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04/09/2015 - Financial Repression Index

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Swiss Re’s FINANCIAL REPRESSION INDEX demonstrates that mainline investment institutions are beginning to see what the FINANCIAL REPRESSION AUTHORITY has been shouting for some time!

LINK HERE to get the Swiss Re Report

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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.


04/09/2015 - Financial Repression Wealth Confiscation: Bailin Ahead for Greece?

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“The loans to Greece by the ECB have been increasing, so the ECB has been increasing its credit exposure to that country. Second, the deposit runs that are occurring in the Greek banks have been accelerating over the past three months and they continue as we speak. So you have these two lines converging. The ECB is never going to allow those two lines to cross because if they did the ECB’s credit exposure would be larger than the amount of deposits in the Greek banking system. And if that were to occur, the ECB would never be able to get its loans to Greece repaid. When Cyprus failed, they (Western central planners) said that bank bail-ins were going to be the blueprint for other countries. And we have to look at what happened in Cyprus and apply it to Greece. When those two lines were converging in Cyprus, the ECB, IMF and the EU basically took over and nationalized two of the Cypriot banks — took the deposits out of those Cypriot banks and used those deposits to repay the ECB loans to Cyprus. So the same thing is going to be happening to Greece. The ECB is going to take the deposits out of the Greek banks and use those to repay all of the loans that the ECB has made to Greece. …. I think we should be worrying about whether this is going to be happening over this weekend.”

– James Turk

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.


04/06/2015 - Leo Kolivakis: Pension Pulse Talks Pension Poverty

Special Guest: Leo Kolivakis – Pension Analyst & Publisher, PensionPulse.blogspot.com

 

Leo Kolivakis brings a unique perspective to Pensions having worked on both the Buy & Sell side as a Pension Plan analyst.

TITANIC GLOBAL BATTLE

Kolivakis sees a titanic battle going on around the world between Inflation & Deflation with the world shifting due to demographics, private / public debt problems and a global jobs crisis. As a result he sees bond yields falling because it is resulting in no inflation. “The bond market is rightly concerned about tight fiscal policy and austerity in a world of low growth, low inflation (possibly deflation) for a prolonged period of time”. “I am more worried about what is going on in China .. if you have a boom-bust scenario in China, the potential to import deflation (ie through lower goods prices, currency devaluation etc) is a significant concern”.

PENSIONS IN PERIL

“I believe there is a Private and Public Pension Crisis in America that needs to be openly discussed by US citizens & politicians. The private savings crisis in America shows the median 401K balance is under $20,000 and somewhere around $76,000 for people 60-65 years of age. That is definitely not enough money to retire comfortably for the rest of your life!”

“In the private sector where corporations are cutting defined benefit programs and going to low cost defined contribution plans, there is another crisis happening.” People are being forced to take on the responsibility of pension investment management decisions.

“Individuals are now caring the risk of their retirement!”

“What people don’t realize is the shift to Defined Contributions is very deflationary. People simply don’t spend as much as they do on Defined Benefits when they have known fixed incomes.”

PENSION POVERTY

  1. DEFINED BENEFITS – A massive underfunding problem between $7 – $10T
  2. CONTRIBUTORY BENEFITS – Median 401K Levels of $18,400 are ‘orders of magnitude’ short,
  3. SELF FUNDING – IRA and Roth Plans are not earning the levels of income required for retirement. Market draw-downs have seriously impaired long term growth,
  4. SAVINGS RATES – Falling Real Disposable Income is increasingly limiting already extremely low personal savings rates.

GOVERNANCE PROBLEMS

“There is a huge problem with the Public Pension Funds in the United States. The problem focuses around the governance model. It is all wrong! They have way too much political interference. They don’t have proper pension fund plan managers that can take internal actions, lower the costs of the funds and … match assets with liabilities”

“The US needs to consider privatizing Social Security and creating independent investment boards.”

“What is going on in the US right now is you have a lot of investment consulting shops that are typically forcing these public pension funds to invest in very high fee, high risk private equity / hedge funds. That is fine for the Private Equity Funds and Hedge Funds but it is not in the best interest of these public pension funds. I don’t think it is. As a matter of fact I know it is not!”

“The US really needs to reform its Public Pension Plans. To introduce shared risk models so that the risk of the plan is shared between the stakeholders (i.e. the employees), the government and the pension. They need to reform the governance so they start to pay the pension plan managers properly to manage more and more of the assets internally”.

“Pension Investments Are Fueling Inequality! The migration of Pension Plans to Alternative Investments such as Private Equity / Hedge Funds are contributing to the growth in Inequality”

 

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.


04/04/2015 - How Can and How Do Governments Address Their Debt Burdens? Paper by Carmen Reinhart & M. Belen Sbrancia

Article which summarizes the thoughts from Carmen Reinhart & M. Belen Sbrancia .. abstract from their original 2011 Paper: “Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of ‘financial repression.’ Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks…Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards)…We describe some of the regulatory measures and policy actions that characterized the heyday of the financial repression era.”.. This article emphasizes how actual events in the current marketplace suggest the U.S. & other high debt/GDP countries are using history as a guide to help them liquidate debt in a politically feasible manner .. Here are some simple examples of possible financial repression in the marketplace:

1. Heavy handed regulation & control of financial institutions is well underway (first step in facilitating financial repression). All of this regulation is being marketed as “for the public good.”

2. Governments are playing a larger & larger role in government bond markets .. It is no longer possible to look at a yield curve & believe it reflects market-priced risk.

3. Governments are pushing for more & more domestic debt ownership.

LINK HERE to the Article

LINK HERE to get the IMF Paper

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


04/04/2015 - The Hidden Dangers of Financial Repression

Chris Whalen* explains the dangers of keeping interest rates too low for too long .. zero interest rates & quantitative easing, or QE, are actually making deflation worse .. “These policies are also causing a precipitous decline in consumer demand, which is visible in lower prices for key commodities such as copper, oil and natural gas. And they come at a long-term cost to individual investors and financial institutions .. Zero rate policy as practiced by the Fed and now by the European Central Bank is actually depressing private-sector economic activity by taking money out of the hands of consumers and businesses.And by using bank reserves to acquire government and agency securities via QE, the Fed has been artificially pushing up the prices of financial assets around the world even as income and GDP stagnates. Public companies are using low interest rates to fund stock buy-backs instead of making new investments .. By robbing individual savers and financial institutions of income, and artificially boosting asset prices, the Fed and ECB are unwittingly creating the circumstances for the next financial crisis.” . Whalen advises ending financial repression.

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.


04/03/2015 - Rare Stamps & Coins – One Way to Beat Financial Repression

The Telegraph article & results from a new study on how investors can seek protection from the damaging impact of quantitative easing, low interest rates, low yields – financial repression – through rare stamps & coins .. “Stamps can’t be licked when it comes to an alternative investment .. Stamps and coins have become a viable alternative investment class that have outperformed the FTSE 100, according to new research.” .. Guy Tolhurst, managing director of Intelligent Partnership: “Stamps and coins present investors with one way to beat financial repression: the low interest rates, money printing and silent currency war that central banks are resorting to in order to stimulate the economy.”

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.


04/02/2015 - FINANCIAL REPRESSION IS AN “OPAQUE TAX” ON YOUR PENSION & INSURANCE POLICIES

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LINK HERE to get the Swiss Re Report

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.


04/01/2015 - Swiss Re: Financial Repression has cost U.S. Savers $470 Billion

Swiss Re report highlights how artificially low interest rates have cost U.S. savers U.S.$470 Billion .. the report also explains how financial repression has exacerbated wealth/income inequality .. Swiss Re has also crafted a “Financial Repression Index” – see above .. “Looking ahead, financial repression is likely to remain a key tool for policymakers given the moderate global growth outlook and high public debt overhang. But, as outlined in this paper, financial repression comes with significant costs. Whether the costs outweigh the benefits largely depends on the ability of governments to take advantage of the low interest rate environment by implementing the right structural reforms. So far, their record for doing so has not been comforting, as also noted by the IMF .. Additional research on financial repression could be linked to the impact of an aging society on the broader economic and financial market environment and hence the optimal policy mix. Finally, a largely unexplored area is the consequence – especially longer-term – of public authorities acting as dominant players in their own bond markets. How does this affect private capital markets, and how severe are the distortions in price formation, investment decisions, allocation to productive areas and capital flows more generally?” .. the report includes a Foreward by Swiss Re Group Chief Investment Officer Guido Fürer.

LINK HERE to get the Report

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FINANCIAL REPRESSION TAX TO SAVERS HAS BEEN ~$470B SINCE 2000

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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.


04/01/2015 - Financial Repression: Wealth Taxes on the Way

Charles Hugh Smith*: “As the global economy slides into recession and the U.S. economy catches a cold, the blueprint for raising taxes will be dusted off in every state .. Here’s the blueprint for raising taxes:
1. Declare the tax is an emergency measure.
2. Start the tax out at a low rate to minimize resistance.
3. Levy the tax only on the wealthy to play the “it’s only fair” card.
4. During some late-night session when the public isn’t looking, make the tax permanent by burying the provision deep inside some popular and/or complicated legislation.
5. Raise the tax rate in response to deficits, i.e. “we need more money.”
6. Gradually expand the base by reducing the qualification level from “wealthy” to “well-off” and eventually to everyone.
7. Gradually reduce deductions and exemptions to pittances.
8. Auction off exemptions for the super-wealthy via campaign contributions.
You can watch the blueprint in action in any number of locales–for example, Rhode Island, where the governor is proposing a first-ever statewide property tax on second-homes worth more than $1 million. The proposed levy has been dubbed the Taylor Swift Tax in honor of Swift’s $17 million mansion on the Rhode Island coast.”

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.


03/28/2015 - Financial Repression is causing Banknotes to become an Attractive Investment – This could cause a run on the Banking System

In his latest investment letter, Tim Price observes how the financial world is bifurcated into 2 camps – savers & speculators .. “All the forces of the world’s central banks have been devoted to shafting the former and encouraging the latter. The process ends badly. When Danish borrowers are paid to borrow by their banks and Danish savers are penalised for keeping money in the bank, something has gone gravely wrong with the financial system. Something is rotten, and not just in Denmark.” .. Price also references Russell Napier who thinks that physical cash – the banknote – is now becoming an increasingly attractive investment, but warns any significant move towards this “investment” will create a run on the banking system: “This has not happened. Yet. However, with the vast bulk of ECB purchases of assets still to come, the move to negative nominal interest rates has just begun. At some stage a shift to banknotes will begin and the limits to monetary policy will become much clearer. The spluttering torch of reflation will have to be passed to governments, and extreme government measures, such as outlawing cash holdings, are already under discussion. Investors should look to the imposition of a Tobin tax on capital inflows in Sweden, Switzerland or Denmark as a key indicator that central bank action will have to be bolstered by direct government intervention in markets.” .. we are in the era of financial repression.

LINK HERE for Full 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.


03/27/2015 - Financial Repression Is Creating Financial Bubbles

“This morning’s Wall Street Journal expressed it about as plaintively as it comes. In a word, the monetary politburo is waiting for zero interest rates, massive debt monetization and its wealth effects promises and “puts” to goose the macros: ‘The central bank has kept rates near zero since the recession to spur hiring, investment and spending.’ .. Does it really take purportedly intelligent people six years to see that the macros are not responding? Better still, isn’t it time for the Fed to explain the exact channel by which its interest rate pegging and forward guidance is supposed to be transmitted to the main street economy? After all, if these channels are blocked or ineffective then its flood of liquidity never leaves the canyons of Wall Street. In that event, the central bank actually functions as a financial doomsday machine, inflating the next financial bubble until it bursts. Then, apparently, its job is to rinse and repeat .. How in the world, it might be asked, is it possible that the chief beneficiary of the financial repression policies of the Fed is the very most affluent segment of society? That is a salient question—-but don’t bother to ask the liberal Keynesians who run the Fed. They do no even have a clue that it’s happening.”
– David Stockman

LINK HERE for Full 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.


03/26/2015 - Financial Repression Depresses The Economy

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“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’smassive 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.”

– Chris Whalen

LINK HERE for Full 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.


03/25/2015 - The “Natural Interest Rate” Is Always Positive And Cannot Be Negative! – Professor Dr. Thorsten Polleit

The True Purpose of Negative-Interest-Rate Policy

For some reason, those who argue that the originary interest rate has become negative seem to overlook that the originary interest rate is a phenomena which is not confined to credit markets. It pervades all markets in which present goods are exchanged for future goods.

For instance, the originary interest rate prevails at each stage of the economy’s time-consuming roundabout production. The originary interest rate also exists in the stock market, where investors exchange present money against a claim on future money (that is a firm’s dividend payment).

If they wanted to be consistent, the believers in a negative originary interest rate would have to call for a policy that does not only make interest rates negative in real terms in the credit market, but also in the markets for, say, stocks and housing.

However, a policy that advocates destroying firms’ values and peoples’ housing wealth wouldn’t be taken too kindly by the public at large; and those economists recommending it couldn’t expect being cheered.

The consequence of a policy of a negative real market interest rate should have become obvious by now:

It is an actually perfidious policy for debasing the real value of outstanding debt; and it is a recipe for wreaking havoc on the economy.

Market interest rates may become negative in real terms. In a “hampered market,” for instance, the central bank can push the real market interest rate into negative territory. However, this does not, and cannot, represent an equilibrium, as time preference and thus the originary interest rate cannot become negative.

Should a central bank really succeed in making all market interest rates negative in real terms, savings and investment would come to a shrieking halt: as time preference and the originary interest rate are always positive, “capitalistic saving” — the accumulation of goods designed for improving the production process — would come to an end. Capital consumption would ensue, throwing mankind back into poverty. It would be the end of the market economy.

It might be interesting to note in this context that, for instance, the German national socialists had called for the abolition, the prohibition of the interest rate. Now you know why: Without a positive (originary) interest rate, the market economy will cease to function.

LINK HERE for Full 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.


03/23/2015 - Professor Guido Hulsmann Talks Financial Repression

Special Guest: Professor Guido Hulsmann – Professor of Economics, University of Angers, France

 

FINANCIAL REPRESSION

“Financial Repression is the name we give to all the different government interventions in which governments seek to improve their own bargaining position with financial markets.”

“As a consequence of Financial Repression (that is of government intervention) people use their savings differently than they would otherwise have used. Therefore different people benefit from those savings (most probably the government itself) to a greater extent than otherwise would have been the case.”

FINANCIAL REGULATION

“The most surprising developments have been regulation, like the Dodd-Frank Act, Basel III, FATCA. They are pretty intrusive. These regulations have been sold to the public as necessary to control the financial markets, which is certainly the case but this is one side, the other is precisely the cause. Governments control the markets and can force Insurance Companies, Banks, Investment Trusts to use their funds in a certain way that governments are then ready to benefit from. This is very often at the expense of the savers.”

EXPECTED TRENDS

INCREASED REGULATIONS

The amount of paperwork and red tape that will be required to comply with expanding regulations is already growing dramatically. “We already require by law in Europe, for example, for an Investment Fund to have a Risk Officer who reports directly to the Ministry of Finance. It is absolutely mind boggling and it makes it very difficult for people to continue doing business profitably – it makes it quite miserable unless you are a big firm!” “These rules boil down to squeezing all small and even medium sized businesses out of business!”

‘FORCED LENDING TO THE STATE OF FORCED SAVINGS

“I expect a trend that will become much larger and more important in the future is what I call “Forced Lending to the State of Forced Savings!” Professor Hulsmann sees Pensions as being a particularly attractive target for this sort of trend.

PRICE RIGGING

We have already seen this most evidently in the area of Precious Metals price rigging. “This is because they are the natural alternative to hold savings outside of Financial Markets and Real Estate Markets! Both are artificially bloated thanks to central bank policy.”… “it is natural that people turn to Precious Metals because there is no counterparty risk”.

LEGAL PRIVILEGE

“Under a fiat money standard, governments (or their central banks) may obligate themselves to bail out, with increased issues of standard money, any bank or any major bank in distress. In the late nineteenth century, the principle became accepted that the central bank must act as the “lender of last resort”, which will lend money freely to banks threatened with failure. Another recent American device to abolish the confidence limitation on bank credit is “deposit insurance”, whereby the government guar­antees to furnish paper money to redeem the banks’ demand li­abilities. These and similar devices remove the market brakes on rampant credit expansion.

According to Hülsmann, there are four groups of legal privileges granted by the state (usually more than one is granted):

  • Legalized Counterfeiting – the promises of banks are allowed to be more “elastic”. For example, a coin marked “an ounce of gold” will be allowed to have any amount of gold or none, and can have any meaning. Banknotes were named “promises to pay”, but were obscure on the details.
  • Monopoly – only some monetary products may be produced by law, like a specific metal; or only the banknotes or coins of a certain bank. This limits the freedom of choice of users of money and benefits the producers and first recipients at the detriment of others.
  • Legal Tender is a money, that must be accepted in exchanges under a predefined price. Some monies may be driven out of the market due to Gresham’s Law.
  • Legalized Suspension of Payments allows banks to avoid paying their obligations, while receiving payments from their debtors. If a bank is freed from contractual obligations to redeem its money and it is also legal tender, its banknotes become genuine paper money.

With legal privileges the banks are allowed to behave more irresponsibly, which increases moral hazard.

PERMANENT POSITIVE PRICE INFLATION RATE

“Without a Fiat Currency system it is impossible to create a permanent positive price inflation rate. With the gold standard the tendency for the price level was generally deflationary… a constantly declining price levels.”

“If you have declining prices then there is a very strong incentive for savers to not worry about any financial investments at all, but to just save in the form of cash … when you have constantly increasing prices… holding cash becomes suicidal for savers. You then have only two choices. Buy Real Estate or Financial Titles. You get promises of remuneration for your savings so you are partially compensated for the lose of purchasing power.”

“Deflationary Recessions are a healing process – it is what precisely gets the economy back in touch with the real world and allow you to move forward event more forcibly!

Please link to the page of our Austrian research seminar:

AND ask your readers to get in touch with me (jgh@guidohulsmann.com) to make a donation. All donations are tax-deductable.

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.


03/21/2015 - GOING OFFSHORE IS ABOUT SAFETY NOT TAX EVASION

AMERICANS ARE BEGINNING TO LEARN WHAT OTHERS HAVE ALREADY BEEN FORCED TO LEARN ABOUT CONTROLLING GOVERNMENTS.

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SAFETY

Going Offshore is not about Tax Evasion it is about SAFETY against predatory and self serving Private Litigation & Exploding Government Laws, Regulations, Fines, Licenses and Fees.

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RENOUNCING CITIZENSHIP LEVELS IS A GROWING SIGN OF ALARM

Land of the Free is Not So Free!

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There is a difference between TAX EVASION and TAX AVOIDANCE.

One is illegal, the other is a family responsibility!

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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.


03/20/2015 - Financial Repression Consequences: Central Banks are Punishing Savers For the Benefit of Governments & the Banks

“These days, interest rates tell us little about a nation’s creditworthiness .. The culprit behind this mess is a familiar one: central banks. Targeted rate reductions, quantitative easing, and other easy-money shenanigans have pushed rates to the floor .. and through it in some cases. Germany, Switzerland, Japan, France, Holland, and even troubled Italy are among the growing number of countries with negative-yielding government bonds. Negative-interest-rate policies (NIRP) have even spilled over into the corporate world. This upside-down environment makes it difficult for investors to grasp underlying economic conditions, especially since there’s no historic precedent. Credit has never been so abundant. The world has also never had so many currencies deadlocked in a race to the bottom. We are truly in uncharted territory .. Artificially suppressed rates have punished savers, encouraged reckless consumerism, and spurred share buyback crazes in the United States and Japan—a trend that’s likely to pick up in Europe now that the European Central Bank has begun its own bond-buying program .. Monetary policy is the only game in town.”
– Casey Research

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.


03/18/2015 - Kristina Hooper: Allianz Global Talks Financial Repression

Special Guest: Kristina Hooper – Managing Director, US Investment Strategist, Allianz Global Investors

 

FINANCIAL REPRESSION

What is financial repression?

Government actions (lower interest rates, increased regulations, etc.) to reduce debt while maintaining inflation

Goal: Create negative real (after-inflation) returns and inflate away public debt by forcing real rates below GDP growth

Why does it matter to investors?

It’s a “stealth tax” that systematically strips wealth; “safe” investments no longer generate enough income

It rewards debtors and punishes savers—especially retirees

Financial repression: It’s happening now around the globe

A Financial Repression checklist:

  • Extremely low key interest rates and bond yields
  • Central bank purchases of government bonds
  • Political pressure on banks to purchase government bonds
  • Nationalization of select banks
  • Repression-friendly regulatory measures
  • Restrictions on foreign capital movements
  • Pension asset transfers to government

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HOW TO ADJUST:

Cash alone may not cut it. Consider whether you are properly diversified to generate the income you need,

Add risk-mitigating strategies to provide downside protection and total return,

Consider moving a portion of your fixed income portfolio out of traditional instruments for income,

Look beyond traditional bonds for alternative sources of income,

Have adequate exposure to equities,

Use an actively managed multi-asset solution

Post-QE, Active Management will be key to uncovering growth opportunities.

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.


03/14/2015 - Financial Repression: Regulators Restricting and Directing Investor Freedom and Behavior

Market Watch article reports on new rules by the SEC on certain bond funds to prevent an investor exodus of a short period of time, similar to what happened at the beginning of the financial crisis .. these rules are influencing investor behavior .. [This is another example of financial repression – governments & regulators ‘ring-fencing’ to control the movement of capital.

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.


03/13/2015 - Peter Boockvar Talks Financial Repression

Special Guest: Peter Poockvar – Managing Director, Chief Market Analyst, The Lindsey Group

 

FINANCIAL REPRESSION

“Financial Repression is the artificial suppression of interest rates well below the rate of inflation and well below what they would be otherwise if set by the supply and demand for money. That is what should determine what the cost of money is!”

SUPPLY & DEMAND CONSEQUENCES

“The central banks are pressuring you to act today in some activity that you would otherwise have done tomorrow. They want you to buy a car today, they want you to buy a house today, they want you to buy that stock today – not tomorrow. It just pulls demand activity forward! When this begins activity in the short term accelerates both in terms of both economic activity and higher asset prices. At some point you reach a wall where you have pulled forward so much activity that you have reached the law of diminishing returns!”

“All of this has pulled forward future returns on asset prices, but that doesn’t stop asset prices from going higher! … “You get short term benefits but at the expense of long term costs. You pay for it over the long term.”… “What the central bankers actually end up creating is Deflation because of the excess capacity build-up to match the artificially created demand!”

We have Deflation presently in Commodity prices but in the US we have Inflation in Professional Services.

“Central Bankers have ‘mucked’ up the entire concept of Supply & Demand and price discovery. All the various inputs are ‘out of whack relative to where they would be historically!”

AT SOME POINT THE FED WILL LOSE CONTROL

“We know the Fed lost control of commodity prices. The Fed is trying to generate inflation and commodity prices have gone the exact opposite way! At some point they are also going to lose control of stock prices.”

“ECB QE was the final act of Central Bank Largesse!”

“There is literally Monetary Madness Going On!”

POTENTIAL FED RATE INCREASES

“This ends when Inflation actually starts to increase! When Interest Rates do start to rise and in affect take away the printing press of the central bankers. Right now Central Bankers have given themselves license to do what they want because at these low levels of inflation, but at some point the bond market is not going to be so accommodating!”

The Central Bankers are trapped in a policy they can’t get out of. It is ridiculous that after 6 years of ZIRP everyone is ‘freaking out’ over a mere 25 basis point increase.

The Fed’s academic econometric models are flashing red over labor market metrics. Therefore they will increase rates in June irrelevant of whether that is actually the right thing to do (assuming you believe the Labor numbers) . That is what guides them.

“The issue is not whether the Fed raises rates but rather the turbulence it causes and what it means to potential future rate hikes.”

A MAJOR CORRECTION IS POTENTIALLY JUST BEGINNING

The combined Fed tightening and a changed earnings picture suggest the basis for rising equity markets is no longer there. The Multiple expansion game is not there.

“How far we decline I am not sure. I am not sure where the Yellen ‘Put’ is. It is an ‘out of the money’ Put but I am not sure what the strike price is! I don’t know if it is 15% or 25% lower. I am pretty sure if we are down 20-25% Yellen will cut rates below where she has them after raising them in June. I would then not be surprised to see another round of QE.”

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.


03/13/2015 - Doug Noland Talks Financial Repression

Special Guest: Doug Noland – Credit Analyst

 

FINANCIAL REPRESSION

“Financial Repression is fundamental to current policy to try and sustain a global credit bubble… Policies have become ever more desperate as the credit bubble has gone global! It is a matter of policy makers distorting the incentives, especially the financial incentives. It is particularly painful for savers. Policy makers want to drive money out of savers into risk markets by creating incentives for speculation and leveraging to reflate the system and generate significant credit growth.

“It is flawed economic doctrine, flawed policy making and goes back a long way.”

  • After the 1987 Stock Market Crash the Greenspan Fed flooded the market with liquidity,
  • We then had the late 80’s excesses and that bubble burst,
  • In the early 90;s the Greenspan Fed came in and aggressively slashed interest rates and created a steep yield curve so the banks could borrow cheap and lend dear,
  • It created leveraged speculation,
  • We have been in serial bubbles ever since then. Each gets bigger and each post reflationary effort is even more extraordinary.
  • The ‘Once in 100 Year Flood’ was not the 2008 Crisis. We are in an even bigger bubble now. It is a Global Bubble. It is at the heart of money and credit. When the next crisis occurs the policies of Financial Repression won’t have much of an impact unfortunately.

THE MARKET BASED CREDIT SYSTEM

“Back in the 1990’s I was obsessed with trying to understand how an impaired banking system from the early 1990’s morphed into this new age financial system that was fueling historic prosperity and a bull market. By the late 1990’s I was convinced we had fundamentally changed finance. That uniquely for the first time in history we had global credit that was unconstrained. The quality and quantity of credit was unrestrained. There was no gold standard, there was no Bretton Woods Monetary regime, there was not even any ad hoc. dollar reserve system to restrain credit. Unlike historically when credit was dominated by bank lending, this new credit that developed in the 1990’s was market based – securitization, Fannie Mae, Freddie Mac, Derivatives, Wall Street Finance. I was convinced that credit which is unstable would see this new credit highly unstable.”

“I believed the government would reign this credit in. I had no inkling that the government would accommodate this type of credit and use this type of credit for reflationary policy. That is really how it got away from them! Accommodating financial leveraging and speculation etc.”

WE HAVE DISREGARDED THE VULNERABILITIES OF CAPITALISM

“I am very much a free market person. I want the market to dictate price. As much as possible I want the government out of it. I look at the Financial Sphere and Economic Sphere. The Financial Sphere needs to be carefully regulated. You cannot have unconstrained credit! You cannot have a Financial Sphere that inflates at a whim because that distorts the pricing mechanism.”

“I fear that when the crisis collapses the system it is going to be folks like us and our listeners who will have defend Capitalism by saying:

“Capitalism wasn’t to blame. It was a run away Financial Sphere and poor Policy making in managing money & credit that was the culprit!”

Capitalism is not flawed but instead has vulnerabilities. We cannot disregard these vulnerabilities. These vulnerabilities are in Credit. We have disregarded the vulnerabilities within Capitalism. We have not separated the real economy pricing mechanism which operates very differently in the Financial Sphere.

This extensive discussion covers a wide range of subjects including:

  • THE BUILD-UP OF SYSTEMIC RISK
  • A CRISIS OF CONFIDENCE IS AHEAD
  • WHY WE HAVE RECORD ARTIFICIAL HOUSEHOLD WEALTH
  • FINANCIAL FRAGILITY – As long as Credit is expanding things looks good. But it camouflages the underlying financial fragility.
  • 2008 WAS ABOUT PRIVATE CREDIT – THE NEXT CRISIS WILL BE ABOUT PUBLIC CREDIT
  • THE GLOBAL BUBBLE HAS NOW BEEN PIERCED

“You can now expect the unexpected from Policy Makers”

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.