“Monetary policy does affect pricing in today’s market to such an extent that monetary policy itself has been a risk you have to watch .. Investors are focused more on monetary policy changes than has been generally the case, than at any time, as far as I can remember .. As anything that moves prices is a risk that has to be monitored, here the effects of monetary policy affect prices dramatically .. It’s of course always been the case with long rates, and now more significantly with the currency. That’s just a fact of the current market.”

– Yngve Slyngstad, chief executive officer of Norway’s $890 billion sovereign-wealth fund

Guy Haselmann of Scotiabank checks the definition of a free-market economy, confirms that is not what we have today .. given the financial repression of “regulatory macroprudential policies conspiring with zero (or negative) interest rates & asset purchases to exterminate the markets’ ability to freely calibrate clearing market prices based on supply and demand factors. It is impossible for central banks to sustain controlling influence on market sentiment, investor behavior, correlations, and valuations, simply because effectiveness wanes over time.” 

LINK HERE to the Article

Some pointers for investors in an environment of long-term 0% interest rates & worldwide QE programs .. “Stock and bond diversification alone will not be enough to adequately protect a portfolio” .. Scotiabank’s Guy Haselmann suggests:
1) It is time to find ways to preserve capital. Return of capital strategies now trump return on capital pursuits. 
2) Where possible, transition from financial to real assets .. such as, real estate, farm land, collectables, art, other non-correlated & less-cyclical assets.
3) Cash has never had better optionality or a lower opportunity cost.
4) I remain a bond bull in long U.S. Treasuries for regulatory, technical, fundamental reasons. 
5) Find companies & countries with low levels of debt & stable cash flows.
6) Despite recent bad press, alternative investments should be considered.
7) Place larger premium on market liquidity & counter-party risk.

Tim Price compares the approach being taken by the central bankers of the massively indebted western world to North Korea .. highlights how the rest of Asia has a bright future for economic growth, given its positive demographics & high savings rate .. “A combination of a Zero Interest Rate Policy, generalized financial repression and trillions of dollars, pounds, euros and yen all conjured out of thin air has failed to trigger inflation in the narrower CPI sense of the word. Central banks, in other words, have failed. Analyst and market historian Russell Napier of Cerno Capital suggests that ‘Central banks’ failure to reflate will be very damaging for the price of financial assets and will also ultimately trigger reflation from another source: the government.'” .. likes gold for protection against likely massive central bank monetary easing & government stimulus by the indebted western world in an attempt to generate inflation .. considers an outcome of ‘deflation followed by inflation’ to imply holding these investments: cash held at reputable and solvent banks, objectively creditworthy sovereign debt, inexpensive but high quality listed stocks, gold… concludes: “You would have thought that North Korea had done a reasonable job of invalidating the legitimacy of state socialism and central planning. Perhaps Janet Yellen, Mark Carney and Mario Draghi could go visit sometime. One way fares would suffice.”

In his latest letter, John Mauldin laments the failure of the Federal Reserve in its monetary policies: “The Fed is implicitly acknowledging again that their policy action over the past 5 years of putting the US economy on a sustainable growth path has been a failure and now if their international concerns become more pronounced, they will also admit to the world that they have no tools to deal with it. I think today’s decision was a bad one. The dollar rally should be over and I’m bullish on precious metals (again) as I don’t understand at all what the bear case is in it anymore. Other commodities should benefit too from the weak dollar.… Therefore be cautious, the Fed did more damage to its credibility today. We have a Federal Reserve that doesn’t trust its models and is running U.S. monetary policy on its understanding of a flawed academic theory.” .. goes on a tirade for what has been happening to savers, retirees & investors on the Federal Reserve’sfinancial repression:
I’m sorry to the retirees that have saved their whole lives. I’m sorry to the generation of young people that don’t know what the benefits of saving [are]. I’m sorry to the free markets that best allocate capital. I’m sorry to pension funds that can’t grow assets to match their liabilities. I’m sorry to the successful companies that are competing against those that are only still alive because of cheap credit. I’m sorry to the U.S. banking system, [which] has been hoping for higher interest rates for years. I’m sorry to those industries that have seen a pile of capital (aka, energy sector) enter their industry and have been or will see the consequences of too much capacity. I’m sorry to investors who continue to be bullied into making decisions they wouldn’t have made otherwise. I’m sorry for the bubbles that continue to be blown. Again, I’m sorry to those who don’t want to hear this.

Sylvester Eijffinger presentation on The Age of Financial Repression at the Global Economic Symposium in Kiel Germany this week .. sees financial repression  when governments implement policies to channel funds to the government (to address the challenges of government debt) where those funds would flow to other assets if government policies were absent .. references the Basel III regulation for banking capital adequacy .. “Basel III regulation stipulates that banks do not have to set cash aside against their investments in government bonds with ratings of AA- or higher. If they invest in government bond of their domicile countries, there is no need for buffers, even if the rating is lower” – this is financial repression .. another form of financial repression is making sure the real interest rates are negative .. “For a long time, direct or indirect monetary financing of budget deficits ranked among the most serious and damaging offences a central bank can do. Quantitative easing and ECB’s expanded asset purchase program are just fancy new names for direct and indirect monetary financing. The fact that central banks in the West engage in monetary financing, says a lot about the real degree of their independence from their governments. Those policies in combination with Basel III regulations and the fact that all of them are of long term nature, mean that financial repression is only set to get even worse and in any case will define the economic landscape for at least a decade.”

“Purportedly the Fed is ready willing and able to go to next step of financial repression insanity .. Negative interest rate proposals go one step further than inflationist policies of central banks down the rabbit hole .. There is absolutely no benefit with financial repression measures that further punish those on fixed income. The positive effects these clowns see are nothing but a mirage that will vanish as soon as asset bubbles collapse .. The problem is debt coupled with asset bubbles created by debt, yet the proposed solution is to make people spend more while taking away scarce resources of those who save .. It is stupid to attempt to force people to spend money on things they don’t want or need on the inane belief demand is too low and wasting money is the cure .. These economic idiots will never stop, which is one reason why I am firmly committed to gold over the long haul.” – Mish Shedlock

Essay makes the case that 0% interest rates – which translate to negative real interest rates after inflation – are a massive transfer of wealth from investors to governments & other borrowers around the world .. “We’ll show that the scale of the transfer is nearly $1 trillion per year in the U.S. alone and will argue that the zero-interest-rate policy lowers expected returns on stocks and real estate as well. Low interest rates hurt more than just investors. Everyone suffers because low rates distort consumption and investment decisions, potentially causing economic growth to be slower than it otherwise would be .. Negative real interest rates are a nefarious tax, punishing savers and depriving the economy of one of its primary sources of income .. Financial repression in this century is thus represented by the space between the zero axis and the red real-rate line. That is the ‘tax’ paid by savers due to the zero interest-rate policy. Actually, that is a low estimate of the tax because real interest rates are usually positive, representing a reward to the investor for deferring consumption .. What a mess. It will take teams of PhDs years to unravel all the distorted incentives, capital misallocations and foregone savings opportunities that emerge from the financial repression of the early 21st century.”

Laurence B. Siegel is the Gary P. Brinson director of research at the CFA Institute Research Foundation, and an independent consultant. Thomas S. Coleman is executive director of the Center for Economic Policy at the Harris School of Public Policy, University of Chicago. 

Icahn warns that the financial markets are being supported by unsustainable earnings outlooks .. what’s coming next will be “very dangerous and could be disastrous” .. emphasizes the need for corporate tax reform in the U.S. .. For the financial markets & the economy, Icahn says the core problem is the Federal Reserve & its ultra-easy, zero-interest-rate policy .. he argues that it was the Federal Reserve that got us into the financial crisis to begin with .. low rates (financial repression) have led corporate managers to employ financial engineering & accounting shenanigans to boost earnings per share.

Article highlights new financial repression measures by China – annual limitations on cash withdrawals outside China on China UnionPay bank cards ..  Cardholders, under the new rules, may withdraw a maximum 50,000 yuan ($7,854) in the last three months of this year & a maximum 100,000 yuan next year .. “The new rules could be the first in a series of measures leading to draconian prohibitions of transfers of money from China. Draconian prohibitions, in turn, could spark a global panic.” .. the article says the global financial community has been focusing on the wrong crisis in China – “Beijing’s efforts to prevent the collapse of equity values by massive purchases of stocks have received wide publicity since early July, but these purchases do not pose an immediate challenge to China’s technocrats.” .. the big crisis is about the currency – with outflows/inflows relating to the depreciation or appreciation of the currency .. “Beijing now finds itself in what looks like a no-win situation. If it does nothing, cash will continue to gush out of China. If, on the other hand, China acts to stem the outflow, it could make an already bad situation worse. Actions that are too radical can create a panic. Moves not radical enough will probably hasten outflows because holders of cash will think they have only a limited opportunity to transfer their wealth to safer jurisdictions. At this late date, confidence is eroding quickly, and China’s technocrats are finding their options narrowing and prospects dimming.”

International asset protection specialist Mark Nestmann does not see free markets – rather he identifies the unintended consequences of financial repression in progress by government authorities & the IMF in particular .. gives the example of what China is doing to prop up the markets now – “Their playbook comes from the International Monetary Fund (IMF), which advises governments to engage in ‘financial repression’ to buoy up global markets. The IMF’s recipe to avoid what former Fed Chairman Ben Bernanke calls ‘chaotic unwinding’ includes bail-ins, higher inflation, negative interest rates, and capital controls. The IMF even proposes a ‘one-off capital levy’ – outright confiscation of private savings – at a rate of 10% or higher. But as world markets have demonstrated over the last few weeks, it doesn’t always work. The cause of this chaotic unwinding is excessive debt combined with leveraged bets financed by more debt.” .. the international economy is beset with massive levels of debt – “collateralized, re-collateralized, hypothecated, and semi-hypothecated. Total world indebtedness now stands close to $200 trillion. That amounts to 286% of the global GDP of $70 trillion.” .. Nestmann says financial repression only works as long as the targets – individuals, families, & businesses – don’t catch on .. Nestmann points out many of the world’s wealthy are investing in real physical assets, no financial assets, stored outside of the banking system & internationally, .. these are assets that cannot be “bailin in, hypothecated, or hyper-hypothecated.”

Free market economist Richard Ebeling points out that when adjusted for inflation, the Federal Funds rate set by the Federal Reserve & also one-year U.S. Treasury not yields have been negative for the last several years already .. “It has cost little or almost nothing to borrow funds in the American financial markets, courtesy of the former chairman Ben Bernanke and current chairwoman Janet Yellen and the other members of the Board of Governors of the Federal Reserve, who possess the monopoly manipulation authority over the quantity of money in the banking system.” .. highlights how the U.S. government has added $8 Trillion to the federal government’s accumulated debt since the financial crisis – “The cost of U.S. government debt payments would be far greater if the Federal Reserve had not kept interest rates artificially low and created the illusion that the interest cost of government borrowing can be almost ignored.” .. these repressed interest rates (financial repression) have caused malinvestment, mispricing of assets & risk, & shafted savers & retirees from earning interest on their savings .. “A healthy restoration of actual market stability and coordination between savings and investment, between supplies and demands, requires an end to the monetary expansion and the reemergence of market-based interest rates that can tell the truth about the availability and cost of borrowing money and the real resources they are supposed to represent, so investments undertaken stay within the bounds or types and time-durations consistent with the saved means of production upon which they are dependent .. While the Federal Reserve has chosen to keep the Federal Funds rate near zero, it is merely delaying the inescapable and inevitable result of its own monetary policy – another needed economic correction that its actions will have generated but which it will, no doubt, blame on the supposed ‘failures’ of the market economy.”

Axel Merk calls upon central banks to abolish their 0% interest rate policy (ZIRP) framework before more harm is done .. “ZIRP is bad for all stakeholders and may even lead to war” .. ZIRP is bad for business – “creative destruction may be undermined through ZIRP” .. ZIRP is bad for investors .. ZIRP is bad for Main Street .. ZIRP is bad for price stability .. ZIRP is bad for peace .. “We believe the key problem many countries have is debt .. The Great Depression ultimately ended in World War II. I’m not suggesting that the policies of any one politician currently in office or running for office will lead to World War III. However, I am rather concerned that the longer we continue on the current path, the more political instability will be fostered that could ultimately lead to a major international conflict .. The Fed needs to have the guts to tell Congress that it is not their role to fix their problems. It requires guts because they must be willing to accept a recession in making their point.”

BCA Research’s Chief Economist Martin Barnes sees financial repression as “here to stay” for the long-term, given the challenges of low economic growth & high debt globally .. Barnes has written a special report to explain why debt burdens are moe likely to rise than fall over the short & long run given demogaphic trends & the low odds of another economic boom .. BCA Research: “If governments cannot easily bring debt ratios down to more sustainable levels, then the obvious solution is to make high debt levels easier to live with. This can be done be keeping real borrowing costs down and by regulatory pressures that encourage financial institutions to hold more government securities. In other words, financial repression is the inevitable result of a world of low growth and stubbornly high debt.Martin argues that central banks are not overt supporters of financial repression, but they certainly are enablers because they have no other options other than to keep rates depressed if they cannot meet their growth and/or inflation targets. A world of financial repression is an uncomfortable world for investors as it implies continued distortions in asset prices, and it is bound to breed excesses that ultimately will threaten financial stability.”

Jim Rickards shares the key points & themes of his conversation with U.S. 4-Star General Michael Hayden who is the only person to have been director of both the National Security Agency & the Central Intelligence Agency .. the discussion is on financial warfare & where it is happening today .. thoughts on the financial warfare between the U.S. & Russia & other nations .. “With the U.S. putting financial pressure on Iran, Russia, and China, wasn’t it likely that these countries would create their own payments systems, develop their own banks and reserve currencies, and turn their back on the U.S. dollar system entirely? If Russia, Iran, China, Turkey and others no longer relied on U.S. dollars, then control of the dollar system would lose its potency as a weapon.” .. for investors, the implications are to invest in hard assets like silver, gold, fine art, rare stamps, cash & other physical stores of value – in addition to consider investing in venture capital & start-up companies where the ownership is in the form of a written contract – not a digital account .. “My conversation with General Hayden reinforced my already strong view that financial warfare is here and digital assets such as brokerage accounts and 401(k)s are in the line of fire.” .. financial warfare is a form of financial repression.

Doug Casey shares some recent experiences on border crossings while carrying gold & silver coins . “What really got my attention was a few weeks later when I was leaving Mauritania, one of the world’s more backward countries. Here, I was also questioned about the silver coins. A supervisor was again called over and asked me whether I had any gold coins. Clearly, something was up .. I haven’t seen any official statements about the movement of gold coins, but it seems probable that governments are spreading word to their minions.” .. Casey suggests this is part of the war on cash .. Casey says it is all about capital controls & financial repression ..  “So what’s next? I expect, as the subtle war on both cash and the transfer of capital across borders gains momentum, that gold coins are going to become the next focus of attention.”

Free market economist Richard Ebeling explains how government policies & central banks actions have resulted in mismanagement of the economy & the financial system .. this has resulted in all kinds of price & market distortions & unintended consequences (financial repression) .. “A variety of key interest rates, as a consequence, have, when adjusted for inflation, been in the negative range most of the time for seven years. Nominal and real interest rates, therefore, cannot be considered to be telling anything truthful about the actual availability of savings in the economy and its relationship to market-based profitability of potential investments. Interest rates manipulation has worked similar to a price control keeping the price of a good below its market-determined and clearing level. It has undermined the motives and abilities of some people to save on the supply-side, while distorting demand-side decision-making in terms of both the types and time-horizons of possible investments to undertake, since the real scarcity and cost of borrowing for capital formation has been impossible to realistically estimate and judge in a financial market without market-based interest rates. Markets have been distorted, investment patterns have been given wrong and excessive directions and labor and resources have been misdirected into various employments that will eventually be shown to be unsustainable.” .. Ebeing issues a call to action for monetary freedom & sound money to return .. “A hundred years of central banking in the United States since the establishment of the Federal Reserve System in 1913 has equally demonstrated the inability of monetary central planners to successfully direct the financial and banking affairs of the nation through the tools of monopoly control over the quantity of money and the resulting powerful influence on money’s value and the interest rates at which savers and borrowers interact. It is time for a radical denationalization of money, a privatization of the monetary and banking system through a separation of government from money and all forms of financial intermediation. That is the pathway to ending the cycles of booms and busts, and creating the market-based framework for sustainable economic growth.
It is time for monetary freedom to replace the out-of-date belief in monetary central planning.”