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

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

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

FINANCIAL MARKETS AFFECTED BY TRUMP

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

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

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

A CHALLENGE TO INFRASTRUCTURE SPENDING

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

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

INTERNATIONAL EFFECTS

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

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

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

TREND AGAINST PHYSICAL CASH

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

DESTRUCTION OF THE AMERICAN DREAM

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

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

STRUGGLING PENSION FUNDS

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

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

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

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

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.

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

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

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

DEMONETIZATION OF INDIA

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

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

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

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

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

US NEW PLANS ON TRADE AND INFRASTRUCTURE

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

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

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

THINGS HAPPENING IN EUROPE

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

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

POSSIBLE PENSION FUND CRISIS

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

ASSET CLASSES TO PROTECT WEALTH

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

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

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

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.

Edelweiss Journal: “After a decade of extreme monetary experimentation, it is now commonly accepted that global fiat money, expansionary money policies and central planning have served to distort the price-finding role of the free market and, as a consequence, the valuation of all assets .. The bifurcation between financial and real economies has grown ever larger, and this has been to the benefit of participants in the financial economy. Precisely because of the scale of this gap between the two, and because of their very different modern natures, a transition back to the real world provides an insurmountable challenge for most who have spent their careers developing skills suited now only to the financial system .. In this scenario, owners of real productive assets, which are genuinely scarce in nature and unavailable to most, seem best placed to prosper. For they do not require liquidity within the financial system, nor to be told what the current price of their company’s shares is. Furthermore it is likely that, in times of real adversity, the best of these businesses will find opportunities to strengthen their position further.”
LINK HERE to the report

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

Kenneth Rogoff is a highly respected U.S. economist. In 2011, he received the Deutsche Bank Prize in Financial Economics, and sooner or later he will probably receive the Nobel Memorial Prize. But Mr. Rogoff also belongs to the elite in which voters in the U.S. and elsewhere no longer trust.

I met Mr. Rogoff when he received the Deutsche Bank Prize. At this occasion, he was asked how the huge debt accumulated in the run-up to the financial crisis could be reduced again to a tolerable level. His answer was: through financial repression. With this, he meant a monetary policy aimed at keeping interest rates low while raising inflation, so that government revenues would rise while interest expenses would be depressed. With this method, the U.S. succeeded in reducing the public debt incurred during World War II. When the U.S. entered the war in 1941, federal debt amounted to 49.5 percent of GDP. As a result of the war expenses, the debt ratio rose to 119 percent of GDP in 1946. Thereafter, it fell again to about 57 percent of GDP in 1959. In 1941-1959, the U.S. Federal Reserve kept the interest rate on long-duration government bonds at 2.6% on average. With an average inflation rate of 4.2%, the real interest rate amounted to -1.6%. Thus, negative real interest rates helped cut the government debt ratio by about half between 1946 and 1959. In the early 1970s, the policy-induced depression of real interest rates was labeled “financial repression.”

Since the financial crisis of 2008-09, central banks have been trying hard to boost inflation. Only few of them admit that their true objective is to push real interest rates into negative territory, with a view to easing the debt service burden of their governments. Only the Bank of Japan has committed itself to fix the interest rate on 10-year government bonds at 0% while aiming to drive inflation above 2%. So far, however, neither the BOJ nor other central banks have succeeded in generating financial repression. Inflation has stubbornly remained low.

Economists like Mr. Rogoff conclude from this that nominal interest rates need to be pushed into negative territory if financial repression cannot be created by rising inflation. “To say that negative real interest rates caused by inflation are unfortunate but negative nominal rates are unnatural is to promulgate financial illiteracy,” he wrote in the Financial Times on Oct. 11. For the technocratic economist, it does not matter how the real interest is pushed into negative territory to create financial repression. If inflation does not increase, nominal rates have to decline. And if citizens flee into cash to avoid negative interest rates on deposits, then cash needs to be abolished.

Economists like Mr. Rogoff cannot imagine that for ordinary people, positive nominal interest rates are related to negative rates like water to ice. The drop below the zero line leads a change in the aggregate condition in both cases. In the “fluid,” positive area, economic agents see interest as a reward for the postponement of consumption. The borrower brings spending forward in time and needs to take care that he uses the borrowed money such that he can repay the lender the principal with interest. In the “frozen,” negative area, economic agents see interest as an illegitimate tax imposed upon them by unelected technocrats. They may just tolerate the tax levied through negative real interest rates when it is the result of unexpected inflation. But they resist taxation through negative nominal rates even more than normal taxation, because it lacks democratic legitimacy.

The politics of negative interest rates has backfired. Banks are bleeding, and people rebel against them. Like Mr. Rogoff, central bankers belong to the elite. But they cannot be voted out of office.

However, people can withdraw their trust in the money they create.

Thomas Mayer is the founding director of the Flossbach von Storch Research Institute in Cologne, Germany.

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.

“While all eyes were on India (as rumors swirled of an imminent gold import ban), The FT reports that China curbed gold imports in the wake of government attempts to clamp down on capital leaving the country, according to traders and bankers.”
LINK HERE to the article

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

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.

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

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

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

MAJOR FINANCIAL REPRESSION IN INDIA

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

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

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

WHO BENEFITS FROM NEGATIVE INTEREST RATES?

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

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

ITALIAN REFERENDUM

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

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

INFRASTRUCTURE SPENDING

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

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

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

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

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

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

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.

“Experience teaches that countries reduce debt relative to their income in five ways: economic growth, substantive fiscal adjustment or austerity plans, explicit default or restructuring of private and/or public debt, a surprise burst in inflation, and a steady dose of financial repression that keeps real interest rates low (usually negative). The last two options — inflation and financial repression — are only viable for debts denominated in domestic currency .. As they have historically in the aftermath of financial crises or wars, central banks have been increasingly resorting to a form of ‘taxation’ that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt. Such policies, known as financial repression, usually involve a strong connection between the government, the central bank and the financial sector. One of the main goals of financial repression is to keep nominal interest rates lower than would otherwise prevail. This effect, other things being equal, reduces governments’ interest expenses for a given stock of debt and contributes to deficit reduction. However, when financial repression produces negative real interest rates (yielding less than the rate of inflation) and reduces or liquidates existing debts, it is a tax on bondholders and a transfer from creditors (savers) to borrowers and, in most cases, governments. Other features of financial repression vary across countries and time. In the past, measures also included directed lending to the government by captive domestic entities (such as pension funds or banks), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and generally a tighter coordination between governments and banks — either explicitly through public ownership of some institutions or through heavy ‘moral suasion’ by officials. In connection with keeping interest rates low, regulatory policies with financial repression features aim to create or expand a captive audience for government debt; Basel III rules fit this mold, as they provide for the preferential treatment of government debt in bank balance sheets.”
LINK HERE to the essay

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.

“Trump will be playing a dangerous game if he turns his back on those who had greater hope for the draining of the swamp. There is a euphoria from the entrepreneurial class that tax reform and the lifting of some burdensome regulations will take place under Trump but a massive fiscal stimulus will have to be financed and rising interest rates will place a burden upon the budget plans being discussed. Even Druckenmiller was talking about robust growth fueling a rise in long-term rates. He noted a level of 6%. As previously discussed, DEBT will be the most important factor overhanging any Trump-inspired growth strategy .. Where Druckenmiller discusses NOMINAL RATES my focus will be on REAL RATES. At zero interest rates around the world, monetary policy has been in uncharted territory as central bankers sought to ease the burdens of a global balance sheet recession (Richard Koo). Getting back to interest rates as a signalling mechanism will restore classic fundamentals to a premier position in global macro analysis .. The point of a cashless society has been raised by Larry Summers as a way to deal with his beloved theory of secular stagnation. In a cashless society a central bank could impose NEGATIVE INTEREST RATES of say 3% and not worry about cash being hoarded. Only a fool would keep being charged on deposits and thus there would be a rush to spend every digital cent. So we will continue to monitor the financial repression in India. Interesting that this took place after Raghuram Rajan was replaced as the Governor of the Indian Central Bank.”
LINK HERE to the commentary

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.

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

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

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

INDIA’S WAR ON CASH AND GOLD

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

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

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

INTEREST TREND SINCE US ELECTION

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

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

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

RECENT SELL-OFF OF US TREASURY BONDS

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

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

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

GLOBAL WEALTH TAXATION

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

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

LOOKING FORWARD FOR INVESTORS

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

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

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

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.

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

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

LINK HERE to The Overlords Of Finance essay

OVERLORDS OF FINANCE

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

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

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

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

INTERNATIONAL  POLICY

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

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

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

TRUMP ELECTION

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

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

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

THOUGHTS ON FUTURE PROGRESS

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

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

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

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

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

2016.11.12 – Trump Infrastructure by zerohedge on Scribd

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.

GoldMoney’s Alasdair Macleod explains: “President-elect Trump stated in his victory speech that he intends to make America great again by infrastructure spending. Unfortunately, he is unlikely to have the room for maneuver to achieve this ambition as well as his intended tax cuts, because the Government’s finances are already in a perilous state. It is also becoming increasingly likely that the next fiscal year will be characterized by growing price inflation and belated increases in interest rates, against a background of rising raw material prices. That being the case, public finances are not only already fragile, but they are likely to become more so from now on, without any extra spending on infrastructure or fiscal stimulus. So far, most informed commentaries on the prospects for inflation have concentrated on the negative effects of an expansionary monetary policy on the private sector .. Central banks, which have a limited understanding of markets and even less of economics, as we have demonstrated, are only too willing to encourage government deficit spending, because they themselves can provide no other answer. That leaves a U.S. Government, with a debt to GDP ratio already over 100%, going on a spending-spree to rescue a failing economy .. The monetary debasement component that finances an escalating budget deficit will only impoverish the long-suffering actors on Main Street even more, and the additional government bond issues required will drive up the cost of borrowing for everyone. Instead he should be reducing his administration’s overall commitments, and getting out of people’s lives. Take a note out of Silent Cal Coolidge’s book, and become a great President. I wish him luck.”
LINK HERE to the essay

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.

Jayant Bhandari explains the unintended consequences of India’s financial repression .. India’s government is conducting a war on cash – it banned the use of Rs 500 (~$7.50) and Rs 1,000 ($15) banknotes ..”This pretty much made most currency-in-use illegal. Banks and ATMs are closed today .. Today, there is utter chaos in the market, with only the spontaneously erupted black market available to bypass the ban — most people simply don’t have anything else but the banned currency bills. Some are booking train tickets for future rides and are subsequently canceling them — they can use the banned currency to buy the tickets and can then get legal currency back after ticket-cancellation charges. This is costing people a lot of time, but it is the only way they can stay afloat and buy food. Others are taking different measures, equally desperate .. Huge chaos in the Indian economy should be expected to continue — as India’s government is simply incapable of bringing liquidity back any time soon. Businessmen will waste their time dealing with this nonsensical event, instead of investing and creating wealth. India simply continues to do more and more of what makes it an uneconomical and wasteful place to invest in.”
LINK HERE to the article

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

The Dallas Texas pension fund is in trouble – the mayor there is warning of 130% property tax hikes will be necessary to avoid a collapse of the pension fund .. it’s the unintended consequences of financial repression .. “Over the past year, the biggest casualty to emerge as a result of global NIRP (or close to it) monetary policy have been pension funds, which have had two choices: either suffer losses as yields on new fixed income investments barely cover (and in some case don’t), or scramble for duration (or outright risky investments like junk bonds and high beta stocks) .. So what do pension fund managers do when perpetually declining interest rates continue to drive their funded status lower and lower despite one’s return profile? Well, there is little choice: one has to move further and further out the yield curve in an attempt to match asset duration with that of one’s liabilities. That, or reach for the skies by buying the riskiest assets possible, and pray for a home run.”
LINK HERE to the article

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

LINK HERE to the article

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

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

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

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

 

PETER BOOCKVAR: EFFECTS OF THE US ELECTION

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

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

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

INFRASTRUCTURE AND GOVERNMENT STIMULUS

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

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

FORECAST ON DIFFERENT ASSET CLASSES

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

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

MORE EFFECTS OF THE TRUMP PRESIDENCY

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

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

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

ALASDAIR MACLEOD: EFFECTS OF THE US ELECTION

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

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

EFFECT ON DIFFERENT ASSET CLASSES

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

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

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

PRECIOUS METALS

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

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

THE NEXT PHASE OF THE FINANCIAL CRISIS?

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

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

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

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

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

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

PRIVATE AND PUBLIC DEBT CRISIS

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

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

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

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

US DOLLAR PURCHASING POWER

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

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

EFFECT ON US ELECTION – FISCAL PLANS?

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

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

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

FORWARD GUIDANCE AND FINAL THOUGHTS

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

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

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

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

Dodd-Frank  represents Regulatory Policy that assures  sub-standard credit and job growth in an Era of Financial Repression!

According to Christopher Whalen of Kroll Bond Rating Agency (KBRA) the 2010 Dodd-Frank law represents another “phase-shift” in regulatory policy that implies sub-standard credit and job growth for years to come, regardless of the level of interest rates or open market purchases (QE) of securities by the Federal Open Market Committee (FOMC) and other global central banks.

As a result, low levels of job creation and growth which are exacerbated by deflationary effect of low/negative interest rates, are driving a populist political backlash in the US and in Europe. The “surprise” result in the BREXIT vote this summer is likely to be repeated in future elections because of the ground swell of popular discontent at failed economic policies.

Markets are now starting to price in these risks, as evidenced by the widening gap in cost of dollar funding in the US and EU.

Christopher Whalen of Kroll Bond Rating Agency (KBRA) has just released a presentation discussing this. The presentation makes the following additional key points:

• The “single mandate” for all governments is job growth, both for economic and political reasons. The FOMC pretends to have a “dual mandate,” but in fact the Humphrey Hawkins law makes “full employment” the paramount policy mandate before price stability or stable interest rates can even be considered.

• Since the 1970s, fiat money and the singular focus on full employment has gradually forced interest rates down to zero or below. The secular decline of interest rates, which is the centerpiece of “financial repression,” necessarily also drives deflation by taking income (carry) out of the economic system.

• With negative interest rates, global central banks are depriving the global economy of trillions of dollars in income and thereby fueling a diminution of private capital and economic activity. Low interest rates and QE also lead to bad investment decisions, as in the case of oil, residential and commercial real estate, shipping and other asset classes.

• The fixation of global monetary authorities with targeting employment has significant costs, including a steady level of underlying inflation that undermines consumer purchasing power (thus, today’s discussion of “income inequality”). The single mandate of full employment also facilitates periodic financial bubbles and crises resulting from the manic swings in monetary policy.

To view the presentation, click here.

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.

“The distortions created by central banks over the past seven years have blunted our navigating instruments. If a storm is approaching, we are unable to see it. We navigate by instruments, valuations, historical precedents, official opinions and reassurances. Even when a gigantic tsunami overwhelms one of the ships in a perversely calm sea, we reject the warning, chalking it up to its conductor’s carelessness. That mighty sterling can collapse 6% in a few seconds says only that the Brexiters made a bad choice. Really? Our senses apprehend that all is not well, but we look around and can’t see it .. Stepping back from the metaphors, I offer that vanishing liquidity (defined as the ability to rapidly execute large financial transactions at low cost with limited price impact) is the lonely indicator of serious trouble ahead. Liquidity to markets is the equivalent of air to humans. And permitting myself one more incursion into the figurative world, air gets thinner, more rarified, the higher one climbs. Historically, bull markets have always been accompanied by rising volumes and rising liquidity. They died when far-sighted, sophisticated sellers overwhelmed the throng of new, enthusiastic, short-sighted buyers. This seven-year-old bull market is different. Precious few buyers with conviction and enthusiasm can be spotted. It’s a lack of sellers that has fortuitously allowed the paucity of buyers to drive up prices. This liquidity constriction is felt in our own skin. Positions that were easy to put on months ago have become increasingly difficult to exit. It now takes five to eight days to get out of positions if we do not wish to noticeably affect prices, compared with one to three days in months past. The loss of liquidity is not an empty term; it’s real .. Not until volume rises significantly above the recent pace will we be confident that risks are being properly priced in and that prices are indeed clearing.” .. Friedberg is bullish on gold, sees the prices as having bottomed out about a year ago .. 
LINK HERE to get the PDF

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.