Gold and Silver Update – It’s Game On!

Posted with permission and written by Sprott USA (CLICK FOR ORIGINAL)

 

 

 

 

Gold continues to consolidate. Two months of sideways price action is proving the yellow metal’s early-year gains were justified while setting the foundation for another move up.

That move will require some kind of impetus and there are many options to provide the push: more stimulus announcements in Europe or Japan, weak Q1 earnings, increasing inflation expectations, rising general economic uncertainty, US dollar weakness, and interest rate roulette, to name a few.

We don’t know if these things will transpire, let alone when. The US dollar is certainly declining, if in fits and starts:

 

 [1]

That helps gold, from both the fundamental angle that gold is priced in greenbacks and the investment rationale that a declining greenback encourages savers to find another safe haven hideout for their savings.

But a declining dollar is only one cog in a machine driving investor interest towards gold. Another is the fact that super low interest rates have removed investors’ go-to tool for hedging their stock portfolios: bonds.

No matter what you think the odds are of a recession in the near to medium term, the fact is we are in uncharted waters. Very low or zero to even negative interest rates had their intended effect, which was to force savers and investors into riskier assets like bonds and equities. That created a seven-year bull market in equities and bonds – but one not representative of the actual economy, which remained stagnant.

That is what already happened. Of interest now is what will happen next.

Bonds have long been the go-to hedge against equities. Bonds are supposed to rise in price when recessionary periods push equities down, because recessions prompt central banks to lower interest rates and that lifts bond prices.

But how’s that supposed to work when interest rates are already rock bottom?

Bonds will not hedge stocks if we enter a recession because central banks can’t do anything to support bonds. That means investors will look elsewhere for a hedge. Gold will be a natural conclusion.

As John Hathaway of Tocqueville Asset Management calculated, if investors were to increase their gold allocation from 0.55% (the current level) to 1.55%, that would represent 56,075 tonnes of demand. That is far more gold than is currently available in London. In fact, a 0.1% increase swamps the supply of physical gold.
[2]

That is the kind of logic that backs the idea that gold has a good run ahead.

Gold moving sideways and consolidating supports the view that gold’s run has truly begun. The way equities are acting adds weight.

Gold stocks outperform gold at the start of a bull cycle. Take a look back to the last cycle: gold bottomed in April 2001 but then ascended slowly, not making a new 52-week high until early 2002 and not establishing a higher high until almost the end of that year. Meanwhile, gold stocks as per the HUI more than doubled during 2002 while many juniors moved far more.

Gold stocks outperform the yellow metal the most at the start of the bull cycle. We are seeing that kind of outperformance now.

Then there’s silver, which has finally started to move.

 

  It doesn’t look like much on the five-year chart, but silver seems to have carved out a bottom. It is up 21% this year, making it the best-performing metal.

And silver has more ground to regain. Gold may have lost 45% in the bear market, but silver lost more than 70%.

The fact that silver is moving now matters. Silver never moves lock step with gold. When uncertainty prompts investors to seek out safe havens, they look to gold long before silver because gold is a far more straightforward safe haven. Silver, by contrast, is also an industrial metal, which means demand waxes and wanes more with economic demand.

However, after some time silver’s safe haven status starts to catch up. And once it starts to look like a safe haven, it acts increasingly so. That process usually starts when gold is consolidating its first big move and preparing to take out its next resistance.

In other words: we’re seeing gold consolidate, which gives confidence in the new price range, and gold is trailing gold equities, which is precisely the pattern we see to start new bull markets. Silver’s recent move only confirms the pattern.

Explorers, miners, and resource investors have been waiting for this pattern to emerge for years. With evidence of a new bull market mounting, they are getting busy.

Here’s a good comparison: in the fourth quarter of last year, miners and explorers raised a measly $565 million. The average placement totaled just $3.3 million.

In the first quarter of this year, the sector has raised $3.5 billion and the average size rose to $23 million. [3]

That’s a massive change. Granted, a few huge raises tipped the scale, including Franco Nevada’s $1 billion, Silver Wheaton’s $623 million, and Goldcorp’s $250 million.

But the money still matters.

For one, royalty and streaming companies like FNV and SLW put capital to use by investing in other assets and companies. That helps the whole sector.

For another, doozies aside the sector still raised a lot of cash and about a fifth of the financings went to explorers and developers. That is significant – in the depths of the bear market, explorers just didn’t have access to capital.

Then there’s the deal flow. The quarter saw several big deals: Tahoe buying Lake Shore Gold, Endeavour buying True Gold, and Newcastle buying Catalyst Copper. There were a good number of smaller deals as well: Probe Metals and Adventure Gold merged, Kootenay Silver took over Northair Silver, and First Mining Finance bought both Clifton Star Resources and the Pitt project from Brionor Resources, among others.

Also really interesting are the moves by majors and mid-tiers to acquire stakes in smaller companies. Goldcorp’s move on Gold Standard Ventures is one example (and it prompted Oceanagold to put more money into GSV to maintain its stake); Oceanagold’s investment in NuLegacy is another.

A favorite question during the bear market was: what will it take to bring mining back to life?

Our answer was always the same: investors have to make money.

In that sense, a mining revival becomes a self-fulfilling prophecy. A bit of recovery gives companies confidence to raise capital. Capital enables exploration, development, and deals, which in turn adds life to share prices.
Reinvigorated share prices means more financings, more activity and happier investors.

 

 

It’s game on.

 

 

 

 

Please email with any questions about this article or precious metals HERE

 

Gold and Silver Update – It’s Game On!

Posted with permission and written by Sprott USA (CLICK FOR ORIGINAL)

 

 

via http://ift.tt/21gFp99 Sprott Money

Authored by Pepe Escobar, Op-Ed via RT.com,

The famous Hollywood adage – 'nobody knows anything' – seems to perfectly apply to the current turbulence in the oil market. So in an effort to clarify where the global oil economy is heading to, let’s engage in a Battle of the Oil Analysts.

Relying on these Oil Analysts (OA) does not necessarily mean you will be handed straightforward answers, but perhaps with some luck you will see a ray of light.

Saudi Arabia is saying that they are raising oil production to 12 million barrels a day. That’s highly debatable. Russia is saying that they can raise oil production to 13 million barrels a day. OA1 cuts to the chase: “Both are bluffing. Prices are still rising. That means no one believes them.”

OA2 kicks in, reminding that, “oil price is holding because of the 1.5 million barrels a day pulled off the market by a strike in Kuwait of about 10,000 workers. That cut their 3 million barrels a day production in half. Now they are going back to work. Yet the price of oil is still rising.”

I had explained before how the oil price was holding over $40.00 a barrel even with concerted Washington pressure over Saudi Arabia to keep it down. Then, OA3 had told me: “that’s because oil demand and supply is tightening.”

But then OA4 came up with a totally different outlook; the whole thing was about 'The Big Long', upon which I based my prediction of $45/$50 per barrel when I was in Tehran in November 2011 and the price was approaching $100 a barrel. The Saudis have been supporting the price and while they have plenty of capital to do so at high prices, storage is finite. Aligning with this, OA4 added that: “the market is about to crash, and is only being supported by the financial positions of the Saudi/GCC support operation, now unwinding."

OA5, predictably, could not agree that the Saudis are supporting the market and about to let it collapse. He elaborated on how “hard it is to predict day-to-day prices. The only way you can know what is happening is to watch by satellite or surface observation the tankers coming out of each exporter, assume they are full, check their names to look up their capacity, and then add up what is leaving each exporter. What they say otherwise means nothing. There are services that do this that cost about $300,000 a year.”

OA6 kicked in with some perspective, explaining what happened in the middle of 2014: “The oil price started to crash with no visible increase in production. The deduction had to be that the surplus in the Gulf – which was the only place where there was a surplus – was being dumped in the market by the Gulf States, under orders from Washington. And this fit geopolitically with the uprising in Kiev as a replay of Afghanistan.”

If there is a consensus amongst most OAs, it is that Saudi Arabia is hurting. OA7 says he’s been “watching the markets, and a lot of this static comes from Iran trying to break into the market. The Gulf States are trying to prevent that as much as possible and trying to cut Iran's throat.

However, I do not see overall that the situation is deteriorating. Such a severe drop in price restrains production. The amount of excess was not more than about 5 percent of the market; not 20 per cent, as in 1985. It has to be tight now based on macro-logic and that is why a famous Goldman Sachs former trader who picked the collapse is not massively buying.”

Still confused? You should be. Because now another variable kicks in – the rise of US  gasoline demand. OA8 has a fine take on the matter: “I was expecting this in the second quarter, not now. We should be over fifty to sixty dollars a barrel then. Fundamentals always prevail in the end.”

The $2 trillion game

So a credible scenario seems to be a world not exactly awash in crude oil, and with the price of a barrel going up soon. And right at this juncture we find China’s CNPC making a play to become a major shareholder of Rosneft – Russia’s top oil producer, which plans to sell 19.5 percent of its shares.

Predictably, US analysts don’t seem to understand why Rosneft may become a top Russia/Chinese-owned corporation. This has nothing to do with selling oil assets when prices are down; Rosneft shares are doing fine, by the way. It’s about the energy/financial consolidation of the Russia-China strategic partnership – from Pipelineistan (those massive, $300 billion gas deals clinched in 2014) to the close connection of Moscow and Shanghai stock exchanges. Translation: all these sophisticated moves further bypass the US dollar.

Oil, in this complex equation, is just one component. For instance, the Ministry of Economic Development in Moscow works with two basic hypotheses: best case at $40 a barrel, and worst case at $25 a barrel. It is duly preparing for both.

And now comes what could be a potential game-changer: the House of Saud’s “vision” for a  post-oil economy.

These are the basics, as announced by Warrior Prince Mohammed bin Salman, 30, the conductor of the – illegal – war on Yemen that is overflowing with “collateral damage”. Saudi Arabia’s power stems from its possession of Mecca and Medina, and geostrategic “Arab and Muslim depth”; it’s central to global trade, with 30 percent passing through the Red Sea and the Persian Gulf; and the future lies in the creation of a $2 trillion sovereign wealth fund, coming from the sale of 5 percent of shares in Aramco, the number one oil company on the planet.

Riyadh, we got a problem. Assuming that Aramco’s partial IPO will yield that astonishing $2 trillion, and these funds are invested all across the West, Saudi Arabia could collect around $100 billion a year. Not much; in fact, only 1/6 of Saudi Arabia’s GDP in 2015 ($653 billion, of which 70 percent come from oil exports). In a nutshell: this plan will not deliver Saudi Arabia a viable post-oil economy.

As if this was not enough, the oil hacienda is currently invested in two expensive wars – in Yemen (directly) and Syria (indirectly). Crucial: the Warrior Prince de facto conducts both. Moreover, the House of Saud will continue to buy spectacularly costly weapons from the usual suspects – the US, UK and France – like there’s no tomorrow.

Back to our OAs. OA8 says that the Saudis under the Warrior Prince made a major mistake: “They have now antagonized the Russians and the Americans. Brennan wants their blood no matter what he says as he thinks of them as terrorists. Also, he believes that they have nuclear tipped missiles from Pakistan. The US cannot reconcile themselves to this.”

Moscow, on the other hand, wants friendly relations with Riyadh, but there’s a perception Russia was betrayed at Doha (cutting oil production was a done deal until the Warrior Prince scuttled it on the very day of the signing.)

Which brings us to OA9: “The self-inflicted wound of cutting the oil price by the Saudis for market share is foolish. The time now is to conserve oil and refrain from selling it, awaiting the tripling of the Chinese economy with the Belt and Road plan. Demand in five or ten years would be massive and oil will be then near $200 a barrel.”

So, in the end, our oil thriller will be all about China; Beijing will need to buy all the energy it needs to pursue the completion of the New Silk Roads. Meanwhile, the House of Saud faces a stark choice. Its “post-oil economy” plan will fail, as others before failed. The Warrior Prince must decide which of the superpowers to ally with. If he thinks he can pull it off all by himself, there’s a cab driver gig waiting for him in London. If he can make it to Heathrow in one piece.

via http://ift.tt/2458mKh Tyler Durden

Submitted by Mike “Mish” Shedlock

More Greece “Uncertainty”: Default Looms in July, EU Rejects Greek Emergency Summit

Those who thought the situation in Greece was solved after prime minister Alexis Tsipras suddenly caved in to creditors’ demands need think again.

Greek tax revenues are running well under expectations. A default looms in July unless the creditors give more money to Greece so that Greece can pay back the creditors. As convoluted as that sounds, that’s precisely the way this madness works.

The creditors demand still more austerity but Tsipras said “no”. Instead, Tsipras seeks an emergency meeting, but European Commission president Donald Tusk said “no” to that proposal.

Supposedly this standoff represents “renewed uncertainty”.

Emergency Meeting Request Denied

The BBC reports EU Rejects Greek Request for Emergency Summit.

The head of the European Union has rejected Greece’s request for an emergency meeting aimed at ending an impasse over the country’s bailout.

 

Greece agreed to a third rescue package worth €86bn (£60bn; $94bn) last year and faces a looming debt payment. However, it has been unable to unlock the next loan instalment after clashing with its creditors over more reforms.

 

The International Monetary Fund and other European partners are demanding that Greece implement further austerity measures. They are looking to generate nearly €4bn in additional savings or contingency money in case Greece misses future budget targets.

 

But the left-wing government led by Alexis Tsipras has said it will not agree to any “additional actions” to what it had already signed up to last summer.

 

A special ministerial meeting was supposed to be held on Thursday, but Dutch Finance Minister Jeroen Dijsselbloem, who is in charge of the Greece negotiations, called it off.

Summit Request Denied

The Financial Times reports Donald Tusk Rejects Alexis Tsipras Summit Request.

Donald Tusk, the European Council president, has turned down a Greek request for an emergency summit on Athens’ bailout and told eurozone finance ministers to do more to narrow their differences.

 

Without a deal on new austerity measures, Greece faces a default on €3.5bn in debt payments that come due in July.

 

Greece is fast running out of cash to pay salaries and pensions in May because of lagging tax receipts. To cover the gap Mr Tsipras’s government has been strong-arming state entities, from the cash-strapped health service to the profitable water utility, to empty their bank accounts and place the funds with the central bank in a short-term loan arrangement.

 

Bailout negotiations have stalled over a request by the EU and the International Monetary Fund, Greece’s main lenders, that Athens legislate €3bn in “contingency” budget cuts that could be triggered if the programme veers off-course and fails to produce projected surpluses.

 

Euclid Tsakalotos, the Greek finance minister, has told negotiators getting additional cuts through the Greek parliament is politically impossible, and has asked instead for lenders to accept across-the-board budget cuts in case targets are missed. EU and IMF negotiators have rejected that proposal, however, insisting the additional reforms be targeted carefully to ensure they do not damage economic growth.

“Renewed Uncertainty”

“I am convinced that there is still work to be done by the ministers of finance who have to avoid a situation of renewed uncertainty for Greece,” Mr Tusk said after a phone call on Wednesday morning with Alexis Tsipras, Greece’s prime minister.

Talk of renewed uncertainty is ridiculous. It’s a certainty that what cannot be paid back, won’t be paid back.

The only thing “uncertain” is the same that that’s been uncertain since the beginning of the crisis: the timing of the credit event.

via http://ift.tt/1pIHzjS Tyler Durden

Today I received in the mail the State of California Primary Voter’s Guide, which the Secretary of State prints up by the millions and sends to every blessed citizen. I was expecting a few boring candidate statements of the U.S. Senate – AKA the World’s Most Exclusive Club – but, boy, was I wrong. Just take a look at some of these gems.

First off is a chap named Tim (I like him already………) who, understandably, doesn’t associate himself with any particular party. It seems what matters to him most is good old J.C., and he comes right to the point:

 

Next up is a woman whose first name, apparently, is President (which is shooting a bit high, since she only wants to be a United States Senator, a “prolific occupation”, as she puts it). For those considering whether or not to give her their vote, keep in mind that she is “mainstream Facebook in social media”, to say nothing of the fact that her core values are what drive America.

 

Mr. Peters, who decided not to bother sending in a photograph, is an “Andrew Jackson Democrat”, which I guess means he will soon be removed from our currency. The last 118 years, evidently, were misguided.

 

Karen Roseberry goes oblique on us with this coined phrase…….

 

If you take the time to go to her web site, however, you can start to drink in her qualifications for this high office.

 

My personal favorite, being from Silicon Valley myself, is Jason Hanania’s, who offers up a binary statement (which cost him $25, the per-word rate, for his entire statement).

 

Mike Peitiks is sporting a rocking beard and offers up his “single board” of a platform, which is climate change. I’d like to point out not one other candidate swore on the graves of future Californians. Not one.

 

Lastly, we end with Ling Ling Shi who, at long last, is willing to challenge the “10 giant chaos in economy” that we’re all so weary of fighting. Rock it, Ling Ling!

via http://ift.tt/1WrZNTK Tim Knight from Slope of Hope

If there was a sign that nothing else matters but central bank largess, this was it. The moment The Bank of Japan statement hit and proclaims “unchanged” a vacuum hit USDJPY and Japanese stocks. Reflecting that Japan’s economy has “continued a moderate recovery trend” which is utter crap given the quintuple-dip recession, Kuroda and his cronies said they will “add easing if necessary” and apparently that is not now. Not so much as a higher ETF purchase or moar NIRP.. and the aftermath is carnage – NKY -1000 points and USDJPY crashed to a 108 handle!!

• *BOJ WILL ADD EASING IF NECESSARY
• *BOJ: SEES LARGE DOWNSIDE RISKS FOR ECONOMIC OUTLOOK
• *BOJ: JAPAN’S CPI TO BE AROUND ZERO PERCENT FOR TIME BEING

Incidentally, this is what consensus looked like ahead of today’s BOJ decision:

Of 41 respondents, 19 predict an increase in purchases of
exchange-traded funds, eight expect a boost in bond buying, and eight
project the BOJ will cut its negative rate.

And the result…

 

Close-up…

 

Some context…

 

The BoJ website crashed also.

 

The fallout is going global… Dow Futures tumbled 150 points to LoD…

 

And Yuan surged…

 

Just as we noted earlier, the biggest argument for a BOJ disappointment was that with the G7
meeting in Japan in on month on 26–27 May 2016, it’s unlikely that
Japanese policymakers will want to draw attention yet again to the idea
that they are in the business of manipulating the JPY lower. After all
the most recent G20 meeting once again confirmed that absent “disorderly moves” in the Yen, the US would frown on any attempt to dramatically manipulate its currency lower.

Unless, of course, Abe wants to send Lew and Obama a message, that if
China can enjoy a weaker dollar (courtesy of its USD peg), then so
should the Bank of Japan.

via http://ift.tt/1N1megU Tyler Durden

Authored by Paul Craig Roberts,

The Third World War is currently being fought. How long before it moves into its hot stage?

Washington is currently conducting economic and propaganda warfare against four members of the five bloc group of countries known as BRICS—Brazil, Russia, India, China, and South Africa.

Eric Draitser provides some details of Washington’s assault on Russia: http://ift.tt/26eY9JM

 

…of Washington’s attack on South Africa: http://ift.tt/1SgURvw

 

…and of Washington’s attack on Brazil: http://ift.tt/1MzC8cH

 

For my column on Washington’s attack on Latin American independence, see: http://ift.tt/1YLtz4T

Brazil and South Africa are being destabilized with fabricated political scandals. Both countries are rife with Washington-financed politicians and Non-Governmental Organizations (NGOs). Washington concocts a scandal, sends its political agents into action demanding action against the government and its NGOs into the streets in protests.

Washington tried this against China with the orchestrated Hong Kong “student protest.” Washington hoped that the protest would spread into China, but the scheme failed. Washington tried this against Russia with the orchestrated protests against Putin’s reelection and failed again.

To destablilze Russia, Washington needs a firmer hold inside Russia. In order to gain a firmer hold, Washington worked with the New York mega-banks and the Saudis to drive down the oil price from over $100 per barrel to $30. This has put pressure on Russian finances and the ruble. In response to Russia’s budgetary needs, Washington’s allies inside Russia are pushing President Putin to privatize important Russian economic sectors in order to raise foreign capital to cover the budget deficit and support the ruble. If Putin gives in, important Russian assets will move from Russian control to Washington’s control.

In my opinion, those who are pushing privatization are either traitors or completely stupid. Whichever it is, they are a danger to Russia’s independence.

As I have often pointed out, the neoconservatives have been driven insane by their arrogance and hubris. In their pursuit of American hegemony over the world, they have cast aside all caution in their determination to destabilize Russia and China.

By implementing neoliberal economic policies urged on them by their economists trained in the Western neoliberal tradition, the Russian and Chinese governments are setting themselves up for Washington. By swallowing the “globalism” line, using the US dollar, participating in the Western payments system, opening themselves to destabilization by foreign capital inflows and outflows, hosting American banks, and permitting foreign ownership, the Russian and Chinese governments have made themselves ripe for destabilization.

If Russia and China do not disengage from the Western system and exile their neoliberal economists, they will have to go to war in order to defend their sovereignty.

via http://ift.tt/1rAUI0h Tyler Durden

The speculative Chinese commodity bubble has begun to reach the mainstream as Citi's warning to "hold on to your hats" today at the surge in trading volumes across Rebar, Iron Ore, Coke, and Copper literally exploded with the former now the most actively trade commodity in the world. The frenzy has become so insane that the head of the largest metals exchange in the world exclaimed at a conference in Singapore today that "I don't think most people who trade it know what it is." We suspect he is 100% correct and judging by the following chart, we know exactly how it will end.

As Bloomberg reports, the head of the world’s largest metals exchange said while volumes in China’s commodity futures markets have become phenomenal, it’s possible some traders don’t even know what it is they are buying or selling.

“Why should steel rebar be one of the world’s most actively-traded futures contracts?” Garry Jones, chief executive officer of the London Metal Exchange, said at a conference in Singapore on Wednesday. “I don’t think most people who trade it know what it is.”

 

Trading of commodity futures in China from steel reinforcement bars — a benchmark product used in construction — to iron ore, coking coal and cotton has ballooned this month on an unprecedented surge in retail investor interest. The jump in volumes has stunned global markets, according to Morgan Stanley, while eliciting concern from Goldman Sachs Group Inc.

 

Exchanges in Asia’s top economy including in Shanghai have announced a series of measures this month to cool the frenzy, and said more steps may follow.

 

“If you look at the client base of most Chinese exchanges, it’s heavily retail-focused,” Jones said on a panel discussion addressing commodities and risk management in China. The exchanges there “have very high retail participation. They have a very high velocity of trading,” he said.

Now where have we seen this pattern of massive speculative volume rushing in from retail investors chasing a trend?

The speculative activities will be vulnerable to a sharp reversal, once the upward price momentum wanes, according to BMI Research, a unit of Fitch Group, drawing parallels with a rally, followed by a slump, in Chinese equities last year.

And that did not end well for price action before in 2015…

 

or 2009…

 

And just as expected above…once the volume reaches a crescendo it crashes and The Party's Over

 

As reports from China suggest both major margin increases at the main exchanges and crackdowns on real production: Tangshan city is banning all coke, steel & cement productions for 24 hours starting this noon.

via http://ift.tt/1pI0Kug Tyler Durden

Authored by former Fed Advisor Danielle DiMartino Booth,

There never was any cake, just crust.

And the French Marie had nothing to do with it. Rather, a Spanish-born queen married to France’s King Louis XIV a century earlier was the ill-mannered Marie who dared to taunt the peasantry. So how then exactly did, “Let them eat cake!” become so universally associated with Marie-Antoinette? In a nutshell: Blackmail.

Historians have uncovered the nasty truth, and it can be laid squarely at the feet some far from scrupulous London-based thugs, intent on shaking down King Louis XVI with threats to besmirch his young bride’s reputation. According to Simon Burrows of Leeds University, a criminal network, drawn to the French monarchy’s vast wealth, plotted to profit by producing a series of pamphlets filled with lies about the ill-fated queen. Those lies included a charge that she had callously suggested her subjects eat cake in response to news of a bread shortage plaguing the masses. Though the king paid a dear price for the pamphlets’ destruction, some 30 copies were not burned as promised and found their way into the public’s hands sealing the queen’s fate kneeling before the guillotine.

Today, the shortage plaguing angry masses of savers worldwide is not one of bread or cake, but rather one of positive rates of return on their cash holdings. The central bankers know best as they command us to eat one rate cut after another. And like it.

For nearly 30 years, central bankers have based their haughty reasoning on the idea that the lower the interest rate, the greater the generation of economic growth. As then Fed Chairman Ben Bernanke explained in 2012, “My colleagues and I are very much aware that holders of interest-bearing assets, such as certificates of deposit (CDs), are receiving very low returns. But low interest rates also support the value of many other assets that Americans hold, such as homes and businesses large and small.”

It’s certainly been the case that the prices of homes and businesses have been upheld. Though their appetite may have waned a bit, investors have richly rewarded companies who use low interest rates to finance share buybacks with debt. And there’s no doubt investors of a different ilk did more than their fair share to prop up home prices at the lower end while wealthy individuals have bid up the prices of luxury homes to record highs.

The question is, is that what Bernanke intended? It would appear not as one of the stated objectives of the punishing policy of ultra-low rates was to spur income-generating job creation:

“Healthy investment returns cannot be sustained in a weak economy, and of course it is difficult to save for retirement or other goals without the income from a job. Thus, while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote.”

Or at least that’s what Bernanke led us to believe.

While it is true that returns on risky investments have been stellar, fewer and fewer Americans are comfortable with the risks associated with owning the most common of the pack — stocks. According to an April Gallup poll, the percentage of U.S. adults invested in the stock market has fallen to 52 percent from 65 percent in 2007, a 20-year low. So while there are definitely benefits to some, Bernanke’s “ultimately benefitting most” part has fallen far short, and to an increasing extent.

Digging into the data, at -14 percentage points, those aged 18 to 34 were the most aggressive lot to abandon stocks. Meanwhile, at -9 percentage points, those aged 55 and above were the least. There seems to be an intuitive disconnect somewhere in that divide, one that should keep policymakers up at night.

There is a very real refute that we’d have to return to the bad old days of rampant inflation, when the degradation of the purchasing power of the dollar more than offsets the plump interest rates on offer at our local bank branch.

While we collectively rue that era, it’s fair to say most seniors would gladly settle for a happy medium, a return to the turn of this young century when you could get a five-year jumbo CD sporting a five-percent APR, which was offset by inflation somewhere in the two percent vicinity. Traditionally, two to three percentage points above inflation is where that old relic, the fed funds rate, traded. So the math worked.

Of course, it could be worse. At least U.S. yields on savings are positive. That’s more that can be said of the $7 trillion of foreign sovereign bonds trading at negative yields. This dynamic spells disaster for life insurers to say nothing of pensions. Increasingly, foreign pensions are raising retirement ages as well as requiring higher employer and employee contributions, all the while lowering the salaries against which benefits are calculated, even as they segue benefits onto 401k-style platforms.

For now, the judiciary in the U.S. is holding the legal line. As long as that’s the case, actions to shore up pension underfunding will be avoided. Of course, at some point drastic measures will be required as the tax bases supporting future benefits shrink in proportion to the highest tax payers fleeing the fleecing.

Public pensioners with no back-up savings are sure to be enraged when their day of reckoning arrives. Then, today’s non-pension-backed retirees making crumbs on their cash holdings will be flush in comparison.

And yet Bernanke deigns to wonder. Last fall after leaving the Fed, he had this to say to Martin Wolf of the Financial Times: “It’s ironic that the same people who criticize the Fed for helping the rich also criticize it for hurting savers. What’s the alternative? Should the Fed not try to support the recovery?”

This coming from the same man who once said, “No one will lend at a negative interest rate; potential creditors will simply choose to hold cash, which pays a zero nominal interest rate.”

According to one recent Wall Street Journal story, that last observation certainly does hold true. Negative interest rates do benefit at least one of our contingencies: U.S. companies with European subsidiaries. Now that the European Central Bank (ECB) is in the business of buying corporate bonds, demand for issuance is all but a lock given the ECB can buy up to 70 percent of an issue, at issuance, to boot. Bully for that?

Not so fast says Standard & Poor’s (S&P), which just stripped the energy giant ExxonMobil of its coveted since 1949 ‘AAA’ credit rating. Why? Share repurchases and dividend payments have “substantially exceeded” internally generated cash flows in recent years even as its debt load has doubled. That leaves two solitary AAA-rated U.S. credits, Johnson & Johnson and Microsoft. It’s getting mighty lonely at the top.

But of course, there’s nothing of the wildcatter in ExxonMobil’s overindulging its shareholders. For seven straight quarters, over 20 percent of the companies in the S&P 500 have reduced their year-over-year share count by at least four percent, which conveniently translates into at least a four percent pop in their PER share earnings. Ain’t math grand?

Based on the data thus far, the trend is becoming increasingly entrenched. S&P’s Howard Silverblatt anticipates that public filings will reveal that over one-in-four deep-pocketed (debt-pocketed?) issues were in the aggressively juicing earnings cohort in the first quarter.

The end result of all of these financial shenanigans? For starters and enders, a whole lot of nothing productive. According to Bookmark Advisors’ Peter Boockvar, the absolute level of core capital spending (nets out transportation) was $66.9 billion vs. $69 billion in 2011. As for the percentage of capacity that’s being utilized, it remains well below its long-term average seven years into this economic expansion.

“Cheap money has created too much excess,” Boockvar noted. “On top of that, some CEOs are more interested in the short term focus on other capital uses such as buying back their own stock in the now second-longest bull market of all time.”

Is it any wonder small investors continue to lose faith in the stock market? Should they be chastised for wanting a teensy weensy return on their cash? Dare we brand these conservative souls greedy, wanting to have their cake and eat it too?

Perhaps. But maybe the real solution to placate the angry masses is an admission that the original intent of zero-to-negative interest rates has utterly failed. Sufficient economic growth to offset the forced risk taking simply has not materialized leaving Grandma and Grandpa with their life savings hanging in the balance.

Perhaps the current conundrum will present an opportunity when the next recession arrives, a chance to recognize the failure of the low interest rate era. As counterintuitive as it would seem, why not use the next period of economic weakness to set a permanently higher floor on interest rates. Will the weakest operators meet their makers at the corporate guillotine? Naturally that will be the case. But isn’t that the American way?

A new generation of revolutionary central bankers must be called to arms for all of our sake. Their battle cry: We commit to never returning rates to zero or below again, to never let be money be free and forever ensure there is a true cost associated with borrowing. Release the markets to set interest rates now and forever!

Will it work? Stranger things have been known to succeed in capitalistic economies with competitive and freely functioning markets.

via http://ift.tt/1QBK3Xi Tyler Durden

By now it is a well-known fact that corporations have no real way of generating organic growth in this economy, so they are relying on two things to boost share prices: multiple expansion (courtesy of central banks) and debt-funded buybacks (courtesy of central banks), the latter of which requires the firm to generate excess incremental cash. Incidentally, as SocGen showed last year, all the newly created debt in the 20th century has gone for just one thing: to fund stock buybacks.

 

The problem with this is that if a firm is going to continue to add debt to its balance sheet in order to fund buybacks (and dividends), then it needs to be able to generate enough operational cash flow in order to service the debt. Even if one makes the argument that debt is cheap right now, which may be true, or that central banks are backstopping it, which is certainly true in Europe as of a month ago, the fact remains that principal balances come due eventually also, and while debt can be rolled over, at some point the inability to generate cash from the operations catches up with them; furthermore even a small increase in rates means the rolling debt strategy is dies a painful death, as early 2016 showed.

In the following chart we can see net debt growth skyrocketing nearly 30% y/y, while EBITDA (cash flow) has been contracting for the past year. In fact, as SocGen shows below, the difference in the growth rate between these two most critical data series is now over 35% – the biggest negative differential in recent history.

 

Of course, every finance 101 student knows that a firm which has to borrow more cash than it is able to produce from its core operations is not a sustainable business model, and yet today’s CFOs, pundits and central bankers do not.

And the next question is: what happens if the Fed does raise rates, what happens to the feasibility of these companies servicing the debt while also spending on R&D and CapEx (assuming there is any), and who can only afford the rising interest expense as a result of ever smaller interest rates? The answer is, first, massive cost cutting, i.e. layoffs, which would be a poetic way for the Fed’s disastrous policies to be reintroduced to the real economy… and then, more to the point, mass defaults. 

via http://ift.tt/1T5QHqe Tyler Durden