not accepted in most of the world, so we still have that advantage.
In a lot of cases, we’re seeing a lot of American entrepreneurs move overseas because there are better opportunities there. The American government used to recognize that its job was to promote and endorse that kind of innovation, but now they’ve basically been sold out. Entrepreneurs can’t afford lobbyists, but large corporations can. It doesn’t matter how innovative you are; if your government prevents you from being successful, the most innovative people will find other parts of the world.
“I think that if the government continues to prevent American entrepreneurs from succeeding, they’re going to go elsewhere and they’re going to bring their talent to help other countries to be competitive.”
FROM ENTREPRENEUR TO HEDGE FUND MANAGER
Dealing with executives of Fortune 100 companies, you need to prove your ethics and morality and loyalty to them before they’re willing to give a small company a chance. In Wall Street, the boxing analogy is what you have to wrap your head around.
“What you see on Hollywood movies about business being cutthroat, it doesn’t really work that way in most of corporate America. On Wall Street, it’s worse than that.”
Entrepreneurs are people who make things happen, who get things done, and that’s what makes us successful. But investing is the opposite of that. They watch and make decisions based on what other people do. Entrepreneurs also don’t have to listen to stupid people, and you can’t do that in investing. If you focus on what should happen in the economy, you’re going in the wrong direction. You want to be learning how the people who are actually in power think.
“During my work week I have to learn how to think like the people who are in charge do, and it’s not based on common sense.”
THE PROBLEM OF CENTRAL BANKS
Governments are taping over our problems and addressing symptoms with printed money. The root cause of the 2008 crisis was too much debt. The solution governments proposed was more debt, and they’re trying to stimulate credit markets in order to get banks lending again so people can go back to spending beyond their means. There’s no focus on saving and investments. A lot of people have said this is unsustainable.
“The truth of the matter is that central banks, with a deflationary backdrop like it is now, can continue to print money.”
They can keep getting away with addressing symptoms as long as we have a deflationary backdrop that permits money printing to occur without causing runaway inflation. Once we get to runaway inflation, central banks will have no choice but to tighten in order to arrest the inflation, and then things will come crashing down.
We’re printing all this money to benefit Wall Street; it’s not benefiting hardworking Americans, it’s supporting financial markets.
“Wouldn’t it be better, if quantitative easing has to happen, if it were helicopter money that helped everyday people?”
When inflation hits the stage, that’s when central banks have to fold their cards. What happens in the meantime, almost everyone thinks that negative interest rates are coming to the United States. As we do get back toward a worsening economic situation, we’re going to see an uprising. Americans might not understand the problem, but they know there’s a problem and they’re angry about it. If there’s going to be more quantitative easing, there’s going to be very strong political pressure that it should be to help Main Street, not Wall Street.
“I think the next president, the one elected this year in 2016, could very possibly be the most important president in the nation’s history because I think the fiscal situation is likely to come to a head.”
People around the world don’t envy the USA the way they used to. They’re angry. The world is getting very pissed off at Americans. Hilary Clinton is talking tough with Russia. Donald Trump is talking tough with China. When you start picking fights with Russia, with China, these are places who have the ability to end humanity on Earth with the push of a nuclear button, just like the US does.
“All of the candidates, I think, are very dangerous in terms of their very tough-guy attitudes that they’re taking toward other countries. So I’m very concerned about where we’re headed in terms of American hegemony offending people that are able to defend themselves.”
THOUGHTS TOWARD THE FUTURE
You’re better off not being a speculator, but in an era of financial repression that gives negative returns. So you either accept financial repression and that your wealth will erode slower than other people, or you become a speculator.
“I think the opportunity is coming to buy energy, hand over fist.”
You have to watch the action of central bankers, and recognize that the smartest people in the room are saying that the global economy does not support current asset prices. What does support current asset prices is that the Fed is going to be accommodative and continue to prop up asset prices. The longer this goes on, the harder the fall will be.
If you wanted to own something long term, precious metals will definitely behave very well. But buying and holding long term in the stock market is not recommended. We’re in an environment where asset prices have been artificially propped up, they’re supposedly taking the punch bowl away and if they do, I think that we could see a very precipitous drop.
PODCAST HOST EXPERIENCES
“I wanted there to be a de facto place where you could go online and collaborate and share investing ideas with other smart people.”
If you look at what’s there in terms of discussion forums on the internet, it’s childish. So where do the adults go for discussion? So I created a podcast that specifically targets high net worth individuals, family offices, accredited investors, basically sophisticated investors living in financial repression and understand that they have to speculate to avoid a negative real rate of return. And that means collaboration.
“The idea behind MacroVoices is to create that podcast, get that discussion going in the podcast, and then have a listener discussion forum where we can discuss the topics and continue the conversation, bring that global community of sophisticated investors together.”
There are other platforms like Twitter, which are starting to gain a huge amount of market share. We’re participating on Twitter through the MacroVoices handle, as well as having our own listener discussion forums. The idea is to just get smart people talking to one another.
“I get to interview the smartest people on Earth about financial topics, and what we tell them all off the air is what we’re doing different here is please do not dumb it down to a retail level. We want you to speak on a professional level.”
So we keep the guest interview on a professional level, and then add a conversation to explain any issues that might have been confusing to the retail component of the audience. We thought we were going to offend the retail audience, but it’s the opposite. The more that they don’t get it, the more interested they are, and the more they post questions and ask other listeners to help them understand.
“Not dumbing it down is the best thing that we’ve done.”
Abstract by: Annie Zhou a2zhou@ryerson.ca
Video Editor: Min Jung Kim minjung.kim@ryerson.ca
06/06/2016 - FRA Sees All Eyes on US-China Strategic Dialogue Summit in Beijing
FRA Sees All Eyes on US-China Strategic Dialogue Summit in Beijing
The July FOMC meeting is being framed today in China.
The FRA was fully expecting an “obfuscated” Jobs Report on Friday to give Yellen the time and cover she needed in striking an agreement with China, now that the Shanghai Accord has clearly broken down.
The FRA presently expects a Fed hike in the July FOMC meeting but NOT BEFORE a final resolution on the DEVALUATION OF THE YUAN is agreed to between the US and China.
China has already fired four devaluation salvos across the US bow in the last 4 weeks. China is out of time and patience.
Remember: China is selling FX Reserves held in US Treasuries and are the banker to a continuing rising US debt requirement.
Both a cheaper Yuan and US$ are required – but what is to be debated at the US_China Summit is how?
06/05/2016 - BMG’s David Chapman On The Bail-In: Or How You Could Lose Money In The Bank
BMG’s David Chapman discusses the failing banking system & Canada’s stance in the unlikely event of a large bank failure .. “Those at risk of a bail-in in the event of a failure are subordinated debt holders, bondholders, preferred shareholders and any accounts in excess of $100,000 not covered by CDIC insurance. Their bonds, preferred shares, deposits etc. would be converted to capital to re-capitalize the banks. According to the financial statements of the CDIC, they insured some 30% of total deposit liabilities, or $684 billion, as of April 30, 2014. The remaining 70% not insured would primarily be large depositors, including both large and small businesses, and other banks and financial institutions. Depositors can avoid problems in a bail-in regime, but to do so they must be aware of the rules and have taken steps to ensure the safety of their funds. The bail-in regime would only apply to eligible Canadian banks and financial institutions. As was noted, it would not cover brokerage accounts, pension funds and mutual funds.”
06/05/2016 - BitGold On Negative Interest Rate Policy & Financial Repression
Wall St For Main St interviews the Co-Founder & the Chief Strategy Officer of Bitgold, Josh Crumb .. discussion on why gold has rallied in U.S.$ terms since December .. a discussion about negative real interest rates & how the gold bull market has actually been going on for more than 2 years in other currencies besides the U.S.$ .. a discussion on negative interest rate policy & the attempt by many global central banks to implement financial repression .. gold will be an even more attractive alternative for investment & savings the more attempts central banks try at manipulating interest rates down as part of negative interest rate policy or NIRP .. 34 minutes
05/31/2016 - Michael Belkin: Central Banks Are Lighting A Rocket Under The Gold Price
“Gold, silver and gold/silver mining stocks have commenced a new long-term bull market. It’s like buying the Nasdaq in April 2009. Meanwhile, global stock indexes have been in a broad topping process for years, our global composite stock index stands at the same level as it did in December 2013, two and one half years ago. The trend has not been your friend in stock indexes, every rally has fizzled out for buy-and-hold stock market investors .. Gold is a currency, it is held as a reserve asset by central banks along with their FX holdings. QE, ZIRP and negative interest rates (NIRP) have destroyed central bank credibility and the value of major reserve currencies (dollar, euro, yen, yuan) .. The failed policies of central bank credit expansion are lighting a rocket under the gold price, the asset that central banks can’t devalue. Precious metals mining stocks are leveraged to a rise in the gold price, profit margins and mineable reserves surge when precious metals prices rally. These are the conditions for a long-term bull market, in which dip-buying is rewarded with constantly higher prices. We continue to recommend the accumulation of gold and silver mining stocks on brief pullbacks. Gold is the central bank put.”
link here to the article
05/27/2016 - John Rubino: DEFLATION IS A DIRECT RESULT OF OUR ATTEMPTS TO CREATE INFLATION THROUGH EASY MONEY!
John Rubino of DollarCollapse.com and FRA Co-founder, Gordon T. Long discuss the effects of the rise in eCommerce along with the rise of technology and the consequences we are facing from flawed perceptions of financial authorities.
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 1980s 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.
The big retail chains are generally seen as pretty good barometers of the health of “the consumer.” And since — in today’s late-cycle debt-binge pseudo-capitalism — the consumer drives the economy, the numbers coming out of the aforementioned retail chains should be cause for worry. Ecommerce companies like amazon are making it easier and easier to stay at home. Women now are more and more buying their clothes from the comfort of their homes which will soon make the need for malls obsolete.
Furthermore by increasing the minimum wage rate in America, all of the fast food chains have begun automating cashiers with kiosks. McDonalds’ has already begun doing this and this new direction has highlighted the lesser need for human labor within the retail sector. Warehouses and factories used to employ many people throughout the world, now with the rise of technology, and particularly in America these places have become vastly automated. In many cases you do not need bartenders, waiters, and cashiers. All of these tasks can be automated through technology.
“I hate to be apocalyptic but the fact of the matter is we have multiple storms that are all playing in the same direction and they are feeding on each other as a link. To link monetary policy and cheap money to robotics. If you are a CEO and money is this cheap, you are going to invest into robotics. These trends have accelerated the shift to robotics and this wave is going to shock people and leave many without jobs.”
MONETARY POLICY
When interest rates are low it is a signal to the market to borrow lots of money. Over the past couple of decades due to these low interest rates, the businesses of the world have begun mass borrowing of money to build factories. This mass overcapacity in turn leads to deflation. for example when you build too much steel you cannot just stop operations at the given plant; the plant must continue to run to at least break the variable cost, which in the long run drops the price of steel.
“Deflation is a direct result of our attempts to create inflation through easy money.”
Cheap money was not going to bring demand forward any more than two years, but what it would do is create a dramatic over supply. We have had $9 trillion leveraged into the emerging markets that basically went into fueling overcapacity for the past several years. When you get overcapacity you lose price power and then cash flows begin to be depleted. This was easily predictable, there was no economist that would say otherwise, however the mistake was that they thought we had some sort of recovery happening or they ignored that and thought Japan had the right approach.
“The people making high level financial decisions the past decade are clueless. They have no idea what the consequences of their decisions are. The people in charge now are getting exactly the opposite of what their predecessors expected when they implemented QE, and ran massive government deficits.”
This is going to force another wave of major layoffs. We already have a gutted middle class; we are killing the golden goose that actually buys consumer products. Maybe what was really missed is that all of this economics was based on a standalone country. We live in a globalized economy now that has labor arbitrage, and the central banks have underestimated the global impacts of these policies.
“We are at the point where there are no more options. Anything we do from now on will have some sort of unintended consequences that will come back to bite us.”
The Japanese Central Bank and the ECB both took steps to devalue their currencies and they got the opposite result; the currencies went up. If we have gotten to the point where all the emergency measures central banks implement do not seem to work then it can’t be interpreted as a sign that we are coming or have come to the end of this process.
THE NEW NARRATIVE
“The narrative has now been shifted to a massive move of increasing central banks’ balance sheets that will be based on fiscal spending of infrastructure.”
James Rickards in his new book, ‘The New Case for Gold’ argues that to get the dollar down and force inflation into the system a way to do it is for the government to drive up the price of the gold. The enemy of the government has been gold, but it can also be the friend of the government in a crisis situation. Similarly, Catherine Austin Fitts argues the 1% has sucking wealth out of the US society for the past few decades and they have basically stolen just about as much as they think they can steal. Now it is in their interest to go back to sound money to protect what they have stolen. This is another reason for the gold standard to eventually look useful to the people in charge.
Karan Singh karan1.singh@ryerson.ca
Sarah Tung sarah.tung@ryerson.ca
05/25/2016 - YRA HARRIS: WE’RE IN A WHOLE NEW BALLPARK – THE FED’S OWN MECHANISM MAY BE BROKEN!
FRA Co-founder Gordon T. Long discusses with Yra Harris about the yield curve of US Treasury bonds along with the G7 meeting and the effect of Germany and ECB on the rest of the world.
Yra Harris is a recognized Trader with over 32 years of experience in all areas of commodity trading, with broad expertise in cash currency markets. He has a proven track record of successful trading through combination of technical work and fundamental analysis of global trends; historically based analysis on global hot money flows. He is recognized by peers as an authority on foreign currency. In addition to this he has Specific measurable achievements as a member of the Board of the Chicago Mercantile Exchange (CME). Yra Harris is a Registered Commodity Trading Advisor, Registered Floor Broker and a Registered Pool Operator.
He is a regular guest analysis on Currency & Global Interest Markets on Bloomberg and CNBC. He has been interviewed for various articles in Der Spiegel, Japanese television and print media, and is a frequent commentator on Canadian Financial Network, ROB TV.
LOW ON 2/10 YIELD CURVE
It looks like we have another temporary bottom. After we took out that previous level we were talking 120 basis points, but now we’re trading at 95. The big problem is going to be the 75 basis point area, but we’ve already taken out the lows that were made in 2007-2008. What it reflects is that the Fed is flattening as they’re talking about raising rates.
Usually with this flattening of the curve, the 2/10 which is called the “investor’s curve” instead of the “speculator’s curve”, indicates one of two things. Firstly, rates are either too high or going too high on the short end relative to what the market perceives is its potential growth in the future. They’re getting nervous.
“Usually I would say this is a very solid indicator and that the Fed has really waited too long to do anything. Which flies in the face of everything we’ve heard in the last two weeks.”
There is a dynamic in play in the global markets. With the vast amount of central bank purchases, they have skewed the markets so badly that the markets are trying to get a read on what this all means. Because everything is relative value, 60% of the developed market bonds are in negative territory. That skews everything, so we can’t get a real feel for what this curve means. If that’s the reason the curve is flattening, then we’re in a whole new ballpark because it’s a global phenomenon at a level we’ve never seen before and that’s going to affect everything. It breaks the Fed’s own mechanism.
“Bond markets need to be a signally mechanism to be effective, and if you’ve broken the signalling mechanism, well, we’re flying here in uncharted territory… then it becomes a question of, who’s in the pilot’s seat?”
That’s what the world is trying to figure out: do the people in the pilot’s seat know what they’re doing and have confidence in what they’re doing or are we really flying blind here?
5/30 CURVE FLATTENING
The 5s30s is where speculators like to play and that curve is actually flattening more as they seem to be able to exert more pressure, but that might be reflective of relative value. In a yield-starved world, yield-starved because central banks have so dynamically shifted everything everything through their massive purchases, people are stuck having to really reach for things.
“The 5/30 is more dynamically telling me that the Fed may be erring in raising rates, that they waited too long.”
People in Europe have 3/10% of GDP yield. It’s not even enough to cover their budget situations. Europe is in a very difficult situation here. That might mean the Fed has waited too long.
THE PREVIOUS G7 MEETING IN SHANGHAI
“I don’t think anything major came out of Shanghai because I’ve been around this business for a long time and nothing could’ve kept that quiet.”
Maybe something did take place, but then we consider June of 1998, when the Chinese were much more concerned, and two weeks before Bill Clinton goes to China, Bob Rubin makes a speech about the strength of the Dollar and the US Treasury started buying Yen and selling Dollars contrary to what Rubin said. The Chinese were very upset with the weakening of the Yen and put pressure on the US to try and correct it. Now in Shanghai, we get the sense that the Chinese were displeased with the recent 30% depreciation of the Japanese Yen and made their voices known.
If you tied that into Shanghai, you can see that the Japanese sent a signal saying, ‘when we have displeasure, and since we’re an autocratic government, we can move in a very quick, dynamic fashion. And when we move, we’ll disrupt the markets, so you better take care of this situation cause we believe the Yen is too weak against the Yuan.’ So now the Japanese are unhappy, so this will get interesting. The Japanese have voiced their concern with this one sided depreciation.
SPECULATION ON RESULTS OF THE G7 MEETING
The Japanese could seriously weaken the Yen if they started buying other countries’ bonds. So there was a conservative effort by the BOJ to buy US treasuries and European debt.
“Any time a central bank intervenes or starts to buy some of these assets in an aggressive manner, it’s being done to weaken your currency. There’s no better way to word it.”
The Swiss are actively intervening in the market, the Norwegians are maintaining stability. If the BOJ were to start buying US Treasuries, the Dollar-Yen would weaken dramatically cause that would be a central bank policy to directly weaken their currency by buying other countries’ assets. They will be warned against doing that, but the Japanese retail investors and pension funds are under a lot of pressure to deliver some modicum of return with negative rates in Japan hampering their ability to achieve a positive return.
“What I think the biggest issue the G7 will speak to is what I call the Larry Summers Agenda… he’s trying to get a global fiscal stimulus.”
He wants everyone to bring forward all their infrastructure spending now. It would make the Chinese very happy, but it certainly seems to be a desire to craft some type of global fiscal stimulus to take the pressure off the fiscal monetary policy.
People talk about the Chinese, but the Germans are much more a propagator of current account surpluses, but they save and save and save.
“We are totally opposed to nations using their currencies to gain a trade advantage. There will be a lot spoken about the need for fiscal stimulus.”
THE PROBLEM OF EUROPE
Europe is 27 different situations looking for a common policy, and that just can’t possibly happen. Germany has full employment and budget surplus, current account surplus, and it sits there with negative interest rates, then everything you’ve told me is wrong. What has to happen is you get very robust inflation in Germany, cause you’re keeping rates way below whatever metric is used.
“Your work is in financial repression. Nobody in the world right now is more financially repressed than the German people.”
We have the German constitutional court ruling against these OMTs and the ability of the ECB to actually perform fiscal policy through their monetary policy.
The markets are complacent. The European bond markets have yields that are preposterous.
“Germany is Europe’s credit card; the ECB, yes, they can print money but they have no credibility without the German credit card.”
No one would buy German debt without someone guaranteeing it. There is no Euro bond. It doesn’t exist. People keep saying they need it, but in order to do that there has to be someone guaranteeing that credit, and that’s the Germans. European debt is at 8-9% and this is going to be the wild card. They have swallowed the concept that the ECB is some sort of brilliant organization with credibility. It has x amount of balance sheet assets which are growing tremendously.
The ECB would be equivalent to the Great Depression in 1932 Austria, when the credit gestalt went under. The ECB sits in that role. If the Germans say they’re not going to be a part of this, the world blows apart financially. They’re hoping to pile all this on so the world will tell the Germans they can’t leave. This is such a surreptitious way of forcing them to be the guarantors.
Meanwhile the ECB is buying 80b more Euro’s worth of credit every month. They don’t even have to buy it. They’re doing it because they need product. They’re in a hurry to keep piling all this debt on the ECB, who kept saying ‘we’ll do whatever it takes’ and the market accepted that, and over the course of this “whatever it takes” they kept piling on this debt.
“If you want to see an accord, there’s going to be a fiscal stimulus accord.”
Abstract by: Annie Zhou: a2zhou@ryerson.ca
Video Editor: Min Jung Kim: minjung.kim@ryerson.ca
05/25/2016 - Paul Brodsky: Governments Are Devaluing To Ease The Burden Of Government Debt
Paul Brodsky:
The Global Monetary System
Has Devalued 47% Over The Last 10 Years
Financial Repression – Forced Inflation
To Reduce The Burden Of Government Debt
“We have argued the inevitability of Fed-administered hyperinflation, prompted by a global slowdown and its negative impact on the ability to service and repay systemic debt. One of the most politically expedient avenues policy makers could take would be to inflate the debt away in real terms through coordinated currency devaluations against gold, the only monetize-able asset on most central bank balance sheets. To do so they would create new base money with which to purchase gold at pre-arranged fixed exchange prices, which would raise the general price levels in their currencies and across the world to levels that diminish the relative burden of debt repayment (while not sacrificing debt covenants) .. The fact that gold remains on the balance sheets of central banks and is being aggressively bought by them suggests it is gaining, not losing, relevancy as a monetary asset. The fact that it can be used as the fulcrum against which to devalue currencies gives it purpose. The fact that allocations to gold and gold-related assets remains less than 3% of investment portfolios makes it a superior risk-adjusted portfolio allocation .. Our view is that there will not be a switch to a fully-reserved banking system or even a reversion to a fixed exchange rate; however, there will be a significant increase in global currency devaluations against gold, and that it will be coordinated by monetary authorities.”
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