04/30/2018 - The Roundtable Insight: Nomi Prins & Yra Harris On How Central Bankers Control Markets & Dictate Economic Policy

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FRA: Hi welcome to FRA’s Roundtable Insight .. Today we have Nomi Prins and Yra Harris. Nomi has worked on Wall Street as a managing director at Goldman Sachs and ran the international analytics group as a senior managing director at [Bear Stearns] in London before becoming an author. Now a journalists, public speaker and media commentator, she’s the author of 6 books. Her writing has been featured in the New York Times, Forbes, Fortune, The Guardian and The Nation among others. Yra as an independent trader, a successful hedge fund manager, global macro consultants training, foreign currencies, bonds, commodities and equities for over 40 years. He was also CME director from 1997 to 2003. Welcome Nomi and Yra.
NOMI: Thank you very much.
YRA: Thanks Richard.
FRA: Well Nomi is coming out with a new book to be released on May 1st. It’s titled Collusion: How Central Bankers Rigged the World. She focuses on five area, Mexico Brazil china japan and Europe and she’s actually scoured the world to write this. Visiting Mexico city, Guadalajara, Monterrey, Rio de Janeiro, Sao Paulo, Brasilia, Porto Alegre, Beijing shanghai, Tokyo, London, berlin and other cities throughout the united states. That’s a lot of traveling Nomi.
NOMI: That sounded like a lot of travelling when you said it Richard. Yes that happened.
FRA: Is that how it came about? Was it through these struggles that you gained this insight how did you get this inside also through your work?
NOMI: The insight itself yes it came from traveling on the ground and that was a result of really watching what happens since the financial crisis in terms of what the federal reserve has done and what other major central banks have done that we know about publicly in terms of advocating and creating and manifesting … Money policy as well as a quantitative easing or asset purchasing policy. It’s asset purchasing of bonds in the US, it’s the ETFs in japan, it’s corporate bonds in Europe are effectively a collaborative process that really had different effects for the major countries versus the more developing countries and also even as it was coming about in the wake of the financial crisis, had a lot of worries and criticisms been brought up about it. What I wanted to do is discover how those words and criticisms impacts on more of the developing countries. We’re part of the results of the Federal Reserve ECB Bank of Japan process of this particular policy. It was a combination of seeing what was going on and wanting to feel it and examine it and research it from the levels of those countries.
FRA: Is this collusion more of a hand off of a baton for example between central banks or is it actually central bank that are more in close coordination with each other?
NOMI: The main central bank that coordinated in the wake of the financial crisis and even before it became public knowledge in the fall of 2008. This was going on in the beginning of 2007 and throughout 2007 is that they worked together to for example have a lot of dollars in the market , in the central bank reserves system to be available in the case of a crisis. They kind of knew in advance what could be happening but to the public of course a particular federal reserve did this through Ben Bernanke. The face was, we’ve got this, there’s no housing crisis, nothing bad is going to happen, everything is fine. In reality central banks the major ones the G7 ones were already starting to work together to mitigate any potential liquidity or money crises that could result from any financial implosions. That was already going on but then once the financial crisis was in a bit of full mode in the fall of 2008 and the spring of 2009 those conversations became much more frequent, the types of coordinated policies amongst these banks became more frequent, the amounts of them more epic in terms of what was swapped between central banks. Like I’ll give you dollars you give Euros and so forth throughout the process to create a global tranquility on the outside that was really fabricated by these central banks. As the years went on different types of timing periods were used to sort of catalyze this type of collusion or group collaboration again. For example in 2012 when there was a more pronounced credit crisis in Europe and so far and it goes on to this day. If the fed raises rates a bit and it hampers the stock markets and all of a sudden there’s a lot of chaos or turbulence and the European central bank as adjusted will step up and say, “We’re are not touching our rates, our rates are good low where they are. We’re going to continue with our quantitative easing or a corporate buy in process so don’t worry.” That’s where the global collusion comes and of course if you’re outside of this main group of these central banks, you’re either acting with them or against them depending on what you need to do for the domestic situation in your own country. For example Brazil when it has high inflation had to do different managers relative to what the fed was doing but that also hurt it politically? A lot of different pools and studs came in that developed countries throughout this process.
FRA: Yra have you seen similar behavior between the central bucks from your observations?
YRA: Are you throwing fuel on my fire on what didn’t know. How do I know? (unintelligible) We’ve known each other 3 or 4 years but I’ve been discussing this with (unintelligible) for years. Nomi can I just ask you a question? Are you familiar with Bernard Connolly?
NOMI: I’m not. It sounds like I should be.
YRA: You ought to be yes. If you’ll give Richard (unintelligible) I’ll send you (unintelligible) We’ll talk about it later but Bernard Connolly who was at AIG London (unintelligible) He wrote a book called The Rotten Heart of Europe. Written in 1995.
NOMI: Wow, okay.
YRA: Everything that has happened. But because he was on the original group that put together the euro currency so what he saw behind the scenes is similar with what you’re discussing. I’ve come to call him a good friend. We talk. He’s kind of disappeared now for a while but he just needed to rest I think. I can’t wait to read your book but Richard you know that answer. The central banks have, as would I would say what’s going on in Europe especially. We saw with droggy this morning that press conference is one of the greatest acts of (unintelligible) Visitation I’ve seen since David Copperfield. He can dance it but you could see it in Europe, there’s basically been a coup d’état in which the ECB is running its monetary and fiscal policy. You can’t escape it and therefore they are all in this and tonight of course will hear from [Kuroda]. Not that they’ll be any change especially with the political problems of Prime Minister Abbey. It’s such a strong word. I’m not used to hearing the word collusion and it’s interesting that you use that word. I always shy away from it because if I can’t prove a conspiracy then I lose some of my credibility so I don’t like (unintelligible) But I love that you do use that word because I do think it is that. It makes me ask you the question Nomi right back to you and do you have some thoughts on the G30?
NOMI: I do and just to maybe circle back to the wording that’s a really good point to bring up because I mean I also shy away in my research and everything I talk about from the idea of conspiracy because to me even though it has lots of different definitions, the implies definition is that it’s something done inside of a dark corner to other outside groups and therefore it’s not out in the light. To me all of this has been pretty public it’s just that nobody is really or a few people you have of course (unintelligible) A few people have connected the dots. The term collusion and of course it’s used now constantly with respect to the US or Russia and the us elections and trump and Putin and whatever might not be going on with that it’s become a constant word in the vernacular and so it’s come to take up on itself more meaning. I think the collusion, the coordination, the collaboration and its parts of all of those things amongst the major central banks definitely it’s not intentionally being negative definitely was the way of artificially creating a veneer in the financial markets and for the banking systems throughout the world and in particular the largest private banks that are codependent upon each other and upon the liquidity that central banks provide them and look to them. As they did in the crisis and continually for support. That is this manipulation of markets by this huge outside fabricated source of capital really does fall under the definition of collusion because it was done in concert and because their perception around what central banks want their behavior to be and the actuality of how artificial it has been for the financial community and markets are at odds with each other.
YRA: Yeah I think (unintelligible) Sorry Richard. I think that’s absolutely perfect. Let me add just 1 piece to that puzzle. This colluding group is absolutely at odds with thee BIS in so many ways. You can go back to Bill White’s work (unintelligible) And how the BIS is taking a different view. Actually two years ago I went to see (unintelligible) Speak in Chicago and I asked him point blank question because being that he (unintelligible) I said now that you’re at the BIS what’s your view on the zero risk waiting for all sovereign debt? I said I understand what you believed when you are at the bank of Spain but has your views changed? He turned right around and said that’s really a good question. Yes I have a different opinion of it. I thought it so clarified the things that you’re exactly talking about. This group is totally at odds with what they BIS is (unintelligible) They are supposed to be the banker’s banker.
NOMI: Right and the BIS as you know has a lot of reports out on this as well as statements that the collusive fabrication over money and the cheaper negative interest rates the major global economies has had a very negative effect on the rest of the world. It’s had the effect of raise in wealth and equality. By raising equity prices and infusing more debt into the world which at some point will need to be paid off. Because equity prices and other assets prices have risen and people who don’t have that same access to them as the wealthier classes and the participants in those markets get left behind. They borrow more money in order to keep themselves afloat. Then their debt burdens are higher but they’re not participating in the outside of quantitative using (unintelligible) And so forth so it creates these chasms for citizens within the age of the countries and as well as between countries amongst the world. What I find the most egregious at odds, to use your term is that for example the Federal Reserve, all 3 of those should have passed chairs. From Ben Bernanke who started it to Janet Yellen to currently Jerome Paul just do not see any problem in what they’ve done. Same thing with the bank of England. They’ll see inequality has risen but they’ll say inequality it rises for lots of different factors. Who can say it’s because of this massively accommodative monetary policy we’ve just imposed for the last 10 years. But the numbers say it. These individuals (unintelligible) As you mentioned, they don’t see that. They put words around their actions that indicate they’re doing this for the greater good and the main economy and GDP and all sorts of other things. But in reality this money goes to the main participants in the asset market and it has the effect of raising those prices and making certain things look really Rosy and positive and it doesn’t go into the main economy. It can’t. It is tied up on the books of these central banks, so how can it possibly go into the main economy?
YRA: Richard (unintelligible) So perfect. If we go back to Jacksonville 2010 when Bernanke laid out what he was going to do with this portfolio balance channel that’s exactly what it was about. You could see it in real time and yet people said no (unintelligible) I was tongue and cheek asked how is this going to trickledown economics? I’m following this through we’re not even going to get trickle down because there is no separate expenditure coming out of this. This is truly asset price inflation and who controls and owns the assets. (unintelligible) In his book basically it was written by Bernanke in …
FRA: And I mean it can we delve into some examples. Nomi, from your book on, like these areas Europe, Japan, China, Brazil, Mexico. Can we go into some of the details that you’ve provided in the book?
NOMI: For example Mexico with each other issues right now, there’s Canada with the united states relative to trade agreement conversations had this issue in the beginning of the financial crisis which words that its economy is doing pretty well and it really was having decent actual growth and actual growth and a decent amount of multiple forms of foreign investment and so forth and it’s not like wedges were perfect but there was a sense of balance to an extent in the few years before the financial crisis hit. Then all of a sudden you have the US. banking system going crazy on toxic assets and fraud and crime and imploding the entire system and its reaction from the fed and so forth. At the time Ortiz who was the head of the central bank in Mexico said I’ve seen this play out in 1994 with a peso crisis. Where these are external movement, there’s a crisis. The currency gets crash. Certain companies that are contingent on trade between various borders get hurt, they fire people, the economy suffers and so forth and he actually went up to Washington and had a meeting with Ben Bernanke. A meeting that isn’t in Ben Bernanke’s memoirs at all. But was covered by the Wall Street journal and they said you really need to do something to install confidence in general. Not within the banking system but from the banking system that’s just done all this outward into the main citizenry because otherwise these ramifications are going to have very long-term effects. Bernanke ignored him and he didn’t write about him and so forth. Ortiz go back and tries to create a policy at the central bank level where he’s critical of what’s going on in the United States. In terms of what they’re doing rates in terms of not restraining the banks that have just caused all of this chaos and as a result he doesn’t get re-nominated to the post of being a central bank leader. It’s taken over by …. Who has this persona outside of Mexico of being more a part of this elite group of central bankers and therefore able to play ball we them. Ortiz goes around the world in particular to US universities and so forth and talks and tries to warn people that these methods are going to ultimately create problems. In particular he’s concerned about regulating the banking system and the derivatives at the heart of the financial crisis going forward because he felt and it’s true that regulators like that central banks aren’t watching them. Which has been true, it is true and it continues and it looks like what the current set of appointees into the fed on what going on around the world will continues to be true. … He tries to basically keep rates to an extent higher in Mexico. They have to be anyway it’s more of an emerging country but not really follow their policies even though he has friends in Washington (unintelligible) rates even though he’s dropping them tight as he possibly can to score of inflationary problems like food prices and so forth that are going on in Mexico. That are going on Brazil and throughout Latin and Central America. As a result he ultimately does come to odds with his leadership there and with the United States and ultimately with president trump and so the critic came in. No he’s at the senior position at the BIS which as we’ve just pointed out before has a more realistic view of artificial fabrication of capital just for the financial markets of banks versus really caring about the ramification toward a real economy. This was a whole decade of a trajectory through these leaders, these two main leaders. No there’s none but two main leaders at the time of the central bank in Mexico that really tried to both keep their independence and also in different ways very different people critique the Fed and one got kicked out and is doing other things and one is at the BIS where again there’s more oven ability to just say what he thinks. That’s the kind of thing that’s happened. Meanwhile in Mexico there were a lot of problems because of our financial crisis in terms of their economy and now there’s other problems related to trade agreements and so forth but that’s really started with our financial crisis this time around.
YRA: Richard can I pick up here more?
FRA: Yeah, sure. Absolutely.
YRA: I love this conversation. It’s like meeting at Starbucks. Nomi let me ask you something. I have a reason for asking I’m not going to tell you why right now. Tell me where you fit the IMF into this colluding process?
NOMI: This is interesting because they are a mess now under (unintelligible) I think have a more (unintelligible) Is most similar to the BIS critique of this whole process. In fact I was at a conference at the Fed in the summer of 2015. They do an annual conference of the IMF, the Fed and the World Bank regulators. We all mean regulator … The regulatory bodies but the main people that are in charge of the regulation of these central bank. I spoke about this very topic, why the money that has been offered to the financial system haven’t made its way down into the main street arena for real. A very quick summary of my talk was I got up in front of them and I said well because you didn’t make them. You did make that money, you had no stipulations on the money that was given as to where it would or should go. As a result why would you even be asking that question? It was around (unintelligible) Janet Yellen they had spoken just before me of (unintelligible) And I had said everything was fine, we’ve passed the regulation in the United States. Some called out Frank under the Obama administration and they basically had the effect of beating down the bench most egregious risky practices and everything was going to be fine. Without addressing anything that the Fed had done and was still doing to provide capital to these and to the asset markets after that there was a luncheon. This is a long answer but I just want to set the stage here. There was a luncheon at which Christine Lagarde was there speaker. This was right after she was having a public media battle with Janet Yellen about not raising rates yet. They hadn’t yet this is the summer of 2015. Because it would negatively impact the emerging economies and countries that were going to be exposed to the dollar and into punitive way. They had borrowed money over these years because they are been under disadvantage because they kept their rates and had to keep their rates higher to fight inflation and other things in their own countries relative to the main countries keeping money down for their financial system. There’s a dislocation that all this debts has accumulated there but if the dollar were to go up because rates were to go up then all of their repayments that had to be done in dollars would be that much more expensive for corporations or for the governments in these emerging countries and that would have a negative effect on those countries. So that’s where she was coming from. Not that she was advocating quantitative easing but she was saying is if you’ve created this mess and you have to understand what the ramifications will be. She didn’t really come up with a solution as to how to do this in a better manner but she certainly warned that the other side could be potentially really dangerous. What you also did was spend a lot of time working with the leader of the people’s bank of china governor Zhou who is not there now he’s just been replaced or he’s just retired. But he had been a long-standing central bank leader and actually he and her had a very good relationship. One of the things that happened in the recent years is that the Chinese … the currency became part of the basket of currencies that the IMF has. The reason for that is I think the IMF was trying to find a way to diversify away from a essentially this us centric, European centric, Japan ancillary contingent because of what has happened over the last decade and to protect the world going forward. I think this whole decade has seen a big shift in the allegiances of the IMF under her. I’m not sure where that will go in the future but that seems to be what has happened.
YRA: I raised the issue because when they chose her of course (unintelligible) Pushed out and I actually had a letter published in the Financial Times suggesting that … Carson I know he was considered for that post but of course he fell back into them overhang. I thought that they should take Trevor Manuel from South Africa, and elevated him because I thought he probably is one of the best finance ministers I’ve ever seen. It’s time to elevate as you rightly talk about non-European non US. Yes I know that their money basically making up the IMF so that. When it’s your gold you get to make the golden rules. It was time to make that shift. I’m not a Lagarde fan I’m not an IMF fan I think that they have a very short … when it comes to certain things like. I’ll always be appalled that they stepped in, in the Greek situation. I have a sense as to why, that they stepped in. But they were just all wrong because if Greece is part of the EU, and the EU is a developed nation with lots of assets. What is the IMF sticking your nose in there for and I know the Chinese were not happy about it, as a lot of the people who work at the IMF at a higher level. Thought that that was a very bad decision. I think they’re going to come and move it after Laggard is gone. When this stuff a lot of gets played out, it will have proven to be a very poor decision. Thank you for answering that.

FRA: What about Japan … Sorry go ahead.

NOMI: This is a great conversation. I agree that there has to be. That was one of the things I noted in China. China chapter in the book is spending time with the heads of a major development bank and the whole idea of even having other consortiums, whether through trade alliances or the development bank alliances that have other countries outside of the main ones that created the IMF and the world bank and control most of the reserve currencies in the world to basically have something else where they have that strength. There’s been a lot of growth. That really doesn’t get covered. I don’t know what it’s like over there. It’s certainly doesn’t get covered in the US the extent to which non developed countries, non G7 or the outside parts of the G30 beyond that are actually working together to be established in a different way and have more power in the world economy.


YRA: It’s a good point. I’ve suggested in my blog for last eight, nine years. The only time the IMF is crying for more money that they suggest issue gold backed bonds and take their hold on gold that they should have and it’s always bothers me.

FRA: Right.

YRA: When real Keynesians will not … It’s just sitting there, and you can leverage it up. You’re from a banking background. I can take that gold and create all the trillion dollars of bond that people around the world who would like a little hard currency or some sense of security whose 20% backed by gold to the demand would be so great and the volume cost. Don’t come asking me for money, you’ve got plenty of money just put it to use.

FRA: I was going to ask on Japan. You have a section in the on Japan Nomi. What is the real story behind the Bank of Japan’s quantitative and qualitative using program which begun in 2013 augmented with a negative interest rate policy for large scale purchases of Japanese government bonds? You go into some detail on the real story behind such actions.


NOMI: Yes so what was going on of course Shinzo Abe the current leader of Japan was also instilling upon a Japan history. Abe economics. Effectively that was an element of stimulus that he brought in. He needed someone at the Bank of Japan that would mirror that, with the kind of policies that the Fed was doing. The Bank of Japan has been involved in dropping rates along this whole period of time, and in quantitative easing. In fact they invented quantitative easing to an extent back in 2001. They basically came on board when Kuroda who’s the current head of the Bank of Japan was selected to lead it. His philosophy was very much in keeping with the feds philosophy and in keeping with Abe’s philosophy that somehow, if there was just watch of capital made available by the central bank, and it could go wherever it needed to go in the economy or in corporations or in the case of the Bank of Japan the actually buy ETFs or exchange trader funds which are collections of basically stocks. Therefore helps elevate the stock market in Japan. This was going to create politically also positive environment for people in Japan to look to this leader and say he’s doing a great job for us. Japan of course has had a very flat economic situation for a long time and this has been a way to consider it stimulus both from a fiscal perspective and the monetary perspective. Even though technically central banks are supposed to … I don’t even know who said they were supposed to. There’s legal boundaries between us central bank and its government in certain countries. The reality is that central banks by virtue of being able to conduct this policies and impact an entire financial system of these countries, are not independent of governments. What Kuroda did was basically give Abe credibility and vice versa, instead of promoting two sets of policies that they could then spin as being positive for the country. There’s also a back story to that which is more relevant now in the age of heighten trade wars. Again I think trade wars or trade re-agreements have been happening very quickly throughout this decade. For Japan had a new agreement with Europe that was penciled not too long ago and forth. They’re also trying to position themselves towards those types of agreements that have more of a leadership role and not just a shadow role to the US and the global economy. By having a central bank that can very liberally conduct these monetary policy moves, it helps their elevation with counterpart as well. They have the capital to do things. That’s a benefit to their overall staff, see what you’ve done as it benefits Abe.

FRA: Go ahead, Yra you wanted to comment.

YRA: No I’m just … Nomi how do I not know you?

NOMI: Because I travel so much, we both travel so much we’re never the same place at the same time.

YRA: It’s amazing because I believe there are things covered in the same way too. In Japan has made a very good … My son it happen to be fluent in Japanese and covers Japan for this male group out of Washington. I have him do my translations for stuff … supposed to stay more in touch with me. I’ve been training for over 40 years, and the Japanese have always been trusted from a currency perspective. What we’ve seen and we can see it. If you go back to the IMF G20 communique in October of 2012 when the Yen really begins its decent from 76, 77, 78 Yen to the dollar to where we presently exist. That was done. You can read the communique because I actually go to blog on the … October 15th 2012 because they’ve got the … from the IMF that was okay for them to lose the currency to weaken. That’s when Abe … As the democratic head of Japan who had a short run midway while that was placed again by the LDP and it all begins to fit into place. We’re going to see it tonight. The bank … The BOJ is(unintelligible). Now they’ve been very lucky, and I use that word as we might use the collude, they’ve been lucky. They’ve been very fortunate that world has had enough growth to carry them. Anybody who compares Japan to US … I don’t think that’s right, because Japan started from a different place anyway. They started with an enormous school of savings, when the whole stagnation period for over two decades has taken place. They had savings burn off, and number two they had the great luck … I won’t call that luck, but 97% of Japanese debt was owned by Japanese. During the inflationary period, they’re not being punished, they’re being rewarded. We’re speaking on the financial oppression authority podcast. They weren’t being financially repressed because of the deflationary cycle, but Japan they’re not in it anymore. Now they’ll be financially repressed because interest rates are so low. There’s low return on earnings, and now they’re really been … so how long they will be able to continue this. It’s interesting. I believe that Kuroda is a prisoner of this policy. He’s a prisoner of his own success, and I have no idea how they’re going to really make the way out of here.

NOMI: No I think that’s right, that’s probably why they’ve shifted. The one modification he’s made that the other central banks … The central bank has done, but is to buy stocks and that’s very much. Because they’ve gone so low to negative on rates, and they do have such a contain population and a better savings rate and all of that, just philosophy of how they save so forth. There’s nowhere really else to go, as there is nowhere else to go on the rest of the world. But because of this particular situation in Japan accept into the Japanese stock market which is also a very highly owned by the Japanese. The central bank is trying to push off some of the … Again this is politically motivated. To push off some of the problems that could arise when this population of people that really don’t invest outside of the country, have nowhere else to go. They’re helping to pop up the only game in town which is their stock market. That I think is the reason for the modification of quantitative easing relative to the Fed that doesn’t actually buy the stock market here. What the Fed does is it supplies all this cheap money and gives out all of this green lights to the private banks who then lend it out to the corporation and so forth and so buy their own stock. We’re looking at record of the stock by about … Here there’s a step removed whereas I think the central bank is more directly involved in the stock market.

YRA: (unintelligible) and qualitative.


FRA: Perhaps we can end with some examples on European. You have two chapters on that Nomi in the book and a lot of interaction battles between the European central bank and the German Bundesbank. [intelligible] as German chancellor, Wolfgang Schauble German finance minister, and of course droggy. Can you get some examples and insight on that?

NOMI: Sure, so those chapters are actually before droggy. I say before he was head of the European central bank when it was Jean Claude Touche that was during the time where I… I mentioned Greece was being absolutely punished for having been involved in allowing foreign investment into Greece effectively. Then being punished because of the overall decline in the economy and the fact that these bond holders wanted their money back and everyone from this European central bank to the Bundesbank as you mentioned to the IMF, anyone involved in Europe thought it was a really good idea to punish Greece by providing a bailout that really was an extraction of whatever wealth and assets values were left physically in Greece. That was where that problem came in and … came into that environment advocating that but also really advocating more quantitative easing to wash over everybody’s issues. And massively increase the balanced sheet books of European, central bank through that process. He had very strong relationships also with the US. He had come from Goldmans, he had been at the Bank of Italy, which was having a lot of problems. His fortuitous timing of leaving the Bank of Italy to run the European central bank got him out of that situation. As a result not just by his own, but what was going on at the time. From Greece to Italy to Portugal, Spain, all of these countries were being hurt by this new wash of money that was going into the major banks for example in Germany. What’s interesting is that, even though a lot of the money that was made available through the European central bank to the core countries and banks in Europe relative to the more south and eastern countries in Europe as it happened, had the benefit of helping the part of the German banking system that was private. At the same time the Bundesbank because it seeing, it’s getting this help, but it’s also saying that Germany is doing quite well from a growth perspective relative to all the rest of these debt ridden, problematic country. Germany is relative to the rest of Europe really enjoying a strong benefit in general. They do have some inflation, they do want to reduce the reliance and quantitative easing. They do have a fight that emerges between the Bundesbank and the European central bank. Because the European central bank is now all of a sudden setting policy for all Europe and the Bundesbank it’s like we don’t really adhere to that, because we think rate shouldn’t be this low, we actually think they should be higher and there is growth there, there is a inflation here people are doing fine. There’s been this constant fight again between Germany and the European central bank over monetary policy since droggy has been and he always was trouble and so forth because of that. They have a very different situation because they’re factioned in that way. Then you throw into that England, and the Brexit vote which was a direct result of people within the UK being are the people that voted for Brexit being concerned about all of the mess that was going on European … all sorts of other things rather than, their policies of these competing central bank who are ultimately helping their own banks relative to their own people. In England that was just seen on a ground level, and bank of England of course was doing the same policy within England, so quantitative easing, helping it’s a market and helping its banks while wages have been stagnant and so forth. There’s been a little fracture going on throughout Europe on which is manifested and how people low in their economic anxiety and so forth.

FRA: Thought on that? I know you’ve written a lot for the blog site. Yra, yeah.

YRA: First let me … This is my opinion going back to 2011 when droggy gets the nod because that was Sarkozy guessing Merkel. When they put her as the most influential person Europe on Time Magazine I broke into laughter. I was probably laughing for two days. There was no way the French were going to tolerate … who ought to have been the president of the ECB, because I think the Germans would have felt a lot more comfortable with a German at that helm. If you had to go down this path following the US, it be more comfortable. … Of course goes back to when I lost a lot of money in the early 90s thinking that they would break the … After they broke the British pound link to the Deutschmark that the French … Franc would be next. That they would have to go … People forget that … was the head of the Bank of France at the time. The Bank of France was raising overnight rates to spend the speculative tide to 100% for overnight borrowing. Because, in order to be short for French, you had to borrow. …as I would say was more German than the Germans, and you saw it in 2011 when he raised his interest rates twice in the middle of this great financial crisis going on. Because that was him I think really play … the Germans at the time. It was a grave message which of course we get droggy who ensured that France would never, never support a German at their helm. We’re going to see the battle play out again right now, because there’s going to be (unintelligible) I think the Germans are at the point especially the politics in Germany are heating up. Everybody says, well the … was another immigration. You know Richard, and don’t normally speak this. It has more to do with my mind, and take very close attention that German savers, and Germans are savers. They have the lowest home ownership rate … of any developed nation. It’s like 42 or 43%. Germans don’t traditionally borrow, they’re savers. There’s been nobody more financially repressed than the German citizens. I think that gets brushed away too quickly as to what the rising sentiment is in Germany. Merkel has phenomenally weakened. Even the … Can back her into corner in different ways. The rise of political angst in Germany is great. I would argue vehemently that there is much more to do … The fact that inflation Germany is let’s be kind and save 2% and they’re running this whole thing. The two year note in Germany right now is 55 basis, Negative 55 basis point. The people who are getting homes are German savers. You’ve not seen the rush of … is really under the underperform … because that’s what happened in 2000 when the Germans finally convinced (unintelligible) When the other stock market and then of course is a bad combo in tolerating the German market especially (unintelligible) They’ve been reticent so nobody has borne the grip of ECG policy more than the German savers and this is having great political ramifications.
NOMI: Yeah I totally agree with that. I totally agree. They are concerned and that’s where their politicians are arising and some of those areas are having the most impact because you can’t really save money on negative interest rates and so that’s another reason that they are at odds with the ultra-low rate policy of the European central banks.

FRA: Great I guess running out of time but the book is Collusion: How Central Bankers Rigged the World. New book by Nomi Prins. I guess additionally above that how can listeners learn more about your work Nomi?
NOMI: Well they’re welcome to come to my website which I try and update which is for anything that I might have knew. I’ll post you if I ever come out there but also just basically the book is available I think it’s on and also in different places.

FRA: Yra?
YRA: (unintelligible) Richard you can go to and Notes From Underground which is my blog pops up I can initiate, you can subscribe to it for free. No advertising on it nothing just a lot of great directive that goes on between the readers over serious issues. As you know we have leadership all over the world so I hear from people who are boots on the ground when we tackle or some of these end I’m glad we did this because now I have to go search Nomi Prins and I’m going to arrange to send her a copy of Bernard Connelly’s book because the fact that Bill Shepard and I Printed 10,000 copies even back in 2013 when the book was out of print. Bernard actually wrote a new forward for … tries to do that to I have many books to spare. I think it’s the most important book. I will say that Nomi’s book is out now and this is an important read for people who felt afraid (unintelligible) Been doing this so I always add a little books of this nature because you need to understand this. These things don’t end well. I haven’t read Nomi’s book but I certainly will order it. I’m sure that’s what goes … They do not end well. It’s not like this is new in history. It’s been done before and it’s in fact the collusion I wanted to get into that if I have a minute of two. We know we talked about that central banks are really (unintelligible) They’re going to lose their independence where they’ve over shot their self-proclaimed mandates I will say we’re self-proclaimed. I know the US congress gave the Fed but I’d …. We’re coming to a very great reflection point that I blogged about the other day which was about everybody better go dust off their knowledge about the 1951 accord between the treasury and the Fed when the treasury forced the Feds prior to that to keep interest rates artificially low because of the huge amount of debt because of World War II. Then the Fed couldn’t take it anymore after inflation got out of hand and (unintelligible) Had to sit down and negotiate and accord. But we are coming to that going to this great inflection point because the fed is now being trapped by this because if interest rates are said to raise the cost of staining the US debt is going to rise and discretionary programs are going to have to be cut dramatically. Here we come.
FRA: Great it’s a nice little discussion based on history financial discussions end economic perspective thank you so much Nomi and Yra.
NOMI: Thank you so much.

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

04/23/2018 - The Roundtable Insight – Charles Hugh Smith On The Developing Trade Wars

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FRA:       Hi. Welcome to FRA’s RoundTable Insight .. Today we have Charles Hugh Smith. He is an author and leading global finance blogger and America’s philosopher – we call him. He’s 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 in the Emerging Economy. His blog has logged over 55 million page views and number 7 on CNBC’s top alternative finance sites. Welcome, Charles!

Smith:   Thank you, Richard! Always a pleasure.

FRA:       I thought today that we’d talk about trade potential for developing trade wars. Where this could ultimately lead and what’s behind it. How have we gotten to this point? We see a lot of, not just in the U.S., but in international trade war issues. This week – Brazil accusing the European Union (EU) of instigating trade wars and threatens World Trade Organization complaint. So, it’s all over the globe now. You recently had a discussion with our co-founder, Gordon T. Long, and I’m just wondering if you can relate that in terms of how financial repression has caused the trade wars.

Smith:   Right! It’s a great topic, Richard, and I’m glad you brought up the issue with Brazil and the EU – showing that this is not just the issue between the U.S. and China which gets a lot of publicity but it is a global phenomenon. But the roots are global as well and at least one of the roots is financial repression which is the major central bank’s policies over the last nine years of recovery to drop interest rates to zero to buy risk assets, to push investors into risk assets and generate a lot of liquidity and credit. One of the results of that is corporations have had an easy time borrowing a lot of money and, of course, some of that have been spent on buying back their own shares and so on. There’s also been a great expansion of capacity, especially in emerging economies like China where the government is explicitly trying to create jobs. There’s been a huge amount of money poured in – generating more capacity. In other words, there are more factories, more production and more mines opening. So, the world is awash in most things. There is too much of everything because of this overcapacity. What that has led to in the private sector is the loss of pricing power. In other words, when there is an over-supply or over-capacity, then you can’t really charge enough to make a good profit. Then, the corporations with global exposure, have to start cutting costs. We’ve seen this lead into sort of an endless cycle where they first offshore production, then they offshore back office, then they slash and burn their payroll and then they move from salary to employees to contract labor. There are all these ways of cutting but eventually, you get through the fat to the meat. Then pretty soon you’re cutting the bone, right? Then you end up with zombie corporations which are still producing and are only surviving because they keep borrowing. In China, that’s the whole model of things. This thing so called SOEs (State Owned Enterprises) which they lose money. The state understands they lose money and they just keep borrowing money so they can keep their payroll. Outside of that sort of government subsidy, it creates a world in which nobody can have enough money to justify their evaluations. So, the national governments start turning to trade wars as a way of getting back pricing power and limiting the over capacity and over supply that’s crushing their domestic economies.

FRA:       Do you think that the trade wars could be implemented by tariffs or by global competitive currency devaluations?

Smith:   That’s a great question, Richard. Because part of what makes every discussion of trade so complicated is because different currencies are the sort of foundation of trade. If a currency is greatly devalued, then those products are cheaper for other buyers and other currencies. If a currency gains in relative value, then that nation’s export becomes expensive and their exports suffer. They talk about competitive devaluation, right? And that’s the policy in which everybody tries to weaken their currency but it’s a zero sum game. We can’t all weaken our currency, right? It’s like if one currency loses its value, it’s against a basket of other currencies. There is some question as to whether that’s really going to work. In other words, if you’re the only country that’s devaluing your currency and everybody else is stable, then you can get away with that and gain an advantage. But if everyone else is starting to play the game, then where would that lead? It’s not really a solution.

FRA:       Let’s dwell a little bit more in detail about the U.S. and the U.S. trade deficit. You’ve graciously provided a number of slides. If you can go through those and provide insight on each?

Smith:   Yeah! Another thing that I find fascinating in trade is that it ties in the global trade economy. We talked about financial repression in central bank policies and how that influences it and how currencies influence trade. In terms of tariffs, I think it is important to mention that many countries such as Japan protect their domestic industries without using tariffs. They just simply use bureaucratic mazes and motes. For example, if you’re going to export something to Japan, you have go through a bunch of different hoops with various ministries and the ministries, of course, are well trained to find some reason to put your application aside for six months and for another six months because have more research we need to do. There is more than one way to protect domestic industries and bureaucratic mazes are actually more effective than tariffs and I think we may get into the political side of this later in the program. But, you know, Trump has announced a bunch of tariffs and then he quickly announces a bunch of exemptions. A bureaucratic maze is actually way more effective way to control or protect your domestic industries. To go through my charts, the first chart is of U.S. based corporate profits.

It is kind of interesting that those profits around 2000 which had shot up a lot as a result of the dotcom boom of the late 90s. They were about $700 billion a year and then China enters the WTO (World Trade Organization) in 2001. Very quickly, the U.S corporate profits basically tripled. That tells you that I don’t think this is a coincidence. That’s a stretch. Clearly, who’s benefitted from the expansion of trade in emerging productive markets like China are the U.S corporations. People that have done research and say,” Oh well, the cost of goods at Wal-Mart are cheap because of the production overseas.” They kind of guesstimated that the American consumers might have saved $200 billion or something like that in the last set number of years. However, if you look at the corporate profits going from $700 billion to $2.4 trillion, the corporations have pocketed trillions. Consumers pocketed nickels. Another chart I have here is the U.S. oil production and has gone up quite a bit as everyone knows because of fracking and other technology since.

This has really relieved the pressure on total U.S. trade deficit and much of which was energy. When the U.S. was importing six to eight million barrels of oil a day, that’s hundreds of billions of dollars’ worth of energy, right? Now that U.S. production has increased, it continues to import energy products and its also exporting some of its oil as well. We know that Canada and Mexico – North American Free Trade Agreement – as a whole is an energy exporter. The U.S., bottom line, has been impacted positively by its oil increase. I have a couple of charts here about breaking down the U.S. trade deficit and it is interesting because we tend to think of it as a national thing, right? What is the trade deficit with China or Germany? This tells us that almost half the goods trade deficit is related to autos and vehicles. That’s an interesting kind of fact. Imports and exports are a really broad part of the economy. In other words, it is not just soy beans and steel or aluminum. It’s a lot of different products from different parts of the world. You can see that the U.S. runs trade deficits with most of the world. Another chart I have here is the trade deficit. It is not mine. It is from somebody else.

The trade deficit used to be extremely modest back in the early post 4 years. Once we got a bubble economy, where the central bank was pouring in tremendous amounts of liquidity into the banking sector and in the economy. Then we get a bubble economy. That’s when our trade deficits sky rocketed. Of course, that is a bit simplistic because oil was a big part of our imports and the strength of the dollar made it convenient to buy other people’s products. When your currency increases in relative value, then it becomes even cheaper for you to buy other nation’s output. There’s a lot going on to add to that huge increase in the national trade deficit there. So the last chart is the IPhone supply chain.

The trade is not calculated with any kind of accuracy. It is very difficult now because of the global supply chain to make sense of what trade really is. This is a good example because if an IPhone is shipped from China and lands at the dock in Longbeach, it is credited as a $500 import from China. But if we look at the components, they’re made in Japan, South Korea, Europe, America, and other nations that as much as $480 of that $500 ‘import’ from China is actually imported from elsewhere. As little as $10 or $20 may actually stay in the Chinese economy. If we calculated trade in that way, some people actually claim that the trade deficit with China basically disappears. So much of what China does is assembling components from elsewhere. That huge trade deficit with China is illusory to some degree.

FRA:       It is somewhat misleading in terms of how we measure trade and that’s leading to misunderstanding as well.

Smith:   Yes. That is right. Much like GDP. It includes a lot of stuff that doesn’t mean the economy is becoming more productive.

FRA:       What about what’s happening in terms of the U.S. Trump administration. Do you think their strategy is to use these trade tariffs and potential trade wars as a bargaining chip for trade treaty organization in order to get the U.S. a better deal?

Smith:   Yeah. I think we see some evidence to support that, Richard. That was one of Trump’s campaign kind of promises – to cut a better deal. It is interesting that when he first announced his trade war sort of policy, then companies like BMW suddenly announced they were expanding their assembly of vehicles in the U.S. It’s an interesting dynamic because if you get a political threat, then corporations don’t really have the luxury of waiting around to see how that policy is implemented.  They see the writing on the wall, they see the political narrative shift and trajectory. It makes sense for them to go ahead and increase their production and assembly in the U.S. In other words, be proactive. Don’t wait around for the trade war to heat up. Just go ahead and move your product line and some assembly to the U.S. ahead of it. Ahead of the curve so to speak. We’re starting to see some of that.

FRA:       Yeah. Speaking of the political angle, there was a recent discussion of placing 25% tariff on U.S. soy beans. Could this be a political ploy by China in order to aggravate the backing of Trump supporters in the U.S. Midwest where a lot of the soy beans are grown?

Smith:   Yeah! It’s a fascinating supposition. I’m glad you brought that up because any kind of announcement regarding trade will have a domestic impact on the companies producing those goods. It’s undoubtedly that the Chinese leadership are trying to undermine Trump’s political support with that. If you’ve ever driven through Iowa, for example, much of the state is soy bean fields, wheat fields and corn fields. The U.S. certainly a bread basket of grain and soy bean producer of global proportions. There was some analysis that came out and said that that sounds nice – the Chinese trying to say they’re going to raise the price of U.S. soy beans but the world does not have an over supply of soy beans. So they can buy some from Brazil which is another major producer but their demand is so large that they’re going to end up buying U.S. soy beans anyway.

FRA:       Yeah. There are 400 million pigs in China that need to be fed. So, without the soy beans, they’re going to run into a lot of problems. There’s only about 14 million tonnes of domestic production in China from my understanding.

Smith:   Yeah, exactly. This is where it is fascinating to drill down because people are saying,” What about rare Earth metals?” This is because China has a monopoly on some of those metals and you can get into some electronic components and chemicals that the Japanese have almost a lock on for relatively modest parts of key industries. It turns out there’s only couple of factories in the world that make these things. That’s why we have to be careful about the sledgehammer to drive attack. Politically, it is also interesting to ask if it is really true that the U.S. has just been a dumping ground for the last 30 years. In other words, everybody else can over produce and just dump over their production into the U.S. market. Maybe it has been unfair. Nobody wants to talk about that but I do wonder if that’s actually a valid perception. As I mentioned earlier about the BMW thing and a lot of the Chinese machinations, people don’t want to lose the U.S. market. It is too big and important. There is no substitute. In a way, Trump has little more leverage than the exporters as far as I can see.

FRA:       Do you think that the U.S. and China will follow through on these plans for tariffs? Do you think that they’ll be pushed back in the market in other countries and economic forces in general?

Smith:   It’s a great topic, Richard. Before we started recording, you sent me an interesting article from the economist Barry Eichengreen – whom I understand you’re going to interview in the near future – he was talking about the fact that China and countries like China with higher export to GDP ratios than the U.S. In other words, these are export dependent mercantilist economies. They don’t really want to encourage a trade war because they’re going to be a much a bigger loser than importing countries.

FRA:       They’re sort of more for free trade than the U.S., ironically.

Smith:   Right! Exactly! To me, it is interesting to look at the model that’s often held up as being remarkably successful since the end of WWII which is the mercantilist model that Japan followed which was to protect domestic industries at all costs and then use government money and power to boost your export sector. Do everything you can to make it easier for corporations to expand their production for selling overseas and that enriches your nation. South Korea followed that model, Asian Tigers and China pursued that model with great success. Now, looking back at what has happened to Japan, after that whole export burst ended in a financial bubble, they’ve been stagnant. Part of why they’ve been stagnant for twenty something years is that when you protect your domestic industry, you protect a bunch of inefficient and unproductive industries. Those companies don’t make enough money to become efficient. They become sort of like a zombie sector. There is some employment but they struggle. Since there is no competition from overseas, to say that that model is successful, it is only successful in the boost phase. But once you get to the point where you’ve protected a bunch of inefficient and unproductive domestic sectors and you run into competition in the global stage with your exports sector, then you get stagnation. Japan’s export sector is still large but look at the profitability problems they’re having. It turns out that big electronic industries like Toshiba and Panasonic, they’re riddled with financial scandals because they’ve been overstating their profits by trillions of yen for years. They’re really not profitable anymore. So much for the mercantilist model. It only works for a while. It is not a permanent successful model. There are blow backs and consequences. To put it another way, trees don’t grow to the sky.

FRA:       Rather than imposing these tariffs, could the U.S administration focus action on intellectual property rights dispute between the U.S. and China on IP (Intellectual Property)? Could that happen?

Smith:   It is important because a lot of what the U.S. exports is software, films, entertainment and all of those things are easily pirated. We all know stories that you could get the DVD of the movie in Hong Kong’s streets before it is even released in theatres. We have a lot of friends in China and they report to us. In general, for the Chinese people, software is like air. Everybody should be free to everybody. It is not considered theft as we would see or it as Microsoft and other companies would see it. Trying to control the theft of intellectual property is very difficult. It is worth doing. You have to make an effort if your export sector is heavily dependent on intellectual property like the U.S. is but I just don’t know how much you can really change that dynamic. It is very difficult to stop thievery except at the official level.

FRA:       Where do you see all of this going in terms of the next phase of trade war discussions? Could this cause inflation in consumer prices because now the U.S. actually have to make the dishwasher or microwave oven here rather than importing it because of the large tariffs. Do you see that potentially happening – much higher inflation?

Smith:   Right. I do wonder about that. People are starting to say,” Oh well, you know, you put tariffs on steel and aluminum and that’s going to ripple through the economy.” We have to start asking. What percentage of our products are basic materials like aluminum, steel and soy beans? If you take a box of cold cereal, it turns out that the grain is something like a nickel or a dime. If we look for inflation, it could be in finished goods, if there’s tariffs on finished goods, that could really hurt like auto parts. If people start slapping 25% tariffs on finished goods, that could have a really big impact. The alternative view is if those producers decide to move their production to the U.S. and go ahead and absorb the higher labor costs and taxes here, it might be awash. In other words, the actual sticker price might not go up that much or there would be benefits in terms of supporting U.S. employment that certain number of higher prices would be offset by bringing the supply chain home, stronger employment here, more taxes being paid and so on.

FRA:       Finally, what are your thoughts on how trade wars could potentially lead to physical wars? If we absorb more labor in the U.S. that would take away labor in China and the ruling party, there is concerned about that – causing social unrest. Could all of this morph into physical wars?

Smith:   There’s a famous quote by a French economist, Bastiat (Frédéric Bastiat), from the 19th century and I’m just paraphrasing. I don’t have it in front of me but it something like this: If goods don’t go across borders, then soldiers will come across borders. Kind of implying that dynamic you’re mentioning. I think trade is about 10-20% of most major economies – imports and exports together. We have to try and remember the scale. We’re not talking about most countries having 50-60% of their economy based on imports and exports. Trade is a critical sector of every economy but I think that the potential for disruption politically is in those countries that are super dependent on trade. Now, that would include Germany of which about 40% of their GDP is related to trade, as I recall. And China and these mercantilists based economies. They are much more likely to suffer political blowback and domestic turmoil and escalating sort of trade war environment. That domestic political turmoil and disorder is much more likely than a shooting war because trade wars are more relatively controllable compared to an actual combat war – where there is really a high risk where things get out of control. It is more likely that there will be domestic turmoil and that’s what politicians will have to focus on – how to deal with their domestic turmoil as a result of trade being disrupted.

FRA:       Wow. That’s great insight, Charles, on this potential for trade wars. How can our listeners learn more about their work?

Smith:   Please visit me in I got three chapters of my most recent books and big archives and come visit me at

FRA:       Excellent! Thank you very much, Charles.

Smith:   Ok! Thank you, Richard. My pleasure!

By Karl De La Cruz


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04/20/2018 - The Roundtable Insight: UC Berkeley Professor Barry Eichengreen & Yra Harris On The Potential For Trade Wars

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03/28/2018 - The Roundtable Insight: Bill Laggner On How Blockchain Will Revolutionize The Economy

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03/28/2018 - The Roundtable Insight: Charles Hugh Smith on Automation, Robotics and Universal Basic Income


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03/22/2018 - The Roundtable Insight: Yra Harris On The Fed, Trade Tariffs, Italy, Gold & Currencies

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FRA: Hi, Welcome to FRA Roundtable Insight .. today we have Yra Harris. Yra is a independent trader, successful hedge fund manager, global macro consultant trading foreign currencies, bonds, commodities and equities for over 40 years, he was also a CME director from 1997 to 2003. Welcome Yra.

Yra: Richard, nice to have you back from Argentina, I haven’t seen you the last time since you were in Singapore so–I cant really follow you. You’re like Waldo.

FRA: Ok, sure. Maybe we could begin with a feedback on what happened on this afternoon, federal reserve, FOMC (Federal Open Market Committee) needing your thoughts on fed share, Jay Powell statement and press conference.

YRA: Yeah—you know, It was interesting that I was just watching the CNBC before we starting going on and Rick Santelli hit it right on target. I’m a fan of Rick, but we don’t always agree. But he had it on target. The one good thing Jay Powell did is he basically said stop relying on (unintelligible]\), because when they go out, the main stream media loves them because it’s an easy way to understand the fed for what they think is understanding… The fed so they can ask questions about it and he basically—you know—These are projections you know—they kept asking about it and asking about and Powell was very (unintelligible) when he said we made a decision today, to (unintelligible) projections and projections you know are just there. projections, they’re not worth the paper that they’re written on and if you follow the fed and their history with their dot plot, they’re a joke and as I wrote last night, you can go back 2006. Our cash in was far better at comprehending where the economy was than those dot plot projections and that’s just our—being, you know all that wisdom. So I just cant stand these dot plots I wrote in the blog last night that he should erase 50 basis points today and put to rest by doing that. Put to rest to dot plots and say yeah you know what we’re going to watch things here. But with raising 50 points and holding until the balance sheet shrunk to $3 trillion. I think he would of done the market to a much greater service because he would of let markets be markets and if there’s one thing that I really like about Jay Powell is that he does have an understanding on the way market works and he seems to be more willing to let markets work and get rid of the theoretical nonsense that fill the air ways with the feds press conference. I do applaud what he did except that I really would of like to see 50 basis points in a whole. Not that I would you know, bullish or bearish the stock I care not about that one way or another cause, I’m going to trade what I see anyway and react accordingly. But it would of put feds note to me a much more interesting position and you know what they got to stop cow toeing to the markets. You know I like what he was doing while the markets were correcting back in February. That he even had Dudley say that 10% drop is small potatoes, so we need to become more market focus than fed focus. That is the end of that story.

FRA: Now instead of the 50 basis point, the raise being only 25, do you think that the fed independence is coming under pressure by the US administration by president Donald trump?

YRA: Not yet, but it will, it will and a lot says about it again is that he talked about it last night and ill expound on it is that, look it. You read every central bank release, whether it is the ECB, Swiss National bank last week was the paradigm of it cause all they talked about was setting policies relative to the currency.

The Australian bank discusses the value of the currency, every central bank (unintelligible) everybody is out there parading this concept of independence of central banks. while they’re all discussing the importance of the currency values when setting their interest rate polices.

Certainly the Japanese, so its all being done so—with the—Donald Trump wanting to turn around the trade deficit, you can’t help but say hey maybe they are actually onto something because they have an independent central bank well—(unintelligible) the independent central bank that goes upon its course based on what its seeing here you know based on domestic economic activity, while everybody else is setting it to international standards then tariffs become the—I guess the alternative especially when the feds is raising the interest rates and they’re the only central bank really raising interest rates… I know… the bank of England went half a basis point, quarter basis point and they are project to go a quarter basis point tomorrow which we will see. But everybody is looking at the international situation and when I read the fed today there wasn’t one statement about it. Of course we did have Powell and little brainer discuss head wins to tail wins which is on the growth of the international economy but everybody goes through currency value when discussing interest policies.

FRA: So with the feds shrinking its balance sheet and raising short term rates—Likely making the US dollar stronger, will that promote tariffs more on the trade tariffs?

YRA: well I think that if the dollar got stronger, you would see much more action… But the dollar hasn’t gotten stronger, so there’s something else or a few other things that are seem to be weighing on the dollar. Now Powell was asked about that and he spoke to—you know—enhance growth, I’m not sure that there’s enhance growth over Europe anyways, I’m not… I need to see a lot more because if that’s the case then the European equity market should be out performing but you know what? They’re way underperforming the worlds equity market. So I’m not quite buying into that argument yet, but you know I’m going to wait and see first. I just need to see more before I go down that road. You know there are many things in play here which we will see which is why we are getting an increase volatility on a global basis.

FRA: And you’ve written recently on thoughts by commerce secretary Wilbur ross in terms that there will be no trade war… Trading partner of the us will compromise on trade treaty, how would that factor in the US dollar, like the potential US dollar devaluation?

YRA: well you know that’s right, that’s what I call the Kudlow dilemma, Kudlow of course when he got into his post, chairman—chief economic advisor to the president, he said you know (unintelligible) dollar and short gold. Well, not so fast Larry. First of all, be very careful about this because if you have king dollar which Kudlow means a strong dollar. Now we all like a strong dollar if its done—If its effected by good policies, but bad policies and a strong dollar, well that’s not such a good thing. You know—I’m not (unintelligible) grow your way out. You may inflate your way out of your debt problem but you’re not going to grow your way out of the debt problem, so let’s get behind that and if the dollar got too strong then the impotence from the white house would be to have more tariffs because they are hell bent on shrinking this trade deficit so when Kudlow discusses that, he ought to be very careful about where he is going because this white house, Peter Navarro and Wilbert Ross will push for a weaker dollar because a weaker dollar is Mnuchin and Wilbert Ross both said in Davos, is sending soldiers to the ramparts in the trade war that exists every day. So, Kudlow, that’s the Kudlow dilemma. It’s going to be interesting to see how he deals with this. But if, you were to get a dollar rally or even what (unintelligible) said and pretty sure wrote in earlier the week when he talked about a possible rip your face off dollar rally. He was quoting what’s his name (unintelligible name) about that. I’d be very very careful with this administration, they will not tolerate a strong dollar at this point in time.

FRA: And if that were to happen what would be the mechanism to effectuate that through monetary policy with the fed with its independence be compromised?

YRA: Yes! That’s a very good question, we don’t know but you would have the treasury secretary just like he said in Davos talking the dollar down which everybody took great umbrage at, but we’ve had that before, you know—One of my issues with Kudlow—(unintelligible) I respect him for his intelligence, he’s been around a long time. He was a Reagan guy, but you know what the Reagan white house lead the battle through James Baker with the Plaza Accord. The Plaza Accord was an orchestrated attempt to drive the dollar down and how is it done? Really—by sitting everybody down in the plaza hotel and reaching this compromise. We’ll pay because the trade deficit are now going to become an issue for wall street in a way that they haven’t in many many years and they are going to start to effect the movements in the market. Not quite ready yet but these algorithms who think that they have factored in every variable that you need and every headline, they are going to be disrupted themselves by the coming impact if the trade deficit continues to grow. This white house will not sit quietly and they made it an issue, and coming into the election this is going to be an important issue for Trump to hold onto his core constituency.

FRA: And thinking globally—how do you see everything playing out in terms of trade. Will Europe introduce measures to protect against Chinese trade and Chinese investments? So you got Europe Asia the U.S., how do you see it playing out?

YRA: well—we’ve seen that already. There was that article FT (Financial Times) earlier in the week that was talking about how Germany is upset that China is targeting some of the corporate jewels of Germany and… believe me the French are the most protectionists trade orientated going back to— (unintelligible) and I don’t care what Macron says because he inherited that it’s a long standing French tradition—so you know what? As the United States leave the battle, you will see that they will all start tail coating… What the white house is trying to accomplish, so while the white house gets beat up today, it gets beat up today because its easy to beat up on the Trump white house for so many missteps that they made. You watch that the European will follow right on top of this, because they have as much with the Chinese and they run. you know—pretty good trade deficit with the Chinese themselves so lets pay attention to what really is going to take place here.

FRA: And ultimately could we then get global competitive currency devaluation—another round?

YRA: Well I think we already have them. You know even with the yen at 103, 104 or 105, the yen is weak and fairly dramatic especially against the euro currency as we’ve talked about for 3 or 4 years already. That has been an interesting play and even I think that the Europeans, especially the Germans have had enough of the weakness in the yen. If you listen to (unintelligible) again, (unintelligible) very upset in January that Mnuchin and Ross, you know—for the D20 agreed not to target their currencies. Well you know what? Who you fooling? Of course, go read the Swiss statement from the release last week when they held their interest rates at negative 75 basis points. It’s all directed against the currency and the Japanese, every time when you listen to (unintelligible) talk, well—we’re not quite ready we need to see inflation. It’s just a nice way of saying we are going to keep our interest rate policy as it is because it keeps pressure on the currency. Come on, let’s call it what it is. They’re all targeting their currency values by using their interest policies for domestic purposes, but you know what? Many variables are in play here which is what is leading to the heightened increased in volatility. And as we’re talking right now, gold is up 23 or 24 dollars and silver is up 45 cents. This is after a fed increase. The dollar is on its lows, stone cold on its lows. What’s going on here in the market is were going to find out. There’s definitely some significant moves and most importantly is that there are two ten yield curve steepened today. Because… of course they changed the dot plot where it seems that there are going to be three rate rises this year so everybody thinks it’s going to be pushed out further and the feds is not going to be as aggressive as previously thought. So the yield curve, the two ten actually steepened out about 3 or 4 basis points as I’m sitting here.

FRA: Hmm.. Do you see president Donald Trump implementing section 301 of the 1974 trade act where the president can impose duties—If there’s like a perceived violation of trade agreements?

YRA: Yeah… that’s a great piece (unintelligible) last week when they were or two weeks ago when they were discussing 232 on the trade expansion act in 1962 under Kennedy which was interesting when it was passed in October of 1962, that was during the Cuban missile crisis. But they put in these—section 301 of the act in 1974. They put them in just because it was the only way they could get these trade agreements through, is that there is leverage against what they deemed at target as unfair traders so in order to get congress to be able to sign onto it there has to be opt outs based on sort of penalties. So yeah, they’re going to vote. We’ve seen it before with the Japanese in the 80s and the 90s was one of the strengths of the Reagan movement to enact 301. They’re going to use whatever they can—like yesterday we saw them soften some of their demands about 50% car parts in US auto—for NAFTA but they soften on that. Of course, and we saw that the peso. The peso reality and the Canadian dollar was really strong today. There are all types of mechanisms in place where they’re sending messages. Hey you better sit down an pay attention, were serious. We put the seal of tariffs down. (unintelligible) yes we backed off a little bit. We have a lot of tools at our command and we are serious about writing some of the wrongs that we have deemed to taken place in over the last 30 or 40 years. You must pay attention to it because, they have shown that they are serious about this, so they are trying to get better negotiating in so Trump can stand tall and say see. See what I did? I over turned some of these past malpractices and it’s going to help us as business returns to the United States.

FRA: will any of this affect U.S. agricultural exports to china?

YRA: well—It will—there is some rattling, we can see hog prices go down, cattle prices go down, some grain prices are holding up pretty well. Even as we are coming into the Brazilian and Argentinian year grind, the south American harvest will bring a lot of supply into the market. Prices are holding up very well, now that the Chinese may threaten the U.S. agriculture and as you know Wilbert Ross strategically laid out—you have to give them credit because they have done their homework and said look it, they’re still going to be buying our soy beans, I’m not buying it but what Wilbert Ross—I think is timing is wrong on the steel and aluminum because the Chinese, there’s so much—Brazil at a record crop this year. The timing wise is bad, we should of waited about two months for the crop to be harvested and for those to be all distributed somewhat and then laid it out because then the Chinese would have less flexibility. Right now they have flexibility because they can buy more Brazilian beans right now and stick it to the US farmers which could really hurt trump in the November elections, because the American farmers are doing very well. This has been a discussion since the China lobby back in the 1940s. the American heart land wants to do business with china, they always wanted to do business with China and when they embargo China, in the 1940s and 50s when Mao came into power, it hurt the American farmers because it took all those businesses with Taiwan versus the peoples Republic of China stunted American export to a billion people. The Chinese number one have to feed their people, end of story and their growth of Chinese purchases of soybeans which is huge because of the diet changes and more protein base especially with higher grades of protein. You have to feed those animals and a lot of soy meals and the Chinese eat a lot of soybeans. So that demand curve goes ever higher, that’s just not going to change… we’re seeing 10 dollar soybeans which is historically pretty high soybean prices and that’s with record supply. You know—agriculture responds very well to capitalism as prices go higher they produce more, but the demand from china and other countries that have now reach much higher per capita income they consume much more protein so prices remain high no matter how many beans come onto the market.

FRA: Yeah. And the soybean meal needed to feed the chickens, there used to be a saying that they only had chicken on Chinese new years but now they have it every day. Finally, your thoughts on Italy, recently you mentioned the markets are underestimating the importance of current Italian political situation and your reference to Picaso dream.

YRA: The market has fallen asleep, they think that there’s going to be some type of center based coalition that everybody (unintelligible) and that the league are going to get tired of trying to deal with five stars—I think it’s a gigantic mistake because 69% of the popular vote in Italy went to the center right including 5 star and if you try to push them out in order to form a coalition that pleases the eurocrats in brussels and status quo in Italy. Well—(unintelligible) I think you’re going to be running into a major problem and I think that the markets are way underestimating the influence of this. And you get again (unintelligible) I can take or leave most days, but he’s been very good with this. In fact, he’s been writing his warning about what’s taken place and you better pay attention to it. It’s no—Its nothing that is insignificant but the market seems to want to downplay it but we’ll continue to watch this. You know, I laugh because we’ve discussed the European financial institution have a severe problem and if you look at the stocks on the European bank, the deutsche bank—(unintelligible) but all the banks are suffering because the amount of non-performing loans have no been resolved, especially in Italy. So they need to really work this out and yet the 5 star and the (unintelligible) really want to push into… you know what we don’t care where the restrictions are coming from—(unintelligible)—budget deficits, we need to get the economy going and the Italian economy even with these ridiculous low interest rates is not showing enough growth and more importantly with these low interest rates, the debt to GDP ratio, it will be sitting around 132% which is enormous with a much lower borrowing cost, so Italy as you know—major problems facing it. (unintelligible) knows and 5 star knows they’re going to get their way because Italy is not Greece, Italy is far too big… far too big and their impact upon the entire global financial system therefore becomes much greater and as it is how to all work out. This is a very interesting time and yet the market is complacent trying to look past it. But I’d be very skeptical about that.

FRA: Wow. Great insight Yra. How can our listeners learn more about your work?

YRA: Well.. You can certainly go to the financial repression authority, we have a treasure trove of discussion but on a daily and weekly basis. I blog from notes underground which you can get and register for free if you go to you’ll be able to access it and—as much as I write, respondence to the blog are at such a high level of discourse that, that makes it a must go to place because we really discuss very important things and its done at a very high level I’m proud to say.

FRA: Yeah, excellent. Yeah, great, thank you very much Yra, thank you.

YRA: Richard, thank you as for the opportunity as always, we do get into a good look under the hood as we say.

FRA: Yeap, and we’ll do it again another time. Thank you Yra.

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

03/18/2018 - The Roundtable Insight: Gordon T Long Talks With Dr. Lacy Hunt

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03/02/2018 - The Roundtable Insight: Charles Hugh Smith On The Current Conditions In The Financial Markets

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02/24/2018 - The Roundtable Insight: Jim Bianco, Yra Harris & Peter Boockvar On Investing Implications Of Volatility & Inflation

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FRA: Hi, welcome to FRA’s Roundtable Insight. Today we have Yra Harris, Peter Boockvar and a new guest, Jim Bianco. Jim is President and Macro Strategist at Bianco Research. Since 1990, Jim’s commentary have offered a unique perspective on the global economy and financial markets. Jim’s wide-ranging commentaries have addressed monetary policy, the intersection markets and politics, the role of government in the economy, fund flows and positioning in financial markets. He is a Chartered Market Technician (CMT) and a member of Market Technician’s Association. Yra Harris is an independent trader, successful hedge fund manager, global macro consultant while trading foreign currencies, bonds, commodities and equities for almost 40 years. Yra is also the CME Director from 1997 to 2003. Peter is Chief Investment Officer for the Bleakely Financial Group and Advisory. He has a newsletter product called the His great macroeconomic insight and perspective with lots of updates on economic indicators. Welcome gentlemen!

Jim: Thank you!

Peter: Hey Rich!

Yra: Thank you, Richard!

FRA: Great! I thought we’d begin with a discussion on volatility. We did a podcast recently with Chris Whalen about a week before the volatility began in the financial markets; this year volatility to a significant extent. Jim, have you been seeing that as a trend through your research or what are your thoughts on that?

Jim: Not as a trend. Pretty much the opposite. Volatility events like what we’ve seen over the last couple of weeks are not the creation of a trend, they are the exaggeration of a trend. So there was a trend in place already and that trend in place was a turn towards more volatility. The turn towards more volatility was driven by a belief that, for the first time in the post-crisis era, inflation was returning. I’d get technical on you for fifteen seconds. What happened with the volatility event is we caught a short-ball traders on the wrong side of the trade. They did one simple narrow thing; blew up the VIX Market. The volatility measure on the S&P 500 Index option. That’s all they blew up. When we found that that spiked from 12.5 to 50 in two days, we found out how important the VIX is to everybody else. It was their measure of risk. When they saw it go up 400% in two days, they overreacted and the next thing you know, the DOW is down 1600 points. What I want to emphasize is they didn’t create the trend. The trend is towards higher inflation and that higher inflation would bring higher volatility and they got caught in the wrong side of it. All derivative debacles like this are an exaggeration of a new trend that everybody got caught on, not the creation of it.

FRA: And Yra, your thoughts on that?

Yra: You can’t say it better.

Peter: In 2017, we saw a hiccup in the US. The Fed decided to raise rates three times instead of one. Let’s start shrinking our balance sheet. That was overwhelmed by the Bank of Japan and ECB. In early 2018, when rates continued to rise, when the inflation pressure started becoming more evident that this is not a short-term bliss. Maybe this is the beginning a more normalized interest rate trend. One of the analogies that I’ve given in the past is when the central banks are full on easing, it gives investors goggles and it makes everything look perfect. When that starts to change, when that liquidity flow starts to slow and rates start to move then those goggles start to clear up a little bit. Monetary policy became more important. Markets are very reactive nowadays. (5:03 – 5:06 would not play. The audio automatically skips it). All of the sudden it woke people up and said,” Uh oh. This is a big deal. This is twice the level of what it was in the summer of 2016. I better start reassessing my positioning. I better start reassessing my leverage. I better start reassessing what valuation I want to place on the S&P 500. VIX and all these other things became a symptom, of what I call now, a disease of rising inflation and rising interest rates that then caused this explosion in volatility.

Yra: There’s been an argument in the market place that inflation is rising but so what. Higher interest rates is not a bad thing. They take the idea that when it comes to inflation, it is either Zimbabwe and it is really bad or it does not matter but there is a middle ground in there which is critically important. I’ve been saying people to stop talking about the Fed. Central banks as a collective, are the easiest they’ve ever been in the post-crisis era. Their balance sheets are the highest they’ve ever been in the post-crisis era this week. If inflation returns, it puts into jeopardy that we’re gradual. Bernanke said,” We are going to get balance sheet back to $2T to 2.5T and it could take until 2026. He wrote it in 2016. It will take 8 or 10 years to get that. If we have inflation, maybe that 8 to 10 years is now 2 years. By the end of the year, you’re going to have a contraction out of the ECB and the BOJ. That’s where inflation matters. It’s going to force central banks to pull in a lot faster than people thought. One last thing. Wall Street runs into this trap all the time. Somebody points out a risk, everybody looks at their watch and says,” Well, we waited eight minutes. The market has not blown up. I guess that risk does not matter.” There’s a risk from all of this money printing. For the first time in nine years, we have an inflation fear and is now putting doubt in central banks. Now, what’s the first thing that markets do? They have a ___ (7:41 inaudible and the podcast skips it) over that. I think that this inflation fear that makes everybody say,” Bring it on! 3.25 is really good in interest rates.” Be careful what you wish for because that is going to cause a reversal especially in the BOJ. If we continue to see global inflation fears rise, the Fed is already tightening right now, that’s why I said do not talk about central banks. This should be a big deal for markets in 2018 and most people continue to dismiss it.

Peter: Just to add on, with respect to what you said, Jim, on balance sheets being at record highs. The analogy we have given out is that yes, they are at record highs but balloon with the air being central banks easing. There’s still air going into that balloon but there’s less air going in. If there’s less air going into that balloon, that balloon is still going to contract. I think it’s the rate of change that is really changing dramatically in terms of central bank (8:41 podcast skips it – inaudible).

FRA: Could the return of inflation force all central banks to accelerate their exit strategy or just some?

YRA: (9:03 – 9:07 inaudible) was just reappointed with a very (9:08 inaudible) group around him. (9:10 – 9:22 podcast skips it). … stand on fiscal policy is used on the sales tax. Draghi dug himself into a hole. (9:25 – 9:52 some are skipped and inaudible). … How do you get out of this? Peter and Jim are both right. Forget about the Feds. Everybody follows the Bernanke book but they’re stuck in a situation here. To me, that’s really dangerous.

Jim: One quick thing about the ECB. Draghi’s term has a little bit more than a year to go before he’s done. The tradition in the ECB is that the next ECB Chairman will probably be German. It does not have to be a German but probably will be a German. That’s code word for a very hard money person. If you’re going to get inflation and you’re going to get a German to run the ECB, you’re going to get a violent reversal in the next eighteen months. Look at two weeks ago. Two Thursdays ago when the DOW was down 1000 points, what was the catalyst story that everybody said? There’s inflation in the UK and the BOE (Bank of England) might have to double the rate hikes that they’re going with. When was the last time the BOE moved the US stock market? That might’ve been the first time. It’s all because of this idea that central banks is maybe peaking soon and starting to reverse. We haven’t had to deal with that possibility until the last two or three months. It was only in the last two or three months that we’ve only really started to see inflation. What Yra said is right that maybe Japan continues to pump money but they might not be enough to do it. If everybody else is going to reverse, then those global central bank balance sheet will peak. These markets will have a digestion problem with that.

Peter: Just to add on to what Jim said, even the Riksbank in Sweden, which is not necessarily relevant for the global economy, experimented with negative interest rates along with others. It’s a good symbolic gesture. They said they’re going to start the process of getting out of negative interest rates well before the ECB starts. Just going back to zero from negative is going to cost an extraordinary amount of loss. The ripple effect that that’s going to have on the world, I don’t think the people will appreciate it. I like to remind people in terms of the concept of risk happening fast. It was 2015 when, the German 10-year went from 6 basis points to 60 in one month and from 60 to 100 points a month later. This is Germany. Not Greece. Not a third-world country. This is a country that went from a 6 basis points to 100 in less than 2 months.

FRA: How could all of this translate onto a change in basic relationship between stocks and bonds? Jim, you mentioned there would likely be a change on that once again?

Jim: First of all, just as a point of emphasis. One of the things that could change it back another way is that if the doubt of inflationary fears go away. There was a mild form of inflation fears about a year ago and then it went away. The difference between now and a year ago is that we’re finding out that the market, collectively, is a bunch of Phillips Curvers. They’re looking at the stimulus from tax cuts, possibility of infrastructure spending, strong growth and that they’re concluding we’re not going to have inflation after we spend thirty years trying to say that the Phillips Curve does not creation inflation. If it is decided that there is inflation, then there is inflation. That’s where it is coming from. To your question about the stocks and bonds relationship, it changes all the time between the way that stocks and bonds trade together. In 1998 to 2000, it changed. What I used to call is under the inflation mindset. In the 1960s to 2000, the starting point of every discussion was, are we having inflation? If the answer was yes, if bond prices went down then stock prices went down. If the answer was no, the 80s and 90s, were not having inflation, then bond prices went up, interest rates went down went up. Bond prices and stock prices move together. Starting around 1998 to 2000, we switched that dynamic because we were worried about deflation. During the middle of that dynamic, we had long-term capitals, the Asian crisis, the tech bubble, sounds like the derivative thing we’ve been talking about the last few weeks as well. Throughout the 2000s until very recently, we worried about deflation. Are we having deflation? If the answer was yes, equity prices struggle. If there was no deflation, then equity prices went up. So now bond and stock prices move opposite of each other. What we’ve seen in the last few weeks is the decline of bond prices and stock prices together since the financial crisis that they both went down together. The day the DOW was down off 300 points. Up until 60 days ago, if you just randomly told me in the last nine years that the DOW was down 300 points, I would’ve said (16:40 – 16:42 inaudible). That’s the way we traded every single time. I think we’re shifting to an inflation mindset. Now where does that matter? In the last nine years, Wall Street has pushed this idea of a 60:40 portfolio. That it’s the optimal way to invest your money; sixty percent in equities and forty percent in bonds because something is always going up. Either there is no deflation and stocks are going up or there is deflation and bonds are going up. But under the new scenario, either they’re all going up or they’re all going down. Both of them have been falling together. So this idea where you can take a lot of risk with a 60:40 portfolio is going to be blowing up on people’s faces. This means that the relationship between stocks and bonds are transitioning right now. It takes around two years to fully transition it. I don’t know if it will take fully two years now but it will take at least months to do it. There will be periods where it does look like they’re transitioning but I do think that we’ve started that process.

FRA: And Yra, do you see that relationship also changing?

Yra: Yes. This whole risk parity. To me, what people don’t understand, is especially on the issue on how you get of out this. Ray Dalio said you’re going to shed tears if you earn cash. Talking about a coming change. That’s in a two week time period. It scared me. Ray Dalio is a great thinker.

Jim: Just to emphasize something on what Yra said that the single hardest thing to do for anybody that’s investing is to recognize the regime that the old rules stopped working. Most people can’t and they keep pounding away with the old rules until they are out of business. The single hardest thing to do in any type of investing is say that we’re now in a regime shift. If you’re wrong, you get wiped out and if there’s no regime shift and you say it is, you also get wiped out. If there is a regime shift and you don’t adapt, you get wiped out. That’s why we have this volatility and blow ups along the way.

Yra: That’s right. And what I think people fail to understand is not just Dalio’s position. It is everybody that has handled this book and tail-coated it. I know a lot of people in banks or foreign exchange traders who made a fortune and have tail-coated George Soros in the BOE. If BOE reacted like the Bank of France and raised interest rates to 100% and said,” We’re just going to do whatever we have to do and you have to pay the cost.” He wasn’t successful in breaking the (2:38 – 2:40 inaudible)… to exit that train would’ve been an enormous pain for all the people who followed them in. So whatever you think Dalio’s positions are, which I think are enormous is tail-coated and recreated the same trades in many other ways. I think that’s what we’re told in the last two weeks. He’s got a lot of company in this low volatility place.

FRA: And Peter, your thoughts also?

Peter: I also think a lot of people lost perspective on the markets. When you turn on the T.V or the radio or when you read the paper, while earnings are great in the economy’s trade and therefore stocks are going to go up and I just want to point out that that’s from the end of 2012. So the calendar year at the beginning of 2013, the January 26th peak at the S&P, the S&P 500 was up 100%. Earnings since then, assuming 2018 assuming $100 to $150 per share, earnings should be up 60%. So the differences is actually multiple (21: 52 Inaudible). When interest rates rise or when people reassess what central banks are doing, why should people pay eighteen times their earnings? All of a sudden, within a week and a half, they decided let’s pay sixteen times with a one dollar change per earnings per share. Every one-term PE is 155 points (22:15 podcast skips, inaudible) while when we’re talking about two-term PEs, that’s 310 points. I think people need to have perspective that the stock market has ran well ahead of the rise in earnings and the difference is PE multiple expansions. It is now compressing because of the new regime change that we were talking about.

FRA: Could the rising interest rates in the U.S. cause us strengthening in the dollar (22:46)… rising defaults in the U.S dollar denominated debt in emerging markets which is estimated approximately $9T? Could that happen or could it also spur a financial crisis in Europe out of the bond markets? Would that mean that international capital flows coming into the U.S. towards U.S. dollar denominated assets? Just some potential scenarios. Jim, your thoughts?

Jim: I would come down on the idea of ‘no’. Let me explain what I mean by ‘no’. There’s this perception in markets that there’s all this money. There is no money heaven. No one ever loses this their money, it just gets allocated around. When the stock market goes down, but all the money from the bond market will come in to replace the stock market money that went down. I do not think you’re going to see some kind of reallocation where everybody is going to come running into the United States and it’s going to (23:53 podcast skips it, inaudible) the U.S. stock market and it is going to hurt them as well. I think the problem with the dollar, and I’ve been wrong with the dollar for several months now, is that the speculative flows are at record highs for some of them. Everybody is selling the dollar or is shorting the dollar right now. This has been keeping it unnaturally strong. If you wanted me to guess why we’re getting a persistent selling of the dollar, foreigners are basing their investments on who the president of the U.S. is. Sell the dollar. Investors have finally realized that it doesn’t matter. Eventually, that’s going to come back to foreigners and make them realize it matters. Your investments in a political idea might see a strengthening in the dollar. But are you going to see some kind of a wholesale run into the dollar that you were suggesting “no, I don’t think I’m going to see that.”

FRA: Yra, your thoughts?

Yra: I haven’t (25:12 – 25:13 Inaudible) … since Mark Fields’ comments back in 2017. Now, I’m fairly neutral towards it because it’s been a (25:24 inaudible) for people because interest rates in the United States are going up and (25:28 – 25:38 podcast skips it and inaudible). I’m scratching my head. If the deficit scare is real, I think what they did here by blowing the budget apart and the stimulus is that the people are a bit nervous. I don’t disagree with Jim because I’m really neutral with the dollar. If we go to real yields, Peter wrote about it today, the least positive on the short end of the paper rate I’d say is about 40 basis points based on the number that we have. The dollar would get a kick especially if the other central banks are just sitting there complacently because they would like their currencies to weaken anyway. I think Mario Draghi would like the Euro to weaken. I think the Japanese policies are driven by the desire for a weaker yen with the Trump agenda. People are being conscious and would like to see the dollar strengthen in relative to their own currencies. So, I’m going to wait. I don’t really have a good sense to where we go from here.

FRA: And Peter, your thoughts?

Peter: I’m bearish on the dollar in the short-term but considering the moves it has had, I’m definitely more uncertain about the very short-term move. We went into the year saying they’re going to increase the rates three times but then the markets really doubted it and now have the rising inflation that is probably happening. Higher inflation that’s not met by a rising Fed funds rate is typically dollar bearish. The Fed is going to raise three times this year. Take the Fed’s fund rate to a real rate of zero. That, of course, is well above where it is overseas, especially in Europe and Japan. But there is a reality that people still think it’s jamming around 2.0 even though maybe he’s not. But it’s still going to be on its gradual path. So there’s no way the Fed is getting ahead of the curve. They’re still going to be playing catch-up on top of better overseas economies that’s drawing dollars into other areas of the world. There are secular headwinds to the dollar but I’m less certain. I was very certain when the euro was 1.05 but much less certain when the euro is 1.25 in the short-term. I would not be surprised if, within the next two years, we see the euro at 1.40. It would not surprise me at all if we see the pound at 1.60. That’s were eventually heading within the next couple of years.

FRA: Jim, you mentioned this whole environment could be like the 90s when the markets went down and everything else. Where do investors and traders go to?

Jim: That’s the old 60:40 risk. Something is always going up. Yeah, I guess somebody is going to win the lottery today too. If an asset class is going to be rising, the answer is that they’re going to be small. Commodities might be rising but 95% of the money in the world is not in commodities. We’re creating a new asset class; cryptocurrencies. I, personally, think is an outgrowth of the rejection of policy. Inflation pressures financial markets. They go down. Stocks go down. Bonds go down. That was, ask Yra, that was the 1970s. I’m not saying we’re going to have high levels of inflation but what we’re going to have is that the stimulus will give you an appearance of high levels of inflation. So, I think that it’s going to be very hard to find, other than special situations like in the commodities markets, beyond that is going to be very difficult to find ideas where you can profit while returning to an inflationary environment.

FRA: And Yra, your thoughts?

Yra: I agree with Jim. What we’re going to see is (31:01 – 31:08 inaudible). Let’s say that the Phillip’s Curve may be able to get it right for a short period of time. We get higher interest rates. And now (31:27 – 31:30 inaudible)… 60:40 because they are both going to go down. I’m not a Phillip’s Curve advocate but if inflation does that. Those are both detrimental for corporate profits because rising wages with rising interest rates (31:42 – 31:53 inaudible). I just don’t see it. I know Peter has looked at this. (31:01 – 32:07). All these companies that borrowed a lot of money (32:09 – 32:15 inaudible). Take the interest rates expense, it is down to a really low level but we know that’s not going to last because for every one percent rise in the cost in borrowing, it’s going to hit discretionary spending levels dramatically. People are in for a shock here. It is really fascinating that (32:39 – 32:52 inaudible). It really does not make any sense. We’re much more worried about inflation. We know how to deal with inflation. In an interview that he did. So, you’re going to get into a feedback where at 60:40, they’re going to be sorry.

FRA: And Peter?

Peter: Just to quantify on what Yra said in terms of profit margins, lower labor costs and lower interest expense are the two biggest contributors for corporate profit growth from the 09 bottom. Just to quantify, there is about $13.5T of total business debt. So for every 100 basis points of interest cost, is $135B. Now, obviously, a lot of companies have turned down debt. But, generically speaking, in terms of labor costs, companies pay about $7T of labor cost every year. Let’s just combine that. (33:50 – 34:00 skips and inaudible)… higher costs that more than offsets the cut in the corporate tax rate from 35% to 21%. A lot of the estimates that is out there for earnings per share are all else equal analysis. It does not take into account higher labor cost and higher interest cost. When a lot of (34:23 – 34:24 inaudible) come out with their year-end price targets, it doesn’t include a lower PE ratio. It is static analysis. In terms of where to survive here, I would not be surprised if a two-year T-Bill paying 2.25% interest rate outperforms the equity market in a broad basket of corporate credit over the next few years. I think the commodity space is very interesting. I know a lot of people like to look at the demand side in terms of dictating prices but since that 2011 – 2012 peak in commodities, the (35:03 skipped) collapsed. Not only industrial metals, but also energy and particularly agriculture, which I’ve been very bullish on and on my belief on the dollar, I think gold and silver will outperform most equities and certainly fixed income within the next couple of years.

Jim: There’s $13T worth of debt and most of it has been turned out. This means rates goes up now but I’ve got 3 – 5 years to maturity. So I don’t see risk immediately. In the last ten years or so, there’s been a lot of people that have been turning up their debt through derivatives markets. They have been engaged in floating or fixed payments or receiving to take shorter-term debt and turn it out into longer-term debt. That is when you get a spike in volatility. Even that is going to start to come back to this day. Well I’ve got all of this short-term debt. The Fed is going to raise its rates. What am I going to do? I’m going to engage in swaps contracts in order to it mimic a 5-year note or a 10-year note but now it is more expensive to buy that swap contract because volatility is going up. That’s going to start hitting their bottom line too.

FRA: Great! Thank you very much gentlemen for your great insight. Just wondering, how can our listeners learn your work or go around? Jim?

Jim: Probably the easiest way is to follow us on twitter or at our website

FRA: And Yra?

Yra: At and the blog is from underground (36:58 – 37:10 inaudible). Food for thought.

FRA: And Peter?

Peter: My twitter is Pboockvar and subscribe to my daily writings at and my managing business is

FRA: Great! Thank you very much gentlemen.


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

01/26/2018 - The Roundtable Insight: Chris Whalen, Yra Harris & Peter Boockvar On 2018 Trends & The Return Of Volatility


FRA: Hi. Welcome to FRA’s Roundtable Insight .. Today we have Yra Harris, Peter Boockvar and a first time guest, Chris Whalen. Yra is an independent trader, a successful hedge fund manager; global macro consultant trading foreign currencies, bonds commodities in equities for over 40 years. He was also CME director from 1997 to 2003. And Peter is the Chief Investment Officer for the Bleakley Financial Group and Advisory at Bleakley and he has a newsletter product called The Boock Report. It offers great macroeconomic insight and perspective with lots of updates on economic indicators. Chris Whalen is an investment banker, author and Chairman of Whalen Global Advisors LLC which focuses on financial services, mortgage finance and technology sectors. He was a Co-founder and Principal of Institutional Risk Analytics from 2003-2013. He has held positions in organizations such as the House Republican Conference Committee…

Christopher Whalen: Yeah, talking about that.. (laughs). That’s okay. Most recently I ran and built up the Financial Institutions Group at Kroll Bond Rating Agency which was a lot of fun. Kroll is really an ABS house, first and foremost, commercial real estate and the rest of it. It’s still very small from competing with giants, but it was a lot of fun.

FRA: Great. And also he was on the board of directors for the Global Interdependence Center (GIC) in Philadelphia.

Christopher Whalen: Yes, that was David Kotok’s little project. You know it’s fun to mix business with pleasure. Fishing, central bankers go fishing.

FRA: Yes, I am actually going next month to the GIC conference in Buenos Aires and going fishing before that. There’s also fishing afterwards, sort of the Camp Kotok in Argentina.

Christopher Whalen: Well, some of them go to Maine. Ramiro Lopez Larroy and his kids will just show which is about 15 hours by plane. It’s a lot of fun. They are great people – A very diverse group at GIC. We’re going to Germany this year, the Bundesbank, so if you like monetary policy that would be a very good trip to go on. I would recommend that.

So, what would you like to talk about this morning?

Peter Boockvar: The Bundesbank has disappointed me for the last few years how they give Draghi the license to do what he has done.

Christopher Whalen: Well, they kind of had no choice. I find it amusing that northern Europe is cranking, and my relatives in Holland are having a great year, and yet southern Europe is not. That dichotomy is ultimately going to be very difficult for them to deal with. The Germans look at southern Europe and they just see more checks to be written. The politics of that is slowly undermining Merkel. It’s very interesting to watch. And then Berlusconi coming back in Italy – Isn’t that great?

Everyone: (laughs)

Christopher Whalen: I always tell people to read about Berlusconi and you’ll see where America is headed.

Yra Harris: Draghi will be making trips to Italy.

Christopher Whalen: Yeah. Draghi has been trying to keep Europe on ice by pushing debt cost down to zero, but the debt keeps growing. So, what are we really about here? There’s no fiscal discipline anywhere in the Western world and the Chinese don’t care. It doesn’t matter in China – It’s a political issue. That’s why I was writing about H&A recently because ultimately, whether that company survives or not, will be determined by uncle Xi. That’s how it works in China. There is no church and state, there is just the state.

Peter Boockvar: He may want to set an example though.

Christopher Whalen: Yeah, there were a little ostentatious, a little floppy with the parties, pasting their names on the side of office buildings around the world. I think we have 3 of them in New York. It’s quite fascinating.

FRA: A few weeks ago, Chris, you wrote an article, Bank Earnings & Volatility, I thought we could begin with some thoughts there. How have the Federal Reserve and other central banks’ actions affected the credit market, the financial markets and the economy, in general?

Christopher Whalen: Well, what the central banks have done is that they have removed a lot of assets from the market. They’ve gone out with a variety of new money, in the U.S. case: excess bank reserves, and they’ve bought treasury bonds and they’re bought also mortgage bonds. Of recent vintage, Fannie Mae, Freddie Mac, Ginne Mae paper which have 3, 3 ¼ and 3 ½ coupons with very low pre-payment rates. Those bonds are going to be around for a long time. In fact, one thing I remind people of is that about 30% of the market today is the FHA and Ginnie Mae and those loans are assumable so they will stay with the house. And the house will trade and the loan will be conveyed to the new buyer. It could be very interesting, over time, to see how that affects the portfolio. But essentially, the central banks have taken all of this duration out of the market and since they’re end investors, they are basically buying the paper on credit and they don’t hedge it. So the capital markets activity that you used to see around a lot of these positions when they were held by trading firms, banks and other who were going to trade the assets and cared about mark-to-market every quarter has greatly diminished — There’s no hedging. The Fed’s sought out hedging it’s block and it’s a problem now because the Fed is now illiquid. They can’t sell without creating a loss and they dare not do that because it gets them in trouble with the Republicans and the House who don’t understand monetary policy at all, but have a lot of opinions on it. And so you have this weird situation where the Fed essentially has their hands tied. They’re going to wait for the book to run off which they hope is about $20 billion a month. And I think that they could be wrong. I think that they could too wishful in terms of the runoff rate in terms of the mortgage paper. The mortgage companies are going to be around forever and the pre-payment rate is going to be very low, especially if rates continue to move up. That’s kind of what I see. The trading line on Wall Street, the earning will be greatly diminished by this. Then you have the vote to rule. So all of the books, the investment books that the banks use to trade every day, just the value of the assets are passive now. You put those 2 data points together and you will understand why Goldman Sachs and why all of the banks have seen an enormous reduction in their trading buy-ins.

The other issue is that the mortgage market is down so there is less hedging. The forward market for hedges, what’s called the TBA market, has a lot less activity. We’ll do a $1.5 trillion in mortgages this year which is down. The peak was $4.5 trillion during the 2000’s; we don’t want to do that.

Peter Boockvar: Yes and why aren’t we seeing an CNI loan growth?

Christopher Whalen: The banks had to slow down. They had a pretty good run in 2015/2016. We had a little scare from oil which didn’t really materialize. Most U.S. banks did fine on oil credits. There was some restructuring, but the banks we follow like Cadence, which is a small lender that was built to do energy – They have no problems. But now a lot of banks have run up to a regulatory limit on commercial real estate loans, multi-family…there’s a big shtick now for the smaller banks. They’ve essentially run out of customers in certain markets too. The OCC, for example, is forcing regionals to peel back their multi-family exposure because the prices have gone up so much. They just look at that go whoa, wait a minute. And they’re right. Loss rate on these assets, multi-family assets, are negative. So if the loan defaults, you’re going to sell the property for a lot more than the loan and that’s reflected in the ABS numbers too. It’s an interesting time in terms of different asset classes, but I don’t see a lot of growth in the book. I really don’t. BA had a really good quarter at year end, but that was the exception. Most of the big guys were not growing. And of course PMC had a very good quarter and had a nice tax number. I think overall, don’t look for alpha in the banking industry. Between the regulatory changes and just the tenure of the economy you would be in the bond market, right? Anybody could raise money in the bond market in 2016 and part of 2017. So, we had a bull market in fixed income which has driven a lot of strategies and I’m sure Yra has some thoughts on that.

Yra Harris: Let me ask a question in regards to that. I was really taken by it because it was such a good point. With the ECB, BoJ and certainly the Feds, the dynamic hedges are missing from the market, but they are going to resurrect themselves as more paper winds up in the hands of private holdings whether it be by pension funds or insurance companies. But do you think that Jerome Powell…You know I go back and read some of his earlier stuff and of course his initial position as a Fed governor, he had a lot of issues with the massive build-up of the balance sheet. Do you think that he might be quicker to say that we can hold the rate at 2%…Do you think that it’s a possibility?

Christopher Whalen: I think that the snippets from the minutes that have sudden found people’s attention…which is very funny, right? We only pay attention to chairmen. It’s a cult of personality. So here you have Powell saying some very interesting things, very forthright, not an economist, he’s a financial guy, and I’m told he’s fairly decisive although he’s quiet and he listens. He knows how to make decisions. On this he’s got politics because the congress, if you remember years ago, they confiscated the Fed’s surplus to pay for a highway bill. And the idiots in congress, I wrote about this for the American Conservative, keep permittences from the Fed as revenue. They don’t understand that it’s an expense foregone. It’s not revenue. You’re just making the debt go away. Every year they look at this money coming in and the CBO and everyone else say: Oh look, it’s revenue. But it’s a snake eating its tail because the Fed and the treasury are one. It’s like a Hindu god, but in economic terms they are the same. And Bob Eisenbeis, who I interviewed, is wonderful on this issue – He is very funny. I think that Powell is going to be a lot more straight-talking then the others have been and I fault Yellen and Bernanke on this because they should’ve gone out and said to the congress: “No, you can behave like this. This is ridiculous. You don’t go confiscating our surplus.” It was just part of Washington politics, but the Fed didn’t respond. If Paul Volcker was there he would have been up on the hill kicking the shit out of them. And the problem is, these are bureaucrats, they come from academia. They have no money and so they don’t know how to behave in big league politics – It’s a tragedy. I think Powell will be much better. I am very hopeful about his 10-year as chairman. It desperately needed change. We got to get the economists out of the temple, I’m sorry. I love them, but they can’t make financial decisions. You want them on the staff, Yra, you don’t want them trading.

Peter Boockvar: We wish that was the case 10 years ago and now Powell gets to clean up the mess.

Christopher Whalen: Exactly and you know, Volcker cleaned up a lot of messes too. They always clean up other peoples’ messes so it’s a public service.

Peter Boockvar: And this is the biggest mess the world has ever seen.

Christopher Whalen: Oh yeah. No question.

Yra Harris: And with Bernanke he had the courage not to act.

Peter Boockvar: Right. Bailing out people doesn’t take courage. It’s not bailing them out what is courageous.

Christopher Whalen: Well precisely. And the Fed has not said no in a long time. They haven’t said no to accommodating treasury options and they haven’t said no most recently with this lunacy of QE. I mean the first one was fine. They had to reliquify the banking system as Walker Todd put it out to me a while back, but the rest of it was crazy. Selling all the short-dated stuff and loading up the book with long-dated treasuries so they own mortgage backs with an average life of around 12 years now. They have extended a lot, by the way, over the last 18 months. Even if the portfolio gets smaller, the duration has got to go up.

(laughs) How about that?

Peter Boockvar: Chris, what was their thinking in their models with operation twist to say okay, in their models, let’s flatten yield curve and that will be good for growth. And then today they express worries over the flattening yield curve.

Christopher Whalen: Well I know, but this is the point. When you have central banks take all this duration out of the market, nobody is hedging the position; well obviously it’s going to be hard to get those maturities to back up. There is just nobody selling euro/dollars, nobody doing swaps or anything – There’s nothing. So there is market is in stasis and they’re going to push up the short end, but there’s nobody pushing up the long end. So it’s gone up a bit, but I keep wondering…I wrote about it this week. I’m kind of hedged on my bull market 10-year trade, right? But, there is still nobody out there selling it. So I do think you have a flat curve in prospect, I agree. It’s bond market basics. It’s got to be somebody at that table in Washington who understands the bond market and I think Powell does – There’s hope.

Yra Harris: But in understanding the bond market, Chris, do you think that he will move to try and steepen the curve by maybe holding the front end, by saying hey, we don’t have to raise rates. If I get it to 1.75 on the Feds’ fund rate or 2%, I’m basically in a neutral real yield. That’s where I am. That’s probably about neutral on the front end. Maybe the real yield on the front end goes to 50 basis points positive, but I don’t think he goes there. Would it not be in his optimal mindset to say let’s start shrinking the, as Peter would say, quantitative tightening on the longer end on the duration. If the yield curve steepens out to 120-150 basis points it’s not necessarily a bad thing.

Christopher Whalen: I totally agree with you. If the Fed were acting rationally they would be doing all of that. They would have even been hedging a bit of the buck. Just trade it. Go out and hedge on the duration.

Peter Boockvar: Definitely afraid of affecting its bubbling asset prices.

Christopher Whalen: That’s part of it – True.

Peter Boockvar: That’s behind their entire thinking.

Christopher Whalen: But bureaucratically in Washington terms, they don’t want to take a loss because then the remittance to treasury goes away. And believe it or not, in the small minded world of some of these Fed people, that’s what they worry about. So, vector that into your thinking too because he’s absolutely right – They should be trading the book. They should have been doing a lot of things, but they’re not thinking like market people. They are thinking like Keynesian and academic economists and that’s scary — It really is.

FRA: In your article you mention also that this is likely going to result in a volatility returning to the markets that were all short volatility – Can you elaborate on that?

Christopher Whalen: Well that was the comment from Powell. He said at the end of that snippet from 2012 that they were going to unwind their short volatility position. In classical terms, if you buy a portfolio of RMBS it should give you a relatively short position, but in this case I think the other part of it is our perspective, the market. We’re sitting here and he’s got all the duration and we’re buying. Now, all of a sudden, he says that we aren’t going to buy anymore and we’re going to let it run off. So eventually private market participants are going to take up that duration, think of it as the weight that they have to support with capital, and they’ll have to hedge. So you will see market activity return. I think that the Fed has missed an opportunity to get a little bit more of this done quickly and figure out how much the street is willing to support. That’s the thing that we don’t know. The Fed has been supporting everything.

Peter Boockvar: The Fed lost their opportunity. The Fed had a chance to raise 3 times in 2015, 3 times in 2016, now they’re entering a situation where maybe the Fed fund rate tops out at 2-2 ¼. And they have now an issue with this falling dollar and bubbling inflation pressures. Just imagine when we do hit a wall and they start to cut rates and what the dollar is going to do in that scenario.

Christopher Whalen: I think it’s a lot simpler than you put forward which is: go ahead and keep your little quarter point march and if you see spreads start to widen, you stop. It’s the basic Irving Fisher test, right? That was the playbook for Bernanke.

Peter Boockvar: That is too much of a free lunch for me. I think that there is no free lunch in reversing this policy that they have implemented.

Christopher Whalen: So, you think we go to 6%? That’s what Yellen said years ago.

Peter Boockvar: We don’t need to go to 6% to cause a major problem. All the 10-year has to do is go to 3.5%/4% and you’ve got, I believe, a recession on your hands. I think the sensitivity to changes in interest rates is dramatic, as it’s been. You’ve got duration levels that are as high as they’ve ever been globally – That’s where the risk is.

Christopher Whalen: Well you’ll certainly see defaults go up because we’re hiding a lot of defaults with the artificial manipulation.

Peter Boockvar: And it’s not just that. Well you need a zero interest rate to go back to zero and $9 trillion of paper is going to lose a lot of money mark-to-market

Christopher Whalen: Hey, I know that’s why…

Peter Boockvar: Actually, I take that back. It’s more than mark-to-market — It’s real life losses.

Yra Harris: From a trader’s point of view…That position is enormous that they are carrying and more people have synthetically created that. Now you’ve got to realize that all of this volatility selling is all from people who are mimicking that risk parity trick. You can mimic it whatever way…You can recreate this trade synthetically in a million different ways. So when you have to actually start unwinding it, it’s almost like the long-term capital of 1998, we’re not going to be able to get out of that door because a lot of people are going to be racing out that door at the exact same time that you want to go because they have the same position whether you realize it or not.

Christopher Whalen: Well of course. And the VIX is just a popularity contest – There’s no basis for that contract. It’s just a matter of supply and demand. It’s like CDS. There is no basis on the underlying credit anymore.

Peter Boockvar: Well sure, but the VIX is still being determined by a lot of participants placing their bets and puts and calls.

Christopher Whalen: Absolutely. A lot of them weren’t hedging the past few years. Everyone was leaning in one direction.

Peter Boockvar: Of course.

Christopher Whalen: You would see default rates double in Peter’s scenario, easily. I think that’s from latency in the system. If we see the 10-year go up to like 3%, I think the windows will be shaking.

Peter Boockvar: And I read a stat over the weekend that of the roughly 2,000 companies, 40% of the debt is floating rate. And that cost goes up every single day with what LIBOR is doing. Even the 2-year note yield today is up to 2.12.

Christopher Whalen: That’s what I’ve been wondering about is to imagine the reissuance of equity that was bought in by these guys as they desperately try and pay off this debt. That could be a lot of fun.

Peter Boockvar: Yeah. The 1-year bill today is now where the S&P 500 is.

Christopher Whalen: We’ve had 4 years of amazing record bond market activity of each year in terms of new issuance and I would say 1/3 or ½ of it was to fund stock repurchases. It’s been quite something.

Yra Harris: And you know what, there’s another part…When the BoJ and ECB are busy buying corporate assets, there’s no hedging that goes on there either. And there’s also no stock re-lending. Another issue that I’ve raised…

Christopher Whalen: Yeah, that’s true. They may not lend the assets. That’s right. The Asian central banks are very, very conservative on that stuff. They won’t re-hypop.

Yra Harris: Yeah. There’s no rehypothecation of anything so now all of a sudden the game gets even more interesting and the question becomes: Do all the ETFs rehypothecate? Or does that result then with everything in that basket we get way late off the market and make it even more expensive for short sellers. So we’re not getting any short selling for some of these companies that are involved in ETFs are really miserable companies. So the whole dynamic here is shifted. And I don’t know that the players have really shifted.

Christopher Whalen: I don’t know about the ETFs. I would suspect those assets are available, but the central banks are the big thing. When they buy all of this paper and just put it away, you’re right, it doesn’t come out. It doesn’t get loaned. It reduces liquidity – That is, to me, the key thing.

The fascinating part is to look at the Swiss. Swiss National Bank is now buying stocks. Why? Because if they don’t, the currency will appreciate. That is their chronic problem. They just can’t keep the money out and even with penalty rates, they still can’t manage it. So if they stop, it will go up.

Peter Boockvar: That’s what one of the interesting central bank comments this week was from the deputy governor of the Swiss bank in Sweden, who has also gone down that rat hole of negative interest rates, and she said that they are not going to wait for the ECB to start raising rates. They’re going to probably start doing it this year. So I think that there is an end in sight to this negative interest rate experience over the next 2 years.

Christopher Whalen: Well, the whole system has way too much debt and a lot of debt that is mispriced. So like I said, you’ll see the banks start to lean into this too. I think you’ll see provisions gently go up from where they are. I was surprised to see the credit cards up this much this quarter.

The mortgages are still real quiet. And commercial is still really quiet because the collateral values have gone up so much. A loan you made 2 or 3 years ago, the building will get sold easily for the principle on the loan which is typically a 50 LTV (loan-to-value) loan. Look at the equity that has been created in multi-family and commercial real estate over the past 4 or 5 years – It’s ridiculous. And it was all levered up again.

Look at New York. New York is going to be a lot of fun. We have compression underway right now.

Yra Harris: Will the balance bring back foreign buyers to the U.S. market to hold this mark up a little longer?

Christopher Whalen: I don’t know. I’ve been trying to get some good data on that because it depends on a lot of things. There was certainly a gold rush for a while, but then the Chinese shut the door. They changed the rules rather significantly. That’s what H&A is about. I think that for Europeans too, things have calmed down a bit so you don’t have that crazy flight capital that we saw in New York in 2015 and 2016. But the bid for high-end condos, that foreign big is definitely waned. I know a couple of brokers who just do that market and there’s a lot of stuff for sale.

Peter Boockvar: There are a lot of signs that commercial real estate has peaked out in this cycle.

Christopher Whalen: Oh yeah — Definitely. But you know a lot of markets are completely on fire, just look at Denver, downtown Denver…

Peter Boockvar: Yeah, with certain demographics.

Christopher Whalen: Yeah and they’re leasing them.

Peter Boockvar: A lot of population growth.

Christopher Whalen: Yes. That city has exploded. The city has almost reached the airport. And for those of us who remembered when the airport opened, it was really far away.

Peter Boockvar: Yeah, I was at that airport 2 weekends ago.

Christopher Whalen: Yeah, and now (highway) 70 has expanded to the airport. It’s about a 40 minute run. That whole area with Colorado Springs and everything else has just completed exploded in terms of development.

Yra Harris: When they built that airport I said: Why are they taking away the old stable that said, “Stupid”. What vision I had.

Christopher Whalen: Now people are going to start expanding east away from the airport. That’s already happening.

Yra Harris: Wow. It will be in Nebraska.

Christopher Whalen: Exactly. But anyway, markets are going to be very interesting. I think that the fact that the dollar has been trading off the way that it has been is going to make for a very interesting year…

Peter Boockvar: And what we’re seeing in front of our eyes is the air leaking out of the bond bubble. Whether it’s here, whether it’s in Europe with the German 10-year breaking out above this multi-year range. I don’t necessarily know the pace of it from here, but things are changing before our eyes with interest and currencies. If there was going to be a major risk to this whole tranquil environment that it’s perceived to be, it’s the rise in interest rates and certainly a big draw down in the U.S. dollar. I mean commodity prices are at multi-year highs, the CRB printing 200 yesterday and holding them today. I think things are changing and there’s still a lot of nonchalance in the face of that.

Christopher Whalen: Of course. Markets sometime just sort of trade around numbers for a while for no particular reason and then you have an event that wakes everybody up and it moves, like the election. If you look at most charts for the bond market, there’s this big discontinuity around November 2016 and what do you do? Now it’s moved. And it moved again for a variety of reasons. China used to be the excuse, but I don’t think we’ll have that now. It will be a fairly boring inward look at China.

FRA: Chris, on your article you mentioned there could be downward pressure on long-term bond yields as the U.S. treasury concentrates future debt issuance on the short-term majorities.

Christopher Whalen: Yeah, that the schedule. And again, going back to our earlier conversation, you’re the Fed and you see treasury in the market with huge issuance. I can put a lot of pressure on short rates such that they may blow past the targets and keep going. Imagine that. Meanwhile the Fed isn’t going to sell anything outright and they’re not doing anything on the long end. They should be selling the futures at least. You don’t want to sell the cash positions? Fine, but do something because otherwise we’ll flatten just like Peter said. I totally agree with that. And it may happen quickly. It could happen in weeks – Imagine that (laughs).

Peter Boockvar: I still expect a creep higher in long rates.

Christopher Whalen: Yeah, it will bounce up, but it could easily rally. You want to be careful because there is so little paper. If they reopen the old issues which they can do, then you’ll know that somebody is yelling in that building saying, “Hey! You should be issuing longer dated paper.” The pit was planning to take their runoff and invest in the short end stuff the treasury is issuing, right? But their runoff may be so slow that they might not have that much net cash if they want to keep up with that $20 billion decline in the overall portfolio. So, I think it’s a funny situation. It goes to what Peter was saying. We could have a really nasty market environment because the Fed can’t help, the banks can’t help, they’re not allowed to anymore. So the street has no strong hands here that come in and push out a bad auction or push on the dollar if it gets messy. They would just have to intervene.

Yra Harris: And if they were to actually start…If Powell says, “I want to sell off…” to go back to your first point Chris, is that they are going to incur losses. And then they’re going to say, “Hey, we’ve got losses on our books this year because we’re actually taking some losses on the long end stuff that we bought.” So they’re kind of locked in that situation. And the situation on the front end has gotten so interesting that I actually called someone at the CME and said that I think it’s time for them to dust off the old contract and bring it back because it may become useful besides with the euro/dollar.

Christopher Whalen: Well no, this is the thing, the Fed economists in Washington were bragging about the fact that they made money on QE and they don’t understand. To your point though, Yra, what Powell has to do is get up and say, “We’re going to be selling some bits of the portfolio to help accommodate the treasury’s issuance and to rebalance because it’s far too long.” And they can do that in a variety of ways, but then he’s got to look at them square in the eye and say, “By the way, this going to reduce remittances for years.” They have a little account called the negative asset; they came up with it, where they put the losses. The congress capped the Fed’s capital at $40 billion when they confiscated the surplus for highways. So this is the situation you have and they don’t want to be insolvent. If there’s a big number in this contra account and they have $40 billion in equity, people can do the math. That’s the politics of this. It’s very strange. You got to realize that they are central bankers, they are very funny and it’s a big factor.

So, if Powell will change that? That’s a big deal.

Peter Boockvar: I think also a key factor is how much control these central banks can have over their external environment. I am of the belief that markets are going to force their hands. I still believe that cyclical inflation pressures are going to force their hands whether it’s commodity prices, wages or supply chains. I read an article yesterday on the front of the Wall Street Journal on how it’s almost impossible to find a truck to deliver your goods and people are paying hand-over-fist to just try and find drivers. I don’t think it’s necessarily fully in their hands. I mean Powell is going to have to start watching the German 10-year yield every day. Behind the scenes, obviously, a liquidity flow is turning into more of a drip and that all of these central bankers have to look at each other because what one does is really going to influence what the others do both on the upside and downside. When you think about this rise in interest rates, as some of these banks start raising, it gives other central banks cover. So, you’re less inclined to keep rates low if other people are doing it on the upside just as we saw the reverse. Peer pressure cut the rates to nothing and it’s going to do the reverse on the upside. I think that also feeds on itself. I am just amazed at people believing that this is going to be a smooth process and historically it never is.

Christopher Whalen: It’s even worse now because they took cash flow out of the system by forcing rates down. Forcing rates down is a debtor-friendly policy. It’s meant to transfer value from savers to debtors. So now, you have more volatility in the system because it’s less cash flow. People also have very little fat. There’s not a lot of embedded savings in the system from carry because your assets don’t throw off that much cash flow. It’s stunning when you look at Bank of America and the gross yield on their book is 4% — They’re not making money. The whole industry has got a negative risk-adjusted return because the return on assets is so low. In fact, I think that the number for the industry now if 0.75% on earning assets across the board. It used to be over 1.00%. And so the central banks by constantly forcing rates down, they’re taking carry out of the system and it’s not good – It’s deflationary, ultimately.

But I looked at the debt thing, Peter, and I totally agree on it. I’m going to have a lot of fun watching this. I was doing comments today for one of the regulators on whether or not they should allow different credit scores for underwriting loans – What do you guys think? Do you think that’s a good idea to have more than one way of measuring something like that?

Peter Boockvar: It makes sense.

Yra Harris: Yes, it would. I think the whole cycle from a private perspective, you know having my kids go through this stuff, and honestly it’s ridiculous. It’s truly ridiculous in the way that they measure it and they hold everyone accountable to the same standard. I know, it made the banks comfortable with time and there was a need for it, but if I ran a small community bank I would never do business like that. And I know they saddle with them. That’s not how you properly do business.

Christopher Whalen: Well, that’s what I’m telling them Yra. Like you said, the government shouldn’t be in the business of picking one. You let the people who underwrite loans figure this out and then the markets are going to tell them whether they like it or not because they’ll price the pools accordingly. So, I think we can figure this out real fast.

FRA: Just as a final question if you can go around to give your thoughts on where central bank: monetary policy and government fiscal policy is going this year in 2018.

Your thoughts, Chris?

Christopher Whalen: Well, for monetary policy I think that they are going to try and stay on the program as far as rate increases. But you get the 10-year stuck and it keeps moving Fed funds up – You’ll have a flat curve. And I think they’ll have to stop at that point.

Fiscal side: I don’t see any inclination of discipline in Washington – It’s a train wreck. They’re going to have to figure out a way to raise some revenue otherwise we’re staring at some pretty scary deficits. And I think eventually the credibility of the United States will suffer.

FRA: And Peter?

Peter Boockvar: Well, I think the weakness in the dollar is beginning to reflect the worries of those depths and deficits. That maybe we do have a $1 trillion budget deficit again in 2019. Obviously fiscal policies, in terms of tax cuts, are in place. Everyone’s got their fingers crossed that it actually improves economic growth as opposed to just improving earnings per share. We are seeing some wage growth which is a good thing, but one thing that we’ve seen is that the assumption on Wall Street was that the tax cuts all that would flow to the bottom line and we’re seeing that not all that will flow to the bottom line.

Christopher Whalen: Oh yeah. And the repatriation narrative is infantile. I cannot believe that people with PhDs in economics can sit there and go on and on about how cash is going to be brought back and invested in the United States. That’s not the way corporate finance works.

Peter Boockvar: Yeah, and a lot of that cash has been spoken for anyway with all the debt accumulation to buy back stock. So companies have already frontloaded the repatriation by taking on all this debt.

Christopher Whalen: Of course. But if you look at tax shelters like you saw they hit the Goldman because they are the great tax shelter shop. And a lot of that stuff is not going to come to light. You think everybody is going to go to the IRS and turn themselves in? The case with Dow last year that the Supreme Court declined to hear was a big deal. Donald Trump has the same tax lawyers as Dow. Trust me, the IRS now, any corporate they go to sham partnerships with as tax shelters, they basically just have to write a check. They have no appeal. There’s trillions of dollars at stake here. Trust me, these corporates are not going to come forward and say we did this wrong. Nope.

Peter Boockvar: I continue to believe that the other side of the easing mountain is upon and that creates the biggest risk for markets and the economy. People say that we’re not going to have a bear market until the economy goes into a recession and I argue that it’s going to be the rise in interest rates that leads to a decline in stocks that then leads to the recession. A trillion dollars of liquidity coming out from the Fed just in a loan is going to be a big deal as we deeper into the year. That’s what we have to look forward to over the next 2 years. The Fed taking out a trillion in loan the next 2 years after beginning that last year, the ECB ending QE, and that’s a $600 billion reduction in their run rate in 2018. And then the elimination of negative interest rates. So that’s what we have to look forward to over the next 2 years in terms of interest rates and I don’t see risk assets just whistling past that.

Christopher Whalen: Oh no. Look, everything is compressed. The whole curve is going to expand. Yra?

Yra Harris: Yeah, everything that was talked about and then you throw in the infrastructure spending package Trump is going to get through. I mean he’s not only selling the world today. You should watch how he probably hijacked Davos because they couldn’t lick his boots fast enough and he’s disruptive…So he’s got all this more debt coming on. He’s got really got discussions going on, in the United States of course, about financing debt. We are going to find out if his interest rates are going higher. We know the answer to it, but the rate of the world is going to have to find out. You have the ECB who took the Bernanke model and did everything they could to explode it with the amount that he could buy and he’s still…Peter and I know, he’s going to end in September, but it’s going to have a massive amount of assets on that balance sheet in the ECB and with the Germans breathing down their neck…There is nothing good going on there. There is nothing good and it’s going to come back to haunt. Now we have Joe from China and he’s reminding us about Minsky. The Chinese are reminding us about Minsky so we know we are in a very difficult situation and the world is just sleeping through it because you wake up in the morning and you see your stock portfolio is doing a whole lot better so you go, “What’s the difference. We’re all good here.” And they carry on. So, I think it’s going to be this year. I don’t think it’s going to wait for 2019. Some of these issues that people have chosen to pretend don’t exist. And it’s all bound to, we always know it. I think the 3 of us would agree that all crises come up from the debt market. Credit and debt markets determine everything and we’re there. It’s just what’s going to be the actual start that sets it off. I am not sure. I do agree with Peter that it’s going to be central bank oriented and it’s going to come as a change of direction. I think, Christ, you would agree with that too, it’s just how they do it. And Jerome Powell is going to be an interesting guy to see how he reacts to it.

Peter Boockvar: I think a very important question is: Where is the out-of-the-money put strike price right now on the Fed? What level, what percent decline, tells Jerome Powell that he needs to stop his tightening or reverse it? I think that’s going to be an important question.

What’s his tolerance level if these asset markets reverse themselves?

Christopher Whalen: But that’s an important question you’re asking because the tolerance level was very low. In other words, they wouldn’t tolerate any market upset. With Powell, it may be a little different.

Peter Boockvar: Because Powell has more tolerance.

Christopher Whalen: Yeah, I think he does.

Peter Boockvar: I agree.

Yra Harris: …Selloff in the equity markets? I don’t know.

Christopher Whalen: That’s the question Yra.

Yra Harris: Yeah.

Peter Boockvar: The irony is that you get a 20% correction then you’re just back to where you were last year.

Christopher Whalen: Oh, Powell has an easy button on his desk. The question is: Does he push it?

Peter Boockvar: Right.

Yra Harris: Yep, I think that’s absolutely right.

Peter Boockvar: As we speak, interest rates are breaking out today. The 10-year is up to 2.67% now. The 3-year is approaching 2.13%.

Yra Harris: And the Europeans…Today they’re not the catalyst; other times they are the catalysts. I’m interested to see it.

Peter Boockvar: Yeah, the dollar rallied for a couple hours after Trump tried to defend it and went straight back down again.

Yra Harris: And you know what? We didn’t even get into our discussion with the Swiss because they get the alchemy award of the last millennium. The game that they played here and pulled off is unbelievable to me. It tells you about the state of the world…

Christopher Whalen: Well, Peter’s right. They could take a loss on all that corporate exposure that they have. That would be a lot of fun.

Yra Harris: You know what, Richard, they finally admitted now that they are going to be the cryptocurrency capital of the world. They have been the currency capital of the world. But I think that is absolutely right. And it’s interesting, Peter, that is the Yen that turned when Kuroda was speaking at Davos today. The Yen turned very hard.

Peter Boockvar: Yep, it did. He said he’s getting more comfortable as inflation is going to their target.

Yra Harris: Yeah, and I think the Japanese are waking up that the Trump administration is not too happy with the Yen being so relatively weak. And Draghi and Kuroda can pretend all they want…And what was that comment yesterday from that one guy, and I know that they went back to that damn G20 meeting in Washington, which I kind of thought that they would, but he said, “Monetary policies that have a negative effect on currencies, that’s just an effect, that’s not a targeted currency.” Right…And that’s why every central bank when they release the statement about their interest rate intentions cites the level of the currency. Everybody in the United States, that is. Everybody talks about the level of the currency. Everyone discusses the level of their currency as being one variable in determining how they’re going to set interest rates.

FRA: Interesting times and great insight on the credit markets, financial markets and the economy. Thank you very much gentlemen for being on the podcast programmed show.

Great discussion.

Yra Harris: I’d love to do this again. This is great.

FRA: Just as a final word for our interested listeners. How can they find more information about your work, Chris?

Christopher Whalen: Just go to my website: It’s the same handle on Twitter. And the Institutional Risk Analytics which is a free newsletter.

Peter Boockvar: Go to and look at the asset management business:

FRA: Great. And finally, Yra?

Yra Harris: You can find my blog at and sign up for Notes From Underground which is also free. Whenever I write which is sometimes 4 times a week or sometimes 1 time a week will be sent you. And listen to the FRA podcasts. I think that they are very informative.

FRA: Great, thank you guys and maybe we can all do this together sometime.

Great discussion.

Yra, Peter, Chris: Thank you.

Transcript posted by Daniel Valentin

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

01/26/2018 - The Roundtable Insight: Yra Harris And Peter Boockvar On The 2018 Trends In The Financial Markets

Download the Podcast in MP3 Here

FRA: Hi welcome to FRA’s Roundtable Insight. Today we have Yra Harris and Peter Boockvar. Yra is an independent trader, a successful hedge fund manager; global macro consultant trading foreign currencies, bonds commodities in equities for over 40 years. He was also CME director from 1997 to 2003. And Peter is the Chief Investment Officer for the Bleakley Financial Group and Advisory and he has a newsletter product called The Boock Report. It offers great macroeconomic insight and perspective with lots of updates on economic indicators. Welcome gentlemen.

Yra Harris and Peter Boockvar: Thanks, Richard.

FRA: Great! I thought we’d do a view on your thoughts on 2018 in general; where markets are heading, what the trends are, if you see any geopolitical events happening; effects on financial markets and the economy. And so, maybe we begin with the current rally in equities. Do you think it is sustainable? What are causes of this? Where do you see it going? Maybe start with Peter?

Peter Boockvar: So, what we have is enthusiasm, of course, post-US tax reform combined with optimism about global growth. Generally speaking, that is overwhelmed any concerns with central banks and the tightening or less easing of monetary policy. We went from “Don’t fight the FEDs, don’t fight Central Banks” to “who cares about Central Banks” because everything is fine in the economy and there is disbelief that we’re making the transition from a reliance on monetary policy to the benefits of a fiscal policy and synchronized growth. That is what the market currently believes. I think, this year, that thesis will be tested as monetary policy usually dominates fiscal policy in terms of its impact on markets and the economy because interest rates are such a strong lever and in a highly indebted global economy, that becomes even more so the case.

FRA: And Yra, your thoughts?

Yra: I have to stop and say that things Peter and I have done a lot with you Richard and so much of what we discuss is really coming to fruition. In fact, today is the most important day coming out of Davos (World Economic Forum) I hate this time of the year because I’m just not a big fan of what goes on in Davos. I found it, actually, kind of despicable to tell you the truth that these people gather and there’s so many political powerful people that are from central bankers to treasury secretaries to finance ministers discussing things and it’s an expensive ticket. I think its $650,000 to $700,000 and just what are you paying for? And it’s only going to be my problem and of course, there’s a day like today. We got a double blast; from Wilbur Ross and Steve Mnuchin. Mnuchin is a secretary and was talking about “if the dollar goes down, it’s actually good for U.S trade and Wilbur Ross, found to be more incendiary because he said,” …well, there’s trade wars every day. What was the exact phrase that he used? “Now we’re sending soldiers to the rampart”. Well, that’s a very, very incendiary phrase and I was truly bothered by that. So, everything we just talked about, everything Peter speaks to, this is going on. You know, Richard, I think that the 10-year will close out the year at 3.4%. I heard Richard Fisher today pushing about poor rate increases. Maybe. The more I hear what these people or what this administration are talking about, the more concerned I get as to where this is all going. I think I understand why Mnuchin and why they chose Davos to make these statements. That’ll be an issue for other people to think about. It’s very problematic and it does raise some serious issues for the Fed. It’s going to put Jerome Powell in a very difficult position especially if they keep the dollar down. I think we’d probably agree. The reason they keep it down. If you’re going to attack the Trump administration for starting a trade war, the only other alternative is to mark the dollar down. So, it now becomes open season, as far as I am concerned, on the dollar. So, why not? Richard, today you’re talking to two people. I know Peter has certainly been bearish, for what, $1.08 on the euro?

Peter: Yeah, $1.05.

Yra: Yeah, at $1.05 for sure. So I know these discussions have been going on for almost a year. And, Richard you know the many conversations that we’ve had in fact, I know Peter and I totally found commonalities when Mark Fields came out of the White House and talked about currency manipulation being the mother of all trade barriers. So it’s almost like this administration has adopted to that and said,” Hey, you want to go this route? We can play this game too,” and that’s where that leaves us to today.

Peter: It’s a very dangerous slippery slope. Steve Mnuchin is obviously trying to help the manufacturing sector but that’s 10% of the U.S economy. We are a consumer-based economy. So, damaging the purchasing power of a consumer-based economy is very dangerous. You have potential for rising input prices and certainly higher interest rates and I think that will swamp any benefit to multi-nationals. You have commodity prices, say CRB index, which is at the highest level in about two and a half years have rising inflationary pressure, generally speaking, particularly in wages. Now you have the threat of rising interest rates that will only be exacerbated by a weaker dollar. We import more than we export; highly inflationary. Foreigners own a lot more of our assets than we own of their assets and we rely heavily, particularly in the U.S treasury market on foreign buying of our bonds. If you look at last year, one year ago, a European buyer that wanted to pick up some yield bought a U.S treasury; 10-yr at 2.45%. A year later, not only did they lose some principal, since prices are lower, but they lost 15% by owning the dollar. So this is a very dangerous game. The administration should be focused more on currency and dollar stability, not the basement. There’s a very negative slippery slope.

FRA: Could other central banks, outside of the Federal Reserve, take reaction to this? Could there be currency depreciation intentionally done by other central banks? Do you see that?

Peter: We’ll find out tomorrow when we hear from Draghi.

Yra:  There’s a lot of people short Yen or long dollar/Yen here who have been comfortable. That is not a comfortable position that you should be in because if there is somebody out there with a target on their back, it’s the Japanese. The BoJ (Bank of Japan) should’ve ended this policy. That doesn’t mean you have to start tightening and I know they’re not buying as much as they say and as the market thinks that they are because they don’t have to. There’s not that much to sell so whatever you have to clean up to keep that yield curve at that position is certainly not nearly as much as it was a year ago. You don’t really know the full amount of buying but with whatever they want to do they step into the equity market anyway people are buying but whatever they want to do. They step into the equity market anyway. It’s a very slippery slope and I think we’re going to hear from Peter’s executive director or from ECB (European Central Bank) about the strength in the euro. Now in some ways, the strength of the euro helps Draghi because it keeps the Germans at bay. It’s interesting that Jens Weidmann, now all of a sudden started talking more and more. So it does give Draghi some leverage. He could certainly go,” Well, we can afford to be more patient.” It’ll be interesting to see in his press conference how much he discusses the recent strength of the euro.

Peter: I actually think in this counter-intuitive that the strength in the euro actually gives Draghi some license to back away from his policy because inflation pressures are building in Europe as well. What the central bankers want, they have to be very careful as with, because if they achieve the inflation they want, interest rates are not going to be where they are. If Draghi gets us 2% inflation, the German 10-yr is not going to be a basis point, it’s going to be multiples of that. We saw in the market data today, talking about prices pressures intensifying. I want to bring up Japan and I’m going to quote Reid from this press release today from market on Japanese manufacturing. It said,” Strikingly output price inflation accelerated to the fastest rate since October 2008 an inch sharper rise to input cost. With a low rate in unemployment and sustained growth in official GDP data, inflation pressures should continue to mount.” Just imagine if they get the inflation they are hoping for, what’s going to happen to these bond markets? So, by having a little rebound in our currency, they can maybe moderate the inflation pressures. At the same time, giving the central banks an out. Now, of course central banks won’t look at it that way. I’m sure Draghi is going to whine about the stronger dollar is making it difficult for him but I think this is a window that’ll give them the opportunity to back away from their policies because I have to believe that they see the same inflation pressures that we do, particularly in the commodity side, with prices continuing to go up every day seemingly.

FRA: So, for this year, do you see a trend towards quantitative tightening by major central banks?

Peter: Well, the Fed is certainly initiating that. The ECB (European Central Bank) and the BoJ are just buying less but buying less is still a form of tightening. If you blow less air in a balloon, there’s still air going in but less air means a contraction of that balloon.

FRA: And Yra?

Yra: Peter and I have little bit of a different view on this because I still think that Draghi is operating, not just prior to his mandate, his self-declared mandate; is of course the preservation of the euro. I still think that his end game is to put so much debt on those books. Not that he doesn’t have it already, he does. He’s going to push for the creation of a Euro bond. Merkel (Angela Merkel), I can’t tell you what she’s thinking right now. She has got some serious issues. She was chirping about some stuff today about globalization, what they need to get done are they going to divide banking authority. There’s a lot of things in the platter in Europe. It’s just not a straight path and I really think that if inflation takes off in Germany, Draghi and a lot of bosses will be happy because it’s a way for them to punish the Germans for being so intransigent towards Greece, Spain and Portugal. And pushing for fiscal austerity even when unemployment is over 20%. You’re going to have to endure this because right now, the most ridiculously priced asset in the world is certainly German debt. It’s preposterous. Peter keeps pushing it and he’s a 100% right. Right now, the interest by any practical measure, the interest should be about 4 %.

Peter: Yeah

Yra: Right.

Peter: Which should be in line with nominal GDP there.

Yra: Yeah. Maybe 4.5%. It is so preposterous. Let alone all the others but nobody acknowledges that. They all look for reasons. Germany is a land of savers. Every bit as much as the Chinese savers. That’s why the current account surplus is so huge. It’s the largest in the world because Germany saves. They save a lot of money and these savers are being punished because the people who are wrong are not Germans who are investing in the DAX or anything, it’s German pension funds and insurance companies but it’s not individual Germans. They got beat up so bad in the market back in 1999 and 2000. They’re not that invested here. So, most of their money is in fixed income type of instruments — they’re getting killed. We’re speaking on the Financial Repression Authority (FRA), nobody is being as much financially repressed as the German population and that has political notifications.

FRA: Will interest rates tend to rise this year necessarily at different points in the yield curve for yield curves across the major economies? Peter?

Peter: I believe that’s where we’re headed. In the U.S, they keep talking about rising commodity prices and rising wage pressures that are clearly evident everywhere will see whether productivity can offset that or not. The Fed is obviously going to be buying less. You have an enormous amount of supply coming our way as debts and deficits continue to rise. We could have a trillion dollar budget deficit next year. Now, I know the relationships between deficits and interest rates that are somewhat squishy but that was the case in a bull market in bonds. If we’re no longer a bull market in bonds, then the U.S treasury market maybe become more sensitive to U.S debts and deficits. Then you throw in the weaker dollar which can impact foreign purchasing of U.S assets. So I think that interest rates here will continue higher. I think they’ll surprise to the upside. In Europe, I think, interest rates there have only one way to go and that is higher as the ECB will likely end QE (quantitative easing) in September. As they’re currently buying less, or 50% of what they were buying in December and Japan is obviously the wildcard. Actually, before I get to Japan, let’s get back to Europe because this is what bondholders in Europe have to look forward to. Not only do we have a situation where QE is shrinking and going away, but after that they have the end of negative interest rates to look forward to afterwards. So, you had the Riksbank today saying that we’re going to start the path out of negative interest rates even before the ECB starts doing it. So, we are now looking at the barrel of the end of negative interest rates over the next two years. With seven or eight trillion of negative yielding interest rates, there’s going to be a lot of money lost in just getting negative interest rates back to zero. I see only higher interest rates under many different scenarios out of the next couple of years globally.

Yra: I agree wholeheartedly with Peter. I think the 10-yr yield, Peter and I have not discussed targets and I hate choosing targets but when I got pinned down I said,” The 10-yr will be at 3.4% at the end of December of this year. I think I’m going to be low. I think the curve will be back between 130 and 150. I really believe that. If they keep bringing the dollar down, it’s going to come harder and faster as Peter talked about that slippery slope. So, I’m a 100% in agreement and at 2.63 on the 10-year it’s a nice technical level. We could go a lot farther, especially if we have the central bank step back and are not there buying as much.

FRA: Now, one of the economists at Davos we mentioned earlier is Bill White, the former Chief Economist for BIS (Bank for International Settlements). He is now the Head of OECD Review Board. Just wondering on your thoughts, he mentioned because of this rising trend in interest rates, there could be some problems on the horizon due to the problems in servicing debt. So there could be a Central Bank debt trap if you will. Your thoughts on that, Peter?

Peter: Over the last few years, the average duration of credit around the world has gotten to record highs. Which means we’re hugely sensitive to small changes in interest rates. I would have to agree with that. I’ve read some chart from Deutsche Bank saying that,” considering the amount of global debt for every hundred basis points of rise in interest expense or in interest rates, can lead to a loss of 1.2 trillion dollars on paper. We’ve been addicted and accustomed to extraordinarily low interest rates that has dictated behaviour whether it’s the behavior of lending money to a junk credit with almost no covenance to keeping zombie companies alive to buying expensive paintings and hundred million apartments in New York City or buying the S&P 500 at historic valuations compared to 1929 and 2000. Changes in interest rates are higher and it doesn’t have to be a lot higher. It could have dramatic effects on the pricing of a lot of different things because the cost of money is the important price in input to a lot of these things. I think the markets are way too nonchalant with this move in interest rates and this change in behaviour with respect to central banks.

FRA: And Yra?

Yra: You can’t say it better than that. Bill White, whom I have great respect for, as I call him Mr. Lean or Clean because in 2006, he wrote that wonderful paper for BIS talking about the role of central banks and should they be in the business of leaning into spectated bubbles or should they just wait and just clean. He was warning what was coming. We are addicted to this. We’re so addicted to just taking on more debt, more debt, and more debt. What are they using the debt for? To buy back stocks and pay dividends. This is so classic. Ray Dalio, whom I certainly respect as a thinker. I’ve been reading him for almost 35 years and Jeremy Grant also. But it seems to me they’re doing a lot of what I call “chirping” on issues that ought not be discussing such as: if you’re holding cash, you’re going to be sorry. Ok, maybe. But as I think by the time I was down with you, I did something a few weeks ago that I haven’t done in nine years. I took the free cash which is out of my trading account and bought T-bills (Treasury Bills) as my security. My daughter called me and said,” Dad, ninety-day T-bills are 138 basis points.” What am I thinking about? I’m moving and I’m not the only one because Warren Buffett said he’s got a one hundred million in T-bills. These are interesting moments here. I’m not as convinced of this great melt-up as everybody else. I think Peter is getting to where, as usual, things started getting called. We’re very sorry you own a $150 million dollar painting.

FRA: Could there be a slow-down in asset inflation due to the quantitative tightening trend?

Peter: It should. It certainly hasn’t happened yet. The sixty-four thousand dollar question is “when does it matter” and none of us know but I think we’re more confident that it will definitely will matter. I just have to be able to understand that risks are dramatically rising when you have such extreme valuations at the same time you have rising interest rates and a tightening of monetary policy. But again, the question is when does it matter and we won’t know until it does.

Yra: Yeah, and that’s right. People say, if they listen to Peter and I talk, you guys are just crying because you missed it. I have more money in stocks than I ever had. Before the market was at its highest, just by good fortune, started peeling back more. So I’m peeling back into this because I missed the last five percent. I’m not going to be upset because when the break comes, it’s not going to be a five percent break. It may be 15 or even a 20% break. Everybody says,” well that puts you in a bear market.” I don’t know that these rules people really hold in the realm of these Bernanke terminology; zero bond interest rates. I don’t know if any of these old rules hold but we’re going to find out.

FRA: Yeah, exactly.

Peter: We will find out.

FRA: Yeah. If this would’ve happened if they were a significant and fast fall in asset values of asset pricing, could there be a reverse in course by central banks from tightening back to quantitative easing?

Peter: Here is where it gets really difficult for the Fed because they went so extreme and were so slow in removing that accommodation, they left themselves with very little wiggle room. So in the past recessions, they obviously have a lot of bulls to respond. If this selloff is precipitated by higher interest rates, weaker dollar and higher inflation and the Fed decided to start cutting rates that would be a further mess for the U.S dollar and potentially even more inflationary and could lead to even higher long-term interest rates. So then what the Fed is going to do is, they’re potentially really screwed and it also ties hands with QE that could weaken the dollar even more. That gets back to the original discussion on the dollar and the administration wanting a weaker one. It really creates a difficult situation for the Fed if the dollar weakness continues because it completely ties their hands in responding to the next down term here. Because imagine them cutting interest rates with and already weaker dollar, that would be a real mess.

Yra: You know what, if you look at the last the curve steepened out over 180 or 200 baseline, I’m talking about the 210, that was when the second QE2 and everybody was convinced. Now we’re really going to get inflation. So the Fed, of course, wasn’t moving on the long end even though they were buying more. People were selling thinking inflation was really going to take hold. People are smug about the stock market breaking or possibly being negative. The other side of the coin has been where people say,” Where is the inflation?” They started talking about gold but gold is not going to go up because of inflation. Gold is going to go up because the central banks in the world capitulate to the deflationary scare because that is when gold went up the first time. There was no inflation. They would do anything and I mean anything to prevent deflation setting in and that’s what Peter was talking about. If they had to back track here now, look out!

FRA: Did that prompt them to go into extreme negative nominal interest rates so we get real nominal interest rates going into negative territory to an extreme level as if they’re cutting the interest rates on the low end to the same extent they did on the first financial crisis?

Yra: No, that view will certainly have “good friend” on the Fed.

Peter: Yes, no pun intended.

Yra: Pun totally intended. Thank you, Peter

Peter: I’m not convinced we go to negative interest rates. I think you’d blow up the U.S money market industry. I think the banks would go bananas so I don’t see that being a possibility in there. I think that the experiment with Japan and Europe with what they did to the profitability of the banks there. I think there’s a part of negative interest rates that’s been repudiated as a good policy. As the reserve currency of the world, having a negative interest rates, what a disaster that potentially could be.

Yra: I totally agree. I think that point was so well taken. I think Japanese stocks is a safe hiding place for many years. I still hold them. They’re finally starting to move now and they’ve been terrible. It’s like the European banks. Every time I hear people talk about European banks, what Deutsche Bank is trading 19.50? Big deal. They haven’t really responded well. Yeah, they’re well off their lows but that was because there was a question of their sovereignty. Now we’ve got beyond sovereignty at least for a minute until one of the European countries who really have a lot of sovereign debt becomes an issue and our sovereign bond is going to be zero risk rating forever but we’ll get to that question later.

FRA: What are your thoughts on geopolitical risk to the financial markets in the economy, Peter?

Peter: I’m less worried about geopolitical risk. It’s usually more news worthy than economic or market worthy. I don’t think we’re going to war with North Korea. I put that on the backburner, it may happen a day here or a day there. I’m less worried the geopolitics than I am of central banks really screwing this thing up.

FRA: And Yra?

Yra: I couldn’t agree more. To me North Korea, I had trip of my own to North Korea because my son who really knows Japan well. He said,” Look it, as long as the United States isn’t sending air transports and take people out of Seoul, you don’t have to worry about anything because there’s 150,000 Americans living and working in Seoul. We know what happens if the United States were to bomb North Korea. I’m just talking about bunker busters that the retaliation upon Seoul would be so great. There’s nothing going on there. To me, the most dangerous place right now politically is Europe because we have the Italian election coming up and there’s a lot more possible impact coming from there. You can’t show that on television. You can’t take a picture of what’s going on politically in Europe. You can talk about it but it doesn’t have that dramatic effect. The only thing is the Saudi-Russian connection and possibly Turkey but that’s with us at all times. The Mid-East is the Mid-East unfortunately. I don’t see much else.

FRA: What about your thoughts, Peter you recently mentioned, Europe could be the epicentre of the next financial crisis coming out of the European bond market. Do you still feel that way?

Peter: Yeah, we need to remember that the bubble this time around was in central banks and interest rates. Just by having a conversation about negative interest rates tells you the bubble ran because, you know, that’s the epitome of a hot potato market. With Europe flooded with negative interest rates and the ECB reversing themselves, that’s where I think there’s a major, major risk. I think people have to really focus on that. Plenty of risks that could emanate from the U.S but a blow up of the European bond market will have global market interest rate reverberations.

FRA: And Yra, your thoughts on that?

Yra: That says it all. There’s nothing I could possibly add to that.

FRA: Given this view on the horizon, how can investors protect themselves or what asset classes, generically, do you see as making sense in this environment? Peter?

Peter: I remain positive on commodities. Not just initially on the weaker dollar but we’ve seen years of underinvestment. Gold and silver is the way I’m playing the weaker dollar directly. I think that will continue to be a good place to be and I expect much higher prices. I think shorts from bonds, now all of a sudden, pay you something. As Yra said earlier, owning T-bills, you actually get paid in a coupon that is at or above the dividend yield on the S&P 500. Those are two places that is a way to protect yourselves, so to speak, in this kind of environment.

FRA: And Yra?

Yra: Here we are, three sophisticated money people and we’re going to park on T-bills and that’s what I’m doing. We know that real yields are still negative on the short-end but it is far better than where we’ve been. I’m moving more to cash every day. This to me, is one of the greatest gifts we’ve seen. Could it be more rational? Sure, you can. We know that. When the S&P 500 came under pressure today, the break was severe and it actually held at a huge technical level but we still have twenty minutes left and while the S&P’s are hovering at unchanged on the date, it wouldn’t surprise me to see some pressure. Especially Mnuchin and Wilbur Ross, as Peter said, they are on a slippery slope and they are playing in a very dangerous arena here and this isn’t good for equities. The equity markets are much higher ready and as Peter talked about the double-edged sword of a weaker dollar and the impact on corporate properties. It’s not as clear and easy as some people think it is because there is going to be a push back and all you’re going to do is wind up with more uncertainty and disruptions. These are serious disruptions. When you start playing and trying to manipulate financial instruments like currencies, you open up the door to a lot of unintended consequences and we saw it this morning. The first reaction was for the DOW Jones to go up because it’s a large multinational corporation they have been reading this for so long. They see a weaker dollar. “Oh that’s good for you European markets Of course, the European markets never could get up off their behind. In fact, I’m buying DAX this afternoon because they have the DAX under severe pressure but where else are you going to go in Germany? What am I going to buy? Whether the euro goes higher or not, really to me, unless it goes another ten or fifteen percent higher, would I really start to get concerned about it for European corporations. Nothing is going on here. They are playing with, not even dynamite, something that is far more volatile and I’m getting very cautious.

FRA: Great words of wisdom. Thank you very much Yra and Peter. How can I listen more about your work? Peter?

Peter: You can go to and if you want to learn more about Bleakley, go to

FRA: Great. And Yra?

Yra: Turn into Financial Repression Authority or check out my blog It’s a good place where you can get thinking. The good thing is people can really do get some trade ideas that you can really act upon. Peter and I are not offering theoretical analysis. I think there’s really bonafide proof to act upon.

FRA: Thank you very much gentlemen. We’ll end it right here and we’ll do it another time as well in another session.

Peter: Thanks guys. We’ll talk in a few days

Yra: Yeah. See you Friday. Thank you.

Karl De La Cruz

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

01/24/2018 - The Roundtable Insight: Graham Summers On The Everything Bubble


FRA: Hi welcome to FRA’s Roundtable Insight .. Today we have Graham Summers. He’s current president and chief market strategist of Phoenix Capital Research, a global investment research firm located in Washington D.C. He’s a graduate MBA of Duke University. With over 15 years’ experience in business strategy investment research, global consulting and business development.

Welcome, Graham.

Graham Summers: Hi Richard it’s nice to be here.

FRA: Great having you on the show. Today we’d like to focus on your new book The Everything Bubble: The Endgame For Central Bank Policy and you got the book divided into two parts; how we got here and what is to come. So maybe we can base the discussion on that if you want to give us some insight into how we got here.

Graham Summers: Sure absolutely. So the idea for the book hit me when I saw that central banks, particularly the Federal Reserve in the United States, because I’m based in the US and most of my clients are, so my focus tends to be on that financial system. But I noticed that central banks were intentionally creating a bubble in sovereign bonds, which in the US we call them treasuries and they did this in response to the 2008 crisis. When I saw that happening it was cause for severe concern because in our current way that our financial system is set up, these bonds are actually the bedrock of the financial system. They’re the most senior asset class that there is. And if you look at what’s happened the last 20 years, we’ve had this kind of period of serial bubbles. In the late 90s, we had a bubble in technology stocks. They called that the “tech bubble”. Then when that burst, the Federal Reserve intentionally created a bubble in housing that was the housing bubble which led to the Great Financial Crisis of ’08. The significance of that is that housing is a more senior asset class than stocks. Then when the Great Financial Crisis hit in ’08, they dealt with that by intentionally creating a bubble in bond. So this is what actually gave me the idea for the title of the book The Everything Bubble because if you create a bubble in the interest rate against which all risk assets are measured, you’re going to end up creating a bubble in everything. It’s like raising the tide of the ocean, every ship going to rise as well. So I started writing the book and essentially what I quickly realized was that in trying to describe these things most people were probably not going to have a good idea of what I was talking about. And they were also probably going to ask why are things this way. So I divided the book into two parts: how we got here and what’s to come. The first half how we got here essentially started with the creation of a Federal Reserve and runs all the way up to about 2016. And I wrote with using a very simple plain language because a personal pet peeve of mine is that finances intentionally kept kind of opaque and confusing because I think it’s meant to keep most people ignorant of how the system actually works. So my goal was to write at least a hundred pages that anybody in the world could read and would instantly be brought up to speed on how did the United States financial system come into being. Why was the Fed created? How does the Fed work? You know, how did we get off the gold standard? And eventually leading up to the current era which is: how did we get into this mess? Where basically every 10 years we’re having these massive financial crises. And why is that the Central Banks are getting away with policies that really are completely insane and which none of us voted for?

I guess that answers your question.

FRA: Yeah that’s interesting. So can you walk us through in terms of the era of serial bubbles beginning, the Fed crossing the financial Rubicon, and leading up to the Everything Bubble?

Graham Summers: Sure I’d be happy to. The easiest thing to do by the way is to just if you really want to know about the things, buy the book. It is on Amazon I think they’re running a 10 percent discount. So the stuff you’re interested in, by all means, check the book out. But the kind of the bullet point way I’d run through this would be when the U.S. completely severed from the gold standard in 1971. It did two things. Number one is: it opened the door to endless money printing because up until that point if the Fed chose to print a ton of currency, central banks and foreign governments could still convert their dollars into gold if they wanted to via the Fed. So up until that point while the Gold Standard had technically been ended for most of us in 1933 by Franklin Delano Roosevelt, it wasn’t until 1971 that the gold standard really was rendered moot for everyone including central banks. So when that happened, suddenly the US Federal Reserve and the United States would be paying any and all debt using U.S. dollars. And of course, these are U.S. dollars that the Federal Reserve can print. So what happened at that time was you see a sudden ballooning of debt relative to the actual economy in the United States.

And there’s a chart in the book which shows basically GDP, which is the gross domestic product, which is the annual economic output of the U.S. and the second line is the total debt securities and the financial system. And what do you see in that chart is that starting around in the 70s these two lines are pretty close together, but after 1971 when the world was removed from the gold standard, the trajectory of the deadline was almost parabolic and just keep going up and up and up. Meanwhile, GDP continues kind of in a linear fashion growing. This was that suddenly the system flooded with debt because the debt is paid for by dollars which the Fed can print at any time so there’s no limit to any of that. What this did was it got us to a point where in the late 90’s the amount of debt relative to the economy was so massive that if ever there was a serious period of debt deflation, which is basically a time in which debt prices are falling which means they’re starting to go insolvent, which means that people are going bankrupt. You’re going to have to restructure debt. As soon as that started to happen the Federal Reserve would panic and flood the system with liquidity because the dirty secret for central bankers is that the thing they fear most is debt deflation. When debt deflation hit, which is when debt falls in value, which means its yield goes up. It means it becomes more and more expensive to issue debt. And if most governments in the world have been financing their budgets with debt, the minute the debt deflation hit, that’s essentially the bond market saying, “hold on now it’s going to cost you a lot more if you want to continue financing your budget”. So this is always the focal point for the Federal Reserve, which is why starting in the late 90s. The Fed switched to a policy of intentionally creating asset bubbles because the alternative would be to let the financial system reset by allowing the debt to clear. Nobody is going to go for that because first of all, it is political and career suicide and second of all it’s the complete systemic reset. So Greenspan then Bernanke and ultimately Yellen all engaged in the same policy, which would then create asset bubble and any time that the asset bubble burst and a crisis hit, it will simply flood the system with more money and create another bubble.

FRA: This is quite interesting also in light of the cryptocurrency developments you mentioned the central bank power of printing money, fiat money, this whole monopoly power. Do you think that governments will give up this monopoly power to private-based cryptocurrencies? That this would be something that would not allow them to print money at will.

Graham Summers: No, they won’t endorse that in any way. Cryptocurrency is the result of two things. One is the fact that central banks are basically trashing their currencies by printing so much money and money capital flows to where it’s treated well. And if your alternatives are Swiss Francs or Euros or dollars all of which are being printed by hundreds of billion, you’re going to seek something else. So I view cryptocurrency as the natural kind of reaction to the system being set up the way it is essentially an individual saying well I want to get out of there somehow and I’m going to create an alternative. The secondary effect is capital flight from China, which is that hundreds of billions of dollars are fleeing China and they’re using Bitcoin and other cryptocurrencies to get the money out. We know that 80 percent of the trading volume of Bitcoin is actually in China, but that’s sort of a topic for another time. But no to answer your question the Fed will never endorse cryptocurrencies. What the Fed will most likely do is try to create its own. And we know from an interview that the New York Fed President William Dudley gave back in November that the Fed has actually been examining that and looking into creating their own alternative to Bitcoin and the Fed would love that. Because if the Fed could somehow get the system to go completely electronic meaning physical cash no longer exists, it would allow the regulators to monitor every single transaction that occurs. And it would also remove the systemic risk of cash because physical cash only represents about 1 percent of the actual wealth within the system. And another dirty secret is that if enough people ever went to the bank and demanded their money in physical cash the whole system would blow up, the money is just not there. You know 99 percent of the so-called wealth is just electrons stored on bank servers and none of the banks actually have the money on hand, which is why a big goal for central banks is to get rid of physical cash in the next 10 years or so.

FRA: Yes, I agree with you fully and that gets us into your other section on what is to come. So you do talk about that the war on cash and also I would say it ties into negative interest rate policy because with the abolishing of cash it would allow central banks to more easily implement monetary policy especially if it goes into negative interest rates. Would you agree?

Graham Summers: Absolutely. So if you look at what I call the period of serial bubbles which is the late 90s till today. The Fed’s response to every crisis has been more and more extraordinary. When tech stocks blew up and we had the tech crash, Alan Greenspan kept interest rates down at 1 percent and he kept them there for like three years more than he should have which is what created the bubble in housing. Because if the rate of interest held by the Federal Reserve is lower than the growth rate of economic activity, money is essentially free because you can borrow money at the interest rate investing almost anything in the economy and you’re going to pocket the spread. So that was how the Fed dealt with the tech crash. Then the housing crash happened and the Fed cut interest rates to actual zero, keep them there for 7 years and does something like 3 trillion dollars in quantitative easing, which is basically printing money and then using that new money to buy assets from the banks which is the kind of backdoor bailout essentially the Fed doing a kind of cash for trash for the Wall Street banks. So that’s what happened last time around and we now have a bubble in sovereign bond and those are the most senior asset class in the financial system. The natural logical conclusion would be that when this bubble burst we’re going to have to see even more extreme policies. And the Fed has already hinted that in research papers and in speeches what those policies would be. They would most likely be negative interest rates meaning the rate of interest the bankers and the Fed is charging on the system is negative three or maybe even negative five. We’d also have that combined with nuclear levels of quantitative easing, so quantitative easing of like 100 billion or more per month. And then at the same time they try to ban cash. The way all of this would work is implement negative interest rate. Well that makes it difficult to sit on cash, so you banned cash so that people can get their money out of the banking system and in faith because of banks trying to charge you 3 percent on your deposit. Well heck just put your money in a safe. You don’t have to pay that interest anymore. So the Fed’s going to want to close the loophole that physical cash present. Than nuclear quantitative easing, the goal here is to just buy as much debt as possible to try and stop the debt bubble from deflating in an attempt to reflate it. And then the final policy will probably be some combination of wealth taxes, bail in and capital grab. Then what basically the way I would describe this is think of it this way, if the problem is that there’s too much debt, your goal is going to be to get as much capital as possible. So any money that’s lying around whether it’s in physical cash or in say, a payroll check you haven’t cashed for a couple of years and you just forgot about it. Or perhaps a CD, a certificate deposit, lying around or even savings deposit that you have in a bank. Government regulators are going to want to get their hands on it, much of that is possible because at the end of the day the issue is there’s too much debt. Most of the large entities in the system are financially insolvent as soon as interest rate normalized. And so they’re going to try and seize as much capital as they can.

FRA: Yeah exactly. And the NIRP, the negative interest rate policy, could also be in light of inflation or rising inflation if you have real interest rates as being negative, so nominal minus interest equals real. What exactly do you see playing out in terms of negative nominal interest rates or just negative real interest rates with rising inflation?

Graham Summers: I think we’ll see actual negative interest rates meaning the interest rate is in the negative like negative three in nominal terms. If you look at the history of the Federal Reserve, typically, when they react to a crisis or a recession on average they cut interest rates about five percent from their prior peak. Which following that line, if interest rates are three percent or the next crisis hit, they’re going to cut them five percent. That’s going to get you to negative two. If interest rates are around one, that gets you down to negative four, so this is how it’s been every time for the last 70 years. So I do think we’ll see nominal interest rates. We have them in Japan, we have them in Europe. Both cases demonstrated that nobody who implements them actually gets kicked out of office which is the ultimate fear for politicians and the central banking class. So no one gets kicked out of office for doing it and for whatever reason the system goes along with it. The reason the system goes along with it is if your option is to pay a little bit of money in NIRP and I end up losing that money, but the bond bubble stays intact and the system continues to function. Versus I don’t pay NIRP, I dump my bond. The bond bubble blows up and everything goes systemic reset, you’re obviously going to choose the first one. So this is why Central Banks have been allowed to get away with policies that just defy logic. If the alternative is everything blows up you’re going to go along with it no matter what. And we saw this with NIRP in Europe, we saw with bail-ins, which is when your savings deposits are actually raided by the bank and used to keep the bank afloat. We saw that in Cyprus, they got away with it there. So, currently there’s not really any indication that there’s going to be enough societal unrest to actually stop central banks from doing that. So, obviously they’re going to do it.

FRA: And do you see the Everything Bubble as bursting at some point or will it be more off of a situation where these measures as you mention the financial repression of war on cash, bank bail-ins, and wealth taxes. Do you see those measures as ongoing within Everything Bubble continuing to expand?

Graham Summers: Yes. The second option, they’re continuing. It’s very complicated to answer that because if you have an Everything Bubble, you’re going to have small asset classes blowing up. The real question is what happens when the sovereign bond markets finally blow up. That’s when you get the actual sort of systemic crisis. So if you look at the debt market as different sectors. For instance, the subprime auto loan sector is currently under a lot of duress. So there are little areas in the economy that are already blowing up here and there. My view currently and what we’ve been telling our clients is that we think central banks are going to have to taper and withdraw liquidity this year because inflation is beginning to threaten the bond bubble. What I mean by that, is bonds trade based on inflation. Inflation is rising, and then bond yields will rise to match it. If bond yields rise, then bond prices fall. If bond prices fall enough, then you start to have a debt deflationary collapse. And while we’re starting to see is that the bond yields on the German, Japanese and United States government bonds are beginning to all rise. So the bond market, the sovereign bond market, is beginning to react to a fear of inflation. Now if central banks have a choice: pool liquidity and let stocks drop or continue with the liquidity, let the inflation genie out of the bottle and blow up the bond. They’re going to choose number one. So my current view is that in the near future like the next six months, you’re going to see a lot of central banks pulling back and getting more hawkish and they’re going to let stocks correct in some way to try and keep the Everything Bubble, the bond bubble, intact. Whether or not that works, I don’t know because once inflation starts rising it’s very hard to get it under control.

So that’s where we are right now, but actually timing the Everything Bubble bursting and thing on this day it’s going to blow up. That is impossible. You know what you can do is you can look at what’s developing in the market. That’s what I do in my financial newsletters and assess where we are in things. Currently, we’re starting to get into dangerous territory. And what matters now is to see how central banks react to it. You know if they pull back and get hawkish, they probably can get away with keeping the show going a little longer, but if they just keep printing money, particularly the ECB and the Bank of Japan, and funnelling it into the financial system by tens of billions of dollars. Inflation’s really going to become a major problem and that’s going to really crash the bond market.

So that’s where we are right now.

FRA: What about longer term. How you see that playing out?

Graham Summers: Well longer term at some point the whole thing is going to blow up just like it did in ’08. Timing exactly how that happens, you’re going to have to look for key things. You know what triggered ’08 was the underlying asset class, which the bubble was based on, in that case housing, those prices peaked and began to drop. So that started to happen with sovereign bonds recently. The question is: does that continue to happen? And then you start to see the derivatives markets and the credit markets locking up. Because if you look at ’08, the crisis, in terms of the progression you had housing peak in ’06. Then you had some of the investment funds that were investing in subprime mortgages, which is the riskiest component of the bubble blowing up that was in ’07. In ’08, the derivatives and credit markets were locked up that’s how got the great financial crisis. So if you view that as a kind of template for where we are now. The underlying asset class, in this case sovereign bonds, has peaked and is beginning to turn. The question is: Does it continue to do that and then we start to see investment funds, bond funds, and then the credit markets blow up? We’ve yet to see that and that’s the key thing I’m looking for right now. If that starts to happen that means we’re in late 2007 area of the timing of the next crisis, which would mean the next one would be insane in the next 12 18 months. But again these are the things we’re all looking for. I haven’t seen them yet. There are no definitive signs that the crisis is beginning right now. The only definitive thing is we’re seeing that the bond yields are rising and this is going to start to concern central bankers very shortly.

FRA: Could the sovereign bond debt crisis be catalyzed through Europe? If we look at Europe, what’s happening in terms of a withdrawal of some of the quantitative easing from 60 billion Euro per month to 30 billion Euro per month — Could the actual crisis come out of Europe rather than the US or Japan?

Graham Summers: It could come out of Europe for sure, it could also come out of China. In terms of Europe, the issue there is that you’ve got a lot of distinct countries with their own individual central banks none of which can print the currency anymore. The only bank that can print Euros is the European Central Bank, which is overarching all of the European Union. You know Germany has its own central bank, so does Italy, but they can’t go and print Euros. That’s what actually led to the crisis with Greece and these other countries. Well, let me back up what led to the crisis for those countries have they had too much debt relative to tax receipts. The reason why those crises actually accelerated and became systemic in nature was their central bank could not print currency or engage in bailouts directly to try and prop the system up. They had to go to the European Union and if you go the European Union then you have issues where countries like Germany and France are saying, well why are we bailing you out when we don’t have a crisis ourselves? So Europe is a kind of a weird case of mutually assured destruction. You know on the one hand if a country leaves the Eurozone, and not like Britain did but like an actual country that’s located directly in it like Italy or France, then the whole thing blows up because suddenly the credit markets go because at that point the credit rating for the European Union is different. You start seeing interest rates rising and that will render these countries insolvent. So, Europe is kind of strange case where they’ve sort of cobbled this thing along. A lot longer actually than I thought they would. I thought they were actually a serious risk of going under in 2012-2013, but again it comes back to that original issue, which is if the option is: Do I go along with this insane policy and assist the main is kept the float or do I reject it and the system blows up? Everybody in a position of power whether it’s a politician, large-scale financial firms, and the central banks is going to go number one. But absolutely if you want to look at countries that are at risk of blowing up Europe would be top of the list along with Japan and China. The U.S., while its debt situation is also catastrophic, has the benefit of having the reserve currency of the world and a more diverse and liquid economy. The way I like to put it is the U.S. is kind of the least dirty shirt in the bunch, but the reality is every single one of them is in serious trouble the minute rates normalize and when that happens then it’s anyone’s guess exactly how it goes down.

FRA: And finally, how do investors invest in this environment? How can they protect themselves in what you’re saying is likely to happen just from a generic asset classes point of view?

Graham Summers: You know everyone’s risk profile is different. If you’re looking for sort of active investment advice and sort of being steered through the financial markets on a week by week basis I write a financial product called “Private Wealth Advisory”. That’s the sort of actively involved we’re buying commodities now or selling bonds now kind of thing. That’s more for people who are actively in the market, who want to have their capital directed in a way that they’re going to continue to profit no matter what happens. If you’re someone who’s more just concerned, what do I do in the next crisis hits, you know, how do I prepare? I’m not really looking to invest actively. The best bet is probably to invest in actual hard assets, things like gold, real estate things that you actually can touch with your hand. Things that actually in the case of hard assets real estate produces some cash flows as there are benefits there. But really think of it this way if the whole world is based on paper debt, then actually owning something outright particularly something that has some sort of financial stability and a less volatile price movement that’s probably going to be one of the safer places probably to be. Does that mean that if you put all your money in real estate you’re not going to lose anything when the crisis hit? Absolutely not. Everything will get hit. The question is: how do I preserve my capital in the way that it’s hit less and I emerge from the situation with as much of my wealth intact? The only real way to go about that would be somewhere in the hard asset class is: gold, precious metals, real estate, businesses that have operating cash flow, and stable demand things. I mean there’s a big reason why Warren Buffett’s been loading up on things like Kraft and other businesses that no matter what happens, you know people will continue to eat cheese or continue to drink beer, and Budweiser awhile back. And that’s sort of the way I’d look at it that way. So it really depends on your risk profile I can’t say hey everyone go do X because everyone has a different risk profile. Everyone has a different interest, but the reality is if the big picture way of looking at things is hey there’s too much debt then central banks are going to be forced to devalue their currency to finance that that you’re probably going to want your money in something of tangible value as opposed to something based on that currency which is going to be devaluing.

FRA: Wow that’s great insight, Graham. Thank you very much for being on the Program Show. We will post a link and information on the book on the website as well. And do have a website that our listeners can learn more about your work.

Graham Summers: Sure we have two websites. One is That’s our website for our products where if you’re looking to be actively involved in the market you want someone actually directing you to buy and sell a different thing to tell you what symbols to buy and what price to pay. That’s where you want to go. If you’re looking just to get sort of more familiar with our work. You can do two things one is you can buy the book “The Everything Bubble: The Endgame For Central Bank Policy” on Amazon right now. Or you can go to our free e-letter. That’s called That’s totally free. I send out a daily briefing on what’s happening in the market and assessing some of the big picture things that are going on in the system. And finally we’re on Twitter gainspainscapital, but the Twitter handle is the @GainsPainsCapit ending with the T. And you can find us on Twitter and I am on there most days commenting on what’s happening in the world.

So those are a lot of different ways you can get a hold of us.

FRA: Also we will interweave some slides that you’ll send within the body of the transcript of this podcast on our website as well. That would be great.

Graham Summers: I’m sure they’ve done based on the conversation. I’ve got a couple of charts in mind that should help illustrate some of the things we talked about.

FRA: Thank you very much, Graham, for being on the show.

Graham Summers: Thank you. My pleasure, Richard.

“The Everything Bubble: The Endgame For Central Bank Policy” on Amazon right now. <>;

Transcript submitted by Boheira Manochehrzadeh.<> and Daniel Valentin

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

01/20/2018 - The Roundtable Insight: FRA Co-Founder Gordon T Long On The New World Order In 2018



FRA: Today we have a very special guest, Gordon T. Long. He is the co-founder of the Financial Repression Authority. He and I started it up. He has been publicly offering his financial and economic riding since 2010 following an international career in technology, senior management and investment finance. He brings a unique perspective to macroeconomic analysis because of his broad background which is not typically found or available to the public. Gordon was Senior Group Executive with IBM and Motorola for over 20 years. He founded the LCM Groupe in Paris, France to specialize in the rapidly emerging internet venue capital and private equity industry. He is a graduate Engineer at the University of Waterloo (Canada) with graduate business studies at the prestigious business school, University of Western Ontario (Canada).

Welcome Gord!

GORDON T LONG: Thank you Richard! That’s the Ivey School down at UWO.

FRA: Yeah. A great background just in all areas to give you that deep insight from different perspectives as you’ve always had.

GORDON T LONG: Well thank you, but it makes me feel like I’m an awfully old man, but I am…But Richard it’s nice to be on this end of a speaker because of all of the videos we did for FRA together…Videos versus the podcast we are now currently doing so it’s nice to be talking from this end.

FRA: You have done an incredible amount of the videos that we started off with over many years.

I thought today we’d look at the 2018 perspective. Over the last several years you have done a yearly analysis of what the risk are in the economy and the financial markets and put it all together, tying all the dots together, in a sort of thesis that you see happening. And you’ve graciously provided a number of slides that we’ll make available on the website and also as a part of the transcript we will write for this podcast. I thought that we would begin there by using that as a basis for our discussion.

The first slide you illustrate a number of risks — Do you want to elaborate on those?



GORDON T LONG: Yeah, absolutely. As you’ve said I have been doing these every year. I started in 2010 where I actually started circulating it to my subscribers and into the public domain and it’s not where I chose a subject to write about. It starts with a process that I refer to as a “process of abstraction”. And the first part of that process is listing all of the tipping points that need to be tracked and watched without drawing any conclusions. In the first chart we are showing here are showing the risks which are grouped in from high to low risk in segments here. We had just over 34 last year which some of them are shown right here on this chart. This year going in we have 44 that we are following and tracking very closely. And when we take those risks and we start to follow them in a process of abstraction which I will show you how we come up with the thesis…But over on the right hand side of this chart you will notice a red box with 11, those are the new ones of the 44. This is the top 11. Quite a number of them have been there for a year, some of them for a couple years now…the bond bubble, China’s hard landing, Japan’s deflation, but what’s really showing up this year and has been moving into this hierarchy is the stock market valuations you see at number 2 as a tipping point. It hasn’t been up this high before, just maybe barely breaking the top 10 as it has grown. But also down at number 11, flows in liquidity and that is the magnitude of what the normalization by the Federal Reserve, effectively the taper program at the ECB and even the reductions in the rate of growth of money supply at the Bank of Japan. The “flows of liquidity”, which is still very high 135 billion a month, is falling and is mapped out to fall. These are some of the destabilizing factors that we see growing, not that the others here aren’t going away. And another one here is number 8, “credit contraction”. We are at the end of an extended expansionary period, one of the longest in history. We are going into our 9th year and we see signals that the business cycle and credit cycle has reversed and has started to fall off — With that is backdrop. The second chart here is really the process we flow. You see the coloured boxes on the left and then we start to abstract those and group them into themes and then from those themes we try and synthesize them and ask, “What are they trying to tell us?” as we move to the right. At the bottom you can see the kinds of things we track over at a site I have with my son called: And we track all those and they’re in the public domain if you want to follow them or look at them. But it leads to these conclusions and that is the subject and you can see where it’s led us in previous years as they keep shifting around and the thesis papers that we wrote. What we find too is that we’re always at least 18 months to 2 years ahead of things before they really come into the fray and become major front and centre. When you really recognized financial repression back in 2012, it was pointing us earlier 2 years before that that it was going to be a major movement and that was as quantitative easing was starting to unfold in the United States. But this year it has forced us to talk about something called: “The New World Order” and I need to state right off the bat that it is not what the conspiracy buffs have been talking about for years. It just happens to be the same name. The new world order is basically a social change that is happening right now because of: the advent of networking and networking communications, the degree of inequality that is starting to surface across the developed worlds, the richer getting richer and the poorer getting poorer, and a number of other factors that we’ll get into, but it’s changing the forms governance, it is going to change the forms of institutions that haven’t changed since the Breton Woods at the end of the Second World War which were predominantly US-based institutions if you would: IMF, World Bank in Washington, the United Nations in New York. But these institutions haven’t really changed and the new world is going to force these changes. Governance, the whole idea of a sovereign state is changing. So in the paper we lay out what those changes are going to look like and how they’ll unfold.

Any questions on that, Richard?

FRA: Yes – Does this include also the network for blockchain technology and cryptocurrencies?

GORDON T LONG: Without question. It’s very central because one of the major changes we believe is going to be an exchange in trading around the world. And I’m not proposing that people should go out and buy Bitcoin, but I am saying that it and other factors like that are going to be with us in a massive way, and more importantly, the technology underlying it, the blockchain technology. So it’s going to and is already reinventing banking and you’ll that accelerating in a bigger way because it’s reflective of the sovereign state and borders are going away. Once you’re on the network…That’s the beauty of a product like Bitcoin and how many are there…a thousand different types now? But it says you can go anywhere in the world and do these transactions so how do you police it, tax it, regulate it? That’s the whole beauty of it – It’s self-regulating and self-policed, you don’t need governments and you don’t have the cost that goes with it. And that’s the model. I’m not trying to talk about Bitcoin; I am talking about blockchain and that model. One of the driving forces is that it will allow us to do away in some ways with a nation state. It doesn’t mean that we are getting rid of governance, but the governance of populations is going to change. We have a centralized approach to government, its top-down right? Well our forefathers never designed it that way. At least in the United States it was supposed to be the bottom-up, but it’s changed. And the technology and the network will allow that reverse and bring the control down to the bottom slowly because it’s not like the status quo is suddenly going to rollover, but these social changes are so big and so powerful and there will be some crisis in here that will force this change to happen.

FRA: On one of the slides you have: “The network is the instrument to control the governments or the governments will use it to control us.” Which way do you think it will go or do you think it will be a combination of both?

GORDON T LONG: It will be a war, that’s for sure. The governments will see it as taking away their power and their control and I don’t mean that negatively because they feel they need to have it to manage, but the reality is that they can be managed differently. You mention in the introductory that I had 20 years in corporate life so I was well acquainted with trying to run large scale organizations on a global basis. Back in the 80’s, the corporations were called international and they were just really beginning to grow. Growth internationally was far bigger than domestic and the problems that went with trying to do that and what came out of it with technology was that we had to decentralize. We were forced to decentralize and push it to the lowest level. It allowed us to downsize, right size, outsource, but to flatten organizations so that we could be more responsive and we could operate in more countries effectively. I’m kind of netting that out. Well our governments are actually in the same boat today. They need to be decentralized, but you can’t decentralize over a border though you can decentralize in the United States by pushing more control and power to the towns, but it’s going to be across borders. And we are seeing that really in effectively trade blocks today. That is where they are trying to work together in a coordinated fashion where they are trying to decentralize and have the power of a group, but they haven’t harnessed the technology to do it and that’s going to be a big part of the changes. So from a sovereignty standpoint at top-down, we are going to go to bottom-up. We’ve got inequality between nations within nations. What we’re going to have is equality across nations. These are going to be some of the changes we are going to start to see. Where we have country laws right now we are going to see international laws because globalization was never planned, it happened. Consequently, we never put institutions and laws in place to handle that. Yes, we have the international courts and the United Nations, but they’re not proactive. As Ronald Reagan said, “The government isn’t the solution. The government is the problem.” So they’re standing in the way of the degree and the speed of the change must have right now.

FRA: Yes, I can see the power of blockchain technology as providing decentralized platform to address some of those challenges of inequality by eliminating the middleman, for example, in transactions or services. But what about on cryptocurrency as one of those applications of blockchain — Do you think that governments will allow private-based cryptocurrencies to coexist with the monopoly power of fiat money that they have today?

GORDON T LONG: It depends on what government you’re referring to. I think our listeners are aware of the SWIFT system (Society for Worldwide Interbank Financial Telecommunication), we really have two sets of governments in the world, the developed countries and countries that I will simply refer to as the “bricks”. We have Russia, we have China and we have Brazil, we have India, we have countries that are outside of the formal developed countries with their currencies where they are debasing it, that is the developed countries. So when, for example, we pass sanctions against Russia, the way we impose them is ways through the SWIFT system and various forms. Well obviously there is a tremendous conflict and it leads into this whole concept of de-dollarization which is going to be one of the major changes in the next 24 months — It’s huge. The whole discussion that we should have on here is on de-dollarization, but the conflict that’s going on right now and part of the answer out of that is what’s going to happen to cryptocurrencies because it’s a way of getting around the controls that the central banks really have on the creation of money, the value of that money and the debasements of those currencies. Ever since Bernanke came in with his, “Enrich thy neighbour” and we have rotating debasement that is when we stop debasing, the ECB, and the BoJ. I have referred to them as the currency cartel, the four currencies, the big debtor nations, the USD, Euro, Pound and the Yen. That’s 95% of the currencies that are exchanged in the world and they’re the ones that are the primary debasement on the other side, which I was referring to, of the bricks. They are not debasing, but in many ways are trying to use gold-backing. So there is a fight that is going on and cryptocurrencies really bring that to the floor. Now Russia and China their problem with it is allowing money to flee out of China right now as capital flight. As it shakes itself out we’ve got these huge geopolitical issues that are facing us, but the cryptocurrencies are not going away. I’m not saying that Bitcoin won’t fail and something takes it place, I’m not saying for one moment that the government banks aren’t going to endorse it. But by endorsing it I’m referring it to controls and trying to use it as competitive advantages as opposed to it being a free open-sourced product like Microsoft Edge. If you go to Firefox, its open technology, there’s no charge and it’s open. It’s like Wikipedia. Once you open up that Pandora’s Box, you allow all the people in the world to participate in a really free democracy.

I’m not sure if I’m making any sense there, Richard, but this is how powerful the concept and the reality of the blockchain currency are because it takes it down to how you can vote. I actually lay out in the thesis paper examples and links to videos, which I encourage listeners to go and get the links, of people who have shown how you can take this technology and put it into democratic organizations from the ground up that can actually grow itself into a world organization…How voting would happen, how policies would be set, how individuals would participate in it at a town level, a state level, a regional level, right up through a global basis where you get a really participative democracy and it works in a much faster period. It sounds impossible, but there are just some brilliant people that are showing how to do it just as brilliant people that showed how blockchain and cryptocurrencies could work.

FRA: And do you see this evolution as being a part of a movement towards the fiat currency cycle failure as one of your slides indicates. Are we going to have a coming currency crisis?

GORDON T LONG: I don’t know if we’re not already in it, Richard, and have been for a while, but yes, absolutely. This chart that we have here which is labelled, “Fiat Currency a Failure” really shows how we’re evolving. There is a little star in the middle in the red pointing to whereabouts we are in this cycle. I put out a chart, that’s included in the thesis paper, back at the time of the financial crisis called, “The Fiat Currency Failure” and the cycle that we would go through. This is a very simplified version of it. Once you get off sound money, you put yourself on a road map that nobody has ever retraced themselves from and has always ended in a fiat currency failure because at that point you’ve entered a fiat currency. But it starts at the top right here with growth and debt. Once you start growing your debt, in the case of the United States, when you consume more than you produce and you become a debtor nation and then all of a sudden you balance your trades out there is a lack of savings going on. You get stagnant productivity and what it does is it forces you into a fiat currency which we did officially in August of 1971. But now what starts to happen is you really get stagnant and falling standards of living because savings, which are typically in a capitalist system, invested into productive assets is what in fact improves your standard of living. That’s what allows a standard of living to increase and when that doesn’t happen, investments start to slow and you get falling capital expenditure and a falling velocity of money. You just had Lacy Hunt on and he’s very strong on what the issues of falling velocity of money are. But then it leads to what we’ve had for a long time, financialization of the economy which we now have. When you get the financialization of the economy all of these issues that you and I have talked about for years now associated with financial repression have become front and centre of the government trying to manage the economy at the best that it can do. But it leads to extreme leverage which we have now, unprecedented degrees of leverage, but it creates policy crises – Fiscal, monetary, public, that kind of disruption is where we are at right now. Before we get to the currency failure, the whole leverage itself has to start correcting and what happens then is really collapsing collateral values. There’s insufficient new savings and insufficient profits. And I’m talking about real profits which are coming from productive assets that are creating new profits which is new collateral, new value that underpins our society. We have $230 trillion of debt right now and you don’t lend money out without collateral. So what happens is all the money that has been lent out, the collateral has been repledged so many times, something called rehypothecation, across the global world within the Euro/Dollar system that the issue now is a shortage of collateral. Now if the collateral falls in value, let’s say that interest rates go up on bonds which means the bond price goes down, the collateral against those bonds is being reduced because what we do in our world right now is we’re making debt and asset. So we’re taking bonds and making it an asset and we’re pledging it as an asset. So when it goes down in price because interest rates are going up, you have to produce and pledge more collateral. Where’s that collateral going to come from if you don’t have new savings. That’s the era that we’re entering right now. Then, of course, we’ll have the governments forcing new kinds of systems or policy changes such as helicopter money to push more money into our society and that’s when we start to get into hyperinflation. We’re not there yet. We are still finishing a deflationary cycle because of the globalization, which is starting to peak. When I say peak, the rate of growth is what is beginning to peak. Once we get into fiat currency beginning to fail, we have the social strife and then we get these forced changes into these institutions and forms of government which I talked about earlier.

Didn’t mean to be long winded, Richard, because there’s a lot in that and we lay that out in the paper.

FRA: That’s great. There is a lot going on. On the next slide you mention where we are and that appears to be past the Minsky moment – Can you elaborate?

GORDON T LONG: Yeah Richard. You know governments aren’t going to roll over and quit on us. And I’m not about to say that markets are about to plummet because what governments are very good at doing is changing the rules. When they change the rules they allow things to accelerate. I can give you all sorts of examples of that. Remember the last financial crisis at the bottom of it we had a concept called “mark-to-market”. That was that all the books were so full of derivatives that they had to price them in a way that would price them to market. But to save the market, besides the 13 facilities that the bank came out with, the regulators changed it where they didn’t have to mark-to-market. They marked to fantasy. All of a sudden the bottom was in and the stock market took off and it was running ever since not because of that but it is an example of how they changed the rules. They could’ve never changed that rule is crises never hit, but we do that. So every time we get into a problem we change the regulations so that we change something else. Right now, even if the mark could start to fall, we have such a huge entitlement program, I think in the United States we are at least $10 trillion underfunded in total pensions at all levels – You can’t have that kind of collapse. So it says you got to keep the equities up. As you and I both know, the Bank of Japan is already buying equities. It owns 5% of the Nikkei, north of 70% of all ETFs. The Swiss National Bank buys $65 billion almost every quarter that we know about. A lot of the central banks, even the Norwegian central bank have been buying. So they are buying equities already. Apparently the Fed is not and the ECB is not and the Bank of England is not, but if we get into a crisis you can expect them to start buying equities in some fashion. I’m not saying that’s definitely going to happen, I’m just trying to give you an example that this is not over. They have not run out of tricks that they will bring forward to keep this thing going into this Minsky melt up. It goes back to that cycle we were talking about. You can keep doing it unless there is collateral somewhere and there is just not enough unpledged collateral out there right now unless they just print the money. Then what happens is you just print it without collateral, which is called helicopter money because that the basic derivative of helicopter money, then immediately you get hyperinflation. Whether that’s this year in 2018 or 2019, I don’t know, but I do know that over the next 3 years this big reversal that we talk about in the paper is going to unfold and is going to take away all the options from the governments that have fiat currencies.

FRA: Can you elaborate on how you see that happening and what the reversal may be?

GORDON T LONG: Yeah, absolutely. It is not my concept. This was actually a paper put out by the Bank of International Settlements in Switzerland. They were very clear that it is the most important paper they have put out in years. They were warning the central banks to say look, you’ve got to get off this paper money and you’ve got to start normalizing and you’ve got to do it now. And they’ve got the gun to do it. What they’re saying and what they argue is that the issue is that the demographics which are changing dramatically…You know the baby boomers aren’t buying as much, the Millennial’s don’t have as much money, at least in the United States, but around the world even in China where we’ve had a dramatic reduction in the growth in population, we don’t have the youth that’s coming on in relationship with the accumulation of wealth that the previous generations have had. So what we’ve seeing is that the rate of savings, and savings goes back to this building of collateral and underpinning debt and the rollover of the debt, is growing but at a certain rate which is a much slower rate. It is slower than the investment capital that is needed to sustain the debt levels and the growth levels we have right now. The delta, its difference, is growing at a significant rate. That is going to force yields to rise steadily because of supply and demand and not necessarily in a big spike, but consistently. As yields go out, it lowers the collateral value of the bonds and as we were saying earlier before we began the show, Richard, the global swaps marketplace is over $600 trillion and at least $400 trillion of that is in bonds. So a 1%/2% increase in rates is just a staggering reduction in the collateral value which has to be shored up. It’s like a giant margin call. For those who have had a margin call, you know it’s not a very good day. So that’s the problem and it’s like a glacier, it’s coming and we stop this. We can’t create the babies and the people to do it. And now we’ve got so much leverage in the system and they’ll try and stop it using pension plans, buying the market, printing the money and that’s what will eventually lead to a fiat currency failure.

I hope I explained that easily.

FRA: Yes and it’s quite interesting.

GORDON T LONG: It’s a 70 page paper. I tried to summarize it in less than 70 words.

FRA: And with the pension crisis, how do you see that unfolding? What will pension funds be doing given this view that you see unfolding.

GORDON T LONG: Well, I think the pension plans right now are in the middle of a lot of changes that they know they have to do. I think they see a large amount of this pretty clearly, at least the better ones. They have been moving out of the stock market. I think they see a bigger run up, but they’re moving into private equities and exchange traded products. They are not looking for liquidity; they are looking for long-term investments. I think they are also counting on the government to come in and start to guarantee investments. I think you’ll see the governments come in and guarantee investments with payouts on it even if it’s with fiat currencies. I think that they are speculating that the major central banks will enter into buying the equity markets. If that’s the case they will stay in and start going heavily into the equity markets. I don’t think that they have bought into that quite yet – I have. I believe that’s where the central banks are pointed. There was a paper out that showed we have $400 million in pensions around the world globally, all totaled. Right now in the United States we have an $84 trillion underfunded pension entitlement – Where is that money going to come from? They just can’t print it. They have to make sure that it’s created through the financial markets and a big part of that is either in the debt market (bonds) or in the equities.

I’m getting a little off-track here, but it is an important point that right now as we talk here today, they are talking about funding the government’s debt and you know we got a $20 trillion thereabouts U.S. federal debt. And the tax plan on what it’s going to do and how it’s going to increase it. But we are squabbling over nothing because the United States debt is not $20 trillion; it is $84 trillion because of the unfunded liabilities associated with Medicare, Medicaid and other social programs that we’ve made commitments to that are coming due. We have 10,000 baby boomers a day that are retiring and we’ll have a 1,000,000 a year turning 70 years old next year. The rate at which they are now claiming and a number of people who don’t have the money to pay into it, the youth, is significantly out of line. But as bad as that is, that’s still not our debt. This is why this cycle is going to unfold because this debt is actually $220 trillion and you ask how I got this number and that’s what is called the fiscal gap. We’ve had Kotlikoff on a couple times and he’s even laid it out before congress – They know it. What the fiscal gap is let’s say we lend money to Puerto Rico. The U.S. doesn’t lend money to Puerto Rico, the banks do. What we do is we guarantee it and we guarantee it in what is called in accounting lingo, a contingent liability. So the banks lend the money, Puerto Rico pays the banks and by the way they couldn’t pay 6% when bankrupt, but now the banks want 12% or 14% because they are not worried about it. They gouge them because they know if they default we’re going to anti. We pay, if in fact, somebody goes broke. Well we have got $220 trillion because we’ve been bankrolling everyone in the world with “government aid” for whatever country and we have these contingent liabilities. Let’s say the U.S. economy actually suffered a recession or a slowdown and let’s just say 2% defaulted. Now we’re talking close to $5 trillion on $25 trillion

Am I making sense here?

FRA: Yes, absolutely.

GORDON T LONG: And that’s why this is a given. The question is just the timing of it. That’s why we’ve going to see a new world order because out of this crisis, it’s not all bad news. Out of this crisis is the natural set of changes that need to happen and there’s a better world on the other side of it.

FRA: Given this view of a potential unfolding, as you’ve indicated, what are your thoughts on the financial markets short-term, medium-term, long-term and the investment markets in general? How do you see that unfolding for the various asset classes like commodities, equities, bonds and currencies?

GORDON T LONG: Well it really gets bound to what you price it in and that is the U.S. dollar. Gold could be going up or down depending on what is happening to the U.S. dollar, right? So it’s really what’s going to happen in the shorter term — What kind of strength we’re going to see or weakness in the U.S. dollar. A big part of what you see with the U.S. dollar is often it is a flight to safety. If we have geopolitical problems, people tend to flow to the least ugly at the party, if you would. So the money will flow to the U.S. dollar which strengthens the dollar which has a certain behaviour in the asset markets. So we’re facing significant numbers of tipping points (opening slide) right now. Which one of these might create a shock that impacts the U.S. dollar and the various crosses right now? Because the moment we have this is what happens is that Japan takes home their money into the Yen because it’s been a safe currency for them despite the debasement of it and then the carry trade starts to contract. So that’s what you need

to watch. You need to watch what’s going to happen to the dollar. I personally think we’re going to have some pretty significant freights, in the next 6 months, in the financial markets because we’re at such levels it’s only natural. We haven’t had a 5% correction in historical lengths of time. 15%, 20% is perfectly normal in a market, but the leverage couldn’t handle that right now. As we see some of these normal adjustments in the market it’s going to be how we react to them. And whether the policies, which I was eluding to earlier, forces the central banks to reverse course of normalization and taper, whether it forces them to put into things such as helicopter money – Time will tell. These crises are going to happen and it depends on how people are going to react in the market.

I am not sure this is the time you want to be speculating in the markets. That last 5% or 10% can often be the most expensive. There’s a lot of places to invest right now besides the stock and the bond market.

FRA: What would be your suggestions for investors, generically, in terms of asset classes? Where can they protect themselves and get yield?

GORDON T LONG: The best advice I can give is to get out of the currencies and get into hard assets because real wealth, the real collateral we talked about, is hard assets. Money is something where you have to grow it, mine or build it and those are the hard assets. So put your money into those real items. Gold and silver have always been the epitome of a hard asset, but to be frank they are right now a manipulated paper market. I think that is pretty evident, but that doesn’t mean that you don’t have some level of those kinds of hard assets. There are a lot of various commodities. Look what’s happening with cobalt, nickel and lithium right now. There is no better performing hard assets then them; They are right off the charts. Why? Because off electric bolts, our cars and it’s not because I think there are going to be a lot of electric cars in Canada and the United States, but because that’s where they are going in China and India. There is no question. There are 50 new models coming out next year. As a Canadian, just go up to Cobalt, Ontario. They are blowing off their lids. Now that game has already happened, but the point is that those are the kinds of areas that are continuously being needed to be looked into. The reason they move is because people say, hey there is some real value here. I know junior gold mining stocks have restarted to move to. But I am not saying to do that. I am saying to look for hard assets.

FRA: You mention also private equity as a potential investment?

GORDON T LONG: For those who can participate in private equity. More typically in the United States you have to be an accredited investor, so you’re limited, but I do know there are new laws changed in Canada that allow you to have a certain percentage in private equity. They aren’t as liquid; they are longer term. But sometimes in a crisis you are just glad to have your money in a safe place.

FRA: Perhaps to end our discussion today we can go to your last slide on, “What All Politicians Can Be Expected to Do” with a quote from President Donald Trump.

GORDON T LONG: I put him up just to say he’s just like all the rest. No matter what, they are going to print the money. It’s not because they are bad people, it’s the only solution that they can agree on because it’s not their money. And Trump was quite clear before he became president he said we can’t go broke because we can print the money. And he said he was the king of debt and I’m not picking on Trump in the least in my comments. He’s a right-wing conservative and he believes this is the solution. So you can bet that as these events unfold, and they will unfold, that that’s the tact they will take. Once you know that then investing becomes relatively easy because once you understand the policies that the government is likely to take, your investment becomes a little bit easier.

FRA: Great insight as always, Gord. This has been a fascinating discussion. We’ll put up those slides.

How can our listeners learn more about your work?

GORDON T LONG: Right now I am pretty well restricted to my work because I am retired, I’m an investor, I just manage my own money and I do this work to really narrow in on where my investing should be, but I publish and put all of this at and there’s a subscription service for it depending on what kind of detail you want to go down to, but a lot of it is right out on a public page. That’s If you sign up for the newsletter, we’ll send you a various list of things if you’re interested.

FRA: Well great.  Thank you very much for being on the show. It would be great to do it in the near future again.

GORDON T LONG: Talk to you again, Richard.

< Transcript written by Daniel Valentin >

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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.

01/14/2018 - The Roundtable Insight: Yra Harris On His 2018 Outlook

LINK HERE to get the PODCAST in MP3

FRA: Hello welcome to FRA’s Roundtable Insight .. Today we have Yra Harris. He’s an independent trader, successful hedge fund manager, global macro consultant, trading foreign currencies bonds commodities and equities for over 40 years. He was also CNE Director from 1997 to 2003. Welcome Yra.

Yra Harris: Well Richard thanks for having me.

FRA: So we begin today with the discussion with what you’ve been writing about “Feeding the Ducks When They Quack”. Can you elaborate?

Yra Harris: You know it comes from the trading floor .. it was always said that when the retail customers came in or any customers who were buying at the top or selling at the bottom,most the time they would come chasing the market and the tongue in cheek attitude,the ducks are quacking feed them and give them what they want. It’s just a trader’s term. It has a derogatory side to basically that the public is always wrong, but you know being a foreign currency trader I learned that wasn’t necessarily the case because, yes, there always has to be winners and losers, but a lot of times you can be opposite the side of the central banker orsomebody doing a massive hedge. So there was room for the public to be more right than the banks believe it or not .. but in this regard as long as the Central Banks are buying and this is what I’ve failed to understand since what we saw in Japan. Of course, once the United States embarked upon quantitative easing, the first blush was actually that the long end of the curve yields went higher because the people who had hedges were afraid that there’s massive infusion of liquidity in the system. Then we’re going to have inflation, if not inflation we’re going to have a greater growth .. So people were actually selling the long end of the curve and were getting steepening, but then when they commenced upon more buying nobody was willing to take on the Central Bank, the Fed. And there were no sellers, sellers disappeared because as I talked about ad nauseam and Rick said over the last 10 years when he would interview me and that basically, you couldn’t make any money. And then the hedgers disappeared because why hedge? You knew that the bank was there compressing yields and essentially when they embarked upon QE2, there became no need to hedge. And as I’m going to write on the blog tonight, I’m going to pick up on Chris Whalen’s wonderful piece that he wrote the other day. I have it sitting on my desk and the Fed doesn’t hedge, the ECB doesn’t hedge because when you have a printing press what do you need to hedge for. If you have the ability to create money whenever you deem that you need it. So why should you hedge? Chris Whalen really beautifully talks about the dynamic hedges that disappeared from the market, which is again another part of the reasons that we are in such a low volatility environment. So that’s what my attitude has been. When the banks come calling you have a natural buyer .. I always thought that the Chinese if they were looking to liquidate some of their treasury portfolios for future inflation, it was time for them to do that and do the ducks are the Fed and all the central banks and their quacking is when they’re buying. So you should be feeding them and when they ran the 10-year, it was Central Banks as much as anything that ran the 10year over the summer down to 1.35/1.36 again. Anybody who needs to unload Treasuries should have been unloading them to the buyers that existed. That’s the purpose of that wisecracked comment “to feed the ducks”.

FRA: And so for 2018, do you see rising interest rates across the entire U.S. yield curve or just a steepening with the low end not moving much?

Yra Harris: I don’t like to make solid predictions like this that I did in the blog last time because some of the people I’ve met who are retired successful business people, who love to discuss markets. When I look across the board and all the readings I’ve done in putting into action really what Chris Whalen talks about .. there is going to become a breakpoint and that’s when there is no longer a Central Bank adding to the global liquidity structure through QE. So now that the ECB is down to 30 billion and the Fed is actually taking out 20 billion a month and the Japanese of course are curtailing their buying, they have been curtailing their buying anyway because there’s just not enough paper for them to buy. And they could have a greater impact or as great an impact by buying far less than they have traditionally been buying or been recently buying I should say. I’m looking for the curve to steepen. I think as I read Jay Powell and I’ve done a lot of research lately and going back to the recent release of the FOMC discussions from 2012. I think Jay Powell will go to maybe 1.75 to 2 percent on the Fed funds, but from all he has talked about in his discomfort with the size of the FOMC balance sheet that you might see them increase Boockvar’s quantitative tightening, which will put upward pressure on the long end of the curve. So I don’t think that they’re willing at this point in time until they really see wage inflation for whatever reason they’re going to hold real yields at neutral, zero. So if inflation is 1.8 and you’re 1.75 on the short end and so they’ll keep those in. If they keep the real yield at basically zero, then they’ll stop there. And then all the pressure will be for long end yields to rise. Now a lot of people say well that’s going to kill the economy. No it’s not. If the yield curve starting to steepen out, the stock market I think will take an original sell-off, but I think it will be the opportunity to buy back in equities because steepening yield curves are not historically negative  equity markets. In fact they’re actually positive because it reflects the fact that the Fed is kind of a neutral and somewhat accommodative, but not crazy so you know that’s my scenario. And I think as I said we’re going to go to 3-4. That’s my call for the 10 year at the end of the year. And if that puts the curve at 1.5, so be it. So that would be a fairly steep curve .. That’s what I’m looking for. And a lot of it is based on the fact that as the Fed says to do quantitative tightening, there will be more private sector or market participants who are buying. Who’ll have to step into the void to replace the Fed and they’ll have to hedge. Chris Whalen’s wonderful work is that dynamic hedging will slowly creep into this market and will make an impact on the long end yield.

FRA: Will that be an impact that does anything to the bond bull? What are your thoughts on Bill Gross’ assessment of the end of the bond bull? What will happen to the 10-year and 30-year bonds?

Yra Harris: I’ve been a big fan of Bill Gross. I was a big fan of Paul McCulley. You know they did some great work, but Bill Gross wrote a piece three or four years ago. It was interesting because anybody who’s a global macro trader and in bonds. Certainly, those who partake in bond markets. Bill Gross wrote a piece .. I have great respect for him. In a way, he hasn’t done well over the last few years and he’s kind of struggled .. He wrote a piece saying that maybe he was just lucky. But you know what we talk about it was the end of the bond bull. And then today he’s out saying well you know he expects rates to be 2.8 by the end of the year on the U.S. 10 year Treasury Bond. We’re at 2.57 today in the morning. With everything that’s going on in the world, that’s not much of a call. So that’s the way I’m looking at it. Is it the end of the great bond bull? I don’t know. I’ve got a lot of other things that I’ll look at to put this in because it’s all about context. Everything is about if you don’t have context and perspective you really don’t have much of anything anyway. So that’s what I’m watching. And I believe it. I have great respect for Bill Gross. I have great respect for Jeff Gundlach, as a big thinker. I think they’ll get Europe wrong because they’ve never bothered to read The Rotten Heart of Europe. These people have never read it .. So it’s nice that the Fed stepping back. I think Jerome Powell will vote to shrink the balance sheet. I think that’s where his comfort zone is. And I think Jerome Powell as I stated in the blog last night, where he actually talks to market participants unlike all the governors, who seem to be very insular and just a giant echo chamber. He is a governor, but he seems to want to actually talk to real market participants. In that regard I think he’s a little leery of the flattening that’s taking place, he doesn’t want it to continue. And if he really thinks it’s true, then it’s time to really increase the shrinking of the balance sheet. And I think that will get us a steeper curve.

FRA: And speaking of Europe where do you see the ECB policies going? Monetary policy?

Yra Harris: Well good question. There are things that scare me over in Europe. We talked about the upcoming election. In Italy, in the failure of the Germans to put together a government, these are things that need to scare people because things are not smooth there. And Draghi is in a terrible situation. And again, I will call anybody out on the carpet and anybody who you want to put on and discuss this because it needs to be debated. These people throw out things like the ECB has a has a single mandate, it’s inflation that’s baloney. Mario Draghi in July 2012 told you forget about the inflation mandate, the mandate is securing the existence of the Euro currency and the preservation of the EU. And if you don’t understand that you really need to go in and lock yourself a library and start reading and put the perspective together for yourself. That is what this is about. And so what happens now? Berlusconi is out. And meanwhile Berlusconi and the the Northern League and Fivestar who are not very enamoured with the ECB nor with Brussels are all pushing for various things about the Italian economy. Berlusconi was out yesterday talking about a flat tax and how good it will be. So they’re all playing off the Trump theme, but with Italy running 136 % debt to GDP ratio. And I know your listeners you know in the realm of the Financial Repression Authority understand this. It’s an enormous number that’s way beyond Rogoff danger of 90 % when countries get themselves in trouble and that ratio isn’t even shrinking. I think Italian 10 year yields were down to 1.7 percent. So the amount of money, the amount of the budget that goes to paying interest rates is probably historical in Italy recovering even at debt because of the manipulated actions of the ECB. Imagine if rates start to go higher there. So this is going to be very interesting to watch. Berlusconi has basically woken up to and I’ve never been a great fan of his, but what he has woken up to is this flat tax idea is he knows that Europe cannot afford to do anything to harm Italy. It is because of that massive balance sheet that Draghi has built up. And again, who bears responsibility? Who bears responsibility for that massive amount of sovereign and corporate debt on the book the ECB. Jerome Powell told told me, in a direct question that I asked him over a year ago, that don’t worry they have a printing press. Well it’s interesting because the Italians who have really been crushed by the Euro in this whole situation. They’ve been crushed because the Italians are famous for making financial mistakes. And they used to be able to bail themselves out of course by depreciating the currency the Lira, but they don’t control the currency anymore. So now they have to do the so-called internal devaluation, which is basically financially repressing workers because you have to keep wages low because you feel you can retain or attain some type of competitive advantage. If you can’t appreciate the currency something has to give. Of course it’s wages. I’d be lying if I told you I wasn’t. I am scared because Berlusconi is going to force it as I say he’s going to call the question. He’s going to call the question. Or he’s going to make somebody call the question and he’s going to look them in the eye and go, “What are you going to do to us?” We saw that you wouldn’t let Greece go. That you bent over a thousand ways and the Italian situation being the third largest economy in the EU, it’s too big and the IMF, they blew their wad with Greece. And they have to be very careful here about push-backs from other parts of the world because they were not happy that they infact got involved in the Greek situation because Greece is part of Europe. Europe is a major developed country. What are you bailing out Greece for? It should’ve been the EU’s situation. And Italy is just too big and Berlusconi with his flat tax is basically, to me, is calling the question: This is how I’m going to stimulate the economy and if you’re going to fight me out it well you’re going to bear the brunt of what do you do. Toss us out? We know you can’t do that because you didn’t ask Greeks out. So we get a free run here. So this gets very interesting as we go forward.

FRA: But will the German credit card be strong enough to make the EU successful?

Yra Harris: That is the $64 trillion question. The question is will the Germans stay the course. What will they get for it. You know this is politics. That’s right. That’s why we don’t study economics. We study political economy because this is the politics of nature .. Merkel she gave a new year’s speech was a joke I thought it was my kindergarten teacher admonishing me about something in the way she talked to the German people and she accepted responsibility. But this goes into what is being spun by the mainstream media. It’s not conspiratorial. That’s a fact. I read the FT front to cover, I have for 35 years already. And the spin is that the AfD and even the Free Democrats did better because people were angry at Merkel for the immigration. And they’re angry because they’re the most financially repressed people in the world because you have 2.5%or maybe 3% growth. You have inflation approaching 2% in Germany and you have the two year shot yielding negative 60 basis points. So they’ve been getting crushed in the effort to bail out Italy and all the others. So these are all things plaguing Europe and look if the German citizens acquiesce and say: OK we agree to a transfer union, we will run in a massive trade surplus of the current account surpluses and we’re willing to transfer money to Italy to help them. We will see you know it if they go that route. Fabulous I’ll go short so many bonds you won’t know what hit you and I’ll buy you know other things. But I’m very skeptical and my skepticism is being actualized by the fact that we’re now almost four months from the German elections and Merkel has yet to form a government.

FRA: Given the potential in Europe for being the epicentre of perhaps the next financial crisis as Peter Boockvar mentions, could we see international capital flows come from Europe and elsewhere to the U.S. markets especially as you mentioned there could be pressure on the long end of the yield curve with the movement into equities. So maybe the financial crises outside of the U.S. spurring capital flows to the U.S. .. plus the tax competitiveness that Trump has created from the new tax bill.

Yra Harris: That was the scenario that everybody painted for 2017 that we know never played out .. this could be the year .. when I look at the Euro currency chart and right now I have a neutral view to the Euro. In fact, I’ve been writing about I think the Euro it bore the angst about Trump and the dollar last year and Trump’s trade agenda. So money flowed into Europe and the Euro gained 13 to 14 % against the dollar, but also gain 10 % against the yen. I think that’s a problem for Europe .. I think the Chinese are unhappy with the weakness of the yen. I think the Koreans whose currency is the Won is really strong, are unhappy with the forced weaknesses because of the policies of Kuroda .. I think that the dollar is going to go lower but on a broad basis. Otherwise, I don’t think the Euro is going to do much this year. I’m not looking for a big rally in the Euro from here I think it’s kind of played out. I think it has Draghi concerned because he doesn’t need a strong Euro. He likes to point to the strong Euro as a statement about the effectiveness of ECB policy, but that’s to placate the Germans anyway, which is a big part of what he has to do. He is on very dangerous ground here and he knows it because he fights well. The last meeting, Jens Weidmann, who is the president the Bundesbank, who sits on the Executive Council of the ECB, they’re voicing their concern and others are joining to get the quantitative easing program has gone too far. So it’s a very difficult time. We’ll see what happens. Last year I thought the dollar was going to lower with Trump, especially with the industrialists, Mark Fields, who was the CEO of Ford at the time when he famously said in February of 2017 that immigration is the mother of all trade barriers. And from that day on the dollar reversed course from strengthening Will we go back down there? No, but I think that 123 area which I will tell you goes back to the range of the week of July 23rd, 2012 when the Draghi, of course, made his famous speech about no taboos and will do whatever it takes. I think that week it was around 120-70 in the Euro and ended up to close I think around 123-80 ..

FRA: For 2018, do you see some type of commodity bull market especially in precious metals and agricultural commodities?

Yra Harris: Yes it’s a great question. It’s a hot topic for a lot of people right now. Yes, I think people are looking to purchase hard assets because our commodities are using securitization like the Chinese are so famously good at securitizing copper whatever. They’re leveraging themselves up, they’re securitizing anything and everything .. I think they are right that commodities have been on the low end of the cycle. So it’s now time and we know that there’s going to be a lot of money with the velocity of money has disappeared. I’m looking for an increase in velocity as the Fed starts to unwind its balance sheet because there’s this money that was tied up at the Fed. The Fed grew its balance sheet because of reserve situations that pile up that these are going to be released. Ben Hunt had made that point for the last year and a half and I applaud him for that I think there’s some validity to it .. we heard the same story last year. I was looking for the Trump inflation, I’m watching very closely to see if now Trump proceeds down that path of being able to get a bipartisan deal on an infrastructure program of significance for the U.S. So there’s a lot of things in play here. The Chinese with their nose know we talked about before when they first announced it about three months ago that they were doing the Yuan-gold-oil interest in arbitrage that helped play it. It is interesting to start to see that we were getting some movement in the commodity sector across a broadly based basket.

FRA: And your sugguestion to the Swiss National Bank would be that they sell their equities and go to hard assets?

Yra Harris: I would say that .. They made their portfolio increased 55 billion with money that was printed in order for them to keep control of their currency. They printed a massive amount of Swiss Franc which they’ve converted to other currencies which they bought equities and they’ve done so well so the paper profit 55 billion last year equal to eight percent of their GDPall through the creation of money in order to keep the Swiss Franc weak, which they’ve managed to weaken against the Euro last year also by about 10 percent even though the Swiss itself held against the dollar was a little bit stronger .. But I would be looking to swap out, but I know they are caught because if they do that the Swiss will gain in value and have been trying to prevent it. I guarantee you that this will be some of these great dissertations on what the Swiss National Bank did .. I think we’ve covered the Swiss as well as anybody, in fact, I did see something that came out from the Ludwig von Mises Institute this morning really discussing in greater detail everything we’ve discussed the Swiss. If I was a Swiss I would for the sake of Swiss citizens start to be moving out of some of that.

FRA: And you gave them the Alchemist Award of the Year.

Yra Harris: Yeah, they definitely get the Alchemist Award of the Year, the ultimate cryptocurrency.

FRA: And finally your thoughts on Larry Lindsey as Fed Vice Chair?

Yra Harris: Oh you making me go down that path. I’m a big fan of Larry Lindsey. I have a lot of respect for Larry and I respect him for exactly why Trump probably won’t pick him is because Larry Lindsey answers. Larry Lindsey is an exceedingly bright analyst. I went back and read some of his old Fed speeches. In fact, I look at the piece in 1996 when he really was not in favour of, or he thought that the markets were ready to exuberant equity markets and they were doing a disservice to hold rates even though he voted with the majority. There was only one dissenter that was Gary Stern from the original Minneapolis bank. But he speaks his mind and he speaks his mind so forthrightly that he even took on the Bush White House when he was a member of that White House as the head of the Council of Economic Advisors and said that their numbers and what the Iraq war would cost in 2003 were way too low. And you know he got sent out into the hinterlands .. He bore all of this to the administration and was sent out to the wilderness, but he spoke his mind and he proved very prescient and he was right. So he tells you he speaks his mind. I think that Donald Trump would fear Larry Lindsey as a role because he’s talked about to be vice chairman which is usually a passive role. Donald Coleman was Vice Chairman to Greenspan and Donald is exceedingly bright, but he knew his place and the same with Stanley Fischer. Vice Chairs’ don’t like to buck, but  Lindsey in my estimation will be a bucker of that he will not sit quietly and he will voice his opinion, and it will be heard. And I think that he would overpower Jerome Powell. It’s just my opinion. I don’t know anything else, but it’s what I feel about it. As much as I would love to see it I am a heart to heart money person, I believe that responsible policy is what holds and what’s needed in a fiat currency world. And I think Larry Lindsey would bring that to the table, but I’m not sure that Trump White House is not looking for that type of person. So we’ll see. That will surprise me and I’ve been right on every Fed pick when people where saying it was going to be Gary Coleman, I vote no chance. In 2013, when it was supposed to be Larry Summers, I stood tall and said there’s no chance it’s going to be Larry Summers because I believe that Lizzie Warren was going to block Larry Summers .. we got Janet Yellen which is not bad, I think Yellen played as good a hand as she possibly could with what she was dealt. And I think she’s done a very good quality job. So we’ll see. I’ve been pretty good with this so because it’s not just economics, it’s politics. And let me end by to ask you a question because you’re pretty astute on monetary affairs. So yesterday the St. Louis Fed put out a very short paper title “FOMC Dissents. Why some Members Break from Consensus”. They talked about the way the Fed Board has voted. The St. Louis Fed did a study of the vote of the Fed Board. OK so they looked at the voting patterns. Since 2005 in what has been a major historical period for central banks. Major historical period around the world especially with the Fed. How many dissents have there been by the governors, not regional presidents FOMC governors to any vote. How many dissents over the last 12 years?

FRA: A low number or zero?

Yra Harris: Zero. Can we think about that? Can we think about the power of that in the most turbulent period of central banking? The amount of dissents by FOMC governors has been zero. That should leave us all speechless. I have nothing else to say.

FRA: That’s a great insight and words of wisdom from Yra Harris. Yra how can our viewers learn more about your work?

Yra Harris: They can head to the blog or all the podcast that I’ve been so honoured to be able to do and to be selected for the FRA, the Financial Repression Authority which have been great. What I blog Notes From Underground is free. All of a sudden the level conversation, the responses to the blog is amazingly high level. I am so honoured by that because the discussion is great .. People read it have serious questions .. It allows me to think and put my thoughts together and put it out there and get feedback from very intelligent people so it helps my training in that way. So it’s not you know so many things in this world today are about validation. People need to be revalidated, that’s the problem of social media. You go to be validated. I’m a Marxist. I need dialectical discourse. And so we are getting it. So people should absolutely go and by The Rotten Heart of Europe .. It’s not my book. It’s written by the brightest guy in Europe. Bernard Connolly. People need to read this book. Europe is going to take center stage in so many different ways. You need to know who the actors are so that you are not blindsided or held captive by a narrative spun by the insiders .. understand what’s going to take place or who’s involved.

FRA: We will have a link to that on the transcript on the website and also a link to your site. and a link to Chris Whalen’s Article that you referenced as well.

Yra Harris: Oh yeah. I sent him an email about how great it was. It’s a great article. Thank you.

FRA: Thank you very much Yra. Thank you.

Chris Whalen’s Article

Yra highly recommends reading The Rotten Heart of Europe – send an email to to order


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

12/15/2017 - The Roundtable Insight: Dr. Lacy Hunt On The Unintended Consequences Of Federal Reserve Policies

FRA: Hi, welcome to FRA’s Roundtable Insight ..

Today, we have Dr. Lacy Hunt. He’s an internationally recognized economist and the Executive V.P. and Chief Economist of Hoisington Investment Management Company, a firm that manages over $4.5 billion USD and specializing in the management of fixed income accounts for large institutional clients. He also served in the past as Senior Economist for the Federal Reserve Bank of Dallas, where he was a member of the Federal Reserve System Committee on Financial Analysis. Welcome. Dr. Hunt.

Dr. Lacy Hunt: Nice to be with you, Richard.

FRA: Great. I thought we’d have a discussion on a variety of topics relating to the economy and the financial markets. You recently mentioned that you thought this was the worst economic expansion recovery in U.S. history since 1790. Wow. Can you elaborate?

Dr. Lacy Hunt: If you calculate the average growth rate in the expansions since 1790, this is a long-running expansion, but it’s the slowest and in the last 10 years the household sector lagged very, very badly. The rate of growth in real disposable household income per capita is only 0.9 percent per year. And in the last 12 months, we’re up only 0.6 percent per year. So it’s a long-running expansion, but it’s been a poor expansion. There are certainly problems with some of the earlier data, but this appears to be the slowest expansion since the turn of the 18th Century and our households are the main problem for the growth rate lag.

FRA: And do you point a finger for this cause as primarily on the Federal Reserve or do you see structural changes happening to the economy?

Dr. Lacy Hunt: I think that the main element suppressing growth is the heavily leveraged U.S. economy. We have too much public and private debt, and this debt does not generate an income stream for the aggregate economy. As a result of the prolonged indebtedness, which is on the verge of going much higher because of problems in the governmental sector, the economy is now experiencing very poor demographics. We have a baby bust, a household formation bust, and the lowest birth rate since 1937. These demographics are exacerbating the problems because we have too much of the wrong type of debt and thus the velocity of money has been falling since 1997. Velocity this year is only 1.43 percent, which is the lowest since 1949. Furthermore, the debt creates a situation where monetary policy capabilities are asymmetric. In other words, a lot of action is needed to provoke even a muted impact on the economy, whereas the slightest monetary tightening goes a long way in depressing economic activity. So the root cause of this underperformance is extreme indebtedness.

FRA: And what about the Federal Reserve? How has it undermined the economy’s ability to grow?
Dr. Lacy Hunt: The Fed’s most serious mistake was made in the 1990s up until 2006 during which they allowed the private sector to become extremely over-indebted with the wrong type of debt. And, in essence, I think that quantitative easing, through the push for higher stock prices, created more problems than it has solved for the economy. QT caused the corporate executives to switch funds from real capital investments into financial investments through the paying of higher dividends, buying shares of their own companies, and buying back their shares from others. While this type of action does produce a higher stock market; it doesn’t generate a higher standard of living. And so, Federal Reserve policy has not improved the economy, although it certainly has well served components of the economy.

FRA: And due to that do you think that there’s been too much financial investment versus real economy investment in terms of diverting the economic financial resources away from the real economy?

Dr. Lacy Hunt: I think that’s the principal problem. Business debt last year reached a record high relative to GDP. As I said earlier, Fed policies have created a higher stock market but have not generated an improved standard of living. When the Reserve undertook quantitative easing, it was a signal to the corporate executives that the Fed preferred and would protect financial investments. But that meant financial assets were preferred over real side investments. And so QT is intermingling with the growth-depressing effects of too much debt. And the debt levels are getting ready to move substantially higher in our governmental sector. Government debt is already approaching 106 percent of GDP, a record high with the exception of a brief period during World War II. And by 2030, federal debt will be approximately 125 percent of GDP. For a long time, we’ve known about the issues that would inflate the entitlements — such as the prior-mentioned demographic problems — but there is an increasing likelihood that new federal programs with expenditure increases will further accelerate the growth in federal debt. I think there is clear evidence that increases in federal debt at these high levels relative to GDP over any measurable length of time, reduces economic activity. Thus, the multiplier is not a positive but negative figure, or otherwise exactly what economist David Ricardo hypothesized in his 1821 work. I have looked at the relationship between per capita changes in real GDP and government debt per capita and the relationship is negative, not positive. And so, we’re trying to solve an indebtedness problem by taking on more debt. You can get intermittent spurts of economic activity and inflation, but ultimately the debt is a millstone around the economy’s neck.

FRA: So would you say that we have migrated to a sort of financial economy?

Dr. Lacy Hunt: Let me give you a couple of examples. There’s so much liquidity in the financial markets, particularly the stock market, that a lot of the economic news is constructively interpreted even when it’s unconstructive. Virtually the world believes that the United States is experiencing large job gains and the idea that such productivity may be incorrect is hardly considered. But the rate of growth in payroll employment on a 12-month basis peaked at 2.4 percent in early 2015 and for the last 12 months, has sunk to 1.4 percent. What is even more critical — if you look at just the expansions and don’t include the recessions since 1968 – is that the average growth in employment in an expansion year was 1.9 percent. And in the last 12 months, we are half a percentage point under that figure. Yet, given these numbers, there is an erroneous perception that the employment gains are strong. And this view undermines the improvement in the standard of living. And because of the liquidity and the need of some investors to fully participate in the rising stock market, investors tend to overlook other important developments. If we go back to the 12 months ending November of 2015, real average hourly earnings were up about 2.5 percent. And in the latest 12 months, real average hourly earnings gained a miniscule 0.2 percent. The liquidity tends to push the focus away from the more realistic interpretation of the economy for certain types of assets.

However, the weak performance overall and the deceleration in some of the indicators that I just referred to is not unnoticed by the bond market. So, we have a dichotomy in which the stock market is strongly up but the long-term bond yields are down. Now, the short-term yields are up because they are under the control or heavy influence of the Federal Reserve. The Federal Reserve is in the process of raising the short-term rates and winding down their portfolio. They sold 20 billion dollars of government agency securities in October and November, pushing up the short-term rates. Erstwhile, the long-term rates — which look at some of the more important economic fundamentals — are actually declining.

Another element not in the public understanding, since the Federal Reserve no longer produces this sort of monetary analysis, is a very sharp slowdown in the money supply’s rate of growth, bank loans, and within important credit aggregates. Last year, the M2 money supply was up 7 percent. In the latest 12 months, it decelerated to less than 4.5 percent. The rate of growth in bank loans and commercial paper, which topped out on a 12- month basis about 9 percent, is now under 4 percent. So the Fed is raising the short-term rates, reducing the monetary base, and causing a tightening in the financial side of the economy. Some investors understand what is happening and yet it’s not in the general psyche because such monetary analysis is increasingly rare.

However, another more public indicator is the very dramatic flattening of the yield curve. And when the yield curve flattens in such a way, first of all, it’s a symptom that monetary restraint is beginning to bite. Now, the slowdown in money supply growth and the bank credit flattening of the yield curve will occur well before there is any noticeable impact on a broad array of economic indicators or long lags in monetary policy. But when the yield curve starts flattening, that intensifies the effect of the monetary tightening because it takes away or, at the very least, greatly reduces the profitability of the banks and all those that act like banks. Banks make a profit by borrowing short and lending long. When those spreads recede, bank profitability is hurt, particularly for the higher, riskier types of bank loans since not enough spread exists to cover the risk premium. So the banks begin to pull back, further intensifying the restraint pressing on economic growth. To the vast majority of investors, we have an economy that is apparently doing well, but in fact there are elements right beneath the surface that strongly suggest to me that the outlook for 2018 is considerably more guarded than conventional wisdom implies.

FRA: And do you see the potential for an inverted yield curve in the near future?


Dr. Lacy Hunt: I’m not sure that we will have to invert because the economy is so heavily indebted and the velocity of money is its lowest since 1949. Now, a number of people have pointed out that we typically invert before a recession and historically such inversions have been the case most of the time — but not always if you go back far enough in time — and you should since this is not a normal economy. For example, money supply growth since 1900 has averaged about 7 percent per annum, whereas, currently, the rate of growth in M2 is about 36 percent below the long-term average, indicating a very weak growth rate. And the velocity of money is lower than all of the years since 1942 — with the exception of 7 years — and the economy has never been this heavily indebted. And so the yield curve could possibly approach inversion, but it may or may not occur or stay there very long because at that stage of the game, the flattening of the yield curve will greatly intensify all the other effects — the reduction in the reserve, monetary, and credit aggregates, as well as the weakness in velocity. And when this reduction becomes apparent, the Federal Reserve will not be able to reverse gears quickly enough to ameliorate the impact produced upon future economic growth.

FRA: So do you still see a secular low in bond yields on the long into the yield curve remaining in the future sometime?

Dr. Lacy Hunt: The lows have not been seen. The path there will remain extremely volatile. We will have episodes in which the long yields rise. My attitude is that the long yields can go up over the short run for any number of causes. While many elements work out of the system in the long end, yields cannot stay up.   When yields go up — especially now that the yield curve is flattening — this intensifies monetary restraint, which puts downward pressure on commodities. This puts upward pressure on the value of the dollar and cuts back on the lending operations. Something I think has been somewhat overlooked in general euphoria over the strength of economic indicators, is the that commercial and industrial loans for all of the banks in the United States are now only up one-tenth of one percent in the last 12 months. There are forward-looking elements that have historically been very important for signaling that change is ahead. They don’t tell us the timing — timing is always difficult — but they are flashing signals that should be observed.

FRA: And as this plays out, do you see monetary policy and fiscal policy is changing, like will we get fiscal policy stimulus? Will there be a change in monetary policy and how will that look like?

Dr. Lacy Hunt: Here’s my attitude: the new federal initiatives, whether tax cuts or infrastructure or otherwise will not provide a boost to the economy if they are funded with increases in debt — that’s where we’re at. And by the way, it’s been that way for some time. If you go back to 2009, we had a one-trillion-dollar stimulus package that was said to be inflationary and was going to boost economic growth, but yet we still had this very poor expansion and little inflation except for intermittent bouts here and there, largely from highly-priced inelastic goods. All the while, the inflation rate has trended lower.

For example, when President Reagan cut taxes, government debt was 31 percent of GDP and now that’s 106 percent on its way to 120-125 percent. And so if you go back and if you read Ricardo’s great article in 1821, he was asked whether it made a difference as to whether the Napoleonic wars were financed by taxes or by borrowing. Ricardo said that, theoretically, either way private sector activity was going to be suppressed. Now we have a lot of evidence, including some that I produced, that the government multiplier is negative, not positive, over a three-year period.  Thus, the tax cuts may work for a very short while, but not on balance. And if the tax cuts were revenue-neutral and financed by reductions in government expenditures that would be a positive since the evidence shows tax multipliers are more favorable than expenditure multipliers. Such a theoretical proposal would provide greater efficiency for private sector spending and government spending. There’s also evidence that you would lower the cost of capital, but that’s not what we’re talking about is it? We’re talking about a debt-financed tax cut and we’re not talking about a revenue-neutral infrastructure plan, just as we were not talking about a revenue-neutral stimulus package in 2009. We’re talking about the debt-financed variety of tax cuts and at this stage of the game, this will make us more vulnerable, except for a few fleeting instances.

I will say this: when you have a debt-financed infrastructure program or tax cut, there will be pockets within the economy that will benefit, but the aggregate economic performance will not benefit and so fiscal policy, as I see it, is not really going to be helpful. The risk is that the debt buildup will add to the problems. There is extensive academic research indicating that when government debt rises above 90 percent of GDP for more than five years, this trend will reduce the economy’s growth rate by a third. Remember, we’re at 106 percent debt to GDP and there’s evidence these higher levels of debt have a non-linear effect. In other words, we use up growth at a faster pace. And there’s a lot of evidence from the available data that we’re even losing a half of our growth rate from the trend. For example, GDP has risen at 2.1 percent per capita since 1790. The latest 10 years produced a reduction to 1.0 percent. And so we should have lost only seven-tenths or come down at 1.3 over 1 but we didn’t and this is a consequence that we have to deal with. We’re not in a position to ignore the debt levels. Fiscal policy can be talked about, we can debate about it, and we can proclaim its benefits, but I don’t see them in the current environment just as I didn’t see them in 2009. I would change my tune if they were revenue-neutral, but that’s not the issue here.

To me, inflation is a money-price-wage spiral not a wage-price spiral as with the Phillips curve. The way inflations begin is by money supply growth acceleration not being offset by weakness in velocity, which shifts the aggregate demand curve inward. Remember, the aggregate demand curve is equal to money times the velocity by algebraic substitution as evidenced in all the leading textbooks on macroeconomics. So you have declines in the money supply and velocity, which will make the aggregate demand curve shift inward over time. This shift gives you a lower price level and a lower level of real GDP. It doesn’t happen every quarter or even every year, but it’s the basic trend. Thus, monetary policy is in the process not of decelerating money supply growth and by a significant amount. If the Fed adheres to their schedule of quantitative tightening, I calculate M2 will grow by the end of the first quarter – it’s currently running around four and a half percent – and the year over year growth rate will be down to less than 3 percent. And so monetary policy is taking steps to lower the reserve monetary and credit aggregates, and these actions will further flatten the curve because they can press the short rates upward. But I think the long-term investors will understand that the inflationary prospects on a fundamental basis are weakening not strengthening.

FRA: And do you see these trends as being exacerbated on the emerging government pension fund crisis? Could there be more debt used to solve that like for bailouts? Do you see that potentially happening?

Dr. Lacy Hunt: Well the main problem with government debt is that we’re going to have approximately one million folks a year reach age 70 in the next 14 to 15 years and we’ve known that this was coming, but we didn’t prepare for it. We’ve made a lot of promises under Social Security Medicare and the Affordable Care Act and government debt will have to be used to fund the entitlement benefits — I don’t see any other way around it. Another overlooked problem is that the actual federal fiscal situation is much worse than these surface numbers. For example, in the last three years, the budget deficit worsened each year. If you sum the budget deficits for 2015, 2016 and 2017, the sum is 1.2 trillion, but a lot of what was previously called “outlays” have been moved off budget — we call them investments (such as student loans) and there are other examples. The actual increase in federal debt in the last three years is 3.2 trillion. So the budget deficit is actually greatly understating what is happening to the level of federal debt which wasn’t always the case. Furthermore, the deficit was made worse by a 2015 bipartisan deal between Congress and the White House. And while neither party is blameless — they both agreed on the deal — yet it doesn’t change the fact that the federal situation is deteriorating and at a much worse rate than the deficit numbers themselves indicate.

FRA: And what about for state and local jurisdiction locales, in terms of their government pension funds? Could there be federal level bailouts at that level?

Dr. Lacy Hunt: Again, what are they going to bail them out with? You’re going to have to sell Federal Securities. And one of the multipliers on new sales of Federal debt is negative, not positive. Forget what was taught you in your macroeconomic class 30, 20, or even 15 years ago. When I was in graduate school, I was taught that the government multiplier was somewhere between four and five percent. Now, it looks like the multiplier is at best zero and even possibly slightly negative.

FRA: Great insight as always. How can our listeners learn more about your work, Dr. Hunt?

Dr. Lacy Hunt: We put out a quarterly letter as a public service. Write to us at and we’ll put your name on the subscription list. We don’t spam you with marketing so please go ahead and subscribe.

FRA: Okay, great. Thank you very much for being on the Program, Dr. Hunt. Thank you.

Dr. Lacy Hunt: My pleasure Richard. Nice to be with you.

Submitted by Boheira Manochehrzadeh

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

12/15/2017 - The Roundtable Insight: Yra Harris Sees The Swiss Franc As The Oldest Cryptocurrency

FRA: Hi, welcome to FRA’s Roundtable Insight .. Today we have Yra Harris. He is an independent floor trader, successful hedge fund manager, a global macro consultant trading foreign currencies, bonds, commodities and equities for over 40 years. He was also the CME director from 1997-2003.

Welcome Yra.

YRA HARRIS: Thank you Richard. It’s good to be back with you – It’s been a while.

FRA: Great. I thought today we would start off our discussion with Janet Yellen’s presentation and her statements – Your thoughts?

YRA HARRIS: Well, the conference went just as I thought it would be. Of course, as usual, she handled herself well. She discussed some certain issues, but didn’t give much away. And more importantly she didn’t trap her successor, Jay Powell, to any type of situation. She has been gracious and thoughtful and so she continued in that vein. She didn’t really tell us much. Again, she was struggling to understand the lack of inflation and that will continue to plague her because they just don’t truly understand where the inflation is as the Fed measures it. That’s all we have to go in is the way they measure it. How any of the rest of us measure it at this point in time really is meaningless because we’re not driving the markets in that regard.

FRA: Did she set any expectations for future interest rate hikes?

YRA HARRIS: I’m not sure, maybe a couple, she was kind of reticent. I heard one of the media economists talking about it today saying that Greenspan understood with the technological innovation, going back to 1996, that he thought it was going to have an impact on supply-enhanced growth period so he was reticent to raise interest rates and that was a good thing. But every Austrian economist I know worth their weight and those who are not in the Neo-Keynesian new model will tell you that that was exactly what caused all the problems, was that Greenspan was reticent to raise all the rates even though the return on capital was rising significantly. And that’s when you need to start raising rates because then you head off any type of excess capacity developments which of course we saw by 1997-1998, we had a massive overcapacity situation which started the Asian Contagion. She is kind of settled with this too because she talked about that with the tax cut and the fiscal policy today which was good, not in any type of derogatory way, but she is worried about maybe the increase in debt, but she’s hoping that if this tax cut is stimulative it will be supply-side leaning and we will get greater productivity growth which she said would be the good type of growth that she wants.

So we will see.

FRA: What about the U.S. yield curve? Do you see continued flattening of the yield curve or potential inversion going into next year?

YRA HARRIS: Well again, they tried to pin her on that new version. People have to be specific. I am using the 2-10 yield curve. When the 2-10 inverts, there is danger ahead for a lot of asset classes. People will say, “Well, not so fast”, but I will be the first one to tell you because I’ve looked at this for 35 years as part of my trading paradigm that I developed for myself and I can’t time it. I have a study here that was done in 2003, it is right here I keep it in my drawer and it’s exactly on this. It was done by an intern of mine who is very highly qualified and it was written in July of 2004 titled, An Investigation into the Relationship between Changes in Yield Curve and the Performance of Stock Indices. So we’ve looked at this. It is so difficult to time. I can’t tell you when the results going to be, but I’m going to tell you just like in 2007 when then yield curve inverted, it was only by 6 basis points, we know what followed. In 2000, the yield curve inverted, we know what happened then. In 1979-1981, of course that was a forced inversion by Volcker as he was ringing inflation out of the system, but we know what happened then. This time, I can’t tell you. We’ve discussed this, you and I, for quite a while. We’ve been right in many ways about it and I’ve warned with what the central banks are doing that this is a wild card. I can’t tell you what the impact is going to be. It was interesting when Yellen discussed the yield curve today. She didn’t talk about the effects from other central banks and I think that’s a huge part of the flattening that is going on.

FRA: Yes. And about that…Do you see the ECB, Bank of England and Bank of Japan having their yield curves affected?

YRA HARRIS: Well for the Bank of Japan, Kuroda tried to give us a different spin on it thinking that maybe they were going to put an end to it, but as soon as the dollar/Yen softened off of that, I forget what the exact phrase was, it was from a speech in Switzerland in mid-November where he used certain language that spooked the market, but then he walked it back of course. You see that the dollar/Yen got weak today and then dollar really fell off after the Fed’s action. Tomorrow (Thursday, December 14th, 2017) we have an ECB meeting, an SNB meeting, Bank of England meeting and the Bank of Mexico – They are all in play here. I think Kuroda’s term that he used in November was reversal rate. It was a new term. We hadn’t heard it and myself included. I thought maybe they are thinking about ways that they can finally start to get out of this, but then he walked that back. They’re not going anywhere. And as I was talking with Rick Santelli the other day, I wasn’t on T.V. with him, but I had a tea and he had a cup of coffee and we were just talking about that and it’s different, unlike the U.S., when the U.S. started down the path of tapering when Bernanke stopped being afraid of his own shadow and stopped being plagued by the Taper tantrum and they actually announced how they were going to do it, it was a monthly reduction in the amount of what they were going to purchase and they were going to end it over in less than a year. They went from $85 billion to zero, where they weren’t purchasing any new stuff, in a fairly quick period, but the market new what they were going to do. The ECB is totally different. We know that they are cutting from $60 billion to 30 billion starting January 1st, but they’re not reducing it after that. So Draghi is going to be buying $30 billion instead of 60 billion, but he has already told us he is extending it out to September. So we know we are going to get $270 billion new buying with whatever else they are buying in Europe all of next year. And the Bank of Japan does have some latitude there because of the yield curve control. There is not change coming.  I think Draghi has a very grave problem on his hands. You saw it today where the Italian bonds actually got hit even with whatever they are buying because now we know there is going to be an Italian election on March 4th and this is going to be a very contentious election because right now the polls have the Lega Nord and Five Star Movement leading. So this market knows there is an election coming. But more importantly for Draghi is Merkel, And Richard you and I have talked about this before the election that she is not going to be as strong – And she’s not. She is very weakened right now and the German elites, the nomenclature or the thinkers, are so afraid of a new election, but meanwhile it is 3 months’ time from the election and no new governments have been formed yet. It’s a caretaker government. And Merkel offered, because she was pressured to do so, the SPD (Social Democratic Party of Germany), who swore that they weren’t going to go into coalition and now they’re negotiating for coalition, but she’s phenomenally weakened. This is a very important thing for Draghi because she has been his bodyguard. Whatever he wanted to do, Merkel was willing to deflect criticism. Now that she’s in such a weakened state with the Italian elections, he’s in no position to do anymore tightening or hawkish statements. I’m looking for tomorrow to be excessively dovish.

FRA: Any updates on the gold currency cross exchange rate you’ve written about recently that gold is being restrained from positive real yields?

YRA HARRIS: Right now, the 2 year yields dropped a little bit today, so we’ve about neutral right now using the 2 year on inflation. Real yields are probably about zero, but global real yields are exceedingly negative. That’s why I said gold will perform well against all currencies because global short-term real yields are very negative. In the U.S. they are neutral, but the interesting thing is the dollar is not getting a bit. This defies most things that anybody has looked at this and traded on it and analyzed it. The United States dollar should be screaming right now based on what we saw during the Reagan years because you’re getting a fiscal stimulus package via tax reform and rising interest rates. These are two variables that are very positive for currency and yet nothing. This is really starting to get interesting and forcing me to think because something is wrong here.

FRA: And today Yellen made some statements about Bitcoin, everybody is talking about Bitcoin. She mentions it is not legal tender – Your thoughts?

YRA HARRIS: Well it’s not legal tender, but it definitely should be legal tender. We have talked about Bitcoin before and again I’m far more interested and I’m on record for over a year saying that I’m more interested in the blockchain technology and the concept of it buying Bitcoin, to my own detriment, but I’m with guys like  Druckenmiller – I can only trade what I understand. I went through the dot-com bubble and I couldn’t understand them. I didn’t understand when people were talking about burn rates of money and my common response was that I’m a child of middleclass parents – We don’t burn money…You’re going to have to help me better than this. So I’m watching it and it’s intriguing. I wonder whether it’s going to affect gold. Some people think it affects gold because it moves potential gold buyers into another alternative, but as I wrote last week, hell has frozen over when I find myself in agreement with Alan Greenspan. Greenspan just didn’t understand and you cannot create value out of nothing. I know tech people tell me that it’s not nothing and that there is a process here that we can probably find in David Ricardo’s labour theory of value. You have to mine it so there is some value, but I agree with Greenspan about that where you just cannot create value out of nothing although I would’ve asked him the question…Then that would make the Swiss Franc the oldest cryptocurrency in the world because it’s so secretive, so if that’s the definition of crypto is being secretive and basically finding it under the radar. They’ve been doing this for a long time and we’ve watched them for 3 years create value out of nothing by printing Swiss Francs so I’m voting the Swiss Franc as the cryptocurrency of the year. If you actually look at the SNB stock price, it almost mirrors that of Bitcoin – It’s such a dramatic rise this year.

FRA: Do you think that a government-based digital currency or cryptocurrency, if we can call it that, will allow private-based cryptocurrencies like Bitcoin and others to coexist?

YRA HARRIS: I really can’t answer that. Janet Yellen was very good in her answer when somebody asked her if the Feds are looking into it and she said, “Other central banks are. When we said we are looking at it, are people doing research? Yes. But we are looking at digitized money, not cryptocurrencies and there’s a big difference.” And she was very good at explaining that difference. I think that we are going to get digitized currencies…Why? Because people like Larry Summers, Kenneth Rogoff and others have wanted to get electronic money because then they would have greater control over what you and I do. So when you go to financial repression rather than us pulling our money out of the system and hoarding it, they would force us to use an electronic currency which they can control. Then they would hope they can restore velocity to the money which is why Larry Summers said to get rid of the $100 bill because it’s much harder to hoard currencies with smaller denominations because if you’re hiding them under your mattress, it doesn’t take that much money to give you sleepless nights. You can only hold so much currency in smaller denominations.

FRA: And to allow for easier implementation of negative interest rates through monetary policy.

YRA HARRIS: Yeah. Marvin Goodfriend, who has written very extensionally on negative interest rates, that’s right because that’s the whole thing. I’m going to go to negative interest rates and I’m going to force you to keep your money in the system rather than anyone with a brain says, “Negative interest rates? I’m going to pull my money out of the bank.” Because if you have negative interest rates for 10 years and we’re at -2%, I’m going to lose 20% of the value of my currency. Then people pull it out of the bank and do other things with it such as investing in gold and other things. It gets very interesting.

FRA: Exactly. And finally, I’m just wondering about your thoughts on the geopolitical scene in terms of Saudi Arabia and Russia with what’s happening in Saudi Arabia and any new developments on meetings and more discussions between Saudi Arabia and Russia.

YRA HARRIS: I have looked at this for quite a while and I stated the last time around that there was major event that took place on October 4th and that’s when the Saudi King, not the crowned prince, Mohammad Bin Salman, the king himself went to Russia for the first time ever. I’m always interested in the events that are first-time-evers because there is always a reason for it. Dixon going to China was amazing event. So the king went to Russia. On those two days he was there, oil traded down to about 49 dollars and then over the next 8 weeks it went all the way up to about 60 dollars. Is this happenstance? No, I don’t think so. I think that major shifts are taking place in the world. You’re seeing it in the mid-east, and Russia is very involved with this because the Obama administration leaped them into a bigger role in Syria which has now given them the primary role. So there are all types of things that are taking place. There are shifting sands, no pun intended, and we have to pay attention.

FRA: Great insight Yra as always. How can our listeners learn more about your work?

YRA HARRIS: You can go to and Notes from Underground, which is where I blog, will pop up. They can follow me and register to receive it for the very expensive price of free. And again I don’t talk trades to people, I try to explain to you where I think the next opportunities are going to be from a trader’s perspective because I always have to wear two hats: as a trader and as an investor. And they are radically different.

FRA: Great. Thank you very much Yra for being on the program show again. Thank you.

YRA HARRIS:  Well Richard, at this time we’re in I hope I was able to “shed some light”.

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12/02/2017 - The Roundtable Insight: Charles Hugh Smith Insights On Bitcoin and Cryptocurrencies

FRA: Hi welcome to FRA’s Roundtable Insight .. Today we have Charles Hugh Smith. He’s author, leading global finance blogger and America’s Philosopher. He’s 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 has logged over 55 million page views in his number seven and CNBC top alternative fine sites. Welcome, Charles.

Charles Hugh Smith: Thank you, Richard. I don’t know if I can live up to that .. but I’m very excited about our topic today.

FRA: Oh yeah. You always do. Always live up. And today we’re talking about Cryptocurrencies. You’ve written a lot about that on your blog, including today as we speak with the potential Bitcoin price as you suggest going to the $17,000 level.

Charles Hugh Smith: Yeah that was my sort of back of the envelope forecast a year or so ago and last summer. You know I want to start out Richard by saying that you know there’s a lot of people have an emotional connection to this topic of Cryptocurrency. A lot of people are extremely skeptical or feel like it’s really not worth anything and certainly not worth you know $10000 per bitcoin and other people are kind of evangelistic about it and super excited about the Blockchain, you know disrupting all of the intermediaries in our financial system. And so I think what we’re going to try to do in our program is to be skeptical of the whole Cryptocurrency movement and be open to the potential benefits that it offers, but not like we’re not going to accept anything just uncritically. We’re going to look at everything .. We’re not going to put our belief structure in either camp either anti-Bitcoin or pro-Bitcoin. we’re just going to look at it as coolly and rationally and as we can and try to understand the value if there is value here.

FRA: Excellent. And you’ve provided some charts that we will make available on the website .. maybe we can begin there with the technology adoption curve.

Charles Hugh Smith: Right. And you know it’s it’s almost unbelievable when you think about it, at least it is to me. That the whole Cryptocurrency space is only eight years old. I mean that Bitcoin protocol was released in 2009 and it really didn’t do anything for quite a while, it was kind of a hobby of certain people and Bitcoin trading under a dollar for quite a while and then under $10 for quite a while and then it kind of made a splash in 2013 with the Cyprus bailin ..  which was at least one of the triggers that caused Bitcoin to suddenly come out of nowhere and go to about a thousand dollars .. and then various hacks into Bitcoin exchanges caused a complete selloff that drove the price back down into the $200 you know so there was a massive sell off.

But my point is this space is developing very quickly in a lot of different directions that are hard for us amateurs to track. In other words, there’s a proliferation of Cryptocurrencies, but there’s also a lot of development going on ..  And then there’s a lot of development of trying to make the transaction rate of Bitcoin faster. You know for instance Bitcoin cash raised a block size from one megabyte to eight megabytes. And this .. was supposed to add a layer on top of Bitcoin that would process transactions much faster. Well that didn’t go because it was withdrawn because of technical difficulties. But you know it’s going to be very difficult to predict where the Cryptocurrency space will be in eight more years. That’s all I’m saying is that there’s a lot of development and innovation going on. And most of it we know will fail or drop away just as the Internet itself proved. But what we’re trying to do is ascertain the core value here. So that whether there will be some winners that will need to develop as as time goes on to meet the needs of people in our financial system .. That’s basically if it meets a need it will it will survive if it doesn’t really meet it. I mean if it doesn’t really have utility then it will fade in and become a novelty.

FRA: Yeah I agree very much with those observations. I mean you have the growth of the block chain based economy that is just massive potential. And then the use of Cryptocurrencies as a payment mechanism for Blockchain based applications and services. Right now there’s about twelve hundred Cryptocurrencies in the universe. And we can see lots of mergers and acquisitions just like what happened in the era. Many of those Cryptocurrency is either going out of existence or many of them merging, some acquiring others, so that space could then dwindle down to a very small number of you know of Cryptocurrencies.

Charles Hugh Smith: Right and one of the other charts I proposed using for our program was a chart of the Venezuelan Bolivar, the national currency of Venezuela. And of course as we all know it used to trade about 10 to 1, in terms of the Bolivar to the U.S. dollar. And now last time I checked which was a few months ago it was trading around 6000 Bolivar to the dollar on the black market. So this currency is as experienced what we call, you know you can call it hyperinflation or a tremendous loss of purchasing power. That’s just basically destroyed the wealth of everybody holding Bolivar right. And so this is what we’re all concerned about with Fiat currencies. You know currencies that are created by Central Banks or national governments and that can be created without any restraints. And so this is what I think part of what’s driving the interest in Bitcoin and the Cryptocurrencies is what other financial mechanism is available to people who are trying to preserve their capital when their own national currencies are in free-fall.

FRA: Yeah exactly. Just recently there’s been a couple of quotes. One from Mike Novogratz on Bitcoin and one from Danielle DiMartino Booth on Bitcoin. And I would just like to read you that that. Mike says “this whole revolution came out of a breakdown of trust. It came out of the ’08 financial crisis when people said we no longer trust financial institutions, we don’t trust governments and in parts of the world today still. If you’re in Venezuela, it’s really hard to trust a Central Bank or in Zimbabwe. So the de-centralized revolution was Bitcoin is really the poster child of a response to the breakdown in trust.” And Danielle DiMartino Booth who is a former Federal Reserve Adviser to the Dallas Federal Reserve President, she mentions that “Bitcoin is a reflection of panic. It’s a reflection of people trying to get into a safe place knowing the major governments of the developed world have got their printing presses running 24 by 7. It’s a reflection of anxiety and fiat currencies and the fact it’s not practical to go back to a gold standard. What scares me most about Bitcoin, if the central bankers are studying it to figure out how the blockchain works. They are going to be controlling our spending with blockchain technology that is being perfected in the Cryptocurrency universe.” Comments?

Charles Hugh Smith: Wow. Yeah I think that those two, you chose quotes very wisely because those express very widely held views that you know we’ve all seen expressed by a number of commentators and observers over the last few years, which is Cryptocurrencies are one of the few avenues that an average person might have to escape the kind of financial repression that you know that you’ve covered in so many programs. In terms of capital controls, bail-ins, expropriations, and massive devaluation of the currencies. You know all these different tricks of financial repression, the elimination of cash. And that’s one of the driving factors, but then the fear on a lot of people’s part is that the central banks and central governments are not going to just stand still. They’re either going to issue their own blockchain currency and require their citizens to use only that Cryptocurrency or that they will try to ban or outlaw the existing Cryptocurrencies as an extension of the financial repression.

FRA: And everybody these days is talking about the price of Bitcoin where is that going .. you mentioned Venezuela on that chart – If we look at the history of the price of Bitcoin .. Going up to sort of the 1000 to 2000-dollar level. A lot of that seems to have coincided with Venezuelans in Venezuela and also Chinese in China looking to get money out of their countries – you know capital outflows and then from there, it seemed to have critical mass taking off to where it is today slightly over $10000 as we speak. Comments on that.

Charles Hugh Smith: Right. Well you know before we started recording you were speaking about the costs of mining Bitcoin and as being one factor in that we could use in its evaluation. And so let’s try to contextualize the discussion about the value of Bitcoin and you know a lot of people feel it should be zero because it’s not backed by anything. And of course then proponents say well there’s nothing backing all these national currencies either, there’s nothing backing the Dollar, the Yuan, the Yen or the Euro either. Which is technically true. And so let’s move on to valuation. One factor that’s in a lot of people refer to Bitcoin in particular as having a big impact on its evaluation is, it’s a scarce entity. In other words, there’s only 21 million Bitcoins that will ever be mined. And beyond that beyond that amount then there will be a fee structure to support the blockchain right. Because currently the whole blockchain is maintained, it’s basically paid for by the issuance of the admittance of new Bitcoins. And I think you had some numbers that you found on the estimates of how much that cost in terms of electricity and computing power to mine one Bitcoin.

FRA: Yeah you know with approximately $1000 US to perhaps $1200 US to mine one bitcoin. And that represents the cost of electricity and computing resources .. It’s similar in the gold world where it costs approximately $500 to $800 per ounce to mine one ounce of gold today. So on that basis, if we look at the value of gold being thirteen hundred dollars today relative to the cost of  mining .. Bitcoin could approximately be valued at something like $1500 to $2500 dollars US relative to its mining cost.

Charles Hugh Smith: Right .. And so in that analysis it’s overvalued you know by a factor of four then. Alternatively, we can say in a world where national currencies and central bank currencies are no longer trustworthy because they’ve been created in vast sums and continue to be created to the tune of like $300 billion a month or more. That may be what’s really happening is gold is lagging and this has of course been frustrating to a lot of people who feel that maybe gold should be $5000 an ounce if Bitcoin is $10000, then gold shouldn’t be $1300 it should be $5000 an ounce. And so it may be that gold is lagging and to where it should be. But you know let’s look at the utility value of some of these alternative currencies and I’m including precious metals are the historical safe haven because they have intrinsic value and in the case of silver they have utility value as well. I mean that we all know that silver is not only pretty and a nice thing to make art out of, it’s also a an industrial metal with you know that it’s widely consumed. So we understand the utility value in the store of value of precious metals and then Bitcoin is obviously it’s a different animal because it’s a digital thing and it has no physical presence and no physical utility, but it is quite handy in terms of transferring capital around the world. And I myself have used it to pay editors and translators in other countries and you know there’s no fooling around with bank fees and you don’t have to fill out any of the capital control forms required by the Federal government. And this is of course why a lot of people feel that Bitcoin you know it’s all about money laundering and drug money. But I am just a little regular person here doing my running my little business and I used it to pay other people doing you know legitimate services for me. I file my tax return you know what little gain I made on my Bitcoin transactions .. So you know I think there’s a legitimate utility to the Bitcoin and the Cryptocurrency phase in terms of regular people transacting business globally.

FRA: Yeah sort of the mobility utility factor. And as mentioned earlier that seemed to what happened to propel the price to go from $1 up to $1000-$2000 dollars per Bitcoin. Especially from Venezuelans and Chinese using it .. Now there is a development just in the last month or two that I’d like to mention. That has to do with the Internet protocol of Bitcoin. So most if not all of the Cryptocurrencies are operating over the Internet, over the IP Internet Protocol space and there are technologies coming out now that are able to detect Bitcoin transactions, Bitcoin traffic, even if the traffic is encrypted. This is quite new. As that develops, this will actually make it possible for banks to look at bringing into regulatory oversight the Cryptocurrencies, the traffic that’s coming to and from the banks .. and even governments as well for Bitcoin traffic into and out of countries. So this mobility advantage initially may not hold as much you know, given this technological development. The government of China has long been looking at this on how to do it .. this technology can be used by banks and by governments.

Charles Hugh Smith: Right. And that’s an excellent topic and observation. I wasn’t aware of this technology, but I think what it raises for me is the regulation of the Cryptocurrency space is inevitable in developed economies. You know in other words like this is a normal trend. And frankly I think it’s a good trend in the sense that if you want to legitimize a new form of money it has to be regulated to some degree so that people won’t get ripped off by fraud, like people selling Bitcoin they don’t actually own or you know this kind of thing. And I also think that you know if people are fortunate enough to make you know a million dollars trading Cryptocurrencies, then why shouldn’t they pay the same taxes somebody that was fortunate enough to make a million dollars trading stocks or bonds or future contracts. So I think the advent of regulation is a positive development. And the reason why I say that also is some countries are embracing the Cryptocurrency space and I mentioned Japan which has legalized Bitcoin I mean fully. Right. And of course this is the third largest economy in the world. And South Koreans have basically given a pass. So they’re not going to ban it which is taken as a form of approval .. the U.S. itself has deemed Bitcoin and Cryptocurrencies as commodities. So in other words they are viewed as, if you’re trading Bitcoin – it’s viewed as equivalent to trading pork bellies or something. Right, it’s a commodity. So I think once a country like Japan, with a huge capital market and a vast economy now that it’s legalized the Cryptocurrencies it’s very difficult for other economies to say oh no we’re going to ban this. And I think we have to draw a distinction between common sense regulation of the Cryptocurrency space, like legalizing it and regulating it and taxing it right, as opposed to banning it. And I’m not so sure that banning it is going to work anymore. Because like I’ve explained on my blog a couple of times, if for instance the United States decided to ban Cryptocurrencies Well I could take my Bitcoin and you know my one Bitcoin or whatever and I could put it on a thumb drive or a so-called hard wallet. And then I could take it with me to Japan or I could mail it in a package with some other stuff. And then I could have an associate or friend in Japan you know upload it and deal with it in a legal country. Where they are legal in a legal setting for Cryptocurrencies and then transfer it into yen or dollars in that country where it’s legal to do so and then transfer it back to the U.S. And so you know if I can figure out a really simple workaround. Pretty much anybody can. So I think where a lot of people fear this tracking of Bitcoin and other Cryptocurrencies and then regulating it, is a bad thing. It doesn’t have to be a bad thing. I think it could be a positive development actually.

FRA: Yeah and it will accompany the growth in Blockchain services as the economy develops around those based services you know. The concept of an encrypted Excel spreadsheet type of ledger that Blockchain is.

Charles Hugh Smith: That’s right. And I’m glad you described it so succinctly. Because a lot of people are confused by it and that’s really what it is. It’s basically a ledger that’s public so everybody gets to see what’s been entered. And so that’s the utility value. Well you know let’s also talk about, go back to the financial repression part because one thing I’ve started to write about and other people have also started to write about is the possibility that we finally get some inflation. We all know that unofficial inflation, real world inflation, is running a lot hotter than official inflation, but so far the central banks of the world have created you know trillions upon trillions upon trillions of new currency and they’ve injected that into the financial sector. And there’s been only asset inflation. Right. In other words, stock markets have doubled and tripled. And you know bonds have risen in value and real estates gone back up to bubble levels but there hasn’t been a lot of real world inflation and certainly no wage inflation. So if we started to get inflation that’s going to create a real problem for the central banks because they won’t be able to emit in the quantities of currency they’ve been emitting because that will fuel inflation and inflation of course destroys capital, it destroys the savings, it destroys the purchasing power of wages and people actually have less money to spend, less purchasing power. You know also that’s I think another driver for the whole Cryptocurrency space is that if Cryptocurrency is perceived as something that is a store of value based on scarcity, then it becomes an attractive hedge against inflation.

FRA: Exactly that’s a good observation. So where do we go from here. Like what will happen? How do you see the Cryptocurrency space evolving? You know I guess we have private based Cryptocurrency. And then they’ll also be government based Cryptocurrency.

Charles Hugh Smith: Right. Right. And my sense is the value of of Cryptocurrencies like Ethereum and Dash and Bitcoin, in other words, we can call these the leading Cryptocurrencies. The value is that they’re non-state, non-central bank, non-government right. And so I don’t see a Cryptocurrency issued by the Bank of China or the Federal Reserve as having any value because the the control of how much of that Cryptocurrency is emitted, is created, is of course still in the hands of the bank and so on. I think the fear of anybody that is at all skeptical of how government and central banks work, as the central bank and say oh well there’s only going to be 21 million of these coins issued and then the next morning they say Oh well actually we’re going to issue $300 billion and then it’s $300 billion. And then that currency has no value at all. And so I think that we have to kind of specify that the value of Bitcoin is that being decentralized, you can’t change the protocol. No one person or agency can say no we’ve decided to issue $210 billion of Bitcoin. Now it doesn’t work like that. And even if somebody claimed that we’re going to do this to the Bitcoin protocol the miners and everybody, the participants in the Bitcoin ecosystem, they would have to follow along and support that. And if they didn’t support it, then that fork would die and others would just vanish. And so if I declare, hey I’m going to start a new version of Bitcoin that there’s a billion coins and nobody comes along to mind that. In other words, maintain the Blockchain, then my version just dies it goes to zero because there’s nobody to support the Blockchain. So there is a rough and ready very free market kind of democracy, if you will, and a lot of people have criticized Bitcoin because it major miners obviously have a lot more influence than people who are mining as a hobby and so on. And so there are blocks of self-interested people who can dominate these Cryptocurrencies. And that’s a danger for sure. But it’s a lot different than having nine people meet in a room and decide to add a zero to the money. Yeah. And so I think that government and central bank versions of Cryptocurrency are going to go nowhere because they’re not again for the elements you described earlier in the program. There’s really no reason to trust them.

FRA: I mean they may be mandated by governments to use just like you know currencies today of the countries of the world. But I guess with the coexistence with private based Cryptocurrencies, the ones that make sense will be ones that are you know operating within the financial system. Even if they’re outside of the banking system, if you will, but still within the financial system. And the ones that are based on sound money, so that they have limited numbers that they can be printed or perhaps they’re based on a commodity like gold.

Charles Hugh Smith: Right. Right. And I think that you raise an excellent point that what people are seeking is sound money and sound money that has utility. In other words, it’s not just a store of value, but it’s a means of exchange and so there’s certainly a role for the precious metals. And that’s why a lot of people are saying if you’re going to go in terms of recommending a hedge that you should have both precious metals and some Cryptocurrency, you know exposure, even if it’s you know one percent or something. But I think you know I would say we’re sort of an equivalent of the Internet or the the world wide web around 1995. You know so we have it back when the first browser emerges. Right. And Mozilla and all that and all the assumptions that we would have drawn that have all turned out differently. Right now there is like Yahoo was the first for the most asked and and and then Yahoo faded and lost all of its advantages. And so we you know to say where will Bitcoin be in eight years. Gosh I would hate to even say. I mean it could it could be surpassed by a new Cryptocurrency or an entirely new Cryptocurrency protocol and then it becomes a legacy system. That’s definitely a possibility right. Something comes in that’s faster better cheaper and it’s going to it’s going to take all the market space away from the existing Cryptocurrencies you know. And that’s what we want. We want innovation, we want faster better cheaper. And that’s part of what we like about the Cryptocurrency space is it’s still open to that kind of thing compared to so much of the developed economies are controlled by monopolies, cartels, central banks, governments, which are only self-serving. You know they only choose policies and enforce policies that protect the few at the expense of the many. On the other hand Bitcoin could transition into being something that’s slow and secure. It’s never going to work in terms of buying a coffee at Starbucks with Bitcoin and that’s just a dead duck. It’s a transaction rate it’s just too small, but it might be useful in interbank transfers or large financial transfers. Maybe Bitcoin will find a home in that space. While other Cryptocurrencies will arise to take care of the the transactions on the level of consumer goods. You know we don’t know.

FRA: You had a chart that shows if Bitcoin replaces or becomes part of reserve currency. We could see prices in the $500000-dollar range:

Charles Hugh Smith: I know and it’s so funny because you know I’ve been following Bitcoin, but I never bought any and I was just kind of an interested observer until I needed it. As for its utility value, in other words, I needed to get some to buy some Bitcoin in order to pay the translators I had in Venezuela because that was the only form of currency that they could they could access right. That made sense. And if you think that the world economy is going to enter a time of instability where a lot of things start falling apart then of course we can say that Bitcoin or other Cryptocurrencies will well maintain their utility value for that reason. In other words, if people can access it and and pay their debts and buy stuff with it or buy other currencies with it, then its going to have utility value.

Charles Hugh Smith: I have another chart here the logarithmic progression of Bitcoin and its obviously kind of a rough guess, but this chart suggests that there is a logarithmic function to the number of days that it takes for Bitcoin to advance tenfold. In other words to go up by ten times and so it was kind of like how long did it take to go from a dollar to 100 an hour to a $10 then to $100 in $2000 and then to ten thousand. And so of course we can play these kind of games and you know those of us who like charts you know we love like tracking charts and projections and stuff, but it certainly we don’t know.

FRABut actually your logarithmic regression chart does seem to be fairly accurate. The November 22 date for $10000 is pretty much on track.

Charles Hugh Smith: Yeah it is. And this was I think the projection was made in late 2014. So by this chart, if we follow if that regression kind of goes continues as charted, then we would be at $100000 Bitcoin in 2021. So while we have to wait a whole four years. Yeah and of course I’m laughing because this is all speculation right, but we really don’t know what’s going to happen and what I like to say is this is the way markets should operate. They shouldn’t be manipulated by central authorities. So they always go higher and there’s never any retrace, there’s no volatility. You know volatility has been destroyed in a stock market, it’s been erased. And so there’s no real price discovery because there’s no volatility, there’s no price discovery. So Bitcoin is extremely volatile and to me, part of that is number one it has a very low float you know that of the 70 million Bitcoin. Several million, at least several million, are estimated to have been lost and in hard drive crashes and things like that. So the founders have about a million Bitcoin that they’ve never touched and never moved. For whatever reason and a lot of people are pursuing the idea of hold on for dear life, otherwise known as HDOL. And so the actual tradable float of Bitcoin is probably a relatively small percentage of that 17 million or 18 billion Bitcoin that are out there. So you got a very small float and like a small float in stocks, you get big volatility when there’s a small float and then if the more open the market is the more volatility you have. Right because you’re exposed to human emotions and there’s more surges of euphoria and panic and all the things that drive volatility, so I don’t see volatility going away.

FRA: Well that’s excellent insight for a balanced view. How can our listeners learn more about your work?

Charles Hugh Smith: Please visit me at

FRA: Great thank you very much Charles for being on the show. We’ll do it again.

Charles Hugh Smith: Yeah. Thank you so much Richard. My pleasure. Great topic.

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12/01/2017 - The Roundtable Insight: Former Fed Advisor Danielle DiMartino Booth On Bitcoin and Cryptocurrencies

FRA: Hi – Welcome to FRA’s Roundtable Insight .. Today we have Danielle DiMartino Booth. She is a global thought leader on monetary policy and economics. She is the author of Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America. Her book rose to number 22 on Amazon’s Best Seller List. She founded Money Strong LLC in 2015 which is an economic consultancy firm with a great insightful newsletter. She is also a full-time columnist at Bloomberg View, a business speaker and a commentator frequently featured on CNBC Bloomberg Radio, Fox News, Fox Business News and other major media outlets. Prior to Money Strong she served as Advisor to the Dallas Federal Reserve President Richard Fisher.

Welcome Danielle.

Danielle DiMartino Booth: So happy to be here.

FRA: Great..I’d thought we would begin with your book. Having worked with the Federal Reserve, the title appears to be very strong; An Insider’s Take on Why the Federal Reserve is Bad for America. Your thoughts on that?  Why is it bad for America?

Danielle DiMartino Booth: It’s not so much that I think the Federal Reserve has to go away. I just think that in its current form, or at least the form it’s been in since August 11th, 1987 when Alan Greenspan took office, has ended up being very bad for our country. We have ended up on a series of booms and busts and I, for one, am tired of being on this rollercoaster and think that it is high time we reinvent the Fed, take it down to the studs, and build it from the ground up and make it an institution that is good for America.

FRA: You recently commented on the Federal Reserve in terms of their biggest fear. Could you elaborate on that?

Danielle DiMartino Booth: There is a fallacy here. We have not just come through an era of deleveraging. If you look back at 2007, there was 150 trillion dollars of credit globally in the market. Today, we have over 220 trillion dollars of debt globally in the credit markets. So what we have actually seen is a very aggressive releveraging, overleveraging, of the global debt markets in order to eke out the economic growth that we have seen. I lay the blame for that at the world’s central bankers printing money to kingdom come, trying to create enough debt to spur economic growth, but the question I have is, at what price? I don’t think the central bankers want to answer that question. I think the 70 trillion dollars in debt build that we’ve seen since the outbreak of the great financial crisis is their greatest fear – It keeps them up at night.

FRA: Do you think central bankers have boxed themselves in a corner – Is there any way out? Can they actually implement quantitative tightening?

Danielle DiMartino Booth: I think that that remains to be seen. I laugh every time I hear that the quantitative tightening, the shrinking of the Fed’s balance sheet, is going to appear on autopilot. They are deluding themselves if they don’t think that this is a form of tightening when on Day 1, headed into this experiment of unravelling and shrinking of the balance sheet, the Fed owned 33% of all mortgage-backed securities in the country – They are deluding themselves. It remains to be seen if the Fed is going to remain agnostic to all data and continue shrinking the balance sheet while they continue to increase interest rates at the same time. It is double tightening if you think about it.

FRA: What about other central banks. What are your thoughts on what they are thinking and potentially doing?

Danielle DiMartino Booth: I’m very dear friends with a regular guest of yours, Peter Boockvar, and he lays out some very simple math. If you add together what the Federal Reserve says it’s going to be shrinking its balance sheet by around 400-some-odd billion dollars, run rate, this time, next year, and what Mario Draghi has committed to doing with the ECB in terms of tapering the ECB’s purchases, at this time as we are looking towards the holidays in 2018, we could theoretically have a trillion dollars less of global quantitative easing liquidity propping up these financial markets. It’s a big number and I think we have to take into context where that’s going to put these markets from the starting point of unprecedented historic overvaluation.

FRA: Is there any connection with the emergence and rise of valuations of cryptocurrencies, such as Bitcoin, to what the central banks have been doing?

Danielle DiMartino Booth: It is an unequivocal, staring straight in the mirror, reflection of investors and citizens worldwide, of their anxiety with what is being done to destroy fiat currencies because of this money printing going on. Bitcoin has risen up in the face of what I call a defacto, but very quiet, stealthy, currency war, in a world where we are beginning to understand, and this is with all due deference to gold bugs, that it’s not practical to go back on a gold standard – So we’re looking for an alternative. But I have deep fears about what central banks are going to do once the cryptocurrency technology is perfected.

FRA: And what are those fears?

Danielle DiMartino Booth: I am not sure if you are familiar with the concept of Fedcoin. And Fedcoin doesn’t bother me to the extent of what Kenneth Rogoff has in mind for the eradication of currency and actually tracking our every move.

FRA: Do you see more pervasive actions by the central banks in terms of blockchain-related services?

Danielle DiMartino Booth: It’s no secret. In fact, Bill Dudley gave a speech that’s on the wires that he is a complete advocate for a Federal Reserve type of currency that ends up being a substitute, if you will, for the dollar bill in your and my wallets. I don’t necessarily have a problem with technological progress as long as that cryptocurrency, as long as the Fedcoin, is just has as anonymous as the dollar bill is when we use it to transact physically. My greatest issue is when big brother steps into the frame, which is why I brought up Kenneth Rogoff, because I think that he would like to see cryptocurrencies not be anonymous such that central bankers were capable, this is the scariest thought I could possibly come up with, of tracking our every single buying transaction, our every purchase consideration and knowing what we are buying on a day-to-day basis. These are the things that truly should keep you up at night.

FRA: But would governments necessarily allow private-based cryptocurrencies to coexist with government-based cryptocurrencies?

Danielle DiMartino Booth: I would have to say no. What we have seen with the parabolic thousand point increase, and we are at a thousand points at 8:26pm EST on November 29th, Bitcoin crossed the $10,000 mark and it didn’t even take it 12 hours to go across the $11,000 dollar mark. What we are witnessing is clearly a bubble that is going to implode on its own weight. I think that we can all hopefully agree on that; we are all adults in the room. But I think that central bankers know good and well that once these cryptocurrency bubbles burst, laying in their wake will be a very refined technology that allows central bank cryptocurrencies to rise up where they have left off. To your question, do I think that they will be allowed to coexist? – I think not.

FRA: So you see a phasing out or an abolishing of Bitcoin and other types of private-based cryptocurrencies?

Danielle DiMartino Booth: I hate to inflammatory words like abolishing, but you could certainly see a sequence of events whereby if the Bitcoin bubble ends up bleeding into other overvalued asset classes that then bleed into an economic contraction leading to recession, and then causing the central banks of the world, starting with the Fed, to go back to the zero-bounded interest rates. Once we get to that point, and I hope we don’t, I hope that our new chairman, Jay Powell, is going to say, “You know what, zero-interest rates didn’t work. We are not going to go back there.” But if we get to the point where we are back to zero-interest rates or worse, negative interest rates, the next logical step for central bankers is the eradication of cash and controlling our buying which can only really be done electronically with this emerging cryptocurrency technology.

FRA: So in other words, the central banks would consider pushing for government-based cryptocurrencies in order to implement their monetary policies.

Danielle DiMartino Booth: When push comes to shove. I mean we are clearly going in the opposite direction. We are anticipating a rate hike right now and further rate hikes potentially into 2018. So we are not there, but again, you could certainly lay out a sequence of events that would lead to that inevitability – I hope that is not the case.

FRA:  In the interim how do you see the cryptocurrencies behaving? Will there be a rise in prices or a correction or a crash – Any ideas there?

Danielle DiMartino Booth: I mean if you are asking me if I can possibly assign any kind of logic or reasoning to what we are witnessing in a market that has seen a thousand percentage point appreciation since January 1st, 2017, you’re barking up the wrong tree. I could not explain this price action. In my weekly newsletter that I literally just published, I included a graph of the Tulip mania from 1630 and Bitcoin has almost surpassed the level of that hysteria and mania.

FRA: Yes – Our research team has done some sort of analogous valuations with gold. If you consider the cost to mine one ounce of gold to be approximately $500-$800 per ounce and the current price of gold today to be around $1,200 per ounce, Bitcoin is estimated to cost approximately $1,000-$1,200 to mine, or in other words to create one Bitcoin. So perhaps the fair market value of Bitcoin could be something like $2,000 per Bitcoin in analogy with the gold mining. That would mean there would be a considerable speculation element right now with Bitcoin.

Danielle DiMartino Booth: Well look, if you want to pretend that Bitcoin is not trading where it is and explore the economics of Bitcoin mining versus gold mining – It’s astronomical. I read an article that said that Bitcoin mining costs what the equivalent of 159 countries consumes annually in electricity. But that being said, there is something called quantum computing on the horizon. I do not pretend to understand it, but it involves quantum physics, and it will put to bed all of the bad economics associated with mining cryptocurrencies today and make it much more economical. And again, I’d lay you money that the world central bankers are very much onto what is occurring at the intels and some of the small boutique quantum technology firms that are out there, how they are looking to displace technology as we know it today.

FRA: Could some of the value of Bitcoin and other cryptocurrencies today be attributed to the mobility factor in terms of, for example, Venezuelans or the Chinese in China using cryptocurrencies to move money out of the country.

Danielle DiMartino Booth: I think that that has certainly been the appeal, if you will, of cryptocurrencies. The same could go for some of the nefarious players who have taken advantage of cryptocurrency for criminal means. If you don’t have an alternative, sometimes you turn to the only thing you can find. But again, the train has left the station on any logical subscription of any kind to Bitcoin and these other cryptocurrencies. At current price levels we are just talking about lunacy here, not a means by which to get your money out of the country. Don’t get me wrong, I agree with what you are saying and I think that that is some of the fundamental basis of Bitcoin and why it succeeded the extent that it has and how it has been adopted the way it has. But I have heard stories that former English literature professors are leaving their posts at universities in order to become Bitcoin players – This is a mania.

FRA: Yeah. That is crazy.

And finally, what are your thoughts on Jay Powell? How do you see Federal Reserve policy evolving over the coming years?

Danielle DiMartino Booth: Well, it’s hard to say. Your crystal ball is as good as mine is in the near term. I can’t say when this is going to end. I recently wrote a piece that said we could see the 3,000 on the S&P before this is all said and done because it long stopped feeling like 2007 and started feeling like 1998, I would say, about 6 months ago.

FRA: How can our listeners learn more about your work, Danielle?

Danielle DiMartino Booth: I publish every Wednesday. They can go on my website, jump on a trial subscription that gives you a 30-day look back into my archives and see if you like what I write and subscribe to my newsletter. Certainly go on Amazon and buy Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America if you haven’t read it yet. I consider it to be a primer of financial literacy and the adoption has been tremendous and humbling. In the event that you’re bored, follow me on Twitter at @DiMartinoBooth – It is never, ever boring. A full-fledged debate involving Neel Kashkari, Peter Boockvar and I broke out last weekend – Like I said, never boring.

FRA: Okay great! Thank you very much for your great insight Danielle.

Danielle DiMartino Booth: Thank you very much. I appreciate your time.

Transcript written by: Daniel Valentin <>


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.

11/11/2017 - The Roundtable Insight: Yra Harris And Peter Boockvar On The Trends In The Financial Markets And Monetary Policy

FRA: Hi welcome to FRA’s Roundtable Insight. This is Richard .. Today we have Yra Harris and Peter Boockvar. Yra is an independent trader, a successful hedge fund manager; global macro consultant trading foreign currencies, bonds commodities in equities for over 40 years. He was also CME director from 1997 to 2003. And Peter is the Chief Market Analyst with The Lindsey Group and the co-chief Investment Officer with Bookmark Advisors. Peter has a newsletter product called The Boock Report. Spell book B-O-O-C-K-REPORT.COM. It offers great macroeconomic insight and perspective with lots of updates on economic indicators. Welcome gentlemen.

Peter Boockvar: Thanks Rich.

Yra Harris: Thanks. Rich.

FRA: It’s great today to start off with a quote that you had in your recent writings, Yra, on flattening yield curve. “It’s the ECB and Bank of Japan policy that is flattening global yield curves as investors search for extra yields” and you made the analogy to something similar which may be happening to the 1994 Orange County bond disaster. Just wondering if you can elaborate on your thoughts.

Yra Harris: OK. So when we look at this you know we were comparing it to Orange County. I do because that was a classic case .. it was actually a meltdown as the Fed started to raise rates and everybody was crowded into a bond trades. We saw first of all the yield curve seeping out dramatically even though it was a shortened because so many people crowded into that trade. But what you really found out what Orange County exposed is that Robert Citron, who was the Treasurer for the Orange County at the time, was busy chasing a little bit extra yield 25-30 basis points and there are many sell side firms who came to him and they were offering him these products and they were exotic products, very exotic at the time. And so in order to please his bosses he chased extra yield, very little. So at 25, 30, 35 basis points and I know this from Sheila Bair’s committee, which I sat on in Washington, in which we analyzed what went wrong there. So I had a pretty good behind the scenes look at it and it reflected in that. So when I look at the world today and I know Peter’s written to me this is a real problem in that people are taking on so much risk in an effort to chase so little return when you’re in a world where Italian bonds are yielding 1.75. You take on all kinds of risk as you search for an extra 30, 35 basis points because 35 basis points in today’s world is a lot. And for those who are trying to outperform the market and these are people who manage institutional money and big pension funds and insurance companies. They are taking on a lot of risk and that’s what keeps me up at night. And I think we’re getting close to crunch time in which some of these trades you know as Warren Buffet would say you know when the tide goes you can find swimmers naked. Well I don’t think there’s many babies who have been sold at all so I think we’re probably more what is it called the hedonism. I’m too old to know and to partake in that. But I think we’ll find out that there’s a lot of nudity in the waters of central bank liquidity.

FRA: Peter do you see a similar 1994 Orange County environment.

Peter Boockvar: I like that analogy. That was great. Yeah I do. It’s good to follow the money. OK so next year even in January when the ECB cuts their QE in half and the Fed goes from draining 10 billion a month to 20 billion a month. Liquidity is going to go to almost zero. Between those two central banks. So that’s a major change. I mean this year on a run rate the ECB was buying net of 700 billion euros of securities and you cut that in half next year and then you subtract what the Fed is taking out and that is almost going to nothing. And that is a really big deal. At the same time the Fed is raising interest rates and the BOJ is buying less ETFs and they’re buying less JGBs. That liquidity flow is going to turn into a drip next year and leaves no room for error anywhere else.

FRA: What about if we look at the U.S. Yra you asked how does the Fed deal with a flattening yield curve in your most recent writing. Noting it’s gone lower than 73 basis points. Any thoughts on that? I mean you did suggest something on the cutting the short term rates on that to make it similar steepened like the German 2/10s.

Yra Harris: Yeah because I compared, Peter and I actually went back and forth of this yesterday on this because I showed them that German 2/10 versus U.S. And if you were a wagering person you say well the ECB is doing all this buying. The Fed is as Peter says has stopped. And in fact is now in contraction. You say well the curve should actually be steepening in the U.S. based on those mechanics. And we should be flattening in Germany, but it’s absolutely the opposite. German curve is out to three year highs and 110 basis points while the U.S. curves was at 70 basis points and flattening. So when you look at this it was a word you used yesterday. You’re absolutely right. They said this is like wild. I said yeah that’s exactly what it is. It makes very little sense and makes in fact no logical sense whatsoever and I don’t know how the Fed, Ron Paul going to have to face this because the Fed has already told us they don’t understand that their models have been wrong and they really don’t understand what’s going on in the inflation world. They don’t understand it. So now they are going to tell us that they don’t understand why the curves are flattening. Because when you look at it and you throw in this tax plan is not tax reform it’s a tax cutting and it’s stimulative by everything that I hold dear to me. This curve should be seeping dramatically. Bond should be getting terrified of what they’re facing. And as Peter says you know next year they’re going to be shrinking. This curve should be steepening and yet it’s not. So if they do and then they’re going to tell us they don’t understand what’s going on with the curve and I know that the curve is one of the big indicators. So if you don’t understand that, you don’t understand inflation. You’ve made a four and a half trillion-dollar wager on the effectiveness of the QE programs. That doesn’t go well with me. So I think that’s what it was. So you can either cut rates which would throw the markets in absolute turmoil. That’s just the way it is there’s nothing else they can do or they can as I say they could increase the amount that you know .. I say if next January if the ECB was cutting to 30 billion or maybe the Fed should be always be selling more than the ECB is buying and you get the curve to steepen and I guarantee that.

FRA: Peter your thoughts?.

Peter Boockvar: Yeah I agree. You know just to quantify the dramatic effect that the ECB had on the entire yield curve in Europe relative to the U.S. and the Fed is that the Fed when they were doing QE infinity, they never bought more than the net issuance of debt that the U.S. government was issuing. In Europe the ECB was buying 7 times the net issuance. It was just so dramatic it was literally the elephant that was stomping everything in its sight. And granted having negative interest rates continuing into 2019 will certainly keep a big anchor on the short end. But because of the dramatic extent that the ECB was buying bonds I have to believe that there is going to be some response when they stop buying bonds. Now again the negative interest rates in the short end will be an anchor. But you know imagine even when that ends. I mean one thing that that we have to take notice, Draghi is now becoming more defensive about negative interest rate. He’s now having to explain himself. Here we are this is three and a half years after he initiated negative interest rates and he is still defending negative interest rates. You have the European Bank Stock Index that is still below where it was three and a half years ago. So I think that the politics around negative interest rates will get more and more difficult as bank profitability continues to be under pressure. And you know that there’s no question that accidents are going to occur here. I just know none of us are smart enough to know how it exactly plays out. But come January when things are shifting in a more dramatic fashion, I think everyone has to be really really careful.

FRA: And so what will happen, your thoughts on the new Federal Reserve chairman nominee Jeremy Powell. How do you see his policies and what will his monetary policies be like in the coming years? Yra you want to start?

Yra Harris: You know I’m not sure .. when I had the opportunity last year to directly ask a question, you know about who guarantees the ECB. It was a two-part question that I asked was who guarantees the ECB and do you think that all sovereigns should be carrying zero weight. Because I know what his expertise, his strength is within the Fed and he was subdued. I was wild about the answer so I would have given him some crap, but I do think that he’s a good choice because he’s very pragmatic and I think he’ll know how to adjust or hopefully. So his response to me on the ECB was they have a printing press, which he didn’t even have to think about that and that came right to him. And the fact that there’s zero weighted. That’s all we have to care about. They are zero weighted and I was never comfortable with those answers, but I think he brings more to the table. I think he is unlike some of the people who do sit in that room with their high level math and Ph.D.’s are too arrogant for the job ..

FRA: And Peter?

Peter Boockvar: Yeah I mean I think while he is very similar to Yellen in that he voted for every QE, he voted for keeping interest rates at zero for as long as they did. So he voted for the committee every single time. There is talk that he was not a big fan of QE. So that’s a positive for the sake of manipulating markets. It won’t necessarily be a positive for markets when we get the next 10 to 20 percent decline and everyone’s screaming oh the Fed save us, the Fed save us. I think he’d be less inclined to be the markets sugar-daddy, which I think is a good thing, but maybe it’s not what the market necessarily wants to hear. Now he’s not going to obviously be as potentially hawkish as Taylor or Warsh would have been. But I think if the market thinks he’s a Yellen look like I think they may be a bit disappointed that he’s going to be thinking more outside the box and he’s not going to believe in John Maynard Keynes to the same extent that Yellen has.

FRA: Just going along the discussion from Europe. Peter you’ve written recently on how higher inflation in the Eurozone is a very under-appreciated risk. Can you elaborate?

Peter Boockvar: Yeah. I follow the market monthly numbers and I like to read their commentary now it’s very anecdotal. So we have to separate the anecdotal commentary from business surveys that they do from the actual consumer price index that the Eurozone comes out with. But on Monday we had the Eurozone services and manufacturing composite index come out and I’ll just read to you what the inflation commentary was. Inflationary pressures have meanwhile lifted higher with price charges for goods and services rising at a rate not seen for over six years. Some price rises merely reflect the pressures of higher cost, but companies are also reporting stronger pricing power as demand conditions continue to improve. Which suggests underlying inflationary pressures are becoming more ingrained than yesterday. Market came out an index on German construction and they talked about intense supply chain constraints contribute to a sharp rise in input costs. The incidence of delivery delays is one of the greatest seen for over a decade while purchase price inflation was pushed to a six and a half year high. And they also reported a retail Purchasing Managers Index for the region and they talked about gross margins facing Eurozone retailers continue to be squeezed. Contributing to this was another rise in average input prices. Moreover, the rate of inflation quickened to a fifty seven month high and remained substantially greater than the long run average. So how that translates into actual inflation. I don’t know what PPI will eventually look, like what CPI will eventually look like I don’t know. But to me when I read that tells you that there’s price pressures that are .. any potential surprise on the inflation numbers in Europe I think will be to the upside using this as as potential evidence. And even with cutting QE by 50 percent there’s still going to be buying 30 billion a month and they still have interest rates deeply negative. So they’re wholly unprepared for a multi-month march to lets just say 2 percent CPI. And I think that that is a major risk for the European bond market. And to me the European bond market is the epicenter of of of the global credit bubble.

FRA: Do you see similar conditions Yra as the biggest bubble being the European bond market?

Yra Harris: Well yeah Peter’s been on the strength of growth and on Europe as he says you know he’s been very bullish in European equity markets, but he’s a more than a little concerned as he’s just talked about about what the banks have done because the interest rate policy is of course the ECB. But you know the issue where we may differ is do I think that Draghi cares about what inflation is? I don’t think so because you know as I’ve talked to Peter and I have discussed I think I’m with you Richard that he has a bigger thing going here and that he’s trying to load that ECB up with as much debt as possible because it’s the only outcome can be of course would be the creation of a Eurozone bond .. The European Commission has not been able to move it forward and you know the talks that came from the Crown was to push it farther and faster. And you know there is of course Germany is more than reticent because they know what’s going to be settled here. So he keeps going and going and going. I agree with Peter once we get over 2 percent inflation. I know what the response is going to be because that’s what you know. They basically use the same kind of dynamic stochastic models that the Fed does and others well you know they’ll call transitory they’ll call this so if it’s the same .. Then if it’s the same for three or four months they’ll have a serious problem and you could see that there is pushback. You know he didn’t talk about it at meetings but there were five dissenting votes to even the cut of 30 of 30 billion, only big movie from 60 to 30 billion and leaving the negative interest rates. And with all that forward guidance so there was pushback and the pushback is coming from just where were the sources from the Dutch the Austrians and now we’ll see even more from Austria because of their political situation. But Merkel’s in severe trouble .. Germany may have to go to a new election because they cannot put together a coalition here because the Free Democrats, they want the Ministry of Finance which, Schäuble used to run and he was fairly hawkish. But they want more. And their issue is you know of course you know with the ECB and their overall policy and that’s the effect on German savers. So this is very very dangerous. In fact, one of Merkel’s ministers, one of her close people came out .. They’re trying to load back the Social Democrats. I don’t think that’s possible. So because the Social Democrats would have to eat such a phenomenal crow it would be it would be the end of them. They could be in this coalition. Well they’ll continue to lose power, but if Germany winds up going into a new election, Merkel is going to get trounced because there’s no way .. So there’s a lot of things yet to play out in Europe again and this is more laid out as Peter and I started the discussion offers her new letters. There were of course was that there’s so much complacency in the world and yet these things are on the boil and I know we haven’t even gotten to the next topic you’re going to go to which puts it more, but Germany is still an unknown yet. And it’s the unknown not because of anything really positive for Europe. It’s a negative for Europe. So she’s got to figure out just what’s going to go on here and who’s going to get one. And she’s trying so hard not to give the free Democrats win there the Ministry of Finance because then he’ll really have a voice. And it’s not going to be a pro-European voice. So a lot of things to be played out here. And as Peter has talked about, where are the banks .. who have really so badly underperformed with this .. the banks are way under-performer as they are in Japan. I mean I’ve been owning Japanese stocks for longer than I care to admit but at least I’ve had some dividends in earnings and they haven’t done anything. But if things are so good why aren’t the banks rising. We’ve seen fairly significant rallies this year in the U.S. Banks and that’s you know even with a quote unquote flattening yield curve. So there are so many uncertainties.

Peter Boockvar: I mean just just to quantify the Japanese TOPIX Bank Index is still 20 percent below its 2015 high. I mean I think the reaction of banks has basically repudiated negative interest rates and central bankers desire to basically destroy their yield curves. And if banks are the transmission mechanism of this sort of policy you wonder how central bankers can contain the circle of damage and profitability of the banks, but continuing on the same path of monetary easing.

FRA: What about now the effect of Saudi Arabia. We’re seeing some incredible events happen over the last week. And you know given all the complacency well how could Saudi Arabia, what’s evolving there affect the financial markets and the global economy. Yra do you want to start.

Yra Harris: Well I believe that you know and I’ve blogged about this the other day too. And this is truly one of my areas is the great strength is the geopolitical events are taking place. And usually it’s for the North Korea statements or nurse those are one off things and I always caution people you know what those moves you can trade them, but don’t look at them as anything longer than a one-day trade or two-day trade because wars don’t push gold higher; wars you know or let’s say some type of conflict. Those are quick one off moves, but what’s going on and I go back to October 5th when we had a seminal event in international relations which is that the King, not the crown prince, but the King of Saudi Arabia went to Russia to meet with Putin for the first time. And as I tongue in cheek say it’s like Nixon going to China. Very unexpected. And ever since that day you can plot a chart take a look at it. Oil prices have risen eight dollars in a steady upward beat and then you had what came out this weekend. But it’s been a steady thing the oil keeps rallying. It’s not a headline grabber. But there are movements of foot here and the Saudis are very concerned about the Shiite influence throughout the Middle East. The role in Syria, the role in Iraq, the role in Lebanon. And then you get of course you know Hariri, who is the Lebanese prime minister, who was in Saudi Arabia and resigned on Saturday night. Now really is interesting because Hezbollah actually assassinated his father. And Hezbollah is a Shiite militia and you know somewhat of a governing group that the Saudis are very worried about as are others in the region. And that has now shown to be even more and then of course you have the downing of a helicopter. So on the Yemen-Saudi Arabian border with some high level Saudi officials supposedly .. You know as I say it’s like the Gulf of Tonkin. We don’t know certain things, but there are movements afoot here and that is you know the Middle East is still a very significant area. It’s significant for China not as much of the United States is used because we don’t get as much oil there. But this is a very dangerous time. And again the equity markets don’t price any of this risk in. It’s like you know I watched Sunday night with what went on and I was amazed that the market was short gold. And I said I’m getting I figured I was going to lose 10 or 20 dollars. It opened basically unchanged and lower. I got this a reprieve I actually turned around and went long. So you know but the market none of this is like if it doesn’t occur on Twitter nobody cares. These are the type of systemic events that take place underneath the radar screens that will when they start to be exposed.

FRA: Peter do you see similar impact from Saudi Arabia and what will be the effect on oil prices?

Peter Boockvar: Well I agree. I think Yra said everything there was to say. I just want to add on that what’s going on with the oil is you know we’ve also had multiple years of a big reduction in the rate of them investment in oil production particularly offshore. You’ve had trillions of dollars of projects get canceled. Yes. And we’ve seen that also in the mining space in the industrial metal space. You know that’s what their markets do and that’s when companies start to focus on returns on capital and cash flow. They spend less on drilling and mining and I think it’s really been the supply side that’s been under more discipline that has created a lift in oil and industrial metals and this rising commodity prices. So I think that’s something to pay attention to that. Yeah this is partly geopolitical, but I think there has been a concerted effort in trying to control at least the supply side and even in yet in the U.S. I think people are waking up to the economics of shale and that markets aren’t necessarily going to be so friendly to continue to finance all the shale drilling where a lot of these companies aren’t generating any cash flows. So while U.S. production will grow over time I think a lot of it’s going to be cash flow driven and less of that just the reckless spending just to drill a hole and create more barrels ..

Yra Harris: And you know what Peter brings up a very good point. For another reason but with the rise in oil prices has pushed the high yield debt of energy companies to the highest levels not yields levels but price levels. And yet when I look I’m looking at JNK the high yield ETF HYG and JNK and those are both have moved underneath the 200 day moving averages which is another warning. There are signs that are developing because what would drag them down, you know last year we did or what sent high yields of course when the energy bonds and all the structured notes that they did were under trouble. Now they rise in the value and yet the high yield indexes, the yields are rising .. So that’s another one of these divergences that really is flashing for me.

Peter Boockvar: Yes, I agree. I think this rise in the cost of capital and expansion .. But you have to remember that the rise in short term interest rates is a really big deal because there’s hundreds of billions of dollars that are seeing a rise in their cost of capital every single day. With this rise in short term interest rates I mean the one-year T-bill is yielding 152 today, the S&P 500 dividend yield is 1.9 percent. These are still obviously very low numbers, but in a world of many years of zero interest rates ..

Yra Harris: In what Peter said that’s such a great point. You know that I’m celebrating 152. I mean world where you know I’m dancing and I’m doing this just because you know.

Peter Boockvar: It’s like shocking to say.

Yra Harris: It’s shocking.

FRA: And maybe we can end with your thoughts on New York Federal Reserve president William Dudley stated “we had a woefully inadequate regulatory regime, it as much better now in place, there is still more work to do” .. In reference to the financial crisis and what’s happened since. Yra you mentioned that was pure rubbish.

Yra Harris: I mean really it’s pure rubbish because the Fed had all the macro prudential tools that they needed, if they wanted to put a halt ..

Peter Boockvar: Yeah and I think Dudley’s comments reflect just an extreme level of delusion that Bernanke had as well. And that for them to, with a straight face, saying that it was regulation that was not in place. That was the cause of the crisis, I’m trying to think the right word, but it’s actually dangerous because they’re deflecting any self blame on monetary policy. I mean monetary policy is the liquor that feed the drunks and where for Dudley and Bernanke before to say well it was the lack of regulation that was the cause. It’s actually scary to hear because it tells you that they don’t understand. They don’t understand and they don’t want to admit the unintended consequences of price fixing the cost of money and that typically goes awry and it has in the past and it is now and it will again. And to think that it’s a regulatory structure in place and that a bunch of bureaucrats are going to somehow manage the economy from that perspective and and create these buffers around economic cycles is just I don’t know if it’s hubris or just complete delusion.

Yra Harris: Really That’s like sums it up and it was a when somebody responded in a blog and I wrote look at Greenspan not only did he not try to curb it he encouraged it. He said use your house as a piggy bank .. refinance it and create demand by spending the money that you can extract from this taking out of course more debt at the same time .. And number two Bernanke he didn’t, as Peter rightly said, they fueled this; this is contained which is no worry here .. They did nothing. I mean at first blush they could have raised reserve requirements to start squeezing the leverage that the banks were employing … Well how do you know it’s a bubble and what if we’re wrong. Because monetary is a blunt instrument you know squeezes the entire economy. Well you know what. Don’t tell me that you didn’t have the tools and you had the tools.

FRA: Exactly agree very much on those thoughts. And that’s great insight. Gentlemen how can our listeners learn more about your work Yra.

Yra Harris: Send money. No Bitcoin .. J just kidding .. I post blogs and Notes From Underground. If you can find register to look up to you but that is a little humor.

FRA: Peter?

Peter Boockvar: You can go to – you can see my daily writings and also you can go to

FRA: Great. Thank you very much gentlemen.

Submitted by Boheira Manochehrzadeh <>


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.

11/03/2017 - The Roundtable Insight: Daniel Lacalle On How Central Banks Are Nationalizing The Economy

LINK HERE to 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.