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Off the Cuff: Financial Repression

Pressure builds beneath the central planners' stranglehold
Saturday, October 4, 2014, 3:43 PM

In this week's Off the Cuff podcast, Chris and Brian Pretti discuss:

  • Financial Repression
    • Central banks have 'cornered the market' for global capital
  • Reason Behind The Dollar's Rise
    • The smart money is getting out of riskier assets
  • Global Flows of Capital
    • The Fed hands the money-printing baton to the EU & China
  • Intergenerational Friction
    • Likely one of the defining issues of the future
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Unpacking the Propaganda

Debunking the increasingly fact-free financial media
Wednesday, October 1, 2014, 7:06 PM

Almost daily there's some article or another in the US financial press that is little more than marketing collateral for Wall Street.

Broken down, the message is always some version of: Now is a great time to buy stocks!

It's gotten to the absurd stage where everything justifies higher stock prices. » Read more

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Stanford

Attempting To Sustain The Unsustainable

Only makes the inevitable crash worse
Monday, September 29, 2014, 8:32 PM

The general theme of the 2008 financial rescues engineered by the world's central banks was: Do more of the same.

The same things that got us into trouble -- namely too much debt and increasingly expensive energy -- simply increased after the 2008 crisis.

By a lot. » Read more

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Off the Cuff: The Tail Wags Harder

The system is more visibly serving itself vs the public
Friday, September 26, 2014, 5:16 PM

In this week's Off the Cuff podcast, Chris and Mish Shedlock discuss:

  • Topping Markets
    • Signs of an imminent correction continue to mount
  • Central Banks Gone Wild
    • No longer hiding their rampant asset purchases
  • Perpetual War
    • The military-industrial complex is the tail wagging the dog
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The 3 Likeliest Ways Things Will Play Out From Here

Do you have a plan for each?
Thursday, September 25, 2014, 3:58 PM

Executive Summary

  • The wisdom and value of scenario planning
  • Scenario #1: A Slow Burn
  • Scenario #2: Fragmentation
  • Scenario #3: A Hard Landing
  • The prudence of taking individual action now, vs depending upon "the system" to react to future events

If you have not yet read Part 1: Ready Or Not... available free to all readers, please click here to read it first.

It all begins with the clear-eyed recognition that the old way of doing business is clearly unsustainable. And yet knowing that the various governmental and institutional powerbrokers are doing everything they can to perpetuate the status quo way of doing business.

Business-as-usual is literally going to end in some flavor of disaster, and yet we collectively adhere to it, even when the end-point is as obvious as calculating the linear rate of withdrawal of water from a non-renewing aquifer.

But there's nothing linear about the nested and/or intertwined complex systems we call the Economy, the Environment and Energy.  Each of these is independently complex, meaning they often easily defy the attempts to manage them. And they are utterly unpredictable for anything longer than the immediate term.

For example, of the three, Energy seems the simplest, and it is.  But even there, we note that the amount of energy that can and will be extracted is a function of the price of energy, available technology and skills, capital available for investment, and what's actually down there in the earth to be pulled up.  In that list, several factors are courtesy of the Economy, which is itself dependent on Energy. A glitch in one can feedback rapidly to create a glitch in the other.

Given all of this complexity, one good way to get a handle on things is to identify the scenarios we deem to be most likely given all available evidence, and then assign probabilities to each. Asking ourselves, What can we today to prepare for Scenario X? then allows us to begin constructing action plans to mitigate our vulnerability, and even better in cases, position ourselves to prosper as the future unfolds. 

Scenario #1:  A Slow Burn

In 2008, the practice of borrowing too much caught up with the developed world and a serious financial crisis threatened to take down the entire financial system.  Indeed, according to after-action reports from Hank Paulson (then Treasury Secretary) and Mervyn King (then BoE chairman), the world came within mere hours of a full-blown global banking system meltdown... » Read more

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Death Cross on the Russell 2000

Another likely harbinger of a coming market correction
Monday, September 22, 2014, 7:51 PM

One of the 'targets' I've had my eye on in the market has been the Russell 2000, a small cap stock index comprised of the smallest 2000 companies in the Russell 3000 index.

The reason I've been tracking this index carefully, along with junk bonds, is that the small companies usually give you an advance heads-up on trouble soon headed for the larger cap companies and stock indexes.

 
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Off the Cuff: A Look Across the Pond

Europe is driving much of the action this week
Thursday, September 18, 2014, 11:46 AM

In this week's Off the Cuff podcast, Chris and Alasdair Macleod discuss:

  • Independence For Scotland
    • The implications of this week's historic vote
  • Gold's Depressed Price
    • The establishment benefits from a low price
  • Europe vs Russia
    • Why the EU holds a losing hand
  • The Evils of Central Banking
    • Creating worse problems than they're supposed to solve
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Why the Dollar Could Strengthen - A Lot - From Here

50-100% appreciation possible in the next few years
Tuesday, September 16, 2014, 10:50 PM

Executive Summary

  • The critical role of interest rates and carry trades
  • How capital flows across borders
  • The growth in supply of dollars is slowing
  • The rationale for the dollar strengthening from here by 50-100%

If you have not yet read Is Part 1: The Dollar May Remain Strong For Longer Than We Think available free to all readers, please click here to read it first.

In Part 1, we reviewed the key concepts that drive supply/demand (and thus the price/relative value) of the U.S. dollar. In Part 2, we’ll cover the dynamics that could push the value of the USD vis-à-vis other currencies much higher in the years ahead.

Interest Rates, Bonds and Carry Trades

To understand the price of any currency—measured in other currencies, gold, oil, etc.—we look at a currency as a special kind of commodity, one that greases transactional trade of goods and services and also serves as a store of value. Like any commodity, its price relative to other commodities is determined by supply and demand.

If demand is strong and supply is tight, the value will increase. This is the same for dollars, gold, oil, grain, bat guano, etc. The reverse is equally true: if demand slackens and supply balloons, the value will decline.

To understand the supply and demand for currencies, we need to understand the role of interest rates, sovereign bonds and carry trades.

The connection between interest rates and demand is self-explanatory: if interest rates paid at home are near-zero, and another nation’s bonds are paying a higher yield, it makes sense to sell (or borrow) one’s own currency and buy a bond denominated in another currency.

This is the foundation of currency carry trades.  PP.com’s own Davefairtex recently offered an excellent explanation of how carry trades work on the Gold & Silver Group forum:

I believe that QE causes inflation in other countries by dropping rates to 0% which encourages carry trades, whereby traders borrow USD for extremely low rates here in the US, and then send it overseas to find a yield.  Cheap money in the US causes money to flow elsewhere, where rates are higher.

Carry Trade For Dummies:

Step 1) Borrow $1 billion US at LIBOR-1M rate; cost 0.16%.

Step 2) Trade $1 billion US for 1.075 billion AUD.

Step 3) Buy 1.075 billion 2-year AUD govt bonds; yield 2.52%

Step 4) Collect $23 million USD/year for doing no work at all.

Carry trades work in both directions for the dollar... » Read more

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Russian Energy Sanctions Will Bite Europe

And possibly the world
Tuesday, September 16, 2014, 2:44 AM

For several months now, we've been running with the hypothesis that Russia would wait until fall arrived and then begin to crimp off EU gas, possibly even just cutting it off.

Well, even though fall is still officially a few days away, Russia has begun to retaliate, subtly, by diminishing the flows of gas to several European countries. » Read more

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Off the Cuff: The Many Reasons To Fear A Market Correction

Just too many signs of instability
Thursday, September 11, 2014, 6:02 PM

In this week's Off the Cuff podcast, Chris and Charles Hugh Smith discuss:

  • The Irrational Altitude of Asset Prices
    • Too high, for all the wrong reasons
  • Dollar Strength
    • The dollar's rise is impacting all assets, some not rationally
  • The Cost of Our Failing Policies
    • We're diminishing the prosperity of future generations
  • Signs A Market Correction Is Beginning
    • Which asset classes to watch closely