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Calls by various mainstream economists to ban cash transactions seem to be getting ever louder, while central bankers have unleashed negative interest rates on economies accounting for 25% of global GDP, with $5.5 trillion in government bonds yielding less than zero. The two policies are rapidly converging.

Bills and coins account for about 10% of M2 monetary aggregates (currency plus very liquid bank deposits) in the US and the Eurozone. Presumably the goal of this policy is to bring this percentage down to zero. In other words, eliminate your right to keep your purchasing power in paper currency.

By forcing people and companies to convert their paper money into bank deposits, the hope is that they can be persuaded (coerced?) to spend that money rather than save it because those deposits will carry considerable costs (negative interest rates and/or fees).

This in turn could boost consumption, GDP and inflation to pay for the massive debts we have accumulated (leaving aside the very controversial idea that citizens should now have to pay for the privilege of holding their hard earned money in a more liquid form, after it has already been taxed). So at long last we can finally get out of the current economic funk.

The US adopted a policy with similar goals in the 1930s, eliminating its citizens’ right to own gold so they could no longer “hoard” it. At that time the US was in the gold standard so the goal was to restrict gold. Now that we are all in a “paper” standard the goal is to restrict paper.

However, while some economic benefits may arguably accrue in the short-run, this needs to be balanced in relation to some serious distortions that could rapidly develop beyond that.

…click on the above link to read the rest of the article…

Death Throes Of The Bull

January 31, 2016

Death Throes Of The Bull

The fast money and robo-machines keep trying to ignite stock rallies, but they all fizzle because bad karma is beginning to infect the casino. That is, apprehension is growing among whatever adults are left on Wall Street that 84 months of ZIRP and $3.5 trillion of Fed balance sheet expansion, aka money printing, didn’t do the trick.

Not only is the specter of recession growing more visible, but it is also attached to a truth that cannot be gainsaid. Namely, having stranded itself at the zero bound for an entire business cycle, the Fed is bereft of dry powder. Its only available tools are a massive new round of QE and negative interest rates.

But these are absolutely non-starters. The former would provoke riots in the financial markets because it would be an admission of total failure; and the latter would provoke a riot in the American body politic because the Fed’s seven year war on savers and retirees has already generated electoral revulsion. Bernie and The Donald are not expressions of public confidence in the economic status quo.

So the dip buying brigades have been reduced to reading the tea leaves for signs that the Fed’s four in store for 2016 are no more. Yet even if the prospect of delayed rate hikes is good for a 50-handle face ripping rally on the S&P 500 index from time to time, here’s what it can’t do. The Fed’s last card—-deferring one or more of the tiny interest rate increases scheduled for this year——cannot stop the on-coming recession.

And it is surely coming. We got one more powerful indicator on that score in this morning’s data on core capital goods orders (i.e. nondefense excluding aircraft).

…click on the above link to read the rest of the article…

The FOMC Decision: The Boxed in Fed

January 29, 2016

The FOMC Decision: The Boxed in Fed

An Imaginary Bogeyman

What’s a Keynesian monetary quack to do when the economy and markets fail to remain “on message” within a few weeks of grandiose declarations that this time, printing truckloads of money has somehow “worked”, in defiance of centuries of experience, and in blatant violation of sound theory?

In the weeks since the largely meaningless December rate hike, numerous armchair central planners, many of whom seem to be pining for even more monetary insanity than the actual planners, have begun to berate the Fed for inadvertently summoning that great bugaboo of modern-day money cranks, the “ghost of 1937”.

Bugaboo of monetary cranks
The bugaboo of Keynesian money cranks – the ghost of 1937.

As the story goes, the fact that the FDR administration’s run-away deficit declined a bit, combined with a small hike in reserve requirements by the Fed “caused” the “depression-within-the-depression” of 1937-1938, which saw the stock market plunging by more than 50% and unemployment soaring back to levels close to the peaks seen in 1932-33.

This is of course balderdash. If anything, it demonstrates that the data of economic history are by themselves useless in determining cause and effect in economics. It is fairly easy to find historical periods in which deficit spending declined a great deal more than in 1937 and a much tighter monetary policy was implemented, to no ill effect whatsoever. If one believes the widely accepted account of the reasons for the 1937 bust, how does one explain these seeming “aberrations”?

The DJIA in 1937 (eventually, an even lower low was made in 1938, see also next chart) – click to enlarge.

As we often stress, economics is a social science and therefore simply does not work like physics or other natural sciences. Only economic theory can explain economic laws – while economic history can only be properly interpreted with the aid of sound theory.

…click on the above link to read the rest of the article…

Dallas Fed “Responds” To Zero Hedge FOIA Request

January 29, 2016

Dallas Fed “Responds” To Zero Hedge FOIA Request

Two weeks ago, Zero Hedge reported an exclusive story corroborated by at least two independent sources, in which we informed our readers that members of the Dallas Federal Reserve had met with bank lenders with distressed loan exposure to the US oil and gas sector and, after parsing through the complete bank books, had advised banks to i) not urge creditor counterparties into default, ii) urge asset sales instead, and iii) ultimately suspend mark to market in various instances.

The Dallas Fed took the opportunity to respond (on Twitter), when in a tersely worded statement it said the following:

Dallas Fed ✔@DallasFed

No truth to this @zerohedge story. The Dallas Fed does not issue such guidance to banks. https://twitter.com/zerohedge/status/688441021986959361 …

12:07 PM – 18 Jan 2016

We thanked the Fed for answering even if its response was in itself a lie, and further since we fully stood by our story, we asked the Federal Reserve chaired by Goldman Sachs veteran, Robert Kaplan, to answer several follow up questions regarding this matter which is of significant public interest. To wit:

Has the Dallas Fed, or any other members and individuals of the Federal Reserve System, met with U.S. bank and other lender management teams in recent weeks/months and if so what was the purpose of such meetings?
Has the Dallas Fed, or any other members and individuals of the Federal Reserve System, requested that banks and other lenders present their internal energy loan books and loan marks for Fed inspection in recent weeks/months?
Has the Dallas Fed, or any other members and individuals of the Federal Reserve System, discussed options facing financial lenders, and other creditors, who have distressed credit exposure including but not limited to:

…click on the above link to read the rest of the article…

Why A Former Fed Official Fears A Global Meltdown

January 26, 2016

Why A Former Fed Official Fears A Global Meltdown

Authored by Gerald O’Driscoll, former vice president at The Dallas Fed, posteed op-ed at The Wall Street Journal,

Are we headed for another global financial crisis? The market convulsions of the past week reflected a continuation of a market selloff that began on the first trading day of 2016. Investors have reasons to be fearful—but not terrified.

This year is likely to be one of financial crises in industries and countries around the world. Whether those turn into a global financial crisis is an open question, and the answer will likely turn on the health of the U.S. financial industry and broader economy. No crisis is global if American financial markets hold up. The best I can foresee, at this moment, is that a true global financial crisis is not likely.

Pundits are focused on collapsing oil prices, which reflect the technological revolution in production among nimble private producers, combined with weakening global demand for their product. The result has been layoffs in the energy industry, and there will be more. Weak and highly leveraged energy firms have gone bankrupt and more will. But bankruptcy doesn’t necessarily mean that production will decline.

Creditors who lent to these energy producers will suffer losses on their loans, and they too might become financially impaired. If past is prologue, those lenders will be reluctant to fully realize their losses, and they will continue to view future energy prices through too-rosy glasses. Banks will be reluctant to mark down the value of nonperforming loans and book losses, or even set aside sufficient loan loss reserves. They will instead “extend and pretend”—i.e., extend maturities and pretend they expect the loans to be paid back. Will federal and state banking regulators aid and abet the process?

…click on the above link to read the rest of the article…

Elastic Money

January 26, 2016

Elastic Money

QUESTION: Mr. Armstrong; I have not read anywhere else how the money created by the Fed you call elastic will evaporate when the bonds they bought mature. You seem to do much more in-depth research than anyone else who just spins conspiracy theories leaving one question what is real or not. Can you elaborate on this topic a bit more?

Thank you for a most fascinating blog I recommend now to everyone.

ANSWER: Perhaps you are right. Sometimes when you know the topic, you do not explain it in detail because you assume everyone knows the facts as well. Elastic money was a brilliant idea that, if implemented properly, would help to stabilize the economy during economic declines. The problem is that Congress usurped and transformed it into buying government bonds that do not help the economy at all. The original design was to “stimulate” by directly buying corporate paper. The Fed would create money to stimulate, and when the short-term paper was repaid, the “elastic money would expire. Targeting corporate paper funded corporations when banks were not lending, and thus prevented excessive unemployment.

The Fed would expand the money supply during periods of economic decline and it would contract the money supply as the corporate paper was repaid. There was no such authority to perpetually create money at will on some covert perpetual basis. A banking crisis, as we have now in Europe, occurs when banks cannot meet the demand for withdrawals because they lent the money long-term. They would have to sell their portfolios at discounts to raise cash to meet the demands of depositors. Elastic money would meet the demands of depositors without having to liquidate the portfolios.

…click on the above link to read the rest of the article…

Why Dip Buyers Will Get Clobbered: The US Economy Isn’t Doing “Just Fine”

January 26, 2016

Why Dip Buyers Will Get Clobbered: The US Economy Isn’t Doing “Just Fine”

As of June 2008 no Wall Street banking house was predicting a recession, yet by then the Great Recession—–the worst economic downturn since the 1930s—– was already six months old, as per the NBER’s subsequent official reckoning.

Actually, it was already several years old if you concede that the phony housing boom of 2005-2007 was generating merely transient “statistical” GDP, not permanent gains in main street wealth. Even the movie houses now showing “The Big Short” have some pretty palpable reminders on that point——not the least being the strip club dancer who owned 5 residential properties, with two adjustable rate mortgages on each.

In fact, by then main street America was crawling with strippers. That is, equity strippers who were repeatedly doing “cash out” refinancings in order to generate between $20,000 and $100,000 or more of mortgage proceeds to spend on vacations, cars, man caves, aspirational leather goods, shoes and apparel, among much else.

At the peak in 2006-2007, upwards of 10% of personal consumption expenditures were accounted for by MEW (mortgage equity withdrawal). The utter unsustainability of that kind of Potemkin prosperity goes without saying, but the point here is that it was no deep dark secret buried in the economic entrails.

In fact, Chairman Greenspan went to great lengths to publicize the facts of MEW on an up-to-date basis. But he wasn’t trying to warn that the end was near. Unaccountably, he and his Wall Street acolytes concluded that the US economy had become virtually recession proof because of the extra firepower being accorded to household consumption by MEW!

In short, the economic booby trap of MEW was hiding in plain sight and so was the Great Recession. Yet there was nothing at all unusual about the 2008 recession call miss.

…click on the above link to read the rest of the article…

Volatility, oil and stock markets

January 25, 2016

Volatility, oil and stock markets

“Down” is such a downer word. That’s why when prices fall for practically anything Wall Street wants to sell you, Wall Streeters talk about volatility instead.

Volatility allows for the possibility that prices will recover soon and go to new highs. Any setback is just temporary. The market turbulence, it seems, is merely designed by invisible market gods to test your character as a long-term investor. Don’t give in to panic, the investment people say, and you’ll be rewarded.

Until you aren’t!

A year ago I said the crash in commodity prices signaled a weak economy and that financial markets would eventually have to reflect this fact. The widely watched S&P 500 Index closed at 1,994.99 on January 30, 2015 just prior to the publication of the linked piece. Last Friday’s close was 1906.90. The U.S. stock market hasn’t exactly reflected the weakness in commodities, but it hasn’t gained any ground either.

In addition, last August I wrote that low oil prices were also a reflection of this weakness and that all the talk about cheaper oil giving a boost to the economy was misplaced because of the immediate loss of oil-related employment and of revenues to companies and to governments which, of course, tax the oil. The S&P 500 is down about 200 points since then, but any significant adjustment still looks like it lies in the future.

Of course, starting in August stock markets around the world began to fall. Central banks reacted with words of support, and the U.S. Federal Reserve Board of Governors put off a long-anticipated interest rate hike because of weak market conditions.

Stock prices then rebounded to near their previous levels and all was forgotten…until the beginning of this year. The continuing rout in oil prices began to underline not only the weakness in the global economy, but also the unclear situation at major banks holding large energy-related loan portfolios.

…click on the above link to read the rest of the article…

Betting on Deflation May Be a Huge Mistake. Here’s Why…….

January 24, 2016

Betting on Deflation May Be a Huge Mistake. Here’s Why…….

Precious metals investors heading into 2016 worry the dollar will continue marching ahead, right over the top of gold and silver prices. The Fed is telegraphing additional rate hikes throughout the year, and commodity prices – led by crude oil – are falling. There have been tremors in the biggest beneficiary markets of all when it comes to the Fed’s QE largesse – U.S. equities and real estate. And the possibility of a recession is growing, both in the U.S. and around the world.

There are plenty of reasons we might see even lower official inflation numbers and a stronger dollar in 2016. But don’t think for a second that consumer prices or living costs will fall. They haven’t, they aren’t, and they never will in a sustained way – thanks to the Fed’s creation in 1913. This is where the deflationists have it wrong.

The impact of further disinflationary forces or even a deflationary episode on precious metals prices is a bit harder to predict.

The bear case for precious metals is rather simple. Should metals trade like commodities, they are likely to follow other raw materials lower. If we get a liquidity crunch akin to the 2008 financial crisis, just about everything will be sold as investors raise cash to meet margin calls or flee to the dollar as a perceived safe-haven.

There is also the possibility that metals prices will simply be managed lower. Growing numbers of investors realize that Wall Street is not a bulwark of free markets. Major banks have admitted to rigging markets against their own customers, and the Federal Reserve aggressively intervenes in markets in its quest to centrally plan the world economy. Why wouldn’t the Fed also be active in trading precious metals? Those dismissing the notion that metals prices are manipulated are naive.

…click on the above link to read the rest of the article…

Why the Black Hole of Deflation Is Swallowing the Entire World … Even After Central Banks Have Pumped Trillions Into the Economy

January 24, 2016

Why the Black Hole of Deflation Is Swallowing the Entire World … Even After Central Banks Have Pumped Trillions Into the Economy

Deflation Threatens to Swallow the World

Many high-powered people and institutions say that deflation is threatening much of the world’s economy …

China may export deflation to the rest of the world.

Japan is mired in deflation.

Economists are afraid that deflation will hit Hong Kong.

The Telegraph reported last week:

RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.

***

Andrew Roberts, the bank’s research chief for European economics and rates, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings.

The Independent notes:

Lower oil prices could push leading economies into deflation. Just look at the latest inflation rates – calculated before oil fell below $30 a barrel. In the UK and France, inflation is running at an almost invisible 0.2 per cent per annum; Germany is at 0.3 per cent and the US at 0.5 per cent.

Almost certainly these annual rates will soon fall below zero and so, at the very least, we shall be experiencing ‘technical’ deflation. Technical deflation is a short period of gently falling prices that does no harm. The real thing works like a doomsday machine and engenders a downward spiral that is difficult to stop and brings about a 1930s style slump.

Referring to the risk of deflation, two American central bankers indicated their worries last week. James Bullard, the head of the St Louis Federal Reserve, said falling inflation expectations were “worrisome”, while Charles Evans of the Chicago Fed, said the situation was “troubling”.

Deflation will likely nail Europe:

…click on the above link to read the rest of the article…

Betting on the Wall Street Crash

January 24, 2016

Betting on the Wall Street Crash

Exclusive: The 2008 Wall Street crash resulted from a combination of unrestrained greed and political contempt for government regulators who might have prevented the devastation. In The Big Short, the tale is told from the perspective of a few players who saw the inevitable and made money on the crash, writes James DiEugenio.

If you read Michael Lewis’s book The Big Short or see the movie by the same name, you won’t find much about how the financial crisis of 2008 was set in motion more than two decades earlier. You won’t learn much about the roles of Ronald Reagan and his disdain for big government or about Bill Clinton’s faith in neo-liberalism, trusting that the modern markets and the supposedly sophisticated investors would keep excesses in check.

Nor will you find much about economist-turned-politician Phil Gramm who incorporated many of Reagan’s and Clinton’s beliefs into legislative actions, slashing taxes on the rich in the 1980s (and thus incentivizing greed) and, in the 1990s, brushing aside Franklin Roosevelt’s painfully learned lessons from the Great Depression about the need for firewalls between the speculation of Wall Street and the hard-earned savings of Main Street.

Also out of Lewis’s narrative frame is Brooksley Born, the federal commodities regulator who foresaw the looming danger from the exotic new financial instruments that sliced and diced risky subprime mortgages and packaged them in bonds with ratings far above what they deserved – and the even riskier tendency to lay bets on how the bonds would perform.

But Born was out-muscled by bigger financial stars with larger egos, the esteemed Federal Reserve Chairman Alan Greenspan (originally a Reagan appointee) and Clinton’s brash Deputy Treasury Secretary Lawrence Summers, a rising star in the neo-liberal establishment which treated the market’s “invisible hand” as a new-age god.

…click on the above link to read the rest of the article…

New Harbor: A Time For Staying Out Of Harms Way

January 24, 2016

New Harbor: A Time For Staying Out Of Harms Way

Preserving your financial capital

Given the brutal start to the markets in the first three weeks of 2016, we thought it a good time to check in with the team at New Harbor Financial. We have had them on our podcast periodically over the past years as the market churned to ever new highs, and have always appreciated their skepticism of these liquidity-driven “”markets”” as well as their unwavering commitment to risk management should the party in stocks end suddenly.

So, how is their risk-managed approach faring now that the S&P 500 has suddenly dropped 8% since Christmas? Quite well. Their general portfolio is flat for the year so far — evidence that caution, prudence and hedging can indeed preserve capital during market downdrafts.

We’ve invited the New Harbor team back on this week to hear their latest assessment on the markets, as well as how they’re approaching their portfolio positioning moving forward:

We spend a lot of time talking about position sizing. Right now we have very little in the stock market. We never cheer for a crash in the sense that we know a lot of people would likely get harmed in such a scenario, but we also spend our time assessing reality and probability. The likelihood of probability for a crash certainly has never been non-zero, but it has developed a greater likelihood than it had even just a few weeks ago. There has been a notable sentiment change.

I’d like to point out: we’re not even a month into the year and we have already clawed back over two years’ worth of gains in the stock market. Even if you look at the S&P 500, which has been the most lofty because of its capitalization-weighted nature, where we are at right now takes us all the way back near the end of 2013.

…click on the above link to read the rest of the article…

Central Banks Are Out of Tricks

January 22, 2016

Central Banks Are Out of Tricks

Once the power to manage expectations has been lost, the central bank bag of tricks is empty.

No one knows precisely how and when the global unraveling will impact their corner of the planet, but we do know one thing with absolute certainty: central banks are out of tricks.

Like all good conjurers, the major central banks will claim that their magical powers to inflate asset valuations and inspire the animal spirits of risk, borrowing and spending are unimpaired, but this time the audience knows the truth: their magic is threadbare and their trick-bag is empty.

Obfuscation and doublespeak are primary components of central bank magic.The magic is largely semantic: if the Federal Reserve claims it can restore the economy and the stock market with reverse repos and other financial legerdemain, the corporate media is always ready to repeat this dubious claim until it is accepted as self-evident.

The central bank magic is fundamentally a mind-trick of managing expectations. If the Fed (or other central bank) announces a quantitative easing or market-goosing program, punters buy assets anticipating the success of the bank’s program, effectively creating the very push higher the bank intended.

This rise draws in other traders, and the program is declared a success as the market generates a self-reinforcing logic: the market’s response is evidence the central bank’s program is a success, which then inspires more risk-on buying and further market gains.

Once a central bank program fails to generate a self-reinforcing rally, the mind-trick’s power is broken. Once expectations of a sustained rally are crushed by the failure of the rally to achieve virtuous-cycle lift-off, the magic no longer works: once traders take a wait and see stance rather than rush to place panic-buy orders, the initial rally soon fizzles, and the expectations of effortless gain are replaced by gnawing fear of more losses.

…click on the above link to read the rest of the article…

Like sheep to slaughter: You still aren’t grasping the systemic risk in the stock market (or else you would have sold everything already)

January 21, 2016

Like sheep to slaughter: You still aren’t grasping the systemic risk in the stock market (or else you would have sold everything already)

(NaturalNews) If you still own stocks and mutual fund shares, you still aren’t grasping the systemic risk in the stock market. No matter what you claim to BELIEVE, it is your ACTIONS that actually determine your true grasp of reality. Failing to sell all your stock holdings right now could result in massive losses as the world’s bubble markets continue with an implosion that could wipe out 50% of current valuations for many stocks.

The massive market bubble currently in place has been propped up by a steady stream of fiat money being printed by the Federal Reserve and handed out to banksters who have ties to Washington. This, combined with near-zero interest rates, is the only thing propping up the bubble market (and creating the illusion of economic prosperity).

High-tech companies are back into bubble territory with unrealistic valuations based on hype and vapor. Meanwhile, the corrupt mainstream media continues to lie to the gullible public, telling them the market can only go UP… even as it careens on the verge of systemic collapse.

The coming market collapse will be the largest in human history
The systemic nature of the global banking system and its insane derivatives debt means the next collapse will be a SYSTEMIC firestorm that’s unstoppable and absolutely devastating. Pensions, bank accounts, investment funds, bonds and much more will be nearly wiped out, and the corrupt, criminal government regime will make sure everyday Americans are the ultimate losers when the dust settles.

The pathetically stupid and dishonest financial media is desperately running stories right now to maintain false faith in the markets, even while their own people are behind the scenes selling like mad.

…click on the above link to read the rest of the article…

Central Banks Are Out of Tricks

January 21, 2016

Central Banks Are Out of Tricks

Once the power to manage expectations has been lost, the central bank bag of tricks is empty.

No one knows precisely how and when the global unraveling will impact their corner of the planet, but we do know one thing with absolute certainty: central banks are out of tricks.

…click on the above link to read the rest of the article…

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