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Authored by Charles Hugh Smith via OfTwoMinds blog,

So let's look at currency flows, reserves and debt.

The demise of the U.S. dollar has been a staple of the financial media for decades. The latest buzzword making the rounds is de-dollarization, which describes the move away from USD in global payments.

De-dollarization is often equated with the demise of the dollar, but this reflects a fundamental misunderstanding of the currency markets.

Look, I get it: the U.S. dollar arouses emotions because it's widely seen as one of the more potent tools of U.S. hegemony. Lots of people are hoping for the demise of the dollar, for all sorts of reasons that have nothing to do with the actual flow of currencies or the role of currencies in the global economy and foreign exchange (FX) markets.

So there is a large built-in audience for any claim that the dollar is on its deathbed.

I understand the emotional appeal of this, but investors and traders can't afford to make decisions on the emotional appeal of superficial claims–not just in the FX markets, but in any markets.

So let's ground the discussion of the demise of the USD in some basic fundamentals. Now would be a good time to refill your beverage/drip-bag because we're going to cover some dynamics that require both emotional detachment and focus.

First, forget what currency we're talking about. If the USD raises your hackles, then substitute quatloos for USD.

There are three basic uses for currency:

1. International payments. This can be thought of as flow: if I buy a load of bat guano and the seller demands payment in quatloos, I convert my USD to quatloos–a process that is essentially real-time–render payment, and I'm done with the FX part of the transaction.

It doesn't matter what currency I start with or what currency I convert my payment into to satisfy the seller–I only hold that currency long enough to complete the transaction: a matter of seconds.

If sellers demand I use quatloos, pesos, rubles or RMB for those few moments, the only thing that matters is the availability of the currency and the exchange rate in those few moments.

2. Foreign reserves. Nation-states keep reserves for a variety of reasons, one being to support their own currency if imbalances occur that push their currency in unwanted directions.

The only nations that don't need to hold much in the way of currency reserves are those that issue a reserve currency–a so-called "hard currency" that is stable enough and issued in sufficient size to be worth holding in reserve.

3. Debt. Everybody loves to borrow money. We know this because global debt keeps rising at a phenomenal rate, in every sector: government (public), corporate and household (private sectors).(see chart below)

Every form of credit/debt is denominated in a currency. A Japanese bond is denominated in yen, for example. The bond is purchased with yen, the interest is paid in yen, and the coupon paid at maturity is in yen.

What gets tricky is debt denominated in some other currency. Let's say I take out a loan denominated in quatloos. The current exchange rates between USD and quatloos is 1 to 1: parity. So far so good. I convert 100 USD to 100 quatloos every month to make the principal and interest payment of 100 quatloos.

Then some sort of kerfuffle occurs in the FX markets, and suddenly it takes 2 USD to buy 1 quatloo. Oops: my loan payments just doubled. Where it once only cost 100 USD to service my loan denominated in quatloos, now it takes $200 to make my payment in quatloos. Ouch.

Notice the difference between payments, reserves and debt: payments/flows are transitory, reserves and debt are not. What happens in flows is transitory: supply and demand for currencies in this moment fluctuate, but flows are so enormous–trillions of units of currency every day–that flows don't affect the value or any currency much.

FX markets typically move in increments of 1/100 of a percentage point. So flows don't matter much. De-dollarization of flows is pretty much a non-issue.

What matters is demand for currencies that is enduring: reserves and debt. The same 100 quatloos can be used hundreds of times daily in payment flows; buyers and sellers only need the quatloos for a few seconds to complete the conversion and payment.

But those needing quatloos for reserves or to pay long-term debts need quatloos to hold. The 100 quatloos held in reserve essentially disappear from the available supply of quatloos.

Another source of confusion is trade flows. If the U.S. buys more stuff from China than China buys from the U.S., goods flow from China to the U.S. and U.S. dollars flow to China.

As China's trade surplus continues, the USD just keep piling up. What to do with all these billions of USD? One option is to buy U.S. Treasury bonds (debt denominated in dollars), as that is a vast, liquid market with plenty of demand and supply. Another is to buy some other USD-denominated assets, such as apartment buildings in Seattle.

This is the source of the petro-dollar trade. All the oil/gas that's imported into the U.S. is matched by a flow of USD to the oil-exporting nations, who then have to do something with the steadily increasing pile of USD.

Note what happens to countries using gold as their currency when they run large, sustained trade deficits. All their gold is soon transferred overseas to pay for their imports. So any nation using gold as a currency can't run trade deficits, lest their gold drain away.

Nations aspiring to issue a reserve currency have the opposite problem. They need enough fresh currency to inject into the global FX markets to supply those wanting to hold their currency in reserve.

This means any nation running structural trade surpluses will have difficulty issuing a reserve currency. Nations shipping goods and services overseas in surplus end up with a bunch of foreign currencies–whatever currencies their trading partners issue. This is opposite of the global markets need, i.e. a surplus (supply) of the reserve currency.

Any nation that wants to issue a reserve currency has to emit enough currency into the global economy to supply the demand for reserves. One way to get that currency into the global system is run trade deficits, as the world effectively trades its goods and services in exchange for the currency.

A reserve currency cannot be pegged; it must float freely on the global FX exchange. China's currency, the RMB, is informally pegged to the USD; it doesn't float freely according to supply and demand on global FX markets.

Nobody wants to hold a currency that can be devalued overnight by some central authority. The only security in the realm of currencies is the transparent FX market, which is large enough that it's difficult to manipulate for long.

(Global FX markets trade trillions of dollars, yen, RMB and euros daily.)

This is why China isn't keen on allowing its currency to float. Once you let your currency float, you lose control of its exchange rate/value. The value of every floating currency is set by supply and demand, period. No pegs, no "official" rate, just supply and demand.

If traders lose faith in your economy, your ability to service debt, etc., your currency crashes.

So let's look at currency flows, reserves and debt. In terms of currencies used for payments, the euro and USD are in rough parity. Note the tiny slice of payments made in RMB/yuan. This suggests 1) low demand for RMB and/or 2) limited supply of RMB in FX markets.

The USD is still the dominant reserve currency, despite decades of diversification. Global reserves (allocated and unallocated) are over $12 trillion. Note that China's RMB doesn't even show up in allocated reserves–it's a non-player because it's pegged to the USD. Why hold RMB when the peg can be changed at will? It's lower risk to just hold USD.

While total global debt denominated in USD is about $50 trillion, the majority of this is domestic, i.e. within the U.S. economy. $11 trillion has been issued to non-banks outside the U.S., including developed and emerging market debt:

According to the BIS, if we include off-balance sheet debt instruments, this external debt is more like $22 trillion. FX swaps and forwards: missing global debt?

Every day, trillions of dollars are borrowed and lent in various currencies. Many deals take place in the cash market, through loans and securities. But foreign exchange (FX) derivatives, mainly FX swaps, currency swaps and the closely related forwards, also create debt-like obligations. For the US dollar alone, contracts worth tens of trillions of dollars stand open and trillions change hands daily. And yet one cannot find these amounts on balance sheets. This debt is, in effect, missing.

The debt remains obscured from view. Accounting conventions leave it mostly off-balance sheet, as a derivative, even though it is in effect a secured loan with principal to be repaid in full at maturity. Only footnotes to the accounts report it.

Focusing on the dominant dollar segment, we estimate that non-bank borrowers outside the United States have very large off-balance sheet dollar obligations in FX forwards and currency swaps. They are of a size similar to, and probably exceeding, the $10.7 trillion of on-balance sheet debt.

So let's wrap this up. To understand any of this, we have to start with Triffin's Paradox, a topic I've addressed numerous times here. The idea is straightforward: every currency serves two different audiences, the domestic economy and the FX/global economy. The needs and priorities of each are worlds apart, so no currency can meet the conflicting demands of domestic and global users.

Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012)

 

So if a nation refuses to float its currency for domestic reasons, it can't issue a reserve currency. Period.

If a nation runs trade surpluses, it has few means to emit enough currency into the FX market to fulfill all three needs: payment, reserves and debt.

As for replacing the USD with a currency convertible to gold: first, the issuer would need to emit trillions for the use of its domestic economy and global trade (let's say $7 trillion as an estimate). Then it would need to issue roughly $6 trillion for reserves held by other nations, and then another $11 trillion (or maybe $22 trillion) for those who wish to replace their USD-denominated debt with debt denominated in the new gold-backed currency.

source

So that's at least $24 trillion required to replace the USD in global markets, roughly three times the current value of all the gold in existence. Given the difficulty in acquiring more than a small percentage of available gold to back the new currency, this seems like a bridge too far, even if gold went to $10,000 per ounce.

Personally, I would like to see a free-floating completely convertible-to-gold currency. Such a currency need not be issued by a nation-state; a private gold fund could issue such a currency. Such a currency would fill a strong demand for a truly "hard" currency. The point here is that such a currency would have difficulty becoming a reserve currency and replacing the USD in the global credit market.

Issuing a reserve currency makes heavy demands on the issuing nation. Many observers feel the benefits are outweighed by the costs. Be that as it may, the problem of replacing the USD in all its roles is that no other issuer has a large enough economy and is willing to shoulder the risks and burdens of issuing a free-floating currency in sufficient size to meet global demands.

Of related interest:

How Dangerous Is Emerging Markets Dollar Debt?

$10.5 trillion in dollar-denominated debt

The Fed's Global Dollar Problem Borrowers around the world have gone on a dollar binge. This makes them vulnerable when interest rates rise.

*  *  *

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

 

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Iranian President Hassan Rouhani delivered another snub to the Trump administration on Friday when he said that Iran would continue its missile program in defiance of US sanctions, and to underscore the determination, the Iranian Revolutionary Guard unveiled its newest long-range ballistic missile during a military parade in Tehran.

The new missile that was introduced at the parade is capable of reaching much of the Middle East, including Israel, with a range of 1,200 miles. It's also capable of carrying several warheads. The parade in Tehran commemorated the 1980s Iraq-Iran war. Though Iran has long boasted of having missiles in the same range in its arsenal, it was the first time that the new Khoramshahr missile was displayed in public, the AP reported adding that in February, Iran test-fired the same medium-range type of missile, prompting Trump to say that the United States is "putting Iran on notice."

Friday's parade also showcased various Iranian army units and Revolutionary Guard forces, as well as the police, according to the Associated Press. Similar parades were held in other Iranian cities.

Rouhani addressed the parade in Tehran, saying that Iran would not halt its missile program but continue to boost military capabilities, despite U.S. demands.

“We will increase our military power as a deterrent. We will strengthen our missile capabilities … We will not seek permission from anyone to defend our country.

 

“All countries in the world supported the nuclear deal in the United Nations General Assembly this year … except the United States and the Zionist regime (Israel),” Rouhani said.

During his address to the general assembly earlier in the week, Rouhani slammed the US and Trump for reneging, and claimed that the Iran deal belongs “to the world” and “cannot be renegotiated.” He criticized Trump’s “ugly, ignorant words” made during Trump's own address where he urged world powers to come together and pressure the Iranian regime. Rouhani added that the country’s missile program is vital to national security, citing the country's long-running war with Iraq in the 1980s as justification for the program.

Iran has continued its ballistic missiles program in defiance of sanctions signed into law by US President Donald Trump in August that targeted any person or company that does business with any entity designated by the administration as having a connection to Iran's missile program. The White House said the sanctions were also levied in response to the country’s purported support of terrorists and alleged human rights violations.

Trump said earlier this week that he has made up his mind about whether to re-certify Iran’s compliance with the deal, but has yet to reveal his decision publicly. The administration has until Oct. 15 to decide whether to label Iran compliant or not. The White House certified in July that Iran was in compliance with the nuclear deal, but would “face consequences” for violating the “spirit” of the deal.

In a press conference Wednesday night, US Secretary of State Rex Tillerson repeated the administration’s line that Iran, while technically in compliance with the deal's terms, has continued to engage in destabilizing behaviors like funding Hezbollah, and Shia militias fighting on behalf of embattled Syrian President Bashar Al Assad, and by continuing its ballistic weapons program. Tillerson said the agreement must be altered, or the US wouldn’t be able to abide by its terms.

Other signatories to the deal have expressed reluctance to renegotiate. According to Reuters, Chinese Foreign Minister Wang Yi said tensions on the Korean peninsula underlined the importance of the Iranian deal, and that China would continue to support it. Russian Foreign Minister Sergei Lavrov said that the US imposition of unilateral sanctions on Iran was “illegitimate and undermines the collective nature of international efforts.”

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Just a week after Jamie Dimon first attacked Bitcoin for being a "fraud," the self-interested JPMorgan CEO has doubled down on his anti-crypto-currency tirade, somewhat exposing just how concerned he is at the potential for disruption within his industry.

To paraphrase, here's what Dimon said last week…

"It’s a fraud. It’s making stupid people, such as my daughter, feel like they’re geniuses. It’s going to get somebody killed. I’ll fire anyone who touches it."

And now, as CNBC reports, JPMorgan Chief Executive Jamie Dimon has laid into bitcoin and digital currencies once again, labeling it a "novelty" that is likely to end badly.

Eventually governments will close down cryptocurrencies: JPMorgan CEO from CNBC.

 

"Right now these crypto things are kind of a novelty. People think they're kind of neat. But the bigger they get, the more governments are going to close them down," Dimon said during an interview with CNBC-TV18 in New Delhi, India, on Friday.

 

Dimon was concerned that with bitcoin, ethereum and various Initial Coin Offerings (ICOs), there are now cryptocurrencies everywhere.

 

"It's creating something out of nothing that to me is worth nothing," he said. "It will end badly."

 

Dimon warned that governments will eventually crack down on cryptocurrencies and will attempt to control it by threatening anyone who buys or sells bitcoin with imprisonment, which would force digital currencies into becoming a black market.

And this has pushed Bitcoin lower (extending losses from BTC China liquidations ahead of its closure)…

Dimon's comments came under criticism from several bitcoin investors and experts.

"Comments like Jamie's show a failure to grasp the significance of the blockchain and the power of brand in a fundamental sea of change," said Scott Nelson, CEO and chairman of blockchain firm Sweetbridge, in an email to CNBC last week.

And as we reported previously, a company called Blockswater has filed a market abuse complaint in Sweden against Dimon and JPMorgan.

Blockswater claims Dimon deliberately spread false and misleading information, according to a report by City A.M.

And perhaps even more interesting, as we detailed before, JPMorgan Securities continues to allow clients to trade this 'fraudulent' security through its platform…

Source

In fact JPMorgan has transacted 87 million Swedish Kroner's worth of Bitcoin ETF transcations in the past year for clients…

Source

As we asked rhetorically previously, does the bank not have a fiduciary duty not to transact on clients' behalf in a security it defines as fraud? (like Subprime CDOs?)

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Authored by Robert Shiller via MarketWatch.com,

The US stock market today looks a lot like it did at the peak before all 13 previous price collapses. That doesn't mean that a bear market is imminent, but it does amount to a stark warning against complacency.

The U.S. stock market today is characterized by a seemingly unusual combination of very high valuations, following a period of strong earnings growth, and very low volatility.

What do these ostensibly conflicting messages imply about the likelihood that the United States is headed toward a bear market in stocks?

To answer that question, we must look to past bear markets. And that requires us to define precisely what a bear market entails. The media nowadays delineate a “classic” or “traditional” bear market as a 20% decline in stock prices.

That definition does not appear in any media outlet before the 1990s, and there has been no indication of who established it. It may be rooted in the experience of Oct. 19, 1987, when the stock market dropped by just over 20% in a single day. Attempts to tie the term to the “Black Monday” story may have resulted in the 20% definition, which journalists and editors probably simply copied from one another.

Origin of the ‘20%’ figure

In any case, that 20% figure is now widely accepted as an indicator of a bear market. Where there seems to be less overt consensus is on the time period for that decline. Indeed, those past newspaper reports often didn’t mention any time period at all in their definitions of a bear market. Journalists writing on the subject apparently did not think it necessary to be precise.

In assessing America’s past experience with bear markets, I used that traditional 20% figure, and added my own timing rubric. The peak before a bear market, per my definition, was the most recent 12-month high, and there should be some month in the subsequent year that is 20% lower. Whenever there was a contiguous sequence of peak months, I took the last one.

Referring to my compilation of monthly S&P Composite and related data, I found that there have been just 13 bear markets in the U.S. since 1871. The peak months before the bear markets occurred in 1892, 1895, 1902, 1906, 1916, 1929, 1934, 1937, 1946, 1961, 1987, 2000 and 2007. A couple of notorious stock-market collapses — in 1968-70 and in 1973-74 — are not on the list, because they were more protracted and gradual.

CAPE ratio

Once the past bear markets were identified, it was time to assess stock valuations prior to them, using an indicator that my Harvard colleague John Y. Campbell and I developed in 1988 to predict long-term stock-market returns. The cyclically adjusted price-to-earnings (CAPE) ratio is found by dividing the real (inflation-adjusted) stock index by the average of 10 years of earnings, with higher-than-average ratios implying lower-than-average returns. Our research showed that the CAPE ratio is somewhat effective at predicting real returns over a 10-year period, though we did not report how well that ratio predicts bear markets.

This month, the CAPE ratio in the U.S. is just above 30. That is a high ratio. Indeed, between 1881 and today, the average CAPE ratio has stood at just 16.8. Moreover, it has exceeded 30 only twice during that period: in 1929 and in 1997-2002.

But that does not mean that high CAPE ratios aren’t associated with bear markets. On the contrary, in the peak months before past bear markets, the average CAPE ratio was higher than average, at 22.1, suggesting that the CAPE does tend to rise before a bear market.

Moreover, the three times when there was a bear market with a below-average CAPE ratio were after 1916 (during World War I), 1934 (during the Great Depression) and 1946 (during the post-World War II recession). A high CAPE ratio thus implies potential vulnerability to a bear market, though it is by no means a perfect predictor.

Earnings to the rescue?

To be sure, there does seem to be some promising news. According to my data, real S&P Composite stock earnings have grown 1.8% per year, on average, since 1881. From the second quarter of 2016 to the second quarter of 2017, by contrast, real earnings growth was 13.2%, well above the historical annual rate.

But this high growth does not reduce the likelihood of a bear market. In fact, peak months before past bear markets also tended to show high real earnings growth: 13.3% per year, on average, for all 13 episodes. Moreover, at the market peak just before the biggest ever stock-market drop, in 1929-32, 12-month real earnings growth stood at 18.3%.

Another piece of ostensibly good news is that average stock-price volatility — measured by finding the standard deviation of monthly percentage changes in real stock prices for the preceding year — is an extremely low 1.2%. Between 1872 and 2017, volatility was nearly three times as high, at 3.5%.

Low volatility

Yet, again, this does not mean that a bear market isn’t approaching. In fact, stock-price volatility was lower than average in the year leading up to the peak month preceding the 13 previous U.S. bear markets, though today’s level is lower than the 3.1% average for those periods. At the peak month for the stock market before the 1929 crash, volatility was only 2.8%.

In short, the U.S. stock market today looks a lot like it did at the peaks before most of the country’s 13 previous bear markets. This is not to say that a bear market is guaranteed: Such episodes are difficult to anticipate, and the next one may still be a long way off. And even if a bear market does arrive, for anyone who does not buy at the market’s peak and sell at the trough, losses tend to be less than 20%.

But my analysis should serve as a warning against complacency. Investors who allow faulty impressions of history to lead them to assume too much stock-market risk today may be inviting considerable losses.

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• North Korea Ramps Up International Rancor With H-Bomb Threat (WSJ)
• A nuclear test over the Pacific? Logical, terrifying (Reuters)
• What’s a ‘dotard’? Kim’s insult to Trump (Reuters)
• From Rubble and Ruin, a Mexican Town Wonders How to Rebuild After the Earthquake (WSJ)
• Bonuses Are Shrinking. Blame Hurricanes and Trump (BBG)
• OPEC’s ‘Problem Children’ Are Holding Down Oil Prices (WSJ)
• Trump Backers Cheer Economic Agenda, Blame GOP for Setbacks (WSJ)
• Turkey to deploy troops inside Syria’s Idlib – Erdogan (Reuters)
• Uber Loses Its License to Operate in London (BBG)
• Alabama Senate race tests Trump’s ability to deliver his voters (Reuters)
• Puerto Rico: No Power, No Phones and Lots of Damage (WSJ)
• Mnuchin’s Incomplete Treasury Staff Could Be a Risk in Crisis (BBG)
• Why Wages Aren’t Growing (BBG)
• Trump’s Travel Ban Decision Could Set Off New Wave of Turmoil (BBG)
• Corporate America Has Amassed a Record Amount of Cash (BBG)
• Hurricane Maria churns toward Turks and Caicos and leaves 32 dead (Reuters)
• The ‘Wife of the Future’ Designed for Japan’s Lonely Men (BBG)
• Australia Has a Taxing Problem When It Comes to Ghost Homes (BBG)
• Mortgages Back in Fashion for London’s Priciest Homes (BBG)
• Electric Cars Can Create the Biggest Disruption Since iPhone (BBG)
• Defying Trump, Iran says will boost missile capabilities (Reuters)
• The Trump-Loving Lawyer Who Won’t Stop Suing Fox News (BBG)
• U.S. Tariffs on Solar Imports May Hinge on Free-Trade Deals (BBG)

Overnight Media Digest

WSJ

– Standard & Poor’s became the last of the three major rating agencies to lower its view on China’s creditworthiness, a move that came as China has taken forceful measures to tamp down risks and emphasize stability. on.wsj.com/2xzs9qg

– North Korea’s foreign minister Ri Yong Ho said the country could detonate a hydrogen bomb over the Pacific Ocean in response to U.S. President Donald Trump’s speech before the United Nations. on.wsj.com/2xyUk8K

– Hewlett Packard Enterprise Co plans to cut its workforce by 10 percent, according to a person familiar with the plans. on.wsj.com/2xyUZqK

– General Motors Co is laying off more than 250 workers from an engine factory in Canada and trimming production at two U.S. facilities, fallout from a strike at a vehicle-assembly plant in Ontario. on.wsj.com/2xz4m9N

– Facebook Inc, under fire for its response to Russian activity on its site before the U.S. presidential election, agreed to hand over detailed information on thousands of Russian-backed ads to congressional investigators and said it would take steps to increase political transparency. on.wsj.com/2xyDbvZ

– On the eve of a closely watched speech on Brexit by UK Prime Minister Theresa May, the European Union’s chief negotiator said Britain needs to speedily present concrete proposals on all the main sticking points for the talks to advance. on.wsj.com/2xycmrs

 

FT

The UK public sector posted its lowest August budget deficit in 10 years, according to figures from the Office for Budget Responsibility, leading economists to predict that finance minister Philip Hammond will have more room for giveaways in his November Budget.

The UK Competition and Markets Authority will probe investment consultancies with a focus on conflicts of interest, barriers to entry and a lack of information for customers, after the industry was referred to the CMA by the Financial Conduct Authority because of “serious concerns” about the way it works.

Prime Minister Theresa May will promise to strengthen legal protections for EU citizens living in the UK in a speech in Florence on Friday in hopes of breaking the stalemate in Brexit negotiations.

UK’s food and drink industry cut back their capital investment last year and are “addicted” to cheap labour, after a second year of falling revenues, according to an annual review by OC&C, a consultancy.

 

NYT

– Facebook Inc said it would turn over 3,000 ads linked to Russia to Congress after growing scrutiny about its role in last November’s presidential election. nyti.ms/2hmgql7

– With a new executive order, U.S. President Donald Trump is expanding efforts to constrict North Korea’s trade with the rest of the world. nyti.ms/2xkKepE

– S&P Global Ratings downgraded its rating on China, saying the country’s strong economic growth has been fueled by heavy borrowing — and that it expects that borrowing to continue. nyti.ms/2fecodT

– The U.S. Department of Justice is seeking information about a New York law firm’s work on behalf of a Russia-aligned former president of Ukraine – Viktor Yanukovych. nyti.ms/2hnB2cG

– The Trump administration is preparing to relax Obama-era rules on drone strikes and commando raids outside conventional battlefields, according to officials familiar with internal deliberations. nyti.ms/2flsfes

 

Britain

The Times

Dorothy Thompson, one of a handful of female chief executives to run a large UK-listed company, is to step down as chief executive of the power giant Drax Group Plc after 12 years in charge. (bit.ly/2fE9tvu)

Britain’s Co-op Group Ltd has sold its last remaining stake in the struggling Co-op Bank as its food business continues to grow and outperform the market. (bit.ly/2fEEcJ8)

The Guardian

Ryanair Holdings Plc Chief Executive Michael O’Leary, has escalated the airline’s dispute with pilots, saying they do not have a “difficult job” and claiming he can force them to defer their time off. (bit.ly/2fEfKHI)

The UK’s first new nuclear power plant for 20 years could be delayed again, after trade unions for construction staff working on the 20 billion pound ($27.14 billion) Hinkley Point C project announced a ballot for strike action in a dispute over pay. (bit.ly/2fELWuB)

The Telegraph

Challenger bank Paragon has shaken up its management and restructured itself to accelerate its push into mainstream banking services, including car, business and development finance. (bit.ly/2fElUYt)

Richard Cousins, chief executive of FTSE 100 catering giant Compass Group Plc, is to step down after more than a decade in the role during which he brought the firm back from the brink and turned it into one of the most successful constituents of the index. (bit.ly/2fDDThx)

Sky News

Uber is bracing itself for regulators‎ to deliver a crucial ruling that could trigger the removal of tens of thousands of private-hire drivers from London’s streets. Transport for London‎ could announce as soon as Friday whether it is handing the world’s biggest ride-hailing app a new five-year operating licence. (bit.ly/2fDFfc7)

Paul Kahn, the former boss of Airbus’s UK operations‎, is to resurface in a senior role at Cobham Plc, the embattled defence and aerospace group. (bit.ly/2xi0Hxi)

The Independent

Greenpeace campaigners in boats and kayaks have stormed a 23-tonne ship, in an attempt to stop it from delivering diesel cars made by Volkswagen AG to the UK. (ind.pn/2fDOmJI)

 

 

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Pensions and Debt Time Bomb In UK:  £1 Trillion Crisis Looms

– £1 trillion crisis looms as pensions deficit and consumer loans snowball out of control
– UK pensions deficit soared by £100B to £710B, last month
– £200B unsecured consumer credit “time bomb” warn FCA
– 8.3 million people in UK with debt problems
– 2.2 million people in UK are in financial distress
– ‘President Trump land’ there is a savings gap of $70 trillion
– Global problem as pensions gap of developed countries growing by $28B per day

Editor: Mark O’Byrne

There is a £1 trillion debt time bomb hanging over the United Kingdom. We are nearing the end of the timebomb’s long fuse and it looks set to explode in the coming months.

No one knows how to diffuse the £1 trillion bomb and who should be taking responsibility. It is made up of two major components.

• £710 billion is the terrifying size of the UK pensions deficit
• £200 billion is the amount of dynamite in the consumer credit time bomb

How did the sovereign nation that is the United Kingdom of Great Britain and Northern Ireland get itself so deep in the red?

This is not a problem that is bore only by the Brits. In the rest of the developed world a $70 trillion pensions deficit hangs heavy.

We are all in this boat because we apparently didn’t learn from the massive man made crisis that was the 2008 financial crisis.

The ‘we’ is referring to UK individuals who are on average holding £14,367 of debt. It refers to the pension fund managers who are ignoring the fact they hold more liabilities than assets. It refers to banks and mortgage and loan providers who give loans to people who are already indebted and who will struggle to pay the debt back. It refers to a compliant media who do not have ask hard questions about irresponsible lending practices and cheer lead property bubbles due to getting significant revenues from the banking and property sectors.

And,  ultimately the ‘we’ is the government who peddled such terrible monetary policy that it has brought us as close to nuclear financial disaster as we have been since 2008.

In the red, everywhere

In the United Kingdom we are running a deficit not only in our day-to-day lives but also in our future lives.

Unsecured consumer credit is now at 2008 levels. There is £200 billion of unsecured credit. The FCA’s Andrew Bailey has put this dangerous issue at the top of the regulator’s agenda.

However it is not just for the FCA to be dealing with. There is no one organisation responsible for the huge levels of personal debt that will eventually cause this financial system to implode.

There are 8.3 million people in the UK with debt problems. The number of debtors falling behind on payments increased by 40% in the first half of this year.

The problem shows no sign of improving: 45% of the £65 billion of credit card debt is managed using the 0% transfer balance offers. But with half of those that transfer, the balance remains the same at the end of the period.

Earlier this year the Bank of England’s director for Financial Stability  warned lending standards were at risk of going ‘from responsible to reckless very quickly’. This comes to mind when you consider that 86% of cars are now bought on PCP (personal contract purchase).

So concerned are financial observers with the UK’s personal debt crisis that in July this year Moody’s downgraded the outlook on bonds backed by credit card customers, buy-to-let mortgages and car loans.

Greg Davies, Moody’s assistant vice president warned:

“Household debt is high and still growing, leaving consumers vulnerable to an economic downturn, while higher inflation, weaker wage growth and levels of indebtedness leaves those in lower-income brackets the most exposed.”

So in our day-to-day lives we are over £200bn in debt. How on earth could we possibly save for our futures?

Sadly, this is a struggle as well. Not just because of our debt but thanks to the rising cost of inflation and stagnant wages and underfunded pension pots in both public and private sectors.

Nest egg isn’t looking so cosy

Ageing populations, low birth rates and dire monetary policy means that over 27 million people in the UK will not be receiving adequate pensions once they retire.

These 27 million are those relying on a a defined-benefit (DB) pension – such as a proportion of final salary, index-linked to inflation for life.

Those who aren’t relying on a DB pension are in just as dire straits.

Savers in modern defined-contribution (DC) plans – where there are no guarantees about what the pension will ultimately pay out – are at risk of not saving enough to avoid poverty in old age.

This is particularly bad when you consider that  listed companies may need to meet their increased DB obligations and so DC investors will see their own investments grow more slowly.

In the UK it is estimated that more than one-in-five people are not saving for their pensions. Even more are  uninformed about how much they will need in retirement.

Low interest rates are clearly greatly exacerbating this crisis as pensions dependent on yields from bonds have seen yields fall to near zero and sometimes go to zero.

Sadly there is little sign of a let-up. In the United Kingdom the pensions deficit grew by £190bn last year. In the last month it has jumped by another £100bn to £710bn.

This is leading to lower-than-expected returns on both corporate and government bonds. The low corporate bond yield has significantly contributed to the growing pension deficit.

Interest rates have been at record lows for over ten years thanks to easy monetary policy.

Thank you Bank of England, ECB and Federal Reserve.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, told the Express:

“Current monetary policy may have kept the economy going but it is killing pension schemes, with disastrous consequences, both for any employers sponsoring a final salary scheme and for any individuals looking to buy an annuity.”

Developed nations with underdeveloped pensions

This is not a problem unique to the UK. Currently the world’s leading economies are dealing with a $70 trillion deficit. The World Economic Forum (WEF) was that this could increase to $224 trillion by 2050.

If you add in India and China then this gap hits $400 trillion in 2050.

The United States has the largest shortfall of the countries measured, followed closely by the United Kingdom. In the land of President Trump there is a savings gap of $70 trillion. It is growing at a rate of $3 trillion per year (5 times the annual defence budget).

The overall savings gap, of the eight countries assessed, is predicted to grow at a rate of $28 billion per day. Unsurprisingly it is in India and China where the gaps will widen the quickest. 10% and 7% respectively.

The global situation is so bad that the WEF has referred to the pensions deficit as ‘the financial equivalent of climate change.’

The OECD recommends pensioners have a retirement income of 70% of their earnings. This is a ‘crude’ assessment according to the WEF who argue low-income workers need closer to 100%.

This is also a sex issue. According to a report in 2014, 50% more women than men cannot afford to contribute to their pensions. It is so bad for the female of the species that 30-40% of global retirement balances are lower for women than men.

Where is the deficit coming from? The WEF’s report looked both public and corporate pensions. It was the government and public pensions that were the most unhealthy looking, accounting for 75% of the under funding.

The WEF seemed little concerned that the largest corporate pension markets were in the UK and US, where there are over $4 trillion in liabilities. The organisation reassures itself that the market is highly regulated and the deficit ‘is modest compared to other components of the pension system’.

Corporates and individuals should not rest on their laurels

No matter what the WEF thinks, the corporate pension market in both the U.S. and Europe is in serious bother.

A report by MSCI found North American and European companies have the largest pension underfunding levels compared with revenues.

This is not surprising. Corporations are struggling to maintain pension pots for the very same reasons the WEF believe there is a major pensions shortfall:

• Rapidly ageing populations
• Falling birth rates
• Poor access to pension products & poorly performing products with high charges

The final one is a huge one and the one which the majority of pension fund managers are unlikely to have foreseen. Individual savers even less so.

According to OECD measures the UK’s shortfall is higher than £6.2 trillion, set to increase by 4% per year. This will be over £25 trillion in 2050.

Take responsibility

The final reason the WEF gave for the current pensions disaster was ‘High degree of individual responsibility to manage pension’.

The WEF argue that the information given to individuals was not enough to expect them to understand how their pensions would work in the future and what was required of them now.

It is vital that individuals take responsibility for their pensions. You must ask questions about it as soon as possible.

Particularly, you should ask if you can invest in gold as part of your pension.

The traditional mix of equities and bonds that make up pension funds has under performed in the last 15 to 20 years.

Stock and bond markets have done well in the short term and they are artificially overvalued thanks to the easy monetary policy of central banks.

It is clear that pension funds’ overexposure to bonds and stocks has impacted pension investors returns over the long term.

With that in mind it’s sensible to allocate some of your pension to gold. Internationally, the trend for doing this is extremely low which is surprising given the role it has played in preserving and growing pension wealth.

Dr. Constantin Gurdgiev, formerly an adviser to GoldCore, says the following about the importance of having gold in your pension:

“Gold is a long-term risk management asset, not a speculative one.

As such it should be analysed and treated predominantly in the context of its role as a part of a properly structured, risk-balanced and diversified portfolio spanning the full life-cycle of the investment and pension horizon for individual investors and those with pensions.

Whether they be SIPPs in the UK or IRAs in the USA.”

Investors in the UK and Ireland, the US, the EU can invest in gold bullion in their pension, through self-administered pension funds.

UK investors can invest in gold bullion through their Self-Invested Personal Pensions (SIPPs), Irish investors can invest in gold in  Small Self Administered Schemes (SSAS) and US investors can invest in gold in their Individual Retirement Accounts (IRAs).

Adding gold to your pension is a time-proven way to protect your retirement from the pensions time bomb. There is little we can do to stop it, investors should act now and take responsibility for their retirement nest egg by investing in the ultimate form of financial insurance – gold bullion.

The ‘pensions timebomb’ looms. UK pension funds’ lack of diversification and overexposure to traditional paper assets may cost pension holders dearly.

Pensions allocations to gold are very low in the UK and yet gold has an important role to play over the long term in preserving and growing pension wealth. You can read our guide about how to invest in gold in a pension in the UK here.

News and Commentary

Metals Morning View: Gold’s Correction Runs Into Haven Buyin (BullionDesk.com)

Gold prices inch up amid North Korea concerns (Reuters.com)

Stocks Drop, Yen Rises on Renewed N. Korea Tension (Bloomberg.com)

Asia stocks fall, yen and franc gain as North Korea moots H-bomb test (Reuters.com)

Kim Jong Un will tame ‘mentally deranged U.S. dotard’ Trump with fire (MarketWatch.com)

 Robert Shiller warns US stocks overvalued. Source: Marketwatch

U.S. stock market looks like it did before most of the previous 13 bear markets (MarketWatch.com)

UK property transactions fell again last month (CityAM.com)

Bitcoin is not a fraud – it’s dotcom 3.0 (MoneyWeek.com)

Bitcoin Under Fire – Profit for Gold? (CoinTelegraph.com)

Fed’s long walk to normalisation might have to turn into a jog (MoneyWeek.com)

Gold Prices (LBMA AM)

22 Sep: USD 1,297.00, GBP 956.15 & EUR 1,082.09 per ounce
21 Sep: USD 1,297.35, GBP 960.56 & EUR 1,089.00 per ounce
20 Sep: USD 1,314.90, GBP 970.53 & EUR 1,094.79 per ounce
19 Sep: USD 1,308.45, GBP 969.30 & EUR 1,091.25 per ounce
18 Sep: USD 1,314.40, GBP 970.16 & EUR 1,100.68 per ounce
15 Sep: USD 1,325.00, GBP 977.32 & EUR 1,109.16 per ounce
14 Sep: USD 1,323.00, GBP 1,002.44 & EUR 1,111.58 per ounce

Silver Prices (LBMA)

22 Sep: USD 16.97, GBP 12.52 & EUR 14.18 per ounce
21 Sep: USD 16.95, GBP 12.58 & EUR 14.24 per ounce
20 Sep: USD 17.38, GBP 12.84 & EUR 14.48 per ounce
19 Sep: USD 17.15, GBP 12.70 & EUR 14.31 per ounce
18 Sep: USD 17.53, GBP 12.94 & EUR 14.66 per ounce
15 Sep: USD 17.70, GBP 13.03 & EUR 14.81 per ounce
14 Sep: USD 17.75, GBP 13.40 & EUR 14.91 per ounce

Recent Market Updates

– Gold Investment “Compelling” As Fed May “Kill The Business Cycle”
– “This Is Where The Next Financial Crisis Will Come From” – Deutsche Bank
– Global Debt Bubble Understated By $13 Trillion Warn BIS
– Bitcoin Price Falls 40% In 3 Days Underlining Gold’s Safe Haven Credentials
– Gold Up, Markets Fatigued As War Talk Boils Over
– Oil Rich Venezuela Stops Accepting Dollars
– Massive Equifax Hack Shows Cyber Risk to Deposits and Investments Today
– British People Suddenly Stopped Buying Cars
– Buy Gold for Long Term as “Fiat Money Is Doomed”
– Conor McGregor – Worth His Weight In Gold?
– Gold Has 2% Weekly Gain,18% Higher YTD – Trump’s Debt Ceiling Deal Hurts Dollar
– ‘Things Have Been Going Up For Too Long’ – Goldman CEO
– Physical Gold In Vault Is “True Hedge of Last Resort” – Goldman Sachs

Important Guides

For your perusal, below are our most popular guides in 2017:

Essential Guide To Storing Gold In Switzerland

Essential Guide To Storing Gold In Singapore

Essential Guide to Tax Free Gold Sovereigns (UK)

Please share our research with family, friends and colleagues who you think would benefit from being informed by it.

via http://ift.tt/2ho54x5 GoldCore

Continuing his early morning tweetstorm, Donald Trump on Friday questioned the recent media focus on Facebook’s decision to overhaul how it handles political advertisements amid investigations into alleged Russian interference in U.S. elections, and called reports of Kremlin-linked groups buying Facebook ads to sway the 2016 election part of a “Russia hoax.”

“The Russia hoax continues, now it’s ads on Facebook. What about the totally biased and dishonest Media coverage in favor of Crooked Hillary.”

The Russia hoax continues, now it’s ads on Facebook. What about the totally biased and dishonest Media coverage in favor of Crooked Hillary?

— Donald J. Trump (@realDonaldTrump) September 22, 2017

In a subsequent tweet, Trump also slammed reports that pro-Russian groups used Facebook ads to influence voters in his favor during the 2016 election, and questioned why no attention was paid to the “fake news media’s” bias in favor of “crooked” Hillary Clinton.

“The greatest influence over our election was the Fake News Media “screaming” for Crooked Hillary Clinton. Next, she was a bad candidate!“

The greatest influence over our election was the Fake News Media “screaming” for Crooked Hillary Clinton. Next, she was a bad candidate!

— Donald J. Trump (@realDonaldTrump) September 22, 2017

Earlier, Kremlin spokesman Dmitry Peskov said on Friday that Moscow had nothing to do with political advertisements on Facebook that were allegedly aimed at influencing the 2016 US presidential election

“We do not know … how to place an advert on Facebook. We have never done this, and the Russian side has never been involved in it,” Peskov told a conference call with reporters.

The statement was in response to Facebook’s report that a Russian agency had purchased some ads on the social network during the 2016 presidential campaign. Facebook co-founder and Chairman Mark Zuckerberg said on Thursday that the company is “actively working with the US government on its ongoing investigations into Russian interference.”

Facebook previously told investigators it discovered some 3,000 political ads published on its platform over the past two years which were reportedly linked to fake accounts based in Russia. Alex Stamos, Facebook’s chief security officer, made the revelation in a blog post Wednesday. Stamos said that 470 inauthentic accounts spent about $100,000 to buy roughly 3,000 ads. He added that the accounts have since been suspended. On Thursday Facebook announced it would turn over the ads to Congressional investigators.

The company also said that it “will help government authorities complete the vitally important work of assessing what happened in the 2016 election.” “We are looking into foreign actors, including additional Russian groups and other former Soviet states, as well as organizations like the campaigns, to further our understanding of how they used our tools.”

via http://ift.tt/2xWUmrX Tyler Durden