How Future Generations Will See Today’s Financial Repression

If you were to look around you (during your trip to the future) and perhaps wander into a college class on economics, chances are you would soon encounter a lecturer talking about the “Great Economic Collapse” of the early 21st century. In other words, talking about where we are right now.

When those lecturers talk about the Great Economic Collapse (in our imaginary future), chances are that the single most critical aspect of their discussion will boil down to this: how is it possible, they will ask, that the people alive at that time did not notice what was taking place all around them?

How is it possible, they will ask their students, that the public of that era (our era) sat back in total stupefaction while…

* Multiple banks, financial agencies and even government regulators not only did nothing to prevent the “bad paper” collapse of 2007—the one immortalized in The Big Short movie—but, in many cases, actually participated in the fraud, and profited handsomely from such participation?

* Faced with overwhelming evidence of the culpability of key banks and conspirators, the democratically elected government of the day not only did nothing but, astonishingly, went one step further and declared most of the bad actors “too big to fail” and then handed them billions of dollars shortly—and appropriately—before Christmas, dollars which had been entrusted to them by the public?

* Shortly thereafter, the Federal Reserve (an agency no more “federal” than Federal Express)—working in conjunction with other so-called central planners around the globe—in full view of the wide-eyed public, intervened in the interest rate market and basically hijacked it, usurped it, and bent it to their will, which ushered in an era of ultra-low rates that not only failed to generate any obvious benefits for Main Street, but paradoxically, rewarded the corporations, banks, and already-rich to a degree that was literally beyond imagination.

Faced with overwhelming evidence that their policies were not working for the intended purpose—and, in fact, were creating new and dangerous market distortions—these same central planners not only stubbornly continued the madness and mayhem, but they also actually took it to a new level. (ZIRPs, or zero interest rate policies, morphed into NIRPs, or negative interest rate policies, in most parts of Europe.) Didn’t Einstein once say that the essence of stupidity is repeating the same action over and over and expecting a different result?

During this same period, the only entities jumping for joy under these regimes were the trading houses (borrowing at zero means making a profit on any investment yielding more than zero!) and the corporations, which discovered that by borrowing at low rates to buy back their own stock, they could reduce their “float” (make less stock available) and therefore drive up the price of the remaining stock, making themselves look clever (even though THEY WERE NOT) and earning massive executive bonuses in the process. (It is my often-stated view that historians of the future will look back at quantitative easing as a mechanism to benefit the banks and ultra-rich, and little else.)

Nor can it be said that the public of the era (our era) was not offered objective information with which to make sense of this. During these troubled times, any brave soul who would have googled the term “financial repression” would have learned that all these strange measures, taken as a whole, were simply part of what governments “do” when they get in deep trouble and need to bail themselves out at the expense of the very same electorate who foolishly gave them power in the first place!

EXTRACTED FROM:  The Coming Great Pension Collapse—How, Why, Where

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

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

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

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

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

THE CHINESE FINANCIAL CRISIS

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

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

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

CONSEQUENCES OF INCREASING CREDIT IN AMERICA

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

“China is increasingly misallocating and wasting credit.”

During the last 25 years in China:

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

• The Gross Output Value of Construction increased by 134 times, growing at an average annual rate of 21%.

• Building Area Under Construction increased by 33 times, at an average annual rate of 15%.

• Steel Production increased by 12 times, at an average rate of 11% growth per year. Consequently, China now has 50% of global steel capacity.

• Cement Production increased 12-fold, growing by an average annual rate of 11%. During just three years (2011 to 2013), China produced more cement than the United States did during the entire 20th Century.  China now has 59% of global cement capacity.

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

FALLING FOREX RESERVES

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

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

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

JOB CREATION AND SUSTAINMENT IN CHINA 

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

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

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

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

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

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

Karan Singh karan1.singh@ryerson.ca

Sarah Tung sarah.tung@ryerson.ca

PLAY VIDEO: https://youtu.be/3Om-VhDG08g

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.

“In the absence of pro-growth policies on the fiscal side, the sole support in the developed world has been monetary policy. There’s been a more or less universally practiced set of monetary policies consisting of zero and now negative interest rates and so-called quantitative easing — various forms of asset buying. It started out as all bond buying, but now it’s leaked into equities. The result of all that — I call it monetary extremism — is that the economies have held up and had some growth, but that growth has been tepid, with the biggest gains going to those who own financial assets while wage growth has been stagnant.
The cure for the crisis — for the debt crisis, the financial crisis — has been deemed by the developed world governments to be more debt. There has not been a deleveraging ..  I think it’s a very dangerous time in the financial markets.”
– Paul Singer

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.

Commerzbank, one of Germany’s biggest lenders, is examining the possibility of hoarding billions of euros in vaults rather than paying a penalty charge for parking it with the European Central Bank, according to sources familiar with the matter .. “Such a move by a bank part-owned by the German government would represent one of the most substantial protests yet against the ECB’sultra-low rates, which have been criticised by politicians including Finance Minister Wolfgang Schaeuble.”

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.

Articles highlight the trend by investors to take more & more risk in an attempt to get the same investment performance returns as many years ago when bonds easily provided those returns .. hedge funds are looking towards Australia where many Australians manage their own pension savings in an attempt to offer investor returns .. “Hedge funds who introduce complex trading strategies to mom and pop investors and massive pension funds – what could possibly go wrong there?”

LINK HERE to the articles

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

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

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

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

AS AN ENTREPRENEUR

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

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

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

TECHNOLOGY IN ENTREPRENEURSHIP

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

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

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

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

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

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

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

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

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

FROM ENTREPRENEUR TO HEDGE FUND MANAGER

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

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

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

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

THE PROBLEM OF CENTRAL BANKS

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

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

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

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

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

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

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

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

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

THOUGHTS TOWARD THE FUTURE

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

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

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

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

PODCAST HOST EXPERIENCES

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

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

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

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

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

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

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

Abstract by: Annie Zhou a2zhou@ryerson.ca

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

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

FRA Sees All Eyes on US-China Strategic Dialogue Summit in Beijing

The July  FOMC meeting is being framed today in China.

The FRA was fully expecting an “obfuscated” Jobs Report on Friday to give Yellen the time and cover she needed in striking an agreement with China, now that the Shanghai Accord has clearly broken down.

The FRA presently expects a Fed hike in the July FOMC meeting but NOT BEFORE a final resolution on the DEVALUATION OF THE YUAN is agreed to between the US and China.

China has already fired four devaluation salvos across the US bow in the last 4 weeks. China is out of time and patience.

Remember: China is selling FX Reserves held in US Treasuries and are the banker to a continuing rising US debt requirement.

Both a cheaper Yuan and US$ are required – but what is to be debated at the US_China Summit is how?

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.

BMG’s David Chapman discusses the failing banking system & Canada’s stance in the unlikely event of a large bank failure .. “Those at risk of a bail-in in the event of a failure are subordinated debt holders, bondholders, preferred shareholders and any accounts in excess of $100,000 not covered by CDIC insurance. Their bonds, preferred shares, deposits etc. would be converted to capital to re-capitalize the banks. According to the financial statements of the CDIC, they insured some 30% of total deposit liabilities, or $684 billion, as of April 30, 2014. The remaining 70% not insured would primarily be large depositors, including both large and small businesses, and other banks and financial institutions. Depositors can avoid problems in a bail-in regime, but to do so they must be aware of the rules and have taken steps to ensure the safety of their funds. The bail-in regime would only apply to eligible Canadian banks and financial institutions. As was noted, it would not cover brokerage accounts, pension funds and mutual funds.”

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.

Wall St For Main St interviews the Co-Founder & the Chief Strategy Officer of Bitgold, Josh Crumb .. discussion on why gold has rallied in U.S.$ terms since December .. a discussion about negative real interest rates & how the gold bull market has actually been going on for more than 2 years in other currencies besides the U.S.$ .. a discussion on negative interest rate policy & the attempt by many global central banks to implement financial repression .. gold will be an even more attractive alternative for investment & savings the more attempts central banks try at manipulating interest rates down as part of negative interest rate policy or NIRP .. 34 minutes

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.

“Gold, silver and gold/silver mining stocks have commenced a new long-term bull market. It’s like buying the Nasdaq in April 2009. Meanwhile, global stock indexes have been in a broad topping process for years, our global composite stock index stands at the same level as it did in December 2013, two and one half years ago. The trend has not been your friend in stock indexes, every rally has fizzled out for buy-and-hold stock market investors .. Gold is a currency, it is held as a reserve asset by central banks along with their FX holdings. QE, ZIRP and negative interest rates (NIRP) have destroyed central bank credibility and the value of major reserve currencies (dollar, euro, yen, yuan) .. The failed policies of central bank credit expansion are lighting a rocket under the gold price, the asset that central banks can’t devalue. Precious metals mining stocks are leveraged to a rise in the gold price, profit margins and mineable reserves surge when precious metals prices rally. These are the conditions for a long-term bull market, in which dip-buying is rewarded with constantly higher prices. We continue to recommend the accumulation of gold and silver mining stocks on brief pullbacks. Gold is the central bank put.”
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.

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

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

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

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

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

MONETARY POLICY

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

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

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

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

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

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

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

THE NEW NARRATIVE

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

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

Karan Singh karan1.singh@ryerson.ca

Sarah Tung  sarah.tung@ryerson.ca

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

FRA Co-founder Gordon T. Long discusses with Yra Harris about the yield curve of US Treasury bonds along with the G7 meeting and the effect of Germany and ECB on the rest of the world.

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.

LOW ON 2/10 YIELD CURVE

It looks like we have another temporary bottom. After we took out that previous level we were talking 120 basis points, but now we’re trading at 95. The big problem is going to be the 75 basis point area, but we’ve already taken out the lows that were made in 2007-2008. What it reflects is that the Fed is flattening as they’re talking about raising rates.

Usually with this flattening of the curve, the 2/10 which is called the “investor’s curve” instead of the “speculator’s curve”, indicates one of two things. Firstly, rates are either too high or going too high on the short end relative to what the market perceives is its potential growth in the future. They’re getting nervous.

“Usually I would say this is a very solid indicator and that the Fed has really waited too long to do anything. Which flies in the face of everything we’ve heard in the last two weeks.”

There is a dynamic in play in the global markets. With the vast amount of central bank purchases, they have skewed the markets so badly that the markets are trying to get a read on what this all means. Because everything is relative value, 60% of the developed market bonds are in negative territory. That skews everything, so we can’t get a real feel for what this curve means. If that’s the reason the curve is flattening, then we’re in a whole new ballpark because it’s a global phenomenon at a level we’ve never seen before and that’s going to affect everything. It breaks the Fed’s own mechanism.

“Bond markets need to be a signally mechanism to be effective, and if you’ve broken the signalling mechanism, well, we’re flying here in uncharted territory… then it becomes a question of, who’s in the pilot’s seat?”

That’s what the world is trying to figure out: do the people in the pilot’s seat know what they’re doing and have confidence in what they’re doing or are we really flying blind here?

5/30 CURVE FLATTENING

The 5s30s is where speculators like to play and that curve is actually flattening more as they seem to be able to exert more pressure, but that might be reflective of relative value. In a yield-starved world, yield-starved because central banks have so dynamically shifted everything everything through their massive purchases, people are stuck having to really reach for things.

“The 5/30 is more dynamically telling me that the Fed may be erring in raising rates, that they waited too long.”

People in Europe have 3/10% of GDP yield. It’s not even enough to cover their budget situations. Europe is in a very difficult situation here. That might mean the Fed has waited too long.

THE PREVIOUS G7 MEETING IN SHANGHAI

“I don’t think anything major came out of Shanghai because I’ve been around this business for a long time and nothing could’ve kept that quiet.”

Maybe something did take place, but then we consider June of 1998, when the Chinese were much more concerned, and two weeks before Bill Clinton goes to China, Bob Rubin makes a speech about the strength of the Dollar and the US Treasury started buying Yen and selling Dollars contrary to what Rubin said. The Chinese were very upset with the weakening of the Yen and put pressure on the US to try and correct it. Now in Shanghai, we get the sense that the Chinese were displeased with the recent 30% depreciation of the Japanese Yen and made their voices known.

If you tied that into Shanghai, you can see that the Japanese sent a signal saying, ‘when we have displeasure, and since we’re an autocratic government, we can move in a very quick, dynamic fashion. And when we move, we’ll disrupt the markets, so you better take care of this situation cause we believe the Yen is too weak against the Yuan.’ So now the Japanese are unhappy, so this will get interesting. The Japanese have voiced their concern with this one sided depreciation.

SPECULATION ON RESULTS OF THE G7 MEETING

The Japanese could seriously weaken the Yen if they started buying other countries’ bonds. So there was a conservative effort by the BOJ to buy US treasuries and European debt.

“Any time a central bank intervenes or starts to buy some of these assets in an aggressive manner, it’s being done to weaken your currency. There’s no better way to word it.”

The Swiss are actively intervening in the market, the Norwegians are maintaining stability. If the BOJ were to start buying US Treasuries, the Dollar-Yen would weaken dramatically cause that would be a central bank policy to directly weaken their currency by buying other countries’ assets. They will be warned against doing that, but the Japanese retail investors and pension funds are under a lot of pressure to deliver some modicum of return with negative rates in Japan hampering their ability to achieve a positive return.

“What I think the biggest issue the G7 will speak to is what I call the Larry Summers Agenda… he’s trying to get a global fiscal stimulus.”

He wants everyone to bring forward all their infrastructure spending now. It would make the Chinese very happy, but it certainly seems to be a desire to craft some type of global fiscal stimulus to take the pressure off the fiscal monetary policy.

People talk about the Chinese, but the Germans are much more a propagator of current account surpluses, but they save and save and save.

“We are totally opposed to nations using their currencies to gain a trade advantage. There will be a lot spoken about the need for fiscal stimulus.”

THE PROBLEM OF EUROPE

Europe is 27 different situations looking for a common policy, and that just can’t possibly happen. Germany has full employment and budget surplus, current account surplus, and it sits there with negative interest rates, then everything you’ve told me is wrong. What has to happen is you get very robust inflation in Germany, cause you’re keeping rates way below whatever metric is used.

“Your work is in financial repression. Nobody in the world right now is more financially repressed than the German people.”

We have the German constitutional court ruling against these OMTs and the ability of the ECB to actually perform fiscal policy through their monetary policy.

The markets are complacent. The European bond markets have yields that are preposterous.

“Germany is Europe’s credit card; the ECB, yes, they can print money but they have no credibility without the German credit card.”

No one would buy German debt without someone guaranteeing it. There is no Euro bond. It doesn’t exist. People keep saying they need it, but in order to do that there has to be someone guaranteeing that credit, and that’s the Germans. European debt is at 8-9% and this is going to be the wild card. They have swallowed the concept that the ECB is some sort of brilliant organization with credibility. It has x amount of balance sheet assets which are growing tremendously.

The ECB would be equivalent to the Great Depression in 1932 Austria, when the credit gestalt went under. The ECB sits in that role. If the Germans say they’re not going to be a part of this, the world blows apart financially. They’re hoping to pile all this on so the world will tell the Germans they can’t leave. This is such a surreptitious way of forcing them to be the guarantors.

Meanwhile the ECB is buying 80b more Euro’s worth of credit every month. They don’t even have to buy it. They’re doing it because they need product. They’re in a hurry to keep piling all this debt on the ECB, who kept saying ‘we’ll do whatever it takes’ and the market accepted that, and over the course of this “whatever it takes” they kept piling on this debt.

“If you want to see an accord, there’s going to be a fiscal stimulus accord.”

Abstract by: Annie Zhou: a2zhou@ryerson.ca

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

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

“We have argued the inevitability of Fed-administered hyperinflation, prompted by a global slowdown and its negative impact on the ability to service and repay systemic debt. One of the most politically expedient avenues policy makers could take would be to inflate the debt away in real terms through coordinated currency devaluations against gold, the only monetize-able asset on most central bank balance sheets. To do so they would create new base money with which to purchase gold at pre-arranged fixed exchange prices, which would raise the general price levels in their currencies and across the world to levels that diminish the relative burden of debt repayment (while not sacrificing debt covenants) .. The fact that gold remains on the balance sheets of central banks and is being aggressively bought by them suggests it is gaining, not losing, relevancy as a monetary asset. The fact that it can be used as the fulcrum against which to devalue currencies gives it purpose. The fact that allocations to gold and gold-related assets remains less than 3% of investment portfolios makes it a superior risk-adjusted portfolio allocation .. Our view is that there will not be a switch to a fully-reserved banking system or even a reversion to a fixed exchange rate; however, there will be a significant increase in global currency devaluations against gold, and that it will be coordinated by monetary authorities.”
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.

Article highlights the challenges & pitfalls of pension funds who are assuming year-over-year returns of say 4% or even 8% in a world of negative interest rates & low investment yields .. worse is the use of pension funds by governments to borrow money, invest it with the pension funds & get “yield” from the pension funds as it were free money .. “Take the Ontario government’s $5-billion deficit. The province can issue long bonds paying interest at 2 per cent in real terms. If the ORPP can reliably earn 4-per-cent real, let’s lever the two-percentage point difference: Borrow $250-billion, invest it with the ORPP and the profit will balance the budget. Better yet, borrow $500-billion, invest with the ORPP, and – presto – a $5-billion surplus! The federal government can do even better. The real yield on their long bonds is zero. If the Canada Pension Plan Investment Board (CPPIB) can reliably earn 4-per-cent real, Ottawa can borrow, say, $500-billion, invest with the CPPIB, and boost their bottom line by $20-billion. Free money! What could go wrong? Well, nothing – if 4-per-cent real, year-in year-out, is really a slam-dunk. But in reality, plenty. In fact, many U.S. state and local plans, including the Detroit plan that went bust in 2013, tried this trick – so beguiled by assumed high returns that they forgot their duty to make actual payments. It is one thing for individuals to shoot for the moon – gamble their own money and retirement. It is something else to do it on others’ behalf – especially millions of others, with failure meaning not just individual but societal hurt.”

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.

Jim Rickards highlights that government authorities are beginning to talk about bidding up the prices of gold to bolster inflation rates in an attempt t inflate away government debt .. “The global monetary elites had a conference in Zurich, Switzerland, last week. Among the speakers were William Dudley, president of the Federal Reserve Bank of New York, and Claudio Borio, chief economist of the Bank for International Settlements. The topic of the conference was the prospect of multiple reserve currencies in the international monetary system. The speakers generally agreed that a system with more reserve currencies (such as the Australian dollar, Canadian dollar and possibly certain emerging markets’ currencies in addition to the Chinese yuan) would be a desirable one. There’s only one problem… It’s a zero-sum game. All of the reserve currencies in the world add up to 100% of the reserve currencies. If new currencies have a larger share, then the U.S. dollar must have a smaller share. It’s just basic math. That means a long-term process of selling dollars and buying the new reserve currencies. That selling lowers the value of the dollar and imports inflation into the U.S.  .. It also means a higher dollar price for gold. The elites won’t tell you that, but it’s true .. The key takeaway is that a higher dollar price for gold is just a lower value for the dollar. And that’s what the elite’s want. It’s part of their global inflation plan.”

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.

Wall St for Main St interviews Erik Townsend on Wall Street & the hedge fund industry .. Townsend thinks all the major central banks like the U.S., Japan, ECB, etc are trapped but predicting the timing of any collapse or market crash is almost impossible. He cautions people to avoid making big bets on the stock market crashing in the short term .. Townsend gives an excellent explanation of financial repression & how savers and investors, who have tried to do the right thing financially in their lives, are being penalized. Jason and Erik discuss how negative interest rates & a cashless society are following financial repression .. 54 minutes

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.

Charles Hugh Smith* explores the concept of property taxes on real estate .. do you really own your house if you have to pay $260,000 in property taxes over 20 years? .. “Owning a home no longer makes financial sense because the property taxes consume any appreciation other than the transitory ‘wealth’ generated by a housing bubble” .. Property tax is not based on consumption or income, but on “the presumed wealth & income of property owners. In effect, property taxes are a wealth tax: if you can afford a house, you can afford property taxes.” .. the problem with this is household income does not rise with housing valuation .. the unintended consequences of financial repression: “As pensions dry up and blow away under the relentless erosion of the Federal Reserve’s zero-interest rate policy (ZIRP), unaffordable property taxes may well start evicting homeowners from the ‘asset’ they mistakenly thought they ‘owned.’ If your Social Security pension can barely pay your property tax, never mind your Medicare, healthcare costs, food and other living expenses, then what exactly do you own?”

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 Co-founder Gordon T. Long is joined by Kristin Tate in discussing her book and the outlook of Millennials on the upcoming US election.

KRISTIN TATE is is a political columnist and author of “Government Gone Wild”.

In her book she says D.C. politicians are shipping our friends and family overseas to fight in wars we shouldn’t be fighting. They monitor our emails, record our phone calls, and peer into our snail mail. They spend our hard-earned cash on things no disciplined family would buy. They tell us who we can marry and what we can put in our bodies. They throw us in overcrowded prisons for smoking pot. They take lavish trips around the world, staying in five-star hotels… and it comes straight out of our paychecks. This isn’t freedom?

Government Gone Wild is a brash, bold ride through the carnival of absurdities that our broken system has become. This isn’t about Democrats vs. Republicans… it’s about inspiring hard working Americans to give a damn so we can take our country back. This is your wakeup call. You’re not anywhere near as free as you think you are – but you can be. We’re not as prosperous as we once were – but we can be.

GOVERNMENT GONE WILD

“You could really open my book on any random page and start reading and not be confused.”

If you want Millennials to not be apathetic you have to get their attention in a way that will let you keep their attention. They grew up with technology and have a shorter attention span, so it’s unrealistic to expect a young person who’s not already politically involved to pick up some long boring book.

The book takes the reader through various topics; everything from social issues to taxes to foreign affairs.

“The main message throughout this book is that whenever too much government gets involved, usually our freedoms are eroded.”

Once you get young people interested, once you get the conversation going, it’s usually easier to keep their attention. The battle’s getting their attention initially.

The book is a really light read, filled with a lot of shocking facts that a lot of people don’t know about our government, but it’s presented in a very fun way.

“One thing I really try to show Millennials is how we really need to start demanding accountability from our politicians.”

We’re scraping to get by and all this money we’re using to pay our taxes are going toward these sanctimonious politicians to live like kings and queens. There’s a lot of things we can do to turn this country around, but you’ve got to show young people why they have to care and why they need to demand accountability from our politicians.

ON THE SPECTRUM BETWEEN BERNIE SANDERS AND DONALD TRUMP

Poll after poll shows that Millennials tend to be more socially accepting of diverse lifestlyles, so maybe more socially to the left, but we’re also fiscally conservative. It’s kind of libertarian.

“I would say that I tend to be a representation of that – socially more liberal and fiscally conservative. It’s kind of libertarian.”

Even if they don’t know what the word ‘libertarian’ means, if you ask them about these issues many young people want the government to stay out of our personal lives and out of our wallets.

A few decades ago, something like gay marriage was very controversial, but this generation has grown up with these social issues and they are a little closer to home than previous generations.

“I see the future of the Republican party as being a little bit more libertarian, and if these older Republicans don’t start understanding that you’re going to keep seeing younger Millennials flock to the Democrats because they really see these social conservative issues as deal-breakers.”

CURRENT ELECTION ISSUES

You have a record number of Millennials living with their parents, the job market is awful, and you do have a lot of young people who do have college degrees working low wage jobs. We’re depressed, and that’s why Bernie Sanders is doing so well. He’s sending a message that sounds positive to young people about the future, even though socialism would destroy this generation. A lot of young people don’t realize that when they hear him talk about income inequality and wealth distribution.

“If the Republicans or Hilary Clinton want to grab some of this Millennial vote, they need to start showing young people how their policies will lead to jobs… and how their policies will bring prosperity to all Americans. That’s what young people care about.”

They get these soundbites of positivity from Bernie and that sounds better than anything else they’ve heard. That’s why they’re so excited about Bernie. It’s depressing, but young people are all about bumper sticker politics; if you want to get their attention you need to spread your message in catchy, easy to understand ways. Bernie Sanders doesn’t really need to show young people how he’s going to make these things a reality because right now he’s the only one giving them any hope at all.

“There’s a lack of understanding of what capitalism is, but the fact that young people say they like free enterprise gives me home that fiscal conservatives can still spread their message to young people effectively.”

The movements behind Bernie and Trump are very similar. People are fed up with the Republicans and the Democrats. The voters are fed up with these establishment bureaucrats who do not look out for the people, on both sides of the aisle. That’s why they flock to Bernie Sanders.

“Although I don’t love Trump or Bernie, the fact that both of them are so popular does give me hope because they’re both outsiders and it shows me that people want something new and that they understand that the system is broken.”

LOOKING FORWARD

If Hilary gets the nomination, young people will continue to be frustrated. Hopefully they’ll start to understand once they get into the job market, they’ll understand that we need more capitalism and less socialism.

“I do think that politics as we know it is changing forever in the US. I think this whole notion of having two establishment parties is crumbling… I see more apathy than ever, but I also see in some other way more awareness of what’s going on.”

It’s easier to hold people more accountable because of technology, and this increased awareness of what our politicians are doing and this connectiveness because of technology will only make the two party system crumble even more. We’re seeing this huge movement toward outsiders, toward politicians who are not career bureaucrats, and we’ll continue to see that in future elections.

“More government involvement is not what we need; we have too much socialism right now… capitalism is our friend, the job market is our friend, a great corporate environment is our friend. I want Millennials to wake up to this stuff and hopefully vote in a way that would lead to these for a free market policy down the road.”

Abstract by: Annie Zhou: a2zhou@ryerson.ca

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

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

“QE and negative interest rates turned out to have unintended consequences, one of which is a drying up of bond trading. If governments buy up all the high-grade bonds then obviously there aren’t many left to trade. And if the yield on new bonds is negative, holders of existing positive-coupon bonds have no incentive to sell them. Hence, eerily silent trading desks around the world .. The financialization of the global economy has created a vast sea of hot money that flows mindlessly from one location and asset class to another on a scale that exceeds traders’ ability to predict and/or manipulate. Put another way, in a world where it’s impossible to know what’s going to boom or crash next, it’s irrationally dangerous to place big bets on anything .. Where do we go from here? Probably into a crisis in which the world stops trusting markets, and financial assets are devalued accordingly.”

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.