LEAP/E2020 is of the view that the effect of States’ spending trillions to « counteract the crisis » will have fizzled out. These vast sums had the effect of slowing down the development of the systemic global crisis for several months but, as anticipated in previous GEAB reports, this strategy will only have ultimately served to clearly drag States into the crisis caused by the financial institutions.
Therefore our team anticipates, in this 42nd issue of the GEAB, a sudden intensification of the crisis in the second half of 2010, caused by a double effect of a catching up of events which were temporarily « frozen » in the second half of 2009 and the impossibility of maintaining the palliative remedies of past years.
As a matter of fact, in February 2010, a year after us stating that the end of 2009 would mark the beginning of the phase of global geopolitical dislocation, anyone can see that this process is well established: states on the edge of bankruptcy, remorseless rise in unemployment, millions of people coming to the end of their social security benefits, falling wages and salaries, limiting of public services and disintegration of the global governance system (failure of the Copenhagen summit, growing Chinese/US confrontation, return of the risk of an Iran/Israel/USA conflict, wars worldwide… (1)). However, we are only at the start of this phase for which LEAP/E2020 will supply a likely timeframe in the next GEAB issue.
The sudden intensification of the global systemic crisis will be characterised by the acceleration and/or strengthening of five fundamental negative trends:
. the explosion of the bubble in public deficits and a corresponding increase in state defaults
. the fatal impact of the Western banking system with mounting debt defaults and the wall of debt coming to maturity
. the inescapable rise in interest rates
. the increase in issues causing international tension
. a growing social insecurity.
In this GEAB issue our team expands on the first three trends of these developments including an anticipation on Russia’s position in the face of the crisis, as well as, of course, our monthly suggestions.
In this public announcement, we have chosen to analyse the « Greek case », on the one hand because it seems indicative of what 2010 has in store for us, and on the other because it is a perfect illustration of the way in which news and information on the world crisis is moving towards « make-believe news » between blocs and interests which are increasingly in conflict. Clearly it is a « must » to learn how to decipher worldwide news and information in the months and years to come which will be a growing means of manipulatory activity.
Progression of the percentage of net new U.S. debt bought by China, net new U.S. government borrowing, percentage of outstanding U.S. Treasuries owned by China (2002-2009) – Sources: US Treasury, Haver Analytics, New York Times
The five characteristics which make up the « Greek case » into the tree with which one tries to hide the forest
Let’s take a look at the « Greek case » which has concerned the media and experts for several weeks now. Before entering into the detail of what is happening, there are five key points to our anticipation on the subject:
1. As we stated in our anticipations for 2010, which appeared in the last GEAB issue (GEAB N°41, the Greek problem will have disappeared from the international media’s radar several weeks from now. It is the tree used to hide both a forest of much more dangerous sovereign debt (to be precise that of Washington and London) and the beginning of a further fall in the world economy, led by the United States (2).
2. The Greek problem is an internal issue for the Eurozone and the EU, and the current situation provides, at last, a unique occasion for the Eurozone leaders to require Greece (a case of « failed enlargement » since 1982) to leave its feudal political and economic system behind. The other Eurozone countries, led by Germany, will do the necessary to make Greek leaders bring their country into the XXIst century in exchange for their help, at the same time making use of the fact that Greece only represents 2.5% of Eurozone GDP (3) to test the stabilisation mechanisms that the Eurozone needs in times of crisis (4).
3. Ango-Saxon leaders and media are using the current situation (just like last year with the so-called banking tsunami coming from Eastern Europe which was going to carry the Eurozone away with it (5)) to hide the catastrophic progression of their economies and public debt and attempt to weaken the attractiveness of the Eurozone at a time when the USA and the United Kingdom have increasing difficulty in attracting the capital which they so desperately need. At the same time Washington and London (which, since the coming into effect of the Lisbon Treaty is completely excluded from any management of the Euro) would be overjoyed to see the IMF, which they control completely (6), brought into Eurozone management.
4. Eurozone leaders are very happy to see the Euro fall to 1.35 against the Dollar. They well know that it won’t last because the current problem is the fall in the value of the Dollar (and the Pound Sterling), but they appreciate this « whiff of oxygen » for their exporters.
5. The speculators (hedge funds and others) and banks heavily involved with Greece (7), have a common interest in trying to bring about rapid Eurozone financial support for Greece, since otherwise the rating agencies will, unintentionally, pull a fast one on them if the Europeans refuse to dig into their pockets (like the scandalous actions of Paulson and Geithner over AIG and Wall Street in 2008/2009): indeed a lowering of Greece’s rating will plunge this small world into the throes of serious financial losses if, for the banks, their Greek loans are similarly devalued, or if their bets against the Euro don’t work out in due course (8).
2008 comparison of the deficits and Eurozone GDP of Portugal, Ireland, Greece, Spain, France and Germany – Source: Der Spiegel / European Commission, 02/2010
Goldman Sachs’ role in this Greek tragedy… and the next sovereign defaults
In the « Greek case », just like in every suspense story, a « bad guy » is needed (or, following the logic of an old-style tragedy, a « deus ex machina »). In this phase of the global systemic crisis, the role of the « bad guy » is usually played by one of Wall Street’s big investment banks, in particular by the leader of the gang, Goldman Sachs. The « Greek case » is no different as indeed this New York investment bank is directly implicated in the budgetary conjuring tricks which allowed Greece to qualify for Euro entry, whilst its actual budget deficits would have disqualified it. In reality it was Goldman Sachs who, in 2002, created one of its cunning financial models of which it holds the secret (9) and which, almost systematically resurfaces several years later, to blow up the client. But what does it matter, since GS (Goldman Sachs) profits were the beneficiary!
In the Greek case what the investment bank proposed was very simple: raise a loan which didn’t appear in the budget (a swap agreement which enabled a ficticious reduction in the size of the Greek public deficit (10). The Greek leaders at the time were, of course, 100% liable and should, in LEAP/E2020’s opinion, be subjected to Greek and European political and legal process for having cheated the EU and their own citizens within the framework of a major historic event, the creation of the single European currency.
But, let’s be clear, the liability of the New York investment bank (as an accomplice) is just as great, especially when one is aware of the fact that Goldman Sachs’ vice-president for Europe was, at the time, a certain Mario Draghi (11), currently President of the Italian Central Bank and a candidate (12) to succeed Jean-Claude Trichet at the head of the European Central Bank (13).
Without wishing to pre-judge Mr. Draghi’s role in the affair of the loan manipulating Greece’s statistics (14), one should ask oneself if it wouldn’t be worthwhile to question his involvement in the affair (15). In a democracy, the press (16), like parliaments (in this case Greek and European), are expected to take on this task themselves. Considering the importance of GS in world financial affairs these last few years, nothing that this bank does should leave governments and legislators indifferent. It is Paul Volcker, current head of Barack Obama’s financial advisors, who has become one of the strongest critics of Goldman Sachs’ activities (17). We already had the occasion to write, at the time of the election of the current US President, that he is the only person in his entourage having the experience and skills to push through tough measures (18) and who, at this moment, knows what, or rather whom, he is talking about.
With this same logic, on the issue of transparency in financial activities and state budgets and using the ill-fated role of Goldman Sachs and of the large investment banks in general as an illustration, LEAP/E2020 takes the view that it would be beneficial for the European Union and its five hundred million citizens, to exclude former managers of these investment banks (19) from any post of financial, budgetary and economic control (ECB, European Commission, National Central Banks). The mixing of these relationships can only lead to even greater confusion between public and private interests, which can only be to the detriment of European public interests. To begin with, the Eurozone should immediately require the Greek government to stop calling on the services of Goldman Sachs which, according to the Financial Times of 01/28/2010, it still uses.
If the head of Goldman Sachs believes he is « God » as he described himself in a recent interview (20), it would be prudent to consider that his bank, and its lookalikes, can seriously behave like devils, and it is therefore wise to draw all the consequences. This piece of advice, according to our team, is valid for the whole of Europe, as well as every other continent. There are « private services » which clash with « public interests »: just ask Greek citizens and American real estate owners whose houses have been repossessed by the banks!
To conclude, our team suggests a game to convince those who seek where the next sovereign debt crisis will surface: simply look for those states which have called upon Goldman Sachs’ services in the last few years and you will have a serious lead (21)!
http://www.leap2020.eu/GEAB-N-42-is-available!-Second-half-of-2010-Sudden-intensification-of-the-global-systemic-crisis-Strengthening-of-five_a4294.html
Showing posts with label interest rates. Show all posts
Showing posts with label interest rates. Show all posts
12 March 2010
18 April 2009
Commodity outlook bullish on Inflation /1935-1945 record
Puru Saxena makes the case......
Today, there are many deflationists who are claiming that the prices will remain depressed for many years due to the weak economic activity. However, these folks should note that even during the Great Depression of the 1930's, prices of commodities stabilised and began rising in 1933. Figure 1 confirms that due to monetary inflation in the early 1930's, the CRB Index embarked on a secular bull-market which had a violent correction in 1937 (marked by purple arrow). Following that crash, commodities bottomed out in 1938 and thanks to the super-inflationary efforts of President Roosevelt, the CRB Index surged for more than a decade.
Figure 1: CRB Spot Index - (1930-2007)
Source: Commodities Research Bureau
Contrary to popular opinion, that huge commodities boom took place despite an economic depression. Furthermore, it is worth pointing out that commodities rose relentlessly despite the fact that private-sector debt and bank lending remained essentially flat until 1945. Back then, similar to the current situation, banks accumulated large reserves but didn't loan these reserves into the broad economy. However, from 1932 onwards, the US government borrowed so much new money into existence that prices began to rise way before private-sector credit started to expand.
A similar drama unfolded in the 1970's when commodities went through the roof. During that time, economic activity was dismal but governments decided to tackle the recession with money creation. The net result was surging hard asset prices and mind-numbing inflation!
Turning to the present situation, US private-sector debt is shrinking as banks remain fearful of lending. However, the US government (along with other nations) is borrowing and creating gigantic sums of money and this should cause prices to rise for the next 3-4 years. Accordingly, we are maintaining our positions in top-quality businesses in the resources sector.
http://www.safehaven.com/article-13104.htm
Today, there are many deflationists who are claiming that the prices will remain depressed for many years due to the weak economic activity. However, these folks should note that even during the Great Depression of the 1930's, prices of commodities stabilised and began rising in 1933. Figure 1 confirms that due to monetary inflation in the early 1930's, the CRB Index embarked on a secular bull-market which had a violent correction in 1937 (marked by purple arrow). Following that crash, commodities bottomed out in 1938 and thanks to the super-inflationary efforts of President Roosevelt, the CRB Index surged for more than a decade.
Figure 1: CRB Spot Index - (1930-2007)
Source: Commodities Research Bureau
Contrary to popular opinion, that huge commodities boom took place despite an economic depression. Furthermore, it is worth pointing out that commodities rose relentlessly despite the fact that private-sector debt and bank lending remained essentially flat until 1945. Back then, similar to the current situation, banks accumulated large reserves but didn't loan these reserves into the broad economy. However, from 1932 onwards, the US government borrowed so much new money into existence that prices began to rise way before private-sector credit started to expand.
A similar drama unfolded in the 1970's when commodities went through the roof. During that time, economic activity was dismal but governments decided to tackle the recession with money creation. The net result was surging hard asset prices and mind-numbing inflation!
Turning to the present situation, US private-sector debt is shrinking as banks remain fearful of lending. However, the US government (along with other nations) is borrowing and creating gigantic sums of money and this should cause prices to rise for the next 3-4 years. Accordingly, we are maintaining our positions in top-quality businesses in the resources sector.
http://www.safehaven.com/article-13104.htm
Inflation Will Be A Surprise
Earlier this week, the Labor Department reported declines in both the Producer Price Index (PPI) and the Consumer Price Index (CPI). Various economists and television commentators believe that these declines are proof that slack in the economy is creating deflation and more than offsetting the inflationary impacts of government stimulus spending and money-printing by the Federal Reserve.
A deeper look at the CPI report shows a different picture:
Source: Department of Labor
The far right-hand column shows that the "All items" CPI headline data declined 0.4% over the past twelve months. This figure is what the deflationists are citing as evidence of deflation. However, the "All items less food and energy" figure rose 1.8%. The whopping 23% decline in energy led to the overall decline in prices or "deflation" that economists cite. It is worth nothing that it took a 23% drop in energy prices to create a 0.4% decline in CPI when energy prices are still so high compared to the last couple of decades.
Prices in the broader economy are not falling despite the worst recession since the 1930's because of the government's programs and the mind-boggling increase in the Federal Reserve's balance sheet. Velocity of money (spending and business transactions) has slowed due to the weakness in the economy. However, as reflected in the chart below, holdings of cash are exploding. As people in the deflation camp alter their deflationary forecasts, holders of cash will rightfully become nervous about their loss of purchasing power. As a result, the velocity of money will rise despite the weak economy - a theme quite common for highly indebted countries. To believe that there is deflation today and to assume it will continue into the future is to misunderstand the definition of inflation.
Market dislocations occur at major turning points when markets falsely forecast the path of inflation versus deflation. For example, in 1982 the market was incorrectly fearful of inflation, which meant stock and bond prices were quite low and provided for outstanding gains if the inflation fear was unfounded. As is now known, inflation had ended and thus it was a great time to buy stocks and bonds.
Today, the market is counting on deflation. As a result, gold is undervalued and US stocks and bonds are overvalued because the market believes deflation will persist until only mild inflation replaces it. As Peter Schiff says, "A little inflation is like being a little pregnant." Stock P/E's contract and interest rates rise during high inflation. As reflected in the chart above there is a huge amount of cash on the sidelines. When fear of deflation subsides and the harsh reality of inflation sets in, cash will flow to commodities and hard assets and thus lead to higher consumer prices rather than higher stock prices (until we have hyperinflation, which clearly is not on the market's mind).
In summary, stocks are rallying and investors believe in deflation. As of March 2009, the CPI is helping to inflate the deflation story. However, at some point, markets will either begin to discount that CPI will turn higher or there will be a rude awakening when the data is released. Either way, inflation will be a surprise because the markets are incorrectly discounting the future.
http://www.safehaven.com/article-13111.htm
A deeper look at the CPI report shows a different picture:
Source: Department of Labor
The far right-hand column shows that the "All items" CPI headline data declined 0.4% over the past twelve months. This figure is what the deflationists are citing as evidence of deflation. However, the "All items less food and energy" figure rose 1.8%. The whopping 23% decline in energy led to the overall decline in prices or "deflation" that economists cite. It is worth nothing that it took a 23% drop in energy prices to create a 0.4% decline in CPI when energy prices are still so high compared to the last couple of decades.
Prices in the broader economy are not falling despite the worst recession since the 1930's because of the government's programs and the mind-boggling increase in the Federal Reserve's balance sheet. Velocity of money (spending and business transactions) has slowed due to the weakness in the economy. However, as reflected in the chart below, holdings of cash are exploding. As people in the deflation camp alter their deflationary forecasts, holders of cash will rightfully become nervous about their loss of purchasing power. As a result, the velocity of money will rise despite the weak economy - a theme quite common for highly indebted countries. To believe that there is deflation today and to assume it will continue into the future is to misunderstand the definition of inflation.
Market dislocations occur at major turning points when markets falsely forecast the path of inflation versus deflation. For example, in 1982 the market was incorrectly fearful of inflation, which meant stock and bond prices were quite low and provided for outstanding gains if the inflation fear was unfounded. As is now known, inflation had ended and thus it was a great time to buy stocks and bonds.
Today, the market is counting on deflation. As a result, gold is undervalued and US stocks and bonds are overvalued because the market believes deflation will persist until only mild inflation replaces it. As Peter Schiff says, "A little inflation is like being a little pregnant." Stock P/E's contract and interest rates rise during high inflation. As reflected in the chart above there is a huge amount of cash on the sidelines. When fear of deflation subsides and the harsh reality of inflation sets in, cash will flow to commodities and hard assets and thus lead to higher consumer prices rather than higher stock prices (until we have hyperinflation, which clearly is not on the market's mind).
In summary, stocks are rallying and investors believe in deflation. As of March 2009, the CPI is helping to inflate the deflation story. However, at some point, markets will either begin to discount that CPI will turn higher or there will be a rude awakening when the data is released. Either way, inflation will be a surprise because the markets are incorrectly discounting the future.
http://www.safehaven.com/article-13111.htm
8 December 2008
Hyperinflation dead ahead?
By: Bob Chapman, The International Forecaster
The following are some snippets from the most recent issue of the International Forecaster. For the full 40 page issue, please see subscription information below.
US MARKETS
...
It should be obvious that throwing hundreds of billions into a black hole of losses numbering in the tens, and perhaps even hundreds, of trillions (i.e. the Quadrillion Dollar Derivative Death Star), is like trying to empty the Pacific Ocean with a coffee can. Let's take ten trillion and buy out all the mortgages in the US, and then modify all the interest rates to a 5% fixed rate. We can float 10 year treasuries at 2% to fund the deal, and pocket the 3% spread of $300 billion, which we can use to shore up our budget deficit, to rejuvenate zombie corporations after we run them through Chapter 11, and to make loan workouts for those who can't even afford 5%, which would number in the millions, because fogging a mirror was the only qualification for getting a mortgage over the past five or so years. This will cure all real estate defaults and immediately convert the toxic waste into real AAA paper for the first time while everyone gets to buy a new house at 5% fixed also, thus saving the real estate market. The banks, now flush with cash, can start lending again because their balance sheets have been restored, and get back into the mortgage business by doing both refinances and purchases, while our foreign owners of agencies and treasuries rejoice, and while owners of what was once toxic waste start tap dancing on the ceiling. As the government-owned mortgages are paid off, we can use the proceeds to either float new mortgages at a 3% spread, or we can use the payoff money to pay down the ten trillion dollar treasury loan and let the banks take over again, this time with oversight and regulations that will put people in jail if they pull their cute little scams again.
We can then also float another ten trillion dollars in bonds at 2%, and give every American, young and old, $33,000, which they would have to use with the following pre-established priorities: (1) Cure any mortgage defaults, (2) pay off any credit cards and car loans, and (3) buy a hybrid car that gets 30+ miles per gallon from an American car manufacturer, or in the alternative, set up an IRA funded by gold and silver to protect against the upcoming hyperinflation, or for the younger citizens, set up a college fund if they can qualify for college. That will cure all the consumer loan defaults and restore value to all the derivatives associated with them, revive our manufacturing sector, solve our energy crisis, provide reliable transportation so everyone can get off welfare and go to work, get our kids educated, and set us all up for retirement with inflation-proofing through gold and silver, while pushing trillions in available loan funds back into the banking sector to totally re-grease the system. What the heck is $20 trillion when we already owe $100 trillion? Sure, it's certainly hyperinflationary, but what is the alternative? The alternative is a purging of the system and ultimate decade long depression for the world financial system with a major war as the cure, which the Illuminists will use to destroy our precious Constitutional rights and pave the way for a one-world government. The same will happen if we hyper-inflate, but much further down the line, and you at least get to have one final party together with some gold and silver protection, and who knows, we might figure a way out in the meantime.
You will never see such a plan implemented, because as should be obvious from the $700 billion Paulson Ponzi Plunder Plan, the idea is to bankrupt the middle class, and not to save it, by pumping taxpayer largesse into failed and insolvent banking and business entities so that the dollars are wasted and are used to destroy the middle class with hyper-stagflation, while Illuminist executives walk away with trillions in salaries, bonuses and stock dividends after buying up all the smaller fry in a fresh round of competition elimination. The Illuminists want to play god with your money and decide who lives and dies in the business world. Obviously it is their crony capitalist companies that will survive, while everyone else heads off to see the bankruptcy trustee, who will then auction off all their assets at pennies on the dollar to newly formed and nationalized Illuminist super-conglomerates that will swallow up all the old discarded, insolvent Illuminist companies that have sucked out the value of our money through their black hole of losses. These new super-conglomerates will form the backbone of our new corporatist, fascist, Orwellian police state. As we said, they get the gold mine; you get the shaft. Expecting the Illuminati to do anything that would benefit working Americans is a form of insane delusion.
We are told that the Federal Reserve may cut interest rates another ½% to 1% in December.
Normally, when the Fed cuts rates, credit-card issuers follow suit, resulting in lower monthly payments for cardholders. Rates have generally fallen slightly, but banks and retailers are trying to offset rising costs and loses by raising fees.
Those with less than perfect credit ratings and those with excellent credit ratings are having credit lines cut dramatically. They are raising rates on cash advances and overdraft protection. JP Morgan Chase will start charging a new monthly fee of $10.00 for cardholders who have been carrying large balances for at least two years, while raising their minimum monthly payments to 5% of their outstanding balance, from 2%. Citigroup’s Citibank and American Express will raise such rates 2% to 3%. Amex is raising its rates on cash advances, late payments and defaults, increasing its foreign-exchange fee to 2.7% from 2% on its consumer and small-business cards and eliminating ways to earn rewards on one of its popular cards.
Home Depot is reducing credit lines on its in-state cards. Nordstroms and Target are raising interest rates on in-store cards
In the third quarter credit card losses at issuer banks were over 5% of total credit card balances and are poised to deteriorate further. This is why interest rates are climbing and fees are rising. You get penalized because others do not pay their bills. Now you can better understand why we have been telling you for the past eight years to eliminate credit card and revolving debt. It is the most expensive of all debt.
Credit card use in the second quarter fell 5% from the first quarter to $663 million, the biggest drop in several years.
Promotional deals are being done away with or cut back as are reward programs. You will see them in next month’s mailing or you’ve already noticed some changes.
All we can say is pay off those balances monthly as they occur and get rid of debt balances ASAP.
Gerald Corrigan will take over at Goldman Sachs. He is the former head of the New York Fed.
If you do not like speeding tickets stay away from Phoenix. If you live there move. In the first two months of work the state’s new speed cameras have issued 40,000 photo speeding tickets beginning the revenue harvest of $6.6 million.
About 60 cameras are in use. Of those, 40 are mounted on vehicles and 20 are at fixed locations along freeways. Twelve more are being added in metro Phoenix. Across the state they hope to have 100 cameras in use by February.
The cameras capture video and license plate numbers of drivers breaking the speed limit by 10 MPH or more. At 20 MPH over, the offense becomes “criminal speeding.” Of all the violations, 661 have been criminals. The highest speed logged so far was 130 MPH.
Law enforcement say the cameras promote safety. They are wrong, speed doesn’t kill, stupidity kills, and all this represents is another tax on citizens and a boon for insurance companies. It gives them the excuse to increase your rates.
Including surcharges a speeding ticket costs $185.00 and your insurance cost rises $1,000 or more a year. Fascist America marches on.
You can expect a record number of fund closures in 2008. If your fund is on this path get out fast to avoid a potential tax nightmare. Funds can shut down without shareholder approval and when you see them throw in the towel you head for the exits.
When a fund liquidates it sells all holdings and gives shareholders full market value of their holdings.
Typically in an IRA, if they hold the fund on the day it closes for good the fund’s transfer agent will send them the proceeds of their account but will automatically take a 10% federal tax withholding because it considers the payout to be a distribution.
An investor who is eligible to roll the account over or transfer the proceeds directly into another IRA, can only avoid the tax withholdings by selling before the fund liquidation.
Retirement savers can complete some tax paperwork to withdraw the funds without the distribution, but will have 60 days from receiving the monies to complete the transaction or face IRS penalties.
If one of your funds is next to give you the ghost, quickly pick a landing pad for the money, determine the tax implications of any transaction, and call the fund’s transfer agent to see how to handle the change most effectively. Get it done and move on, or you could mourn the loss of your fund – specifically what it cost you in taxes or depleted retirement assets – for years.
...
GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS
...
We have watched over and over again since 10/19/87 our government dump gold on the market to suppress prices. From 10/19/87 until 8/20/88 that was an illegal enterprise. As we moved into the early 1990s, we saw commercials on the Comex shorting and increasing shorts as prices rose, which is not a normal procedure. It exposes one to the possibility of major losses, unless your shorting is covered by the US government. The result has been suppressed gold prices for 30 years, especially over the past 16 years. These methods have been augmented by the selling and leasing of gold by a large number of central banks. These sales were made over and over again to break the back of any gold rally. Due to overwhelming physical demand over the years gold has still managed to achieve new highs.
During this month of December we see unusual physical delivery of Comex futures contracts. We have been reporting those figures to you as we receive them. The registered gold available at the Comex for delivery is being depleted something that has never happened before. Due to the fact that the CFTC has never audited the registered Comex holdings we really do not know how much gold is available for delivery. If the demand is high default could occur. We’ll know that by the end of the month or perhaps sooner.
A short seller must be 90% covered by gold or by offsetting long contracts. The CFTC is supposed to oversee such activity and if they haven’t then we can assume that the US government is behind the naked shorting of gold contracts without gold as collateral or offsetting long positions. The pros, specs, and traders have seen this going on during 2008 and they have been abandoning the market in droves. Open interest has fallen from 625,000 contracts to 264,000 as a result. Players are tired of being stolen from by their own government.
Normally ½% to 1% of contracts are delivered when the contract expires. Thus far into the delivery month we are seeing about 6% take delivery. Over the next three weeks we will find out just what a fix Comex is in. It won’t be a positive event no matter what happens. Large deliveries will force gold higher and default will send gold upward like a rocket.
Our government needs much higher gold prices to devalue the dollar. If the Fed curtails the availability of money and credit the stock market will collapse, as well will the economy and the Second Great Depression will be underway.
As this transpires we are seeing the beginnings of a trade war as export countries deliberately devalue their currencies, this is a confluence of very bad events. This we believe is about to force the Fed and the Treasury to abandon their gold suppression of many years.
The Fed has to devalue the dollar versus gold - it has no other choice. If it doesn’t everything else, financial and economic, collapses. We are at a great crossroads - the event we’ve been waiting years to see. This is the only way Fed Chairman Ben Bernanke can void many years of depression. He knows if gold goes to $6,000 an ounce, debt will be mitigated and pressure will ease on the economy. This is why we are starting to hear insider Illuminists talk of $2,000 gold. They want to be recognized as having forecast the event and they also want to set a mental barrier at $2,000 an ounce. This revaluation of gold and return to the gold standard will neutralize hyperinflation by absorbing excess currencies. Why else would JP Morgan Chase and Citigroup be predicting $2,000 gold?
We see Morgan, Citigroup, Goldman and Hong Kong Shanghai Bank HSBC, taking large deliveries of gold because they know what is coming and they can buy cheaper on the Comex. The trade is a lock because they take delivery on the futures market and if they want to they can sell on the spot market and take a profit due to massive physical demand. We are close to seeing a great breakout in the gold price. Stand by we’ll let you know when to add to your positions.
...
The following are some snippets from the most recent issue of the International Forecaster. For the full 40 page issue, please see subscription information below.
US MARKETS
...
It should be obvious that throwing hundreds of billions into a black hole of losses numbering in the tens, and perhaps even hundreds, of trillions (i.e. the Quadrillion Dollar Derivative Death Star), is like trying to empty the Pacific Ocean with a coffee can. Let's take ten trillion and buy out all the mortgages in the US, and then modify all the interest rates to a 5% fixed rate. We can float 10 year treasuries at 2% to fund the deal, and pocket the 3% spread of $300 billion, which we can use to shore up our budget deficit, to rejuvenate zombie corporations after we run them through Chapter 11, and to make loan workouts for those who can't even afford 5%, which would number in the millions, because fogging a mirror was the only qualification for getting a mortgage over the past five or so years. This will cure all real estate defaults and immediately convert the toxic waste into real AAA paper for the first time while everyone gets to buy a new house at 5% fixed also, thus saving the real estate market. The banks, now flush with cash, can start lending again because their balance sheets have been restored, and get back into the mortgage business by doing both refinances and purchases, while our foreign owners of agencies and treasuries rejoice, and while owners of what was once toxic waste start tap dancing on the ceiling. As the government-owned mortgages are paid off, we can use the proceeds to either float new mortgages at a 3% spread, or we can use the payoff money to pay down the ten trillion dollar treasury loan and let the banks take over again, this time with oversight and regulations that will put people in jail if they pull their cute little scams again.
We can then also float another ten trillion dollars in bonds at 2%, and give every American, young and old, $33,000, which they would have to use with the following pre-established priorities: (1) Cure any mortgage defaults, (2) pay off any credit cards and car loans, and (3) buy a hybrid car that gets 30+ miles per gallon from an American car manufacturer, or in the alternative, set up an IRA funded by gold and silver to protect against the upcoming hyperinflation, or for the younger citizens, set up a college fund if they can qualify for college. That will cure all the consumer loan defaults and restore value to all the derivatives associated with them, revive our manufacturing sector, solve our energy crisis, provide reliable transportation so everyone can get off welfare and go to work, get our kids educated, and set us all up for retirement with inflation-proofing through gold and silver, while pushing trillions in available loan funds back into the banking sector to totally re-grease the system. What the heck is $20 trillion when we already owe $100 trillion? Sure, it's certainly hyperinflationary, but what is the alternative? The alternative is a purging of the system and ultimate decade long depression for the world financial system with a major war as the cure, which the Illuminists will use to destroy our precious Constitutional rights and pave the way for a one-world government. The same will happen if we hyper-inflate, but much further down the line, and you at least get to have one final party together with some gold and silver protection, and who knows, we might figure a way out in the meantime.
You will never see such a plan implemented, because as should be obvious from the $700 billion Paulson Ponzi Plunder Plan, the idea is to bankrupt the middle class, and not to save it, by pumping taxpayer largesse into failed and insolvent banking and business entities so that the dollars are wasted and are used to destroy the middle class with hyper-stagflation, while Illuminist executives walk away with trillions in salaries, bonuses and stock dividends after buying up all the smaller fry in a fresh round of competition elimination. The Illuminists want to play god with your money and decide who lives and dies in the business world. Obviously it is their crony capitalist companies that will survive, while everyone else heads off to see the bankruptcy trustee, who will then auction off all their assets at pennies on the dollar to newly formed and nationalized Illuminist super-conglomerates that will swallow up all the old discarded, insolvent Illuminist companies that have sucked out the value of our money through their black hole of losses. These new super-conglomerates will form the backbone of our new corporatist, fascist, Orwellian police state. As we said, they get the gold mine; you get the shaft. Expecting the Illuminati to do anything that would benefit working Americans is a form of insane delusion.
We are told that the Federal Reserve may cut interest rates another ½% to 1% in December.
Normally, when the Fed cuts rates, credit-card issuers follow suit, resulting in lower monthly payments for cardholders. Rates have generally fallen slightly, but banks and retailers are trying to offset rising costs and loses by raising fees.
Those with less than perfect credit ratings and those with excellent credit ratings are having credit lines cut dramatically. They are raising rates on cash advances and overdraft protection. JP Morgan Chase will start charging a new monthly fee of $10.00 for cardholders who have been carrying large balances for at least two years, while raising their minimum monthly payments to 5% of their outstanding balance, from 2%. Citigroup’s Citibank and American Express will raise such rates 2% to 3%. Amex is raising its rates on cash advances, late payments and defaults, increasing its foreign-exchange fee to 2.7% from 2% on its consumer and small-business cards and eliminating ways to earn rewards on one of its popular cards.
Home Depot is reducing credit lines on its in-state cards. Nordstroms and Target are raising interest rates on in-store cards
In the third quarter credit card losses at issuer banks were over 5% of total credit card balances and are poised to deteriorate further. This is why interest rates are climbing and fees are rising. You get penalized because others do not pay their bills. Now you can better understand why we have been telling you for the past eight years to eliminate credit card and revolving debt. It is the most expensive of all debt.
Credit card use in the second quarter fell 5% from the first quarter to $663 million, the biggest drop in several years.
Promotional deals are being done away with or cut back as are reward programs. You will see them in next month’s mailing or you’ve already noticed some changes.
All we can say is pay off those balances monthly as they occur and get rid of debt balances ASAP.
Gerald Corrigan will take over at Goldman Sachs. He is the former head of the New York Fed.
If you do not like speeding tickets stay away from Phoenix. If you live there move. In the first two months of work the state’s new speed cameras have issued 40,000 photo speeding tickets beginning the revenue harvest of $6.6 million.
About 60 cameras are in use. Of those, 40 are mounted on vehicles and 20 are at fixed locations along freeways. Twelve more are being added in metro Phoenix. Across the state they hope to have 100 cameras in use by February.
The cameras capture video and license plate numbers of drivers breaking the speed limit by 10 MPH or more. At 20 MPH over, the offense becomes “criminal speeding.” Of all the violations, 661 have been criminals. The highest speed logged so far was 130 MPH.
Law enforcement say the cameras promote safety. They are wrong, speed doesn’t kill, stupidity kills, and all this represents is another tax on citizens and a boon for insurance companies. It gives them the excuse to increase your rates.
Including surcharges a speeding ticket costs $185.00 and your insurance cost rises $1,000 or more a year. Fascist America marches on.
You can expect a record number of fund closures in 2008. If your fund is on this path get out fast to avoid a potential tax nightmare. Funds can shut down without shareholder approval and when you see them throw in the towel you head for the exits.
When a fund liquidates it sells all holdings and gives shareholders full market value of their holdings.
Typically in an IRA, if they hold the fund on the day it closes for good the fund’s transfer agent will send them the proceeds of their account but will automatically take a 10% federal tax withholding because it considers the payout to be a distribution.
An investor who is eligible to roll the account over or transfer the proceeds directly into another IRA, can only avoid the tax withholdings by selling before the fund liquidation.
Retirement savers can complete some tax paperwork to withdraw the funds without the distribution, but will have 60 days from receiving the monies to complete the transaction or face IRS penalties.
If one of your funds is next to give you the ghost, quickly pick a landing pad for the money, determine the tax implications of any transaction, and call the fund’s transfer agent to see how to handle the change most effectively. Get it done and move on, or you could mourn the loss of your fund – specifically what it cost you in taxes or depleted retirement assets – for years.
...
GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS
...
We have watched over and over again since 10/19/87 our government dump gold on the market to suppress prices. From 10/19/87 until 8/20/88 that was an illegal enterprise. As we moved into the early 1990s, we saw commercials on the Comex shorting and increasing shorts as prices rose, which is not a normal procedure. It exposes one to the possibility of major losses, unless your shorting is covered by the US government. The result has been suppressed gold prices for 30 years, especially over the past 16 years. These methods have been augmented by the selling and leasing of gold by a large number of central banks. These sales were made over and over again to break the back of any gold rally. Due to overwhelming physical demand over the years gold has still managed to achieve new highs.
During this month of December we see unusual physical delivery of Comex futures contracts. We have been reporting those figures to you as we receive them. The registered gold available at the Comex for delivery is being depleted something that has never happened before. Due to the fact that the CFTC has never audited the registered Comex holdings we really do not know how much gold is available for delivery. If the demand is high default could occur. We’ll know that by the end of the month or perhaps sooner.
A short seller must be 90% covered by gold or by offsetting long contracts. The CFTC is supposed to oversee such activity and if they haven’t then we can assume that the US government is behind the naked shorting of gold contracts without gold as collateral or offsetting long positions. The pros, specs, and traders have seen this going on during 2008 and they have been abandoning the market in droves. Open interest has fallen from 625,000 contracts to 264,000 as a result. Players are tired of being stolen from by their own government.
Normally ½% to 1% of contracts are delivered when the contract expires. Thus far into the delivery month we are seeing about 6% take delivery. Over the next three weeks we will find out just what a fix Comex is in. It won’t be a positive event no matter what happens. Large deliveries will force gold higher and default will send gold upward like a rocket.
Our government needs much higher gold prices to devalue the dollar. If the Fed curtails the availability of money and credit the stock market will collapse, as well will the economy and the Second Great Depression will be underway.
As this transpires we are seeing the beginnings of a trade war as export countries deliberately devalue their currencies, this is a confluence of very bad events. This we believe is about to force the Fed and the Treasury to abandon their gold suppression of many years.
The Fed has to devalue the dollar versus gold - it has no other choice. If it doesn’t everything else, financial and economic, collapses. We are at a great crossroads - the event we’ve been waiting years to see. This is the only way Fed Chairman Ben Bernanke can void many years of depression. He knows if gold goes to $6,000 an ounce, debt will be mitigated and pressure will ease on the economy. This is why we are starting to hear insider Illuminists talk of $2,000 gold. They want to be recognized as having forecast the event and they also want to set a mental barrier at $2,000 an ounce. This revaluation of gold and return to the gold standard will neutralize hyperinflation by absorbing excess currencies. Why else would JP Morgan Chase and Citigroup be predicting $2,000 gold?
We see Morgan, Citigroup, Goldman and Hong Kong Shanghai Bank HSBC, taking large deliveries of gold because they know what is coming and they can buy cheaper on the Comex. The trade is a lock because they take delivery on the futures market and if they want to they can sell on the spot market and take a profit due to massive physical demand. We are close to seeing a great breakout in the gold price. Stand by we’ll let you know when to add to your positions.
...
6 December 2008
Hamilton ~ Negative real rates drive Gold bull
by Adam Hamilton
It's been a tough year for gold investors. Instead of soaring during the great fear and uncertainty of the global financial panic as most gold investors expected, gold got caught up in the selling. Thus it is down 7.3% year-to-date. This is far-better performance than virtually everything else, especially the S&P 500's 40.7% YTD loss. Nevertheless, the lack of a flight to gold in such dire conditions remains disappointing.
Why didn't gold rally? Capital fleeing out of the imploding bond and stock markets flooded into US Treasuries at staggering rates. While Treasuries weren't yielding much, at least they sheltered capital from the surrounding universal panic selling. Before taking refuge in Treasuries, foreign investors first had to buy US dollars. This frenzied dynamic drove a monster dollar rally which hammered gold futures.
Since gold has been the financial-panic asset of choice for centuries, its lackluster trading action during the last couple months has really shaken gold investors' confidence. While physical-coin demand has been very high from small investors, big investors did not rush to buy gold as stock-market fear soared to unprecedented sustained levels. This is leading to questions about this gold bull's ongoing viability.
During times like these when the technical action and sentiment feel terrible, I find it useful to return to the core fundamentals. I started recommending physical gold coins to our subscribers back in May 2001 when gold traded in the $260s. In the 7+ years since, gold has seen plenty of good and bad spells. Yet one major fundamental driver remained steadfastly bullish throughout this bull, real interest rates.
Real rates are the returns realized by bond investors after inflation is subtracted out. If you earn 5% in Treasuries, and inflation is running 3%, then you earn a 2% real return. Much of the 1.05x growth in your nominal capital is eroded by the relentless loss of purchasing power in the dollar. What you could buy last year for $1.00 now costs $1.03, so in terms of real goods and services you aren't advancing as fast.
Normally real rates are positive. For putting their hard-earned capital at risk, debt investors deserve to earn a real purchasing-power return after inflation for their efforts. Even though they don't accept much risk compared to stock investors, they still need to be fairly compensated for this risk. If they are not, they will invest less over the long term because it is pointless to risk scarce capital for a guaranteed loss.
Would you loan money to anyone if you knew you would take a real loss for doing so? Not if you are rational. When nominal interest rates are forced so low by central banks that real returns plunge negative, debt investing becomes a losing proposition. In such a hostile environment, debt investors gradually turn to gold. While bonds guarantee them a real loss, gold will at least keep pace with inflation to preserve the purchasing power of their capital.
To understand the interaction between real rates and gold, you really have to take the long view. Since it takes years for investors to perceive the impact of inflation and change their behavior accordingly, gold doesn't react overnight. But eventually react it does, and this is very clear over a long-enough time slice. The longer real bond returns are poor or negative, the more capital gradually takes refuge in gold.
Interestingly I wrote my first essay in this series back in July 2001 when gold traded in the $260s. Back then real rates had yet to go negative but the Fed was hellbent on driving them there. At that time, we only had the example of the 1970s to consider. But now, the lion's share of a decade later, the real-rates-and-gold comparison is vividly apparent in the 2000s as well. Just as expected, when central banks attack debt investors they gradually forsake losing bonds and migrate into gold.
While researching real rates, I try to use the most-conservative-possible measures. While this really understates the bullish case for gold, it is much easier for mainstream investors to accept and very easy for contrarians to defend. Since most interest rates are still driven by the free markets despite all of Washington's incessant socialist meddling, the inflation measure used is where conservatism comes into play.
Wall Street believes the US government's Consumer Price Index is an accurate measure of inflation. Everyone accepts the CPI as gospel, so I've always used it in this research thread. Since inflation is truly defined as monetary growth, the growth rates in the money supplies are a far-superior measure. With the Fed running its printing presses like there is no tomorrow, relatively more money is chasing relatively less goods and services which drives up nominal prices.
Over the past year, the broad MZM money supply in the US has grown by 9.9%! This is much closer to true inflation than the CPI's modest 3.7% gain. For a variety of reasons including inflation-indexed welfare payments as well as inflationary perceptions' impact on the financial markets, the government statisticians intentionally lowball the CPI via mathematical wizardry. It is really a garbage indicator, but to most market participants the CPI is inflation. So I use it to be conservative, which really understates the case for gold.
To compute real rates, you simply take the nominal rate of return and subtract annual inflation growth. The purest and most-conservative interest rate to use is the yield on the 1-year US Treasury Bill. All over the world, short-term US Treasuries are considered "risk-free" investments that are the foundation for interest rates. Since Washington can create infinite fiat US dollars out of thin air to pay Treasury investors, there is really no risk of default unless a rebellion or invasion takes out Washington.
Also on real-rates analysis, synching up the time periods is crucial. Since interest rates are typically thought of in annual terms, a 1-year span is ideal. And 1y T-bill yields match up perfectly with the year-over-year change in the CPI. So 1y T-bill yields minus the YoY CPI growth equals real interest rates. Comparing these to gold over strategic time spans is very interesting.
In these charts, 1y T-bill yields are rendered in black. The YoY CPI change, which is only published once a month and hence looks stair-steppy, is drawn in white. The difference between this nominal yield and inflation is the real rate shown in blue. Finally gold is superimposed over the top of all this interest-rate data in red. As you'll see, low and negative real rates are very bullish for gold.
It always strikes me as ironic. Manipulation theorists spend endless hours railing about perceived manipulation in tiny subsets of the financial markets. But the biggest manipulation of all is out in the open. Like the old Soviet Politburo, the unconstitutional Federal Reserve meets in secret to set the price for money traded among banks. If the Fed was abolished as it should be, and overnight rates operated in a truly free market, the entire financial system would be infinitely more sound than it is today.
In real-rates analysis, we have to start with nominal interest rates. And the shorter the term of a debt instrument, the more the Fed's heavy-handed manipulation influences its yields. 3m Treasuries usually trade in lockstep with the Fed's target overnight bank rate (fed funds), while 30y Treasuries largely ignore it. Since 1y Treasuries are relatively short on this time scale, they are heavily influenced by Fed manipulations.
The black 1y Treasury yield line above looks very similar to the Fed's fed-funds-rate target. Since the Fed dominates the short end of the yield curve, it also dominates real rates. When the Fed drives its own interest rates to artificially-low levels, 1y T-bill yields follow. And if these nominal returns fall below the rate of headline inflation growth, all of a sudden debt investors are losing purchasing power by investing.
Back in 2000, Treasury yields were reasonable near 6%. Investors earned a fair return on their precious capital while debtors paid a fair rate to borrow it, above inflation on both fronts. But in early 2001, the healthy post-tech-stock-bubble bear spooked Alan Greenspan into sowing the seeds for today's calamity. To try and reinflate a stock bubble, the Fed drove nominal rates down to inflation rates so real rates fell to zero.
Note above that gold was languishing, consolidating after a multi-decade bear, until real rates fell decisively under 1%. And gold really didn't start accelerating until real rates went negative in 2002. Negative real rates drive investment demand for gold because bonds become unattractive. Investor preference gradually switches to gold, which will keep pace with inflation, instead of falling behind in under-yielding bonds.
Of course the Fed's monetary inflation never goes where the Fed wants it to. In trying to reinflate the stock markets, Greenspan instead ignited the housing bubble. Its terrible aftermath is apparent today. Never learning any lessons from history, the Fed is doing the same thing today that it did in the early 2000s. It just forced nominal rates down near 1% again to attempt to reinflate the housing bubble. Of course this new monetary inflation will go elsewhere to.
Between 2001 and 2006, with real rates at +1% or lower, gold thrived. It wasn't until real rates decisively headed over 1% again in mid-2006 that gold finally stopped advancing to consolidate. But as soon as the Fed panicked again in late 2007 and started slashing rates, real rates plummeted. Not surprisingly, gold simultaneously soared. More and more bond investors grew discouraged by the Fed's attack on them and bought gold.
Now realize there are many short-term forces acting on gold, such as the US dollar's behavior, general commodities trends, and overall financial-market sentiment. So there are many short-term places in this chart where gold and real rates are not tightly correlated. But if you filter out technical noise and examine this decade as a whole, it is crystal clear that gold has been very strong during a time of low and negative real rates. They spark big gold investment demand.
In late 2007 real rates plunged negative again as Ben Bernanke failed to learn the lessons from Alan Greenspan's disastrous easy-money inflationary orgy. By early 2008 they were -2%, the lowest levels seen in decades. Naturally gold was rocketing higher and headed above $1000 by March. And while gold did get caught up in the brutal commodities correction and global stock panic since, it remains near nice high levels in the context of its secular bull.
And check out real rates in the last 6 months or so. They have been -2% at best, falling to under -3% at times to their lowest levels since summer 1980! This is incredibly bullish for gold. Once the stock panic fades and the dollar-buying frenzy abates, fundamentals will again drive gold. And a negative-real-rate monetary environment hostile to bond investors is the most-bullish-possible environment for gold.
History is very clear in illustrating this fact, which we'll get to shortly here. But first consider the likely future course for real rates. CPI inflation growth is in a clear uptrend as rendered above. While prices for many things plunged during the panic of October and November 2008, prices will quickly stabilize as fear evaporates. So odds are this CPI uptrend will continue. With the Fed's incredible monetary growth, 10% in MZM compared to 0% growth in the US economy, higher general prices are absolutely inevitable.
And if CPI inflation remains at 4%+, heck even 3%+, real rates will stay negative. Failure is an important part of capitalism as it moves assets from incompetent managers to competent managers to keep the economy fresh and vibrant. But for some reason, those traitorous scum in Washington have decided no one should fail. They are hellbent on keeping interest rates artificially low forever if necessary so failed companies and managers can sit on and lock up stagnating assets. Karl Marx would be very proud.
Imagine what would happen if the Fed actually had the courage to quadruple interest rates to make the bond markets mutually beneficial to both investors and debtors again. Overextended debtors would actually fail! Oh the horror! Until nominal rates get up to the 4%+ range again, real rates will remain negative. And I can't see any way our cowardly Fed can raise rates substantially for a long time to come.
With a brutally negative real-rate environment here now and likely to persist for years, the monetary case for gold is exceedingly bullish. If bond investors can't earn a real return after inflation for the risks they take, they will be much better off holding gold. Sure, it doesn't pay a yield. But bonds really don't pay much today either. And unlike bond yields, gold will rise to keep pace with monetary inflation. Investors' purchasing power will be preserved.
All these monetary truths are readily apparent now, proved again in this past decade. But in mid-2001 when I started this thread of research, all we had to rely upon was history. Looking at gold and real rates since 1970 is fascinating. This chart is similar to the prior one except the gold price is adjusted for CPI inflation. Negative real rates helped drive the famous 1970s gold bull, which was far larger than today's so far.
Once again, there are a myriad of short-term factors that affect the gold price. So if you look closely, you can find short-term exceptions to the negative-real-rates-are-great-for-gold rule. But if you carefully consider this chart as a whole, the strategic implications of negative real rates become very apparent. In a secular sense gold does best when real rates are low or negative, and worst when they are healthy.
The 1970s was a time of inflation exceeding the nominal returns available on bonds. So debt investors, acting totally rationally, gradually shifted capital into gold. These investors drove a strong gold bull that speculators ultimately flooded into at the very end, igniting a legendary gold bubble. While the monthly data in this chart doesn't show the daily high, in today's 2008 dollars gold approached $2400 an ounce in January 1980! Today's gold bull isn't even close to seeing a similar blowoff top yet.
That 1970s gold bull only ended when Paul Volcker courageously hiked short-term interest rates dramatically until real rates shot positive to healthy levels again. With excellent 4% to 8% real returns available in bonds, investment demand for gold collapsed. And it didn't reignite again until decades later when real rates finally threatened to once more plunge decisively negative.
By foolishly deciding to bail out speculators in the housing bubble, including highly-leveraged banks and highly-leveraged house "owners", the Fed has trapped itself. Interest rates are way too low, they do not offer realistic returns for bond investors. Yet if the Fed raises rates to more rational levels, the speculators it is trying to bail out are going to fail. While healthy over the long term, this is apparently unacceptable politically.
As long as the Fed strong-arms nominal rates to levels under headline inflation, real rates are going to remain negative. Instead of sitting in bonds and losing real purchasing power year after year, increasing numbers of bond investors are going to park capital in gold to protect it from all this monetary inflation. Even though gold doesn't pay a yield, as long as it merely paces inflation it is a much better investment than bonds lagging behind inflation.
This argument certainly isn't new today. Back in 2001, the coming negative real rates were one of the main fundamental reasons I recommended our subscribers buy physical gold coins for core long-term investments. When the price of money isn't set by the free markets, when it isn't mutually beneficial and robs from investors to subsidize debtors, investors gradually pull out of the debt markets.
In July 2001 I opened my first essay in this series with a 1993 quotation from a Federal Reserve official. He said, "The Fed's attempts to stimulate the economy during the 1970s through what amounted to a policy of extremely low real interest rates led to steadily rising inflation that was finally checked at great cost during the 1980s." Sounds like today, no? Bernanke is doing the same thing done in the 1970s, and his endless easy money will ultimately lead to the same result, massive inflation.
Of course gold is the ultimate asset in highly inflationary times. And the unfathomable quantity of fiat-paper dollars the Fed is creating out of thin air to force-feed into the financial system these days is going to eventually manifest itself in tremendous inflation. This will drive great investment demand in gold and lead to gold's gains not only pacing inflation, but far exceeding it as more and more investors buy.
Gold didn't look great in the last few months, I agree. But don't let technical and sentiment anomalies cloud your perceptions of secular fundamental realities. Today's negative-real-rate environment courtesy of the Fed is the most-bullish-possible monetary environment for gold. Thus at Zeal we have been adding gold and gold-stock positions lately despite all the carnage. Contrarians buy when no one else wants to.
If you are wondering what to do with your capital after weathering the worst of the stock panic, the gold realm is a great place to put a sizeable chunk of it. I don't know of any more-bullish asset class in today's environment. I am more excited about gold today than I was in early 2001 before it quadrupled. To learn about and navigate these treacherous markets, and thrive as this panic abates, subscribe today to our acclaimed monthly newsletter.
The bottom line is negative real rates are one of gold's most powerful fundamental drivers. And thanks to the Fed refusing to let housing speculators fail as they should, negative real rates are going to persist for a long time to come. Maybe years. But bond investors are not dumb. They won't invest for long in an environment where their capital is guaranteed to lose real purchasing power. Some will migrate into gold.
Negative real rates were the monetary foundation of the biggest secular gold bulls in modern history, the 1970s and the 2000s. And just as it took radically high 6%+ real rates to end that 1970s gold bull, this bull isn't likely to end until we see sustained hugely positive real rates as well. In the meantime, gold will continue to thrive on balance despite big pullbacks from time to time driven by capricious sentiment.
Da Man
It's been a tough year for gold investors. Instead of soaring during the great fear and uncertainty of the global financial panic as most gold investors expected, gold got caught up in the selling. Thus it is down 7.3% year-to-date. This is far-better performance than virtually everything else, especially the S&P 500's 40.7% YTD loss. Nevertheless, the lack of a flight to gold in such dire conditions remains disappointing.
Why didn't gold rally? Capital fleeing out of the imploding bond and stock markets flooded into US Treasuries at staggering rates. While Treasuries weren't yielding much, at least they sheltered capital from the surrounding universal panic selling. Before taking refuge in Treasuries, foreign investors first had to buy US dollars. This frenzied dynamic drove a monster dollar rally which hammered gold futures.
Since gold has been the financial-panic asset of choice for centuries, its lackluster trading action during the last couple months has really shaken gold investors' confidence. While physical-coin demand has been very high from small investors, big investors did not rush to buy gold as stock-market fear soared to unprecedented sustained levels. This is leading to questions about this gold bull's ongoing viability.
During times like these when the technical action and sentiment feel terrible, I find it useful to return to the core fundamentals. I started recommending physical gold coins to our subscribers back in May 2001 when gold traded in the $260s. In the 7+ years since, gold has seen plenty of good and bad spells. Yet one major fundamental driver remained steadfastly bullish throughout this bull, real interest rates.
Real rates are the returns realized by bond investors after inflation is subtracted out. If you earn 5% in Treasuries, and inflation is running 3%, then you earn a 2% real return. Much of the 1.05x growth in your nominal capital is eroded by the relentless loss of purchasing power in the dollar. What you could buy last year for $1.00 now costs $1.03, so in terms of real goods and services you aren't advancing as fast.
Normally real rates are positive. For putting their hard-earned capital at risk, debt investors deserve to earn a real purchasing-power return after inflation for their efforts. Even though they don't accept much risk compared to stock investors, they still need to be fairly compensated for this risk. If they are not, they will invest less over the long term because it is pointless to risk scarce capital for a guaranteed loss.
Would you loan money to anyone if you knew you would take a real loss for doing so? Not if you are rational. When nominal interest rates are forced so low by central banks that real returns plunge negative, debt investing becomes a losing proposition. In such a hostile environment, debt investors gradually turn to gold. While bonds guarantee them a real loss, gold will at least keep pace with inflation to preserve the purchasing power of their capital.
To understand the interaction between real rates and gold, you really have to take the long view. Since it takes years for investors to perceive the impact of inflation and change their behavior accordingly, gold doesn't react overnight. But eventually react it does, and this is very clear over a long-enough time slice. The longer real bond returns are poor or negative, the more capital gradually takes refuge in gold.
Interestingly I wrote my first essay in this series back in July 2001 when gold traded in the $260s. Back then real rates had yet to go negative but the Fed was hellbent on driving them there. At that time, we only had the example of the 1970s to consider. But now, the lion's share of a decade later, the real-rates-and-gold comparison is vividly apparent in the 2000s as well. Just as expected, when central banks attack debt investors they gradually forsake losing bonds and migrate into gold.
While researching real rates, I try to use the most-conservative-possible measures. While this really understates the bullish case for gold, it is much easier for mainstream investors to accept and very easy for contrarians to defend. Since most interest rates are still driven by the free markets despite all of Washington's incessant socialist meddling, the inflation measure used is where conservatism comes into play.
Wall Street believes the US government's Consumer Price Index is an accurate measure of inflation. Everyone accepts the CPI as gospel, so I've always used it in this research thread. Since inflation is truly defined as monetary growth, the growth rates in the money supplies are a far-superior measure. With the Fed running its printing presses like there is no tomorrow, relatively more money is chasing relatively less goods and services which drives up nominal prices.
Over the past year, the broad MZM money supply in the US has grown by 9.9%! This is much closer to true inflation than the CPI's modest 3.7% gain. For a variety of reasons including inflation-indexed welfare payments as well as inflationary perceptions' impact on the financial markets, the government statisticians intentionally lowball the CPI via mathematical wizardry. It is really a garbage indicator, but to most market participants the CPI is inflation. So I use it to be conservative, which really understates the case for gold.
To compute real rates, you simply take the nominal rate of return and subtract annual inflation growth. The purest and most-conservative interest rate to use is the yield on the 1-year US Treasury Bill. All over the world, short-term US Treasuries are considered "risk-free" investments that are the foundation for interest rates. Since Washington can create infinite fiat US dollars out of thin air to pay Treasury investors, there is really no risk of default unless a rebellion or invasion takes out Washington.
Also on real-rates analysis, synching up the time periods is crucial. Since interest rates are typically thought of in annual terms, a 1-year span is ideal. And 1y T-bill yields match up perfectly with the year-over-year change in the CPI. So 1y T-bill yields minus the YoY CPI growth equals real interest rates. Comparing these to gold over strategic time spans is very interesting.
In these charts, 1y T-bill yields are rendered in black. The YoY CPI change, which is only published once a month and hence looks stair-steppy, is drawn in white. The difference between this nominal yield and inflation is the real rate shown in blue. Finally gold is superimposed over the top of all this interest-rate data in red. As you'll see, low and negative real rates are very bullish for gold.
It always strikes me as ironic. Manipulation theorists spend endless hours railing about perceived manipulation in tiny subsets of the financial markets. But the biggest manipulation of all is out in the open. Like the old Soviet Politburo, the unconstitutional Federal Reserve meets in secret to set the price for money traded among banks. If the Fed was abolished as it should be, and overnight rates operated in a truly free market, the entire financial system would be infinitely more sound than it is today.
In real-rates analysis, we have to start with nominal interest rates. And the shorter the term of a debt instrument, the more the Fed's heavy-handed manipulation influences its yields. 3m Treasuries usually trade in lockstep with the Fed's target overnight bank rate (fed funds), while 30y Treasuries largely ignore it. Since 1y Treasuries are relatively short on this time scale, they are heavily influenced by Fed manipulations.
The black 1y Treasury yield line above looks very similar to the Fed's fed-funds-rate target. Since the Fed dominates the short end of the yield curve, it also dominates real rates. When the Fed drives its own interest rates to artificially-low levels, 1y T-bill yields follow. And if these nominal returns fall below the rate of headline inflation growth, all of a sudden debt investors are losing purchasing power by investing.
Back in 2000, Treasury yields were reasonable near 6%. Investors earned a fair return on their precious capital while debtors paid a fair rate to borrow it, above inflation on both fronts. But in early 2001, the healthy post-tech-stock-bubble bear spooked Alan Greenspan into sowing the seeds for today's calamity. To try and reinflate a stock bubble, the Fed drove nominal rates down to inflation rates so real rates fell to zero.
Note above that gold was languishing, consolidating after a multi-decade bear, until real rates fell decisively under 1%. And gold really didn't start accelerating until real rates went negative in 2002. Negative real rates drive investment demand for gold because bonds become unattractive. Investor preference gradually switches to gold, which will keep pace with inflation, instead of falling behind in under-yielding bonds.
Of course the Fed's monetary inflation never goes where the Fed wants it to. In trying to reinflate the stock markets, Greenspan instead ignited the housing bubble. Its terrible aftermath is apparent today. Never learning any lessons from history, the Fed is doing the same thing today that it did in the early 2000s. It just forced nominal rates down near 1% again to attempt to reinflate the housing bubble. Of course this new monetary inflation will go elsewhere to.
Between 2001 and 2006, with real rates at +1% or lower, gold thrived. It wasn't until real rates decisively headed over 1% again in mid-2006 that gold finally stopped advancing to consolidate. But as soon as the Fed panicked again in late 2007 and started slashing rates, real rates plummeted. Not surprisingly, gold simultaneously soared. More and more bond investors grew discouraged by the Fed's attack on them and bought gold.
Now realize there are many short-term forces acting on gold, such as the US dollar's behavior, general commodities trends, and overall financial-market sentiment. So there are many short-term places in this chart where gold and real rates are not tightly correlated. But if you filter out technical noise and examine this decade as a whole, it is crystal clear that gold has been very strong during a time of low and negative real rates. They spark big gold investment demand.
In late 2007 real rates plunged negative again as Ben Bernanke failed to learn the lessons from Alan Greenspan's disastrous easy-money inflationary orgy. By early 2008 they were -2%, the lowest levels seen in decades. Naturally gold was rocketing higher and headed above $1000 by March. And while gold did get caught up in the brutal commodities correction and global stock panic since, it remains near nice high levels in the context of its secular bull.
And check out real rates in the last 6 months or so. They have been -2% at best, falling to under -3% at times to their lowest levels since summer 1980! This is incredibly bullish for gold. Once the stock panic fades and the dollar-buying frenzy abates, fundamentals will again drive gold. And a negative-real-rate monetary environment hostile to bond investors is the most-bullish-possible environment for gold.
History is very clear in illustrating this fact, which we'll get to shortly here. But first consider the likely future course for real rates. CPI inflation growth is in a clear uptrend as rendered above. While prices for many things plunged during the panic of October and November 2008, prices will quickly stabilize as fear evaporates. So odds are this CPI uptrend will continue. With the Fed's incredible monetary growth, 10% in MZM compared to 0% growth in the US economy, higher general prices are absolutely inevitable.
And if CPI inflation remains at 4%+, heck even 3%+, real rates will stay negative. Failure is an important part of capitalism as it moves assets from incompetent managers to competent managers to keep the economy fresh and vibrant. But for some reason, those traitorous scum in Washington have decided no one should fail. They are hellbent on keeping interest rates artificially low forever if necessary so failed companies and managers can sit on and lock up stagnating assets. Karl Marx would be very proud.
Imagine what would happen if the Fed actually had the courage to quadruple interest rates to make the bond markets mutually beneficial to both investors and debtors again. Overextended debtors would actually fail! Oh the horror! Until nominal rates get up to the 4%+ range again, real rates will remain negative. And I can't see any way our cowardly Fed can raise rates substantially for a long time to come.
With a brutally negative real-rate environment here now and likely to persist for years, the monetary case for gold is exceedingly bullish. If bond investors can't earn a real return after inflation for the risks they take, they will be much better off holding gold. Sure, it doesn't pay a yield. But bonds really don't pay much today either. And unlike bond yields, gold will rise to keep pace with monetary inflation. Investors' purchasing power will be preserved.
All these monetary truths are readily apparent now, proved again in this past decade. But in mid-2001 when I started this thread of research, all we had to rely upon was history. Looking at gold and real rates since 1970 is fascinating. This chart is similar to the prior one except the gold price is adjusted for CPI inflation. Negative real rates helped drive the famous 1970s gold bull, which was far larger than today's so far.
Once again, there are a myriad of short-term factors that affect the gold price. So if you look closely, you can find short-term exceptions to the negative-real-rates-are-great-for-gold rule. But if you carefully consider this chart as a whole, the strategic implications of negative real rates become very apparent. In a secular sense gold does best when real rates are low or negative, and worst when they are healthy.
The 1970s was a time of inflation exceeding the nominal returns available on bonds. So debt investors, acting totally rationally, gradually shifted capital into gold. These investors drove a strong gold bull that speculators ultimately flooded into at the very end, igniting a legendary gold bubble. While the monthly data in this chart doesn't show the daily high, in today's 2008 dollars gold approached $2400 an ounce in January 1980! Today's gold bull isn't even close to seeing a similar blowoff top yet.
That 1970s gold bull only ended when Paul Volcker courageously hiked short-term interest rates dramatically until real rates shot positive to healthy levels again. With excellent 4% to 8% real returns available in bonds, investment demand for gold collapsed. And it didn't reignite again until decades later when real rates finally threatened to once more plunge decisively negative.
By foolishly deciding to bail out speculators in the housing bubble, including highly-leveraged banks and highly-leveraged house "owners", the Fed has trapped itself. Interest rates are way too low, they do not offer realistic returns for bond investors. Yet if the Fed raises rates to more rational levels, the speculators it is trying to bail out are going to fail. While healthy over the long term, this is apparently unacceptable politically.
As long as the Fed strong-arms nominal rates to levels under headline inflation, real rates are going to remain negative. Instead of sitting in bonds and losing real purchasing power year after year, increasing numbers of bond investors are going to park capital in gold to protect it from all this monetary inflation. Even though gold doesn't pay a yield, as long as it merely paces inflation it is a much better investment than bonds lagging behind inflation.
This argument certainly isn't new today. Back in 2001, the coming negative real rates were one of the main fundamental reasons I recommended our subscribers buy physical gold coins for core long-term investments. When the price of money isn't set by the free markets, when it isn't mutually beneficial and robs from investors to subsidize debtors, investors gradually pull out of the debt markets.
In July 2001 I opened my first essay in this series with a 1993 quotation from a Federal Reserve official. He said, "The Fed's attempts to stimulate the economy during the 1970s through what amounted to a policy of extremely low real interest rates led to steadily rising inflation that was finally checked at great cost during the 1980s." Sounds like today, no? Bernanke is doing the same thing done in the 1970s, and his endless easy money will ultimately lead to the same result, massive inflation.
Of course gold is the ultimate asset in highly inflationary times. And the unfathomable quantity of fiat-paper dollars the Fed is creating out of thin air to force-feed into the financial system these days is going to eventually manifest itself in tremendous inflation. This will drive great investment demand in gold and lead to gold's gains not only pacing inflation, but far exceeding it as more and more investors buy.
Gold didn't look great in the last few months, I agree. But don't let technical and sentiment anomalies cloud your perceptions of secular fundamental realities. Today's negative-real-rate environment courtesy of the Fed is the most-bullish-possible monetary environment for gold. Thus at Zeal we have been adding gold and gold-stock positions lately despite all the carnage. Contrarians buy when no one else wants to.
If you are wondering what to do with your capital after weathering the worst of the stock panic, the gold realm is a great place to put a sizeable chunk of it. I don't know of any more-bullish asset class in today's environment. I am more excited about gold today than I was in early 2001 before it quadrupled. To learn about and navigate these treacherous markets, and thrive as this panic abates, subscribe today to our acclaimed monthly newsletter.
The bottom line is negative real rates are one of gold's most powerful fundamental drivers. And thanks to the Fed refusing to let housing speculators fail as they should, negative real rates are going to persist for a long time to come. Maybe years. But bond investors are not dumb. They won't invest for long in an environment where their capital is guaranteed to lose real purchasing power. Some will migrate into gold.
Negative real rates were the monetary foundation of the biggest secular gold bulls in modern history, the 1970s and the 2000s. And just as it took radically high 6%+ real rates to end that 1970s gold bull, this bull isn't likely to end until we see sustained hugely positive real rates as well. In the meantime, gold will continue to thrive on balance despite big pullbacks from time to time driven by capricious sentiment.
Da Man
3 December 2008
Only higher interest rates will do
The US dollar must fall 50% and real rates (inflation adjusted) must be about 5%, only if the US starts saving can the world economy recover. Savings and investment in new capital goods and the abandonment on the demand of the worlds savings.
Funny how interested individuals can see through the fog even though the professionals, esp. the X-Gens can't see past the default setting, the status quo. Boomers at least knew people who had experienced the Great Depression and WW2. Boomers can even recall the bear market of 72-80.
Most professional economists are prisioners of the assumptions of their models.
This is the essentials of that argument:
Should the Fed intervene to reduce interest rates at the long end of the curve? Fed Chairman Bernanke’s intimation today that the might do this got the market’s undivided attention.
The answer depends on whether the policy objective is to get Americans to consumer again, or to get them to save.
Edmund Phelps,the 2006 Nobelist in economics, reminds me of a warning he issued in a March 14, 2008 op-ed in The Wall Street Journal:
The Fed’s view seems to be that the natural interest rate has decreased with the business downturn. But this too is uncertain.
We should consider Hayek’s argument that the upheavals in a boom may change the natural rate of interest. If the boom left it elevated, failure by the central bank to raise its interest rate correspondingly would cause inflation to begin rising. Something like that may be happening now.
I would add another possibility. Consider the sharp decline over the past year in Americans’ stock market wealth. This means, at unchanged interest rates, a decrease in their income from wealth.
For households to be willing in such straitened circumstances to save as much as before — cutting their consumption by the whole amount of the drop in their income from wealth — they would have to be compensated with a higher interest rate. At unchanged interest rates, people will not want to leave consumption in the present so pinched. So natural interest rates are driven up.
There may be other mechanisms at work. Uncertainty reigns. But if the above scenario comes to pass, the Fed cannot keep interest rates as low as now for very long. We may see in the near future higher interest rates and higher unemployment than have prevailed in the recent past.
Prof. Phelps is exactly correct, in my humble opinion. As Francesco Sisci and I wrote recently,
In the rush to prop up America’s financial institutions, foreign economic policy seems remote from Washington’s agenda. America wants to revive the mortgage market and consumer spending. The effort is doomed to failure. For a quarter of a century the American consumer has been the locomotive of the world economy, and now the locomotive has derailed and taken the rest of the world economy with it.
Recovery requires a great change in direction of capital flows. For the past decade, poor people in the developing world have financed the consumption of rich people in America. America has borrowed nearly $1 trillion a year, mostly from the developing world, and used these funds to import consumer goods and buy homes at low interest rates. The result is a solvency crisis of the American household, which shows up as a solvency crisis for financial institutions. If we reckon the retirement needs of households as a liability, the household sector is as good as bankrupt.
No recovery is possible unless American households can save, and they cannot save in an economic contraction when incomes spiral downwards. To save, Americans must sell goods and services to someone else, and a glance at the globe makes clear who that must be: nearly half the world’s population, and most of the world’s capacity for economic growth, is concentrated in China and the Pacific Littoral.
Funny how interested individuals can see through the fog even though the professionals, esp. the X-Gens can't see past the default setting, the status quo. Boomers at least knew people who had experienced the Great Depression and WW2. Boomers can even recall the bear market of 72-80.
Most professional economists are prisioners of the assumptions of their models.
This is the essentials of that argument:
Should the Fed intervene to reduce interest rates at the long end of the curve? Fed Chairman Bernanke’s intimation today that the might do this got the market’s undivided attention.
The answer depends on whether the policy objective is to get Americans to consumer again, or to get them to save.
Edmund Phelps,the 2006 Nobelist in economics, reminds me of a warning he issued in a March 14, 2008 op-ed in The Wall Street Journal:
The Fed’s view seems to be that the natural interest rate has decreased with the business downturn. But this too is uncertain.
We should consider Hayek’s argument that the upheavals in a boom may change the natural rate of interest. If the boom left it elevated, failure by the central bank to raise its interest rate correspondingly would cause inflation to begin rising. Something like that may be happening now.
I would add another possibility. Consider the sharp decline over the past year in Americans’ stock market wealth. This means, at unchanged interest rates, a decrease in their income from wealth.
For households to be willing in such straitened circumstances to save as much as before — cutting their consumption by the whole amount of the drop in their income from wealth — they would have to be compensated with a higher interest rate. At unchanged interest rates, people will not want to leave consumption in the present so pinched. So natural interest rates are driven up.
There may be other mechanisms at work. Uncertainty reigns. But if the above scenario comes to pass, the Fed cannot keep interest rates as low as now for very long. We may see in the near future higher interest rates and higher unemployment than have prevailed in the recent past.
Prof. Phelps is exactly correct, in my humble opinion. As Francesco Sisci and I wrote recently,
In the rush to prop up America’s financial institutions, foreign economic policy seems remote from Washington’s agenda. America wants to revive the mortgage market and consumer spending. The effort is doomed to failure. For a quarter of a century the American consumer has been the locomotive of the world economy, and now the locomotive has derailed and taken the rest of the world economy with it.
Recovery requires a great change in direction of capital flows. For the past decade, poor people in the developing world have financed the consumption of rich people in America. America has borrowed nearly $1 trillion a year, mostly from the developing world, and used these funds to import consumer goods and buy homes at low interest rates. The result is a solvency crisis of the American household, which shows up as a solvency crisis for financial institutions. If we reckon the retirement needs of households as a liability, the household sector is as good as bankrupt.
No recovery is possible unless American households can save, and they cannot save in an economic contraction when incomes spiral downwards. To save, Americans must sell goods and services to someone else, and a glance at the globe makes clear who that must be: nearly half the world’s population, and most of the world’s capacity for economic growth, is concentrated in China and the Pacific Littoral.
27 October 2008
Expect rates to rise 12% points as we depress
Reflecting very "easy" credit that is integral to every great bubble, real long interest rates have declined until speculation fails. As shown on the following page of charts, some of the declines have been huge.
Soaring real rates is one of the features of a post-bubble contraction, and is accomplished by falling prices and earnings power that impairs the ability to service debt.
A revulsion for most corporate debt soon encompasses long-dated treasuries such that nominal yields increase as the rate of CPI inflation declines.
In each case, the shock to the markets and policy makers was sufficient to end a generation's abuse of credit.
16 October 2008
Uncle Sam's A.R.M.~ ......Dude, where's the Dharma?
As many home-owners have or are in the process of discovering, adjustable rate mortgage (A.R.M.s) payments can quickly become unmanageable when rates reset. As interest charges double or triple the wisdom of a long term fixed rate mortgage becomes clear.
Fortunately the wise men at the Treasury Department are well versed in such matters and didn't succumb to the temptation of "teaser" rates.
Right?
Wrong.
According to the US Treasury, as of June 2008 (thus not inclusive of the recent bail-outs and mortgage market nationalization), of the $2.72T in government debt owned by foreigners, $1.2T has a duration of under 2 years. In other words, interest rates on that $1.2T ($1.4T including interest payments) will be reset in the next 24 months.
Expanding the scope to include all US external debt, as of June 2008, of the $11.7T of debt owned by foreigners, $6.3T has a duration of under 2 years.
One of Hyman Minsky's claims to fame is his research on the transition from financial stability to fragility in a capitalist economy experiencing a bubble- the Financial Instability Hypothesis.
The Levy Institute, continuing Minsky's research, argues: The aim of these hypotheses is to show that the normal functioning of “a capitalist economy endogenously generates a financial structure which is susceptible to financial crises”because of the higher sensitivity of the economy to changes in income, cash commitments and asset prices. Thus, it is important to explain how the financial structure of the economy (or a sector) changes. This implies studying how it is affected by the prevailing convention regarding the appropriate balance-sheet and cash-flow structures, and by thedevelopments in the productive economy: both the expectation and actual sides of the economyaffect the financial structure of the economy.
The logic of this financial instability hypothesis is that during a prosperous economicperiod, there are forces that progressively lead the economy from conservative financialpositions (hedge positions) to positions for which the articulation of cash flows is high andbalance sheets are illiquid and highly leveraged (Minsky 1986a, 210-211):
The logic of this theorem is twofold. First, within a financial structure that is dominated by hedgefinance, there will be a plentiful supply of short-term funds, so that short-term financing is“cheaper” than long-term financing. Accordingly, firms will be tempted to engage in speculativefinance. Second, over a period of good times, the financial markets will become less averse torisk. This leads to the proliferation of financing forms that involve closer coordination of cashflows out with cash flows in—that is, narrower safety margins and greater use of speculative andPonzi financing. (Minsky 1986b, 5)
In other words, Minsky, a proponent of financial regulation, argued that unregulated finance was prone to succumb to the temptation of lower short term rates. Debt duration would decrease and financial stability would be lost.
And so it has.
With the fiscal deficit expected to rise dramatically over the next 2 years, the US Treasury will not only need to finance that expansion, it will also need to roll-over the maturing short term debt.
Good Luck.
Fortunately the wise men at the Treasury Department are well versed in such matters and didn't succumb to the temptation of "teaser" rates.
Right?
Wrong.
According to the US Treasury, as of June 2008 (thus not inclusive of the recent bail-outs and mortgage market nationalization), of the $2.72T in government debt owned by foreigners, $1.2T has a duration of under 2 years. In other words, interest rates on that $1.2T ($1.4T including interest payments) will be reset in the next 24 months.
Expanding the scope to include all US external debt, as of June 2008, of the $11.7T of debt owned by foreigners, $6.3T has a duration of under 2 years.
One of Hyman Minsky's claims to fame is his research on the transition from financial stability to fragility in a capitalist economy experiencing a bubble- the Financial Instability Hypothesis.
The Levy Institute, continuing Minsky's research, argues: The aim of these hypotheses is to show that the normal functioning of “a capitalist economy endogenously generates a financial structure which is susceptible to financial crises”because of the higher sensitivity of the economy to changes in income, cash commitments and asset prices. Thus, it is important to explain how the financial structure of the economy (or a sector) changes. This implies studying how it is affected by the prevailing convention regarding the appropriate balance-sheet and cash-flow structures, and by thedevelopments in the productive economy: both the expectation and actual sides of the economyaffect the financial structure of the economy.
The logic of this financial instability hypothesis is that during a prosperous economicperiod, there are forces that progressively lead the economy from conservative financialpositions (hedge positions) to positions for which the articulation of cash flows is high andbalance sheets are illiquid and highly leveraged (Minsky 1986a, 210-211):
The logic of this theorem is twofold. First, within a financial structure that is dominated by hedgefinance, there will be a plentiful supply of short-term funds, so that short-term financing is“cheaper” than long-term financing. Accordingly, firms will be tempted to engage in speculativefinance. Second, over a period of good times, the financial markets will become less averse torisk. This leads to the proliferation of financing forms that involve closer coordination of cashflows out with cash flows in—that is, narrower safety margins and greater use of speculative andPonzi financing. (Minsky 1986b, 5)
In other words, Minsky, a proponent of financial regulation, argued that unregulated finance was prone to succumb to the temptation of lower short term rates. Debt duration would decrease and financial stability would be lost.
And so it has.
With the fiscal deficit expected to rise dramatically over the next 2 years, the US Treasury will not only need to finance that expansion, it will also need to roll-over the maturing short term debt.
Good Luck.
13 July 2007
Swinging the Market - Calvin Bear
NEW 7/12/2007 4:08:50 PM
Two politically independent factors affect what happens in the share market – one is the real market price of money, and the other is the range of competitive options available for the equity dollar, in other words, comparative risk values.
Three politically dependent factors affect what happens in the market – whether or not the investment bankers who have supported their political candidates feel they have control of these politicians, whether they are individually extracting an evenhanded distribution of favours and money between their ranks from their political ‘slaves,' whether they have sufficient control over the minds and actions of the voting public.
There is only a very small handful of investment banks that exert that much control over the White House. But they control by far the largest dollar push in the equities markets virtually worldwide.
Whereas the judiciary is not politically independent in the USA, it is very very much independent in Israel – and consequently, there is a dynamic that is not much referred to even among those Jewish Banking Conspiracy ‘nutjobs' which often produces disturbances and wide differences of opinion among the operators in the bullfight ring who normally ‘should' be going along a consistent and collusive pathway; except that they don't regularly. This condition innately part of the Israel Lobby, allows for sudden dark volatility in almost every function of policy coming out of the White House, and equivalently it is the root cause of unheralded volatility within the share market collusive banking cartels who operate at the top of capital flow decisions in New York.
Although it is true that there has been for a long time a total lack of discipline surrounding the extending of money from the US Treasury to a small handful of investment banks and their associated interests – this cannot completely overcome the forces of money worldwide that really are the drivers of the interest rate; notwithstanding that it is also due to the trade currency status of the US Dollar and its link to the policy decisions of Japanese banks and the Japan Government, that the Treasury can get away with its bizarre belief in the printing press over the minting press.
Although I find it extremely odd for me to be making references to Lyndon Larouche, nevertheless he is an exact example of a brand name thinker whose printed body of recent work draws from so much excellent historical background, yet still manages to say that dead people are behind the active decisions of today's money and capital managers: it is perfectly true that there was a London City merchant base of corruption and greed that developed into a collusive trans-Atlantic elite two or three hundred years – but these people suffered just as much decimation through all the major wars since Napoleon and there is no evidence they still exist today.
In the same way, it is perfectly possible that Henry Kissinger was part of a globally powerful elite that includes Rumsfeld and Cheney – an elite that directed the current wars in the Middle East – it is not at all certain these people fully control all the complexities of US political reality and there is far more evidence that Congress is swinging brutally strongly AWAY from this clique and its interests.
The investment banks that are not aligned with the Kissinger ideologues currently running the White House, could already be operating on a long term plan to undo the present Republican ruling faction, and these banks will far prefer to create a BIG BUBBLE that can be pinned on the current Bush administrations negligence. Consequently you are more likely to see the share market withdrawals closer to the elections and not quite yet, so that the ‘problems' are fresh in the minds of voters and hot in the media AT THE TIME OF VOTING, and not sooner.
Kissinger is an old man, and Cheney is past his best aggressive years. Olmert is a political dead man walking. These people are dancing their swan songs, not their Bolero Fire Dances!
I mean career fund managers out of the establishment business schools can jump on all the bandwagons they want to but the fact will remain that they have no real access to private equity or hedge fund knowledge no matter how many new IPOs they set up.
ALL debt is supposed to have collateral supporting its downside risks – why should the phrase ‘collateralised debt obligation' suddenly imply an intrinsically self-immolating investment structure?
There is private equity that can NEVER be looked into by the SEC no matter it tries to do – there are secrets of financing and funding that simply are not in the public arena of knowledge. And there are hedge operations that can build or destroy any currency and these have nothing whatsoever to do with the types of leverage and derivative positions and the CREDIT DEFAULT SWAPS (which are totally different to CDOs in essence).
The sub-prime lenders are called sub-prime because everyone always knew they could not meet their repayment schedules – why is it surprising to the professional investor that these will default? It might be surprising that the packaged funds that sell such sub-prime bundles to pension funds collapse with such regularity – but not to me. The fact is, the pension fund contributers are not collapsing; THEY are still making payments to someone, anyone, and probably just the next risky fund that replaced the collapsed one!
The only time there will be a market crisis is when the pension holders start making large scale capital calls… But this might conceivably be actuarily defeated as a ‘problem' if a lot of pensioners simply die. Which they inevitably will at some point.
No. The equity market will not fall just because idiot hedge fund managers or CDOs fail the investor. The equity market will only start to become a slide downwards when the quiet private equity investment bankers sell their equity positions in large scale in order to take up a position in a more competitive investing position. And this will require interest rates closer to 7 per cent than to 5.
Calvin J. Bear
Two politically independent factors affect what happens in the share market – one is the real market price of money, and the other is the range of competitive options available for the equity dollar, in other words, comparative risk values.
Three politically dependent factors affect what happens in the market – whether or not the investment bankers who have supported their political candidates feel they have control of these politicians, whether they are individually extracting an evenhanded distribution of favours and money between their ranks from their political ‘slaves,' whether they have sufficient control over the minds and actions of the voting public.
There is only a very small handful of investment banks that exert that much control over the White House. But they control by far the largest dollar push in the equities markets virtually worldwide.
Whereas the judiciary is not politically independent in the USA, it is very very much independent in Israel – and consequently, there is a dynamic that is not much referred to even among those Jewish Banking Conspiracy ‘nutjobs' which often produces disturbances and wide differences of opinion among the operators in the bullfight ring who normally ‘should' be going along a consistent and collusive pathway; except that they don't regularly. This condition innately part of the Israel Lobby, allows for sudden dark volatility in almost every function of policy coming out of the White House, and equivalently it is the root cause of unheralded volatility within the share market collusive banking cartels who operate at the top of capital flow decisions in New York.
Although it is true that there has been for a long time a total lack of discipline surrounding the extending of money from the US Treasury to a small handful of investment banks and their associated interests – this cannot completely overcome the forces of money worldwide that really are the drivers of the interest rate; notwithstanding that it is also due to the trade currency status of the US Dollar and its link to the policy decisions of Japanese banks and the Japan Government, that the Treasury can get away with its bizarre belief in the printing press over the minting press.
Although I find it extremely odd for me to be making references to Lyndon Larouche, nevertheless he is an exact example of a brand name thinker whose printed body of recent work draws from so much excellent historical background, yet still manages to say that dead people are behind the active decisions of today's money and capital managers: it is perfectly true that there was a London City merchant base of corruption and greed that developed into a collusive trans-Atlantic elite two or three hundred years – but these people suffered just as much decimation through all the major wars since Napoleon and there is no evidence they still exist today.
In the same way, it is perfectly possible that Henry Kissinger was part of a globally powerful elite that includes Rumsfeld and Cheney – an elite that directed the current wars in the Middle East – it is not at all certain these people fully control all the complexities of US political reality and there is far more evidence that Congress is swinging brutally strongly AWAY from this clique and its interests.
The investment banks that are not aligned with the Kissinger ideologues currently running the White House, could already be operating on a long term plan to undo the present Republican ruling faction, and these banks will far prefer to create a BIG BUBBLE that can be pinned on the current Bush administrations negligence. Consequently you are more likely to see the share market withdrawals closer to the elections and not quite yet, so that the ‘problems' are fresh in the minds of voters and hot in the media AT THE TIME OF VOTING, and not sooner.
Kissinger is an old man, and Cheney is past his best aggressive years. Olmert is a political dead man walking. These people are dancing their swan songs, not their Bolero Fire Dances!
I mean career fund managers out of the establishment business schools can jump on all the bandwagons they want to but the fact will remain that they have no real access to private equity or hedge fund knowledge no matter how many new IPOs they set up.
ALL debt is supposed to have collateral supporting its downside risks – why should the phrase ‘collateralised debt obligation' suddenly imply an intrinsically self-immolating investment structure?
There is private equity that can NEVER be looked into by the SEC no matter it tries to do – there are secrets of financing and funding that simply are not in the public arena of knowledge. And there are hedge operations that can build or destroy any currency and these have nothing whatsoever to do with the types of leverage and derivative positions and the CREDIT DEFAULT SWAPS (which are totally different to CDOs in essence).
The sub-prime lenders are called sub-prime because everyone always knew they could not meet their repayment schedules – why is it surprising to the professional investor that these will default? It might be surprising that the packaged funds that sell such sub-prime bundles to pension funds collapse with such regularity – but not to me. The fact is, the pension fund contributers are not collapsing; THEY are still making payments to someone, anyone, and probably just the next risky fund that replaced the collapsed one!
The only time there will be a market crisis is when the pension holders start making large scale capital calls… But this might conceivably be actuarily defeated as a ‘problem' if a lot of pensioners simply die. Which they inevitably will at some point.
No. The equity market will not fall just because idiot hedge fund managers or CDOs fail the investor. The equity market will only start to become a slide downwards when the quiet private equity investment bankers sell their equity positions in large scale in order to take up a position in a more competitive investing position. And this will require interest rates closer to 7 per cent than to 5.
Calvin J. Bear
13 June 2007
Global dollar crisis dead ahead
The financial and stock exchange players are now focusing on a single indicator, the evolution of the interest rates fixed by the central banks, and in particular that of the American Federal Reserve. Indeed, because of the United States central role in the world financial system, they play the part of the catalyst of hopes and fears; and their financial authorities will, during this phase II, accelerate the crisis. The US government and Federal Reserve have indeed led their economy and the whole of the financial markets towards a total dead end. The return of inflation has led to an increase in interest rates everywhere in the world, and the loss of confidence in the real American economy (with the background, the general loss of confidence in the United States) imposes a dramatic choice between two solutions with painful consequences:
. Solution 1 - towards stagflation: to raise of the US interest rate to fight against inflation and to preserve the credibility of the Dollar (since it is only the differential in the interest rate with the EU and Japan that now maintains its relative value), but to accelerate the collapse of the growth of the United States economy, by making the real estate bubble (which is already deflating quickly) explode, and by disrupting up household consumption (on which the essence of the US growth has rested for 5 years). Inflation, high interest rates and growth at half-mast, even recession, this is a well-known situation which prevailed during the Seventies: stagflation [1].
. Solution 2 - towards hyperinflation: stability of the US interest rates (and thus a drop of their relative value compared to the EU and Japan) to try (without guarantee, given the current state of the US economy [9]) to maintain the American internal growth and cause a collapse of the Dollar whose value “only just holds” on this differential, leading to the brutal interruption of the financing by the rest of the world of the American deficit (commercial and public) and thus a total financial crisis. This decision of course leaves the space open to inflation by trying to privilege growth, but it opens a period of generalized loss of confidence which reinforces, with the collapse of the Dollar, a very strong inflationary pressure in the United States which could lead to hyperinflation [10].
LEAP/E2020 believes that the US Reserve Federal, whose shareholders are large banks [11], will choose Solution 1 because in the second case the Federal Reserve is itself marginalized and loses the possibility of using one of its main instruments of action (interest rates). In addition, the current president of the Federal Reserve is convinced that parallel to a rise of the interest rates, an additional contribution of liquidity [12] to the economy will make it possible for the latter to set out again on the path towards growth [13]
For the team of LEAP/E2020, neither of the two solutions open to the American authorities can cure the total systemic crisis, their choice will be in fact primordial in determining the form and the extent of phase III of the total systemic crisis, the phase known as “impact phase”. The rest of the world will indeed not be affected the same way if the American authorities choose solution 1 or solution 2.
. Solution 1 - towards stagflation: to raise of the US interest rate to fight against inflation and to preserve the credibility of the Dollar (since it is only the differential in the interest rate with the EU and Japan that now maintains its relative value), but to accelerate the collapse of the growth of the United States economy, by making the real estate bubble (which is already deflating quickly) explode, and by disrupting up household consumption (on which the essence of the US growth has rested for 5 years). Inflation, high interest rates and growth at half-mast, even recession, this is a well-known situation which prevailed during the Seventies: stagflation [1].
. Solution 2 - towards hyperinflation: stability of the US interest rates (and thus a drop of their relative value compared to the EU and Japan) to try (without guarantee, given the current state of the US economy [9]) to maintain the American internal growth and cause a collapse of the Dollar whose value “only just holds” on this differential, leading to the brutal interruption of the financing by the rest of the world of the American deficit (commercial and public) and thus a total financial crisis. This decision of course leaves the space open to inflation by trying to privilege growth, but it opens a period of generalized loss of confidence which reinforces, with the collapse of the Dollar, a very strong inflationary pressure in the United States which could lead to hyperinflation [10].
LEAP/E2020 believes that the US Reserve Federal, whose shareholders are large banks [11], will choose Solution 1 because in the second case the Federal Reserve is itself marginalized and loses the possibility of using one of its main instruments of action (interest rates). In addition, the current president of the Federal Reserve is convinced that parallel to a rise of the interest rates, an additional contribution of liquidity [12] to the economy will make it possible for the latter to set out again on the path towards growth [13]
For the team of LEAP/E2020, neither of the two solutions open to the American authorities can cure the total systemic crisis, their choice will be in fact primordial in determining the form and the extent of phase III of the total systemic crisis, the phase known as “impact phase”. The rest of the world will indeed not be affected the same way if the American authorities choose solution 1 or solution 2.
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