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Is The Fed Back To “Quantitative Easing?”
The Fed added $11 billion to its SOMA account for the week ending yesterday. It purchased $11 billion in mortgage securities directly from banks. This injects $11 billion into the banking system. Cash is “high powered” money, meaning it can be leveraged 10x (banks need to hold 10% in reserves against “high powered” money. $11 billion is $110 billion of leverage for the banks to use for activities such as propping up the stock market.
This certainly explains why there appears to be another “V” recovery in the stock market after a near-10% drawdown in the Dow and the SPX. This is very similar to the 10% market plunges in August 2015 and January 2016, both of which were followed with highly unusual “V” recoveries.
This is also likely the catalyst that powered gold’s $41 rise since February 9th.
Clearly the Federal Reserve – not withstanding the fecal odor that emanates from Fed officials’ mouths when they speak – has an implicit monetary policy that targets the stock prices.
Furthermore, the Fed must be getting worried about the housing market. Removing $11 billion in mortgage securities from the banking system and replacing those securities with cash was likely a move targeting the rate spread between conventional mortgages and the 10-yr Treasury. Mortgage purchase applications plunged 6% last week. This was without question in response to mortgage rates pushed meaningfully higher by the rising 10yr Treasury yield and the widening of spreads associated with higher volatility in the markets.
I remain highly skeptical that the Fed will actually follow-through with its stated plan to raise monthly its balance sheet reduction to $30 billion this year. In fact, the Fed has yet to disclose a definitive schedule for said balance sheet reduction. I’m taking wagers that we do not see this occur.
The Importance Of Gold In 2018 And Beyond
If you’ve held physical gold for the past five years, you’ve likely been frustrated by its lack of price appreciation. Of course, physical gold always retains its value as sound money and wealth “insurance,” but while prices of paper assets have flourished since 2013, the dollar price of gold has languished. That, it seems, is about to change.
At long last, gold, silver and all commodities appear poised for a price breakout in 2018 (and beyond) as the lower dollar, price inflation and higher interest rates that so many expected in 2010-2011 finally come to pass. In addition to those factors, several gold-specific positives have recently appeared, and they demand your consideration:
- Global gold demand is strong, with the only restraining component being western investment demand. Since western investors are typically trend followers, you’d expect low investment demand to appear at price lows. This is exactly what the recent Gold Demand Trends report from the World Gold Council showed when it was published earlier this month: https://www.gold.org/research/gold-demand-trends/g…
- Traditional technical and cycle analysis also augurs for a price bottom and trend change. Respected market analyst Tom McClellan recently declared the current cycle to be upward for gold, with the next three years providing some unusually strong price gains. You can read more of his analysis here: https://www.themaven.net/mishtalk/economics/eight-…
- In late 2017, many investors began to think of Bitcoin and other “crypto-currencies” as alternatives to gold. But with the recent sharp price correction and looming legislation to regulate (or even ban) crypto trading, the investment world is realizing that cryptos are not a replacement for a sound money strategy of holding precious metal. Instead, they are at best a supplement to a diverse portfolio.
…click on the above link to read the rest of the article…
Stephen Poloz Right To Be Worried
Bank of Canada governor Stephen Poloz cited numerous worries plaguing the economy during his speech to Toronto’s financial elites yesterday at the prestigious Canadian Club.
However, the title of Poloz’s presentation, “Three things keeping me awake at night” seemed odd, given positive recent Canadian employment, GDP and other data.
Poloz highlighted high personal debts, housing prices, cryptocurrencies and other causes for concern, along with actions that the BoC is taking to alleviate them. His implicit message was (as always) “We have things under control.”
But if that’s all true, then Canada’s central bank governor should be sleeping like a baby. So, what is really keeping Mr. Poloz up at night? Three possibilities come to mind.
The Poloz Bubble
Firstly, far from just a housing bubble, Canada’s economy shows signs of being in the midst of an “everything bubble.” Bitcoin, for example, hovered near CDN $23,000 this week. Stock and bond valuations are not far behind in their relative loftiness.
Worse for Poloz, who took office four years ago, his fingerprints are all over those bubble-like levels.
Canadian stock, bond and house prices were already at dizzying heights when Stephen Harper hired Polozwith the implicit expectation that he would juice up the economy, in preparation for what Canada’s then-Prime Minister knew would be a tough upcoming election.
Poloz didn’t disappoint, promptly delivering a nice Benjamin Strong-styled “coup de whiskey” to asset prices in the form of two interest rate cuts, which brought the BoC’s policy rate down to just 0.50% during the ensuing months.
Although Harper lost the election, loose BoC policy continues to provide the Canadian government with free money to borrow and spend as it wishes.
More broadly, the Poloz BoC’s current policy, like that of the US Federal Reserve, is to boost asset prices even higher in the hope that the resulting wealth effect will trickle down to spur economic activity among ordinary Canadians.
…click on the above link to read the rest of the article…
Rig For Stormy Weather
What storm? The Dow Jones Industrial Average (DOW) reached another all-time high. Interest rates in the U.S. are yielding multi-decade lows, some say multi-century lows. Trillions of dollars in global sovereign debt have negative yield and European junk bonds yield less than 10 year U.S. treasuries. “Official” unemployment is low. Borrowing is inexpensive. Things are good, so they say!
I Doubt It!
Do you believe the above is a fair and accurate representation of our economic world? If so, how do you explain the following?
- Global debt exceeds $200 trillion and is rising rapidly. This massive debt will NOT be paid back in currencies with 2017 purchasing power. Debt MUST be rolled over in continually DEVALUING dollars, euros, yen and pounds.
- The financial system rolls over maturing debt, adds more, and pretends repayment will not be problematic. Those who hope this will remain true ignore the lessons of history, including sky-high interest rates in the late 1970s, the Asian and Long Term Capital crises in the late 1990s, many defaults and hyperinflations in the last century and the credit-crunch-recession-market-crash of 2008.
- Official inflation statistics show that consumer price inflation is low – supposedly in the two percent range. However, if you pay for health care, hospital bills, prescription drugs, Obamacare, beer, cigarettes, college tuition, fresh vegetables, processed food, auto insurance, and many other necessities, you know better. The Chapwood Index agrees with your experience. Their statistics show consumer price inflation is much higher than official numbers.
- National debt – the official debt of the U.S. government exceeds $20.5 trillion – more than the U.S. Gross Domestic Product. The debt has increased exponentially (straight line on a log scale chart) for the past century.
- Interest paid on the official national debt is approximately $500 billion per year and climbing. Congress is influenced by the financial elite and will not operate within a balanced budget. Therefore the U.S. will pay more interest each year.
…click on the above link to read the rest of the article…
We Give Up! Government Spending And Deficits Soar Pretty Much Everywhere – John Rubino
A recurring pattern of the past few decades involves governments promising to limit their borrowing, only to discover that hardly anyone cares. So target dates slip, bonds are issued, and the debts keep rising.
This time around the timing is especially notable, since eight years of global growth ought to be producing tax revenues sufficient to at least moderate the tide of red ink. But apparently not.
In Japan, for instance, government debt is now 250% of GDP, a figure which economists from, say, the 1990s, would have thought impossible.
Over the past decade the country’s leaders have proposed a series of plans for balancing the budget, and actually did manage to shrink debt/GDP slightly in 2016.
But now they seem to have given up, and are looking for excuses to keep spending:
Japan plans extra budget of $24-26 billion for fiscal 2017
(Hellenic Shipping News) – Japan’s government is set to compile an extra budget worth around 2.7-2.9 trillion yen ($24-26 billion) for the fiscal year to March 2018, with additional bond issuance of around 1 trillion yen to help fund the spending, government sources told Reuters. Following October’s big election win, Prime Minister Shinzo Abe’s cabinet has made plans to beef up childcare support, boost productivity at small and medium-sized companies, and strengthen competitiveness of the farm, fishery and forestry industries.
In the UK, a balanced budget has been pushed back from 2025 to 2031:
Britain in the red until 2031: Bid to balance the books pushed back yet again
(Daily Mail) – Philip Hammond’s ambition to get Britain’s finances back into the black receded further last night – as the Treasury watchdog said he would struggle to eliminate the deficit before 2031. The Chancellor had promised to balance the books by 2025. The target has been pushed back twice already, after George Osborne’s pledge in his 2010 Budget to balance the books ‘within five years’, before he revised the figure to 2020.
…click on the above link to read the rest of the article…
A Golden Opportunity in 2018 Awaits as Distrust in Our Fiat Based System Accelerates
Americans prepare to sit down, feast and give thanks this weekend for what they have, who they have and the good blessing that they have enjoyed over the past year.
This comes amidst a time period when their email boxes are being flooded with Black Friday specials for trinkets, bobbles and cosmetic goods that will provide a temporary reprieve from the more realistic situation that the vast majority are experiencing: growing debt levels and increased uncertainty.
The fact is, the stock market continues to tick higher, though not to the benefit of the mass majority of individuals who have simply not been able to partake in the “recovery” after the decimation they experienced via the 2008 crisis – a crisis that I contend has simply been papered over and one that will eventually once again rear its ugly head.
At the same time as new record highs in the stock market, we see that debt levels are also at all time highs, breaking new records and reaffirming my previously mentioned belief that the rot within our system continues to persist, silently behind the scenes. It appears that as a mass, we have learned nothing.
I am not trying to be pessimistic, but the fact is, people are rushing out to buy goods this weekend that they don’t need, can’t afford and ultimately that won’t make them any happier.
The only saving grace is the fact that a growing trend continues to manifest. This trend is one that cannot be ignored at this point and one that has central Banksters privately meeting and discussing what they are going to do about it.
…click on the above link to read the rest of the article…
Kotlikoff: America in Worse Financial Shape than Russia or China – Peter Diekmeyer
America’s 2017 fiscal gap will come in near $6 trillion, nine times higher than the $666 billion deficit announced by the US Department of the Treasury last week, says Laurence Kotlikoff, an economics professor at Boston University.
“Our country is broke,” says Kotlikoff, who estimates total US government debts at more than $200 trillion, when unfunded liabilities are included. “We are in worse shape than Russia, China or any developed nation.”
Worse, says Kotlikoff, who has testified before Congress, government officials are well-aware that many of America’s debts and accruing liabilities are being written off the books.
However, for the most part, they are keeping their mouths shut.
A two-tier reporting system
The upshot is a de facto “two-tier” financial reporting system, in which politicians and insiders have access to key data buried in footnotes about unfunded liabilities, which indicate that there are huge problems in the economy.
The public, on the other hand, in slews of Presidential and Congressional Speeches and publications, is led to believe that while things are tough, overall everything is OK.
According to Kotlikoff, a long-time activist for fiscal rectitude, the problem stems in large part from the fact that the US government has been spending almost all of Americans’ approximately $795 billion in social security payroll taxes to pay current bills, rather than investing them to fund retirees’ benefits.
The upshot is that on a net basis, the US government has no money to pay all the benefits that have been promised. Politicians know that defaults will occur, they just haven’t figured out how to finesse this.
…click on the above link to read the rest of the article…
An Accountant Smells a Rat – Peter Diekmeyer
Twenty years ago Doug Noland was so worried about imbalances surrounding the dot.com boom that he began to title his weekly reports “The Credit Bubble Bulletin. Years later, he warned the world about the impending 2008 crisis.
However a coming implosion, he says, could be the biggest yet.
“We are in a global finance bubble, which I call the grand-daddy of all bubbles,” said Noland. “Economists can’t see it. They can’t model money and credit. However, to those outside the system, the facts are increasingly clear.”
Noland points to inflating real estate, bond and equity prices as key causes for concern. According to the Federal Reserve’s September Z.1 Flow of Funds report, the value of US equities jumped $1.5 trillion during the second quarter to $42.2 trillion, a record 219% of GDP.
Noland’s Credit Bubble thesis
Noland may be right. A report by the International Institute of Finance released in June estimated that global government, business and personal debts totaled $217 trillion earlier this year. That’s more than three times (327%) higher than global economic output.
Adding to the complexity is the fact that not all debts are fully recorded. For example, according to a World Economic Forum study, the world’s six largest pension saving systems – the US, UK, Japan, Netherlands, Canada and Australia – are expected to experience a $224 trillion funding shortfall by 2050.
Noland’s warnings come during a time of exceptional public trust in governments, central banks, regulators and other institutions. Market volatility is trending at near record lows.
In June, Federal Reserve Chair Janet Yellen spoke for many when she said that she did not see a financial crisis occurring “in our lifetimes.”
Unburdened by “econometrics groupthink”
So why would Noland, who during his day job runs a tactical short book at McAlvany Wealth Management, see things that government, academic, and central bank economists don’t?
…click on the above link to read the rest of the article…
The ONLY Variable That Matters To The Price Of Gold
The ONLY Variable That Matters To The Price Of Gold
There are all sorts of positive fundamentals when it comes to the price of gold. There are the positive supply/demand fundamentals. The gold market is in a supply deficit. Mine reserves are at a 30-year low . The price of gold is below what is necessary to sustain the gold mining industry .
There are the positive geopolitical fundamentals. The world’s two most-unstable leaders – Kim Jong-un and Donald Trump – have been constantly trading threats and insults. And both of these people have nuclear weapons at their disposal. There is the endless “War on Terror”.
There are the positive economic fundamentals. Western real estate bubbles in major urban centers are at never-before-seen levels of insanity. Western markets are generally also at bubble levels, with U.S. markets representing bubbles on steroids . Western governments are bankrupt.
In relative terms, none of these fundamentals count .
There is one more important fundamental for the price of gold. Not only is it the most important fundamental, but it involves a variable which dwarfs all other fundamentals in magnitude — combined.
Regular readers have heard many times before that gold (and silver) is “a monetary metal” . The definition is simple. Gold is money. Therefore the price of gold must change proportionate to changes in the supplyof other forms of “money” (i.e. currency).
This is not a theory. It is a function of simple arithmetic. An elementary numerical example will illustrate this principle.
Suppose (in the entire world) there was a total of 10 oz’s of gold. Suppose also (in this hypothetical world) that there was a total of only $10,000 U.S. dollars. And in this hypothetical world, the price of gold is $1,000/oz.
…click on the above link to read the rest of the article…
On Guard Against The Banks
Following the events of yesterday, it seems wise this morning to take an in-depth look at the charts in order to discern what moves The Banks may take next in the hope of stemming this rally and reversing the trends.
Let’s start with Comex Digital Gold. It has been in an UPtrend since July 10 and this rally has carried it $150 or about 12.5%. In doing so, The Commercials on the CoT have increased their NET short position by 182,000 contracts and, specifically, the 24 Banks of the Bank Participation Report have doubled their NET short position, going from 104,748 contracts NET short in July to 213,746 NET short last week.
This places the CoT in its “worst” position since last September and this BPR reveals the largest NET short position on record. Therefore, you KNOW that The Banks will do just about anything at this point to reverse the trend and begin flushing The Specs back out of paper gold. Though they are clearly capable of pulling this off, it may take them a while to do it. Why, you ask?
For CDG, it’s all about the moving averages. We noted early last week that CDG’s 50-day had bullishly crossed UP and through both its 10-day and 200-day MAs. This is a very bullish trend indicator and, most importantly, it sets the Spec HFTs into a “buy the dip mode”. You can see this playing out already when you look at the daily chart.
Also last week, we began to discuss the significance of the $1331 level as support in any pullback. This was the level of resistance and then support in late August so we hoped/expected that same action on any pullback. And look what has happened thus far this week! Even though the all-important USDJPY is up another 50 pips today and pressing against 110, Comex gold is hanging firm at….$1332! For us, this is clear evidence of the HFTs buying the dip.
…click on the above link to read the rest of the article…
Total G-3 Central Bank Control – Craig Hemke
There’s a lot of amazement and wonder at how the “stock market” can be up today with the devastating news out of Texas and the latest North Korean missile launch. Longtime readers of TFMR know exactly how this market levitation is accomplished so this post is designed as a public service in order to better educate and inform everyone else.
Let’s just keep it simple…
In 2017…and, actually, since 2008…the “markets” don’t actually exist. Oh sure, there are trades and prices but in terms of what the markets were 20 years ago?…those days are long gone. Instead, what we have now is total HFT domination. Over 90% of all volume on the NYSE and NASDAQ is now done through HFT machines that swap positions back and forth. This is common knowledge and if you and I know this, then you can be assured that The Fed, The ECB and the BoJ ( known henceforth as the G-3) know this, too.
To that end, since the G-3 are dedicated to market stability and the wealth effect, these central banks clearly seek to influence the direction of the equity markets by influencing the two key drivers of the HFT machines. And what are these drivers? The currency pair of USDJPY and the volatility index known as the VIX. Simply stated, if your wish is to drive “the stock market” higher, all you need to do is buy the USDJPY while at the same time selling the VIX. It truly is that simple.
To that end, daily observation of trading patterns allows us to observe a clear and obvious, algo-driven program in the all-important USDJPY. Because of the sheer size of the forex market (up to $7T/day), any algorithm put in place to manage this pair could only come from pockets deep enough to make it happen….namely, the G-3.
…click on the above link to read the rest of the article…
Rosen Slams Canadian Accountants: “Investors Are Being Swindled” – Peter Diekmeyer
That’s not surprising – because, as the Fraser Institute notes, nearly three quarters of those debts are not included in the federal and provincial governments’ financial statements. So, Canadians have no clue how bad the country’s true financial situation is.
This lax reporting is spread throughout the system, including public companies, says one expert.
“Investors are being systematically swindled out of large amounts of retirement savings,” says Al Rosen, a forensic accountant and co-author of Easy Prey Investors, a recently-released book that details shortfalls of Canada’s lax reporting standards.
Accounting scandals abound
“Investors mistakenly believe that their pension plans, mutual funds and other investments are safeguarded,” says Rosen. “In fact, they are suffering losses that are monumental, compared to individual publicized scams.”
A key challenge, says Rosen, relates to Canada’s use of International Financial Reporting Standards, which “assign excessive power and choice to corporate management, providing them the ability to inflate corporate profits.”
Rosen cites a range of accounting scandals including Valeant, Nortel and Sino-Forest as examples of Canadian laxness.
(In one famous fraud case, Bre-X, auditors couldn’t be bothered to check if the company’s gold mine, its only major asset, actually existed. External accountants instead essentially relied on a manager’s claim that he had “found gold” in the core samples he presented to a valuation firm, when they signed off on the statements).
…click on the above link to read the rest of the article…
Ken Rogoff’s Government Debt Default Plan
Ken Rogoff’s Government Debt Default Plan
Ken Rogoff is by all accounts a brilliant man. The Harvard professor and former IMF chief economist is a chess grandmaster. His thesis committee included current Fed vice-chair Stanley Fischer. But like many survivors of Ivy League hoop jumping, the poor fellow appears to have emerged punch drunk.
That’s the only conclusion to be drawn from Rogoff’s new book, The Curse of Cash , which, in effect, proposes a ban on paper currency.
It’s terrifying piece of work, for several reasons.
First, the cashless society, which Rogoff proposes in order to make it easier for the US government to confiscate private wealth, in effect, amounts to an admission that Washington can’t pay back its debts.
Second, the fact that Rogoff uses the fight against “terrorism” and “crime” arguments in selling his proposals to the public – justifications which he as a mathematician should know are farcical – suggest that his arguments hide another agenda.
Third, and most important, is the fact that not only would banning cash not achieve Rogoff’s objectives – it could cause irreparable harm to the dollar’s role in the American economy and as a reserve currency.
Let’s look at these arguments one at a time.
Enforced negative rates ARE debt defaults
Rogoff’s “cashless society” is an elegant solution to a key problem bedeviling the Federal Reserve: with interest rates at the zero bound, the US central bank has no ammunition left to fight the next recession – because if cuts rates below zero, savers will withdraw their cash and put it under their mattresses.
“In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy,” Rogoff writes. “Unfortunately, the existence of cash gums up the works.”
That argument is spurious at best.
…click on the above link to read the rest of the article…
Canada goes full Krugman. Finance minister jacks up borrowing and spending, confirms gold sale – Peter Diekmeyer
Bill Morneau took centre stage last week in the Canadian Parliament and didn’t disappoint. The new Liberal finance minister’s first budget jacked up program spending across the board, to be paid for by borrowing and, eventually, presumably, money printing. His rhetoric was coated with suggestions that “economic growth” would solve the country’s problems. The only folks left out were taxpayers and savers.
On the face of it, Morneau’s logic makes sense. With interest rates near zero and the Canadian government’s debts among the lowest in the G-7, why not borrow a bit and invest in infrastructure? Well, there are several reasons – and all of them augur well for the future of gold.
Canadian government debt at record levels
Morneau is technically right. The Canadian government’s debt is at low levels compared to that of other advanced economies. However, those numbers are shaky. For one, they include only federal debts, not provincial debts. If you include all Canadian government debts including the provinces (US states are not allowed to run deficits), things look far worse.
Furthermore, Morneau’s numbers don’t include huge debts that the former Conservative Harper Government never bothered to record as liabilities, such as deferred pension and healthcare costs, a policy Prime Minister Trudeau’s Liberal government is continuing. Canada’s Fraser Institute estimates that such unfunded liabilities totalled nearly $4.1 trillion1 in 2014. Those unrecorded debts alone are equal to more than 200% of Canada’s GDP. Worse, Canadians, whose household debt-to-disposable-income ratios are at record levels, are in no position to finance those additional government obligations.
Sell off gold, spend the cash
During the hours before Mr. Morneau tabled the budget, he wandered into the lock-up room, where reporters were poring over advance copies of the document.
…click on the above link to read the rest of the article…
