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.

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.

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.

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.

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.

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

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.

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

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.

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

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.

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

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

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.

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

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.

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

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.

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

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.

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

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.

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>

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.

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>

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.

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>

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.

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>

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>

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. 4^th, 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>

FRA is joined by Barry Habib and Jayant Bhandari in discussing India’s socioeconomic state, along with the wealth taxation there and in the USA.

As founder and CEO of MBS Highway, Barry is also Chief Market Strategist for Residential Finance Corporation, a leading national mortgage banker. Barry has also enjoyed a long tenure as a market commentator on FOX and CNBC Networks. He can be seen presenting his Monthly Mortgage Report on “Squawk Box,” the early-morning CNBC business news show. Barry also serves as a professional speaker on the financial markets, housing, negotiation, technical trading analysis, sales training, building relationships and motivation. He is also co-creator and currently Principal Managing Director of Health Care Imaging Solutions.

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 AND GOLD

On Nov. 9, Prime Minister Narendra Modi banned Rupee 500 and 1000 banknotes, equivalent to $7.50-15USD, which represents 88% of the total monetary value in circulation. These two are the most commonly used by poor and rich people alike. He banned them despite the fact that 97% of the consumer economy is based on cash, which means in this country they have pretty much banned cash and brought the economy to a standstill. They coincided this with the US election so the world would not pay much attention, but this is creating a massive crisis in the country to maximize tax collection irrespective of what it does to Indian society.

People are now in a desperate situation and savers are pouring their money into gold, because people are forced to use the cash they have. The price of gold is going up in both Rupee and USD. The Rupee price should be about 10% higher than the dollar price, but right now it’s almost 100% higher in India than the US. The reason is that the sudden repression of cash has forced people to divert their cash into physical gold. All the lower denomination bank notes are rapidly going out of circulation and India’s economy is rapidly going into paralysis.

Indians did not resist when the government imposed a ban on currency notes, which is really confiscation of private property. Moral instinct is being taken away from Western societies using socialist, welfare, and warfare economies. Eventually people in Western countries will become incapable of resisting the government whey they start seizing private properties. When governments have no more capabilities to print money, they will go confiscate peoples’ money.

INTEREST TREND SINCE US ELECTION

The long end of the yield curve is going higher in terms of interest rates, coupled with rising inflation. We’re currently at a really important juncture. We’re so oversold on yield that we could see a bit of relief where we’ll see yield drop. The same thing applies for mortgage-backed securities.

Rates started to rate in mid-September when Central Banks in Europe and Asia went to negative rates. It diminished the appetite for bond buying. There was so much money to be made on capital appreciation and with negative interest rates there was theoretically no longer a floor and you could theoretically make an infinite amount of profit as long as rates kept going down. Since then we’ve seen zero become a rational floor across the globe.

Stocks started to make a move, and as stocks rallied some of that money came out of the bond market. We have seen a transition out of bonds and into stocks, but now we do have an opportunity to make a profit on bonds. On December 14^th we’re going to get a rate hike, and historically speaking every time that happens bonds tend to improve while stocks drop. In the long term, everything is in place for yields to rise at least a little bit. We remain bullish, and housing will weather the storm and continue to be a good opportunity.

RECENT SELL-OFF OF US TREASURY BONDS

What’s interesting is the complete reversal everywhere in foreign banks buying US bonds. One of the way countries whose currency is pegged to the US is to repatriate some of the dollars they receive from exports by selling Treasuries, so you wonder how long that will last. That lack of buying has to be picked up somewhere, and it’s not going to be domestically.

The best cure for high rates is high rates; the market will take care of itself. Trump has great ideas in that the US needs quite a bit of infrastructure built, we just don’t have the money to do it. It would be wise to use instruments of a longer duration, like 10 or 30 years. There will always be a buyer, it’s just a function of price. We see yield moving higher to stop up some of the supply, to make up for the lost foreign demand, and to incent people to stop up the excess for infrastructure.

While Western countries are suffering, things are much worse in emerging markets with the exception of China. They are becoming negative yielding economies again. People in these countries still see USD as a good way to preserve their wealth, because they trust the US government more than their own economies or governments. This means capital income flow into the US. These countries have historically subsidized the US money printing press, and will continue to do so in the future.

GLOBAL WEALTH TAXATION

Governments in North America are already instituting wealth taxes on real estate. If you’re a foreigner, you might want to invest in real estate or Treasuries not just because it’s a good investment, but also because you get the benefit of the currency move. If you think the Dollar will continue to show strength against other currencies, you’re going to continue to get that foreign investment. In regards to a wealth tax, we’re unlikely to see one under the current administration. A VAT consumption tax is a bit regressive but the bulk of it is going to be on items that are higher ticket than upper incomers can afford, and could really generate some growth.

There are new taxes being imposed regularly, but these taxes are going to converge into one. They want to take away as much of the savers’ wealth as they can. The salaried middle class is indoctrinated and look at life in very simplistic terms, and as long as they aren’t suffering much they’re willing to let these things happen in their society.

LOOKING FORWARD FOR INVESTORS

If you want to do a short term trade, it’d be best to go long bonds and cautious stocks. Long term, it’d be better to short the bond market and then short bonds after the rate hike. Residential real estate in many parts of the US is a very good investment, especially since you can leverage it for an excellent rate of investment.

A lot of the wealth in China and India and Africa still trust the American government more than their own, and will continue to buy more and more properties in North America and Europe. We will continue to exist in a negative yielding environment, so gold and silver is a good place to keep your money. Far East Asia is also a good place to invest, as these are very passionate people with energy and societies geared toward growing their economy.

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

FRA is joined by Danielle DiMartino Booth in discussing Fed policy and the results on future economic states worldwide.

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.

LINK HERE to The Overlords Of Finance essay

OVERLORDS OF FINANCE

In the aftermath of Trump’s election, there’s been a lot of cheering about pushing back some of the Obamacare regulations. Zero interest rates led to a very untenable situation in housing. It’s currently more expensive to rent and buy than in any other time. Had we not been in a period of too low for too long, then we wouldn’t have had home builders only build luxury homes, because that’s the only thing they can make work in a 0 interest rate environment. These are unintended side effects of Fed policy, but you have to start wondering if they’re blind or cruel.

If you look at transcripts in December 2008 when the Fed lowered interest rates to the zero bound, they didn’t bother taking into account the terrible impact on the retirees who can no longer be prudent in their investments.

If interest rates were to rise, that would cause devastation in the bond market. If interest rates on the 10-Year were to rise to 7-8% and stay there for several years, the entire US federal budget would need to be paid by money printing. If that were to be sustained it’d be a global recession. If interest rates were closer to the 4% level, we would have seen the deficit double or more what’s been reported.

One of the major sources of social unrest in the future is the pension system. In Great Britain, the rate of return assumption is capped at 3.5%. It’s exactly the opposite here. In this era of low interest rates, not only has it forced liabilities themselves to bloom, but created a risk and liquidity vacuum that’s going to haunt retirees in the end. You will end up with social unrest if you cut police and firefighters as a direct result of Fed policy.

INTERNATIONAL  POLICY

One of the things people anticipated the least when it comes to traditional triggers for inflation, is China and the effect a massive economy coming online would have in terms of driving deflationary sources that more than offset central bank actions. As long as debt continues to grow worldwide, we’ll keep a lid on inflation because people don’t have money to spend on other things as long as they keep servicing that debt. Chinese foreign reserves have started to decline, and they’re at the lowest level in three years.

About a trillion of their reserves is reserved to build a road to Europe. Another trillion is very illiquid, which leaves them with a trillion dollars in a black box of debt, an insolvent banking system, and a massive housing bubble. If we start to see fiscal spending in the United States that continues to drive up metals, then the combination of foreign buyers stepping away, the deflationary interest from overseas and globalization ebbing, and inflation at home, it won’t be pretty.

There’s always a danger when you go from one extreme to another. Japan implemented negative interest rates and failed, which meant the onus moved from the powerful central bankers back to governments in the form of fiscal stimulus.

TRUMP ELECTION

The Fed is a political institution, and not too happy with Trump. They might hike interest rates in December to spite him and try and induce a recession to flip the election, which results in Democrats leading Congress again. Then the question is what the yield curve looks like as inflation continues to rise. There’s no cut and dry answer to what bond yields do, because of the state of the current economic cycle and the bull market in the stock market.

From what we’ve seen, Trump is backing off most of the crazy things he said during his campaign. He’s going to be highly aware of his legacy and try his best to avoid the recession that will occur.

Infrastructure spending is the way to go. Australia has come up with some great programs for helping their students to pay off student loans. The programs we have now in the US encourage students to take on more debt than they can afford, because at the end of the road there’s an option they can take for forgiveness.

THOUGHTS ON FUTURE PROGRESS

We should also look to job retraining programs in the event of recession, instead of encouraging people to stay out of the workforce, which is what cheap money has encouraged. We should work to rebuild the competitiveness of the US. All of these things make a difference over the long term.

The message from the USA elections has a large part to do with regulations and regulatory captures in the economy in terms of companies trying to protect their own industry. Had the default been able to play out before QE2 came to the rescue, we would’ve had a more competitive environment. Way too many companies populate way too many industries, and we’re paying the price for that now. We’ve stifled entrepreneurship in the most innovative country in the world. The big companies completely control their interest and stifle innovation at the same time.

We can only hope to shift away from Keynesian thinking. It will require the revolution that we’re seeing in election results continue all the way to economic thinking

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

FRA is joined by Peter Boockvar and Alasdair Macleod in discussing the effects of the US Trump presidency on the global economy and the resulting shifts in financial markets, along with infrastructure spending that will likely occur in the near future.

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.

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.

 

PETER BOOCKVAR: EFFECTS OF THE US ELECTION

The reverse on markets is in hopes that Trump’s easing of the regulatory burden and cutting of taxes will kick-start the US economy. Inflation pressures have been building going into the election. We’re seeing this short rise in long-term interest rates. Interest rates are spiking at the same time that stocks are rallying.

We saw a bottom in the 10-year yield at 1.53% right after Brexit, and right now we are basically fifty plus points higher. It’s not because the US economy has gotten much better, but interest rates are likely to continue to rise in the long end and the Fed is going to be playing catch-up when they raise rates in the short end. It will be a challenge for stocks to continue to rally in the face of the rising rates, as a large part of the bull market in stocks predicated on artificially low interest rates.

There’s no such trend that the fall in the bond market represents outflows from the bond market would then be taken back as inflows into the stock market. A lot of people had long puts going into the election, hedging against a potential Trump victory, and now we’re seeing massive put-selling which lends upward pressure to the market. We’re seeing some overvalued stocks that are being challenged today by the rising interest rates.

INFRASTRUCTURE AND GOVERNMENT STIMULUS

In 2008 we had an almost trillion dollar ‘stimulus package’. The government is always throwing money out there and spending it, and it’s not always the most efficient use of money. There are plenty of estimates out there saying the multiplier effect is below zero, so the idea that we’re building bridges as panacea are hugely misplaced. An increase in infrastructure would potentially contribute to the trend of rising inflation if the demand for raw material exceeds the supply. The continued deficit spending would be potentially inflationary as well.

In terms of Fed policy, it would be extraordinarily dangerous if there was a greater linkage between fiscal policy and monetary policy. Trump is likely to take a step back and stop criticizing the Fed. Janet Yellen’s term is up in January 2018 and she’s just going to retire and be replaced by someone else.

FORECAST ON DIFFERENT ASSET CLASSES

The action of the bond market is the main driver of the equity bull market, with the suppression of interest rates to near zero and multiple rounds of quantitative easing. We’ve built this economic construct based on an artificial level of interest rates that, if rising, potentially threatens economic activity and market multiples. If interest rates continue to rise, there will be some short-term correction in the stock market.

The reflation trade is going to continue. Commodity prices have been in a five year bear market, gold and silver in particular, and we’re going to see a rise in inflation and fall in real rates. Cash is also a good asset right now, and emerging markets are still an attractive place. Interest rates will rise in December and next year as well if inflation continues to creep higher. The last position the Fed wants to be is being forced to raise interest rates rather than doing it from their own volition.

MORE EFFECTS OF THE TRUMP PRESIDENCY

That’s the potential danger of the Trump presidency. Tariffs and protectionism is essentially a tax, and that in itself is inflationary as well. So it would be a toxic mix if he actually implemented it. The hope is that he’ll surround himself with more rational economical minds and that a lot of what he said is just talk.

We’re already seeing the 10-year yield move up 20 basis points. The level of infrastructure spending could be limited by what the financial markets are reacting to. The market multiplier in government spending, in many cases, is barely above zero and some will argue below. The hope is that the regulatory noose that’s been put around the banks will ease up, but regulations across the entire country will hopefully ease up on businesses and individuals. Areas that have been driven down by the fear of a Hilary presidency are bringing back the market.

People have to keep their eyes on interest rates. That’s going to be the main driver of interest rates, which need to normalize and go higher. There’s going to be a painful transition to more normalized interest rates, which is needed in the big picture. The debasement of currencies will continue, and will get worse if we continue to build up all these debts and deficits.

ALASDAIR MACLEOD: EFFECTS OF THE US ELECTION

The problem is not infrastructure projects. Trump’s real problem is that everyone is underestimating how rapidly government finances are deteriorating. There’s going to be a pickup of inflation in 2017, which means government incomes get squeezed. The index of non-food raw materials will rise, getting more expensive than originally thought, and at the same time the lags in tax collection means government income will not keep up with the pace of inflation. The underlying budget deficit is going to keep getting larger. It’s difficult to see how Trump will finance infrastructure projects while cutting taxes as it is too dangerous to borrow excessively.

Base metals are going up, and the effect of these raw material increases is going to feed through to wholesale and retail prices. The Fed is going to find itself in a place where inflation at the CPI level is at 4%. They’re worried about raising interest rates because of the level of indebtedness in the economy, and if interest rates rise more than 2.5% there’s a severe risk that the whole economy will fall over from the outstanding debt. The last thing you want is to exacerbate that by borrowing money to finance tax cuts and infrastructure spending.

EFFECT ON DIFFERENT ASSET CLASSES

The bond market has peaked and is falling considerably. The falls in US treasury prices are likely to transmit into falls in sovereign debt prices around Europe, which in turn will threaten the European banking system.

If you get rising bond yields, you get falling stock prices. Equity markets will fall considerably on the back of rising bond yields. In the endgame, equities will become a way to protect yourself from inflation.

Property turns out to be very good protection from hyperinflation, but the amount of gearing in residential property market is staggering. If we get a rise in interest rates from the current level, a lot of people are going to be in severe difficulties. It will put off buyers on the market and possibly force sellers onto the market as well.

PRECIOUS METALS

In the short term, the reaction by which gold prices went up was quite natural. We see inflation picking up, bond yields falling, and interest rates rising but not enough to deal with the inflation problem. The Fed raising interest rates will be very aware of causing a systemic crisis if they raise rates too much. We have a potential for crisis with the rise in Fed funds rate to as little as 2.5%. If inflation goes to 5%, the Fed can’t respond to it, and gold will begin to anticipate that. Silver moves about twice as much as gold, and may be quite rewarding for speculator play. Gold is sound money and the dollar is less sound money, and that translates to higher gold prices.

The yields on bond will go up next year, in line with rising inflation, and there will likely be quite a lot of distress selling from people who went long in that market at the wrong price.

THE NEXT PHASE OF THE FINANCIAL CRISIS?

We will probably have a banking crisis of some sort – possibly in Italy – and as that crisis spreads, central banks will print money and this time it will be inflationary. China is already in the market for raw materials and putting in huge infrastructure to take her population into the middle class. The rush for infrastructure spending is happening in various countries at the same time, and this means rising commodity prices across the board.

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

FRA is joined by Alasdair Macleod and Uli Kortsch in discussing global levels of government debt and the challenges in servicing that debt, providing economic growth, and its effect on central bank policy.

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.

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 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.

PRIVATE AND PUBLIC DEBT CRISIS

There’s a slow back and forth between private and government debt. When there’s a deleveraging in the private sector there’s a massive pickup on the governmental side, and vice versa. Global debt today is at about 110% of global GDP. The level of outstanding debt at the end of 2015 is about $200T. This doesn’t take into account the shadow banking system, which can’t really be quantified.

The whole system is in a debt crisis. If the Fed Funds Rate rises to 2.5%, that will trigger a complete collapse in the economy. It is virtually impossible for the Fed to have any control over outcomes if the only room they have is to raise interest rates by no more than 2.5%. If we have inflation picking up next year, we are likely to have a situation where we have no economic growth and inflation at the price level beginning to pick up, the Fed is faced with a dilemma. They can’t raise interest rates to the level where it will stop price inflation.

The next recession isn’t going to be a normal recession at all. If we end up with a situation where we have official stagflation, we will move into a hyper-inflationary situation if the general public begin to understand that the paper money only has as much value as they give them, and then the whole thing enters a very dangerous slope.

Even economic collapse has always resulted in wealth destruction, which occurs due to the collapse of the purchasing power of the currency. By the end of the firs World War, the only way Germany could function was to print money. And that culminated in 1923 with the collapse of the currency. Nowadays we have a different set of circumstances, but the burden is at least as painful as reparations. An inflation rate of 4% for 10 years will reduce the debt by half. That has been the preference of governments and central banks over the years.

US DOLLAR PURCHASING POWER

The banks have been drawing down on their reserves over the last couple of years. If you look at LIBOR rates and compare that with what they get for leaving it in reserve at the Fed, there is a huge incentive to gradually move some of this money out. The Fiat Money Quantity (FMQ) includes money that is reserves held by the Fed and the Austrian True Money supply. That has been increasing at an accelerating rate. If you look at M2-M1, then you see a recent acceleration above trend. That suggests there is a demand for money somewhere outside the Fed and US banking system. International debt is tending toward contraction, which is likely creating a demand for dollars. The debt is still the dominant factor.

Recently Brazil targeted a specific rate of inflation, which ultimately led to a much higher rate of inflation. It’s very difficult to keep the inflation target at a certain level once it gets going. The value put on the dollar in terms of purchasing power is up to the people, not the Fed. This is the point the monetary planners miss: they can never control the purchasing power of the currency.

EFFECT ON US ELECTION – FISCAL PLANS?

Debt has not been on the discussion at all. The candidates say things to get votes, but what’s interesting is how the press has been on Hilary’s side to become president. Trump has achieved astonishing results. Hilary’s campaign has literally become a “woman’s lib”. The motivation for the FBI, when it comes to reopening Hilary’s case, can only happen if there has been a decision taken by the security services as to who they actually want to support.

The good news is that Donald Trump will be on side with the establishment. It is actually the establishment that is switching side. Whoever becomes to the next president will likely be a one term president. There are no answers in our current economic system to deal with the accumulation of debt.

Recently Trump has been going after the Fed, and there certainly is the possibility that the next president will put in several of the new governors. The next president will definitely be able to stack the deck in the Fed’s favor.

FORWARD GUIDANCE AND FINAL THOUGHTS

Forward guidance has a place if you actually understand economics and what is happening to money. Then you can use forward guidance to tell the banking systems look, we’re moving back to freer markets and this is the schedule, so banks can prepare for it and the transition becomes possible. To use forward guidance to pursue current policies is a horrendous mistake.

In 2017, the story is going to be stagflation. Escaping from that isn’t going to be as easy as it was in the 1970s; it’s going to morph into something far worse on the inflationary front.

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

FRA is joined by John Butler and Alasdair Macleod of Goldmoney in discussing the impact of stagflation on the global economy, along with the effects it would have on equity markets.

John Butler is the Vice President and Head of Wealth Services for Goldmoney, Inc, the world’s leading provider of savings, payments and other financial services all fully backed by physical, allocated gold. Prior to joining Goldmoney he had a 15-year career as a macro investment strategist at Deutsche Bank and Lehman Brothers, among other firms. He is also the author of The Golden Revolution, a book analysing the causes and consequences of the 2008 financial crisis and exploring ways in which gold could re-enter the international monetary system.

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.

THE EFFECT OF PRINTING MONEY 

Theory would have told you, years ago, that all the money printing during the crisis of 2007/2008 would eventually turn into rising price level. There tends to be a relationship – albeit a very unstable one – between expansion of the money supply and a rising nominal price level. It can’t be modeled precisely, which is why the bulk of the economic profession doesn’t bother to even think about it.

We’re finally starting to see that the vast expansion of money supply that happened in all major economies in 2008/2009 is following through into a general consumer price inflation. We’re seeing in commodities, which have bottomed, and in wages. Wages are picking up.

We have passed an inflection point with growth generally weak in most economies around the world. This combination of CPI inflation rising and growth that is weak or slowing further makes for a stagflationary mix, which is a horrific environment for investors as it implies a potential under-performance of both stocks and bonds.

The fact that the fiscal profligates are talking about fiscal stimulus spending more aggressively than they have been for a while, is clear evidence that the inflation inflection point is behind us. They simply want to inflate their way out of the massive debts they have created for their own political reasons. That is the world we’re now living in. It’s amazing, in a way, how openly they are discussing helicopter money.

There is an assumption among the Keynesians and Monetarists that if the state expands the quantity of money in circulation, it will stimulate the economy. As a one-off, it is certainly possible as it fools people into thinking there is real extra demand in the economy. The payment for that extra money is a tax on all the existing money in circulation that gets realized gradually over time, so you find that prices start rising when that new money is spent, and then the price rises gradually ripple out from that point. There is a gradual wealth transfer because the purchasing power of an individual’s wages and savings is being debased by price rises which are emanating as a result of this extra money being injected into the economy. What you’re doing, in effect, is making a few people wealthier by printing money and giving it to them first, but making the vast majority of people impoverished. To do this continuously guarantees that there is no economic recovery at all in the economies that suffer from this money printing. Stagflation is essentially the early stages of a price inflation that risks morphing into a hyperinflation. We have a situation today where there is so much debt around that it is impossible to conceive of a situation where the central banks could raise interest rates to a level that can slow down the switch in preference away from money and into goods.

A RISING CPI

There is going to be a huge reluctance on the part of central banks to tackle the situation. The CPI deliberately understates the increase in the general level of prices in the economy. If you had a true representation since the Lehman crisis, you would find that as a deflator on GDP, we would be showing negative growth since the Lehman crisis. Everyone is getting poorer from the wealth transfer effect resulting from printing money and credit.

The trend toward rising consumer prices is the legacy of all the stimulus we have seen today. It’s almost as if central bankers love the smell of inflation. They have this obsession with it, even though it’s destroying the middle class’ purchasing power.

Since Brexit, the Sterling has weakened considerably. If you look at producer prices, falls in producer prices have now reversed due to higher commodity prices and because of lower sterling. It reversed from -20% to +25% BPI inflation in Sterling. What will that do to the inflation rate in the UK in 2017? Businesses will go into recession, unemployment will rise, and we will likely to have headline inflation rates in excess of 5%.

EFFECT ON EQUITIES AND ASSETS

At the moment, bond markets are controlled by central banks because they can’t afford for there to be a bear market in bonds. At some stage, the market will win, and that would cause a very substantial rise in bond yields and a very substantial fall in equity prices. The UK has routinely 80% loaned value mortgages, so all the assets that have been puffed up and sustained since the Lehman crisis are at risk. When that market rigging starts cracking, it could be extremely expensive for anyone who has invested in conventional assets.

Since gold is an asset that cannot possibly default, prices tend to rise with inflation. Stagflation is an even better environment for gold because it will outshine equities dramatically. It is the best environment for gold outright, in price terms, and relative to stocks and bonds. Stagflation only occurs in the occasional economic cycle, and then those cycles that tend to be those that follow major crises. As an investor, you cannot responsibly create a portfolio for a stagflationary environment that does not have a material allocation to gold in it.

When you get inflation, you do get conventional markets being destabilized, and the social ramifications are extremely unsettling. We mustn’t look at this stagflation scenario in just the narrow terms of the financial effects; there are also social effects and it is the interplay of the social effects and the financial effects that make it worse for conventional assets.

HOW IS THIS TREND AFFECTED BY KEY ISSUES?

We need to understand how distressed the European banking system really is. It never materially recapitalized deleveraged anything after 2008. There have been all kinds of accounting shenanigans that have been deliberately engaging in structured transactions whose only purpose is to disguise the fact that they are under-capitalized vis a vis regulatory requirements. There is overwhelming but circumstantial evidence that even the biggest banks in Europe are in even worse shape than they were in 2008. The market is kind of telling you that they’ve figured this out, but the problem is that in a global economy, if one financial over-leverages and not capitalize itself properly, then you have these cross boarder linkages. It happened in the 1920s and 1930s, when an Austrian bank catalyzed a cascade of solvency issues and defaults across the entire world. If it could happen then, it could happen now.

If you look at the Italian situation, Italian non-performing loans, which are all in the private sector, are officially admitted at 40% of private sector GDP. It’s a very clear indication of the underlying state of the Italian economy and why almost 50% of youth are unemployed in Italy. The banks will go under, but the underlying situation is impossible as well.

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

FRA is joined by Yra Harris in discussing the impact of the potentially failing Deutsche Bank on the global economy, along with the state of US markets as election day draws closer.

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.

DEUTSCHE BANK

We don’t know if Deutsche Bank is a buy-in opportunity. It’s based on the fact that the EU and Germany will not allow Deutsche to fail. This extensive systemic risk because of the fact that Deutsche Bank is one of the world’s largest notional derivative books – of about $46T at the end of last year – represents a lot of risk in terms of derivatives meltdown between counterparties. While the ECB balance sheet has grown from €2T to €3.4T in just 18 months, there’s only about €7.5T outstanding Eurozone sovereign debt. It represents a challenge going forward in a very quick period of time, in terms of the overall systemic risk to the European banking system.

Its risk profile is based on Deutsche’s own models, so we don’t really know what the exposure is. It ought to be a higher risk rating than they reveal.

CAN’T LET DEUTSCHE FAIL – WHAT THEN?

It would be extremely difficult to bail Deutsche out or bail it in. If you want to see financial repression, watch what the ECB is doing to the savers in Germany. They’re bearing the bailout of the entire European project. If there was a bail-in, that would cause even more political angst. If that balance sheet grows big enough, no one can escape the EU ever, and the German taxpayers will be on the hook for this forever.

The German government is boxed in. It could go in the direction of a bailout of 100M to potentially a bail-in, as part of financial repression where there’s a wealth confiscation of assets that take place at the capital structure layers, anywhere from bank depositors to senior secure bond holders. It could happen either way or a combination of both. Or you could have both, or have the European Central Bank step in and monetize a lot of the bailout in terms of assistance for quantitative easing programs.

Mario Draghi would like to increase QE, but there’s no chance of that happening. He’s under a lot of pressure, and wants to build that balance sheet up bigger and bigger. Central bankers are running out of tricks and ammo.

The US equity market has now broken out of the uptrend. The equity market is fairly valued, but vulnerable to a sell-off. Wall Street would prefer Hillary, but she will certainly raise capital gains or the holding period in which you can obtain capital gains. People who have been in this market and have long term capital gains will likely sell that which they can before the end of the year, which makes this market vulnerable. Corporations have piled up so much debt that it weighs on this market dramatically. The amount of debt piled on the balance sheets around the world is just enormous.

The markets are vulnerable from the perspective of overvaluation measures and overhanging debt, but also from the potential of helicopter money for doing projects like infrastructure to provide a stimulus to the financial markets as well as the economy. The asset markets will have to go down significantly to some level to prompt fiscal authorities to bring the political will together to create fiscal stimulus. With increasing central bank buying of stocks, that will likely artificially support stock markets.

US PRESIDENTIAL RACE

Trump makes the markets nervous, because they don’t like unknowns translating into high volatility in the markets. Trump might be anti-trade, which could affect international companies, but Clinton might bring geopolitical events that could negatively affect the markets as well.

Several people have laid out the possibility that if Trump pulls out a surprise upset victory on election night, there would likely be calls to say this was Russian tampering and that election results should be put on hold until it could be determined if foreign interests undermined the election. This will likely provide a great deal of social unrest, which could translate into a lot of economic uncertainty. There’s a lot happening outside of North America that could work to propel the US markets higher with a strengthening dollar.

US DOLLAR STRENGTHENING

Last week we saw, for the first time since February, the US dollar move above 97.50 on the dollar index. It’s starting to look like the makings of an upside break-out in the dollar index. When you look at the problems around the world, it’s hard to believe the Euro is still above par. The Yen is still 20% higher on the year. The dollar ought to be higher, but it’s not. The central bankers are working to manage the stability of currencies relative to each other, but overall we’re looking at the decline of purchasing power of money regardless of currency.

This is about global assets – they’re all somewhat in trouble here.

PORTFOLIO CONSTRUCTION AND ASSET ALLOCATION

Treat everything as short term trades. If you can turn it into a profit, go ahead, and go on to the next one. It’s very difficult to say in a medium or long term sense because of the strong tug of war between inflation and deflation type forces. We have strong deflationary forces that are naturally happening in the financial system being counterbalanced by the very inflationary forces provided by central banks. It could go either way in a medium term. It would be difficult to quickly change your portfolio, but perhaps a diversified portfolio in the medium-long term with this short term trading strategy.

Another way is looking at companies with little or no debt, high discounted free cash flow with little or no leverage.

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

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