When the GOP handed congress the $1.1 trillion spending measure to pass, which would avoid a government shutdown (with no time for congress to actually read it), the backroom republican strategists buried within it the removal of FIRPTA. There are major reasons for this as we outlined in “Obama Abruptly Waives 1980 Foreign Investment in Real Property Tax Act (FIRPTA)” but less recognized was that it subtle shows what we can expect if the Republican party wins the White House in the upcoming election. The clearly confident GOP party is quietly laying the foundations now.

Klueger & Stein, LLP, who’s clients are “individual investors and multinational businesses entering the United States to acquire a U.S. business, invest in U.S. real estate, or enter the U.S. market through a joint venture or the creation of a U.S. subsidiary and also assist U.S. investors and businesses looking to engage in commercial transactions or acquire valuable assets abroad”,  recently wrote this article which appeared in LOWTAX – Global Tax & Business Portal:

Our neighbors to the North may have found a way to accomplish some U.S. tax reform. Canada is offering the U.S. the opportunity to gain much needed investment for public works such as U.S. freeways and bridges by using Canadian pension funds. The condition is – drop the 10% tax tagged onto foreigners selling U.S. property.

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was implemented in response to the growing fear of a takeover of domestic resources by foreign money. The law imposes a 10% tax of the sale price on U.S. real property owned and sold by foreigners.  Because the law is so broad, it includes foreign pension funds.

President Obama has been pushing for changes to FIRPTA that would exempt foreign pension funds from paying taxes on U.S. real property sales.

In the U.S., public-private relationships, especially foreign ones, have traditionally been viewed with skepticism, and investment in public infrastructure has suffered because of this.  Investment in public infrastructure by private funds is reported at 3.6% of the nation’s Gross Domestic Product, a significant shortfall compared to the estimated $3 trillion needed to bring the country’s public infrastructure up to standard.

If the proposals pass, foreign, including Canadian pension funds could invest in public works projects without investors worrying about the FIRPTA tax burden.

Canadian pension funds including the Canadian Pension Plan Investment Board, the largest in Canada, has been the biggest supporter for the change. Should the FIRPTA law include this exemption it will cost the U.S. government approximately $2 billion in lost tax revenue over the next decade. However, the flurry of foreign investment would far surpass the losses.

Klueger & Stein, LLP are keeping our international clients informed of any changes to FIRPTA that may affect their foreign pension funds and investment portfolios.

CONCLUSION

The FRA (Financial Repression Authority) believes that a historic stimulus plan currently on the US public policy drawing board is aimed at US Infrastructure Investment.The above article confirms our belief about the degree of backroom “crony capitalism” Public-Private Partnership negotiations that have been going on. It will of course be sold to the US electorate after the 2016 election as being targeted at creating jobs and stimulating an economy rapidly falling into recession. However, the real truth is about the massive transfer of wealth needed from pensions to support US government debt financing. Separately, the recent formation of the $51T AIIB (Asian Infrastructure Investment Bank) is an indicator of what the global strategists see as mandatory to keep a rapidly weakening global economy on “life support”.

Gordon T Long

Co-Founder, 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.

The Financial Repression Authority has consistently shown that Regulatory changes which “Ring Fence” US investors choices is a cornerstone of the Macro-Prudential Policy of “Financial Repression”. Through stealth programs like FATCA and PFIC the US government has steadily and quietly limited Americans ability to take cash out of the country and to invest abroad, other than through profitable public exchange traded products sold by the financial industry.  However, it is one thing to shut the doors to American investing abroad but it is quite another to fully open the doors to foreigners! It begs the question why, why now and why the change needed to happen so urgently?

This week, as the BOJ, ECB and PBOC all continued to aggressively expand credit  the Federal Reserve was “full ahead” in the process of withdrawing approximately $1 Trillion of liquidity to achieve its December FOMC decision to increase the Fed Funds rate by 0.25%. To counteract this policy initiative and the alarming collapse in the HY & IG bond market, the US government immediately opened the floodgates to easy foreign credit in a major policy reversal. A policy decision which was rushed through congress with almost no time for congressional debate. Obviously what was not lost on the White House was the fact that the now troubled $2.2 Trillion of High Yield bonds peddled to yield starved investors since the financial crisis matches 2/3’s of the $3.5 Trillion increase in the Federal Reserves balance sheet during the same period.

FIRPTA was implemented during a better era for Americans in response to international investors in the late 1980s and early 1990s buying U.S. farmland, as well as the more publicly visible buying of trophy U.S. property by the Japanese.  The US government has now expediently waived FIRPTA.

Bloomberg reports:

President Barack Obama signed into law a measure easing a 35-year-old tax on foreign investment in U.S. real estate, potentially opening the door to greater purchases by overseas investors, a major source of capital since the financial crisis.

Contained in the $1.1 trillion spending measure that was passed to avoid a government shutdown is a provision that treats foreign pension funds the same as their U.S. counterparts for real estate investments. The provision waives the tax imposed on such investors under the 1980 Foreign Investment in Real Property Tax Act, known as FIRPTA.

“FIRPTA has historically made direct investment in U.S. property a non-starter for trillions of dollars worth of foreign pensions,” said James Corl, a managing director at private equity firm Siguler Guff & Co. “This tax-law modification is a game changer” that could result in hundreds of billions of new capital flows into U.S. real estate.

Foreign investors have flocked to U.S. real estate since the global economic meltdown, drawn by the relative yields and perceived safety of assets from office towers and shopping centers to apartments and warehouses. The demand has helped drive commercial real estate prices to record highs. Many foreign investors structured their purchases to make themselves minority investors and bypass FIRPTA.

REIT Purchases

The new law also allows foreign pensions to buy as much as 10 percent of a U.S. publicly traded real estate investment trust without triggering FIRPTA liability, up from 5 percent previously.

“By breaking down outdated tax barriers to inbound investment, the FIRPTA relief will help mobilize private capital for real estate and infrastructure projects,” Jeffrey DeBoer, president and chief executive officer of the Real Estate Roundtable, an industry lobbying group, said in a statement.

Cross-border investment in U.S. real estate has totaled about $78.4 billion this year, or 16 percent of the total $483 billion investment in U.S. property, according to Real Capital Analytics Inc. Pension funds accounted for about $7.5 billion, or almost 10 percent, of the foreign total, according to the New York-based property research firm.

“Foreign pensions are such a low percentage of foreign investment in U.S. real estate because of FIRPTA,” Corl said.

Investment Surges

Foreign investment has surged from just $4.7 billion in 2009, according to Real Capital. Foreign buying this year as a percentage of total investment in U.S. real estate is about double the 8.1 percent average in the 10 years through 2012.

Despite a perception that FIRPTA was a response to the wave of Japanese buying of trophy U.S. property in the late 1980s and early 1990s, including Rockefeller Center and Pebble Beach, the act was actually passed in 1980 in response to international investors buying U.S. farmland. Under old rules, foreign majority sellers had to pay 10 percent of gross proceeds from the sale of U.S. real estate as well as additional federal, state and local levies that could increase the total tax burden to as much as 60 percent, according to the National Association of Real Estate Investment Trusts.

The change “is a huge deal,” said Jim Fetgatter, chief executive of the Association of Foreign Investors in Real Estate. “There’s no question” it will increase the amount of foreign investment in U.S. property, he said.

WARNING

The FRA predicts that Americans will face significant increases in US property taxes over the next five years starting in 2016. With the change in FIRPTA Americans should additionally expect property values to increase in 2016-2017.

Clearly, foreigners, the “1%” and property owners will all gain from this, but most Americans will simply face significantly increasing property taxes on elevated asset values to fund the ever increasing government debt burden.

Americans owning a house can be expected to initially focus on their net worth being higher, and not that they once again will have even less disposable income. Some will learn painfully why the number one killer of small business is cash flow, not profits..

Gordon T Long

Co-Founder,

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.

Bill Laggner is the Principal and Co-Founder of Bearing Asset management in Dallas, TX. Mr. Laggner and his partner manage the Bearing fund using an Austrian School of Economics lens in terms of identifying boom-bust cycles, value in the market place, bubbles, and distortions created by both fiscal and monetary authorities.

“We started back in 2002, creating the Bearing credit index when we say that authorities would not let the recession play out”

On describing the Austrian School of Economics, Bill says that Austrian economists would categorize their theory as human action and individual decision making and their responsibilities of those decisions being what really creates normal economic activity. He points out how unfortunate it is that today we have fiscal and monetary intervention which distort human actions.

“We create these boom-bust cycles that are magnified by the very interventions that we’re witnessing today”

SAVINGS & PROPER ALLOCATION OF THOSE SAVINGS

Bill thinks that one of the key aspects of the Austrian economic theory that investors should pay attention to is that one has to have savings and a proper allocation of those savings. He also says that people have to quantify both risks and return as well.

“In that environment as well, you would want interest rates to be set by the market place and not a group of bureaucrats who are essentially socializing credit”

On whether we have an inflation or deflation right now: There is a lot of discussion about inflation in the Austrian theory in terms of the phenomena comes about in terms of pricing, in  light of that we have deflation in commodity prices which was a function of the excess supply created by false signals coming out of China. According to Bill we are facing a deflationary state as of right now.

Bill thinks China and Glencore are the canaries in the coalmine when it comes to credit cycles in the commodity market.

CREDIT CYCLE HAS TURNED

Gord states that the credit cycle is now changing, taking its signals from the business cycle. Bill agrees with Gord, saying:

“We’re at the end of the credit cycle, the whole mal-investment in shale oil…tens of billions of dollars in lost wealth”

For the future, Bill anticipates a massive series of defaults, resulting from huge deflationary pressures and a tightening by the market place, which is basically an unintended result of constant intervention. We are looking at corporate bond defaults, sovereign defaults which will send shockwaves into the currency system.

“We’re probably looking at some kind of new currency system, which looks likely to be gold”

At Bearing Asset Management: They run an aggressive, long-short portfolio.

Bill points out even in the turmoil we’re in he remains optimistic. He thinks that technology will be the savior as the wheels are coming out from the bus, looking at how the internet connects people all over the whole who do business daily.

“We’re coming to a realization that we can look to each other and share expertise, knowledge, goods and shy away from things like speculating in commodities, speculating in real  estate, speculating in the stock market and get back to pricing money correctly.”

“The beauty of America is that the entrepreneurial DNA in this country is unlike any other part of the world.”

Gord mentions that if we could take away centralized control and planning from the planners and controllers in a logical fashion, adjustment will happen. He says that “a crisis is nothing but more than change trying to happen.”

If people want to get more information and insight from Mr. Bill Laggner, they can go to bearingasset.com/blog. They write a lot about relevant topics relating to wealth and the financial markets.

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.

QUESTION: Can you relate some of your career background in portfolio management and a general description of your investment approach?

ANSWER: I’ve been very fortunate. I’ve only had one job….and have been with the same firm since the beginning, when I turned 21, in 1976. It’s nearly 40 years of managing money for the wealthy. I strive to provide solid investment advice, high levels of service and the confidentiality clients have grown to expect. I am solely responsible for asset allocation and selection for my discretionary clients…. My niche stays within the bounds of retail, working directly with families helping them to achieve their goals. Every year, I am challenged by the change in our economic environment, the continued changes in technological advancements and how these and other factors relate to client allocations. Recently I stepped down as President of The Portfolio Manager’s Institute; Currently I serve as co-Chair of Morgan Stanley’s National Financial Advisory Council. I am proud to say that over 50 families have relied on my advice for over 25 years, some longer. By any measure, it’s been quite rewarding

QUESTION: Can you comment on your currently relating to the recent much talked about Federal Reserve policy statements and interest rate direction and how these could affect the financial markets

ANSWER:- Morgan Stanley’s Global Investment Committee supports that interest rate normalization will provide headwind for investors using bonds for principal preservation, as rates rise its likely longer duration bonds will fall.  We show the total return impact of a 1% rise in rates can impact a 30 year bond by a negative 17.9%; which is tremendous. To show the range, if you own a 2 year bond a 1% rise in rates has a negative 2% impact.

– Typically after interest rate hikes the companies with the strongest balance sheets that do not rely on floating debt fare the best

– Rate hikes will likely lead to a rise in interest income on deposit which should help those with larger portions of savings in the bank

– In this environment, Morgan Stanley’s GIC expects housing, mid/lower tier retail, airlines, hotels and leisure’s to benefit. Additionally, we see value in consumer finance and regional banks as consumer confidence is boosted

– It is important to note, we see the initial tightening as a signal of self-sustainability, not the end of economic expansion.

QUESTION: What are the challenges with portfolio management for clients in today’s environment resulting from and characterized by 0% or even emerging negative interest rates?

ANSWER:

– Income more difficult to provide clients, in a zero rate environment many will suggest high yield corporate bonds and leveraged loans to supplement traditional fixed income but many clients are not willing to sacrifice quality for a higher yield.

QUESTION: Do you see any unintended asset price distortions in the financial markets resulting from an extended period of virtually 0% interest rates and from quantitative easing (QE) by many central banks worldwide?

– We found that as the cycle has matured security selection based more heavily on credit quality created dispersion in spreads and opportunities for further security selection. In addition, we see credit spreads have widened significantly creating opportunity for credit selection.6

QUESTION: What types of generic investment classes and investment approaches make sense in today’s environment characterized by very low interest rates, low yields, volatile capital markets, emerging regulations and international capital controls in many jurisdictions including the United States?

ANSWER:

– Morgan Stanley’s GIC continues to recommend equities over fixed income. Within the US we prefer technology, financials, consumer/housing related products and industrials. If you are an investor that is looking for fixed income we would recommend below-benchmark duration and find the US high yield market attractive.

– In this environment, Morgan Stanley’s GIC expects housing, mid/lower tier retail, airlines, hotels and leisure’s to benefit. Additionally, we see value in consumer finance and regional banks as consumer confidence is boosted

QUESTION: Do you advise international and geographical diversification to your clients and if so how can this be factored in to the investment process?

ANSWER:

– While personally I do not have a large diversification to international it is definitely a theme you are seeing in today’s investment sphere.

– Europe is getting the support from the ECB with quantitative easing and the GIC expects European equities to continue outperforming in 2015.

Additional Commentary

– Lower energy prices help drive increase in consumer spending despite weak wage growth in 2014. Lower unemployment levels should lead to stronger wage growth going forward

– bullish on housing – We see US consumer confidence at an eight-year high based on the University of Michigan, Consumer Sentiment Index supporting the strength of the middle class and US economy going into 2016.

The individuals mentioned as the Portfolio Managers are Financial Advisors with Morgan Stanley participating in the Morgan Stanley Portfolio Management program. The Portfolio Management program is an investment advisory program in which the client’s Financial Advisor invests the client’s assets on a discretionary basis in a range of securities.  The Portfolio Management program is described in the applicable Morgan Stanley ADV Part 2, available at www.morganstanley.com/ADV or from your Financial Advisor.

Ronnie Sax is a Financial Advisor with Morgan Stanley Global Wealth Management in Bethesda, MD. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

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.

The head of supervision at the central bank of Italy says the bail-in rules which impose losses on bank investors, bondholders & bank account holders if the bank needs to be rescued can undermine the confidence of small savers or investors in the banking system .. “The bail-in can exacerbate – rather than alleviate – the risks of systemic instability caused by the crisis of individual banks .. It can undermine confidence, which is the essence of banking; transfer the costs of the crisis from government at large to a smaller category of people no less worthy of protection – small investors, pensioners – who directly or indirectly invested in bank liabilities.”

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.

click to enlarge

It’s another example of the unintended consequences of financial repression – the risk of not being able to sell the fund you are invested in, or in not being able to get the money after selling your fund, either immediately or within a certain period of time .. Deutsche Bank has prepared the above infographic (click to enlarge) which summarizes the main choke points which predispose both funds to runs or outright shutdown.

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.

Yra Harris: Read “The Rotten Heart of Europe”!

FRA co-founder Gordon T. Long deliberates with Hedge Fund Manager, Yra Harris about the effects of financial repression and the imminent credit event. Harris is a macro Global Trend Trader and publisher of the Blog Notes From the Underground.

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.

Yra Harris is a recognized global trader who 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.

FINANCIAL REPRESSION

“The way governments repay the interest on their debt.”

When governments borrow money, they do not want to pay back the money at any real market rate, instead they artificially hold rates down to pay off creditors. It is about the size of the government debt and being able to debase it; pay it off in less value.

“Financial repression has led to serious inequalities.”

It begins with Tim Geithner, bailing out Wall Street and banks as opposed to bailing out main street. Financial repression has focused its effects on the savers, the people who have been saving for retirement are being seriously damaged and forced to go into the stock market.

A recent paper, The Hidden Cost of Zero Interest Rate Policies by, Thomas Coleman and Laurence Siegel report “Zero interest rates cost $5 trillion per year, or rather 5% of GDP from savers that is being transferred to other entities.[1]”

“When there is too much debt, all financial authorities have a chief goal, and that is to create inflation.”

Many people have called Geithner out on his ill-advised actions. Everybody fell in line with the ‘you have to protect Wall Street’ way of thinking, and to a certain degree that is true. The first QE was mandatory because you had to prevent the mass liquidation of assets. The lessons from the 1930s boldly taught us that the US cannot take such an immense liquidation of assets. People need to begin equating what is the real return on their money, which is the true financial repression because all zero interest rates do is culminate into inflation; the best friend of debtors.

FUTURE RAMMIFICATIONS WITH THE FED

“The French are tired of being ‘Germanized’”

The proof will be what will happen in the yield curve. If the curve were to flatten further the equity markets will retaliate. What the yield curve does, what the dollar does and finally what gold does when the Fed raises rates will be the three indicators we must keep an eye on.

Is it going to be the German euro or the French euro? Germans are hard money advocates because they are savers, and right now what is happening in Europe is the ultimate financial repression. German savers are being severely hurt in order to bail out the rest of Europe. The euro was at 82 cents in 2001 and 2002 because the Germans needed a weak euro in order to get all the labor reforms that were being put in place. They played this card upon the ECB and they got what they wanted.

THE IMPENDING EVENT

“There is something right now eating at the debt markets. It may be in the mining or energy sector, but this market right now is scared of some credit event that it lurking out there.”

There is a credit event somewhere going on, it is evident by how the markets are acting. What is dangerous is that it is taking place now, during the holidays and anything that happens will therefore be magnified. The stock markets are off, if you look at the coordination of them, they are all out of place.

The Fed is aware of this so they must ask what it is that they are not seeing. I will not be surprised if come this Wednesday, they will not raise rates. If the Fed does not raise rates on Wednesday, the stock markets will have a high sell off because people will think what it is that the Fed knows.

Richard Cue has done great work, he has recently written about recent debt developments throughout the world. The debt structure which is supposed to be handled hasn’t been dealt with at all, and the greatest error you can make; borrowing to buy back your stock.

As soon as corporation free cash flows starts to erode, that debt becomes a major issue. We have had a run on this fictitious financial engineering of buybacks that will boomerang and it may be violent. There are symptoms of debt overhang, and global slowdown will reveal to us the weak players that took on too much debt.

[1] Thomas Coleman and Laurence Siegel. The Hidden Cost of Zero Interest Rate Policies, Sept 28 2015.

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

Cumberland Advisors’ Chief Investment Officer David Kotok highlights the plight of 4 banks in Italy rescued by the government, causing many to lose their life savings in the process .. “The bailout was carried out under the principles which governed Cyprus’ bailout. All of the stakeholders in the bank, including depositors, were at risk in the banks’ failure .. The Italian banking system is in serious trouble, and the failure of these four banks is simply the tip of the iceberg. Non-performing loans, loans that debtors are not paying off as agreed, but which have not yet been written off by the banks, have been rising. At this point 18% of all outstanding loans in Italy are non-performing. That is an extraordinarily high level, particularly when you consider that Italy is the eighth largest economy in the world and the fourth in Europe.” .. Kotok speculates that a contagion risk connection looms between the issues in Europe & the high-yield sector in the U.S. .. Kotok advises investors these words of wisdom to mitigate the risks: “If you cannot see it, don’t buy it. If you do not understand it, don’t buy it. It you cannot trade it with liquidity, avoid it. If you violate any of these rules, make sure you are getting additional compensation for the risk you are taking. In Italy, these are now proven to be three sound principles. In the U.S., the same rules apply.”

Article by David Kotok, Co-Founder and Chief Investment Officer of Cumberland Advisors

LINK HERE to the article
LINK HERE to the referenced 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.

Our FRA video guest, Graham Summers of Phoenix Capital Research reports that it will be much, much harder to get your money out during the next crisis:

Consider the recent regulations implemented by SEC to stop withdrawals from happening should another crisis occur.

The regulation is called Rules Provide Structural and Operational Reform to Address Run Risks in Money Market Funds. It sounds relatively innocuous until you get to the below quote:

Redemption Gates – Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate).  To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests.  A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier.  Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period…

Also see…

Government Money Market Funds – Government money market funds would not be subject to the new fees and gates provisions.  However, under the proposed rules, these funds could voluntarily opt into them, if previously disclosed to investors.

http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542347

In simple terms, if the system is ever under duress again, Money market funds can lock in capital (meaning you can’t get your money out) for up to 10 days. If the financial system was healthy and stable, there is no reason the regulators would be implementing this kind of reform.

As Zero Hedge noted earlier today, the use of “gates” is spreading. A hedge fund just suspended redemptions… meaning investors cannot get their money out. Expect more and more of this to hit in the coming months as anyone who is has bet the farm on the system continuing to expand gets taken to the cleaners.

The solution, as it was in 2008, will not be to allow the defaults/ debt restructuring to occur. Instead, it will be focused on forcing investors to stay fully invested at whatever cost.

This is just the start of a much larger strategy of declaring War on Cash.

This is part of one of the pillars of Financial Repression that the FRA refers to as “Regulatory Ring Fencing”

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

In 2006, he joined Vienna-based Erste Group Bank, covering International Equities, especially Asia. In 2006, he also began writing reports on gold. His six benchmark reports called ‘In GOLD we TRUST’ drew international coverage on CNBC, Bloomberg, the Wall Street Journal and the Financial Times.

He was awarded 2nd most accurate gold analyst by Bloomberg in 2011. In 2009, he began writing reports on crude oil. Ronald managed 2 gold-mining baskets as well as 1 silver-mining basket for Erste Group, which outperformed their benchmarks from their inception. In 2014 he published a book on Austrian Investing, Austrian School for Investors – Austrian Investing Between Inflation & Deflation.

AUSTRIAN INVESTING BETWEEN INFLATION & DEFLATION

“For an investor it is critical to understand we are not in a cyclical crisis; we are in a systemic crisis.”

Well I have to admit I am not an economist which is why I am open to the Austrian school of economics Complex econometric models that try to forecast future models simply do not work, the 2008 financial crisis is an example of that. The Austrian school of economics simply described is “common sense economics.”

As a practitioner we are writing about the theory of the Austrian school of economics. It is a book dedicated to the practitioners of the Austrian school. What I want to point out is that the Austrian school has a completely different view when it comes to inflation and monetary systems.

For Keynesian economists inflation is simply a rise in prices. There is no point in discussing the details of inflation, however for Austrian economists it is an increase in the money supply.

The Austrian school shows the new monetary system which began august 1971, when President Richard Nixon suspended the convertibility of the dollar into gold. Since this was done we have seen major misallocation of capital.

“This interplay between inflation and deflation is crucial to understand, this refers to the term, monetarytectonics.”

“If you have an Austrian mindset, you have a great advantage.”

You are able to understand other currencies, thinking outside the fiat money system and as an investor focus on the real results not the nominal results you make.

THE CHANGING CREDIT CYCLE

 “In 2016, we very well may face a recession.”

For an Austrian a recession is something that’s normal, it is like a fitness program that prepares the economy for the next stage up. Trying to avoid such a recession will be difficult as QE, fiscal stimulus, monetary stimulus and low interest rates only make the situation more severe.

“The credit cycle leads the business cycle and therefore the fed will have a hard time fighting this falling trend in economic activity.”

To fight against it, negative rates in the US might be implemented. Many academic studies in the US say that evidence from Europe shows that negative interest rates work. The Fed may very well consider implementing negative interest rates. We will see increasing fiscal stimulus. There are many voices saying we should introduce helicopter money, but rather is it now called The People’s QE.

INVESTING ADVICE FROM THE BOOK

1. To have a nonfragile portfolio, and investing in your own skill set offers a great yield.

2. A good investor separates from a bad one in times of crisis.

3. Become an entrepreneur, the Austrian school greatly encourages entrepreneurship.

4. The Austrian school is very modest in saying we cannot predict the future but be prepared for all scenarios.

5. It is highly recommended to read Austrian School for Investors – Austrian Investing Between Inflation & Deflation. Many people have interpreted it as a philosophical book that attempts to cultivate and establish this Austrian mindset. It is a pragmatic school of thought which offers great benefits if implemented, and this book is the perfect guide to it.

Abstract written by Karan Singh karan1.singh@ryerson.ca

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

FRA’s Co-Founder Gordon T. Long interview Thomas Coleman and Larry Siegel on their paper, The Hidden Cost of Zero Real Interest Rates. Thomas Coleman is the executive director of the center of economic policy at the University of Chicago Harris School of Public Policy and has spent most of his career in the financial industry mainly in research, trading and model development for derivatives and trading other fixed income derivatives. Larry Siegel is the research director at the research foundation of the CFA institute and also the senior advisor at Ounavarra Capital. He is also an author and public speaker.

$1 TRILLION or 5% per Year Taken From US Savers

On financial repression Larry describes it as the use of market prices, in particular interest rate to transfer resources from party A to party B in this case from savers to government. According to him the government can then borrow at rates that are extraordinarily low and not a reflection of the true value of the money to the lenders.

On the paper, Thomas explains that there are 3 highlights. The First is detailed from a historical perspective. He says that from looking at history we can see that nominal rates are low by historical standards. According to him what really matters are real interest rates. He mentions that when taking into account nominal interest rate and inflation we currently have real interest rates as minus one percent. This means that the real value of saving in a zero rate deposit would be a loss in value at about one percent a year.

“Financial repression is a disastrous ongoing strategy”.

Thomas mentions that one of the costs of a negative real interest policy is that negative real rates potentially distort decision making. He explains that the real interest rate is the price that determines how much we consume or how much we want to consume, the price of consumption today versus consumption in the future and how such a policy disrupts such decisions. Thomas stresses that it is the real interest rates that matter and that one of the reasons nominal rates has gone down below zero especially in Europe is because inflation has trended lower.

“Businesses decide whether to undertake a project based on whether the return they expect to make on the project is greater than the cost of capital. If you force the apparent cost of capital low enough through a low interest rate policy a lot of projects will look good and profitable that aren’t if you applied a normal cost of capital to that product so this motivates businesses and consumers to do a lot of things they shouldn’t be doing”.  –Larry

On trying to understand the wealth transfer from savers to borrowers, Thomas likens it to an implicit tax. He says that it is more than just a transfer from households to government but also from one set of households to another, from older to younger there by reinforcing the idea that negative real interest rates are potentially a distortion to  the price of consumptions today and consumptions tomorrow and also what we save today versus spend today. The troubling thing with all this according to him is the potential distortions that arise as a result of a negative real interest policy.

Abstract written by Chukwuma Uwaga – chuwaga@gmail.com

PAPER:   The Hidden Cost of Zero Interest Rate Policies

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.

Finland Government Officials Propose to Give Tax-Free Payout of $870 to Every Citizen Each Month.

As a way to improve living standards and boosts its economy, the nation of Finland is moving closer towards offering all of its adult citizens a basic permanent income of approximately 800 euros per month.

The monthly allotment would replace other existing social benefits, but is an idea long advocated for by progressive-minded social scientists and economists as a solution—counter-intuitive as it may first appear at first—that actually decreases government expenditures while boosting both productivity, quality of life, and unemployment.

“For me, a basic income means simplifying the social security system,” Finland’s Prime Minister Juha Sipilä said last week.

Though it would not be implemented until later in 2016, recent polling shows that nearly 70 percent of the Finnish people support the idea.

According to Bloomberg, the basic income proposal, put forth by the Finnish Social Insurance Institution, known as KELA, would see every adult citizen “receive 800 euros ($876) a month, tax free, that would replace existing benefits. Full implementation would be preceded by a pilot stage, during which the basic income payout would be 550 euros and some benefits would remain.”

Read more at http://globaleconomicanalysis.blogspot.com/2015/12/bernankes-helicopter-drop-hits-finland.html#aTG3KkokT0goe1Ia.99

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 Fed’s in a bind

ALASDAIR MACLEOD 3 DECEMBER 2015

One can understand the Fed’s frustration over the failure of its interest rate policy, and its desire to escape the zero bound.

However, since the FOMC has all but said it will increase rates at its December meeting, events have turned against this course of action. The other major central banks are in easing mode, and the slowdown in China has further undermined both world trade flows and commodity prices. The result has been a strong dollar, which has effectively eliminated any perceived need for higher dollar interest rates. Meanwhile, the US’s non-financial economy remains subdued.

Last August, a similar situation existed, when the FOMC signalled that a rise in the Fed Funds Rate might be announced at its September meeting. Ahead of it, China revalued the dollar by announcing a small devaluation of its own currency, taking the wind out of the Fed’s sails. While the talking heads saw this as a failure of Chinese financial policy, it was nothing of the sort. Given the US was dragging its feet over the yuan’s inclusion in the SDR, it was a salvo in the financial war between the two states, and the Fed found itself in the firing line.

Since then the pressure has been mounting from the IMF for the US to back down over the SDR issue. The result was announced only this week, with the dollar content hardly changing and the yuan being accommodated mostly at the expense of the euro from September next year. However, despite the SDR issue having been dealt with for now, the Fed appears to have very little room for manoeuver before higher interest rates will give rise to a new financial crisis.

The chart below illustrates the problem. It is of the Fed Funds Rate since 1980 and the Fiat Money Quantity, which simply put is the sum of the commercial banks’ reserves at the Fed, plus cash and sight deposits held at the banks.

From the mid-eighties, successive interest rate peaks (the pecked line) have declined to the point, which if the trend continues, would indicate a Fed Funds Rate peak today of roughly 3%. It is clear that the reason for this declining trend is the increase in bank-related debt, the principal counterpart to FMQ, and the interest burden it places on borrowers.

This trend of declining interest rate peaks was established before the Lehman crisis, when the Fed’s response was to rapidly expand its balance sheet. The result is FMQ growth accelerated from a compounding annual rate of 5.8% to 14%, taking FMQ to 70% above the previous long-term trend today. It would therefore require a far smaller increase in interest rates than indicated by the pecked line to tip the monetary system into a crisis, perhaps a Fed Funds Rate of as little as 1%.

The idea that we can be so precise about interest rate levels is obviously nonsense. If the Fed increases the Fed Funds Rate even slightly, non-financial borrowers often end up paying a significantly higher rate that includes a larger interest rate spread. The spread between interbank and corporate borrowing rates becomes an important indicator of financial stress, and junk bonds are already signalling deteriorating borrowing conditions. Just the threat of higher interest rates could turn out to be destabilising for the financial sector.

A problem of the financial sector’s own making

The key metric which has permitted debt to increase at such a pace is the declining rate of price inflation. This rate has not responded to monetary inflation as one would expect, having continually fallen from the high rates of the late ‘seventies, while the quantity of money and credit has increased significantly. The reason the rate of price inflation has declined is that by taking over the securities industry in the 1980s, the banks have been able to combine their licence to create credit out of thin air with the direct application of this credit into financial instruments. The result has not only been extremely profitable for the banks, but it has diverted excess credit from less profitable non-financial activities.

This partly explains why banks have increasingly neglected commercial and retail customers, concentrating capital allocation into investment banking. The effect has been to generally confine price inflation to assets, such as stocks, bonds and property. At the same time consumers have been packaged through securitised bulk lending for mortgages, student loans, credit cards and motor loans. Any pretence that banks exist to provide a service for customers has flown out of the window.

At the same time, this credit and securities duopoly has given the banks the ability to magically create paper substitutes for physical commodities through the futures markets, suppressing prices to levels below where they would otherwise be. In turn, this has reduced the pressure on price inflation for consumer goods. The decline in price inflation over the last thirty-five years is therefore the combined result of suppressed commodity prices, the reduced expansion of credit available to non-financial sectors, as well as favourable changes in statistical methods.

The declining trend of interest rates has been crucial for the profitable expansion of financial activities for their own sake. Since assets are valued with reference to interest rates, the falling trend in interest rates since the mid-eighties has delivered large profits to the banks and their financial customers.

The ground-level which inhibits further credit expansion is zero interest rates, a condition that has existed for seven years. Despite talk of negative rates, the impetus lower interest rates give to expansion of the financial side of the economy has already come to an end. Attempts by the Fed to raise interest rates, even slightly, should be considered in this light.

The next financial crisis could manifest itself in the coming months. The time-line of monetary expansion reflected in the chart above is at risk of being terminated by events. If so, it will mark the end of current central bank monetary policies and state control of markets, as free markets reassert realistic pricing. Government bond yields will normalise, stock markets will fall, and banks will almost certainly fail. Supressed commodity prices will rise as banks, short through paper contracts, will be forced to close their positions. Credit default swaps, where the banks are collectively exposed to losses when interest rates rise, will be a further source of grief.

When something as epochal as this happens, we can expect the macroeconomic establishment to be clueless with respect to the problem itself and its scale. Central banks will naturally revert to the Lehman remedy of further monetary expansion to cover the losses, whose enormous scale will not be apparent at the outset. This time, not only will the fiat money quantity accelerate into hyper-drive, it will be impossible to maintain the purchasing-power of the world’s reserve currency, therefore threatening that of all the others.

This month’s FOMC rate decision will not change this outlook, but it could bring forward the timing.

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.

European Central Bank will step up efforts to support economy, says Mario Draghi

Speaking a day after the ECB’s moves to expand stimulus fell short of market expectations, the central bank president said that he was confident of returning to that level of inflation “without undue delay”.

“But there is no doubt that if we had to intensify the use of our instruments to ensure that we achieve our price stability mandate, we would,” he said in a speech to the Economic Club of New York.

“There cannot be any limit to how far we are willing to deploy our instruments, within our mandate, and to achieve our mandate,” he said.

source: tradingeconomics.com

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Are We Stealing from SAVERS to Allow the Government & Corporations to Accelerate Borrowing?

$1 TRILLION/ Annually or 5% of GDP

READ: The Hidden Cost of Zero Interest Rate Policies September 28, 2015 by Laurence B. Siegel and Thomas S. Coleman

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.

“Central banks are casinos. They print money as if they were manufacturing endless numbers of chips that they’ll never have to redeem. Actually a casino is an apt description for today’s global monetary policy .. Central banks haven’t really succeeded – this is a testament to what I and others have theorized for some time. Martingale QE’s and resultant artificially low interest rates carry distinctive white blood cells, not oxygenated red ones, as they wind their way through the economy’s corpus: they keep alive zombie corporations that are unproductive; they destroy business models such as insurance companies and pension funds because yields are too low to pay promised benefits; they turn savers into financial eunuchs, unable to reproduce and grow their retirement funds to maintain expected future lifestyles. More sophisticated economists such as Kenneth Rogoff and Carmen Reinhart label this ‘financial repression’. Euthanasia of the saver is the result if it continues too long .. Timing is the key because as gamblers know there isn’t an endless stream of Martingale chips – even for central bankers acting in unison. One day the negative feedback loop on the real economy will halt the ascent of stock and bond prices and investors will look around like Wile E. Coyote wondering how far is down. But when? When does Martingale meet its inevitable fate? I really don’t know; I’m just certain it will.”

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.

Mises Institute posted essay refers to the recent letter to the Federal Reserve from the “savers of America” written by Ralph Nader .. the letter emphasizes how savers & retirees have been shafted by very low interest rates on bank accounts & fixed income investments .. it’s financial repression .. it’s the result of the unintended consequences of central bank & government policies & financial reform/regulations .. the essay makes a few great points to counter those seeing the “positive” short-term boom aspects of central bank money printing: “If Yellen is asserting that things are more affordable because it’s easier to borrow cheap money, then she’s just ignoring the trade-offs involved. Low interest rates and inflation mean that people must borrow more because it’s far more difficult to save under those conditions. Yes, debt is cheaper, but people must also take on more debt because it’s so difficult to save or make money off investments unless you’re not already rich. And, of course, this just applies to people who are at a stage of their life where it makes sense to take on more debt. If you’re old or on a fixed income, all you’re getting from the Fed is a huge ‘screw you.’ Moreover, when it comes to affordability of everyday, things, who is Yellen kidding? Home price growth and rent growth are at historic highs. Are we to believe that immense growth in rents and mortgage payments (the largest single expense for families) are a good thing for families? For people who already own homes, rising home prices are often a hurdle that can be overcome. But for people who don’t already own real estate, there’s little hope of buying one under these conditions. Surely, the Fed has played no small part in driving the homeownership rate in America down to a 30-year low. And again, if you’re retired: good luck. You’re gonna need it. Yellen no doubt believes that wages are higher because of Fed intervention. But in a world of sky-high rents, real wages are in fact lower.”

LINK HERE to thehttp://www.cliffkule.com/2015/11/the-federal-reserves-stimulus-hurts.html 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 interviews Brett Rentmeester on Austrian economics and the importance of having an entrepreneurial mindset in investment.  Brent Rentmeester is the president of Windrock Wealth Management and has been in the wealth asset management for over 18years. Mr Rentmeester believes the uniqueness of Windrock is its focus on the macroeconomic picture, Austrian economics and what it all means for investment implications as well as an entrepreneurial mindset on how to find investment opportunities.

The Austrian school to him is the “acknowledgement of the influence that central banks have on the business cycle and interest rate and therefore the opportunities left for investment”.

He mentions that the traditional stock, bond portfolio is under a lot of challenge going forward because there is no real and safe income anywhere today. As a result people are becoming speculators and risk takers even when they don’t want to.

Brett believes having an entrepreneur mindset when investing, is the key to addressing the dilemma of income and the future of investment. Secure private lending is lending money to borrowers that is backed by real tangible assets or an income stream. According to him, what makes this a unique category is that it addresses the pockets of lending that is being neglected by the big banks as a result of  the financial banking distress that took place in 2008.

On examples of secure private lending, Brett highlights 3 different categories with his examples. He explains that in auctioned rental properties, the government organizations Fannie Mae and Freddie Mac by law are restricted from buying mortgages on such properties until after 2 years, this results in a niche market for private lenders. “In energy markets more states are moving towards a deregulated market”. What this means is that a consumer can buy energy from a variety of energy companies. Now this system is facilitated by third party brokers who go door to door offering this energy from various energy companies. Now because the brokers want the commissions up front and the energy companies can’t provide it, we see people coming in to pay the brokers a discounted fee upfront and then agree to collect the 3year contract provided by the energy companies.

Trade financing

“Global trade happens between different parties but often times it’s financed by big banks, trade receivables. So one party needs to buy goods and a supplier supplies them but someone’s got to finance that transaction and it’s often the third party bank”.

Due to new regulations, banks are required to reserve more capital in such situations, as a result an opportunity is created for private money to finance the transaction between the customer and supplier.

“Rather than taking on more risk you don’t have to today, you just have to be more creative”

– Gordon. T. Long.

Brett echoes this sentiment saying:

“So much of the industry and investors think in a very narrow box of stocks, bonds and maybe hedge funds but there’s a lot of things outside of that, that if you open your mind to the opportunities, are quite interesting to research”.

Abstract written by Chukwuma Uwaga – chuwaga@gmail.com

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.

Ellen Brown* elaborates on the emergence of negative interest rates around the world & why it is happening .. she identifies 4 European central banks now promoting negative interest rate (NIRP) .. for now the Federal Reserve & the Bank of Japan are still at zero interest rate policies (ZIRP) .. it’s all financial repression .. The stated justification for these policies is to stimulate “demand” by forcing consumers to withdraw their money & go shopping with it. When an economy is struggling, it is standard practice for a central bank to cut interest rates, making saving less attractive – “This is supposed to boost spending and kick-start an economic recovery.That is the theory, but central banks have already pushed the prime rate to zero, and still their economies are languishing. To the uninitiated observer, that means the theory is wrong and needs to be scrapped. But not to our intrepid central bankers, who are now experimenting with pushing rates below zero.” .. Brown concludes that the big driver for the move to negative interest rates & a war on cash is the idea that should the banks get into trouble again with another banking crisis, perhaps stemming from a derivatives crisis, the banks could then easily take bank deposits, given the fact that most deposits/cash would in banks & not outside of the banking system .. “And that may be the real threat on the horizon: a major derivatives default that hits the largest banks, those that do the vast majority of derivatives trading .. The promise of Dodd-Frank, however, was that there would be no more government bailouts. Instead, insolvent systemically-risky banks were supposed to ‘bail in’ (confiscate) the money of their creditors, including their depositors (the largest class of creditor of any bank). That could explain the push to go cashless. By quietly eliminating the possibility of cash withdrawals, the central bank can make sure the deposits are there to be grabbed when disaster strikes.”

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.