China’s Coming Financial Meltdown

Anbang Insurance Group is one of China's largest and most aggressive financial institutions. It is known for its huge customer base, high leverage, and fast-paced deal making.

At least it was until the Friday before last.

That's when Anbang was taken over by the Communist Chinese government. You can call that takeover, "a bailout with Chinese characteristics."

Today, Anbang is a financially distressed ward of the Chinese state. In a classic too-big-to-fail moment, the Chinese Insurance Regulatory Commission, a government financial regulator, took control of Anbang, installed new management, and said they would manage Anbang for at least a year, "to protect the legitimate rights and interests of consumers and safeguard public interests," according to the commission's press release.

Anbang is not some medium-sized regional insurance company. It's gigantic. Anbang has over $310 billion in assets, over 35 million customers, and has operations in Asia, Europe and North America.

China's Anbang Insurance went on a global acquisition spree using policyholder funds. Among Anbang's most high-profile acquisitions was New York City's iconic Waldorf-Astoria Hotel, pictured here. Anbang paid almost $2 billion for the landmark property. After the takeover of Anbang, such assets are effectively owned by the Chinese government.

Anbang thrived by selling customers a kind of life insurance called "universal life," which is more like a structured high-yield note than true insurance. Anbang sold these policies through a network of bank branches throughout China.

The sale proceeds were used to finance high-profile overseas acquisitions including the Starwood Hotels chain, and New York City's historic Waldorf-Astoria Hotel on Park Avenue.

The problem with Anbang's business model was that many of the universal life insurance policies had required payments in three-to-five years, while its investments were illiquid long-term investments. The only way Anbang could meet its obligations was with bank loans or sales of new policies in a kind of Ponzi scheme where new customers' funds were used to pay off the old promises.

As Anbang's business became more highly leveraged and its asset-liability maturity mismatch grew, policyholders became more nervous and started demanding their money back instead of extending the maturities on their policies. An insurance version of a run-on-the-bank was beginning. The Chinese authorities moved in to bailout the policyholders and prevent an out-of-control financial panic.

Anbang a good example of what might be called a "managed meltdown."

You'll be reading and hearing a lot more about the Anbang disaster in the weeks ahead. More importantly, investors need to take a step back from the headlines and consider the bigger picture of financial distress and the coming credit collapse in China more broadly.

Let's consider how this will play out:

On the one hand, the Chinese financial sector (banks, insurance, asset management, shadow banking, etc.) is totally insolvent. Consumers' savings have been used to finance ghost cities, white elephants, capital flight, Ponzi schemes, bribes and kickbacks.

There are some real assets to show (their trains are the best in the world) and some growth, but not nearly enough to cover the liabilities that have been created in the form of bank deposits, corporate bonds, wealth management products, intercompany loans, etc.

On the other hand, China has enough in hard currency reserves to clean up the mess. China will need hard currency in addition to yuan money printing to handle the external dollar-denominated debt.

The policy issue for China, therefore, is when and how they go about the clean-up. If China moves too quickly, they risk slowing the economy, slowing job creation and delegitimizing the Communist Party.

If China waits too long, they risk an uncontrolled panic and a liquidity crisis, which can grow far worse than the initial problem through contagion. Chinese contagion also has the potential to go global.

Given this dilemma, China is trying a Goldilocks approach of not too fast and not too slow. This Goldilocks plan has three parts:

1. Keep the problem from getting worse than it already is.

2. Shut down the worst institutions in a relatively transparent "no drama" manner.

3. Play for time with regard to the rest of the financial system and try to grow out of the problem.

This all comes at a critical time in China. The Communist Party Politburo is in the process of selecting a new head of the central bank. Financial regulators and party officials don't want to rock the boat while this delicate transition is taking place.

Also, the Communist Party Politburo has just announced they are repealing term limits on the President of China. Currently that office is limited to two five-year terms, but those are being eliminated. The incumbent, President Xi Jinping, will remain in office indefinitely.

This puts Xi on a par with Russia's President Vladimir Putin. Xi is now "Big Xi," the most powerful ruler in China since the death of Mao Zedong.

If China encounters a financial crisis, Xi could quickly lose what the Chinese call, "The Mandate of Heaven." That's a term that describes the intangible goodwill and popular support needed by emperors to rule China for the past 3,000 years. The term applies equally to the new "peasant dynasty" of Communist rulers as it has in the past to Ming, Tang and Qing Dynasty emperors.

If The Mandate of Heaven is lost, a ruler can fall quickly.

Will China be able to pull this off this Goldilocks approach to a potential credit crisis? Of course not, nobody's that good or that lucky. Still, the Communists will try and may be able to keep the greatest Ponzi scheme in history afloat in China for another year or so.

The endgame is still a financial crisis that the Chinese won't see coming. In that case, China's only solutions are to close the capital account, devalue the currency, nationalize the financial sector, and put the malefactors in jail.

This story is getting worse because U.S. President Donald Trump has now launched an all-out trade war on China with tariffs on certain appliances and solar panels and new tariffs on steel and aluminum.

In addition, Trump is considering other punishments aimed at China for its theft of U.S. intellectual property. Trump is also banning Chinese acquisitions of U.S. companies using national security powers through the Committee on Foreign Investment in the United States, CFIUS.

The Chinese financial sector is caught in a vise between internal constraints imposed by President Xi, and external constraints imposed by President Trump. The result will be a financial meltdown of unprecedented magnitude in China with the potential to go global and cause a market collapse in Europe and the U.S. as well.

In one version of the old Goldilocks fairy tale, she is almost eaten by the three bears, but manages to escape the cottage and run into the woods.

The Communist Chinese will not be so lucky.

China’s Coming Meltdown Will Rapidly Spread to U.S.

The coming credit crisis in China is no secret.

China has $1 trillion or more in bad debts waiting to explode. These bad debts permeate the economy.

Some are incurred by Chinese provincial authorities trying to get around spending limitations imposed by Beijing. Some are straight commercial loans on bank balance sheets. Some are external dollar-denominated debts owed to foreign creditors.

The most dangerous type of debt involves a daisy chain of insolvent corporations buying debt from each other.

A single cash advance of $100 million can be passed from corporation to corporation in exchange for a new promissory note, used to extinguish an old unpayable promissory note. Repeated enough times, the $100 million can be used as window dressing to prop up $1 billion or even $2 billion of bad debts.

These kinds of accounting tricks will land you in jail in the U.S., but it's an accepted practice in China as long as the corporate CEO is a "Princeling" (a politically connected Communist Party insider descended from the old guard) or an oligarch willing to pay bribes.

This state of affairs has existed for years. The question investors keep asking is, "How long can this last?" How long can the daisy chain keep operating to gloss over a sea of bad debt and give the Chinese economy an appearance of good health?

Well, the answer is the Ponzi will not likely last much longer. Even compliant Chinese regulators are starting to blow the whistle on bad loans and the banks that cover them up. So the good news is that China is starting to address the problem. The bad news is that if China gets serious about cleaning up bad debts, their growth will slow significantly and so will world economic growth.

That's bad news for global stock markets.

Essentially, China is on the horns of a dilemma with no good way out. On the one hand, China has driven growth for the past eight years with excessive credit, wasted infrastructure investment and Ponzi schemes like wealth management products (WMPs).

The Chinese leadership knows this, but they had to keep the growth machine in high gear to create jobs for millions of migrants coming from the countryside to the city and to maintain jobs for the millions more already in the cities.

The Communist Chinese leadership knew that a day of reckoning would come. The two ways to get rid of debt are deflation (which results in write-offs, bankruptcies and unemployment) or inflation (which results in theft of purchasing power, similar to a tax increase).

Both alternatives are unacceptable to the Communists because they lack the political legitimacy to endure either unemployment or inflation. Either policy would cause social unrest and unleash revolutionary potential.

The Tiananmen Square protests and massacre of 1989 did not start out as a liberty movement, although that's how they are remembered in the West. It started out as an anti-inflation protest, and that's how the Communists remember it.

Instead of these unpalatable extremes, the Chinese leadership is trying to steer a middle course with gradual financial reform and gradual limits on shadow banking. I've previously predicted that this gradual policy would not work because the credit situation is so extreme that even modest reform would slow the economy too fast for comfort.

That's exactly what has happened.

China has already flip-flopped and is easing up on financial reform. That works in the short run but just makes the credit bubble worse in the long run.

China may soon resort to a combination of a debt cleanup and a maxi-devaluation of their currency to export the resulting deflation to the rest of the world. When that happens, possibly later this year in response to Trump's new trade war with China, the effects will not be confined to China.

A shock yuan maxi-devaluation will be the shot heard round the world as it was in August and December 2015 (both times, U.S. stocks fell over 10% in a matter of weeks). The trade and currency wars are far from over.

Get ready for more volatility and drawdowns in U.S. stocks.

How Amazon Can Blow Up Asset Management

If you buy physical and digital products from Amazon, would you consider buying financial products as well? 70% of U.S. households trust Amazon enough to be Prime members (Consumer Intelligence Research Partners, 2017). In all probability, an even greater portion of households owning mutual funds are Prime members. I believe most of these customers would at least investigate the possibility of becoming an Amazon asset management client. It's also likely that some non-trivial portion of this group would go on to become clients. Jeff Bezos' disdain for Wall Street is well known, so it's surprising that he doesn't appear to have set his sights on asset management. If Amazon could decimate bricks and mortar retailers, what might happen to the asset management industry, where 35% operating margins are the norm?

How Amazon Can Gobble Assets

In addition to its home page, Amazon is rich with the most important resource in asset management: trust. The firm earned the highest reputation ranking in the U.S. in a 2017 Harris Poll. It was ranked as both the most influential and most trusted company in a 2016 survey by SurveyMonkey. It was the only company to land in the top 5 for both categories. Unlike a surprising number of tech companies, Amazon has paid attention to web security. When you're handling other people's money, competently allocating resources for security is critical. There are some asset managers and fund administrators I wouldn't do business with because of observed technology or culture gaps with regard to security. The public's familiarity with and trust in Amazon raises its brand to a privileged place in business.

That doesn't automatically translate to easy monetization in asset management. But Chinese tech companies show how easy it could be. Take a look at Alibaba, which is a Chinese incarnation of Amazon + eBay + Paypal + Mastercard + UPS +… Fidelity. In just 4 years, it has come to manage the world's largest money market fund, according to the Wall Street Journal. The asset management world watched in awe and horror as the fund amassed $92 billion in its first year alone, becoming the world's 4th largest money market fund in 2014. At first conceived as a holding place for excess funds held by Alibaba customers at Alipay (similar to Paypal), the fund exploded in popularity by combining an incongruously high yield with NAV principal stability.

Alibaba has expanded its product line to include funds managed by other asset managers. It is possible that Alibaba eventually houses the world's largest asset manager. Tencent, another Chinese internet behemoth, has also entered the asset management domain. Could Amazon embark on a similar venture?

Thought Experiment on the Amazon Fund Platform

Imagine that you go to the Amazon homepage. You click on a link labeled "Funds", which is next to the "Prime" link. You are now on a fund products page, featuring a mix of Amazon branded and 3rd party funds. Just as you can buy an Amazon private label sweater for $7 or a branded sweater for $75, you can now buy a large cap U.S. equity index ETF from Amazon with zero management fees or the Vanguard equivalent with 0.04% in management fees.

Trading in either ETF would occur with zero transaction cost for non-professional traders. Since placement on the Amazon platform is so valuable, external fund managers pay Amazon a fee, allowing Amazon to charge no transaction cost. Presentation of fund performance, performance attribution, and risk decomposition are standardized, colorful, and informative. It is superior to similar presentations by industry incumbents because Amazon specializes in presenting information clearly and quickly. At the first layer of detail, the information suits average retail investors. At the second and third level of detail, quant PhDs are satisfied.

Just as Amazon doesn't care which sweater you buy as long as it's ordered through them, the company is indifferent to the debates between active vs. passive, open end fund vs. ETF, 60/40 vs. 130/30, domestic vs. international.

If you want to buy it, Amazon will sell it. Do you like Southeast Asian casinos with artificial intelligence croupiers? You can find a niche ETF that holds that group of companies in either market cap weighted or equal weighted form. Amazon might even offer its own private label ETFs on simple indices (constructed by Amazon itself to save on fees it would otherwise have to pay to index providers). It might also offer private label risk factor strategies and unabashed active strategies, which will probably do no better, but no worse, than their peer groups.

What we do know is that Amazon's active strategies will be cheaper. The website offers funds that have both weak and strong historical performance because Amazon knows that historical performance is no indication of future returns. Amazon will offer it all, but provide adequate quantitative and qualitative disclosure so that end investors can decide. You choose to sweep cash into the Amazon short term investment vehicle, which doesn't guarantee NAV stays at $1, but tries hard to. Maybe Amazon uses funds from this account for corporate purposes, driving its negative net working capital into more negative territory. Account holders benefit from a slightly higher yield than they might otherwise get (due to Amazon's low investment grade debt rating), and Amazon has a cheap funding source.

Portfolio Management

Perhaps Amazon identifies you as a top 0.01% trader in terms of hit rate, profitability, and drawdowns for 5 years running, across every 12 month period. Amazon's analytics determine that you are achieving these results with statistical robustness, devoid of risk factor exposures that make strategies unscalable (small cap, illiquidity risk); therefore, you're offered a chance to run your own fund with infrastructure, compliance, and reporting handled by Amazon at no fixed cost and 10% of whatever management fee you propose.

Amazon assists you with marketing on the website and seeds you with $10mm. The only condition is that you hold all personal liquid investments at Amazon (for compliance oversight), and Amazon itself custodies the assets. Soon Amazon has a virtual stable of in-house portfolio managers, all over the world, managing trillions of dollars, at minimal cost to end investors. Marginal distribution costs are zero and almost all compensation goes to the portfolio manager. Due to the law of large numbers and the culling of its entire user base, Amazon's active managers are in the top decile of all active managers in all active management categories.

Maybe you're a deeply knowledgeable and conservative investor, preferring funds from established asset managers. You like a specialist emerging market active manager whose fund you've owned for 10 years but suspect you don't understand how to fairly analyze their relative performance vs. other active managers or vs. passive or risk factor ETFs. Amazon has a tool that analyzes the fund's SEC filings, and derives the most efficient combination of index and risk factor ETFs to replicate the active fund's performance. You also see costs compared to its proxied combination of passive or smart beta or risk factor exposures. Amazon's technology delivery and process optimization caters to clients of varying degrees of sophistication.

Investment Advice

Amazon recommends Huckleberry Finn because you ordered Tom Sawyer last week. When you go to the Funds page, you get a recommendation to look at a combination of 3 ETFs that mimics (at 1/10th the cost) a branded bond fund that you looked at earlier.

Amazon has a robo-advisor available with the latest in AI and human voice-modulated response. If you want to trade internationally without being gouged on FX costs, you can do that too. Perhaps you want to be informed of the 10 biggest movers in the tech sector at 9:45 am every day. Alexa gives you a shout out and stands by to take your limit order afterward. Amazon also has an army of Series 7 certified advisors, freshly hired from Vanguard and other old guard companies. When you speak with them on the phone, you marvel at how energized and enthusiastic they are. Because of Amazon's overall relationship with you, these reps are armed with knowledge about you that comparable financial firms could not hope to know.

Who Benefits? Who Suffers?

I have no personal knowledge of a fund management skunk works at Amazon, but as an Amazon shareholder, I'd be disappointed if they don't already have one. I think the biggest beneficiary of an Amazon entry into fund management will be retail investors, as it should rightly be. Many investors understand that they're not informed investors, but also don't care to spend much time learning. For them, trust is paramount, and Amazon has it in spades.

Beneficiaries in the existing asset management industry exist too. It will be those active managers who truly add value by generating excess returns above and beyond the risk factor loadings inherent in their portfolio. Their inclusion on the Amazon platform would amplify their exposure to end investors, without the layer of costs introduced by mediation through RIAs, investment consultants, and the Rube Goldberg fund distribution machinery. Another possible beneficiary is a growing class of portfolio managers who want to free themselves of the politics and endless meetings at a typical asset management firm. Millennial money managers, especially, may enjoy working in a streamlined, virtual asset management firm without comically useless 7:00am market update meetings. A zero cost distribution channel provided by Amazon might attract entire fund management teams who can now work in peace, charge less, and make more.

The bundling of compliance overhead made possible in part, by the replacement of lawyers with AI, could drive marginal compliance costs down to zero. That's a boon for folks who want to just manage money. In my experience, the compliance cost center has driven a large portion of expenditures in HR and technology at the largest asset managers over the past 10 years. Madoff cost his investors tens of billions of dollars, but cost the industry (and by extension, all end investors) hundreds of billions for what may be nothing but the illusion of safety.

Fixed income managers of retail assets could be in a pickle because most fixed income "alpha" relies on simple biases in systematic risk factors. Taxable core and core plus fixed income mandates typically generate their pseudo-alpha by: 1) taking excess credit risk; 2) taking excess interest rate risk; 3) selling volatility through securities with embedded short call options. The bigger the fund, the more simplistically systematic this overweighting becomes because taking such overweights is the only way to move the needle when the manager needs to keep an eye on maintaining a liquid portfolio.

In emerging markets fixed income, pseudo-alpha is generated by: 1) taking excess credit risk; 2) taking out-of-index FX risk; 3) taking illiquidity risk (i.e. buying bonds that rarely trade and trade with a yield premium as compensation). Furthermore, EM fixed income managers start ahead of the index because most indices used for marketing are sub-optimally constructed. It's simple to avoid glaring errors such as buying a market cap weighting of the most indebted companies, and active managers shouldn't be paid extra to avoid this silly error. Amazon's performance attribution and disclosures, simply presented, could reveal much of fixed income alpha to be glorified beta. You would be able to compare the fund vs. a true risk benchmark, not the fund firm's marketing benchmark.

The continuing development of better risk factor ETFs will also make it easier to outperform "active" bond funds by offering cheaper ways to take exposures to the risk factors that are overweighted by the active managers. Equity managers will have it slightly easier compared to bond managers because taking idiosyncratic risk in equities still has potential positive payoffs. One position in a tech stock may boost the overall portfolio's performance in a big way. The story is different for fixed income. Because the upper bound on a bond's price return is par, 20-baggers don't exist to make up for a default incurred elsewhere in a concentrated bond portfolio. Consequently, long term bond investors are usually ill-served in taking concentrated idiosyncratic risk in bonds held to maturity. A bond's realized return is generally its yield-to-maturity (assuming no default and reinvestment rates on coupon income that are in line with the yield-to-maturity at time of purchase).

Intermediaries in the advisory space, and others who are involved in that twilight between advising and asset allocation, will probably not be helped by an Amazon incursion, especially if it implements a human advisory function.

Implementation Risk and Priorities

Starting up a virtual distribution shelf for investment funds is no easy task, but I believe it is much easier to do today than what Amazon managed to do in its primary business of delivering physical goods from the biggest virtual storefront in the world. Investment funds take no physical space, no warehouses. You don't need to account for bathroom breaks by human workers. In a sense, this business is ideal for Amazon as a new entrant and dovetails perfectly with the management discipline and proven execution that Bezos has shown.

Some might say that it would be hard for Amazon to be more cost efficient that Vanguard, especially given Vanguard's mutual ownership structure. I beg to differ. I think it not only possible, but probable, that Amazon could do it both cheaper and better.Until recently, most of us believed that Walmart defined retail efficiency. Amazon's hidden advantage is its ruthless commitment to per customer profitability. I'm willing to bet that the firm has our number. It knows our lifetime value as customers and how we stack up against our cohorts by age, zip code, film preference, etc.

Similarly, Amazon has shown that it doesn't hesitate to fire unprofitable customers who abuse the return privilege. If it exercises the same discernment in avoiding the worst clients, incumbent asset managers stand to lose. Amazon has no legacy costs and no legacy relationships in asset management. Furthermore, it will not plead for such relationships. If you're a 3rd party fund manager, for instance, getting on Amazon's platform will be like the Godfather's offer you can't refuse.

To me, asset management is the type of utility business that Amazon could easily disintermediate, for both its own benefit and the benefit of average investors worldwide.If you thought the overbuilt status of bricks and mortar retailing provided the kindling to the Amazon explosion in retail, the abundance of asset managers (especially active asset managers) provides the uranium for an apocalypse that could be much worse.

Debt Crisis Dead-Ahead: Italy's Results Are Truly Forza Italia!

Europe is headed for a breakup.  But, after a year of watching the EU establishment work the polls just enough to maintain the status quo in the Netherlands, France and Germany I wasn't expecting much from yesterday's Italian elections.

But with turnout over 73% we got just that.  Voters were clearly motivated to change the course Italy is on.  Now, we knew that Silvio Berlusconi's center-right coalition would do well alongside upstart Five Star Movement.

The question was always going to be, however, how well would they do?

It looks like it was much better than the polls wanted us to believe.   Last week I told you the markets were getting nervous about this election.  This weekend the news was all about how subdued the reaction was to the polling.

As if a major technical breakout to the upside on Italian bond yields in the face of furious ECB buying wasn't a strong enough market response?

But, that's doesn't fit the plan to gaslight voters and traders to worry about the potential outcome here.

The League of 5-Star Gentlemen

It looks like Five Star Movement will take more than 30% of the final tally, which is a couple of points above where polling had it tracking when the blackout went into effect two weeks ago.

The bigger result is that of The League (formerly The Northern League) who came off their secessionist mountain and ran hard on a platform of euroskepticism and anti-immigration.

The most important person in Italian politics right now is The League's leader, Matteo "The EU can go F&%k itself" Salvini.

When the final votes are revealed, if The League out-polled Silvio "Establishment Stalking Horse" Berlusconi's Forza Italia! then he has the hammer in coalition negotiations.

This is exactly the situation I was hoping for in this election. Because this paves the way for Salvini to pull out of the weak coalition with Berlusconi and form a stronger government with Five Star.

And at that point the price of Tums in Germany rises sharply on new demand.  Because the 'agita' over Italy's untenable banking and debt situation will be enormous.

But, if you want to know what the real issue is just look at this map of Italian unemployment.

1% GDP growth is not something to cheer about when you have this kind of capital destruction for half of a country.   And with the euro above $1.20, just like Germany wants it, this is only making it harder for Italy to compete in world markets.

In other words, German strong-euro policy is creating the very election results now creating agita in Berlin.

Forza Populism!

Politicians are stupid.

They don't know anything about currency, capital flow or substitution effects… except when it feathers their nests.  But, when a policy is inconvenient to them they invariably blame 'the market' which is another way of saying 'blaming the people.'

When the people rise up and vote to end their clown show they cry "Fascism!" or "Populism!"

But this trend is in place all around Europe and it won't end here.  Next month Hungary goes to the polls.  It's leader Viktor Orban and his Fidesz party have the opportunity to grab a super-majority with coalition members and begin altering the Hungarian constitution to the desires of Hungarians, not the EU.

Italy just gave Hungary a big boost of adrenaline to do just that.  It also gave Poland an assist in resisting Angela Merkel's crusade to crush Polish sovereignty for the second time by Germany in under a century.

There comes a point where lying to your people doesn't work anymore.  They can see with their own eyes what's happening and no amount of gaslighting via polls, economic statistics or Alinsky-style shame tactics works anymore.

That's what's happening in Italy.  And that's the beginning of the end of the European Project.

Debt Crisis!  Dead Ahead!

Right now the market has been lulled into a false sense of security by the ECB's manipulation of bond yields via its asset purchasing program, i.e. QE.  Five year Italian Credit Default Swap spreads are at a 6-month low thanks to a lack of concern about these election results.

So far, there has been no knee-jerk reaction but that can and will change if Salvini and Five Star head Luigi Di Maio put their heads together and form a workable coalition.

Because Italy's banking system is more functionally insolvent than everyone else's (by orders of magnitude) there will be a push by the market to resolve this situation.

For months I've been warning you that that all we needed was a trigger to end this counter-trend rally in the euro and firm up the U.S. dollar.

We've seen the rush into the euro while bond yields began rising a few months ago.  This is an investor class moving to cash pre-positioning for a chaotic market.  We'll see a bit more of this while these results are digested and there is still hope for a Grand Coalition deal between Berlusconi's center-right coalition and the failing Democrats.

But, more likely is what I just laid out above.  So, the next step will be the wholesale pulling out of assets from Europe once Salvini rejects a deal from Berlusconi and he and Di Maio form a government.

And once that occurs, CDS rates will rise, bond yields (already under pressure from a tightening Fed) will rise as well and the next wave of the cycle can begin.

Salvini knows the euro is the main source of Italy's pain.  He's said as much.  Now here's the opportunity to heal Italy as a country and bring the North, where The League is strong, and the South, where Five Star is strong, together for an Italy which stands up to the depredations of a voracious EU bureaucracy.

As I've pointed out multiple times, the German people have no desire to bail out Italy. They wouldn't bail out Greece, a much smaller problem.  They just voted for no bail-outs and are marching in the streets against more strain on their social fabric via Merkel's immigration policy.

So, the only path forward in Italy's best interest is Salvini and Di Maio coming together and selling a showdown with Germany over the euro and debt relief.  Once they move forward with reforms both Brussels and the IMF will not back the true face of the EU will be shown and I expect an already angry Italy will shift very quickly towards Italeave just like what happened in the U.K. with Brexit.

Why Your Broker May Break You

As a perennial holder of precious metals, I've often been laughed at (literally) by my associates who are senior bankers, trust officers and brokers. But, to be fair, I should say that, on occasion, one or another would say to me, "Metals are an anomaly. Even if I agreed with your premise, metals don't fit our portfolio format. If I recommended them, my clients would think I'd lost my marbles. I'm in business to win clients, not lose them."

This is an important point for anyone who uses a banker, trust officer, or broker as his investment advisor. He may be a very sincere guy, but he's not willing to risk losing clients by touting an investment that doesn't fit his format, and worse, might give his competitors an excuse to call him a nut-case.

Those advisors whom I've respected the most have been the ones that, over the years, have said, "I believe you're correct and, in fact, I've increased metals in my own portfolio, but I'm not going to be so foolish as to tell my clients to buy metals, unless they come to favour them independently." (At least they've thought the subject through.)

However, in recent years, I've seen an increase in those same professionals seeing the writing on the wall - foreseeing a crash in the markets. A common comment is, "I provide my clients with a diversified portfolio, except, the truth is, it's diversified within the markets themselves.I don't provide them with anything outside the markets, so if the markets hit a wall, my clients stand to lose it all. That's not true diversification."

And again, they fear advising their clients of this inevitability, because their competition will still be touting that, "The markets have never been higher. This is the worst time to get out. If your broker tells you differently, come over to us."

The result of this conundrum is that, right up until a crash occurs, advisors always tell their clients, "You're on the right track. The market's never been higher. Keep buying."

They say this even if they themselves have lost faith in the markets and are getting out.

This is an important point to ponder, as it's one of the primary reasons why a major bull market never ends with a whimper; it always ends with a major upside spike. The crash occurs when buyers are at fever-pitch, borrowing money, buying on margin, to increase their positions.

And this latter point is a major reason why crashes can be so immediate and so devastating. When those in the market are up to their ears in debt in order to expand their positions, all that's necessary is a slight rise in the interest rate, or another factor, to put them under water. This, of course, is exactly what happened in 1929, when the Federal Reserve raised the interest rate. I believe it's likely to happen again rather soon. (Not all rate rises cause a crash, but all crashes are precipitated by a rate rise.)

This is also the reason why so many investors panic following a crash. If they had received no warnings in the run-up to the crash - if everyone around them was saying, "Buy! Buy! Buy!" it's little wonder that they're taken completely by surprise. Worse - they have no idea how to react in order to save whatever might be left of their wealth.

At that point, the few who have been hard hit - but can keep their wits about them - may move a portion of their remaining wealth into metals. But, in my estimation, the numbers of those who can keep their heads clear in the face of a crisis will be few.

At this time, the average investor - the roughly 80% who tend to just chase the trends - will likely be in shock, not having any idea what to do. How long will this period of shock last? Six months? A year? Whatever the length of time, at some point, the 80% will begin to recover their composure and chase a new trend - precious metals, the investment that their advisors once scoffed.

Another key point to ponder at this juncture is that those who chase trends do so because it's their natural mindset - to follow the crowd. Therefore, when they see a trend into gold building, they'll jump on board at some point and yet, importantly, they will still not understand the reason why gold is moving up. They'll only understand that they're missing out and will chase the new trend.

The reason that is important to understand is that the great majority of people almost always act in character. If they blindly chased one trend, they'll blindly chase the next one. It's for this reason that those of us who've predicted a gold mania over the last decades believe that metals will not simply enjoy a return to their "rightful place."

Fortunately or unfortunately, once the pendulum begins to swing toward metals, it will continue beyond the centre point, as it invariably does, and will move into the irrational mania area.

We can therefore anticipate precious metals prices to far exceed what would seem a reasonable intrinsic value. At that time, we may also see many of the old hands selling off a major portion of their positions quietly.

But what about our old friend, the broker? What will his role be in this? Well, in my experience, whenever I've advised bankers, trust officers, and brokers of a major change in precious metals prices, over the decades, they've tended to ignore the advice—but curiously, whenever that advice has proven true (such as previous market crashes), they've said, almost uniformly, "No one could have seen this coming."

Clearly, they had no recollection of the warning, which suggests that they'd simply pressed the mental "delete" button at the time.

This being the case, when the pendulum does swing toward metals to the point that it becomes a major trend, the advisors can be expected to get on the bandwagon and actually drive the trend, creating a precious metals bubble.

Back in 1929, there was a saying amongst savvy investors that, "When every shoeshine boy is giving stock tips, it's time to get out of the market." We're now seeing a repeat of that situation—one in which virtually everyone is either in the market or discussing the market.

Another saying among investors is, "There's a reason a broker is called a broker. A broker is someone who invests your money 'til you're broke."

So, is there a takeaway here? Yes, decidedly so. Advisors have their use. But they should not be the final factor in an investor's decision-making. A wise investor questions everything,then comes to his own conclusions independently.

Always bear in mind that anyone who's selling you something has a vested interest in your belief that his recommendation is the correct one. Listen to him, but then extend your reasoning beyond his recommendation. And come to your own conclusion.