The head of supervision at the central bank of Italy says the bail-in rules which impose losses on bank investors, bondholders & bank account holders if the bank needs to be rescued can undermine the confidence of small savers or investors in the banking system .. “The bail-in can exacerbate – rather than alleviate – the risks of systemic instability caused by the crisis of individual banks .. It can undermine confidence, which is the essence of banking; transfer the costs of the crisis from government at large to a smaller category of people no less worthy of protection – small investors, pensioners – who directly or indirectly invested in bank liabilities.”

link here to the article

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

click to enlarge

It’s another example of the unintended consequences of financial repression – the risk of not being able to sell the fund you are invested in, or in not being able to get the money after selling your fund, either immediately or within a certain period of time .. Deutsche Bank has prepared the above infographic (click to enlarge) which summarizes the main choke points which predispose both funds to runs or outright shutdown.

LINK HERE to the article

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

Yra Harris: Read “The Rotten Heart of Europe”!

FRA co-founder Gordon T. Long deliberates with Hedge Fund Manager, Yra Harris about the effects of financial repression and the imminent credit event. Harris is a macro Global Trend Trader and publisher of the Blog Notes From the Underground.

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.

Yra Harris is a recognized global trader who 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.

FINANCIAL REPRESSION

“The way governments repay the interest on their debt.”

When governments borrow money, they do not want to pay back the money at any real market rate, instead they artificially hold rates down to pay off creditors. It is about the size of the government debt and being able to debase it; pay it off in less value.

“Financial repression has led to serious inequalities.”

It begins with Tim Geithner, bailing out Wall Street and banks as opposed to bailing out main street. Financial repression has focused its effects on the savers, the people who have been saving for retirement are being seriously damaged and forced to go into the stock market.

A recent paper, The Hidden Cost of Zero Interest Rate Policies by, Thomas Coleman and Laurence Siegel report “Zero interest rates cost $5 trillion per year, or rather 5% of GDP from savers that is being transferred to other entities.[1]”

“When there is too much debt, all financial authorities have a chief goal, and that is to create inflation.”

Many people have called Geithner out on his ill-advised actions. Everybody fell in line with the ‘you have to protect Wall Street’ way of thinking, and to a certain degree that is true. The first QE was mandatory because you had to prevent the mass liquidation of assets. The lessons from the 1930s boldly taught us that the US cannot take such an immense liquidation of assets. People need to begin equating what is the real return on their money, which is the true financial repression because all zero interest rates do is culminate into inflation; the best friend of debtors.

FUTURE RAMMIFICATIONS WITH THE FED

“The French are tired of being ‘Germanized’”

The proof will be what will happen in the yield curve. If the curve were to flatten further the equity markets will retaliate. What the yield curve does, what the dollar does and finally what gold does when the Fed raises rates will be the three indicators we must keep an eye on.

Is it going to be the German euro or the French euro? Germans are hard money advocates because they are savers, and right now what is happening in Europe is the ultimate financial repression. German savers are being severely hurt in order to bail out the rest of Europe. The euro was at 82 cents in 2001 and 2002 because the Germans needed a weak euro in order to get all the labor reforms that were being put in place. They played this card upon the ECB and they got what they wanted.

THE IMPENDING EVENT

“There is something right now eating at the debt markets. It may be in the mining or energy sector, but this market right now is scared of some credit event that it lurking out there.”

There is a credit event somewhere going on, it is evident by how the markets are acting. What is dangerous is that it is taking place now, during the holidays and anything that happens will therefore be magnified. The stock markets are off, if you look at the coordination of them, they are all out of place.

The Fed is aware of this so they must ask what it is that they are not seeing. I will not be surprised if come this Wednesday, they will not raise rates. If the Fed does not raise rates on Wednesday, the stock markets will have a high sell off because people will think what it is that the Fed knows.

Richard Cue has done great work, he has recently written about recent debt developments throughout the world. The debt structure which is supposed to be handled hasn’t been dealt with at all, and the greatest error you can make; borrowing to buy back your stock.

As soon as corporation free cash flows starts to erode, that debt becomes a major issue. We have had a run on this fictitious financial engineering of buybacks that will boomerang and it may be violent. There are symptoms of debt overhang, and global slowdown will reveal to us the weak players that took on too much debt.

[1] Thomas Coleman and Laurence Siegel. The Hidden Cost of Zero Interest Rate Policies, Sept 28 2015.

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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’ Chief Investment Officer David Kotok highlights the plight of 4 banks in Italy rescued by the government, causing many to lose their life savings in the process .. “The bailout was carried out under the principles which governed Cyprus’ bailout. All of the stakeholders in the bank, including depositors, were at risk in the banks’ failure .. The Italian banking system is in serious trouble, and the failure of these four banks is simply the tip of the iceberg. Non-performing loans, loans that debtors are not paying off as agreed, but which have not yet been written off by the banks, have been rising. At this point 18% of all outstanding loans in Italy are non-performing. That is an extraordinarily high level, particularly when you consider that Italy is the eighth largest economy in the world and the fourth in Europe.” .. Kotok speculates that a contagion risk connection looms between the issues in Europe & the high-yield sector in the U.S. .. Kotok advises investors these words of wisdom to mitigate the risks: “If you cannot see it, don’t buy it. If you do not understand it, don’t buy it. It you cannot trade it with liquidity, avoid it. If you violate any of these rules, make sure you are getting additional compensation for the risk you are taking. In Italy, these are now proven to be three sound principles. In the U.S., the same rules apply.”

Article by David Kotok, Co-Founder and Chief Investment Officer of Cumberland Advisors

LINK HERE to the article
LINK HERE to the referenced article

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

Our FRA video guest, Graham Summers of Phoenix Capital Research reports that it will be much, much harder to get your money out during the next crisis:

Consider the recent regulations implemented by SEC to stop withdrawals from happening should another crisis occur.

The regulation is called Rules Provide Structural and Operational Reform to Address Run Risks in Money Market Funds. It sounds relatively innocuous until you get to the below quote:

Redemption Gates – Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate).  To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests.  A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier.  Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period…

Also see…

Government Money Market Funds – Government money market funds would not be subject to the new fees and gates provisions.  However, under the proposed rules, these funds could voluntarily opt into them, if previously disclosed to investors.

http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542347

In simple terms, if the system is ever under duress again, Money market funds can lock in capital (meaning you can’t get your money out) for up to 10 days. If the financial system was healthy and stable, there is no reason the regulators would be implementing this kind of reform.

As Zero Hedge noted earlier today, the use of “gates” is spreading. A hedge fund just suspended redemptions… meaning investors cannot get their money out. Expect more and more of this to hit in the coming months as anyone who is has bet the farm on the system continuing to expand gets taken to the cleaners.

The solution, as it was in 2008, will not be to allow the defaults/ debt restructuring to occur. Instead, it will be focused on forcing investors to stay fully invested at whatever cost.

This is just the start of a much larger strategy of declaring War on Cash.

This is part of one of the pillars of Financial Repression that the FRA refers to as “Regulatory Ring Fencing”

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 the Austrian School of Economics with German Finance bestselling author, Ronald-Peter Stöferle. Ronald 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, Austrian School for Investors – Austrian Investing Between Inflation & Deflation.

AUSTRIAN INVESTING BETWEEN INFLATION & DEFLATION

“For an investor it is critical to understand we are not in a cyclical crisis; we are in a systemic crisis.”

Well I have to admit I am not an economist which is why I am open to the Austrian school of economics Complex econometric models that try to forecast future models simply do not work, the 2008 financial crisis is an example of that. The Austrian school of economics simply described is “common sense economics.”

As a practitioner we are writing about the theory of the Austrian school of economics. It is a book dedicated to the practitioners of the Austrian school. What I want to point out is that the Austrian school has a completely different view when it comes to inflation and monetary systems.

For Keynesian economists inflation is simply a rise in prices. There is no point in discussing the details of inflation, however for Austrian economists it is an increase in the money supply.

The Austrian school shows the new monetary system which began august 1971, when President Richard Nixon suspended the convertibility of the dollar into gold. Since this was done we have seen major misallocation of capital.

“This interplay between inflation and deflation is crucial to understand, this refers to the term, monetarytectonics.”

“If you have an Austrian mindset, you have a great advantage.”

You are able to understand other currencies, thinking outside the fiat money system and as an investor focus on the real results not the nominal results you make.

THE CHANGING CREDIT CYCLE

 “In 2016, we very well may face a recession.”

For an Austrian a recession is something that’s normal, it is like a fitness program that prepares the economy for the next stage up. Trying to avoid such a recession will be difficult as QE, fiscal stimulus, monetary stimulus and low interest rates only make the situation more severe.

“The credit cycle leads the business cycle and therefore the fed will have a hard time fighting this falling trend in economic activity.”

To fight against it, negative rates in the US might be implemented. Many academic studies in the US say that evidence from Europe shows that negative interest rates work. The Fed may very well consider implementing negative interest rates. We will see increasing fiscal stimulus. There are many voices saying we should introduce helicopter money, but rather is it now called The People’s QE.

INVESTING ADVICE FROM THE BOOK

1. To have a nonfragile portfolio, and investing in your own skill set offers a great yield.

2. A good investor separates from a bad one in times of crisis.

3. Become an entrepreneur, the Austrian school greatly encourages entrepreneurship.

4. The Austrian school is very modest in saying we cannot predict the future but be prepared for all scenarios.

5. It is highly recommended to read Austrian School for Investors – Austrian Investing Between Inflation & Deflation. Many people have interpreted it as a philosophical book that attempts to cultivate and establish this Austrian mindset. It is a pragmatic school of thought which offers great benefits if implemented, and this book is the perfect guide to it.

Abstract written by 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.

FRA’s Co-Founder Gordon T. Long interview Thomas Coleman and Larry Siegel on their paper, The Hidden Cost of Zero Real Interest Rates. Thomas Coleman is the executive director of the center of economic policy at the University of Chicago Harris School of Public Policy and has spent most of his career in the financial industry mainly in research, trading and model development for derivatives and trading other fixed income derivatives. Larry Siegel is the research director at the research foundation of the CFA institute and also the senior advisor at Ounavarra Capital. He is also an author and public speaker.

$1 TRILLION or 5% per Year Taken From US Savers

On financial repression Larry describes it as the use of market prices, in particular interest rate to transfer resources from party A to party B in this case from savers to government. According to him the government can then borrow at rates that are extraordinarily low and not a reflection of the true value of the money to the lenders.

On the paper, Thomas explains that there are 3 highlights. The First is detailed from a historical perspective. He says that from looking at history we can see that nominal rates are low by historical standards. According to him what really matters are real interest rates. He mentions that when taking into account nominal interest rate and inflation we currently have real interest rates as minus one percent. This means that the real value of saving in a zero rate deposit would be a loss in value at about one percent a year.

“Financial repression is a disastrous ongoing strategy”.

Thomas mentions that one of the costs of a negative real interest policy is that negative real rates potentially distort decision making. He explains that the real interest rate is the price that determines how much we consume or how much we want to consume, the price of consumption today versus consumption in the future and how such a policy disrupts such decisions. Thomas stresses that it is the real interest rates that matter and that one of the reasons nominal rates has gone down below zero especially in Europe is because inflation has trended lower.

“Businesses decide whether to undertake a project based on whether the return they expect to make on the project is greater than the cost of capital. If you force the apparent cost of capital low enough through a low interest rate policy a lot of projects will look good and profitable that aren’t if you applied a normal cost of capital to that product so this motivates businesses and consumers to do a lot of things they shouldn’t be doing”.  –Larry

On trying to understand the wealth transfer from savers to borrowers, Thomas likens it to an implicit tax. He says that it is more than just a transfer from households to government but also from one set of households to another, from older to younger there by reinforcing the idea that negative real interest rates are potentially a distortion to  the price of consumptions today and consumptions tomorrow and also what we save today versus spend today. The troubling thing with all this according to him is the potential distortions that arise as a result of a negative real interest policy.

Abstract written by Chukwuma Uwaga – chuwaga@gmail.com

PAPER:   The Hidden Cost of Zero Interest Rate Policies

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.

Finland Government Officials Propose to Give Tax-Free Payout of $870 to Every Citizen Each Month.

As a way to improve living standards and boosts its economy, the nation of Finland is moving closer towards offering all of its adult citizens a basic permanent income of approximately 800 euros per month.

The monthly allotment would replace other existing social benefits, but is an idea long advocated for by progressive-minded social scientists and economists as a solution—counter-intuitive as it may first appear at first—that actually decreases government expenditures while boosting both productivity, quality of life, and unemployment.

“For me, a basic income means simplifying the social security system,” Finland’s Prime Minister Juha Sipilä said last week.

Though it would not be implemented until later in 2016, recent polling shows that nearly 70 percent of the Finnish people support the idea.

According to Bloomberg, the basic income proposal, put forth by the Finnish Social Insurance Institution, known as KELA, would see every adult citizen “receive 800 euros ($876) a month, tax free, that would replace existing benefits. Full implementation would be preceded by a pilot stage, during which the basic income payout would be 550 euros and some benefits would remain.”

Read more at http://globaleconomicanalysis.blogspot.com/2015/12/bernankes-helicopter-drop-hits-finland.html#aTG3KkokT0goe1Ia.99

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 Fed’s in a bind

ALASDAIR MACLEOD 3 DECEMBER 2015

One can understand the Fed’s frustration over the failure of its interest rate policy, and its desire to escape the zero bound.

However, since the FOMC has all but said it will increase rates at its December meeting, events have turned against this course of action. The other major central banks are in easing mode, and the slowdown in China has further undermined both world trade flows and commodity prices. The result has been a strong dollar, which has effectively eliminated any perceived need for higher dollar interest rates. Meanwhile, the US’s non-financial economy remains subdued.

Last August, a similar situation existed, when the FOMC signalled that a rise in the Fed Funds Rate might be announced at its September meeting. Ahead of it, China revalued the dollar by announcing a small devaluation of its own currency, taking the wind out of the Fed’s sails. While the talking heads saw this as a failure of Chinese financial policy, it was nothing of the sort. Given the US was dragging its feet over the yuan’s inclusion in the SDR, it was a salvo in the financial war between the two states, and the Fed found itself in the firing line.

Since then the pressure has been mounting from the IMF for the US to back down over the SDR issue. The result was announced only this week, with the dollar content hardly changing and the yuan being accommodated mostly at the expense of the euro from September next year. However, despite the SDR issue having been dealt with for now, the Fed appears to have very little room for manoeuver before higher interest rates will give rise to a new financial crisis.

The chart below illustrates the problem. It is of the Fed Funds Rate since 1980 and the Fiat Money Quantity, which simply put is the sum of the commercial banks’ reserves at the Fed, plus cash and sight deposits held at the banks.

From the mid-eighties, successive interest rate peaks (the pecked line) have declined to the point, which if the trend continues, would indicate a Fed Funds Rate peak today of roughly 3%. It is clear that the reason for this declining trend is the increase in bank-related debt, the principal counterpart to FMQ, and the interest burden it places on borrowers.

This trend of declining interest rate peaks was established before the Lehman crisis, when the Fed’s response was to rapidly expand its balance sheet. The result is FMQ growth accelerated from a compounding annual rate of 5.8% to 14%, taking FMQ to 70% above the previous long-term trend today. It would therefore require a far smaller increase in interest rates than indicated by the pecked line to tip the monetary system into a crisis, perhaps a Fed Funds Rate of as little as 1%.

The idea that we can be so precise about interest rate levels is obviously nonsense. If the Fed increases the Fed Funds Rate even slightly, non-financial borrowers often end up paying a significantly higher rate that includes a larger interest rate spread. The spread between interbank and corporate borrowing rates becomes an important indicator of financial stress, and junk bonds are already signalling deteriorating borrowing conditions. Just the threat of higher interest rates could turn out to be destabilising for the financial sector.

A problem of the financial sector’s own making

The key metric which has permitted debt to increase at such a pace is the declining rate of price inflation. This rate has not responded to monetary inflation as one would expect, having continually fallen from the high rates of the late ‘seventies, while the quantity of money and credit has increased significantly. The reason the rate of price inflation has declined is that by taking over the securities industry in the 1980s, the banks have been able to combine their licence to create credit out of thin air with the direct application of this credit into financial instruments. The result has not only been extremely profitable for the banks, but it has diverted excess credit from less profitable non-financial activities.

This partly explains why banks have increasingly neglected commercial and retail customers, concentrating capital allocation into investment banking. The effect has been to generally confine price inflation to assets, such as stocks, bonds and property. At the same time consumers have been packaged through securitised bulk lending for mortgages, student loans, credit cards and motor loans. Any pretence that banks exist to provide a service for customers has flown out of the window.

At the same time, this credit and securities duopoly has given the banks the ability to magically create paper substitutes for physical commodities through the futures markets, suppressing prices to levels below where they would otherwise be. In turn, this has reduced the pressure on price inflation for consumer goods. The decline in price inflation over the last thirty-five years is therefore the combined result of suppressed commodity prices, the reduced expansion of credit available to non-financial sectors, as well as favourable changes in statistical methods.

The declining trend of interest rates has been crucial for the profitable expansion of financial activities for their own sake. Since assets are valued with reference to interest rates, the falling trend in interest rates since the mid-eighties has delivered large profits to the banks and their financial customers.

The ground-level which inhibits further credit expansion is zero interest rates, a condition that has existed for seven years. Despite talk of negative rates, the impetus lower interest rates give to expansion of the financial side of the economy has already come to an end. Attempts by the Fed to raise interest rates, even slightly, should be considered in this light.

The next financial crisis could manifest itself in the coming months. The time-line of monetary expansion reflected in the chart above is at risk of being terminated by events. If so, it will mark the end of current central bank monetary policies and state control of markets, as free markets reassert realistic pricing. Government bond yields will normalise, stock markets will fall, and banks will almost certainly fail. Supressed commodity prices will rise as banks, short through paper contracts, will be forced to close their positions. Credit default swaps, where the banks are collectively exposed to losses when interest rates rise, will be a further source of grief.

When something as epochal as this happens, we can expect the macroeconomic establishment to be clueless with respect to the problem itself and its scale. Central banks will naturally revert to the Lehman remedy of further monetary expansion to cover the losses, whose enormous scale will not be apparent at the outset. This time, not only will the fiat money quantity accelerate into hyper-drive, it will be impossible to maintain the purchasing-power of the world’s reserve currency, therefore threatening that of all the others.

This month’s FOMC rate decision will not change this outlook, but it could bring forward the timing.

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.

European Central Bank will step up efforts to support economy, says Mario Draghi

Speaking a day after the ECB’s moves to expand stimulus fell short of market expectations, the central bank president said that he was confident of returning to that level of inflation “without undue delay”.

“But there is no doubt that if we had to intensify the use of our instruments to ensure that we achieve our price stability mandate, we would,” he said in a speech to the Economic Club of New York.

“There cannot be any limit to how far we are willing to deploy our instruments, within our mandate, and to achieve our mandate,” he said.

source: tradingeconomics.com

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

Are We Stealing from SAVERS to Allow the Government & Corporations to Accelerate Borrowing?

$1 TRILLION/ Annually or 5% of GDP

READ: The Hidden Cost of Zero Interest Rate Policies September 28, 2015 by Laurence B. Siegel and Thomas S. Coleman

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.

“Central banks are casinos. They print money as if they were manufacturing endless numbers of chips that they’ll never have to redeem. Actually a casino is an apt description for today’s global monetary policy .. Central banks haven’t really succeeded – this is a testament to what I and others have theorized for some time. Martingale QE’s and resultant artificially low interest rates carry distinctive white blood cells, not oxygenated red ones, as they wind their way through the economy’s corpus: they keep alive zombie corporations that are unproductive; they destroy business models such as insurance companies and pension funds because yields are too low to pay promised benefits; they turn savers into financial eunuchs, unable to reproduce and grow their retirement funds to maintain expected future lifestyles. More sophisticated economists such as Kenneth Rogoff and Carmen Reinhart label this ‘financial repression’. Euthanasia of the saver is the result if it continues too long .. Timing is the key because as gamblers know there isn’t an endless stream of Martingale chips – even for central bankers acting in unison. One day the negative feedback loop on the real economy will halt the ascent of stock and bond prices and investors will look around like Wile E. Coyote wondering how far is down. But when? When does Martingale meet its inevitable fate? I really don’t know; I’m just certain it will.”

LINK HERE to the Article

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

Mises Institute posted essay refers to the recent letter to the Federal Reserve from the “savers of America” written by Ralph Nader .. the letter emphasizes how savers & retirees have been shafted by very low interest rates on bank accounts & fixed income investments .. it’s financial repression .. it’s the result of the unintended consequences of central bank & government policies & financial reform/regulations .. the essay makes a few great points to counter those seeing the “positive” short-term boom aspects of central bank money printing: “If Yellen is asserting that things are more affordable because it’s easier to borrow cheap money, then she’s just ignoring the trade-offs involved. Low interest rates and inflation mean that people must borrow more because it’s far more difficult to save under those conditions. Yes, debt is cheaper, but people must also take on more debt because it’s so difficult to save or make money off investments unless you’re not already rich. And, of course, this just applies to people who are at a stage of their life where it makes sense to take on more debt. If you’re old or on a fixed income, all you’re getting from the Fed is a huge ‘screw you.’ Moreover, when it comes to affordability of everyday, things, who is Yellen kidding? Home price growth and rent growth are at historic highs. Are we to believe that immense growth in rents and mortgage payments (the largest single expense for families) are a good thing for families? For people who already own homes, rising home prices are often a hurdle that can be overcome. But for people who don’t already own real estate, there’s little hope of buying one under these conditions. Surely, the Fed has played no small part in driving the homeownership rate in America down to a 30-year low. And again, if you’re retired: good luck. You’re gonna need it. Yellen no doubt believes that wages are higher because of Fed intervention. But in a world of sky-high rents, real wages are in fact lower.”

LINK HERE to thehttp://www.cliffkule.com/2015/11/the-federal-reserves-stimulus-hurts.html Article

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

FRA Co-Founder Gordon T. Long interviews Brett Rentmeester on Austrian economics and the importance of having an entrepreneurial mindset in investment.  Brent Rentmeester is the president of Windrock Wealth Management and has been in the wealth asset management for over 18years. Mr Rentmeester believes the uniqueness of Windrock is its focus on the macroeconomic picture, Austrian economics and what it all means for investment implications as well as an entrepreneurial mindset on how to find investment opportunities.

The Austrian school to him is the “acknowledgement of the influence that central banks have on the business cycle and interest rate and therefore the opportunities left for investment”.

He mentions that the traditional stock, bond portfolio is under a lot of challenge going forward because there is no real and safe income anywhere today. As a result people are becoming speculators and risk takers even when they don’t want to.

Brett believes having an entrepreneur mindset when investing, is the key to addressing the dilemma of income and the future of investment. Secure private lending is lending money to borrowers that is backed by real tangible assets or an income stream. According to him, what makes this a unique category is that it addresses the pockets of lending that is being neglected by the big banks as a result of  the financial banking distress that took place in 2008.

On examples of secure private lending, Brett highlights 3 different categories with his examples. He explains that in auctioned rental properties, the government organizations Fannie Mae and Freddie Mac by law are restricted from buying mortgages on such properties until after 2 years, this results in a niche market for private lenders. “In energy markets more states are moving towards a deregulated market”. What this means is that a consumer can buy energy from a variety of energy companies. Now this system is facilitated by third party brokers who go door to door offering this energy from various energy companies. Now because the brokers want the commissions up front and the energy companies can’t provide it, we see people coming in to pay the brokers a discounted fee upfront and then agree to collect the 3year contract provided by the energy companies.

Trade financing

“Global trade happens between different parties but often times it’s financed by big banks, trade receivables. So one party needs to buy goods and a supplier supplies them but someone’s got to finance that transaction and it’s often the third party bank”.

Due to new regulations, banks are required to reserve more capital in such situations, as a result an opportunity is created for private money to finance the transaction between the customer and supplier.

“Rather than taking on more risk you don’t have to today, you just have to be more creative”

– Gordon. T. Long.

Brett echoes this sentiment saying:

“So much of the industry and investors think in a very narrow box of stocks, bonds and maybe hedge funds but there’s a lot of things outside of that, that if you open your mind to the opportunities, are quite interesting to research”.

Abstract written by Chukwuma Uwaga – chuwaga@gmail.com

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

Ellen Brown* elaborates on the emergence of negative interest rates around the world & why it is happening .. she identifies 4 European central banks now promoting negative interest rate (NIRP) .. for now the Federal Reserve & the Bank of Japan are still at zero interest rate policies (ZIRP) .. it’s all financial repression .. The stated justification for these policies is to stimulate “demand” by forcing consumers to withdraw their money & go shopping with it. When an economy is struggling, it is standard practice for a central bank to cut interest rates, making saving less attractive – “This is supposed to boost spending and kick-start an economic recovery.That is the theory, but central banks have already pushed the prime rate to zero, and still their economies are languishing. To the uninitiated observer, that means the theory is wrong and needs to be scrapped. But not to our intrepid central bankers, who are now experimenting with pushing rates below zero.” .. Brown concludes that the big driver for the move to negative interest rates & a war on cash is the idea that should the banks get into trouble again with another banking crisis, perhaps stemming from a derivatives crisis, the banks could then easily take bank deposits, given the fact that most deposits/cash would in banks & not outside of the banking system .. “And that may be the real threat on the horizon: a major derivatives default that hits the largest banks, those that do the vast majority of derivatives trading .. The promise of Dodd-Frank, however, was that there would be no more government bailouts. Instead, insolvent systemically-risky banks were supposed to ‘bail in’ (confiscate) the money of their creditors, including their depositors (the largest class of creditor of any bank). That could explain the push to go cashless. By quietly eliminating the possibility of cash withdrawals, the central bank can make sure the deposits are there to be grabbed when disaster strikes.”

LINK HERE to the Article

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

Special Guest: Puru Saxena – Founder and CEO Puru Saxena Wealth Management

As part of the ongoing series of Austrian School of Economics, FRA Co-Founder Gordon T. Long sits with Puru Saxena, of Puru Saxena Wealth Management. Mr. Saxena is the portfolio manager of his firm and he oversees discretionary investment mandates. He is also responsible for heading the firm’s research process and formulating investment strategy.

Mr. Saxena has extensive investment experience and he is a registered investment advisor/money manager with the Securities & Futures Commission of Hong Kong. Highly respected in the investment management business, he is a regular guest on various media such as CNN, BBC, CNBC, Bloomberg, Reuters and a host of other channels. Furthermore, he is regularly featured in several publications such as Barron’s, Hong Kong Economic Times, South China Morning Post, Benchmark magazine, Hong Kong Business and China Daily.

Mr. Saxena is also the editor of a monthly economic report – Money Matters. A highly acclaimed publication is read by professional and retail investors in numerous countries. He first began publishing his monthly economic report in June 2000 and it has now attracted a wide following. Prior to establishing Puru Saxena Wealth Management in 2005, he was a Founding Director and President of financial services firm – Bridgewater (now Tyche Group), where he oversaw the firm’s investment strategy.

LIMITING CENTRAL BANKS BALANCE SHEET GROWTH

“Financial markets are so distorted and so twisted that reliable indicators are no longer working. Everything is backwards”.

People are so conditioned now of believing the stimulus jargon that every time a central bank utters the word stimulus, everybody starts buying stocks again. If you look at japan, they have tried this for nearly 25 years now, and we have had recession after recession. There are zero percent short term interest rates, and not much economic growth in Japan. I don’t think this monetary experiment is going to end very well.

CENTRAL BANKS FUTURE ACTIONS

“I would be very weary by promises from the government and central banks at this point because they have a vested interest.”

I think they will try and inflate this in a typical Keynesian manner. We have negative interest rates already throughout Europe, so it won’t surprise me if you have it in the US.

“The problem isn’t a liquidity problem, it is a debt problem.”

The world has never been so indebted; the debt to GDP ratio is now over 280% globally. When you have this much accumulated debt, history has shown that economic growth slows down. Economic growth, by definition, comes from the private sector taking on more debt. When people borrow, they bring forth tomorrows consumption, today, and they consume without ever buying any assets.

“Whatever they’re doing, it’s not working.”

Central planners do not realize that if somebody is already in debt, they are not going to borrow anymore with interest rates at zero. We are currently in a deflationary environment. Central planners are trying to fight this by implementing quantitative easing, and all sorts of bizarre experiments. But at the end of the day the monetary velocity is at a decade low.

At some point, maybe even next year, we are going to get a recession. We are going to get a global recession which will occur at a time where interest rates at the short end of the curve are already at zero.

“Asset prices are going to deflate quite sharply and when this happens, there will be chaos.”

CURRENT MARKET MISCONCEPTIONS

“Major mistake people have is that QE works, or stimulus works.”

First one is that QE causes hyperinflation and therefore everybody drove up the prices of commodities to multi year highs. Investors still believe QE causes economic growth, I do not believe this. People think stimulus will cause economic recoveries and economic growth. When people realize stimulus actually leads to anti-growth you will see a big sell off in equities.

The one thing I’ve learned from being in this field from 16 years is that markets go up and markets go down. There is no one way street.

TO DIVERSIFY INTERNATIONALLY

“I think investors should keep a large chunk of their money in cash right now and long term treasuries are also a good idea.”

But if you’re look at a long term horizon, (i.e. 5 years+) I think investors should start looking at the beaten down commodity areas. Commodities have been decimated over the last 4 tears. If it was me I would not buy any equities right now. We personally don’t own any stocks on the long side for our clients at the present. The downside risks for many stocks is greater than their upside potential.

Abstract written by 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.

Special Guest: Robert Wenzel – Editor & Publisher of Economic Policy Journal.com & Target Liberty

Investing based on The Austrian school of Economics

FRA Interview of Robert Wenzel by FRA Co-founder Gordon T Long.

Across well-known literature, the Austrian school of economics has earned and put its indelible mark on the complicated world of economic analysis and theory. The school of thought varies significantly from the mainstream schools of economics like the classical, neoclassical and Keynesian schools of thought. In essence the Austrian school of thought believes in using logical thoughts to explain and solve economic problems rather than getting technical and going into mathematics to explain the same problems.

“The key to understanding is that what you have with mainstream economists is that they look at things from a very mathematical, very empirical approach… unlike in physical sciences you cannot do that for the science of economics because you’re dealing so many variables like changes and desires”

Unlike the mainstream none-Austrian economists, Wenzel believes that there’s a lot to be understood from the economy based on logical build up from solid premises. He goes on to mention that another key aspect to be understood is that Austrian economists believe that when the Fed injects money into certain sectors of the economy, it’s those sectors that turn to boom. According to Wenzel, when the Feds eventually start tightening this money supply it leads to a crash.

On the current economy:

“We’re in a period of accelerated money supply”

Wenzel thinks there could be an increase in price inflation and the possibility of another dip in the price of oil.

Explaining how we have inflation in some areas and deflation in others when we’ve been pumping money into the system, he explains it by outlining how it depends on how quickly people want to spend the money.

“if there’s a great desire to hold money, you’re not going to see the inflation right away”

When people don’t spend money what happens is you have money building up in cash balances which Wenzel terms “the desire to hold cash balances”. With this you see people reluctant to spend money and hence a low velocity of money.

On the confusing environment of economics and how understanding the Austrian school can help to clear things up …. Understanding the business cycle and inflation comes about in terms of the Austrian school of thought. It definitely helps to clear a lot of things up but even more can be taken from this approach. The methodology additionally helps out in terms of having people analyzing the world through logic rather than attacking it solely with empirical data.

On considering Quantitative easing and going into negative nominal rates …. QE is a method where the fed prints a lot of money and buys long durtion debt. The negative nominal rates idea is based on the Keynesian idea that it’s spending that helps the economy to grow, so the idea is to use negative rates to pressure people to spend their money. Wenzel calls this “a tax on holding money”.

Asked if he sees Hyperinflation in the future:

It could happen at some point. The Fed’s target of 2% could easily go up to three 3% with accelerated printing of money. At this point they might raise rates but if the inflation is at 5% and they raise rates from 12bp to 2% that still won’t be able to fight the inflation. However it may be too soon to say hyperinflation.

The business cycle should be understood as a boom and bust cycle.

“Whatever is going up now does not necessarily mean it will go up long term. The bust will occur but they will pump it up with new fed printing, which is eventually where the inflation comes in”

Abstract by Agang Moeng. Can be reached at agang.moeng@ryerson.ca

The infographic above shows some differences in Keynesian and Austrian views. Courtesy of The Austrian Insider.

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 deliberates with Alasdair Macleod, head of research at GoldMoney on the Austrian School of Economics in an Era of Financial Repression.

Alasdair. Macleod began his career as a stockbroker in 1970 on the London Stock Exchange. Through experience he rapidly learned about things as diverse as mining shares and general economics, within nine years he had risen to become senior partner of his firm.

Subsequently, he has held positions at director level in investment management, as a mutual fund manager, and also at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, he has been de-mystifying macro-economic events for his investing clients. From the accumulation of his experience he concluded that unsound monetary policies are the most destructive weapon governments’ use against people.

“I want to destroy this business of printing money as the solution to everything.”

Mr. Macleod strives to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

WHAT IS AUSTRIAN ECONOMICS

“Prices are entirely subjective.”

It began with Carl Menger who was one of the 3 economics who came up with marginal theory of prices. Where Menger differed from other two was that he appreciated that prices were purely subjective. You cannot forecast tomorrow’s prices because prices are determined by the consumer who always has the option to buy.

“It overturns the cost theory of prices which is what Adam Smith believed in. It is completely irrelevant.”

The law of the markets, the reason you and I work is we go out to earn something. We need to transform our skills into consumption. In a free market economy we have people who use their skills to earn money for consumption; the intermediary in this is money. Money is nothing more than the temporary storage of someone’s labour that is transferrable into goods. If you understand this you will see how unsound money is bad for an economy. The idea by printing money which runs a budget deficit that a government can generate economic growth is nonsense.

“In regards to investing one thing that is desperately important to understand is that asset prices always refer back to their production.”

This applies across every asset that you buy. If you see that the prices of assets have moved away from their underlining productive value then you know that you are in a bubble.

A WORLD OF INFINITE CREDIT

“The world post 1970’s is a completely different world from before the 1970s.”

After 1981 rates had been lifted to a point which stopped the relationship between businesses and savers. This is what killed the price inflation up until the early 90s. Banks not only had the liberty to print credit but also to monopolize and control securities markets, if you combine these two thongs together; it is basically a money making machine, which is what we have today.

The end point in credit comes from the logical conclusion of that development. At every cyclical peak the level of interest rates which collapse the economy gets lower. The reason it gets lower is because this combination of credit control in securities markets does nothing more than just pumps up the level of debt. The overhang of debt means the rise in interest rates to stop the economy from getting out of control is getting lower. You cannot raise interest rates by more than one or two percent without serious economic dislocation.

NEGATIVE NOMINAL INTEREST RATES

“The effect of negative interest rates would be to throw every commodity into backwardation.”

There is no doubt that negative interest would drive up inflation, or rather, it would lower the purchasing power of said currency. Negative interest rates for the reserve currency in which all commodities are priced have a severe risk which we will generate runaway inflation, but in fact it is a collapse. In order to make negative interest rates work you need to ban cash entirely. I have no doubt at all that that is the underlying reason why there is so much emphasis on anti-money laundering.

THE FMQ CONCEPT

“The fiat money quantity is the amount of money that would have to be redeemed for gold that once was deposited.”

The fiat money quantity was put together to try to quantify the amount of money that Is being issued in return for the gold that we originally gave to our banks which the banks then handed to the federal reserve.
The reason for doing this is to try to get an idea of how much money is not only in public circulation, but also not in public circulation and potentially in public circulation. From looking at the Feds balance sheet and considering other factors like repos and reverse repos, we see that the growth curve has taken off; and in the very broadest sense we have monetary hyperinflation.

Abstract written by 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.

Discussion between Dan Popescu & Gordon T Long .. Financial repression & interest rates .. Deflation, inflation or hyperinflation .. The currency wars and the dollar: up or down? .. Gold & Silver: an insurance policy .. Banning cash & the cashless society .. China gold, yuan & the SDR .. 25 minutes

LINK HERE to the French version of this

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.

Special Guests: Charles Hugh Smith – OFTWOMINDS.COM; Rick Ackerman – rickackerman.com

Charles Hugh Smith is an American writer and blogger. He is the chief writer for the site “Of Two Minds”, which started in 2005. His work has been featured on a number of highly acclaimed sites including: Zerohedge.com., The American Conservative and Peak Prosperity.

Rick Ackerman has professional background including 12 years as a market maker on the floor of the Pacific Coast Exchange, three as an investigator with renowned San Francisco private eye Hal Lipset, seven as a reporter and newspaper editor, three as a columnist for the Sunday San Francisco Examiner, and two decades as a contributor to publications ranging from Barron’s to The Antiquarian Bookman to Fleet Street Letter and Utne Reader. Rick Ackerman is the editor of Rick’s Picks and a partner in Blue Fin Financial LLC, a commodity trading advisor.

Co-founder of The Financial Repression Authority, Gordon T. Long has an in-depth discussion on the current financial situation with Charles Hugh Smith, of OfTwominds.com and with Rick Ackerman, trader and forecaster of Rickackerman.com.

THE OUTLOOK ON QUANTITATIVE EASING

Rick:

“I’ve been shouting from the rooftops that the fed will never raise interest rates.”

If you want to find out if QE is working the first person you have to go to is the retiree. The whole idea of stimulus should have been refuted simply by the fact that savers have been cheated for so long.

Charles:

They may go ahead and do the quarter point rates increase because they have built up so many expectations to that. They will need to do this to create the allusion that the economy is recovering or else it’s robust.

Gordon:

The market may be a key driving factor, not because of the wealth effect; but because of collateral.

THE STATE OF JAPAN:

Charles:

“The Juggernaut of deflation is so huge now, that there isn’t going to be any time to react. Keep a shoebox full of cash because on that day we might wake up and the banks won’t be open, we will need that cash.”

I don’t see the possibility of massive inflation. The only viable way of getting money into the system is to borrow it into existence.

Japan, is a developed economy that has been in a deflationary setting for almost 25 years now. We can see what they’ve done and what effects it has. They have attempted to stimulate their economy by improving roads and infrastructure. But it has not worked. Japan refuses to cleanse their financial system to allow real investment so they have consequently brought in mal-investment with borrowed money.

Rick:

Japan had something over the last 20 years that we didn’t have, and that is us. Japan has a global economy to export into; we were the buyer of last resort.

NEGATIVE INTEREST RATES

Rick:

“If you can extrapolate a somehow positive benefit from negative interest rates, where would this benefit be and how long would it last?”

The idea is if people can no longer park money anywhere, they can only spend it or invest it, we have to ask, where are they going to invest or spend it? It’s inconceivable that money can find itself into somewhere in the economy that would promote growth and economic health.

Charles:

In a current example of negative interest rates we see what is happening with Sweden who is actively pursuing negative rates. The net result is that it is taking their housing bubble and inflating it even further. Basically it is pricing everybody out of housing and creating a credit bubble.

COLLATERAL GUARANTEES

Gordon:

“It is in the cards, in the middle of the next crisis.”

We have an approximately $500 trillion swaps market that is underpinned with collateral. So if bond prices were to drop it would be a horrendous situation. We were able to stop the 2008 crisis, we did not fix it we only stopped it. Now it will be a global issue, and the central banks will be forced to come in and pay attention to these collateral values. We have a huge pool of bond ETF’s that have exploded in the past few years, somebody has to sell these bonds but they are not easily transferred. The central banks will have to intervene in a massive way. I believe many people are betting on this, and are therefore taking risk adjusted positions.

Rick:

“We are really talking about a quadrillion dollar bubble.”

Much of borrowing and leveraging shifted into rehypothecation. It occurred mostly in London markets that were more unregulated than US markets. So when we had the real estate bust in 2008 we needed something to pledge as collateral.

When you look at the entire quadrillion dollar enchilada, somebody may say the actual size of the bubble is only several hundred trillion dollars. When in reality the gross amount is something everyone involved in the daisy chain thinks they have a claim on a particular asset.

Charles:

We must own real assets, and have no debt. Whatever financial wormhole we are going to go through,we must own the right tools, because the tools will still exist after we get through the wormhole.

THE INDIRECT EXCHANGE:

Regarding a recent show with Warren Buffet, and Ty Andros, Editor at Tedbits Newsletter,

Warren Buffet so masterfully utilizes the indirect exchange. He takes paper, which is his entire insurance side of business and plows it back into real hard assets that will sustain themselves at a fair price. Buffet has don’t this so consistently for so many years and that is why balances; paper products (insurances, bonds, and structures against real assets). Buffet has certainly been a consistent winner without question.

Rick:

Buffet has also resisted the temptation of going after easy money. His money is not in Uber, Dropbox, and Instagram etc. It’s simple to see that it is not going to end well, not only for the companies but for the whole city, if I were to short any city in this country it would be San Francisco. Everything is so pumped up in that city because there are companies that hire these people that are extremely overvalued.

Buffet has demonstrated amazing restraint and discipline for sticking with the nuts and bolts, instead of going after the alluring high attraction companies. He has found real businesses with real products that have a sustaining capability to survive during good times and bad.

Charles:

Raising the issue of risk, how do we deal with the kind of systemic global risk that we currently have? Risk is extremely misrepresented to the average middle class American. We are trying to help people make a realistic assessment of the global risk they are engaged in by having a 401k that is involved in these risky financial assets.

CLOSING REMARKS

Rick:

“You can’t look at what’s in prospect as hypothetical, if you don’t think there is going to be a collapse then you don’t understand the problem.”

There is no way we can continue to muddle on, for one its taking a lot more debt to create the dollars’ worth of GDP growth at the margin. We are really going to face a day of reckoning. The most important thing is for us to be resourceful and ready for when it comes.

Charles:

“This enormous supernova of debt is going to implode and whatever is left will not be a financial instrument.”

Gordon:

“Crisis is nothing more than change trying to happen.”

We have so many global imbalances. We have political, economic, and financial systems that are not correct, we are still running from a Bretton Woods; post WWII model. And during this process, mal-investment, lack of price discovery and mispricing are rampant.

But on the flip side, for those who have prepared themselves for this storm, I think the world is going to see its greatest years. The advancements in technology, and so many other endeavors is staggering.  !5-25 years out will be an incredible time for the world but meanwhile we are going to go through some rough times, but there will be winners and there will be losers, and the winners are always the ones who prepare.

Abstract written by 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.