Is the Bond Market About to Call the Fed"s Inflationary Bluff?

Perhaps the single biggest development this year, as far as the markets were concerned, was the Fed admitting on the record that it has no idea what is going on with inflation.

This represents a kind of endgame for the Fed. Since the early ‘80s, the Fed has been actively understating inflation via a variety of gimmicks.

It first removed home prices and replaced them with “owner’s equivalent rent.” Doing that removed any sharp rise in home prices from affecting inflation data, thereby downplaying the official inflation rate.

Then in 1998, the Fed started playing around with “hedonics” (think food and energy prices). The Fed claimed that the goal was to somehow balance the deflationary forces of technology vs. the inflationary forces of hedonics items… but the reality was that this was just another gimmick to understate inflation.

Then, finally in 1999, the Fed introduced the idea of “substitutions.” Here again the Fed claimed it was trying to get an accurate read on inflation (the Fed argues here that if a consumer cannot afford steak anymore, the fact he or she can substitute hamburger indicates his or her quality of life is roughly the same as before).

And once again the goal was to understate inflation.

I realize this is getting a bit complicated, so let’s put this in simple terms…

1)   Since the early ‘80s, the Fed has been employing various gimmicks to hide the real rate of inflation.

2)   Doing this allowed the Fed to overstate GDP growth while understating the true decline in incomes/ quality of life for most Americans.

This game worked for a while, but this year the whole scheme crashed into a wall when the various gimmicks resulted in data that made no sense what-so-ever.

At a time when the NY Fed’s UIG inflation measure and the Atlanta Fed’s “sticky inflation” measure, showed inflation at 2.8% and 2.1% respectively, the Fed’s official inflation measures (CPI and trimmed PCE) were clocking in at 1.7% and 1.4%,

The Fed’s Board of Governors had a choice here:

1)   Admit the official inflation numbers were garbage

Or…

2)   Act surprised by the official rate being so low and claim it’s an anomaly.

The Fed went with #2 in what was one of the most insane Fed statements ever. According to the Fed’s July FOMC statement…

• Most participants expect inflation to pick up over the next couple years.


• Many Fed participants think inflation will remain below 2% longer than expected.


• Many Fed participants believe that inflation measures dropped recently due to “idiosyncratic factors.”


• A few Fed participants believe the Fed’s framework for forecasting inflation is no longer valid.


• Some Fed participants noted their increase uncertainty about the outlook for inflation.

Put simply: the Fed admitted that it no longer had a clue what was going on with inflation. It has since maintained this “who knows!” shtick (I note that Fed Chair Janet Yellen, in last week’s conference stated that the Fed’s understanding of inflation is “imperfect.”)

Why does this matter?

As I explain in my bestselling book The Everything Bubble: the Endgame For Central Bank Policy, US sovereign bonds (also called Treasuries) trade based on inflation expectations.

Put simply, when inflation spikes higher, so do Treasury bond yields.

When bond yields rise, bond prices fall.

When bond prices fall, the Bond Bubble bursts.

When the Bond Bubble bursts, the EVERYTHING bubble follows.

Well, guess what? The yield on 10-Year US Treasuries is spiking, having broken above its 20-year trendline.

What"s coming will take time for this to unfold, but as I recently told clients, we"re currently in "late 2007" for the coming crisis. The time to prepare for this is NOW before the carnage hits.

On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Long Island Woman Indicted For Funding ISIS With Bitcoin

With intriguingly coincidental timing, as cryptocurrencies reach mainstream and grab the world"s attention, the US Justice Department has unsealed a grand-jury indictment that shows a Long Island woman has been indicted on charges that she tried to funnel money to ISIS using Bitcoin.

The Eastern District of New York press release details the crimes...

Long Island Woman Indicted for Bank Fraud and Money Laundering to Support Terrorists - Defendant Stole and Laundered Over $85,000 Using Bitcoin and Other Cryptocurrencies

 

As alleged in the indictment and court filings, the defendant defrauded numerous financial institutions and obtained over $85,000 in illicit proceeds, which she converted to Bitcoin and other cryptocurrencies.  She then laundered and transferred the funds out of the country to support the Islamic State of Iraq and al-Sham (“ISIS”), which has been designated by the U.S. Secretary of State as a foreign terrorist organization.  After consummating the scheme, the defendant attempted to leave the United States and travel to Syria.

 

...“As alleged, the defendant Zoobia Shahnaz engaged in a bank fraud scheme, purchased Bitcoin and other cryptocurrencies and laundered money overseas, intending to put thousands of dollars into the coffers of terrorists,” stated Acting United States Attorney Rohde.  “The indictment reflects the resolve of this Office, together with our law enforcement partners, to investigate and prosecute anyone who would seek to support terrorists, including those who would perpetrate financial crimes to do so.” 

 

...Specifically, Shahnaz obtained a loan for approximately $22,500 by way of materially false representations.  She also fraudulently applied for over a dozen credit cards, which she used to purchase approximately $62,000 in Bitcoin and other cryptocurrencies online.  She then engaged in a pattern of financial activity, culminating in several wire transactions, totaling over $150,000, to individuals and apparent shell entities in Pakistan, China and Turkey.  These transactions were designed to avoid transaction reporting requirements, conceal the identity, source and destination of the illicitly obtained monies, and, ultimately, benefit ISIS.

Imagine the headlines now - The FT already started...

This plays so perfectly into the narrative that anyone and everyone who uses cryptocurrencies is a criminal that one could be forgiven for being skeptical of the "false flag"-like nature of the timing of the release.

The trouble with the narrative is two-fold - Bitcoin is not anonymous... and Cryptocurrencies are not a major source of funding for terrorists.

As we detailed previously, even the IRS can track you down through the distributed ledger that tracks every transaction ever in memoriam. Last month Alt-Market.com founder Brandon Smith warned that Bitcoin may not be all that it’s cracked up to be in terms of its purported anonymity:

For years, one of the major original selling points of bitcoin was that it was “anonymous.” It always surprised me that so many people in the liberty movement bought into this scam.

 

Surely after the revelations exposed by Edward Snowden and organizations like Wikileaks, it is utterly foolish to believe that anything in the digital world is truly “anonymous.”

 

The feds have been proving there is no anonymity, even in bitcoin, for some time, as multiple arrests using bitcoin tracking have indeed occurred when the FBI decided it was in their interest. Meaning, when the feds want to track bitcoin transactions, they can, and it does not matter how well the people involved covered their actions.

Because every transaction exists on a public blockchain ledger, an enterprising organization – say like the NSA or IRS – could conceivably implement blockchain analysis tools to track down Bitcoin fund transfers around the globe.

Of course, with ISIS having been hammered to shell of its former self by Russia and its allies the following "how does ISIS fund itself" infographic is out of date, but provides some context for the "threat" that donations... let alone donations via cryptocurrencies... represent.

Even The Fed has argued that the payments flows within the crypto-space are not relevant.

However, we fully expect to see a congressional probe demanded sooner rather than later to crackdown on Bitcoin as funding source of terrorism (besides, the US and Saudis don"t like competition).

* * *

Coincenter"s Peter Van Valkenburgh has issued a statement about the arrest:

Coin Center statement on Long Island money laundering arrest.All we have to go on so far is the unsealed indictment, which does not mention cryptocurrencies, and the statements of the prosecutor. Based on what we know so far though, here are our thoughts:

Thankfully she got caught before she was able to move money to ISIS. This suggests that law enforcement has the tools necessary to deal with this sort of money laundering even when it involves cryptocurrency.
The unsealed indictment doesn’t have enough facts in it to draw strong conclusions about how important Bitcoin actually was to the scheme. We know she bought it with fake credit cards and a bogus line of credit from a bank, but that’s about all.

From the statement of the prosecutor, it looks like she still tried to use wire transfers and shell companies in order to get the money to ISIS. This may suggest that a simple bitcoin transfer didn"t work to accomplish her ends, and that the old ways (wire fraud) remain the best ways when it comes to evading sanctions.

We await further information.

Gundlach Reveals His Favorite Trade For 2018

One day after Stanley Druckenmiller confessional to CNBC that as a result of central planning and markets that make no sense, the legendary hedge fund manager had a "terrible" year, and his "first down year in currencies ever" (he also said many not very nice things about bitcoin), it was Jeffrey Gundlach"s turn to confess some of his more controversial views. And so, the man who two years ago correctly predicted the Trump presidency, first discussed his best investment idea for the new year. To those who listened to his latest DoubleLine investor presentation last week, the answer will hardly be a surprise: namely commodities, because they"re "historically, exactly where you want it to be a buy."

"I think investors should add commodities to their portfolios," Gundlach says on CNBC"s Halftime Report.

Gundlach said commodities are just as cheap relative to stocks as they were at historical turning points, while the macroeconomic backdrop also supports the case for commodities; he was referring to the following chart which he highlighted last week.

Echoing his presentation from last week, Gundlach said that once "you go into these massive cycles... the repetition is almost eerie. And so if you look at that chart the value in commodities is, historically, exactly where you want it to be a buy."

Investors should add commodities to their portfolios. There is a really remarkable relationship between a market cap or the total return of the s&p 500 and the total return something like the Goldman Sachs commodities index. The cyclicality is really repettiive.

Gundlach also noted that commodities are just as cheap relative to stocks as they were at turning points in previous cycles that began in the 1970s and 1990s. The S&P Goldman Sachs Commodity Index is up 5% this year, versus the S&P 500"s 19% gain.

There is also a fundamental case for investing in commodities, Gundlach said. He pointed out that global economic activity is increasing, a tax cut could boost growth and the European Central Bank is implementing "absurd" stimulus policies in the euro zone.

Jeffrey Gundlach: Investors should add commodities to their portfolios from CNBC.

In addition to his favorite trade, Gundlach touched upon several other topics including:

What drives the dollar:

"Short-term fed moves are not what drives the dollar. It correlates much more to what the bond market thinks vis-à-vis the fed say 18 months forward. So if you actually rook at the bond market pricing for 2019 now, there’s a pretty big discrepancy between the bond market and the fed, so that’s going to be really interesting in driving the dollar, and this time i think the bond market is going to be right."

Why the markets are so calm:

"I think it’s because of central bank pegging of rates and quantitative easing going on full bore in  europe and in japan. One of the charts that i love to reference is the nearly linear rise in central bank balance sheet holdings ever since 2011, where the Fed stopped quantitative easing back three years ago, and japan and the ecb just took over the slack, and it’s just a linear rise."

 

Jeffrey Gundlach: This has been a great year for investors from CNBC.

On ECB president Mario Draghi:

"That’s going to slow things down a little bit, but the real worry from the central bank activity would be forward about a year. Because Mr. Draghi has said astonishingly that they’re going to continue 30 billion euros per month of quantitative easing at least until September and then he threw  in, just to put a cherry on top of the cake of stimulus, he said, and negative rates well past the end of quantitative easing. Which means – sounds to me you’ll have negative rates as long has Mr. Draghi is around which is a little under two years."

On tax cuts and bonds:

"If there is a net tax cut, it has to be bond unfriendly. we already have growing bond supply. we’ve been liiving in a world for the last three years thanks to quantitative easing of negative net bond supply, really, from sovereign bonds in the developing world. and that’s gonna flip because the fed is now letting bonds roll off, the budget deficit is increasing, a tax cut would increase the deficit further, and to the extent that a tax cut might be stimulative to the economy, that’s bond unfriendly, because bonds don’t like economic growth and also it’s more bonds, expanding the deficit, so even more supply."

On tax hikes and risk:

"If i"m correct and i’m going to receive a seven-point bump in my tax rate, which is actually about a 15% tax increase, i have a feeling that i’m probably going to be less able and willing to buy risky assets or buy all the other things that are bubbling up these days, and maybe that side of the narrative will start showing up."

Jeffrey Gundlach: Tax plan could have unintended consequences from CNBC.

On stimulating the economy:

"While we’re not probably going to get 3% real for the year, we’ve had it for two quarters in a row. and gdp now at the atlanta fed has been bouncing around but it’s around 3% for the third quarter. when is the last time we had something like 3% growth for three quarters in a row? it’s a long time. why would you be stimulating the economy?"

Finally on bitcoin:

The Fed is Arranging Deck Chairs on the Titanic (the Iceberg Comes in 2018).

The Fed concludes its final FOMC meeting of the year today.

The entire financial world expects the Fed to raise rates a final time. This will mark the fifth rate hike since December 2015, and the fourth of the last 12 months.

Throughout this time period, the Fed has routinely stated that it is confused as to why inflation is “too low.”

Inflation is not too low. The method the Fed uses to measure inflation is intentionally incorrect. As a result, the official inflation numbers reflect whatever the Fed wants, as opposed to reality.

Alan Greenspan devised this entire gimmick back in the 1990s. At that point, the amount of debt in the US financial had already become a systemic issue.

So Greenspan opted to “paper over” this fact via inflation… hoping that by aggressively devaluing the US Dollar he could keep this game going.

The only problem as far as the Fed was concerned was that the inflation numbers would reveal the Fed’s strategy. So Greenspan started tinkering with how the Fed measured inflation, removing various components (food and energy) and tweaking things so the Fed would no longer measure the cost of maintaining the same quality of life.

Greenspan hoped understating inflation publicly he would give him the cover he needed to pursue an aggressive devaluation of the US Dollar. The flip side of this was that the Fed would begin intentionally creating asset bubbles by maintaining loose monetary policy ad infinitum.

The late ‘90s was the Tech Bubble.

When that burst in the mid-‘00s, the Fed created a bubble in housing.

When that burst in ’08 the Fed created a bubble in US sovereign bonds or Treasuries.

And because these bonds are the bedrock of the US financial system, the “risk-free rate” of return against which ALL risk assets are valued, when the Fed did this it created a bubble in EVERYTHING.

That bubble is now beginning to burst. And ironically it is inflation (which the Fed claims is too low) that will do it.

It will take time for this to unfold, but as I recently told clients, we"re currently in "late 2007" for the coming crisis.

The time to prepare for this is NOW before the carnage hits.

On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Blow.Off.Top.

Authored by Sven Henrich via NorthmanTrader.com,

No period is worse for bears than when it’s the best time to sell stocks. It’s the polar opposite of when conditions are worst for bulls, right when it’s the best time to buy as it was in January-March 2009. The exhaustion factor is enormous. It’s called capitulation as moves get stretched to the extreme even though the set-up is valid.

November’s close marked the 13th consecutive month straight up for global markets. Nothing but up with fewer and ever smaller dips in between. Deutsche Bank’s Reid illustrated the point: “We’ve never had such a run with data going back over 90yrs”. I’d say that qualifies as the worst of time for bears.

Yet we could be sitting on a generational opportunity to sell equities as it could be argued that conditions will never be better for bulls as the game of offering carrots of free money is coming to an end. Indeed it could be argued that the prospect of tax cuts is the final carrot the free money scheme has to offer. The carrot top. No more carrots.

Consider the central banking liquidity game has peaked and is dropping off:

The 2016/2017 period saw the largest amount of central bank intervention ever. Ever. Over 8 years after the financial crisis.

The slow reduction in central bank liquidity has been supplemented by record ETF inflows this year. Retail went long and continues to buy the most expensive market since 1900 according to Goldman:

Even now via @jennablan: “U.S.-based money market funds attract inflows of $33 bln in week ended nov 29, largest inflows for the year”.

And leverage has never been higher either. Via @Schuldensuehner: 

“Dow Jones Industrial closed >24k for the first time ever. Wall St record has occurred in tandem w/record margin debt. Margin debt now at $561bn, double amount of tech bubble of 2000, 47% > than in 2007”:

Retail is in and we see it in various data charts:

Via @BN:

The Rydex bull/bear allocation data shows the most bullish allocation into equities ever:

Don’t tell me it’s the most hated bull market ever. The data says otherwise.

Markets are in big time pig time mode. The prospect of imminent tax cuts keeps investor salivating and allocating cash into all time highs as markets drenched in 8 years of artificial liquidity find tax cuts to be the next carrot to push markets caps into the stratosphere:

A blow-off top perhaps setting us up us for something more sinister than a correction. What’s the biblical phrase? Forgive them for they do not know what they are doing?

Look, the tax narrative is that tax cuts will pay for themselves, that companies will hire more people as a result, and that middle class will benefit greatly from it, that GDP will swell to 4% and Trump claimed that these tax cuts will actually personally hurt himself financially. None of these things are true. Not a one. In fact everything is precisely the opposite. The math says so.

While extreme political tribalism encourages ideology over facts math is true whether you believe in it or not. And these tax cuts will add greatly to the deficits. I won’t belabor the point here as I’ve outlined my thoughts on the subject in detail in Tax Cut Scam.

An Opinion Piece From The Edge: Tax Cut Scam.
This tax cut proposal is a scam. Don"t fall for it.https://t.co/rkDg5UnIZ3 pic.twitter.com/L9lhIqd9sn

— Sven Henrich (@NorthmanTrader) November 9, 2017

The deficit will increase, many will see actual tax increases over time and/or lose benefits and the big tax cut benefits go precisely to people such as Trump and corporations already sitting on record cash positions. As far as GDP growth the FOMC doesn’t believe it either as incoming Fed Chair Powell affirmed a 2.5% GDP outlook for 2018 and many companies are on the record that they will use the extra cash for dividends and buybacks not hiring. This tax bill will exacerbate wealth inequality.

And hiring? Forget it. Structurally we’re looking at the great firing to come: 800 million people might be out of a job by 2030 because of automation

Precise numbers are to be taken with a grain of salt but it’s coming, whether you want to believe it or not.

And this perhaps is the biggest lie of the entire construct: That it’s done for the benefit of the middle class. It’s not. It’s done for wealthy donors who have threatened to cut off donations if they don’t see results. It’s big time pig time. Greed at its finest consequences be damned.

So the odds are the tax cut bill will end up passing in one form or another unless someone stands up and says they’re not voting for something that’s based on a lie.

Deficits will keep expanding before even a new recession hits. I’ve said for a long time that market levels and economic growth have been bought with debt and stimulus producing multiple expansion. See below multiple expansion in context of price and aggregate GAAP earnings:

We do not know what organic growth is without permanent intervention. That was true with the past administration and it is true with this one.

Except now we see increased in defense spending and a cutting of the revenue structure. This year’s deficit was already $666B and that’s without tax cuts. The deficit will be expanding to $900B by 2019 according to JPMorgan.

Even Janet Yellen felt compelled to comment on the debt:

“I would simply say that I am very worried about the sustainability of the U.S. debt trajectory,” Yellen said.

 

“It’s the type of thing that should keep people awake at night,” she added.”

Cute, especially coming from her who was a key contributor to the easy money train. The context is glaringly obvious:

Janet Yellen:
“It’s the type of thing that should keep people awake at night” pic.twitter.com/PsRUHVpbH5

— Sven Henrich (@NorthmanTrader) November 30, 2017

But Janet Yellen is not alone in suddenly getting concerned about the sustainability of debt expansion.

Dallas Fed president Kaplan came out this week and basically highlighted many of the concerns I’ve been talking about for a long time. A shockingly rare admission of the truth. Quite a statement:

“As a central banker, I want to be vigilant to imbalances and distortions that can build as a result of accommodative monetary policy. I have argued that monetary policy accommodation is not “free” —there are costs to accommodation in the form of distortions and imbalances in consumer decisions as well as in investing, hiring and other business decisions. More specifically, experience suggests that the greater the overshoot of full employment, the more difficult it is to unwind imbalances when growth ultimately slows—as it certainly must.

When excesses ultimately need to be unwound, this can result in a sudden downward shift in demand for investment and consumer-related durable goods. There are surprisingly few historical examples of “soft landings” in cases where employment has risen above its maximum sustainable level.

It is of course possible that “this time will be different,” but as I assess the condition of the U.S. economy, I am carefully monitoring evidence that might suggest growing risks of real imbalances, which could threaten the sustainability of the current economic expansion. For example, the headline unemployment rate has fallen by 70 basis points over the past year, nearly matching the average rate of decline over the prior seven years of the expansion. If this rate of decline continues, this will further tighten labor market conditions and would likely add to excesses and imbalances accumulating in the economy.

Excesses can also manifest themselves in financial imbalances. While I would prefer to rely primarily on macroprudential policy tools to manage financial imbalances, I am nevertheless monitoring various measures of potential financial excess. I monitor these and other market measures because I am aware that, as excesses build, we are more vulnerable to reversals which have the potential to cause a rapid tightening in financial conditions, which in turn, can lead to a slowing in economic activity. Examples of potential excesses might include:

• The U.S. stock market capitalization now stands at approximately 135 percent of GDP, the highest since 1999/2000.[3]Correspondingly, commercial real estate cap rates and valuation measures of debt and other markets appear notably extended.


• Measures of stock market volatility are historically low.[4] We have now gone 12 months without a 3 percent correction in the U.S. market.[5] This is extraordinarily unusual.


• While household debt to GDP has improved over the past eight years, corporate debt is now at record highs.[6] I am not overly concerned about current levels of corporate debt because, importantly, financial sector leverage has declined substantially since the Great Recession. However, U.S. government debt now stands at approximately 75 percent of GDP,[7] and the present value of unfunded entitlements now stands at approximately $49 trillion.[8] In my view, the projected path of U.S. government debt to GDP is unlikely to be sustainable—and has been made to appear more manageable due to today’s historically low interest rates.


• Debt and equity securities trading volumes have markedly declined over the past several years. For example, NYSE equity trading volume on average for 2017 is down 51 percent from 2007 levels, while the NYSE market cap has increased 28 percent over the same time period.[9] I would also note that margin debt is now at record-high levels.[10] In the event of a sell-off, high levels of margin debt can encourage additional selling, which could, in turn, lead to a more rapid tightening of financial conditions. Sufficient market trading liquidity is key to managing the resulting increased volume. I am cognizant that lower trading volumes may be due, in part, to low levels of market volatility and may also be due to regulations such as the Volcker rule.”

So he’s watching markets closely and looking at some of the very same trends and factors we are.

In essence he is affirming one of the key cornerstones of the bear case: We are late in the cycle and low unemployment is not sustainable:

Again:  “There are surprisingly few historical examples of “soft landings” in cases where employment has risen above its maximum sustainable level”.

And neither is the debt build up and he knows it just like Yellen: “In my view, the projected path of U.S. government debt to GDP is unlikely to be sustainable —and has been made to appear more manageable due to today’s historically low interest rates”.

The chart above outlines the argument I’ve been making for a long time. This hyper bull market has not only been enabled by low rates but is the end product. Low rates enabled unprecedented debt expansion. And without low rates it can’t be sustained.

In this context then the concern is what happens if the 10 year were to rise above its 30 year trend line. Note the 2 most recent market tops came at a time when the 10 year was approaching its upper trend line. It is doing so again now.

And it’s doing it in context of a flattening yield curve:

The Fed is paying attention and it’s very concerned:

“Federal Reserve Bank of St. Louis President James Bullard on Friday warned that more rate increases by the central bank would raise the risk the U.S. economy could fall into recession.”

The key question: How sensitive is the entire construct to rising rates in context of record debt. The macro charts I keep tracking suggest stress building underneath.

And so the question then becomes not if it unwinds, but when and from where.

Morgan Stanley came out this week and raised its own concerns:

“An unprecedented central bank unwind… We think there is way too much complacency regarding what is a notable and growing shift in central bank policy globally. Remember, monetary policy has been massive in this cycle, and extremely supportive for credit markets. The Fed is now tightening in an untested way, through the balance sheet, while also pushing rates near restrictive territory. Markets expect a seamless unwind. We do not.

…with markets late cycle, and very dependent on ultra-easy liquidity… It is not a coincidence that fundamental problems are becoming more apparent in one sector after the next, as the Fed withdraws liquidity. In fact, we see late-cycle risks popping up all over the place, and as is often the case near a top, these risks are mistakenly (we think) being rationalized as purely ‘idiosyncratic’ problems. Defaults should remain low in 2018, but that is expected. Credit markets anticipate defaults one year ahead of time, and we think a cycle turn is closer than many believe.

…and valuations very rich: Spreads are near all-time tights, adjusting for the quality deterioration in the indices over time. Yes, the technicals have been strong, but that may change as the Fed’s balance sheet shrinks faster. We note, a recession is not necessary to see negative excess returns, especially in the second half of a cycle, and particularly late in a Fed tightening cycle. Credit markets have not experienced three straight years of positive excess returns in over 20 years.

More than anything else, we firmly believe that central banks have been THE driver of credit in this cycle, stimulating markets like never before. Now they are attempting to tighten in a completely untested way, and yet credit is pricing in a seamless unwind. At the least, we expect a bumpier 2018, with a tougher setup anyway we slice it. Growth will decelerate, while the Fed continues tightening into a low-inflation environment, driving a completely flat yield curve (per our rates forecasts). Additionally, the year is beginning with booming confidence, as hopes for tax cuts rise, thus the bar to positively surprise is high, while “Goldilocks” is firmly in the price across most risk assets.

We would not rule out the scenario in which financial conditions could tighten materially next year as the Fed withdraws stimulus in this unprecedented way, especially if growth expectations decline at the same time, pushing us from late cycle to end of cycle (though not our economists’ base case). And for those expecting the Fed to come to the rescue any time volatility picks up, remember that, with the balance sheet now effectively set on “auto-pilot,” reversing course, in our view, is a last resort.”

You may note how these comments compliment the concerns Kaplan is raising himself. All of this fits with the larger macro analysis I’ve been outlining all year.

There is a reason the Fed has been oh so careful in tinkering and hand wringing. There’s a reason the ECB and the BOJ keep printing. They all know the construct is fragile and they are all worried. They actually say so:

From the recent FOMC minutes: “They worried that a sharp reversal in asset prices could have damaging effects on the economy.”

That’s it. Asset prices are now so elevated that a correction is viewed as a clear and present danger to the global economy. It’s actually all quite simple and obvious. They’ve created a monster and are worried about pissing it off. So the entire construct is held up by low rates and there is a moment where the balance breaks. But we don’t know the when and the where although as my previous chart showed $SPX just hit its 1987 trend line this week which could make any further advances rather challenging or perhaps mark a key pivot.

Here’s the closer view:

Note this tag is coming in context of a $VIX that keeps pinging its upper trend line as it did again this week:

The monthly view via Mella:

These charts continue to signal that volatility will eventually break higher and perhaps violently so.

Now in context of $TNX and the $SPX I’ve created a ratio chart looking at the interplay between $SPX and $TNX:

Note that since the 2009 lows a trend line established itself and it was broken in 2016. Indeed in 2017 it rejected trying to recapture the trend line. Furthermore we can observe a potential right shoulder building. With a significant lower high. Why is that? Well because despite $SPX printing new highs $TNX is not printing new lows. So if $TNX breaks higher it will take massive higher market gains to avoid a break lower in the ratio. This pattern is massive and it would accelerate to the downside if markets broke lower with yields rising. In essence the scenario that Kaplan and Morgan Stanley expressed concerns about.

Bottomline: The macro analysis of the entire construct remains spot on. Central banks have created the TINA effect (there is no alternative) asset prices have become amplified via multiple expansion in lieu of any other investment alternatives and now with the prospect of tax cuts all sellers have disappeared. For now.

Markets have proven they can rally with the loosest financial conditions in this cycle along with continued M1 money supply expansion:

They have yet to prove they can do without.

But after tax cuts there are no more carrots to dangle in front of markets hence we’re finding ourselves in an environment of an imminent carrot top.

The watershed moment will come when people want to sell. How will markets handle a situation with sellers suddenly appearing? Nobody knows. But clearly the Fed is worried about it.

*  *  *

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"It"s Global & It"s Viral" - DiMartino Booth Exposes The Fed"s Biggest Fear

Via Greg Hunter"s USA Watchdog blog,

Former Federal Reserve insider Danielle DiMartino Booth says the record high stock and bond prices make the Fed nervous because it’s fearful of popping this record high credit bubble. DiMartino Booth says,

“The Fed’s biggest fear is they know darn well this much credit has built up in the background, and the ramifications of the un-wind for what has happened since the great financial crisis is even greater than what happened in 2008 and 2009. 

 

It’s global and pretty viral.  So, the Fed has good reason to be fearful of what’s going to happen when the baby boomer generation and the pension funds in this country take a third body blow since 2000, and that’s why they are so very, very intimidated by the financial markets and so fearful of a correction.”

[ZH:As a reminder, The Fed is normalizing the balance sheet - and as Yellen said last night - "so far so good"...  

So far The Fed (since the end of September) has shrunk the balance sheet by 0.17%... or $7.3 Billion of a $4.5 trillion balance sheet]

 Why will the Fed not allow even a small correction in the markets? DiMartino Booth says,

“Look back to last year when Deutsche Bank took the markets to DEFCON 1.  Maybe you were paying attention and maybe you weren’t, but it certainly got the German government’s attention.  They said the checkbook is open, and we will do whatever we need to do because we can’t quantify what will happen when a major bank gets into a distressed situation. 

 

I think what central banks worldwide fear is that there has been such a magnificent re-blowing of the credit bubble since 2007 and 2008 that they can’t tell you where the contagion is going to be.

 

So, they have this great fear of a 2% or 3% or 10 % (correction) and do not know what the daisy chain is going to look like and where the contagion is going to land.  It could be the Chinese bond market.  It could be Italian insolvent banks or it might be Deutsche Bank, or whether it might be small or midsize U.S. commercial lenders.  They can’t tell you where the systemic risk lies, and that’s where their fear is.  This credit bubble is of their making.”

In short, the Fed does not know what is going to happen, and according to DiMartino Booth, nobody does. DiMartino Booth contends,

“I don’t think any of us know what the implications are for a $50 trillion debt build since the great financial crisis (of 2008).

 

It is impossible to say.  We have never dealt with anything of this magnitude.”

On Bitcoin’s rapid rise in value, DiMartino Booth warns,

“To me, Bitcoin is a reflection of panic. It’s a reflection of people trying to get money into a safe place knowing the major governments of the developed world have got their printing presses running 24/7. 

 

It is a reflection of anxiety in fiat currencies and the fact it’s not practical to go back to a gold standard.  What scares me about Bitcoin is the central bankers are studying it to figure out how the blockchain works...

 

They are going to be controlling our spending with blockchain technology that is being perfected in the crypto currency universe.”

On gold and silver, DiMartino Booth says,

“2017 is the record for quantitative easing (money printing) globally. We have never, not even in the darkest days of the financial crisis, central banks have never injected as much money as they have into the markets...

 

I am not a gold bug, but we do know that in times of corrections that there is no place to hide in traditional asset classes that you can get at your Merrill Lynch brokerage. 

 

Gold and silver in the precious metals complex are the only places to hide and get true diversification and safety.”

Full interview below:

Danielle DiMartino Booth has free information on her website DiMartinoBooth.com. She also offers a subscription service called “Money Strong.”  For a one month free subscription click here.

The Fed Isn"t "Confused" About Inflation... It WANTS You In the Dark!

The Fed claims it’s “confused” as to why inflation remains so low.

The Fed isn’t confused at all. It intentionally measures inflation in ridiculous ways to guarantee that the “official number” remains nowhere near reality.

On top of this, we have factual evidence that Fed is in fact well aware that inflation is clocking in well above its 2% "target.”

Indeed, the New York Fed’s UIG inflation measure (which includes a “full data set,” unlike the ridiculous CPI which ignores most costs of living) records inflation between 2.25% and 3%.

-the UIG measures currently estimate trend CPI inflation to be in the 2.25% to 3.00% range, with both registering above the actual twelve-month change in the CPI.

Source: the New York Fed

So the New York Fed, the branch of the Fed that is in charge of market operations, is well aware that inflation is well over 2%.

It"s not the only Central Bank is aware of this either. The Central Banks of China, Russia, and Germany also know inflation is in fact higher than the Fed claims... which is why ALL of them are loading up on Gold by the ton.

What do they see coming?

A $USD collapse like this:

Put simply, BIG INFLATION is THE BIG MONEY trend today. And smart investors will use it to generate literal fortunes.

Imagine if you"d prepared your portfolio for a collapse in Tech Stocks in 2000... or a collapse in banks in 2008? Imagine just how much money you could have made with the right investments.

THAT is the kind of potential we have today. And if you"re not already taking steps to prepare for this, it"s time to get a move on.

We just published a Special Investment Report concerning FIVE secret investments you can use to make inflation pay ou as it rips through the financial system in the months ahead

The report is titled Survive the Inflationary Storm. And it explains in very simply terms how to make inflation PAY YOU.

We are making just 100 copies available to the public.

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/inflationstorm.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Deutsche: Every Time We Asked "How Much Lower Could Vol Go” Things Would Become Unpleasant

According to Deutsche Bank"s Aleksandar Kocic, we live in a reflexive world, one where "the Fed knows that the market knows and the market knows that the Fed knows that the market knows, so everyone knows, but pretends that nobody knows and the game goes on." That pretty much covers much of modern market analysis which, like some mutant version of the Heisenberg Uncertainty Principle, implies that it is impossible to know the value of assets without also taking into account what the Fed thinks about said value, and what it will do in response to the valuation manifesting itself in the form or asset prices.

There"s more to it.

Following up on last week"s note, in which the DB derivatives analyst looked at the market"s current "metastable" state from the perspective of Minsky dynamics - a series of constantly shifting disequilibria which vary in leverage and volatility (the lower the vol, the higher the leverage until the system tips over and is forced to reset)...

... to analyze what may be the exogenous "circuit breaker" that finally snaps the fake calm of the past 9 years of central planning, overnight Kocic put it all together in his latest report which converges on most of the tropes he has been discussing over the past year, including the build up of negative convexity by way of continued state of exception, misallocation of capital, buildup of tail risk, and metastablity, and explains why markets are caught in a "Sachzwang – a factual constraint residing in the nature of things that leaves no choice but to perpetuate the existing conditions."

For those unfamiliar with Kocic"s latest metaphysical allegory for capital markets - which would be everyone - this is how he explains it. As usual, a PhD in philosophy is recommended, and increasingly, required.

Continued pressure on vol is shaping to become the signature mode of this year. Its decline from its post-elections high at 95bp (in terms of 3M10Y) to its near all-time lows of 55bp in less than 12 months has been a function of general distribution of risks and persistent supply of convexity through complacency, transparency, liquidity, and predictable monetary policy. Politics no longer matters -- increasing negative newsflow has created political bottlenecks which have eroded the ability to produce consensus resulting in a noisy status quo. Yield enhancement strategies seems to be everywhere. Credit spreads have compressed to their post-2008 lows while risk premia and volatilities have collapsed across the board.

 

At the same time, this state of affairs is causing a buildup of negative convexity out-of-money by way of continued state of exception, misallocation of capital, buildup of tail risk, and metastablity. The market is vulnerable to bear steepening of the curve with Fed massively negatively convex to inflation risk. One would expect that vol would find support in the face of these risks. However, there does not seem to be any meaningful signs of resistance levels at this point. Investors are aware of the underlying risks, but are implicitly forced to ignore them in order to survive the short-term demand for return.

Unlike the chess "zugzwang", in which the player is forced to make a move, making their position significantly weaker, and would thus rather not move at all, in the Kocic world, the equilibrium market state is a suffocating paralysis under which the only option is making no move at all, thereby perpetuating the paralysis. The final outcome - as we are confident the metaphysical analyst will eventually unveil - is Cosmic Death... a state of 0 Kelvin in which central planning crushes one"s will to exist, let alone trade, or some other similarly dramatic philosophical narrative.

Markets are caught in a Sachzwang – a factual constraint residing in the nature of things that leaves no choice but to perpetuate the existing conditions.

 

Short-dated volatility continues to probe new lows in tune with other  measures of risk premia. There has been hardly any departure from the trend. As gamma collapsed, vol sellers have been moving along the surface and ironing out the calendars. This is causing collapse of horizons and general paralysis which further perpetuates status quo. Time is gradually coming to a stop – this is the real collateral damage of the existing dynamics.

Perhaps he is right: instead of a "VIX supernova", maybe the fate of the market is a singularity of ever-shrinking volatility and trading and infinite boredom, one in which everyone withers away as neither newsflow nor decisions matter. If so, it would certainly explain the next part: angry clients who know the final outcome, yet are reluctant to concede that they have become irrelevant pawns in a game which is no longer winnable.

These ominous vol lows are triggering unpleasant memories of the past episodes of complacency and their aftermaths. Every time we asked the question: “How much lower could vol go”, things would become unpleasant.

And yet, as the saying goes, maybe this time it is different, at least for rates traders. Here - according to Kocic - is why and how it is different.

To be blunt, when it comes to future rates volatility, there is very little to be learned from its history at this point. Most of the past market mechanisms, and by that we mean pre-2007, are no longer in place. Mortgage negative convexity is no longer transmitted from home owners to capital markets. Monetary policy shocks used to arrive from the front end of the curve, and active convexity hedging, and with it, bid for vol, went hand in hand with carry, steeper curve, and generally higher risk premia. In contrast, post-2008, the MBS convexity hedging has practically disappeared – while housing market continues to expand, hardly any of its negative convexity is being transmitted to the capital markets. Monetary policy seems to be largely administered through the back end of the curve – more stimulus during QE meantflatter curve, less carry, but also potentially higher volatility. Management of stimulus unwind has now become a major source of convexity supply -- Fed’s communication with the markets has been the key reason for compression of risk premia. On top of that, financial conditions have been as loose as ever. Tight fiscal policy, stricter regulations and positive supply oil shocks, together with global QE, have compressed long rates to the point that remaining playground for the Fed has been reduced to a mere 50-60bp range. On this restricted landscape, nothing is super exciting anymore. The Fed’s main concern is how to get unstuck without getting unglued.

To be sure that concern will become a trigger for wholesale market panic if the Fed raises rates by another 50-60bps while long rates fail to budge in parallel. In fact, it will be especially ironic if it is the Fed"s rate hikes that unleash the yield curve inversion and thus, the next recession, something another DB analyst - Dominic Konstam - suggested would happen two months ago. And speaking of vol regime variances, Kocic also explains what he perceives to be the biggest disconnect between past and present vol regimes.

Lots has changed relative to pre-2008. Vol is still a carry game, but the market is effectively less negatively convex then before. Monetary policy now dampens volatility instead of generating it, and economic volatility is lower. During the  period of active convexity hedging, carry was an opportunity to buy vol – existence of carry allowed mortgage hedgers to spend some of that carry to hedge their convexity exposure. That supported an extra    premium for rates volatility, on top of general uncertainty reflected by other markets. The Figure shows a history of 3M10Y rates gamma overlaid with the FX vol index (CVIX). We note the spread between the two in the first half of the first decade. With disappearance of convexity transmission mechanisms, carry is now seen as signal to sell vol.

Having establishing the disconnect between present and the past volatility regimes, how does Deutsche Bank see its future? Before answering that, Kocic revists the Minsky Dynamics aspect of historical crisis formation he discussed last week:

In our view, interplay between volatility and leverage is the framework that gives the most straightforward tool for understanding the future path of volatility. We have discussed this relationship in our recent publication. Here, we extend this interaction to a broader context of buildup of leverage and management of subsequent crises across multiple cycles. To recap, we argued that there is a logical relationship between leverage and volatility. Low uncertainty engenders higher leverage which in turn leads to additional compression of risk premia and a buildup of risks. Ultimately the system becomes unstable and results in a crisis, which in turn forces the system to deleverage in a highly volatile manner. In a way, continued prosperity and stability in itself is destabilizing leading to riskier lending as the asset prices of collateral decline. This is the essence of Minsky"s take on financial markets.

However, what is most interesting for Kocic, is the question of "what comes after each crisis, namely how is the recovery engineered and economy brought back on track." His answer:

To be specific, let’s choose as the starting oint 1999, the beginning of the internet bubble and follow (in the clockwise direction) the subsequent economic trajectory in the vol-leverage plane in the Figure. As the economy is heating up, volatility declines and leverage increases until the bubble bursts sometime in the late 2000. There is a volatile deleveraging for the next 2-3 years when low rates and expansion of the real estate market created conditions for the turnaround and beginning of another cycle. The only difference is that, this time around, the bubble was bigger and the limits were more extreme. Instead of being a periodic object (e.g. ellipse), the trajectory now becomes an outward spiral – in the second sweep, the leverage is higher and risk premia compression more extreme leading, naturally, to a deeper crisis and a need for an even more extreme measures of recovery.

Of course, one could (far simply) say that it takes more and more debt to kick the can, and keep the world"s biggest asset bubble ever created - the explicit backing of central banks - inflated. This is precisely what Bank of America"s Barnaby Martin did in far less words yesterday:

 "the irony in today"s world is that central banks are maintaining loose monetary policies to generate inflation…in order to ease the pain of a debt "supercycle"…that itself was partly a result of too easy (and predictable) monetary policies in prior times."

Alas, sounding philosophical has emerged as a calling card for quite a few financial pundits, as saying the same thing over and over (for 9 years) has lost much if not all impact and has to be spiced up in any possible way. Like, for example, using Finnegans" Wake or Ulysses as one"s stylesheet.  In any case, when charted, Kocic"s argument looks as follows:

Where Kocic is concise, and accurate, is in what he says next, namely that "spiraling leverage cannot continue indefinitely. At some point, the bubble becomes too big and cannot be subsumed by a bigger bubble – the damage of its burst would become irreparable. Therefore, when that moment comes -- and we believe that moment is now – the market is facing a following dilemma."

• Permanent state of exception: We continue to operate in a regulated environment. Leverage is limited, but care is taken not to overconfine the system so we avoid the Japanese scenario. While this appears as a prudent approach to reality, it implies giving up all the ideas of unlimited growth, something that made US economy look better than the rest of the world. Compared to what we have seen before, this means settling for much less than this country is used to aspiring. Although a reasonable proposition, it is emotionally a difficult choice that is and will remain subject to substantial political manipulation. It is unlikely that populist narrative will not continue to challenge this choice [ZH: hey, one can just blame the Russians, right?]


• Flirting with high tail risk : Deregulation and deficit spending could result exactly due to abandoning the first path, as its direct challenge, under political pressure that American economy can restore its old status and resume its pace of the previous decades. This is a serious tail risk as it is playing against the backdrop of considerable overhang of the post-2008 one-side positioning. Central banks are massively short convexity in this scenario. Any inflationary maneuver, or anything that would be a bear steepener of the curve, could force disorderly unwind of the bond trade and reinforce the trend thus creating another crisis from which there could be no way out.


• Forced deleveraging: An overly hawkish Fed forces rates higher and triggers a disorderly unwind of the bond trade, thus forcing the system to deleverage. This is the policy mistake.

Deutsche Bank"s conclusion:

"The tension created by these three choices is in the center of both economic and political discourse. It will shape the market dynamics in the future, beyond the near term. Taper tantrum and the US presidential elections were the two most recent episodes that have highlighted the risk distribution opened by these choices. Policy mistake appears less likely at this point. The financial conditions are as loose as they have ever been. Fed hikes are only going to tone this down, but it is very difficult to see how they can create overly tight financial conditions and cause economic slowdown. Nevertheless, negative convexity of the central banks in the bear steepening or generally high rates scenarios are making risk of volatile deleveraging alive."

Ironically, it was yesterday"s sharp bear steepening that was largely cheered by markets:

If they only knew.

Trump Will Own The Next Fed But "All Their Models Are In Ruins"

Authored by James Rickards via The Daily Reckoning,

President Trump is expected to nominate the next Federal Reserve chair within a matter of days.

As I’ve explained before, Donald Trump has the opportunity to appoint a higher percentage of the Board of Governors of the Federal Reserve system at one time than any president since Woodrow Wilson.

President Wilson signed the Federal Reserve Act during the creation of the Fed in 1913 when they had a vacant board. At that time, the law said the secretary of the Treasury and the comptroller of the currency were automatically on the Fed’s board of governors. But besides that, President Wilson selected all of the other participating members.

Due to vacancies he inherited and key resignations, Trump now has the opportunity to fill more seats on the Fed’s Board of Governors than any president since then.

That’s pretty amazing when you think about it.

To review, the Federal Reserve’s Board of Governors is made up of seven appointees. That means that they can make a majority decision with four votes. If you’re reading about the Fed, you might also see reference to “regional reserve bank presidents.” These are roles within the Federal Reserve System, but the real power is found on seven-member Board of Governors.

Trump will own the Fed.

Meaning, whatever the president wants monetary policy to be, he’ll get. In other words, Donald Trump will be able to shape the Fed’s majority. But the tricky part is figuring out how he plans to shape it...

During the campaign season, Trump called China and other nations currency manipulators. That signaled he believed the dollar was too strong and wanted it to weaken. But then the North Korean nuclear crisis rose to the fore.

Trump backed off his threats against China because China has the most economic influence over North Korea, and Trump wanted China to use that leverage to convince the North to back off its nuclear program.

But China didn’t deliver as Trump had hoped, and a trade war with China is now likely. That’s especially true now. Chinese president Xi Jinping has solidified his hold on power after the Chinese Politburo re-appointed him yesterday. Xi had avoided rocking the boat in recent months while his position was uncertain. But now that his lock on power is secure, Xi can afford to be much more confrontational with Trump.

Trump’s trade policy has led many to believe that Trump will appoint a lot of “doves” to the Board. But don’t be surprised if Trump goes with a hard-money board. In fact, that’s what I expect. These will be hard-money, strong-dollar people, contrary to a lot of expectations.

Trump advisers include hard-money advocates like Dr. Judy Shelton, David Malpass, Steve Moore and Larry Kudlow. I expect Trump to heed their advice.

Which brings us to Janet Yellen and the next Federal Reserve Chair…

Janet Yellen’s term as chair is up at the end of January - just over three months from now. Whoever President Trump appoints to replace her will be subject to Senate confirmation.

Because that process takes time, that means the president has to name Yellen’s successor around November or December.

And again, he’s expected to make that announcement by Nov. 3, before he heads to China.

The market is tightly focused on President Trump’s pick. As of now, betting markets had the approximate probabilities as follows:

Powell’s main qualification seems to be that he’s just like Yellen except he’s a Republican. So, if we combine their votes, that a 68% chance that policy will continue unchanged, which means more rate hikes ahead.

The next in line is John Taylor, who is considered the most hawkish of the group. If we add his votes to the Powell + Yellen pool, that an 85% probability that policy will either be the same or tighter.

No relief for gold in the Fed sweepstakes.

Now, as I’ve been saying for months, my money’s on Kevin Warsh. Warsh is the likely next chair of the Fed.

Warsh has previously served on the board. After being nominated by President George W. Bush he was a Fed governor where he served from 2006 until he resigned early in 2011.

Kevin Warsh is a pragmatist, not an ideologue like Yellen. He’s not beholden to obsolete Fed models like Phillips curve that says low unemployment means higher inflation. Warsh understands that disinflation is a serious problem for a country with a 105% debt-to-GDP ratio, like the U.S.

Warsh and the pragmatists understand that inflation is needed for the U.S. to have any hope of getting the debt problem under control.

Warsh believed that the Federal Reserve should have raised interest rates a long time ago. But with disinflation a much more pressing concern than inflation right now, being a pragmatist means he won’t commit to tightening if conditions don’t warrant it.

We’ll see how this all plays out probably late this week or early next before Trump leaves for China.

But it’s important to realize that institutions boil down to people. And there’s going to be a lot of turnover at the Fed under Trump. It’s not just limited to his choice of Fed chair.

Yes, Yellen will likely be out. But so are Fed officials that align with her, like Vice President Stanley Fischer, who announced his resignation in September.

As I indicated, the new, emerging Fed will have less faith in traditional models. For example, in September, Fed governor Lael Brainard delivered one of the most significant Fed speeches ever. Translating from Fed-speak to plain English, she more or less admitted the Fed has no idea how inflation works.

Brainard pointed out that the Fed began its current monetary policy tightening cycle in the belief that tight labor markets implied inflation was coming with a lag. The Fed raised rates in December 2015, December 2016, March 2017 and June 2017 in part to get out ahead of this coming inflation.

Instead the opposite happened.

The Fed’s favorite measure of inflation plunged from 1.9% to 1.3% between January and August 2017 even as job creation continued and the unemployment rate fell. In other words, the relationship between tight labor markets and inflation turned out to be the exact opposite of what the Fed believed.

Their models are in ruins.

Of course, this is what I’ve been telling my readers to expect all year. The Fed was tightening into weakness, not strength, and would soon have to flip back to ease in order to avoid an outright U.S. recession. And ease is exactly what Brainard called for in her speech.

In the meantime, a lot of uncertainty over the Fed’s direction will hover over the market, as if there wasn’t enough uncertainty in the market already.

But one thing is certain:

The next Fed head will have a lot on his (or her) plate.

The biggest winner will be gold. The time to enter your gold position, if you don’t already have one, is now.

Ron Paul: Trump’s Candidates for Federal Reserve Chief Are a Total Disaster

(RPI Op-ed) This week President Trump revealed his final five candidates for Federal Reserve chair. Disappointingly, but not surprisingly, all five have strong ties to the financial and political establishment. The leading candidates are former Federal Reserve governor and Morgan Stanley banker Kevin Warsh and current Fed governor, former investment banker, Carlyle Group partner, and George H.W. Bush administration official Jerome Powell. Gary Cohn, current director of the president’s National Economic Council and former president of Goldman Sachs, is also on Trump’s list.

Trump is also considering reappointing Janet Yellen, even though when he was running for president he repeatedly criticized her for pursuing policies harmful to the middle class. Of course candidate Trump also promised to support Audit the Fed and even voiced support for returning to the gold standard. But, he has not even uttered the words “Audit the Fed,” or talked about any changes to monetary policy, since the election.

Instead, President Trump, in complete contradiction to candidate Trump, has praised Yellen for being a “low-interest-rate-person.” One reason Trump may have changed his position is that, like most first-term presidents, he thinks low interest rates will help him win reelection. Trump may also realize that his welfare and warfare spending plans require an accommodative Fed to monetize the federal debt. The truth is President Trump’s embrace of status quo monetary policy could prove fatal to both his presidency and the American economy.

The failure of the Fed’s post-2008 policies of unprecedented money creation and record-low interest rates shows our experiment with fiat money is nearing its inevitable end. All of Trump’s potential picks are likely to continue the Fed’s current policies. Even the ones who say they favor higher rates will likely bow to the wishes of their friends in the financial and political establishment and make sure any rate hikes are minuscule. Appointing a Fed chair who will continue, or only make marginal changes to, these failed policies will hasten the collapse while making the resulting depression more painful.

Some say that Trump could make a radical change in monetary policy by appointing Stanford University professor and former George W. Bush administration Treasury official John Taylor. Professor Taylor is a leading advocate of a “rules-based” monetary policy. Advocates of forcing the Fed to follow specific rules say this will bring stability and predictability to monetary policy. However, a rules-based policy still allows the Fed to control the money supply and distort interest rates, thus still plaguing the economy with Fed-created bubbles and busts.

Trump would do well to appoint a Fed chair who follows the teachings of the Austrian school of economics and thus understands that the only thing the Fed can do to “fix” the economy is allow the correction to run its course. He should also use his bully pulpit to pass Audit the Fed and legislation legalizing competing currencies.

Fortunately, even if Trump is not speaking out on Audit the Fed, many Americans are demanding that Congress vote on and pass this bill. An increasing number of Americans are seeking alternatives to the Federal Reserve System, such as precious metals and cyber currency.

Another positive development is occurring in the states. Arizona recently passed legislation recognizing gold, silver, and other precious metals as legal tender. Wyoming will consider similar legislation next year. If Congress refuses to act to restore a free market in money by auditing and ending the Fed, more states are likely to pass these laws as more Americans reject fiat currency in favor of real money.

Op-Ed by Ron Paul / Republished with permission / RPI / Report a typo

This article was chosen for republication based on the interest of our readers. Anti-Media republishes stories from a number of other independent news sources. The views expressed in this article are the author’s own and do not reflect Anti-Media editorial policy.

How The Elite Dominate The World – Part 2: 99.9% Of The World Live In A Country With A Central Bank

Authored by Michael Snyder via The Economic Collapse blog,

Even though the nations of the world are very deeply divided on almost everything else, somehow virtually all of them have been convinced that central banking is the way to go. 

Today, less than 0.1% of the population of the world lives in a country that does not have a central bank.  Do you think that there is any possible way that this is a coincidence?  And it is also not a coincidence that we are now facing the greatest debt bubble in the history of the world. 

In Part I of this series, I discussed the fact that total global debt has reached 217 trillion dollars.  Once you understand that central banks are designed to create endless debt, and once you understand that 99.9% of the global population lives in a country that has a central bank, then it finally makes sense why we have accumulated so much debt.  The elite of the world use debt as a tool of enslavement, and central banking has allowed them to literally enslave the entire planet.

Some of you may not be familiar with how a “central bank” differs from a normal bank.  The following definition of a “central bank” comes from Wikipedia…

A central bank, reserve bank, or monetary authority is an institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency,^[1] which usually serves as the state’s legal tender.

Over the past 100 years or so, we have seen central banks steadily be established all over the planet.  At this point, there are just 8 very small nations that still do not have a central bank…

• -Andorra


• -Monaco


• -Nauru


• -Kiribati


• -Tuvalu


• -Palau


• -Marshall Islands


• -Federated States of Micronesia

When you add the populations of those 8 nations together, it comes to much less than 0.1% of the global population.

But even though central banking is nearly universal, only a very small fraction of the global population can tell you how money is created.

Do you know where money comes from?

Here in the United States, most people just assume that the federal government creates money.  But that is not true at all.

Many are absolutely shocked when they discover that U.S. currency is actually borrowed into existence.  The federal government gives U.S. Treasury bonds (debt) to the Federal Reserve in exchange for money that the Federal Reserve creates out of thin air.  The Federal Reserve then auctions off those bonds to the highest bidder.

Since the federal government must pay interest on those bonds, the amount of debt that is created in these transactions is actually greater than the amount of money that is created.  But we are told that if we can just circulate the money throughout our economy fast enough and tax it at a high enough rate, then we can eventually pay off the debt.  Of course that never actually happens, and so the federal government always has to go back and borrow even more money.  This is called a debt spiral, and at this point we will never be able to escape it until we do away with this horrible system.

But why does our government (or any government for that matter) have to borrow money that is created by a central bank in the first place?

Why can’t governments just create money themselves?

Oops.  That is the big secret that nobody is supposed to talk about.

Theoretically, the U.S. government doesn’t actually have to borrow a single penny. Instead of borrowing money the Federal Reserve creates out of thin air, the federal government could just create money directly and spend it into circulation.

Yes, this could actually happen.  Back in 1963, President John F. Kennedy signed Executive Order 11110 which authorized the U.S. Treasury to issue debt-free “United States Notes” which were not created by the Federal Reserve.  These debt-free notes began to be issued, and you can still find them for sale on eBay today.  Unfortunately, President Kennedy was assassinated shortly after this executive order was issued, and the notes were not in production for long.

If we had ultimately fully adopted “United States Notes” and had phased out Federal Reserve notes, we would not be 20 trillion dollars in debt today.

The elite of the world love to get national governments deep into debt, because it enables them to enslave entire populations while making an obscene amount of money in the process.

Back in 1913, an insidious plan was rushed through Congress just before Christmas that was based on a blueprint that had been developed by very powerful Wall Street interests.  Author G. Edward Griffin did an extraordinary job of documenting how all of this happened in his book entitled “The Creature from Jekyll Island: A Second Look at the Federal Reserve”.  A central bank was established, and it was purposely designed to create a government debt spiral, and that is precisely what happened.

Since 1913, the size of the national debt has gotten more than 6,000 times larger, and the value of our dollar has declined by more than 98 percent.  Many conservatives are still under the illusion that we could get out of debt someday if we just grow the economy fast enough, but I have shown in another article that we have gotten to the point where this is mathematically impossible.

And most people are also operating under the false assumption that the Federal Reserve is part of the federal government.  But that is not accurate either.  The following comes from one of my previous articles…

There is often a lot of confusion about the Federal Reserve, because a lot of people think that it is simply an agency of the federal government. But of course that is not true at all. In fact, as Ron Paul likes to say, the Federal Reserve is about as “federal” as Federal Express is.

The Fed is an independent central bank that has even argued in court that it is not an agency of the federal government. Yes, the president appoints the leadership of the Fed, but the Fed and other central banks around the world have always fiercely guarded their “independence”. On the official Fed website, it is admitted that the 12 regional Federal Reserve banks are organized “much like private corporations”, and they very much operate like private entities. They even issue shares of stock to the private banks that own them.

In case you were wondering, the federal government has zero shares.

According to the U.S. Constitution, a private central banking cartel should not be issuing our currency.  In Article I, Section 8 of our Constitution, Congress is solely given the authority to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.

So why in the world has this authority been given to a central bank?

The truth is that we do not need a central bank.

From 1872 to 1913, there was no central bank and no income tax, and it turned out to be the greatest period of economic growth in all of U.S. history.

But since the Fed was established, there have been 18 different recessions or depressions: 1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.

Abolishing the Federal Reserve is one of the core issues of my platform, and I have been writing about these things for the last seven years.

As I discussed yesterday, the elite use debt to enslave all of the rest of us, and central banking allows them to literally dominate the entire planet.

Until we abolish this debt-based system and go to a currency that is debt-free, we are never going to permanently solve our very deep long-term economic and financial problems.

But because they are so immensely wealthy, the elite are able to wield extraordinary influence in our society.  They control the mainstream media, our politicians and even global institutions such as the United Nations.  Anyone that would dare to question the validity of the current system is marginalized, and for a long time very few politicians around the world were even willing to speak out against central banking.

However, that is starting to change.  A new generation of leaders is rising up, and they are absolutely determined to break the stranglehold that the elite have on our society.  It won’t be easy, but if we are able to wake enough people up, I believe that we will eventually be able to free ourselves from this insidious system.