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“No signs of recession” says agency that always fails to predict recession

In the middle of a heated battle against my jetlag yesterday, I finally decided to exercise the nuclear option and turn on CNBC in order to stay awake.

I figured someone would say something completely ridiculous, and it would get my blood boiling enough to power through the next couple of hours.

Within minutes I saw a top economist for Moody’s (one of the largest rating agencies in the world) saying that there are absolutely zero signs of recession.

Boom. I was suddenly so wide-awake it was like that adrenaline scene from Pulp Fiction.

I couldn’t believe what I had just heard. Moody’s. No recession. Seriously?

In addition to being criminally complicit in committing widespread fraud that fueled the housing bubble ten years ago, Moody’s takes advantage of every opportunity to show the world that they don’t have a clue when it comes to economic forecasts.

It’s like what Churchill said about democracy– it’s the worst form of government, except for all the others.

Well, Moody’s is the worst rating agency and economic forecaster… except for all the others.

These are the same guys (along with their colleagues at S&P, Fitch, etc.) who totally missed the boat on the housing market and slapped pristine credit ratings on subprime mortgage bonds.

They also missed the boat on the subsequent banking crisis, giving strong ratings to Lehman Brothers and AIG right up through September 2008.

Lehman, of course, went bust that month. And AIG had to be bailed out by the taxpayer.

Moody’s and the gang also missed the rest of the global financial crisis, the collapse of Iceland, Greece’s bankruptcy, and just about every other significant financial event since… forever.

These guys are so drunk on their own Kool-Aid that in October 2007, Moody’s announced that “the economy is not going to slide away into recession.”

In December 2007, they called the bottom in the housing market, suggesting that prices would not fall any further.

Of course, the following year, the entire world was engulfed in the biggest financial crisis since the Great Depression.

Moody’s didn’t see it coming. Wall Street didn’t see it coming. The Federal Reserve didn’t see it coming. Governments didn’t see it coming.

Everyone assumed that the good times would last forever.

So when the agency that consistently fails to predict recession predicts that there will be no recession, you can pretty much guess what’s going to happen next.

This is what virtually assures negative interest rates in America.

Central banks almost invariably cut interest rates amid economic slowdown.

And over the last seven recessions in the Land of the Free, the Federal Reserve has cut interest rates an average of 5.68%.

The smallest cut was in the 1990 recession when the Fed lowered rates by 2.5%. The greatest was in 1982 when the Fed slashed rates by a massive 9%.

Think about it– rates right now are just 0.25%. So even with a tiny cut the Fed is almost guaranteed to take interest rates into negative territory in the next recession.

We can see the effects of this in Europe and Japan where negative interest rates already exist.

Negative interest rates destroy banks. It eats into bank profits and forces them to hold money losing toxic assets.

Bank balance sheets become riskier, and people start trying to withdraw their money as a result.

In Japan (which just recently made interest rates negative), one of the fastest selling items is home safes, which people are buying in order to hold physical cash.

In Europe (where negative interest rates have existed for a while longer), bank controls have already been put in place to prevent people from withdrawing too much of their own money out of the banking system.

This is a form of capital controls– a tool that desperate governments use to trap your savings within a failed system and steal your prosperity.

Wherever you see negative interest rates you are bound to see capital controls close behind.

In light of this data there are fundamentally two courses of action.

1) Hope. Pretend that everything is going to be OK until the end of time.

2) Action. Take sensible steps BEFORE any of the metaphor hits the fan.

One of the easiest things you can do is withdraw some physical cash out of the banking system.

Buy a safe and hold 50s and 20s (they might ban the Benjamins, so avoid $100 bills). And don’t take out more than a few thousand dollars at a time.

It’s hard to imagine you’re worse off for keeping a safe full of cash.

Even if nothing bad ever happens in the banking system, you can still use the cash. And all you’re missing out on is 0.01% interest in your checking account. Big deal.

But if the trend continues and capital controls arise, the value of cash (and gold for that matter) will go through the roof. And you’ll wish you had acquired some while you still had the chance.

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Over 80,000 People Want Bill Clinton Arrested For Violating Election Laws On Super Tuesday

Submitted by Carey Wedler via TheAntiMedia.org,

More than 80,000 people are calling for the arrest and prosecution of former president Bill Clinton, alleging he violated election laws by entering multiple polling stations in Boston and other Massachusetts areas on Tuesday. A Change.org petition launched that same evening calls on the state’s attorney general, Maura Healey, to take action against Clinton, though the Secretary of State insists his behavior was lawful.

The petition says the Bill Clinton made a “clear, knowing and egregious violation of the campaign laws to swing an election in a significant way,” alluding to Massachusetts General Laws and procedures that prohibit “[c]ampaigning within 150 feet of a polling station, or in any way interfering with the right to vote.“ According to state voting procedures, “no person shall solicit votes for or against, or otherwise promote or oppose, any person or political party or position on a ballot question, to be voted on at the current election.”

Secretary of State William Galvin told the New York Times his office “had to remind some of our poll workers that even a president can’t go inside and work a polling place. He can go in, but he can’t approach voters.”

He continued: “We just took the extra precaution of telling them because this is not a usual occurrence. You don’t usually get a president doing this.”

WVBC, a local ABC affiliate, reported that Brian McNiff, a spokesperson for Galvin, “clarified that Clinton broke no laws during his visits to the interior of polling places because he was not handing out any flyers or voting materials for Hillary Clinton.”

Clinton also entered polling centers in West Roxbury and Newton, and attended an event outside a polling center in New Bedford. In West Roxbury, Clinton visibly spoke to a poll worker and agreed to take a picture with her, remarking, “As long as we’re not violating any election laws.” McNiffsaid of the New Bedford appearance that “No one was prevented from voting. The city and voters were notified well in advance of the event.”

He admitted that Galvin’s office notified Clinton’s campaign of possible violations. “We have heard about it, and the clerks have been instructed and the campaign has been instructed that 150 feet is the rule.”

Clinton supporter and mayor of Boston, Marty Walsh, declined to acknowledge any illegal activity. Rather, he shook poll workers’ hands with the the former president in West Roxbury. “President Clinton joined Mayor Walsh to thank poll workers in West Roxbury this morning,” a spokesperson for his office said, adding that Clinton did not campaign inside the polling place.

 

 

The Massachusetts’ state brass is defending the Clintons in spite of unethical and possibly illegal behavior, and the petition disputes the apparent free pass.

“Bill Clinton was not only electioneering within the boundary. Although the spokesperson for Bill Clinton denies that he was ever inside a polling place, photos and video show him clearly greeting and talking up election workers inside,” it says.

The statement continues:

“After being told to refrain from this activity, which is a 3rd degree Voter Violation Felony, for which Clinton indeed must have known the law and chose to violate it, Bill Clinton does not vote in Massachusetts, and would have no other business in a polling station on election day besides campaigning for his wife.”

A spokesman for Clinton directed inquiring CNBC reporters to the WCVB article, where McNiff asserted Bill had committed no wrongdoing. Even if Clinton did not technically violate election laws, it seems apparent his presence at polling centers was intended to promote Hillary’s campaign.

Bernie Sanders supporters and others have raised concerns throughout the campaign cycle regarding the integrity of the process, and the Clintons’ most recent apparent transgression has attracted a great deal of scrutiny. As of Wednesday afternoon, the Change petition calling for Clinton’s arrest and prosecution had attracted over 63,000 signatures, closing in its goal of 75,000.

Though the Clintons have recently been accused of even more serious criminal conduct — including rape and war crimes — they have not faced prosecution.


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It’s Official: Canada Has Sold All Of Its Gold Reserves

One month ago, when looking at the latest Canadian official international reserves, we noticed something strange: Canada had sold nearly half of its gold reserves in one month. According to the February data, total Canadian gold reserves stood at 1.7 tonnes. That was just 0.1 per cent of the country’s total reserves, which also include foreign currency deposits and bonds. 

As we noted, the decision to sell came from Finance Minister Bill Morneau’s office.

“Canada’s gold reserves belong to the Government of Canada, and are held under the name of the Minister of Finance,” explained a spokesperson for the Bank of Canada on Wednesday. “Decisions relative to gold holdings are taken by the Minister of Finance.”
Reached by Global News on Wednesday evening, a spokesperson for the finance department said the sale “was done in the normal course of business for the government. The decision to sell the gold was not tied to a specific gold price, and sales are being conducted over a long period and in a controlled manner.”

This latest sell-off is indeed part of a much longer-term pattern of moving away from gold as a government-held asset. According to economist Ian Lee of the Sprott School of Business at Carleton University, Ottawa has no real reason to keep its gold reserves other than adhering to tradition.

“Under the old system, (gold) backed up currencies,” Lee explained. “The U.S. dollar was tied to gold. One ounce was worth US$35. Then in 1971, for lots of reasons I won’t get into, Richard Nixon took the United States off the gold standard.”

Gold and dollars were interchangeable until that point, he said, but in the modern financial world, the metal is no longer considered a form of currency.  “It is a precious metal, like silver … they can be sold like any asset.”

The amount of gold the Canadian government holds has therefore been falling steadily since the mid-1960s, when over 1,000 tonnes were kept tucked away. Half of those reserves were sold by 1985, and then almost all the rest were sold through the 1990s up to 2002.

By last year, Canada’s reserves were down to just three tonnes, and the latest sales have now halved that. At the current market rate, the value of 1.7 tonnes of gold comes in at just under CAD$100 million, barely a drop in the bucket when you consider the broader scope of federal finances.

According to Lee, there may soon come a time when Canada’s gold reserves are entirely a thing of the past. There are better assets to focus on, he argued, calling the government’s decision to dump gold “wise and astute.”

* * *

Lee was right, because fast forward one month when earlier today Canada’s Department of Finance released its latest official international reserves and as of this moment it’s official – Canada has fully “broken away with tradition” and has exactly zero gold left.

This is what it said:

The Government of Canada sold 21,851 ounces of gold coins for settlement in February. On February 29, gold holdings stood at 77 ounces. The valuation is based on the February 29, 2016, London p.m. fix of US$1,234.90 per ounce.

And now, Canada can focus on buying “better assets.” As to whether “the government’s decision to dump gold was wise and astute”, we’ll check back on that at some point in the near future.


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The Ongoing Plunge In American Worker Productivity Explained

While revised modestly higher from preliminary levels, US non-farm productivity plunged 2.2% in Q4 2015 – the biggest drop since Q1 2014.

 

Economists are gnashing their teeth to explain this "plunging productivity paradox" – we think it is rather simple…

 

While only modestly tongue in cheek, here is what is really going on…

Just under two years ago, when Bank of America's economic team still produced meaningful commentary instead of blaming the growth slowdown on the snow (especially after it said not to blame the growth slowdown on the snow), it pointed out that the real reason the US recovery was aging (this was in the summer of 2013) was the tumble in worked productivity. This is what BofA said then: "what we show below is that, outside of the tech boom in the late 1990s, productivity tends to slow as business expansions mature. Our current 'expansion' is now thoroughly mature."

 

This time, Bank of America was absolutely right.

And finally, here is Eugen Bohm-Bawerk explaining how US productivity is now on par with Agrarian slave economics…

monetary policy has become slave to the service sector as it has become linked to the much touted wealth effect (capital consumption) that is now an integral part of the American business cycle.

Now it is time to take a closer look at productivity measured in terms of GDP per capita. While this is not an entirely correct way to measure productivity, it does adhere to new classical growth model theories which posit that in a developed economy, reached steady state, the only way to increase GDP per capita is through increased total factor productivity. In plain English, growth in GDP per capita equals productivity growth. The reason we use this concept instead of more advanced productivity measures is to get a long enough time series to properly understand the underlying fundamental forces driving society forward.

In our main chart we have tried to see through all the underlying noise in the annual data by looking at a 10-year rolling average and a polynomial trend line.

In the period prior to the War of 1812 US productivity growth was lacklustre as the economy was mainly driven by agriculture and slaves (slaves have no incentive to work hard or innovate, only to work just hard enough to avoid being beaten). From 1790 to 1840 annual growth averaged only 0.7 per cent.

As the first industrial revolution started to take hold in the north-east, productivity growth rose rapidly, and even more during the second industrial revolution which propelled the US economy to become the world largest and eventually the global hegemon (see bonus chart at the end).

As a side note, it is worth noting that while the US became the world largest economy already by 1871, Britain held onto the role as a world hegemon until 1945. Applied to today’s situation in light of the fact that China is, by some measures, already the largest economy on the planet, it does not mean it will rule the seven seas anytime soon. In our view, they probably never will, but that is a story for another time.

Adjusting for the WWII anomaly (which tells us that GDP is not a good measure of a country’s prosperity) US productivity growth peaked in 1972 – incidentally the year after Nixon took the US off gold. The productivity decline witnessed ever since is unprecedented. Despite the short lived boom of the 1990s US productivity growth only average 1.2 per cent from 1975 up to today. If we isolate the last 15 years US productivity growth is on par with what an agrarian slave economy was able to achieve 200 years ago.

In addition, the last 15 years also saw an outsized contribution to GDP from finance. If we look at the US GDP by contribution from value added by industry we clearly see how finance stands out in what would otherwise have been an impressively diversified economy.

With hindsight we know that finance did more harm than good so we can conservatively deduct finance from the GDP calculations and by doing so we essentially end up with no growth per capita at all over a timespan of more than 15 years! US real GDP per capita less contribution from finance increased by an annual average of 0.3 per cent from 2000 to 2015. From 2008 the annual average has been negative 0.5 per cent!

In other words, we have seen a progressive (pun intended) weakening of the US economy from the 1970s and the reason is simple enough when we know that monetary policy broken down to its most basic is a transaction of nothing (fiat money) for something (real production of goods and services). Modern monetary policy thereby violates the most sacred principle in a market based economy; namely that production creates its own demand. Only through previous production, either your own or borrowed, can one express true purchasing power on the market place.

The central bank does not need to worry about such trivial things. They can manufacture the medium of exchange at zero cost and express purchasing power on the same level as the producer. However, consumption of real goods and services paid for with zero cost money must by definition be pure capital consumption.

Do this on a grand scale, over a long period of time, even a capital rich economy as the US will eventually be depleted. Capital per worker falls relative to competitors abroad, cost goes up and competitiveness falls (think rust-belt). Productive structures cannot be properly funded and the economy must regress to align funding with its level of specialization.

In its final stage, investment give way for speculation, and suddenly finance is the most important industry, pulling the best and brightest away from every corner of the globe, just to find more ingenious ways to maximise capital consumption.

As the slave economy got perverted by incentives not to work, so does the speculative fiat based economy, which consequently create debt serfs on a grand scale.

Bonus chart:


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Hints That SCOTUS May Overturn the Texas Abortion Law

Before Supreme Court Justice Antonin Scalia died, his colleague Anthony Kennedy was the swing vote on whether to uphold H.B. 2, the Texas abortion law that restricts the procedure to surgical centers and requires doctors who perform it to have admitting privileges at a nearby hospital. Now that the Supreme Court is down to eight members, Kennedy is still the swing vote, although not in quite the same way. If Kennedy sides with the three conservative justices who clearly want to approve H.B. 2, the even split will leave in place an appeals court ruling that upheld the law, but the impact will be limited to the 5th Circuit. If Kennedy sides with the four liberal justices who clearly want to overturn H.B. 2, the ruling will doom similar laws throughout the country. His questions during yesterday’s oral argument suggest the latter possibility is more likely.

Under Planned Parenthood v. Casey, the justices are supposed to decide whether H.B. 2 imposes an “undue burden” on the right to obtain an abortion, meaning that “its purpose or effect is to place substantial obstacles in the path of a woman seeking an abortion before the fetus attains viability.” As I noted in my column yesterday (and as Justices Elena Kagan, Sonia Sotomayor, Ruth Bader Ginsburg, and Stephen Breyer emphasized during oral argument), the medical justification for H.B. 2 is very weak, which suggests protecting women’s health is a pretext for discouraging abortion, since the law is expected to reduce the number of abortion clinics in Texas by about 75 percent.

Texas Solicitor General Scott Keller argued that the resulting burden should not be considered “undue” as long as women “are able to make the ultimate decision to elect the procedure.” But Kennedy, who played a crucial role in deciding Casey, did not seem inclined to accept that argument. He suggested that the state’s rationale for a regulation and the obstacles created by the regulation are not “two completely discrete analytical categories,” that “the undue burden test is weighed against what the state’s interest is.”

In other words, any given burden on women seeking abortions might be deemed constitutional or not, depending on the strength of the state’s justification. That means the crucial issue may be not how many women will have to drive how much farther to get abortions as a result of H.B. 2 but whether the official justification for the law has any real scientific basis. Focusing on the law’s rationale, as opposed to its practical consequences (which remain uncertain), does not bode well for its supporters. Another bad sign for them: Kennedy noted that H.B. 2 seems to have encouraged women who might have obtained drug-induced abortions to have surgical abortions instead, which “may not be medically wise.”

Then again, Kennedy also suggested, during a discussion of whether the case should be remanded for further fact finding, that the Court might not know enough about the capacity of the abortion clinics that would remain after H.B. 2 took full effect. Before the law was passed, he noted, those clinics accounted for about 20 percent of the state’s abortions. But he wondered if they might be able to expand enough to pick up the slack.

If the case is sent back to the lower courts, the justices might not see it for another year or two, at which point the significance of Kennedy’s vote will have changed once again. Should Hillary Clinton win the presidential election in November, Kennedy’s vote won’t matter, since whoever she picks to replace Scalia will side with the Court’s liberal wing to overturn H.B. 2. If a Republican wins the election (even if it’s Donald Trump), Scalia’s replacement probably will vote to uphold the law, in which case Kennedy will once again have the power to set a national precedent one way or the other.

More on the Texas abortion case, Whole Woman’s Health v. Hellerstedt, from Elizabeth Nolan Brown and Damon Root.

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A.M. Links: GOP Debate Tonight, Romney vs. Trump, More Email Troubles for Hillary

  • Mitt Romney, the Republican Party’s 2012 presidential nominee, will deliver a speech today attacking Donald Trump. “His promises are as worthless as a degree from Trump University,” Romney is expected to say.
  • “The Justice Department has granted immunity to a former State Department staffer, who worked on Hillary Clinton’s private email server, as part of a criminal investigation into the possible mishandling of classified information, according to a senior law enforcement official.”
  • Defense Secretary Ash Carter weighed in on the privacy showdown between Apple and the FBI, saying that encryption technology is “absolutely essential” from the Defense Department’s point of view. “We are squarely behind strong data security and strong encryption, no question about it.”

Follow us on Facebook and Twitter, and don‘t forget to sign up for Reason‘s daily updates for more content.

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Cartels Demonstrate the Utter Failure of the War on Drugs: New at Reason

To understand how drug cartels work, we should consider the industry as we would any other that has to deal with regular business problems–how to hire the best personnel, how to handle the competition, how to deliver product to customers, and so on.

That is what Tom Wainwright sets out to do in his new book Narconomics: How to Run a Drug Cartel. “Regulatory approaches that in the ordinary business world would be discarded for their ineffectiveness have been allowed to endure for years in the world of counternarcotics,” says the author, a former correspondent in Mexico for The Economist. Ian Vasquez, director of the Center for Global Liberty and Prosperity at the Cato Institute, explores Wainright’s book and how drug cartels operate in Latin America.

View this article.

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Initial Jobless Claims Rise Again But What’s Wrong With This Picture?

For the second week in a row, initial jobless claims rose (up 6k to 278k) but remain flat at 42 year lows for the last year. Challenger job cuts rose 21.8% YoY (and yet initial jobless claims are lower still YoY. The problem with this ‘data’ is that employment signals from both manufacturing and services PMIs are entirely divergent…

 

 

Still it keeps The Fed’s recovery narrative alive, so just hold your nose and buy the f##king dream.


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Bill Gross Previews The Financial Apocalypse: “The Classical Economic Model Has Reached A Dead End”

Bill Gross takes a turn for the downright apocalyptic (with a +/- 5 billion year error margin) in his latest letter speculating on the future of banking and finance under NIRP in a world where the “credit based economic system appears to be in the process of devolving from a production oriented model to one which recycles finance for the benefit of financiers”; a world in which “the negative interest rates dominating 40% of the Euroland bond market and now migrating to Japan like a Zika like contagion, are an enigma to almost all global investors”; a world where our “finance based economic system which like the Sun has provided life and productive growth for a long, long time – is running out of fuel and that its remaining time span is something less than 5 billion years.”

His bottom line? The same as ours for the past 7 years: “central bankers seem ever intent on going lower, ignorant in my view of the harm being done to a classical economic model that has driven prosperity – until it reached a negative interest rate dead end and could drive no more.”

The next step: admission of failure and paradropping money, leading to soaring inflation.

Or perhaps Gross is wrong and banks will be able to sweep all the world’s problems under the money printing/NIRP/helicopter money rug for another 5 billion years?

His full monthly letter below

Sunshine, Lollipops and…

Our Sun – a rather tiny star in the galaxial scheme of things – seems inexhaustible. But 5 billion years from now, it will swallow, instead of nurture the Earth as it burns itself out – first contracting, then expanding like a flaming candle turned firecracker. Not to worry though. We won’t be around. It’s not that we are beyond worrying; it’s that our lives are much shorter and we needn’t think much about it. In the nearer term, there is global warming/climate change, and other such down to Earth problems as paying the bills and getting kids into the right colleges. Still – there are presumably inexhaustible things that deserve our attention in the here and now. One of them is finance-based capitalism and our assumption that the risk/ reward historically inherent in it will be sufficient to drive economic growth forward. Unlike the Sun, whose fate and lifespan can be scientifically determined, there is little evidence that anything could ever change what has been until now a flawed, yet the best economic system conceivable. Capitalistic initiative married to an ever expanding supply of available credit has facilitated economic prosperity much like the Sun has been the supply center for energy/ food and life’s sustenance. But now with quantitative easing and negative interest rates, the concept of nurturing credit seems to have morphed into something destructive as opposed to growth enhancing. Our global, credit based economic system appears to be in the process of devolving from a production oriented model to one which recycles finance for the benefit of financiers. Making money on money seems to be the system’s flickering objective. Our global financed-based economy is becoming increasingly dormant, not because people don’t want to work or technology isn’t producing better things, but because finance itself is burning out like our future Sun.

What readers should know is that the global economy has been powered by credit – its expansion in the U.S. alone since the early 1970’s has been 58 fold – that is, we now have $58 trillion of official credit outstanding whereas in 1970 we only had $1 trillion. Staggering, is it not? But now, this expansion appears to be reaching an ending of sorts, at least in its current form. Private sector savers are growing leery of debt piled upon debt and government regulators have begun to build fences against further rampant creation. In addition, the return offered on savings/investment whether it be on deposit at a bank, in Treasuries/ Bunds, or at extremely low equity risk premiums, is inadequate relative to historical as well as mathematically defined durational risk. The negative interest rates dominating 40% of the Euroland bond market and now migrating to Japan like a Zika like contagion, are an enigma to almost all global investors. Why would someone lend money to a borrower with the certainty of getting less money back at a future date? Several years ago even the most Einsteinian-like economists would not have imagined such a state but now it seems an everyday occurrence, as central banks plumb deeper and deeper depths like drilling rigs expecting to strike oil, if only yields could be lowered another 10, 20, 50 basis points.

There is growing evidence that they cannot. Instead of historically generating economic growth via a wealth effect and its trickle-down effect on the real economy, negative investment rates and the expansion of central bank balance sheets via quantitative easing are creating negative effects that I have warned about for several years now. Negative yields threaten bank profit margins as yield curves flatten worldwide and bank NIM’s (net interest rate margins) narrow. The recent collapse in worldwide bank stock prices can be explained not so much by potential defaults in the energy/commodity complex, as by investor recognition that banks are now not only being more tightly regulated, but that future ROE’s will be much akin to a utility stock. Observe the collapse in bank stock prices – not just in the last few months but post Lehman. I’ll help you: Citibank priced at $500 in 2007, now $38 as shown in Chart I. BAC $50/now $12. Credit Suisse $70/now $13. Deutsche $130/now $16. Goldman Sachs $250/now $146. Banking/finance seems to be either a screaming sector ready to be bought or a permanently damaged victim of write-offs, tighter regulation and significantly lower future margins. I’ll vote for the latter.

Chart I: The Big C Then and Now

 

In addition to banks, business models with long term liabilities that depend on 7-8% future returns from risk assets are themselves at risk – not necessarily of bankruptcy but future profitability. The Met, the PRU, Hartford – all of these insurers whether it be for life, accident, or storm damage, cannot cover claims as conveniently as they could in the past, because they can’t earn as much on their bonds and stocks. Same goes for pension funds. Puerto Rico follows Detroit not just because of overpromised benefits but because they cannot earn enough on their investment portfolios to cover the promises. Low/negative interest rates do that. And the damage extends to all savers; households worldwide that saved/invested money for college, retirement or for medical bills. They have been damaged, and only now are becoming aware of it. Negative interest rates do that.

But central bankers seem ever intent on going lower, ignorant in my view of the harm being done to a classical economic model that has driven prosperity – until it reached a negative interest rate dead end and could drive no more.

In addition, government policymakers seem to be setting up future roadblocks for savers. There is a somewhat suspicious uniform attack on high denomination bills of global currencies. Noted economists such as Larry Summers; respected journalists such as the FT’s Gillian Tett, central bankers such as Mario Draghi – all seem suddenly concerned that 500 Euro or 10,000 Yen Notes are facilitating drug dealers and terrorists (which they are). But what’s an economist/central banker doing opining on law enforcement? It appears that the one remaining escape hatch for ordinary citizens is being closed. Money in a mattress will heretofore be associated with drugs/terror. The cashless society which appears over the horizon may come sooner than the demise of the penny! Give a 500 Euro/take a 500 Euro is in our future I guess. Both that and the lowly penny will be equally scorned.

And that’s not the end of it. If negative interest rates fail to generate acceptable nominal growth, then the Milton Friedman/Ben Bernanke concept of helicopter money may be employed. How that could equitably be distributed nationally or worldwide I have no idea, but the opinion columns are mentioning it more and more often, and on Twitter, the “Likes” are increasing in numbers. Can any/all of these policy alternatives save the “system”? We shall find out, but current evidence of the past 7 years’ experience would support only a D+ report card grade. Barely passing. As an investor though – and as a citizen in this election year – you should be aware that our finance based economic system which like the Sun has provided life and productive growth for a long, long time – is running out of fuel and that its remaining time span is something less than 5 billion years.

Investment implications? Do not reach for the tantalizing apple of high yield or the low price/ book ratio of bank stocks. Those prices are where they are because of low/negative interest rates. And too, do not reach for the seemingly momentum driven higher prices of Bunds and Treasuries that negative yields have produced. A 30 year Treasury at 2.5% can wipe out your annual income in one day with a 10 basis point increase. And no, you can’t go to a bank and demand your cash for a fear of being labeled a terrorist. Seems like you’re cornered, doesn’t it? Well not quite. The secret in a negative interest rate world that poses extraordinary duration risk for AAA sovereign bonds is to (1) keep bond maturities short and (2) borrow at those attractive yields in a mildly levered form that provides a yield (and expected return) of 5-6%. Janus unconstrained portfolios attempt to do that and are inching to the head of its asset universe day by day. No guarantees. The advice about borrowing at low yields above obviously has to be matched with investments that are less volatile and least affected by the evolving changes of our monetary system. But it can be done. Closed end funds at deep discounts, highly certain acquisition arbitrage stocks, as well as volatility sales at tails are general examples.

The Sun still comes up every morning but at different times according to the season. Summer, for our credit based financial system, is past and a shorter winter-like solstice is in our future. Be prepared for change.


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Interest on Gold Is the New Tempest in a Teapot

by Keith Weiner

Zero Hedge published an article on Canadian Bullion Services (CBS) last week. Other sites ran similar articles. The common thread through these articles, and in the user comments section, is that CBS is committing criminal fraud. Or, if not, then it’s a conspiracy by the Canadian government to confiscate gold. Terms like fractional reserve and re-hypothecation were dusted off for the occasion.

I don’t know anything about this company other than what I read that day. I am writing today to make a different point, not to address or defend CBS.

My point is: a company offers interest on gold, and the gold community goes ballistic. Why so visceral a response? To answer that, we need to look at the backdrop of today’s bizarre financial world.

Interest rates have been falling for well over three decades. This has caused endless asset bubbles in which to speculate to make a fortune (or lose one). And now, in the terminal stage of our monetary disease, there is scant yield to be had even in the US. Negative yields already prevail in several other countries.

We have become accustomed to it. We’re trained to not expect to earn interest, to not even think about it. Instead, we’re like Pavlov’s dogs who know to salivate at the sound of a bell. Only we’re not after food, but opportunities to speculate. All we want to know is, what’s going up next. Mainstream folks prefer to speculate on mainstream assets like stocks and real estate. Gold bugs would rather bet on gold and silver. Either way, it’s the same: seek capital gains by the rising dollar price of an asset. Yield is as dead as the rotary dial telephone.

And, we’re beyond merely accustomed. People demand speculative bubbles. It feels right as rain—or the next dose of opiate painkillers. Besides, speculation is how you get rich quick. Especially with leverage. Interest is boring and slow.

As those articles I mentioned earlier show, many people who are accustomed to demand speculative capital gains are actually offended at the very promise of a yield. It’s cognitive dissonance. If speculation is how we are supposed to make money, then interest is a vestige of the old normal. It’s like a thorn under your skin that you can’t get rid of, an annoying reminder.

This touches on a point I frequently make: gold does not go up or down. It’s the dollar that goes down or up. However, if this is true, then there’s a problem: how can you speculate on gold? I think so many people are so insistent on measuring gold in dollars for a simple reason. They want gains.

They want gold to go up, so they can get rich. This requires something to use to measure gold. If gold is going up, then compared to what? The dollar!

Perversely the fiat dollar suits the gold bugs as well as it suits the Federal Reserve (though for different reasons). Both believe that if everyone is forced to use the dollar as the unit of account, then they benefit from rising asset prices.

After the fiat dollar, what comes next? There are two possibilities. One is a normal world where gold is used as money, and people can earn a return on their gold. The other is collapse into a new dark age. Even in a dark age, gold is money all right. It’s just that no one wants to risk getting killed for his metal.

There’s nothing intrinsically wrong with borrowing, lending, or earning interest. In fact, the loan is a win-win deal. It benefits the business who borrows in order to produce the things that people want. And it benefits the saver and retiree who lend to earn an income on their savings. Productive lending is an integral part of the gold standard.


via Zero Hedge http://ift.tt/1p1kXfg Monetary Metals