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Over the past year we have provided extensive coverage of what will likely be the biggest, most politically charged, and most significant financial crisis facing the aging U.S. population: a multi-trillion pension storm, which was recently dubbed “one of the most heated battles of a lifetime” by John Mauldin. The reason, in a nutshell, why the US public pension problem has stumped so many professionals is simple: for lack of a better word, it is an unsustainable Ponzi scheme, in which satisfying accrued pension and retirement obligations requires not only a constant inflow of new money, but also fixed income returns, typically in the 6%+ range, which are virtually unfeasible in a world where global debt/GDP is in the 300%+ range. Which is why we, and many others, have long speculated that it is only a matter of time before the matter receives political attention, and ultimately, a taxpayer bailout.

That moment may be imminent. According to Pensions and Investments magazine, Democratic Senator Sherrod Brown from Ohio plans to introduce legislation that would allow struggling multiemployer pension funds to borrow from the U.S. Treasury to remain solvent.

The bill, which is co-sponsored by another Democrat, Rep. Tim Ryan, also of Ohio, could be introduced as soon as this week or shortly after. It would create a new office within the Treasury Department called the Pension Rehabilitation Administration. The funds would come from the sale of Treasury-issued bonds to financial institutions. The pension funds could borrow for 30 years at low interest rates. The one, and painfully amusing, restriction for borrowers is “they could not make risky investments”, which of course will be promptly circumvented in hopes of generating outsized returns and repaying the Treasury’s “bailout” loan, ultimately leading to massive losses on what is effectively a taxpayer-funded pension bailout.

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

The Pricing of Risk is Kaput

October 2, 2017

The Pricing of Risk is Kaput

US Treasury Yield v. Euro “Junk Bond” Yield. A new record in central-bank engineered absurdity.

US Treasury Securities with longer maturities fell this morning, with the 10-year Treasury yield rising above 2.37% early on and currently trading at 2.34%. This is still low by historical standards, and it’s still in denial of the Fed’s monetary tightening: Four rate hikes since it started this cycle, and the QE unwind has commenced as of today. But it cannot hold a candle to the Draghi-engineered negative-yield absurdity still unfolding in the Eurozone.

The average yield of junk bonds denominated in euros hit a new all-time record low at the close on Friday of 2.30%.

Let that sink in a moment. These euro corporate bonds are rated below investment grade. Companies, unlike the US, cannot print their own money to prevent default. There is little liquidity in the junk bond market, and selling these bonds when push comes to shove can be hard or impossible. The reason they’re called “junk” is because of their high risk of default.

And yet, prices of these junk bonds have been inflated by the ECB’s policies to such a degree that their yield, which falls as prices rise, is now lower than that of 10-year US Treasury securities that are considered the most liquid securities with the least credit risk out there.

The average yield of the euro junk bonds is based on a basket of below-investment-grade corporate bonds denominated in euros. Issuers include junk-rated American companies with European subsidiaries – in which case these bonds are called “reverse Yankees.”

They include the riskiest bonds. Plenty of them will default. Losses will be painful. Investors know this. It’s not a secret. But they don’t mind. They’re institutional investors plowing other people’s money into these bonds, and they don’t need to mind, but they have to buy these bonds because that’s their job.

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

Nomi Prins: Big Bank Concentration and Counterparty Risk Expands

August 28, 2017

Nomi Prins: Big Bank Concentration and Counterparty Risk Expands

Nomi Prins joined Sprott Money News for its Ask the Expert segment that covered the Federal Reserve system, Glass-Steagall reform and even the recent activity from the U.S Treasury.

Beginning the conversation she highlighted U.S debt and the position of U.S treasury bonds. Prins remarks, “One of the reasons in general that government debt is considered an asset is that it can be traded and holds enough liquidity to either raise money or post as collateral for other forms of capital. They have an intrinsic benefit in the financial system between central banks, large multinational institutions and banks, etc.”

“U.S Treasury bonds also have the idea behind them that they have this implicit guarantee by their respective government that they will not default. Even though, right now, these bonds barely have any interest from a return perspective and are not particularly lucrative, it does have the idea behind them that it is not going to lose its value.”

Nomi Prins is a former Wall Street insider where she worked as a Managing Director at Goldman Sachs among other major financial outlets. She is also a best-selling author who wrote All the Presidents’ Bankers, a book that examines the hidden alliances between Wall Street and Washington.

Switching gears, she was pressed on whether the U.S treasury bonds could face a replacement Nomi Prins noted, “In the current international monetary system we have where the U.S dollar is the major reserve currency there is a necessity for central banks and private banks to use and have the U.S treasury bonds. The bonds are used to balance payments and used for potential liquidity emergency mechanisms and any other financial circumstances.”

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

Stock & Bond Markets in Denial about QE Unwind, but Banks, Treasury Dept Get Antsy

August 21, 2017

Stock & Bond Markets in Denial about QE Unwind, but Banks, Treasury Dept Get Antsy

“Let markets clear.” It’ll be just “a financial engineering shock.”

Stock and bond markets are in denial about the effects of the Fed’s forthcoming QE unwind, whose kick-off is getting closer by the day, according to the minutes of the Fed’s July meeting.

“Several participants” were fretting how financial conditions had eased since the rate hikes began in earnest last December, instead of tightening. “Further increases in equity prices, together with continued low longer-term interest rates, had led to an easing of financial conditions,” they said. So something needs to be done about it.

And “several participants were prepared to announce a starting date for the program at the current meeting” – so the meeting in July – “most preferred to defer that decision until an upcoming meeting.” So the September meeting. And markets are now expecting the QE unwind to be announced in September.

Since then, short-term Treasury yields have remained relatively stable, reflecting the Fed’s current target range for the federal funds rate of 1% to 1.25%. But long-term rates, which the Fed intends to push up with the QE unwind, have come down further. As a consequence, the yield curve has flattened further, which is the opposite of what the Fed wants to accomplish.

The chart shows how the yield curve for current yields (red line) across the maturities has flattened against the yield curve on December 14 (blue line), when the Fed got serious about tightening:

Yields of junk bonds at the riskiest end (rated CCC or below) surged in the second half of 2015 and in early 2016, peaking above 20% on average, as bond prices have plunged (they move in opposite directions) in part due to the collapse of energy junk bonds, which caused a phenomenal bout of Fed flip-flopping.

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

Brodsky: This Is A Red Flag Warning

July 17, 2017

Brodsky: This Is A Red Flag Warning

Authored by Paul Brodsky via Macro-Allocation.com,

Red Flag Warning

Two identifiable dynamics may signal significant market shifts imminently:

1. The US debt ceiling will be debated soon and signs point towards a messy outcome.

2. Recent economic data have been weak, confirming our thesis that US economic growth is slowing and will not be reversed until a recession is acknowledged.

Debt Ceiling

Excessive debt has a way of catching up with people and institutions, and the first true test for the US government may be at hand. Congress was expected to raise the debt ceiling by October or else Treasury could not fund all the government’s programs and current obligations. Yet talk of Trump tax reform in 2016 may have given taxpayers incentive to defer their liabilities. As a result, Treasury received about 3 percent less in revenues than expected, accelerating the timetable to debate and raise the debt ceiling.Progress on raising the ceiling will unlikely be made in August, as Congress is in recess.

Meanwhile, the political atmosphere in the Republican Party has splintered further under President Trump. The conservative wing, which tried to block raising the ceiling in the past, has signaled it will again dig in its heels to force the government to begin balancing its budget. Though it caved in the past, the conservative caucus’ resolve should not be doubted this time, judging by its will and ability to so far block health care reform that does not absolutely repeal the Affordable Care Act.

Treasury Secretary Mnuchin has stated that the Department has options if Congress does not raise the ceiling, but has not been forthcoming with specifics. If a cash flow shortfall develops in the fourth quarter, principal and interest payments on Treasury debt would be prioritized so that the government would avoid default.

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

The Federal Reserve Is Destroying America

May 27, 2017

The Federal Reserve Is Destroying America

And wait until you hear what they’re getting away with now

Perhaps I should start with a disclaimer of sorts. Yes, I realize that the people working at the Federal Reserve, as well as the other central banks around the world, are just people. Like the rest of us, they have egos, fears, worries, hopes, and dreams. I’m sure pretty much all of them go home each night believing they are basically good and caring individuals, doing important work.

But they’re destroying America. They might have good intentions, but they are working with bad models. Ones that lead to truly horrible outcomes.

One of the chief failings of central banks is that they are slaves to an impossible idea; the notion that humans are free to pursue perpetual exponential economic growth on a finite planet. To be more specific: central banks are actually in the business of promoting perpetual exponential growth of debt.

But since growth in credit drives growth in consumption, the two are concepts are so intimately linked as to be indistinguishable from each other. They both rest upon an impossibility. Central banks are in the business of sustaining the unsustainable which is, of course, an impossible job.

I can only guess at the amount of emotional energy required to maintain the integrity of the edifice of self-delusion necessary to go home from a central banking job feeling OK about oneself and one’s role in the world. It must be immense.

I rather imagine it’s not unlike the key positions of leadership at Easter Island around the time the last trees were being felled and the last stone heads were being erected. “This is what we do,” they probably said to each other and their followers. “This is what we’ve always done. Pay no attention to those few crackpot haters who warn that in pursuing our way of life we’re instead destroying it.”

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

Buy the Dip?

April 17, 2017

Buy the Dip?

The military frolics of spring have distracted the nation’s attention from the economic and financial dynamics that pose the ultimate mortal threat to business as usual. Note the distinction between economic and financial. The first represents real activity in this Land of the Deal: people doing and making. The second, finance, used to be a minor branch — only about five percent — of all the doing in the days of America’s putative bigliest greatitude. The task of finance then was limited and straightforward: to manage the allocation of capital for more doing and making. The profit in that enabled bankers to drive Cadillacs instead of Chevrolets, but not much more.

These days, finance is closer to 40 percent of all the doing in America, and it is not about making anything, but getting more than its share of “money” — whatever that is now — and what “money” mostly is is whatever the people engaged in finance say it is, for instance, Fannie Mae bonds representing millions of sketchy loans for houses of vinyl and strand-board built in places with no future… or stock issued by the Tesla corporation… or the sovereign IOUs of the US Treasury.

The list of things that pretend to be “money” these days would be long and shocking and the sheer churn of these instruments among the banks and markets “produces” the fabled “revenue streams” beloved of The Wall Street Journal. What happens when the world discovers that these instruments (securities and their derivatives) represent falsely? Why, bigly trouble.

And this is the season we’re moving into as the dogwoods blaze: the season of the re-discovery of actual value. For those of you gloating over last week’s demonstrations of US Big Stick-ism, be warned that our military shenanigans have given China and Russia every reason to discipline this country by undermining the international standing of the dollar.

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

Great Expectations (Not)

March 6, 2017

Great Expectations (Not)

Halloween’s coming super-early this year and it will be a shocking surprise to those currently busy looking for Russians behind every potted plant in Washington DC. First, accept the premise that your country has lost its mind.

This is what happens when societies (and individuals) can’t face the true quandaries of a particular moment in their history. All of their attention gets channeled into fantasy: spooks, sexual freakery, conspiracies, persecution narratives, savior fairy tales. It’s been quite a cavalcade of unreality for the past six months, with great entertainment value for connoisseurs of the bizarre — until you’re reminded that the fate of the nation is at stake.

The questions Americans might more profitably ask ourselves: can we continue living the way we do? And by what means? These matters of home economics have been sequestered in some forgotten storage unit of the collective mind for at least a year while a clock ticks in the time-bomb that sits on the national welcome mat. That bomb is made of financial plutonium and it’s getting ready to blow. When it does, all the distracting spookery and freakery will vaporize and the shell-shocked citizens will have a clear view of the bleak, toxic, devastated landscape they actually inhabit.

March 15 is when the temporary suspension of the national debt ceiling — engineered in a 2015 deal between Barack Obama and then House Speaker John Boehner — finally expires, meaning the government loses its authority to continue borrowing money. The chance that congress can pass a bill raising the debt ceiling to enable further borrowing is about the same as the chance that Xi Jinping will send every American household a dim sum breakfast next Sunday morning by FedEx.

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

Jim Rickards: The New Case For Gold

April 4, 2016

Jim Rickards: The New Case For Gold

A powerful set of arguments for owning the yellow metal

Monetary expert Jim Rickards returns this week to share the insights from his latest work The New Case For Gold, a detailed and highly-researched study of the fundamentals likely to drive the price of gold bullion in the years to come.

Rickards is quite confident that the price is going higher — much higher in fact — as the current world fiat currency regimes falter, to be replaced by ones backed (at least in part) by bullion.

On the way to that outcome, expect the price to be subjugated to the interests and aims of the largest players on the geopolitical chessboard:

Is there gold price manipulation going on? Absolutely; there’s no question about it. That’s not just an opinion.

I spoke to a PhD statistician who works for one of the biggest hedge funds in the world. I can’t mention the name but it’s a household name, you would know the fund. This guy is a PhD statistician. He looked at COMEX opening prices and COMEX closing prices for a 10-year period and he was dumbfounded. He said…This is the most blatant case of manipulation I’ve ever seen. He said if you went into the aftermarket, bought after the close and sold before the opening every day, you would make risk-free profits. He said statistically that’s impossible unless there’s manipulation going on.

I spoke to Professor Rosa Abrantes-Metz at the New York University Stern School of Business. She is the leading expert on globe price manipulation. She actually testifies in some of these gold manipulation cases that are going on. She wrote a report reaching the same conclusions. It’s not just an opinion, it’s not just a deep, dark conspiracy theory. Here’s a PhD statistician and a prominent market expert lawyer, expert witness in litigation qualified by the courts, who independently reached the same conclusion.

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

US Money Supply and Debt – Early Warning Signs Remain Operative

March 18, 2016

US Money Supply and Debt – Early Warning Signs Remain Operative

Still Slowing Down

Year-end distortions have begun to slowly come out of the data, and while broad true US money supply growth remains fairly brisk, it has begun to slow again relative to January’s y/y growth rate, to 7.8% from 8.32%.

Many dollars in the format of a gift box

So far it remains in the sideways channel (indicated by the blue lines below) between approx. 7.4% and 8.6%, in which it has meandered since mid 2013. We believe the next break “below the shelf” is likely to be a significant event.

Broad true US money supply TMS-2, annual growth rate: still in the channel, but slowing again from January’s brief upward spike – click to enlarge.

Readers may recall that it was primarily the US treasury’s general account at the Fed which was responsible for the recent upward spike in the growth rate of TMS-2, combined with a year-end surge in deposit money. We suspect the latter had to do with offshore dollars being moved to domestic accounts at year-end for various accounting-related reasons. This suspicion has been confirmed by the fact that the move has been largely reversed in the new year.

As an aside, total bank credit growth (total loans and leases, excl. mortgage debt) stands at 8.24% y/y as of the end of February, which is still well below the peak growth rates seen in previous boom periods (these were closer to 13%).

As can be seen below, the amount of money held in the general account has declined further in February as well, but it seems to us that this money has merely moved into other demand deposits, i.e., there has simply been a shift from one categorization to another:

Money held in the treasury’s general account at the Fed – the recent record spike has begun to reverse – click to enlarge.

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

The Financial System Is A Larger Threat Than Terrorism

March 8, 2016

The Financial System Is A Larger Threat Than Terrorism

In the 21st century Americans have been distracted by the hyper-expensive “war on terror.” Trillions of dollars have been added to the taxpayers’ burden and many billions of dollars in profits to the military/security complex in order to combat insignificant foreign “threats,” such as the Taliban, that remain undefeated after 15 years. All this time the financial system, working hand-in-hand with policymakers, has done more damage to Americans than terrorists could possibly inflict.

The purpose of the Federal Reserve and US Treasury’s policy of zero interest rates is to support the prices of the over-leveraged and fraudalent financial instruments that unregulated financial systems always create. If inflation was properly measured, these zero rates would be negative rates, which means not only that retirees have no income from their retirement savings but also that saving is a losing proposition. Instead of earning interest on your savings, you pay interest that shrinks the real value of your saving.

Central banks, neoliberal economists, and the presstitute financial media advocate negative interest rates in order to force people to spend instead of save. The notion is that the economy’s poor economic performance is not due to the failure of economic policy but to people hoarding their money. The Federal Reserve and its coterie of economists and presstitutes maintain the fiction of too much savings despite the publication of the Federal Reserve’s own report that 52% of Americans cannot raise $400 without selling personal possessions or borrowing the money. http://www.federalreserve.gov/econresdata/2013-report-economic-well-being-us-households-201407.pdf

Negative interest rates, which have been introduced in some countries such as Switzerland and threatened in other countries, have caused people to avoid the tax on bank deposits by withdrawing their savings from banks in large denomination bills. In Switzerland, for example, demand for the 1,000 franc bill (about $1,000) has increased sharply. These large denomination bills now account for 60% of the Swiss currency in circulation.

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

The Bubble Finance Cycle——What Our Keynesian School Marm Doesn’t Get

November 13, 2015

The Bubble Finance Cycle——What Our Keynesian School Marm Doesn’t Get

The world of Bubble Finance economies created by the Fed and other central banks is fundamentally different than that prevailing under the “Lite Touch” monetary policies which preceded the Greenspan era.

Those essentially reactive and minimally invasive central bank intrusions into the money and capital markets prevailed from the time of the Fed’s 1951 liberation from the US Treasury by the great William McChesney Martin through September 1985. That’s when the US Treasury/White House once again seized control of the Fed’s printing presses and ordered Volcker to trash the dollar via the Plaza Accord. In due course, the White House trashed him, too.

The problem today is that the PhDs running the Fed have an economic model which is a relic of the Lite Touch era. It is not only utterly irrelevant in today’s casino driven system, but is actually tantamount to a blindfold. It causes them to look at a dashboard full of lagging indicators, while ignoring the explosive leading indicators starring them in the face.

The clueless inhabitants of the Eccles Building do not recognize that they have created a world in which Wall Street supersedes main street; and in which the monetary inflation that eventually brings the business cycle to a halt is soaring financial asset prices, not wage rates and new car prices.

During the Light Touch era recessions were triggered by sharp monetary tightening that caused interest rates to surge. This soon garroted business and household borrowing because credit became too expensive. And this interruption in the credit expansion cycle, in turn, caused spending on business fixed assets and household durables to tumble (e.g. auto and appliances), setting in motion a cascade of recessionary adjustments.

But always and everywhere the pre-recession inflection point was marked by a so-called wage and price spiral resulting from an overheated main street economy. Yellen’s Keynesian professors in the 1960s called this “excess demand”, and they should have known.

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

Blatant Gold/Silver Manipulation Reflects The Complete Corruption Of The U.S. System

October 31, 2015

Blatant Gold/Silver Manipulation Reflects The Complete Corruption Of The U.S. System

The morning of the FOMC announcement on Wednesday (Oct 28) gold was up $14 overnight, close to $1080 and the cartel’s dreaded 200 day moving average. The “premise” was that the market was expecting another rate hike deferral.

I friend called me that morning and I told him to not get excited because when the FOMC policy decision hits the tape, they will annihilate gold and push the S&P 500 up toward 2100. I was only 10 pts off on the S&P call, as the S&P 500 closed at 2090, up an absurd 24 points. Gold was taken to the cleaners:

What’s incredible is not one mainstream media analyst or reporter questions this market action. If the premise behind the gold sell-off was a “hawkish” FOMC statement and the threat of a rate hike in December (yawn), then the exact same premise should have cause a big sell-off in stocks. Since when does the threat of tighter monetary policy not hit the stock market?

Just to recount the play-by-play in gold, the moment the FOMC announcement hit the tape, the Comex computer system was bombarded with sell orders. At this point in the trading day, the ONLY gold/silver market open is the Comex computer Globex system. In the first 30 minutes 29.6k contracts were unloaded – 2.6 million paper ounces. In the entire hour after the announcement 50.5k contracts were unloaded – 5.1 million ounces. Note that the Comex is showing around 200k ounces to be available for delivery.

The blatant, unfettered manipulation and intervention in the gold and silver market is sponsored by the Fed and the U.S. Treasury, executed by the big bullion banks and fully endorsed by the CFTC.

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

Lost in Extrapolation

October 29, 2015

Lost in Extrapolation

Phillips Curve Fail

In the late 1970s the impossible happened. Inflation and unemployment simultaneously went vertical. The leading economists of the day were flummoxed.

summers Larry Summers favors us with his “eternal stagnation” shrug. The man is a sheer inexhaustible fount of truly atrocious ideas. As we have previously pointed out, when he’s around, the economy can only be deemed safe under certain circumstances.
Photo credit: Reuters

The Phillips curve said there’s an inverse relationship between inflation and unemployment. When unemployment goes down, inflation goes up. Conversely, when unemployment goes up, inflation goes down.

These are the data economist William Phillips originally studied – wage rates vs. unemployment in the UK in the years 1913 to 1948. Phillips’ study will forever stand as a monument as to why economic theory cannot possibly be derived from empirical data. In the wake of the 1970s experience, at least seven Nobel prizes in economics were awarded for work that debunked the Phillips curve-based assumptions of the Keynesians in some shape or form. Recently its long dead cousin NAIRU has risen from the grave again, like a zombie – click to enlarge.

How could it be that both were going up at once? Weren’t they mutually exclusive? Indeed, it took years of heavy handed government intervention to pull off such a feat.

When unemployment began creeping up in the 1970’s the U.S. Treasury, with backing from the Federal Reserve, did what Keynes had told them to do. They spent money to stimulate the economy and spur jobs creation.

According to the Phillips curve, with rising unemployment the planners could have their cake and eat it too. They could run large deficits without inflation.

Unfortunately, something unexpected happened. Instead of jobs they got inflation. Then, when they tried it again, they still didn’t get jobs. Astonishingly, they got more inflation.

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

Treasury Warns Of “Humanitarian Crisis” In Puerto Rico If Congress Does Not Agree To Bailout

October 22, 2015

Treasury Warns Of “Humanitarian Crisis” In Puerto Rico If Congress Does Not Agree To Bailout

“Puerto Rico is not Greece“… but it increasingly looks like it will be in a few weeks, thanks to US taxpayers who are about to foot the bill for yet another creditor bailout.

As we reported last night, creditors of the insolvent commonwealth, hoping to get a bailout and the highest possible return on their bond investment courtesy of the US taxpayer, have been pushing to portray the fiscal situation in Puerto Rico as beyond repair, hoping to force the administration and Congress to act. As The NY Times reported, on Wednesday, Puerto Rico took the unusual step of announcing that talks over restructuring about $750 million of the island’s debt had broken off, a move that some creditors saw as posturing to Washington for help.

Then, all day today, Puerto Rico’s leadership, realizing its interests are suddenly alligned with those of its creditors as a bailout is in everyone’s best interest, took the rhetoric up a notch when the island’s Governor Alejandro Garcia Padilla said in written testimony for Senate Energy Committee that Puerto Rico will have negative cash balance of $29.8 million in November 2015, and then added that the Puerto Rico Government Development Bank may be unable to make its $355 million debt service. “These GDB bonds are supported by a guarantee from the Commonwealth, and the GDB, which faces its own liquidity crisis, is not expected to be able to make the payment on its own based on current information.”

Others quickly chimed in: Puerto Rico Senate President Eduardo Bhatia said he would be in favor of “including everything” in a broad, comprehensive restructuring of the debt.

In short: bail us out now or face the consequences of a domino effect of defaults which puts not only the creditors, but the island itself, in dire straits.

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

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