“The Fed has been largely slanted towards subsidizing and supporting debtors at the expense of savers .. since the financial crisis. They’ve been running away from the problem of debt is what it comes down to, and now, as you noted, this year could be plenty interesting, 2016.”

LINK HERE to the transcript

“ZIRP (zero interest rate policy) and QE (quantitative easing) as practiced by the Fed and ECB are not boosting, but instead depressing, private sector economic activity. By using bank reserves to acquire government and agency securities, the FOMC has actually been retarding private economic growth, even while pushing up the prices of financial assets around the world. ZIRP has reduced the cost of funds for the U.S. banking system from roughly half a trillion dollars annually to less than $50 billion in 2014.
This decrease in the interest expense for banks comes directly out of the pockets of savers & financial institutions.
While the Fed pays banks 25bp for their reserve deposits, the remaining spread earned on the Fed’s massive securities portfolio is transferred to the U.S. Treasury – a policy that does nothing to support credit creation or growth. The income taken from bond investors due to ZIRP and QE is far larger. No matter how low interest rates go and how much debt central banks buy, the fact of financial repression
where savers are penalized to advantage debtors has an overall deflationary impact on the global economy.
Without a commensurate increase in national income, the elevated asset prices resulting from ZIRP and QE cannot be validated and sustained. Thus with the end of QE in the U.S. and the possibility of higher interest rates, global investors face the decline of valuations for both debt and equity securities.”

LINK HERE to his presentation to the Bank of France
link here to an alternate overview

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.

A “WITCH’S BREW” BUBBLING IN BOND ETFs

We believe the Credit Cycle has turned and with it will come some massive unexpected shocks. One of these will be the fall out in the Bond Market, centered around the dramatic growth explosion in Bond ETFs coupled with the post financial crisis regulatory changes that effectively removed banks from making markets in corporate bonds.  It is a ‘Witch’s Brew’ with a flattening yield curve bringing it to a boil.

2000 – Flat to Inverted Yield Curve

2007 – Flat Yield Curve

TODAY – Signalling a Flattening at Seriously Lower Bound!

PRESSURES FLATTENING THE YIELD CURVE

In the last six weeks, the spread between the Ten Year and the Two year treasuries has flattened exactly 25 basis points, which is EXACTLY the same amount that the Fed just moved the Fed Funds target rate this past Wednesday. With investors starved for yield many are being forced further out on the yield curve taking rates down further and pushing prices up.

Dan Norcini at http://traderdan.com lays it out pretty clearly:

This horrific predicament, compliments of our masters at the Central Banks, is forcing money to chase yield meaning that it is going further out along the curve to the long end. The more money that enters any bond market, the LOWER yields go since bond prices move inversely to the yield. When demand for anything increases, its price rises. Bonds, bills, notes, are no exception. As the money flows increase into the long end of the curve, at a faster rate than the money flows might be increasing into the shorter end of the curve, the price of the longer dated bonds rises faster than the price of the shorter dated bonds ( bills, notes,. etc). That means a flattening curve.

Secondly, and something that is extremely relevant to what is going on here – FOREIGN INVESTORS are sending monies overseas to chase yield as well. Think of where interest rates are in both Japan and in the Eurozone compared to comparable dated government debt here in the US. Those foreign flows do two things. They boost the price of the longer dated Treasuries as well as boosting demand for US Dollars.

This phenomenon tends to support both the Dollar’s value on the foreign exchange markets as well as keeping prices for those longer dated Treasuries well supported. Again, bond prices move inversely to yields thus the more money flows into the longer dated treasuries, the more those yields tend to move lower.

Look at what the result of both of these above factors have done to the yield on the Ten Year Treasury. Its yield was 2.170% on the last day of 2014. Today, its yield is 2.19%. We are only a short two weeks away from ending this year and we are basically back to where we started this year. We have essentially gone nowhere on yields.

What is perhaps even more alarming is that the curve is flattening further. The low point on this spread occurred in early February of this year when it reached 1.19%. Today, it closed at 1.22%. We are talking about a mere 3 basis points from the curve having flattened to a 2015 low!

Clearly, this is NOT A VOTE FOR STRONG ECONOMIC GROWTH laying ahead.

Perhaps this is the reason that the equity markets are beginning to show signs of wobbling.

What some analysts have been saying is that once the Fed started to raise rates, the stock market would come under pressure because the move would be a signal that the Fed has begun the process to slowly drain the liquidity that has fueled its monster seven year rally. I personally take issue with that in the sense that the Fed has not made any move towards actually reducing liquidity that I am aware of. After all, while they did increase the short term target rate by 1/4%, one can hardly say that the interest rate environment is not accommodative. Furthermore, the size of its balance sheet remains the same as it has been in some time nor have I seen any talk coming from the Fed that it intends to reduce that balance sheet.

Here is a chart of the Fed Balance Sheet beginning in October of 2013 ( I chose this month at random). Notice how constant the line has remained over the last year. As you can see, there has been no shrinking of the Balance sheet.

What I think appears to be causing concerns in the stock market is the fact that the yield curve is signaling that economic growth is not going to be increasing. That has gotten some stock investors nervous that perhaps stocks are overvalued. After all, it is hard to make the case that the equity markets should be hitting new lifetime highs when the yield curve is collapsing.

THE “WITCH’S BREW”

Many Including Morningstar Have Hyped “The Great New Yield Opportunity”

Thanks yet again to innovation in the realm of exchange-traded funds, the walls have come down and individual investors now have efficient access to tools that enable them to implement a strategy that only the big boys on the block could implement. Without the benefit of such scale and low relative trading costs, the cost hurdle was far too high for most individual investors and advisors trying to implement this strategy using individual bonds.

Then came along a new breed of fixed-income fund that combines the diversification and accessibility of an ETF with the precision of an individual bond. While an index, for example, typically maintains a fairly stable maturity range, these ETFs have specified maturity dates upon which cash is distributed back to investors. That means, just like an individual bond, the duration of these ETFs will steadily decrease as it approaches maturity.

…..

These ETFs are typically pitched as a way to build bond ladders in order to match cash flows with future liabilities. But thanks to their precise exposure and individual bondlike characteristics, defined-maturity ETFs–which are relatively cheap to trade–are also great tools for executing customized “roll down” strategies to enhance fixed-income total returns.

Even for relatively large investors, the wide bid-ask spreads and dealer mark-ups or commissions incurred when buying and selling individual bonds present a high hurdle. Moreover, the minimum investment that would be required could be another barrier to entry. Often, investors will be dealing in “odd lots,” which typically trade at wider spreads, as they are considered less liquid.

One of the attractive traits of an individual bond is the visibility of its cash flows and knowing exactly how much principal is due to you at maturity. Contrast that against a bond index, which does not mature and will see slight variations in its cash flows as it rebalances or reconstitutes over time. In the case of an actively managed portfolio, the payout will fluctuate as the portfolio manager buys and sells bonds. While there are several ETFs that target a relatively narrow portion of the yield curve, they still lack the precision and flexibility of defined-maturity bond ETFs.

This is another example of ETFs democratizing the investment landscape. Armed with these innovative solutions, investors have yet another arrow in their quivers to manage their fixed-income allocation amid a low-interest-rate environment. Be sure to monitor the steepness of the yield curve when executing the strategy, and keep in mind that the “roll down” strategy will lose a lot of steam if the yield curve flattens more than expected. As great as it sounds on paper, this strategy is still not a free lunch. The buy-and-hold investor sees price volatility steadily decease as his bond nears maturity. However, the price volatility in the “roll down” strategy stays relatively high, given that it reinvests in longer maturities, which tend to experience larger price fluctuations. The premium earned via the strategy can be considered compensation for assuming slightly longer duration and higher levels of volatility.

What has been sold to many investors, speculators and even desperate Fund Managers is using Bond ETFs to play the old “Roll Down the Yield Curve” Strategy. Here is how it works in case you are not familiar with the strategy.

ROLLING DOWN THE YIELD CURVE

The strategy of “rolling down the yield curve” targets investing in bonds at the steepest part of the curve. After a year or two, the bond is sold and the proceeds are reinvested back up the curve into higher-yielding, longer-maturity bonds. By selling the position well ahead of the actual maturity date, the strategy aims to capture the price increase that results when a bond’s yield drops as it “rolls down” the curve (that is, it moves closer to maturity). From there, the process repeats.

To illustrate, we can look at an example based on the yield curve in Exhibit 1. Consider an investor who buys a five-year Treasury paying a 1.5% coupon rate at par value. Fast forward two years, and that original five-year Treasury still yields 1.5%, but at that point it would have three years left to maturity. As can be seen in the yield-curve chart, the Treasury yield at a three-year maturity is 1.05%. Therefore, the price of the originally purchased five-year Treasury (which now also has a maturity of three years) would increase in order to ensure that its yield to maturity aligns with the current yield curve. (Note that, for the sake of simplicity, this example assumes that the yield curve remains stable over the observation period.)

If the Treasury paid a 1.5% coupon at a face value of $100, then after two years the price would have actually risen to $101.35 so that its yield to maturity matches the prevailing market. Recall that the three-year Treasury has a coupon yield of 1.05%. The original five-year Treasury in this example maintains its annual coupon yield of 1.5%, but then faces annual price declines of about $0.45 over the remaining three years until it matures. The yield to maturity balances out to 1.05% after factoring in those future price declines, which of course is equivalent to the yield to maturity that an investor could earn at that time from buying a newly issued three-year Treasury at par.

A buy-and-hold investor who bought at $100 would collect 1.5% per year in coupon payments and receive $100 at maturity. That comes out to a total of $7.50 in interest payments. The “roll down” strategy described in our example, on the other hand, could generate $10.90 in total returns during the same period thanks to locking in price gains and reinvesting into higher-yielding bonds.

YRA HARRIS WARNS “ALL HELL MAY BREAK LOOSE!”

Legendary trader Yra Harris who we recently interviewed at the Financial Repression Authority has been pounding the table for some time but just issued this warning:

The flattening of the yield curves in 2016 may lead to all hell breaking loose. WHAT DID I MEAN BY THIS? Grab a glass of scotch or Chuckie B., or some medicinal California and think about what I am going to say. (And, to paraphrase Danny Devito in the War of the Roses, when a person who charges $5,000 an hour offers free advice you might want to listen [humor intended].) In July 2012–the 24th to be exact–the U.S. 2/10 curve was flattening when it appeared that Europe was in a deep crisis. The two-year yields on EU sovereign debt were rapidly rising as the market feared about the viability of the EU and the EURO currency.

The European 2/10 curves were also flattening and when ECB President Mario Draghi issued his famous, NO TABOOS AND WE WILL DO WHATEVER IT TAKES to preserve the EU and the euro, the two-year yields began dropping and the 2/10 curves reversed course and began to steepen. The July 24 low was 117.25 positive slope. This was also the low made in January 2015 when the ECB and the SNB were busy revealing their plans about the EUR/CHF peg and the ECB‘s new QE policy (again, 117.25). As the year comes to an end, the flattening of the U.S. 2/10 curve continues and today we made an intraday low of 119.80. Now I will warn again that because of the lack of liquidity the last few weeks of the year prices can be easily manipulated and/or distorted.

BUT IF THE MARKETS RESUME FLATTENING IN RESPONSE TO GLOBAL ECONOMIC WEAKNESS AMID CHINESE SLOWING OR SOME GEO-POLITICAL EVENT ALL HELL WILL BREAK LOOSE. WHY? Last time the yield curves dramatically flattened in 2007 or 2012 in Europe the central banks, like John Mayall, HAD ROOM TO MOVE. When the U.S. curve inverted in early 2007, the rate was at 5.25% so the FED could swiftly cut rates in response to an incipient crisis. In Europe,the yields on the two-year notes of the so-called PIIGS were more than 7.0% and thus a dramatic drop in rates could be a positive signal to the markets.

WITH INTEREST RATES AT ZERO IN ALL THE DEVELOPED ECONOMIES WHAT WILL THE KEY POLICY MAKERS DO? A FLATTENING CURVE AT THIS JUNCTURE WOULD PUSH THE FED INTO NEW TERRITORY AND PUT FEAR INTO THE MARKETS.Thus, “ALL HELL WILL BREAK LOOSE” is an inference that the flattening of the curve at the zero  bound will signal that the central banks have lost “control.” Will it be on the first close below 117.25? Most probably not but it is certainly an area for investors and traders to be very aware of. That was my point and it needed explanation beyond the allotted time of the Santelli spot. I await any questions or responses.

CONCLUSION

What Yra doesn’t say is we now have $2.2 Trillion of troubled High Yield bonds peddled to yield starved investors since the financial crisis, which matches 2/3’s of the $3.5 Trillion increase in the Federal Reserves balance sheet during the same period. Additionally, there are well north of $60 Trillion of Bond ETFs out there with anyone guess on how many fast money speculators are playing the “Rolling Down the Yield Curve” Strategy now up against the warning Morningstar so clearly disclaimed: “the roll down strategy will lose a lot of steam if the yield curve flattens more than expected.”

With serious liquidity issues clearly evident it should be interesting as a potential positioning scramble ensues. It somewhat reminds me of someone potentially shouting “FIRE” in a theater, except this times the theater doors will be barred and the only way out will be to have someone outside take your seat inside! ETF holders may find it easier to sell that old bridge over the East River in Brooklyn than get their money out of their ETFs.

Maybe what we will actually soon hear is someone shouting “CUSTODIAL RISK!”

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.

THIS CHART IS REGULARLY IN GORDONTLONG.COM’S MONTHLY MATA REPORT

THE QUESTION TO CONSIDER IS HOW YOU WILL MAKE MONEY WHEN THE CRACK-UP BOOM ARRIVES?

… OR HAS IT ALREADY ARRIVED?

1- VENEZUELA

As Zero Hedge Reports: Consider Venezuela

It’s that time of year again. When hindsight is 20/20 and coulda/woulda/shoulda gives way to reality. With the US equity market barely able to keep its head above green water, a look around the world shows investors could have done a lot better (or not).

In fact, as Handelsblatt shows, the best investment in the world in 2015 would have been – drum roll please – Venezuelan stocks!

Note – these returns are from a EUR-denominated persepctive

So – that proves it – buying stocks during hyperinflation “works” and protects your purchasing power, right?

Not so fast! While Venezuela’s official spot Bolivar rate has been flat at 6.2921 all year as Maduro dreaded the admission that his nation is in utter collapse, the “real” exchange rate – or ‘Dolar Libre’ Rate – has been crashing…

Which means, if you wanted to “invest” in Caracas Stocks last year (by moving your USD into Bolivars, buying stock, then moving your “gains” back into USDs to bring home and celebrate), things look a lot different.

From a 287% gain, you would have actually lost 22% of your initial USD stake!

So sorry, hyperinflation does not pay after all!

Still, The Fed, ECB, BoJ, PBOC will keep playing the ‘inflate’ and debase game until they are all proven wrong.

2- BRAZIL

Let’s also consider Brazil. Brazil was an investment darling as hot money flooded into Brazil prior to the 2008 Financial Crisis and the Commodity boom exploded with China’s emergence as a global manufacturing giant.

However, things haven’t been so good since the Financial Crisis and 2010 as China began to slow. Recently things have only gotten worse as government corruption and failed policies surface.

Following recent strength on the heels of hope for a new finance minister, news that Ruosseff has sent the minimum-wage-hike Bill to Congress appears to have crushed the hype of any fiscal rectitude and sent Real tumbling. Down over 4% – the most since September 2011 – BRL is back above 4.00 per USD, giving up all the recent gains.

Broad weakness in EMFX…

Seems to have been exacerbated by:

A Bill that could cost BRL 4.77 billion, wrecking hopes of any improvment in the fiscal situation. As Bloomberg reports,

Brazil’s bigger-than-estimated minimum wage increase and potential credit expansion make it harder for govt to control around 11% on year inflation and cut budget gap, Marcelo Schmitt, portfolio manager at investment firm Sul America, says in a phone interview.

These initial policy steps after Barbosa replacing Levy as finance minister are concerning, says Schmitt.

And so…

This is the biggest drop in BRL since September 2011.

Charts: Bloomberg

HOW HAVE BRAZILIANS DONE AFTER THE BIG RUN UP WHEN DENOMINATED IN “BOGUS” USD?

THE DEVASTATION – FROM 65 TO 20!

A CASCADING CRACK-UP BOOM

The Crack-Up boom is already underway in many of the peripheal nations of the world. It is more about a cascading series of events. The story in all the peripherals is similar to both Venezuela and Brazil. The only way to make Money in the Crack-up Boom is in the US$, remembering the US Dollar will be the last to fall while globalized Crack-Up Boom is underway. However, the US$ will eventually fall.

It may be subtle but what is happening is Emerging Market Wealth is being pillaged around the world via “Exorbitant Privelege” and a fictitionally valued US$. This is the greatest “Debt for Equity” Swap in history. M& A activity has exploded as overvalued US stocks (due to buybacks and borrowing to pay dividends) is used as “currency” in this M&A binge.

The real question is where is the crack-up boom occurring today and most importantly, how will you keep your wealth after the Cascading Crack-up Boom ends and the US Dollar inevitably collapses?

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

FINANCIAL REPRESSION POLICIES MIRROR

AN ACCELERATING “CRISIS OF TRUST”

Since the Dot.com Bubble burst the US has accelerated its Macro-Prudential Policies of Financial Repression. PEW Research just released a study which tracks the deterioration in the confidence citizens have in their government.

We have a Crisis of Trust in America and as the charts below show, it has only accelerated with government policies of Financial Repression.

Just 19% of Americans say they “can trust the federal government always or most of the time”. 

• That’s among the lowest levels in over 50 years.
• The long-term erosion of public trust is mirrored by a steep decline in the belief that the government is run for the benefit of all Americans.

Less than a year ahead of the presidential election, there is widespread discontent with the federal government. A new Pew Research Center report finds deep distrust in government and considerable cynicism about politics and elected officials alike. But despite these negative assessments, majorities believe government does a good job on many issues and want it to have a major role on a wide range of policy areas.

Here are five of PEW’s key takeaways from the report:

1 The public’s trust in government remains at historic lows. Today, just 19% say they trust the federal government to do what is right always or most of the time, which is little changed from recent years. Fewer than three-in-ten Americans have expressed trust in government in every major national poll conducted since July 2007 – the longest period of low trust in government seen in more than 50 years.

While Democrats are more likely than Republicans to say they trust the government, trust remains low across partisan lines: Just 11% of Republicans and Republican-leaning independents say they trust the government, compared with 26% of Democrats and Democratic leaners. (For more on the public’s trust in government, see this interactive.)

2 As in the past, the public’s feelings about government run more toward frustration than anger. Currently, 57% are frustrated with the federal government; 22% are angry, while 18% are basically content.

Far more Republicans (32%) than Democrats (12%) say they are angry with the government. But higher shares in both parties expressed anger toward government in October 2013, during the partial government shutdown.

While anger at government has been higher among Republicans than Democrats during Barack Obama’s administration, the situation was reversed during George W. Bush’s presidency: In October 2006, 29% of Democrats said they were angry with government, compared with just 9% of Republicans.

3 Despite their widespread cynicism, most Americans give government good ratings in a number of areas. Half or more say the federal government is doing a “very good” or “somewhat good” job in 10 of the 13 governmental functions tested in the survey.

However, the federal government receives particularly low marks in two key areas: Managing the nation’s immigration system and helping people get out of poverty. Nearly seven-in-ten (68%) say the government does a very or somewhat bad job in managing the immigration system; just 28% say it is doing a good job. Ratings are nearly as negative when it comes to the federal government’s efforts to help people get out of poverty: 61% say the government is doing a bad job in this area, while 36% give it a positive assessment.

Majorities say the government should have a major role in dealing with 12 of 13 issues included in the survey.

4 Americans are harshly critical of elected officials. The public views politicians as more selfish and considerably less honest than ordinary Americans. Just 29% say that “honest” describes elected officials very or fairly well, a much smaller share than those who describe the average American as honest (69%).

Most people do say the term “intelligent” describes elected officials very or fairly well (67%). However, just as many view the typical American as intelligent. And when asked if elected officials or ordinary Americans could do a better job of solving the nation’s problems, 55% say ordinary Americans could do better.

While negative opinions of politicians are not new, the perception that elected officials don’t care about what people think is now held more widely than it has been in recent years. Today, 74% say this, compared with a narrower 55% majority who said the same in 2000.

5 Congress is not the only institution the public sees as having a negative influence on how things are going in the country today. Majorities see the national news media (65%) and the entertainment industry (56%) as having a negative impact on the country. By contrast, overwhelming majorities see small businesses (82%) and technology companies (71%) as having a positive impact.

There are substantial partisan and ideological divides in the views of several of these institutions. For example, nearly seven-in-ten liberal Democrats (69%) say colleges and universities have a positive impact on the country, compared with just less than half (48%) of conservative Republicans. Conversely, fully three-quarters of conservative Republicans say that churches and religious organizations have a positive impact on the country, while just 41% of liberal Democrats agree.

The Thompson-Reuters TRust Index of confidence in the top 50 Global Financial Institutions shows an also very worrying trend deterioration!

CRISIS OF TRUST

As we laid out in the 2013 Thesis Paper “Statism“, a Crisis of Trust has a profound impact on the economy and if left unresolved politically for a protracted period will lead to economic stagnation.

In last year’s 2015 Thesis Paper: “Fiduciary Failure” we spelled out the crippling level it has now reached in the US. It has only gotten worse and we detail in the 2016 Thesis Paper: Crisis of Trust in The Era of Uncertainty how it is now infecting the global economy.

Sign-up now for your 2016 Thesis Paper: Crisis of Trust in The Era of Uncertainty

at the FINANCIAL REPRESSION AUTHORITY

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.

“Helicopter money drops (what else?)”

Our conclusion is that, in a financially-challenged economy like the Eurozone, with policy rates close to the ELB, and with excessive leverage in both the public and private sectors, balance sheet expansion by the central bank alone may not be sufficient to boost aggregate demand by enough to achieve the inflation target in a sustained manner.

This is more than an academic curiosity. Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990. The balance sheet expansion of the Bank of Japan since the crisis has been remarkable but ineffective as regards the achievement of sustained positive inflation and, since 2000, the inflation target. The balance sheet of the Swiss National Bank has expanded even more impressively, again with no discernable impact on the inflation rate.

* * *

We do expect the ECB’s asset purchase program will expand considerably further, with the Eurosystem’s balance sheet reaching €4,000-4,500bn over the next year or two. But we doubt that even this will be enough to achieve the inflation target of close to but below 2% on a lasting basis. It might take even greater ECB balance sheet expansion to achieve the target.

But the larger central banks’ balance sheets get, the louder will become the voices of those that criticize the power vested in unelected and mostly unaccountable central banks. In addition, it is worth remembering that the laws and regulations that underwrite and circumscribe central bank actions were written at a time when their current range of actions, let alone the potentially even larger future ones, seemed exceedingly unlikely and maybe even (in the case of the ECB) inconceivable. Political concerns likely played a role in the SNB’s decision to rely less on its balance sheet and more on negative rates when managing its currency (and indeed allowing a sharp appreciation of the Swiss franc and greater exchange rate volatility). The ‘Audit the Fed’ movement is likely to be followed by ‘Audit the ECB’ movements and eventually by explicit limits on central bank actions as their balance sheets grow to politically unacceptable levels. We do not say that moment is near, but to dismiss the idea that political limits to the size of the central bank balance sheet exist seems naïve.

Moreover, even if the ECB were to expand its balance sheet sufficiently to achieve the inflation target in the next few years (say, to €5tn or €6tn), the monetary policy toolkit would then seem to be rather empty, with little option for stimulus if and when the next downturn hits (as it inevitably will). Experience teaches that downturns do happen – either for internal or external reasons – and sometimes happen when output gaps have not been closed. What happens then? Draghi’s answer seems to be: perhaps a balance sheet expansion to €10tn or €15tn. We are doubtful that such a course of action would be both perceived to be politically legitimate and economically effective.

* * *

The case for helicopter money is therefore partly to ensure the euro area (and some other advanced economies) reflate powerfully enough to escape the liquidity trap, rather than settle in a lasting rut of low-flation and low growth, with “emergency” levels of asset purchases and interest rates becoming the norm.

* * *

In orderly markets and with the policy rate at the ELB, the central bank can talk loudly, but on its own – without the fiscal support required to turn its monetized balance sheet expansions into helicopter money drops – it carries but a small stick.

* * *

If, as seems possible, the ECB will increase, in H1 2016, the scale of its monthly asset purchases from €60bn to, say, €75bn, and if these additional purchases are concentrated on public debt, the euro area will benefit from a ‘backdoor’ helicopter money drop –something long overdue.

CONCLUSIONS

This supports FRA’s views on the coming policies on OMF (Helicopter Money).

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.

BoAML’s analysts are warning about the degree of Mispriced Risk and Central Bank Risk Manipulation according to a report by Zero Hedge:

Essentially central banks, by unfairly inflating asset prices have compressed risk like a spring to unfairly tight levels.  Unfortunately, the market is aware the price of risk is not correct, but they can’t fight it, and everyone is forced to crowd into the same trade.  By manipulating markets they have also reduced investors’ inherent conviction by rendering fundamentals less relevant.

This then creates a highly unstable (fragile) situation that breaks violently when a sufficient catalyst causes risk to rise – overly crowded positioning meets a market with little conviction.

Catalysts can range from a “valuation scare” similar to Oct-14 or Aug-15 to a prominent investor stating that assets (e.g. bunds) are not fairly priced and are the “short of the century”.

The unwinds from these crowded positions are violent, but almost equally violent in some cases are the reversals, which are driven from investors crowding back in when they realize central banks are still there providing protection.

From this vantage point, it becomes clear that the biggest visible risk to financial markets is a loss of confidence in this omnipotent CB put.

READ FULL ARTICLE WITH GRAPHICS

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.

Peak Prosperity’s Chris Martenson interviews Daniel Amerman who sees the Federal Reserve announcement as another confirmation of continued financial repression to control the burden of debt & allow a transfer of wealth from savers to the government .. “I just read the statement from the Federal Reserve and what they clearly showed was this was not normal. And, one of the clear ways that they showed it is that they made crystal clear that they would be keeping their current holdings of U.S. government and agency debt in roughly the 2.4 to 2.5 trillion dollar range . If you want to drive interest rates up, you want to tighten the system and you might remove money from the system let’s say by selling many of those assets. And, they’ve made clear on the front end that they’re not doing that .. What governments typically do, their most popular choice when they get deeply into debt is they increase their control over the markets so they knock out the interest rate risk for themselves, they push rates way down as they’ve done to historical lows. There’s more to it than that (we’d need another full hour more to talk about financial repression), but basically, they transfer wealth from savers to the government in the process of paying down the debt, in a process that most people don’t understand.”

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.

Making the analogy of the U.S. economy to Star Wars, Charles Hugh Smith* sees the Federal Reserve as the Dark Side, inflicting fatal wounds on the economy through financial repression of massive floods of money .. it has not boosted real economic productivity, rather it has fueled speculation which in turn has brought widening wealth/income inequality & devastating boom/bust business cycles .. “By slashing rates to zero, the Fed ruthlessly eliminating safe returns for savers, pension funds, insurers and the millions of people with 401K retirement nesteggs. In effect, the Fed-Farce has pushed everyone into risk assets–and then played another Dark Side mind-trick by masking the true dangers of these risky assets. As oil-sector debt blows up, as junk bonds blow up, and emerging markets blow up, we are finally starting to see the real costs of going over to the Dark Side of endless credit expansion and throwing the gasoline of near-zero interest rates on the speculative fires of financialization .. The Fed’s hubris has led it to the Dark Side, and now its Death Star of impaired debt, phantom collateral, speculative frenzy and bogus mind-tricks is about to blow up.”

LINK HERE to the essay

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

When the GOP handed congress the $1.1 trillion spending measure to pass, which would avoid a government shutdown (with no time for congress to actually read it), the backroom republican strategists buried within it the removal of FIRPTA. There are major reasons for this as we outlined in “Obama Abruptly Waives 1980 Foreign Investment in Real Property Tax Act (FIRPTA)” but less recognized was that it subtle shows what we can expect if the Republican party wins the White House in the upcoming election. The clearly confident GOP party is quietly laying the foundations now.

Klueger & Stein, LLP, who’s clients are “individual investors and multinational businesses entering the United States to acquire a U.S. business, invest in U.S. real estate, or enter the U.S. market through a joint venture or the creation of a U.S. subsidiary and also assist U.S. investors and businesses looking to engage in commercial transactions or acquire valuable assets abroad”,  recently wrote this article which appeared in LOWTAX – Global Tax & Business Portal:

Our neighbors to the North may have found a way to accomplish some U.S. tax reform. Canada is offering the U.S. the opportunity to gain much needed investment for public works such as U.S. freeways and bridges by using Canadian pension funds. The condition is – drop the 10% tax tagged onto foreigners selling U.S. property.

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was implemented in response to the growing fear of a takeover of domestic resources by foreign money. The law imposes a 10% tax of the sale price on U.S. real property owned and sold by foreigners.  Because the law is so broad, it includes foreign pension funds.

President Obama has been pushing for changes to FIRPTA that would exempt foreign pension funds from paying taxes on U.S. real property sales.

In the U.S., public-private relationships, especially foreign ones, have traditionally been viewed with skepticism, and investment in public infrastructure has suffered because of this.  Investment in public infrastructure by private funds is reported at 3.6% of the nation’s Gross Domestic Product, a significant shortfall compared to the estimated $3 trillion needed to bring the country’s public infrastructure up to standard.

If the proposals pass, foreign, including Canadian pension funds could invest in public works projects without investors worrying about the FIRPTA tax burden.

Canadian pension funds including the Canadian Pension Plan Investment Board, the largest in Canada, has been the biggest supporter for the change. Should the FIRPTA law include this exemption it will cost the U.S. government approximately $2 billion in lost tax revenue over the next decade. However, the flurry of foreign investment would far surpass the losses.

Klueger & Stein, LLP are keeping our international clients informed of any changes to FIRPTA that may affect their foreign pension funds and investment portfolios.

CONCLUSION

The FRA (Financial Repression Authority) believes that a historic stimulus plan currently on the US public policy drawing board is aimed at US Infrastructure Investment.The above article confirms our belief about the degree of backroom “crony capitalism” Public-Private Partnership negotiations that have been going on. It will of course be sold to the US electorate after the 2016 election as being targeted at creating jobs and stimulating an economy rapidly falling into recession. However, the real truth is about the massive transfer of wealth needed from pensions to support US government debt financing. Separately, the recent formation of the $51T AIIB (Asian Infrastructure Investment Bank) is an indicator of what the global strategists see as mandatory to keep a rapidly weakening global economy on “life support”.

Gordon T Long

Co-Founder, Financial Repression Authority

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

The Financial Repression Authority has consistently shown that Regulatory changes which “Ring Fence” US investors choices is a cornerstone of the Macro-Prudential Policy of “Financial Repression”. Through stealth programs like FATCA and PFIC the US government has steadily and quietly limited Americans ability to take cash out of the country and to invest abroad, other than through profitable public exchange traded products sold by the financial industry.  However, it is one thing to shut the doors to American investing abroad but it is quite another to fully open the doors to foreigners! It begs the question why, why now and why the change needed to happen so urgently?

This week, as the BOJ, ECB and PBOC all continued to aggressively expand credit  the Federal Reserve was “full ahead” in the process of withdrawing approximately $1 Trillion of liquidity to achieve its December FOMC decision to increase the Fed Funds rate by 0.25%. To counteract this policy initiative and the alarming collapse in the HY & IG bond market, the US government immediately opened the floodgates to easy foreign credit in a major policy reversal. A policy decision which was rushed through congress with almost no time for congressional debate. Obviously what was not lost on the White House was the fact that the now troubled $2.2 Trillion of High Yield bonds peddled to yield starved investors since the financial crisis matches 2/3’s of the $3.5 Trillion increase in the Federal Reserves balance sheet during the same period.

FIRPTA was implemented during a better era for Americans in response to international investors in the late 1980s and early 1990s buying U.S. farmland, as well as the more publicly visible buying of trophy U.S. property by the Japanese.  The US government has now expediently waived FIRPTA.

Bloomberg reports:

President Barack Obama signed into law a measure easing a 35-year-old tax on foreign investment in U.S. real estate, potentially opening the door to greater purchases by overseas investors, a major source of capital since the financial crisis.

Contained in the $1.1 trillion spending measure that was passed to avoid a government shutdown is a provision that treats foreign pension funds the same as their U.S. counterparts for real estate investments. The provision waives the tax imposed on such investors under the 1980 Foreign Investment in Real Property Tax Act, known as FIRPTA.

“FIRPTA has historically made direct investment in U.S. property a non-starter for trillions of dollars worth of foreign pensions,” said James Corl, a managing director at private equity firm Siguler Guff & Co. “This tax-law modification is a game changer” that could result in hundreds of billions of new capital flows into U.S. real estate.

Foreign investors have flocked to U.S. real estate since the global economic meltdown, drawn by the relative yields and perceived safety of assets from office towers and shopping centers to apartments and warehouses. The demand has helped drive commercial real estate prices to record highs. Many foreign investors structured their purchases to make themselves minority investors and bypass FIRPTA.

REIT Purchases

The new law also allows foreign pensions to buy as much as 10 percent of a U.S. publicly traded real estate investment trust without triggering FIRPTA liability, up from 5 percent previously.

“By breaking down outdated tax barriers to inbound investment, the FIRPTA relief will help mobilize private capital for real estate and infrastructure projects,” Jeffrey DeBoer, president and chief executive officer of the Real Estate Roundtable, an industry lobbying group, said in a statement.

Cross-border investment in U.S. real estate has totaled about $78.4 billion this year, or 16 percent of the total $483 billion investment in U.S. property, according to Real Capital Analytics Inc. Pension funds accounted for about $7.5 billion, or almost 10 percent, of the foreign total, according to the New York-based property research firm.

“Foreign pensions are such a low percentage of foreign investment in U.S. real estate because of FIRPTA,” Corl said.

Investment Surges

Foreign investment has surged from just $4.7 billion in 2009, according to Real Capital. Foreign buying this year as a percentage of total investment in U.S. real estate is about double the 8.1 percent average in the 10 years through 2012.

Despite a perception that FIRPTA was a response to the wave of Japanese buying of trophy U.S. property in the late 1980s and early 1990s, including Rockefeller Center and Pebble Beach, the act was actually passed in 1980 in response to international investors buying U.S. farmland. Under old rules, foreign majority sellers had to pay 10 percent of gross proceeds from the sale of U.S. real estate as well as additional federal, state and local levies that could increase the total tax burden to as much as 60 percent, according to the National Association of Real Estate Investment Trusts.

The change “is a huge deal,” said Jim Fetgatter, chief executive of the Association of Foreign Investors in Real Estate. “There’s no question” it will increase the amount of foreign investment in U.S. property, he said.

WARNING

The FRA predicts that Americans will face significant increases in US property taxes over the next five years starting in 2016. With the change in FIRPTA Americans should additionally expect property values to increase in 2016-2017.

Clearly, foreigners, the “1%” and property owners will all gain from this, but most Americans will simply face significantly increasing property taxes on elevated asset values to fund the ever increasing government debt burden.

Americans owning a house can be expected to initially focus on their net worth being higher, and not that they once again will have even less disposable income. Some will learn painfully why the number one killer of small business is cash flow, not profits..

Gordon T Long

Co-Founder,

The Financial Repression Authority

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.

Bill Laggner is the Principal and Co-Founder of Bearing Asset management in Dallas, TX. Mr. Laggner and his partner manage the Bearing fund using an Austrian School of Economics lens in terms of identifying boom-bust cycles, value in the market place, bubbles, and distortions created by both fiscal and monetary authorities.

“We started back in 2002, creating the Bearing credit index when we say that authorities would not let the recession play out”

On describing the Austrian School of Economics, Bill says that Austrian economists would categorize their theory as human action and individual decision making and their responsibilities of those decisions being what really creates normal economic activity. He points out how unfortunate it is that today we have fiscal and monetary intervention which distort human actions.

“We create these boom-bust cycles that are magnified by the very interventions that we’re witnessing today”

SAVINGS & PROPER ALLOCATION OF THOSE SAVINGS

Bill thinks that one of the key aspects of the Austrian economic theory that investors should pay attention to is that one has to have savings and a proper allocation of those savings. He also says that people have to quantify both risks and return as well.

“In that environment as well, you would want interest rates to be set by the market place and not a group of bureaucrats who are essentially socializing credit”

On whether we have an inflation or deflation right now: There is a lot of discussion about inflation in the Austrian theory in terms of the phenomena comes about in terms of pricing, in  light of that we have deflation in commodity prices which was a function of the excess supply created by false signals coming out of China. According to Bill we are facing a deflationary state as of right now.

Bill thinks China and Glencore are the canaries in the coalmine when it comes to credit cycles in the commodity market.

CREDIT CYCLE HAS TURNED

Gord states that the credit cycle is now changing, taking its signals from the business cycle. Bill agrees with Gord, saying:

“We’re at the end of the credit cycle, the whole mal-investment in shale oil…tens of billions of dollars in lost wealth”

For the future, Bill anticipates a massive series of defaults, resulting from huge deflationary pressures and a tightening by the market place, which is basically an unintended result of constant intervention. We are looking at corporate bond defaults, sovereign defaults which will send shockwaves into the currency system.

“We’re probably looking at some kind of new currency system, which looks likely to be gold”

At Bearing Asset Management: They run an aggressive, long-short portfolio.

Bill points out even in the turmoil we’re in he remains optimistic. He thinks that technology will be the savior as the wheels are coming out from the bus, looking at how the internet connects people all over the whole who do business daily.

“We’re coming to a realization that we can look to each other and share expertise, knowledge, goods and shy away from things like speculating in commodities, speculating in real  estate, speculating in the stock market and get back to pricing money correctly.”

“The beauty of America is that the entrepreneurial DNA in this country is unlike any other part of the world.”

Gord mentions that if we could take away centralized control and planning from the planners and controllers in a logical fashion, adjustment will happen. He says that “a crisis is nothing but more than change trying to happen.”

If people want to get more information and insight from Mr. Bill Laggner, they can go to bearingasset.com/blog. They write a lot about relevant topics relating to wealth and the financial markets.

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.

QUESTION: Can you relate some of your career background in portfolio management and a general description of your investment approach?

ANSWER: I’ve been very fortunate. I’ve only had one job….and have been with the same firm since the beginning, when I turned 21, in 1976. It’s nearly 40 years of managing money for the wealthy. I strive to provide solid investment advice, high levels of service and the confidentiality clients have grown to expect. I am solely responsible for asset allocation and selection for my discretionary clients…. My niche stays within the bounds of retail, working directly with families helping them to achieve their goals. Every year, I am challenged by the change in our economic environment, the continued changes in technological advancements and how these and other factors relate to client allocations. Recently I stepped down as President of The Portfolio Manager’s Institute; Currently I serve as co-Chair of Morgan Stanley’s National Financial Advisory Council. I am proud to say that over 50 families have relied on my advice for over 25 years, some longer. By any measure, it’s been quite rewarding

QUESTION: Can you comment on your currently relating to the recent much talked about Federal Reserve policy statements and interest rate direction and how these could affect the financial markets

ANSWER:- Morgan Stanley’s Global Investment Committee supports that interest rate normalization will provide headwind for investors using bonds for principal preservation, as rates rise its likely longer duration bonds will fall.  We show the total return impact of a 1% rise in rates can impact a 30 year bond by a negative 17.9%; which is tremendous. To show the range, if you own a 2 year bond a 1% rise in rates has a negative 2% impact.

– Typically after interest rate hikes the companies with the strongest balance sheets that do not rely on floating debt fare the best

– Rate hikes will likely lead to a rise in interest income on deposit which should help those with larger portions of savings in the bank

– In this environment, Morgan Stanley’s GIC expects housing, mid/lower tier retail, airlines, hotels and leisure’s to benefit. Additionally, we see value in consumer finance and regional banks as consumer confidence is boosted

– It is important to note, we see the initial tightening as a signal of self-sustainability, not the end of economic expansion.

QUESTION: What are the challenges with portfolio management for clients in today’s environment resulting from and characterized by 0% or even emerging negative interest rates?

ANSWER:

– Income more difficult to provide clients, in a zero rate environment many will suggest high yield corporate bonds and leveraged loans to supplement traditional fixed income but many clients are not willing to sacrifice quality for a higher yield.

QUESTION: Do you see any unintended asset price distortions in the financial markets resulting from an extended period of virtually 0% interest rates and from quantitative easing (QE) by many central banks worldwide?

– We found that as the cycle has matured security selection based more heavily on credit quality created dispersion in spreads and opportunities for further security selection. In addition, we see credit spreads have widened significantly creating opportunity for credit selection.6

QUESTION: What types of generic investment classes and investment approaches make sense in today’s environment characterized by very low interest rates, low yields, volatile capital markets, emerging regulations and international capital controls in many jurisdictions including the United States?

ANSWER:

– Morgan Stanley’s GIC continues to recommend equities over fixed income. Within the US we prefer technology, financials, consumer/housing related products and industrials. If you are an investor that is looking for fixed income we would recommend below-benchmark duration and find the US high yield market attractive.

– In this environment, Morgan Stanley’s GIC expects housing, mid/lower tier retail, airlines, hotels and leisure’s to benefit. Additionally, we see value in consumer finance and regional banks as consumer confidence is boosted

QUESTION: Do you advise international and geographical diversification to your clients and if so how can this be factored in to the investment process?

ANSWER:

– While personally I do not have a large diversification to international it is definitely a theme you are seeing in today’s investment sphere.

– Europe is getting the support from the ECB with quantitative easing and the GIC expects European equities to continue outperforming in 2015.

Additional Commentary

– Lower energy prices help drive increase in consumer spending despite weak wage growth in 2014. Lower unemployment levels should lead to stronger wage growth going forward

– bullish on housing – We see US consumer confidence at an eight-year high based on the University of Michigan, Consumer Sentiment Index supporting the strength of the middle class and US economy going into 2016.

The individuals mentioned as the Portfolio Managers are Financial Advisors with Morgan Stanley participating in the Morgan Stanley Portfolio Management program. The Portfolio Management program is an investment advisory program in which the client’s Financial Advisor invests the client’s assets on a discretionary basis in a range of securities.  The Portfolio Management program is described in the applicable Morgan Stanley ADV Part 2, available at www.morganstanley.com/ADV or from your Financial Advisor.

Ronnie Sax is a Financial Advisor with Morgan Stanley Global Wealth Management in Bethesda, MD. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

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.

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 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.

Subscribe to our Youtube Channel to watch our Program Show – click on the red Youtube button to subscribe:

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.