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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…

The Chart That Explains Everything

January 15, 2016

The Chart That Explains Everything

Why is the economy barely growing after seven years of zero rates and easy money? Why are wages and incomes sagging when stock and bond prices have gone through the roof? Why are stocks experiencing such extreme volatility when the Fed increased rates by a mere quarter of a percent?

It’s the policy, stupid. And here’s the chart that explains exactly what the policy is.

Screen Shot 2016-01-14 at 12.06.21 PM

(Richard Koo: The ‘struggle between markets and central banks has only just begun’, Business Insider)

What the chart shows is that the vast increase in the monetary base didn’t impact lending or trigger the credit expansion the Fed had predicted. In other words, the Fed’s madcap pump-priming experiment (aka– QE) failed to stimulate growth or put the economy back on the path to recovery. For all practical purposes, the policy was a flop.

QE did, however, touch off an unprecedented 6-year bull market rally that pushed stocks into the stratosphere while the real economy continued to languish in a long-term slump. And the numbers are pretty impressive too. For example, the Dow Jones Industrial Average, which bottomed at 6,507 on March 9, 2009, soared to an eye-popping 18,312 points by May 19, 2015, an 11,805 point-surge in just five years. And the S&P did even better. From its March 9, 2009 bottom of 676 points, the index skyrocketed to a record-high 2,130 points on May 21, 2015, tripling its value at the fastest pace in history.

What the chart shows is that the Fed knew from 2010-on that stuffing the banks with excess reserves was neither lowering unemployment or revving up the economy. The liquidity was merely driving stocks higher.

It’s worth noting, that the Fed knows that credit does not flow into the economy without a transmission mechanism, that is, unless creditworthy borrowers are willing to to take out loans. Absent additional lending, the liquidity remains stuck in the financial system where it eventually creates asset bubbles.

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

Discovery

January 11, 2016

Discovery

It looks like 2016 will be the year that humanfolk learn that the stuff they value was not worth as much as they thought it was. It will be a harrowing process because a great many humans are abandoning ownership of things that are rapidly losing value — e.g. stocks on the Shanghai exchange — and stuffing whatever “money” they can recover into the US dollar, the assets and usufructs of which are also going through a very painful reality value adjustment.

Of course this calls into question foremost exactly what money is, and the answer is: basically a narrative construct. In other words, a story explaining why we behave the way we do around certain things. Some parts of the story have a closer relationship with reality than other parts. The part about the US dollar has a rather weak connection.

When various authorities — the BLS, the Federal Reserve, The New York Times — state that the US economy is “strong,” we can translate that to mean giant companies listed on the stock exchanges are able to put up a Potemkin façade of soundness. For instance, Amazon.com. The company continues to seem like a good idea. And it reinforces that idea in the collective imagination by sending a lot of low-priced goods to your door, (all bought on credit cards), which rings your (nearly) instant gratification bell. This has prompted investors to gobble up Amazon stock.

It’s well-established by now that the “brick-and-mortar” retail operations are majorly sucking wind. Meaning, fewer people are driving to the Target store and venues like it to buy stuff. Supposedly, they are buying stuff at Amazon instead. What interests me in that story is the idea that every single object purchased these days has a UPS journey attached to it. Of course, people also drive to the Target store, though I doubt they leave the place with just one thing.

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

2016 – the BIG SHIFT

January 1, 2016

2016 – the BIG SHIFT

As we close 2015 and begin a new year, the markets generally closed flat to neutral with a warning that as we approach the political year from hell being 2017, this is by no means going to be a walk through the park. We are more likely than not going to see some trends conclude in 2016 and others perform a false move the scare the hell out of everyone. Nevertheless, the stars may not be aligning, but the markets appear to be setting the stage to align for the BIG SHIFT.

What does the BIG SHIFT mean? It means that as we face a meltdown in Socialism which has taken hold of Western Governments destroying our underlying democratic foundations, ALL assets must prepare for the HEDGE against government.

Relationships are NEVER constant, yet the TV analysis touts fixed concepts that people then believe. At first, many will buy or sell based upon such unfounded beliefs and assumptions. When we examine them in detail, they fall to the ground into dust.

Europe is operating under a dictatorship and has lost any possible right to exercise a democratic process to remove the three members of the Troika since not a single one stands for any election. Lagarde is of the IMF and is not even appointed the head of the IMF exclusively by Europeans. She was a personal friend of Obama. Draghi is ex-Goldman Sachs. Once a member of Goldman, you never leave. The EU Parliament has no validity since the Commission is not bound by their vote. The people of European nations have absolutely no means to reclaim their sovereignty by any method other than force. And to prevent that, the EU Commission wants to create its own army.

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

The Catastrophic Threat of Bail-Ins

December 30, 2015

The Catastrophic Threat of Bail-Ins

It has now been more than two and a half years since the Cyprus Steal , the first “bail-in” perpetrated in the Western world, occurred. Before reviewing the history of this newest financial atrocity, it is necessary to define the terms.

The term “bail-in” describes a scenario in which a bank confiscates private property to indemnify itself for losses it has suffered. A bail-in is a totally lawless theft of assets, as there is no principle of law (of any kind) that could authorize such a seizure of private property. And in fact, there are many principles of law that demonstrate the lawlessness at work here. As with much of the financial crime jargon, “bail-in” is simply another gibberish euphemism like “quantitative easing” or “derivatives.”

As custodians of the financial assets of their clients, banks represent a form of trustee. The purpose of any trust relationship is to provide absolute security to the beneficiary of the trust (i.e., the legal owner of the property). Thus, one of the most fundamental principles of our legal system is non-encroachment regarding the property held in the custody of a trustee.

From a legal standpoint, it is like there is an invisible and impenetrable wall that surrounds the trust property. The only exceptions to this wall (ever) occur when the trust beneficiary makes a legal request for some disbursement or related transaction, when the trust itself directs some form of action (in the interests of the trust beneficiary), or when the trust allows the trustee to manage the trust assets on behalf of the beneficiary.

The idea of trustees using assets for their own benefit or (worse) claiming ownership of any trust assets represents one of the most serious forms of financial crime in Western civilization. Given this context, how did the government of Cyprus respond when its own Big Banks whined and claimed that they “needed” to confiscate deposits in order to pay off their own gambling debts? It meekly rubber-stamped the lawless theft.

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

Government Influence Over Asset Prices Growing

December 15, 2015

Government Influence Over Asset Prices Growing

The facts are OECD stocks have fell in October, not increased. That runs against the generally accepted belief that storage capacity is full and we are oversupplied by around 2 million barrels per day (mb/d). That suggests that the IEA is underestimating demand and grossly exaggerating inventory levels.

Further, the EIA has consistently overstated supply in its weekly data release, “adjusting” inventory up by seemingly arbitrary amounts. Now, according to Cornerstone Analytics, last week we find that the EIA is under-sampling small producers whose production is rapidly declining. Also, monthly production figures continue to be inflated. This conclusion from Cornerstone Analytics is noteworthy:

“On the USA, one point we will leave you with is that there appears to be some scope for the DOE to revise down American oil production figures for the past few months. Our sense is that the monthly survey numbers for production have ‘undersampled’ output from small independent producers whose output has been more negatively impacted from the activity fall-off as compared with the larger producers.”

The problem these days is that markets are controlled by people who don’t take care to delve deep into numbers and simply don’t question numbers being fed to them by media or government agencies. Instead they trade off headlines and care less about their validity because it suits their agenda, ideology or, even more likely, unconscious bias, reinforced by propaganda.

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

Is Judgment Day At Hand?

November 12, 2015

Is Judgment Day At Hand?

What is Judgment Day?

It is like ancient times that the Feds, under Greenspan, somehow decided that US needed to follow a zero interest rate policy, a policy now known as the ZIRP. It was 2008 when Bernanke gave birth to the term Quantitative Easing, QE. QE was followed by Operation Twist, and its sequels – QE2 and QE3.

The new buzzword is “normalization”. Normalization is the reversal of the QE operations and the raising of interest rates to above zero. Whether we agree or disagree is irrelevant. The fact is that the BLS just declared the unemployment rate is at 5%, a level that should justify initiating the normalization process starting with the next FOMC meeting in December. In other words, judgment day is at hand.

juday Batten down the hatches, judgment day approacheth
Image credit: World Wrestling Entertainment (WWE)

The following two charts summarize the Fed’s policies nicely. The first shows the Federal Funds rate. It dropped from over 5% in 2007 to zero today. So we are making a big deal over a possible 25 basis points hike? I will leave that question for later.

Effective Federal Funds rate. It may be hiked from nothing to almost nothing soon, but what difference would it really make? – click to enlarge.

The second chart shows the Fed Balance Sheet, also starting in 2007. It went from $875 billion in 2007 to $4.5 trillion today, an increase of $3.625 trillion.

Total assets held by the Federal reserve. This unprecedented intervention has delivered “the weakest economic recovery of the entire post-WW2 era”. This result should be no surprise to anyone, except perhaps the monetary mandarins themselves – click to enlarge.

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

Looking at the two charts above, they beg the question: How do you normalize the extreme policies of the last 8 years? If normal means a return to a 5% federal funds rate and reducing the Fed’s balance sheet back to under $1 trillion, we have a hell of a long way to go.

Short Squeeze, Liquidity, Margin Debt and Deflation

October 13, 2015

Short Squeeze, Liquidity, Margin Debt and Deflation

Some things you CAN see coming, in life and certainly in finance. Quite a few things, actually. Once you understand we’re on a long term downward path, also both in life and in finance, and you’re not exclusively looking at short term gains, it all sort of falls into place. The only remaining issue then is that so many of you DO look at short term gains only. Thing is, there’s no way out of this thing but down, way down.

Yeah, stock markets went up quite a bit last week. Did that surprise you? If so, maybe you’re not in the right kind of game. You might be better off in Vegas. Better odds and all that. From where we’re sitting, amongst the entire crowd of its peers, this was a major flashing red alarm late last week, from Investment Research Dynamics:

September Liquidity Crisis Forced Fed Into Massive Reverse Repo Operation

Something occurred in the banking system in September that required a massive reverse repo operation in order to force the largest ever Treasury collateral injection into the repo market. Ordinarily the Fed might engage in routine reverse repos as a means of managing the Fed funds rate. However, as you can see from the graph below, there have been sudden spikes up in the amount of reverse repos that tend to correspond the some kind of crisis – the obvious one being the de facto collapse of the financial system in 2008. You can also see from this graph that the size of the “spike” occurrences in reverse repo operations has significantly increased since 2014 relative to the spike up in 2008. In fact, the latest two-week spike is by far the largest reverse repo operation on record.

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

Dying Petrodollar Ripples Through Markets As Asset Managers Bemoan Loss Of Saudi Bid

September 28, 2015

Dying Petrodollar Ripples Through Markets As Asset Managers Bemoan Loss Of Saudi Bid

One of the key things to understand about China’s liquidation of hundreds of billions in US paper is that far from being a country-specific phenomenon, it actually marks the continuation of something that’s been taking place in other emerging markets for some time.

As we outlined in “Why It Really All Comes Down To The Death Of The Petrodollar,” the forced sale of Beijing’s UST reserves is simply the most dramatic example of what Deutsche Bank has called “quantitative tightening.” For years, reserve managers in the world’s emerging economies worked to accumulate war chests of USD-denominated paper in an effort to ensure that in a crisis, they would have sufficient firepower to guard against speculative attacks on their currencies and/or accelerating capital outflows. Slumping commodity prices and the threat of a supposedly imminent Fed hike have conspired to put pressure on these reserves and outside of China, nowhere is this dynamic more apparent than in Saudi Arabia. Indeed it was the Saudis who dealt the deathblow to the great EM reserve accumulation.

By intentionally killing the petrodollar, Riyadh effectively ensured that the pressure on commodity currencies would continue unabated, but as we’ve documented exhaustively, that was and still is considered an acceptable outcome if it means bankrupting the US shale complex and securing market share. But for Saudi Arabia, this is all complicated by three things: 1) the necessity of preserving the lifestyle of everyday citizens, 2) spending associated with the proxy war in Yemen, and 3) defense of the riyal’s dollar peg. All of those factors have served to weigh heavily on the county’s already depleted petrodollar reserves, and if the “lower for longer” crude thesis plays out, Riyadh may see further pressure on its current and fiscal accounts which are now both squarely in the red.

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

What the Heck’s Happening to the Global Stock Markets?

September 27, 2015

What the Heck’s Happening to the Global Stock Markets?

According to our soothsayers, when the Fed decided to keep interest rates where they’ve been since 2008, at near zero, rather than raise them, it should have triggered a big stock-market rally. But that’s not what happened.

Or rather, it triggered some rallies, but soon the hot air hissed out of them and they deflated. That’s what’s different this time: apparently nothing can keep these stocks propped up at these dizzying levels, not even the Fed.

Friday in the US, stocks rallied at the open, and by 1 PM, the S&P 500 hit 1,953, up 1% intraday and looking strong, when you could suddenly hear the hot air hissing out of it. In two hours it plunged 31 points to 1,922, before bouncing at the last hour to close down 1 point.

That left it down 1.4% for the week and 6.2% for the year. It’s down “only” 9.4% from its all-time high in May, with a lot more room to fall. Despite its nerve-wracking daily gyrations, it has gone absolutely nowhere since June 12, 2014.

The most hated asset class of all

The asset class that the Fed has been trying to render as appealing as a mildewed wet blanket – cash in bank – handily beat the S&P 500 without all the gray hairs and fees.

The Nasdaq wasn’t quite so sanguine on Friday, however. It opened up 51 points, at 4,785, then relentlessly dropped 126 points, for a 2.5% swing, before bouncing off a little at the end and closing at 4,686, down 1% for the day, and 3% for the week. Now it’s back where it had been on November 13, 2014, and in March 2000.

The Dow remained in the green all day despite its gyrations and closed up 0.7%. At 16,314, it’s down 0.4% for the week and back where it had been on Christmas Eve 2013. Yup.

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

Safe Assets In A World Gone Mad

September 20, 2015

Safe Assets In A World Gone Mad

Gold and silver are good assets to hold to insure the preservation of EXCESS wealth but there are other assets that are even more valuable longterm. Those things that can be used to produce a product are the elements that can be used to leverage your time, resources and talents to produce wealth. The ability to produce excess is the basis of the need for wealth preservation.

Physical goods in the form of equipment that can be used to create or produce goods needed by society are the basis of prosperity and wealth in the world. Gold and silver only become necessary when society begins to produce more products than the producer can use. This excess production is then traded for those things that can preserve the value of this excess production until it is needed by individuals.

Machines to build or repair such as saws and hammers, sewing machines, metal fabricating machines such as lathes and mills and machines to convert raw materials to value added products such as steel to I beams or pots and pans, wheat to flour or pasta, lumber to finished furniture and cotton to cloth are the assets that define how prosperous you are as a nation. A nation derives its wealth from having a product to sell. That will never change. It is true for nations as well as for individuals.

Individuals need to have the ability to produce something in excess of their needs to advance to the need to store that excess. This requires tools and equipment in most cases. You do not necessarily need to process your own resources to generate this excess. A miller can provide the equipment to grind grain for the community taking part of the production for his time and effort.

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

Taxation & Its Role in the Destruction of Our Economy

September 12, 2015

QUESTION: Thank you for your fascinating blog. I thoroughly enjoy reading your analysis on social, political, financial and historical topics. i would like to make a couple points with questions and get your analysis or feedback on these.

First point: You describe that post 2015.75 (Big Bang), you expect a peak in bonds (safe haven) that will coincide with a low in stocks due to global fear. The eventual collapse in bonds will drive everyone into “private assets” causing a major rise in stocks and commodities due to lack of confidence in government. At the same time, you say that government won’t give up the fight on taxation and asset seizure. So, my question is, what good is it to invest in stocks in this private phase if the government will most likely tax all profits to the point of making the investment pointless? Why would people continue to buy stocks then? Typically when fair rule of law degrades, people hoard and don’t invest, correct?

…

Thanks for your analysis!

ANSWER: Historically, this has been the difference between movable and immovable assets, such as real estate. Collectibles, stocks, and precious metals are in the moveable category. Of course this is what governments are now attempting to seize.

The best hedge would be to have assets in terms of stocks in the USA, and certainly not in Europe. It may be harder to engage in a taxation of shares as an asset, whereas in Europe they are much closer to communism and see nothing wrong with taxing assets, not just income.

If we look at the fall of Rome, the first asset class to decline was real estate, as you cannot take it with you when you leave town. Thus, the population of Rome collapsed from 1 million to 15,000 by the Middle Ages. People had no choice and just walked away, unable to pay the taxes demanded.

Taxes are the great destroyer. You are an economic slave if you simply cannot retire without having to pay taxes. Taxes reduce economic growth and lower productivity for they are no different, economically speaking, from some gangster demanding “protection” money to operate a business.

“It’s A Tipping Point” Marc Faber Warns “There Are No Safe Assets Anymore”

September 3, 2015

“It’s A Tipping Point” Marc Faber Warns “There Are No Safe Assets Anymore”

Markets have “reached some kind of a tipping point,” warns Marc Faber in this brief Bloomberg TV interview. Simply put, he explains, “because of modern central banking and repeated interventions with monetary policy, in other words, with QE, all around the world by central banks – there is no safe asset anymore.” The purchasing power of money is going down, and Faber “would rather focus on precious metals because they do not depend on the industrial demand as much as base metals or industrial commodities,” as it’s now “obvious that the Chinese economy is growing at nowhere near what the Ministry of Truth is publishing.”

Faber explains more… “I have to laugh when someone like you tries to lecture me what creates prosperity”

Some key exceprts…

On what central banks hath wrought…

I think that because of modern central banking and repeated interventions with monetary policy, in other words, with QE, all around the world by central banks there is no safe asset anymore. When I grew up in the ’50s it was safe to put your money in the bank on deposit. The yields were low, but it was safe.

But nowadays, you don’t know what will happen next in terms of purchasing power of money. What we know is that it’s going down.

On the idiocy of QE…

In my humble book of economics, wealth is being created through, essentially, a mixture of capital spending, and land and labor. And if these three production factors are used efficiently, it then creates a prosperous society, as America became prosperous from its humble beginnings in 1800, or thereabout, to the 1960s, ’70s. But it’s ludicrous to believe that you will create prosperity in a system by printing money. That is economic sophism at its best.

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

Bubble, Bubble, Toil and Trouble: When Authorities Buy Assets to Prop Up Markets

July 25, 2015

Bubble, Bubble, Toil and Trouble: When Authorities Buy Assets to Prop Up Markets

The Central Planners who thought that buying shares to prop up the stock bubble was an excellent fix are about to find out the true meaning of toil and trouble.

The actual line from Shakespeare’s Macbeth is double, double, toil and trouble, fire burn, and cauldron bubble but for the purposes of analyzing what happens when authorities prop up market bubbles by directly buying assets, bubble, bubble, toil and trouble is also appropriate.

China’s authorities seem to have chanted Shakespeare’s magical incantation nonstop this year, as the Shenzhen and other Chinese stock market indices have more than doubled. This chart illustrates what the Chinese authorities were aiming for: a bubble that just keeps expanding and never pops:

But what actually happened was predictable: China’s stock bubble burst. In response, Chinese authorities threw everything within reach into the market to stem the decline: criminalizing negative comments about stocks, loosening credit, enablinggreater fools to post their homes as collateral for margin accounts, and the last and chillingly irreversible tool in the Central Planning Bubble Inflation Tool Kit, direct purchases of stocks: China Spends 10% Of GDP On “All Bark, No Bite” Stock Bailout:

In gambling parlance, Chinese authorities doubled-down on their bet (there’s your double, double) that they could save their bubble, bubble.

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

Our Phantom Economy

June 15, 2015

Our Phantom Economy

Those who believe that phantom recoveries and phantom metrics can be substituted for reality are in for a shock in the next downturn.

Stripped of artifice, there are only two kinds of media stories: those that support the status quo narrative, and those that are skeptical of that narrative.

What is the status quo narrative? Simply this: not only is this the best possible arrangement of labor, assets and money, it is the only possible arrangement of labor, assets and money.

It is impossible to challenge a system that is the only possible arrangement; the only option is to accept it.

One of the greatest and most important PSYOPS of the Imperial State (U.S. Government) and its faithful lapdog the mainstream media is the unemployment rate. As I will show tomorrow, the real unemployment rate is between 20% and 40%, depending on whether you think someone earning $1,500 a year selling stuff on eBay and Etsy should be counted as “employed.”In effect, the mainstream media is a vast Psychological Operation (PSYOPS) aimed at persuading the American public that the status quo Imperial system of predatory, debt-based crony-capitalism that benefits the few at the expense of the many is not just beneficial to all its debt-serfs and welfare recipients, but it is the only possible system–there is no alternative(TINA).

The federal government is delighted to count everyone earning $100 a year as employed, and equally delighted to label everyone without a job (even one paying $100/year) who doesn’t qualify for unemployment insurance a job market zombie–a once living person who is no longer counted as among the living.

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

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