Monday, June 30, 2014

If we see rising US rates, the dollar will rise and capital will flow to the USA ......

The Press Keep Talking The Market Down – Historically this is Very Bullish Indeed

I have warned about how the press had constantly written negatively about the rising stock market during the 1920s.  Once again, the press are now hanging on the hope that the Fed will start to raise rates to justify their bearish bias swearing the market cannot be justified at these highs. However, I have shown the evidence that a bull market ALWAYS rises with rising interest rates and declines with dropping interest rates. These people who think markets will decline because of a rise in rate repeat the same propaganda they have never once investigated or bothered to check the facts. If you think the market will rise by 25%, you will borrow at 10%. You will not borrow at 0.1% if you do not believe the market will rise at all – i.e. Japan for 23 years.
Sorry, but the Fed DOUBLED interest rates from 1924 into 1929. The Wall Street Journal accused Jesse Livermore of trying to influence Presidential elections back then for they could not understand that there were international capital flows pouring into the USA. This domestic analysis is simply lethal.
True, in the past week, James Bullard, president of the St. Louis Federal Reserve bank, told Bloomberg News that the economy was improving enough to handle an increase in short-term rates next year. The Fed fears that unless they raise rates, they will have no leverage when the economy turns down. The Fed is not entirely convinced about the negative interest rate scenario put forth by Larry Summers.
1927-Secret Cental Bank Meeting
The press will go nuts when stocks rise with rising interest rates. In 1927 there was a secret meeting where the USA tried to lower its interest rates to deflect the capital inflows from Europe that was creating a shortage there and set the stage for the defaults in 1931. History is repeating. US and UK rates will rise while Europe will go negative. This will set the capital flows to the USA and may yet create a bubble top.
If we see rising US rates, the dollar will rise and capital will flow to the USA especially when smart money begins to realize that the IMF solution is to freeze all public debt in Europe so you cannot liquidate and/or seize everything in the pension funds. Once you extend 30 day government paper into 10 year, how do you sell anything next year? These IMF solutions are made by lawyers who are brain-dead with zero understanding of the credit markets or human nature.
We may be seeing history repeat again like an old record that is scratched and cannot move forward. So welcome the press and their perpetual talking down the market. As long as they keep this up, we are nowhere close to a major high.

Wednesday, June 25, 2014

Fed’s Exit Tax on Bonds: Collapse in liquidity - Both long and short bond rate could shoot up

Fed’s Exit Tax on Bonds – Confirms Liquidity Crisis

The greatest threat we have to the financial stability of the entire global economy is the collapse in liquidity. Governments cannot understand that their desperate need for money that has unleashed the worldwide hunt for money that is producing the greatest collapse in liquidity on a global scale. Even just recently, the Federal Reserve Governor Jeremy Stein commented on what has become obvious that the bond market has become too large and too illiquid, which exposes the entire market structure to a contagion crisis that is capable of seizing up the world economy like never before in history since the 1720s.
International investment has been the lynch-pin of economic expansion since ancient times. International trade began in Babylonian times. Even in Athens, Aristotle wrote about the people who made money from money that inspired Marx. Aristotle believed that the creation of the market economy whereby farmers could produce excess crops and sell them to brokers in Athens who resold them in foreign lands was undermining the quiet Athenian social structure. Cicero wrote about how any disaster in Asia Minor sent panic running down the streets of the Roman Forum because of international investment. After the Dark Age, the Tulip Bubble attracted capital from all over Europe as it the Mississippi Bubble in France that burst in 1720 followed by the South Sea Bubble in England later that same year. Targeting money overseas for not paying taxes is destroying international trade and that reduces global liquidity. The greedy people in government only see their self-interest and not the consequences of their actions.
The events of 2008 when the money market funds briefly fell below par was a warning sign that we are in a bear market for liquidity. The Federal Reserve is now deeply concerned about liquidity and understands the possibility insofar as the bond market is concerned. But rather than address the issue directly that is causing the collapse in global liquidity, the Fed is directing its attention to try to slow any potential panic selling of bonds by constructing a barrier to any panic exit. According to a small story in the Financial Times, Fed officials are contemplating the requirement to impose upon retail owners of mutual bond funds an “exit fee”to liquidate their positions.
Obviously, curtailing banks from proprietary trading has also helped to reduce liquidity and this has the bankers screaming that this new policy should be reversed for it is creating a highly fragile bond market. However, what is being overlooked here is the reality of CONTAGION. Because we are in a serious bear market for liquidity, volatility will rise exponentially as liquidity declines. We are seeing the calm before the storm right now.
The risk of CONTAGION can be illustrated by the events of 1998. The 1998 Long-Term Capital Management Crisis was precisely such a CONTAGION when people could not liquidate their Russian bonds and suddenly needed cash. This liquidity crisis in Russian debt sent investors scrambling selling whatever they could in other markets from the Japanese yen to shares is equities everywhere. Yes, gold rallied briefly from $502 to $532, but it fell to new lows thereafter into 1999. They needed money and sold whatever they could to raise cash. Hence, a crisis in one area and sector has the potential to create a wave of selling in other markets that people will never see coming from the fundamentals. This is the danger of CONTAGION. The 1987 Crash was precisely that. Foreign sellers of US equities came from nowhere contrary to domestic fundamentals all based solely upon the fear the dollar would drop another 40% because of the G5 (now G20) attempt to lower the dollar to reduce the trade deficit. CONTAGION disarms fundamental analysis!
The Fed’s idea of an exit fee that would penalize people for trying to sell in a panic may sound logical, but in a panic logic goes out the window. This is not much different from banning short-selling, which Europe is moving to do. However, the Fed seems to have listened to what I have been arguing for decades. Markets collapse NOT because of short-sellers, but because everyone who is long tries to sell and there is no bid. That creates the flash crash. People will not look at the exit fee when the potential loss is greater than the tax or fee. Sorry – it will fail.
It has been mistakenly attributed to the Fed for the decline in rates over the last six years. True, the Fed can control the short-term rates up to a point within confidence. However, if confidence in the dollar collapsed, then rates would have to rise in proportion to the risk of devaluation by market forces and that the Fed could not control. This is the forces at work upon Argentina.
Additionally, the long-end has not been within the power-structure of the Fed’s control. There they embarked upon a buying spree of long-bonds to reduce the supply in hopes of lowering long-term rates. Yet the Fed realizes that it lacks the power to even try to manipulate the economy through the next down turn and thus it needs to end its quantitative easing and to allow long-rates to rise. That introduces the risk of a panic in long-bond funds and hence the idea of an exit fee. This new idea would be a more direct way the Fed hopes it could control the rise in long-rates by slowing the exit.
The Federal Reserve policy of QE purchases has extended the decline in long-rates, but this has been aided by the bid from pension funds. The short-term bond bulls have anticipated making their “risk-free” long-term debt would bring stability, but even the central banks are now buying equities. As a result, mutual fund holdings of long-term government and corporate debt have risen sharply to over $7 trillion as of the end of 2013, which is more than double that of 2008 levels. This shows there is a pool of money that the Fed realizes will wake up and run to equities as the central banks have been doing on their own.
Then there is the fact that many funds are leveraged. This introduces another complexity to the mix for leverage means you are borrowing on the short-end to buy on the long end. This has contributed artificially to further lowering the long-end yields as they dropped to under 2.5% on the 10 year. Keep in mind that playing the yield-curve like this was the very scheme that blew up Orange Country, California years ago. Buying 30 year bonds and selling 10 year bonds on a leveraged basis took the difference in rates as a profit and then when leveraged back to the actual money invested dramatically raised the appearance of the yield on the actual money put on the table. This introduction of leverage borrowing short to buy the long can reverse in a panic sending the short-term rates up faster than the long-end. Banks have being paying hardly anything and lending at spreads that are sharply higher. If short-end rises exponentially, we will end up with bank failures.
So are the Fed policies playing with fire rather than telling Congress that FATCA is destroying global liquidity? The Fed may be playing out the song Hotel California where you can check in, but you cannot check out. This will only undermine confidence even more – not firm it up. As for those who just think the Fed is all-powerful, well they will think this should protect them and buy even more in the middle of a liquidity nightmare on the horizon.


Will Society Ever Wake Up?

QUESTION: Does society ever wake up? Are there any such examples from history?
ANSWER: Of course. If society did not wake up now and then, the outcome would always be the same – a dark age. The late 1700s was a revolution against monarchy – i.e. American Revolution. Then there was the overthrow of the kings and birth of Roman Republic in 509 BC. Each of these two events was followed by a contagion where the first inspired the French Revolution and the latter the Athenian revolution giving birth to Democracy. Then there was the collapse of Communism that began in China and spread to Russia and Eastern Europe as a contagion.
There is hope that we can wake before we go to the Dark Age stage – the Mad Max Event. If there were not, I would be building a bunker on an island someplace. This all depends upon society and where it resides at that moment. We have more danger in places like France where people are so reliant upon government which has laid waste to the private sector exactly as communism did in Russia.
The difference between China and Russia is important. In China, they did not try to change the thinking of society, they merely punished those who disagreed openly. Under Stalin, he persecuted people for having a brain. Therefore, China’s rebound has been spectacular because people were NOT reliant upon government. The more a society relies upon government the greater the damage to its economic potential. It requires a control-alt-delete reboot.
It is similar today where we have smart phones. We now push a button to call a friend. Lose the phone and most of us have no idea what phone number to call any more. We become dependent upon the technology. The same is true with government. In Ukraine, the people simply did not trust government and have had an independent streak to always maintain some self-reliance.
The future depends upon that quality. It will vary from region to region even within the same nation. For example, stop the flow of food into NYC and they begin to starve after 10 days. You would see a mass exodus raiding the homes in the suburbs. The city people rely upon someone producing the food 100% and have no land to even grow a tomato. At least in the suburb, they can plant something assuming it is not robbed by another.
This is the problem with all analysis. Only a fool cannot see that there is something beyond a one-dimensional view of the world. Everything they look at they twist into their own view and fail to understand that this is a multi-dimensional world where the same fundamental does NOT produce the same result perpetually. This is a combination of trends, which merge together to create a dynamic future that leaves opinion always trying to justify its errors.
Society will wake up, but not necessarily as a whole on a universal basis. There will always be differences of opinions and culture for everyone’s history dictates their future. Germany demands austerity because of the 1920s hyperinflation after the communist revolution of 1918, and the USA stimulates because of the 1930s deflation. There is NEVER a one size fits all outcome for everyone. They simply fight the last war over and over again blind to the changes because of their prejudice.

Tuesday, June 24, 2014

Gold & The Private Wave -2032 ?

Given the cycle work that you do, it appears that Gold had a 12 year Bull Market Cycle from 1968 to 1980 followed by a 19 year (one metonic cycle) bear market, followed by a 12 year Bull Market from 1999 to 2011. Does that mean we have entered another 19 year Bear Market Cycle?
ANSWER: Under normal conditions that would be true. However, our problem is that we are now in a Private Wave and that means confidence will decline in government and shift to the private sector. That inverts this outcome and the eventual high in gold and private assets is more-likely-than-not going to form off in 2032. The private sector will then collapse and thereafter people will turn back to the state.

US & UK Central Banks Look to Rates Rising in Autumn

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Part of the real financial crisis from the central bank perspective is that they have been trapped by the excessively low-interest rates that in reality has disarmed them from even trying to steer the economy. The bid on long-term rates has been strong over the last decade thanks to retirement plans. People have been just trying to lock in guaranteed rates of return even when under 3%. Just as Volcker went crazy pushing rates to nearly 20% in 1981, the banks scared the hell out of the central bankers and they pushed rates excessively to the downside. That has relieved the central banks of any leverage to try to manipulate the economy during the next downturn. They KNOW that and are frightened to death about what comes next – hence negative interest rates theory.

We must also realize that the trend toward rising taxation has historically also had a major impact upon interest rates. Politicians have NEVER taken taxation into account. They see taxes as their divine right. Britain is hiring judges as they expect greater legal challenges to their new offensive on tax collection. The battle cry is get the tax avoiders at all costs. They fail to grasp that this will also have an impact upon long-term rates. The yield-curve has been altered several times between taxation and war. When short-term interest rates became taxed in 1918, they rose sharply and that contributed to the Crash of 1919.
Consequently, the Fed’s intention to eliminate its long-term debt buying in the autumn has too many central bankers anticipating that long-term rates will then start to rise sharply when the Fed’s buying has been really minimal – a drop in the bucket within the global economy. As a direct result, many central banks are starting to sell their long-end expecting rates to rise both in US and UK. This will no doubt contribute to a modest rate rise into the end of next year on the long-end given the bid for mortgages as well. However, the bid from the pension side will cap rates more so than it has in the past. Nonetheless, this toxic cocktail that is starting to unfold is more likely than not going to produce a serious crisis in government debt between 2016 and 2020 where they will be unable to sell long-term as more and more pension funds are driven into insolvency. The bid from the long-term buyers is going to reverse and with it, government debt will become highly volatile on the short-end.
As taxation rises, capital invests based entirely upon NET RETURN. The greater the tax increase the higher the gross interest rates will rise. The pension funds tend to be more conservative and as a result they will be the next great crisis as insolvency starts to rise as they have been unable to meet their obligations. Governments are going to find the traditional flight to quality reverse as more and more capital shifts to the private sector fearing even the economic data published by governments is not trustworthy for they will play with the numbers to support their position of control.

Monday, June 23, 2014

Gold & Seasons? - Annual June 2nd lows !!!

1-Gold Seasonality
QUESTION:  Martin,
In your June 23rd post, you stated: “The [June] bounce is really seasonal, yet it is being explained as everything but.”
What Does this mean? There is a season to gold?
ANSWER: Yes. May/June often produces the low in gold. That is what we were saying a June low with a bounce. The other key months tend to be January/February. So the “bounce” from a June low on June 2nd is rather common.

Monday, June 16, 2014

Central Banks Buying Shares & Selling Gold?

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What is interesting is that those who manage the more than $11 trillion in reserves for central banks know more than what they are revealing. Previously, on April 4th we reported that China’s debt holding in Euros fell to BELOW 7%.
We have been collecting the raw data on the reserve holdings and will report shortly on that breakdown. However, what has been going on is nothing but shocking. While the gold promoters are touting hyperinflation, the central bank reserves have been diversifying and moving into TOP BLUE CHIP STOCK!!!!!!! Yes – you read correctly.
Even when the Federal Reserve was originally formed in 1913, to “stimulate” the economy it once upon a time bought corporate paper. When World War I came, the politicians told the Fed it had to buy only US government paper – not corporate. During World War II, the Fed was ordered to support US government bonds at PAR until 1950.They thereafter began a crash and burn nosedive for 31 years into 1981.
Some central banks appear poised to sell gold to raise money given they have no intent to return to a gold standard. This is the shadow behind the advice to Cyprus to dump gold. Meanwhile, Switzerland had recalled its gold because the US was going after them for helping Americans avoid taxes. The Swiss hold 70% of their gold reserves at home, 20% is held by the Bank of England, and 10% by Canada. They removed all gold from the USA. Thus, those who said Germany would find the US vaults empty, have been proven wrong by the Swiss who preceded the Germans on that score.

Bubble in Stocks? - Phase transition required

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DJIND-M 10252013
The amazing thing is people are already talking about this is a BUBBLE that is unsustainable. They are now claiming household income is down 4% yet the S&P 500 is up 70%. They are incapable of any real analysis. The RETAIL investor is NOT involved in this market. There is no wild speculative fever. They are obsessed with this being a bubble purely based on new highs with no regard for the pattern.

There has to be a Phase Transition for a Bubble. That requires a near doubling in the value within often the last year. We have new highs in the DAX as well. Why? Is the European economy doing well? No way!
Capital is fleeing from PUBLIC to PRIVATE. This is capital preservation – not wild speculation. Pension funds are moving into equities. Central banks are even putting out their reserves to be privately managed. The IMF is proposing taking 10% of all accounts in a bank in Europe. They are arguing for a SuperBank in Europe that will have the power to directly tax people in Europe and no nation can stop them.
HELLO! Just where is the wild speculation these people are yelling about that make up a bubble?

Tuesday, June 10, 2014

Interest rates and stock markets

So Smart – They Always Get it Wrong

QUESTION: Marty; Virtually every so called analyst on TV has missed the US stock rally. When they asked … how does it feel that he missed the rally, he said he didn’t miss it because he was in foreign market not US. Then he said once the Fed cuts off all of its QE stimulus the market will fall. I can see what you are talking about. These people all analyze everything based upon the Fed and domestic theory looking at markets through domestic colored glasses. Why are companies buying back their own shares?
1-Buyback 1st 2014
ANSWER: Yes. Your eyes are opening. The Fed is in serious trouble. It realizes there is a problem with capital inflows headed into real estate from Europe and into the US market. This is why the domestic press and analyst have missed the rally. They keep analyzing this from a domestic viewpoint blind to the global trends.

Insofar as the buybacks, the biggest are taking place in the tech field. They are also under the attack for taxes from everywhere. It makes sense to use overseas cash to buy back shares as much as possible. This also has the benefit of reducing charges for taxes and increases profits per share.

I reported that the Fed was going around to the NY banks warning them that their models are
incorrect and that the Fed does NOT BELIEVE that there will be a flight to quality next time to the long-end. They have also informed the banks that they will NOT bailout their proprietary trading again. This is info DIRECTLY from the banks who are friendly toward us and are not part of the proprietary trading against the world. Based upon their comments, they were presuming the Fed was starting to listen to our models. Perhaps. I have no formal arrangement with them. Nonetheless, other central banks are more open about it and have attended our WEC conferences some incognito and others opened stated who they were.

The whole NEGATIVE interest rate thing is part of this problem. Rates were lowered by the strong big for fixed income from pensions. With all the baby-boomers, pensions just needed to lock in their guarantees. This is why long-term rates are still declining for now they fear negative rates and even 2.5% for 10 years will look good.

Look closely at this theory that these so called analysts espouse that that raising interest rates will cause the stock market to collapse. SORRY! Just run a correlation and you will see these people are simply delusional. The theory in their mind is rates up and people will buy less so the market will collapse. When you correlate the world, you see that the market has NEVER peaked with the same rates twice in history and that the market rises with higher rates for that is the indication that people are bullish and even willing to buy. Japan rates fell for 23 years and virtual zero rates produced nothing bullish. The theory is just complete nonsense and anyone who states this theory is a parrot merely repeating the words without ever investigating they are true or false.

Monday, June 9, 2014

Lower interest rates do not stimulate economy

The Theory Behind NEGATIVE Interest Rates

Not sure if this is even possible.
Can the consumer savings interest rates go to a level at or below Zero that will drag down the lending interest rate lower?
Thus making borrowing even cheaper to stimulate the economy with more cheaper debt and punish savers.
Will our designed economic system sustain this thinking or will the system implode because people must save for banks to lend?
Even Japan had low interest rates but not zero.
Is that taboo?
ANSWER: The whole idea of moving to negative interest rates is seriously flawed and grossly misunderstood. The idea stems from the whole Keynesian concept that you lower interest rates to stimulate borrowing. That notion of stimulation not only completely failed in Japan, but as with everything else government reasons and unfortunately the talking heads just repeat, it is one-dimensional and fails to grasp that everything is connected. Lowering rates to try to “stimulate” fails for simultaneously you are destroying the fixed income of the elderly and pension funds based upon a theory that is bogus.
We have the largest database in the world. That has come in handy in combination with the Adam Smith approach of staying unbiased and letting the data speak instead of the Marx-Keynesian approach of trying to force the free markets to do as you think best. When we step back and try to just figure out HOW THE ECONOMY works as did Smith, what emerges from the data is quite interesting.
The business cycle has NEVER peaked twice with the same level of interest rates. Just look at the call money rates from the NYSE from 1880 to 1932. Likewise, interest rates collapse with the business cycle NOT because you will stimulate demand, but because demand collapses. That demand will return ONLY when the expectation of future gain reappears regardless of the level of interest rates. Consequently, the real formula is:
Economy Turns Up = (Expectation of Gain > Rate of Interest)
Therefore, lowering the rate of interest alone will not stimulate the economy. We have to take in account the entire picture. If you are raising taxes diminishing the disposable income, then you are creating more damage without any hope of stimulating spending that is not available.
I have explained that government’s approach is not only seriously flawed in thinking that rates alone will do anything, but then they fail completely to actually implement a policy. During the TARP bailout, all they did was hand the banks money and HOPE it will lead to lending. It never does. NOT EVEN ONCE!
Right now, deposit rates collapse because that is controlled by the central bank, but they then do not regulate the lending rates – DAH! We have ended up with the historical high in the spread between what banks pay depositors and what they charge. Therefore, going negative will still not stimulate, but it may at last force people to invest without borrowing shrinking the bank deposit base and ONLY then will banks start acting like banks. The money center banks have been trading to make profits NOT lending. Why lend when you can trade for less risk? This is why I am against banks being traders. That is a hedge fund – not a bank.

Buyback trend combined with declining rates lead to an investment rally

Stock Market – Has the Bull Been Replace with the Pink Bunny?

The market keeps churning higher ironically because people keep shorting listening to this nonsense. These constant short positions are the fuel that makes the market rise on a gradual basis. Keep in mind, people are running into the 10 year at 2.6% because they fear even lower rates coming. This is a different crowd. Many do not invest in stocks or do so with one-eye open all the time. This is the attitude behind Andrew Melon’s famous quote at the beginning of the Crash in 1929 – Gentlemen Buy Bonds.
Nevertheless, while the market then crashed in a normal fashion and started to recover, then the second shoe fell in 1931 that began with the sovereign default in Austria. That turned into a collapse in confidence and people ran from government debt in Europe and elsewhere pouring into the USA driving our rates to barely 1%. That proved that gentlemen also lose money.
Part of that trend was also the buybacks. We are seeing that again this time but into the rally. The first target for the high on this trend lines up with the ECM turning point on 2015.75. That will be 26 quarters from the low in 2009.
1923 Jesse Livermore Turns Bullish

This buyback trend combined with declining rates attempting to stimulate spending, is more likely to lead to an investment rally and the mainstream media (including internet) who constantly preach the end of the world, will be wrong and stubborn. When the Wall Street Journal  accused Jesse Livermore of trying to influence the Presidential Election and they were proved dead wrong, Even when the market rallied during the summer of 1926, Time magazine, the New York Times and the Wall Street Journal all reported the rally skeptically and they doubted how much it truly reflected business conditions. They were predominately bearish back then during the rally as they are today. In the February 25th, 1924 edition of Time Magazine, they reported the prejudice of the Wall Street Journal who after falsely accusing Livermore, simply refused to ever quote him again.
“At this stage enters Mr. Livermore, the noted operator. His last two main prophecies on the stock market had been sufficiently fulfilled so that he had attracted considerable speculative following.  From his vantage point in Miami, he sent a statement to the press which was widely published, although  the Wall Street Journal refused to include it in its columns.”
Unfortunately, this is reality. They press will NEVER quote what I have forecast because it does not fit their agenda. You can tell easily who is biased and who is not. When they give only one-side of a story, beware, there is something rotten in the core. Refusing to be balanced is not journalism – it is propaganda.
1-1924 Rally WSJ Livermore

Here is a chart showing the rally the WSJ did not believe back then. Look at the oscillator. It remained high into 1929.