John Burbank Shuts Flagship Hedge Fund, Plans Launch Of Cryptocurrency Unit

The writing for John Burbank"s Passport Capital was on the wall back in August, when as we reported, in his latest letter to investors Burbank reported that at what was once a multi-billion fund, total firm assets at Passport had shrunk to just $900 million as of June 30 as a result of net outflows totaling a whopping $565 million, or a nearly 40% loss of AUM due to redemptions. The collapse in assets took place just a few months after Passport announced it was liquidating its long/short strategy in April.

And unfortunately for Burbank, just four month later, a chapter of Passport Capital"s history comes to a close, because as Bloomberg reported, the fund would shutter its flagship hedge fund after returns slumped and following unprecedented redemptions. Passport - which shot to fame for its lucrative bet against subprime housing ahead of the global financial crisis - peaked at around $5 billion but lately managed a fraction of that after a double digit loss last year and further losses in 2017.

The fund’s "returns over the past two years are unacceptable and cause me to rethink how to manage money in this environment," Burbank wrote in a Dec. 11 letter to investors, the Wall Street Journal first reported overnight. Passport will continue to operate its roughly $300 million special opportunities fund, which holds some of the firm’s more successful bets on companies such as Alibaba Group Holding Ltd.

As Bloomberg reminds us, Burbank founded Passport in 2000 which was best known for its big bet on a tumble in subprime mortgages in 2006. His fund made 220% the following year, ushering in the good times - if only briefly - with Passport AUM briefly hitting a peak of $5 billion before a double-digit loss last year and more losses in 2017, as we reported previously. Total assets declined to $2.4 billion in April, then plummeted further to $900 million amid client withdrawals and after it wound down its Long-Short Strategy fund after an "incredibly disappointing 2016," Bloomberg reported earlier this year.

“You will not hear about Passport shutting down -- there is too much opportunity available to do that,” Burbank wrote, adding that the firm may announce a new area of investment in the near future.

Well, yes, hedge funds rarely want to publicize that they are closing. And yes, even as Passport the hedge fund as we know it no longer exists, the company has decided to pivot into Mike Novogratz" sandbox, and as the WSJ reports this morning, even as Burbank"s hedge fund is pulling back from traditional investing and trading, it is launching a new arm that focuses only on cryptocurrencies such as bitcoin. More from the WSJ:

Despite his recent performance, Mr. Burbank’s pronouncements remain closely followed by his peers. He would become one of the more prominent major investors to go big on bitcoin and the like, along with the former Fortress Investment Group hedge-fund manager Michael Novogratz and Horizon Kinetics Chief Investment Officer Murray Stahl.

To be sure, the burly John Burbank - a Duke University graduate - is in some ways an unlikely evangelist for digital currency. As the WSJ describes him, "he made his name buying up credit default swaps ahead of the financial crisis, resulting in a more-than 200% gain for his main fund in 2007. That year, he made $370 million personally, Forbes estimated."

His predictions have mostly failed to pan out since. Passport bet big on gold mining companies in 2014, but prices dropped thereafter, and slashed its overall exposure to rising stocks in early 2015, missing out on some of the subsequent rally.

Burbank"s interest in bitcoin and cryptos is hardly new, however, and was reinforced in his last investor letter in which he shared the following perspective:

We have been monitoring block chain technology and cryptocurrencies for some time. We believe this technology represents a secular change with the potential to profoundly disrupt many markets. AMD is the first position in the portfolio that has been a net beneficiary of this trend, but we expect our understanding of block chain technology’s potential to be an increasingly relevant factor in stock selection.

Burbank continued in Monday"s letter:

“Technological progress and its non-linear enhancement or deflation of the biggest industries and markets in the world is my choice for what will have mattered most five years from now. I want to capture these extraordinary outcomes in new ways appropriate to the current era.”

The new cryptocurrency-focused fund’s leadership will include longtime Passport executive Seth Spalding, the WSJ said. While Passport hasn’t told prospective investors much about its strategy, but has scheduled a call for later this week to lay out more.

It is unclear if bitcoin - in addition to everything else - will also emerge as a "hail mary" pass for fading hedge fund managers desperate to attract just enough capital - through the use of buzzwords or otherwise - to stay in business for just one more lap. If Burbank is successful, watch as every other hedge fund and family office promptly launches their own [Insert Name Here] Crypto Asset Special Situations LLC.

Who"s Next? Venezuela"s Collapse Puts These Nations At Risk

"It"s a wake-up call for a lot of people who will say ‘Look, the stuff I own is actually very risky"..." warns Ray Jian, who oversees about $6 billion at Pioneer Investment Management Ltd. in London. "People have been ignoring risks in places like Lebanon for a long time," and the official default of Venezuela this week has emerging-market money managers are looking to identify countries that might run into trouble down the road.

While Bloomberg reports that while none are nearly as badly off as Venezuela - where a combination of low oil prices, economic mismanagement and U.S. sanctions did the country in -  traders are scouting for credit risk, from Lebanon, where Prime Minister Saad Hariri’s sudden resignation has once again thrust the nation into a Saudi-Iran proxy war, to Ecuador, where recently elected President Lenin Moreno continues to expand the debt load in a country with a history as a serial defaulter.

1. Lebanon:

One of the world’s most indebted countries, Lebanon may hit a debt-to-gross domestic product ratio of 152 percent this year, according to International Monetary Fund forecasts. That’s coming at a time when political tension is rising. Hariri’s abrupt resignation, announced from Riyadh on Nov. 4, triggered about $800 million of withdrawals from the country as investors speculated that the nation would be in the crosshairs of a regional feud between the Saudis and Iranians. While the central bank says the worst may be over, credit-default swaps have hit a nine-year high.

2. Ecuador:

After a borrowing spree, the Andean nation’s external debt obligations over the next 12 months ballooned to a nine-year high relative to the size of its GDP. Ecuador probably has the highest default risk after Venezuela, according to Robert Koenigsberger, the chief investment officer of Gramercy Funds Management. The country will be vulnerable “when the liquidity environment changes and they can no longer go to the market to get $2.5 billion to plug the hole," he said. Finance Minister Carlos de la Torre told Bloomberg in an email on Thursday that there is "no default risk" for any of Ecuador’s debt commitments and the nation’s indebtedness is nowhere near "critical" levels.

3. Ukraine:

While the Eastern European nation’s credit-default swaps have declined from their 2015 highs, persistent economic struggles are giving traders reason for caution. GDP expansion has slowed for three consecutive quarters and the World Bank warns that the economy is at risk of falling into a low-growth trap. Ukraine’s parliament approved next year’s budget on Tuesday as it eyes a $17.5 billion international bailout.

4. Egypt:

Egypt’s credit-default swaps are hovering near the highest since September. The cost for protection surged in June as regional tensions heated up amid a push by the Saudis to isolate Qatar. While Egypt has been able to boost foreign-currency reserves and is on course to repay $14 billion in principal and interest in 2018, its foreign debt has climbed to $79 billion from $55.8 billion a year earlier.

5. Pakistan:

Pakistan’s credit-default swaps surged in late October and linger near their highest level since June. South Asia’s second-largest economy faces challenges as it struggles with dwindling foreign reserves, rising debt payments and a ballooning current account deficit. Pakistan is mulling a potential $2 billion debt sale later this year. Speaking at the Bloomberg Pakistan Economic Forum last week, central bank Deputy Governor Jameel Ahmad played down concerns over the country’s widening twin deficits.

6. Bahrain:

Bahrain’s spread rose dramatically in late October to the highest since January after it was said to ask Gulf allies for aid. The nation is seeking to replenish international reserves and avert a currency devaluation as oil prices batter the six Gulf Cooperation Council oil producers. Although its neighbors are likely to help, Bahrain could still be left with the highest budget deficit in the region, according to the IMF.

7. Turkey:

Despite high yields, investors are still reluctant to buy Turkish bonds. The nation has been caught up in a blur of political crises, driving spreads on credit-default swaps to their highest level since May. Turkey was the only holdover on S&P Global Ratings’s latest “Fragile Five” list of countries most vulnerable to normalization in global monetary conditions.

Venezuela Signs $3.2 Billion Debt Restructuring Deal With Russia

As Venezuela teeters right on the brink of complete financial collapse, Bloomberg reports that Russia has agreed to restructure roughly $3.2 billion in outstanding obligations.  While details of the restructuring agreement are scarce, both sides reported that the deal spreads payments out over 10 years with minimal cash service required over the next six years.

Russia signed an agreement to restructure $3.15 billion of debt owed by Venezuela, throwing a lifeline to a crisis-wracked ally that’s struggling to repay creditors.

 

The deal spreads the loan payments out over a decade, with “minimal” payments over the first six years, the Russian Finance Ministry said in a statement. The pact doesn’t cover obligations of state oil company Petroleos de Venezuela SA to its Russian counterpart Rosneft PJSC, however.

 

“The terms are flexible and very favorable for our country,” Wilmar Castro Soteldo, Venezuela’s economic vice president, told reporters in Moscow after the signing. “We will be able to return to the level of commercial relations with Russia that we had before,” he added, noting that a deal to buy Russian wheat will be signed next week.

This is the second time Russia has agreed to reschedule Venezuela’s debt payments after agreeing to an extension last year. Still, Caracas failed to make payments amid an economic crisis triggered by low prices for oil. Rosneft has also provided several billion dollars in advance payments for Venezuelan crude supplies.

The rescheduling pact is a “demonstration of the desire to maintain ties with the current Venezuelan leadership,” Viktor Kheifets, an expert in Venezuela at St. Petersburg State University, said by phone. “Russia isn’t happy with everything that the government there is doing but Venezuela is an ally where Russia has economic interests and Moscow is firmly against a forcible change of regime there.”

 

In a website statement announcing the deal, Russia’s Finance Ministry said, “The debt relief provided to the republic from the restructuring of its liabilities will allow funds to be allocated for the country’s economic development, to improve the debtor’s solvency and increase the chances of all creditors to recoup loans granted earlier to Venezuela.”

Of course, the deal with Russia comes as attempts to hold talks with Venezuela"s other creditors faltered this week. President Nicolas Maduro had summoned holders of some $60 billion of bonds issued by the government and PDVSA to begin a renegotiation as the nation’s cash crunch worsens, but as we noted previously (see: S&P Downgrades Venezuela To "Selective Default" After Bondholder Meeting Devolves Into Total Chaos), the meeting turned out to be nothing more than a photo op. 

Meanwhile, as the Financial Times noted yesterday, failure of ISDA committees to determine whether or not a default event actually occurred when Venezuela blew through its grace period, has only added to the confusion of the restructuring process.

A finance industry committee convened to discuss whether Venezuela’s state oil company has defaulted on its debts has elected to delay the decision once again, underscoring the uncertainly swirling around the country’s bond payments.

 

Venezuela belatedly came through with a $1.1bn PDVSA bond payment last week, but only well after a three-day grace period following the bond’s maturity on Nov 3. That led to a request that the International Swaps and Derivatives Association’s “determinations committee” consider whether PDVSA was in default.

 

The Isda committees have the power to declare a “failure to pay”, which would trigger insurance-like contracts on PDVSA’s bonds, known as credit-default swaps, even if the actual bondholders haven’t declared it a default. But in a statement on its website on Monday, Isda said that the committee had decided to reconvene on Tuesday at 11am to discuss the PDVA question further.

All of which has left bondholders in limbo...

Are Cryptocurrencies Inflationary?

Posted with permission and written by John Rubino, Dollar Collapse 

 

 

There’s a debate raging over what, exactly, bitcoin and the thousand or so other cryptocurrencies actually are. Some heavy-hitters are weighing in with strong, if not always coherent opinions:

 

Jamie Dimon calls bitcoin a ‘fraud’

 

JPMorgan Chase CEO Jamie Dimon did not mince words when asked about the popularity of virtual currency bitcoin.

Dimon said at an investment conference that the digital currency was a “fraud” and that his firm would fire anyone at the bank that traded it “in a second.” Dimon said he supported blockchain technology for tracking payments but that trading bitcoin itself was against the bank’s rules. He added that bitcoin was “stupid” and “far too dangerous.”

————————

Peter Schiff: Even at $4,000 bitcoin is still a bubble

 

One of the best-known among the bears, investor Peter Schiff, is now making his case in even stronger terms for why bitcoin has advanced ever farther into bubble territory.

Schiff, who predicted the 2008 mortgage crisis, famously referred to bitcoin as digital fool’s gold and compared the cryptocurrency to the infamous bubble in Beanie Babies.

Moreover, the recent run-up in bitcoin hasn’t softened Schiff’s view: If anything, it’s reinforced his sense of impending doom.

Schiff told CoinDesk:

“There’s certainly a lot of bullishness about bitcoin and cryptocurrency, and that’s the case with bubbles in general. The psychology of bubbles fuels it. You just become more convinced that it’s going to work. And the higher the price goes, the more convinced you become that you’re right. But it’s not going up because it’s going to work. It’s going up because of speculation.”

“What it comes down to is that bitcoin ain’t money.”

“Libertarian-minded crypto fans saw this was a way to liberate people from the government,” he said, concluding:

“I think it will have the opposite effect. People are going to lose money. This could really backfire, giving libertarian ideals a bad name by making fiat look good. The downside can be really spectacular.”

————————

Hedge fund manager James Altucher: Cryptocurrencies Could Be Worth $200 Trillion One Day

 

I’m not exaggerating when I say cryptocurrencies are the biggest innovation since the internet. We’re on the ground floor of an enormous trend that’s going to change the world.

Cryptocurrencies are currencies with no government in the middle. No bank in the middle. No organizations in the middle keeping track of all your payments, or taking advantage of your spending so they can invade your privacy, and on and on.

Cryptocurrencies solve trillions of dollars’ worth of problems, which is why they will be worth trillions of dollars one day.

Consider the potential:

There is currently $200 trillion in cash, money and precious metals used as currencies in the world. Meanwhile, there’s only $200 billion in cryptocurrencies. Cryptocurrencies are eventually replacing traditional currencies.

So that $200 billion will eventually rise to the level of currencies. And probably sooner than we can imagine.

Ask yourself, why does the world need multiple currencies? There’s actually no real reason. The only reason we have a U.S. dollar and also a Canadian dollar is that in 1770 the people in Canada decided not to join the U.S. So an artificial border created two currencies. It’s all dictated by artificial borders.

In the past, an ounce of gold would be accepted almost anywhere in the world. In that sense, unbacked modern fiat currencies are a step backwards.

But in cryptocurrency world, there are what I call “Use Borders.” Every currency is defined by its use. For instance, Ethereum is like Bitcoin but it makes “smart contracts” easier. Contract Law is a multi-trillion dollar industry so this has a huge use case. Filecoin makes storage easier. It’s a $100 billion industry. And on.

Studying the “use” cases, and the effectiveness of the coin to solve those use cases can help us make investment decisions confidently.

This is the great promise of cryptocurrencies and why they will change the world. It’s just getting started.

Don’t try to make sense of the above. Instead, let’s just assume that the cryptocurrency universe will continue to expand for a while and narrow the discussion down to a single question: Are cryptocurrencies inflationary? That is, will their spread lead to higher or lower prices for the average person, and greater or lesser financial instability for the markets, and what does this mean for today’s fiat currencies?

 

One common opinion is that cryptocurrencies can’t be inflationary because their owners have to pay for them in fiat currencies. So one bitcoin bought means one dollar, yen, or euro sold, with the net effect on prices being zero.

 

This makes intuitive sense at first glance, but only holds for the moment of purchase. Consider what happened after someone in, say, 2014 exchanged dollars for bitcoins. The dollars held most of their value, which means the total amount of dollar purchasing power in the world remained constant. But those bitcoins went up by several thousand percent, dramatically increasing the purchasing power – and thus the potential inflationary impact – of the bitcoin complex.

 

A real world example is Julian Assange:

 

Julian Assange Says Wikileaks Has Made a 50,000% Return on Bitcoin. Here’s What That Means

 

Wikileaks has seen an amazing return on investments in bitcoin, founder Julian Assange says, and he is “thanking” the U.S. government for forcing the controversial organization to get into bitcoin in the first place.

In a Tweet on Saturday, Assange said the group’s investment in the cryptocurrency has seen a return greater than 50,000% since 2010. Wikileaks began investing in bitcoin back then because global payment processors like Visa, Mastercard, and Paypal were under pressure by the U.S. government to block the ability of the group to take payments.

In fact, Bitcoin has seen a more-than 9 million percent return over the dates Assange references. In certain periods in 2010, bitcoin was trading for mere pennies. According to coindesk.com, one unit of bitcoin is now worth a record high of roughly $5,700. Anyone buying bitcoin through much of 2011 and 2012, when one unit was sometimes trading below $1 and was often under $10, would indeed see a return on investment of more than 50,000%, assuming they never sold.

The difference between Wikileak’s purchasing power pre and post-bitcoin is immense. If Assange decides to spend his windfall on goods and services he’d have, at the margin, an inflationary impact on the stuff he buys.

 

So the answer to the question of cryptocurrencies’ impact on price levels depends on how their values change. If they rise after people buy them, then they’re inflationary. If they rise a lot, they’re potentially very inflationary.

 

In this sense, it might be helpful to view cryptocurrencies as assets like houses or stocks rather than as money. When they rise relative to fiat currencies they increase the purchasing power of their owners, generate a “wealth effect” in which owners feel richer and more comfortable with splurging, and in that way push up prices. Based on the following chart, a lot of early adopters are feeling a whole lot richer these days.

 

 

Which then leads to what might be the major cryptocurrency theme of the coming year: Why would governments allow such an inflationary supernova to explode right in front of them when they presumably have the power to stop it? Here’s one possible — and of course disturbing — answer:

 

Will cryptocurrencies trash cash? ‘Fedcoin’ could do it

 

Economist Ed Yardeni of Yardeni Research asks the obvious question: Why would central banks—which derive their power as the centralized gatekeepers of fiat currency creation, check clearing and payment processing—embrace a movement that’s primary motivation has been to usurp this power in a decentralized way?

Part of that, according to St. Louis Federal Reserve president James Bullard, is recognition that the technology has achieved critical mass. Thus, there’s a fear of being left behind as the very foundations of banking and monetary policy—intermediation, funds transfers, transactions—rapidly change, not unlike the way the creation of mortgage-backed securities and credit default swaps changed housing finance in the mid-2000s.

There’s another, more self-serving purpose: Central banks could use their own cryptos to put the squeeze on paper currency. Why? To facilitate the use of negative interest rate policy, which has been deployed in Europe and Japan in recent years in half-baked forms. Currently, in Switzerland, short-term interest rates are at -0.75%.

When another recession hits, especially if one comes soon, a dive to even deeper rates of negative interest would be hampered by the hoarding of cash since banks would charge for deposits (vs. absorbing the cost of negative rates themselves, as they’re doing now). This is known by the economics cognoscenti as the “zero lower bound” in that interest rates cannot go much below negative before the traditional functions of deposits, loans and fractional money creation break down. Mattress stuffing ensues en masse.

The Fed is clearly thinking about it. In testimony to Congress last year, Fed chairman Janet Yellen admitted policymakers “expect to have less scope for interest-rate cuts than we have had historically,” adding she would not completely rule out the use of negative interest rates.

The BIS­—the central bank of central banks—in its latest quarterly review posited that a crypto backed by the Fed “has the potential to relieve the zero lower bound constraint on monetary policy.” Any distinction between regular dollars and this new “Fedcoin” could be removed by establishing a fixed one-to-one valuation. Any competition

from the likes of bitcoin could be squashed by regulation; not unlike how the private ownership of gold was outlawed in the 1930s when it threatened the Fed’s ability to ease credit conditions.

At the risk of being repetitious, pretty much all of the above looks good for gold and great for silver.

 

 

Questions or comments about this article? Leave your thoughts HERE.

 

 

 

 

Are Cryptocurrencies Inflationary?

Posted with permission and written by John Rubino, Dollar Collapse

 

Ray Dalio Is Shorting The Entire EU

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

A point BOE Governor Mark Carney made recently may be the biggest cog in the European Union’s wheel (or is it second biggest? Read on). That is, derivatives clearing. It’s one of the few areas where Brussels stands to lose much more than London, but it’s a big one. And Carney puts a giant question mark behind the EU’s preparedness.

Carney Reveals Europe’s Potential Achilles Heel in Brexit Talks

Carney explained why Europe’s financial sector is more at risk than the UK from a “hard” or “no-deal” Brexit. [..] When asked does the European Council “get it” in terms of potential shocks to financial stability, Carney diplomatically commented that “a learning process is underway.” Having sounded alarm bells about clearing in his last Mansion House speech, he noted “These costs of fragmenting clearing, particularly clearing of interest rate swaps, would be born principally by the European real economy and they are considerable.”

Calling into question the continuity of tens of thousands of derivative contracts , he stated that it was “pretty clear they will no longer be valid”, that this “could only be solved by both sides” and has been “underappreciated” by Europe . Carney had a snipe at Europe for its lack of preparation “We are prepared as we should be for the possibility of a hard exit without any transition…there has been much less of that done in the European Union.”

In Carneys view “It’s in the interest of the EU 27 to have a transition agreement. Also, in my judgement given the scale of the issues as they affect the EU 27, that there will ultimately be a transition agreement. There is a very limited amount of time between now and the end of March 2019 to transition large, complex institutions and activities…

If one thinks about the implementation of Basel III, we are alone in the current members of the EU in having extensive experience of managing the transition for individual firms of various derivative and risk activities from one jurisdiction back into the UK. That tends to take 2-4 years. Depending on the agreement, we are talking about a substantial amount of activity.” [..] “I wouldn’t want to use financial stability issues as leverage. I wouldn’t want them to be addressed in a bloodless technocratic way in the interests of all the citizens.”

Sounds like Carney knows a thing or two that Juncker et al haven’t sufficiently thought through. The EU plans to move all – or most- derivatives clearing to the continent, but such a thing is anything but easy. That’s another very tangled web, and an expensive one to boot. Brussels probably wants to use the issue to put pressure on London in some way, but a hard Brexit might make that unlikely if not worse. Bloomberg from June this year:

EU Targets Derivative-Clearing Giants With Relocation Threat

“Today, a significant amount of financial instruments denominated in the currencies of the member states are cleared by recognized third-country CCPs,” according to the proposal. “For example, the notional amount outstanding at Chicago Mercantile Exchange in the U.S. is €1.8 trillion for euro-denominated interest-rate derivatives,” the commission said. “This also raises a series of concerns.”

The financial industry has lobbied hard against a location policy. The International Swaps and Derivatives Association said requiring euro-denominated interest-rate derivatives to be cleared by an EU-based clearinghouse would boost initial margin requirements by as much as 20% . The FIA, a trade organization for the futures, options and centrally cleared derivatives markets, has said forced relocation “could nearly double margin requirements from $83 billion to $160 billion.”

According to that Bloomberg piece, the notional amount outstanding of euro-denominated OTC interest-rate derivatives is some $90 trillion, 97% of which goes through the London Clearing House (LCH) based in .. well, you guessed it. Wikipedia:

LCH is a European-based independent clearing house that serves major international exchanges, as well as a range of OTC markets. Based on 2012 figures LCH cleared approximately 50% of the global interest rate swap market, and is the second largest clearer of bonds and repos in the world , providing services across 13 government debt markets.

In addition, LCH clears a broad range of asset classes including: commodities, securities, exchange traded derivatives, credit default swaps, energy contracts, freight derivatives, interest rate swaps, foreign exchange and Euro and Sterling denominated bonds and repos. LCH’s members comprise a large number of the major financial groups including almost all of the major investment banks, broker dealers and international commodity houses.

More details from Reuters, also in June:

Derivatives Body Warns EU Against Moving Euro Clearing From London

Shifting clearing of euro-denominated derivatives from London to the European continent would require banks to set aside far more cash to insure trades against defaults, a cost that would be passed on to companies, a global derivatives industry body says. [..]The London Stock Exchange’s subsidiary LCH currently clears the bulk of euro-denominated swaps, a derivative contract that helps companies guard against unexpected moves in interest rates or currencies.

Britain, however, is due to leave the bloc in 2019, putting it out of the EU’s regulatory reach. The International Swaps and Derivatives Association (ISDA), one of the world’s top derivatives industry bodies, said on Monday that a “relocation” in euro clearing to continental Europe would split liquidity in markets and reduce the ability of banks to save on margin by offsetting positions in the same liquidity pool.

Deutsche Bank has the world’s largest derivatives portfolio. Not all of it will be euro-denominated, but still. And I know it’s just notional amounts, but derivatives are not things one plays fast and loose with, lest the clearing becomes opaque and trouble starts.

Juncker better solve this thing. Oh, and this one too (yes, it’s quite fun to report on this):

Money Will Divide Europe After Brexit

As part of the transition period of around two years that she called for in her emollient Florence speech last month, Britain would continue to pay in to the EU budget to ensure that none of the member states was out of pocket owing to the decision to leave. These net payments of around €10 billion a year would fix the immediate problem facing the EU, the hole that would otherwise open up in its finances during the final two years of its current budgetary framework, which runs from 2014 to 2020.

[..] through its accounting procedures, the EU can and does commit it to spending that will be paid for by future receipts from the member states. What this means is that even after 2020 there will still be payments due on commitments made under the current seven-year spending plan. That pile of unpaid bills, eloquently called the “reste à liquider” (the amount yet to be settled), is forecast to be €254 billion at the end of 2020.

Estimates of what Britain might owe towards this vary, but taking into account what might have been spent on British projects it could be around €20 billion. On top of that – and the second main reason why the EU is holding out for more – the EU has liabilities, notably arising from the unfunded retirement benefits of European staff estimated at €67 billion at the end of 2016, which it is expecting Britain to share. Even taking into account some potential offsets from its share of assets, Britain may face a bill of between €30 billion and €40 billion on top of the €20 billion paid during the transition period.

The EU finances itself on the fly. It’ll have a €254 pile of unpaid bills in 3 years time. That is scary. Not for Brussels, but for its member countries. A hard Brexit, in which Britain may refuse to pay, is perhaps even scarier.

Anyway, once Juncker’s done with all that, he’ll have to move on to the next problem.

Derivatives is a big cloud hanging over Europe, but this one is potentially shattering.

Ray Dalio, manager of the world’s biggest hedge fund, is shorting, placing large bets against, anything Italian, and given Italy’s size and hence importance to the EU, his bets are effectively bets against Brussels.

Dalio’s Fund Opens $300 Million Bet Against Italian Energy Firm

Bridgewater Associates is adding to its billion-dollar short against the Italian economy. The world’s largest hedge fund disclosed a $300 million bet against Eni SpA, Italy’s oil and gas giant, data compiled by Bloomberg show. Bloomberg previously reported that Ray Dalio’s firm had wagered more than $1.1 billion against shares of six Italian financial institutions and two other companies.

This latest bet is the hedge fund’s second-largest against an Italian company, trailing only the $310 million against Enel SpA, the country’s largest utility. Eni’s majority holder is the Italian government via state lender Cassa Depositi e Prestiti SpA and the Ministry of Economy. The public involvement also is reflected in the government’s role in appointing the chief executive officer. Current CEO Claudio Descalzi has been at the helm since 2014 and was reconfirmed this year.

$1.1 billion against the banking system, $310 million against the main utility, $140 million vs pan-European insurer Generali and now $300 million vs the national oil and gas company, That adds up to quite a bit more than the Bloomberg graph says, but I’ll include it anyway.

Dalio doesn’t call the bluff of Italy, and this is not just like George Soros’ shorting the British pound in 1992, he’s calling out the entire EU and its financial system.

He’s saying I don’t believe you can keep up the charade.

He’s making a mockery of Mario Draghi’s “whatever it takes”.

So what are Rome, Brussels and Frankfurt going to do? They can’t ignore the no. 1 hedge fund forever. They will have to pump money into Italy, in large amounts. Merkel won’t like that, neither will her new coalition partner FDP, and the Bundesbank may start legal action.

Dalio’s located the Union’s achilles heel, which is not just that Italy’s insolvent (it’s not alone in that), but that there’s a gigantic theater production being performed to give everyone the impression that things are going just swimmingly, thank you. So Dalio’s said: how much for a ticket to the show?, and paid it. And now he’s inside.

Bridgewater didn’t enter that theater for nothing. $1.85 billion is not chump change for them. Intesa Sanpaolo CEO Carlo Messina may have said that Dalio will lose his bets, but according to the IMF Italy’s non-performing loans levels were €356 billion at the end of June 2016, which is 18% of total loans for Italian banks, 20% of Italy’s GDP and one-third of total Eurozone NPLs. Intesa Sanpaolo holds a nice chunk of that.

‘Whatever it takes’ may well be too much to take for the EU, and Draghi looks outsmarted, as do Juncker and Merkel. How many billions will it take for Dalio to go away? And then, who’s next, which hedge fund, which politician, which ECB chief? Coming soon to a theater near you.

Citi's Bringing Back The Synthetic CDO...But In A Way That "Insulates It From Any Losses"

Less than a decade after being forced to take a taxpayer funded bailout to avoid an embarrassing bankruptcy filing, Citibank, proving that they learned precisely nothing from the so-called "great recession," has put a 35 year old in charge of once again making the bank into a powerhouse in the Synthetic CDO market.  But please don"t worry about the risk because this time Citi says they"re building the business in a "way that insulates them from any losses."  Here"s more from Bloomberg:

It’s an astonishing comeback for the roughly $70 billion market for synthetic CDOs, which rose to infamy during the crisis and then faded into obscurity after nearly destroying the financial system. But perhaps the most surprising twist is Citigroup itself. Less than a decade ago, the bank was forced into a taxpayer bailout after suffering huge losses on similar types of securities tied to mortgages. Now, many in the industry say Citigroup is responsible for over half the deals that come to market, though precise numbers are hard to come by.

This time, Citigroup says, it’s doing things differently. The deals are tailored in a way that insulates it from any losses, while giving yield-starved buyers a chance to reap returns of 20 percent or more. The market today is also just a fraction of its size before the crisis, and few see corporate defaults surging any time soon. But as years of rock-bottom interest rates have pushed investors toward riskier products, the revival of synthetic CDOs may be one of the clearest signs yet of froth in the credit markets.

Danielle Romero-Apsilos, a spokeswoman at Citigroup, said synthetic CDOs are fundamentally different than they were before the crisis and that banks today aren’t managing market risk any more. That’s because every part of a synthetic CDO deal is distributed to investors, which also helps to prevent the market from growing too fast.

“Every single client we talk to always asks the differences pre-crisis and post-crisis,” said Vikram Prasad, who oversees Chen’s team as the head of correlation and exotics credit trading. “Everyone remembers the word CDO. Our clients are thinking the same thing, they are doing the due diligence.”

Of course, at least in our experience, levering a levered product in order to juice returns by 10x is almost always incredibly safe (can you taste the sarcasm?). 

The safest portion, which would typically return 0.6 percent a year, can be levered up to 6 percent in some cases. Equity tranche returns can reach 20 percent.

Meanwhile, it"s not just Citibank looking to recreate the financial crisis...other banks, including BNP Paribas, are looking to get in on the action as well...

Other Wall Street banks, which shunned the market since the crisis or struggled to establish a foothold, are angling for a bigger slice of the action. BNP Paribas SA is also active in synthetic CDOs and others are keen to follow suit, according to people familiar with the matter, who asked not to be identified because they aren’t authorized to speak publicly.

For those who have forgotten how Synthetic CDOs work, below is a quick primer.  To summarize, you go out and find a bunch of suckers willing to backstop trillions of dollars worth of credit risk in return for a few bps in annual premium payments.  You then tranche out the risk being taken by the CDO investors so that those at the top can get a AAA-rating and, in return, tell their investors that they"re taking no risk at all.  Those investors then lever up their capital another 10x so they can make 8% returns on a "risk-free" investment...it"s basically as safe as having you"re own printing press from the U.S. Treasury.

Typically, these CDOs pool together about 100 different credit-default swaps tied to various companies, which are then sliced into varying levels of risk called tranches -- senior, mezzanine and equity. Over the life of a deal, which generally lasts two to three years, the swaps generate a steady stream of income for “long” investors (and are paid by “short” investors on the other side of the trade who want insurance against a potential default).

The equity tranche has the biggest risk of getting wiped out if losses from defaults exceed roughly 5 to 7 percent, and nets the highest returns.

And guess who"s buying?  If you guessed 20-something year old pension and insurance fund investors who were in middle school during the last financial crisis then you"re absolutely right...congratulations.

Yet after years of rising markets, declining corporate defaults and tighter credit spreads, the trade is finally attracting greater interest. Increasingly, pension funds and endowments have become senior tranche investors in many of Citigroup’s synthetic CDOs. And because the CDOs are derivatives, they have small upfront costs and amplify returns.

“There is a whole generation of people in finance who never knew or forgot what the problems were with synthetic CDOs,” said Janet Tavakoli, a 30-year veteran of the financial markets who runs a consulting firm and has written books on structured credit and CDOs. “Just as derivatives can lever up the upside, they can lever up the downside.”

Conclusion:  "Short everything that guy has touched."

"Leading Indicator Of Potential Weakness" Looms In Corporate Credit Markets

While credit spreads are broadly-speaking unmoved by recent chaos, signals are emerging that investors are starting to get worried about the $7.2 trillion U.S. investment-grade bond market.

Bloomberg"s Lisa Abramowicz points out that bond buyers are starting to show some signs of unease, with traders are increasingly turning to derivatives to hedge against potential losses.

This is a marked shift from earlier in the year, when many bond investors seemed unwilling to give up any returns for such protection.

During most of 2017, trading volumes in credit-default swaps sagged well below recent years" averages (the red oval below)

Now, however, Abramowicz notes that activity in the derivatives has risen sharply (green oval above), with volumes surging more than 110 percent in the week ended Aug. 11 compared with the same week in 2016.

That contrasts with a more than 10 percent decline in volumes on average throughout 2017 compared with the period last year.

"This is often a leading indicator of potential weakness," Peter Tchir, head of macro strategy at Brean Capital LLC, said on Bloomberg Radio on Tuesday.

Investors don"t want to sell their corporate-bond holdings because they know it could be difficult to buy them back in the future. But they are are feeling less secure owning the debt, especially at such high valuations. So they"re either getting exposure to the securities in a way that"s easy to exit quickly in a pinch, or they"re paying a premium to cover any losses incurred during a selloff.

"There are events on the horizon that could cause a dislocation," said Anindya Basu, a credit derivatives strategist at Citigroup Inc. "You"re seeing that feed through to the market."

US Debt Ceiling, The Wall, Runaway Spending, & The Lack Of Evidence Of Concern... So Far

Via Snake Hole Lounge blog,

The US Statutory Debt Limit, a failed tool to halt the endless growth of Federal debt issuance, is once again in play at nearly $20 trillion. It was only at $6 trillion in 2002.

The problem, of course, is runaway Fed spending which is currently at around twice that of Federal current tax receipts, requiring that the deficit be funded by issuing Federal debt (or raising taxes and/or cutting Federal spending).

The staggering increase in Federal debt starting in 2007 also resulted in a large spike in public debt to GDP.

The US has joined the European PIGs (Portugal, Italy, Greece, as well as Cyprus and Belgium) in having debt as a percentage of GDP being over 100%. The fourth debt piggie is Spain at 99.40% debt to GDP.

The core problem with Federal spending, now and in the future, is mandatory (entitlement) spending.

Of the entitlement spending, Medicare is growing at an unsustainable rate (although Medicaid growth is no slouch either).

So we are on an ussustainable track in terms of spending. How does “the wall” with Mexico fit it? It could be funded with more taxation, or spending cuts on other programs. Democrats LOVE raising taxes, but not to build a wall. Republicans are split on building a wall (open border freemarketeers versus those with national security concerns).

My colleagues at my former employer Deutsche Bank have attempted to lay out possible funding scenarios. Although I think the odds of deep spending cuts is about as likely as North Korea embracing personal freedom and capitalism.

With explosive Federal spending and projections of public debt exceeding first $20 and then $30 trillion, I have little doubt that Congress and President Trump will agree on a debt limit increase even if there is a momentary government shutdown.

But right now, credit default swaps are signaling no shutdown, particularly in comparison to previous shutdown fears surrounding debt ceiling increases (orange boxes).

So, there is nothing YET showing up in the CDS data. We are seeing an increase in Treasury bills rates even when the probability of a Fed increase in their rates is very low for the next year.

The probability of a US default is around 0.04%.

But there is also a realization that while there was intial enthusiam that Trump would lower taxes and deregulate the economy,  there has a steady decline in enthusiasm over his promises since Congress is obstructing most of Trump’s economic agenda.

We can hope that Congress and President Trump follow the advice of the band Canned Heat and work together. 

But we do know that Congress loves to spend money, so they have a natural mutual allegiance to raising the debt ceiling.

The Planned Destruction Of America: "If They Can't Collapse It Internally They'll Attack The U.S. Externally"

Authored by Jeremiah Johnson (Nom de plume of a retired Green Beret of the United States Army Special Forces) via SHTFplan.com,

From within and from without.  Before our very eyes, we are seeing actions taking place both within the U.S. domestically and outside of it.  The scripted plans were set into motion decades ago, and are seeing fruition now, with increases in activities leading toward the planned downfall of the U.S.  The architects follow a very “Orwellian” pattern: it isn’t important who takes the reins of power, if that power is used to promulgate the continually leftward-moving paradigm shift and the continuance of power.  These oligarchs are globalists who wish to remove the national boundaries except to use the governments in an administrative fashion to control the masses.

Sound radical?  It is, as in “Rules for Radicals,” by Saul Alinsky, in a concept known as “organizing the organized.”  In such a fashion, the oligarchy will control the population through the captains…the “duly-elected” commander of the ship of fools.  The apparatus of the military and police being already in place in the nation, then it is just a matter of appropriating that apparatus to use it as a control mechanism and enforce the totalitarianism.  It is not a new story.  So why is this era different?

Technology.  The technology to monitor hundreds of millions of human beings on CCTV (Closed-Circuit Television) cameras.  The technology to keep track of every person…every item purchased and the funds spent, as well as the balance in the bank account and the source of the income.

“What is your source of income, citizen?  Where is this money here coming from? Oh, you claimed not to be able to pay your traffic ticket, but we have you right here at 10 pm on camera withdrawing $20 from the ATM next to your house.”

Everyone carries around their personal monitors, the personal tracking device of the cellular telephone.  Almost everyone.  I was amazed the other day as a man showed some friends of mine how there’s an app on his cellular telephone that allows you to see a heat signature…yes, thermal imaging! of a person standing just 10 feet away from him.  I was amazed because this is on some average person’s cellular phone, now.

These oligarchs and politicians who had their start as children weaned on the milk of the poisonous Frankfurt Economic School teachings…the creators of the Warburg’s and Rothschilds, who readily embrace Moore’s “Utopia,” while scoffing at the world’s billions whom they fully intend on destroying.  Utopias are expensive, with a cost in removal of undesirables.

Technology will help propel the New World Order into existence.

They’re working really, really hard on controlling all the cash and removing physical cash from the hands of the people.  Success in this endeavor brings with it a total loss of privacy, as all electronic funds can be monitored, and made to disappear with no recourse in the blink of an eye.  An Australian woman whose name I will not mention recently sent me an e-mail informing me that the Australian government is trying to place “chips” in $100 bills to “monitor the cash supply and prevent people from hoarding cash.”

The days of cash everywhere are numbered, as once it is removed, they can do what they will to everyone’s funds.  It can be anything: a computer glitch, a solar flare, an EMP (Electromagnetic Pulse) attack, or a cyberattack to take it all to a “zero” balance.  Notice how the states are one by one beginning to become insolvent?  Notice how the narrowed eyes of the suit-swathed “gentlemen” are now on the IRA’s?  These are now being proposed as the means of closing the holes in the unfunded liabilities?

The unfunded liabilities that were leveraged after NAFTA was created…the “shell game” of jobs and international trade…but in reality, to create more unfunded liabilities and derivatives ventures, as well as Credit Default Swaps (CDS) and fostered indebtedness in foreign nations.  The forced dependency of a “client state” as created by the IMF, shifting revenues and expenditures back and forth with plenty of fatback dripping from each transaction for bankers and host-nations’ warders alike.

Europe is tottering akin to a group of drunken men in various stages of sodden decay.  European nations are caught between the need to maintain their national identity and the desire to join hands and sing “Kumbaya” in 50 different languages as they embrace the utopia.

The forced integration of illegal aliens (termed “refugees” in Europe) will be the death-knell for those governments, as they absorb even greater expenses and burdens…self-inflicted, mind you…taking in a hostile population whose dogma demands the subversion and destruction of any foreign land they enter.

Cloward and Piven on overdrive, as they take us down with the destruction (to paraphrase Michael Savage) of borders, language, and culture.  The “Kumbaya” singers do not realize they will all be exterminated at the end of it by the oligarchy and the politicos who are of one mindset.

First the U.S.  Any country that has a Constitution such as ours that recognizes the rights of its citizens to be armed…. oh, that country has to go.  They’re collapsing the economy, and shaping it to be more interdependent with Europe and the rest of the world.  The President is under attack from every angle, as the Marxists force him up against the ropes, never able to come forth with an attack of his own.  They are checkmating him at every angle.  In the meantime, the policies of Obama are still in place outside of the country.  We are still bolstering ISIS and trying to oust Assad in Syria.  The New Cold War is forming, and we have flashpoints in Syria, Ukraine, and North Korea that could lead to a war with the drop of a hat.

If they can’t collapse it internally, they’ll attack the U.S. externally.

Civil unrest, economic collapse, and an attack on the current administration are the vehicles used to promote the fall of the U.S. domestically.  Warfare (initiated by a foreign nation or by the U.S.) is used outside of the country.  Both use different approaches to work toward the goal of the United States coming to an end.  Read history, especially Solzhenitsyn to see how this occurs.  Before a nation comes to an end, its citizens are in denial that it truly has reached that point.  The United States is in its final days, now.  It will come to an end.  Whether it remains that way and is absorbed by the NWO, or has a new beginning will be up to us.

Sanctions, What Sanctions? Russian Credit Risk Collapses To 4-Year Lows

After more than three years of US sanctions (and almost a year of constant attacks from the western media) Russian credit risk has collapsed to its lowest level since September 2013.

As Bloomberg notes, high demand for Russia’s dollar-denominated assets is driving the cost of the country’s credit-default swaps back near record lows...

Investors with a bullish view on the nation’s debt sell the default protection and collect regular payments for the instruments rather than buying the country’s dollar bonds and receiving interest.

After sanctions caused a dearth of new dollar securities, CDS have become an increasingly popular way for investors to gain exposure to Russia, according Societe Generale SA’s Rosbank PJSC unit.

While Russian 10Y bond yields have tumbled back to 4.00% - the lowest since the election, Chinese bond yields have exploded higher (up almost 100bps to 3.7% - the highest since Dec 2014).

Perhaps Rex Tillerson was right after all - despite the liberal media"s desperation to paint him as yet another "friend of Putin" - when he questioned the efficacy of US sanctions on Russia this week during his confirmation hearings...

The long-serving executive said the Trump administration needs to review the efficacy of the sanctions and judge whether there might be better ways to try to constrain, or potentially woo, the Kremlin.

"Sanctions, in order to be implemented, do impact American business interests,” Mr. Tillerson said in response to questioning. "When sanctions are imposed, they are, by design, going to harm American business."

"In protecting American interests.…sanctions are a powerful tool. Let’s design them well... Let’s ensure those sanctions are applied equally.”

Korean Sovereign Risk Spikes After Syrian Airstrike

Despite being rated five levels higher than Thailand by Moody’s Investors Service, the cost of insuring South Korea’s bonds against default is now more expensive for the first time in 7 years.

As Bloomberg reports, five-year credit-default swaps on Korean notes have surged in the past couple of days on concern a more aggressive U.S. foreign policy is increasing the risk of conflict with nuclear-armed North Korea.

Meanwhile, the cost of such contracts on Thai debt have more than halved over the past year as the nation’s current-account surplus swelled.

Satyajit Das Warns Financial Engineering "Has Masked The Global Economy's Precarious Health"

Submitted by Satyajit Das via MarketWatch.com,

Easy money masks global economy’s precarious health

Too much of economic growth and the accompanying bull market in stocks is the result of financial engineering. Increasingly, companies seek to improve earnings or increase their share price by means that are not necessarily directly linked to their actual business.

Companies have increased the use of lower-cost debt financing, taking advantage of the tax deductibility of interest. In private equity transactions, the level of debt is especially high. Complex securities have been used to arbitrage ratings and tax rules to lower the cost of capital.

Mergers and acquisitions as well as various types of corporate restructurings (such as spin-offs and carve-outs) have been used to create “value.” Given the indifferent results of many such transactions, the major benefits appear to have accrued financially to corporate insiders, bankers, and consultants.

Share buybacks and capital returns, sometimes funded by debt, have been used to support share prices. In January 2008, prior to the global financial crisis, U.S. companies were using almost 40% of their cashflow to repurchase their own shares. Ominously, that position is similar today.

Tax arbitrage, especially by international companies operating in multiple jurisdictions, has increased post tax earnings. The use by many companies of special vehicles in low tax jurisdictions, like Ireland, evidences this trend.

Some companies have used trading to increase earnings. Oil companies can make money from trading or speculating in oil, for example. Accordingly, they can make money irrespective of whether the oil business is good or bad or the price of crude is high or low, profiting from uncertainty and volatility. It is not even necessary to produce, refine, or consume oil to benefit from its price fluctuations.

Even Berkshire Hathaway headed by traditional investor and legendary stock-picker Warren Buffett, enjoys significant gains through financial engineering, including the use of leverage and derivative contracts. Berkshire uses the insurance premiums received as “free float” to finance investments. In the last decade, the company has sold long-dated options on international stock indices, credit default swaps on U.S. corporate credits, and insurance against municipal bonds. The premiums received boost its investment capital.

In both of these cases, the leverage derives from the receipt of cash up-front against a promise to make a contingent payment sometime in the future. The advantage is attenuated by the fact that the risk is back-ended and Berkshire does not have to post collateral to secure the risk. Payment is required only when the contracts are unwound or expire.

Nothing has really changed since the 2008-09 crisis. Low interest rates encourage borrowing. Artificially low capital costs have allowed unsustainable businesses to continue, generating sub-standard returns. Companies seek glib solutions to the complex problem of earning adequate returns by re-engineering their finances, rather than improve their operations.

Governments also are increasingly borrowing and adopting private-sector financial engineering techniques to deal with economic problems. Governments have increased their debt levels, in some cases resorting to forcing purchases of bonds by central banks, domestic banks, and captive institutions such as state pension funds.

Conventional and innovative monetary policies have supported aggregate demand and helped maintain economic activity to prevent prevented even deeper recessions. Policies that have sent both real and nominal interest rates to ultra-low levels have resulted in re-distribution of income and wealth.

According to a 2013 report from the McKinsey Global Institute, between 2007 and 2012, governments in the U.S., Europe and the U.K. collectively benefited by $1.6 trillion, primarily through reduced debt-service costs and increased profits remitted from central banks. Most of this wealth transfer came from households, pension plans, insurers, and foreign investors, mainly through lower interest earnings on savings.

It is time that businesses and governments focus on helping the real economy to solve large problems including debt, lack of growth, industrial stagnation, slowing innovation and productivity, aging demographics, income inequality, resource scarcity, and environmental threats.

Financial engineering masks the true performance and health of companies and nations. But the damage goes much deeper, deluding decision-makers into thinking that things are better than they are, and that solutions to problems can be deferred.

Alan Greenspan: Ron Paul Was Right About The Gold Standard

As John Rubino eloquently puts it, "when the history of these times is written, former Fed Chair Alan Greenspan will be one of the major villains, but also one of the greatest mysteries. This is so because he has, in effect, been three different people." Greenspan started his public life brilliantly, as a libertarian thinker who said some compelling and accurate things about gold and its role in the world. An example from 1966: "This is the shabby secret of the welfare statists" tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists" antagonism toward the gold standard."

Yet everything changed a few decades later when Greenspan was put in charge of the Federal Reserve in the late 1980s, instead of applying the above wisdom, for example by limiting the bank"s interference in the private sector and letting market forces determine winners and losers, he did a full 180, intervening in every crisis, creating new currency with abandon, and generally behaving like his old ideological enemies, the Keynesians. Predictably, debt soared during his long tenure.

Along the way he was also instrumental in preventing regulation of credit default swaps and other derivatives that nearly blew up the system in 2008. His view of those instruments:

The reason that growth has continued despite adversity, or perhaps because of it, is that these new financial instruments are an increasingly important vehicle for unbundling risks. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it. This unbundling improves the ability of the market to engender a set of product and asset prices far more calibrated to the value preferences of consumers than was possible before derivative markets were developed. The product and asset price signals enable entrepreneurs to finely allocate real capital facilities to produce those goods and services most valued by consumers, a process that has undoubtedly improved national productivity growth and standards of living.

In the aftermath of the dot com crisis Greenspan cut interest rates to near-zero in the early 2000s, igniting the housing bubble, which neither he nor anyone else at the Fed was able to detect along the way. He even made it into the dictionary, as the "Greenspan put" became the term for government bailing out its Wall Street benefactors. From this the leveraged speculating community learned that no risk was too egregious and no profit too large, because government - that is, the Fed - had eliminated all the worst-case scenarios. Put another way, under Greenspan profit was privatized but loss was socialized.

Then, another metamorphosis took place: after Greenspan retired from the Fed in 2006 he began morphing back into his old libertarian self. A cynic might detect a desire to avoid the consequences of his past actions, while a neurologist might suspect senility. But either way the transformation has been breathtaking.

Consider Greenspan"s latest public address. In an extended interview published in the World Gold Council’s Gold Investor February issue, Greenspan repeated his now standard warning about the risk of coming stagflation, which would send the price of gold higher: "The risk of inflation is beginning to rise...Significant increases in inflation will ultimately increase the price of gold." As such, "investment in gold now is insurance. It’s not for short-term gain, but for long-term protection.”

Going back to his libertarian roots, it was the idea of returning to a gold standard that Greenspan focused on: a gold standard that he said would help mitigate risks of an “unstable fiscal system” like the one we have today.

“Today, going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today, we would not have reached the situation in which we now find ourselves,” he said.“[T]here is a widespread view that the 19th Century gold standard didn’t work. I think that’s like wearing the wrong size shoes and saying the shoes are uncomfortable! It wasn’t the gold standard that failed; it was politics.”

And the punchline: “We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.” 

To be sure, this is something we discussed exactly two years ago, when we showed a chart showing the sudden end of prosperity for the "bottom 90%" of US earners at the time Nixon ended the US Gold Standard in August 1971, unleashing what ultimately would be the "Great Moderation", an unprecedented increase in US debt, and the stagnation of real incomes and net worth for all but the "top 1% of earners."

As we said then, in retrospect it is no wonder "why the 1% hates the gold standard" and added that the chart above, "should also clarify just why to the "1%", including their protectors in the "developed market" central banking system, their tenured economist lackeys, their purchased politicians and their captured media outlets, the topic of a return to a gold standard is the biggest threat conceivable."

As for Greenspan"s repeated attempts to undo the past by admitting his mistakes, the jury is out. As Rubino concludes, "one of the nice things about the information age is that public figures leave long paper trails and can"t therefore easily escape their pasts. Greenspan"s past, being perhaps the best documented of any central banker in history, will haunt him forever."

That said, at least Greenspan is going out a gold bug.

* * *

Below are the key excerpts from his Gold Investor interview:

Q. In recent months, concerns about stagflation have been rising. Do you believe that these concerns are legitimate?

We have been through a protracted period of stagnant productivity growth, particularly in the developed world, driven largely by the aging of the ‘baby boom’ generation. Social benefits (entitlements in the US) are crowding out gross domestic savings, the primary source for funding investment, dollar for dollar. The decline in gross domestic savings as a share of GDP has suppressed gross nonresidential capital investment. It is the lessened investment that has suppressed the growth in output per hour globally.

Output per hour has been growing at approximately ½% annually in the US and other developed countries over the past five years, compared with an earlier growth rate closer to 2%. That is a huge difference, which is reflected proportionately in the gross domestic product and in people’s standard of living.

As productivity growth slows down, the whole economic system slows down. That has provoked despair and a consequent rise in economic populism from Brexit to Trump. Populism is not a philosophy or a concept, like socialism or capitalism, for example. Rather it is a cry of pain, where people are saying: Do something. Help!

At the same time, the risk of inflation is beginning to rise. In the United States, the unemployment rate is below 5%, which has put upward pressure on wages and unit costs generally. Demand is picking up, as manifested by the recent marked, broad increase in the money supply, which is stoking inflationary pressures. To date, wage increases have largely been absorbed by employers, but, if costs are moving up, prices ultimately have to follow suit. If you impose inflation on stagnation, you get stagflation.

* * *

Q. As inflation pressures grow, do you anticipate a renewed interest in gold?

Significant increases in inflation will ultimately increase the price of gold. Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection.

I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counterparty signature. Gold, however, has always been far more valuable per ounce than silver. No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counterparty. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.

* * *

Q. Although gold is not an official currency, it plays an important role in the monetary system. What role do you think gold should play in the new geopolitical environment?

The gold standard was operating at its peak in the late 19th and early 20th centuries, a period of extraordinary global prosperity, characterised by firming productivity growth and very little inflation.

But today, there is a widespread view that the 19th century gold standard didn’t work. I think that’s like wearing the wrong size shoes and saying the shoes are uncomfortable! It wasn’t the gold standard that failed; it was politics. World War I disabled the fixed exchange rate parities and no country wanted to be exposed to the humiliation of having a lesser exchange rate against the US dollar than it enjoyed in 1913.

Britain, for example, chose to return to the gold standard in 1925 at the same exchange rate it had in 1913 relative to the US dollar (US$4.86 per pound sterling). That was a monumental error by Winston Churchill, then Chancellor of the Exchequer. It induced a severe deflation for Britain in the late 1920s, and the Bank of England had to default in 1931. It wasn’t the gold standard that wasn’t functioning; it was these pre-war parities that didn’t work. All wanted to return to pre-war exchange rate parities, which, given the different degree of war and economic destruction from country to country, rendered this desire, in general, wholly unrealistic.

Today, going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today we would not have reached the situation in which we now find ourselves. We cannot afford to spend on infrastructure in the way that we should. The US sorely needs it, and it would pay for itself eventually in the form of a better economic environment (infrastructure). But few of such benefits would be reflected in private cash flow to repay debt. Much such infrastructure would have to be funded with government debt. We are already in danger of seeing the ratio of federal debt to GDP edging toward triple digits. We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.

* * *

Finally, buried at the very end of the interview was perhaps the most interesting statement by Greenspan : the former Fed Chair"s implicit admission that Ron Paul was right all along:

Q. Against a background of ultra-low and negative interest rates, many reserve managers have been large buyers of gold. In your view, what role does gold play as a reserve asset?

When I was Chair of the Federal Reserve I used to testify before US Congressman Ron Paul, who was a very strong advocate of gold. We had some interesting discussions. I told him that US monetary policy tried to follow signals that a gold standard would have created. That is sound monetary policy even with a fiat currency. In that regard, I told him that even if we had gone back to the gold standard, policy would not have changed all that much.

For those unfamiliar, here is Ron Paul "s explanation of his plan for monetary freedom and a return to a gold standard.

Full Greenspan interview below
(link)