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Satyajit Das on Economic Growth, Interest Rates and Central Banks

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Satyajit Das on Economic Growth, Interest Rates and Central Banks

Posted on 03 April 2014 by Shae Smith

Satyajit Das, a man gifted with a unique insight into financial markets, was welcomed to the stage at the World War D conference on Tuesday. Part of his introduction was a mention that he doesn’t own a mobile phone.

Yes, that’s right. Apparently it’s news if someone doesn’t own a mobile phone.

The crowd politely laughed. Das wasn’t here to talk about technology, so it didn’t matter that he doesn’t own a mobile phone.

What did matter to the audience was Das’s take on the current mess we call a financial system…

Now Das is an entertaining speaker. His turn of phrase and emphasis had the masses laughing almost every minute. But underneath every line to elicit a giggle or snort was a serious message.

As he stood in front of the attendees, he opened with ‘Problems, what problems? We’re rich. Every minute of every day the Dow makes a new high.’

He then bombarded the audience with truly frightening statistics to demonstrate the absurdity of this statement.

Like the fact that Japan’s market is almost 50% below its all-time highs, and Australia’s share market is about 20% below its all times high. ‘But,’ he paused, ‘You are rich.’

Alarming the crowd further were the inflation-adjusted figures for superannuation over the period of 2000–2013.  His calculations show we’re only up 3.51% on average. ‘But again, you ARE rich,’ Das told the room.

If anyone knows how to keep a crowd hanging, it’s Das. From here, no one dared shift in their seat…just in case they missed some valuable information from his rapid-fire presentation.

Americans on food stamps have risen to 47 million today, from 27 million in October 2007. These are essential, he argued, to keep people from rioting in the streets. He may have been joking. But that one line demonstrates two things: The rise in poverty in a ‘rich’ nation and the increasing dependency on the government to provide.

Moving on, Das wanted to ‘…look at the real economy, where they don’t shuffle papers around.’

But looking at the real economy paints a bleak picture, Das noted.

America needs US$1.6 trillion to create US$300 billion dollars of ‘growth’ in the economy. What’s more, debt levels haven’t been this high since the Napoleonic Wars.

Emerging markets, America and the other countries considered ‘rich’, financialised their economies. They spend more time shuffling assets and financial engineering rather than any real engineering.

Increases in debt levels, financial imbalances and entitlement culture were the causes of the crisis Das tells us.

‘The real solution is to reduce debt, reverse the imbalances, decrease the financialisation of the economy and bring about major behavioural changes,’ says Das.

‘But rather than deal with the fundamental issues, policy makers substituted public spending, financed by government debt or central banks, to boost demand.’

What no politician or central banker will ever tell you, expresses Das, is that we need a 30% drop in gross domestic product.

The historically low interest rates also got a mention from Das on Tuesday. This, he reasons, continues to create imbalances in the economy. However central banks have to keep fiddling with the interest rate. Simply because no one in the Western world has sustainable debt.

‘As an example’ Das explains, ‘a 1% rise in rates would increase the debt servicing costs to the US government by around $170 billion. A rise of 1% in G7 interest rates increases the interest expense of the G7 countries by around US$1.4 trillion.’

Without economic growth, you can’t pay back your debt. However, there is no economic growth. So interest rates won’t go any higher for now.

He points out when then Federal Reserve Chairman Ben Bernanke announced QE3 — quantitative easing — Bernanke said himself that it would not significantly increase economic activity directly.

This leads to the relevance, and perhaps stupidity, of central banks.

Forward guidance, he declared is an abused term in the central bankers handbook of doublespeak.

‘Nobody actually believes central banks anymore,’ he declared.

He likens their language to something similar to a Monty Python skit.

One European Central Bank member said last year, that ‘[forward guidance is] a change in communication but not in monetary policy strategy.

Or this, from the current US Federal Reserve chairwoman, Janet Yellen. ‘If I thought that was a situation we will likely encounter in the next several years we would probably have revised our forward guidance in a different way. We revised it as we did, eliminating that language because it didn’t seem at all likely.’

However, Das said, nothing ever lives up to the comments from Alan Greenspan (former Fed Chairman): ‘I know you believe you understand what you think I said, but I am not sure you realise that what you heard is not what I meant.’

Later, Greenspan added: ‘If I have made myself clear then you have misunderstood me.’

Finally, when the crowd stopped laughing, Das reminded everyone that, ‘They get paid to do this.’

After the sledging on central bankers was over, he moved on to how we get out of this mess.

And right now, there is no ‘stage left’, according to Das.

Higher interest rates will crash the economy. And the actual limit of money printing isn’t known yet. Das wondered aloud just how much more the world can handle.

Policy incompetence, ‘pointy heads in financial markets’ and plenty of people talking but not actually saying anything aren’t going to dig the world out of the ongoing financial calamity.

From here, Das reckons there’s no path to normalisation. Perhaps secular stagnation or slow global bankruptcy.

More likely, he thinks we’re looking at a life of financial repression from governments. ‘After all, isn’t the art of taxation to pluck the goose with the least amount of hissing?’

With that, he offered the crowd a tip or two on where to stick their money (hint: it’s not shares). And then told the attendees ‘there’s no way out.’

Shae Smith+
Contributing Editor, Money Morning

PS: We captured Das’s full 90 minute presentation on tape. You can find out how to watch it, plus more than 15 hours-worth of other intriguing material and financial insight from the conference, here.

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Faber, Rickards, and Duncan on Deflation, Inflation and Interest Rates

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Faber, Rickards, and Duncan on Deflation, Inflation and Interest Rates

Posted on 02 April 2014 by Callum Denness

After the discussion on Bitcoin, China and liberty at World War D, the international keynote speakers, Marc Faber, Jim Rickards, and Richard Duncan continued answering questions on delfation, inflation and interest rates.

You can read a summary of the discussion below, or go here to find out how to see video of the full discussion.

Deflation, inflation and stagflation

If the energy boom, technology boom, and globalisation is deflationary, asked Jim Rickards, how can the US pay its debts?  ’Remember deflation increases the real burden of debt, so if you can’t pay them off today when can you?‘ The forces of deflation are powerful, the necessity for inflation is powerful, but what will happen is a near instantaneous collapse in confidence in paper money and a flight to hard assets, he said.

Faber’s diagnosis was much the same. ‘Inflation and deflation can co-exist, especially in a money printing environment.‘ For example, he argued that gold and precious metals have been in a deflationary phase, as have real wages, for the past 20 years or so. Asset prices however have been in an inflationary phase. Faber’s warning: every inflation phase will sooner or later come to an end. The question for investors is when it will happen. ‘We have a global festival of money printing,‘ he said to much laughter. ‘It’s going to end badly, we just don’t know when.

You can see and hear Dr Faber’s comments on video. Click here to find out how.

Richard Duncan agreed the outlook is uncertain. ‘This is being managed by the government. We don’t know who the government will be five years from now,‘ said Duncan, which means it’s difficult to predict what will happen.

To manage this risk, the panel agreed on the need for a diversified portfolio of cash, quality stocks, and gold. Richard Duncan added:  ’I would borrow money at fixed interest rates to buy property. The property I would buy is land with lots of houses on them.‘ Like gold, land is scarce and as long as owners aren’t too leveraged they will always make money from rents, even in a depression.

Mark Faber also added: ‘I would choose the stock part of my portfolio very carefully. If you look hard there is always something somewhere that is depressed, and always something somewhere that is in fantasy land.

Jim Rickards also thinks buying up currencies is a good idea, naming the euro, Canadian dollar, Korean yuan and Singapore dollar. He has been a defender of the euro because it’s a de facto German currency. ‘The euro is the deutschmark in drag so to speak,‘ he said.

Interest rates

On the question of locking in fixed mortgage rates, Mark Faber argued that interest rates move in long cycles of 45-60 years – and with effective rates in the US at zero for last five years we have to assume we’re nearing the end of the interest rate downturn. Any interest rate rise will affect the value of assets. ‘I’m convinced in my life I will see the day when my asset values drops 50%,‘ he said.

Speaking on the uncertainty of data that underpins interest rate decision, John Robb argued economic conditions are much worse than central banks and governments are reporting. ‘What we’re seeing on the ground in the US is a lot more dire. Jobs are evaporating faster than they’re being replaced. That’s why so many [people] end up at retirement without any savings at all, and it’s going to get worse and worse.

I don’t find any discussion of IR [interest rates] useful unless you’re talking about real and nominal. The way I look at it IR are at an all-time high,‘ added Jim Rickards.

And that ended day one. You can catch the events from days one and two here.

Callum Denness
Roving Reporter for Money Morning at World War D

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Why Regulation from the Central Banks Never Works

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Why Regulation from the Central Banks Never Works

Posted on 28 March 2014 by Bengt Saelensminde

Like army generals, the senior financial regulators are always fighting the last war. Here’s how the game works:

The regulator recruits some low-ranking bod from London to tell them what they need to know about the dastardly banks’ various nefarious schemes…

The big London institutions recruit high-ranking bods from the regulator…

Then the new recruits tell the banks exactly what they can and can’t get away with. And exactly how they should push the envelope.

It’s a ‘revolving door’ of staff succession between the central banks and the finance industry. It means the regulator is indeed, always preparing for the last battle. The bigger chequebook offered by the banks ensures they are always one-step ahead of the shoeshine.

I was catching up with an old mate the other week and together we lamented the regulatory environment (yes, these are the sorts of conversations old bores like us have for fun!)…

Well, Bengt, surely the regulator needs to be beefed up. They need to spend bank-level salaries and get hold of the top talent to keep this industry in check!

No, no, no…‘ says I. ‘What we need is anarchy…

Regulation just doesn’t work

In the run-up to the 2007/08 crisis, regulation failed. It’s practically bound to. When it comes to banking, we’re dealing with big-money power brokers.

There’s also the nature of global capital markets. If you don’t like the regulation in one country, then shift operations to another. That’s a powerful tool oft used by the banks. London, in particular, has benefited from open financial markets. Successive governments have kept EU regulation at bay, shielding our banks from legislation emerging from Brussels.

The point is it’s extremely difficult to regulate effectively. Either the banks won’t have it, or they’ll continually adapt to new legislation.

But the worst of it all is the uncanny ability of the regulators to score own goals.

Take the highly topical annuities furore here in Britain. Regulation has long-since been established to ensure pensioners (or the pension managers) don’t whittle away individuals’ savings as they go into retirement. The regulators decreed that most retirees on a private pension will have to buy an annuity (an income for life policy).

An IFA mate was just telling me how just about everyone she’s put into annuities over the last year has opted for a non-inflation linked policy. Nobody wants to buy an inflation-linked policy paying a pitiful £3,000 a year, for every £100,000 invested. Instead, they buy fixed annuities paying something like £6,000 on £100,000 invested.

These retirees could be alive for 30 years or more. Given the central bank’s monetary experimentations, these annuities could become all but worthless.

This is the law of unintended consequences…and it has an uncanny way of popping its head round the regulators door. So I was encouraged to see MP George Osborne breaking out of this way of thinking in his budget last week.

The government’s radical move

In the light of Osborne’s budget announcement to vastly scale back annuities, the insurance industry is up in arms. But with the government’s swift action here, it seems the industry didn’t have time to dispatch its lieutenants.

The industry is crying ‘foul!’ They say retirement funds will be whittled away. ‘Regulation is there for a reason you know!’

But their argument hides the truth. And that is, regulation is used by the big boys to protect their own interests and their carefully groomed markets. It adds reams of complexity to finance, maintains the status quo and thwarts competition.

The current system of regulation strips individuals of responsibility and hives it off to an industry highly undeserving of our trust. It all too often allows the industry free rein to siphon off vast sums of our money. A) Because somebody has to pay for all the compliance staff in the first place. And B) because the regulation hinders competition in the savings market.

Explanation, not regulation

I like the idea of simplifying finance. Simplifying pensions. Making it easy for people to understand and to look after their own finances by demystifying the industry. And yes, that means less complicated regulation. Explanation, not regulation.

The NHS has a very useful online flow-chart that helps individuals identify and help treat symptoms. The government could set a similar flow-chart for the health of an individual’s finances.

Let the investing public work it out for themselves. In so doing, I suspect many will be much more realistic about their retirement savings policy too.

But, I hear you cry, ‘Who’s going to look after individuals and make sure they don’t just get ripped off?’

Now, while that’s a concern, I don’t think it’ll be as considerable as you may think. Given today’s vast information network, it wouldn’t be too difficult to weed out the industry’s nasties. If eBay can set up a decent enough system to identify shamsters, then why can’t a government website do the same?

And anyway, it’s not as if there aren’t enough investment scams going on even in today’s regulated markets. I dare say many individuals are conned into land banking schemes, diamond investment fraud and dodgy wine investments because they think that the regulators are policing the whole system. Individuals put too much faith in the system.

Better to be honest about it. Osborne needs to go further. He needs to further demystify the financial system and let individuals get on with their own investments. That would open up the financial markets to more simple investment products that investors understand. Because I firmly believe that with a little help, investing is something anyone can manage on their own. While unregulated, the system would be an awful lot safer than what goes on behind the closed doors of today’s highly regulated investment banks!

Your money. Your look out!

Bengt Saelensminde,
Contributing Editor, Money Morning

Ed note: The above article was originally published in MoneyWeek.

From the Archives…

Hashing Out the Iron Ore Price
22-03-14 – Shae Smith

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Why You Should Start Buying Into The Australian Share Market Now

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Why You Should Start Buying Into The Australian Share Market Now

Posted on 25 March 2014 by Kris Sayce

Here’s something that won’t surprise you.

Or rather, it shouldn’t surprise you.

If it does surprise you then you really haven’t been paying attention.

What’s the big non-surprise?

Stock markets are risky. And yet it seems as though some of the smartest people around are only just starting to figure that out…

It’s funny how different people react to the Australian share market.

We’ve warned for well over three years now that the stock market is risky.

But we also warned that despite the risks of investing, it was a bigger risk not to invest.

With interest rates at record lows it’s quite frankly almost impossible to get a decent return without using leverage on any investment except stocks.

And this risk in the Australian stock market isn’t about to end anytime soon, even though the central banks would have you believe that interest rates will rise within two years. That’s hogwash.

Interest rates aren’t likely to go up within the next five years. And they may not even go up in your lifetime. That’s why we’ve made a bold call for the S&P/ASX 200 index to hit 15,000 points – more than triple where it is today .

Did they miss the past six years?

And yet a bunch of commentators still can’t seem to grasp the idea that this is and has been a risky market.

It’s as though they’ve lived in a bubble for the past six years, totally unaware of everything that has happened.

Take this op-ed in the Financial Times from Mohamed El-Erian, the chair of President Barack Obama’s Global Development Council, and a former big shot at PIMCO, the world’s biggest bond fund:

Markets have been sanguine about geopolitical risk for several years now, a phenomenon illustrated by the relaxed approach they have taken to Ukraine’s crisis. There are understandable reasons for this, but contrary to a popular saying, this could well be a case where the trend is not necessarily the markets’ friend.

After just one day of extreme nervousness, global markets had little problem digesting a major change in the map of eastern Europe. And Crimea’s annexation is not the only notable development in a crisis that has repeatedly surprised quite a few experts.

We have to say it. Is Mr El-Erian kidding?

He says share markets have been ‘sanguine‘ about geopolitical risk. In other words, he’s saying that markets have been happy or satisfied about the risk in the world.

He’s got to be kidding. Didn’t he notice the hullaballoo and ruckus about Libya, Syria, Ukraine, North Korea, China, and any other number of crises that have reared up since 2008?

We listed 19 such problems just a few weeks back. Granted, they weren’t all geopolitical events, but let’s be honest, there’s a superfine line between geopolitical and economic risks. One has a nasty habit of turning into the other.

And yet, so far nothing has happened. 19 crises and counting since 2008, and the result? Most stock markets worldwide have gone up. One exception…one big exception is China.


PS: If you can’t make it to Melbourne for our World War D conference on March 31-April 1, don’t worry. We’ll be live tweeting the event throughout the two days. To get all the action live, follow us on Twitter @MoneyMorningAU

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Are Central Banks Losing Relevance?

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Are Central Banks Losing Relevance?

Posted on 05 February 2014 by Kris Sayce

‘At the same time, with resources sector investment spending set to decline significantly, considerable structural change occurring and lingering uncertainty in some areas of the business community, near-term prospects for business investment remain subdued.’

Monetary Policy Decision, Reserve Bank of Australia

After nearly six years of central banks dominating the business pages, and terms such as ‘the Fed’, ‘the RBA’, and ‘Bernanke’ getting more than their fair share of use, we can only look back on yesterday with fondness.

You may think that’s an odd reaction, seeing as the S&P/ASX 200 fell 90 points. That was the index’s biggest drop since June last year.

So what was it that brought a smile to our face even while stocks fell?

It was the possibility — however slim — that maybe things are returning to normal…

Last year we set a target for the main Aussie stock index to hit 7,000 points. Our prediction was that the index would get to that mark in early 2015 (say around January or February).

Part of our rationale was that the continued money printing from central banks and record low interest rates would provide a ‘money torrent’ of fresh cash helping to push up stock prices.

We weren’t the only one to hold that view. Dr Marc Faber, keynote speaker at our upcoming World War D conference in March, calls the US Federal Reserve’s latest round of money printing ‘QE Infinity’.

That was a reference to the fact that the plan didn’t have a fixed duration or end date.

But maybe now it’s time to change that view. That doesn’t mean we’ve ditched our 7,000 point target for the ASX — far from it. But maybe now the driving force behind the stock market’s rise is no longer the central banks.

Cashed-up Miners

At the top of this letter we printed a quote from the latest Reserve Bank of Australia monetary policy decision statement.

We’ve printed it for two reasons.

First, it supports an argument made by analyst Jason Stevenson. He’s made it pretty clear where he stands on where the mining sector is going this year.

His view is that the mining sector is moving from an investment phase into a production phase. If you read the RBA statement it sounds like that’s a bad thing. But it’s not. In fact, it’s the opposite of bad.

A shift from the investment phase to a production phase means there are a whole lot of beaten down mining stocks that will soon have stacks of cash flooding into their bottom line as explorers become producers.

This will give investors the clearest indication they’ll have gotten in 10 years on whether a company’s management is all talk and no action. One of our biggest criticisms of the mining sector is that a company’s breakthrough project always seems to be ’18 months from production’.

Just as tomorrow never comes, for many mining companies production never comes either. But if investors become fussier about where they’ll put their cash (and by investors I mean the institutions providing direct funding on projects) it likely means investment dollars will migrate towards the most viable and potentially profitable projects.

That’s actually good news for retail resource investors, and flies in the face of the mainstream rubbish about the end of the resources boom.

And that’s why Jason is focusing most of his attention on the companies that have the greatest chance of turning exploration projects into production projects.

But that’s not the only reason to be positive about the markets…

If Bad News is Bad News, Then Good News Should be Good News

As we said, there is another reason to be positive. In fact, this is what cheered us the most. It wasn’t until 2.20pm yesterday afternoon, 10 minutes before the Reserve Bank of Australia was due to release its statement, that we remembered the RBA board was meeting.

(Incidentally, the RBA decided not to change the current Cash Rate.)

How different that was to even a year ago? Back then it seemed as though everyone was waiting for the RBA decision with bated breath. We even remember a few years ago when Sky Business channel had a countdown clock as a gimmick leading up to the RBA decision.

We haven’t watched Sky Business channel in years, so maybe they still do the countdown thing. It’s a pretty sad state of affairs when the only thing driving the market is the actions and comments of the grey suits in Martin Place.

Maybe it’s just your editor who had this feeling. But if you add this to the previous day’s action on Wall Street, where bad economic news actually translated into bad stock market news, perhaps investors should see this as a positive sign.

It’s always dangerous to use one or two events in order to formulate an entire investment strategy. But you’ve got to start from somewhere. For over a year we’ve based our entire theory of a soaring stock market on the belief that central banks will keep printing money.

There is of course an alternative: rather than central banks boosting stocks to 7,000 points, what if the boost comes from investors pouring money back into the market in the belief that a genuine recovery is underway?

It’s a crazy idea. But do you know what? It might just happen…and if it does, we’re betting on mining stocks to be some of the best performing stocks on the Aussie market.


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Why the Fed Wants Inflation and the Stock Price Bubble to Continue

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Why the Fed Wants Inflation and the Stock Price Bubble to Continue

Posted on 09 January 2014 by Kris Sayce

In yesterday’s Money Morning we looked at negative interest rates.

We noted how the Danish central bank had cut the benchmark lending rate to minus 0.1% in 2012.

That means it costs banks to hold money on deposit at the central bank, thus removing the incentive for banks and consumers to save.

Instead, it encourages banks to lend money to borrowers, and it encourages borrowers to borrow money.

The Danish plan has ‘worked’, if working means that stocks have gone up. The OMX Copenhagen 20 index has climbed 160% since the 2009 low. We also mentioned how the US Federal Reserve was creating and would continue to create an asset bubble.

Based on the latest data, its plan is working too…

Yesterday we pointed out that central banks still have many more tricks up their sleeves. The idea that they can’t do anything more because interest rates are already low is false.

They can do plenty more.

One option is to follow the Danish lead and cut interest rates to below zero. That may work in what we could call a ‘second tier’ economy, but it may not cut it in one of the major economies.

After all, you’d think the one country to try such a policy after two decades of low interest rates would be Japan. But however tempted the Japanese may have been to do so, they haven’t yet cut the interest rate to below zero.

The other option, the option central banks seem to prefer, is to be more discreet (devious is probably a better word). That involves using inflation.

Two Reasons Why Central Banks ‘Print’ Money

The central bankers’ most well-known use of inflation in recent years is their policy of ‘printing’ new money in order to buy government bonds. This serves two purposes. First, it creates a guaranteed buyer for government debt.

That means the government doesn’t have to stop spending.

The second purpose is to induce inflation. If the central banks can push more money into the economy it should raise prices, which they hope will also raise incomes, which they hope will make it easier to repay loans, which they hope will make consumers more likely to take out new loans.

We say that it’s a devious trick because the truth about inflation is that it doesn’t increase wealth. In fact, it does the opposite. General price rises inflict harm on savers and income earners because, typically, wage rises lag price rises.

Furthermore, it harms people who stop working (such as retirees or those who become unemployed) because prices continue to rise even though their income earning capacity may have stopped. It’s why even in retirement, retirees still need to try to earn an income and take risks by investing because they know if they don’t inflation will gnaw away at their savings.

This is why we say investors have to invest in riskier assets (where you can get big returns) such as stocks, rather than just staying in cash. Proof of that is in the latest report from the Financial Times:

US inflation expectations have jumped to their highest since May, with central banks and investors seeking insurance against the prospect that a recovering American economy will stoke price pressures.

Inflation expectations, as measured by the difference between yields on 10-year nominal Treasury notes and Treasury inflation protected securities (Tips), have risen to 2.28 per cent from a low of around 2.10 a month ago.

Just remember that the typical US investor who would like to keep their money in a ‘safe’ bank account earns close to zero on their deposits. Thanks to the central banks, which are apparently seeking ‘insurance’ against inflation (the inflation they’ve created), savers have to take big risks in the stock market.

Stocks Go Up, What Could Possibly Go Wrong?

So, the plan is working.

Stocks are going up. Inflation is inflating. And governments can keep spending.

What could possibly go wrong?

OK. You know that’s a tongue in cheek comment. There’s plenty that can go wrong, which is why you need to be an active investor in this market, keeping a close tab on what’s happening to your investments.

The Aussie market gained 16% last year. It was a bad time to be in cash. A portfolio of individual stocks would have done even better, especially if you had bought into some good dividend payers when we told you to back in late 2011…and again when we suggested increasing your stock exposure at the end of 2012, the beginning of 2013, and mid last year.

Make no mistake. For all the stick we give central bankers, they’re working towards a plan. That plan isn’t necessarily beneficial for you or the economy.

But it is a plan that you can take advantage of to build your wealth, and fight back against the harm caused by inflation.

The way to do that is to pick a select portfolio of stocks priced at a good value, and where possible that pay a dividend.

As we pointed out yesterday and today, central banks have many tricks up their sleeves, so it’s premature to think this latest ‘Great Asset Bubble’ is about to pop anytime soon.


From the Port Phillip Publishing Library

Special Report: Five Fatal Stocks You Must Sell Now

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How Interest Rates are Like the ‘Moving Forest’ in a Scottish Play

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How Interest Rates are Like the ‘Moving Forest’ in a Scottish Play

Posted on 09 January 2014 by Nick Hubble

Actors never say the name of what they call the ‘Scottish Play’ inside a theatre. That’s because it brings down a curse on the play. Sandbags have been known to fall on actors, unoccupied cars run over people in the car park, and, according to legend, a real dagger was swapped for the retracting kind in the first ever performance. Some say the magic used in the opening scene by the three witches is real.

According to the actor Sir Donald Sinden, the truth is better than fiction. Macbeth was the default plan B of village theatre productions around England for many years. If the actual theatre production failed to draw an audience, swapping for Macb…the Scottish Play guaranteed a full house. So saying the name of the Scottish Play during a different theatre production was kind of like implying it wouldn’t be good enough and the troupe would have to use plan B.

Anyway, all this is very similar to today’s financial markets. It’s a tale of greed and delusion, and it won’t have a happy ending. The witches at the world’s central banks have brewed up a curse known as QE. Investors were sucked into the stock market hook, line and sinker, just as Macbeth was by promises of becoming king.

With the Federal Reserve’s first reduction of Quantitative Easing, we’ve reached a new act in the play. It’s the act where things get dicey. But let’s start at the beginning.

In the play, the witches tease Macbeth by saying that he can become king and his good fortune will last until the local forest comes to his castle at Dunsinane. ‘Forests don’t move’ reckons Macbeth, so he throws caution to the wind. I won’t ruin how the forest ends up moving, but I can tell you the financial market equivalent to the moving forest is moving interest rates. If interest rates begin to rise, the stock market’s good fortune will end.

Now interest rates have been in a steady downtrend since the 80s. That made debt steadily less expensive, which allowed people to borrow more and boost the economy. But, with the financial crisis, interest rates approached zero, especially once you take inflation into account. In other words, they can’t go lower.

The problem is that interest rates will rise eventually. And then all the debt incurred over the past few decades will become expensive.

So now that rates have hit zero and central banks are reducing their stimulus, the ongoing recovery is all about managing the increase in interest rates. If they rise too quickly, the recovery will stall because debt will be expensive. That would prolong the economic malaise many countries are still in. If they rise too slowly, the recovery could become inflationary. Inflation has the same effect on interest rates that screaming ‘Macbeth’ has on actors. They jump. And that leads us back to economic malaise, but with a bout of inflation mixed in.

In other words, the world’s central bankers have painted themselves into a corner. They could lose control. The lure of suppressing interest rates using QE gave them a short term gain, just as killing the king gave Macbeth his title. But now that decision could come home to roost.

So this year will be the year of watching interest rates around the world, just as Macbeth watched the forest from the top of his castle. That sounds mind-numbingly boring. But looking for cracks in a dam is probably boring too. Until it suddenly isn’t.

The most important interest rate to watch is the US 10-year Treasury bond yield. It is the rate that all others are influenced by. And it happens to be at its highest since 2011.

Did you see that tree move?

Nick Hubble +
Contributing Editor, Money Morning

Ed note: This article is an edited version of ‘A New Act in the Scottish Play’ which was originally published in The Money for Life Letter.

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Are Stocks Cheap, Fair Value or Overvalued?

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Are Stocks Cheap, Fair Value or Overvalued?

Posted on 21 November 2013 by Kris Sayce

So far it has been a bad week for Australian stocks.

The S&P/ASX 200 has lost 93 points since last Friday. That’s nearly a 2% drop.

So, what’s going on? What does this mean for our 6,000 point year-end target?

If the market doesn’t hit our target, it could leave your editor with a big dollop of egg on our face.

But wait. Outgoing US Federal Reserve chairman Dr Ben S Bernanke speaks. It turns out he’s confirmed what we’ve known all along.

You better put those eggs on hold…

We’ve gone on record throughout this year, trying to convince you that central banks have no intention of raising interest rates.

How long they’ll keep them low is anyone’s guess. Our bet is you can measure it in years. But even that may not be a long enough timescale.

It’s quite possible that the central banks think they can keep interest rates low for…well…forever.

The clue is in a comment from Fed chairman Dr Bernanke, as reported by Bloomberg News:

“The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after” the jobless rate breaches the Fed’s 6.5 percent threshold.

OK, maybe not forever. But now do you believe what we’ve said on this?

Stocks Pause for ‘Thinking Time’

However, we’ll stop the self-congratulation for a moment.

Being right is only half the story. We’re not involved in the financial markets as an academic exercise or to score points.

We’re in the financial markets to identify trends and then recommend specific investments. And ultimately to help our readers make money.

That hasn’t happened this week as the market has fallen 93 points. So, should you get those eggs ready again? Not so fast.

Our view is the market and investors are going through the usual period of self-doubt after hitting a new high point (we’re talking specifically about the US market here).

That’s only natural. When the market breaks a record, investors begin to wonder about the sustainability of the current gains and whether it’s possible the market can go any further.

It’s quite normal to see stocks trade around a key level as investors and traders weigh up valuations – are stocks still cheap, fairly priced, or are they overvalued?

Investors ask those questions all the time, and rightly so.

You can see from the following chart that a similar dance played out with the Dow Jones Industrial Average for most of the second half of this year:

Source: Google Finance

It wasn’t until the fourth time of trying that the Dow finally broke through 15,500 points and stayed above it.

Australian Stocks Still Heading for a 10% Gain

Now the Dow is flirting with 16,000 points. This is another key psychological level. It broke through on Monday but failed to stay above it.

It traded above that level again on Tuesday. But once more it failed to stay above the line.

And while we always prefer to see stock markets going up, you shouldn’t panic when stocks have a few days of falls. Remember that the Dow has gained around 600 points – about 4% – over the past month.

So if it gives up a few points, so what?

The same goes for the Australian market. Sure it has lost 93 points in less than a week. But it’s still 150 points higher than it was in early October. And even if the market gives up that gain, the S&P/ASX 200 would still be almost 500 points higher than it was at the start of the year.

The bottom line is this: despite the volatility we still don’t see that anything has changed. Dr Bernanke has confirmed our view – interest rates aren’t going anywhere.

And when the market finally gets that, you’ll see stocks break out of this funk and move higher. So we’re sticking with the game plan.

This is Part of the Federal Reserve’s Plan

Whether you stick to the game plan of buying stocks on these dips is up to you.

We certainly are. As always it’s a risk. Even if the market rallies, not all stocks will achieve the same gains. Some may even fall. So it pays to put in the research to give you a better chance of backing a winning stock.

It was a big risk telling you to buy stocks through May and June when the market slumped 10% in a few short weeks.

But at the time our research and analysis suggested it was the right thing. And we’ve got the same conviction right now.

Remember (and this is the key point) that while the Federal Reserve and other central banks want stocks to go higher, they don’t want them going too high too soon. They’re trying to manipulate prices to achieve slow and steady price growth over time.

So far this year the US market has gained 21%. Is that enough for the Fed? Maybe they will be happy for a 30% gain this year. One thing we’re certain of is that Dr Bernanke won’t do anything to spoil his perceived legacy as he enters the last two months as head of the Fed.

As we see it, while it wouldn’t have been great to see your portfolio take a hit this week, the plus side is that if you have cash available to top up your holdings, now is as good a time as any.

It’s a punt, but if you can cope with the volatility, it’s worth the risk.


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The Economy Is On Strike

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The Economy Is On Strike

Posted on 18 November 2013 by Dan Denning

You know one of the definitions of insanity, right? It’s repeating the same action over and over but expecting a different result. Well, there’s either a lot of insane people running the world’s financial system…or they’re just simply incompetent. Either way, it’s extraordinary.

Let’s be clear: central banks are out of ideas. Their policies pump up stock prices. Meanwhile, the real economy has gone on strike. It refuses to react in the way the academics in government and finance expect. Let me just give you two quick examples.

First, Japan’s growth rate fell by 50% in the third quarter (between July and September). GDP grew at an annualised pace of 1.9% for the quarter. But it’s been slower every quarter this year. It was 4.3% in the first quarter and 3.8% in the second quarter.

The bloom is off the cherry blossom for Abenomics. Promising to double the monetary base drove down the yen for a bit, which boosted export earnings. Stocks raced ahead. But all the momentum is gone. Emerging market demand (which is not boosted by QE) hasn’t recovered.

The chart above shows that the Nikkei is at the top of the trading range it’s been in since late July. It’s not looking over-bought on a relative strength basis. But this shows me that if you’re looking for the next blue chip rally driven by QE, you’re not going to find it in Japan, at least not without some new big, bold stimulus.

US stocks, on the other hand, flew like a gaggle of drones hunting for a strike after Janet Yellen fronted the US Senate Banking Committee. The nominee to replace Ben Bernanke as Chairman of the world’s most powerful banking cartel assured the suits in Washington they could expect the same from her, only more of it. The Dow Jones Industrials are closing in on 16,000 and the S&P 500 hit 1790 (or a year after the beginning of the French Revolution, if you’re looking for historical rhymes).

To chase the US stock rally at this point would be madness. You might make some short-term gains in the next few weeks, but the rocket is nearly out of Fed fuel. And stocks cannot trade at a permanently high plateau merely on the basis of Fed money printing.

A Speculative Trade for 2014

That leaves Europe, if you’re looking to take a punt on where the next gains could come from the currency wars. In Europe, there are two pieces of evidence to suggest that money is about to flow from the European Central Bank (ECB) and into stocks.

The first item is that GDP growth in Europe is even weaker than Japan. The 17-country Eurozone grew by just 0.1% in the third quarter. That’s an annualised rate of 0.4%. And it’s so low as to be statistically inconsequential, assuming it’s not flat-out made up. The ECB now has plenty of economic justification for hitting the gas pedal (even if Japan’s experience shows that the effects of doing so are temporary).

Next is what ECB executive board member Peter Praet told the Wall Street Journal earlier this week. He said that, ‘All options are on the table‘ for the ECB to fulfil its mandate of promoting growth, stable prices, and low inflation. That’s just as ridiculous as Janet Yellen committing to 2% inflation. You can’t have stable prices if your policy is designed to increase them (you CAN have asset inflation though, which is what the finance sector loves).

But it appears that ‘asset purchases’ are now on the table in Europe. The matter may have some added urgency, given the weak GDP figures. And if the US and Japan are a precedent, the biggest beneficiary of the ECB’s next campaign ought to be large cap European stocks; hence my recommendation of an Aussie-listed ETF.

World War D and Financial Feudalism

One final note on the ‘currency wars’. Let’s not forget that low interest rates aren’t just good for the financial sector. They’re great for governments with large fiscal deficits. These days, that’s pretty much every major Western government.

Governments would face an immediate 20% increase in debt service costs if interest rates went back to 2007 levels, according to a new study from McKinsey and Co. The study shows that suppressing official interest rates has ‘saved’ governments $1.6 trillion in lower interest payments since 2007. Regrettably, while governments are winners with lower borrowing costs, savers and pensioners can go suck eggs, as the chart below shows.

Source: McKinsey and Co.
Click to enlarge

The study is a good read, if you have time. There are lots of pretty charts and graphs. But the fundamental conclusions are inescapable.

Interest rates are at 30-year lows and can’t go any lower, at least in nominal terms. They could go negative if central banks start charging interest on the excess reserves. If you were a bank, you’d have to pay to deposit money overnight with the central bank.

But really, what this means is that asset purchases are the only tool left in the central bank toolbox. They’ve tried it and it hasn’t worked. All that’s left is to try more of it and see if that works. It won’t. But they’ll do it anyway and we’ll know they’re either incompetent or insane.

Let’s not rule out devious, either. This could all be deliberate. It’s a modern version of feudalism, only the peasants and serfs don’t realise they are wage slaves who are asset poor. If you have a high definition television and a full stomach, you can stand a lot degradation in life.

Besides, who needs castles and moats and armour and crowns when you control interest rates, have the only legal printing press in town, and own all the politicians?

Where all this is headed is anyone’s guess. A financial problem (too much debt and poor risk management) has become an economic one. The economic has become political. And the political has become social and cultural. It may not end in another French Revolution. But one regime – the global fiat money standard – is about to lose its head.

These are some of the ideas we’re going to talk about in Melbourne late next summer. If you click on this link, you can add your name to a list. Once on it, you’ll be notified when the conference – what we’re calling World War D – goes live.

Dan Denning+
Editor, The Denning Report

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You Can Bank on Another Crisis

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You Can Bank on Another Crisis

Posted on 25 September 2013 by Vern Gowdie

The GFC brought into stark contrast just how vital the banking system is to the functioning of an economy.

At the height of the GFC banks did not trust each other. And people did not trust the banks.

Banks viewed each other with suspicion. Letters of credit were no longer accepted on face value. The shipping industry, which relies heavily on letters of credit, ground to a standstill.

Customers lined up outside banks (some with suitcases) to withdraw their savings.

Such was the demand for cash, the Reserve Bank of Australia came close to running out of physical notes.

Modern commerce is a function of faith. When faith in the financial system is lost, chaos follows. 

Banks are the Heart of the Financial System

Money pumps in and money pumps out. The flow of money through the system is as vital to economic health as the flow of blood is to our physical wellbeing. We all know what happens when arteries become blocked or, worse still, when a heart stops pumping.

Governments are only too aware of the need to maintain public faith in the banking sector. Government backed deposit guarantees still remain in force five years after the event – albeit the guarantees are now applied to lower dollar levels.

The first premise of my theory is governments must and will support the banking system in times of crisis. They cannot afford to have the heart stop beating. While nothing is ever certain, the prospect of government not wheeling out the defibrillator is extremely remote.

So I go with the balance of probability and assess that the banking system will be rescued. But who pays and at what cost?

Sayings like ‘safe as a bank’ refer to an era of prudence that is not reflective of modern banking.

Yet, by and large, banks are still viewed as these conservative pillars of society.

This chart from last week shows US credit growth exploding from 1980 onwards.

This graph applies equally to the rest of the western world. Who facilitated and profited (handsomely) from this debt mania? The banks. Fractional banking enabled banks to gear up by a factor of 10x or more. This highly leveraged pillar is what our monetary system rests upon.

The Impact of Shrinking Credit

After 30-years of unbridled debt expansion we have reached the stage where there are too many vested interests prohibiting the stabilisation of banking system.

Firmer foundations would require banks to reduce their gearing – lend less. Think of the ramifications of banks systematically reducing the credit flow throughout society:

  • Government tax revenues (on which all those entitlement promises have been built) would shrink faster than a wool sweater in a dryer.
  • Retail profits would fall and staff would be laid off.
  • The lay-off contagion would affect all business sectors and unemployment would rise. (And how does the government afford all this NewStart while on its Jenny Craig budget diet?)
  • Imagine the reaction from the real estate industry as property prices fall.
  • Bank profits would fall and share prices follow – member balances in superannuation would suffer and cause more pressure on the age pension to fund the shortfall.
  • Last but by no means least in a list that could go on and on, bank executive remuneration would collapse to under the $1m per annum mark. Shock, horror; imagine all those Porsches and North Shore homes that would flood back onto the market.
  • And the domino effect continues right through society.

I think you get the drift on how society is so hooked on the debt. Due to debt dependency, it is virtually impossible for anyone or any institution to voluntarily embark on the stabilisation process.

There have been token attempts at so-called banking reforms. In reality very little has changed. Bankers still get remunerated for taking risks, and not for being conservative.

The banks are even bigger than they were before Lehmann Brothers’ demise.

And the system is totally dependent upon unlimited central bank support. The system, in my opinion, is more unstable than it was in 2008. A cardiac arrest awaits.

Vern Gowdie+
Chairman, Gowdie Family Wealth

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Why You Should Be ‘Hands On’ When Investing Your Money

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Why You Should Be ‘Hands On’ When Investing Your Money

Posted on 30 July 2013 by Kris Sayce

Central banks have become the insider traders of the currency market, which is a paradigm shift that systematic traders cannot pick up as well as fundamental traders.‘ – Bloomberg News

If you had said 10 years ago that central banks were insider trading, you would have been laughed out of town.

Today everyone knows central banks trade in advance of upcoming policy decisions.

But it’s not just the central banks. The big investment banks play the same game too…

If you don’t believe us, take this story from Bloomberg back in May:

Goldman Sachs Group Inc. (GS), which generated about half its revenue from trading last quarter, posted losses from that business on two days in the first three months of 2013, compared with one day a year earlier.

If we assume there were 60 trading days in the first quarter, it means Goldman Sachs traders made profits 96.7% of the time.

In the world of trading that’s an unheard of strike rate. Most traders are happy to make profits on just half their trades.

Even if you factor in the large number of traders on Goldman Sachs’ trading desk, the law of averages would still dictate a win rate close to what an individual trader can achieve.

So there’s only one explanation – the big boys have a secret advantage compared to every other investor. But it’s not just insider knowledge. Until recently they’ve had another advantage…

Investing: Humans v Computers

Over the past few years, some folks have made a lot of noise about the influence of computer trading at the big banks and hedge funds. Another name for it is algorithmic or ‘algo’ trading.

Many worried that computers would take over the world. Some feared it would even be the end of investing as we know it.

But now it seems that computers aren’t quite so smart after all. In fact, according to Bloomberg:

Currency funds that use computer models for trading decisions made 0.7 percent this year through June, compared with 2.3 percent for those that don’t, the biggest margin since 2008.

The article says that computers haven’t yet figured out how to trade unpredictable markets. A good example was the US Federal Reserve’s about-face in May, when many thought it would start raising interest rates.

Human traders traded that move quickly as bond yields soared. It seems the computer (‘algo’) trading programs weren’t quick enough to catch the move.

(We guess we’ll find out soon enough on how many days Goldman Sachs traders and computers made profits during this rocky period.)

Saying that, the fallibility of computers and computer modelling shouldn’t surprise you. One of the big controversies during the 2008 financial meltdown was value at risk models (VaR).

Big traders used VaR to work out the potential loss for a portfolio. They use historical volatility and the expected behaviour of various asset classes in certain conditions – stress testing.

But none of this counted for toffee when financial markets collapsed. Events that the models said were a one-in-a-thousand-year’s possibility happened…and in a big way.

So, what does that tell you? For a start it tells you that even the smartest computer trading system needs a human to get involved when the computer misses something.

That’s why, as fond as we are of new technology and its ability to improve lives and drive down costs, we also know the human element is important.

‘Hands On’ Investing

In truth, as a fundamental analyst, we don’t leave anything to automation.

Because when dealing with revolutionary, breakthrough and leading-edge technology companies, the most important thing we look for is innovation.

And as far as we’re aware, there isn’t a single computer model that can identify a revolutionary change before it happens. There certainly isn’t one that can identify a company to benefit from the change.

So when it comes to finding revolutionary investments, we have no problem saying we’re old school. Call it a ‘hands on’ approach if you like.

But just as we prefer a ‘hands on’ approach with our investment research, we prefer to be ‘hands on’ when investing our own money too.

We like to know a human has complete control over our savings and investments. But not just any human. We like to have personal control over each of our investments.

That way, on any given day we can know exactly how much money is in our investment savings account. We know our shares balance. And we know the value of our precious metals.

This is vital. It’s important to know where your money is and what you’re invested in at all times. That means avoiding opaque investments. And most of all, avoid investments where you don’t have complete control.

This is the key to avoiding any nasty surprises during the next financial meltdown (whenever it arrives). Whether the cause of the next meltdown is computer trading or human traders, it’s doesn’t matter.

What matters is that you take charge of your investments today.


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From the Port Phillip Publishing Library

Special Report: The Sixth Revolution

Daily Reckoning: The Absurdity of Australian Property

Money Morning: This Stock Market Rally Hasn’t Run Out of Puff Yet…

Pursuit of Happiness: Save Now to Avoid the Government’s Retirement ‘Labour Camps’

Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks

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How Central Bank Zombies Control the Stock Market

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How Central Bank Zombies Control the Stock Market

Posted on 25 June 2013 by Dr. Alex Cowie

Zombies…zombies everywhere!

Popular culture is infested with the un-dead.

No less than sixty-five zombie movies hit the silver screen in the last twelve months. Some, like World War Z are worth watching, while you can probably miss Dating a Zombie.

The infestation has spread to TV shows too, with series like The Walking Dead.

No longer are you safe on the streets either. ‘Zombie walks’ – where tens of thousands of people stumble through the streets as zombies – have erupted globally including Australian cities.

What is it with this recent obsession with zombies?

On the way home from watching World War Z at the cinema with the missus, the answer struck me.

…We can blame Ben Bernanke, and let me explain why…

In a world where apathy reigns, the zombie walk resonates as a mild mannered protest.

Take a look at this photo from the recent Brisbane zombie walk:

It’s the same demographic each time: Generation Y, the teenagers through to the ‘thirty-somethings’.

Sure, they’re out to have some fun. But why do it all, and why specifically zombies…why aren’t they dressing up as the other current horror genre: vampires for example?

Is it a coincidence that zombies are a social metaphor for a rudderless, corrupted, join-or-die culture, mindlessly consuming as it spreads?

And is it by chance that Gen Y is has found expression in the zombie metaphor over the last few years in particular, as financial turmoil has spread to economic and social turmoil?

If this is getting a bit heavy, think about it. We are all Bernanke’s zombies in the markets too.

Almost half a decade of quantitative easing has long since transformed the investing community from fresh-faced free-marketeers into the half-alive-half-dead, stumbling around for fresh QE to feed on – all the time festering and slowly rotting a bit more.

The drip feed of US Federal Reserve QE has kept the market twitching for years. But is it all about to dry up?

Bernanke is hinting so. But I don’t want to add more zombie column-inches to the pointless discussion of ‘will he or won’t he’. The messages out of separate Fed members make it clear that they couldn’t agree on the colour of an orange between them.

Let’s look further up the food-chain instead to get word from zombie central command (AKA: The Bank of International Settlements – or BIS). BIS is ‘the central bank’s bank’ and their message is clear – no more QE please:

Central banks cannot do more without compounding the risks they have already created…How can they avoid making the economy too dependent on monetary stimulus? When is the right time for them to pull back … how can they avoid sparking a sharp rise in bond yields? It is time for monetary policy to begin answering these questions.

Tough words indeed from the Zombie Central Command…

60 countries’ central banks are members of BIS.

These include the Federal Reserve, the Bank of Japan, the Peoples Bank of China, as well as the European Central Bank.

BIS has clearly aimed this not just at the Federal Reserve, which has talked about dialling back the QE, but also Japan which is in the early stages of an epic QE program planned to go for another eighteen months.

But let’s not worry about Japan for today. That’s a whole separate barrel of worms.

Front and centre for market zombies today is if the BIS is pressuring the Fed to dial back on the QE sooner rather than later.

Markets Are Crashing Everywhere On the Prospect

And it doesn’t matter what it is.

…Bonds are falling.

…Currencies are falling.

…Commodities are falling.

…Stocks are falling.

Markets in Free Fall – Across All Asset Classes

Source: stockcharts

The zombies are in full-blown panic as their life support threatens to dry up.

But it’s not just the fear of the Federal Reserve liquidity drying up.

There has been a big China scare in the last week regarding interbank lending. The rate at which banks lend to each overnight other spiked to 14%, when 1-3% is more normal.

But instead of hosing the problem down with liquidity as is the usual response, the Peoples Bank of China (PBoC) has held back, with reports of a small level of support for one bank.

What stands out is that the PBoC has put the blame on the banks, telling them to do a better job of managing liquidity, and not to expect the cavalry to come riding over the hills to the rescue every time they stuff up.

The official response read:

At present, the overall liquidity in China’s banking system is at a reasonable level, but due to many changing factors in the financial markets and also because of the mid-year point, the requirements for commercial banks in liquidity management have become higher … commercial banks need to closely follow the liquidity conditions and boost their ability to analyze and make predictions on the factors that influence liquidity.’

It’s a dangerous game to play. Once a credit bubble pops, you don’t have much, if any, opportunity to stop it. So PBoC needs good reason to respond this way.

Maybe the words from Zombie command (BIS) hit home. After all, China has been one of the biggest credit junkies in recent years.

My colleague Greg Canavan at Sound Money Sound Investments has closely followed this story for a few years, and recently put out a chilling video of how this could pan out. It’s worth a watch.

The markets have very quickly flipped from complacent to fearful in the last few weeks. Until we get a better idea of what to expect from the Fed, and from China’s central bank…watch out for attacking zombies.

Dr Alex Cowie
Editor, Diggers & Drillers

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From the Port Phillip Publishing Library

Special Report: The Sixth Revolution Has Just Begun

Daily Reckoning: When it Comes to Future and Technology, Which Camp Are You in?

Money Morning: Why The ‘Asia-Zone’ Crisis Makes Australian Stocks a Buy…

Pursuit of Happiness: Don’t Blame Progress, Blame the Governments

Diggers and Drillers:
Why You Should Invest in Junior Mining Stocks Now

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Bernankenstein’s Financial Monster

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Bernankenstein’s Financial Monster

Posted on 07 June 2013 by Vern Gowdie

Just when you think central bankers are as clueless as our Treasurer, they go and surprise you. The release of minutes from the latest US Federal Reserve Advisory Panel meeting was a bit of a revelation.

The Federal Reserve’s ‘mad scientists’ appear to realize they have created a financial monster. Call it Bernankenstein’s Monster if you like. Take this extract (bold emphasis is mine):

‘There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices.’

Concern about an ‘unsustainable bubble‘? Given the Federal Reserve’s previous track record of creating bubbles (housing rings a bell), all they can muster is ‘concern’. What about fear and alarm?

Here’s another bit of genius from the minutes:

‘Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses. Given the Federal Reserve’s balance sheet increase of approximately $2.5 trillion since 2008, the Fed may now be perceived as integral to the housing finance system.’

‘Reestablish normal valuations?’  Is this Fed code for the fact we now have abnormal valuations? The minutes insinuate the ‘mad scientists’ know they have stuffed it up.

The Experiment Has Gone Too Far Now

And as for the idea that the withdrawal of stimulus ‘may be‘ painful, please spare us the ‘may be’. The market is a highly dependent ‘junkie’. When the Federal Reserve turns off the ‘juice’ (voluntarily or involuntarily), a world of hurt waits.

Haruhiko Kuroda (Bank of Japan Governor) can’t afford to be as contemplative as the Fed. He is a modern day kamikaze – if he thinks of the inevitable outcome, he would never have signed up in the first place. Kuroda is zeroing in on the battleship called ‘deflation’.

A lot of others have moved into Kuroda’s slipstream and had a free ride on the devaluing yen and rising Nikkei. But poor old Kuroda has run into severe turbulence. This is tossing the markets around like a single seater in a cyclone.

Uncertainty and volatility are the hallmarks of Japan’s experiment in printing their way to inflation. The Nikkei’s wild swings (of up to 500 points in a day) illustrate investor nervousness.
According to Wikipedia ‘about 14% of kamikaze attacks managed to hit a ship‘. I think Kuroda’s odds of achieving his mission are even lower.

Central banks believe (publicly at least) asset bubbles can rescue the global economy. History doesn’t just tell us, it shouts at us; asset bubbles don’t fix anything.

The pain of the bust far outweighs the euphoria of the bubble. Time and again this is the lesson central bankers never learn.

Andy Xie, from Caixin Online summed it up:

‘Japan and the United States are using asset bubbles to revive their economies. They are struggling to manage the speed of bubble expansion or contraction. This dancing on a pinhead brings big uncertainty to the global economy. When they fail, a global recession may follow.’

Welcome to the Real World  

Central bankers tell you they are busy conducting an ‘experiment’. But the economy isn’t a scientific research project. They can’t control it. The global economy is a complex and unpredictable ecosystem. Its evolution is a function of the decisions the seven billion people who inhabit the earth make every day.

A handful of bureaucrats and academics with computer models can’t control this ecosystem, any more than marine scientists can control the ocean.

Acknowledging this fact is a step towards understanding the gravity of the situation. Otherwise, these crackpot scientists will blow the lab sky high.

We only have to look back a dozen years to see how their previous experiments (of lesser intensity) have failed.

US fund manager John Hussmann made this observation in his latest report:

‘… the last two 50% market declines – both the 2001-2002 plunge and the 2008-2009 plunge – occurred in environments of aggressive, persistent Federal Reserve easing.’

The significant share market losses suffered during the ‘tech wreck’ and ‘GFC’ occurred when the Fed was aggressively intervening (meddling) in the economy. The Fed’s tampering only makes a bad situation worse.

If we look further back in time, Hussmann discovered:

‘…the maximum drawdown (loss) of the S&P 500, confined to periods of favorable (meddling) monetary conditions since 1940, would have been a 55% loss. This compares with a 33% loss during unfavorable (non-meddling) monetary conditions.

According to Hussman the market collapses ‘were preceded by overvalued, overbought, overbullish euphoria‘. This is what asset bubbles do. The animal spirits run strong – the need for greed drives values well above rational levels.

Anyone with a passing interest in the financial world knows the current level of meddling is without precedent. So if all the previous periods of ‘Fed intervention’ resulted in 50+% losses, what pain is in store for this market?

The following charts show the current level of disconnect between the market and the economy.

The first chart tracks US economic activity. In 2008/09 (the grey shaded area represents a recession) all measures of economic activity fell into a crater.

The important take from this graph is 2010 onwards. After the economy ‘recovered’ from its initial GFC shock, it has steadily declined. This is in spite of the US Fed spending trillions (over the past four years) ‘stimulating’ the economy. The Great Credit Contraction is proving far more powerful than the printing press.

This next chart compares the performance of the S&P 500 index with the level of margin debt (borrowing to invest) in the US. Talk about a mirror reflection. 

While the economy (Main Street) is tanking, Wall Street is gearing up and milking the experiment for all it’s worth.

The next wave down in this Secular Bearmarket will be gut wrenching. It’ll make the previous two corrections look like gentle slippery slides.

Interest rates are destined to go lower, but being in a cash bunker is still the best place to observe the inevitable detonation of this experiment.

Vern Gowdie
Contributing Editor, Money Morning

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From the Archives…

Keep One Eye on Resource Stocks and the Other on the NASDAQ
31-05-2013 – Kris Sayce

Getting in on the ’99 Cent Craze’ with Crowdfunding
30-05-2013 – Sam Volkering

Buyer Beware: Japanese Government Bonds are Moving
29-05-2013 – Murray Dawes

The Best Contrarian Play on Gold I’ve Ever Seen…
28-05-2013 – Dr Alex Cowie

A Revolution in the Share Market is Coming…
27-05-2013 – Kris Sayce

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The Next Move in the Currency War

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The Next Move in the Currency War

Posted on 15 May 2013 by John Stepek

In the world of central banking, the gloves are coming off. You can blame the Japanese.

At the G7 meeting, everyone smiled politely and said that they completely understood why the Japanese were printing unprecedented amounts of money and hammering the yen.

The main reason they gave Japan a free pass is because lots of other countries are hoping to get away with doing the same.

Central banks overseeing around a quarter of the world’s GDP have cut rates this month alone, notes Bloomberg.

The currency wars are just getting started…

The Bank of Israel Joins the Currency War

The Bank of Israel has become the latest central bank to cut interest rates. The bank cut the key interest rate by a quarter of a percentage point to 1.5%. That’s a three-year low.

What was unusual is that the rate cut came outside of an official bank meeting. That meant it surprised the market, which sent the shekel down and Israeli stocks higher.

So why did they do it? Bank governor Stanley Fischer threw out a variety of excuses.

He told Bloomberg that the move came ‘in light of the continued appreciation of the shekel, taking into account the start of natural gas production from the Tamar gas field, interest rate reductions by many central banks – notably the European Central Bank, the quantitative easing in major economies worldwide and the downward revision in global growth forecasts.’

But clearly it boils down to this: if everyone else is going to print money, slash rates, and hammer their currency, then we’ve got to join in.

As Bloomberg points out, the shekel has risen by nearly 9% over the past six months. It’s one of the best-performing currencies in the world, after the Mexican peso.

Trouble is, ‘exports make up about 40% of Israel’s economy.‘ That means the Israeli economy really won’t like a rising currency. It doesn’t help that sales of natural gas will turn the shekel into a form of ‘petrocurrency’.

So the central bank also plans to buy around $2.1bn in foreign currencies (selling the shekel to do so), to offset the impact of natural gas exports.

That all sounds quite sensible. But there’s a flipside to cutting interest rates.

You see, we’ve all become really quite blasé about rate cuts. There seem to be no consequences these days (well, beyond surging stock markets at least). Much of the world has been in such a deep hole that it was hard to see whether or not all that money-printing and rate-slashing was having an impact.

But in Israel, the trade-off is more visible. The country already has a very buoyant property market, with prices up by around a fifth since 2010. Back in November, the central bank set restrictions on the amount buyers could borrow to purchase a house. First time buyers need at least a 25% deposit.

It’s hardly ideal to have your central bank trying to control a bubble with one hand while stoking the fire with the other.

The Currency War Will Not Stop Anytime Soon

It also reveals just how much power central banks have. Politicians have virtually ceded responsibility for their economies to the central bankers.

The politicians may fiddle with the national balance sheets: tweaking a regulation here and there, diverting handouts from one special interest group to more politically-friendly ones. But overall, the burden of returning economies to growth is falling on central banks.

This is nice for politicians, in that they can blame central bank policy if things go wrong. But it does not sit well with the central banks’ role as the ‘guardian’ of a nation’s currency. After all, the only real lever they have to pull to boost growth is to cut interest rates.

And with Japan’s experiment apparently working so well – in that stocks have rocketed – the pressure on central banks to follow suit will only continue.

What does it mean for your money? Well, we’d expect the flood of money from central banks to continue.

As for the US, in a world where everyone is printing money, it’s going to be hard for Ben Bernanke to keep devaluing the dollar. Everyone is getting excited about the idea that the Federal Reserve might rein in quantitative easing (QE). That seems unlikely to us.

But even if QE is simply maintained at current levels, that’s not going to look that impressive if the rest of the world’s central banks are competing to do various ‘shock and awe’ currency debasement schemes. So we reckon the US dollar is the currency most likely to benefit from this ‘race to the bottom’ for now.

John Stepek
Contributing Editor, Money Morning

Join Money Morning on Google+

From the Archives…

Why Small-Cap Resource Stocks Beat Blue Chips Hands Down
10-05-2013 – Dr Alex Cowie

Can Australian Stocks Defy Gravity if The Australian Dollar Falls?
9-05-2013 – Murray Dawes

Build Wealth Fast through the Resource Sector
8-05-2013 – Dr Alex Cowie

36% Potential Upside for Australian Stocks Over the Next Two Years
7-05-2013 – Kris Sayce

The Key to Becoming a Successful Investor
6-05-2013 – Kris Sayce

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Addictive and Irreversible: Destructive Policies Worldwide

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Addictive and Irreversible: Destructive Policies Worldwide

Posted on 26 April 2013 by MoneyMorning

After months of being under central bank-administered anaesthesia, many investors are pondering outside the repeated mantra of, ‘Money printing equals higher stocks.’

The question they’re asking now? How, exactly, swapping overvalued shares back and forth will create wealth for everybody — including those unfortunate enough to be buying late?

Masking symptoms of troubled economies with oceans of fresh money is not a good prescription for ‘wealth creation’.

But the Federal Reserve and other central banks have gone down that road, and there is no going back, even after the uglier symptoms of inflation emerge.

In the wake of the chaotic break in gold futures market, all gold mining stocks have been smashed. After two dreadful years, it looked like a final, cathartic purge. I haven’t seen sentiment and price moves like this since the depths of the 2008 crash.

Let’s examine the question of whether or not the gold bull market is over…

After spending much time re-examining gold’s fundamental drivers, my own assumptions and the views of a few dozen top analysts, I’ve come to the following conclusion: Ignore Wall Street’s clueless, half-baked opinions of the gold futures market.

Most of the banks’ opinions, including Goldman Sachs’ famous ‘short gold’ report, are based on an extremely speculative forecast: that the global economy can thrive after central banks stop printing. This cannot happen.

The only drivers of the US economy in recent years — rebounded stocks, housing and autos — owe their strength almost entirely to the Fed’s policy. Take away the policy, and all three would collapse. So the Fed simply cannot remove the policy. If it attempts to remove easy money, and the economy crashes, it will reinstate printing in a heartbeat.
The fundamental facts have not changed, so the underpinnings of gold’s bull market are intact.

The Number You Need to Know

The number you need to remember is zero.

Zero is where central banks will peg interest rates for several years into the future. Zero is also the number of times in recorded history that the “QE/ZIRP” policies in place worldwide have boosted any economy to ‘escape velocity’ (as economists say).

Such radical policies always result in destruction of the currency being printed. In other words, stagflation — not sustained economic recovery. Japan will discover that history rhymes once its financial market sugar high wears off. It offers a preview for the US.

As inflation expectations rise — the great hope of Bank of Japan governor Kuroda — Japanese investors will discover that money printing schemes are addictive, with no practical exit.

Here’s why: Once consumers buy tomorrow’s products today (ahead of expected price rises), what will they buy when tomorrow arrives? When tomorrow arrives, the howls for another round of printing will be louder than ever! We keep bringing up this question because thus far, there is no indication that any policymakers know (or admit) that Japan’s new policy is addictive and irreversible.

The real world isn’t nearly so simple and easily modelled as the professors running central banks believe. Trying to ‘boost inflation expectations’ will only trap central banks into permanent cycles of easing — both in the US and Japan. And the bigger government debts get, the harder it will be for central banks to tighten policy.

Raising interest rates a few years from now would result in interest expenses consuming an unacceptable amount of government tax revenue; so higher short-term interest rates — which would really put the brakes on gold prices — will not happen.

Finally, zero happens to be the number of fiat currencies in history that held their value.
The [US] dollar’s value isn’t going to zero anytime soon, but debasement continues, and stopping the growth federal entitlement spending — the real driver of federal budget deficits — is politically impossible.

The guardians of the paper dollar’s sanctity, rather than preserving its value with positive real interest rates and balanced budgets, are aggressively pushing it toward its ultimate destination: zero.

I’m waiting to see a strong rebuttal from the defenders of the paper money system. Thus far, I haven’t seen any cases for a strong dollar — a case that proves central banks have not trapped themselves into permanent cycles of easy money.

The gold bull market lives on…

Dan Amoss
Contributing Writer, Money Morning

Join Money Morning on Google+

From the Archives…

Why Waste Your Time on Gold When You Can Invest in Dividend Stocks?
19-04-2013 – Kris Sayce

A Trader’s Eye View of Gold’s Frightening Collapse
18-04-2013 – Murray Dawes

Why You Should Buy ‘Dirty, Grimy’ Gold Stocks
17-04-2013 – Dr. Alex Cowie

Why this Historic Fall in the Gold Price Equates to a Historic Opportunity
16-04-2013 – Dr. Alex Cowie

Beware the ‘Safety Bubble’, But Don’t Sell Dividend Stocks Yet
15-04-2013 – Kris Sayce

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gold road_lge

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Gold Bulls About to Win the War

Posted on 09 April 2013 by Dr. Alex Cowie

If you’ve ever thought about buying gold, but never quite got round to it — in the space of a week, the market just gave you three huge reasons to ‘back up the truck’.

The incredibly bullish set up is at direct odds with the poor price performance, which saw gold dip as low as US$1540 last week.

This dip in the price is our friend: after all we’re meant to buy gold ‘on the dips’.

So when gold pulled back last week, I put my money where my mouth is…

Here’s part of the latest addition to the Cowie retirement fund:

Buy Gold

And if it gets cheaper still, I’ll buy more.

Let me explain what I’m seeing that makes me think a turning point is getting close…

What to Do When Investment Banks Say Sell

Back in late 2008, institutional analysts were tripping over themselves to downgrade their forecasts on gold…right before gold started a 180% rally.

The fact is that consensus institutional forecasts on gold have been consistently wrong for the last ten years. You could trade gold perfectly by doing the exact opposite to what the big investment banks recommend.

In other words, when they say ‘sell’…you should buy.

So it’s exciting to see more and more big banks are calling gold a ‘sell’.

Last week, the gold forecast that got all the attention was from Societe Generale (SocGen), a French multinational banking company with a market cap of around $20 billion.

They called for gold to drop to $1375/ounce.

Frankly I’m surprised that the market paid so much attention to the SocGen report. But it popped up across the mainstream financial media, as well as financial blogs and other newsletters. It was emailed to me about twenty times.

Most commentators quoted it as though it was gospel! Yet no one seems to have checked out SocGen’s insanely bad track record on gold…

I’d like to share with you what I wrote about this in a snippet from the Diggers and Drillers weekly update from last Thursday:

‘The 27 page [SocGen] report was called ‘The end of the gold era’, making the case for gold to fall as far as $1375/ounce.

‘Everything about today’s gold market reminds me of late 2008: the fundamentals, the technicals, the bearishness, the institutional downgrades, and the market action.

‘And now we have Jesper Dannesboe, who co-authored this week’s Soc Gen report, who also got it tragically wrong back in 2008. I’ve dug into the archives for you to show you what he was saying back then.

SocGen sell to be a contrarian indicator to buy again?

Oct 31 2008 Context: Eight days after gold bottomed out at an intraday low of $680, and at the start of a monster rally that took gold to $1920 over the next three years:

‘The most likely scenario for gold is it goes down a lot, especially if it is trading at historically high levels … Because the fears of inflation will be replaced by fears of disinflation and that is a killer for gold … I think gold is going below $600 in this cycle.’ Source

Nov 18 2008 Context: Gold was at $740, and would jump 11% to $820 within a week:

‘The bullish story on gold based on fears of inflation is dead,’ Source

Jan 6th 2009 Context: Gold was at $840: 24% above its intraday low of $680, and at the start of a three-year rally that would see gold gain 182%.

‘Gold should be sold into rallies’ Source

‘Well…there were three years of rallies to sell into, which should have been plenty! This is what SocGen’s calls look like on the chart.

SoGen Gold

Source: stockcharts

‘Then last year they called gold to soar to $8500, and it fell.

‘So, their latest call for gold to fall could well be the best reason to buy that we’ve had so far!’

In short — SocGen taking another swing against gold with the same weak argument that it had back in 2008 is a clear warning signal that a rally could be imminent.

Since I wrote the above, the guys at Sprott Asset Management took SocGen’s argument to pieces. Part of their rationale brings me to the second big reason to start buying gold now.

(NB: you can watch my recent interview with legendary investor, Eric Sprott, by taking out a subscription with any Port Phillip Publishing paid investment service. Check out our latest offer here… )

You see, last week we heard that the Bank of Japan will DOUBLE their balance sheet over the next few years.

Where This Goes, Gold Follows

This is quite simply a game changer for the entire market: everything from bonds to foreign exchange, commodities, and equities.

But it’s gold I want to focus on today. There is a tight relationship between gold and the collective size of central banks’ balance sheets.

As balance sheets swell, gold rallies. You can see how closely the two track each other below in the chart from the guys at Sprott Asset Management.

Gold Moves With Central Bank Balance Sheets

Global Central Bank Assets Vs Gold Bullion

Source: Sprott Asset Management

Right now the major central banks have $9 trillion on their books — and Japan wants to add $1.4 trillion to that number by the end of next year.

If the relationship holds true, this would convert to a 15% increase in the gold price.

But hang on…didn’t we use the same rationale about the US Fed last year? Wasn’t the growth of their balance sheet meant to push up gold?

Well, the Fed has bought $85 billion worth of US Treasuries and mortgage-backed securities a month, and gold has gone nowhere fast. But you’ll get your explanation if you look closely at the chart above. You’ll see that the total balance sheet has actually pulled back slightly in the last few months.

Surprisingly, it’s because the European Central Bank’s (ECB) balance sheet has in fact shrunk by 10% this year.

This would explain why gold has had a rough start to the year. The ECB’s contraction cancelled out the Fed’s expansion.

However, the ECB’s balance sheet has stabilised now, and with Slovenia and the Netherlands lining up to be the next Cyprus, it could be on the way back up very soon.

Even if it shrunk at the same pace again, it would be easily exceeded by the combined growth in the balance sheets of Japan ($75bn) and the US ($85bn) of $160 billion/month.

Assuming no change from the ECB, and that the Fed and the Bank of Japan keep going at the current pace for another two years, this would equate to a balance sheet expansion of $3.8 trillion. This would add over 40% to the current global balance sheet of $9 trillion. As gold moves so closely with this, you could expect a roughly 40% rise in gold.

It’s dangerous to look exclusively at fundamental drivers, and ignore the positioning in the futures market.

And this is where we get the third major reason to buy gold today.

The Commitment of Traders Report

This report analyses the positioning in the futures market, which — right or wrong — determines the price, at least in the short-term.

And there is a keg of dynamite under the price here right now: there are a near record number of traders (‘managed money’) trying to short gold.

Just like journalists, these guys basically get it wrong every time. You can use them as a good contrarian indicator.

To show you their near perfect record of getting it wrong, I’ve highlighted (in red circles) the times they have stacked on the biggest short positions in the last five years. Then I’ve highlighted the corresponding periods on the gold chart (green circles on pink line). You can see that each spike in shorts has signalled a rally in gold.

Traders Shorting Gold — So Get Ready for a Rally

Managed Money Short Positions Gold

Take another quick look at the chart. The two big spikes in shorts back in 2008 preceded the three year rally in gold. And you can see that today’s short position is at far higher levels than back in 2008. It’s at record levels, and has been for a few weeks now. This is a highly explosive situation.

I suspect we’ll see volatility both ways at first as they defend their trade, but almost certainly this ends in a big move up.

Because there is a real chance these guys are going to have to ‘cover their positions’ if gold rallies just a little bit. Each trader doing this will raise the price, and cause another trader to follow suit. They are like a large group of mountaineers all tied together with the same rope. When one falls, the rest will follow in spectacular style. It would be enough to cause a massive move in gold.

Watching the gold price trending calmly down, you’d never imagine a war was waging below the surface of the market.

But a war it has been — and one that gold bulls are about to win.

Dr Alex Cowie
Editor, Diggers & Drillers

Join me on Google+

From the Port Phillip Publishing Library

Special Report: TORRENT SIGNAL 3

Daily Reckoning: Our Largest Asian Trading Partners Are in Trouble: China and Japan

Money Morning: A Better Inflation Bet Than Gold…Stock Market Investing

Pursuit of Happiness: Why the NBN is Dead Before it’s Begun

Diggers and Drillers:
Why You Should Invest in Junior Mining Stocks

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Why Crime Pays for ‘Too-Big-to-Fail’ Banks

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Why Crime Pays for ‘Too-Big-to-Fail’ Banks

Posted on 04 April 2013 by Shah Gilani

You need to know the truth about banks.

Why? Because they rob you.

Why? Because they can.

It’s the Willie Sutton bank robber quote in reverse. Willie was asked, ‘Why do you rob banks?’

He famously answered, while in handcuffs, ‘Because that’s where the money is.’

But, banks can’t keep robbing the public if they keep shooting themselves in their feet. That’s where central banks come in.

They are the real kingpins keeping their robber minions in pinstripes — instead of prison stripes.

Estimates now are that US banks — the too big to fail ones — will end up paying more than $100 billion in fines, settlement costs, to buy back bad mortgages, to right some of the past wrongs related to the mortgage crisis they caused.

It could end up being more. But they’re all still in business. They’re able to digest these ‘costs of doing business’, and get bigger. And the banks are making enough profits to want to ‘reward shareholders’ by raising their dividend payouts and buying back their stock.

‘The Cost of Doing Business’

Then there’s the LIBOR mess. Banks colluded to manipulate the London Interbank Offered Rate. LIBOR is referred to by the British Bankers’ Association (an outfit populated by bankers as a kind of trade group that oversees LIBOR dissemination), as ‘the world’s most important number’.

There have been some settlements already. Three giant European banks — Royal Bank of Scotland, UBS, and Barclays — have ponied up almost $3 billion to settle matters regarding their involvement.

How much will the big American banks have to pay to settle their end of the scheming manipulation?

Nobody knows. But estimates I’ve seen range from $7.8 billion (I have no idea how the analyst came up with that figure… Thin air?) to more than $125 billion.

The point is that no one knows how much it will cost banks because it’s impossible to calculate how so many people, businesses, municipal governments, and anybody who paid interest based on LIBOR, was adversely affected.

The banks will pay whatever they have to in order to get these matters settled. They’ll all still be in business and able to digest these ‘costs of doing business’. They’ll get bigger, and make enough profits to want to ‘reward shareholders’ by raising their dividend payouts and buying back their stock.

But the hits keep coming folks.

Now the banks are being investigated for collusion, price fixing, restraint of trade, and just flat out being the criminal enterprises that they are. And for all their hard work in keeping credit default swap (CDS) trading off exchanges — where prices would be transparent and honest.

Then again, who cares about that little corner of the market for that little product? It’s only estimated to be in the tens of trillions of dollars. They are weapons of financial mass destruction in the shaky hands of speculating shysters.

Okay, that’s a hyperbole. There is a place for CDS, it’s just not where it is now — which is everywhere.

How much will it cost banks? $1 billion? $10 billion? $100 million billion?

Who cares?

The banks will pay whatever they have to. They’ll all still be in business. They’re able to digest these ‘costs of doing business’. They’ll get bigger, and make enough profits to want to ‘reward shareholders’ by raising their dividend payouts and buying back their stock.

Get the Picture?

Banks have become protected criminal enterprises.

They couldn’t do what they do without two things…

Make that one thing, because the one thing really encompasses the two things. I was going to say with they operate under the auspices of their cronies in government — and the Federal Reserve or central banks everywhere. But forget the government stooges. They are beholden to the Federal Reserve and central, which they long ago sold their souls to.

Without central banks to bail out the banks they would fail. And they should. But they can’t because they are too big to fail — and too big to jail.

Now that’s a business model!

Oh, and why are governments around the world (case in point: the United States) able to run mega-deficits?

That would be because they’re in bed with their cuddly central banker colluders, so they can print money to buy their never-ending, always-spewing bills, notes, and bonds that finance political pandering to the voters to stay in power.

They couldn’t do it without central banks.

Shah Gilani
Contributing Editor, Money Morning

Join Money Morning on Google+

From the Archives…

Why Dividend Stocks May Not Stay This Cheap for Long
29-03-2013 – Kris Sayce

Respect the Market Trend, but Don’t Expect it to Last
28-03-2013 – Murray Dawes

Silver ‘$100 Within Two Years’
27-03-2013 – Dr. Alex Cowie

11 Billion Reasons to Expect a 200% Move in Gold Stocks Within Months
26-03-2013 – Dr. Alex Cowie

You Want Proof the Stock Market’s Heading Up? Try This…
25-03-2013 – Kris Sayce

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Good Riddance to Deposit “Insurance”

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Good Riddance to Deposit “Insurance”

Posted on 04 April 2013 by MoneyMorning

Once the public furore and shrill media coverage have died down, it will become clear that events in Cyprus did not mark the death of democracy or the end of the euro, but potentially the beginning of the end of deposit ‘insurance’.

If so, then three cheers to that. It may herald a return to honesty, transparency, and responsibility in banking.

Let us start by looking at some of the facts of deposit banking: When you deposit money in a bank, you forfeit ownership of money and gain ownership of a claim against the bank — a claim for instant repayment of money, but a claim nonetheless. In 1848, the House of Lords stated it thusly:

‘Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him, when he is asked for it…

‘The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in hazardous speculation; he is not bound to keep it or deal with it as the property of his principal, but he is, of course, answerable for the amount, because he has contracted.’

This is not legal pedantry or just a matter of opinion, but logical necessity. It follows inescapably from how deposit banking has developed, how it was practiced in 1848, and how it is still practiced today.

Deposit Banking Has Been the Same for 300 Years

If ownership of the money had not passed from depositor to banker, then the banker could not lend the money to a third party against interest. He could not then pay interest to the depositor. If the depositor had retained full ownership of the deposited money, the banker would only be allowed to store it safely and to probably charge the depositor for the safekeeping of his property.

Money stored in a bank’s vault earns as little interest as money kept under a mattress. It is evidently not what bank depositors contract for. If interest is being paid or ‘free’ banking services are being provided, then the depositor must have at least implicitly agreed that the banker can ‘invest’ the money, i.e., put it at risk.

For more than 300 years, banks have been in the business of funding loans that are risky and illiquid with deposits that are supposed to be safe and instantly redeemable.

When banks fail, depositors lose money, although in former times, no rational person claimed that the depositors were unfairly ‘bailed in’ (a bail-in is an agreement by creditors to roll over their short-term claims or to engage in a formal debt restructuring with a troubled country) or were the victims of ‘theft’.

Although the mechanics of fractional-reserve banking have not changed in 300 years, the public’s expectations have greatly changed. Today, banks are expected to lend more generously than ever while depositors are supposed to not incur any risk of loss at all. This means squaring the circle, but it has not stopped politicians from promising such a feat.

Enter deposit insurance.

The Bogus ‘Insurance’

State deposit ‘insurance’ is not insurance at all. Insurance companies calculate and calibrate risks, charge the insured party, and set aside capital for when the insured event occurs. A state deposit ‘guarantee’, by contrast, is simply another unfunded government promise extended in the hope that things won’t get that bad.

Eventually, the state does what it always does, i.e., take from Peter to pay Paul. Cyprus is a case in point. Private insurance companies would have pulled the plug on a ballooning banking sector long ago. The Cypriot state, still the local monopolist of bank licensing and bank regulation, simply looked on as the banks amassed deposits of four times GDP.

In the end, Cyprus’ government ran out of ‘Peters’ to stick the bill to — and ‘Hans’ in Germany refused to get ‘bailed in’ completely (although he is still providing the lion’s share of the bailout).

Cyprus is just an extreme example of what the institutionalised obfuscation of risk and accountability that comes with state-protected banking can lead to. Deposit ‘insurance’ masks the risks and socialises the costs of fractional-reserve banking. Unlimited state paper money and central banks that assume the role of ‘lenders of last resort’ have the same effect.

If the original idea behind these innovations was to make banking safer, it has not worked, as banks have become bigger and riskier than ever before, although I suspect that the real purpose of these ‘safety nets’ has always been to provide cover for more generous bank credit expansion.

Under present arrangements, there is little incentive for banks to position themselves in the marketplace as particularly conservative. Depositors have been largely desensitized to the risks inherent in banking.

They no longer reward prudent banks with inflows, nor do they punish overtly risky banks with the withdrawal of funds. And even if they do, the banks can now obtain almost unlimited funds from the central bank, at least as long as they have any asset that the central bank is willing to ‘monetise’.

This is a low hurdle, indeed, as banks have become conduits for the never-ending policy of ‘stimulus’ and are thus being fattened further for the sake of more growth. Once a bank has ‘ticked the boxes’ and meets the minimum criteria of regulatory supervision, any additional probity would only subtract from potential shareholder returns.

Our modern financial infrastructure has created an illusion of safety coupled with an illusion of prosperity, thanks to artificially cheapened credit. The risk of the occasional run on an individual bank has now been replaced with the acute and rising risk of a run on the entire system.

This would change radically if we reintroduced free market principles into banking. Bankers would again be answerable to all their lenders, including small depositors, who would no longer be lulled into a false sense of security. Rather, in their proper role as creditors to the banks, they would become ‘deposit vigilantes’ and would help keep the banks in check.

In order to gain and maintain the public’s trust, the banks would again have to communicate balance sheet strategy and risk management to the wider public, not just to a handful of highly specialized bureaucrats at the central bank or the state’s bank regulator. Banking would become less complex, more transparent, and less leveraged. Conservative banking would again be a viable business model.

The wider public would begin to appreciate how dangerous the populist policies of cheap credit and naive demands for ‘getting banks lending again’ ultimately are. The depositors would finally realize that they’re underwriting these policies and that they carry the lion’s share of the risks.

Detlev Schlichter

Contributing Writer, Money Morning 

Join Money Morning on Google+

Publisher’s Note: This article first appeared here.

From the Archives…

Why Dividend Stocks May Not Stay This Cheap for Long

29-03-2013 – Kris Sayce

Respect the Market Trend, but Don’t Expect it to Last

28-03-2013 – Murray Dawes

Silver ‘$100 Within Two Years’

27-03-2013 – Dr. Alex Cowie

11 Billion Reasons to Expect a 200% Move in Gold Stocks Within Months

26-03-2013 – Dr. Alex Cowie

You Want Proof the Stock Market’s Heading Up? Try This…

25-03-2013 – Kris Sayce

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‘Gold Only Rises During the Bad Times’ and other Fairy Tales

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‘Gold Only Rises During the Bad Times’ and other Fairy Tales

Posted on 02 April 2013 by Dr. Alex Cowie

When journalists start bagging out gold, you know it’s time to think about buying some.

Because they have an uncanny knack of getting gold’s next move 100% wrong.

When they are cheering gold on, you can bet your nugget that the price is topping out. And conversely when they are giving gold a tough time — like now — you can be sure the gold price is bottoming out.

Because let’s face it: if they could make accurate trading calls on gold, they wouldn’t be making their living writing newspapers…

So I was pleased as punch over the Easter weekend to see the Sunday Age lead its finance section with a story called, ‘Has gold had its time in the sun?’

Bring it on. More of that bearishness please!

The writer did, in fairness, include some quality research from our own Greg Canavan of Sound Money Sound Investments.

Then countering Greg’s argument he used some negative views from AMP Capital Investors Chief Economist, Shane Oliver.

To quote the story: ‘[Oliver] says the risk of a global meltdown or collapse has receded and the appetite for gold is less than it was…He cannot see much upside in the gold price from here, though that could change quickly if there is another major financial crisis or inflation spikes.’

Now I’m sure Shane’s a lovely guy, but he’s clearly not very good at gold.

Then again, which institutional economist is? While they may be able to talk about dividend payout ratios, and franking credits until dawn; gold (and gold stocks) make up just 1% of global assets, so doesn’t tend to preoccupy their thinking at 3am on a very regular basis.

The main problem here is Shane’s assuming gold can only rise if the world is going to pot.

Some Urban Myths About Gold

This is perhaps the most popular of gold’s urban myths. And I’m happy to say that it’s total nonsense.

Gold actually gained far more in the five ‘go-go’ years prior to the GFC than it has gained in the five crisis-riddled years since.

For example, between the start of 2003 and end of 2007, the average global GDP rate was a chunky 4.78%.

No ‘global meltdown or collapse’. And in this period gold gained a respectable 149%.

From the start of 2008 to the end of 2012, the global economy has been an ever-evolving ‘global meltdown’. The average global GDP rate has been just 2.86%, mostly thanks to China.

And gold gained less in this period — with a 95% rise.

So contrary to Oliver’s argument, gold can do just as well or even better during the good times than the bad.

The misconception is so common, I even hear it from smart analysts saying things like this: ‘I’d love to see gold at $2000, but I’d hate to live in a world that creates such a high price.’

So I ask them if a five-fold rise in the gold price since 2002 has translated into a world that’s five times worse (discounting the rise over that period of reality TV, drivers who text, and of course Justin Bieber).

The fact is that the state of the global economy is not a direct driver of the gold price.

Other factors, for example global money supply growth, are far more important.

And here’s the other two biggest of these golden fairy tales.

Firstly: that rising interest rates will stop gold from rising.

The idea is that investors will sell their gold when bonds start paying more yield. For example, if the US ten year bond starts paying 3–4% again, then gold will lose its appeal.

There may be a few gold owners that think that way, but they are in a tiny minority. But the real issue here is that history disagrees with the argument.

From 2003 to 2008, yields on a ten year US bond were around that 4% mark. And factoring in inflation, the real yield was around the 2% mark most of this time.

Did that slow the gold price down? Not exactly. It gained 149%.

Yields have a Long Way to Go Before They Stand a Chance of Denting Gold

Yields on US 10 Year Bonds

Source: Bloomberg

So it has been amusing to hear people argue gold was going to fall because rates were creeping back up again. Because gold soared despite five years of real rates as high as 2%.

With today’s rates in negative territory, I’d say gold owners are pretty safe from this particular bogey-man.

The third bogey-man is the theory that mass sales from ETF’s could kill the gold price.

Back in February, the media was frothing at the bit that gold would crash because investors had liquidated 100 tonnes of gold (from a total of 2500) from ETFs during the month.

But let’s step back and put that in context.

Last year China imported 834 tonnes, with 114 tonnes in December alone.

India imported 860 tonnes in 2012, with another 100 in January.

As a whole, central banks purchased 534 tonnes in 2012.

These three buyers alone account for 2228 tonnes between them in 2012. In other words, they bought 100 tonnes every 16 days.

So I wouldn’t sweat it that ETF’s sold 100 tonnes in February. It wouldn’t even touch the sides of Asian demand.

In fact, global gold ETF holders could dump their entire remaining position of 2400 tonnes, and it still wouldn’t be enough to feed China, India and the central banks for thirteen months.

The Real Driver Behind Gold

Gold is an Asian story now. Western investors, and famous traders and hedge fund managers for that matter, need to wake up and smell the coffee if they still think that their trading is relevant to the big picture for gold.

I wrote to you yesterday with the transcript from my recent conversation with Eric Sprott about gold. I asked what he thought about the People’s Bank of China suggesting that they hadn’t increased their holding over the last three years, from 1,054 tons. Eric said:

‘I don’t believe that for a second. It seems so obvious to me. They haven’t been buying US treasury bills or treasury bonds for the last 18 months. I think it doesn’t take a rocket scientist to realise that owning gold is probably the best thing you can do these days as a central bank.’

It was a good chat we had. And if you haven’t seen it yet, I’d recommend a quick read, as Eric made some very interesting observations.

That’s the thing. Just as you should be selective about the food you consume, you should be careful about the ideas you consume.

It’s your choice. Will those ideas come from a fund manager that runs $11 billion in the precious metals space — or will you prefer to gobble up a journalist’s musings instead?

Dr Alex Cowie
Editor, Diggers & Drillers

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From the Port Phillip Publishing Library

Special Report: Australia’s Energy Stock BLOWOUT

Daily Reckoning: Why a PlayStation and Mining Technology Have More In Common Than You Think

Money Morning: On Gold — Billionaire Investor Eric Sprott Says : ‘I’m in Alex Cowie’s Camp’

Pursuit of Happiness: Three Scams and One Opportunity to Escape Your Mortgage

Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks

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Why The Federal Reserve and Central Banks Should Be Abolished

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Why The Federal Reserve and Central Banks Should Be Abolished

Posted on 27 March 2013 by Keith Fitz-Gerald

Last week I spent two days speaking to senior government officials and business leaders in Bermuda, which is one of the world’s leading international insurance and reinsurance hubs. The men and women in the room are responsible for hundreds of millions in assets worldwide.

I spoke for over an hour on the implications and opportunities of the financial crisis.

As I was finishing up, I received one of the most provocative questions I’ve gotten in a long time from the darkness beyond the stage lights: ‘Does any nation really need a ‘Fed’?’ asked one of the directors.

The answer is, unequivocally, no. Especially if it’s modelled after the United States Federal Reserve.

The individual depositors who were the protected class when the Fed was originally formed are little more than cannon fodder today. Instead, the banks the Federal Reserve supports have become the protected few.

To be honest, I didn’t always think this way. For much of my career, I took the Federal Reserve for granted, believing like millions of Americans that it was acting in our country’s best interest.

Then I sat down with legendary investor Jim Rogers in Singapore a few years back at the onset of the current financial crisis. During our discussion, he pointed out several things that really made me think about the Fed and its role in not only creating this crisis, but making it worse.

A 100 Year-Old Affront to Freedom

The American Federal Reserve as it operates today is an insult to anybody who believes in economic and political freedom. In an era of globally-linked finance, the very concept of a Fed is an abomination.

I realize that this may not sit well with you if this is the first time you’ve thought about the issue.

So let’s walk you through a few things that will challenge your thinking…

The Federal Reserve was established in 1913. It’s only 100 years old. And it’s anything but an original part of America’s economic machine.

Its original purpose was simple: To prevent banking failures.

At the time, the United States had just gone through the vicious bank panic of 1907. That crisis was significant because it saw the failure of Knickerbocker Trust, which sought – but failed – to receive financial support from its peers. Unable to obtain liquidity from any source, Knickerbocker Trust collapsed.

This affected public psychology deeply because Knickerbocker’s peers not only chose not to rescue Knickerbocker, but also suspended payments to each other.

This boomeranged through the system and came to roost at the retail level when the public figured out that they didn’t have access to their money, especially in ‘specie’, meaning in gold. Bank runs and closures became the norm.

The New York Stock Exchange fell 50% before financier J.P. Morgan famously locked banking executives in his personal library and formulated a liquidity injection that ultimately calmed everything down.

Loath to waste a good crisis, legislators stepped up to the plate by agitating for centralized banking as a means of restoring public confidence while providing the banking system with a source of liquidity that would prevent their wholesale collapse.

And they got it a few years later…in spades.

What’s really interesting to me looking back using today’s lens is how sophisticated the machinery of the time was. Powerful public and private figures worked together, often in great secrecy like they did at Jekyll Island, Georgia, to build the framework for the Fed. The Wall Street Journal published a 14-part series highlighting the need for a central bank. Citizen groups and trade organizations piled on.

And voilà…the Fed was born under the guise of a politically independent institution that would stabilize the financial system, protect the monetary supply against inflation, and maintain credit as needed by injecting stimulus when the economy flagged and withdrawing it when things were overheated.

In the terminology of the day, this was viewed as giving elasticity to the dollar which would, in turn, establish more effective control over the banking system.

None other than the Comptroller of the Currency observed that the Fed would supply a circulating medium that is ‘absolutely safe’. What irony.

Fast forward to today.

Every 1913 dollar is now worth US$0.04 cents. Goods and services that cost a buck back then now will set you back $21. Where’s the stability in that?

If that’s not practical enough, consider wages.

According to the US Census Bureau, the median income of male workers in 2010 was $32,137 while the median income of male workers in 1968 was $5,980. On the surface this isn’t too shabby. It’s a 437.4% increase over 42 years – or an average income gain of 10.41% a year, over the same time period.

However, if you run the numbers the other way, using 2010 dollars, a very different picture emerges. You quickly see that median earning male workers actually have less purchasing power today than they did 42 years ago ($32,844 vs. $32,137).

That’s your Federal Reserve at work. It’s robbing America by gradually sucking the life out of the financial system. Over time, it will cause the system to collapse – just ask anybody in the former Soviet Union. They had a ‘Fed’ and no Soviet bank ever failed per se. However, the state eventually took so much wealth from the people that the entire system broke.

Taxation Courtesy of the Printing Press

Legions of spend-it-while-you-can politicians and economists don’t see it this way. And neither, perhaps more importantly, does sitting Federal Reserve Chairman Dr. Ben Bernanke.

He said explicitly on November 21st, 2002, in remarks to the National Economists Club that, ‘by increasing the number of dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of the dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.’

In other words, he believes he can create economic value merely by printing money. It’s no wonder that he continues to print money today (euphemistically calling it ‘quantitative easing’) knowing full well that he is eviscerating the dollar. He believes that doing so is the same thing as raising prices by managing inflation.

In fact, inflation is actually defined as the artificial increase in the supply of money and credit. It’s a tax by any other name. So what Bernanke is really doing is artificially taxing the American public by debasing its currency. It’s no wonder that more people have less. But here’s where it really hits home for me.

When the Federal Reserve was created, it was envisioned as a source of liquidity for the banking system. The presumption was that any specific failure in the banking system subject to the Fed’s oversight would be offset by the available cash from the government because it had centralised the credit risks associated with their lending portfolios.

In today’s environment, credit is diffused globally far beyond the Fed’s reach. What’s more, there’s too much of it and the banking system is now so big that the risks it holds dwarf the Fed’s liquidity capacity.

For example, there are an estimated $600 trillion to $1.5 quadrillion in derivatives products worldwide at the moment. Global gross world product is approximately $79 trillion by comparison.

Contrary to what Bernanke and others who are so tightly involved in the system believe, this crisis was not caused by a lack of liquidity. Rather, it was caused by too much money sloshing around in some sort of unregulated mosh pit with inadequate supervision and inadequate regulatory oversight.

The real villain here is that excess liquidity is leveraged. This lets big banks buy derivatives for pennies on the dollar yet exposes them to hundreds of billions in market risk.

The sad reality is that Bernanke and his central banking buddies in ‘Feds’ around the world could print money until the end of time and they still wouldn’t be able to print enough to guarantee liquidity. Yet they will continue to try because that’s the only way they keep the illusion going.

It’s also the only way they keep a handle on their version of risk…to the system. And that brings us full circle.

Success by its very definition includes failure. People forget that the discipline of failure is integral to capitalism. When the Fed creates money out of thin air, the risk of failure does not exist. Without the risk of failure, the big banks know they can place one way bets and not worry about losses because they are literally ‘too big to fail’.

In fact, management and traders are paid to do exactly this. If the monstrous one-way bets pay off, they get up to 50% of the profits. If the bets go bad, the stockholders, the Federal Reserve, and now the public eat the losses.

So they have every incentive to act in their own interests while reinforcing incompetent management, improper risk taking and inefficient operations. Politicians and regulators are incentivized the same way, since the Fed also makes it possible for them to skirt the issue of responsibility.

The Fallacy of Free Money

Which brings me to the last sacred cow I want to barbeque today: interest rates.

The Fed spends a good deal of its time and our money promoting and maintaining low interest rates. It’s doing so on the assumption that low rates prompt everyone to put money to work by making savings less appealing. But ask Japan how much demand there was when money was free – the answer is next to none.

The trillion-dollar problem is that this economic assumption presumes the savings are there in the first place. In reality, America and other ‘Fed’ nations are flat broke. There is no savings pool to draw upon, which means the foregone assumption is a bust.

At some point, people who do not have cash cannot pay for the goods and services they need – no matter how much liquidity is in the system.

International capital markets actually exacerbate the problem because other governments and major trading firms purchase that very same excess liquidity which they, in turn, then begin using as collateral for their own expansion.

Congressman Ron Paul, a staunch Fed opponent, summed it up much more eloquently than I ever could in his book, End the Fed, noting that ‘those who suffer [rarely] see the connection between Federal Reserve monetary policy and the suffering that comes as a consequence of financing big government and big banking.’

Under the circumstances, is it any wonder that almost every currency in recorded history that is controlled by a central bank has failed or is failing?

The Federal Reserve

No. We do not need a Fed because dissolving it would:

  • Force any government that has one to live within its means;
  • Restore the appropriate level of risk to the global financial community; and,
  • Nullify the risks involuntarily forced upon the public in the name of political priorities.

As for how we dissolve this mess, that’s a subject for another time and another email.

Keith Fitz-Gerald
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in Money Morning (USA)

From the Archives…

Why You Should Buy This Falling Stock Market
22-03-2013 – Kris Sayce

Stock Market Warning: Part II
21-03-2013 – Murray Dawes

New Developments on Whether You Can Get Your Mortgage Cancelled
20-03-2013 – Nick Hubble

Your Retirement or Your Mortgage?
19-03-2013 – Nick Hubble

Get Used to This Stock Market Action, It’s Set to Last…
18-03-2013 – Kris Sayce

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My Love/Hate Relationship With Gold Miners

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My Love/Hate Relationship With Gold Miners

Posted on 19 March 2013 by Bengt Saelensminde

In May last year, I made the point that gold miners looked cheap. Today I want to catch up on that market, and I’ll tell you how I see the market today.

As you can see from the following chart…for a while, I was right. I was very right!

Miners whizzed up some 20% in next to no time. But since, they have been well and truly crushed. The question is why?

Arca NYSE Gold Miners Index – One Year

For sure, the gold price itself hasn’t performed well. But the mine stocks have been in an underclass all of their own.

The following chart shows the GDM index (white line) relative to the gold price over the last year. The gold spot price (orange line) is certainly at the bottom of its range. Year-to-date, it’s off about 3%. But then look at that white line – the miners…down more than six times the fall in gold!

The Gold Miners vs Gold – One Year

In fact, if you were to plot the two-year chart, you’d see that gold is actually up 10%, but the mining stocks are down a massive 40%.

What’s going on?

Five Things Holding the Miners Down

  • Geared to the gold price. When the gold price is on the up, the miners do incredibly well. If gold goes up 15%, miners’ profits may go up 50% – perhaps more…production costs can be quickly dwarfed by a rise in the gold price, and so increased revenues from the high gold price feed straight through to the bottom line.
  • Problem is, the converse is also true. If the gold price falls, the miners may fall harder. And seeing as many in the market see the gold price falling from here, they sell off the miners in anticipation.
  • Mining costs aren’t fixed. Gold production costs have escalated quite significantly – inflation in energy prices and other commodities have been a thorn in the side of the producers. On top of that, it’s becoming increasingly difficult to find decent grades to mine. The ‘low-hanging fruit’ has been picked – it’s now very hard work to refine each ounce of the precious yellow metal. Many gold miners would hate gold to slip below $1,500…and we’re pretty close to that figure right now!
  • Central banks want gold – not miners. One of the reasons gold has held up relatively well is because there’s large demand coming out of the emerging market central banks. The likes of China and Russia are filling their boots – other smaller nations are dipping in too. Wisely these guys want to diversify foreign reserves. And gold is the ultimate reserve currency. Not the gold miners!
  • Nationalisation fears. There’s an irony at the heart of gold investing. Gold is often bought as an insurance policy to guard against turmoil and panic in the markets. And during periods of turmoil, governments can do strange things. With so much trouble at the heart of the Western financial system, many fear a blow up. If gold is in some way the solution to this fiscal mess, then many fear that miners will suffer windfall taxes, or even forced nationalisation. Many are starting to wonder whether it isn’t safer to tuck away some gold coins than hold shares.
  • Sentiment. Many investors are just plain fed up with how badly run many of these miners seem to be. A while back, many stockholders found that management had sold future gold production at what were increasingly looking like very low prices. As the gold price escalated, many stockholders didn’t benefit.

Today some miners have found other ways of messing things up. A fundamental lack of control on the cost side of things, and a poor pipeline of new resources seem to be the main (gold) bugbears.

So management is the biggest problem in the industry. Encouraged by a rising gold price, lots of miners have mined for more costly, inaccessible gold.

In effect they’ve made big bets on the gold price. That explains the ‘gearing’ I discussed above. So you need disciplined management that watches costs just as carefully as the gold price. And you need companies that operate in safe jurisdictions. But to find those stocks, you need expertise

Gold Miners: Where Do We Go From Here?

So you’d have to be mad to invest in miners… right?

Well, no. There’s absolutely no doubt that, for the reasons mentioned, sentiment on these stocks is bouncing about at the bottom. That’s usually a good sign!

If gold finds its way back to the much safer level towards the mid-$1,700s, then I’d expect sentiment toward the stocks to change very quickly. Just look at the chart at around September and October last year to see how gold miners respond to the gold price. So there’s surely a great opportunity there if you time it right…and if you’re pointed towards the right kind of mining stocks.

And as for the great gold hoarders in the East, we’ve already seen some moves toward buying gold production, as well as gold. Although China’s plans to take control of African Barrick Gold fell through, there’s no doubt they’re sniffing around other deals.

With the miners so deeply out of fashion, it’s likely to stir more interest from the East. And if gold gets back to nearer the top of its recent trading range, I wouldn’t be surprised to see a sharp 20% mark-up in the miners.

So, hey, if you back the fundamentals for gold this could be a great buying opportunity. All you need next are some well-managed mining stocks.

But the key recovery won’t come until gold re-asserts itself in bull territory. That’s when the miners will see some serious attention. That’s the play I’m waiting for.

They say that patience is a virtue. Sit on your hands for the moment is my advice.

Bengt Saelensminde
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek

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From the Archives…

Can This Indicator Predict The Dow Jones Next Move?
16-03-2013 – Kris Sayce

Seven Situations to Watch in the Pacific Currency War
15-03-2013 – Dan Denning

Stock Market Warning: Next Week Could be a Blood Bath
14-03-2013 – Murray Dawes

REVEALED: One Opportunity to Escape Your Mortgage
13-03-2013 – Nick Hubble

UK Property: How You Can Buy a House For Less Than 250 Grand
12-03-2013 – Dr. Alex Cowie

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Bill Gross: Beware the Central Banks Bond Playing Game

Posted on 24 January 2013 by James McKeigue

Central bankers around the world are enthralled by quantitative easing, says Bill Gross. That should make investors very nervous, says the co-founder of PIMCO, the world’s biggest bond fund.

In his January newsletter, he notes that ‘the world’s six largest central banks have collectively issued six trillion dollars’ worth of checks since the beginning of 2009 in order to stem private sector deleveraging.’

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The Four Central Bank Lies to Look Out for in 2013…

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The Four Central Bank Lies to Look Out for in 2013…

Posted on 11 January 2013 by Bengt Saelensminde

The world’s powerful central banks are playing a very dangerous game. Trying to manage inflation expectations while pursuing downright inflationary policies has caused, and is set to cause, a great deal of volatility in the market this year.

But as I said on Monday, there’s good money to be made for those who can stay a couple of steps ahead of the central planners.

Today I want to show you how central banks will try to pull the wool over your eyes this year. And what you can do to make sure you stay ahead of them.

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