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Friday, February 12, 2016

UPDATE: Canada Displays its Ignorance of Monetary History

UPDATE: Today, March 3, 2016, Canada announced that its remaining official gold holdings have been sold (except for 77 ounces), thus cementing its banana republic image, monetarily speaking.

Well, Canada is fast on its way to winning the race to the bottom, at least as far its official gold reserves are concerned. In the 1950's and 60's, Canada held about 25 million troy ounces (about 800 tonnes) of gold in its official reserves. That was more than one troy ounce per capita. Not bad! Well, not as rich as the U.S., Germany, France, Italy, and some other members of the G20 but good enough to place in the top 10 or so.

But then some strange form of enlightenment took hold in government financial corridors and by the late 1960's the selling started. But around 1986 a veritable orgy of selling commenced culminating in a descent to 1.7 tonnes this month. This places Canada in spot #99 in the world rankings between Haiti, one of the poorest nations on the planet and Albania who are #100.

The new Liberal Government in Ottawa still wants to make good on its promised "stimulative" deficit spending but Canada's economic situation has deteriorated significantly since the 2015 fall election. From a surplus position early in 2015, deficit projections for 2016 have steadily increased to $20 Billion or more. So it seems a decision was made to scrounge a few measly dollars by selling off $90 Million of Canada's remaining forlorn little stake. What a shame!
It seems that Canada has no idea of monetary history and how vital a strong gold reserve position can be in troubling financial times. In particular, nations that are rapidly expanding their world prominence are also rapidly acquiring and bolstering their official gold reserves while Canada is moving into the backwaters. Lets hope that Canada does not find itself in the throes of a financial crisis.

Sunday, January 24, 2016

Imaginary Prosperity

World sentiment and confidence seemed to sag towards the end of 2015 and the trend has accelerated into early 2016 in spite of continuing comforting media headlines and words from world leaders. So what is going on?
Since the great recession (2008-2009), world leaders, the IMF and central banks have taken the road of “whatever it takes” to get the world economy moving again: 

  • ·         Stimulus and bailout programs
  • ·         Zero Interest Rate Policy (ZIRP)
  • ·         Central Bank exchange of toxic debt for Sovereign Debt (such as US Treasuries)
  • ·         Encouraging (manipulated) statistics and rosy projections
  • ·         Positive propaganda
The message to markets, firms and ordinary citizens was basically “We’ve got your back”, “Fear not – spend and borrow”. And by and large, that is what most did. Money was almost free. Real estate started to move, autos were purchased, and stock markets ramped up and up. Riskier and riskier debt instruments such as “high-yield” bonds became popular. Indebtedness soared at almost all levels of society: consumers, business and government.
An examination of some of the cheer leading is most amusing: “growth”, “green shoots” and recovery are always just around the corner. Today may be a problem but tomorrow it’s going to be great. The IMF’s successive revisions are a good example.

Virtually everyone has been in the game. The worst information manipulator is likely China. Yet, by late 2015, even these statistics started to show some negative trends.
Also, there were many visible signs early on that something was very wrong, at least for those who paid attention to indicators that were difficult to manipulate. By early 2011, for example, world commodity prices were sinking. Why?
The plummeting price of oil was easy to explain away as a Saudi thing, say,  but what about rice, wheat, copper, nickel, iron, soybeans, sugar, etc? By 2013 even lumber prices had started to decline. This didn’t look like a recovering world economy at all. Yet China, while not growing at the previously torrid rates, was still supposedly exhibiting growth. Really? I was in China in the Spring of 2015 and while their achievements are amazing and construction activity was evident, the number of vacant buildings everywhere also amazed me. China is definitely slowing.

Another small matter: World trade! How come world trade volume is contracting?


World trade volumes started to slip in early 2015. Prices paid are even worse (lower)!

Another indicator related to World Trade is the Baltic Dry Index, a measure of world shipping demand/supply. It has reached levels below that of the “Great Recession” of 2008-2009.



Meanwhile consumers are getting tapped out, even at current low interest rates. Indebtedness is rising almost everywhere. 

In Canada, for example, household debt to disposable income has reached 171%.


In the U.S., many indicators are contradicting the Cheerleader in Chief (Obama) and the Federal Reserve chiefs. Manufacturing has been slumping and inventories have been rising, for example. 



And the much vaunted automobile sector has been spun shamelessly. But look at the U.S. Census Bureau’s own reports.

 Peaked in 2013!


But the actual situation is likely worse still because automobile inventories have been piling up.


Similar problems for U.S. Steel Production.

And then there are new home sales that are sputtering along but even at today’s low mortgage rates, aren’t anywhere near the rate 10 years ago:

 And what about the U.S. consumer? Well, there has been considerable deterioration since mid 2012, with debt to income ratios widening steadily.

Much the same has been repeated around the globe. Trillions in central bank stimulus (printing) by the likes of the Federal Reserve, The People’s Bank of China, the Bank of Japan, The Swiss National Bank, The European Central Bank and the Bank of England have kept economies sputtering along with the bulk of the money going into securities such as stock markets and bonds. It has been wonderful for the banks and financial centres such as Wall Street but not that good for the middle classes around the world.


Since the end of the “Quantitative Easing” stimulus period dubbed QE3, things have started to get wobbly in the stock markets again and also in lower quality (high yield) bonds. In some parts of the world, real estate prices have begun to deteriorate sharply.


The continuing decay in commodity prices as well as rising commercial, consumer and government debt loads have also taken their toll.What will the Debt to GDP charts look like if a world recession takes hold? Will any of this be manageable?

Let’s face it; interest rates cannot be lowered much from where they are now, though they may go a bit negative. Governments and Central Banks have almost run out of tools. Another round of distortion creating stimulus may soon be upon us in spite of clear evidence that these measures have at most kicked the problems down the road at the expense of increasing the structural problems that led to the various rounds of stimulus in the first place. We now have much bigger problems than we already had. The scary thing to me is that unlike other periods in history, the world has embarked almost in unison on a coordinated and massive mission to keep economies afloat.
When this crisis finally breaks, it won’t be an Asian crisis or a South American crisis or an emerging economies crisis, it will likely be a world-wide crisis with virtually no major pockets of strength to moderate its effects. In such a scenario, valuations in almost all asset classes including currencies, real estate, stocks, bonds and commodities will change drastically. Financial dislocations and misery will abound. Be on guard!

Friday, June 12, 2015

Greek Bond Risk Laughable

As I wrote late last year, risk and reality are disconnected in so many investments today. Among the most laughable and most egregious disconnects today are bond prices/yields of Greek sovereign bonds.

A multi-year chart from Bloomberg illustrates this:

Whereas Greek yields in 2012 rose to 35%, indicating a significant risk to bondholders, today's yield is only 11.31%. Yet all we hear on a daily basis out of Europe is the danger of Greek default and possible exit from the EU, usually referred to as "Grexit".

The markets today in so many securities are totally fake, controlled directly or indirectly by Central Banks. The CB's are putting more fingers in more dykes daily. Similarly, most nations are issuing increasingly fictitious unemployment, economic and fiscal indicators. 

This means that economic observers and investors are increasingly flying blind since most of the data that they could count on in the past to give an idea of what is really going on in the world are completely unreliable/fake today.

Realize this and exercise extreme caution!

Wednesday, December 10, 2014

Central Banks and World Stock Markets

With few exceptions, the world’s stock and bond markets continue making new highs, all the while listening for the tiniest of clues that Central Banks (CB's) might be reversing gears or curtailing their apparently endless backstopping of securities.

But so far at least, any time things seem to get a little wobbly, especially after some slightly concerning remark from one or other mouthpieces of the world’s main CB's, one of their members steps up to the plate with news of new “liquidity injections” and soothing words.

But of course, propaganda notwithstanding, the underpinning economies and fiscal situations of most nations continue to deteriorate. So the pricing of securities and their actual free market values continue to diverge ever wider.

What is worse, the whole concept of risk seems to be disappearing. Take a look at sovereign bonds. It used to be that the bigger the risk that a nation could not repay its debt obligations, the higher the interest rate demanded to lend to that nation. Logical, huh? Well take a look at Spain's debt situation since 2008:

Now take a look at the yields on Spain's bonds!

Spain Government Bond 10Y Yields (courtesy of http://www.tradingeconomics.com)

So the divergence is pretty clear! Sometime in 2012, the markets began to let go of all pretense that there is any risk whatsoever in holding toxic debt, provided that CB's could be counted on to buy it up whenever things start to look dicey and real buyers had disappeared. This is the essence of "ZIRP", the so-called Zero Interest Policy espoused in one form or another by most of the world's CB's, which, in some cases has become "NIRP" or negative interest rate policy.
Of course, this engenders precisely the opposite behaviour by indebted nations to that required to reduce their reliance on borrowing. After all, if you can borrow for next to nothing, what the heck, right?

Of course, this moral hazard has spread throughout the world's economies, as subordinate interest rates for almost everything have been driven lower. Consumers continue to buy on credit, especially for big ticket items such as vehicles where interest rates are often next to zero. In the meantime, savers and pensioners are being ravaged. A yield of 2.5% on $1million in savings will only bring $25,000 annually. It's hard to live on that. And how many have saved a million, anyway?

Interestingly, when CB support becomes questionable, the markets begin to work again. Look at these charts of a selection of Government 10 Year Yields. What is the only one that makes any real market sense? Well, Greece, of course. And why? Because it is not certain whether Greece will remain a part of the EU. So in that case it could not depend on being backstopped by the European Central Bank (ECB). So Greece's bonds get priced accordingly.

The bottom line is that in an attempt to rescue the banking system (remember that most CB's are run to a large degree by bankers) and the economy, central banks have created enormous investment bubbles in securities that are artificially priced on a variant of the greater fool theory, where the greater fools to whom you can pitch your investments are the CB's.

But CB's may be slowly coming to be in fear of what they have created and increasingly, concerns are being expressed that the divergences between markets and reality can not continue indefinitely.

I urge all to observe the markets carefully as the day will come when CB's can't or won't continue to madly print and buy everything in sight in an attempt to keep it all glued together. When things get unglued this time, the carnage will be much worse than anything we have seen in recent history.

Sunday, November 10, 2013

China, the Dollar and Sovereign Debt

Quite a few observers are suggesting that China could/will bring the U.S. down by suddenly dumping its dollar-denominated Treasuries and Bonds, thereby creating a mass exodus from the delicately-perched $US, dramatically raising bond yields and thereby interest rates in general, resulting in a global economic crash and a “reset” in currency values and a realignment of world powers. As the second largest holder of $U.S. sovereign debt (the Federal Reserve has now moved into the #1 position), it is certainly plausible for the Chinese to do this. But in my view this scenario, at least as a deliberate action, as opposed to a reaction to some other external trigger, is extremely unlikely. Why would the Chinese rock the boat unless the perceived benefits outweighed the associated costs (such as loss of the remaining value of their $U.S. denominated paper assets, crippling of their export-oriented manufacturing base, etc.)?

However, our financial system is increasingly perched atop an unstable ledge. Interest rates are held artificially low by constant central bank backstopping of sovereign debt in an attempt to keep the economy (and banks!) from collapsing. Remember, bond yields are inversely related to bond prices! The U.S. Federal Reserve, for example is pumping at least $85 Billion a month into Treasuries, bonds and other debt instruments. The resulting super-low-interest rate environment has created a mad scramble for investments that have a higher rate of return than the 1% or 2% available from traditional “safe” investment vehicles. Middle class savers can either join this scramble into increasingly higher-risk ventures or be savaged by returns lower than inflation. Those funding their own retirements are finding that even $2 Million savings earns a paltry $40,000 in annual interest. Meanwhile, stock markets have surged to record highs and sovereign debt yields, even for Italy and Spain, have declined. All this is taking place while outstanding sovereign debt continues to accumulate. The chart below shows the deteriorating European debt situation.
 The divergence between the actual situation and the financial pricing of risk in bonds and securities is increasing. As recently as last week, S&P downgraded France's credit rating. Did this cause French bond yields to rise? Of course not. They are stuck at a nice 2.2%. In layman terms, everything is increasingly out of whack in the financial, investment and monetary world. Price discovery is dying. Manipulation of interest rates and other markets is forcing money where money shouldn't be and forcing risk to be mispriced by a large margin. New bubbles are forming.

The Chinese and most everyone else with big money on the table know this but are riding out the trend supported by ever-increasing central bank intervention variously labeled as stimulus, quantitative easing, monetary aggregate adjustment, etc. So the Chinese seem to be preparing for that day, whether they, the Chinese, or some other event triggers a run from sovereign debt and the affected currencies, say, the Euro, the British Pound, the Yen and the $US. They have been purchasing large amounts of gold and entering into increasing numbers of Renminbi/Yuan currency swaps with other nations in an apparent move to initiate the internationalization of their currency as a possible prelude to eventual reserve currency status for their currency. 

Perhaps a rapid transition in mind-set is not imminent but some unexpected trigger could cause a rush for the exits at any time. It's really a state of mind as well as a collective assessment of when the end of the rope is reached for central bank printing actions. Most folks know none of this is repayable, after all, and the wiser ones are warily eying the exit doors for signs of  mass exodus. I suspect that the Chinese are in that category. They have too much to lose to be the last ones out the door.

Monday, October 28, 2013

Culture of Ignorance

I've been quiet lately. I feel like I'm in a trance some days, watching the world spin but not really comprehending how or why things are evolving as they are, seemingly oblivious to facts and reality. On occasion, it has struck me that willful ignorance within the world's population, somewhat akin to the lemming paradigm may have something to do with it. But then I drift off.
Today I was jarred out of my periodic apathy again by Jim Quinn's fine post entitled "Culture of Ignorance". He has eloquently put down in words what I've often begun to assemble in disjointed thoughts over the last 10 years or so (maybe longer) but never managed to output in a cohesive way. Well sprinkled by quotes from thinkers, I strongly endorse Quinn's "Part 1 - Culture of Ignorance".

Tuesday, March 12, 2013

Bitcoin and Gold

I must admit to a certain philosophical attraction to the concept of a digital currency. What does Bitcoin have in common with Gold or fiat currencies? What are the differences? Will Bitcoin, or some future digital currency replace gold?  Let’s take a look at three forms of currency or money:
1) Fiat currencies like the $US, the European €, the Japanese ¥, etc.
2) Gold (and Silver)
3) Digital Currencies such as Bitcoin

High recognition/acceptance
Long History
High acceptance of notes
Widely available electronic substitutes and transfer mechanisms.
Centrally controlled

High Recognition
Long History
Limited supply
No central control
No central point of failure
Lower acceptance than Fiat
Storage risk and cost
Requires electronic substitutes to facilitate transactions
Software fraud
Technology failure
Encryption flaw
Gov’t sanction
Easy to transfer
Easy to store
Limited supply
No central control
No central point of failure
Anonymous transfers
Irreversible transactions

Low recognition
Short history, unproven
No physical medium
Anonymous transfer-gov’t concern
Lost Bitcoins unrecoverable
Point of sale delays, storage insecurity
Irreversible transactions
Difficult to establish value
Bitcoin Exchanges are unregulated

Gold and silver have thousands of years of history. Gold-backed currencies then evolved and were around since at least the Roman times interspersed with periodic returns to Gold and Silver after early debasement schemes such as clipping of gold coins or adulterating with copper caused currency collapses. Then came almost totally fiat currencies of the type we have today. They have been around in their recent manifestations for several decades backed by the full guarantee of the state! While some fiat currencies look increasingly shaky the major currencies have, with some exceptions, survived in spite of progressive debasement over the decades with very few near total collapses requiring re-establishment of the currency.
Bitcoin, on the other hand is still very, very new. It had its beginnings in 2008 and got traction largely because its design solved a number of problems that early virtual currencies failed to address. The anonymity with which transfers can be done, its lack of central control, its inability to be debased and its electronic/virtual nature are strong suits. But there are some drawbacks not the least of which is its newness. It is untested relative to the countless trials by fire for gold and silver and fiat. It is not tangible like the paper dollar or a coin. It can easily take 10 minutes or more to verify the authenticity of a Bitcoin. This would be problematic in point of sale transactions at stores, for example. But the real problem for new entrants to the currency game is government. Government relies on central control for taxation and revenue. Governments also detest things that they can’t control, sometimes for legitimate reasons such as crime control but often because it is the nature of governments to meddle in people’s affairs. This to me is the biggest challenge and risk for Bitcoin and subsequent iterations. Will government even tolerate, never mind, endorse such a new currency? I doubt it.
But forgetting government for a moment and taking a lesson from history, most, if not all successful currencies were initially launched by being backed by gold and silver. This is simply because a tangible starting point for value is usually needed for mass adoption. Once confidence in a currency is earned, the backing is typically gradually removed to permit unfettered debasement. Thus, down the road, an interesting approach would be to combine Gold, the “barbarous relic” with a virtual currency such as Bitcoin to produce a gold-backed Bitcoin which would also add the missing physical exchange mechanism. Gold wouldn’t be used for most transactions, though. It would be like your savings account. Bitcoin would be your checking account. Now the government could confiscate the gold and outlaw the Bitcoin - Back to square one! Seriously, though, for digital currencies such as Bitcoin to come out of the shadows will require wide public, merchant and government acceptance, as well as a solution to the delays inherent in verifying authenticity of a Bitcoin transaction. Some accommodation to Government demands for traceability (reduced anonymity) will likely also be a needed compromise.
UPDATE April 7, 2013: Example of Bitcoin Storage security issues: