Stagflationary Crisis: Understanding The Cause Of America’s Ongoing Collapse

This report was originally published by Brandon Smith at Alt-Market.com

It is at times frustrating, but also interesting, to witness the progression of the mainstream’s awareness of economic crisis within the U.S. over the years. As an alternative economist, I have had the “privilege” of perching outside the financial narrative and observing our economy from a less biased position, and I have discovered a few things.

First, the mainstream economic media is approximately two to three years behind average alternative economists. At least, they don’t seem to acknowledge reality within our time frame. This may be deliberate (my suspicion) because the general public is not meant to know the truth until it is too late for them to react in a practical way to solve the problem. For example, it is a rather strange experience for me to see the term “stagflation” suddenly becoming a major buzzword in the MSM. It is almost everywhere in the past week ever since the last Federal Reserve meeting in which the central bank mentioned higher inflation pressures and removed references in its monthly statement to a “growing economy.”

For those unfamiliar with what stagflation is, it is essentially the loss of economic growth in numerous sectors coupled with a marked spike in consumer and manufacturing costs. In other words, prices keep going up while employment growth, wages, production, etc. decline.

I have been warning about a stagflationary crisis as the ultimate result of central bank bailouts and QE for many years. In 2011, I published an article titled ‘The Debt Deal Con: Is It Fooling Anyone?’ in which I predicted that the Fed would resort to a third round of quantitative easing (they did). This prediction was based on the fact that the previous two QE events had not resulted in the kind of results the central bankers were obviously looking for. At that time, the stock market remained a dubious mess on the verge of a renewed crash, the U.S. debt rating was about to be downgraded by S&P, true employment growth was dismal, etc. The Fed needed something spectacular to keep the system propped up, at least until they were ready to trigger the next stage of the collapse.

In that same article I also discussed the inevitable end result of this stimulus bonanza:  Stagflation.

QE3 was a dramatic con, along with Operation Twist. The Fed got exactly what it wanted — an unprecedented bull market rally in stocks and temporary stability in bond markets. As stocks jumped higher and higher despite all negative fundamental data, the mainstream simply regurgitated the fool’s narrative that a “recovery” was upon us. But now things are changing and no illusion lasts forever.

The second observation I have made is that central banking elites and their cronies tend to give warnings on great economic shifts, but only about a year before they occur. They do this for a few reasons. One, because they are the people that engineer these crisis events in the first place and it’s not very hard to predict a calamity you helped create. Two, because it makes them appear prophetic when they are not, while at the same time giving the public as little time as possible to prepare. And three, because it gives them plausible deniability when the crisis actually happens, because they can claim they “tried to warn us”, though unfortunately it was too late.

The Bank For International Settlements warned of the derivatives and credit crash in 2007, about a year before the disaster struck. In 2017, former Fed chairman Alan Greenspan warned of inevitable “stagflation not seen since the 1970s.” In later comments, he and others attributed this potential crisis to the policies of Donald Trump.

It is important to note that stagflation is entirely the fault of central bankers and not the presidency, though the White House has indeed aided the Fed in its efforts regardless of who sits in the Oval Office.

Years ago there was a rather idiotic battle between financial analysts over what the end result of the Fed’s massive stimulus measures would be. One side argued that deflation would be the outcome and that no amount of Fed printing would overtake the vast black hole of debt conjured by the derivatives implosion. The other side argued that the Fed would continue to print perpetually, resorting to QE4 or possibly “QE infinity” and negative interest rates as a means to stave off a market crash for decades (like Japan) while at the same time initiating a Weimar-style inflationary bonanza.

Both sides were wrong because they refused to acknowledge the third option — stagflation.

The Fed clearly found a way to direct inflationary pressures into certain parts of the economy while allowing deflationary pressures to weigh down other parts of the economy. They also are NOT sticking to their previous strategy of holding interest rates down while pumping up markets with talk of further QE.

Deflationary proponents used to sarcastically argue that if people really believed that inflation would be the consequence of Fed activities then they should jump into the housing market because they would make a mint on price increases. Well, this is exactly what has happened. Home prices have continued to surge despite all fundamentals, including dismal home buyer stats which hit an all time low in 2016 and have barely recovered since.

I use home prices as a prime example of stagflation because the housing market constitutes around 15 percent to 18 percent of total GDP in the U.S. Since items like food and fuel are not counted in the calculation of the CPI index, housing should be the next consideration. Signs of stagflation in housing are a sure indicator of stagflation in the rest of the economy.

The manner in which housing is calculated in the CPI and GDP is a bit odd, of course. Housing is not included in these stats in terms of home purchases annually. In fact, home purchases and improvements are treated by the Bureau of Labor Statistics as an “investment” and not as a consumer purchase, which means they are not considered a measure of inflation. However, home values in terms of their “rental cost and change in cost” are counted in CPI.

As we all know, rent prices across the country have been skyrocketing in the past few years along with home prices, while at the same time home buyers have dwindled and the millennial generation is staying at home with mom and dad rather than paying out monthly for homes and apartments. That is to say, in a normal economic environment fewer buyers should result in lower prices, but this is not what has happened. The question is, how has the Federal Reserve and QE contributed to this example of stagflation?

First, the Fed’s artificial support for Fannie Mae and Freddie Mac after the derivatives debacle allowed for the continued propping up of the housing market when bad debt should have been allowed to cycle out of the system and house prices should have been allowed to fall.

Second, the Fed’s bailout funding of Fannie Mae directly benefited companies like Blackstone, which has become a partner with Fannie Mae and one of the largest buyers of homes in the country. Blackstone has not purchased tens of thousands of homes for resale, but for conversion into rentals. Blackstone’s vast purchases of single family homes has artificially boosted home values across the nation and given the false impression of a housing recovery that does not really exist.

Third, a very interesting discovery; while the central bank under Jerome Powell has become more and more aggressive in its balance sheet reductions, a move which has directly contributed to the recent decline in stock markets, there is one asset class that the Fed has been ADDING to its balance sheet — Mortgage Backed Securities (MBS).  These purchases tend to take place directly after older MBS have been allowed to roll over, meaning, the Fed is maintaining a relatively steady number of MBS while it is dumping other assets.

MBS represent around 40 percent of the Fed’s total balance sheet, and the Fed’s continued fiat support of the MBS market helps explain why home prices refuse to fall despite negative fundamentals. It is also interesting to me that the Fed has chosen to dump certain assets that appear to be causing a downward reaction in stock markets and other sectors while maintaining assets that keep housing prices high. It’s almost as if the Fed wants stagflation…

Finally, while the Fed’s interest rate hikes do not traditionally have a direct correlation to home mortgage rates, there is an indirect correlation. Fears of inflation sometimes ironically create inflation, and as the fed raises interest rates, mortgage rates tend to track. In 2018 mortgage rates have spiked, climbing 48 basis points since the beginning of the year.

This contributes to higher home prices as well a perceived rental values according to the CPI.

The source of almost every instability within our economy can be tracked straight back to the Federal Reserve and the “too-big-to-fail” corporations they bailed out after the credit crash. The current stagflationary development is no different. Stagflation will ultimately result in extreme price increases on necessary goods and services far beyond what we have already seen while the public’s ability to keep up with those prices will falter.

The fact that this issue is FINALLY hitting the mainstream should be concerning to everyone. For when a crisis development is discussed in the mainstream, it means we are on the verge of that crisis reaching its nexus. In June the Fed will raise interest rates yet again despite failing fundamentals. The Fed will continue to cite inflationary pressures, and the Fed will continue to cut its balance sheet. There is no room for delusion on this anymore. The Fed will not stop on its current path. In the meantime, central banks will continue to blame external forces such as trade wars and Trump era policies for stagflation while ignoring the trillions in fiat they have expertly poisoned our financial system with.

All bubbles collapse, but not all bubbles collapse in the exact same way. I believe the Fed has created a perfect storm of combined deflationary and inflationary factors; an economic bomb to surpass all economic bombs.

******

If you would like to support the publishing of articles like the one you have just read, visit our donations page here. We greatly appreciate your patronage.

You can contact Brandon Smith at: brandon@alt-market.com

After 8 long years of ultra-loose monetary policy from the Federal Reserve, it’s no secret that inflation is primed to soar. If your IRA or 401(k) is exposed to this threat, it’s critical to act now! That’s why thousands of Americans are moving their retirement into a Gold IRA. Learn how you can too with a free info kit on gold from Birch Gold Group. It reveals the little-known IRS Tax Law to move your IRA or 401(k) into gold. Click here to get your free Info Kit on Gold.

The Zealous Pursuit Of State-Sponsored Collapse

Authored by EconomicPrism"s MN Gordon via Acting-Man.com,

When Bakers Go Fishing

Government intervention into a nation’s economy is as foolish as attempting to control the sun’s rise and fall by law or force.  But that doesn’t mean governments don’t meddle each and every day with the best – and worst – of intentions.  The United States government is no exception.

From the “When the government helps the economy” collection: Breaking a few eggs while baking the bridge to nowhere omelet. [PT]

 

Over the years, layers and layers of interference by various federal, state, and local agencies have built up like grime on a kitchen window.  The grease shines and smells of something fierce.  The layers of government grime also drip and ooze into every crack and crevice of the economy.

These days, for example, it is impossible to carry out a simple private transaction with your barber or barista without some form of government interference.  Has your barber obtained the required license and paid the obligatory fees to be able to legally taper your neck line?  Has your barista’s espresso bean grinder passed city health inspection?

Is the hot Cup of Joe served in a paper cup of appropriate recycled material composition?  Did the hot beverage exceed the legally accepted temperature standard?  Did state and local governments receive their tax exaction upon payment?

 

The licensing racket – left panel: the basic definition of the racket; middle panel: how long it takes and what it costs to obtain licenses for assorted jobs in the US; right panel: the inexorable growth of rules and regulations. One shouldn’t be surprised that the pace of real economic growth has steadily declined since peaking in the late 19^th century (or if one wants to focus on the modern era, since it peaked not too long after WW2). From money supply inflation to regulatory inflation, Leviathan has undermined the economy at every turn by inflating all the stuff we definitely don’t need more of. The pretense is that this is needed to “protect” us (for instance, last year the police courageously protected the citizens of Georgia from the dangers of an unlicensed lemonade stand by arresting its 14-year old female proprietor). Let us be clear: No-one will be allowed to terrorize the community by running an unlicensed lemonade stand or engaging in the high crimes of dispensing unlicensed manicures and haircuts. [PT] – click to enlarge.

 

When it comes to more complicated matters, where real money’s on the line, government interference is an absolute disgrace.  Did you know that it costs 10 times more to have an appendectomy in the United States than in Mexico?  Is the procedure 10 times better?

Obviously, this is nothing new.  Governments have been regulating and impressing their fingerprints all over commerce since society first granted its leaders the opportunity.  People are so accustomed to it that they accept government intervention as necessary to better their lives.

When it comes to price fixing, wage controls, and dictating oil production, things quickly go haywire.  This is because prices, wages, and resources have their own independent relationships beyond what can be legislated.

When the price of a certain good or commodity is artificially fixed below its natural equilibrium, scarcity and shortages follow.  In short, when the price of bread is decreed below the cost of the wheat that goes into it, bakers go fishing.

The scourge of occupational licensing [PT]

 

Credit Market Intervention

Perhaps the most nefarious of all government intervention, is that which directly affects a nation’s money stock.  Many people don’t recognize its occurrence.  But they do misdiagnose its effects.

Wage stagnation, for instance, is often blamed on greedy executives off-shoring their production.  In reality, this is merely a consequence of a forced monetary regime that inhibits genuine capital formation and earned savings in favor of asset price inflation. Of course, only a complete killjoy would bother scratching below the surface to uncover such minutiae.

Without question, the last decade has brought forth some of the craziest monetary policy experiments in human history.  If you recall, the Federal Reserve dropped the federal funds rate to near zero in December 2008, and kept it there until December 2015 – exactly seven years.

Since then, the Fed has hiked the federal funds rate four times – 0.25 percent each time – bringing the federal funds rate up to 1.25 percent. The Federal Open Market Committee (FOMC) meets on December 12 and 13, and will likely raise the federal funds rate another 0.25 percent.

It is also anticipated that the Fed will raise rates three times in 2018, assuming financial markets and the economy don’t break down before they can accomplish this.

 

Broad true money supply TMS-2 and the federal funds rate – a mountain of money was created, and it is an apodictic certainty that is has not made us one iota more prosperous – quite the contrary. [PT] – click to enlarge.

 

Concurrent with the Fed’s interest rate raising efforts, they’ve also begun to reduce their balance sheet.  They’re selling some of the roughly $3.6 trillion in Treasury and mortgage-backed securities purchased as part of their Quantitative Easing program. This reversal of the Federal Reserve’s Quantitative Easing program reduces the pool of available credit in the financial system.

It doesn’t take much imagination to visualize the effect this will have on an economy and financial markets that are wholly addicted to cheap and abundant credit.  So where does the GOP’s tax bill fall within this landscape?

 

The Zealous Pursuit of State-Sponsored Collapse

Here we turn to David Stockman, former Director of the Office of Management and Budget under President Reagan.  Stockman’s more than four decades of in-the-trenches experience, study, and contemplation of taxes, budgets, and deficits, and how these all influence and affect the economy, is unrivaled. As he explains:

“All tax cuts are not created equal.  Their impact for good or ill depends on: (1) which taxes are cut; (2) how the revenue loss is financed; (3) when they occur in the business cycle; and (4) how they impact that nation’s underlying fiscal posture.

 

“Our point today is that the GOP gets an “F” on all four components of the test.  That’s because a deficit-financed tax cut is never a good idea, but is especially counter-productive if done late in the business cycle in the face of a structural deficit that is high and rising (owing to inexorable demographic pressures on entitlement spending); and in the teeth of an unprecedented cycle of monetary contraction, which is exactly what the Fed’s interest rate normalization and balance sheet shrinkage (QT or quantitative tightening) amounts to.”

 

David Stockman, former budget director in the Reagan administration – which he quit when it ignored his admonishments on its massive spending. [PT]

 

To clarify, if you’ve been out of school for a while, “F” stands for fail.  Most notably, financing tax cuts with money borrowed from the future is doomed to fail.  Hence, the great GOP tax cuts represent but another fail milestone in the zealous pursuit of state-sponsored collapse.

 

As an aside, since last week, when we declared buying bitcoin above $11,000 to be an action for idiots, bitcoin has spiked up above $19,000.  That represents more than a 70 percent increase in just one week.  Nonetheless, we stand behind our claim.  We also stand behind our claim that sometimes idiots get rich – click to enlarge.

 

We should point out that the spike to $19,000+ in BTC was confined to the Coinbase exchange, where a huge premium developed during the trading day. It was not replicated at any of the other exchanges, where BTC peaked just below $16,000. This is mainly a sign of inefficiencies at said exchange (BTC routinely trades at a premium there, but it is usually much smaller). It took a while for arbitrageurs to bring the premium back down, but they succeeded eventually. [PT]

 

WORLD’S LARGEST OIL COMPANIES: Deep Trouble As Profits Vaporize While Debts Skyrocket

By the SRSrocco Report,

The world"s largest oil companies are in serious trouble as their balance sheets deteriorate from higher costs, falling profits and skyrocketing debt.  The glory days of the highly profitable global oil companies have come to an end.  All that remains now is a mere shadow of the once mighty oil industry that will be forced to continue cannibalizing itself to produce the last bit of valuable oil.

I realize my extremely unfavorable opinion of the world"s oil industry runs counter to many mainstream energy analysts, however, their belief that business, as usual, will continue for decades, is entirely unfounded.  Why?  Because, they do not understand the ramifications of the Falling EROI - Energy Returned On Invested, and its impact on the global economy.

For example, Chevron was able to make considerable profits in 1997 when the oil price was $19 a barrel.  However, the company suffered a loss in 2016 when the price was more than double at $44 last year.  And, it"s even worse than that if we compare the company"s profit to total revenues.  Chevron enjoyed a $3.2 billion net income profit on revenues of $42 billion in 1997 versus a $497 million loss on total sales of $114 billion in 2016.  Even though Chevron"s revenues nearly tripled in twenty years, its profit was decimated by the falling EROI.

Unfortunately, energy analysts, who are clueless to the amount of destruction taking place in the U.S. and global oil industry by the falling EROI, continue to mislead a public that is totally unprepared for what is coming.  To provide a more realistic view of the disintegrating energy industry, I will provide data from seven of the largest oil companies in the world.

The World"s Major Oil Companies Debt Explode Since The 2008 Financial Crisis

To save the world from falling into total collapse during the 2008 financial crisis, the Fed and Central Banks embarked on the most massive money printing scheme in history.  One side-effect of the massive money printing (and the purchasing of assets) by the central banks, was that it pushed the price of oil to a record $100+ a barrel for more than three years.  While the large oil companies reported handsome profits due to the high oil price, many of them spent a great deal of capital to produce this oil.

For instance, the seven top global oil companies that I focused on made a combined $213 billion in cash from operations in 2013. However, they also forked out $230 billion in capital expenditures.  Thus, the net free cash flow from these major oil companies was a negative $17 billion... and that doesn"t include the $44 billion they paid in dividends to their shareholders in 2013.  Even though the price of oil was $109 in 2013; these seven oil companies added $45 billion to their long-term debt:

As we can see, the total amount of long-term debt in the group (Petrobras, Shell, BP, Total, Chevron, Exxon & Statoil) increased from $227 billion in 2012 to $272 billion in 2013.  Isn"t that ironic that the debt ($45 billion) rose nearly the same amount as the group"s dividend payouts ($44 billion)?  Of course, we can"t forget about the negative $17 billion in free cash flow in 2013, but here we see evidence that the top seven global oil companies were borrowing money even in 2013, at $109 a barrel oil, to pay their dividends.

Since the 2008 global economic and financial crisis, the top seven oil companies have seen their total combined debt explode four times, from $96 billion to $379 billion currently.  You would think with these energy companies enjoying a $100+ oil price for more than three years; they would be lowering their debt, not increasing it.  Regrettably, the cost for companies to replace reserves, produce oil and share profits with shareholders was more than the $110 oil price.

There lies the rub....

One of the disadvantages of skyrocketing debt is the rising amount of interest the company has to pay to service that debt.  If we look at the chart above, Brazil"s Petrobras is the clear winner in the group by adding the most debt.  Petrobras"s debt surged from $21 billion in 2008 to $109 billion last year.  As Petrobras added debt, it also had to pay out more to service that debt.  In just eight years, the annual interest amount Petrobras paid to service its debt increased from $793 million in 2008 to $6 billion last year.  Sadly, Petrobras"s rising interest payment has caused another nasty side-effect which cut dividend payouts to its shareholders to ZERO for the past two years.

Petrobras Annual Dividend Payments:

2008 = $4.7 billion

2009 = $7.7 billion

2010 = $5.4 billion

2011 = $6.4 billion

2012 = $3.3 billion

2013 = $2.6 billion

2014 = $3.9 billion

2015 = ZERO

2016 = ZERO

You see, this is a perfect example of how the Falling EROI guts an oil company from the inside out.  The sad irony of the situation at Petrobras is this:

If you are a shareholder, you"re screwed, and if you invested funds (in company bonds, etc.) to receive a higher interest payment, you"re also screwed because you will never get back your initial investment.  So, investors are screwed either way.  This is what happens during the final stage of collapsing oil industry.

Another negative consequence of the Falling EROI on these major oil companies" financial statements is the decline in profits as the cost to produce oil rises more than the economic price the market can afford.

Major Oil Companies" Profits Vaporize... Even At Higher Oil Prices

To be able to understand just how bad the financial situation has become at the world"s largest oil companies, we need to go back in time and compare the industry"s profitability versus the oil price.  To find a year when the oil price was about the same as it was in 2016, we have to return to 2004, when the average oil price was $38.26 versus $43.67 last year.  Yes, the oil price was lower in 2004 than in 2016, but I can assure you, these oil companies weren"t complaining.

In 2004, the combined net income of these seven oil companies was almost $100 billion..... $99.2 billion to be exact.  Every oil company in the group made a nice profit in 2004 on a $38 oil price.  However, last year, the net profits in the group plunged to only $10.5 billion, even at a higher $43 oil price:

Even with a $5 increase in the price of oil last year compared to 2004, these oil companies combined net income profit fell nearly 90%.  How about them apples.  Of the seven companies listed in the chart above, only four made profits last year, while three lost money.  Exxon and Total enjoyed the highest profits in the group, while Petrobras and Statoil suffered the largest losses:

Furthermore, the financial situation is in much worse shape because "net income" accounting does not factor in the companies" capital expenditures or dividend payouts.  Regardless, the world"s top oil companies" profitability has vaporized even at a higher oil price.

Now, another metric that provides us with more disturbing evidence of the Falling EROI in the oil industry is the collapse of  the "Return On Capital Employed."  Basically, the Return On Capital Employed is just dividing the company"s earnings (before taxes and interest) by its total assets minus current liabilities.  In 2004, the seven companies listed above posted between 20-40% Return On Capital Employed.  However, this fell precipitously over the next decade and are now registering in the low single digits:

In 2004, we can see that BP had the lowest Return On Capital Employed of 19.68% in the group, while Statoil had the highest at 46.20%.  If we throw out the highest and lowest figures, the average for the group was 29%.  Now, compare that to the average of 2.4% for the group in 2016, and that does not including BP and Chevron"s negative returns (shown in Dark Blue & Orange).

NOTE:  I failed to include the Statoil graph line (Magenta)  when I made the chart, but I added the figures afterward.  For Statoil to experience a Return On Capital Employed decline from 46.2% in 2004 to less than 1% in 2016, suggests something is seriously wrong.

We must remember, the high Return On Capital Employed by the group in 2004, was based on a $38 price of oil, while the low single-digit returns by the oil companies in 2016 were derived from a higher price of $43.  Unfortunately, the world"s largest oil companies are no longer able to enjoy high returns on a low oil price.  This is bad news because the market can"t afford a high oil price unless the Fed and Central Banks come back in with an even larger amount of QE (Quantitative Easing) money printing.

I have one more chart that shows just how bad the Falling EROI is destroying the world"s top oil companies.  In 2004, these seven oil companies enjoyed a combined net Free Cash Flow minus dividends of a positive $34 billion versus a negative $39.1 billion in 2016:

Let me explain these figures.  After these oil companies paid their capital expenditures and dividends to shareholders in 2004, they had a net $34 billion left over.  However, last year these companies were in the HOLE for $39.1 billion after paying capital expenditures and dividends.  Thus, many of them had to borrow money just to pay dividends.

To understand how big of a change has taken place at the oil companies since 2004, here are the figures below:

Top 7 Major Oil Companies Free Cash Flow Figures

2004 Cash From Operations = ............$139.6 billion

2004 Capital Expenditures = .................$67.7 billion

2004 Free Cash Flow = ...........................$71.9 billion

2004 Shareholder Dividends = ..............$37.9 billion

2004 Free Cash Flow - Dividends = $34 billion

2016 Cash From Operations = .................$118.5 billion

2016 Capital Expenditures = ....................$117.5 billion

2016 Free Cash Flow = ................................$1.0 billion

2016 Shareholder Dividends = ...................$40.1 billion

2016 Free Cash Flow - Dividends = -$39.1 billion

Here we can see that the top seven global oil companies made more in cash from operations in 2004 ($139.6 billion) compared to 2016 ($118.5 billion).   That extra $21 billion in operating cash in 2004 versus 2016 was realized even at a lower oil price.  However, what has really hurt the group"s Free Cash Flow, is the much higher capital expenditures of $117.5 billion in 2016 compared to the $67.7 billion in 2004.  You will notice that the net combined dividends didn"t increase that much in the two periods... only by $3 billion.

So, the lower cash from operations and the higher capital expenditures have taken a BIG HIT on the balance sheets of these oil companies.  This is precisely why the long-term debt is skyrocketing, especially over the past three years as the oil price fell below $100 in 2014.  To continue making their shareholders happy, many of these companies are borrowing money to pay dividends.  Unfortunately, going further into debt to pay shareholders is not a prudent long-term business model.

The world"s major oil companies will continue to struggle with the oil price in the $50 range.  While some analysts forecast that higher oil prices are on the horizon, I disagree.  Yes, it"s true that oil prices may spike higher for a while, but the trend will be lower as the U.S. and global economies start to contract.  As oil prices fall to $40 and below, oil companies will begin to cut capital expenditures even further.  Thus, the cycle of lower prices and the continued gutting of the global oil industry will move into high gear.

There is one option that might provide these oil companies with a buffer... and that is a new even larger Fed and Central Bank money printing scheme which would result in severe inflation and possibly hyperinflation.  But, that won"t be a long-term solution, instead just another lousy band-aid in a series of band-aids that have only postponed the inevitable.

The coming bankruptcy of the once mighty global oil industry will be the death-knell of the world economy.  Without oil, the global economy grinds to a halt.  Of course, this will not occur overnight.  It will take time.  However, the evidence shows that a considerable wound has already taken place in an industry that has provided the world with much-needed oil for more than a century.

Lastly, without trying to be a broken record, the peak and decline of global oil production will destroy the value of most STOCKS, BONDS and REAL ESTATE.  If you have placed most of your bests in one of these assets, you have my sympathies.

Check back for new articles and updates at the SRSrocco Report.

ECB Reportedly Considering Slashing QE In Half In January, EURUSD Shrugs

Mario Draghi"s "leaks" have lost their mojo.

ECB officials are considering cutting their monthly bond buying by at least half starting in January and keeping their program active for at least nine months, according to Bloomberg which cites "officials familiar with the debate".

Reducing quantitative easing to 30 billion euros ($36 billion) a month from the current pace of 60 billion euros is a feasible option, said the officials, who asked not to be identified because the deliberations are private. While the central bank’s governors are split on the need to identify an end date for purchases, a pledge to keep buying bonds until September -- with the proviso that it could be extended if needed -- may offer grounds for compromise, they said.

Policy makers led by President Mario Draghi are becoming increasingly confident that ECB policy makers will on Oct. 26 agree to the specifics of how much debt the euro-area’s central banks will buy in the coming year. After more than 2 1/2 years of trying to revive the region’s economy through bond purchases, some governors see the recent period of robust growth as a reason to rein in the support. Others are concerned that inflation remains too weak.

Separately, the ECB"s trial balloon sources must have been working in overdrive because the central bank"s favorite media outlet, the FX trading desk also known as Reuters, just blasted a similar report according to which "ECB policymakers are in broad agreement to prolong asset purchases at a lower volume at their October meeting with views converging on a nine months extension."

The details:

• ECB has consensus to extend asset purchases at lower volumes on Oct 26


• Agreed on reducing buys from €60 bln/month for nine months


• Debating buys between €25-40 bln, whether programme should be open-ended


• Reuters sources say no formal proposals made yet


• €25BN would be on the lower side of expectations


• Draghi defended pledge to keep rates low well past QE Thurs

EURUSD dipped a whole 15 pips on the headlines... then rallied it all back.

Typically this kind of leak is a strawman aimed at testing the market"s response in an effort to gauge just how ready traders are to accept the punchbowl being removed.

In this case the now-blinkered traders in FX land seem to have either lost all confidence in these leaks, or all belief that Draghi can ever pull out without immediately piling back in at the first sign of weakness.

This Is The Real Threat To Us All: “Don’t Be Fooled By The Magic Show”

The following article was originally published by Brandon Smith of Alt-Market.com

Federal Reserve Will Continue Cutting Economic Life Support

by Brandon Smith

I remember back in mid-2013 when the Federal Reserve fielded the notion of a “taper” of quantitative easing measures. More specifically, I remember the response of mainstream economic analysts as well as the alternative economic community. I argued fervently in multiple articles that the Fed would indeed follow through with the taper, and that it made perfect sense for them to do so given that the mission of the central bank is not to protect the U.S. financial system, but to sabotage it carefully and deliberately. The general consensus was that a taper of QE was impossible and that the Fed would “never dare.” Not long after, the Fed launched its taper program.

Two years later, in 2015, I argued once again that the Fed would begin raising interest rates even though multiple mainstream and alternative sources believed that this was also impossible. Without low interest rates, stock buybacks would slowly but surely die out, and the last pillar holding together equities and the general economy (besides blind faith) would be removed. The idea that the Fed would knowingly take such an action seemed to be against their “best self interest;” and yet, not long after, they initiated the beginning of the end for artificially low interest rates.

The process that the Federal Reserve has undertaken has been a long and arduous one cloaked in disinformation. It is a process of dismantlement. Through unprecedented stimulus measures, the central bank has conjured perhaps the largest stock and bond bubbles in history, not to mention a bubble to end all bubbles in the U.S. dollar.

Stocks in particular are irrelevant in the grand scheme of our economy, but this does not stop the populace from using them as a reference point for the health of our system. This creates an environment rife with delusion, just as the open flood of cheap credit created considerable delusion before the crash of 2008.

Today, we find our economic fundamentals in complete disarray, but the overwhelming fantasy within stocks still remains. Why? Because yet again, for some reason, no one is ready to accept the reality that the Fed is pulling the plug on America’s fiscal life support. Nary a handful of economists in the world think that the Fed will raise interest rates one more time this year if ever again, and the threat of a balance sheet reduction is the furthest thing from everyone’s mind. Daytrading investors are utterly convinced they have the Fed by the short hairs. I say, the situation is actually in reverse.

The minutes from the Fed’s July Open Market Committee Meeting indicate that while the central bank has been the savior of stock investors for several years, the party is about to end. Comments on the risks a bull market might pose to “financial stability” have been more frequent the past couple of months

Only a few weeks ago, former Fed chairman Alan Greenspan commented that bond markets could collapse and bring stocks down with them do to overvaluations and increasing interest rates.

Recent spikes in markets despite a steady stream of natural disasters, threats of war with North Korea, as well is “increased inflation” (according to Fed models) due to the damage wrought by Hurricane Harvey suggest that the Fed will indeed continue hiking rates into our ongoing financial collapse.

The next FOMC meeting will conclude on the 20th of this month, and the question is, will the Fed surprise with a rate hike and/or balance sheet reduction program? I believe the odds are much higher than many people seem to think.

First, let’s be clear, historically the Fed’s predictable behavior has been to skip major policy actions in September and then startle markets with renewed and aggressive actions in December. People placing bets on a Fed rate hike in September would look at this pattern and say “no way.” However, the narrative I see building in Fed rhetoric and in the mainstream media is that stock markets have become “unruly children” and that the Fed must become a “stern parent,” reigning them in before they are crushed under the weight of their own naive enthusiasm.

In my view, the Fed will continue to do what it says it is going to do — raise interest rates and reduce and remove stimulus, and that the mainstream narrative will soon be adjusted to suggest that this is “necessary;” that stock markets need a bit of tough love.

If the Fed means to follow through with its stated plans for “financial stability” in markets, then the only measure that would be effective in shell-shocking stocks back to reality would be a surprise hike, a surprise announcement of balance sheet reduction or both at the same time.

If the Fed intends to continue cutting off life support to equities and bonds in preparation for a controlled demolition of the U.S. economy, then there is a high probability at the very least of a balance sheet reduction announcement this week with strong language indicating another rate hike in December. I also would not completely rule out a surprise rate hike even though September is usually a no-action month for central banks.

This would fit the trend of central banks around the globe strategically distancing themselves from artificial support for the financial structure. Last week, the Bank of England surprised investors with an open indication that they may begin raising interest rates “in the coming months.” The Bank Of Canada surprised some economists with yet another rate hike this month and mentions of “more to come.” The European Central Bank has paved the way for a tapering of stimulus measures according to comments made during its latest meeting early this month. And, the Bank of Japan initiated taper measures in July.

Even Forbes is admitting that there appears to be a “coordinated tightening of monetary policy” coming far sooner than the mainstream expects. If you understand how the Bank for International Settlements controls policy initiatives of national central bank members, then you should not be surprised that central banks all over the world are pursuing the same actions and the same rhetoric. The only difference between any of them is the pace they have chosen in taking the punch away from the party.

The point is, when it comes to the fiat peddlers, there are indeed a few sure things, but continued stimulus is not one of them. One thing that is certain is that they will act in concert as they are clearly doing now in terms of policy tightening. Another thing that is certain is that if they plant a notion in the mainstream media — such as the notion that they are “worried about overvaluations in stocks” and that interest rates must rise, then they will follow through as they always have. Perhaps not at the pace the mainstream expects, or the pace I expect, but certainly somewhere in-between.

Finally, it behooves me to mention again that the Fed has done all of this before. In the lead up to the stock market crash of 1929, the central bank bloated stocks with easy credit measures and low interest rates, only to hike rates in the name of “quelling inflation.” This hacked the legs out from under markets with a machete, and the rest is history. The hidden purpose behind this tactic is extraordinary centralization on a global scale. The Fed is not interested in the health of the U.S. economy, it is interested in total globalization of all economies under one totalitarian umbrella. To make an omelet, you have to break a few eggs.

Of course, the Fed will not engineer a market crash in a vacuum. It is my suspicion that the next Fed meeting will be followed by a geopolitical distraction — the most likely candidate being increasing conflict with North Korea. Do not be fooled by the magic show. The real threat to us all is the central banking and international banking apparatus, including the BIS and the IMF. From now until the end of this year, remain vigilant.

If you would like to support the publishing of articles like the one you have just read, visit our donations page here. We greatly appreciate your patronage.

You can contact Brandon Smith at: brandon@alt-market.com

Unsuspecting Americans to be Hit Hard by this U.S. Scheme to Confiscate Your Savings:Alan Greenspan, 20-year head of the US Fed, reveals Washington’s nasty trick to confiscate the savings of unsuspecting Americans. Here’s How Some Americans Are Preparing

Warren Buffett Reveals His Biggest Fear

Bloomberg’s David Westin spoke with Berkshire Hathaway Chairman Warren Buffett on his 87th birthday before his charity auction lunch at Smith & Wollensky’s in New York.

Among the topics discussed was the Fed"s upcoming balance sheet normalization: Buffett told Westin that the Federal Reserve will be “very careful” with how they handle quantitative easing as the Fed may have to find buyers for "trillions" in assets. Predictably, Buffett argued in support of QE which added tens of billions to his net worth: “[QE] did wonders for us coming out of 2008. Without it we would have gone back to the economics of 100 years ago. If the Fed had not been there to ease, we would have had a far different recovery. I think the Fed has overwhelmingly done the right thing. Now, we’ve never gone through a period like this and how it will all work out, we will find out. I think they will be intelligent about it but they’ve never played this game yet either.”

Separately, Buffett said the relentless, artificial, central bank-induced rally over the last several years has made it "harder to find bargains", but that stocks "remain his choice over bonds." Asked by Westin why cash has been piling up at Berkshire, Buffett said “it tells us stocks aren’t as cheap as they’ve been most of the time.” Buying shares after the 2008 financial crisis, Buffett said, was like “shooting fish in a barrel”, although he forgot to add that the US government bailing out his core financial holdings, did not hurt either.

In any case, in recent year, Berkshire"s stock portfolio, which includes multibillion-dollar stakes in companies like Apple, the scandal-plagued Wells Fargo and Coca Cola, was valued more than $135 billion at the end of June, almost the same size as the AUM of the world"s largest hedge fund, Bridgewater.

Stocks “have gotten less attractive as they’ve gone along,” Buffett said. “They’re still very attractive compared to bonds.”

Buffett has plowed money into stocks this year, including Apple. But finding new acquisitions has been a challenge lately. Earlier this month, his bid to take control of Oncor Electric Delivery Co., Texas’s largest power distributor, fell apart. That failed effort came six months after a Berkshire-backed deal to buy Unilever hit the skids.

The collapse of two high-profile pursuits in such a short time frame is a rarity for Buffett, who did his last major deal in 2015 when Berkshire agreed to buy aerospace-parts manufacturer Precision Castparts Corp. for more than $35 billion. While he’s made many offers that went nowhere, it’s less common for such misses to play out in public.

According to Bloomberg, the recent deal drought has bigger implications for Berkshire. The company doesn’t pay a dividend and rarely buys back its own stock, so failing to consummate a few major transactions means cash piles up from its subsidiaries. At the end of June, Berkshire had just shy of $100 billion.

Finally, in a discussion of assorted items, Buffett said that the US economy does not feel like a 3% GDP, that anger in the US stems from wealth inequality and when asked what"s the one thing that Buffett generally feared, the answer was "if we"re talking broadly, the answer is weapons of mass destruction."

"Now you"ve got weapons that can kill millions and millions and millions of people, and you"ve got them in unstable hands in certain cases. We live in a dangerous world that way, it"s the only real problem for humankind."

Buffett then said that in this context, North Korea is at the top of his list: "if you have a small, relatively poor country that"s spending a significant part of its GDP trying to figure out how to get an ICBM to hit the west coast of the US, there"s something going on in somebody"s mind that I don"t like."

Finally, the reason why Buffett was in the New York Smith & Wollensky today is to dine with the winner of an annual charity auction that raises money for Glide, a San Francisco non-profit. The top bidder, who chose to remain anonymous this year, paid $2.68 million to bring as many as seven friends to lunch with the billionaire at Smith & Wollensky steakhouse. With insights such as these, we think the many could have been spent with a much higher IRR elsewhere.

Rothschild Just Dumped Massive Amounts of US Assets, Sending an Ominous Signal

In what is a sure signal to oligarchs across the globe, Lord Jacob Rothschild, founder and chairman of RIT Capital Partners, has substantially minimized his exposure to what he views as a risky and unstable U.S. capital market. In the half-yearly financial report for RIT Capital Partners, Rothschild explained the company’s aggressive moves to significantly reduce exposure to U.S. assets.

“We do not believe this is an appropriate time to add to risk. Share prices have in many cases risen to unprecedented levels at a time when economic growth is by no means assured,” Rothschild said in his semi-annual report.

Additionally, Rothschild stated that he believes quantitative easing (QE) programs employed by central banks, such as the Federal Reserve Bank in the U.S. will “come to an end.”

Rothschild was quoted in the report as saying, “The period of monetary accommodation may well be coming to an end.”

Signaling a potential disaster in the making in the United States financial markets, Rothschild reduced the investments RIT Capital Partners has in the U.S. dollar by nearly fifty percent. On December 31, 2016, RIT Capital Partners reported a 62 percent net value asset investment in U.S. dollars. In the latest report released by RIT Capital Partners on June 30, 2017, the company has a 37 percent net value asset investment in U.S. dollars.

Advertisment

Over that same period of time, Rothschild increased RIT’s investment in Sterling and the Euro.

Just last year, the bond manager of what was once the world’s largest bond fund had a dire prediction about how “all of this” will all end. And by “all of this,” he means the propping up of financial markets by central banks.

Gross: Global yields lowest in 500 years of recorded history. $10 trillion of neg. rate bonds. This is a supernova that will explode one day

— Janus Henderson U.S. (@JHIAdvisorsUS) June 9, 2016

When the U.S. stock market is trading at all-time highs, but Lord Rothschild is divesting RIT from those same markets, the central bank manipulation of market valuations becomes apparent.

READ MORE:  "Sell Everything" - Top Mega Banks Warn that a "Cataclysmic" Collapse has Begun

Additionally, it’s worth noting that Rothschild’s RIT investment portfolio has returned roughly 2,000% since its formation – so he obviously understands how to position his assets to get big returns on investments, thus these recent moves should be a red flag to every American.

In explaining his recent investment moves, Rothschild, the RIT chairman stated:

“We have a particular interest in investments which will benefit from the impact of new technologies, and Far Eastern markets, influenced by the growing demand from Asian consumers.”

The report also noted that RIT had invested in Social Capital, a tech investment firm based in Silicon Valley, and that Francesco Goedhuis, Chief Executive of J. Rothschild Capital Management, will serve on the company’s advisory board. Social Capital provides seed funding for companies in the education, finance, and health care business sectors.

Rothschild also mentioned the advent of a fourth industrial revolution in the RIT Capital Partners report, noting, “As the ‘Fourth Industrial Revolution’ develops, it becomes increasingly important for your Company to be able to assess investment opportunities in the innovation driven changes which are affecting almost every business sector.”

The fourth industrial revolution will be driven by new technologies that work to integrate the digital, biological, and physical worlds. Rothschild indicated in the report that the fourth industrial revolution was a driving factor in his investment in Social Capital.

The latest report is simply a continuation of a narrative that was clearly seen in Rothschild’s last half-yearly RIT report when he stated:

The six months under review have seen central bankers continuing what is surely the greatest experiment in monetary policy in the history of the world. We are therefore in uncharted waters and it is impossible to predict the unintended consequences of very low interest rates, with some 30% of global government debt at negative yields, combined with quantitative easing on a massive scale.

To date, at least in stock market terms, the policy has been successful with markets near their highs, while volatility on the whole has remained low. Nearly all classes of investment have been boosted by the rising monetary tide. Meanwhile, growth remains anaemic, with weak demand and deflation in many parts of the developed world.

Many of the risks which I underlined in my 2015 statement remain; indeed the geo-political situation has deteriorated with the UK having voted to leave the European Union, the presidential election in the US in November is likely to be unusually fraught, while the situation in China remains opaque and the slowing down of economic growth will surely lead to problems. Conflict in the Middle East continues and is unlikely to be resolved for many years. We have already felt the consequences of this in France, Germany and the USA in terrorist attacks.

With global yields at their lowest in recorded history, and with $10 trillion of neg. rate bonds, there is likely only one way that this ends – with a massive global financial collapse, the likes of which would make the Great Depression look like the “good old days.” Make no mistake that when Lord Rothschild begins to move his assets out of the U.S., it is surely a sign of ominous things on the horizon.

READ MORE:  Despite Global Economy Plummeting into Despair, Mega Banks Boast All-Time Record Profits

Spanish Bond Yields Plunge To Record Lows As 'Economy Improves' (Just Don't Tell The Nation's Youth)

Spain’s two-year bond yields have collapsed to a record low -35bps this week and Portugal"s followed suit, plunging near record low levels as Draghi"s "whatever it takes" has benefitted all those front-running bondholders but left youth unemployment hovering still near record-high levels.

As a strong euro weighs on the region’s inflation outlook, it makes it harder for the European Central Bank to end quantitative easing and negative interest rates, said Peter Chatwell, head of European rates strategy at Mizuho International Plc in London, and sure enough today"s reports that Draghi"s Jackson Hole appearance will be a nothing burger has sparked more anticipation that QE isn"t ending anytime soon, despite better-late-than-never complaints from the Germans.

"Whatever it takes" to keep asset prices high!

The Fed Has An Alarming Low-Inflation Problem

With all the talk of central bank hawkishness in the last week, one might assume there was some inflation to point to. It is quite the opposite. It is one thing to talk about inflation being below the Fed’s target of 2%, it is an entirely different issue to see it flirting with deflation! Shorter-term trends of core-inflation are very near to 0%, levels we haven’t seen since the great recession and the advent of quantitative easing.

In its most common form, inflation is quoted by measuring its percentage change compared its level 12 months ago, the so-called year-over-year (YoY%) metric. But, shorter-term periods can be measured to get a sense of more recent trends as well as if there is acceleration or deceleration in the metric. The shorter the period measured, the more volatility the metric has, and so year-over-year (YoY%) has become the standard. It also has the added benefit of eliminating any seasonal effects.

In the charts below, we show the two top-tier measures of consumer price inflation, the Fed-preferred core PCE deflator, and the core CPI; with its common year-over year (YoY%) format, 6 months back annualized, and 3 months back annualized. Comparing the three gives a sense of acceleration of deceleration. If the 3mo. is less than the 6mo. is less than the 12mo., there is deceleration and vice-versa, there is acceleration.

 

But, beyond these charts, evidence of low inflation abounds. The headline versions of these numbers (including oil and food) are negative over the last three months, the ‘prices paid’ component of the manufacturing ISM number fell by a large amount in a release on Monday (7/3), the ‘prices paid’ component of the Service-sector ISM is now contracting, inflation expectations in all indicators have been falling since February, and the OECD published a report yesterday (7/4) that the inflation rate has fallen for four straight months in G-20 economies.

Despite the excitement last week at the prospect of global central banks moving away from easy money policies, there is no fundamental basis for this. We expect that the Fed will soon need to move to a neutral from tightening bias.

Cranfield: "This Was A Watershed Week For The Euro: Beware Of Getting Steamrolled"

After three days of fireworks for the Euro, when it first surged on Draghi"s hawkish comments, then tumbled on the ECB"s "clarification" to Bloomberg that the market had overreacted to Draghi, then continued to surge after Draghi himself did little to dissuade the market it was wrong, the common currency is now trading at above 1.14, or 1.1425 to be precise...

... the highest level in one year, and on a relentless push higher, as the dollar tumbles, because as Sean Callow, currency strategist at Westpac says, “it will take more than anonymous ECB sources to cool the desire to bet on the euro and dump the dollar,” and adds “many investors are tantalized by the prospect of key quarterly meetings in September producing no move from the Fed but a plan to wind down quantitative easing at the ECB.”

But how did we get here so fast, just a few months after virtually every sellside desk expected parity with the USD, and what"s next? Here are some thoughts from the latest "Macro View" by Mark Cranfield, former .FX trader who currently writes for Bloomberg.

Euro Is Dancing the Macron, Draghi Two Step:

This week could be seen as a watershed for the euro, the week when all the stars align to set up a powerful run in the second half of the year. 

ECB President Mario Draghi is acknowledging reflationary forces as investors are getting comfortable with improving European economic and political fundamentals.

The tectonic plates are shifting in favor of the euro, even if some ECB members are saying that markets are jumping to the wrong conclusions.

At the beginning of 2017, research notes were being circulated with scary maps of the European electoral earthquakes ahead, starting with the Netherlands in March.

It was going to be a roller-coaster year. The rise of populism had been given a steroid boost after the U.S. presidential election and European nations were poised to follow by electing their own version of Donald Trump. The old order was going to be toppled, even Angela Merkel seemed vulnerable.

Not quite, as it’s turning out. Even the threat of a destabilizing Italian vote seems to be evaporating.

The Trump effect isn’t coming through, and the new order is being led by a staunch European supporter called Emmanuel Macron. European politics is going from zero to hero.

What a contrast with the developments across the Atlantic.

Looking at a long-term picture of euro-dollar, one can see the potential for a major breakout as bullish momentum builds up. The pair has essentially been in a range between 1.05 and 1.15 for the past two and a half years after the huge collapse in 2014-2015. If it does break the top side it probably won’t be quietly.

When the world’s number two reserve currency gets rolling, it’s probably best to get on board or run the risk of being steamrollered.

Lacy Hunt: The Fed Has Undermined The Economy's Ability To Grow

Authored by Stephen McBride via MauldinEconomics.com,

The Fed’s hope was that quantitative easing would stimulate economic growth. But a former senior economist for the Fed believes it has done the exact opposite.

Speaking at the Mauldin Economics Strategic Investment Conference, Dr. Lacy Hunt, the executive vice president of Hosington Investment Management and former senior economist for the Dallas Fed, said that quantitative easing has created “significant unintended consequences.”

The Worst Expansion in US History

“What the Fed did was, they said to the world we are undertaking quantitative easing so we can boost the stock market… and the stock market will then produce a wealth effect and invigorate the economy.”

While the Fed has increased its balance sheet by $3.57 trillion since 2008, and the S&P 500 is up 255% since 2009, Hunt says, “this is the worst expansion in US history.”

Source: BCA Research

As just half of Americans own stocks, it’s no wonder the wealth effect hasn’t percolated through the economy.

The Fed’s massive experiment has also created huge distortions in the private sector, which has severe consequences.

Business Leverage at Record Highs

“Quantitative easing has created a lot of negatives, one of the most glaring is this liquidity which has fueled record leverage of the business balance sheet.”

Total business debt is now up 71% since 2008—twice the long-term growth rate. Worse yet, Hunt says much of this debt has been used unproductively:

“Quantitative easing encouraged a shift from real investment to financial investment. The Fed’s backing your play, engage in financial engineering… buyback shares, raise dividends. The business managers think they can reverse [these actions].’’

Although total business debt is at a record high, real investment—expenditures on property, plant, and equipment—is falling.

Hunt goes on to say,

“It’s the investment, the real investment which grows the economy. The Fed has created very significant unintended consequences, which have undermined the US [economy’s] ability to grow and lift the standard of living.”

An Ominous Sign for the US Economy

Speaking in an exclusive interview with Mauldin Economics, Hunt also addressed the Federal Reserve’s current monetary tightening cycle: “Whether they [raise rates] is immaterial because already they have engineered a contraction in [credit]… all major categories of bank lending are slowing.”

“Since 1915, of the 18 recessions, all of them, bar one, were preceded by monetary tightening… the Fed is on very thin ice.”

Where Do Bond Yields Go from Here?

For Dr. Lacy Hunt’s thoughts on the future of the US economy, where bond yields are headed, the Fed’s next move, and more—watch the full interview below.

Greece Progressing For Upgrade to Investment Grade and Markets Should Follow - by Michael Carino

Greece should be about to get a credit upgrade to investment
grade from non-investment grade and the markets seem ill prepared for this
positive development.

Greek stock and bond markets have been on a negative
trajectory since the sovereign financial crisis of 2008/ 2009.  After such a long negative stretch, positive
investors seem to be a rarity. The investment landscape is filled with short
sellers and traders who have been attacking the markets on every negative
headline.  With a lack of positive investors,
the markets positive moves have been limited. Greece has made substantial
progress in moving its economy forward with the required adjustments of its
creditors.  As a benchmark of the limited
positive progress in the Greek markets, the main Greek stock market index, the
ASE, is down 85% from its peak in 2007.  Yet
the outlook for the Greek economy is positively poised with a long term upward
trajectory. This leaves the market susceptible to positive asymmetric skews to
its return profile.

Greece has now overcome its financial difficulties and
passed all the laws necessary to complete its financial assistance from the
international community.  This Thursday there
is a Eurozone finance ministers and Greek creditor meeting that will discuss
and most likely agree on a path forward that allows Greece to tap the public
debt markets, become self-sufficient in its funding and have its bonds accepted
as collateral for the ECB’s sovereign debt quantitative easing purchases. Once
this happens, Greece’s credit rating should soon follow to investment grade.
This will force and allow investors to access Greece’s markets again after a
protracted period of being non-investment grade and off limits.

When markets are depressed for such a protracted period and
the economic climate improving but not acknowledged in financial markets, the
potential for significant upside exists. If Thursday’s meeting continues to
show progress, investors will eventually catch on.  It should not take heavy inflows into the
markets to propel assets higher since the base is so low and investors so few.  Therefore, there should be a great focus on
Thursday and any positive developments should be felt instantly in the
marketplace. But it appears that the markets are prepared for no positive
developments.  This discounts all of the
positive steps taken so far.  It ignores
that Greece has been set on a healthy path to prosperity and all necessary developments
will be forthcoming, whether today, tomorrow or down the road.  It’s time to stop being hyper-focused on the
negatives and acknowledge the substantial positives in Greece.

 

by Michael Carino, 6/12/17

Michael Carino is the CEO of Greenwich Endeavors, a
financial service firm, and has been a fund manager and owner for more than 20
years.  He is optimistically invested in
Greek equities.

 

 

    

Why The World's Billionaire Investors Buy Precious Metals

There are always lessons that can be learned from the “smart money”. Unlike regular investors, Visual Capitalist"s Jeff Desjardins notes that billionaire money managers like Ray Dalio and Stan Druckenmiller are professional investors. They have entire institutional teams at their disposal, dive deep into the nuances and complexities of the market, and spend every waking moment of their lives thinking about how to get more from their investments.

They want to make money – but they also want to execute on strategies that will protect their wealth and build robust portfolios that can withstand any type of macro event.

TURNING TO GOLD

In recent months, some of these elite investors have turned to precious metals like gold as a part of their overall investment strategies.

In the following infographic from Sprott Physical Bullion Trusts, we explain why these investors are adding precious metals to their portfolios, the underlying tactics, and the best quotes each investor has on assessing today’s market.

Why are these billionaires buying precious metals?

Their cited reasons can basically be summed up with six categories: wealth preservation, store of value, inflation hedge, portfolio diversification, future upside, and investment fundamentals.

WHAT BILLIONAIRE INVESTORS ARE DOING

1. Lord Jacob Rothschild

In late summer 2016, Rothschild announced changes to the RIT Partners portfolio because he was worried about very low interest rates, negative yields, and quantitative easing, saying they are part of the “greatest monetary experiment in monetary policy in the history of the world”.

His solution? Buy gold to help preserve wealth, and as a store of value for the future.

2. David Einhorn

Einhorn has a similar assessment. He believes that monetary policy is becoming increasingly adventurous, and that this – along with the policies of the Trump administration – will eventually lead to large amounts of inflation.

In February 2017, he shorted sovereigns, and bought gold.

3. Ray Dalio

Ray Dalio is the founder of the world’s top hedge fund, Bridgewater Associates, but he’s also no stranger to gold.

If you don’t own gold, you know neither history nor economics.

– Ray Dalio, Bridgewater Associates

More recently, in 2016, Dalio is quoted as telling investors to own a well-diversified portfolio that is 5-10% gold.

4. Stanley Druckenmiller

Druckenmiller, some people argue, is the best money manager of all time.

Lately, he’s placed his bets on gold as well, but for different reasons than the above managers. Druckenmiller has always placed big trades with lots of conviction, and in February 2017 he put his money in gold because “no country wants its currency to strengthen”.

Trader Warns ECB "It's Strange Optics To Bail-In A Bank One Day & Hike The Next"

We used to think of forward guidance as an important, long-term, device in the central bank tool box. As Bloomberg"s Richard Breslow explains It was meant to direct investor, business and consumer behavior through the vicissitudes and noise created by what seem seminal but are often random events. It was what convinced investors that buy and hold, augmented by gobbling up every dip, was a winning, and protected strategy. A way of saying, you can listen to every speech on the schedule but this is what the people that matter are telling you.

But, as Breslow details below, this is in the process of morphing into a much more tactical tool and it’s worth keeping up with the changes.

As the timing of global central bank actions diverges, it won’t always mean the same thing at the same time to everyone.

For years we were meant to understand that low, lower, lowest rates was where we were going and staying. That was easy. No one had to do anything. Then it changed to yes, but not forever, a message skewed by Chairman Bernanke’s initial missteps. Eventually that became we’re making a change. But we all knew their bluff could be called easily.

We’ve entered the latest iteration and it’s going to require actually paying attention. They want to tell you exactly what they intend right now. It means they’re unlikely to be dissuaded from their message absent truly exigent circumstances.

For good reason, we’ve gotten used to taking everything with a grain of salt. It’s probably better to err now on giving them a serious dose of the benefit of the doubt. Of course, if you believe you’re a better forecaster than they are, make your own assumptions and bets. This is a very healthy development.

Which brings us to today, the eve of what’s being taken as quite an important ECB meeting. Will they signal the beginning of the end of their aggressive quantitative easing reign? Lo and behold, Bloomberg News just reported that the economics staff will be proposing lowering inflation forecasts right through 2019. And, yes, the market reacted. Even though it’s said to be the result of lower oil prices. Which should, if you think about it, be laughable.

Brent crude was $57 a couple of months ago. Today it sits just under $50. It gyrates, it flies around, it’s largely unpredictable, and they’re tearing up the playbook on it? Not hardly. They’re giving their latest iteration of tactical forward guidance and have found a plausibly deniable way to do it. And the Germans have to acknowledge the fact even while muttering “Verdammt, foiled again.”

It’s just that it’s not the time to upset the apple cart, no matter that the numbers have been getting better. You have to admit that it’s strange optics to bail out a bank one day and hike the next.

But while they’ve probably signaled their short-term intention, you’re free to make your own forecasts for the fall. Watching how markets react is relevant.

The euro sold off on the news, but has so far held 1.12 to the dollar, an important pivot. Euro Stoxx 50 futures jumped, as equities are apt to do on such news, but stalled out at the quite useful 21-day moving average. Another pivot. Bund yields are slightly lower but closed the gap left on April 24 after the French election, settling at another important level at 25 basis points.

And of course, as Breslow concludes, for all those US investors so comfortable buying FANG stocks while looking across the pond - Europe isn’t an island. What goes on elsewhere will have big effects on these assets, as well.

Lance Roberts: This Market Is Like A Tanker Of Gasoline

Lance Roberts, chief investment strategist of Clarity Financial and chief editor of Real Investment Advice has authored a number of impressive recent reports identifying potential failure points in today"s financial markets. 

In this week"s podcast, Lance explains how the massive flood of investment capital into passively-managed ETFs, along with record amounts of margin debt, has the potential to set the markets afire:

Fundamentally, there’s nothing different in today"s markets because, at the end of the day, they are about evaluations, earnings -- those types of things. Technically, the market is very different today because of quantitative easing, computerized trading etc.

What we see are two things happening, in particular, that people should be paying attention to. One is that investors are herding into passively-managed ETFs now, which is creating a dislocation between the underlying realities of individual stocks and their prices, because the piling into ETFs is requiring stocks like Facebook, Amazon, and Google to be bought in much greater volumes than they otherwise would. And people are making an assumption that there will always a buyer for every seller in the market.

Now that’s absolutely true. But it"s often argued by the mainstream media that "For every buyer there’s a seller, so it doesn’t matter when the market turns. You’ll be okay." But you won’t, because, yes, at some point there is a buyer for every seller, but it always begs the question: At what price? And because of all the piling into these ETFs, when the market eventually breaks, yes, there will be a buyer; but that buyer could be at many percentages lower than where prices were before. We could very well see a vacuum appear in prices, with a gap down so sharp and so fast that it not only paralyzes most investors who may be hoping to get a little bit of recovery to sell into, but then will start triggering margin calls.

There’s been numerous articles written about margin debt: "margin debt is not a problem; don’t worry about margin debt." Well, margin debt is not fine. We’re at record levels of margin debts. It’s like a can of gasoline. If I set a can of gasoline in the middle of a room and nobody touches it, it"s fine. But drop a match into that can of gasoline you have a different story.

So, the only thing that’s been missing up to this moment right now is the herding of individuals into a specific type of investment. But just like with real estate in the past, we have now people herding into ETFs. And now, with all these computers basically acting on the same set of information pushing stocks in the same direction because they’re all working off the same set of information, the market is like a tanker of gasoline. And somebody’s going to put a lit stick a dynamite into it because when this all reverses, you have these passive indexers become panic sellers. And then that beings to immediately trigger a reversal in the algorithms, which all feed on themselves in a negative direction. And the gap that opens up between the bid and sell prices will be staggering.  

Click the play button below to listen to Chris" interview with Lance Roberts (45m:28s).

Is Risk Parity Driving The Market?

Authored by Brean Capital"s Peter Tchir via Forbes.com,

I am have more and more discussions about Risk Parity.

While Bridgewater is the best known and largest advocate of Risk Parity - it can be implemented in a simple form by virtually anyone.

Sophisticated Risk Parity strategies involve balancing multiple asset classes (global bonds, global equities, commodities, FX, etc.) in the "correct" proportions to achieve a desired level of portfolio risk while still have positive expected returns.

At its most basic level - it is buying stocks AND buying bonds under the assumption (hope) that when one goes down, the other goes up, dampening volatility while generating positive returns over time.

There is an appeal to buying bonds as a "hedge" against equity risk rather than buying options or buying VIX based ETFs and ETNs.  In an "ideal" world, buying treasuries as a hedge generates income while offering some "risk-off" protection; whereas, buying options tends to just drain money time and again.

One big question is "why are treasuries doing so well and stocks not reacting?"

There are a lot of potential answers, but one thing that would explain some of the more perplexing market moves would be that more investors are allocating money, directly or indirectly into Risk Parity strategies.

• Investors wouldn"t need to sell stocks out of fear as they would be hedged - check


• Investors wouldn"t be buying options so the price of volatility, or VIX, would be low - check


• Investors would be buying bonds, particularly "safe" bonds - check

Three things that are happening in the market, that are not easy to reconcile, can be explained by a growing interest in Risk Parity.

Because this strategy can be implemented in so many ways, it is difficult to detect whether I am right or not, but there are some indications that this might be occurring

• IEF, TLT and LQD (treasury and investment grade bond ETFs) have all had inflows


• Risk Parity and "Adaptive Risk Allocation" Funds, like CRAZX (one of my favorite tickers) have had inflows

If I am correct, the risk in the  market is not to increasing volatility but something that changes the relationship to stocks and bonds that causes them to both drop.

The strategy has had long periods of success - not surprisingly up until the Financial crisis as bond yields were high and reasonably stable while equities rallied.

In the Quantitative Easing Period when Central Banks helped inflate the price of all assets - which was rudely interrupted by the Taper Tantrum and again in the post Brexit era of more central bank support.

It is far from clear how well this strategy will do going forward, especially if central banks are scaling back their support and it is becoming a crowded trade in a world where liquidity often seems fickle.