Interviews

04/11/2017 - The Roundtable Insight: 5 Top Money Managers Discuss Austrian School Investing – Now Published

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Today we have five panelists from around the world, Russ Lamberti from Cape Town, South Africa, Mark Valek from Liechtenstein, Chris Casey from Chicago, Bill Laggner from Dallas, and Mark Whitmore from Seattle.

Chris is the Managing Director of WindRock Wealth Management. He combines a degree in Economics from the University of Illinois with a specialty in the Austrian school of Economics. He advises clients on their investment portfolios in today’s world of significant economics and financial intervention. He’s Also written a number of publications on a number of publications on websites including the Ludwig von Mises Institute, Zero Hedge, Family Business, Casey Research, and Laissez Faire Books. He is a board member of the Economics Development Council with the University of Illinois, a Policy Advisor for The Heartland Institute’s Center on Finance, Insurance, and Real Estate.

Bill is a Co-founder of Bearing Asset Management, he’s a partner with Kevin Duffy that manage the Bearing fund using an Austrian School of Economics lenses in terms of identifying boom-bust cycles, value in the marketplace, bubbles, and distortions created by both fiscal and monetary authorities. He’s a graduate at University of Florida, began his investment industry career in the late 1980s initially as a stockbroker, and then moved to the buy side at fidelity investments. He’s been featured also in Barrons, Reuters, and CFA magazine.

Russ Lamberti is the founder and chief strategist of ETM Macro Advisors. Which provides Macroeconomic intelligence and strategy services to asset managers, family offices, and high net worth individuals. He is the Co-Author of “When Money Destroys Nations”, a book about Zimbabwe’s hyper-inflation, and he’s a contributing author at the mises.org institute.

Mark Valek is a partner investment manager of incrementum, he’s a Chartered Alternative Investment Analyst (CAIA) and has studied business administration and finance at the Vienna University of Economics. From 1999 he worked at Raiffeisen Zentralbank (RZB) as an intern in the Equity Trading division and at the private banking unit of Merrill Lynch in Vienna and Frankfurt. In 2002, he joined Raiffeisen Capital Management and in 2014 he published a book on Austrian Investing. He’s one of the authors of “Austrian School for investors”.

Mark Whitmore is the Principal, Chief Executive Officer of Whitmore Capital. Mark has been managing personal portfolio assets, periodically publishing newsletters and blogs, and providing pro bono financial planning/investment consulting since leaving law in 2002. His specialties are currencies and international economic analysis. He obtained a B.A. in Political Studies from Gordon College, graduated Summa Cum Laude at the University of Washington he earned a Masters of International Studies (MAIS) at the Jackson School and a J.D. from the School of Law.

Austrian School of Economics Explained:

Mark Valek defines some basic points and differences of the Austrian School as: Economics about the behavior of individuals and human action, The Subjective value theory, under consumption of savings is necessary for sound investing and growth, capital structure being key to a sustainable economy, and price mechanic mechanism coordinates the centralized knowledge. Perhaps the most important distinction of Austrian Economics is its view towards the monetary system. Some of these points are inflation being defined as expansion of the money supply and finally expanding money and credit supply causes a boom and bust cycle in the business cycle theory.

He points out that these are the typical differentiating points, but this is by no means a complete list, and you can discuss the differences between the Austrian School and traditional Keynesian theory.

Russell Lamberti thinks that one of the key differentiators from a practical analytical and investment perspective was that the Austrian school draws a very straight and consistent line between microeconomics and macroeconomics. He notes that at the microeconomics level, Keynesianism is very similar, but when they aggregate it up to the macro, a whole different theoretical framework is used and there’s essentially no consistency between neo-classical and Keynesian micro and macroeconomics so there’s a fundamental break down there. He ends the thought by saying in today’s Macro world it’s only really the Austrians who are talking about the unsustainability of certain demand trends because of misallocated capital and misallocated productive resources and that’s why he thinks the Austrian Business Cycle is such a key distinguishing feature of the Austrian school.

Chris Casey discusses why Austrian Economics can provide new insight, saying that Austrian Economics is the only one that really puts man at the center of the discussion. It boils economics down to man in the context of nature as it relates to scarcity for his needs and wants. And in so doing they then use a number of first principles that build on from the deductive reasoning standpoint to create a consistent and sound economic school and economic philosophy. And that’s what really makes the difference from the other economic schools out there. It’s not just the conclusions, it’s how we arrive at those conclusions.

Mark Whitmore adds that specifically, the role of central banking is something that is really distinct from an Austrian perspective vs Keynesianism.  Specifically the asset price inflation that you’ve seen has largely been ignored by Keynesians in the last two bubbles.  Now we’re into a third bubble I would argue as well. And essentially the Fed and the Keynesians will continue to point to there being really no headline inflation pressure and hence there’s really no reason to begin to normalize or adjust or move up interest rates meaningfully. And I think that from an Austrian standpoint, this exacerbates this boom-bust cycle which we’ve seen which has been really compressed in terms of time lately versus what has historically been the case. Since the mid to late 90s the amplitude of bubbles to the upside has just been far greater. He highlights Henry Hazlitt’s two points as far as critiques of Keynesianism. The first one being that fundamental flaw in terms of interest, with Keynesians tending to service the visible minority at the cost of the invisible majority and again it gets to this whole issue of government being the problem solver, the one that can allocate assets essentially, in its view, the most effectively from a Keynesian perspective in a counter-cyclical effective way, where the Austrians are much more skeptical of the accuracy of that. And second,the propensity under Keynesian Economics to over-consume in the present generation at a cost of creating massive debt or future debt for future generations to essentially somehow deal with, we’re sort of seeing that today in all developed parts of the world.

How it’s used in past, present and future Economies including how and why the 2007-2008 financial crisis happened:

Bill Laggner says what was interesting was that the internet created this initial innovation wave decentralization wave, and of course due to excess credit creation, money creation, you had a bubble and then a subsequent bust. And then instead of letting the system purge and heal, the central banks led by the U.S. came and lowered interest rates and you segued from a technology bubble to a private sector credit bubble. And of course it went longer then everyone on this call thought it would, and it eventually hit a wall and again tried to cleanse and it’s interesting central banks let certain groups fail and then when things started to get out of hand, they stepped in and bailed out a number of politically connected contingents and then laid the foundation for this third bubble, and this third bubble’s gone on longer I ever imagined or my business partner imagined that it could. He also points out that the distortions are epic, and that this won’t end well.

Mark Whitmore chimes in discussing Kurt Rickenbacker’s idea of “Ponzi finance” which is a powerful analytical insight that essentially the boom-bust cycle is endogenous to the particular type of finance credit system you have in place.Credit can thus becomes increasingly untethered to any kind of historic connectors such as sound collateral. One increasingly witnessed these signs of the economy going off the rails in the upward direction in a trajectory that was simply unsustainable. So indeed that bubble went longer than most of us expected, and this one is truly epic.


 

* Includes the US, ECB, BOJ and PBoC.

Sources: Yardeni Research, Inc. (www.yardeni.com); Haver Analytics

He notes that the curve and amplitude of the line showing the increase in central bank assets seen above is almost exactly the same as the line showing the increase in the S&P 500. He calls this the engine that’s driving what’s been taking place in terms of asset price inflation and ends by calling it highly unstable, and saying again that this will not end well.

Russell Lamberti emphasizes the importance in looking at this as three very big bubbles in a row, but also to think about the compounding effects of repeated malinvestment that has been essentially dis-allowed from correcting and from reallocating promptly. He also discusses this unwritten law against recessions, saying this is not just a problem in America, this is a problem everywhere in the world. Politicians don’t like recessions. As they push back through repeated cycles we have chronic malinvestment, chronic poorly allocated capital. And this creates a hostile working lifetime of living in an essentially very strange unreal financial and capital structure. He ends by saying: we’re in a third very excessive state of distortion and the best case scenario that we can hope for is a sharp, painful clear out of chronic malinvestment. That is the fastest path to genuine economic progress again, I hope we get there soon.

Chris Casey adds that when discussing how Austrian Economics explains the 08 crisis gives us some guidance to future bubbles in economic recessions, it’s worth recounting what can not explain the 08 crisis, and that is mainstream economics. And it’s worth remembering that in 2002 at Milton Friedman’s 90th birthday party that Ben Bernanke stood up and literally apologized for the great depression, and he basically said something to the effect of “we won’t do it again” and so that tells you central bankers pretty much around the world do not understand the causes of recessions at its most fundamental level. “They can’t explain why it occurs, they can’t explain why it’s a cycle, they can’t explain what Austrians call ‘the cluster of error’, why all these businesses have made horrendous investment decisions. They can’t explain why every recession is proceeded by monetary inflation, they can’t explain why certain industries are far more cyclical than say consumables. So it’s just something that cannot be explained, the Austrians do, and for the listeners who may not be all that knowledgeable on the Austrian School, in short, whenever you inflate the money supply, you are decreasing interest rates which distorts the whole structure of production, it forces economic actors to make investments they would not have otherwise done, that they would have otherwise deemed unprofitable, and it creates this malinvestment in the system, as my colleagues here today mentioned, we’ve already seen this play out twice in the last 20 years. And the response, if that’s the causation of a recession, the response should be hands off.”

The Austrian School Investing, Investments/Asset Classes/Investment Strategies

Bill Laggner discusses how knowing the Austrian business cycle theory is helpful in fact, during the second bubble, the credit bubble, he wrote an article with a colleague called “collateral damage”. And what he found fascinating about writing the article was the Bearing Credit bubble index created back in 2004 when it was pretty obvious that we were segueing into this new bubble. He says: I kept looking at the types of asset backed securities are being created mainly, and mortgage arena, and then the derivatives wrapped around it, and then attended a few conferences. But I started focusing on the collateral because it’s a confidence game, right, I mean people have confidence when these troubles start, they grow and what was interesting was in 2005 the home-builders had started declining severely and writing down land values ext. but subsequent to that you had maybe 12-18 months of watching paint dry. I mean the other related industries kind of kept chugging along. And it wasn’t until early 07 where the secondary market for certain types of mortgage backed securities just locked up. And that was the beginning of the end. So to me, when I look at excess credit creation through the socialization of credit by the central bank and or other government agencies like Fanny and Freddie in the U.S. I was looking at collateral that was kind of a helpful sign that we were near some kind of inflection point. I think  what makes this cycle so much more difficult, and look full disclosure I mean we’ve had a net equity short bias for the last several years, and it’s been pretty painful. I think this cycle, because they’re all playing the same game, they’re all in together. Is there any limit to what the central bank balance sheets can go to? I mean, how many bonds can the central bank give Japan or the ECB or the Fed purchase, and I think it’s pretty clear that since all the chips are in the middle of the table, they’re going to continue to buy bonds, and try and hold certain parts of the yield curve suppressed to keep the game going.

Chris Casey discusses how it’s unclear if Austrian Economic principles are necessarily applicable to investing, but Austrian Economic conclusions certainly are. He goes on to say “They certainly are as they relate to the macroeconomic phenomena of recessions and inflation. Because these are the two forces that create the greatest risk factors regarding ones investment portfolios. The recessions are going to pop any bubbles that are out there pushing the equity markets, and inflation will destroy the bond markets. And when you’re looking at equities or bonds, these obviously make up for most people the vast majority of their investment portfolio or at least the core of the investment portfolio. So if you’re able to use Austrian economics to navigate these two risk factors, I think it presents a tremendous advantage for investing. As far as whether or not there’s been empirical evidence demonstrating this, not to my knowledge, I think it would be difficult to construct such a study for a couple reasons. One being the time period that we’re looking at. Austrian economics hasn’t been utilized in this form for very long. And secondly would be the sheer number of people using Austrian Economics in this fashion. It’s a very limited set. The people here on the call know that they represent a good portion of that universe, may be the universe, of people managing money with Austrian Economic concepts in mind.”

Mark Whitmore also tends to be somewhat skeptical as far as can you look at Austrian Economics as instrumental tools for specific kinds of investment analysis or recommendation. What he think is incredibly valuable is how you explain the efficient market theory; this idea that whatever the price of the given asset is at any time, it’s the “right price”. Because all the information is being priced in so trying to outguess the market is kind of a fool’s errand. And I think that one of the most basic, the most essential insight of Austrian Economics is this idea of subjectivism, and that prices are wholly derived by human beings, and one of the other schools of economic thinking that I think dovetails nicely with the Austrian school is Economic behaviorism, this idea that individuals are driven by greed and fear, and as a result, and this feeds very much into the boom bust cycle of the Austrian framework, that you get these ridiculous, unexplainable run-ups in asset prices that leads to catastrophic losses.

Russell Lamberti thinks it’s about creating a coherent perspective of macro-reality, saying how there’s so many investment firms, you go on their websites and they talk about how they like to find miss-priced assets because they believe that the market doesn’t always effectively price assets. But they’ve never really got a coherent reason why. He goes on to say “I think the nature of clusters of error of boom and bust cycles, of the business cycle creates a very coherent reason why you get big distortions and big mispricing. And what I try to do for my clients is I say to them that ultimately using Austrian principals is essentially about creating a coherent perspective of reality, and also using that coherent perspective of reality to compare it to the market narratives that emerge. Donald Trump gets elected, and there’s a narrative there that emerges, a reflationary narrative. A narrative might be that he’s going to deregulate and the market finds an excuse to run even higher. And you’ve got to kind of test all these market narratives against really sound perspectives of reality. In addition to that I’d say a few things: one is that an Austrian perspective gives you an understanding that you’re not in a free, unfettered market, you’re in a market where the state plays an incredibly dominant role and is essentially trying to plunder private resources. And so a huge element of investment strategy from an Austrian perspective has to be at the sense of you are defending your wealth against the plunderers”.

Mark Valek thinks knowing Austrian Economics provides you with a potentially huge edge. He points out that even though you can read about it online at mises.org or on other websites, many people don’t care enough or are not aware of it. He thinks another large edge is that Austrian Economists in general are able to understand alternative currencies much better. They are able to think about it outside of the money system just as we all think so much about the current system, that helps us for instance when bitcoin currency came up. So knowledge of Austrian Economics can provide a good investing edge sometimes in an indirect way as long as it’s utilized properly. He also discusses the potential weaknesses of using the Austrian system, saying that strictly speaking from an Austrian School, you don’t get any help regarding the timing of when we would expect to happen, however, you can still use other theories to help with that aspect.  The last potential risk he discusses is that Austrians have a dogmatic bias and tend to be very cautious in an investment space.

Ethical Issues:

Russell Lamberti points out that “We all have to make a decision about leverage. In a system where debt is created by fractional reserve banks, we understand that the core of business cycle problems arises from creating debt liabilities without prior saving – this is a systemic problem. And of course when you participate in that system, there’s two ways you can look at that. You’re ether participating in the bank and leverage system as a defence mechanism against that system, but you can also argue that you’re aiding in advancing that system, so I think every investor has to answer some pretty tough questions about leverage and about the kind of leverage.” Bill Laggner agrees and adds “I think people are leaving tax-free bonds or government bonds and doing other things with their capital, getting involved with private local businesses. I don’t want to get too far off track but I think that is something clearly playing out”.

How Austrian Economics help you when looking at investments from a risk-return standpoint:

Chris Casey recalls what Mark Whitmore pointed out and added “hopefully I’m not misinterpreting him, but I believe Mark made a point that Austrian Economics doesn’t help us analyze any particular investment vehicle or perhaps even investment asset class, and by that I mean just because one company has more or less debt then another company doesn’t make it more or less Austrian. Or just because a company operates in such and such industry doesn’t make it more or less Austrian. Austrian Economics helps us because of the explanations as to inflation and recession. It helps us protect portfolios it helps us minimize risk. It also helps us profit from macroeconomic developments when they occur. Primarily meaning any kind of pops in bubbles or bond markets, whether stock or bond markets. So there you want to look for investments that will do well in that context, or that will weather the storm so to speak and do well regardless as to what happens. So you want to consider industries that potentially have high growth that will not be negatively impacted or at least will not shrink or be reduced in size through the effects of inflation of recession. Maybe you want to look at investments that historically have done well when you have inflation, meaning you want to consider gold, you want to consider farmland, things like that. So, I think Austrian Economics again helps us from an investment portfolio standpoint, minimize risk, and really seize onto some great opportunities as these things transpire. But as far as analysing any particular asset or asset class, I don’t think they lend that much value.”

Mark Whitmore adds “this notion of efficient market theory which attempts to just buy and hold the market no matter what, being completely price indifferent is clearly suboptimal. And that’s really key, as that Austrians, I think, have a sense of value in the marketplace naturally. And it doesn’t come from any unique insight of the Austrian School, other than the fact of the combination of the subjectivism coupled with the inherent boom-bust cycle makes those of us who use Austrian Economics very sensitive to issues of price and value. I think a cynic is often defined as someone who knows the price of everything and the value of nothing and I feel like Austrians are exactly the opposite.  Whereas other investors are chasing price action if you’re somebody who’s sort of a trend follower or you’re simply buying and holding, there’s a greater tendency among Austrian investors to appreciate value.”

Websites and other information on the panelists:

Russell Lamberti: www.etmmacro.com where you can sign up for a free newsletter called “The Macro Outsider”: http://etmmacro.com/the-macro-outsider/

Bill Laggner: http://www.bearingasset.com/ and a blog at http://www.bearingasset.com/blog

Chris Casey: https://windrockwealth.com/ includes podcasts, articles, blogs and more

Mark Whitmore: http://whitmorecapitalmanagement.com includes a quarterly newsletter

Mark Valek: http://www.incrementum.li/ and he has a book called Austrian School for Investors” available on amazon.

 

Abstract:

Austrian Economics takes into account the behavior of man, and has different views than traditional economic theories on monetary policy, and differs from Keynesian economics greatly on the macro level. It can also be used to identify when there is too much debt and when bubbles are in danger of bursting. Austrian Economics can be very useful for observing the overall behavior of the economy and can often help an investor make more informed decisions.

FULL TRANSCRIPT

FRA: Hi, Welcome to FRA’s Roundtable Insight. Today we have a special treat for our listeners, it’s a discussion on the principals of the Austrian School of Economics and how those principals can be used in investing. Today we have five panellists from around the world, Russ Lamberti from Cape Town, South Africa, Mark Valek from Lichtenstein, Chris Casey from Chicago, Bill Laggner form Dallas, and Mark Whitmore from Seattle.

Welcome Gentlemen

So I thought we’d have a discussion initially about what exactly is the Austrian School of Economics and how does this school of economics differ from other schools such as the Keynesian School of economics. Mark Valek, would you like to begin?

Mark Valek: I’d love to, thanks for having me, very excited to discuss basically an economic school which is from Vienna, my hometown, unfortunately Vienna, in the University doesn’t really teach Austrian Economics anymore. However, I think the topic of the Austrian School is a big one, one can talk for hours on end on how it differs, we actually tried to make the Austrian School to list the 11 of 10 bullet points, we came up with an 11th one so we could describe the Austrian school in 11 bullet points. And this is by no means a complete observational but just some basic concepts we put together, we refer to them:

  • Economics is about behavior of individuals, it’s basically about human action
  • They can point human innovation and entrepreneurial action of a source of wealth creation
  • Private property is preconditioned for sensible resource allocation
  • Trading is mutually beneficial (The Subjective value theory. Theory of Value)
  • Another point would be under consumption of savings is necessary for sound investing and growth
  • Also, very important point I think which differentiates the Austrian school is its view towards capital structure. So capital structure is key to a sustainable economy. Thinking about Hayek‘s triangle for the guys who know what I’m talking about here.
  • And price mechanic mechanism coordinates the centralized knowledge.

So these were some basic, basic concepts and they are not only found in the Austrian School, perhaps what does differ more is the view towards the monetary system. And I just want to add 3 or 4 points regarding the Austrian view on the monetary system:

  • Inflation, for instance, is defined as expansion of money supply, something very central to Austrian Economists
  • Inflationary monetary systems chronically transfer wealth, I’m talking about the Cantillon effect, something I think the other schools really don’t talk about at length and it’s something very interesting for society also these days.
  • And finally expanding money and credit supply causes a boom and bust cycle in the business cycle theory

So these are perhaps the more typically differentiating points, especially from the Austrians, but this list is by no means complete, just a few thoughts perhaps to put on a discussion.

FRA: And Russ you’re perspective on the Austrian School of Economics

Russell Lamberti: Yeah, well everything Mark said was valid, I would, you know at a high level I think that one of the key differentiators from a practical analytical and investment perspective was that, the Austrian school draws a very straight and consistent line between microeconomics and macroeconomics. In fact strictly speaking the Austrians wouldn’t differentiate between the two, whereas what you see in Keynesian and monetarist schools is that they have relatively sound microeconomic principals, although they do still differ with the Austrians in one or two key areas, but when they aggregate it up to the macro, a whole different theoretical framework is used and there’s essentially no consistency between neo-classical and Keynesian micro and macroeconomics so there’s a fundamental breakdown there, Austrians are far more consistent there, I think part of the sense of that is also that the Austrians school derives its lineage from the classical schools of the 1700 and 1800s. And I think we must never forget that because a very key distinction in macroeconomics, a very key departure point between the different schools of thought is what’s known as Say’s law of markets. And you know Say’s law essentially is probably a poorly named concept because Jean-Baptiste Say was not necessarily the best articulator of Say’s law. But nonetheless, Say’s law essentially says that you know, properly allocated production, production that is sustainable is ultimately what finances the ability to demand. You know, and I think that in today’s Macro world it’s only really the Austrians who are talking about the unsustainability of certain demand trends because of misallocated capital and misallocated productive resources and that’s I think why the Austrian Business Cycle is such a key distinguishing feature of the Austrian school.

FRA: And Chris, your thoughts?

Chris Casey: Well the Austrian school certainly has a number of conclusions in Macroeconomic explanations that my colleagues have discussed, but if you boil it down and ask the true question as far as what makes Austrian Economics different I’m reminded of Ayn Randwhen she was describing, or criticizing I should say, other philosophiess and philosophers. And I remember her comment I forget which writing it was, it was something to the effect of: these philosophies have excluded man from their theories, and in so doing it’s no different than, let’s say, an astrophysicist that has no concept of gravity or a doctor that has no concept of germ theory. And the same could be said with other economic philosophies. Austrian Economics is the only one that really puts man at the center of the discussion. It boils economics down to man in the context of nature as it relates to scarcity for his needs and wants. And in so doing they then use a number of first principles that build on from the deductive reasoning standpoint, create a consistent and sound economic school and economic philosophy. And that’s what really, I think, makes the difference from the other economic schools out there. It’s not just the conclusions, it’s how we arrive at those conclusions.

FRA: And Bill, your perspective on the Austrian School?

Bill: Well, look I think everyone here has covered quite a bit of the main points, I would add that the world we’re living in today where we’re very far from any Austrian practices, you cannot have a healthy economy without savings, and by artificially setting the interest rate through central banking, you set in motion numerous distortions. And I think everyone at this table would agree that we’re living at a time where the distortions have never been greater. We have nothing resembling a natural rate anywhere around the world as far as I know. And so what’s happening is your setting in motion layers and layers of malinvestment and then every time there’s a crisis in the Keynesian way of looking at things, they come to the rescue and try and either bail something out through monetary or fiscal policy and/or socialize it directly or indirectly. And I would say we’re living in a time today where so much of the credit expansion that we’ve witnessed especially coming out of the great financial crisis in 2008-2009 is a function of either zero or negative interest rates and/or socializing some aspect of credit that’s entered the economy, and when you have that, clearly there’s no feedback loop. There’s no clear natural feedback loop you have a very distorted picture of things, and I think what makes today’s investing environment very challenging.

FRA: and Mark Whitmore, your thoughts on the Austrian school?

Mark Whitmore: Well, batting clean-up here is a little tough, because as Bill mentioned, I think that people have really nicely covered a lot of the main, sort of theoretical tenants of Austrian Economics, I guess I would add that specifically the role of central banking is something that I think is really distinct from an Austrian perspective vs Keynesianism, specifically the asset price inflation that you’ve seen has largely been ignored specifically in the last two bubbles, and now we’re into a third bubble I would argue as well. And essentially the Fed and the Keynesians will continue to point to well there’s really no headline inflation pressure and hence there’s really no reason to begin to normalize or adjust or move up interest rates. And I think that from an Austrian standpoint exacerbates this boom-bust cycle which we’ve seen really compressed in terms of time verses what has historically been the case since maybe the mid to late 90s and the amplitude of bubbles to the upside has just been far greater. And I guess I would just add Henry Hazlitt’s kind of 2 points as far as critiques of Keynesianism. The first  fundamental flaws being that it highlights in terms of interest, the visible minority at the cost of the invisible majority.And again it gets to this whole issue of government being the problem solver, the one that can allocate assets essentially, you know, in its view the most effectively from a Keynesian perspective in a counter-cyclical effective way, where the Austrians are much more skeptical of the efficacy of that. And second of all, the propensity under Keynesian Economics to over-consume in the present generation at a cost of creating massive debt or future debt for future generations to essentially somehow deal with, we’re sort of seeing that today in all developed parts of the world.

FRA: Great, let’s move to a discussion on how the Austrian School of economics is helpful in understanding how and why the 2007-2008 financial crisis happened. And then sort of in parallel to that, what is the Austrian School saying today about the global economy, are there any trends or outcomes that could be identified using the Austrian school. Just general question opened to the floor. Anybody?

Bill Laggner: This is Bill, I would say that all of the Austrians I’m sure on this call saw the crisis building coming out of the reflation right after the tech bubble that burst. It was interesting, the internet created this initial innovation wave decentralization wave, and of course due to excess credit creation, money creation, you had a bubble and then a subsequent bust. And then instead of letting the system purge and heal, the central banks led by the U.S. came and lowered interest rates and you segued from a technology bubble to a private sector credit bubble. And of course I think it went longer then everyone on this call thought it would, and it eventually hit a wall and again tried to cleanse and it’s interesting central banks let certain groups fail and then when things started to get out of hand, they stepped in and bailed out a number of politically connected contingents and then laid the foundation for this third bubble, and this third bubble’s gone on longer I ever imagined or my business partner imagined that it could. I think distortions are epic, I think we’re living in a fascinating time. It’s not going to end well, but I think along the way, there has been a continuation of decentralization, innovation, that’s the positive that I think we’re seeing today is as well, that’s just the natural order of the entrepreneurs and the ecosystem, they’re up.

Mark Whitmore: This is Mark chiming in here, I would say that in terms of leading up to the Global Financial Crisis I feel tremendously bad for Kurt Rickenbacker.  He was I think a really fine economist, informed by sort of the Austrian School perspective and he had done a great job identifying the perils of the tech bubble that I think Bill mentioned, a lot of us who are Austrians saw coming, and died right before the bursting of the second bubble.  And what he had talked about is this notion of “Ponzi finance” that I think is good analytical insight that Hayak also talks about which is essentially the boom-bust cycle is endogenous to the particular type of finance credit system you have in place, and this credit can become increasingly untether any kind of historic connectors to things such as sound collateral and whatnot you saw increasingly these signs of the economy going off the rails in the upward direction in a trajectory that was simply unsustainable. So indeed that bubble went longer than most of us expected, and this one is truly epic, there’s one slide that I drew up which essentially overlays the growth of S&P 500 with the growth of central bank assets in Japan, the Eurozone, and the United States.

* Includes the US, ECB, BOJ and PBoC.

Sources: Yardeni Research, Inc. (www.yardeni.com); Haver Analytics

The assets of these central banks have been expanded a little bit more jagged but the curve, the direction and amplitude of the line is almost exactly the same and so you see this again, unsustainable credit fueled engine that’s driving what’s been taking place in terms of asset price inflation.It’s just highly unstable, and again this will not end well.

Russell Lamberti: Hey it’s Russ, I just wanted to chime in on what Bill had mentioned, I think it’s really critical to look at this as three very big bubbles in a row, but also to think about the compounding effects of repeated malinvestment that has been essentially dis-allowed from correcting and from reallocating promptly. There’s basically been since, I don’t know how long, maybe it was the Greenspan era that essentially ushered us in. But there’s essentially an unwritten law against recessions. And this is not just a problem in America, this is a problem everywhere in the world. Politicians don’t like recessions. As they push back through repeated cycles we have chronic malinvestment, chronic poorly allocated capital. And this creates a hostile working lifetime of living in an essentially very strange unreal financial and capital structure. But of course, as Bill rightly says, you have the countervailing forces of progress constantly working, the market is constantly trying to figure out how to make the best of its present reality and its present situations. This is why I think you have inherent paradoxes when you look at these big cycles, because there is so much to be bearish about, and yet there’s also a lot to be bullish about, and I guess that’s the essence and the nature of risk and opportunity. You know Mark Thornton once mentioned that Murry Rothbard used to say he was permanently bearish about the short term and permanently bullish about the long term. And I think that it’s an aphorism, but it kind of speaks to this notion that state intervention can really mess up markets and financial markets in the short term. But over time the power of the free market and of private enterprise is extremely pervasive and eventually seems to win out at the end of the day. Of course in the interim what that means is that because you have such disinflationary forces because of private enterprise and technology, it kind of emboldens the policymakers to run these bubbles longer and larger than they should be, so no question that the last two bubbles have been a symptom of these kind of policies, and I agree, we’re in a third very excessive state of distortion and the best case scenario that we can hope for is a sharp, painful clear out of chronic malinvestment. That is the fastest path to genuine economic progress again. I hope we get there soon.

Chris: This is Chris, I’ll just add that in discussing how Austrian Economics explains the 08 crisis gives us some guidance to future bubbles in economic recessions, it’s worth recounting what does not explain the 08 crisis, and that is mainstream economics. Whether it’s so-called Chicago or Keynesian schools. And it’s probably worth remembering that in 2002 at Milton Friedman’s 90th birthday party that Ben Bernanke stood up and literally apologized for the Great Depression, and he basically said “We’re never going to have a significant recession again.” I believe he said something to the effect of “we won’t do it again” and so that tells you central bankers pretty much around the world do not understand the causes of recessions at its most fundamental level. They can’t explain why it occurs, they can’t explain why it’s a cycle, they can’t explain what Austrians call “the cluster of error”, why all these businesses have made horrendous investment decisions. They can’t explain why every recession is proceeded by monetary inflation, they can’t explain why certain industries are far more cyclical then say consumables. So it’s just something that cannot be explained, the Austrians do, and for the listeners who may not be all that knowledgeable on the Austrian School, in short, whenever you inflate the money supply, you are decreasing interest rates which distorts the whole structure of production, it forces economic actors to make investments they would not have otherwise done, that they would have otherwise deemed unprofitable, and it creates this malinvestment in the system, as my colleagues here today mentioned, we’ve already seen this play out twice in the last 20 years. And the response, if that’s the causation of a recession, the response should be hands off. The response by the government and central banks should be to not re-inflate the money supply, do not create bailouts, not have deficits which only will spur consumer spending at the expense of savings. So if that’s the antidote for recessions, the governments since the 08 crisis has done the exact opposite and it’s simply set up the economy for far, far greater downturn then what we even experienced (in 2008), with the possibility of significant inflation. So the 08 crisis gives great lessons and basically proves out the Austrian theory, the business cycle. And it really demonstrates errors and issues with other explanations from other economic schools of thought.

FRA: and Mark Valek, any thoughts on applying the Austrian school to the financial crisis and where we’re potentially heading today and the Global economy?

Mark Valek: Definitely some thoughts, very short though because again, a lot has been said already. Where are we going in the Global Economy? Providing you have the Austrian perspective as we all obviously have, you actually know that there are significantly high (inaudible) to the capital structure, and this is not a sustainable state. But there lies the problem for investing obviously, the timing question, but sooner or later this state of capital structure will not last, it’s absolutely not sustainable. Just on a side note, as an asset manager, I encounter sustainability so many times a year, it’s kind of a hyperinflated world, everybody wants to invest sustainably and what bugs me that is nobody things about if our, for instance, monetary system is sustainable, and I would argue against it. So this is to me, really a very superficial discussion here. However, I think if this cleansing process starts the next time, we will probably will not see the big fear we saw the last time, which was basically the fear of deflation of debt deflation if you want to call it, like debt. I think the authorities have proven that they just will not let this happen so market participants probably are not going to have fear that will be too little money going around or being printed, but perhaps we’ll start to fear that this is going to be an overdose the next time, and I think as soon as this psychology changes, you have (Inaudible) things like price inflation look much more realistic in such an environment if you ask me.

FRA: Great insight, and so given this view of applying the Austrian school to the economics environment, if we can consider that as far as the investment environment, does it make sense to look at the principals of the Austrian school in investing, I mean, we see some of the principals, of being stores of value, indirect exchange method, meaning exchanging fiat currency for investments that are real assets that provide cash flows, investments with little or no debt, high free discounted cash flows as well. Little or no leverage, also scarcity in innovative industries, and then perhaps cryptocurrencies that are outside of the banking system but are still regulated within the financial system. So does it make sense to apply those principals in investing, and what are those principals? Also, are there any empirical studies or analysis that taking this approach can provide an edge or an enhanced investment management performance? This question is for the floor.

Bill Laggner: This is Bill, I could say I think knowing the Austrian business cycle theory is helpful in fact, during the second bubble, the credit bubble, I wrote an article with a colleague called “collateral damage”. And what was fascinating about writing the article was we had created the Bearing Credit bubble index back in 2004 when it was pretty obvious that we were segueing into this new bubble, and I kept looking at the types of asset-backed securities are being created mainly, and mortgage arena, and then the derivatives wrapped around it, and then attended a few conferences. But I started focusing on the collateral because it’s a confidence game, right, I mean people have confidence when these troubles start, they grow and what was interesting was in 2005 the home-builders had started declining severely and writing down land values ext. but subsequent to that you had maybe 12-18 months of watching paint dry. I mean the other related industries kind of kept chugging along. And it wasn’t until early 07 where the secondary market for certain types of mortgage-backed securities just locked up. And that was the beginning of the end. So to me, when I look at excess credit creation through the socialization of credit by the central bank and or other government agencies like Fanny and Freddie in the U.S. I was looking at collateral that was kind of a helpful sign that we were near some kind of inflection point. I think what makes this cycle so much more difficult, and look full disclosure I mean we’ve had a net equity short bias for the last several years, and it’s been pretty painful. I think this cycle because they’re all playing the same game, they’re all in together. Is there any limit to what the central bank balance sheets can go to? I mean, how many bonds can the central bank give Japan or the ECB or the Fed purchase, and I think it’s pretty clear that since all the chips are in the middle of the table, they’re going to continue to buy bonds, and try and hold certain parts of the yield curve suppressed to keep the game going. So ultimately I think you know gold, we own a lot of gold, we’ve owned gold since 2002, I mean gold will continue to act well, and may become one of the best performing asset classes over the next several years until we ether get some kind of boom or something close to it. So that’s how it’s helped us and how we employ it in day to day portfolio management.

Chris Casey: This is Chris, I’ll say that I’m not sure if Austrian Economic principles are necessarily applicable to investing, but Austrian Economic conclusions certainly are. They certainly are as they relate to the macroeconomic phenomena of recessions and inflation. Because these are the two forces that create the greatest risk factors regarding ones investment portfolios. The recessions are going to pop any bubbles that are out there pushing the equity markets, and inflation will destroy the bond markets. And when you’re looking at equities or bonds, these obviously make up, for most people, the vast majority of their investment portfolio or at least the core of the investment portfolio. So if you’re able to use Austrian economics to navigate these two risk factors, I think it presents a tremendous advantage for investing. As far as whether or not there’s been empirical evidence demonstrating this, not to my knowledge, I think it would be difficult to construct such a study for a couple reasons. One being the time period that we’re looking at. Austrian economics hasn’t been utilized in this form for very long. And secondly would be the sheer number of people using Austrian Economics in this fashion. It’s very limited set. The people here in the call know that they represent a good portion of that universe, may be the universe, of people managing money with Austrian Economic concepts in mind. So there are very limited data points out there.

Mark Whitmore: This is Mark, I would sort of follow up on Chris’s comments. I tend to also be somewhat skeptical as far as can you look at Austrian Economics as instrumental tools for specific kinds of investment analysis or recommendation. And I think that’s a harder thing to make a case for. What I think is incredibly valuable, is how do you explain reality and in essence, the kind of the largest school out there in terms of money management is the efficient market theory, this idea that whatever the price of the given asset is at any time, it’s the “right price”. Because all the information is being priced in so trying to outguess the market is kind of a fool’s errand. And I think that one of the most basic, the most essential insight of Austrian Economics is this idea of subjectivism, and that prices are wholly derived by human beings, and one of the other schools of economic thinking that I think dovetails nicely with the Austrian school is Economic behaviorism, this idea that individuals are driven by greed and fear, and as a result, and this feeds very much into the boom bust cycle of the Austrian framework, that you get these ridiculous, unexplainable run-ups that leads to catastrophic losses. And if investors can simply, instead of, and I remember reading one of the most tortured treatments by Burton Malkiel who wrote the seminal Random Walk Down Wall Street which is sort of like the bible of efficient market theory, and soon after the edition following the 1987 stock market crash where the Dow went down 20% in a day, he attempted to try to explain how this was a rational response to changing monetary conditions, and the market was kind of correctly pricing things all the way along. And you find these things which, I think Chris mentioned earlier simply that Keynesians and the people who look at kind of classical economics and efficient market theory, they can’t explain reality. But the power, the strength of Austrian Economics you can see bubbles when they’re coming. And like Bill, I’ve leaned into the defensive positive in the last few years, so in the short run you might seem to be looking like a fool, but if you can help your investors avoid and maybe even profit from bubbles as they unwind, you’re going to be far better off than the vast majority of investors out there that are just being caught up and are losing 50% of their portfolio in multiple stretches.

Russell: Hey guys, its Russell here, Mark you’ve just made some really great points. And I think I would echo a lot of what you said. I think it’s about creating a coherent perspective of macro-reality, you know there’s so many investment firms, you go on their websites and they talk about how they like to find miss-priced assets, because they believe that the market doesn’t always effectively price assets. But they’ve never really got a coherent reason why. I think the nature of clusters of error of boom and bust cycles, of the business cycle creates a very coherent reason why you get big distortions and big mispricing. And what I try to do for my clients is I say to them that ultimately using Austrian principals is essentially about creating a coherent perspective of reality, and also using that coherent perspective of reality and comparing it to the market narratives that emerge. Donald Trump gets elected, and there’s a narrative there that emerges, a reflationary narrative. A narrative might be that he’s going to deregulate and the market finds an excuse to run even higher. And you’ve got to kind of test all these market narratives against really sound perspectives of reality. In addition to that I’d say a few things one is that an Austrian perspective gives you an understanding that you’re not in a free unfettered market, you’re in a market where the state plays an incredibly dominant role and is essentially trying to plunder private resources. And so a huge element of investment strategy from an Austrian perspective has to be the sense that you are defending your wealth against the plunderers. The second component is that business opportunities can be false, and that’s something that’s embodied in the essence of boom-bust cycles, subsidization, and the principals of Say’s Law, you know expecting consumer markets to boom when in fact you’ve got misallocated productive capital, those consumer markets are not going to perform how you expect. And the flip side of that of course is that you get overestimated business risk, because some people are avoiding sectors that look unattractive when in fact they are fundamentally attractive, particularly if they can exploit state failure. And then finally Hayek spoke about the pretense of knowledge in his famous Nobel acceptance speech, and you know one of the things that none of us, whether you’re an Austrian or not, none of us have the entirety of knowledge that we need to make very precise and accurate calls about the investment world. And that’s one of the reasons why, and it’s spoken about in the book “Austrian School for Investors” but you know you’ve got to start off by exploiting opportunities as an investor that are close to you. That you’re capable of having knowledge about, and that’s why before you invest in public companies and in funds, you probably have to invest in yourself, in your own entrepreneurship or in private equity opportunities that are very close to you and where you have some special knowledge. Because you don’t have any more knowledge then the central planners do either. So I think those are some really key objectives. I think there’s some ethical issues as well but I don’t want to go into that right now, but I do think that when we talk about Austrian Economics being free of value judgment, that’s very much in the theoretical analytical sense. But once you’ve derived conclusions from that, value judgments definitely come to the fore, and I think there’s a strong ethical component that can be informed across a range of asset classes and how you invest and how you go about investing. I’m going to not go into that right now, we can maybe circle back to that a bit later.

FRA: Then Mark Valek, as Russ refers to your co-authored book on the Austrian School for investors, can you provide some insight from that book on these principals?

Mark Valek: Yeah thanks. Just a small supplement here, we thought about this topic very hard and we thought, where potential opportunities lie in Austrian investing and where do potential risks lie in such a discipline. Just a few words on opportunities we’ve heard I think already in that direction. The fact that it’s not read among investors. I think that’s potentially a huge edge, it’s a huge edge in a marketplace where it’s not really a secret, it’s out there, you just have to read it on the internet, go on mises.org or wherever, but most of the people just don’t care or know about this so it’s not read. Second edge knowledge about Austrian business cycle theory we also talked about, but I just want to point out the third edge which we identified and I think Austrians in general are able to understand alternative currencies much better they are able to think about it outside of the money system just as we all think so much about the current system that helps us for instance when bitcoin currency came up, I was not even as a tech guy but just from an Austrian view I was able to pretty fast wrap my head around the basic concepts. And I knew if this thing monetizes then it’s huge financial gain and if it doesn’t well until it does it’s speculation on a potential alternative money, but now I think it’s more clear to the rich investor too, but such thing I think come with an Austrian mindset. On the other hand just also to talk about the risks perhaps for one moment with Austrian investing, generally, and I’m sure all of us know about this potential risk, is a bearish bias is associated to the Austrians. I think that’s because Austrian investors are sensitive to these flaws in the capital structure we already talked about. And they always kind of think perhaps this boom will be bust sooner than later and so on, and we know the problems I think associated with that. Another problem I also touched already is the Austrian School statistic it does not make timing calls. So this is a predictive problem obviously, especially in finance. I think one can circumvent this problem with the help of other techniques from the quantitative side take the analysis, whatever. But strictly speaking from an Austrian School, you don’t get any help regarding the timing problem. Just to mention the last potential risk, Austrians do tend to be very convinced, it’s like what we call potentially a dogmatic bias, and dogmatism is probably a thing where one should be cautious in an investment space. So there are other opportunities, but there’s also risks and one should be aware of these risks and find some ways to manage these risks as an Austrian investor.

FRA: If we could do one more round on bringing it all together and providing some examples of investments or asset classes or perhaps investment strategies that exemplify using the principals of the Austrian School in investing or the outcomes as Chris mentions, of the Austrian School. Let’s do a round based on that to close out. No specific companies or securities, but just generically speaking. Anybody?

Russell: It’s Russell here, maybe I can come in and say one or two things about some of the ethics around investing. I mean, we all have to make decisions about leverage. In the system where debt is created by fractional reserve banks we understand that the core of business cycle problems arises from creating debt liabilities without prior saving – this is a systemic problem. And of course, when you participate in that system, there’s two ways you can look at that. You’re either participating in the bank leverage system as a defense mechanism against that system, but you can also argue that you’re aiding in advancing that system, so I think every investor has to answer some pretty tough questions about leverage and about the kind of leverage. I think from an Austrian perspective, you would typically favor equity over debt and you would favor non-bank debt over bank debt. The other big ethical question, of course, is to talk about government bonds – financing the state. The state is essentially a mechanism of wealth destruction, you know do you really want to be financing plunder, but in another sense, by funding the state, you’re again, aiding and abetting a fairly large degree of wealth destruction. And ultimately getting your coupon payments in part by being taxed more and your friends and family being taxed more. So one’s got to think about that, some of these issues. And then, we know that Ludwig von Mises was one of the greatest advocates for peace, and anti-war, and you have to think about what firms are doing in terms of financing and funding and equipping governments to fight unjust wars. These are obviously very tricky and murky. And I’m not trying to make any kind of high-brow ethical statements here, I just think that these are the kind of things that have to be considered and Austrians do think a lot about these things. So I just wanted to kind of lay that out there, because ethics and feeling personally good about your investments, not just intellectually, but emotionally as well, I think is an important part of an investment strategy.

Bill: This is Bill, I’d like to just touch on something Russell mentioned, great points by the way, the state has grown immensely around the world subsequent to 2009. And I don’t want to get to far into the metrics we all know what played out in certain parts of the world, I think one of the beauties of the internet and the search for the truth and leading us to the election in the United States for example last year in WikiLeaks, the internet is essentially exposing a lot of the fiction that we’ve all grown up around over the last number of decades. And with that comes almost an awaking, a move to higher consciousness. So people are, I see it every day, I think people are leaving tax-free bonds or government bonds and doing other things with their capital, getting involved with private local businesses. I don’t want to get too far off track but I think that is something clearly playing out. Cryptocurrencies, I’ve spent a lot of time looking at the economic actors within this interesting ecosystem and you think about not being a participant in the plunder if you look at just the banking system and all of the friction within the banking system, let alone the leverage, you’re looking at a couple trillion dollars a year just in general friction that’s being stripped out of the ecosystem. So the movement towards the internet of value as opposed to what we witnessed the last couple of decades, the internet of information knowledge I think is another fascinating innovation playing out. So I think more and more people per Russell’s point, don’t want to participate in the plunder and are actually spending time and capital creating these new economic fabrics and I think it’s quite exciting to witness.

Chris: This is Chris, if we take out the ethical considerations that a couple of my colleagues just mentioned, the question is how Austrian Economics help you when looking at investments from a risk-return standpoint. And I think Mark mentioned this earlier, hopefully I’m not misinterpreting him, but I believe Mark made a point that Austrian Economics doesn’t help us analyze any particular investment vehicle or perhaps even investment asset class, and by that I mean just because one company has more or less debt then another company doesn’t make it more or less Austrian. Or just because a company operates in such and such industry doesn’t make it more or less Austrian. Austrian Economics helps us because of the explanations as to inflation and recession. It helps us protect portfolios it helps us minimize risk. It also helps us profit from macroeconomic developments when they occur. Primarily meaning any kind of pops in bubbles or bond markets, whether stock or bond markets. So there you want to look for investments that will do well in that context, or that will weather the storm so to speak and do well regardless as to what happens. So you want to consider industries that potentially have high growth that will not be negatively impacted or at least will not shrink or be reduced in size through the effects of inflation of recession. So maybe in America you want to consider the cannabis space. Maybe you want to look at investments that historically have done well when you have inflation, meaning you want to consider gold, you want to consider farmland, things like that. So, I think Austrian Economics again helps us from an investment portfolio standpoint, minimize risk, and really seize onto some great opportunities as these things transpire. But as far as analysing any particular asset or asset class, I don’t think they lend that much value. I’ll also say that I think Austrian Economics lends itself naturally to contrarian investing which I think is a great way to make money. It’s pretty obvious that there’s not a lot of people out there managing money that believe in Austrian Economics. So we hold a key, we understand something that few people embrace or have any kind of knowledge of. And I think that really is a key factor in contrarian investing which really just means you’re looking for extreme market value questions on the high or low side, and identifying the catalysts that will bring that prices back to its historical mean or median. And I think the explanation and conclusions of Austrian Economics do that quite well.

Data Courtesy of the St. Louis Federal Reserve

Mark Whitmore: This is Mark Whitmore, I keep forgetting we have two Mark’s on the line here, and Chris you absolutely interpreted what I was trying to say correctly, and kind of to follow up a little bit, I think one of the things that the other Mark pointed out is the issue of timing, and whereas the two prevailing investing paradigms out there seem to be this notion of efficient market theory which attempts to just buy and hold the market no matter what, completely price indifferent. And that’s really key, is that Austrians I think have a sense of value in the marketplace naturally. And it doesn’t come from any unique insight of the Austrian School, other than the fact of the combination of the subjectivism coupled with the inherent boom-bust cycle makes those of us who use Austrian Economics very sensitive to issues of price and value. I think a cynic is often defined as someone who knows the price of everything and the value of nothing and I feel like Austrians are exactly the opposite.  Whereas other investors are chasing price action, if you’re somebody who’s sort of a trend follower, or you’re simply buying and holding, there’s a greater tendency among Austrians to appreciate value. And this point dovetails with the other point as far as since we don’t pretend to know the precise timing of when bubbles kind of unwind or when the busts will finally reach a bottom, the idea is that we can actually be in the right quartile of activity, in other words I never try to catch the very top of a bubble, I don’t try to ride things to the very end, and similarly I don’t mind catching falling knifes. Because as investors if you’re looking at this current contemporary global macroeconomic backdrop from the 10-12 year perspective, I find it with the typical disclosure here that I’m not able to see with a perfect crystal ball or anything but it’s hard to believe that traditional assets, that global equities, will be thriving in this environment just from the simple perspective of how overstretched they are from any reasonable measure of valuation.  And similarly, the global bond market which has been the classic offset to unwinding stocks in the past, is also so stretched.Because just like bond prices are inversely related to interest rates, you have interest rates around the world, I mean you have negative interest rates in Sweden, in Japan, in Switzerland, and back last July you have negative interest rates over a swath of different developed markets so there’s simply not a lot of room basically for bond appreciation. I think it’s a very careless time for equity and bond investors from a longer term perspective whereas those of us who are Austrian have a bend for the idea of real money, sound money, and one of the things that looks pretty attractive in a Ponzi finance global macroeconomic backdrop would be precious metals I would say. And I particularly play in the currency space and one of the thing that’s attractive there is the idea that in eras where you have reckless central banking there’s huge distinction between reckless central bankers and those who are engaged in reckless central banking with abadon and as a result I think that there becomes some real value disparities from a currency standpoint as well. But I mean I think that’s how I at least use Economic principals from the Austrian school to inform overall investing decisions in the marketplace.

FRA: And finally, the other Mark?

Mark Valek: Yeah, I think that most points have been touched seriously. Yeah I just don’t want to drag it out unnecessarily, but I think there were very interesting comments in all kind of directions, really enjoying this discussion, I don’t know if we have anything else on the plate?

FRA: Nope, that’s it. Just wanted to close out with regard to giving everybody a chance to identify how our listeners can learn more about your work, if you have a website or perhaps a newsletter?

Russell Lamberti: Yeah my website, ETM macro advisors website is www.etmmacro.com and I am starting a new newsletter called the macro outsider, and you can sign up for it for free on www.etmmacro.com and you’ll get a free essay called “The real currency war” which is subtitled “monopoly money vs real money” and essentially there I just go into a lot of what we’ve spoken about today in terms of chronic malinvestment, the weakness of fiat currency reserve systems, and then ultimately where I think the real currency war is, which is in centralized vs. decentralized money, and I talk a little bit about cryptocurrencies there as well, so that’s www.etmmacro.com you can sign up for that free newsletter.

Bill Laggner: This is Bill, so Kevin Duffy and I, we manage a couple of funds, long short-biased, I should say long short strategy macro oriented funds, bearing asset, like ball bearing .com, http://www.bearingasset.com/ and then we also write a blog http://www.bearingasset.com/blog and then Kevin and I are on twitter as well, we post some comments from time to time.

Chris Casey: This is Chris Casey with WindRock Wealth Management, we manage money for high net worth individuals. I would encourage anyone that wants to check us out just to visit our website https://windrockwealth.com/ We have our contact information there, we have all of our content, meaning podcasts, articles, blogs etc. That’s been posted since we started the firm and the people can feel free to read more about our philosophy on various issues.

Mark Whitmore: Great, and this is Mark Whitmore in Seattle, I have a website at http://whitmorecapitalmanagement.com there’s a research and article section which has, I do a quarterly newsletter and would be happy to put anyone interested on the mailing list for that, and basically we have a strategic currency fund that is again, informed largely by Austrian Economic principles that I operate. I also will make a plug here for one of my co-panellists, Mark Valek, who has his book “Austrian School for Investors” is essentially that he co-authored is one of the only kind of resources out there that’s an outstanding resource and really well researched and thought out, so I want to complement the fine work you’ve done on that.

FRA: Great, and now Mark Valek

Mark Valek: Thanks so much, thank you if you’re interested the book is on amazon I guess, Austrian School for Investors” our homepage is http://www.incrementum.li/ we’ve got lots of good stuff which is relevant up there, first of June our annual “In gold we Trust” report is going to be published as well. You’ll find that on the homepage as well.

Summary and Transcript by Jacob Dougherty jdougherty@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.


04/07/2017 - The Roundtable Insight (Full Version) – Yra Harris, Peter Boockvar and Uli Kortsch On Central Bank Distortions

FRA is joined by Yra Harris, Peter Boockvar, and Uli Kortsch in discussing central bank distortions, global currency trends, along with protectionism and infrastructure spending in the US.

Yra Harris is a recognized Trader with over 40 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 a combination of technical work and fundamental analysis of global trends; historically based analysis on global hot money flows. He is recognized by peers as an authority on foreign currency. In addition to this he has specific measurable achievements as a member of the Board of the Chicago Mercantile Exchange (CME). Yra Harris is a Registered Commodity Trading Advisor, Registered Floor Broker and a Registered Pool Operator. He is a regular guest analysis on Currency & Global Interest Markets on Bloomberg and CNBC.

Yra highly recommends reading The Rotten Heart of Europe – send an email to rottenheartofeurope@gmail.com to order

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Prior to joining The Lindsey Group, Peter spent a brief time at Omega Advisors, a New York based hedge fund, as a macro analyst and portfolio manager. Before this, he was an employee and partner at Miller Tabak + Co for 18 years where he was recently the equity strategist and a portfolio manager with Miller Tabak Advisors. He joined Donaldson, Lufkin and Jenrette in 1992 in their corporate bond research department as a junior analyst. He is also president of OCLI, LLC and OCLI2, LLC, farmland real estate investment funds. He is a CNBC contributor and appears regularly on their network. Peter graduated Magna Cum Laude with a B.B.A. in Finance from George Washington University. Check out Peter’s new newsletter service at www.boockreport.com.

Uli Kortsch is the Founder of both the Monetary Trust Initiative (MTI) and Global Partners Investments (GPI).  Currently most of his time is spent on MTI whose mission is to bring transparency and authentic principles to our monetary system. As President of Global Partners Investments and other ventures, he has worked in over 50 countries, written a bill for Congress, and conferred with approximately 15 national presidents, ministers of finance, and ministers of commerce.  He has served on numerous corporate boards with both for-profit and not-for-profit organizations.

EFFECTS ON THE EQUITY MARKET

The Swiss National Bank (SNB) has been printing money to buy equities for years now. They have interest rates that are deeply negative, all because they’re afraid of the negative economic impact of a stronger Swiss Franc against the Euro. But the SNB is about to get lucky because the ECB has decided it’s time to take a step back from their policies. Maybe it’ll be a time out with respect to the Swiss and what they’ve done fighting tooth and nail to prevent a rally in the Swiss Franc. They have become one of the largest shareholders of a lot of companies, what with all the money they’ve printed trying to find a home somewhere. They’ve essentially become their own S&P500 fund and are behaving like a hedge fund overall .. like a sovereign wealth fund, but unlike Norway or Singapore, the only thing the Swiss mine is a printing press.

If you look at what the world is doing – basically trying to weaken their own currencies – we’re taking the wealth of the country and moving it to exporters. Everyone loses since the currency that we hold has a certain value with respect to the rest of the world when it comes to imports. The exporters aren’t just corporations, they’re also workers. What is the gain verses the loss on a national average?

The concept of weakening one’s currency is tremendously mistaken. We only have to look at Japan and see their experiment of weakening their currency since 2013. The ideal currency is a stable one.

If you drive your currency lower, your consumers are going to be losers, especially if you’re buying a lot of imports, because the prices of your imports are going to go up. This is a discussion that’s also plaguing Germany. It’s an established policy that they promote exports and keep a low currency, which burdens the purchase of imported goods around the world.

If China were to move to a consumer based economy, they would do better with a stronger currency. That’s why the Yuan is such an important denominator in what China wants to do. If they’re making the shift to a much more domestically oriented economy to soak up all that excess capacity, they should promote a stronger currency as that would be better for their consumers.

THE EFFECT ON THE US DOLLAR

Trade flows are only a small percentage of the daily moves in currencies. The foreign currency market is $5T in debt, so what’s $500B of a trade deficit in the US? Nothing. What’s going to drive the dollar is real interest rates, not nominal interest rates. The Fed started raising rates in Dec 2015, and the 5yr real rate is +50 basis points. Here we are, three hikes later, and it’s -19 basis points. Anyone who looks at nominal rates is not really looking under the hood, and it’s the steep decline in real rates that’s what’s kept a lid on the Dollar, which is at a level that’s no different than where it was a couple of years ago. Look at everything that’s been thrown at other currencies. These currencies have stop going down. It says a lot about the flaws of the Dollar and the impact that negative real interest rates have, notwithstanding the rise in the Fed funds rate. Real rates in the US are negative, and that will bear on the currency.

If you’ve been a saver-investor for the last five years, it’s very difficult to find a way to protect yourself in this environment. If you put your money into two year US Treasuries, with negative nominal real rates, you’re losing money. And that’s where their safety zone is. There is about $11-12T sitting in zero interest rate bearing savings accounts. At a 1% yield, that’s $100B extra of interest income. Multiply that by 8 years of zero interest rates, and you’re talking savers that have been deprived of almost $1T through this monetary policy the Fed said would promote growth.

It’s always a policy where someone gets paid and someone suffers. In the world we live in, savers have been punished and borrowers have been rewarded. With QE it’s the ultra-rich that gained tremendously from the rise in asset prices.  The political left which complains about capitalism is the source of the problem. They’re driving asset prices through the roof.

EFFECT ON THE BALANCE SHEET

We’re up to the point where the Fed funds rate was historically 200-300 basis points above the rate of inflation. If inflation was at 2% right now, historically the Fed funds rate would be 4-5%. The problem is that with the enormous amount of leverage built up in the financial system, getting to that Fed funds rate would literally blow up the system. So the question now is, where should the Fed funds rate be in light of that? Let’s just get it to a 0 real interest rate, so we have a 2% Fed funds rate. Right now they’re at 0.875%. One of the rules of the central banks is that you don’t wait until after you get to your supposed mandate targets to then start normalizing interest rates, you should be at normalized interest rates when you get to your target. So it’s clear the Fed is well behind the curve. It’s only in the halls of academia that “neutral interest rates” exist, and it’s their way of rationalizing this very slow growth in interest rates. They waited for the perfect world to end QE and raise interest rates, but none of that exists so now they’re playing catch up.

They want to slowly raise interest rates and keep everyone calm, but that means they are getting behind the curve. Then they want to shrink their balance sheets to not be disruptive, and normalize interest rates at the same time they created another credit bubble. If the Fed announced that they were going to actively shrink their balance sheet, and think the market won’t punish them, they don’t know how the market works.

Let’s say we start unwinding the balance sheet. That curve ought to straighten out quite a bit on paper, with one large buyer exiting the market on top of foreigners who are net sellers of US Treasuries. If people start worrying about what this will do to the stock market, do we then get an actual flattening of the curve instead because everyone is freaked out about growth? If this curve does not steepen, it’ll be a signal that there are many other things afoot here.

THE AUTO SECTOR

The auto sector was a main driver of growth post-recession, and it’s interest rate credit sensitive, second only to housing. Look what’s happening in the auto sector. This is another sequel called boom and bust, and it’s written and directed by easy money. We now have the Fed who may continue to shrink their balance sheet – at the same time a major driver of growth is now rolling over. The auto sector itself can’t necessarily put us into recession, but the ripple effects could be extraordinary. 45% of all jobs touch the auto sector in some way, and this is a big canary in the coal mine.

We’re not only at high auto sales but also record repossession of autos. It’s a classic case of intertemporal misallocation. Through the use of credit, they keep borrowing all this demand from the future and the future is now.

INFRASTRUCTURE AND UNEMPLOYMENT

Especially now, when labour is especially tight, who are you going to find to build that bridge? All those construction workers are building other things, so it’s just a transfer of resources. The infrastructure will ultimately create more productivity.

Our reliance on U3 numbers is really inappropriate in today’s economy. The appropriate number is U6, which includes people who would like to get a job who have not actively looked for a job over the last four weeks and the people with part time jobs. Thirty years ago we lived in a U3 economy where people had steady, stable jobs and you were employed by someone full time. We don’t live in that world anymore.

Since 2007, U6 has not dropped. It’s been around 10%. Things are better than they were a few years ago, but there’s still a huge percentage who are not participating for one reason or another. Right now it’s about 9.2%. The average since the 90s is over 10%, so even though the U6 is very high, it’s not out of the ordinary.

US NOTES FOR INFRASTRUCTURE

Uli’s proposal .. create US Notes for infrastructure spending .. They are not part of the debt limitation legislation and create no real debt. They are no interest bearing, non-repayable, and are created by Treasury and transferred into the Treasury account at the Fed, which creates no inflation whatsoever as long as it stays at the Fed. Once they’re in circulation they’re no different from any other US Dollar, it’s just the way they’re created is radically different. Our Fed notes are created through debt where US notes are driven by value.

Most of the spending is on the state level. The point is to use federal US Notes to fund states and municipalities on a debt free interest free basis. The $300B Obama infrastructure bill is all debt based money. All of that money increases the $20T total output in Treasuries, whether they’re owed internally or not.

There’s nothing sustainable in terms of growth when there’s money spent on infrastructure. It’s short term in nature. Once the job is done, the workers still have to find something else to do. Hopefully the focus on infrastructure spending doesn’t distract us from creating more sustainable long term growth and that gets through to tax and regulatory policy.

Trump has talked about mimicking the German method of really training people so they’re going into apprentice programs. When you look at the outcome from education, for the most part it’s hyperinflation. In the general American population, if you go into an apprenticeship program you tend to be seen as a loser, which is terrible. That’s what Germany does well. They train tradespeople, and there’s a lot of pride to it. Here, we push college at everybody and all it does is multiply the debt levels exorbitantly.

TRENDS IN PROTECTIONISM

They talk about protectionism because Trump and some of his administration don’t understand trade. They see deficits as a negative, but consumers in the US who can buy things cheaper overseas have their standard of living improved. There are some things that we should make and some things that other countries should make, and what we have to do is make ourselves as competitive as possible and let the chips fall where they may. Trump is taking this mentality of deficit = bad, surplus = good and then goes into a meeting with the Chinese with that mentality.
We should be embracing the second largest economy in the world because they are our partner in a sense of creating healthy, sustainable, quicker growth. But to battle with them over a trade deficit number is just a misunderstanding of the benefits of trade. The “curse” of being a global reserve currency is that you have to export Dollars. It’s impossible to do anything else, especially as other countries build up their USD reserves. If some other currency becomes strong from a global currency perspective, which makes it easier for the US to not run a deficit. The emerging markets have built up their dollar reserves to an astronomical level over the last few years because they’ve been afraid from a stability perspective.

When you’re the reserve currency of the world, you have a different role to play and you’re not just like everyone else. That’s the basis of Pax Americana. Instead of gold, the global currency became the Dollar. The world is in this situation, and if you rip that bandage off and say, no, we’re not supplying Dollars to the world, we will embark on a global depression of huge magnitude. Trump wants to roll back Pax Americana and the cost of being imperial America, but that better be done in a timely way. The Americans filled the void when the Brits abdicated their empire and the role of the British pound, but who’s going to fill that void now?

The Chinese will bring all sorts of gifts to placate Trump, but that pushes the stock market higher in the hopes of there being some rational discussion.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

LINK HERE to download the podcast

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.


03/31/2017 - The Roundtable Insight – Yra Harris & Uli Kortsch On How Switzerland Is Performing Financial Alchemy

FRA is joined by Yra Harris and Uli Kortsch in discussing the impact of Switzerland on the Eurozone, along with the upcoming elections and the global debt.

Yra Harris is a recognized Trader with over 40 years of experience, with broad expertise in the cash currency markets. He has a proven track record of successful trading through a 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, he has specific measurable achievements with the Chicago Mercantile Exchange (CME). Yra Harris is a Registered Commodity Trading Advisor, Registered Floor Broker and a Registered Pool Operator. He is a regular guest analysis on Currency & Global Interest Markets on Bloomberg and CNBC.

Uli Kortsch is the Founder of both the Monetary Trust Initiative (MTI) and Global Partners Investments (GPI).  Currently most of his time is spent on MTI whose mission is to bring transparency and authentic principles to our monetary system. As President of Global Partners Investments and other ventures, he has worked in over 50 countries, written a bill for Congress, and conferred with approximately 15 national presidents, ministers of finance, and ministers of commerce.  He has served on numerous corporate boards with both for-profit and not-for-profit organizations.

SWISS END OF THE EUROZONE

The Swiss print a lot of Swiss Francs as a means of intervening in the markets. They exchange those for primarily Euros, some Dollars, Yen, etc. They’re busy accumulating a massive equity portfolio along with their foreign exchange reserves. They hold $2B of Apple stock because their policy of intervention is to try and keep the Swiss Franc from appreciating too much. Back in January 15 2015, they let the peg to the euro go and we saw a giant move up in the Swiss Franc. The world sits back and lets the Swiss central bank actively be a currency interventionist, but the Swiss are smart enough to understand that they don’t want to just hold everybody else’s currency; they are buying real assets through their process of intervention.

The Swiss Franc represents the frugality of the global investment system as investors are willing to buy Swiss assets with negative yields out over 10 years. There’s a tie-in with potentially increasing its gold reserves. If you’re buying all those equities, you might as well start adding to your gold reserves.

GOVERNMENT GOLD HOLDINGS

The Swiss referendum on gold last year was to increase their gold holdings. They were selling gold and the referendum was to stop selling and repatriate the gold. The amount of paper gold out there out there is about a hundred times the amount of real gold, so what is really out there? No one really knows.

Switzerland is an island, surrounded by the Eurozone. Switzerland is an island of monetary stability. They’re trying to weaken their currency through the increase in reserves and purchase of various assets.

Italy is in very bad shape. If they were to use GAAP accounting for their banks, the country would instantly go bankrupt. France isn’t that much further behind, and we know where Greece is. About 40% of the Swiss National Bank (SNB) is owned by private individuals, so it’s a different system. The Fed is owned by its member banks and it’s impossible to go bankrupt; they can have negative equity and no one cares. But if the Swiss central bank were to go bankrupt that’s a different story. We are coming up against a global recession, our debt levels are again greater than they were in 2007 before the last recession, and this time we do not have the fallback position of the emerging markets like we did then. Plus the political problems, the shaking that is occurring is very substantial. When the debt levels again reach the point where we have another recession, what is going to be the fallback this time, other than more debt?

If we do go into that global recession, the overhang of debt is greater than it was in 2007-2008.

One of the arguments we get against the ‘evil of debt’ is that it’s owed to somebody. It’s not owed to anybody, it’s created by the banks because almost all of our money today is electronic. The money is created by the banks through debt. If we go back in history, nations inflated their way out of debt. The scenario doesn’t change. The central banks have turned the world upside-down and we’re not even close to understanding what right-side up is.

SUSTAINABILITY OF EUROPE AND SWITZERLAND

“The market can remain irrational longer than you can remain solvent.” – Keynes

This is at least the second longest running time between recessions since WW2. The question is whether or not the next recession will be deep enough that some of these abnormal situations fall apart, or will it take another recession past that. We have both political and market pressures, and if you talk China and Russia we have military pressures. The Russians are going to have the biggest Eastern European military exercise this September; a power play verses all the small nations immediately around there.

We have three aspects: a very unbalanced market, a very fragile political situation especially in Europe, and now very recently a military aspect.

One of the things Trump had right is the role of NATO in the world. It’s served its purpose for a long time. Just because we get into this mindset, we don’t have to see it to its illogical end and Trump is right in wanting to roll back Pax Americana. It’s served its time and you don’t have to serve out your Imperial desires until you go broke like Britain. People are up in arms about NATO but it’s the same people who were up in arms about the One China policy. The world is changing dramatically and Trump isn’t wrong to address these things.

Based on the political uncertainty, markets are not pricing correctly. The real risk factor is in these markets.

POSSIBLE EUROZONE EVENTS WITH MAJOR IMPLICATIONS

The probability of the ECB doing a full guarantee is virtually zero unless there was a split in the Eurozone between the north and the south. The probability of a Eurozone country leaving he euro monetary union is ~70%.

Even though Britain is invoking Article 50, it’s a two year process now. So much could happen in the next two years in Europe. Italy is in severe trouble. The only ones who can guarantee a European bond are the Germans, so the Brits are going to get a two year window and a lot of things can go topsy-turvy. If there’s one threat of it, they’ll come begging the Brits to come back because they’ll need them, and the British will be able to make the greatest deal ever where they’ll be able to get back their sovereignty for financial assurance.

The political system in France is weighted against Marine Le Pen and the odds of her winning are low, but then the issue becomes the German elections. Germans are not used to borrowing to finance asset purchases, but when you’re running negative real interest rates, the real yields are negative yields and you’ve got to protect yourself. Otherwise it’s the ultimate form of financial repression to bail out the rest of Europe, and that’s what this election in Germany may hinge on.

If it breaks up north/south and the north takes the Euro, the SNB will make a fortune. If the southern nations wind up with the Euro, everyone else goes about recreating a synthetic Deutschmark – that would be the most interesting outcome of all.

THE NEXT 6-12 MONTHS

Uli: There’s about a 30-40% probably that there’s going to be a serious crash by the end of the year. The problem is that we’re all on a tipping point. The system’s kind of like a plateau. 20 years ago the plateau was very wide. It’s become narrower and narrower and now it’s like a mountaintop. What would get us to fall off the edge of the cliff? The plateau is narrow, so initiating action becomes more and more likely to move us off one of these points, because it doesn’t take much.

Yra: There’s a huge amount of debt that plagues the global system, which is why the Border Adjustment Tax discussion is crazy. If you had a 20% appreciation of the Dollar, that would be the spark to ignite a terrible situation.

A huge amount of debt is Dollar financed. It makes the sub-prime situation ridiculous. Where will the world get their Dollars from, if the U.S. does not run a deficit?

The Trump people are talking tax reform, not tax cuts. It’s revenue neutral, which means there’s going to be winners and losers. If there’s really good winners it’ll be the middle class. That’s why Trump won. The cost of Britain leaving is just a soundbite. How are they going to force the Brits to pay? They’re already leaving. There’ll be no settlement of that debt ever.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

LINK HERE to the podcast

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.


03/25/2017 - The Roundtable Insight: Alasdair Macleod And Jayant Bhandari On The Factors Driving The Purchasing Power Of Currencies Lower

FRA is joined by Jayant Bhandari and Alasdair Macleod in discussing current trends in gold, along with Asian currency markets and their expectations for them.

Jayant Bhandari is constantly traveling the world looking for investment opportunities, particularly in the natural resource sector. He advises institutional investors about his finds. Earlier, he worked for six years with US Global Investors (San Antonio, Texas), a boutique natural resource investment firm, and for one year with Casey Research. Before emigrating from India, he started and ran Indian subsidiary operations of two European companies. He still travels multiple times a year to India. He is an MBA from Manchester Business School (UK) and B. Engineering from SGSITS (India). He has written on political, economic and cultural issues for the Liberty magazine, the Mises Institute (USA), Mises Institute (Canada), Casey Research, International Man, Mining Journal, Zero Hedge, Lew Rockwell, the Dollar Vigilante, Fraser Institute, Le Québécois Libre, Mauldin Economics, Northern Miner, Mining Markets etc. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.

Alasdair Macleod writes for Goldmoney. He has been a celebrated stockbroker and Member of the London Stock Exchange for over four decades. His experience encompasses equity and bond markets, fund management, corporate finance and investment strategy.

 

UPDATE ON INDIA

India is very rapidly becoming a police state. Last month the government announced that any cash transaction over 300,000 Rupees (approx. $4500USD) would no longer be legal. Any transaction over that amount, according to them, has to be through the banking system. But they have actually come out with 40 amendments in the last few days, and the latest one says that cash transaction limit is now 200,000 Rupees. If you make a transaction over that amount, you will be penalized with the same amount you tried to transact with. This is an absolutely crazy situation in a country where 96% of transactions are made in cash.

Last week Uttar Pradesh, the biggest province in India and which basically decides who runs the federal government as well, elected BJP (Bharatiya Janata Party) into power, and Modi appointed Yogi Adityanath as head of the state. Yogi Adityanath is a Hindu extremist, who has openly and publically asked for the killing of hundreds of Muslims for every Hindu killed. In the last few days that he has been the minister, they have already been establishing a very backward sort of law and order in the province, and a few Muslim shops have been brought down in the last few days. This can very easily escalate. In 1991, there was the destruction of a mosque in Uttar Pradesh, which Hindu extremists wanted to convert into a temple, and now that a Hindu extremist is in power he has no choice but to convert that mosque into a temple. This is a very delicate situation for India.

INDIAN DEMAND FOR GOLD

The gold demand is very subdued even today, and the reason is that people don’t have access to cash to buy gold. More than 50% of ATMs still do not have cash and banks are clogged with people. At the same time, the economy is stagnating, and in a negatively yielding environment people have a tendency to buy gold. People just don’t have access to their own cash.

In a police system, people will trust their institutions even less than they have in the past. And now tax authorities have the right to enter your house without reason. They still need a warrant, but the whole institution climate is such that savers and businessmen are extraordinarily afraid of the state. This will increase people’s interest in gold or in moving their money out of the country.

GOLD RETURNING TO CENTRAL BANK RESERVES

The reason this is happening is because China is getting rid of Dollars in order to stockpile the commodity it needs for its development over Asia. China will spend huge amounts of resources in developing not just the Silk Roads but also the associated infrastructure, and the industrial revolution that China will be bringing in effect. We’re talking about a massive, 20-year project. China will effectively be selling Dollars down against the price. The problem the other central banks who will be dealing with China has is that they will have to try and match, to some degree, the pace at which the Chinese central bank disposes of its Dollars and adds to gold. One way or another, central bank demand is being driven into gold.

They also have the problem that if you’re looking at fiat currencies, where do you go instead of the Dollar? The Euro? The political situation in Europe suggests that currency might not exist in its current form within a 2-3 year timeframe. The Yen? Probably yes, but the problem with Yen is negative yields, and you don’t necessarily want to have Japanese government bonds that effectively yield nothing or very very little. There is not a lot of choice for the Asian central banks. For example, if Thailand just adjusted their portfolio, it probably means they’d have to pick up 60 tonnes of gold just to adjust their reserve portfolio by 10%. You can’t just walk into the market and buy that much easily. You can see that there is an underlying tendency for central banks to sell Dollars to buy gold.

MOVING AWAY FROM FREE TRADE

Last weekend the G20 finance ministers agreed to drop the reference for free trade. The Americans are changing the terms of global trade. They’re moving away from trade agreements, they’re moving away from WTO mandated minimums, and consequentially they’re saying that they’re going to run trade and they don’t care what anyone else says.

This is rather like the Smooth-Hawley problem we had under Hoover, which drove the whole world into a depression. The American move will lead to a contraction in global trade. The Chinese are mostly protected from this since they’re already moving away from selling cheap goods into developing the Asian continent. As the volume of trade contract in the coming years and global trade diminishes, Dollars will be returning home. And they will be returning home at the same time that Asian central banks are trying to reduce their exposure to the Dollar. We are at the peak value of the Dollar in terms of its purchasing power. The price of gold measured in dollars is going to go up quite sharply.

This goes as far as Saudi Arabia, whose market is Asia. Suddenly we have a situation where the Eurasian continent landmass is now the most economic driver in the world and America is receding into the distance. The consequences of this are not fully understood and will take time for us to work this one out. The importance of Asia is becoming paramount. Already China’s trade with Asia exceeds her exports to America. They need to redeploy the labour from the production of cheap goods into the further development of her own economy and move 200M people into new cities, expanding the middle class. This is the most populous country in the world, bar India, which is going upmarket. We really don’t understand this, if we still think America still runs the world. No longer. This is changing. Mr. Trump is going to find that the world is not quite as he thinks it is.

It’s only really been the last 200 years where the combined GDP of China and India have not been greater than the rest of the world, so a reversion of the mean is happening. The natural North American partner for China is Canada, not only because of raw materials and commodities, but because Trudeau Sr. was the first Canadian to go over to China and form the diplomatic bonds that persist until today.

SIMILAR TRENDS IN ASIA

The USD can continue to be very strong in the near terms. Emerging markets are facing huge financial and economic problems. They have taken on too much private and public debt which means that compared to the USD, their fiat currency has even less value in the future. As a result, the locals still prefer to own USD if they can get a hold of it. The USD can still hold its value, particularly if these emerging markets fail or if European currencies collapse.

The thing is that China is stockpiling all these resources. The effect China is having on the global supply of raw materials and energy is remarkable. The idea that if you get a recession in America, demand for raw materials go down because companies reduce their margins and prices start falling. But not this time. Raw material prices will continue to rise. These are precisely the conditions you have for stagflation, where you see your own economy going nowhere but prices are rising. People are latching onto the idea that the purchasing power of their domestic currency is not holding, and they prefer to hold fewer Dollars than normal to have lower exposure to that declining currency. When you start thinking that way, the purchasing power of the currency goes down irrespective of the quantity in circulation.

This hasn’t happened before. The idea that America runs the world is no longer true. They’re playing second fiddle to what China is doing to the whole of Asia.

SOUTHEAST ASIA DOLLAR DEVALUATION

This will not trigger a wave of global competitive currency devaluations, because the problem is that these countries have inherent problems in their economic structure. Devaluing their currencies against the US economy won’t help them, but the temptation will be there because this is how they’ve historically operated. If they do that, gold will be more attractive due to the loss of purchasing power in currencies worldwide. It’s becoming a subject of interest for people who not only want to buy commodities, they want to invest outside their own countries, and they want to own and hold gold outside their own country.

The world has changed. Governments still seem to think they can push their own people around, but it doesn’t work like that anymore. The amount of control that countries like India think they have over their people.

The loss of purchasing power in these currencies has been absolutely incredible. When the dollar goes down, other currencies will tend to lose their purchasing power on balance more rapidly. The Euro has potential for disintegration; the political developments in Europe are pointing to that being an escalating risk in 2017.

FINAL THOUGHTS

There’s a huge amount of accumulation of intellectual capital happening in China. You go to bookshops and you get books translated from English to Chinese. You see coffee shops, restaurants, offices trying to copy the western way of working. The Asian continent is where the excitement is. 90% of all engineers and scientists are Asians living in Asia.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

LINK HERE to download the MP3

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.


03/22/2017 - The Roundtable Insight: Chris Casey on The Austrian School of Economics and Why It May Be Time To Change Our Perspectives

Chris Casey is a trusted advisor to many business owners and companies alike on their pool of investments within their portfolios. With a specialty in the Austrian School of Economics, the far less popular thread of the study especially here in North America, Chris combines a unique viewpoint on traditional economic themes with an expertise on the Austrian way of thinking.

As name would suggest, the Austrian School of Economics did in fact originate in Vienna, Austria. It was powered by what was called the “marginalist” revolution in the 1870’s, which aimed attention at diminishing marginal utility-that an individual’s given choice is made on the margin. With that said, the Austrian school is a body of thought that puts emphasis on the value products as being determined by its utility to the consumer. This is balanced with Keynesian economics which focuses on the importance of dissecting the nature of various aggregate economic variables such as output, employment, interest rates, and inflation.

The Western world is largely exposed to only the Keynesian study of economics, possibly causing narrow perceptions of the principles themselves. With the emphasis of both schools of thought centered around two very different principles, a basic understanding of both is essential to better understand the world around us and how it functions.

 

FRA:     Hi, welcome to FRA’s roundtable insight. Today we have Chris Casey. He combines a degree in economics From the University of Illinois with a specialty in the Austrian School of Economics. He advises clients on their investment portfolios in today’s world of significant economic and financial intervention. He has also written a number of publications on websites including the Ludwig Von Mises Institute, Casey Research, and Laissez-faire Books. He’s a board member of the Economics Development Counsel with the University of Illinois, a policy advisor for Heartland Institute Centre and Finance, Insurance and Real-Estate. Welcome, Chris.

Chris Casey:     Thanks for having me on today.

FRA:     Great! Today we wanted to discuss an approach to investing that uses the principles of the Austrian School of Economics. Chris takes that approach with his clients, and we just wanted to explore in detail how he does that, and how it gives an edge to investing. Chris?

Chris:     Sure. Well, anyone’s portfolio has exposure to two very significant and primary forces; and that is the business cycle, and that recessions could pop any kind of financial bubbles out there whether it’s the stock or bond markets, as well as inflation, although that’s not talked about in today’s circles as often as it should be, it’s certainly a significant threat to anyone’s portfolio as anyone who lived through the 70’s certainly witnessed.

The Austrian school has unique explanations for both of those economic phenomena as well as interest rates. Having a unique economic perspective, truly understanding the way the world works, and being able to interpret the repercussions of various economic actors within the economy whether it’s the federal reserve, other central banks, or the treasury issuing bonds etc. is really key to structuring one’s portfolio to protect yourself from these significant threats that are out there.

FRA:     How do you apply this process…is it sort of like a flow chart-based approach? Do you look for certain characteristics, or do you look at the macro view first from that economics perspective? How do you actually approach that?

Chris:     Well, we’re always trying to interpret what the true effects or repercussions of, for instance, Federal Reserve actions would be on the economy. For instance, while some people may believe that raising rates will stifle inflation, we realize that that’s one of but several tools that federal reserve uses to inject money into the economy, and therefore doesn’t have much significance nor does it happen right away relative to other tools at their disposal. It’s really an interpretation of the actions that are out there and it lends itself well to Contrarian Investing because it’s a great way to truly make money in any market. So in Contrarian Investing, you’re looking at any kind of price levels that are extreme highs or extreme lows and just as importantly, you have to look at a catalyst to bring those extreme price levels to their median or mean average over time. And if you have a catalyst that is out there that’s a true interpretation of how the economy works and you understand it but everyone else believes in something different even though you’re looking at the same data, I think that’s a significant advantage in structuring your portfolios.

FRA:     That’s right the Austrian view places a strong emphasis on how the “interventionary”-type policies are distorting the price of risk, the price of money, interest rates, so that wouldn’t make sense. Do you do this on a daily basis; do you monitor central bank policies, fiscal stimulus policies, government regulations…how do you monitor what’s happening and the potential distortionary effects in the investment environment?

Chris:     Sure, well, we’re looking at same data as everyone else is, it’s not like we have some special insights or we’re necessarily looking at different data, it’s really the interpretation of the data. Let me give you a couple of examples. A lot of people, a lot of mainstream wealth management firms, a lot of media within the finance industry take a lot of stock with what the Federal Reserve believes and does and says, which astounds me because they are the absolute worst predictors of future events of any prognosticator out there. Think about it like this, it’s one thing if you’re wrong about predicting the future, but the Federal Reserve is even wrong about predicting their own actions. I mean, how many people can you say that, or economic actors can you say that, are simply wrong in predicting what they will do in the future. Yet time and time again, they are. If you look at the Federal Reserve, you could look at previous pronouncements, you have Ben Bernanke in January of 2008 saying they don’t see any kind of recession, and famously he did the same with the housing bubble. I don’t know why anyone believes these people on anything that they believe will happen to the economy. It’s not because they have obviously more access to data than we do, it’s simply an interpretation of what’s going on. They simply have an unsound and fundamentally flawed understanding as to what causes recessions. They cannot explain a business cycle. If you cannot explain the root causes as to why something happens, then predicting when something will happen is no different than reading tea leaves. The whole point is that it’s a different interpretation, it’s a different lens on the same data that’s out there.

FRA:     Can you provide some specific examples of investment asset classes and how they are tied into an Austrian school of economics view?

Chris:     Well the one everyone always talks about is of course precious metals, and that’s because they understand the true nature of money and what money represents, what it does not represent, and therefore they understand the dangers of a Fiat currency in today’s world and its ability to create inflation. Let me just reiterate what a Fiat currency is because a lot of people just assume it means paper money, it doesn’t. Fiat means by force. It’s government required use of money, legal tender laws, and the ability to print money that’s unbacked by any kind of commodity. So we’ve obviously had that in full blown mode since 1971, and because of that we’ve experienced significant inflation in the 1970’s. The Federal Reserve has printed a huge amount of money since the 2008 recession, so people think, well why haven’t we had inflation since then? There’s a couple forces at play, it’s not a simple matter of the stock of money goes up and prices go up automatically. There are some deflationary forces to the extent that loans are called in or loans are repaid, there’s time elements, there’s a lag. It’s very possible that the demand for money has gone up, and that’s a key element to the price level equation…what is the demand for money? In times of uncertainty and in times of extreme low growth when people are afraid, the demand for money, I’m sure, goes up, so that’s been keeping a damper on inflation as well.

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Data Courtesy of Federal Reserve Bank of St. Louis

FRA:     What types of investments would provide yield and preservation of purchasing power?

Chris:     In addition to, obviously precious metals, I think you want to look for any kind of investment or economic activity where you are getting paid in more stable and increasingly valuable foreign currency, but you have your costs in dollars. Let me give you a couple of examples that exist in the real world: in Russia over the last couple of years the Ruble has fallen tremendously relative to the US dollar, but if you look at their commodity producers, if you look at an oil company there, they’re getting paid in international markets in dollars. Meanwhile their costs are lower relative to their revenue. Another example would be in Brazil, we have the same thing happening with producers, their costs have fallen dramatically and yet they’re getting paid on the international market in dollars. And so people should look at that and think about what will happen next in the US, how could they position themselves to benefit from any kind of US inflation. US farmlands are a good example. Much like Brazil, the same thing could happen here, we saw that in the 1970’s when the price level essentially doubled over a ten year period, farmland prices went up about threefold, so they more than kept pace with inflation because the more farmers started exporting, as dollars became cheaper for foreigners to buy, their real sales went up in real terms, their land value went up in real terms. So that’s another way to play inflation, not just a knee-jerk reaction to precious metals but actually looking at other areas where you could benefit between the discrepancies in currencies.

decline vs US dollar image

Data Courtesy of Federal Reserve Bank of St. Louis

trade weighted US dollar image

Data Courtesy of Federal Reserve Bank of St. Louis

 

FRA:     What about other investments in agriculture, does that make sense as well in agricultural commodities or companies focused in that sector?

Chris:     If farmers are doing better, if they’re wealthier, if their underlying land values are better, I’m sure that there’s a lot of by-products that they will do very well. We haven’t looked at any in particular, but there are certainly a ton of products that would do quite well on that scenario

FRA:     Given the Austrian School of Economics places a big emphasis on debt, in a negative sense, would it make sense to look at investments where there are business with little or no debt, little or no leverage?

Chris:     I wouldn’t say that the Austrians necessarily view debt per se, negatively, they certainly view the non-repayment of debt negatively because that affects everyone in the economy, and they are strong believers in property rights and contractual obligations. But they do view government debt extremely negatively, for a number of reasons: morally, constitutionally, and just economically. They would advocate a balanced budget and much lower debt levels to the extent where there is no debt overall which we haven’t seen since the time of (pres.) Andrew Jackson.

FRA:     Yeah, exactly. Would it be possible for the government to consider some type of migration plan from a Keynesian based to an Austrian based management of the debt? Is that possible or could that be proposed, perhaps, as an evolutionary?

Chris:     Well I don’t think anyone in government actually subscribes to the Austrian school of economics, which is unfortunate, but out of the thousands of economists, very few of them would even be aware of the school, let alone understand or believe in any of its principles. I just don’t see anyone within the government, in any significant way, migrating economic policies towards an Austrian viewpoint.

FRA:     Do you know of any studies or empirical analysis with regard to using the principles of the Austrian School of economics for investing? Are there any past performance studies that indicate taking this approach has advantages and can provide an edge to investing?

Chris:     I’m not aware of any, and frankly it would be very difficult to conduct those, but more importantly I’m not sure exactly what those results would show meaning I’m not sure how beneficial someone simply believing in Austrian economics would have an advantage over others. I mean, we use it, we believe it is an advantage but just knowing about it doesn’t necessarily do anything, you have to really act on it. It’s not foolproof either. The Austrian Economics will help you identify bubbles and the catalysts to pop those bubbles. It will tell you about the direction and magnitude of markets, perhaps, but it won’t tell you anything about the timing, or at least that’s the trickiest part. In my mind, timing is far less significant when you have those other attributes nailed down because otherwise you’re “picking up nickels in front of a steamroller”. So, I’m not aware of any studies that would be interesting down the road, it’s also a pretty small data set of people who actually believe in this and act on it.

FRA:     Given the level of government intervention of central bank policies that intervene in the economy and in the investment environment on a long term basis, how does one address the challenge of timing, as you just mentioned? Is it a matter of waiting a certain period of time or are there tipping points where the distortions have just become too large and there will be a reversion to the meaning of Contrarian type-based approach? How do you actually look at the timing challenge?

Chris:     I do believe that direction and magnitude are more important. Let me give you an example: 2008 was a horrendous time. You had businesses thinking about where they have their cash, whether or not it’s even safe in a bank, that’s how fearful they were. The unemployment rate literally shot up in 7/8 months to 10% from maybe a high 4(%) in early 2008. You cannot understate the severity of that recession. Now from that, the government and Federal Reserve and treasury did exactly what they should not have done. They should have let these liquidations happen, they should have let the recession run its course but instead they did everything wrong. They printed a lot of money, they ran huge deficits, and all they did was cause dramatic and increased distortions within the economy. So make no mistake, what happened in 2008 was devastating, could be dwarfed by what comes down the pike based on what’s happened, because the distortions are even greater. The longer this has gone on, the greater the distortions are allowed to run their course and the more severe will be the contraction; the beneficial time period where we restore the structure of production to how it should be. So, timing to me just isn’t as important as magnitude and direction.

FRA:     I see, yeah. Given what’s happening in the economy and what’s happening with central bank policies, not only with the central bank of the US, the Federal Reserve, but other central banks around the world, as well as government policies on fiscal stimulus, the potential for increased infrastructure. Given that, and from an Austrian school perspective, where do you see the asset classes preferable to be in over the next 6-12 months, 1-2 year period?

Chris:     Well perhaps more importantly, is to what you should be in, is to what you should NOT be in. I think everyone should start looking at Cryptocurrencies in some form, emerging markets are very tempting based on not only the disparity in values between currencies but based on the disparity in relative values between their markets. Farmland, as I mentioned, I think is attractive. There are certain one-off sectors that have nothing to do with the economy which should do well regardless as to what happens. So for instance, uranium, or cannabis for that matter. But more importantly than these areas that one may want to consider, are areas that you should avoid; certainly anything within the equity markets that’s highly overvalued based on historical norms, I think, people should think about not having it in their portfolio. Certainly any kind of debt instruments are potentially at risk with rising interest rates, so you may want to lighten up on those. So in general, those are some themes to embrace or consider as well as what to avoid.

FRA:    Great, and how can our listeners learn more about your work and your services?

Chris:     More importantly than that, is what we believe in and how we apply Austrian economics. We have a lot of content on our website. I would just encourage people to check out our website which is WindRockWealth.com, and certainly our contact information is on there as well.

FRA:     Excellent! We will be posting this podcast as well as a number of charts and graphs that Chris will be providing on the website. We will also do a write-up abstract-transcript of this interview for anyone who wants to read that, including the charts and graphs. Thank you very much, Chris.

Chris:     Thank you.

windrock image

Abstract written by:  Tatiana Paskovataia <tatiana-p28@hotmail.com>

 

LINK HERE to download the MP3 Podcast

 

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.


03/17/2017 - The Roundtable Insight: Daniel Amerman On How Varying Forms Of Financial Repression Will Need To Be Applied To Address Surging U.S. Social Security And Medicare Benefits

FRA is joined by  Daniel Amerman in a thorough discussion on the future of the US national debt and the impact of the upcoming surge in social security and medicare benefits.

Daniel R. Amerman is a Chartered Financial Analyst, author, and speaker, with BSBA and MBA degrees in Finance, and over 30 years of professional financial experience. As an investment banking vice president in the 1980s he did groundbreaking work in the security originations and asset/liability management areas, including CMO/REMIC originations as part of portfolio restructurings for financial institutions, as well as the creation of synthetic securities for institutional clients. As an independent quantitative analyst in the 1990s and 2000s, he structured mortgage-backed bond financings and provided analytical services for real estate acquisitions by multifamily and commercial real estate owners, investment banks, and tax-exempt issuers.

Mr. Amerman is the creator of a number of DVDs and books on finance, including two books published by McGraw-Hill (and subsidiary): Mortgage Securities, and Collateralized Mortgage Obligations: Unlock The Secrets Of Mortgage Derivatives. He has been a speaker and workshop leader for sponsors including The Institute for International Research, New York University, and many banking groups.

 

US NATIONAL DEBT AND THE FUTURE OF INTEREST RATES

The easiest way to talk about financial repression is to look back at the classic financial repression period of roughly 1945-1970, when all the developed economies in the west were engaged in financial repression. In this case, financial repression means forcing negative real interest rates, which is how they escaped from very high government debt levels relative to the economy the last time we were in this situation. Many things today are different from that time, and the difference is that when financial repression was occurring the first time, what was happening was that the baby boomers gave us a tremendous number of workers producing real goods and services, which gave the the economy a boost and helped get government debts under control.

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The difference this time is that the boomers are retiring, and the expenses of paying for them are about to get far more expensive. You can see that we have a tremendous increase in projected benefit payouts. You take the entire US government expenditures right now, and just paying out anticipated social security and medicare that so many boomers are going to be collecting, we’re expecting to be adding another trillion dollars per year by 2024. We have this tremendous increase in cost at the same time that we’re starting with a $20T national debt.

There are a number of different ways that social security and medicare costs can be effectively reduced by nicking it in small little ways that reduce overall payments for everybody substantially over the years to come. In the US, social security payments are not tied to the CPI, but a different index that tracks wages that increases at a slower rate than overall consumer prices.

HIGH DEBT, SOCIAL SECURITY & MEDICARE COSTS

The key point is that we can’t really look at financial repression in the post-WW2 example because it’s fundamentally very different. They used financial repression to hold the debt level in inflation-adjusted terms for a 25 year period. We went from the national debt exceeding the total size of the economy to being under 30% of the size of the economy, but they weren’t facing this tremendous challenge we are with benefits costs. Because of that, the impact on investors and anyone who is expecting social security or medicare benefits means things have to work differently this time around.

We know for a fact that in the coming years we’re going to have this force that’s getting more powerful every year that we’re just not used to dealing with. We have twinned unprecedented situations: a $20T debt and much higher social security and medicare costs on the way quickly, and those two are happening at the same time.

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When you look at these, the key column is net interest which is exploding upwards. It doesn’t happen instantly because the weighted average life of the debt outstanding is 5.8 years, so it takes a number of years for it to actually reflect in the interest payments going out. What would happen is that we’d still have this surge in the deficit that’s going up almost dollar for dollar with the net interest payments. If you look at the overall impact on the economy and total governmental debt, what economists usually do is compare the size of the government debt to the economy, and you can see that the debt crosses the size of the economy by the mid 2030s and accelerates from there.

BENCHMARK OF “INSANITY”

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We define insanity as if benefits and interest payments consumes all government taxes and every other dollar of government spending has to be borrowed. By the 2020s, we’re more than halfway there, and in that dangerous yellow zone that could shift at any time.

From AC3, with benefits being paid in full, the net interest column has been negated. But now the problem is in the net benefits column, where the deficit is shooting up out of control again. You can see how the red line is pulling the yellow line up step by step, and by the time it reaches 2039 the annual deficit exceeds all normal governmental spending.

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We have two entirely independent compelling major financially problems out there. There’s the $20T debt being held in check by some the lowest interest rates in history, and we also have the tremendous increase in social security and medicare payments that’s going to hit soon. The problem is that in reality, we have both of these hitting us at the same time.

AD3 shows what would happen if we return to historically accurate interest rates. It takes some time for it to be reflected, but we still go from $400B in net interest payments to almost $2T at the same time that we have net benefits almost doubling. When those two hit together, it’s like we have two exponential series hitting each other simultaneously and reinforcing it. If you look at AD15, you see that we’re in the insanity range in under ten years. The future national debt, the future social security and medicare, and the future interest rates are all intertwined.

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GOVERNMENT REACTION

The point is not to say these scenarios will happen, the point is that this will happen if we had normality in the same way most people are building their assumptions when it comes to long term retirement planning. People are expecting to get their benefits in full because that’s what the government has assured them. They’re looking for long term historical returns in terms of investment allocations, and the point is that if everyone’s expectations were met simultaneously, then the country’s very quickly in the insanity range.

Even with 2% economic growth rate, you can stay in the green the entire time. You can do that with interest rates, you can do that with benefits, you can do that prioritizing interest rates over benefits, you can do it prioritizing benefit changes over interest rates, you can do it with tax changes, and you can do it with inflation. All of these are valid ways of staying within the range.

If you look at paying everything with taxes, the degree taxes would have to rise is shocking. This would be very difficult politically to do. Part of the appeal of financial repression to the government is that there is virtually no political cost to this. People pay personal cost in their lives, but this is generally not understood by the voters. Some of the methodologies of staying in the green are far more politically palatable than others, so we’re more likely to see those used and those are the ones where individuals need to have their defenses in place for. Every single one of these possibilities for staying in the zone has  very broad effects on all investment categories.

Much depends on the specific methods being used and the exact approach the government takes. Bonds in general are not a good idea during financial repression, though there are some time periods where they could be a good investment for a period of time. Real estate, gold, silver, and things like that are good investments.

There is very much a direct personal cost for savers, and working in a different way but related, a direct personal cost for beneficiaries.

CLOSING REMARKS

Social security is not fully inflation indexed. Most people have their medicare premiums deducted from their social security payments, and there is a provision called hold harmless which allows the government to strip away all inflation indexing to the extent that medicare premiums are increasing. Often times when people look at things at this, they take a high drama approach.

All it takes is a tweak of a half percent here and next thing you know these seemingly huge problems have gone away. But when you follow through to the impact on individual savers and individual beneficiaries, they are in fact being paid in full. If you’re going to make a $100T problem go away, $100T in pain has to be shifted somewhere. It happens, but not in a way where people can say, this is happening to me right now because this change was made here.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

LINK HERE to get the podcast in MP3

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.


03/13/2017 - The Roundtable Insight: Charles Hugh Smith On Inequalities And Distortions Caused By Central Bank Policies

FRA is joined by Charles Hugh Smith in discussing income inequality as a result of central bank policies

Charles Hugh Smith is a contributing editor to PeakProsperity.com and the proprietor of the popular blog OfTwoMinds.com. He is the author of numerous books, including Why Everything Is Falling Apart: An Unconventional Guide To Investing In Troubled Times.

 

ENGINES OF INEQUALITY

A lot of people are connecting the dots between rising income inequality and central bank policy. Wages as a percentage of GDP is a very broad-based method of saying how much the economic activity in a nation is ending up in the hands of wage earners as opposed to owners of capital or rent-seekers. We want to differentiate between rent-seeking –  monopolies and cartels getting the government to protect their income streams and eliminate competition – as opposed to the innovative, creative destruction side of capitalism where growth and income inequality might be rising because the most talented and the most successful at allocating capital are benefiting. We can see that both of those forces are at work. A lot of people have noted that the top 5% of wage earners are scooping up most of the gains in wages while the bottom 90-95% are seeing stagnating wages.

GDP-wages8-15a

If you look at GDP as a percentage of wages, it’s been declining since 1970. Something else is going on. Why are wages declining for decades? Clearly it’s connected to policies. 1970 coincides with the decoupling of the USD from gold, so from that point it all comes down to central banking policies and interventions by the Fed in the US.

We can also look at debt. The primary function of central bank policies over the last few decades seems to be facilitating the expansion of debt at a rate that’s far faster than the expansion of GDP. The global bond market is basically the creation of debt instruments, and from 1990 there was about $10T in global bond market debt, and now it’s pushing $100T. We have to ask if the major economies of the world increase tenfold, and the answer is no. Looking at US sovereign debt, around that period it went from $3T to $20T. We can kind of follow that narrative and see what happens when debt is awarded and the acquisition of debt is easy for those closest to the money. There is a tremendous conservation of central bank policies, which is to lower interest rates and make it easier for banks and corporations to borrow money. This is one of the key drivers in wealth and income inequality.

global-bond-market

When the rent-seeking, exploitative part of the economy that used to be a relative modest percent of the economy, grows to 10-20% of the economy, it leaves less actual capital for innovators. We want to encourage innovators, but in the US we have a system where if you’re already extremely wealthy, then the Fed policies have enabled you to enlarge your rent-seeking at the expense of everyone else. Increasing levels of debt are yielding less economic growth over time, requiring more and more debt to get the same level of increase in economic activity.

 

DEBT AND DISTRIBUTION OF WEALTH

The debt has soared, and so has global financial assets, but not as much. There’s been a healthy expansion, but it’s completely asymmetric to the amount of debt that’s increased. In China, within a decade their total debt load has gone from $3T to $30T. A lot of other nations have followed that same pattern of skyrocketing debts and assets that have gone up but not by the same proportion.

Distribution of wealth in the US since the 1917s has favored bottom 90% the most in the 70s and 80s, and then about 1990 it’s gone against wage earners. We can perhaps extrapolate these vast changes in wealth and income inequality and ask what the social changes are. A lot of people have pointed out that the election of Trump, Brexit, and the rise of the “right” parties in Europe are connected to the social disorders that are arising from this wealth inequality.

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There’s potential for misattribution by the general public on why the financial crisis happened and why income wealth inequality is getting worse. Both Canada and Mexico has a larger, broader-based middle class than the US, and the Gini coefficient reflects that. Mainstream media doesn’t explain that the wealth effect only benefits those with assets or access to cheap credit that can be used to buy assets. This is where the central bank has created a vast social injustice, and that’s why the social cohesion is being lost. People recognize that these central bank policies are exacerbating social injustices. The fallacy of the central bank idea that if they create all this wealth in the wealthy class, some of it will trickle down and benefit the bottom 95%. But that trickle effect is very modest and not something the central banks can control. That’s a structural flaw in central bank policies.

global-debt2016

The way you deal with financial crises is by forcing people to take losses all the way along the line. You don’t create moral hazard and bail people out and make it easy for people to avoid losses, because then you pile up a lot of bad debt that is hidden. Policy makers at central banks don’t address inequality, perhaps because they know they’ve failed in that area and it’s a problem they don’t have any influence on.

LOOKING FORWARD

Millennials are quite financially conservative and are aware that the generational burden is falling on them. They might not cleave to any of the political lines that we’re used to. It’s interesting because they favor more socialist agenda, in the sense that it reduces the inequality and injustice that is rising, but they may very well be conservative financially instead. There may be a hybrid political solution going forward.CB-buying2-17

We could get rid of central banks or limit them to providing liquidity in liquidity crises. If we went back to a market of private capital, that would instantaneously remove a lot of the benefits rent-seekers get from central bank policies and everyone would have a transparent market for capital. That would open up the capital market to innovators in a way the central banks have repressed.

There is a huge potential benefit to innovators and small enterprises in decentralized crypotcurrencies. These currencies have great value as they’re outside the control of central banks. If we can decentralize money and capital, that would open the door to a lot of solutions.

These distortions are building up systemic risk that’s beneath the surface. Right now central bank policies are all about masking risk, but the systemic risk is rising at the same time that benefits of adding more debt to the system are diminishing. There’s going to be a banquet of consequence in the next few years, and we can see it being prepared right now.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

LINK HERE to download the MP3

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.


02/24/2017 - The Roundtable Insight – Have Central Banks Reached The “Coffin Corner”?

FRA is joined by Uli Kortsch and Jayant Bhandari in discussing global interest rate trends and growth, along with the likelihood of another recession.

Uli Kortsch is the Founder of both the Monetary Trust Initiative (MTI) and Global Partners Investments (GPI).  Currently most of his time is spent on MTI whose mission is to bring transparency and authentic principles to our monetary system.  He was asked to organize a conference on this topic at the Federal Reserve Bank in Philadelphia, the proceeds of which are now published as a book.  He is a regular speaker at various conferences in different countries. As President of Global Partners Investments and other ventures Mr. Kortsch has worked in over 50 countries, written a bill for Congress, and conferred with approximately 15 national presidents, ministers of finance, and ministers of commerce.  He has served on numerous corporate boards with both for-profit and not-for-profit organizations.

Jayant Bhandari is constantly traveling the world looking for investment opportunities, particularly in the natural resource sector. He advises institutional investors about his finds. Earlier, he worked for six years with US Global Investors (San Antonio, Texas), a boutique natural resource investment firm, and for one year with Casey Research. Before emigrating from India, he started and ran Indian subsidiary operations of two European companies. He still travels multiple times a year to India. He is an MBA from Manchester Business School (UK) and B. Engineering from SGSITS (India). He has written on political, economic and cultural issues for the Liberty magazine, the Mises Institute (USA), Mises Institute (Canada), Casey Research, International Man, Mining Journal, Zero Hedge, Lew Rockwell, the Dollar Vigilante, Fraser Institute, Le Québécois Libre, Mauldin Economics, Northern Miner, Mining Markets etc. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.

 

RELOADING THE AMMUNITION

We’re going to have another recession. Who knows when it will come, but it will come. We’re close to having the longest buildup growth since the last recession, so we’ll have another one fairly soon. The problem is that under our current system, we use interest rates to stimulate the economy. It appears negative so we increase interest rates and make money more expensive, so people stop borrowing. The interest rates globally are so extraordinarily low that in order to stimulate growth during the upcoming recession, there’s not enough movement without going back into negative interest rates. If we do have another recession fairly soon, we’re going to go into negative interest rates.

Most of the savers are older and trying to live off a certain portfolio or expecting a certain kind of income. When you have negative interest rates, the more money you have the more expensive money becomes. You lose money off your money, so the net result is that consumers save more. Instead of negative interest rates stimulating the economy, they actually slowed down even further.

We have an intersection of the interest rate of the economy and the world is able to handle, and where central banks are desperately trying to increase the rate.

If we increase the interest rates, the governments cannot afford their own debt. If we were to pay normal interest rates on US federal debt right now, we would have a deficit of above $1T. We currently have $10T in global debt denominated in USD. As the interest rates go up, those companies can’t afford those either. If you have a crash internationally, we are so linked today that no one will be spared. It’s this coffin corner where you’re damned if you do and damned if you don’t. You’ve got to raise the interest rates, but if you do you’ll crash the economy.

If you look at the last century, western economies mostly grew at a faster rate than the rest of the world. What actually was happening was that the non-western economies had negative real interest rates, and a lot of western economists don’t recognize that. The same disease might’ve entered the western economy society over the last decade or so. We might have over regulated businesses so much that the capital no longer has capacity to generate economic growth. Even negative interest rates might not be enough to help these companies add economic growth to their society. The emerging markets are clearly facing this problem right now, except for East Asia.

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INFLATION: US AND INDIA

We continue to be in such a strongly deflationary environment, but it would be more of the Japanese style of deflationary stagnation versus the stagflation we saw in the 70s and 80s. If you look at the demographics that are changing everywhere, plus IT developments that reduce prices, plus global trade, plus the debt overhang, it’s strongly deflationary.  Every single major crash in over a hundred years has been deflationary, so why are we so concerned about inflation?

Inflation will continue and the government of India is preparing itself to spend a lot of money. Governments are trying to get emerging markets to go cashless so they can destroy their informal economy and move the money to the formal economy. In a lot of these countries, because they’re trying to force people to move their money, they’re reducing the interest rate in the formal economy but actually destroying the growth in the informal economy and that is where economic growth lies in countries like these. The result is that there will be inflation in these emerging markets.

Even in the US, the majority of the growth is in new companies and for the first time in decades the two lines have crossed negatively where if you graph the birth and death of new companies, we’ve gone negative. We are now destroying more companies than we’re creating, and this has never happened before since these statistics were kept.

We’re locked into this Keynesian world view that this is how we do things, but we’re going to face a major crash if we stay with this paradigm, and there’s no way out of it. If we keep on doing what we’re doing, we’ve only got a few years. If we are willing to switch from the Keynesian paradigm to the Fisherian paradigm, we could solve this.

Keynesian economics have become a part of us that it’s almost impossible for institutions and governments to understand that there’s an alternative. In their view, the printing press is a solution to all their problems. All these emerging markets have become very big believers in these things, and this has already led to a huge amount of malinvestment in the west and even more in emerging markets. If you go to Africa and Latin America, private debt levels are much higher as a proportion of their GDP. Those people have taken out massive private loans for consumption, not for investment purposes.

THE CHINA FACTOR

Under Trump and where trade is at, there is a possibility of another Smoot-Hawley. If there’s a sudden decrease in the value of the Yuan relative to the USD, there will be a decrease in trade. The amount of money that’s available to support the Yuan is a lot less than what they’re officially publishing. We would have to be very careful and very wise to not immediately do something stupid like blocking trade. If the Yuan had a significant crash, that would affect the whole Asian bloc.

If the Yuan falls for any reason, it will be extremely harmful to every emerging market. The Yuan is very competitive compared to other smaller manufacturing places, so if it falls for any reason, it will be disastrous for these smaller economies. But it’s so closely linked to the international market as the factory of the world; it operates differently from other currencies. The PBOC’s support mechanism effectively creates a currency board.

When the US acts as a global reserve currency, there has to be a constant leakage of Dollars out, which gives us a negative Current Account standing. If we were to reverse that, there would be an enormous Dollar squeeze globally that will backfire like there’s no tomorrow. The

INTEREST RATES IN THE COMING MONTHS 

You’d have to have some real balls to do this, and there’d have to be timing involved, but it’s likely they’re not going to be able to reload the gun in time for the next recession. When you think the height of the Fed rate has been reached, you can buy US Treasuries. You can make a lot of money, but it’s a risky play.

International institutions have recognize that a lot of corporations in the developing world don’t produce as much as they thought they should, and the result has been that these corporations are basically extensions of governments in these countries. There has been pressure on governments to reduce interest rates on these corporations so they can survive. They’re forcing investments to shift from the informal economy to the formal economy, which is leading to a drop in interest rate which is good for the government. But the way they want to structure the monetary might be destroying the informal economy and the livelihoods of a major part of their population.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

LINK HERE to download the Podcast

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.


02/19/2017 - The Roundtable Insight: Doug Casey On The Economic State Of The World

FRA is joined by best-selling author and world-renowned speculator Doug Casey in discussing current economic state of the world, from India’s demonetization to Trump.

 

Doug literally wrote the book on profiting from periods of economic turmoil: his book Crisis Investing spent multiple weeks as #1 on the New York Times bestseller list and became the best-selling financial book of 1980 with 438,640 copies sold. Then Doug broke the record with his next book, Strategic Investing, by receiving the largest advance ever paid for a financial book at the time. Interestingly enough, Doug’s book The International Man was the most sold book in the history of Rhodesia. And his most recent releases Totally Incorrect (2012) and Right on the Money (2013) continue the tradition of challenging statism and advocating liberty and free markets.

He has been a featured guest on hundreds of radio and TV shows, including David Letterman, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin, Maury Povich, NBC News, and CNN; has been the topic of numerous features in periodicals such as Time, Forbes, People, and the Washington Post; and is a regular keynote speaker at FreedomFest, the world’s largest gathering of free minds.

Doug has lived in 10 countries and visited over 175. Today you’re most likely to find him at La Estancia de Cafayate (Casey’s Gulch), an oasis tucked away in the high red mountains outside Salta, Argentina.

 

CURRENT WRITINGS

Speculator is the first of a series of six novels following our hero, Charles Knight, going to Africa to look at a gold mining project he got lucky on. It’s an adventure novel about a bush war in Africa and how he made a couple hundred million dollars, and it’s actually an excellent novel. The second in the series explains the drug business the same way we explain the mining business.

THOUGHTS ON THE CURRENT STATE OF THE WORLD

We entered the hurricane in 2007. The governments of the world papered it over by printing scores of trillions of new currency. It’s surprising that we haven’t gone out of the eye of the hurricane and into the trailing edge, but we’re entering the trailing edge as we speak. It’s going to be much different and much longer lasting, and much worse than the unpleasantness of 2008-2009.This is going to be the biggest deal since the Industrial Revolution 200 years ago, and not in a good way.

The Euro has always been an Esperanto currency. If the US Dollar is an “I owe you nothing” on the part of the bankrupt US government, the Euro is a “who owes you nothing”. It’s a disaster waiting to happen. The European Union itself is likely to break up, and that’s a good thing because most people are unaware of the fact that Brussels has gone from a sleepy little town to one that holds 50000 employees of the EU who serve no useful purpose. If the Europeans want a free trade zone, all they have to do is drop duties. You don’t need a gigantic bureaucracy in Brussels to do that.

We’re going into a time of real chaos. One of the big things we’re going to see is migration from Africa, especially Africa south of the Sahara. There’s a 1-1.5M migrants that came to Europe this year, but in the future there’s going to be scores of millions. Most people are unaware that 42% of the world’s population will be African by the year 2100. It’s going to be an invasion of Europe by Africans; that’s going to continue and compound. At the same time, the Chinese are taking over the continent. It’s going to be a race war. A lot of Europeans are going to be coming to South America. That’s the big picture.

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DEMONETIZATION AND DEBT

It’s incredibly stupid on the part of Modi; half the people in India are earning 1-2 dollars a day. Unfortunately, this is something that’s happening to one degree or another around the world. Governments are trying to get rid of cash, and this is catastrophic from an economic point of view and a personal freedom point of view. Without cash, everything you do goes through a bank and is monitored. There is absolutely no privacy at that point, especially in India which is technologically backward.  It’s a complete disaster.

It’s definitely going to happen in the US and Canada as well. All these government officials talk to each other and seem to share a common philosophy.

When you look at US government spending, we’re going to be running trillion dollar deficits as far as the eye can see. As the world goes into the next stage of the greater depression, it’s going to go well above a trillion dollars. The US government is going to be manifestly bankrupt. They can only get the money by selling the debt to the Fed, and when debt is sold to the Fed they pay for it by printing money. We’re going to be seeing much higher levels of inflation, and the Dollar is eventually going to turn into a hot potato.

TRUMP’S PROTECTIONIST POLICIES

It’s going to be worse than stagflation. If these countries stop putting up tariffs, people can’t sell to you at the same time; they don’t have the ability to buy from you. What’s going on in the US with the Trump administration is an excellent chance and the same thing will be going on in Holland and France and all through Europe.

Every four years, there’s about 2% more of the kind of people who voted for Hilary. Trump is a one term president at best, and the next president is going to be in the middle of an economic catastrophe. Americans are likely to vote for somebody that’s going to promise the government’s a cornucopia.

INVESTING IN A TRUMP WORLD

One of the good things about Trump is that he’s moving to gut the EPA. It means that mining is going to have a resurgence in the US. That’s the best place to be because the stock market is grossly overpriced by any reasonable parameter. That’s an accident waiting to happen at this point, and the bond market’s even worse. We’re at the bubble end of a 35 year bull market in bonds. Bonds are the biggest bubble in world history, at this point.

Commodities are very cheap right now. In the inflationary environment we’re going to have in the future prices are going to go way up. Food commodities are the place to be.

You should go where your money and yourself are treated best, and that’s no longer in the US.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

LINK HERE to get the podcast

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.


02/18/2017 - The Roundtable Insight: Jayant Bhandari On India’ Demonitization And Investing Using The Principles Of The Austrian School Of Economics

FRA is joined by Jayant Bhandari in discussing emerging trends resulting from India’s demonetization, along with suggestions for investment in a Trump world.

Jayant Bhandari is constantly traveling the world looking for investment opportunities, particularly in the natural resource sector. He advises institutional investors about his finds. Earlier, he worked for six years with US Global Investors (San Antonio, Texas), a boutique natural resource investment firm, and for one year with Casey Research. Before emigrating from India, he started and ran Indian subsidiary operations of two European companies. He still travels multiple times a year to India. He is an MBA from Manchester Business School (UK) and B. Engineering from SGSITS (India). He has written on political, economic and cultural issues for the Liberty magazine, the Mises Institute (USA), Mises Institute (Canada), Casey Research, International Man, Mining Journal, Zero Hedge, Lew Rockwell, the Dollar Vigilante, Fraser Institute, Le Québécois Libre, Mauldin Economics, Northern Miner, Mining Markets etc. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.

 

UPDATE ON INDIA

India is becoming crazier by the day. In the last two weeks, the Indian government has come out with two new regulations which now make it illegal for people to do transactions of more than 300000 Rupees ($4500USD) in cash Remember this is a country where more than 95% of consumer transactions are cash-based. This country is becoming increasingly a police state. Everywhere people are losing jobs, food prices have fallen quite a bit, and farmers are going to face horrendous problems. In a country where more than 50% of the population lives on daily wages, if you have an economic crisis they will go hungry.

About 75-80% of Indians live in rural areas, but even in towns often there is no electricity. Only about 25% of India is connected by internet, and the connection is fairly unreliable. In rural areas there might be a bank among 50 villages. These people might need to walk 30-50km to take cash out of the bank if the government forces them to deposit. If you earn $1-2 every day, would you have time to walk for three hours each way to deposit your cash? This is an impossible situation.

EMERGING TRENDS

This has completely disrupted the economic structure of the country. Food prices have fallen quite substantially in the last few months, not because of excess supply, but because there has been a significant reduction in demand. This tells you only one thing: poor people cannot afford to buy food. Farmers can’t make money because prices have fallen so much, which means they’re dumping their produce. This means in the next cycle, these farmers will not be producing food. Food prices will be higher three months from now than they were before demonetization happened.

In the smaller villages, people have taken up bartering, but bartering only works well with tribal peoples. In a modern economy, bartering doesn’t work because you can’t do all of the transactions.

This is going to fail mostly because Modi wanted to impress a western audience that he was very pro-market, and he’s failed so badly that this will hopefully delay western governments approaching cashless societies.

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AUSTRIAN SCHOOL OF ECONOMICS

Keynesian economics is superstition and irrationality. Keynesian economists believe that by running the printing press you can generate wealth. The only way to understand the world is through the understanding of Austrian economics, which is nothing but the common sense of rational economists.

The reality is that cash has no inherent value. It’s based on regulatory edict. Investors should stay outside the currency system. Money should be kept in jurisdictions where you have more trust in – internationalize to protect yourself. The more you spend outside the cash and banking system, the better it is for you.

There are property companies in Hong Kong and Singapore that are trading for 50% of their net present value. These companies offer you anything from 5-10% dividend yield. When you focus on countries that provide you very good downsize support, and you invest in companies with almost assured revenue and profitability, you put yourself in a situation where you continue to make a profit. There’s so much similarity between value investing and Austrian economics. One is how to invest your money; the other is an understanding of economics, and there is a huge amount of overlap. You want instruments that provide a higher yield than what the bond markets offer.

Precious metals are a great way to store your value. You could invest in properties, or property companies. Diversify yourself internationally and invest in countries that have a very good history of protecting your properties.

INVESTING IN A TRUMP WORLD

One does not necessarily have to agree with Trump’s policies, but he’s trying to do what he promised to do. There’s no other example in modern politics where a politician tried to do what he promised to do during elections. He’s trying to improve America’s position in the world, so if he succeeds America’s economy will improve quite a bit.

Trade can be a gray area, and it might be a negotiating ploy that Trump is using. Maybe he wanted to get Mexico to approve building a wall by making the subject much bigger than it actually was so Mexico would ignore the key thing – building the wall. Freedom of movement is important, but a lot of immigration is creating a lot of problems for the western world.

Nothing he’s doing is destroying the economy of the United States. It’s entirely possible that you can reduce the prices and improve the profitability of American companies and increase employment in the US, provided that Trump continues to do what he said he would do. As long as he’s taking the country in the right direction, countries and the stock market and investments will respond to that.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

LINK HERE to download the MP3 Podcast

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.


02/10/2017 - The Roundtable Insight: Yra Harris & Peter Boockvar On Implications Of The Border Tax, Dodd Frank Act Changes, And Steepening Yield Curves

FRA is joined by Peter Boockvar and Yra Harris in discussing their predictions for Europe and the actions of the ECB, along with the Fed’s behavior and potential consequences.

Yra Harris is a recognized Trader with over 32 years of experience in all areas of commodity trading, with broad expertise in cash currency markets. He has a proven track record of successful trading through combination of technical work and fundamental analysis of global trends; historically based analysis on global hot money flows. He is recognized by peers as an authority on foreign currency. In addition to this he has Specific measurable achievements as a member of the Board of the Chicago Mercantile Exchange (CME). Yra Harris is a Registered Commodity Trading Advisor, Registered Floor Broker and a Registered Pool Operator. He is a regular guest analysis on Currency & Global Interest Markets on Bloomberg and CNBC. He has been interviewed for various articles in Der Spiegel, Japanese television and print media, and is a frequent commentator on Canadian Financial Network, ROB TV.

Yra highly recommends reading The Rotten Heart of Europe – send an email to rottenheartofeurope@gmail.com to order

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Prior to joining The Lindsey Group, Peter spent a brief time at Omega Advisors, a New York based hedge fund, as a macro analyst and portfolio manager. Before this, he was an employee and partner at Miller Tabak + Co for 18 years where he was recently the equity strategist and a portfolio manager with Miller Tabak Advisors. He joined Donaldson, Lufkin and Jenrette in 1992 in their corporate bond research department as a junior analyst. He is also president of OCLI, LLC and OCLI2, LLC, farmland real estate investment funds. He is a CNBC contributor and appears regularly on their network. Peter graduated Magna Cum Laude with a B.B.A. in Finance from George Washington University. Check out Peter’s new newsletter service at www.boockreport.com.

EUROPEAN PREDICTIONS

What has been going on in Europe even with the ECB’s aggressive QE program is that the 2/10 has a far different character from other yield curves like the 5/30. The 2/10 is an investor curve and the 5/30 is much more speculative. Those curves have been steepening out fairly dramatically. Sophisticated investors and speculators are selling into the ECB buying the long end. Usually steepening curves are not good for currency in the short term, because they reflect that the economy is hotter than the central banks have prepared for.

The Greek curve has inverted again, significantly so. That’s sending a signal that the Greeks are having problems on the 2-year end. People are very nervous about Greek’s ability to make it through the next phase of the lending crisis.

There’s a rise in inflation expectation. We know that the markets are testing out the ECB, and that come April their monthly purchases will be reduced 20%. They’re extending the term of QE but on a flow basis they’re cutting it by 20%. Adding it all up, it helps to explain that steepness. You can pick apart that it’s good if it’s responding to growth, and it’s not good if it’s responding to inflation or the ECB backing off. Europe’s been buying less foreign bonds, which implies that they’re buying less of their own bonds. This is happening in the face of the ECB purchases. The Germans are furious that they’re seeing inflation to the extent that they are and the ECB is still going full steam ahead. That pressure is only going to grow.

The overnight deposits at the ECB are at an all-time high, and the repo rate isn’t moving in Europe. People in Europe are very nervous; they’re willing to give the ECB their reserves. This is a great signal that investors are getting nervous. The European equity markets are stalling out and US markets are carrying on like this doesn’t affect them, but any of these problems are systemic in nature at this point. The amount of sovereign debt purchased by all domestic banks in within the old established nations is so bad that if this seizes up, the repercussions will be felt globally.

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EFFECTS OF INTERNATIONAL CAPITAL FLOWS

It’s possible that in times of nervousness that people repatriate money back home. Why else would you have record deposits when you’re being taxed 40 basis points? US money may leave Europe if there’s a problem and come to the US, but European money is not necessarily going to leave Europe if they have their own liquidity and balance sheet issues. Safe haven trades don’t play out the way people think they will, because they’re not one dimensional.

If the US puts on the border tax, the hit to the global financial system would bring on a wave of deflationary liquidation of assets that could really wreak havoc. The main thesis behind the border adjustment tax is that we’re going to tax goods that are imported, not exported, and importers don’t worry because the Dollar will rally 20% which offsets the 20% tax and everything will be fine. But overhauling the US tax code on the corporate side and placing all your chips on foreign currencies and the Dollar is incredibly stupid. Maybe the Dollar rallies, maybe it takes three years to adjust, and in the meantime the economy goes into recession because the price of goods rises to an extraordinary extent on an economy that’s dependent on consumer spending. And you throw in the $10T of Dollar related debt held by companies overseas that will get killed by the strengthening Dollar.

If the Dollar weakens from this border adjustment tax, then the US goes into recession.

CHANGES TO THE BANKING ACT

Banks will still have to hold a lot of capital, and hopefully we’ll have incentives for banks to lend. In terms of effect on the US economy, we still need a willing lender and a willing borrower, and hopefully this will facilitate that.

If you’re a commercial bank, you should have to adhere to the rules. The problem is that if you’re a bank and you want to leverage yourself off, you have to reveal daily what your risk profile is, and you can’t get FDIC insurance if you hit a certain risk level. Banks like everyone else should pay commissary value for the risks they’re taking.

The best part of Glass-Steagall was that it separated commercial banks from investment banks. It’s the small banks that had been most burdened by Dodd-Frank, but it’s the small banks that will hopefully get the most relief from the changes.

FED WOEFULLY BEHIND THE CURVE

The stock market is at an all-time high and the Fed Funds rate is at 0.65%. Historically the Fed Funds rate is 2 points above inflation. Even to get real interest rates back to zero, the Fed Fund’s rate should be at 1.5-2%. In the eighth year of an economic expansion, the Fed thinks negative interest rates is the right policy. That’s extraordinarily dangerous, and the Fed seems to be realizing that they’re caught and if Trump is successful in creating faster growth, it’s going to be hugely inflationary while they sit at 6.5%. They may raise in March, since they’ve shown that they like to raise on the day of a press conference meeting.

A lot of this year is going to be determined by central banks and interest rates, and less so Trumponomics. Germany is doing fairly well, with 1.7% inflation and a 2 year yield that’s negative 80 basis points. Germans should be borrowing money hand over fist to buy hard assets, since that’s where things are going to play out. Yes, the US is going to have tax and regulatory relief, but it’s a played out game. It’s a good value to buy things, in Germany, that have to be vastly undervalued.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

LINK HERE to get the MP3

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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.


02/05/2017 - The Roundtable Insight: Dr. Marc Faber Sees Fiscal Stimulus Necessitating Monetary Stimulus To Keep Interest Rates Repressed

FRA is joined by Dr.  Marc Faber to discuss his outlook on 2017, particularly the effects of current events in the US, India, and China.

Dr. Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics magna cum laude.

Dr. Faber is the editor and publisher of a widely read monthly investment newsletter “The Gloom Boom & Doom Report” report (www.gloomboomdoom.com) which highlights unusual investment opportunities, and is the author of several books including “ TOMORROW’S GOLD – Asia’s Age of Discovery” which was first published in 2002 and highlights future investment opportunities around the world. “ TOMORROW’S GOLD ” was for several weeks on Amazon’s best seller list and is being translated into Japanese, Chinese, Korean, Thai and German. Dr. Faber is also a regular contributor to several leading financial publications around the world.

A regular speaker at various investment seminars, Dr Faber is well known for his “contrarian” investment approach. He is also associated with a variety of funds and is a member of the Board of Directors of numerous companies.

2017 OUTLOOK

We don’t know what will happen. We don’t know much about the past, we don’t even know much about the present, and we know nothing about the future. Markets nowadays are not normal markets; these are markets that are manipulated by central banks who can print an unlimited amount of money. They can buy all the outstanding bonds and equities, and you socialize entire economies if central banks buy all the assets. It is probably dangerous to be 100% in cash because you’ll lose an enormous amount of purchasing power. We didn’t have an enormous amount of consumer inflation, but we had a colossal amount of asset inflation. Central banks will continue to print money but one day things will collapse. If you look at the last few years, not all asset prices have gone up. The next ten years will be a period of asset deflation.

Central banks globally are interested in generating a certain level of CPI in order to ease the burden of government debt over a long period of time. If you have deflation, the burden of an overleveraged system is very high. Who benefits the most from inflation and is hurt the most by deflation? Governments. The US inflation rate isn’t very high, but everyone is having rent increases, food price increases, and insurance increases. Why is consumption relatively weak? Most young people don’t have any money after paying the rent, insurance premiums, and taxes that have gone up.

INCREASE IN INFRASTRUCTURE SPENDING

Fiscal policies that are expansionary will necessitate expansionary monetary policies otherwise interest rates will go up substantially. These fiscal policies are not necessarily favorable. When interest rates tend to go up, the Fed will be very reluctant to increase rates significantly. If the inflation rate moves up, the Fed will increase rates but in real terms rates will stay negative. The cash holder will lose out regardless, in terms of purchasing power.

If you look at the recent literature of the establishment economist, they advocate the abolition of cash because it will “eliminate crime”, which is completely nonsense because the big corruption is in governments and contracts where money moves elsewhere. The other argument is that if the central bank is deflationary, they could push interest rates into negative territory. This is a subtle way to expropriate goods.

This is the mindset you have to be aware of, that central banks are screwing over ordinary people’s savings in order to save the financial market and over-indebted governments that have outgrown their usefulness in terms of economic growth.

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INDIA’S CASH BAN

They declared certain bank notes to be invalid. You had to turn them in and there was a minimum limit that would be turned into the new bank notes. The rich and the elite had advance notice to get rid of the cash. The fact that 86% of the money was turned in shows that there was very little illegal money in the system. In India, if there is illegal money, it’s in the hands of big government officials and bankers and rich businessmen, who have ways to evade all the rules.

It’s a complete joke, this Indian “experiment”. The idea was fed to the Indian government by some think tank or economist in the US.

Governments always have a way to maintain and increase their power, and they can tell the public that one of the problems of criminality is cash. There is some level criminality related to cash, but if you ban cash it will continue or even increase; there will be so much cyber-crime you won’t know where to start. It’s just a pretext to give power to central banks. Under Trump maybe some of the power given to central banks will be removed, but that will only last until the next recession. If the stock market declines 20%, we’ll have another QE for sure. Whatever they call it, it’ll be the same: money printing.

TRUMP VS REAGAN

Trump has been frequently compared to Reagan. The difference between Trump and Reagan is that asset prices were very depressed when Reagan became president. It was no higher than it had been in 1964. Trump has huge headwinds. Interest rates won’t go down very much and Trump has an overvalued Dollar.

This high valuation of equities and low bond yields bring about a problem of pension fund liabilities. The pension fund system is basically bankrupt. They have to cut the pensions they give to pensioners or increase the contributions meaningfully, which is like an additional tax. So with low interest rates the Fed has actually created numerous problems. Most people are not wildly bullish, but they think asset prices will go up, along with real estate prices. But actually it’s started to go down in the last six months.

The financial market today, globally, is disproportionately large compared to the real economy. That was very different in 1980.

WHAT’S HAPPENING IN CHINA

The Chinese economy has definitely slowed down, and will continue to slow down in the long run to a growth rate of about 4% per annum. China has a gigantic credit bubble, which will hurt consumption at some point because the consumer invests in a lot of things at overpriced levels, and going to lose money. The best thing for China is to have a serious recession, because that will clean the system. Recessions are useful because they clean the system, the bad debts, and most importantly if you have a capitalist system it wipes out misbehaving entrepreneurs. That eliminates the competition and so the price level stabilizes. But if the government steps in, then the price level is likely to fall. These interventions by central banks with fiscal policies may actually aggravate deflationary pressures instead of removing them.

The economic system leaves us in a free market where old companies that look backward and don’t innovate are wiped out, and that’s why we have progress in the world. If we don’t have that, we’re going back to a socialist system.

There’s no question that a slump in China will have a huge impact in the world. The US is a slightly larger economy than China, but the US is over 70% consumption, and of that consumption it is 70% services. China is still a manufacturing center, and there is huge capital spending in China. If China really has a recession, the demand for raw materials will plunge. This is a different world from the 1950s, when the US was dominant. China is the largest trading partner of 120 countries compared to the US being the largest trading partner of 74 countries.

INVESTMENT PROTECTION

The only protection is to diversify because we don’t know what will happen. An investor should own some real estate, and invest some money in equities. There are always pockets of value somewhere, but what the fund managers will never tell you is that the best performing sector last year was mining stocks, not energy. Big institutions don’t want to tell you that because they hate gold.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

LINK HERE to download the MP3 Podcast

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.


01/28/2017 - The Roundtable Insight – Yra Harris Emphasizes Keeping An Eye On Europe

FRA is joined by Yra Harris to discuss Trump’s effect on the global market, along with Draghi’s influence coming from Europe.

Yra Harris is a recognized Trader with over 32 years of experience in all areas of commodity trading, with broad expertise in cash currency markets. He has a proven track record of successful trading through combination of technical work and fundamental analysis of global trends; historically based analysis on global hot money flows. He is recognized by peers as an authority on foreign currency. In addition to this he has Specific measurable achievements as a member of the Board of the Chicago Mercantile Exchange (CME). Yra Harris is a Registered Commodity Trading Advisor, Registered Floor Broker and a Registered Pool Operator. He is a regular guest analysis on Currency & Global Interest Markets on Bloomberg and CNBC. He has been interviewed for various articles in Der Spiegel, Japanese television and print media, and is a frequent commentator on Canadian Financial Network, ROB TV.

 

TRUMP’S EFFECT ON THE MARKETS

This is going to be a slow, grinding process. There’s a lot of things to dislike about Trump, but he’s showing some real leadership in that he’s willing to go out of a lot of boxes. He wants to renegotiate NAFTA so relations with Mexico and Canada would be stronger after it takes place. The Mexican Peso, by all fundamentals, is one of the most undervalued assets in the world. The currency has depreciated 700% since the beginning of NAFTA.

When you look at the value of the Peso, outside of an absolutely closing of the border, you’ll shut down America. The same goes for Canada. The Mexicans have tried to hold their currency, they don’t like the weakness of their currency, but the world has done it. Anyone who has emerging market exposure goes to sell the Peso because it’s the most liquid, but that’s driven it down to 21.28 Pesos to the Dollar. For a currency to devalue that much, it has to be choking on debt or going through phenomenal inflation.

With Canada being a member of NAFTA as well, there’s a strong dependence of Canada on the US economy. The Canadian dollar, weak as it is compared to eight years ago, is still medium.

Trump’s a negotiator, so if went in and spoke to the automobile manufacturers and said “This is what I want from you, what do you want from me?”, they must’ve replied by saying that the Japanese Yen is incredibly weak. It was a cry saying they want relief from this. There’s a lot of short position on the Japanese Yen out there. To couple with that, the Australians approached the Japanese saying they should carry on with PPP regardless, and the Japanese disagreed.

There can’t be a positive course because the world is at odds. United States will move unilaterally to depreciate the Dollar. Trump operates on a give-get basis, and doesn’t hold to international deals like avoiding currency intervention. A lot of Japan’s monetary policy that resulted in financial repression was done to drive currency values lower.

 

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TRADE ARRANGEMENTS

Mexico has a debt on imports, which is basically a surcharge. The US is the opposite because we tax exports for revenue and allow imports. Global supply chains are so deep now. A lot of fields are changing. Trump does want to do a reset on the global order. The entire global order has been a burden on the American middle class especially. It was good for them in the 50s and 60s when the US dominated the world stage, but that was when the US had no competition. It’s harder now because there’s more global competition, but the US is still funding that. And that’s what Trump is saying.

Draghi told the German people that they’ve gotten a lot of benefits from being in the EU, and that may be true but they’re running into the same problem that Clinton and the Democrats had: Trump raised the question of “who’s benefited?” The average German citizen has been repressed to pay for this. They’ve borne the burden. They walked into this; German people do not live on debt, with the lowest home ownership of any developed market because people don’t borrow money to buy things. They’re savers, and whole basis of Financial Repression Authority is talking about people who are financially repressed and the central banks decide to bail out. There’s a momentum to this; this is about what’s going on, and the Germans can’t do anything because they don’t control their currency and they don’t control the bank.

CENTRAL BANK ACTIVITIES AND COORDINATION

Coordination will break down because they’re all in different places. Kuroda’s put the Japanese in a bad spot. What do they do now? The curve has now started to steepen in Japan so they’re on this mission where they’re moving on with QE which weakens the currency. They’re going to have a problem. With the ECB, if Draghi were to pull back the QE, rates would rise dramatically in Italy, Spain, and Portugal. There are some serious issues with this and you can see the Fed going their own way now because they’re looking to fight a battle about exorbitant fiscal stimulus and suddenly they go hawkish. If the Fed were to move aggressively, Trump will respond by intervening on the Dollar.

The effect on the 10 year bond is unknown. If the Dollar rallies, everyone loves America again. If the US intervenes, the 10 year yield will go higher because people will start selling Dollar assets. It’s a very tough question and we’ll have to watch the Fed closely and economic fundamentals, but the curves are steepening all over the world. People are selling in the long run in anticipation of improved global growth.

Gold is good because the central banks have been married to this zero to negative interest rate, and they don’t know what to do. If they’re seeing the panic in any way, that’s what gold is good for. It’s amazing that gold is still up there when equity markets are rallying.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

LINK HERE to download the MP3 PODCAST

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.


01/20/2017 - The Roundtable Insight: Alasdair Macleod & Jayant Bhandari On The Impact Of Trump, China & India

FRA is joined by Alasdair Macleod and Jayant Bhandari on discussing India’s war on cash and the impact of China and Trump on the world.

Alasdair Macleod writes for Goldmoney. He has been a celebrated stockbroker and Member of the London Stock Exchange for over four decades. His experience encompasses equity and bond markets, fund management, corporate finance and investment strategy.

Jayant Bhandari is constantly traveling the world looking for investment opportunities, particularly in the natural resource sector. He advises institutional investors about his finds. Earlier, he worked for six years with US Global Investors (San Antonio, Texas), a boutique natural resource investment firm, and for one year with Casey Research. Before emigrating from India, he started and ran Indian subsidiary operations of two European companies. He still travels multiple times a year to India. He is an MBA from Manchester Business School (UK) and B. Engineering from SGSITS (India). He has written on political, economic and cultural issues for the Liberty magazine, the Mises Institute (USA), Mises Institute (Canada), Casey Research, International Man, Mining Journal, Zero Hedge, Lew Rockwell, the Dollar Vigilante, Fraser Institute, Le Québécois Libre, Mauldin Economics, Northern Miner, Mining Markets etc. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.

 

DRIFT INTO FASCISM

Virtually every town and city is covered in cameras and they can literally follow you everywhere. The labour constitution clause was the desire to take into public ownership the means of production – in other words, a communist approach. Everyone’s going that way, not just in the advanced western nations. The central banks basically want to do away with cash. They’re looking forward to the financial technology revolution as means of replacing cash payments. It’s just that India jumped the gun on it. It’s interesting that we’ve had a mini rebellion with Brexit and the election of Trump. The authorities are having difficulties pushing through their plan, but it’s happening.

If you do away with cash, the effect is that people will trust the Rupee less. To an extent this is reflected in reports of unofficial gold prices, showing huge premiums. Which clash with official reports where people have to buy their gold through the market and be charged extra tax. The whole thing is a horrendous mess.

WHAT’S HAPPENING IN INDIA – WAR ON CASH UPDATE

There continue to be problems. India simply cannot work without cash. The banks have taken all the notes back but they have not released new notes to the public. The economy has stagnated; millions of small companies are failing, hundreds of millions of people are losing their jobs, and the economy is in deep trouble. This is a country where about a billion people don’t have internet connection, and people who do find it unreliable. Banks are very unethical and there is no electronic system. The cashless approach will completely fail but it will be very painful.

The IMF came out with a report saying the Indian economy will slow down from 7.6% to 6.6% growth rate, but that’s not true. There is negative growth in the country and everyone is claiming that their business has fallen from 20-80%. The IMF will likely revise that estimate over the next few months. People are avoiding anything other than necessities, but even there hospitals are empty and people are not buying food. Farmers have to dump their food supplies; they’re discontinuing farming, and food prices are down 25-75%. This is a huge gain for the middle class, but if farmers go bankrupt and don’t farm for the next cycle you won’t have food in a few months’ time. This is extremely chaotic for the economy.

There is also the issue of the value of the Rupee compared to the USD. India is among the most expensive of the poor countries, which means the Rupee is overvalued. It will likely lose value, and this will have an additional negative effect on the economy.

THE THREAT OF CURRENCY COLLAPSE

Business being down 20-80% is immensely serious, and we could expect GDP to fall by a third over the next year. There will definitely be a food price inflation, and inflation will follow as the central bank will make sure there is money available and funneled into the market. The people at the bottom of the chain will be impoverished, and the effect is that the Rupee is headed down.

In a cash economy, the rate at which a cash currency loses its purchasing power is largely governed by the availability of cash. As the cash loses purchasing power you need to produce more of it to meet the demand created by the collapsing of purchasing power. This puts a break on the rate at which the purchasing power goes down in a cash economy. If you make it a purely electronic money economy, you can lose that purchasing power overnight because there is no break on the availability of the money through an electronic currency system.

The people who are suffering the most are those that work in the informal economy, and the government doesn’t care about them because they’re below the tax bracket anyway and don’t pay their taxes. It’s very likely that some sort of famine might start in India, and this is something the world doesn’t understand yet.

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A MOVE TOWARD CASHLESS SOCIETY?

This is the direction all central banks in Southeast Asia are travelling in. These economies are running on two speeds: the cities, similar to the ones in the west, where people need infrastructure and pay taxes, and then there’s the rest of the country where the poor live. People just use cash because they have no other means of paying for things. From the point of view of the central bank, they see this two speed economy and think that if they can get the economy that isn’t recorded on the books, their economic growth will appear quicker than anyone expects.

The only thing good that might come out of India is that it might make the governments elsewhere think of it before they take similar actions.

STAGFLATION IN NORTH AMERICA

If you look at what’s going on with bank lending, it’s clear that it’s been expanding since 2006. It’s still running over trend, which indicates the US economy is healthy. Trump is going to inject a huge amount of reflation on top of an economy in the stage of the credit cycle where it is already expanding. That will rapidly lead to overheating.

His intended expansion through infrastructure spending and lower taxes comes at a time where China has been stockpiling industrial raw materials so they can discharge their five year plan. China wants to make their economy more technology and service driven, and to bring about an industrial revolution throughout Asia. One way or another, China has cornered a lot of industrial materials and energy to execute their plans. Trump wants to do the same, and the effect on commodity prices is to drive them higher. This is going to bring inflation pressures into American consumer prices, and prices elsewhere.

How far can the Fed raise rates to take control over price inflation? Not very far, because the Fed funds rate of no more than 2.5% will be enough to topple the economy.

There will be a huge amount of investment happening in the US, and China is staying aggressively on the development path. These are very good signs for the future of commodity prices. There is a possibility that Trump will be able to reduce regulations on businesses, which will have deflationary effects on society.

CHINA: BITCOIN AND CREDIT BUBBLE

The authorities don’t like BitCoin. The Americans don’t like it, and the Chinese authorities would rather people use gold as an alternative. But BitCoin seems to be immensely popular with speculators, and is in a speculative bubble right now. BitCoin is too volatile to be practical as money. The only sound alternatives to fiat currencies are gold and silver, which will come back as fiat currencies collapse. The problem with BitCoin is that it has no inherent value. The pricing is based on pure speculation, and is backed by speculative pressures.

We tend to overemphasize the risk of a Chinese credit bubble collapse, because the Chinese government owns the banks and any collapse of that sort gets absorbed by the system. This is a very situation than in the west. While there’s a lot of debt in that economy, the sheer fact that it’s a very productive economy makes it able to go over these humps as time passes.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

LINK HERE to download the MP3

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.


01/13/2017 - The Roundtable Insight – Incrementum’s Ronald-Peter Stoeferle On The 2017 Outlook

FRA is joined by Ronald-Peter Stoeferle in discussing his predictions for the next year, along with his thoughts on the state of the global monetary system.

Ronald is a managing partner and investment manager of Incrementum AG. Together with Mark Valek, he manages a global macro fund which is based on the principles of the Austrian School of Economics. Previously he worked seven years for Vienna-based Erste Group Bank where he began writing extensive reports on gold and oil. His benchmark reports called ‘In GOLD we TRUST’ drew international coverage on CNBC, Bloomberg, the Wall Street Journal and the Financial Times. Next to his work at Incrementum he is a lecturing member of the Institute of Value based Economics and lecturer at the Academy of the Vienna Stock Exchange.

 

GOING INTO THE NEW YEAR

It’s all about politics. We’re seeing quite a lot of drastic changes last year, but in 2017 political uncertainties will most likely come from the Eurozone where we’ve got elections in France, Germany, and the Netherlands. There will be much more surprises coming in, politically. It’s going to be an interesting year, and the interplay between inflation and deflation will be crucial for investors. Inflation numbers and expectations were picking up significantly, while the enormous strength in USD and the major correction in bond markets were very deflationary. There might be some surprises on the deflationary side going forward, though the mainstream is concerned about inflation.

At the end of the zero interest rate trap is going to be inflation. Every fiat money system in history collapsed because of inflation, not deflation, but we can imagine there might be some sort of deflationary shock. And central bankers will act extremely inflationary and this might be the tipping point where people will lose trust in fiat money.

Gold is in the very early stage of of a bull market, and now we’re at the beginning of the public participation phase and gold will rise in purchasing power verses fiat currencies. Already since the beginning of the year, gold is up 3% in dollar terms. The fact that the market became very bearish on gold in the last weeks is a good sign. It’s going to be a great year for gold, but even more bullish on silver.

INFLATION ON THE MONETARY SYSTEM

We all know that at the moment the US dollar is a leading global currency. Normally strength in the USD will affect emerging markets as the weakest links first, and we’re seeing enormous stress in Mexico, Turkey, Brazil and so on, and this will have effects. If the Fed delivered more rate hikes the dollar will go through the roof, and the dollar is the most important driver that one should follow in the market at the moment.

We may be having a transition from very low interest rates to forced inflation. This is going to go hand in hand with social upheaval and more socialist politicians because 4% real inflation is going to hurt the average person the most. The rich don’t care because they’ve diversified their real assets, but for the average person this is going to be a real problem, and this is going to be the point in time where things really get ugly.

The root cause comes from our central banks and the monetary system. Where the money is created first, those regions prosper from. Normally this means financial hubs like London and New York, where people really profit from monetary inflation. This is why in big cities people mostly voted for the status quo while people in rural areas that suffer from monetary inflation voted for change.

Sooner or later in the US there might be a recession.

 

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GLOBAL STAGFLATION

Stagflation is something we should focus on, and is a very realistic scenario. Inflation rates, due to the base effect, may rise 3-4% in the next few months. If economic activity cools off, which is what we’re seeing, then we’re already in stagflation! People should prepare for stagflation, and what works is precious metals.

Stocks in general leave the comfort zone at inflation rates of 3%. Once we get over that level it’s a negative environment for stocks. As a rule, higher inflation rates are not positive for stocks in general.

CHINA’S EFFECT ON THE MACRO VIEW

Perhaps their credit bubble already burst. There’s very aggressive fiscal stimulus in China, and credit growth only came from state owned banks. At the moment capital controls are slowly being put in place, and BitCoin is going crazy because of China, and the RMB is at a seven year low. There’s quite a lot of stress in China, and this will have enormous effects on commodity markets and precious metals.

There are many similarities between BitCoin and gold, but they are competing currencies. There’s so much going on in the crypto-currency space, and a technological revolution will be happening. Our whole world is digitized, so why should that end with money?

It’s not either BitCoin or gold; there’s room for both. The worst financial repression will become, the more people will pile into BitCoin or physical gold.

Companies might stop buying their own stock, and this would have enormous consequences for the equity market. In the corporate world, we’ve been in an earnings recessions for four or five quarters now, and some economic factors already show us that the economy isn’t as well off as people would suggest. Equity markets are overpriced, but for market participants right now greed is much more important than fear. It’s hard to anticipate reasons for such a shift, but it’ll happen very quickly.

GENERIC ASSET CLASSES TO CONSIDER

No one’s talking about business models or valuations anymore; everyone’s only trying to anticipate what central banks might do next. This shows how dependent we are on cheap liquidity and central bank bubble. In this environment you should protect your downside and diversify, and find ways to profit from falling markets.

There’s plenty of opportunities, like in silver and uranium, and if institutional investors start buying into the silver space it’ll have enormous effect as it’s a tiny market. The biggest threat is definitely from China, so one has to be cautious and follow the signs coming out of China, but you should take those signs with a grain of salt.

We’re seeing huge volatilities in emerging market currencies, and this will have global effects. Normally crises start from the periphery. Before every major market crash we’ve actually seen rising rates and rising inflation rates, and we’re seeing both right now. There may not be a crash, but the odds are much higher than the market is seeing.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

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


01/07/2017 - The Roundtable Insight – Update On India’s War On Cash From Jayant Bhandari

FRA is joined by Jayant Bhandari in discussing the continued effects of India’s war on cash on the Indian economy.

Jayant Bhandari is constantly traveling the world looking for investment opportunities, particularly in the natural resource sector. He advises institutional investors about his finds. Earlier, he worked for six years with US Global Investors (San Antonio, Texas), a boutique natural resource investment firm, and for one year with Casey Research. Before emigrating from India, he started and ran Indian subsidiary operations of two European companies. He still travels multiple times a year to India. He is an MBA from Manchester Business School (UK) and B. Engineering from SGSITS (India). He has written on political, economic and cultural issues for the Liberty magazine, the Mises Institute (USA), Mises Institute (Canada), Casey Research, International Man, Mining Journal, Zero Hedge, Lew Rockwell, the Dollar Vigilante, Fraser Institute, Le Québécois Libre, Mauldin Economics, Northern Miner, Mining Markets etc. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.

 

INDIA’S WAR ON CASH

With respect to Alasdair Macleod’s recent writings, India will completely fail in trying to making this country cashless. They don’t really have the competency, it’s a technologically backward country, and almost a billion people do not have internet or telephone connections, even in big cities. Electronic transactions won’t be able to work.

This is a country of GDP per capita of $1700, the government has done absolutely no planning, and in the last 55 days since they announced demonetization, they have released 70 notifications of changes. The government has done no planning. All they have done is print two different bank notes, and they are extremely badly printed, with errors and poor quality paper and ink. Imagine how incompetent the Indian government must be, that they can’t even print in a printing press properly.

The whole situation is absolutely crazy, and the government is incredibly incompetent.

WHAT’S HAPPENING IN THE ECONOMY

There have been reports showing how economic activity is beginning to fall precipitously. Things are cheaper than they were two months ago, and the reason is that poor people don’t have the cash to buy anything. Remember that 80% of this country is poor, and this is the population that works in the informal economy. They don’t have jobs and can’t buy food. Food prices have fallen and the middle class is happy, but these are the people who are the backbone of this country. When they lose jobs, they will riot and create crime, and at the end of the day the formal economy sits on the back of the informal economy. These people earn $1-2 a day, and they can’t make banking part of their lifestyle.

70-80% of India’s population will go half-bankrupt. When the next cycle starts, farmers won’t have the money to plant seeds anymore, which means that food production will fall in the next few months and food prices will go up. This hits the middle class and the formal economy, and the formal economy is already very badly hit. People are sitting on their money because they can’t do anything with their money since government tax collectors are rapacious and corrupt. There’s so much anxiety and fear among small businesses and savers.

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CURRENCY PROBLEMS

There likely won’t be a currency collapse because the government has a monopoly on currency and all the money in your bank account is frozen. The biggest problem is that one person has a monopoly on the economic blood circulation of the society, and he has completely destroyed it. The economy will suffer, and socially and culturally this society will face horrendous problems going forward.

India has always been a totalitarian country, but it’s increasingly become more and more totalitarian over the last seven years. We are reaching the peak where this will become completely totalitarian, and the only result will be massive chaos and problems in the society and possibly the disintegration of India.

The stock market is going down in Rupee and Dollar terms, but the Rupee is continuing to fall. But if you’re invested in this stock market you can’t really take your money out. The reality is that when foreign investors understand what India is doing, they might stop bringing their money into the country and the result may be that the stock market will fall extremely quickly. India has been a negative yielding economy forever and now that they have destroyed the economic backbone of the country, the stock market can and should fall going forward.

A lot of bartering is starting to happen in rural places where economies aren’t very complex. The transaction costs for bartering are huge, and create massive anomalies in the economy. It doesn’t work in more sophisticated environment where you are doing proper business and exchanging modern goods. Hopefully people will start exchanging gold in place of cash for bigger transactions, because governments’ monopoly on cash is disastrous and extraordinarily risky for any society.

EFFECTS ON GOLD

There is a chronic fear in the society and raids are happening. The government has told people that anyone owning more than 500g of gold might be assessed for tax. The problem is that you can’t prove to the government that you own gold that has been passed down or gifted. This boils down to paying unnecessary taxes and a huge amount of bribes. Corruption has skyrocketed in the last two months because this is now a police state and in a police state you don’t question the police.

The price of gold went up to $3000/oz a few days after the demonetization was announced, and now has fallen to the international rate. The street price is 10% more than the international price because there’s a 10% customs duty on imports of gold. Most of the gold come through smuggling channels, and these smugglers make a massive amount of money.

BitCoin or something similar will likely be important tin convincing Indian to move their money out of the country. The reality is that Indians have been very inward looking. But now for the first time people are considering how to move their money and gold out of the country. Governments will almost certainly institute capital controls and put restrictions on gold ownership sooner rather than later. If they don’t, people will buy gold with credit or move their money abroad using foreign exchange channels. The government will remove those possibilities in the near future.

Historically people have moved their money into silver and farmland, and Indians will do that to protect their wealth from the government.

India was never growing at 7.5%. The Indian economy is stagnating and this country continues to be irrational and tribal. They haven’t been using the technology they’ve gotten from the west, food habits have gone bad, and disease is growing rapidly. There’s a huge amount of chaos, and will likely disintegrate in a few years’ time.

GLOBAL PARALLELS

Similar things are happening in the rest of South Asian countries and the Middle East. Much worse is happening in Africa. These 2.5B people are in chaos right now. All of these people are tribal societies with a natural organic inclination to become tribal again. A lot of these countries will change their shape over the next few decades and go through major problems.

The problems of the emerging markets – particularly the South Asia, Middle East and Africa, is extremely high and bad.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

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


01/06/2017 - The Roundtable Insight – Peter Boockvar And Yra Harris On The 2017 Outlook

FRA is joined by Peter Boockvar and Yra Harris in discussing their expectations for 2017, along with predictions for Europe and the global debt crisis.

Yra Harris is a recognized Trader with over 32 years of experience in all areas of commodity trading, with broad expertise in cash currency markets. He has a proven track record of successful trading through combination of technical work and fundamental analysis of global trends; historically based analysis on global hot money flows. He is recognized by peers as an authority on foreign currency. In addition to this he has Specific measurable achievements as a member of the Board of the Chicago Mercantile Exchange (CME). Yra Harris is a Registered Commodity Trading Advisor, Registered Floor Broker and a Registered Pool Operator. He is a regular guest analysis on Currency & Global Interest Markets on Bloomberg and CNBC. He has been interviewed for various articles in Der Spiegel, Japanese television and print media, and is a frequent commentator on Canadian Financial Network, ROB TV.

Prior to joining The Lindsey Group, Peter spent a brief time at Omega Advisors, a New York based hedge fund, as a macro analyst and portfolio manager. Before this, he was an employee and partner at Miller Tabak + Co for 18 years where he was recently the equity strategist and a portfolio manager with Miller Tabak Advisors. He joined Donaldson, Lufkin and Jenrette in 1992 in their corporate bond research department as a junior analyst. He is also president of OCLI, LLC and OCLI2, LLC, farmland real estate investment funds. He is a CNBC contributor and appears regularly on their network. Peter graduated Magna Cum Laude with a B.B.A. in Finance from George Washington University. Check out Peter’s new site at www.boockreport.com.

 

2017 OUTLOOK

There’s going to be this tug-of-war over Trump and the tax and regulatory policies he hopes to pass and initiate, and financial conditions that will continue to tighten in the interest rate perspective. Since November, the focus has been on the positives of Trump, and when people start looking at the details, people will have to acknowledge that what got us to record highs in the stock market was QE and zero interest rates. At some point we’ll have to shift back to interest rates and the uncertainty of what Trump will pass and the offsets in terms of tax policy.

What you failed to see materialize was a lot of year-end tax selling, except for losses. This is not a Reagan phenomenon. There are so many vast differences, mainly the debt load piled on the US and global economy. For every 100 basis point increase in interest expense is $470B. Despite all this excitement over the corporate tax income cut, there’s not enough attention being paid to the potential offsets. There’s a potential border adjustment tax, and a credit addicted economy where they may be taking away the deductibility of future interest expense.

Debt has to be serviced. It’s not all coming due in this year, but we don’t know how much of it is floating. If Trump changes the tax code, a lot of people will see when interest deductions will not be part of the equation anymore, just how great the impact will be on corporate earnings. If Trump doesn’t get these offsets, the corporate tax rate isn’t going to make it to 15-20%. People are going to start digging into the details of the Trump plan, and they’re going to realize there’s no free lunch here. Because of the size and depth of the deficit, he can’t just cut taxes. There’s going to be an offset, and that’s what people have to start paying attention to.

FISCAL DEBT DRIVING US DEBT

Entitlement obligations are now at 10% of GDP and rising. This trend is expected to escalate, give then trillions of unfunded liabilities obligated toward entitlement. On the private side, corporations have taken out about $620B for the share buybacks, and if rising interest rates begin to reverse that trend, that’s a big factor that could have the markets going in the other direction.

We’re seeing some political maneuvering from Trump, who’s controlling his narrative. We’re about to see the difference between campaigning and governing, and the reality of the latter.

KEY THEMES GOING INTO THE NEW YEAR

Rising inflation; slowing growth

US growth is still around the 2% level, but the question for 2017 is how much of the positive sentiment numbers that we’re seeing in manufacturing etc. is hopes and how much is actual improvement in business activities. Right now it’s still hopes, and GDP for 2017 is still going to be around the 2% level and we’re not going to see the benefits of Trump until 2018. Inflation levels are moving higher, partly due to the rate of change of the base effects of the decline in energy, on top of high prices of medical care and rent. We’re seeing inflation expectations rise in Europe and the US, and it gets down to how the Fed responds to that.

Interest rates may mug the markets and trump over reality. What got us here was QE, negative interest rates, and zero interest rates in the US. To think that that can reverse with no pain, and somehow fiscal policy will offset that, is delusional.

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THE PROBLEM OF GERMANY

The most important area is going to be the Euro. The only way out of some of the mess that they’re in is for Germany to have higher inflation. Right now with the Deutschmark 10% lower, the German current account surplus is about 8.5% of GDP. And yet, there’s nothing they can do about it because Germany is tied into this weak economic consortium, and they’re benefitting from it with phenomenal growth. The weaker the Euro goes, the more benefit Germany gets anyways. This is the year where Germany will have to decide if they’re going to be the transfer agent for all this growth. The operative question for this year is: who guarantees the ECB’s balance sheet?

We’re going to see firsthand the fallacy of demanding 2% inflation. Draghi doesn’t realize the epic bond bubble that he’s created. When you have huge amounts of negative yielding bonds in Europe and anemic levels of interest rates, and at the same time he wants 2% inflation. He’s desiring something that’s going to blow himself up.

As we head into 2017, Europe is going to become the centerpiece of the global financial system. It was a 50% decline in the value of Japanese and European banks that finally got them to realize flattening your yield curve into the ground is not a good idea. We are in the last inning of this last bout of monetary easing. People should not lose sight that interest rates, while still extraordinarily low, will move higher in the coming years and they should be prepared for that.

The markets are beginning to take some control. We’re going to get a rise in interest rates, and we have a very sensitive equity market.

As of 2015, of the profit pie, labour got the smaller share since WWII. That’s now beginning to shift, but there’s a lot of catch up on the labour side in terms of wages. While that’s good for earners, it’s not going to be good for corporate profits and companies will have to either slow down hiring or absorb those costs, or pass it on as higher prices.

EFFECTS OF CHINA

Right now non-performing loans in China are at 15-20% of GDP levels. China’s fallen into the same trap as the US, where it takes more and more debt to generate more GDP. This obsession with 6-7% growth has put them in this trap. The level of credit it takes to generate this level of GDP is out of their control. Growth will continue to slow, and debt will continue to become a big problem, but China’s one big black box in the sense that they could throw a lot of things under the rug and keep it there in some controlled way. It’s very difficult to forecast how Chinese authorities are going to manage that.

If China were to implode and let their currency depreciate, then we’d have to change our scenarios because that could send a tidal wave of disinflation around the globe and they’ll just be exporting regardless of price. Their problem is far too much capacity, and unless they can miraculously shift their economy from an export oriented to a phenomenally domestic economy, and that won’t be an easy task with that debt load. If China makes the transition, food will be an important thing.

COMMODITY MARKETS FOR THIS YEAR

Gold’s going to trade where real interest rates are, and if you think Janet Yellen will be slow in raising interest rates in response to a rise in inflation, then you should be positive in gold and silver. It’s handled two rate hikes and a 14 year high in the dollar, and it’s still a hundred off the lows of last year. That was the bottom in this bear market, and higher prices are expected. With respect to emerging markets, Brazil and South Korea have good political direction and should be positive.

If you see the German inflation numbers, it’s obvious they’re debasing their currency as a way to bail out the EU.

BitCoin is up 150% year over year. Over the last couple of months it’s doubled. There’s something very wrong that BitCoin is doubling like that while gold is suffering. There’s a push for a non-fiat type currency. Right now they’re buying BitCoin, but the difference between gold and BitCoin is nonsensical.

The ECB will become the big issue for the German elections come September.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

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


12/23/2016 - The Roundtable Insight: Danielle DiMartino Booth & Peter Boockvar On The Market Outlook Into 2017 & Consequences Of Federal Reserve Policies On The American Dream

FRA is joined by Danielle DiMartino Booth and Peter Boockvar in discussing the impact of the Trump administration on the market, along with its effects on US pension funds.

Danielle DiMartino Booth makes bold forecasts based on meticulous research and her years of experience in central banking and on Wall Street. Known for sounding an early warning about the housing bubble in the 2000s, Danielle offers a unique perspective to audiences seeking expertise in the financial markets, the economy, and the intersection of central banking and politics.

Prior to joining The Lindsey Group, Peter spent a brief time at Omega Advisors, a New York based hedge fund, as a macro analyst and portfolio manager. Before this, he was an employee and partner at Miller Tabak + Co for 18 years where he was recently the equity strategist and a portfolio manager with Miller Tabak Advisors. He joined Donaldson, Lufkin and Jenrette in 1992 in their corporate bond research department as a junior analyst. He is also president of OCLI, LLC and OCLI2, LLC, farmland real estate investment funds. He is a CNBC contributor and appears regularly on their network. Peter graduated Magna Cum Laude with a B.B.A. in Finance from George Washington University.

FINANCIAL MARKETS AFFECTED BY TRUMP

The market is celebrating the possibility of major tax reforms, regulatory changes, and infrastructure. The main focus right now is tax reforms. The trade issue is not necessarily going to be one thing; it’s potentially going to be a variety of things as things progress rather than anything particularly planned. The market is celebrating the possibility that we can break out of the 2-2.5% GDP range over the next couple of years. It’s driven by tax policy that’s more conducive to capital investment, which has been a drag on GDP. That’s the optimism; the question is whether it’s going to get passed and when it’ll be impactful. If it does pass, we’re not going to feel the impact until 2018-2019. In the meantime, there are still challenges the US economy faces, both in terms of US growth, global growth, and changes in monetary policy and a different direction in interest rates globally. There’s a tremendous amount of optimism going into the New Year, but it’s really going to come down to timing. After inauguration day we might see markets take a step back.

Infrastructure spending is going to be the second thing administration focusses on. They want to get this tax bill passed, and they need to do it as revenue neutral as they can. They’re going to spend the most amount of capital on that, and infrastructure spending is not happening any time soon and shouldn’t even be part of the discussion right now. Trump will be expending quite a bit of his political capital on appointing someone to the Supreme Court right away, as well as gathering up the money needed to push through the infrastructure spending. February 2017 will be the third longest economic expansion in the post WW2 era, and you have to ask yourself if this economy is going die of exhaustion.

Interest rates are moving higher and historically those long term long time expansions have been tripped up by rises in interest rates. What got us here was a decade of zero interest rates and massive quantitative easing, and now we’re seeing no QE and rising interest rates. We’ve built this economic and market construct that’s addicted to low levels of interest rates. So we can all be excited about Trump liberalizing the US economy, but he still has to deal with the unwinding of the biggest bubble we’ve ever had. And that’s not going to be painless.

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A CHALLENGE TO INFRASTRUCTURE SPENDING

Politically speaking, it goes back to the support Trump is going to find within his own Republican party. You can pass spending bills of the magnitude of something like Obamacare much more easily if borrowing costs for the government are 1.8%. If you look at US debt, you’re talking $47T of debt. Not all this debt matures in the same year, but over the next couple of years we have massive debt maturities and that’s going to happen at a higher cost of capital. Higher interest expense is going to eat into the benefits of lower corporate tax rates and other regulatory letups from the government. When you create a debt bubble and then get a rise in interest rate, that’s going to hurt people who are over-levered and don’t have enough cash to offset that.

Rising interest rates could present a formidable challenge and you add to that the sheer amount of supply that’s coming online, whether you’re talking about the hotel sector, the multifamily sector, the amount of shadow inventory weighing down the office sector, and retail. We’ll be seeing more announcements of brick and mortar locations closing after this holiday shopping season. At some point, the simple number of units of supply implies that refinancing is going to be extremely difficult because you won’t be able to offset the increase in interest rates. There’s too much capacity in real estate and the economy is only running at about 70%. Trump can lower taxes to zero but we still have to work through the extra capacity built up in a variety of industries. This is going to take years to work through, regardless of Trump and the policies he passes.

INTERNATIONAL EFFECTS

Europe is plagued by slow growth, enormous amounts of debt, and the ECB has distorted their entire financial system. The European bond markets are unprepared for any rise in inflation and any taper whatsoever. China should be in the forefront again, as they’re trying to moderate their property market without crashing it. Japan’s bond market will be part of the global rise in interest rates. With markets overvalued in many different error classes, there’s no margin for safety and no room for error. There will be a lot of focus in the coming year as it pertains, especially to China, to how quickly they can run through their reserves.

The cost of hedging out your currency has gotten to the point where it’s not profitable to do so unless you can get a really high rate of return. It’s easier said than done. One of the potential unforeseen hiccups going into 2017/2018 as we see the potential for the global economy to slow more, is that there might be a need for a lot of the amount of money flowing into the US commercial real estate from foreigners to go back home.

It appears that Trump has put some rational people in with him, and someone has told him that China does not qualify, on paper, as a currency manipulator. Even threats of it from Trump are enough to slow things down.

TREND AGAINST PHYSICAL CASH

With Trump in office, we have the chance to put rational people at the head of the Fed who don’t want to abolish cash. You’ll have many people in this country revolt if they threaten to get rid of any denomination of cash. This country is much less conducive than India to pull something like that off. A lot of it is more talk than action, especially in the US where people voted for Trump because they were anti-establishment, and getting rid of cash is the epitome of an establishment move. Our central bankers here have been able to benefit from and learn from Japan’s failure at implementing negative interest rates. Central bankers worldwide have a blueprint of how to not eradicate cash, because of how severely it’s impacted India and the people who live inside who’ve been devastated by it.

DESTRUCTION OF THE AMERICAN DREAM

Even though we’ve had quite a bit of deleveraging, household debt has become a way of life for Americans. The average American family today has $1600 in credit card payment, and the interest rate was at 19%. Central banks placate the masses with household debt and making it accessible, rather than forcing the government to make more difficult choices and allowing us to continue to be a save and invest economy. Other countries that have different cultures than ours have their sights set on the weaknesses it exposes in our social fabric.

As noble as central bankers think they are, in practice all they’re doing is encouraging you to borrow money. That’s why they think lower interest rates are good and higher interest rates are bad. Now we’ve reached a point where the US economy has levered up to such an extent that we are so sensitive now to any changes in interest rates and financing that debt. Instead of creating a savings and investment culture, we’ve created a borrowing and spending culture instead. That’s something that has to flip around and reverse itself, but it’s going to be a messy process.

STRUGGLING PENSION FUNDS

There’s not enough time to make up for what’s been lost by the assumed rate north of 7% not being compounded all these years and having gone in the opposite direction, to say nothing of what will happen when markets correct and take down the liquid part of pension portfolios. They’ll be left with the understanding and realization that private equity is not only an inappropriate investment risk-wise, but also a devastating investment because of the lack of liquidity. Pension funds were piling into real estate at the peak of a cycle, they were piling into private equity just as there’s a possibility that the Trump administration is going to end tax deductibility of interest expense on new debt accumulated going forward, which dramatically damages the entire private equity model. It’s chasing yesterday’s winners, and pensions have done it over and over again.

They’re not being honest with their constituencies who think that their retirement money is there. That money does not exist, but the politicians out there aren’t being honest with their constituencies.

The political appetite for government bailouts on pensions are going to be very low. Could it be possibly forced in time? Possibly. But we’ve got four years of someone in the White House who will veto these measures.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

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


12/15/2016 - The Roundtable Insight: Repercussions Of India’s Demonitization; Challenges With Trump’s Infrastructure Spending Plans

FRA is joined by Jayant Bhandari ad Ronald Stoeferle to discuss further repercussions of India’s demonetization and the results of Trump’s presidency on US infrastructure and pension plans.

Jayant Bhandari is constantly traveling the world looking for investment opportunities, particularly in the natural resource sector. He advises institutional investors about his finds. Earlier, he worked for six years with US Global Investors (San Antonio, Texas), a boutique natural resource investment firm, and for one year with Casey Research. Before emigrating from India, he started and ran Indian subsidiary operations of two European companies. He still travels multiple times a year to India. He is an MBA from Manchester Business School (UK) and B. Engineering from SGSITS (India). He has written on political, economic and cultural issues for the Liberty magazine, the Mises Institute (USA), Mises Institute (Canada), Casey Research, International Man, Mining Journal, Zero Hedge, Lew Rockwell, the Dollar Vigilante, Fraser Institute, Le Québécois Libre, Mauldin Economics, Northern Miner, Mining Markets etc. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.

Ronald Stoeferle is a managing partner and investment manager of Incrementum AG. Together with Mark Valek, he manages a global macro fund which is based on the principles of the Austrian School of Economics. Previously he worked seven years for Vienna-based Erste Group Bank where he began writing extensive reports on gold and oil. His benchmark reports called ‘In GOLD we TRUST’ drew international coverage on CNBC, Bloomberg, the Wall Street Journal and the Financial Times. Next to his work at Incrementum he is a lecturing member of the Institute of Value based Economics and lecturer at the Academy of the Vienna Stock Exchange.

DEMONETIZATION OF INDIA

The situation in India is absolutely chaotic. People are getting desperate and every single small business is failing as anything between 20-80% of their revenue is down. Even a 5-10% drop in revenue leads to losses. People can’t find jobs and are being laid off, and a large proportion of the population has been taken out of the system. They have declared 80% of the monetary value of the currency in circulation illegal, and that has created all this desperation in the society today.

Most of the money that banks are issuing right now are 500 and 2000 Rupee notes. The smaller denomination bank notes have gone under the carpet right now because people perceive those to be the safest instruments. Bad money drives out good money from circulation, and that is happening. It is not necessarily causing inflation; there has been deflation in most of the things that we buy, and this is because poor people are not competitors in terms of buying, and people are mostly abstaining from buying things that they don’t necessarily need. This is only causing inflation in gold price, because savers want to buy as much gold as possible but that market has now gone underground because of the problem and risk associated with the government.

The government has imposed regulations on gold for many years now. Rich by implication means that anyone who owns more than 500g of gold can now be assessed for tax, which automatically means a huge amount of bribes to the government. There are many unintended consequences, and these consequences only hit us after a long delay. The war against cash is already going on, and the things going on in India are the most drastic measures, but we’re seeing so many similar measures going on around the globe. If people should lose confidence in fiat currencies, then there will be consequences for the holders of those.

At the moment, for some reason, the confidence in the US dollar and other fiat currencies are pretty strong. People will find ways around the black market and gold will be very strong. People have switched to silver in India, and BitCoin is making new records.

This will fail in India because India doesn’t have the infrastructure to go cashless in the first place. The government is trying to force as much cash as possible into the banking system so they can go more negative yielding by forcing the cash into the hands of the government and by forcing people to invest in two instruments the government likes. None of this will work; it will destroy the economy and people will find ways around it. The end result will be that the gold consumption will go up, it has already gone up, we just don’t have the real numbers because most of the gold market has gone underground. There is a huge demand for gold in the country.

US NEW PLANS ON TRADE AND INFRASTRUCTURE

It’s a huge divergence we’re seeing at the moment, meaning a significant increase in inflation expectations. Our inflation indicator switched to disinflation a couple of weeks ago. The enormous strength in the Dollar, the heightening of the Reserve and the significant rise in Treasury yields is incredibly deflationary. We should not forget that in the bond market, $1.8T USD in paper value was destroyed over the last few weeks. This is clearly deflationary, and all these Keynesian programs Trump wants to implement will be successful. He’s not a new Regan; the setup is completely different. The US will likely hit a recession next year.

What politicians say and do are two completely different things. Even if they want to do the right thing, the bureaucracy might not want to follow. The only thing that can reduce financial repression is by reducing regulations. Infrastructure spending won’t work because it’ll only be inflationary unless you reduce regulations. People in markets are overestimating the immediate effect of all those stimulus packages. It’s a bit naive to believe all the infrastructure packages will have an immediate effect on the economy. Confidence is getting better, but that’s on very thin ice. Looking at employment numbers, the US in the last four years created 430000 new jobs, mostly waiters and low paying jobs while in the manufacturing industry more than 70000 jobs were destroyed. The re-industrialization of the US is a nice story, but it just won’t happen that quickly.

So far what we’ve seen from Trump was very disappointing, because most of the things he promised in the campaign he broke in the first few days. There’s too much confidence in the market and greed is greater than fear at the moment.

THINGS HAPPENING IN EUROPE

Everyone is bullish on the US these days. You can make a case for a very strong dollar, but the consequence is that emerging markets will suffer big time. A strong dollar is pretty deflationary and no one wants a strong dollar. The whole 2017 year will be a very political year, and everyone will be busy promising things.

Emerging markets haven’t really done well. They’ve copied western technology over the last 20-30 years instead of developing their own technologies. The result is that these people consider US dollars to be gold, and this trend will likely continue. Trump may be positive in terms of controlling migrants flowing into the US.

POSSIBLE PENSION FUND CRISIS

Governments will try to avoid a pension fund crisis, but the question is whether or not they’ll be able to. There’s kind of an illusion that the politicians and central bankers can keep the market under control. The reality is that by manipulating the paper market to continuously create wealth, you actually destroy wealth as a consequence of it. What pension funds and the welfare system really needs is an increase in wealth and the paper market can’t create that, it only destroys that. The requirements of the welfare system are increasingly too big for the capability of the wealth creating aspect of the society to handle. They have to keep bringing in new people to support pensions, and if they don’t it’s a paper palace that will collapse at some point in time.

ASSET CLASSES TO PROTECT WEALTH

You should try to diversify out of the financial system. Counterparty risk will be more of an issue in the next crisis. It seems that gold has gotten very positive and robust aspects for every portfolio. So in the context of an anti-fragile portfolio gold definitely makes sense. Mining stocks are also good right now. People should follow volatility strategies going forward and from a strategic point of view, US 10-year Treasuries are oversold and there will be a bounce. Equity markets are massively overvalued and there will likely be a correction in the next year.

In terms of investment, East Asian markets are undervalued. Western people should look to China and Hong Kong for keeping some of their cash and wealth in. People should own a lot of gold and consider storing it in places like Singapore and Hong Kong because of the respect to private property these countries still offer. New Zealand and Australia are good places to diversify into, as they are western countries still unaffected by the social problems currently happening in Europe and North America.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

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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.


12/02/2016 - The Roundtable Insight – The Repercussions Of India’s War On Cash

FRA is joined by Mike Shedlock and Yra Harris to discuss the repercussions of India’s war on cash, along with implications for the rest of the world and what we can expect from global policies that are occurring.

Mike Shedlock / Mish is a registered investment advisor representative forSitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

Yra Harris is a recognized Trader with over 32 years of experience in all areas of commodity trading, with broad expertise in cash currency markets. He has a proven track record of successful trading through combination of technical work and fundamental analysis of global trends; historically based analysis on global hot money flows. He is recognized by peers as an authority on foreign currency. In addition to this he has Specific measurable achievements as a member of the Board of the Chicago Mercantile Exchange (CME). Yra Harris is a Registered Commodity Trading Advisor, Registered Floor Broker and a Registered Pool Operator. He is a regular guest analysis on Currency & Global Interest Markets on Bloomberg and CNBC. He has been interviewed for various articles in Der Spiegel, Japanese television and print media, and is a frequent commentator on Canadian Financial Network, ROB TV.

MAJOR FINANCIAL REPRESSION IN INDIA

It’s been estimated that 82% of the entire physical cash currency is now out of circulation, and that’s devastating the economy. The price of gold is going through the roof to upward $3000 USD/oz.

The impact will be different from what a lot of people think. It’s not as financially repressive and they believe it’s an effort to raise more taxes. There’s a lot of black market activity that takes place in India and they’re trying to recoup some of that tax, but it’s interesting that it comes on top of efforts by Larry Summers and others to go to a cashless society. That’s the ultimate act of financial repression because then they can take rates as low as they want and there’s no penalty because everyone is going to spend what they have instead of hoarding their cash.

A lot of the housing transactions are done with black market cash, so this might act to cool off some of the wild inflation we’ve seen in Indian home prices. We can say for sure that central banks around the world are watching this to see what they can do and what they can get away with. The Bank of Japan would like to outlaw cash, the EU banned the 500 Euro note, and Larry Summers in the US is proposing banning the $100 bill. All of this is allegedly to stop the black market in currency, but that’s not the real target. The real target is to get rid of cash, make sure the government can track your spending, and make sure you pay taxes on everything you should be. The reason people aren’t paying taxes is because taxes are too high and banks aren’t safe. The real reason behind this is so governments can confiscate cash at will, so no one in the long run is benefiting from this move.

WHO BENEFITS FROM NEGATIVE INTEREST RATES?

Interest rates have been negative for the last decade, other than the financial crash when the prices of everything crashed. Rising productivity is inherently deflationary. We have more goods produced by fewer people with less effort and less money. Central banks don’t want that. The BIS did a study last year and their perspective was that routine CPI deflation are not damaging at all. The only time you’re going to find it is going back to the Great Depression, and that was an asset bubble bust, not just routine price inflation bust. What central banks have done in their fight against cash is elevate the price of assets until they’ve created bubbles.

White anger sponsored by the Fed helped elect Trump. People still don’t understand the Fed and central banks brought about the very thing they’re railing against by repressionary financial tactics and promotion of inflation.

ITALIAN REFERENDUM

On Dec. 4th, two things happen: we have a referendum in Italy and Italian president Matteo Renzi vowed to step down if the referendum failed, and an election in Austria where Norbert Hofer is anti-immigration and the odds have been very good for him. He will be the first anti-immigration nationalist president of any nation in Europe since the end of WWII.

If Renzi loses, he’s not going to be allowed to resign. They will go with the crisis mode and Renzi is far better off if he loses. It’s extremely difficult to see how things will play out. We’ve got these multiple simultaneous battles going on in France, in the Netherlands, in Austria, and in Italy. There is a serious risk of fracture.

INFRASTRUCTURE SPENDING

It takes an authorization from Congress for Trump to build a wall, and he’s probably not getting it. If Trump can actually divert funds from somewhere to build a wall, as far as wasteful spending goes it’s not the most wasteful thing in the world. If you want to stop people from coming to the US for free handouts, you stop the free handouts, not build a wall. The stock market is mostly reacting to the premise of all these tax cuts and how inflationary this is going to be.

When we look at a potential collapse in global trade, a potential collapse in housing market and stocks, if bond yields, we’re looking at a deflationary outcome. We are not necessarily going to get immediate inflation out of this. Down the line, possibly, but the immediate picture in light of productivity enhancements coming online, millions of taxi jobs vanishing, and a possible collapse in asset prices, this is a very deflationary setup and a rising dollar exacerbates that.

With a huge amount of debt, this is nothing like a Reagan redo. It’s a far different picture from Reagan’s time. If we expect to go through this massive fiscal stimulus in infrastructure and “full employment”, they should be raising rates by 100-200 basis points because that’s what the model says to do. If Trump is able to get real tax reform, it will be a phenomenal presidency.

If Hillary won the election, the stock market would rally because it was more of the same in peoples’ minds. We’re not going to get a huge amount of year end selling of capital gains because a lot of people are going to hold off until 2017 because they think they might see a lower capital gain rate. A lot of people were expecting that selling to take place and it has not shown itself.

Podcast and youtube will be available and posted here shortly ..

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

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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.