A Rising (Central Bank) Tide Turns Everyone into a Genius

April 26, 2017

Until the system implodes--you're a genius.

So you've ridden the markets higher--stocks, housing, commercial real estate, bat guano, quatloos, you name it--everything you touch turns to gold. What can we say, bucko, other than you're a genius!

It's a market truism that rising tides lift all boats. But that's not the really important effect; what really matters is rising tides turn everyone into a genius--at least in their own minds.

Those of us who have been seduced by the Sirens' songs of hubris know from bitter experience how easy it is to confuse a rising tide with speculative genius. When everything you touch keeps going higher, the only possible cause is.... your hot hand, of course!

Stocks--I'm a genius! Housing--I'm a genius! Commercial real estate--yes, well, I suppose the evidence is overwhelming--it does seem I'm a genius.

The only thing better than buy and hold is buy the dips and hold--and use margin or whatever leverage you have to buy more before the price goes even higher.

What can we say other than: this is the strategy of geniuses. The proof is in the charts:

The S&P 500: margin to the hilt and buy every dip: genius!

Housing in Sweden, Toronto, Brooklyn, West L.A., San Francisco, Seattle, Portland, Shanghai and every other blazing-hot market: borrow more from the shadow banking system, mortgage your house to the hilt, do whatever you have to do to get the down payment and buy another flat: pure genius!

Commercial real estate: everyone who jumped in with all four feet in mid-2009 forward: geniuses!

The source of our collective genius isn't an act of Nature--it's that good old pump inflating every asset bubble on the planet, central banks creating credit-money out of thin air and buying assets hand over fist: stocks, ETFs, bonds, mortgages, and so on.

Central banks have collectively purchased $1 trillion in assets year to date:

The Federal Reserve and the other central banks are playing the role of financial gods, intervening in the interactions of mere mortals to create the illusion of stability.

To this end, the Fed has created trillions of dollars and used this money to prop up delusional asset values (high) and destabilizing interest rates (low).

If we look at a decentralized financial system as a self-organizing ecosystem, we find that the strength of the system lies in the adaptability of the myriad organisms in its many micro-climates. The key strength of a decentralized financial ecosystem, i.e. one not organized as a top-down command economy, is the "genetic diversity" of its many participants. There is not just one dominant species in the ecosystem, but many interdependent species.

In a financial ecosystem, there is not one lender and one class of borrowers, but a huge diversity of lenders, borrowers, creditors and savers, and a wealth of interacting, inter-dependent enterprises.

A centrally planned financial ecosystem is a doomed system. The Fed is the equivalent of an ignorant, hubris-infused agency that seeks to "restore" an ecosystem by flooding it with water and unleashing a single predatory species raised in an unnatural, contrived "factory."

The Fed is wiping out diversity and thus the adaptability of the enterprises that survive its crude flooding and replication of a single predatory species.

The Fed is creating a sickly, vulnerable mono-culture of an economy, one dominated by financial predators which are themselves lacking in genetic diversity.

Just as agencies playing god further degrade the natural systems they claim to be "restoring" with ever-grander interventions, so too is the Fed destroying the U.S. economy with equivalent god-like meddling and ever-more grandiose, ever-more delusional interventions in what were once decentralized, self-organizing systems that naturally sought harmony and stability through the low-level churn of bad bets being written off and over-leveraged speculators going bankrupt.

Put another way: the Fed has taken the risks generated by predatory institutions and policies, and distributed it throughout the entire financial system. This distribution of risk in service of maintaining asset bubbles creates the illusion of stability, low risk and "sure thing" speculation.

Rather than let over-leveraged speculators and institutions reap the consequences of their excesses, the Fed (and other central banks) have loaded the entire system with risk.

Until the system implodes--you're a genius.

Central Banks Are Now Printing $200 Billion Per Month… Without a Crisis

April 25, 2017

A tsunami of inflation is rapidly moving through the financial system.

Most investors only pay attention to the Federal Reserve. And they are missing the BIG PICTURE for Central Bank monetary policy.

The Fed is tightening policy by hiking rates. But the rest of the world's Central Banks are printing a combined $200 BILLION in QE every single month.

Yes, $200 billion. At a time when the financial system is out of crisis and the Fed's put its own "print" button on "pause."

This is an all-time record… greater even that the global money printing that occurred at the depth of the 2008 Crisis when Central banks were desperate to prop the system up.

Indeed, at $200 billion per month, we're talking about an annualized pace of over $2 TRILLION in money printing every year.

If you don't believe this will unleash inflation, consider that already in the US, inflation has exceeded the Fed's targets on ALL FOUR of its measures.

Bear in mind, these are the "official" measures of inflation… the ones that don't include things like food, or energy. When you account for the rise in the REAL cost of living in the US, REAL inflation in the US is closer to 6%.

And this is happening at a time when the Fed is hiking rates and NOT printing money.

If you don't take my word for it, take a look at Gold priced in the $USD, Japanese Yen, Euro, and British Pound.  The precious metal has begun to break of to the upside in all major world currencies.

Gold "smells" what's coming. It's inflation. And smart investors are preparing for it now.

Stocks Rally, With No Basis In Reality

Tuesday, April 25, 2017

Stocks rallied strongly on Monday given a number of political and geopolitical events converging this week, as President Trump completes his first 100 days in office ahead of this Saturday. The stock market is hoping this week the GOP Congressional leaders can agree on a bill to repeal Obamacare. Wouldn't it be great if the GOP had been sandbagging a much better bill all along? The President wants a bill that cuts corporate income tax down to 15% by this Wednesday but can he come up with a bill that doesn't send the deficits up by another $2 trillion? If it's not revenue-neutral will the President get the votes needed to pass it? Most think not. Also, regarding the budget, the President is adamant about funding a border wall but the Democrats have threatened to shut down the government, so what does the President have to give away to get this in the budget? Does he have to keep Obamacare? The investment bankers gapped the market open today, setting the highs for the day with the news that it looks like Marine Le Pen might lose the French election, lessening the risk of the EU and the Euro breaking apart. Over the weekend we saw the victory of pro-European Union centrist Emmanuel Macron, who took an edge in winning the French presidency by winning the first round of voting and qualifying for a May 7th runoff alongside nationalist leader Marine Le Pen. Macron, 39, who was a former French Minister of the Economy and investment banker, won 24% of the vote representing a more centrist viewpoint. Marine Le Pen won 21.3% of the vote representing a more nationalist perspective and a view of leaving the EU. The mainstream parties, represented by François Fillon, the French Republican winning 20% of the vote and Jean-Luc Mélenchon, the socialist who took 19.6% of the vote, were both knocked out of the election, but it is thought a large percentage of their voters will support Emmanuel Macron, though the Republicans could swing towards Le Pen. Stocks Detached from Economic Data Meanwhile, the odds of the next rate hike have jumped to 69% for June. No one is expecting the Fed to raise rates in May but that may change this week if the President is successful in getting his bills passed in Congress in his first 100 days. Momentum rules the stock market detached from economic reality. This last week was the biggest drop in U.S. Macro data in six years, as housing starts, car sales, retail sales, a drop in inflation, deteriorating jobs report, etc., have detached investors from economic reality. In fact, Charles Schwab, the investment brokerage firm, announced that the number of new brokerage accounts has soared 44% during the first quarter of 2017, the fastest pace the company has seen in 17 years! In other words, not since the highs of the stock market in the first quarter of 2000, when the public bought at the top of the market, has the public been this enamored with the stock market. Meanwhile, commodity prices continued to sink today. Gold fell $11.6 to close at $1,275 while crude oil prices fell 39 cents at $49.23 a barrel. While investors are anticipating much better earnings from the energy sector, they take note that the energy stocks within the S&P 500 allocation have a P/E ratio of 132.66 times earnings ratio, according to the latest data from Zacks. I think the S&P 500 has already factored in any earnings improvements in energy. While the investment bankers are trying to get us to focus on the French elections and what may or may not happen this week within Donald Trump's first 100 days, investors need to be aware that it was also reported over the weekend that 8,640 retail stores are now in the process of being closed! Amazon is one thing, but a developing recession is another matter that people just aren't recognizing while the investment banks continue to pump stocks. Beware of chasing stocks purely on the basis of momentum.

Central Banks Are Now Printing $200 Billion Per Month... Without a Crisis

A tidal wave of inflation is rapidly moving through the financial system.

Most investors only pay attention to the Federal Reserve. And they are missing the BIG PICTURE for Central Bank monetary policy.

The Fed is tightening policy by hiking rates. But the rest of the world's Central Banks are printing a combined $200 BILLION in QE every single month.

Yes, $200 billion. At a time when the financial system is out of crisis and the Fed's put its own "print" button on "pause."

This is an all-time record… greater even that the global money printing that occurred at the depth of the 2008 Crisis when Central banks were desperate to prop the system up.

Indeed, at $200 billion per month, we're talking about an annualized pace of over $2 TRILLION in money printing every year.

If you don't believe this will unleash inflation, consider that already in the US, inflation has exceeded the Fed's targets on ALL FOUR of its measures.

Bear in mind, these are the "official" measures of inflation… the ones that don't include things like food, or energy. When you account for the rise in the REAL cost of living in the US, REAL inflation in the US is closer to 6%.

And this is happening at a time when the Fed is hiking rates and NOT printing money.

If you don't take my word for it, take a look at Gold priced in the $USD, Japanese Yen, Euro, and British Pound.  The precious metal has begun to break of to the upside in all major world currencies.

Gold "smells" what's coming. It's inflation. And smart investors are preparing for it now.

Is World War The Twisted Cure For A Doomed Economy? "Signals for War Are Fiscal"

Apr 19, 2017 10:40 PM

The march to war is deafening.But the reasons for it go beyond the elements of military conflict and political intrigue.

But the reasons for it go beyond the elements of military conflict and political intrigue.

Underlying it all, the reasons are economic.

With a nothing-doing economy that has long dragged on the American soul, there is a growing temptation to wipe the slate clean, and launch a wider war – all with the wider aim of igniting a new economic engine.

Theoretically, the economy would spruce up on the same gin that fueled WWII – and not only delivered a victory, but solidified America a prosperous superpower while vanquishing the Great Depression.

The thought is twisted, and perhaps more and more likely everyday. Something like economic gains off of spilling blood – true military industrial complex stuff.

I hope they know what there doing, and that the rest of the country can maintain a strong moral fiber, because if that scenario is green-lighted, things could get pretty grim, pretty quick.

The constant Greg Hunter of USAWatchdog.com speaks with economist Martin Armstrong, who sees war coming as a result of the bad economy:

Former hedge fund manager Martin Armstrong, who is an expert on economic and political cycles, says, "You have to understand what makes war even take place? It does not unfold when everybody is fat and happy. Simple as that. You turn the economy down, and that's when you get war. It's the way politics works."

Startlingly, there were reports (albeit unconfirmed) in the foreign press back in 2008 – in the immediate wake of the economic crisis – that the RAND Corporation was suggesting that a new world war could be started in order to jump start and revive the economy.

It named Russia, China, Iran or another Middle Eastern country and/or North Korea as potential opponents, though the latter was considered too small time for a real economic boost.

Nine years after that crisis, the economy has not recovered, and remains in the doldrums, it seems that the option for further has gone full-blown.

As Paul Watson and Yihan Dai wrote back in 2008:

According to reports out of top Chinese mainstream news outlets, the RAND Corporation recently presented a shocking proposal to the Pentagon in which it lobbied for a war to be started with a major foreign power in an attempt to stimulate the American economy and prevent a recession.

China's biggest media outlet, Sohu.com, speculated that the target of the new war would probably be China or Russia, but that it could also be Iran or another middle eastern country. Japan was also mentioned as a potential target for the reason that Japan holds the most U.S. debt.

North Korea was considered as a target but ruled out because the scale of such a war would not be large enough for RAND's requirements.

[…]

One would hope that good people, or at least sane people who don't wish to start a global nuclear war, will oppose the RAND proposal, such as top the military generals who threatened to quit if Bush ordered an attack on Iran. Admiral William Fallon, the head of US Central Command, quit in March last year as a result of his opposition to Bush administration policy on Iran.

Now that we are seeing a plan long in action playing out, there's a good chance that our time is up.

Do you think that Wall Street has already planned the after party?Apr 19, 2017 10:40 PM

The march to war is deafening.But the reasons for it go beyond the elements of military conflict and political intrigue.

But the reasons for it go beyond the elements of military conflict and political intrigue.

Underlying it all, the reasons are economic.

With a nothing-doing economy that has long dragged on the American soul, there is a growing temptation to wipe the slate clean, and launch a wider war – all with the wider aim of igniting a new economic engine.

Theoretically, the economy would spruce up on the same gin that fueled WWII – and not only delivered a victory, but solidified America a prosperous superpower while vanquishing the Great Depression.

The thought is twisted, and perhaps more and more likely everyday. Something like economic gains off of spilling blood – true military industrial complex stuff.

I hope they know what there doing, and that the rest of the country can maintain a strong moral fiber, because if that scenario is green-lighted, things could get pretty grim, pretty quick.

The constant Greg Hunter of USAWatchdog.com speaks with economist Martin Armstrong, who sees war coming as a result of the bad economy:

Former hedge fund manager Martin Armstrong, who is an expert on economic and political cycles, says, "You have to understand what makes war even take place? It does not unfold when everybody is fat and happy. Simple as that. You turn the economy down, and that's when you get war. It's the way politics works."

Startlingly, there were reports (albeit unconfirmed) in the foreign press back in 2008 – in the immediate wake of the economic crisis – that the RAND Corporation was suggesting that a new world war could be started in order to jump start and revive the economy.

It named Russia, China, Iran or another Middle Eastern country and/or North Korea as potential opponents, though the latter was considered too small time for a real economic boost.

Nine years after that crisis, the economy has not recovered, and remains in the doldrums, it seems that the option for further has gone full-blown.

As Paul Watson and Yihan Dai wrote back in 2008:

According to reports out of top Chinese mainstream news outlets, the RAND Corporation recently presented a shocking proposal to the Pentagon in which it lobbied for a war to be started with a major foreign power in an attempt to stimulate the American economy and prevent a recession.

China's biggest media outlet, Sohu.com, speculated that the target of the new war would probably be China or Russia, but that it could also be Iran or another middle eastern country. Japan was also mentioned as a potential target for the reason that Japan holds the most U.S. debt.

North Korea was considered as a target but ruled out because the scale of such a war would not be large enough for RAND's requirements.

[…]

One would hope that good people, or at least sane people who don't wish to start a global nuclear war, will oppose the RAND proposal, such as top the military generals who threatened to quit if Bush ordered an attack on Iran. Admiral William Fallon, the head of US Central Command, quit in March last year as a result of his opposition to Bush administration policy on Iran.

Now that we are seeing a plan long in action playing out, there's a good chance that our time is up.

Do you think that Wall Street has already planned the after party?Apr 19, 2017 10:40 PM

The march to war is deafening.But the reasons for it go beyond the elements of military conflict and political intrigue.

But the reasons for it go beyond the elements of military conflict and political intrigue.

Underlying it all, the reasons are economic.

With a nothing-doing economy that has long dragged on the American soul, there is a growing temptation to wipe the slate clean, and launch a wider war – all with the wider aim of igniting a new economic engine.

Theoretically, the economy would spruce up on the same gin that fueled WWII – and not only delivered a victory, but solidified America a prosperous superpower while vanquishing the Great Depression.

The thought is twisted, and perhaps more and more likely everyday. Something like economic gains off of spilling blood – true military industrial complex stuff.

I hope they know what there doing, and that the rest of the country can maintain a strong moral fiber, because if that scenario is green-lighted, things could get pretty grim, pretty quick.

The constant Greg Hunter of USAWatchdog.com speaks with economist Martin Armstrong, who sees war coming as a result of the bad economy:

Former hedge fund manager Martin Armstrong, who is an expert on economic and political cycles, says, "You have to understand what makes war even take place? It does not unfold when everybody is fat and happy. Simple as that. You turn the economy down, and that's when you get war. It's the way politics works."

Startlingly, there were reports (albeit unconfirmed) in the foreign press back in 2008 – in the immediate wake of the economic crisis – that the RAND Corporation was suggesting that a new world war could be started in order to jump start and revive the economy.

It named Russia, China, Iran or another Middle Eastern country and/or North Korea as potential opponents, though the latter was considered too small time for a real economic boost.

Nine years after that crisis, the economy has not recovered, and remains in the doldrums, it seems that the option for further has gone full-blown.

As Paul Watson and Yihan Dai wrote back in 2008:

According to reports out of top Chinese mainstream news outlets, the RAND Corporation recently presented a shocking proposal to the Pentagon in which it lobbied for a war to be started with a major foreign power in an attempt to stimulate the American economy and prevent a recession.

China's biggest media outlet, Sohu.com, speculated that the target of the new war would probably be China or Russia, but that it could also be Iran or another middle eastern country. Japan was also mentioned as a potential target for the reason that Japan holds the most U.S. debt.

North Korea was considered as a target but ruled out because the scale of such a war would not be large enough for RAND's requirements.

[…]

One would hope that good people, or at least sane people who don't wish to start a global nuclear war, will oppose the RAND proposal, such as top the military generals who threatened to quit if Bush ordered an attack on Iran. Admiral William Fallon, the head of US Central Command, quit in March last year as a result of his opposition to Bush administration policy on Iran.

Now that we are seeing a plan long in action playing out, there's a good chance that our time is up.

Do you think that Wall Street has already planned the after party?

Are Options Traders Running For The Hills?

Apr 18, 2017 3:00 PM

Fear finally made its way into the equity options market at the end of last week – at least for a day.

After months of (well-documented) investor complacency, recent stock turbulence has begun to introduce some fear back into the market. It has been manifested in the volatility market, as we covered extensively in our Vexing Vix miniseries last week. And after last Thursday’s sharp selloff, fear has now also crept into the options market – at least for a day.
We base this on last Thursday’s reading of the CBOE Equity Put/Call Ratio. Of course, when the ratio is elevated, it is indicative of relatively heavy put volume – and a possible sign of an elevated level of fear on the part of traders. Last Thursday, the reading came in at 0.95. This was just 1 of 3 readings that high over the last 12 months. The other 2 dates happened to be within a day or 2 of the market lows during the Brexit episode and the U.S. Presidential election.


So now that options traders have seemingly headed for the hills, is the coast clear for stock investors? Inasmuch as the coast is ever really “clear” in the markets, we may have to caution investors about getting too giddy based on this data point. For, as we also demonstrated in the the case of the VIX last week, the circumstances surrounding last Thursday’s reading aren’t exactly textbook conditions of a market low.

Specifically, while most readings above 0.94 in the CBOE Equity Put/Call Ratio since the onset of the Bull Market in 2009 have come following a gradual buildup of fear, this was more or less a one-off. As evidence, of the 54 daily readings over 0.94 in the past 10 years, this is just the 5th occurring while the 10-day average of the ratio was less than 0.70. Now, that does not mean that last Thursday’s reading was not a meaningful show of investor fear (witness yesterday’s subsequent big bounce). However, it may make it less likely that a durable bottom is in place, than had it occurred into an already more fearful environment.

Here’s Italy’s Latest Plan B, Where Desperation Meets Insanity

Apr 13, 2017

Selling securities backed by defaulted loans to NIRP refugees.

Nerves are beginning to fray in Italy’s banking sector, as pressure rises on the worst hit banks to remove the most noxious elements off their books — most likely at big discounts that will further impair their balance sheets. On Saturday Italy’s finance minister, Pier Carlo Padoan, begged the ECB for more time for the banks to clean up their act. “We cannot demand that suddenly banks offload their NPLs, because this could be potentially destabilizing, especially if the problem involves several banks in the same banking system,” Padoan told a news conference. By “several banks, ” Padoan means perhaps the 114 banks, of the close to 500 banks in Italy, that have “Texas Ratios” of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank’s non-performing loans by its tangible book value plus reserves — or as money manager Steve Eisman put it, “all the bad stuff divided by the money you have to pay for all the bad stuff.”
If the TR is over 100%, the bank doesn’t have enough money to “pay for all the bad stuff” and tends to fail. In Italy, 24 banks are estimated to have ratios of over 200%. On Tuesday it was the Governor of Bank of Italy Ignazio Visco’s  turn to plead for more time. “The majority of bad loans are held by banks whose financial position does not require to sell them immediately,” he told European Union lawmakers. One bank that does need to sell its bad loans immediately — originally planned for last year — is the poster-child of Italy’s financial crisis, Monte dei Paschi di Siena. According to a new report by Il Sole 24 Ore, the world’s oldest bank has a new, highly creative plan to save itself from the brink, which is actually an old plan that’s been dug up from the archives and repackaged.
The securitization option is back in the cards for the disposal of €29 billion of non-performing loans at Italian lender Monte dei Paschi di Siena (MPS) – maybe with US investment bank JP Morgan. This will be the strong point of the group’s industrial plan under consideration at the European Commission.
That’s right: the new “strong point” of MPS’ latest self-salvation scheme is to securitize €29 billion of toxic debt and spread it as far and wide as it possibly can, with the help of none other than JP Morgan Chase. In other words, have we finally reached the juncture of Italy’s banking crisis where desperation meets insanity — the insanity of yield-starved investors, those NIRP refugees that have been tortured for too long by the ECB’s negative interest rate policy?
Under this plan, the bank would slice, dice, and repackage non-performing financial assets, such as loans, residential or commercial mortgages, or other  sometimes uncollateralized Italian “sofferenze” (bad debt) into asset-backed instruments which can then be sold to yield-starved gullible investors all over the world. This is riskier than the subprime mortgage-backed securities in the US that played a major role in the global financial crisis.
Now banks, central banks, regulators and governments are talking about allowing the same to happen with assets that are not just at risk of failure but have already failed. In some cases they haven’t generated income for years and in many cases they are personal or business loans that are not backed by any collateral of any kind. The idea is for investors to use the inadequate and slow-moving Italian legal system to collect on this often illusory collateral if any.
The FT describes the idea of securitizing NPLs as “subprime derivatives on steroids,” but only in relation to China’s plans to do exactly the same thing with its own non-performing loans, which according to official figures recently surpassed the $200 billion mark. The FT has been a lot less critical of the same plans being hatched in Italy. Some economists are even calling for an Europe-wide securitization of toxic debt.
As the FT reports, one major hurdle Chinese banks currently face in securitizing their debt is getting rated by the international rating agencies. Not that it’s stopped them. As for banks in Italy, they are less likely to face such a problem.
As part of a deal reached with the European Union in January, 2016, Italian banks can bundle bad loans into securities and buy state guarantees for theleast risky portions, provided those notes have an investment-grade credit rating. So the taxpayer would not only be on the hook for a portion of the NPLs underlying these securities, but also for the fees and profits generated along the way to securitize them.
In the first iteration of this process (depicted in the included  infographic by Deloitte), executed in September 2016, Popolare di Bari got informal approval from PricewaterhouseCoopers LLP and the Bank of Italy not only to remove the entire face value of the bad loans from its books but also to keep the senior portion of its securitization. The result: healthier looking balance sheets while the risks posed by its toxic assets have been shifted elsewhere.
Since then, Italy’s biggest and sole global systemically important bank (G-SIB) Unicredit has joined the party, shedding €17.7 billion of non-performing loans into two separate securitization vehicles, one managed by Pimco and the other by Fortress Investment Group. UniCredit retained minority stakes. The transaction was aptly dubbed Project Fino – as in, everything is just fine.

Observer Warns: "Nothing Has Changed Under Trump... We're Headed For A Major Crisis"

Apr 13, 2017 10:40 PM

When Donald Trump was elected, there was so much optimism among libertarians and conservatives, it was almost palpable. However, it’s only been several months into his first term, and it’s becoming quite apparent that Trump is no savior. In retrospect, it was foolish to think any single person could snap his fingers, and reverse decades of financial mismanagement and political corruption. It was foolish to think that he could dismantle an entrenched bureaucracy that is more powerful than most people realize.

But not everyone was convinced that Trump was going to be able to turn this ship around. Peter Schiff knew that the damage done by the political establishment was irreversible, and that our financial system was living on borrowed time. In a recent interview with Future Money Trends, Schiff explains why Donald Trump can’t stop the inevitable, and how you can crash proof your assets ahead of the economic pain that is coming:

Donald Trump should already be disappointing a lot of people who thought we were going to get change, we were going to make America great again. We didn’t repeal Obamacare, that’s here to stay. Major tax reform is dead. We’re dropping bombs.



I mean it’s the same old same old right? Big government… bigger deficits… more cheap money… keep the air in the bubble. We’re headed for a major major crisis.



As for what that major crisis will be, it’s not what most people would expect. As Schiff points out, it’s not going to be triggered by one sector of the economy, as we saw in during the last financial crash. The crisis is going to emerge with the dollar itself, which Schiff says could cause precious metal prices to soar.Everyone is taking for granted the fact that the dollar is king, but it’s not going to be for long. Not when our government continues to rack up debt like a compulsive gambler; which at this point, doesn’t appear to be changing under Trump.

The dollar is living on borrowed time, literally. And so we just don’t know. It’s like a bomb with a fuse, but we just don’t really know how long the fuse is. The dollar, I think is in a major bubble. I think it is in the process of topping out. I think once it completes this top it’s going down. And I think it’s going to take out the lows from 2008…



…I think it’s going to go down for the count. Because the last time, what saved the dollar was the financial crisis, and that crisis resulted in everybody buying the dollar. But I think the next crisis is not going to be the same crisis that we had in 08. I think the dollar is going to be the crisis. I don’t think it’s going to be a bread and butter financial crisis.



This is going to be a currency crisis. So it’s going to be the US government. It’s not going to be the mortgage markets that’s blowing up. It’s going to be the treasury bond market that’s blowing up. It’s going to be the Federal Reserve that’s blowing up. And this is going to be a major major negative for the dollar, not a positive.

We really don’t know how long that fuse is, but there’s no doubt that it’s been lit. There is a frustrating truism in economics. You can easily predict if something bad is going to happen, but you can never predict when it’s going to happen.

That’s because the economy is built on numbers that are easy to calculate, but it’s impossible to predict how people will react to those numbers. In our case, people don’t want to believe that this economy is built on a house of cards and that their standard of living is in jeopardy. That willful ignorance, that confidence, can keep the show going long after the curtain should have been drawn. However, no amount of confidence can keep an unsustainable system running forever. Eventually, reality becomes impossible to ignore.


Trump doesn’t want to preside over a major decline in our standard of living, but ultimately that has to happen. Because this is the consequence of all this excess consumption that went on before he was president. You know, we sacrificed our future to indulge our past. The future is now the present. We’re here, and it’s time to pay the piper.

Three More Reasons to Worry about the Euro’s Future - From the “Doom Loop” to the Black Hole.

 Apr 9, 2017

“Despite uncertainty over Brexit — formally triggered last week by prime minister Theresa May — central bankers from around the world see the UK as a safer prospect for their reserve investments than the Eurozone, a new poll reveals”.

At first whiff, this may smell counter intuitive. After all, it’s the UK that’s supposed to be in the weaker negotiating position over Brexit terms. It also risks losing a sizable chunk of its core industry, finance. Yet according to a survey of reserve managers at 80 central banks, who together are responsible for investments worth almost €6 trillion, the stability of the monetary union is their greatest fear for 2017.

They have good reasons to worry. Here are three of them:

1. The Doom Loop is Back in All Its Glory.

In fact, it never went away; it was just squeezed into temporary irrelevance by the ECB’s mass purchase of Eurozone sovereign bonds. The biggest beneficiaries are Italy and Spain where banks’ balance sheets are overflowing with bonds of their individual governments — all considered “risk free” for regulatory reporting.

In 2012, Spanish banks held a staggering 32% of Spain’s national debt (excluding regional and local debt). At the end of 2016, that figure had shrunk to 22.7%, or €168 billion. This scheme has kept the doom loop in some form of check, but shoveling as much peripheral sovereign debt as possible from peripheral banks onto the ECB’s books is not a sustainable long-term solution — not when the ECB’s balance has already crossed the €4-trillion mark. That’s the equivalent of 38% of the Eurozone’s GDP, well in excess of the Fed’s 23.7%.

The moment the asset purchases slow, however, the Doom Loop kicks in again, as has happened in the last few months. After the ECB announced that it was paring down its asset purchases from €80 billion a month to €60 billion a month, the purchase by Italian and Spanish banks of their respective national bonds began ticking up again.



When rates begin rising, those same banks will begin bleeding losses from their current holdings of government debt. As a new report by Spanish consultancy firm Analistas Financieros Internacionales (AFI) warns, over 70% of the fixed income assets held on the balance sheets of Spain’s biggest banks are prone to price variations, and in the worst case, the solvency of some banks could be called into question. In Italy, as many as one-quarter of the banks are already verging on insolvency. French banks have very limited exposure to French government debt but they are estimated to hold over €250 billion of Italian bonds.

2. Rising Imbalances.

The financial imbalances in the Eurozone are growing and in some cases have exceeded the crisis levels hit in 2012. The best indicator for this is Target2, standing for Trans-European Automated Real-time Gross Settlement System, which, month after month, has tracked the accelerating capital flight from the region’s periphery (Italy, Spain, Portugal, Greece and Ireland) to the core (Germany, the Netherlands, and Luxembourg).

In March, Italy’s Target2-deficit — the total amount the Bank of Italy owes other national central banks in the Eurozone (mainly Germany’s) — widened by €34 billion to a fresh record of €420 billion. At the height of the sovereign debt crisis in 2012, it was just €290 billion. In Spain things are not much better: in February its central bank owed €361 billion, €25 billion more than at the height of its banking crisis in 2012.

The ECB asserts that record T2 balances are pure accounting values and should be viewed as a benign by-product of the decentralized implementation of QE rather than renewed capital flight. Draghi refers to them even as a form of solidarity within the European system — a way for the core to help fund the periphery.

But in a recent letter to Italian EU politicians the same Draghi maintained that such debts should be settled in full should Italy decide to leave the euro. With Target II liabilities of close to 25% of GDP in Italy and above 30% of GDP in Spain, this poses a double-barreled question: how, and in what currency?

3. A Big (and Growing) Black Hole in EU Finances

If the first two problems are primarily monetary in nature and are exclusive to the Eurozone, the third is purely fiscal and affects all EU countries. At the heart of Brussels’ finances is a growing black hole. At the end of last year itreached €238 billion, up from €99 billion in 2002. This is the so-called reste à liquider, or RAL, which is a stock of commitments at the end of each year that have been made in annual EU budgets, but which are deferred for payment in later budgets.

Even under normal situation, this would be cause for concern. But the EU’s current fiscal situation is anything but normal: the bloc is in the process of losing one of its biggest net providers of funds, the UK. As the German economist Hans Werner Sinn recently put it, “Because the UK is so large, its withdrawal is economically equivalent to the withdrawal of 20 of the smallest EU countries – 20 out of 28, which we have in total.”

Other EU countries will have to pick up the slack. Günther Oettinger, the German commissioner, said as much in February. Those countries include Italy, whose public debt amounts to 133% of GDP, among the highest in the world, and it hasn’t even started bailing out its banks yet. In other words, the people in Italy may have to pay more taxes to Brussels while suffering more austerity, in the process becoming even more disenchanted with the euro project, hardly a strong foundation for a long-term future.

For the Bundesbank, the War on Cash is a war on personal freedom and choice.

NIRP is dying

Markets are suspecting that central banks are in the process of exiting this fabulous multi-year party quietly, and that on the way out they won’t refill the booze and dope, leaving the besotted revelers to their own devices. That thought isn’t sitting very well with these revelers.

In markets where central banks have pushed  government bond prices into the stratosphere and yields, even 10-year yields, below zero, there has been a sea change.

The 10-year yield of the Japanese Government Bond (JGB) jumped 2.5 basis points to 0.115% on Thursday, the highest since January 2016, after an auction for ¥2.4 trillion of 10-year JGBs flopped, as investors were losing interest in this paper at this yield, and as the Bank of Japan, rather than gobbling up every JGB in sight to help the auction along, sat on its hands and let it happen.

And on Friday morning, the 10-year yield jumped another 3 basis points to 0.145%!

In September last year, the BOJ started the now apparently troubled experiment of trying to control not just short-term interest rates but also the entire yield curve. It targeted a 10-year yield of about 0% (it was negative at the time). Analysts believed that this would mean a range between -0.1% and +0.1%, and that if the yield rose to +0.1%, the BOJ would throw its weight around and buy.

But the fact that the BOJ allowed the yield to go above that imaginary line signaled to the markets that it no longer has the intention of capping the yield at +0.1%, that in fact the BOJ has stepped back.

This happened even as BOJ Governor Haruhiko Kuroda, on Thursday, once again was trying to jawbone the markets with a verbal commitment to his yield-curve targeting strategy and his mega-QQE of ¥80 trillion ($710 billion) a year in asset purchases.

The 10-year yield had fallen below zero for the first time on February 9, 2016, as the BOJ began dabbling with its own negative interest rate policy (NIRP), because its zero-interest-rate policy and its mega-QQE bond and stock buying binge somehow wasn’t enough, and because everyone in Europe was doing it. But that’s like so ancient history now (via Trading Economics; red marks in the charts below are mine):

Germany, the second largest NIRP fiefdom, is subject to the ECB’s crazed NIRP absurdity and asset-buying binge that includes government bonds, corporate bonds, covered bonds, asset backed securities, and what not.

But there too, bonds have fallen in price despite the ECB’s purchases, with the 10-year yield emerging from negative la-la land just before the US election and soaring after it. There are now rumors that the ECB will announce sometime later in 2017 the untimely and slow death of QE (via Trading Economics):

Denmark, whose households are the second biggest debt slaves in the world, still has its own currency and therefore its own monetary policy, and therefore its own NIRP. But the 10-year yield only briefly dipped below 0% and has since rumbled higher (via Trading Economics):

And that leaves Switzerland, whose households are the Number 1 debt slaves in the world, as the lone straggler in the 10-year negative yield absurdity, but it too is about to exit.

Its 10-year yield plunged below 0% in January 2015, the first sovereign debt in that maturity to do so, when the Swiss National Bank scuttled its currency cap against the euro, and at the same time cut its benchmark interest rate from -0.25% to -0.75%. It was a day of chaos that those who got tangled up in it will likely never forget. A lot of wealth was transferred, by dint of a central bank decision.

The charts above covered one year because that was the time frame of negative 10-year yields in those countries. But in Switzerland, the story started two years ago hence the five-year chart. On Wednesday, the 10-year yield rose to -0.10%, and on Thursday, it rose further to -0.024%, getting perilously close to 0%, before easing back to -0.04% (via Trading Economics):

In France, the 10-year yield never quite made it into the negative. The French government would like nothing more than to maximize its profits from its debts, which the negative-yield absurdity allows it to do. But it only got within a hair of it in September 2016 when the 10-year yield reached an all-time low of +0.10%. Close, but no cigar.

France, I believe, was the country whose 10-year yield got the closest to participating in the NIRP absurdity without actually making it. Alas, since then, bond prices have tumbled as the 10-year yield has soared over a full percentage point to 1.05% (via Trading Economics):

These 10-year yields are still very, very low at a time when the annual inflation in the Eurozone has shot up to 1.8% and is threatening to tear higher. Financial repression at its finest continues.

In the US, 10-year Treasury prices have also fallen and the 10-year yield has surged by over a full percentage point since last summer. Unlike the central banks in Japan and Europe, the Fed is on a path of raising rates and is also thinking out loud about unwinding its big-fat balance sheet by shedding some of its Treasuries or mortgage backed securities or both.

So it would make sense for US yields to rise. But why are yields in the bailiwicks of the other central banks so jumpy? Because markets smell a rat – as central banks, despite ceaseless jabbering, appear to be sitting on their hands after years of iron-fisted market domination.

But markets have gotten so used to central-bank booze and dope that they “cannot believe” it will ever really end. 

EU Banking Mayhem, One Bank at a Time, then All at Once

September 28, 2016 

Investors are not amused.

The European banking crisis simply doesn't let up. Currently, the big two German banks are grabbing the headlines away from the Italian banks, due to their size and the damage they could do to the global financial system. Other banks are in bigger trouble still, and some have already collapsed, with bailouts and bail-ins getting lined up.

Deutsche Bank had to endure a horrendous Monday after it was leaked on Friday that Merkel had refused to entertain bailing out the bank before the general elections a year from now. Merkel's popularity has gotten broadsided recently, and bailing out bank bondholders with taxpayer money is just not popular at the moment.

Then Commerzbank, in which the government already owns a stake of 16% as a result of the bailout during the Financial Crisis, graced the headlines with leaks that it would lay off 9,000 employees, nearly one-fifth of its workforce. This will cost about €1 billion, according to the sources. To pay for it, the bank will scrap its dividend for 2016 to reduce the bleeding and preserve capital, in what is turning out to be the hellish environment of negative interest rates.

We've been writing about the European banking crisis for a long time, it seems, as it drags on, and meanders from one country to another, and sometimes we write about it in an amused fashion because we've got to keep our sense of humor in all this gloom.

But investors who believed in all the hype and in Draghi's promises and in Merkel's strength and in the willingness of all of them to do whatever it takes to protect bank bondholders and stockholders, and who believed in the miracle of Spain's recovery, and in Italy's new government and what not – well, they're not amused.

For them, it has been bloody. The global financial crisis got swept under the rug. Then the euro debt crisis took down some banks at the periphery, and taxpayers stepped in to bail out the bondholders, mostly, and a lot more things got swept under the rug. But the problems weren't solved. And as the decomposing assets under the rug kept exuding their pungent odor, investors held their nose and played along for a while.

But now it's just getting worse. And investors are wondering what exactly is under these rugs – or maybe they'd rather not know for it's too ugly to behold. And every time someone does look, for example at the Italian banks, they find even bigger problems that have started to metastasize.

This banking crisis has the potential to transmogrify into a financial crisis. All it takes is for one of the big ones to suddenly topple. The flow of credit would freeze up instantly. In an economic system that depends on credit, and whose lifeblood is credit, such an event is a financial crisis.