Capital Controls & Confiscation – The Most Important Strategy Investors Ignore

Submitted by Jeff Clark via Casey Research,

“If I scare you this morning, and as a result you take action, then I will have accomplished my goal.” That’s what I told the audience at the Sprott Natural Resource Symposium in Vancouver two weeks ago.

But the reality is that I didn’t need to try to scare anyone. The evidence is overwhelming and has already alarmed most investors; our greatest risk is not a bad investment but our political exposure.

And yet most of these same investors do not see any need to stash bullion outside their home countries. They view international diversification as an extreme move. Many don’t even care if capital controls are instituted.

I’m convinced that this is the most common—and important—strategic investment error made today. So let me share a few key points from my Sprott presentation and let you decide for yourself if you need to reconsider your own strategy. (Bolding for emphasis is mine.)

1: IMF Endorses Capital Controls

Bloomberg reported in December 2012 that the “IMF has endorsed the use of capital controls in certain circumstances.“

This is particularly important because the IMF, arguably an even more prominent institution since the global financial crisis started, has always had an official stance against capital controls. “In a reversal of its historic support for unrestricted flows of money across borders, the IMF said controls can be useful…”

Will individual governments jump on this bandwagon? “It will be tacitly endorsed by a lot of central banks,” says Boston University professor Kevin Gallagher. If so, it could be more than just your home government that will clamp down on storing assets elsewhere.

2: There Is Academic Support for Capital Controls

Many mainstream economists support capital controls. For example, famed Harvard Economists Carmen Reinhart and Ken Rogoff wrote the following earlier this year:

Governments should consider taking a more eclectic range of economic measures than have been the norm over the past generation or two. The policies put in place so far, such as budgetary austerity, are little match for the size of the problem, and may make things worse. Instead, governments should take stronger action, much as rich economies did in past crises.

Aside from the dangerously foolish idea that reining in excessive government spending is a bad thing, Reinhart and Rogoff are saying that even more massive government intervention should be pursued. This opens the door to all kinds of dubious actions on the part of politicians, including—to my point today—capital controls.

“Ms. Reinhart and Mr. Rogoff suggest debt write-downs and ‘financial repression’, meaning the use of a combination of moderate inflation and constraints on the flow of capital to reduce debt burdens.”

The Reinhart and Rogoff report basically signals to politicians that it’s not only acceptable but desirable to reduce their debts by restricting the flow of capital across borders. Such action would keep funds locked inside countries where said politicians can plunder them as they see fit.

3: Confiscation of Savings on the Rise

“So, what’s the big deal?” Some might think. “I live here, work here, shop here, spend here, and invest here. I don’t really need funds outside my country anyway!”

Well, it’s self-evident that putting all of one’s eggs in any single basket, no matter how safe and sound that basket may seem, is risky—extremely risky in today’s financial climate.

In addition, when it comes to capital controls, storing a little gold outside one’s home jurisdiction can help avoid one major calamity, a danger that is growing virtually everywhere in the world: the outright confiscation of people’s savings.

The IMF, in a report entitled “Taxing Times,” published in October of 2013, on page 49, states:

“The sharp deterioration of the public finances in many countries has revived interest in a capital levy—a one-off tax on private wealth—as an exceptional measure to restore debt sustainability.”

The problem is debt. And now countries with higher debt levels are seeking to justify a tax on the wealth of private citizens.

So, to skeptics regarding the value of international diversification, I would ask: Does the country you live in have a lot of debt? Is it unsustainable?

If debt levels are dangerously high, the IMF says your politicians could repay it by taking some of your wealth.

The following quote sent shivers down my spine…

The appeal is that such a task, if implemented before avoidance is possible and there is a belief that is will never be repeated, does not distort behavior, and may be seen by some as fair. The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away.

The IMF has made it clear that invoking a levy on your assets would have to be done before you have time to make other arrangements. There will be no advance notice. It will be fast, cold, and cruel.

Notice also that one option is to simply inflate debt away. Given the amount of indebtedness in much of the world, inflation will certainly be part of the “solution,” with or without outright confiscation of your savings. (So make sure you own enough gold, and avoid government bonds like the plague.)

Further, the IMF has already studied how much the tax would have to be:

The tax rates needed to bring down public debt to pre-crisis levels are sizable: reducing debt ratios to 2007 levels would require, for a sample of 15 euro area countries, a tax rate of about 10% on households with a positive net worth.

Note that the criterion is not billionaire status, nor millionaire, nor even “comfortably well off.” The tax would apply to anyone with a positive net worth. And the 10% wealth-grab would, of course, be on top of regular income taxes, sales taxes, property taxes, etc.

4: We Like Pension Funds

Unfortunately, it’s not just savings. Carmen Reinhart (again) and M. Belén Sbrancia made the following suggestions in a 2011 paper:

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of ‘financial repression.’ Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks.

Yes, your retirement account is now a “captive domestic audience.” Are you ready to “lend” it to the government? “Directed” means “compulsory” in the above statement, and you may not have a choice if “regulation of cross-border capital movements”—capital controls—are instituted.

5: The Eurozone Sanctions Money-Grabs

Germany’s Bundesbank weighed in on this subject last January:

“Countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help.”

The context here is that of Germans not wanting to have to pay for the mistakes of Italians, Greeks, Cypriots, or whatnot. Fair enough, but the “capital levy” prescription is still a confiscation of funds from individuals’ banks or brokerage accounts.

Here’s another statement that sent shivers down my spine:

A capital levy corresponds to the principle of national responsibility, according to which tax payers are responsible for their government’s obligations before solidarity of other states is required.

The central bank of the strongest economy in the European Union has explicitly stated that you are responsible for your country’s fiscal obligations—and would be even if you voted against them! No matter how financially reckless politicians have been, it is your duty to meet your country’s financial needs.

This view effectively nullifies all objections. It’s a clear warning.

And it’s not just the Germans. On February 12, 2014, Reuters reported on an EU commission document that states:

The savings of the European Union’s 500 million citizens could be used to fund long-term investments to boost the economy and help plug the gap left by banks since the financial crisis.

Reuters reported that the Commission plans to request a draft law, “to mobilize more personal pension savings for long-term financing.”

EU officials are explicitly telling us that the pensions and savings of its citizens are fair game to meet the union’s financial needs. If you live in Europe, the writing is on the wall.

Actually, it’s already under wayReuters recently reported that Spain has

…introduced a blanket taxation rate of .03% on all bank account deposits, in a move aimed at… generating revenues for the country’s cash-strapped autonomous communities.

The regulation, which could bring around 400 million euros ($546 million) to the state coffers based on total deposits worth 1.4 trillion euros, had been tipped as a possible sweetener for the regions days after tough deficit limits for this year and next were set by the central government.

Some may counter that since Spain has relatively low tax rates and the bail-in rate is small, this development is no big deal. I disagree: it establishes the principle, sets the precedent, and opens the door for other countries to pursue similar policies.

6: Canada Jumps on the Confiscation Bandwagon

You may recall this text from last year’s budget in Canada:

“The Government proposes to implement a bail-in regime for systemically important banks.”

A bail-in is what they call it when a government takes depositors’ money to plug a bank’s financial holes—just as was done in Cyprus last year.

This regime will be designed to ensure that, in the unlikely event a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital.

What’s a “bank liability”? Your deposits. How quickly could they do such a thing? They just told us: fast enough that you won’t have time to react.

By the way, the Canadian bail-in was approved on a national level just one week after the final decision was made for the Cyprus bail-in.

7: FATCA

Have you considered why the Foreign Account Tax Compliance Act was passed into law? It was supposed to crack down on tax evaders and collect unpaid tax revenue. However, it’s estimated that it will only generate $8.7 billion over 10 years, which equates to 0.18% of the current budget deficit. And that’s based on rosy government projections.

FATCA was snuck into the HIRE Act of 2010, with little notice or discussion. Since the law will raise negligible revenue, I think something else must be going on here. If you ask me, it’s about control.

In my opinion, the goal of FATCA is to keep US savers trapped in US banks and in the US dollar, in case the US wants to implement a Cyprus-like bail-in. Given the debt load in the US and given statements made by government officials, this seems like a reasonable conclusion to draw.

This is why I think that the institution of capital controls is a “when” question, not an “if” one. The momentum is clearly gaining steam for some form of capital controls being instituted in the near future. If you don’t internationalize, you must accept the risk that your assets will be confiscated, taxed, regulated, and/or inflated away.

What to Expect Going Forward

  • First, any announcement will probably not use the words “capital controls.” It will be couched positively, for the “greater good,” and words like “patriotic duty” will likely feature prominently in mainstream press and government press releases. If you try to transfer assets outside your country, you could be branded as a traitor or an enemy of the state, even among some in your own social circles.
  • Controls will likely occur suddenly and with no warning. When did Cyprus implement their bail-in scheme? On a Friday night after banks were closed. By the way, prior to the bail-in, citizens were told the Cypriot banks had “government guarantees” and were “well-regulated.” Those assurances were nothing but a cruel joke when lightning-fast confiscation was enacted.
  • Restrictions could last a long time. While many capital controls have been lifted in Cyprus, money transfers outside the country still require approval from the Central Bank—over a year after the bail-in.
  • They’ll probably be retroactive. Actually, remove the word “probably.” Plenty of laws in response to prior financial crises have been enacted retroactively. Any new fiscal or monetary emergency would provide easy justification to do so again. If capital controls or savings confiscations were instituted later this year, for example, they would likely be retroactive to January 1. For those who have not yet taken action, it could already be too late.
  • Social environment will be chaotic. If capital controls are instituted, it will be because we’re in some kind of economic crisis, which implies the social atmosphere will be rocky and perhaps even dangerous. We shouldn’t be surprised to see riots, as there would be great uncertainty and fear. That’s dangerous in its own right, but it’s also not the kind of environment in which to begin making arrangements.
  • Ban vs. levy. Imposing capital controls is a risky move for a government to make; even the most reckless politicians understand this. That won’t stop them, but it could make them act more subtly. For instance, they might not impose actual bans on moving money across borders, but instead place a levy on doing so. Say, a 50% levy? That would “encourage” funds to remain inside a given country. Why not 100%? You could be permitted to transfer $10,000 outside the country—but if the fee for doing so is $10,000, few will do it. Such verbal games allow politicians to claim they have not enacted capital controls and yet achieve the same effect. There are plenty of historical examples of countries doing this very thing.

Keep in mind: Who will you complain to? If the government takes a portion of your assets, legally, who will you sue? You will have no recourse. And don’t expect anyone below your tax bracket to feel sorry for you.

No, once the door is closed, your wealth is trapped inside your country. It cannot move, escape, or flee. Capital controls allow politicians to do anything to your wealth they deem necessary.

Fortunately, you don’t have to be a target. Our Going Global report provides all the vital information you need to build a personal financial base outside your home country. It covers gold ownership and storage options, foreign bank accounts, currency diversification, foreign annuities, reporting requirements, and much more. It’s a complete A to Z guide on how to diversify internationally.

Discover what solutions are right for you—whether you’re a big investor or small, novice or veteran, many options are available. I encourage you to pursue what steps are most appropriate for you now, before the door is closed.

Learn more here…




via Zero Hedge http://ift.tt/1oexcCc Tyler Durden

Capital Controls & Confiscation – The Most Important Strategy Investors Ignore

Submitted by Jeff Clark via Casey Research,

“If I scare you this morning, and as a result you take action, then I will have accomplished my goal.” That’s what I told the audience at the Sprott Natural Resource Symposium in Vancouver two weeks ago.

But the reality is that I didn’t need to try to scare anyone. The evidence is overwhelming and has already alarmed most investors; our greatest risk is not a bad investment but our political exposure.

And yet most of these same investors do not see any need to stash bullion outside their home countries. They view international diversification as an extreme move. Many don’t even care if capital controls are instituted.

I’m convinced that this is the most common—and important—strategic investment error made today. So let me share a few key points from my Sprott presentation and let you decide for yourself if you need to reconsider your own strategy. (Bolding for emphasis is mine.)

1: IMF Endorses Capital Controls

Bloomberg reported in December 2012 that the “IMF has endorsed the use of capital controls in certain circumstances.“

This is particularly important because the IMF, arguably an even more prominent institution since the global financial crisis started, has always had an official stance against capital controls. “In a reversal of its historic support for unrestricted flows of money across borders, the IMF said controls can be useful…”

Will individual governments jump on this bandwagon? “It will be tacitly endorsed by a lot of central banks,” says Boston University professor Kevin Gallagher. If so, it could be more than just your home government that will clamp down on storing assets elsewhere.

2: There Is Academic Support for Capital Controls

Many mainstream economists support capital controls. For example, famed Harvard Economists Carmen Reinhart and Ken Rogoff wrote the following earlier this year:

Governments should consider taking a more eclectic range of economic measures than have been the norm over the past generation or two. The policies put in place so far, such as budgetary austerity, are little match for the size of the problem, and may make things worse. Instead, governments should take stronger action, much as rich economies did in past crises.

Aside from the dangerously foolish idea that reining in excessive government spending is a bad thing, Reinhart and Rogoff are saying that even more massive government intervention should be pursued. This opens the door to all kinds of dubious actions on the part of politicians, including—to my point today—capital controls.

“Ms. Reinhart and Mr. Rogoff suggest debt write-downs and ‘financial repression’, meaning the use of a combination of moderate inflation and constraints on the flow of capital to reduce debt burdens.”

The Reinhart and Rogoff report basically signals to politicians that it’s not only acceptable but desirable to reduce their debts by restricting the flow of capital across borders. Such action would keep funds locked inside countries where said politicians can plunder them as they see fit.

3: Confiscation of Savings on the Rise

“So, what’s the big deal?” Some might think. “I live here, work here, shop here, spend here, and invest here. I don’t really need funds outside my country anyway!”

Well, it’s self-evident that putting all of one’s eggs in any single basket, no matter how safe and sound that basket may seem, is risky—extremely risky in today’s financial climate.

In addition, when it comes to capital controls, storing a little gold outside one’s home jurisdiction can help avoid one major calamity, a danger that is growing virtually everywhere in the world: the outright confiscation of people’s savings.

The IMF, in a report entitled “Taxing Times,” published in October of 2013, on page 49, states:

“The sharp deterioration of the public finances in many countries has revived interest in a capital levy—a one-off tax on private wealth—as an exceptional measure to restore debt sustainability.”

The problem is debt. And now countries with higher debt levels are seeking to justify a tax on the wealth of private citizens.

So, to skeptics regarding the value of international diversification, I would ask: Does the country you live in have a lot of debt? Is it unsustainable?

If debt levels are dangerously high, the IMF says your politicians could repay it by taking some of your wealth.

The following quote sent shivers down my spine…

The appeal is that such a task, if implemented before avoidance is possible and there is a belief that is will never be repeated, does not distort behavior, and may be seen by some as fair. The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away.

The IMF has made it clear that invoking a levy on your assets would have to be done before you have time to make other arrangements. There will be no advance notice. It will be fast, cold, and cruel.

Notice also that one option is to simply inflate debt away. Given the amount of indebtedness in much of the world, inflation will certainly be part of the “solution,” with or without outright confiscation of your savings. (So make sure you own enough gold, and avoid government bonds like the plague.)

Further, the IMF has already studied how much the tax would have to be:

The tax rates needed to bring down public debt to pre-crisis levels are sizable: reducing debt ratios to 2007 levels would require, for a sample of 15 euro area countries, a tax rate of about 10% on households with a positive net worth.

Note that the criterion is not billionaire status, nor millionaire, nor even “comfortably well off.” The tax would apply to anyone with a positive net worth. And the 10% wealth-grab would, of course, be on top of regular income taxes, sales taxes, property taxes, etc.

4: We Like Pension Funds

Unfortunately, it’s not just savings. Carmen Reinhart (again) and M. Belén Sbrancia made the following suggestions in a 2011 paper:

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of ‘financial repression.’ Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks.

Yes, your retirement account is now a “captive domestic audience.” Are you ready to “lend” it to the government? “Directed” means “compulsory” in the above statement, and you may not have a choice if “regulation of cross-border capital movements”—capital controls—are instituted.

5: The Eurozone Sanctions Money-Grabs

Germany’s Bundesbank weighed in on this subject last January:

“Countries about to go bankrupt should draw on the private wealth of their citizens th
rough a one-off capital levy
before asking other states for help.”

The context here is that of Germans not wanting to have to pay for the mistakes of Italians, Greeks, Cypriots, or whatnot. Fair enough, but the “capital levy” prescription is still a confiscation of funds from individuals’ banks or brokerage accounts.

Here’s another statement that sent shivers down my spine:

A capital levy corresponds to the principle of national responsibility, according to which tax payers are responsible for their government’s obligations before solidarity of other states is required.

The central bank of the strongest economy in the European Union has explicitly stated that you are responsible for your country’s fiscal obligations—and would be even if you voted against them! No matter how financially reckless politicians have been, it is your duty to meet your country’s financial needs.

This view effectively nullifies all objections. It’s a clear warning.

And it’s not just the Germans. On February 12, 2014, Reuters reported on an EU commission document that states:

The savings of the European Union’s 500 million citizens could be used to fund long-term investments to boost the economy and help plug the gap left by banks since the financial crisis.

Reuters reported that the Commission plans to request a draft law, “to mobilize more personal pension savings for long-term financing.”

EU officials are explicitly telling us that the pensions and savings of its citizens are fair game to meet the union’s financial needs. If you live in Europe, the writing is on the wall.

Actually, it’s already under wayReuters recently reported that Spain has

…introduced a blanket taxation rate of .03% on all bank account deposits, in a move aimed at… generating revenues for the country’s cash-strapped autonomous communities.

The regulation, which could bring around 400 million euros ($546 million) to the state coffers based on total deposits worth 1.4 trillion euros, had been tipped as a possible sweetener for the regions days after tough deficit limits for this year and next were set by the central government.

Some may counter that since Spain has relatively low tax rates and the bail-in rate is small, this development is no big deal. I disagree: it establishes the principle, sets the precedent, and opens the door for other countries to pursue similar policies.

6: Canada Jumps on the Confiscation Bandwagon

You may recall this text from last year’s budget in Canada:

“The Government proposes to implement a bail-in regime for systemically important banks.”

A bail-in is what they call it when a government takes depositors’ money to plug a bank’s financial holes—just as was done in Cyprus last year.

This regime will be designed to ensure that, in the unlikely event a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital.

What’s a “bank liability”? Your deposits. How quickly could they do such a thing? They just told us: fast enough that you won’t have time to react.

By the way, the Canadian bail-in was approved on a national level just one week after the final decision was made for the Cyprus bail-in.

7: FATCA

Have you considered why the Foreign Account Tax Compliance Act was passed into law? It was supposed to crack down on tax evaders and collect unpaid tax revenue. However, it’s estimated that it will only generate $8.7 billion over 10 years, which equates to 0.18% of the current budget deficit. And that’s based on rosy government projections.

FATCA was snuck into the HIRE Act of 2010, with little notice or discussion. Since the law will raise negligible revenue, I think something else must be going on here. If you ask me, it’s about control.

In my opinion, the goal of FATCA is to keep US savers trapped in US banks and in the US dollar, in case the US wants to implement a Cyprus-like bail-in. Given the debt load in the US and given statements made by government officials, this seems like a reasonable conclusion to draw.

This is why I think that the institution of capital controls is a “when” question, not an “if” one. The momentum is clearly gaining steam for some form of capital controls being instituted in the near future. If you don’t internationalize, you must accept the risk that your assets will be confiscated, taxed, regulated, and/or inflated away.

What to Expect Going Forward

  • First, any announcement will probably not use the words “capital controls.” It will be couched positively, for the “greater good,” and words like “patriotic duty” will likely feature prominently in mainstream press and government press releases. If you try to transfer assets outside your country, you could be branded as a traitor or an enemy of the state, even among some in your own social circles.
  • Controls will likely occur suddenly and with no warning. When did Cyprus implement their bail-in scheme? On a Friday night after banks were closed. By the way, prior to the bail-in, citizens were told the Cypriot banks had “government guarantees” and were “well-regulated.” Those assurances were nothing but a cruel joke when lightning-fast confiscation was enacted.
  • Restrictions could last a long time. While many capital controls have been lifted in Cyprus, money transfers outside the country still require approval from the Central Bank—over a year after the bail-in.
  • They’ll probably be retroactive. Actually, remove the word “probably.” Plenty of laws in response to prior financial crises have been enacted retroactively. Any new fiscal or monetary emergency would provide easy justification to do so again. If capital controls or savings confiscations were instituted later this year, for example, they would likely be retroactive to January 1. For those who have not yet taken action, it could already be too late.
  • Social environment will be chaotic. If capital controls are instituted, it will be because we’re in some kind of economic crisis, which implies the social atmosphere will be rocky and perhaps even dangerous. We shouldn’t be surprised to see riots, as there would be great uncertainty and fear. That’s dangerous in its own right, but it’s also not the kind of environment in which to begin making arrangements.
  • Ban vs. levy. Imposing capital controls is a risky move for a government to make; even the most reckless politicians understand this. That won’t stop them, but it could make them act more subtly. For instance, they might not impose actual bans on moving money across borders, but instead place a levy on doing so. Say, a 50% levy? That would “encourage” funds to remain inside a given country. Why not 100%? You could be permitted to transfer $10,000 outside the country—but if the fee for doing so is $10,000, few will do it. Such verbal games allow politicians to claim they have not enacted capital controls and yet achieve the same effect. There are plenty of historical examples of countries doing this very thing.

Keep in mind: Who will you complain to?
If the government takes a portion of your assets, legally, who will you sue? You will have no recourse. And don’t expect anyone below your tax bracket to feel sorry for you.

No, once the door is closed, your wealth is trapped inside your country. It cannot move, escape, or flee. Capital controls allow politicians to do anything to your wealth they deem necessary.

Fortunately, you don’t have to be a target. Our Going Global report provides all the vital information you need to build a personal financial base outside your home country. It covers gold ownership and storage options, foreign bank accounts, currency diversification, foreign annuities, reporting requirements, and much more. It’s a complete A to Z guide on how to diversify internationally.

Discover what solutions are right for you—whether you’re a big investor or small, novice or veteran, many options are available. I encourage you to pursue what steps are most appropriate for you now, before the door is closed.

Learn more here…




via Zero Hedge http://ift.tt/1oexcCc Tyler Durden

Step Aside Panama Canal: China To Build Nicaragua Canal, “World’s Largest Infrastructure Project Ever”

A month ago, a Nicaraguan committee approved Chinese billionaire Wang Jing’s project to create The Nicaraguan Canal. With a planned capacity to accommodate ships with loaded displacement of 400,000 tons (notably bigger than The Panama Canal), the proposed 278-kilometer-long canal that will run across the Nicaragua isthmus would probably change the landscape of the world’s maritime trade.

“The project is the largest infrastructure project ever in the history of man in terms of engineering difficulty, investment scale, workload and its global impact,” Wang told reporters, adding that with regard the project’s financing, which is around $50 billion, Wang seems quite confident, “If you can deliver, you will find all the world’s money at your disposal.”

Worried about conservation? Don’t be: “We have 100-year concession rights, we will be responsible to ourselves, and we are there to build, not to destroy,” explained Wang.

 

 

As China Global Times reports,

In the mountains and rivers of Central America, work on one of the world’s largest infrastructure projects is progressing as planned, driven by Chinese billionaire Wang Jing.

 

 

The Nicaragua Canal, which is about four times the length of the Panama Canal, will connect the Atlantic Ocean and the Pacific Ocean upon its completion. The project is estimated to cost $50 billion.

 

“Our canal lock is 15-meter-thick, hard steel. Imagine its size. [It’ll be] the world’s largest,” the 41-year-old Wang said.

The Nicaragua Canal project is just one of many giant infrastructure projects commenced by Chinese around the world.

There are at least another five megaprojects that are currently being planned or under construction, including the $32 billion China-Pakistan economic corridor and the $1.7 billion Baltic Pearl Project, according to media reports.

 

 

Wang’s company secured a 50-year concession for the canal and an extension right of another 50 years.

Panama Canal competitor?

Wang said the Nicaragua Canal will be able to accommodate ships with a displacement of 400,000 tons.

 

Wang dismissed speculation that the canal he is building would become a competitor to the Panama Canal.

 

“The Panama Canal won’t fit my clients’ ships. After expansion, they can only accommodate ships up to 150,000 tons. But our canal offers an alternative route for those sailing across the Panama Canal,” he said.

 

“The world’s leading shipbuilders have already commenced research projects to design and build ships especially for the Nicaragua Canal,” Wang said.

 

Analysts said that currently ships with a displacement of 400,000 tons mainly carry crude and bulk cargo  such as minerals, coal, and grains, but as trade develops, larger ships could be a trend.

Financing the $50 billion?

If you can deliver, you will find all the world’s money at your disposal,” Wang said, adding that he will raise the money through combined measures of cross-shareholding, bank lending and debt issuance.

 

Wang estimates that his company could collect several billion US dollars worth of tolls on an annual basis, but he urged investors not to lose sight of the bigger picture.

 

“The canal would bring huge benefits to the world’s seaborne trade. It will make large-scale, low-cost, high-efficiency trade possible, unlocking trade demand between the East and the West,” Wang said.

 

“The continuously growing Chinese economy and a rising Latin America underpin a growing global maritime transport volume,” Zhang Yongfeng, a Shanghai-based shipping expert, told the Global Times Monday.

Costs?

For the locals at Nicaragua, a key concern has been the man-made canal’s environmental impact, particularly on the Nicaragua Lake, the largest freshwater lake in Central America.

“We have 100-year concession rights, we will be responsible to ourselves, and we are there to build, not to destroy,” Wang said.

*  *  *
Time to print some more Yuan…

*  *  *
Wang concludes… when asked “Does digging a canal in the “backyard of the US” not bug you?”

“No – Free, prosperous maritime trade benefits everybody, including the US”




via Zero Hedge http://ift.tt/1oEZV1x Tyler Durden

Step Aside Panama Canal: China To Build Nicaragua Canal, "World's Largest Infrastructure Project Ever"

A month ago, a Nicaraguan committee approved Chinese billionaire Wang Jing’s project to create The Nicaraguan Canal. With a planned capacity to accommodate ships with loaded displacement of 400,000 tons (notably bigger than The Panama Canal), the proposed 278-kilometer-long canal that will run across the Nicaragua isthmus would probably change the landscape of the world’s maritime trade.

“The project is the largest infrastructure project ever in the history of man in terms of engineering difficulty, investment scale, workload and its global impact,” Wang told reporters, adding that with regard the project’s financing, which is around $50 billion, Wang seems quite confident, “If you can deliver, you will find all the world’s money at your disposal.”

Worried about conservation? Don’t be: “We have 100-year concession rights, we will be responsible to ourselves, and we are there to build, not to destroy,” explained Wang.

 

 

As China Global Times reports,

In the mountains and rivers of Central America, work on one of the world’s largest infrastructure projects is progressing as planned, driven by Chinese billionaire Wang Jing.

 

 

The Nicaragua Canal, which is about four times the length of the Panama Canal, will connect the Atlantic Ocean and the Pacific Ocean upon its completion. The project is estimated to cost $50 billion.

 

“Our canal lock is 15-meter-thick, hard steel. Imagine its size. [It’ll be] the world’s largest,” the 41-year-old Wang said.

The Nicaragua Canal project is just one of many giant infrastructure projects commenced by Chinese around the world.

There are at least another five megaprojects that are currently being planned or under construction, including the $32 billion China-Pakistan economic corridor and the $1.7 billion Baltic Pearl Project, according to media reports.

 

 

Wang’s company secured a 50-year concession for the canal and an extension right of another 50 years.

Panama Canal competitor?

Wang said the Nicaragua Canal will be able to accommodate ships with a displacement of 400,000 tons.

 

Wang dismissed speculation that the canal he is building would become a competitor to the Panama Canal.

 

“The Panama Canal won’t fit my clients’ ships. After expansion, they can only accommodate ships up to 150,000 tons. But our canal offers an alternative route for those sailing across the Panama Canal,” he said.

 

“The world’s leading shipbuilders have already commenced research projects to design and build ships especially for the Nicaragua Canal,” Wang said.

 

Analysts said that currently ships with a displacement of 400,000 tons mainly carry crude and bulk cargo  such as minerals, coal, and grains, but as trade develops, larger ships could be a trend.

Financing the $50 billion?

If you can deliver, you will find all the world’s money at your disposal,” Wang said, adding that he will raise the money through combined measures of cross-shareholding, bank lending and debt issuance.

 

Wang estimates that his company could collect several billion US dollars worth of tolls on an annual basis, but he urged investors not to lose sight of the bigger picture.

 

“The canal would bring huge benefits to the world’s seaborne trade. It will make large-scale, low-cost, high-efficiency trade possible, unlocking trade demand between the East and the West,” Wang said.

 

“The continuously growing Chinese economy and a rising Latin America underpin a growing global maritime transport volume,” Zhang Yongfeng, a Shanghai-based shipping expert, told the Global Times Monday.

Costs?

For the locals at Nicaragua, a key concern has been the man-made canal’s environmental impact, particularly on the Nicaragua Lake, the largest freshwater lake in Central America.

“We have 100-year concession rights, we will be responsible to ourselves, and we are there to build, not to destroy,” Wang said.

*  *  *
Time to print some more Yuan…

*  *  *
Wang concludes… when asked “Does digging a canal in the “backyard of the US” not bug you?”

“No – Free, prosperous maritime trade benefits everybody, including the US”




via Zero Hedge http://ift.tt/1oEZV1x Tyler Durden

Is This Decline The Real Deal?

Submitted by Charles Hugh-Smith via Peak Prosperity blog,

Is this stock market decline the "real deal"? (that is, the start of a serious correction of 10% or more) Or is it just another garden-variety dip in the long-running Bull market? Let’s start by looking for extremes that tend to mark the tops in Bull markets.

Extremes Eventually Revert to the Mean

There's little doubt that current measures of valuations, sentiment, leverage and complacency have reached historic extremes. Many analysts have posted charts depicting these extremes, and perhaps the one that distills well multiple extremes into one metric is Doug Short’s chart of the S&P 500’s inflation-adjusted Regression to the Trend, another way of saying mean reversion or reverting to the mean.

I have added two red boxes: one around the peak reached just before the Great Crash of 1929 (81% above the trend line), and one around the current reading (86% above the trend line).

That the current reading exceeds the extreme that preceded the Crash of 1929 should give us pause. And little comfort should be taken that the bubble of 2000 reached even higher extremes, as that should likely be viewed as an outlier rather than the harbinger of the New Normal.

What this chart demonstrates is the market tends to overshoot to the upside or downside before reversing direction and once again reverting to the mean.  Other than a very brief foray below trend line in 2009, the S&P 500 has been at or above the trend line for the past 20 years. While the Gilded Age boom of a century ago stayed above the trend line for over 30 years, more recent history suggests that markets that stay above the trend line for 20 years are getting long in the tooth.

Extremes in Risk Appetite and “Risk-On” Asset Allocation

One measure of risk appetite is junk bond yields, which as Lance Roberts shows in this chart, have reached multi-year lows:

(Source)

Money managers’ appetite for the “risk-on” asset class of equities is similarly lofty:

Previous readings near the current level preceded major stock market declines—though high readings have been the norm for the past few years without presaging a major drop.

Can Extremes Be Worked Off Without Affecting Price?

From the Bullish point of view, these extremes have been worked off in relatively mild downturns in the seasonally weak periods of February to April and August to October:

Let’s look at a chart of the S&P 500 (SPX), with a focus on the seasonally weak periods:

Rather significant declines in indicators such as the MACD have translated into relatively brief, shallow declines.

From the Bull’s perspective, all the extremes in valuations, sentiment, leverage and complacency have been worked off in modest declines that haven’t reached the 10% threshold of a correction. So why should the present period of seasonal weakness be any different?

One potential difference in August 2014 is the sheer number of current financial/market extremes.  Analyst John Hampson prepared a list of all-time records that is impressively long:

Here are some of the all-time records delivered in 2014:

  1. Highest ever Wilshire 5000 market cap to GDP valuation for equities
  2. Highest ever margin debt to GDP ratio and lowest ever net investor credit
  3. Record extreme INVI bullish sentiment for equities
  4. Record extreme bull-bear Rydex equity fund allocation
  5. All-time low in junk bond yields
  6. All-time low in the VXO volatility index (the original VIX)
  7. Highest ever cluster of extreme Skew (tail-risk) readings in July
  8. Highest ever Russell 2000 valuation by trailing p/e
  9. Lowest ever Spanish bond yields
  10. Lowest ever US quarterly GDP print that did not fall within a recession

?And this week:

11.  Lowest HSBC China services PMI since records began

12.  Lowest ISE equity put/call ratio since records began

If we had to summarize the current set of extremes in risk appetite, valuations and sentiment, we might state the Bear case as: These extremes characterize the tops of asset bubbles that inevitably deflate in dramatic fashion, despite the majority of participants denying the asset class is in a bubble.

Conversely, we might state the Bull case as: The fundamentals of low interest rates, abundant liquidity, slow but stable growth and rising corporate profits support current measures of value, confidence and risk appetite.

For context, let’s go back in time to the Great Housing Bubble circa 2006-07, when the official and mainstream media narrative denied that housing had reached bubble heights even as the housing market was increasingly dependent on often-fraudulent stated-income (a.k.a. liar loans), interest-only adjustable rate mortgages (ARMs) for sales and mortgage originations.

A report by the U.S. General Accountability Office (GAO) found that almost 80% of all interest-only adjustable-rate mortgages (ARM) and Option ARMs nationwide were stated-income in 2006. In effect, prudent risk management had been thrown out the window. But participants chose to focus on the supposedly solid fundamentals of housing to rationalize their confidence in what was an increasingly obvious Ponzi scheme based on fraud and borrowers who were bound to default once the bubble popped.

(Chart source: Market Daily Briefing)

In other words, even as valuations, risk appetite, complacency and Bullish sentiment were reaching extremes, participants and Status Quo observers were confident that these bubble valuations were the New Normal.

Those who are confident that the current stock market is fairly valued have to explain why the many current extremes are different this time from previous asset bubbles, and provide an explanation of why extremes can continue indefinitely or be worked off without affecting price more than a few percentage points.

Indeed, what characterizes Bull markets is their ability to work off extremes of complacency (i.e. low volatility) and overbought conditions with only modest declines in price (for example, the S&P 500 is currently down 3.4% from its closing high around 1,988).

But the weight of these numerous extremes is significant, and a detached observer would naturally wonder if such a wide spectrum of extremes can be worked off without affecting price much.

The prudent observer would also ask: Have stocks been pushed to their current valuations by these extremes, or are these extremes merely temporary spikes of exuberance that have little to do with the fundamentals driving valuations higher?

It’s a critical question. For if extremes in risk appetite and sentiment have underpinned the market’s rise, then as these tides recede, price will inevitably follow.

If these extremes are merely temporary spikes that can dissipate without effecting price, then we have to ask: If this is the case, then what are participants afraid of?

We know participants are afraid of something, because the Put/Call Ratio—a measure of participants buying hedges (put options) against a downturn—has skyrocketed to a multi-year high in the past week:

This ratio has traced out a declining channel for the past two years. If nothing fundamental has changed, then what are we afraid of right now?

The Challenge To The Bulls

Those who are confident in the Bull case—that rock-solid fundamentals will drive stocks higher—have a daunting task ahead: they need to explain away the obvious spike in fear/caution, and explain why all these extremes in valuations, sentiment, leverage and complacency have no real bearing on the rock-solid fundamentals.

But given that the psychology of bubbles is characterized by precisely this rationalization of why extremes don’t matter,  Bulls must also explain why their rationalizations don’t mark this as the top of an asset bubble that is remarkably similar in terms of extremes to recent bubbles in housing and stocks.

In Part 2: Prepare For The Bear, we take a look at changing fundamentals that may affect the market’s five-year Bullish bias. We’ll look at how the fundamentals of the Bull case have been weakened or threatened, and determine whether indeed we are witnessing a key moment of direction-reversal in the markets.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)




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Gold And What The High Priests Of Funny Money Don’t Want You To Know

Steve Forbes has had enough of the Federal Reserve and its "sinning" policies to undermine the dollar. In this brief interview with Birch Gold Group, the publisher and CEO of Forbes, Inc. exposes the damage that the central bank has created, "Bernanke was a disaster…has totally mucked up the credit markets." Blasting Janet Yellen "who needs to go to re-education camp," Forbes explains why he believes so strongly in the gold standard, and the one single scenario under which he would ever sell his gold.

 

 

Rachel Mills for Birch Gold Group (BGG): I am so glad to be talking with Steve Forbes, here at FreedomFest. My name is Rachel with Birch Gold Group. Can you talk a little bit about the Federal Reserve printing money these days. And the Federal Reserve recently announced that they have decided to stop printing money by October. Do you think that will actually happen, the Quantitative Easing, anyway?

Steve Forbes: The Fed will stop the Quantitative Easing, but what is disturbing is that they are going to still keep all the bonds that they bought. They’re not going to let them run down, which is now going to be about, when October rolls around, four and a half trillion dollars. So the Fed is still sinning, and those excess reserves are still an overhang and they’re still working to undermine the dollar, openly.

BGG: Do you think they’re going to be using any kind of back door vehicle to basically effectively do the same thing but just sort of under the radar?

Steve Forbes: Well the overhang is so huge, it’s unprecedented. They don’t have to do anything, it’s already there. And they just have to hope that the flood doesn’t sweep away the town.

BGG: Right, you also said that you believe in gold and owning gold, not as an investment but as insurance against economic malpractice. Tell me more about your thoughts on gold these days.

Steve Forbes: Well gold maintains its intrinsic value better than anything else on Earth, and that’s for 4,000 years. And when you see the dollar price fluctuate around gold, that means the dollar is either weakening or peoples’ perceptions about the dollar are changing. So for 180 years this country, the United States, had the dollar fixed to gold, worked pretty well. Certainly has worked better than the floundering we’ve had since. And in the ’80s and ’90s, we had a semi-stable monetary policy, so instead of an F, we’d give it a C, maybe a C+. But we had a terrible decade in the ’70s and we’ve had a terrible time since the early part of the last decade. And this is all unnecessary.

BGG: What do you think about the performance of Bernanke and now Janet Yellen at the Fed?

Steve Forbes: Bernanke was a disaster. He put in Quantitative Easing, he put in Operation Twist. He suppressed interest rates across the board, which has totally mucked up the credit markets. He hurt the economic recovery, this is the first time we’ve had a recovery that didn’t have a sharp snap back, at least initially. And before he became the head of the Fed, he bought into weakening the dollar and bought into the idea that there are excess savings around the world. So he’s got a pretty bad record.

BGG: And do you think Janet Yellen is simply continuing that?

Steve Forbes: Janet Yellen has shown that she needs to go to re-education camp. She has learned nothing and won’t because she has a PhD, spare her a lot of years in the system. So she is a devotee of the Kool-Aid.

BGG: I would agree. You said something really interesting about the gold standard that I wanted to ask you about. You said that a way to sort of peg the dollar back to gold would be to peg it to the price of gold. We would print more dollars based on the price of gold, we would print or stop printing. Can you elaborate?

Steve Forbes: Yes, let’s say we fix the ratio at $1,300 to an ounce of gold. So if it went above $1,300, the Fed would stop the printing. If it goes below $1,300, it would print to keep it, keep it within range.

Steve Forbes: It is. That’s what the high priests of funny money don’t want you to know. The gold standard is very simple to do.

BGG: That’s amazing. But we’re not going to do that, why?

Steve Forbes: One is the economics profession knows less about money than it did a hundred years ago. And they and others have a vested interest in currency instability. Currency trading, now the volume on a daily basis, is over three trillion dollars.

BGG: Currency trading?

Steve Forbes: Currency trading.

BGG: Wow. Just people changing money back and forth trying to get an edge. It’s a huge, huge business. But it’s not really a business.

Steve Forbes: No, gold would put it out of business. They could do something useful, like medical research.

BGG: Do you think interest rates are going to actually go up any time soon?

Steve Forbes: Not a lot. The Fed is determined to suppress them, which means you won’t get good functioning credit markets. So that’s another example of Janet Yellen, she’s misbehaving like Mr. Bernanke.

BGG: They would much rather have people spending and borrowing rather than saving.

Steve Forbes: Well they buy into the notion that saving money is putting it in a black hole instead of realizing that’s capital to create a more prosperous economy. They think people buying stuff is the way to wealth. Well, people produce to buy. But they believe in counterfeiting.

BGG: So do you sell gold often? What would it take for you, personally, to sell your gold?

Steve Forbes: When we’re on a gold standard. Then you wouldn’t need the insurance.

BGG: Right, well thank you so much for talking with me.

Steve Forbes: Thank you, thank you.

Source: Birch Gold Group

Some further thoughts on The Gold Standard (via Forbes)

 

Under the gold standard, working people would control the money supply, not elitist bureaucrats. If the Fed increased the supply of dollars beyond the people’s demand for dollars, people would exchange dollars for gold. The people would consequently stop the Fed before it could create inflation.

 

But the people could also increase the money supply if needed to support economic growth. Under the gold standard, banks and other financial institutions would be empowered to mint their own gold coins as long as the amount of gold in the coins was correctly denominated. Banks could consequently increase the money supply to meet the demand for business loans or other unsatisfied demand for money. That increased demand for gold would induce mining companies to increase their supply of gold.

 

But they could not increase the money supply faster than the demand for money. If the people did not want to hold more gold coin, there would be no takers for the newly minted coins.

 

Contrary to myth, and intellectual confusion, under the gold standard the money supply would not be limited to the government’s holdings or supply of gold. The Fed could increase the supply of dollars to meet the demand for dollars, providing the money needed to service economic growth. As long as the supply did not exceed the demand, there would be no increased draw on the Fed’s holdings of gold due to the increased supply of dollars. So if the economy demanded more money to support the level of economic growth, under the gold standard, there would be no limitation on the Fed supplying it. This is why any country could operate a gold standard on any reserve of gold the government holds to support it. (The government could also print more of its currency to buy more gold in the marketplace if it thought holding more gold was necessary. That is fully consistent with the gold standard as well.).

 

Reestablishing the Gold Standard

 

The gold standard could be restored first by legislation simply instructing the Fed to follow a price rule in conducting its monetary policy that would maintain a stable dollar price for gold. If gold’s price was rising, the Fed would then tighten the money supply to stop this budding inflation. If gold’s price was falling, the Fed would increase the money supply to stop that budding deflation. Once the price of gold was thus stabilized for a sufficient period, Congress could then enact legislation exercising its constitutional power to define the dollar as equal to that stabilized value of gold.

 

If America restored its gold standard, other countries would quickly follow. Otherwise, their economies would fall behind. The Chinese and the Russians could be expected to do the same immediately, especially as the Chinese are already ardently seeking restored stability for the dollar. Indeed, if America does not act, nothing would stop the Chinese from adopting their own gold standard for their currency, with Russia to quickly follow. This very column, in fact, could easily be translated into Chinese.

 

Read more here…




via Zero Hedge http://ift.tt/X2V9Bj Tyler Durden

Gold And What The High Priests Of Funny Money Don't Want You To Know

Steve Forbes has had enough of the Federal Reserve and its "sinning" policies to undermine the dollar. In this brief interview with Birch Gold Group, the publisher and CEO of Forbes, Inc. exposes the damage that the central bank has created, "Bernanke was a disaster…has totally mucked up the credit markets." Blasting Janet Yellen "who needs to go to re-education camp," Forbes explains why he believes so strongly in the gold standard, and the one single scenario under which he would ever sell his gold.

 

 

Rachel Mills for Birch Gold Group (BGG): I am so glad to be talking with Steve Forbes, here at FreedomFest. My name is Rachel with Birch Gold Group. Can you talk a little bit about the Federal Reserve printing money these days. And the Federal Reserve recently announced that they have decided to stop printing money by October. Do you think that will actually happen, the Quantitative Easing, anyway?

Steve Forbes: The Fed will stop the Quantitative Easing, but what is disturbing is that they are going to still keep all the bonds that they bought. They’re not going to let them run down, which is now going to be about, when October rolls around, four and a half trillion dollars. So the Fed is still sinning, and those excess reserves are still an overhang and they’re still working to undermine the dollar, openly.

BGG: Do you think they’re going to be using any kind of back door vehicle to basically effectively do the same thing but just sort of under the radar?

Steve Forbes: Well the overhang is so huge, it’s unprecedented. They don’t have to do anything, it’s already there. And they just have to hope that the flood doesn’t sweep away the town.

BGG: Right, you also said that you believe in gold and owning gold, not as an investment but as insurance against economic malpractice. Tell me more about your thoughts on gold these days.

Steve Forbes: Well gold maintains its intrinsic value better than anything else on Earth, and that’s for 4,000 years. And when you see the dollar price fluctuate around gold, that means the dollar is either weakening or peoples’ perceptions about the dollar are changing. So for 180 years this country, the United States, had the dollar fixed to gold, worked pretty well. Certainly has worked better than the floundering we’ve had since. And in the ’80s and ’90s, we had a semi-stable monetary policy, so instead of an F, we’d give it a C, maybe a C+. But we had a terrible decade in the ’70s and we’ve had a terrible time since the early part of the last decade. And this is all unnecessary.

BGG: What do you think about the performance of Bernanke and now Janet Yellen at the Fed?

Steve Forbes: Bernanke was a disaster. He put in Quantitative Easing, he put in Operation Twist. He suppressed interest rates across the board, which has totally mucked up the credit markets. He hurt the economic recovery, this is the first time we’ve had a recovery that didn’t have a sharp snap back, at least initially. And before he became the head of the Fed, he bought into weakening the dollar and bought into the idea that there are excess savings around the world. So he’s got a pretty bad record.

BGG: And do you think Janet Yellen is simply continuing that?

Steve Forbes: Janet Yellen has shown that she needs to go to re-education camp. She has learned nothing and won’t because she has a PhD, spare her a lot of years in the system. So she is a devotee of the Kool-Aid.

BGG: I would agree. You said something really interesting about the gold standard that I wanted to ask you about. You said that a way to sort of peg the dollar back to gold would be to peg it to the price of gold. We would print more dollars based on the price of gold, we would print or stop printing. Can you elaborate?

Steve Forbes: Yes, let’s say we fix the ratio at $1,300 to an ounce of gold. So if it went above $1,300, the Fed would stop the printing. If it goes below $1,300, it would print to keep it, keep it within range.

Steve Forbes: It is. That’s what the high priests of funny money don’t want you to know. The gold standard is very simple to do.

BGG: That’s amazing. But we’re not going to do that, why?

Steve Forbes: One is the economics profession knows less about money than it did a hundred years ago. And they and others have a vested interest in currency instability. Currency trading, now the volume on a daily basis, is over three trillion dollars.

BGG: Currency trading?

Steve Forbes: Currency trading.

BGG: Wow. Just people changing money back and forth trying to get an edge. It’s a huge, huge business. But it’s not really a business.

Steve Forbes: No, gold would put it out of business. They could do something useful, like medical research.

BGG: Do you think interest rates are going to actually go up any time soon?

Steve Forbes: Not a lot. The Fed is determined to suppress them, which means you won’t get good functioning credit markets. So that’s another example of Janet Yellen, she’s misbehaving like Mr. Bernanke.

BGG: They would much rather have people spending and borrowing rather than saving.

Steve Forbes: Well they buy into the notion that saving money is putting it in a black hole instead of realizing that’s capital to create a more prosperous economy. They think people buying stuff is the way to wealth. Well, people produce to buy. But they believe in counterfeiting.

BGG: So do you sell gold often? What would it take for you, personally, to sell your gold?

Steve Forbes: When we’re on a gold standard. Then you wouldn’t need the insurance.

BGG: Right, well thank you so much for talking with me.

Steve Forbes: Thank you, thank you.

Source: Birch Gold Group

Some further thoughts on The Gold Standard (via Forbes)

 

Under the gold standard, working people would control the money supply, not elitist bureaucrats. If the Fed increased the supply of dollars beyond the people’s demand for dollars, people would exchange dollars for gold. The people would consequently stop the Fed before it could create inflation.

 

But the people could also increase the money supply if needed to support economic growth. Under the gold standard, banks and other financial institutions would be empowered to mint their own gold coins as long as the amount of gold in the coins was correctly denominated. Banks could consequently increase the money supply to mee
t the demand for business loans or other unsatisfied demand for money. That increased demand for gold would induce mining companies to increase their supply of gold.

 

But they could not increase the money supply faster than the demand for money. If the people did not want to hold more gold coin, there would be no takers for the newly minted coins.

 

Contrary to myth, and intellectual confusion, under the gold standard the money supply would not be limited to the government’s holdings or supply of gold. The Fed could increase the supply of dollars to meet the demand for dollars, providing the money needed to service economic growth. As long as the supply did not exceed the demand, there would be no increased draw on the Fed’s holdings of gold due to the increased supply of dollars. So if the economy demanded more money to support the level of economic growth, under the gold standard, there would be no limitation on the Fed supplying it. This is why any country could operate a gold standard on any reserve of gold the government holds to support it. (The government could also print more of its currency to buy more gold in the marketplace if it thought holding more gold was necessary. That is fully consistent with the gold standard as well.).

 

Reestablishing the Gold Standard

 

The gold standard could be restored first by legislation simply instructing the Fed to follow a price rule in conducting its monetary policy that would maintain a stable dollar price for gold. If gold’s price was rising, the Fed would then tighten the money supply to stop this budding inflation. If gold’s price was falling, the Fed would increase the money supply to stop that budding deflation. Once the price of gold was thus stabilized for a sufficient period, Congress could then enact legislation exercising its constitutional power to define the dollar as equal to that stabilized value of gold.

 

If America restored its gold standard, other countries would quickly follow. Otherwise, their economies would fall behind. The Chinese and the Russians could be expected to do the same immediately, especially as the Chinese are already ardently seeking restored stability for the dollar. Indeed, if America does not act, nothing would stop the Chinese from adopting their own gold standard for their currency, with Russia to quickly follow. This very column, in fact, could easily be translated into Chinese.

 

Read more here…




via Zero Hedge http://ift.tt/X2V9Bj Tyler Durden

No More Easy Money?

By Nick Colas of ConvergEx

(Brick) House Money Investing
 
Every gambler knows about the “House money effect” – betting more when you are up, since part of your pile of chips comes from winnings rather than initial capital.  Recent global stock market volatility means we are essentially in the middle of a huge behavioral finance experiment: how will investors consider their substantial gains over the past 5 years?  “House money” is an illusion, after all – a trick of the light.  Every dollar of gain or loss has the same value.  After 5+ years of outsized gains, however, will investors sit tight through increased volatility, reasoning that “House money” gives them a buffer to accept lower prices for a while?  Or will they prove truly rational and reduce equity exposure if we see further market churn?  The answer may well lie in the speed and magnitude of any further declines. August may not be the cruelest month, but it may well prove the toughest one of the year for long term investors. 
 
When I started on Wall Street in the 1980s, the Securities and Exchange Commission frowned upon comparing the stock market to gambling.  As an analyst writing a research report, your compliance supervisors would edit out any allusion – no matter how metaphorical – to “Rolling the dice”, “putting it all on black”, “doubling down” or any other reference to games of chance.  Investing was supposed to be a rational discipline, with positive expected returns over time.  Gambling, where the “House always wins”, was an unwelcomed comparison. 
 
What a difference a few decades can make to our understanding of capital markets, for now commentators, academics and even central bankers routinely use the language of gambling to interpret investor behavior.  The relatively new study of behavioral finance appreciates that human beings calculate risk and return through the lens of their personal histories and emotional biases. That’s as true at the gaming tables of Monaco or Macau as it is on the corner of Main and Wall Streets. And don’t think for a minute that the rise of quantitative investing has made capital markets more rational or dampened the effect of “Fight or flight” responses to volatility. Humans still write the code, and their DNA – emotions and all – intertwines with the mathematical precision of programmatic trading like one strand of a double helix.
 
Consider, for example, the concept of “House money”. If you’ve ever had the good fortune to be on the winning side of a few turns with Lady Luck, you know that your decision-making changes as the stack of chips in front of you grows. Wager $100 and win $100, and that second Benjamin feels different from the first. From that point, losing $50 doesn’t feel as bad as if you had lost $50 right off the bat. That makes no rational sense, of course. Both outcomes are negative, and both cost you $50. But the $50 that comes from your winnings is “House money”, and chances are you consider it less seriously than the cash you brought with you to the casino.
 
The Federal Reserve Bank of Atlanta published a very useful paper on the topic of capital markets and “House money” back in 2003 (see link at the end of this note).  The authors both summarized the concept and ran a simple experiment to show how it related to capital markets pricing.  Here is a brief summary of their paper:

  • The intellectual anchor for much of behavioral finance is something called “Prospect Theory”, an idea first developed be Amos Tversky and Daniel Kahneman. Contrary to classical financial models, they posited that humans do not evaluate gains and losses along the lines to expected returns. Rather, we consider losses as more psychologically painful than gains prove beneficial. 
     
    An easy example of Prospect Theory: would you rather have a certain $1 million or flip a coin for $5 million/nothing? You should choose the coin toss – the expected value is $2.5 million, well ahead of the $1 million. But the thought of losing out on the sure thing weighs heavily on your mind. What if you lose the toss? How much regret would you experience? So you chose the “Suboptimal” choice, grab the million and feel good about it. 
     
    Daniel Kahneman won the Nobel Prize for Prospect Theory in 2002. 
  • Prospect Theory opened the floodgates to reconsider other aspects of financial theory. In 1990 researchers Richard Thaler and Eric Johnson published a paper that outlined the “House money effect”. Their work showed that “Prior outcomes influence real monetary decisions”. Initial losses create risk aversion, while prior gains spur individuals to take greater risks.
  • Atlanta Fed researchers Ackert, Charupat, Church and Deaves looked at the effect in the context of price setting in capital markets. They ran experiments where subjects received varying amounts of cash and then bid on fictitious stocks in a market-based game. Sure enough, when the subjects were given more cash up front (the “House’s money”) they bid more aggressively. 

 
So how much “House money” are market participants playing with at the moment?  The answer, by pretty much any measure, is “A lot”.  We’ve had years of gains in U.S. stocks ever since the March 2009 lows for the S&P 500 of 666. Over the past five years the S&P is up by 95%, the NASDAQ by 120%, and the Russell 2000 by 99%. Until recently, those returns came with little in the way of volatility, meaning that investors did not need much fortitude to earn them. Not only are these returns “House money”, but “easy money” as well. 
 
With the price action last week, we seem to be entering a new phase for capital markets. The 4% GDP print, hawkish commentary from parts of the Federal Reserve, and worries over equity valuations all conspire to force a general re-think of appropriate equity allocations and sector weightings. Those considerations aren’t going away any time soon, and nor is the continued slow burn of geopolitical concerns from the Ukraine to the Fertile Crescent. Volatility may have well seen the lows for this capital markets/business cycle. The world likely only gets more complex from here – no more easy money, anyway. 
 
At least one key question is a simple one: “How will investors respond to the recent volatility?” If the concept of “House money” is valid, they may well sit tight for a while. Even after last week’s sell off, after all, the S&P 500 is still up 12.6% over the last year.  The star-crossed Russell 2000 is still 5.3% higher over the same period even though it is 4.1% lower in 2014. The five year numbers are, of course, still pretty fantastic, giving those investors with a long enough memory a lot of psychic “House money” in the memory bank. 
 
Unfortunately, there isn’t much work out there on exactly how much “House money” gamblers or investors are willing to lose before they know to walk away (or run). Fans of technical analysis know their Fibonacci retracement levels by heart – 24%, 38%, 50%, 62% and 100%. Those are the moves that signal the evaporation of house money confidence as investors sell into a declining market. There isn’t much statistical analysis that any of those percentage moves actually mean anything, but enough traders use these signposts that it makes them a useful construct nonetheless.
 
The only other guideposts I can think of relate to the magnitude of any near term market decline. One 5% down day is likely more damaging to investor confidence than a drip-drip-drip decline of 5% over a month or two. The old adage “Selling begets selling” feels true enough in markets with a lot of “House money” on the line. After all, you don’t want to have to walk home from the casino after arriving in a new Rolls-Royce. 
 
Sources:

http://ift.tt/1sygazl
http://ift.tt/V2IyMB




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US Military Presence In Africa In One Chart

Last week President Obama explained “Africa also happens to be one of the continents where America is most popular,” and added that the US is “deeply interested in working with Africa, not to extract natural resources alone.” We suspect, one glance at the following map answers the why (so popular) and the what (aside from natural resources)…

 

Source: The FT

Johnnie Carson, a veteran US diplomat in Africa and assistant secretary of state for the continent until last year, warns…

We should not take ownership of another country’s problems. We don’t need to put boots on the ground in response to every extremist threat that emerges. We also have to be careful not to identify and attach an international element to every extremist threat that emerges.”

 

“Some threats are indigenous and grow out of issues of political and economic marginalisation and are not linked to the international network of jihadis. If we start linking all of these things it will become a self-fulfilling prophecy.”

As The FT humorously notes,

The hum of US drones is becoming more familiar over African skies.




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Wall Street Isn’t Fixed: TBTF Is Alive And More Dangerous Than Ever

Submitted by David Stockman via Contra Corner blog,

Practically since the day Lehman went down in September 2008 Washington has been conducting a monumental farce. It has been pretending to up-root the causes of the thundering financial crisis which struck that month and to enact measures insuring that it would never happen again. In fact, however, official policy has done just the opposite.

The Fed’s massive money printing campaign has perpetuated and drastically enlarged the Wall Street casino, making the pre-crisis gamblers in CDOs, CDS and other derivatives appear like pikers compared to the present momentum chasing madness.  In a nutshell, the Fed’s prolonged regime of ZIRP and wealth effects based “puts” under risk assets has destroyed two-way markets. The market’s natural mechanism of risk containment and stabilization—-short sellers—has been driven from the casino. Accordingly, carry-trade speculators engorged with free money funding have taken the market to lunatic heights, while leaving it vulnerable to a violent collapse upon an unexpected drop because the market’s natural braking mechanism—short sellers taking profits—- has been eviscerated.

At the same time, the giant regulatory diversion known as Dodd-Frank has actually permitted the TBTF banks to get even bigger and more dangerous. Indeed, JPM and BAC were taken to their present unmanageable size by regulators—ostensibly fighting the last outbreak of TBTF—who imposed or acquiesced to the shotgun mergers of late 2008.

So now these same regulators, who have spent four years stumbling around in the Dodd-Frank puzzle palace confecting thousands of pages of indecipherable regulations, slam their wards for not having sufficiently robust “living wills”. C’mon! This is just another Washington double-shuffle.

The very idea that $2 trillion global banking behemoths like JPMorgan or Bank of America could be entrusted to write-up standby plans for their own orderly and antiseptic bankruptcy is not only just plain stupid; it also drips with political cynicism and cowardice. If they are too big to fail, they are too big to exist. Period.

Indeed, it is utterly amazing that adult legislators and regulators could even take the idea of a “living will” seriously—-let alone believe that they could possibly thwart the recurrence of another outbreak of so-called “financial contagion”. Yet so thick is the beltway cynicism and so complete is the K-Street domination of policy-making that a trite bureaucratic gimmick like the “living will” has become a major component of so-called macro-prudential policy.

So there is nothing to do except go back to the fundamentals. First and foremost, the September 2008 meltdown was not a main street banking problem; it was a crisis confined to the canyons of Wall Street, owing to the fact that the gambling houses domiciled there had massively bloated their balance sheets with toxic assets and risky derivatives trades, and then funded these balance sheets leveraged at 30:1 with huge amounts of “hot money” in the form of repo and unsecured wholesale loans.

As I demonstrated in the Great Deformation, the “bank run” was almost entirely in the Wall Street wholesale market. By contrast, there was never any danger of retail runs at the corner branch bank offices, and the overwhelming majority of the 7,000 main street banks did not own the kind of toxic securitized assets that were roiling Wall Street.

In fact, the wholesale market runs in the canyons of Wall Street were actually a positive, economically therapeutic event. They had already taken out three of the reckless gambling houses—- Bear Stearns, Lehman and Merrill Lynch—-and were fixing to finish off the remainder, that is, Goldman and Morgan Stanley.

Had the market been allowed to finish off the work of the economic gods in late September 2008, the TBTF problem would have been substantially alleviated. Today there might have existed a half dozen “sons of Goldman” in the form of M&A, trading, investment banking and asset management boutiques—run by chastened veterans who lost their lunch during the 2008 Wall Street cleansing.

The excuse for Washington’s massive intervention against the free market in the form of TARP and the Fed’s monumental flood of liquidity, of course, is that the US economy was about to be annihilated by something called financial “contagion”.  But that is a specious urban legend invented by the crony capitalists who controlled the Treasury and the money-printers who had fueled the housing and credit bubble at the Fed.

As I have also shown, for example, AIG’s dozens of insurance subsidiaries were money good and would have been protected in bankruptcy by insurance regulators and capital maintenance rules, while settlement of the holding company’s fraudulent CDS insurance would have been parceled out pennies on the dollar by a Chapter 11 judge to the dozen giant global banks who had stupidly attempted to turn toxic CDOs into AAA credits. Likewise, FDIC could have liquidated Citigroup’s regulated bank, while allowing the gamblers who bought the stock, bonds and other obligations of the holding company to face their just deserts.

In short, TBTF became a “problem” to be ostensibly remedied with bureaucratic malarkey like living wills primarily because Washington made it a problem—- by means of its panicked bailouts of Wall Street in the fall of 2008. Indeed, the true solution to TBTF is always and everywhere to allow the free market to cleanse its own excesses and imbalances and to impose financial discipline and demise upon outbreaks of reckless gambling and leverage when they occur.

Unfortunately, even if Washington were to refrain from ad hoc bailouts, the free market cure would be perennially compromised by the giant moral hazard posed by deposit insurance and the Fed’s cheap money discount window. Owing to these policy institutions, which systematically encourage excessive gambling by their beneficiaries, US banks are inherent wards of the state—including the easily abused privilege of fractional reserve banking conferred by regulatory charters.  The right thing to do would be to abolish these sources of moral hazard and tell the K-Street financial lobbies to fold up their plush tents because their employers are now all expected to sink or swim on the free market.

Needless to say, the chances that Washington would permit the Wall Street gambling houses to be returned to the unfettered free market that they profess to defend—are somewhere between slim and none. Accordingly, a second best solution is warranted, and it could readily be done.  And it would be far more effective than the lunacy of living wills and all the other bureaucratic mumbo-jumbo that has come out of Dodd-Frank.

First, Washington should re-enact a strict version of Glass- Steagall. Only “narrow banks” which take deposits and make consumer and business loans would have access to the Fed’s discount window. By contrast, propriety trading, underwriting, merchant banking, asset management and all the rest of the financial services sectors would be banned at regulated banks and sent back to the free market where they belong.

Secondly, a ceiling on regulated bank size would be established—perhaps measured at 1% of GDP or $200 billion in terms of asset scale. There are no demonstrated economies of scale in deposit and loan banking above that size, anyway.

Stated differently, banks wishing to indulge in the moral hazard of deposit insurance and accessing the Fed’s discount window would not have to prove they were not “too big to fail” or that they had a viable “living will”. Instead, a TBTF law would do it for them in the form of a statutory cap on the size of regulated banks.

To be sure, Wall Street would scream that such a regime would interfere with the ability of small business and American consumers to get cheap loans. But in a national economy that has gone through a rolling 30-year LBO resulting in $60 trillion of credit market debt outstanding and which sports leverage ratios against income in all sectors that are off the historical charts—that complaint has no merit. Making debt more expensive and permitting it to be economically priced on the free market is, in fact, just what is needed to eventually cure the nation’s debt-ridden economic malaise.




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