Interviews

11/26/2016 - The Roundtable Insight – Barry Habib & Jayant Bhandari On Rising Interest Rates & The War On Cash

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 14th 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>

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


11/19/2016 - The Roundtable Insight: Danielle DiMartino Booth on The Overlords Of Finance

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>

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


11/11/2016 - The Roundtable Insight: Peter Boockvar & Alasdair Macleod On The U.S. Elections’ Implications To The Economy & Markets

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>

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


11/04/2016 - The Roundtable Insight – Alasdair Macleod & Uli Kortsch On The Unintended Consequences Of Massive Government Debt Levels

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>

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


10/29/2016 - The Roundtable Insight – Alasdair Macleod & John Butler On Rising Inflation & Gold

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>

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


10/21/2016 - The Roundtable Insight: Yra Harris on Deutsche Bank, Systemic Risk and the U.S. Elections

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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10/14/2016 - The Roundtable Insight: Uli Kortsch On Infrastructure Without Debt

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Hedge Fund manager Erik Townsend of Macro Voices is joined by Uli Kortsch in discussing his project Infrastructure Without Debt and the ways it will impact the current banking system.

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.

 

INFRASTRUCTURE WITHOUT DEBT

The average infrastructure cost is twice the principle amount. The moment you talk infrastructure without debt, you’re saving 50% of all our infrastructure debt.

Right now most people think all of our money is created by private banks, when it’s actually created through deposit creation. If you sign a contract with the bank, that’s an asset to the bank that deposits into your account. The money was created out of nothing. We call that deposit creation, and that’s where our money comes from. If you were charged an interest rate, that interest payment is income for the bank, but the principle is destroyed. It did not exist at the beginning of the loan, and it does not exist when the loan is paid off.

That means in order to have price stability, as our overall production increases then the amount of money in circulation must also increase. And the only way that can increase is through more debt. So we’re constantly increasing the debt load. The US debt load ends up as part of the global debt load of all those who use US dollars. This is a very slow, long term process. Slowly we get to the level where this is not possible. It isn’t just that the government runs deficits, it’s the structure of our whole economy.

WAYS TO SOLVE

One of the way of solving this is to change who gets the seigniorage on the creation of that money. Today the indirect seigniorage goes to the bank, and they use it to charge you interest. People think that banks intermediate funds by moving funds from savers to investors and that the money moves in a circle. Long term, this will result in a crash. Short term, there are ways of solving that. President Lincoln used US notes to pay for the civil war and build infrastructure. It’s Treasury money deposited in the Federal Reserve bank with no interest rate, and the seigniorage goes to us as taxpayers. And that is infrastructure without debt.

Essentially it’s the creation of new Federal notes as opposed to Federal Reserve notes, which could be used to purchase infrastructure.

We are living in a temporary period of time where this could be done easily, because other than asset inflation we do not see much consumer inflation. We live in a time where this would work really well. The Federal government should create Federal Treasury money without the debt created when the Federal Reserve is used as an intermediary.

WHY INFRASTRUCTURE WITHOUT DEBT?

Private banks should not have the ability to create money. That should be taken away from them and given back to the government, so the amount of money created is equivalent to the increase in production. The current disinflationary state we’re in allows for temporary steps, and this has been done before multiple times over the course of history. Guernsey, for 200 years, has also used this method and the results have been spectacular.

No inflation has been triggered by this, though there was a strong inflationary during the 1870s and 1880s, but that had to do more with the terms of trade with the gold-based rest of the world. Because they do not create debt, there is no such thing as equity accounting in government accounts.

POSSIBLE DANGERS

What if this keeps going? This is a nuclear option and can be abused. The assumption is that the banks won’t be allowed to create money anymore, which takes the inflationary part out of this because the price stability portion is locked in. Part of the control is that it should never be 100%. So the US Federal government makes very few decisions about infrastructures; almost all of it is made by municipalities. The funding should never be 100%.

The danger is there, we’re headed for a major crash, and at that point it would be better for the system to radically change. If we could run infrastructure without debt for a few years, people might want to change the entire banking system.

HOW DO WE CONTROL THIS?

According to the system we’re using today, the government only owes what’s on its credit card. Government saving bonds are the “credit cards” of the government, and it only owes the issuance of its Treasuries. What does it actually owe in contract that it’s signed? Here in the US, we owe $205T.

Our money supply is constantly increasing through debt. We stabilize that through interest rates and the desires of banks to lend and borrowers to borrow. We are not going to increase the money supply; we’re currently doing that through debt anyway. We’re just shifting the methodology of how that money is created; only the seigniorage will go to the taxpayers. The amount of money created is identical.

The amount of money that is created, just as it is now, is strictly dependant on our ability to produce. Instead of gold-backed, this is production-backed money. The system is self-regulating, other than the control of the money, which you hand to a deliberately separate group of people under very strict rules. The downfall is that the banks will still make money.

A POTENTIAL SYSTEM FOR THE FUTURE

Under the infrastructure without debt system, banks are divided into two windows dependant on function. There’s the depository window, which keeps your money as yours since there’s no merging of the funds. On the income and investment side, things are mutualized and equity based. During the crash of 2007*2008, mutual funds didn’t go bankrupt because they’re equity-based.

Government insurance can only protect against one bank failing, not a systemic run on the fractional reserve banking system, only a run on an individual bank. It’s nowhere near big enough to protect against a systemic run. In the US, by law, the FDIC has to hold 1.15% of the aggregated deposits.

This whole international system is running on models, and their models are the most important thing, and this should change to human well-being. We need to run our decisions based on true results, rather than what we think the model is.

LINK HERE to the podcast

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

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


09/30/2016 - The Roundtable Insight: Macleod, Stoeferle, Boockvar, Townsend On Central Bank Effects

Hedge Fund manager Erik Townsend of Macro Voices is joined by Alasdair Macleod, Ronald Stoeferle, and Peter Boockvar in discussing the effects of central bank policy on global markets, along with debating the option of investing in gold versus mining stocks.

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.

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.

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.

EFFECT OF US PRESIDENCY ON GLOBAL MARKETS

Trump has managed to appeal to the disaffected masses, so we have very little clue how he’ll perform if elected president. The possibility he’ll win is higher than the polls and media discount, as the public seems to be disgusted with the political establishment and want change.  But regardless of who the next president is, in the early part of their term they’re going to preside over a recession. Both will face the same challenges. Central banks have manhandled markets over the past eight years, and will still be the deciding factor.

Trump has set up a situation where if it looks like he’s going to be elected, markets will tank. And Hilary will keep things at the status quo, where the government and policies are still for sale to Wall Street through bribe money in the form of political campaign contributions.

FED POLICY AND A BEAR MARKET IN BONDS

Increasingly the central banks are trying to stop a bear market in bonds from materializing. If you look at central banks in Europe, some of them are overloaded with sovereign debt. If you get a substantial bear market in sovereign debt, those banks basically go under. 2017 is going to see an acceleration in price inflation, to the point where the Fed and other central banks are going to have to raise interest rates, but they can’t do that without breaking the system.

Price inflation will be a concern going forward. Gold is a good signal regarding future price inflation, and the price is rising in every currency now. Most people forget that in 2011 in the US had CPI rates at 4.5%, and last year oil prices started to collapse. Therefore the base effect will be kicking in in the next four months.

Four months ago the 40-year JGB yield touched 7 basis points. Within two months that was 67 basis points. The Bank of Japan acknowledged that they were doing major damage to their banking system and therefore needed a steeper yield curve. For the first time a central bank is acknowledging the limits of their policy, and a bond market is fighting against that. This is all combining for a possible mix that’ll be negative for global bond markets, and any asset that is priced off low interest rates, particularly equities.

US Dollar LIBOR has been ticking up, well above the Fed rates. If you look at the LIBOR rate and tie it in with the increase in bank lending, that tells us that interest rates should rise, and very soon. The market as a whole will begin to understand that the rate that matters is the free market rate measured by LIBOR.

This is getting beyond the Fed’s control. The potential for a bond market crash is very large. A banking crisis similar to 2008 would definitely be deflationary. If the US implements negative rates, then this crazy bull market in bonds could accelerate. We’re seeing a lot of recession signal right now, and if we fall into recession it’s possible that we can see even lower yields.

The game of negative interest rates is over. It’s proven to be awful policy that central banks will be embarrassed to quickly backtrack on, and for that reason the US is unlikely to go to negative interest rates.

BULLION VS MINING SHARES

If you regard gold as insurance or money, owning mines is a speculation. Anyone investing in gold mines has to understand that there are risks you don’t have in bullion itself. Overall the bear market was pretty positive for the sector. It’s a highly volatile sector, so it might not be suitable for every investor – you have to live with the volatility and enormous political risk.

The gold bull market in the beginning part of the bull market should outperform the underlying, but as the gold bull market matures and prices get higher, it’s probably best to switch from mining to bullion. But for now, miners should outperform the underlying.

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

LINK HERE to listen to or to download the MP3

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


09/01/2016 - Charles Hugh Smith: “The Fly-in-the-Ointment” -> Stagnant Wages & Hidden Inflation

FRA Co-founder Gordon T. Long discusses with Charles Hugh Smith about stagnating wages and high real inflation rates, using the IRS tax reports as a guide to real economic activity, and the likelihood of future tax increases.

Charles Hugh Smith is the author of nine books on our economy and society, including A Radically Beneficial World: Automation, Technology and Creating Jobs for All;Resistance, Revolution, Liberation: A Model for Positive Change; and The Nearly Free University & the Emerging Economy. His blog, oftwominds.com, has logged over 55 million page views and is #7 on CNBC’s top alternative finance sites.

WHY WAGES HAVE STAGNATED

“The statistics we rely on are becoming more and more suspicious.”

Statistics are now used for perception management rather than reflecting the real economy. Of all these statistics we’re relying on to reflect reality, some of them are really suspect. We’re trying to stick with the ones that are valid. GDP is flawed but still our bellwethers, and we’re still relying on FRED database.

Slide8

When you look at stagnant wages, two things pop out: GDP has continued to go up and the economy’s expanding, so wages and employment should be expanding as well. Productivity has also been rising until recently.  We would expect that wages and employment would be rising at the same rate as productivity and GDP, but what we find out is that wages for the bottom 95% have stagnated.

 

The GDP increases and the increases in productivity are not flowing through to the bottom 80%. They’ve actually lost purchasing power in their wages. The top 5% have done really well, and the middle sector has stayed even. There are huge disconnects.

PURCHASING POWER IN DECLINE

For the last 15 years, we see wages stagnating for declining for all but the top 5%.

“Our standard of living is falling. We’re working harder, longer hours for less in real disposable income.”

Spending in the bottom 95% has been flat for the last decade. The top 5% are skimming a good percentage of the productivity gains.

“I think that’s the best and only valid way you can reach an estimate of inflation: take a basket of goods and test them in the same metropolitan area over the years.”

As consumers see lots of evidence that inflation is running higher than 1%, we start wondering why the official statistic is suppressed to 1%. The answer is that the system would break down if that 7% was reveals as reality.

The bottom 60th percentile can’t afford to buy, even with cheap interest rates and rents are going through the roof relative to their salaries.

Slide13

Both the charts from Dollar Tree and Dollar General are talking about how tough business is, and that it is a serious issue for the bottom 80%. Their biggest sellers are bread, eggs, and milk. The basics staples are where people are now going to buy them, because they can get them cheaper. They’re talking about the items being hit by by price hikes: rent, food, healthcare, taxes. Rather than raise the price by 15%, they’ve cut the amount by 15%. Regardless, it’s still a 15% loss in purchasing power.

FALLING TAX REVENUES

Tax receipts are falling across the board. We’ve lost so many small businesses, and the jobs that go with them. The chains have consolidated dramatically, but put all the mom and pop stores out of business.

Slide15

“We’ve lost some 770,000 net losses of small business since 2000. That is crippling to the economy, and that’s where the bottom 60% have worked.”

The United States is not alone in suffering from statistics that are being gamed. China had the same problem – people started looking at the statistics for electricity consumption because that was a more accurate gauge of economic activity than the obviously phony GDP statistics the government was issuing.

“There’s always a way to get a better statistic, but it has to be outside whatever the official government agencies can manipulate. In the United States, the one thing you can’t manipulate is the IRS tax statistics.”

Everyone that reports to the IRS reports the facts because it’s not worth their time to try any gimmicks. These are as accurate statistics as we can get. These numbers can’t be gamed like GDP and the numbers we know are rigged.

TAX INCREASES COMING IN THE FUTURE

Major tax increases are coming. There’s no question. Hilary’s already mentioning it, Trump’s already mentioning it, they know it has to come: at the state level, at the federal level, and it’s going to be at the local level and it’s going to be property taxes. It’s happening in the US already.

The government is not collecting more taxes, but the cost of running the government is going up at a significant rate. Every time in the past that tax receipts fell to the zero line, the United States was in recession. So what we’re talking about here is a recessionary economy where people are suffering a stagnant or declining household income, and their taxes are going up if they owe any taxes at all.

“Even low income people have to pay sales tax – if you jack up sales tax, everybody pays that. Even the people who were barely getting by.”

JUNK FEES AND CIVIL FORFEITURES

There’s so many fees, licenses and tolls that you have to pay; that’s where the tax is coming from, not just on income. Even police fines have gone through the roof. These are extremely aggressive forms of taxation. These are regressive taxes that hit the lower income households a lot harder than the upper income households.

Slide16

If you look at these charts, a lot of people are suddenly going to be classified as “rich”. There’s going to be surcharge on the upper middle class, and you can argue that it’s justified, but we’re likely going to see a double whammy: higher regressive taxes that everyone has to pay in the form of junk feels, and higher income and sales taxes as well. So it’ll be a tax increase across every form of taxation. There is no alternative. The government is going to get the revenue however they can.

They’re actually seizing assets and you have to prove that they were wrong to get your assets back, which can take a long time. The police departments are a revenue source now in many areas. They’re gambling that people will miss something, and they’ve got the assets. And you may not get it back.

Slide18

“What we’re talking about here is a vice that’s slowly squeezing the households. We’re seeing stagnating income, hours cut, hidden inflation that’s eating away at our purchasing power at a far greater rate than 1%, and we’re anticipating a lot higher taxes across the entire spectrum of fees and taxes because we can see that government tax revenues aren’t rising anymore.”

As there’s more and more pressure on the government to sustain itself, it has to resort to more and more aggressive stances like this. There’s a lot of very good people in all levels of the government that feel like they have no choice, especially where there’s a lot of underfunded pensions that they have where they have pension obligations and no money to meet them.

“If taxes are declining, that means households and businesses are making less.”

Abstract by: Annie Zhou a2zhou@ryerson.ca

Video Editor: Min Jung Kim  minjung.kim@ryerson.ca

 

 

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


08/28/2016 - John Rubino: Have the Markets Now Become too Big To Fail?

FRA Co-founder Gordon T. Long discusses with John Rubino

John Rubino is author of Clean Money: Picking Winners in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, January 2008), and author of How to Profit from the Coming Real Estate Bust (Rodale, 2003). After earning a Finance MBA from New York University, he spent the 1980’s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.

GOVERNMENT INTERFERENCE

“Governments are acting like they don’t think they can handle a garden variety equities bear market anymore.”

You’re seeing central banks all of a sudden become among the biggest buyers of equities in the world. It’s one thing to buy bonds and intervene in the interest rate markets, but another to buy equity. This is governments buying the industrial capacity of the world and from an Austrian Economics point of view, this is catastrophically dangerous.

08-18-16-FRA-John_Rubino-ABSTRACT-1

“If the central banks of the world own all the major equities, then they get to direct investment by those corporations, and that’s a recipe for something that isn’t capitalism anymore”.

“Market based economies are the only method of organizing a society that’s been proven to work, to generate progress, and pull people out of poverty, and we’re actively doing away with that.”

HEDGE FUND PROBLEMS

If you look at the hedge funds, you get a sense of how distorted our markets are. They’ve been under-performing, for example, the S&P 500. You could buy an ETF that charges next to nothing, and do better than the average hedge fund. You’re seeing big institutions pull money out of hedge funds and start buying ETFs and a lot of brand name hedge funds are folding or scaling back, and this is a really difficult time in that market. It’s not going to get better any time soon because governments are distorting markets more and more progressively by buying stocks indiscriminately, or forcing interest rates down to artificially low levels, and generally messing around with the price signalling of free markets.

08-18-16-FRA-John_Rubino-ABSTRACT-2

A lot of the heavy hitters are shorting everything in sight and a big part of the reason is that they don’t trust the markets anymore. The people who have been worried about the market for years now have some high powered money on their side and assuming they’re right again, things are going to get interesting in the coming year.

Besides private placements, hedge fund money is also flowing into emerging markets stocks and bonds, and that’s a direct result of these developed markets being distorted by government actions.

CHANGES IN THE EQUITY MARKET 

Corporate share repurchases involve hundreds of billions of dollars, but the flow into equities is slowing down dramatically. Corporations have hit the point where they can’t borrow anymore, and they’re starting to be punished for borrowing so much money to buy back their stocks. Buyback announcements are going down at the same time that corporate equity issuance is going up, for the first time since 2010 or so. At the same time, corporate insiders are selling stock at a rapid pace. These are things that usually precede bear markets or at least dramatic corrections in share prices.

08-18-16-FRA-John_Rubino-ABSTRACT-3

“Somewhere in the US government there’s an agency that’s buying stocks aggressively right now. They just don’t tell us because they lie to us in ways some other central banks don’t lie to their people.”

On the one hand you have everything that relates to market valuations and rational behavior on the part of private sector actors pointing to a bear market, but you also have governments and central banks with effectively unlimited funds buying aggressively. That along with terrified foreign capital flowing into the US are two things, that if you are shorting the US market, you’ve got to be worried about. There are big forces contending, but we’ve never been here so we can’t say anything with certainty except that chaos is the inevitable result.

This is an incredibly hard time to manage money because it’s not about the fundamentals anymore. If those are your only tools, then you’ve got a real problem.

“I don’t envy professional money managers and I think that for most of them, this is going to end really badly… It’s highly unlikely that you’re going to make a perfect set of decisions when you’re still learning about this new world.”

THE MARKET IS NO LONGER A MARKET

“There’s not a single financial market that isn’t manipulated in some way by someone.”

There’s no actual free market that you can point to and participate in. This goes on until these guys run out of ammunition, when we don’t accept these fictitious fiat currencies as having some intrinsic value. As long as we’re willing to be fooled in that way, then governments have ammunition to continue to manipulate the markets. This could go on for a while, or blow up overnight; there’s no way to tell the timing.

People are starting to pick up on the fact that governments are trying to devalue their currencies, but it’s making more and more sense for people to move some of their fiat currencies into things that governments can’t make more of. That’s been gold and silver, lately. The gold and silver miners have been reporting phenomenally good numbers. You’re seeing precious metal miners report really low cost numbers and dramatically higher profit numbers, and they are almost alone in having this kind of a trend.  It doesn’t mean they won’t have a big correction going forward, but it does mean that there are suddenly healthy businesses, and that’s a good place to be when you’re worried about the health of rest of the world.

We are now printing over $200B a month between the ECB, the Bank of Japan, and the Bank of England lately. What they’re doing is they’re rotating it. 95% of the world’s currencies are Bank of Japan, the Sterling, the Euro, and the Dollar, and if you can rotate them around there’s nowhere to run, other than hard currencies and outside that gain. Its called the Bernanke Doctrine of “Enrich-Thy-Neighbor”.

Almost everything in Keynesian economics is short term with terrible long term consequences. We’re living in previous Keynesian economists’ long term now and we’re suffering the consequences of previous policy mistakes. The guys in charge now are making bigger and bigger policy mistakes that we a few years from now, or our kids, will have to deal with.

“The idea that tweaking systems in the short run to keep it in a fictional equilibrium is all you need to do if you’re a government running an economy, is profoundly mistaken.”

Abstract by: Annie Zhou a2zhou@ryerson.ca

Video Editing by: Min Jung Kim http://minjung.kim@ryerson.ca

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


08/15/2016 - Catherine Austin-Fitts: “THE DEBT MODEL IS DONE!”

FRA Co-founder Gordon T. Long discusses with Catherine Austin-Fitts about the future of the global economy, along with providing insight on recent events and potential expansion into space.

Catherine is the president of Solari, Inc., publisher of the Solari Report, and managing member of Solari Investment Advisory Services, LLC. Catherine served as managing director and member of the board of directors of the Wall Street investment bank Dillon, Read & Co. Inc., as Assistant Secretary of Housing and Federal Housing Commissioner at the United States Department of Housing and Urban Development in the first Bush Administration, and was the president of Hamilton Securities Group, Inc. Catherine has designed and closed over $25 billion of transactions and investments to-date and has led portfolio and investment strategy for $300 billion of financial assets and liabilities.

Catherine graduated from the University of Pennsylvania (BA), the Wharton School (MBA) and studied Mandarin Chinese at the Chinese University of Hong Kong. She blogs for the Solari Report at solari.com.

GLOBAL DEBT FOR EQUITY GAIN

It’s equity for debt swap. Since WW2 we’ve been on the debt-growth model, growing the economy by issuing more government debt.

“We have literally evolved an infrastructure and a leadership of people who don’t understand or have never participated in markets.”

They don’t understand market economies; they don’t understand understand command and control economies. We’ve literally been living off debt growth, and that debt growth is slowing. Part of the challenge of being in a debt-based economy is that people get out of alignment. There’s no better example than what’s happening with student loans. We’re literally watching an entire industry make more money off their borrowers’ failure than their borrowers’ success.

When you’re integrating very complex equity at fantastic speeds, equity builds a much more aligned model between the parties. We’re definitely coming into a debt-for-equity swap worldwide.

A PERIOD OF INSTITUTIONAL REFORM: WHO LEADS?

We have two challenges: the leadership we developed over the last 50-70 years don’t know how to work in a world where capital is dear and you have to optimize, particularly fundamental economics. The other problem is that there are two ways to do an equity for debt swap: one is on a managed process where you realign bottom up, the other is where you write everything down.

“Are we going to crash out the equity markets or are we going to foreclose and bankrupt everybody? There’s two ways to go.”

THOUGHTS ON BREXIT

“I think one of the reasons that they wanted to get out is in fact not to get away from Germany and France, but to get away from the US and US domination in Europe.”

England is very concerned about where the United States will go if it continues to push the interpolar model, particularly if it continues to push a new cold war with Russia. They want to make sure that as that process pushes out and we switch from a unipolar to a multipolar world that they are in control of British policy and can’t be roped or tricked into anything.

“If you look at how the Americans have managed their financial system in the last three decades… the Americans are basically developing a brand of organized crime.”

Slide4

Asia and China are also becoming more important to the Commonwealth, and they’re finding themselves in too many conflicts of interest positions between what the US wants to do and what they can do globally through the Commonwealth. Their relationship with China is very old, very long, and very deep. They basically own and control and run the offshore payments in Asia.

GEOPOLITICS: 3RD QUARTER

We’re going through a long term rebalancing of the relationship between China and the United States. For two decades China has been building its manufacturing capacity and economy by taking Chinese savings and lending that to the US, which would use it to hand out government cheques that would be used to buy Chinese goods. Now the reality is that China needs to diversify away from that, and they’re using their economic progress to finance other areas around the world. Now they’re building their own consumer economy.

“We’re also watching tremendous concern because much of the push and growth in the economy comes from Asia. If China slows down, what’s that going to do to the global economy?”

Slide5There are tremendous issues in productivity. Real productivity growth is slowing down in the G7 countries and globally. Asian per capita incomes are merging towards the G7 per capita incomes. If you take a slowing productivity growth along with a slowing increase in the labour pool, you’re not watching the kind of inflationary growth we’ve had for the last thirty years. The problem the establishment has is the way they have really radical productivity growth is through technology, which is highly inflationary.

“The more they implement things that give them productivity growth the more deflation they get. And that really conflicts with the fact that they want to continue siphoning off huge amounts of money.”

It’s one of the reasons you’re seeing more and more push for invasive control.

SPACE-BASED ECONOMY

There is a huge amount of money going into “underground base infrastructure” and evidence that we took the space program dark. There is a tremendous emphasis on reinvesting in space, both on government and private sides.

“I ultimately came to the opinion that the reason we proceeded with the Europe GAAP was to create sufficient capacity to become a multiplanetary civilization.”

If you’re going to become a multiplanetary civilization, then you really do need to centralize much more in the financial system to umbrella more than one economy. Our entire society is repositioning and making a massive investment in space.

“We have locked up enough technology to really deal economically with whatever we’re dealing with. The problem is if no one trusts the government, if no one trusts the leadership, how’s that going to work?”

BLOCKCHAIN TECHNOLOGY

Mr. Global wants a digital currency, and part of the reason is that if you want to create a global currency, you have to drive transaction costs dramatically down to reach into the emergent markets and the frontier markets.

“I think the blockchain is going to be instrumental to building very low cost digital global transaction systems.”

You can radically reduce a financial system out of very cumbersome payment systems. Before the Brits voted for Brexit, the Bank of England was doing very significant work looking at blockchain and what it could do.

“How it rolls out is anybody’s guess, and I think it’s going to be very organic.”

CLOSING REMARKS

The fundamental issue is that we live on a planet where the government system is unclear and invisible to us, and we’re seeing more and more secrecy related to more and more of the economy. And secrecy leads to privilege and privilege leads to corruption. If you’re in the financial system you’re aware of the extent of the corruption, and there’s no way to heal that problem without transparency.

“The more we can bring transparency to what’s going on, the more we can delete a lot of very expensive and harmful privilege and what it’s doing to our environment and what it’s doing to our economy and what it’s doing to our personal freedoms.”

Abstract by: Annie Zhou a2zhou@ryerson.ca

Video Editor: Min Jung Kim  minjung.kim@ryerson.ca

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


07/21/2016 - Mish Shedlock: KEY TAKE AWAY FROM BREXIT IS ONE THING, VOTERS ARE FED UP!

FRA Co-founder Gordon T. Long is joined by Mish Shedlock in discussing the details of Brexit, the BoJ, the current state of Illinois and much more.

Mike Shedlock is a registered investment advisor representative for SitkaPacific 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.

SOCIAL UNREST AND BREXIT

“Key take away from Brexit is one thing, voters are fed up.”

What’s unique about Italy is that it’s a lot of individual people buying bank bonds and they can literally lose everything. Furthermore social unrest in the US explains the rise of Donald Trump and the popularity of a socialist, Bernie Sanders. This explains why Clinton, Sanders, and Trump are all against the Trans-Pacific Trade Partnership. It is a 5500 page document, there is absolutely no way it is simply about free trade. Free trade can fit on a napkin; it doesn’t take 5500 pages to enforce a free trade agreement. Make no mistake the TPP is about much more.

“Brexit is not the cause, it is the symptom.”

Speaking of real household income, the top 5 % have done very well, the top 20% have done good, but the bottom 80% have done horribly in comparison and this all began in 1971 when Nixon took the US off the gold standard. This is the same time when you had an explosion in credit, an explosion in corporate profits; all of this began at the same time. People are not blaming the Fed or the public union, they are blaming free trade when in fact we started losing manufacturing jobs long before NAFTA. The number of people it takes to build anything is dramatically lower and this began well before any of the agreements happened. The politicians can’r make accurate decisions because they don’t get it, they are a part of the wealthy class; they are exempt from Obamacare and rules and regulations that the ordinary citizen abides to. They live in their own isolated world and they just don’t get it.

“The EU isn’t about free trade, just look at the carve outs they have on France for agriculture. Everyone in Europe pays more for agriculture just to protect the inefficient French market.”

Then we had all these warnings that the UK was still going to have to abide by the migration rules of the EU if the UK wanted to work out any trade agreement, don’t these arrogant politicians realize that this is exactly why the UK left? Then if you look at bilateral trade, the UK has most of its trade with the rest of the world; the UK runs a huge trade deficit with Europe and especially Germany. Because of this the UK has the upper hand in negotiations due the bilateral balance of trade it has with the rest of Europe.

LABOR REPORTS

 

 

There is certainly a story behind the numbers they are putting out. The household survey numbers have been bad for 4 straight months; meanwhile there is this volatility in the establishment survey. We need to see another month or two of both surveys and maybe we will see a new trend.

Throughout America, people are working multiple jobs because companies do not want to hire them full time and provide them full time benefits. Another example, New England nursing homes are facing problems keeping staff because of their 24/7 operations. Workers cannot live off of one salary and so they are working 2-3 jobs.

STATE OF ILLINOIS

“Every 5 mins somebody is leaving Illinois.”

The people leaving the most are the millennials and those a little bit older. It is a sad environment, property taxes here are totally out of this world, and in Illinois you down own your own home because of property taxes. The solution without a doubt is bankruptcy. The Chicago public school system is bankrupt, period. All that needs to happen is recognition of that fact but it is not even possible to declare bankruptcy because Illinois doesn’t allow it.

JAPAN STICKING WITH THE OLD

“Japan is a bug in search of a windshield.”

I believe people are increasingly questioning whether central banks have things under control. Japan just doesn’t get it; they are trying to work something that hasn’t worked for 30 years. The only thing they know how to do is print more money and push liquidity out. But the bigger problem is central banks can fix liquidity but they can’t fix solvency.

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


07/20/2016 - Ronnie Stoeferle: “IN GOLD WE TRUST!”

Ronald-Peter Stöferle, Managing Partner & Investment Manager at Incrementum discusses with FRA Co-founder Gordon T. Long,  the key points of his recent 2016 report, “In Gold we Trust.”

Ronald was born 1980 in Vienna, Austria, is a Chartered Market Technician (CMT) and a Certified Financial Technician (CFTe). During his studies in business administration and finance at the Vienna University of Economics and the University of Illinois at Urbana-Champaign, he worked for Raiffeisen Zentralbank (RZB) in the field of Fixed Income/Credit Investments. After graduation, he participated in various courses in Austrian Economics.

In 2006, he joined Vienna-based Erste Group Bank, covering International Equities, especially Asia. In 2006, he also began writing reports on gold. His six benchmark reports called ‘In GOLD we TRUST’ drew international coverage on CNBC, Bloomberg, the Wall Street Journal and the Financial Times. He was awarded 2nd most accurate gold analyst by Bloomberg in 2011. In 2009, he began writing reports on crude oil. Ronald managed 2 gold-mining baskets as well as 1 silver-mining basket for Erste Group, which outperformed their benchmarks from their inception. In 2014 he published a book on Austrian Investing

“One of the main aspects of the report is that we are in a bull market again.”

Gold Price Target for June 2018: USD 2,300

Slide14

Hedge fund managers and investors were buying gold and mining shares a couple of months ago and now we are entering what the Dow Theory calls ‘the public participation pace.’ $2,300 USD is our long term target which is based on the fact we are expecting rising inflation rates. Right now we have a tremendous global slowdown and the strong USD has further fueled this slowdown.

It is confirmed however that gold is rising in every currency. And this is a strong sign for a bull market. The world believed that the Fed would hike interest rates but that didn’t happen and now with the Brexit we will definitely be in this current interest rate environment for longer, the US may even implement negative interest rates.

“The one obvious thing in the midst of this all is that central banks are really good at finding excuses for not raising rates’ now their excuse is Brexit.”

The strength of the dollar has had enormous consequences for commodities. There is a very high negative correlation between the strength of the USD and the health of commodity markets. Furthermore we have seen the effects in emerging markets that are highly dependent on a cheap dollar, the rising dollar acted as a rate hike.

Expansion of Central Banks Balance Sheet: 2007 vs 2015

Slide15

“There have been rumors about helicopter money and I am almost certain it will be implemented.”

With monetary experiments, central banks have been engaging into an all-or-nothing gamble, hoping it will eventually bring about the long promised self-supporting and sustainable recovery. The central banks‘ leverage ratios and the sizes of the balance sheets relative to GDP have enormously risen in the aftermath of the 2008 financial crisis. Lastly it doesn’t help Bank of Japan (BoJ) has taken this insanity several steps further than their peers have managed; the ECB has been comparably conservative, but is currently doing its best to catch up.

5,000 Years of Data Confirm: Interest Rates Have Never Been as Low as Nowadays

Slide16

“The longer interest rates stay this low, the more fragile the system will become.”

Negative interest rates are one of the last hopes to which policymakers cling. Meanwhile 5 currency areas (government bonds valued at more than USD 8 trillion have negative yields to maturity). When the centrally planned bubble in bonds finally bursts, it will be abundantly clear how valuable an insurance policy in the form of gold truly is

“Lose-lose situation for central bankers.”

  1. The long-term consequences of low/negative interest rates are disastrous (e.g. aggravation of the real estate and stock market bubbles, potential bankruptcies of pension funds and insurers)
  2. Normalizing interest rates would risk a credit collapse or rather a recession

Trade-weighted US Dollar Index (lhs) and the Effective Federal Funds Rate (rhs)

Slide17

“A strong dollar undoubtedly has consequences for the manufacturing industry, while a strong USD is also deflationary.”

The Fed wants a weaker dollar, but this doesn’t happen in one day, it is a process. We are making a really strong case for a recession happening in the US and it will have global consequences. A recession is a very normal thing; it is akin to your need for sleep. It is a way for the system to replenish.

“If the Fed fails with the normalization of interest rates, the already crumbling narrative of economic recovery could collapse.”

We are comparing this year’s oil prices to last year’s and last year the big plunge in oil prices started in July, so just do to that we will have rising inflation rates. But it is not only this there are many factors that indication rising inflation rates. The fact that gold and mining shares have done so well since the beginning of the year is indicative that inflation is going to be a big topic.

Value of Gold Production vs. Volume of ECB and BoJ QE purchases 2016

Slide18

“Gold has to be physically mined, its global supply is exceedingly stable – holding it provides insurance against monetary interventionalism and an endogenously unstable currency system”

At a price of USD 1,200 per ounce, the ECB would have bought 4,698 tons of gold in the first quarter of 2016 (which is more than 6 times the value of globally mined gold). If the European QE program is continued as planned, it would be equivalent (assuming prices don’t change) to the value of 21,609 tons of gold (~12% of the total stock of gold of 183,000 tons ever mined). Adding the volume of the BoJ: the equivalent would be 39,625 tons of gold in 2016

Incrementum Inflation Signal

Slide19

“In the Long Term: If Currencies Depreciate, Gold Should Appreciate.”

It is a guide for investment allocations in our funds – depending on the signal’s message we shift allocations into or out of inflation-sensitive assets.

  • Proprietary signal based on market-derived data as a response to the importance of inflation momentum
  • Shorter reaction than the common inflation statistics
  • For the first time in 24 months the Incrementum Inflation Signal indicates a full-fledged inflation trend is underway

Closing Remarks

“The market is a pain maximizer.”

In poker you have to bring some chips to the table and it’s no coincidence that China is massively buying gold. Not only has the central banked, but individuals as well. Central bankers just don’t like talking about gold. They pretend that it’s just lying around in the basement. I think we are already in the early stages of an inflationary pattern, but it is important to never rule out a deflationary event. Going forward we should prepare for much more government intervention and intervention from central banks. We are seeing that the medicine doesn’t work yet they will continue to give doses of it.


“In this current global monetary experiment that we are in, it just makes sense to hold gold.”

 

 

 

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


07/15/2016 - Jeff Snider: HOW LONG CAN BUYBACKS CONTINUE TO SUPPORT A MARKET WHICH IS STANDING ON A FUNDAMENTALLY FLAWED PREMISE?

FRA Co-Founder Gordon T.Long and Jeffrey Snider, Head of Global Investment Research at Alhambra Investment Partners discuss earnings, the Chinese Yuan, Japanese Yen and the falling credibility of central banks.

As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. Jeff joined Atlantic Capital Management, Inc., in Buffalo, NY, as an intern while completing studies at Canisius College. After graduating in 1996 with a Bachelor’s degree in Finance, Jeff took over the operations of that firm while adding to the portfolio management and stock research process.

In 2000, Jeff moved to West Palm Beach to join Tom Nolan with Atlantic Capital Management of Florida, Inc. During the early part of the 2000′s he began to develop the research capability that ACM is known for. As part of the portfolio management team, Jeff was an integral part in growing ACM and building the comprehensive research/management services, and then turning that investment research into outstanding investment performance. As part of that research effort, Jeff authored and published numerous in-depth investment reports that ran contrary to established opinion. In the nearly year and a half run-up to the panic in 2008, Jeff analyzed and reported on the deteriorating state of the economy and markets. In early 2009, while conventional wisdom focused on near-perpetual gloom, his next series of reports provided insight into the formative ending process of the economic contraction and a comprehensive review of factors that were leading to the market’s resurrection. In 2012, after the merger between ACM and Alhambra Investment Partners, Jeff came on board Alhambra as Head of Global Investment Research.

EARNINGS

Picture1

“It is no doubt that earnings have been under-performing.”

What’s even more concerning is that not even is the top line falling off, but the cash flow is falling dramatically and this impacts credit along with everything else. With no earnings and no cash flow it puts us in a high risk environment. The only thing that has been holding up the market has been excessive corporate buybacks which has come out of cash flow, and to a lesser degree, borrowing. But to borrow is tough when you don’t have the cash flow to justify the credit ratings.

“How long can buybacks continue to support a market which is standing on a fundamentally flawed premise?”

Picture2

We have had 4 to 5 quarters of falling revenue but the US market seems to ignore it. At some point reality has got to set in. But it is also important to note that trade problems are a systemic factor to the decline in earnings. China’s imports are down 17% year over year, but these imports are coming from basically the emerging markets and commodity markets. They have also borrowed upwards of 9 trillion USD in the last 7 years that has suddenly gotten very expensive for them, I think there is more pain to come.

CHINESE YUAN

“The health of the Yuan is tied into the global economy and the fact that the global economy is stumbling.”

Picture3

Less growth in China combined with less growth around the world again increases financial risk which fuels more reluctance to funnel dollars into China; it has become a vicious cycle. The Chinese have no choice but to continue going in one direction, they are in a rock in a hard place. As the Chinese Yuan has been falling, the Yen has been rising in strength. This has become a huge issue for Japan to add to their already lost list of issues to deal with. A fracture is likely around the corner, China and Japan cannot go long without devaluing the Yen.

The markets are reassessing what central banks can actually do. And what markets found was that central banks aren’t actually as powerful as everyone believes them to be and Japan is a perfect example of that. No matter what the BOJ does that Yen continues to move on up. It fits into the paradigm of the economy, the financial risk, everyone reevaluating what central banks are capable of etc. The markets are reevaluating central banks because they see that a tight money environment despite efforts from central banks to fuel stimulation.

Picture4

“Some major European bank stocks are indicative of an incoming banking crisis. We see already low interest rates around the world getting lower with each passing day; this is indicative of tight money conditions. Low rates are not stimulating.”

TROUBLING MATTERS OF DEBATE

“Most troubling thing to me currently is that there are not many answers available.”

What I see is an unstable global currency regime which we are completely unprepared for. There is no solution that has been presented that would allow for a stable currency to take over Euro dollars which clearly doesn’t work. Generally the central banks can fix liquidity problems, but they cannot fix solvency problems. We see that the credit cycle has turned from non-performing loans so on and so forth.

The idea behind QE for Japan, America and Europe was to kick start a robust recovery. Now that central banks has lost credibility as well as support.  Then you have all the unintended consequences that come with almost zero money. We have nearly zero price discoveries and risk is greatly mispriced.

“Policy makers and economists have simply run out of ideas.”

Desperation is a big role of why markets are reevaluating central banks. If we go back 20 years where Alan Greenspan was a genius and he didn’t even do anything, all he did was talk and he made a career out of not talking. No matter what he did he was taken as a genius. Whereas 20 years later, Janet Yellen sounds like a fumbling idiot no matter what she does. All her actions come across as desperate because the credibility has been blown away. The Fed has been forced into action and by being forced into action it has only highlighted what the Fed can’t do.

“Resource allocation is the main benefit of price discovery; it is the life blood of the economy. The more we damage price discovery the more fatal situations will become.”

We need to look at this as an opportunity in the long run. Now that the power of central banks has come to surface and credibility has been shot, it in turn opens the door to credible solutions. The fact of the matter is that the economy is nothing like what it should be and people know that something is wrong and change is needed.

ABSTRACT WRITER: Karan Singh karan1.singh@ryerson.ca

VIDEO EDITOR: Sarah Tung  sarah.tung@ryerson.ca

 

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


06/30/2016 - Ellen Brown: WHAT YOU NEED TO KNOW ABOUT THE TRANS-ATLANTIC TRADE AND INVESTMENT PARTNERSHIP (TTIP)

The Financial Repression Authority is joined by Ellen Brown, a well renown author and advocate of financial reforms. FRA Co-founder, Gordon T. Long sits with Ellen to discuss a myriad of topics including the TTIP, Monsanto, Blockchain Technology, and bank bail-in’s.  Ellen Brown is an American author, political candidate, attorney, public speaker, and advocate of alternative medicine and financial reform, most prominently public banking. Brown is the founder and president of the Public Banking Institute, a nonpartisan think tank devoted to the creation of publicly run banks. She is also the president of Third Millennium Press, and is the author of twelve books, including Web of Debt and The Public Bank Solution, as well as over 200 published articles. She has appeared on cable and network television, radio, and internet podcasts, including a discussion on the Fox Business Network concerning student loan debt with the Cato Institute’s Neil McCluskey,  a feature story on derivatives and debt on the Russian network RT,[6] and the Thom Hartmann Show’s “Conversations with Great Minds.” Ellen Brown ran for California Treasurer in the California June 2014 Statewide Primary election.

TRANS-ATLANTIC TRADE AND INVESTMENT PARTNERSHIP (TTIP)

The Transatlantic Trade and Investment Partnership (TTIP) is a proposed trade agreement between the European Union and the United States, with the aim of promoting trade and multilateral economic growth. The American government considers the TTIP a companion agreement to the Trans-Pacific Partnership (TPP). The agreement is under ongoing negotiations and its main three broad areas are: market access; specific regulation; and broader rules and principles and modes of co-operation

The controversial agreement has been criticized and opposed by unions, charities, NGOs and environmentalists, particularly in Europe. The Independent describes the range of negative impacts as “reducing the regulatory barriers to trade for big business, things like food safety law, environmental legislation, banking regulations and the sovereign powers of individual nations”, or more critically as an “assault on European and US societies by transnational corporations”; and The Guardian noted the criticism of TTIP’s “undemocratic nature of the closed-door talks”, “influence of powerful lobbyists”, and TTIP’s potential ability to “undermine the democratic authority of local government”

Kangaroo Court

A weaker element of this trade agreement is the ISDS, an investor dispute which is a ‘guaranteed kangaroo court.’ Corporations whose profits have been hurt by some actions of government can take these local governments to court. But it is not a true court; moreover it’s a panel of 3 lawyers who are paid by the corporations. The issue is that these corporations can sue the government but the government cannot sue the corporations. It is a one way street, in which these corporations do not have to pay attention to legal authorities. It is a court set up for the betterment of the corporations. Furthermore they can not only sue for their lost profits, but they can also sue for lost projected future profits.

“This is not government by the people for the people; rather it is government by the corporations and for the corporations.”

MONSANTO AND THE TTIP

“Monsanto can now start a factory in Europe, which goes completely against what Europeans have been fighting for years. This agreement squanders everything Europeans have achieved in this sort of protection.”

One of the goals of these agreements is to enforce the world to use our rules rather than the rules of the BRICS.  As soon as Gaddafi started talking about his gold backed banking system for northern Africa he became a target. Saddam Hussein did the same thing that was going to take euros for oil which is counter to the whole petro dollar. History shows that anybody who steers away from this system becomes a target. If you go through the banking, the ones that control their own creation, Venezuela, Brazil, and Russia etc. are facing high waters. Furthermore there is not enough money in the system because of the nature of the system, where banks create the money and charge interest.  But ideally you need a central authority that can put some money out there. I think the national dividend is a great idea, the Swiss just had a referendum but it didn’t pass. Nonetheless it’s great for them to consider this at all.

“The money shouldn’t be coming from us, from our elected representatives, or from our central banks which should be representing us, but they don’t; they only represent themselves. The Federal Reserve isn’t there to serve our interest; they are there to serve the banks.”

BLOCKCHAIN TECHNOLOGY

The blockchain is seen as the main technological innovation of Bitcoin, since it stands as proof of all the transactions on the network. A block is the ‘current’ part of a blockchain which records some or all of the recent transactions, and once completed goes into the blockchain as permanent database. Each time a block gets completed, a new block is generated. There is a countless number of such blocks in the blockchain. Blocks are linked to each other in proper linear, chronological order with every block containing a hash of the previous block. To use conventional banking as an analogy, the blockchain is like a full history of banking transactions. Bitcoin transactions are entered chronologically in a blockchain just the way bank transactions are. Blocks, meanwhile, are like individual bank statements. Based on the Bitcoin protocol, the blockchain database is shared by all nodes participating in a system. The full copy of the blockchain has records of every Bitcoin transaction ever executed. It can thus provide insight about facts like how much value belonged a particular address at any point in the past.

Block chain technology can definitely revolutionize the banking system. It is important to understand that at this point, nearly all alternatives are better than what we currently have in place. The banks haven’t been able to come up with a valid plan because they don’t have the money; they are creating lots of money only to give off the appearance.

“Banks create money on their books in response to our request for a loan.”

We now know that we basically create the money. When we take out a loan, the bank takes your IOU and turns it into money, and that’s where money comes from. We, the borrower are the ones monetizing our own IOU; the bank merely just makes it official.

BANK BAIL-IN

“We are moving towards a cashless society.”

The argument for going cashless is this whole monetarist theory that there is specific amount of money in the system, and the central banks control the money that’s out there by playing with interest rates. They lowered the interest rate to zero and still we have deflation, and now the theory is to lower it below zero which clearly makes it worse. That means you’re paying money to keep your own money in the bank.

The reason people are waking up now is because they have been screwed. The balance is tipping; the people who are suffering are beginning to wake up to the reasons why.

Abstract Writer: Karan Singh karan1.singh@ryerson.ca

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


06/27/2016 - Peter Boockvar: BREXIT: “THIS IS ALSO EXPOSING A LOT OF FAULT LINES WITHIN THE EU WITH BUREAUCRACY & THE PUSH BACK AGAINST THE ‘RULING CLASS’!

FRA Co-founder Gordon T. Long is joined by Peter Boockvar in discussing the aftermath of Brexit and the effects on the future economy.

Peter is the Chief Market Analyst with The Lindsey Group, a macro economic and market research firm founded by Larry Lindsey.

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 an 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.

Peter graduated magna cum laude with a B.B.A. in finance from George Washington University.

BREXIT

The shock is going to lead into some chaotic-type thinking, but while this is a gigantic inconvenience and reason for continued economic slowdown, over time the UK will adjust and trade with Europe the same way Norway and Switzerland does. For the rest of Europe, this raises the question of other countries deciding to leave.

“I think having the Euro is something they want to be a part of, but that is a major risk, no question.”

This is also exposing a lot of fault lines within the EU with bureaucracy and the pushback against the “ruling class”. The failure of the EU in Brussels to address the refugee problem is a major concern, but immigration was a short term emotional decision.

“Certainly, if it wasn’t for the immigration issue,  I think it’s pretty obvious that they would’ve voted to remain.”

EU BANKING STRUCTURE

“On a bank to bank basis, they’re being crushed by the ECB and the negative interest rates. That’s the biggest threat to the European banking system, and their overleveraged banking sheets with too many nonperforming loans. Not the UK vote.”

We should remember what the underlying fundamentals are that we’re faced with every day. That is, slowing economic growth globally. In the US that is falling earnings, falling profit margins, a loss of credibility on the part of all central bankers and the Fed. On top of this is an asset price bubble over the last six years that leaves us with no margin of safety in order to face all these headwinds.

The European Union can adjust to it, because this is a gigantic wake-up call and they have two choices: they either let this bleed away or they say, you know, we have to change our ways, and some things for the better may come from that.”

“The global growth story remains very challenged, asset prices remain very expensive, and central bankers have lost credibility. Those are the risks that people should be mostly focussed on right now.”

China’s been slowing for years. Who doesn’t know that China’s going through challenges? Even the Chinese stock market is down 50% from where it was in 2007. It’s still part of a broader picture of slow growth.

DOLLAR AND YIELD

Past the very short term knee-jerk reactions – sell the Euro, sell the Pound – the Dollar has its own issues. The Fed is stuck at 37½ basis points throughout this economic cycle. They likely won’t raise rates until the expansion after the next recession. So it’s easy to sell other currencies to buy the Dollar right now, the Dollar has its own issues.

“The fair answer to that question is which is going to be the currency left standing? And the only answer to that is going to be gold and silver, and that’s obviously being reflected today. The dollar is getting a knee-jerk bounce here, but I’m not a believer in a strong Dollar because I think it itself is facing major headwinds.”

The Fed isn’t raising interest rates, and the US economy is slowing. Going from current growth to recession is not that far of a leap. The determinant of that is what asset prices do, actually. If the S&P500 goes back to 1800, then the odds of a recession increase.

The reason the stock market is used as the swing factor is because the last two recessions were led by a decline in asset prices, tech stocks, and housing prices. We have our third bubble in front of us. Tt’s mostly been manifested in credit markets, but if you do get a decline in asset prices, as it reprices to the global economic reality, that in itself could tip us over. In the US, the consumer is the only thing keeping us from a recession, and a decline in asset prices could tip the consumers over from a psychological standpoint.

LOOKING FORWARD

“The Fed has no policy right now… They were so clear on how they were going to ease, and they’ve been in the clouds on how they’re going to exit… they’re stuck, they’re trapped, and they essentially are writing policy with their fingers crossed.”

The US growth will likely continue to slow, we saw durable goods today that were very weak, we saw core capital spending within that is at a five year low, at a level last seen 10 years ago, and this was before the greater unknowns now coming out of Europe. Growth will continue to slow and asset prices will continue to decline.

In an election season and campaign, this is when peoples’ voices are heard. Where that goes socially, who knows. It’ll depend on a lot of different things. People are making their voices heard, and hopefully the ruling class is listening.

“I think the whole commodity space has bottomed out. I think investors need to look where it is most painful to look. That remains emerging markets that have already gone through a five year bear market and have much better valuations than the rest of the world.”

In Europe right now, you’re going to see carnage, but there’s probably going to be some opportunity there. There might be opportunities in the UK where selling is occurring due to the weaker pound.

“I’m very nervous about the US stock market, which happens to be one of the most, if not the most, expensive in the world.”

Abstract by: Annie Zhou a2zhou@ryerson.ca

Min Jung Kim minjung.kim@ryerson.ca

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


06/22/2016 - Graham Summers: “DURING THE NEXT CRISIS ENTIRE COUNTRIES WILL GO BUST!

FRA Co-founder Gordon T. Long is joined by Graham Summers in discussing

Graham Summers, MBA is Chief Market Strategist for Phoenix Capital Research, an investment research firm based in the Washington DC-metro area.

Graham’s sterling track record and history of major predictions has made him one of the most sought after investment analysts in the world. He is one of only 20 experts in the world who are on record as predicting the 2008 Crash. Since then he has accurately predicted the EU Meltdown of 2011-2012 (locking in 73 consecutive winners during this period), Gold’s rise to $2,000 per ounce (and subsequent collapse), China’s market crash and more.

His views on business and investing has been featured in RollingStone magazine, The New York Post, CNN Money, Crain’s New York Business, the National Review, Thomson Reuters, the Fox Business, and more. His commentary is regularly featured  on ZeroHedge and other online investment outlets.

 

RECENT HISTORY REPEATS ITSELF

What we’ve seen since 2009 has been kind of this grand delusion. We did have a bit of a recovery from 2009-2011 where the economy and the financial markets snapped back from the very deep recession in 2008. But since about 2012, the real economy hasn’t really progressed. What you’re actually seeing is a financialization of the economy in the sense that asset markets have boomed but real economic activity has stagnated. Throughout this time we have central banks engaging in massive monetary programs which have effectively been a transference of private debt onto the public sector’s balance sheet.

The very policies that bankrupted Wall Street and resulted in the 2008 crisis, those policies have now been shifted onto the public sector’s balance sheet. And as a result of this, most countries are sporting worse fundamentals from a debt to GDP perspective and when the next crisis hits, we’re going to see a severe cycle of default begin, that will eventually be sovereign. The real fireworks have yet to fit.

“If you want to use 2008 as a proxy, we’re currently in the late 2007-early 2008 stage of the cycle.”

LEVERAGE BUBBLES AND CENTRAL BANKS

“Everything post-2009 has effectively been academic central bankers implementing what their economic models suggest would work, but what works in an Excel spreadsheet doesn’t work in reality a lot of the time.”

If you simply want to refer to leverage bubbles, Lehman Brothers was leveraged 30:1 when it went bankrupt. You now have the Fed leveraging something like 70:1, the European central bank is leveraged at nearly 30:1, so you now have central banks sporting leverage ratios on par with Wall Street. To those that say it’s different because the Lehman Brothers couldn’t print currency, central banks have gone bust throughout history. The US Federal Reserve is the third central bank the US has had, and there’s no reason a central bank cannot go broke, because whether you’re going for a hyperinflationary collapse or a deflationary collapse, it’s the same thing. It’s the loss of actual value relative to nominative terms.

“The issue we believe is going to start unfolding is because central banks have spent so much money… propping the markets up over the last 6-7, we’re going to see some sort of implosion.”

Even if central banks engage in what we would call nuclear levels of intervention going forward, that in of itself would result in some kind of systemic event. You can’t have trillions of dollars of intervention without things breaking. We actually had a taste of this in April 2013, when the Bank of Japan launched the largest QE program in history, their famous Shock and Awe program. They announced their program equal to almost 25% of Japan’s GDP, and when they did this there was a brief period in the following week where the Japanese government bond market almost broke and had to be halted several times.

“Even if one were to say, well, we can’t have central banks go bust, they’ll just do a larger program, the problem is eventually the program becomes large enough that either you run out of assets to buy or the system simply can’t handle it.”

We had a brief taste of that with Japan. If central banks go nuclear when the next crisis hits, we’ll probably get another taste of it. They’ll probably close the stock market, to be honest, but how exactly the details will play out remains to be seen.

The other thing to consider is that the political landscape has changed. At some point there’s going to be a popular revolt where people don’t put up with central banks’ meddling to the level they are. There’s a lot of things in the air about how things will play out, but we’re very close to the edge.

THE 2008 TRADE SETUP

“You have to find these kinds of easy ideas for people to latch onto. You can talk about leverage, you can talk about complicated sort of financial metrics, but the reality is that you have to put it in terms that people are going to grasp and helps them realize what’s happening.”

We see an opportunity similar to 2008 today in terms of the discrepancy between economic realities and asset level pricing.

“The idea is that when something breaks and the asset prices begin to readjust to more in line with economic levels, you’re going to see a sharp move… During periods like that, you can see a very large return if you position properly.”

If you compare the S&P500’s GAAP earnings to the S&P levels today, earnings are back to where they were in 2012 but the stocks are 70% higher. Just that alone, for stocks to fall back in line with their actual earnings, you can see a very large percentage collapse.

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IS THE FED BUYING STOCKS TO PROP UP THE MARKET?

What we do know financially is that the futures markets have a program through which central banks can buy stocks. We also know that the Swiss National Bank and the Bank of Japan directly intervene in the stock market.

“It’s not a far stretch to assume that the Federal Reserve is also playing around with this, and it makes perfect sense.”

We know they’re intervening in the markets on a regular basis. Somebody is trying to hold the markets up. Whenever the markets begin to break down on a very aggressive fashion and they hit a key inflection point, for some reason ‘buyers’ move in very aggressively and start buying the heck out of the market. Real buyers don’t do that. When an institution puts in an order to buy stocks, they put in these orders over a span over a couple weeks because they don’t want to adjust the price and lose the value.

We also have some corporate buybacks driving the markets higher, cash flows are flowing, and buybacks should be halting. Retail investors have been selling, and so far the only buyers are corporate buybacks and some form of intervention from central banks.

ECONOMIC TURNING POINTS

It’s very hard to find these turning points. Investors have been crushed so many times by central bank interventions that they’re loathe to put a lot of money into the markets and go hard short. Your average investor, when the market turns against them and they’re short, it’s very hard for them to sit on that position. If you actually look at investment fund managers, the ones who can and want to go short don’t want to because they’re afraid they’ll be crushed by central bank interventions.

At which point does the actual selling begin? It’s impossible to guess, but what you can do is look at the warning signs, the selling pressure, but the specifics are impossible to guess.

INVESTMENT STRATEGIES FOR THE FUTURE

US Treasury yields have had a significant breakdown. Globally we now have $10T of bonds with negative yields, but Treasuries still remain positive.

“From a financial and economic perspective, the US is on at least a sound a footing as Europe and Japan.”

That begs the question of why our Treasuries rallying instead of pushing their yields lower. It’s likely that there’s going to be a move in Treasuries that’s going to have yields falling to all-time lows.

There’s a big question as to whether the dollar is about to begin another leg up in a bull market, or if it’s just going to continue to consolidate. Something happened in the last four months where the dollar really sold aggressively. A theory is that the Fed formed the Shanghai Accord to devaluate the dollar in order to prop the markets up. Since QE300, stocks and the dollar have been in a trading range.

If another round of serious deflation hits, will gold sell-off with the commodity complex or will it hold up? Currently in the last year, we see gold and the dollar rallying, which doesn’t often happen. The question is whether gold will become a fair trade or if it would be a commodity trade.

“The S&P500 is just a couple of percentage points away from all-time highs, but based on earnings and other fundamentals it could fall over 40%. To us, it seems the downside potential is higher than the upside risk.”

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

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


06/15/2016 - Richard Duncan: CHINA’S HARD LANDING HAS ALREADY BEGUN!

The Financial Repression Authority is joined by Richard Duncan, an esteemed author, economist, consultant and speaker. FRA Co-founder, Gordon T. Long discusses with Mr. Duncan about the current Chinese situation and the ramifications being imposed on the global economy.

Richard Duncan is the author of three books on the global economic crisis. The Dollar Crisis: Causes, Consequences, Cures (John Wiley & Sons, 2003, updated 2005), predicted the current global economic disaster with extraordinary accuracy. It was an international bestseller. His second book was The Corruption of Capitalism: A strategy to rebalance the global economy and restore sustainable growth. It was published by CLSA Books in December 2009. His latest book is The New Depression: The Breakdown Of The Paper Money Economy (John Wiley & Sons, 2012).

Since beginning his career as an equities analyst in Hong Kong in 1986, Richard has served as global head of investment strategy at ABN AMRO Asset Management in London, worked as a financial sector specialist for the World Bank in Washington D.C., and headed equity research departments for James Capel Securities and Salomon Brothers in Bangkok. He also worked as a consultant for the IMF in Thailand during the Asia Crisis. He is now chief economist at Blackhorse Asset Management in Singapore.

Richard has appeared frequently on CNBC, CNN, BBC and Bloomberg Television, as well as on BBC World Service Radio. He has published articles in The Financial Times, The Far East Economic Review, FinanceAsia and CFO Asia. He is also a well-known speaker whose audiences have included The World Economic Forum’s East Asia Economic Summit in Singapore, The EuroFinance Conference in Copenhagen, The Chief Financial Officers’ Roundtable in Shanghai, and The World Knowledge Forum in Seoul.

Richard studied literature and economics at Vanderbilt University (1983) and international finance at Babson College (1986); and, between the two, spent a year travelling around the world as a backpacker.

THE CHINESE FINANCIAL CRISIS

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“China’s economy resembles a spinning top that is running out of momentum. It is wobbling and gyrating erratically.”

China is really just running into a brick wall. If they continue to have more and more credit growth, it will only exaggerate their problem. This is essentially the nature of China’s current problem. A stock market crash, diminishing returns on credit, a plunge in imports, capital flight and currency volatility are all signs that China’s great economic boom is now coming to an end. In all probability, this is just the beginning of what is likely to be a very protracted economic slump.

China’s economy need not collapse into a Chinese Great Depression to produce a global economic crisis, although the possibility of economic collapse in China cannot be ruled out. The 17% contraction in Chinese imports last year was already enough to tip the global economy into recession. The consequences of this economic hard landing in China will be felt in ever corner of the world.

CONSEQUENCES OF INCREASING CREDIT IN AMERICA

Despite the efforts of quantitative easing, it did not help or facilitate much benefit to China. This is largely due to the fact that China’s economy is so large. There is a large gap between how much China produces and how much China consumes.  From 2005 to 2014, China invested $4.6 trillion more than it consumed. If we look at aggregate financing it reveals a much more detailed story of the credit growth situation in China. Since 2009 credit growth has been significantly slowing, and once this began, so too did nominal GDP growth begin to decline.

“China is increasingly misallocating and wasting credit.”

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During the last 25 years in China:

If credit growth in China continues to grow then by 2021, total credit growth in China will be more than the peak credit growth the US had back in 2008.

  • The Gross Output Value of Construction increased by 134 times, growing at an average annual rate of 21%.
  • Building Area Under Construction increased by 33 times, at an average annual rate of 15%.
  • Steel Production increased by 12 times, at an average rate of 11% growth per year. Consequently, China now has 50% of global steel capacity.
  • Cement Production increased 12-fold, growing by an average annual rate of 11%. During just three years (2011 to 2013), China produced more cement than the United States did during the entire 20th Century.  China now has 59% of global cement capacity.

On the other hand many would believe that if China devalued the yuan, it would bring in more capital investment, but this is not the case. If they had one big devaluation it would make china much more competitive in the global economy. The trade surplus will soar and bring in more money into china. But at the same time China’s trading partners would not be pleased because China already has a large trade surplus with the rest of the world. So too devalue further only to make the already large trade surplus even larger would be unfair by anyone’s standards.

FALLING FOREX RESERVES

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“Rather than the reserves shrinking, the more important thing to note is that they have not been growing.”

The buyers who are absorbing the treasuries being sold at are really people just fleeing negative interest rates. Rather than take a negative yield, they would rather buy US treasuries at a pathetic 1.7% on a 10yr. The reason China’s forex reserves are falling is because Chinese people want to sell Chinese yuan and buy dollars. And with these dollars they want to buy treasury bonds.

I do expect there to be a steady depreciation in the yuan coming in the near future. But much of this depends on what happens to the dollar. It is very clear that if the dollar goes up, the yuan is going to go down and this is a problem because the more the yuan goes down then the cheaper the Chinese goods will become compared to the US. Therefore making it more difficult for the fed to reach its mandate of 2% inflation.

JOB CREATION AND SUSTAINMENT IN CHINA 

 

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The green shows that China’s’ economy made up 13% of the global economy. But Chinese household consumption made up only 9% of global consumption, while investment made up 24.4% of global investment. This is mind boggling because its telling of investment in all kinds of structures which create jobs.

 “If global investment and Chinese investment grow at the same rate as they are now, then within 10 years; Chinese investment will make up 60% of global investment. Of course this is not possible, it just won’t happen, so the investment is going to have to slow. “

What Chinese authorities are telling is that they are consequently going to move from investment driven growth into consumption driven growth, but this again is just not possible because if you begin laying off factory workers, then these people will consume less, not more.  If investment slows as it must, then consumption will also slow. So in order to have any growth at all, Chinese spending will need to sharply increase.

“For the rest of the world it does not matter how much China’s economy is growing by, but that matter is how much their imports are growing by.”

When Chinese imports are growing, china then becomes a significant driver for global economic growth. But last year Chinese imports contracted by a staggering 17%. Brazil is now suffering the world depression in 100 years because commodity prices have crashed due to lack of Chinese demand. The effects of this import contraction are clearly being felt and it will be global. All around the world we are seeing a rapidly growing backlash against free trade and the rise of anti-free trade candidates on both the right and the left.

“We need to push up wages in the manufacturing industries around the world. Currently the average wage rate globally is $8/day, and there are hundreds of millions of people who would be happy to work for $5/day. We now live in a global economy, we are very much interconnected and we have to find a way to increase wages in the manufacturing sector.”

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


06/09/2016 - Erik Townsend: “YOU EITHER ACCEPT FINANCIAL REPRESSION AND YOUR WEALTH WILL ERODE, OR YOU BECOME A SPECULATOR!”

FRA Co-founder Gordon T. Long is joined by Erik Townsend in discussing what it means to be an American entrepreneur and his perspective as a global traveler, along with the impact of the upcoming election.

Erik Townsend is a retired software entrepreneur turned hedge fund manager. Throughout his career, Erik has capitalized on his ability to understand complex systems and anticipate paradigm shifts far in advance of the mainstream. By the mid-1980s, Erik had invented an approach to distributed system design that is now widely known as Service-Oriented Architecture (SOA). In 1992 Erik founded the Cushing Group, a boutique consultancy focused exclusively on bringing advanced distributed application computing technologies to market. The Cushing Group’s work with Wells Fargo Bank in the early 1990s paved the way for Wells Fargo to become the world’s first Internet Bank by early 1995. After selling the Cushing Group to Ciber, Inc. (NYSE: CBR) in 1998, Erik briefly engaged a well-known investment bank to manage his assets, but was profoundly disappointed with their services.

Erik has become a passionate world traveler. He moved to Hong Kong in 2009 to get a better perspective on changing global economics. While living in Hong Kong, several hedge fund professionals he met there observed that through his own passionate trading activities, Erik was “already doing all the work of running a hedge fund except for picking up the phone and calling a lawyer and turning it into a fund”.

Erik eventually took his Hong Kong friends’ advice to heart, and founded Fourth Turning Capital Management, LLC in 2013. Through that asset management company, he launched a Global Macro-strategy hedge fund in July 2013. In February 2016, in a joint effort with Nathan Egger, Erik launched Macro Voices, a new weekly financial podcast program which will target professional finance, high net worth, and other “sophisticated” investors who desire financial content at a level of sophistication and complexity above what the retail investment-focused podcasts on the Internet presently offer. Erik continues to live a very international lifestyle, and presently has homes in Hong Kong, Mexico and the United States.

AS AN ENTREPRENEUR

Being an American entrepreneur was kind of a hero story. It was understood in America that the people who launch small business and innovate new ways of doing things are the heroes that make America strong, and made it what it once was. It’s in decline, unfortunately. In 2008 I wanted to get back into technology entrepreneurship, bur there were barriers to entry and it was so easy to watch the reckless monetary policy and get into trading instead. The government is desperate and doing crazy things. We’re in very unprecedented times, and if you can understand that picture, it’s not too hard to be successful in trading. It’s much easier to make money by understanding how reckless the government is being.

“I help rich people get richer while watching the country that I’m very proud to be from, in my eyes, fall apart at the seams. Being an entrepreneur was a much more responsible and honorable thing to do with one’s life.”

There’s a huge financial incentive to trade markets and take advantage of the huge inefficiencies that are created by reckless actions of government.

TECHNOLOGY IN ENTREPRENEURSHIP

“I don’t know that entrepreneurship is necessarily stronger in other places, compared to what the United States used to have.”

There is no place that begins to compare with what America used to be. We see America in decline today. It’s gone from being head and antlers above the rest of the world down to still one of the better countries. I don’t know that there’s anything that’s dramatically better in terms of opportunities for entrepreneurs starting their own companies.

“I think that Americans who don’t travel a lot have no idea how much things have changed.”

Technologically, every place was behind the United States. But that was during the 80s. Today, America is run down and broken. The systems in the United States don’t work very well. Asia is shiny and new.

For example, Hong Kong’s octopus card. It has an RFID chip in it and can be used on every form of public transit as an electronic cash card. This was in service and working in 1997. That was 19 years ago and there’s nothing like it in the United States today. Gigabit internet is standard around most of the world now, yet it’s next to impossible to find. Hundred megabit is “unheard of fast” in the United States, but that’s really slow service in most of the world now. What makes this infuriating is that all of the underlying technology that makes this possible was invented in the United States.

“Why is it that the United States is last in terms of adoption of technology that we ourselves invented? I think it’s the failure of government. They have created so many barriers to entrepreneurs taking technology and using it to change society for the better that entrepreneurs are going and doing it elsewhere where governments are cooperating with them.”

That said, the way things are done elsewhere is according to procedure with no deviation from the standard policy. The way Americans think and innovate is still culturally not accepted in most of the world, so we still have that advantage.

In a lot of cases, we’re seeing a lot of American entrepreneurs move overseas because there are better opportunities there. The American government used to recognize that its job was to promote and endorse that kind of innovation, but now they’ve basically been sold out. Entrepreneurs can’t afford lobbyists, but large corporations can. It doesn’t matter how innovative you are; if your government prevents you from being successful, the most innovative people will find other parts of the world.

“I think that if the government continues to prevent American entrepreneurs from succeeding, they’re going to go elsewhere and they’re going to bring their talent to help other countries to be competitive.”

FROM ENTREPRENEUR TO HEDGE FUND MANAGER

Dealing with executives of Fortune 100 companies, you need to prove your ethics and morality and loyalty to them before they’re willing to give a small company a chance. In Wall Street, the boxing analogy is what you have to wrap your head around.

“What you see on Hollywood movies about business being cutthroat, it doesn’t really work that way in most of corporate America. On Wall Street, it’s worse than that.”

Entrepreneurs are people who make things happen, who get things done, and that’s what makes us successful. But investing is the opposite of that. They watch and make decisions based on what other people do. Entrepreneurs also don’t have to listen to stupid people, and you can’t do that in investing. If you focus on what should happen in the economy, you’re going in the wrong direction. You want to be learning how the people who are actually in power think.

“During my work week I have to learn how to think like the people who are in charge do, and it’s not based on common sense.”

THE PROBLEM OF CENTRAL BANKS

Governments are taping over our problems and addressing symptoms with printed money. The root cause of the 2008 crisis was too much debt. The solution governments proposed was more debt, and they’re trying to stimulate credit markets in order to get banks lending again so people can go back to spending beyond their means. There’s no focus on saving and investments. A lot of people have said this is unsustainable.

“The truth of the matter is that central banks, with a deflationary backdrop like it is now, can continue to print money.”

They can keep getting away with addressing symptoms as long as we have a deflationary backdrop that permits money printing to occur without causing runaway inflation. Once we get to runaway inflation, central banks will have no choice but to tighten in order to arrest the inflation, and then things will come crashing down.

We’re printing all this money to benefit Wall Street; it’s not benefiting hardworking Americans, it’s supporting financial markets.

“Wouldn’t it be better, if quantitative easing has to happen, if it were helicopter money that helped everyday people?”

When inflation hits the stage, that’s when central banks have to fold their cards. What happens in the meantime, almost everyone thinks that negative interest rates are coming to the United States. As we do get back toward a worsening economic situation, we’re going to see an uprising. Americans might not understand the problem, but they know there’s a problem and they’re angry about it. If there’s going to be more quantitative easing, there’s going to be very strong political pressure that it should be to help Main Street, not Wall Street.

“I think the next president, the one elected this year in 2016, could very possibly be the most important president in the nation’s history because I think the fiscal situation is likely to come to a head.”

People around the world don’t envy the USA the way they used to. They’re angry. The world is getting very pissed off at Americans. Hilary Clinton is talking tough with Russia. Donald Trump is talking tough with China. When you start picking fights with Russia, with China, these are places who have the ability to end humanity on Earth with the push of a nuclear button, just like the US does.

“All of the candidates, I think, are very dangerous in terms of their very tough-guy attitudes that they’re taking toward other countries. So I’m very concerned about where we’re headed in terms of American hegemony offending people that are able to defend themselves.”

THOUGHTS TOWARD THE FUTURE

You’re better off not being a speculator, but in an era of financial repression that gives negative returns. So you either accept financial repression and that your wealth will erode slower than other people, or you become a speculator.

“I think the opportunity is coming to buy energy, hand over fist.”

You have to watch the action of central bankers, and recognize that the smartest people in the room are saying that the global economy does not support current asset prices. What does support current asset prices is that the Fed is going to be accommodative and continue to prop up asset prices. The longer this goes on, the harder the fall will be.

If you wanted to own something long term, precious metals will definitely behave very well. But buying and holding long term in the stock market is not recommended. We’re in an environment where asset prices have been artificially propped up, they’re supposedly taking the punch bowl away and if they do, I think that we could see a very precipitous drop.

PODCAST HOST EXPERIENCES

“I wanted there to be a de facto place where you could go online and collaborate and share investing ideas with other smart people.”

If you look at what’s there in terms of discussion forums on the internet, it’s childish. So where do the adults go for discussion? So I created a podcast that specifically targets high net worth individuals, family offices, accredited investors, basically sophisticated investors living in financial repression and understand that they have to speculate to avoid a negative real rate of return. And that means collaboration.

“The idea behind MacroVoices is to create that podcast, get that discussion going in the podcast, and then have a listener discussion forum where we can discuss the topics and continue the conversation, bring that global community of sophisticated investors together.”

There are other platforms like Twitter, which are starting to gain a huge amount of market share. We’re participating on Twitter through the MacroVoices handle, as well as having our own listener discussion forums. The idea is to just get smart people talking to one another.

“I get to interview the smartest people on Earth about financial topics, and what we tell them all off the air is what we’re doing different here is please do not dumb it down to a retail level. We want you to speak on a professional level.”

So we keep the guest interview on a professional level, and then add a conversation to explain any issues that might have been confusing to the retail component of the audience. We thought we were going to offend the retail audience, but it’s the opposite. The more that they don’t get it, the more interested they are, and the more they post questions and ask other listeners to help them understand.

“Not dumbing it down is the best thing that we’ve done.”

Abstract by: Annie Zhou a2zhou@ryerson.ca

Video Editor:   Min Jung Kim minjung.kim@ryerson.ca

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


05/27/2016 - John Rubino: DEFLATION IS A DIRECT RESULT OF OUR ATTEMPTS TO CREATE INFLATION THROUGH EASY MONEY!

John Rubino of DollarCollapse.com and FRA Co-founder, Gordon T. Long discuss the effects of the rise in eCommerce along with the rise of technology and the consequences we are facing from flawed perceptions of financial authorities.

John Rubino is author of Clean Money: Picking Winners in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, January 2008), and author of How to Profit from the Coming Real Estate Bust (Rodale, 2003). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.

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The big retail chains are generally seen as pretty good barometers of the health of “the consumer.” And since — in today’s late-cycle debt-binge pseudo-capitalism — the consumer drives the economy, the numbers coming out of the aforementioned retail chains should be cause for worry. Ecommerce companies like amazon are making it easier and easier to stay at home. Women now are more and more buying their clothes from the comfort of their homes which will soon make the need for malls obsolete.

Furthermore by increasing the minimum wage rate in America, all of the fast food chains have begun automating cashiers with kiosks. McDonalds’ has already begun doing this and this new direction has highlighted the lesser need for human labor within the retail sector. Warehouses and factories used to employ many people throughout the world, now with the rise of technology, and particularly in America these places have become vastly automated. In many cases you do not need bartenders, waiters, and cashiers. All of these tasks can be automated through technology.

“I hate to be apocalyptic but the fact of the matter is we have multiple storms that are all playing in the same direction and they are feeding on each other as a link. To link monetary policy and cheap money to robotics. If you are a CEO and money is this cheap, you are going to invest into robotics. These trends have accelerated the shift to robotics and this wave is going to shock people and leave many without jobs.”

MONETARY POLICY

When interest rates are low it is a signal to the market to borrow lots of money. Over the past couple of decades due to these low interest rates, the businesses of the world have begun mass borrowing of money to build factories. This mass overcapacity in turn leads to deflation. for example when you build too much steel you cannot just stop operations at the given plant; the plant must continue to run to at least break the variable cost, which in the long run drops the price of steel.

“Deflation is a direct result of our attempts to create inflation through easy money.”

Cheap money was not going to bring demand forward any more than two years, but what it would do is create a dramatic over supply. We have had $9 trillion leveraged into the emerging markets that basically went into fueling overcapacity for the past several years. When you get overcapacity you lose price power and then cash flows begin to be depleted. This was easily predictable, there was no economist that would say otherwise, however the mistake was that they thought we had some sort of recovery happening or they ignored that and thought Japan had the right approach.

“The people making high level financial decisions the past decade are clueless. They have no idea what the consequences of their decisions are. The people in charge now are getting exactly the opposite of what their predecessors expected when they implemented QE, and ran massive government deficits.”

This is going to force another wave of major layoffs. We already have a gutted middle class; we are killing the golden goose that actually buys consumer products. Maybe what was really missed is that all of this economics was based on a standalone country. We live in a globalized economy now that has labor arbitrage, and the central banks have underestimated the global impacts of these policies.

“We are at the point where there are no more options. Anything we do from now on will have some sort of unintended consequences that will come back to bite us.”

The Japanese Central Bank and the ECB both took steps to devalue their currencies and they got the opposite result; the currencies went up. If we have gotten to the point where all the emergency measures central banks implement do not seem to work then it can’t be interpreted as a sign that we are coming or have come to the end of this process.

THE NEW NARRATIVE

IT-infrastructure

“The narrative has now been shifted to a massive move of increasing central banks’ balance sheets that will be based on fiscal spending of infrastructure.”

James Rickards in his new book, ‘The New Case for Gold’ argues that to get the dollar down and force inflation into the system a way to do it is for the government to drive up the price of the gold. The enemy of the government has been gold, but it can also be the friend of the government in a crisis situation. Similarly, Catherine Austin Fitts  argues the 1% has sucking wealth out of the US society for the past few decades and they have basically stolen just about as much as they think they can steal. Now it is in their interest to go back to sound money to protect what they have stolen. This is another reason for the gold standard to eventually look useful to the people in charge.

Karan Singh karan1.singh@ryerson.ca

Sarah Tung  sarah.tung@ryerson.ca

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