6 Reasons Why ECB Will Avoid QE As Long As Possible (And Why The Fed Did It)

Yields on European sovereign debt have collapsed in recent months as investors piled into these ‘riskless’ investments following hints that the ECB will unleash QE (at some point “we promise”) and the economic situation collapses. However, Mario Draghi has made it clear that any QE would be privately-focused (because policy transmission channels were clogged) and the appointment of Blackrock to run an ABS-purchase plan confirms that those buying bonds to front-run the ECB may have done so in error. As Rabobank’s Elwin de Groot notes in six simple comments that he expects continued “procrastination” by the ECB over sovereign QE even after dismal economic data – and in doing so, exposes the entire facade behind The Fed’s QE.

This post was published at Zero Hedge on 08/28/2014.

German Finance Minister Tells EU Leaders: Free Money Party’s Over

Has Germany had enough? Hot on the heels of Mario Draghi’s ‘demands’ that EU leaders undertake “structural reforms” to boost competitiveness and overcome the legacy of Europe’s debt crisis, German Finance Minister Wolfgang Schaeuble unleashed perhaps the most worrisome statement tonight for all the free-money-party-goers – the music is about to stop. In an interview with Bloomberg TV, Schaeuble blasted “Europe needs to find ways to foster growth,” adding that “the ECB has reached the limit in helping the Euro Area.” In a clear shot across the bow of his ‘core’ cohort, Schaeuble said he “understood” Hollande’s demands but shot back that “monetary policy can only buy time.”
As WSJ notes, the French are seeking aid…

This post was published at Zero Hedge on 08/28/2014.

Margin Debt & Trends

The debate over the pending crash in the stock market seems endless. Whether or not margin debt as reported by the NYSE has relevance any more is an interesting question in a world in which the retail investor has abandoned investing (decline in liquidity). The real marginal buyers are hedge funds and some banks while the cash buyers remain central banks. The make-up of the market has changed and the interest rates are well below even many dividends. So talking about total margin debt nearing $500 billion cannot be compared just on a nominal basis.

This post was published at Armstrong Economics on August 27, 2014.

I Blame The Central Banks

The current bubbles in financial assets — in equities and bonds of all grades and quality — raging in every major market across the globe are no accident.
They are a deliberate creation. The intentional results of policy.
Therefore, when they burst, we shouldn’t regard the resulting damage as some freak act of nature or other such outcome outside of our control. To reiterate, the carnage will be the very predictable result of some terribly shortsighted decision-making and defective logic.
The Root of Evil Blame can and should be laid where it belongs: with the central banks.
They were the “experts” who decided to confront the excesses of decades past (which saw borrowing running at roughly 2x the rate of real economic growth) with even easier monetary policies designed to spur even moreborrowing.
Rather than take stock of the simple fact that nobody can forever borrow at a faster rate than their income is growing (no matter how large that entity may be), the Fed, the ECB, the BoJ and the BoE have conveniently overlooked that simple fact and then boldly claimed that the cure is identical to the disease. If the problem is debt then the solution is even more debt.
If the Fed, et al. were doctors, they would prescribe alcohol to the alcoholic. They would administer more lead to the lead-poisoned patient. They would call for more water to put in the pool where a drowning individual is floundering.
The bottom line is that the Fed and its ilk made the disastrous decisions that gave us the first two burst bubbles of the new millennium. And the wonder of it all is that, instead of being met at the gates with torches and pitchforks and held to account for their errors, they have instead been granted even greater powers, less oversight, and practically zero blame.
And now they’ve given us a third and, I suspect, final bubble. By which I mean I think the effects of this bursting bubble will be so horrendous that a hundred years might pass before people will again be in the mood to speculate on fantasy wealth.

This post was published at PeakProsperity on August 27, 2014.

Will There Be a ‘New Gold Rush?’ — Ian Gordon, Longwave Analytics

Ian Gordon created Longwave Analytics, which studies the Longwave principle, by which economies obey long-term cyclical trends of expansion and contraction. Eric Sprott is an avid reader — he suggested I interview Ian Gordon for his take on the role of Kondratiev’s ‘long wave cycle’ in explaining the economic environment we are seeing today.
Ian said ‘winter’ was coming for the world economy, though it has been staved off by the flexibility provided by paper money. As a result, a depression will be very different today than in 1929 or 1873, he believes. But now, as then, we could see a massive push for new gold discoveries.
Mr. Gordon explained how he got to know Eric Sprott over 10 years ago:
‘I was writing about long-term economic cycles, referred to as ‘Kondratiev’ cycles. In 1998, I realized that we were close to the top of a bull market; we were somewhere akin to 1928 – immediately preceding the Great Depression. Eric appreciated my work, because it helped explain an imminent bull market for gold, which he saw as well.’
I asked: Do these ‘long wave’ economic patterns explain today’s bear market for gold – and the recent rally in general stocks?
‘Well, they didn’t predict this – but they can help explain why it’s happening. Over the course of one entire ‘long wave’ economic cycle, covering a full expansion and subsequent contraction, you have what I call four ‘seasons.’ Winter is the period where debt is wiped out of the economy. It happened after 1929, which caused the US banking system to collapse. During the 1920′s, there had been a big build-up in consumer and corporate debt, as well as sovereign debt.
‘During the Great Depression and the previous depression of 1873, we were on a gold standard system, so the ability to create money was limited. This time around, we are in a pure credit-based system, so the ability to create money withstands the ravages of the winter. Effectively, governments have been creating more debt. This will ultimately cause a more horrendous economic decline than in either 1929 or 1873, as debt levels are far greater today – and because the world is much more inter-connected financially.’
What about your prediction of a ‘new gold rush’ similar to the late 19th century?

This post was published at GoldSeek on 27 August 2014.

Europe: Stagnation, Default, Or Devaluation

Last week’s Jackson Hole meeting helped to highlight a simple reality: unlike other parts of the world, the eurozone remains mired in a deflationary bust six years after the 2008 financial crisis. The only official solutions to this bust seem to be a) to print more money and b) to expand government debt. Meanwhile, Europe’s already high (and rising) government debt levels and large budget deficits raise the question whether we should worry about ‘debt thresholds’, past which increasing deficits, and hence growing sovereign debt, no longer add to growth? Such a constraint could come from one of at least two sources:

This post was published at Zero Hedge on 08/26/2014.

Argentine Peso Collapses on Top of Rogue Regime

Adeptly managed by the central bank and the government, the Argentine peso has been plunging in perfect form, an activity it is very, very good at. And so on Thursday, it plunged 4.1% on the black market, hitting 14 ARS/USD for the first time. With the official rate at 8.39 ARS/USD, the gap between the two soared to a record of 5.61 pesos. A sign that any remaining trace-amounts of confidence in the peso were evaporating.
It was the steepest plunge since January 24, when the central bank devalued the peso by 15%.
‘Expect the government to take action to bring this rate down – fast,’ wrote Bianca Fernet, stilettos-on-the-ground American economist in Buenos Aires and contributor to Wolf Street. This ‘Argentine monetary policy,’ as she explained in The Bubble, would include:
Forcing state-owned agencies to sell dollar bonds locally Closing the cambios and other currency dealers for a few days Raising interbank lending rates, forcing banks to sell assets locally. On Friday, the peso recovered a smidgen, and the reported ‘blue dollar’ rate dipped below 14 ARS/USD, after the central bank had reportedly blown $10 million of its foreign exchange reserves to prop it up. But it desperately needs those reserves – now below $29 billion – to service its foreign-currency debt, part of which it defaulted on once again on July 31.
‘They are reporting a lower rate than the real rate; reporting a rate above 14 is evidently not permitted,’ Bianca told me, perhaps tongue in cheek because that’s the only way to take Argentina. Then she added, ‘The brokers are trading at 14.35 right now.’
On Monday, brokers were selling the dollar at 14.1 ARS/USD, illegal and un-permitted as that may be.

This post was published at Wolf Street on August 25, 2014

The G-20′s Solution To Systemically Unstable, “Too Big To Fail” Banks: More Debt

It’s been 6 years since Lehman went bankrupt overnight, stunning bondholders who were forced to reprice Lehman bonds from 80 to 8 (see chart below) in a millisecond, and launching the world’s worst depression since the 1930s, which courtesy of some $10 trillion in central bank liquidity injections, has been split up into several more palatable for public consumptions “recessions”, of which Europe is about to succumb to the third consecutive one even if for the time being the Fed’s has succeeded in if not breaking the business cycle, then certainly delaying the inevitable onset of the next major contraction in the US economy.
Paradoxically, instead of taking advantage of this lull in volatility and relative economic calm, and making the financial system more stable, all so-called regulation has done, is paid lip service to the underlying problems, hoping that should the next crisis appear the Fed will be able to delay it yet again by throwing countless amounts of taxpayer money at the problem. In the meantime, the biggest banks have gotten so big that the failure of one JPM or Deutsche Bank, and their hundreds of trillions in gross notional derivatives, would lead to the biggest financial and economic catastrophe ever witnessed and make 2008 seem like a fond memory of economic euphoria.
So finally, with a 6 year delay, the western world’s “government leaders” have finally decided to do something about a TBTF problem that has never been more acute. According to Reuters, in November said leaders will agree “that the world’s top banks must issue special bonds to increase the amount of capital which can be tapped in a crisis instead of calling on taxpayers to come to the rescue, industry and G20 officials said.” In other words, suddenly the $2.8 trillion in Fed injected excess reserves, split roughly equally between US and European banks, are no longer sufficient, and while regulators are on one hand delaying the implementation of Basel III and its tougher capital rules, on the other they are tacticly admitting that whatever “generous” capital buffer banks have on their books right now will not be sufficient when the next crisis strikes.

This post was published at Zero Hedge on 08/23/2014

‘Monetary Policy’ Gone Berserk

One issue the financial media is willing to ignore, but has been foremost in my mind for many years is the utter recklessness of the Federal Reserve’s ‘monetary policy.’ Below is a chart the public will never see on CNBC, or anywhere else, but I believe is vital to understand the threat that Washington and Wall Street currently present to the world at large. You’re looking at what academic-quack economists have done to the global reserve currency to save the hides of the banking elite, who for decades have acted as if Wall Street was their private fiefdom.

The FOMC calls this ‘monetary policy’ but for me something completely different comes to mind: legalized counterfeiting. Unfortunately, for years the baby-boomer generation (and their children; the Gen-Xers) have sought pleasure in immediate consumption. It’s hard to blamethem since the Fed destroyed their incentive to save by lowering the Fed Funds Rate to nearly 0% in December 2008. This rate can never be raised (despite the Fed rhetoric) without blowing up the budget deficit, sinking the economy in the process. For decades American’s, (and just about everyone else) have taken full advantage of the debt generously provided by the banking system to leverage their income, and now far too many people are hooked on cheap credit and just one paycheck away from insolvency, as are their employers.

This post was published at Gold-Eagle on August 24, 2014

Four Horsemen – The Cycles of an Empire Revealed

This documentary by the Renegade Economist reveals the cycles that all the empires of the world have followed and how they all eventually fail.  The current disparity between the very rich and the very poor is but one indication that today’s western empire, led by the U.S. is approaching its end.

Ray Dalio: How the Economic Machine Works

Ray Dalio of Bridgewater Associates narrates this video, which gives a simplified explanation of how an economy really functions when controlled by a central bank, such as the US Fed.  He shows how there are short and long-term cycles which govern credit, debt, inflation and productivity.  Dalio ends the video with some simple rules to help maintain a healthy economic system:

  • Ensure debts don’t rise faster than income
  • Ensure income doesn’t rise faster than productivity
  • Try to keep increasing productivity as much as possible


Economic Freedom vs Debt Slavery

Pierre Poilievre, Canadian MP, makes a plea for his nation not to follow in the footsteps of countries like the United States, where people have been encouraged to go into debt which will be impossible to repay, or like Europe, which is now ensnared in welfare programs that are impossible to stop without complete social upheaval.

  • Official US Debt is now larger than its economy.  Through current or future taxation, the US citizen is on the hook for this debt.
  • The US is on the cusp of funding 100% of the Chinese Military – just with interest payments alone!
  • The direction the US is going reflects the socialist policies already in place in Europe, where Greek citizens are taking to the streets to demand their government not halt the flow of welfare checks they have become so dependent upon.
  • It’s good that Europe has bail-out fund, but S&P has recently downgraded that fund, indicating that it, too, will soon need a bail-out.

Too Much Debt!

Update: January 11, 2013

Congress lived up to their reputation and kicked the can once more.  Essentially, tax rates were raised (such as on those making $450,000 or more and estate taxes went up from 45% to 40%) but spending cuts were deferred for a couple months, entailing yet another round of political saga to come.  So, as the following chart from Casey Research shows, the deficit situation has not gotten any better.  In fact, according to the CBO, it’s worse – earlier estimates had not even considered the interest payments, so the annual deficit will be $60 billion more than originally anticipated.

Fiscal Cliff - Budget Deficit Details

September 22, 2012

On January 1, 2013 the US will face the real possibility of falling off a fiscal cliff and may take down much of the global economy with it. Specifically, the cliff is represented by three factors, which policy makers must overcome in order to avoid another severe recession – or worse, depression.

  1. The Bush Tax Cuts are set to expire at the end of 2012.  At a time such as this, when the economy is stagnant, any tax increases will only serve to further sour any potential business activity. On the other hand, the government annual deficit spending is already at $1.2 trillion and if revenues aren’t increased, budget deficits will only get worse.
  2. Mandatory budget cuts are set to take affect. Last year, when congress was unable to agree on a long-term plan to tackle the never-ending growth of the national debt – now over $16 trillion – the temporary measures they initiated allowed for a small ceiling increase, while putting in place a special super-committee to study the situation and recommend policy. The super-committee came and went without any agreement, which automatically instituted a $1.2 trillion cut in government spending – half from domestic spending and half from defense spending. These cuts are set to go into affect starting in January, 2013 at about $100 billion per month and last for nine years.
  3. The debt ceiling is again being breached. Last year, when the ceiling debate was the centerpiece of discussion, lawmakers were unable to reach agreement on a debt reduction policy. They were only able to conclude a temporary measure, allowing for a small increase in the ceiling while the super-committee furthered the discussion. The current debt ceiling limit of $16.394 trillion is coming up fast.

It should be obvious that the real problem is that there is simply too much debt!  But then again, what should one expect when the whole monetary system has become based on debt? In today’s world, money only comes into existence when someone is willing to borrow it from the banking system. This is why the Fed and all the other central banks try so hard to keep interest rates low – as  more money is borrowed, the banks are able to use fractional reserve banking methods to increase money availability even more. The economy keeps chugging along as long as people and companies are willing to borrow more.

But this debt-based system obviously has its limits, as the current economy has been showing. People and companies are unwilling to burden themselves with more debt.  The Fed’s policies have been trying to overcome that by keeping interest rates low so that the government can keep spending borrowed money in order to sustain the perception that the economy is okay.

It is impossible for the governments to ever repay these debts, which is why the central banks will continue to employ “QE” measures, just as they did in early September, when the ECB in Europe, followed by the US Fed, and finally the Bank of Japan all embarked on major money-printing policies to keep the debt-game going a bit longer.

In relative terms, it wasn’t that long ago when money was based on real, tangible assets, such as gold and silver – assets that couldn’t simply be conjured up out of thin air.  These are the real assets that people should be seeking now, especially since saving cash in a savings account yields next to nothing in interest. Plus, as the governments of the world continue to print money to cover unpayable debts, the value of all fiat paper money will only continue to decline.

However, investors in precious metals will want to get their priorities straight.  Many gold bugs, for example wish to keep their precious metals close – where they can actually touch them. Possession is nine-tenths of the law, after all.  Having physical possession of one’s precious metals has benefits, especially in the case of a complete financial collapse, which some say is inevitable, given the shape of the current over saturated debt system.  Having real money to barter with under those circumstances may be priceless.

On the other hand, not everyone is comfortable holding physical precious metals in substantial quantities. Private storage can be a risk, which should be weighed carefully.  For those concerned about the safety of private storage, or even those seeking diversification can look into alternative ways to hold precious metals. One convenient method is to use Exchange Traded Funds (ETF) traded on stock exchanges. Whether open-ended funds like GLD and SLV or closed-ended funds like PHYS and PSLV, the investor should be aware that there are still risks to overcome, such as the stock market itself.

Yet there are other ways people can invest in precious metals.  Companies such as BullionVault allow their clients to buy and sell precious metals online, via an internet browser.  Once purchased, the metal is physically stored in various geographically separated regions of the world. This immediately accomplishes two things – diversifies assets across national boundaries, which reduces some sovereign risks and also relieves the investor of personal storage responsibilities.

Perhaps some combination of all of the above methods, or others not covered can be sought after for the potential precious metals investor.  When the debt-system finally collapses, people will wake up and remember what real money really is and wonder why they never thought about it before.  It’s funny, isn’t it?  Something so vital to every day activities, yet so little thought is given to what money really is. It’s good that some people are waking up early.

Ponzi Economics

Casey Research provides a lucid interview with David Stockman, former Reagan administration budget director and author of The Triumph of Crony Capitalism.  Stockman explains that in today’s economy, companies are reporting profits today that are “based on a debt-bloated economy that isn’t sustainable.”  Furthermore, “This market isn’t real. … the 2% on the 10 year, 90 basis points on the 5 year, 30 basis points on the 1 year – those are medicated, pegged rates created by the Fed, and which fast money traders trade against as long as they’re confident the Fed can keep the whole market rigged. Nobody in their right mind wants to own the ten year bond at a 2% interest rate, but they’re doing it because they can borrow overnight money for free … put it on Repo, collect 190 basis points on the spread and laugh all the way to the bank.”

“The Fed has destroyed the money market, it’s destroyed the capital markets.  They have something you can see on a screen called an interest rate – that isn’t a market price of money…. that is an administered price that the Fed has set and that every trader watches by the minute to make sure that he’s still in a positive spread. … You can’t have capitalism if the capital markets are dead, if the capital markets are simply a branch office (a branch casino) of the central bank and that’s essentially what we have today.”

The 12 members of the FOMC are the western world’s Monetary Politbureau – “monetary central planners who are attempting to use the crude instrument of interest rate pegging and yield curve manipulation and essentially buying debt that no one else would buy in order to keep this whole system afloat. It’s Ponzi Economics!!

Gold Becoming Widely Recognized as a Collateral Asset

Gold may not “do anything but just sit there on the shelf” but it is becoming more recognized as a safe haven for investors and now, it seems, for bankers too!   There is so much outstanding debt in the global banking system that finding ‘good’ collateral to back it is becoming more difficult. Furthermore, as the debt increases, and maturing debt is rolled over into new debt, traditional asset-backing collateral becomes more scarce.  The Basel Committee for Bank Supervision (BCBS) is considering making gold a Tier-1 asset, which would escalate the desire for banks to hold more of it in their vaults to provide backing for all their debt activities.  Read more at SafeHaven.

John Exter's Inverted Pyramid

Ron Paul on CNBC

Which presidential candidate would you be most be confident would NOT lie to you?  Here’s Ron Paul on CNBC taking up the philosophical arguments no other candidates are discussing, including one hell of a debate on gold and the debasement of the dollar with Morgan Stanley’s Stephen Roach.

A Little Too Close for Comfort

Fox has fired Judge Napolitano after this rant. His intimations were a little too close to the truth.  No, the main-stream media, controlled by the established powers, cannot have a loose cannon like this, can they?

But in a beautifully articulated monologue in his final episode, Napolitano sums up America’s root problems and encourages the people to fight for their freedoms against the tyranny of government!