Thursday, October 30, 2014

Man Who Ran QE1 Warns 
Of Major Plunge 
In Global Markets
"What happened today with the Fed was expected. The Fed has been angling for the end of QE for quite some time. The reality is that they are not entirely ending QE .. the Fed is committed to maintaining the current size of its portfolio. As some of their bonds mature, the Fed will be going out and buying bonds to replace them. So we will still see the Fed buying hundreds of billions of dollars of bonds each year .. But obviously the Fed is not further expanding their stimulus at this time. It will be extremely interesting to see how the markets accept this. After the end of QE1 and QE2 we saw the market fall about 20% in each instance .. I still believe, especially if the data does not improve, that we are going to see the markets test the Fed .. The real downside here is in terms of confidence. The reality is that confidence in markets has been artificially stimulated in the last few years by the Fed. Now we could see the opposite situation -- that confidence is ultimately undermined by the Fed. This will mean that the world is in a much less happy place in terms of the markets. This will also have a major impact on credit expansion in America.”
- Andrew Huszar, former Federal Reserve Official & Morgan Stanley Managing Director

LINK HERE to the article
Historical Figures’ Salaries 
in Gold: Leonardo da Vinci
Sovereign Man article on the example of the salary of Leonardo da Vinci keeping its value in today's fiat money terms .. da Vinci was paid 240 scudi & 200 florins by the King, equivalent to today's gold prices (relatively low compared to recent prices) of a salary of about $100K - what he might similarly receive today as an artist or museum staffer .. "Imagine for a moment that time travel were possible, and Leonardo could transport himself to today’s time—he would still be able to spend those coins. Or at least trade them for currency at the same purchasing power. Now that is a store of a value. This is the real stuff." .. the article emphasizes investing today in real assets - productive businesses, land, & precious metals.
LINK HERE to the article
TIMELINE: The Gold Price 
and the Fed's Rocky Relationship
MINING interactive timeline over the last few years between gold prices & Federal Reserve activities, statements, QE programs .. from Bernanke on gold - "doesn't pretend to understand gold prices" to Yellen - "doesn't "think anybody has a very good model of what makes gold prices go up or down.
CLICK on the image above to interactive
Understanding Federal Reserve
Bond Buying vs Monetary Expansion,
Keep an Eye on "Reverse Repos"
click to enlarge
Sober Look clarifies this week's Federal Reserve announcement - the statement says that "the Committee decided to conclude its asset purchase program this month" - It's important to point out that while this is the end of the Fed's bond purchases (for now), the U.S. monetary expansion ended this past summer. The outcome is visible in the the banking system's excess reserves, which flattened out around July & in the leveling off of the U.S. monetary base in July also - see charts above .. "This begs the question: How is it that the excess reserves and the monetary base stopped growing this summer while the securities purchases and the balance sheet expansion continued through October? The answer has to do with some other balance sheet items that offset ("absorbed") reserve creation. The key item to consider here is the Fed's reverse repo position, which became more impactful as the securities purchases ebbed." [Cliff Note: Click on the reverse repo link just above to learn about them, & revisit our recent post below highlighting the potential for the Federal Reserve to use their reverse repo position as liquidity to address any financial asset market correction.]
LINK HERE to the analysis
From Our Recent Archives:
October 19, 2014
Phase Shift in
the Financial Markets?
Always interesting discussion between John Rubino* & Gordon T Long* on the current environment in the financial markets .. they see a change of sentiment happening in the markets .. Gordon points out that the Federal Reserve still has more ammunition ready to go, illustrates this with the recent derivatives contract signed between the Fed & the U.S. option exchanges & as well as the $300B Reverse Repo account "locked and loaded" in anticipation of any market correction that might ignite a potential cascading collateral collapse .. This has the potential to change sentiment from fear to greed once the much needed bond rotation is complete .. 49 slides based discussion
Jim Rickards*: "Elapsed time from end of QE1 to start of QE2 was 17 months. Time between QE2 and QE3 was 15 months. So, expect QE4 in late 2015 .. As for the economy, QE didn't help, & ending it won't hurt. We're in a structural depression & will remain so. QE only affects asset prices."
Roubini: Risks for 
'Significant' Credit Bubble
Nouriel Roubini discusses Federal Reserve policy, the global economy & markets .. 13 minutes
click to enlarge
Inside The Shanghai International 
Gold Exchange Vaults
In Chinese but is interesting to actually see the vaults, security, processes .. 3 minutes
Dr. Albert Friedberg*:
There Are Opportunities
But Also Large Risks
Dr. Albert Friedberg* sees pockets of opportunities in the financial markets, though remains worried about big macro risks including potential geo-political disaster events & debt rising faster than economic growth .. sees the recent financial market correction as a technical decline - mentions he had some stock market puts in preparation for the correction, which he covered quickly as the market began to rebound .. he has remained bullish on U.S. homebuilders & continues to do so .. still remains bullish on German bunds - sees bunds as being the best asset in the event of some political geo-political disaster scenarios .. explains how central banks are keeping monetary policy very accommodative, emphasizes how the massive amount of baseline money created by central banks has not multiplied into the economy .. thinks gold will move higher in the long-term due to concerns about debt & the expectations of getting paid back on debt-based assets .. remains bearish on oil, given rising oil & natural gas supplies globally .. 1 hour podcast
LINK HERE to the podcast

From Our Archives Of A Few Days Ago:
October 24, 2014
Dr. Albert Friedberg*
Quarterly Letter
World Economic Slowdown
In his latest letter to investors, Dr. Albert Friedberg* .. 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.

Greenspan Advising to Buy Gold!?
'QE Failed To Help The Economy,
The Unwind Will Be Painful'
WSJ article on views of Former Federal Reserve Chair Alan Greenspan .. is worried about the future of monetary policy .. thinks the Federal Reserve’s bond-buying program helped lift asset prices & lower borrowing costs, but didn’t do much for the real economy .. Greenspan is especially worried about the Federal Reserve ending its easy-money policies in a trouble-free manner - "I don't think it's possible" .. says gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments .. is bearish on Europe, thinks the only way the euro can survive is through full political integration.
LINK HERE to the article
No Need for the Federal Reserve
to Buy Bonds When They Can
Force Others To Do It
CNBC article highlights who will be buying bonds as the Federal Reserve leaves the bond market .. new regulations are requiring big banks to hold more liquid assets - financial repression .. Since the "tapering" of the Fed's bond buying, U.S. commercial banks' holdings of Treasury & agency securities (not including mortgage-backed securities) rose to $605 billion, a 23% increase - Including mortgage-backed securities, that total swells to $1.97 trillion, according to data from the Federal Reserve Bank of St. Louis .. Earlier this year, the Fed finalized a rule requiring banks to hold enough liquid, easy-to-sell assets to cover 30 days of operations should the economy get in a bind again. The rule, called the 'liquidity coverage ratio' requires banks to be mostly compliant by January 2015 & fully compliant by 2017 .. in addition, you have a new liquidity requirement coming out of Basel Switzerland for banks globally to do similarly as U.S. banks - buy more bonds! .. wait - even more buyers coming: "Additionally, a mid-November meeting of G20 leaders and finance ministers in Brisbane, Australia, will evaluate regulations requiring all global banks of a certain size to hold a large buffer of capital—up to 20% in excess capital—against risky assets .. To build those buffers, international banks would need to raise hundreds of billions of dollars in capital." - all of that would be met with addtional government bond buying.
LINK HERE to the CNBC article
LINK HERE to the new BIS rule
There Comes A Point When
"Pay Later" Overwhelms "Buy Now"
CNBC interview of Dr. Lacy Hunt of Hoisington Investment Management .. Dr. Hunt states unequivocally that "The Fed will not raise rates in 2015," warns that the U.S. economy & monetary policy "are not on the right path" .. "The Fed has spawned this 'buy now, pay later' scheme of the American consumer... but there comes a point when the 'pay later' overwhelms the 'buy now'... and when that happens monetary policy is basically ineffective."
Making Sense Of 
The Bond Market
Saturna's Phelps Mcllvaine, Bond Portfolio Manager, writes an insightful essay on the bond market & where yields/interest rates could likely move from here .. the bottom line: "A persistent reduction in the US inflation rate and well-anchored inflation expectations continue to contradict the common understanding that interest rates have reached a cyclical floor." .. references Carmen M. Reinhart in describing negative yield as a form of financial repression consisting of negative real interest rates that helps liquidate the huge overhang of public and private debt & ease the burden of servicing that debt .. the essay provides the following chart for consideration - click to enlarge:
"The global demand for income and security may push U.S. rates even lower as it has in Japan and the eurozone. A cyclical floor in U.S. rates seem unlikely in the context of how much lower rates are in other heavily indebted economies. Perhaps the Japanese 10-year note is pointing the way for the U.S. 10-year T-note yield instead of the other way around. In last year's bond market review (July 2013) we stated, 'We do not expect 10-year U.S. Treasury note yields to move up or down more than 1% from a 2.5% fulcrum.' For the coming year, we expect the fulcrum to remain at 2.5% and the U.S. 10-year T-note yield to explore the lower half of this range. With the Fed poised to raise short-term rates, and with long-term inflation expectations already well contained, the yield curve may continue to flatten, adding to the risk-adjusted appeal of long-term paper. Global debt deleveraging will continue to overwhelm the fiscal and monetary policies deployed against it, and the deleveraging process is years from completion."
LINK HERE to the essay
Demise of the Petrodollar & 
The End of American Power?
- The Colder War by Marin Katusa
Casey Reseach Marin Katusa's blockbuster book The Colder War: How the Global Energy Trade Slipped from America's Grasp .. 4 minutes
click to enlarge

Wednesday, October 29, 2014

David Stockman*:
Good Riddance To QE
Creating Money out of Thin Air 
Has Not Helped The Economy
Where Did The Money Go?
In his latest essay, David Stockman* proclaims the end to the Federal Reserve's money printing program known as quantitative easing (QE) .. Stockman explains why the Federal Reserve's
QE did not impact the real economy with banks lending money to real businesses, with economic growth in the private sector
.. what did happen in the last few years is money printing out of thin air to buy government debt created to fund the government sector .. at the same time, these actions by the Federal Reserve repressed the basic interest rates which are connected to the entire financial system - interest rates for example that determine mortgages to buy houses .. what happened as a result? - over-valuation of all financial assets: "The Fed’s most recent massive monetization and 'stimulus' has therefore simply inflated financial asset values—-meaning that the Fed has become a serial bubble machine." .. now that the Federal Reserve has stopped the QE, "the Fed is actually taking a tiny step toward liberating the interest rate and re-establishing honest finance." .. for how long? - "As soon as the current massive financial bubble begins to burst, it will doubtless invent some new excuse to resume central bank balance sheet expansion [more money printing/QE] .. But this time may be different. Perhaps even the central banks have reached the limits of credibility—- that is, their own equivalent of peak debt."
- David Stockman*
link here to the essay
Now The Swedish Central Bank
Lowers Interest Rates To 0%
0% Everywhere & For Eternity?
"Deflation Is Very Dangerous for a Country with Large Public & Private Debt" -
Financial Repression is the Government's Solution
"The RIKSBANK strikes again! This is the most important story of the day. The Swedish Central Bank lowered its lending rate to ZERO in an effort to halt a slide into deflation .. Deflation is a very dangerous economic outcome for a country with a large public and private debt load. It is why I keep discussing the impact of 1937 on the work of Ben Bernanke and why he obsessed about removing FED stimulus until he was sure of price stability, meaning inflation of 2 percent .. Riksbank Governor admitted that depreciating the Swedish kroner was one of the tools in the central bank’s arsenal .. the Riksbank has made efforts to weaken the currency. This is a problem for ECB President Draghi as he comes under increasing pressure from France and Italy to enact policies to depreciate the EURO. Mario Draghi’s job is now more difficult as he sees his neighbors weaken their currency to prevent deflation, just as the tide of deflationary fears washes up on the ECB‘s shore .. But the job of the Yellen Fed became easier as global deflationary fears will keep the Fed steady as it goes. More importantly, for the world financial system the G20 agreement of not entertaining policies aimed at weakening a nation’s currency is now officially dead. The global financial system is now in a full-blown war against deflation. Damn the printing presses, debt restructurings, currency devaluations and full speed ahead. I wonder if Sweden will get a Nobel Peace Prize for its efforts. The global equity markets comprehend that deflation is the common enemy. What new policies await the markets? Is this what Joseph Schumpeter meant by CREATIVE DESTRUCTION?"
- Yra Harris
link here to the commentary
"The Swedish Riksbank (central bank) has cut its key interest rate to zero percent. With this quantitative easing monetary policy the central bank is desperately trying to stimulate borrowing to fight deflation .. How can dropping the interest rate from 0.25% to 0% make ANY difference? They will wipe out any savings for the elderly causing them to spend nothing if not seek employment driving unemployment higher. This is how brain-dead government operates when you NEVER consider yourself in the equation and the problem is always the people who have to be manipulated .. When the economy turns down in the USA, look out below. We are facing one of the most dramatic deflationary waves perhaps in history. This is the price of a collapse in socialism.
We are going through the same collapse process that destroyed communism.
It ain’t the private sector – its government!
- Martin Armstrong
link here to the commentary
Great piece here by Ambrose Evans-Pritchard also on the same subject .. Riksbank cuts rates to zero & mulls currency war to fight deflation .. "Sweden's central bank is having to pick its poison, choosing between deflation or an asset bubble .. The Riksbank is now fully aligned with the Yellen Fed in Washington, which argues that raising rates to stop asset bubbles merely destroys jobs for little useful purpose. Both are pitted against the Bank for International Settlements. The BIS says radical monetary stimulus may help invidual countries but only by displacing the problem onto others, leading to a 'Pareto sub-optimal' for the world as a whole. It warns that speculative excess is reaching pre-Lehman levels, and calls on global central banks to take pre-emptive action before the bubbles becomes unmanageable."
LINK HERE to the article
Observation Rings True Today
On the Consequences of the
Financial Crisis/Bailouts:

From Our Archives:
March 30, 2014

Mish Shedlock* Is No Radical. He Is A Highly Respected Economist Making One Of Our Theme Points. Is Anyone Listening?
Saving The Major Banks From 
Is A "Necessity"?!?!?
5* - Mish Shedlock*: "I am one of those who staunchly believes that banks should fail .. Was the last bailout 'necessary'? .. The world will not end if banks fail. Bondholders would have and should have paid the price. Who are the bondholders?" "If 'necessary' means in the eyes of central bankers, then yes – it was deemed "necessary" .. It's all part of the moral hazard tactics of central banks that  tells the 'too big to fail banks' that no matter what they do, they will be bailed out, again and again and again .. Privatize the Gains, Socialize the Losses .. Over-leveraged financial institutions should pay the price for their folly, not overburdened taxpayers .. The poor bailed out the wealthy."
[Cliff Rant: Saving the major banks that control the Federal Reserve was a necessity? That is the question we keep trying to get Americans to consider! The people of the United States are not allowed (not free) to know who is controlling their money. Wouldn't you wish you could be part of that 'partnership'? IF you & a group of your friends had that exorbitant privilege, wouldn't you try to keep that privilege hidden from the public? Wouldn't you try to make sure that if the financial system you created were to collapse .., the whole country would work to keep you out of bankruptcy? .. Wouldn't the people of the United States be better off if President Kennedy's plan to issue money straight from government had been allowed to continue after he died? His plan had money issued directly by the U.S. government, it was not money that was 'debt based'. That money would not charge interest to the taxpayers & the National Debt would not be in the trillions of $$$. Better yet, there would have been no need to provide trillions of $$$ after 2008 to the financial corporations that control America's money. Even better than Kennedy's plan, wouldn't the people of the U.S. be better off if their government had kept the dollar under the control of the people .. as Andrew Jackson fought for? .. as all the founding fathers & the Constitution stipulate? .. as the American Revolution was fought for? ..I'm Just Asking America]
PLEASE LINK HERE to Mish Shedlock
The Case for a 
Global Recession in 2015
click to enlarge
Forbes article on considerations indicating the potential for a global recession beginning within a few months .. Economist David Levy argues instability in emerging markets will sink the U.S. economy before the end of next year .. Emerging economies, like China & Brazil & Russia, are having trouble maintaining the kind of growth they have become accustomed to in recent years .. "David Levy, economist and chairman of the Jerome Levy Forecasting Center, argues that the problems of the rest of the world will end up taking the U.S. down, rather than the other way around. Levy is calling for a 65% chance that there will be a global recession by the end of 2015, based on the simple fact that emerging markets have continued to invest in an export infrastructure to sell goods to the West that it no longer has the wherewithal to buy." .. Levy bases his views off of economist Hyman Minsky whose views accurately foresaw the financial crisis (reference economist Steve Keen's work) .. Minksy said economies slowly & naturally become unstable over time, as banks and private businesses take on more & more debt, until the system finally snaps under the weight of these obligations.
LINK HERE to the article
Egon von Greyerz:
Reset Will Be Dramatic
Interview with Egon von Greyerz, Founder of Matterhorn Asset Management .. "You can’t have governments borrow more than ever and have interest rates at zero. You can only do that temporarily because you have governments printing money and artificially holding interest rates down. That will not last either. So, the reset will be dramatic. It won’t happen overnight, but there will be events that trigger short term pitfalls, but this is a long term thing. .. sees the financial markets as being in a terrible state: "The ammunition that they have will, of course, be so devalued that nobody will want it. So, any support they try to muster in the future will have no effect. This is why markets are going to be in a terrible state in the next few years. It will be all the bubbles that have been created over a very long period." .. 30 minutes
The Adens - 
'The Subsidized Bull Market'
McAlvany Commentary with the Aden sisters who provide regular analysis & commentary on the precious metals markets .. consideration of whether QE is ending or not, or if it will resume & if so when .. the Adens recommend buying gold on weakness .. 33 minutes