Friday, October 24, 2014

Markets Are Distorted By 
"Rumsfeld-Knowns" &
Either Way, Financial Repression For The Benefit Of The Government & Their Bank Partners Are Winning
"The behavior of financial markets these days is frankly divorced from reality, with value-investing banished .. Markets have become distorted by Rumsfeld-knowns such as interest rate policy and 'market guidance', and Rumsfeld-unknowns such as undeclared market intervention by the authorities. On top of these distortions there is remote investing by computers programmed with algorithms and high-frequency traders, unable to make human value-assessments .. The reality is that there is intervention across a range of markets; but most of the mispricing is in the hands of private, not government investors .. We can fret about who is actually responsible for market distortions, instead we should ask who benefits:
Governments: in the past they have covered their debts through a process dubbed financial repression, when artificially low interest rates and bond yields were the principal mechanism whereby wealth is transferred from savers to the government. This process still goes on today.
Zero interest rate policy: lays the process bare, and turns savers into borrowers.
Investment and hedge funds: invest together with the banks which take our deposits & speculate on our behalf. They think that with a Yellen or Draghi 'put' underwriting markets a ten-year government bond with a two per cent yield is an attractive investment. In doing so they are transferring financial resources to governments in a variation on old-fashioned financial repression."
- Alasdair Macleod
link here to the  commentary
Markets Are Reacting Wildly On Any Federal Reserve Shifts Or Statements Of Policy
In his latest commentary, Scotiabank's Guy Haselmann sees warning signs from a stock market in freefall changing to a melt-up lately .. emphasizes the markets should not underestimate the power of central bank policy & statements influencing the direction of the markets .. "The FOMC should take this as a warning sign. It would be irrational for the Fed to believe that after QE purposefully elevated asset prices and generated a one-way moral hazard spectacle, that there is not going to be some-type of reversal (reaction) when QE is withdrawn and the first hike nears .. The new flaw in Fed communication that has arisen recently, and that was amplified by James Bullard’s interview, is how Fed policymakers assess the trade-off between stimulating economic activity and financial stability risks .. Last week’s wild ride was a precursor of the unwind trade that will occur when the one-way bets have to find a two-way equilibrium price." .. Circumstances have become a 'Hobson’s Choice'.
LINK HERE to the commentary
Tug of War Between
Inflation & Deflation
Incrementum Advisory Board discussion on "The tug-of-war between inflation and deflation and its implications on financial markets" .. the advisory board consists of: ► Zac Bharucha: Independent trader and writer, experienced fund manager at Phillips & Drew Fund Management, AMP Asset Management and M&G in London
► Heinz Blasnik: Independent trader, market analyst at Hedgefund Consultants & publisher of the highly regarded Economics blog
► James G. Rickards: Bestselling author (Currency Wars, The Death of Money), Partner at Tangent Capital, frequent interview guest on CNBC, Bloomberg, CNN
► Dr. Frank Shostak: Chief economist at MMG Zurich and one of the world leaders in applied Austrian School of Economics
► Rahim Taghizadegan: Founder of the Institute for value-based economics, bestselling author & internationally renowned expert on the Austrian School of Economics
The main topic of the discussion was the increasing deflationary pressure & its consequences on markets & central bank policy. Moreover we discussed the possibility of another round of Quantitative Easing, the technical setup of equity & high yield markets & the outlook for Gold. Probably the whole discussion can best be summed up by Ludwig von Mises’ quote:
"No increase in the welfare of the members of a society can result from the availability of an additional quantity of money."

From Our Archives:
June 25, 2014
2014 Gold Report
From Incrementum AG
The newest edition of the annual In Gold We Trust report emphasizes how gold is a monetary asset rather than an industrial commodity .. the report provides analysis on the gold sector .. It is written by Ronald Stoeferle who is the managing partner at Incrementum AG in Liechtenstein & he takes an economic perspective from the Austrian School of Economics .. "We are currently on a journey to the outer reaches of the monetary universe. We believe that the monetary experiments currently underway will have numerous unintended consequences, the extent of which is difficult to gauge today. Gold, as the antagonist of unbacked paper currencies, remains an excellent hedge against rising price inflation and worst case scenarios .. Monetary policy does not work like a scalpel, but like a sledgehammer .. The tug-of-war between a deflationary debt liquidation and politically- induced price inflation is well and alive. Last year we coined the term 'monetary tectonics' which describes the battle between these powerful forces. In our opinion, it is by no means certain that inflationary forces will win the race. However, socio-economic incentives and high indebtedness clearly suggest that in case of doubt, higher inflation rates will be tolerated. Should the inflation trend reverse, there would be excellent opportunities in inflation sensitive assets like gold, silver and mining equities."
Dr. Albert Friedberg*
Quarterly Letter
World Economic Slowdown
In his latest letter to investors, Dr. Albert Friedberg* limits his commentary for a much more in depth conference call discussion (to be held with the next week or so) .. sees global economic conditions deteriorating .. thinks Europe will stagnate while debt burdens continue to levels which will become impossible to service once rates normalize: "Real interest rates are already high enough to ensure the inevitable debt debacle" .. sees the Russian situation making economic depression worse in Europe .. on Japan & China: "Japan’s QE has proven totally ineffective .. Swamped by a huge amount of bad credit, China’s economic activity has slowed down dramatically — witness the extraordinary falloff in the demand for raw materials." .. sees a long-term support level on gold of $1200 per ounce.
Albert Edwards Calls
Central Bankers "Morons"
But Will They Continue
To Have the Last Laugh?
Societe Generale's Albert Edwards thinks there is far too much over-confidence in the U.S. recovery .. says just the fear of recession will likely be enough to trigger a massive market move .. rails against the central banks which have continued to intervene in propping up the financial markets & the economy - at some point this can not go on indefinitely .. "Simply put, the central banks, for all their huffing and puffing, cannot eliminate the business cycle. And they should have realized after the 2008 Great Recession that the longer they suppress volatility, both economic and market, the greater the subsequent crash. Will these morons ever learn?"
LINK HERE to the commentary
Is There Any Road To Take
From Creditopia to Utopia?
Economist Richard Duncan* emphasizes that if the government spends a lot less, the economy will remain marred in an economic depression with no visible end in sight .. identifies 3 options - austerity, but that will lead to a new Great Depression .. status quo, but that means continued borrowing & spending until a sovereign debt crisis & an economic depression is hit .. or for the government to borrow & spend in a way that "not only supports the economy but actually restructures it so as to restore its long-term viability. This option, rational investment, is the only one of the three with the potential to result in a happy ending" .. That requires the government to borrow and invest - "Would that be capitalism? No.
BUT We do not have capitalism now.
Our economic system is NOT one in which the accumulation and investment of capital drives the production process. It is one in which the creation and expenditure of credit does. The question is not whether we are going to abandon capitalism and replace it with a different kind of economic system. We did that long ago. The question is: Are we going to allow the economic system now in place to collapse?"
[Cliff Rant: We believe Richard Duncan has things figured out much better than the world's Keynesian economists. What we believe is missing from his analysis is the focus of our website:
The issuance & distribution of the government's money is controlled by the major Wall St. banks through the Federal Reserve Act.
The government cannot produce wise, virtuous & 'rational' investments that could produce Richard Duncan's "happy ending". The political & monetary system is beholden to the banks that control the issuance & distribution of the American government's money. The extraordinary 'investment' that America has made since 2008 has been to support the banking system & the government .. exactly as one should expect in a system where the money is controlled by the nations largest banks (unlike the system in the U.S. Constitution .. The Constitution HAS (or should we say HAD?) checks & balances on the power of banks or government to control the people's money!!!).] 
LINK HERE to the essay
Stock Market Living on
Reds, Vitamin C & Cocaine?
"The stock market's wild swings of sentiment have got me thinking it's living on reds, vitamin C and cocaine. This is a famous line from the Grateful Dead song Truckin' .. I've marked up a one-month chart of the S&P 500 (SPX) to illustrate what I mean: Reds are slang for barbiturates, a class of depressants/sedatives (downers). Cocaine induces euphoric highs in which the cokehead feels he possesses god-like powers--for example, he might imagine he is a Federal Reserve member, or even its chairperson. There are multiple interpretations of the role of vitamin C in the lyric, but for the purposes of the chart it serves as a modest dose of something healthy to keep the drug-ravaged market from crashing. After multiple swings between cocaine highs brought to earth by downers, the market seems to be tripping on acid again. Though no one can know precisely what hallucinations are spinning through the manic-depressive sentiment of the market, it seems the market has responded to the withdrawal of its free-money cocaine--supplied of course by the Federal Reserve--by entering a drug-induced fantasy that everything's been fixed in the global economy .. This state of delusion would be amusing if it wasn't so tragic. The acid will wear off soon enough, and a mega-dose of vitamin C will not be enough to restore the shattered health of a manic, drugged-out market careening between euphoria and fear."
- Charles Hugh Smith*
link here to the commentary
The End of the 
U.S. Dollar Imperium
Mises Institute podcast discussion on the issue of monetary imperialism .. How does the U.S. use the dollar as a weapon of economic & cultural power? How long can it last? What might the unprecedented collapse of a worldwide reserve currency look like? And how do the BRIC nations & Asian central banks fight back? .. 17 minutes
click to enlarge
Egon von Greyerz on 
the Swiss Gold Referendum
Discussion on how a yes vote on this referendum would result in a shock to the gold market .. relates the recent poll results on the initiative ..discussion on the historical relation of gold to the Swiss people .. & China's official gold reserves .. 22 minutes
Why Democracy Won’t Survive 
the New Depression
"People often ask me, 'How severe would the New Depression be?' And I think the best way to think about it is to consider what happened with the last Depression. After all, the two occurred for the same reason; a fiat money credit bubble formed when we broke the link between dollars and gold both times .. If the United States stops taking China’s imports into the United States, China’s economy would not have a recession, it would implode. There would be starvation in the cities and in the countryside .. With the complete collapse of government revenues, the United States could no longer afford to maintain a string of military bases around the world, so our global economic dominance would evaporate .. Unemployment would be at least 25% in this country, I would imagine, and how would those people vote? They would vote for parties that promised to give them money and food. In other words, we would take a very, very hard turn to the left and that may be met with the response from the right that involved a military coup .. So it’s not at all certain that democracy could survive this sort of New Depression."
- Economist Richard Duncan*
link here to the essay
The Financial Engineering Market
Mauldin Economics posted essay focuses on what IBM has been doing as a model example of the financial markets & the economy in general .. companies have been taking out debt to buy their own stocks or to pay out dividends on their stocks .. "You are not actually increasing profitability. You are just rewarding one tranche of the capital structure (common stockholders) at the expense of another one (bondholders)." .. points out how IBM tripled their debt over time, retiring stock through stock buybacks .. the essay concludes by emphasizing this cannot go on forever, it will come to a painful end .. "Financial engineering .. is a self-reinforcing process that has worked for a while, but I don’t want to be around when it stops working."
LINK HERE to the essay
'Deflationary Pressure 
is Bearing Down' on 
the World Economy
In his 2013 book The Age of Oversupply, Westwood Capital's Dan Alpert argued the global economy is suffering an oversupply of labor, capital & productive capacity relative to demand, calls it a "reverse supply shock" .. The book features a number of solutions to the issue -- namely more government spending on infrastructure .. "The problem is that when you have this global deflationary pressure that is bearing down on the advanced nations that’s even affecting the emerging nations, that’s a big problem .. And the big problem is that eventually prices are going to start to fall. Prices for goods and services." .. he observes similar deflationary forces appearing in China & Japan ..
George Soros:
Wake Up, Europe
George Soros is warning Europe over the potential risk by Russia over the continent .. "Europe is facing a challenge from Russia to its very existence. Neither the European leaders nor their citizens are fully aware of this challenge or know how best to deal with it .. Russia is presenting an alternative that poses a fundamental challenge to the values and principles on which the European Union was originally founded .. What is shocking is that Vladimir Putin’s Russia has proved to be in some ways superior to the European Union — more flexible and constantly springing surprises. That has given it a tactical advantage, at least in the near term .. It is high time for the members of the European Union to wake up and behave as countries indirectly at war. The bureaucracy of the EU no longer has a monopoly of power and it has little to be proud of. It should learn to be more united, flexible, and efficient. And Europeans themselves need to take a close look at the new Ukraine. That could help them recapture the original spirit that led to the creation of the European Union." .. NNOO 
LINK HERE to the essay
Time to Buy Airline Tickets
click to enlarge
The lowest price for domestic tickets is roughly 2 months in advance of a flight. For international flights the best price is just short of 6 months out.
link here to the article
What should Value Investors
do in this Market?
Boom Bu$t .. discussion with Patrick O'Shaughnessy – portfolio manager at O'Shaughnessy Asset Management & author of Millennial Money: How Young Investors Can Build a Fortune ..  believes it’s critical for young people to start investing early despite the unique economic issues millennials face .. also a discussion with David Merkel – founder & president of Aleph Investments - he elaborates on what value investors can make of the current market environment & how to deal with it .. 1/2 hour total program
click to enlarge
Wealth Gap Flashing 
Recession Warning
The present spike of wealth (asset values) above income coincides with similar tops in historical past peaks .. 2 minutes

Thursday, October 23, 2014

How Quantitative Easing 
Contributed to Wealth Inequality
NY Times DealBook article highlights the role that the Federal Reserve has played in contributing to income/wealth inequality in the U.S. .. "Federal Reserve Chair Janet Yellen is failing to appreciate how Mr. Bernanke’s extraordinary quantitative easing program, started in the wake of the financial crisis, has only widened the gulf between the haves and have-nots .. Maybe the Fed is delusional about the effects of its policy. In an interview over the weekend with The Wall Street Journal, Eric S. Rosengren, the president of the Boston Fed, denied that the Fed’s quantitative easing policies, which are supposed to end this month – we shall see — were benefiting the rich at the expense of the poor. If anything, he said, the 'distributional effect' of quantitative easing is 'likely tilted in the opposite direction' to actually helping the poor. Let’s face it, until the Fed acknowledges the role it has played – and continues to play – in widening the gulf between rich and poor in this country, you’ll forgive me if I find speeches like the one Ms. Yellen gave in Boston last week to be more than just a little bit ironic."
LINK HERE to the article
Dr. Lacy Hunt*:
Lookout for Global Deflation
In his latest Outside The Box, John Mauldin* features the newsletter from Hoisington Investment Management's Dr. Lacy Hunt* .. Hunt focuses on the velocity of money & its relationship to developed-world overindebtedness & the potential for deflation in this week’s .. Lacy takes the U.S., Europe, & Japan one by one, examining the velocity of money (V) in each economy & demonstrating the principle that V is critically influenced by the productivity of debt. Then, turning to the equation of exchange (M*V=Nominal GDP, where M is money supply), he explains sluggish global growth & warns on global deflation .. Hunt: "With the nominal growth trajectory extremely soft, U.S. Treasury bond yields are likely to continue working lower as similar circumstances have created declines in government bond yields in Europe and Japan. Viewing the yields overseas, it is evident that ample downside still exists for long U.S. Treasury bond yields, as the higher U.S. yields offer global investors an incentive to continue to move funds into the United States. Another factor suggesting lower long- term U.S. Treasury yields is the strength of the U.S. dollar. In many industries, the price leader for certain goods in the U.S. is a foreign producer. A rising dollar leads to what economists sometimes call the “collapsing umbrella”. As the dollar lifts, the foreign producer cuts U.S. selling prices, forcing domestic producers to match the lower prices. This reinforces the prospect for lower inflation as nominal GDP wanes. This creates a favorable environment for falling U.S. Treasury bond yields." .. NNOO
LINK HERE to the letter
Click "Mauldin October 22" to download Mauldin's letter (may need to provide your email address), or hit "View Fullscreen" at the bottom next to the Scribd logo to enlarge viewing .. John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to:

Reggie Middleton 
on Bank Capital & Regulations
Boom Bu$t .. discussion with Reggie Middleton – CEO of Veritaseum & inventor of Ultracoin – to talk about banks & bank shares, how he thinks banks will respond to Bitcoin & what impact the Internet will have on financial services .. 1/2 hour total program