In a world which has long since crossed the monetary twilight zone of negative rates, and which is spiraling ever deeper into NIRP, below we present some quite fascinating observations on debt, NIRP and how the latter leads to the deleveraging of the former, and thus encourages global deflation - something which in retrospect will be (and in many cases already has been) seen as a central bank fatal flaw, and confirmation said central bankers have zero understanding of the process they have unleashed.
From HSBC's Anton Tonev.
Negative rates = deleveraging
- Negative interest rates on developed world sovereign bonds could reduce debt burdens and may be a market solution to overleveraging
- While the side effect of extreme money creation is inflation, the side effect of extreme debt creation is deflation
- We argue that the need for further deleveraging may be a reason why negative interest rates persist in sovereign bond markets
Bonds and deleveraging
While conventional theory suggests that central banks set base interest rates and that negative rates are a result of low inflation and slow economic growth, we suggest there may be an alternative explanation. Drawing on historical and cultural analogies, we view negative rates as a possible market response to the growing levels of debt and inequality in income and wealth.
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Barack Obama recently stated that anyone that is claiming that America’s economy is in decline is “peddling fiction“. Well, if the economy is in such great shape, why are major retailers shutting down hundreds of stores all over the country? Last month, I wrote about the “retail apocalypse” that is sweeping the nation, but since then it has gotten even worse. Closing stores has become the “hot new trend” in the retail world, and “space available” signs are going up in mall windows all over the United States. Barack Obama can continue huffing and puffing about how well the middle class is doing all he wants, but the truth is that the cold, hard numbers that retailers are reporting tell an entirely different story.
Earlier today, Sears Chairman Eddie Lampert released a letter to shareholders that was filled with all kinds of bad news. In this letter, he blamed the horrible results that Sears has been experiencing lately on “tectonic shifts” in consumer spending…
In a letter to shareholders on Thursday, Lampert said the impact of “tectonic shifts” in consumer spending has spread more broadly in the last year to retailers “that had previously proven to be relatively immune to such shifts.”
“Walmart, Nordstrom, Macy’s, Staples, Whole Foods and many others have felt the impact of disruptive changes from online competition and new business models,” Lampert wrote.
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As regulators have sought to curb bank instability, in many cases, the result hasn’t been risk reduction, but merely the transfer of the same risks to different players. Increasingly, the new risk takers are investors. One place this has occurred on a large scale, yet gotten very little notice, is how private equity funds, whose business model depends on high levels of borrowing, have gone into the shadow banking business to supplant banks as their debt suppliers.
A combination of regulatory intervention and residual memory of the 2007-2008 buyout frenzy has restrained some of the worst behavior. The Volcker Rule forced the banks that were active in private equity to shed most of these assets. Globally, annual buyout fundraising amounts remain a quarter below their peaks of 2007 and 2008. In Europe the total value of buyout transactions in 2015, although up a quarter on prior year according to the Centre for Management Buyout Research, was still half that recorded in 2007. Extreme behaviours such as quick flips and repeat dividend recaps have been partly curtailed by the European Union’s Alternative Investment Fund Managers Directive. US bank regulators have guidelines for banks to limit leverage assigned to LBOs to 6 times EBITDA. And the worst performing fund managers have been shunned by LPs – natural selection has operated as intended by preventing incompetent managers from gorging themselves on fees for another ten-year vintage. No doubt it will take a little while for these zombie funds to disappear, but if LPs remain disciplined and strong-willed, disappear they shall.
Yet a new source of risk, that of PE groups “diversifying” their fee-earning activities by building private debt businesses, is now almost entirely outside regulatory reach. Whilst several of these investors had arguably been very active on the credit side for years and can claim real expertise, others piled on opportunistically as their levered portfolio companies were in dire need of balance-sheet restructuring. And frankly the initial nibbling quickly turned into a feast, so discounted were some of these companies’ LBO loans. In 2009 and 2010, a vast array of mega-buyout debt tranches were trading well below par, with high-profile transactions like Caesars and TXU seeing their unsecured loans hit 20 cents on the dollar or less. It was too tempting an occasion for some PE groups to resist.
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The perennial promises of free stuff from political candidates are front and center again now that we are ensnared in another US election cycle. The knee-jerk response from some economists and libertarians is “TANSTAAFL!” And of course it’s true that There Ain’t No Such Thing As A Free Lunch, because somebody must bear the costs of the supposedly “free” stuff. Nothing is free because every action has an opportunity cost.
Especially when the government is involved in doling out the gifts, all it means is that it was bought with money taken from others. Or, sometimes, the money is taken from the person receiving the gift, who thinks he’s gotten something for nothing. (This is a sleight-of-hand political trick that has fooled many for centuries.)
But what if we interpret “free” in a more colloquial sense? Is it still preferable for the government to give away free stuff? Do unhampered markets provide for free stuff?
Two Definitions of “Free”
Today’s promises include free college, free healthcare, free paid time off of work, and all sorts of goodies. Although the above conclusion (no such thing as “free”) applies to all of these, I want to consider a different, more liberal definition of “free”: gifted.
For example, if Bernie gives Jonathan an apple that Bernie either grew in his orchard or bought at the store and Bernie expects nothing in return, the apple is a free gift from Bernie to Jonathan. The production, purchase, and loss of the apple is costly, but Jonathan bears none of these costs. Jonathan would technically have to expend some time and effort to hold and consume the apple, and he would lose an apple’s worth of carrying capacity on his person, but ignoring these and other technicalities, we can casually say that the apple is a free gift from Jonathan’s perspective.
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Did you know that there are some U.S. states that have already officially fallen into recession? Economic activity all over the planet is in the process of slowing down, and there are some areas of the country that are really starting to feel the pain. In particular, any state that is heavily dependent on the energy industry is hurting right now. During the years immediately following the last recession, the energy industry was the primary engine for the growth of good paying jobs in America, but now that process is completely reversing. All over the U.S. energy companies are going under, and thousands upon thousands of good jobs are being lost.
On Sunday evening, Bloomberg published an article entitled “The U.S. States Where Recession Is Already a Reality“. The following is an excerpt from that article…
As economists size up the chances of the first nationwide slump since 2009, pockets of the country are already contracting. Four states — Alaska, North Dakota, West Virginia and Wyoming — are in a recession, and three others are at risk of prolonged declines, according to indexes of state economic performance tracked by Moody’s Analytics.
The three additional states that are “at risk of prolonged declines” are Louisiana, New Mexico and Oklahoma. What all of those seven states have in common is a strong dependence on the energy industry. Last year, 67 oil and gas companies in the United States filed for bankruptcy, and approximately 130,000 good paying energy jobs were lost.
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Oilprice.com wanted to check in with Dr. John C. Edmunds, a Professor of Finance at Babson College, to get his thoughts on the OPEC deal, oil markets, and some developments in Latin America. He is an expert in international finance, capital markets, foreign exchange risk, and Latin American stock markets.
Dr. Edmunds holds a D.B.A. in International Business from Harvard Business School, an M.B.A. in Finance and Quantitative Methods with honors from Boston University, an M.A. in Economics from Northeastern University, and an A.B. in Economics cum laude from Harvard College. He has consulted with the Harvard Institute for International Development, the Rockefeller Foundation, Stanford Research Institute, and numerous private companies.
This interview has been edited for brevity and clarity.
Oilprice.com: I wanted to start off with the OPEC deal that was announced [on February 16], the production freeze. Notably, Iran declined to comment on whether or not they’d freeze production. So most people think that means they won’t, and that they will still pursue their pre-sanctions production levels. I was wondering what you thought of this deal and if it had any practical implications for the oil markets?
Dr. John Edmunds: Well, I would say that it has not come together yet. Pretty soon they are going to do something because there are countries that are really just flat out desperate. I wouldn’t mention Iran specifically, although, they have been years and years without full income. But the ones I’m aware of right now…Nigeria just announced that they couldn’t pay their school teachers.
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Normalcy bias is a rather horrifying thing. It is so frightening because it is so final; much like death, there is simply no coming back. Rather than a physical death, normalcy bias represents the death of reason and simple observation. It is the death of the mind and cognitive thought instead of the death of the body.
Ever since the derivatives collapse of 2008 the public has been regaled with wondrous stories of recovery in the mainstream to the point that such fantasies have become the "new normal". These are grand tales of the daring heroics of central bankers who “saved us all” from impending collapse through gutsy monetary policy and no-holds-barred stimulus measures.
Alternative economists have not been so easy to dazzle. Most of us found that the recovery narrative lacked a certain something; namely hard data that took the wider picture into account. It seemed as though the mainstream media (MSM) as well as the establishment was attempting to cherry-pick certain numbers out of context while demanding we ignore all other factors as “unimportant.”
We just haven’t been buying into the magic show of the so called “professional economists” and the academics, and now that the real and very unstable fiscal reality of the world is bubbling to the surface, the general public will begin to see why we have been right all these years and the MSM has been utterly wrong.
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What does one make of it when someone whose career has been based on having powerful friends and contacts at the top levels of the financial services industry appears to be acting as a traitor to his class? In this case, the apparent turncoat is one Neel Kashkari, ex Goldman, ex Treasury, ex Pimco employee, now the new President of the Minneapolis Fed, who in his first speech in his new job, said all sorts of unpleasant truths: the financial crisis imposed huge costs on society as a whole, Dodd Frank didn’t go far enough, the authorities won’t be willing to risk using untested new powers in a financial meltdown and will bail out banks again. He also argued that the financial system was now stable enough to make (by implication overdue) transformative changes to end the “too big to fail” problem, such as breaking up banks and regulating them like utilities. Kashkari plans to come up with a comprehensive plan by year end and is seeking public input, including having expert discussions that will be webcast.
Now readers might think I’ve gone soft in the head by virtue of having an insider advocate some of our pet ideas, such as treating banks like utilities, when I tell you there are reasonable odds that Kashakri is serious.
As much as there was a great deal to like in his speech, I feel compelled to comment on a couple of issues before turning to the big question of “What to make of this?”
Kashkari Calls for a “Bold Approach”
This is the guts of Kashkari’s speech:
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After a series of stunning declines through the month of January and the first half of February, global financial markets seem to have found a patch of relative stability at least for the moment. But that does not mean that the crisis is over. On the contrary, all of the hard economic numbers that are coming in from around the world tell us that the global economy is coming apart at the seams. This is especially true when you look at global trade numbers. The amount of stuff that is being bought, sold and shipped around the planet is falling precipitously. So don’t be fooled if stocks go up one day or down the next. The truth is that we are in the early chapters of a brand new economic meltdown, and I believe that all of the signs indicate that it will continue to get worse in the months ahead. The following are 21 new numbers that show that the global economy is absolutely imploding…
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Even as some insist that the global economy is in “secular stagnation,” the facts suggest that we may be entering the “worst” depression in history. The global markets have been on a slippery slope since the summer of 2007, and things have only been getting worse in 2016. The picture looks dismal, no matter which theoretical lens one uses. (This article was written on 5 February before last week’s tumble in global and Indian markets.)
As the following quotation from Bradford DeLong’s 8 January 2016 Huffington Post article demonstrates, one of the ongoing debates among economists of many tribes is whether the period that began in the summer of 2007 will be called the “Greatest Depression” or the “Longest Depression” by future economic historians.
Unless something big and constructive in the way of global economic policy is done soon, we will have to change Stiglitz’s first name to ‘Cassandra’—the Trojan prophet princess who was always wise and always correct, yet cursed by the god Apollo to be always ignored. Future economic historians may not call the period that began in 2007 the ‘Greatest Depression’. But as of now, it is highly and increasingly probable that they will call it the ‘Longest Depression’.
I offer “Worst Depression” as the third alternative and leave it to future economic historians to call the period that began in 2007 whatever they want. However, some sort of consensus is emerging as the reconciliation prize of this debate. It is that the period that began in the summer of 2007 is some sort of depression, despite Lawrence Summers still calling it secular stagnation.
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Credit is not innately good or bad. Simplistically, productive Credit is constructive, while non-productive Credit is inevitably problematic. This crucial distinction tends to be masked throughout the boom period. Worse yet, a prolonged boom in “productive” Credit – surely fueled by some type of underlying monetary disorder - can prove particularly hazardous (to finance and the real economy).
Fundamentally, Credit is unstable. It is self-reinforcing and prone to excess. Credit Bubbles foment destabilizing price distortions, economic maladjustment, wealth redistribution and financial and economic vulnerability. Only through “activist” government intervention and manipulation will protracted Bubbles reach the point of precarious systemic fragility. Government/central bank monetary issuance coupled with market manipulations and liquidity backstops negates the self-adjusting processes that would typically work to restrain Credit and other financial excess (and shorten the Credit cycle).
A multi-decade experiment in unfettered “money” and Credit has encompassed the world. Unique in history, the global financial “system” has operated with essentially no limitations to either the quantity or quality of Credit instruments issued. Over decades this has nurtured unprecedented Credit excess and attendant economic imbalances on a global scale. This historic experiment climaxed with a seven-year period of massive ($12 TN) global central bank “money” creation and market liquidity injections. It is central to my thesis that this experiment has failed and the unwind has commenced.
The U.S. repudiation of the gold standard in 1971 was a critical development. The seventies oil shocks, “stagflation” and the Latin American debt debacle were instrumental. Yet I view the Greenspan Fed’s reaction to the 1987 stock market crash as the defining genesis of today’s fateful global Credit Bubble.
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Stock markets around the world continue to collapse as this new global financial crisis picks up more steam. In the U.S., the Dow lost 254 more points on Thursday, and it has now fallen for five days in a row. European stocks continued to get obliterated, and financial institutions are leading the way. But this week what is happening in Japan has been the most sobering. After falling 918 points the other day, the Nikkei plunged another 760 points early on Friday. The Nikkei has now fallen for seven of the past eight days, and investors in Japan are in full panic mode. Overall, global stocks are well into bear market territory, and nearly 17 trillion dollars of global stock market wealth has already been wiped out.
As panic rises, investors are seeking alternative investments. On Thursday, the price of gold hit $1,260 an ounce at one point before settling back a bit. But even with the fade at the end of the day, it was still the biggest daily gain in more than two years. Overall, gold is having its best quarterly performance in 30 years.
Whenever a financial crisis happens, investors seek out safe havens such as gold that can help them weather the storm. In particular, demand for physical gold is going through the roof all over the planet. Just check out the following excerpt from a Telegraph article entitled “Investors ‘go bananas’ for gold bars as global stock markets tumble“…
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Earlier this month, Kyle Bass asked a funny question in a discussion with CNBC’s David Faber. To wit: “If some fund manager in Texas is saying that your currency is dramatically overvalued, you shouldn’t care on a $10 trillion economy with $34 trillion in your banks. I have, call it a billion - it’s so small it should be irrelevant and yet somehow it’s really relevant.”
Bass was referring to China’s penchant for firing off hilariously absurd “Op-Eds” in response to anyone who suggests that the country may indeed be experiencing the dreaded “hard landing” or that a much larger yuan devaluation is a virtual certainty. The People’s Daily literally laughed at George Soros when the aging billionaire said he was short Asian currencies in Davos. “Declaring war on China’s currency? Ha ha,” PD wrote. Chinese media also called Soros a “crocodile,” a “predator,” and said his yuan gambit “cannot possibly succeed.”
That’s what Bass means when he says the Chinese seem to be quite ornery for a country that claims to be unabashedly confident about the prospects for their economy. Bass, like Soros, is betting on a steep devaluation of the yuan. In fact, he thinks a one-way bet on RMB weakness is "the greatest investment opportunity right now." The thesis is simple. Here’s some of our commentary from last week followed by key excerpts from the CNBC interview which should serve as a nice recap of why Bass thinks the yuan is set to fall by 30-40%:
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It’s ugly out there.
The proximate cause of this week’s market wobbles was a sharp selloff in bank stocks in Europe on Monday. That appeared to be triggered by the recognition that energy related dud loans could imposes losses of an additional $100 billion on already wobbly banks. And that’s before you get to the fact that many banks already had corporate loans they had not written down sufficiently and those books can only be getting worse given low growth and borderline deflation in Europe. And on top of that, European banks lent to other commodities players, not just energy concerns, and many were active in lending in emerging markets (Deutsche Bank, the most undercapitalized of the megabanks, is almost certainly exposed to all these trades, and its stock has been swooning accordingly).
But as bad as this bad loan story is, and the foregoing is already pretty ugly, the underlying structural and regulatory picture is is vastly worse. Central banks have painted the financial system in such a tight corner that it’s not clear how they get them out. And even if there were no big dud loan overhang, banks would bleed to death under current circumstances.
First, the current low interest rate environment has been squeezing banks’ bread and butter source of earnings, like risk-free income on float and other sources of net interest margin (“NIM”), as Izabella Kaminska has reported at FT Alphaville. From a post last week:
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With China offline for the rest of the week, global markets have found a new Asian bogeyman in the face of Japan which as reported last night saw its markets crash, and the Yen soar, showing that less than 2 weeks after the BOJ unveiled NIRP, yet another central bank has lost control.
The Nikkei crashed 5.4%, the biggest drop since June 2013, dropping over 900 points to August 24 lows driven by crashing banks, while the Yen soared to 114.50 overnight before the BOJ desperately tried to push the Yen lower, with London dealers reported the BoJ checking rates and levels to prompt short covering through 115.
But while the BOJ failed to push up equities, it certain managed to launch a panic buying spree in JGBs, which as also reported finally slid into negative yield territory, thus boosting the global number of bonds with a negative yield to just shy 30% of total or roughly $7 trillion!
Aside from Japan, everyone is looking at the bank which we first asked if it was "the next Lehman" last June, namely Germany's Deutsche Bank, to see if yesterday'd desperate scramble to publicly confirm it has sufficient liquidity will sufficient will stop the price from dropping and its CDS drom blowing out. For now, the stock is indeed up modestly, even if the CDS has refused to tighten suggesting that whatever management did, it is not enough and it is only a matter of time before the selling returns.
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Do you remember how much stocks went down when the first dot-com bubble burst? Well, it is happening again, and tech stocks are already down more than half a trillion dollars since the middle of 2015. On Friday, the tech-heavy Nasdaq dropped to its lowest level in more than 15 months, and it has now fallen more than 16 percent from the peak of the market. But of course some of the biggest names have fallen much more than that. Netflix is down 37 percent, Yahoo is down 39 percent, LinkedIn is down 60 percent, and Twitter is down more than 70 percent. If you go back through my previous articles, you will find that I specifically warned about Twitter again and again. Irrational financial bubbles like this always burst eventually, and many investors that got in at the very top are now losing extraordinary amounts of money.
On Friday, tech stocks got absolutely slammed as the bursting of dot-com bubble 2.0 accelerated once again. The following is how CNBC summarized the carnage…
The Nasdaq composite fell 3.25 percent, as Apple and the iShares Nasdaq Biotechnology ETF (IBB) dropped 2.67 percent and 3.19 percent, respectively.
Also weighing on the index were Amazon and Facebook, which closed down 6.36 percent and 5.81 percent, respectively.
LinkedIn shares also tanked 43.63 percent after posting weak guidance on their quarterly results.
Overall, LinkedIn is now down a total of 60 percent from the peak of the market. But they are far from the only ones that have already seen their bubble burst.
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Just four days ago, on Monday afternoon, "legendary" oilman T Boone Pickens said that crude has hit bottom at $26 per barrel, and predicting that prices should double within 12 months.
Pickens then doubled-down on his wrong call from last year, telling CNBC's "Squawk Box" that oil prices will rise to at least $52 per barrel by the end of the year. That said, he was at least honest enough to admit that his virtually identical call from last year, when he thought prices would strongly rebound, was wrong.
Whether it's $50 or $70 by the end of 2016 will largely be determined by the global economy, he added reiterating the same flawed thesis he used to justify his bullishness a year ago: "We're still building inventories, and we will for the next several months. And then we'll start to draw," Pickens said. "Once you start to draw, you're not going to start back building again. The draw will come here in the next few months. It'll become pretty clear."
He was wrong then, and he will be wrong this time again for the simple fact that while historically OPEC exercised a rational production strategy, as of the 2014 OPEC Thanksgiving massacre, there is no more OPEC, as can be seen by the relentless attempts by roughly half the members to call an OPEC meeting unsuccessfully, confirming what we said in late 2014 - OPEC no longer exists, which means it is every oil producer for themselves.
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The insidious nature of the war on cash derives not just from the hurdles governments place in the way of those who use cash, but also from the aura of suspicion that has begun to pervade private cash transactions. In a normal market economy, businesses would welcome taking cash. After all, what business would willingly turn down customers? But in the war on cash that has developed in the thirty years since money laundering was declared a federal crime, businesses have had to walk a fine line between serving customers and serving the government. And since only one of those two parties has the power to shut down a business and throw business owners and employees into prison, guess whose wishes the business owner is going to follow more often?
The assumption on the part of government today is that possession of large amounts of cash is indicative of involvement in illegal activity. If you’re traveling with thousands of dollars in cash and get pulled over by the police, don’t be surprised when your money gets seized as “suspicious.” And if you want your money back, prepare to get into a long, drawn-out court case requiring you to prove that you came by that money legitimately, just because the courts have decided that carrying or using large amounts of cash is reasonable suspicion that you are engaging in illegal activity. Because of that risk of confiscation, businesses want to have less and less to do with cash, as even their legitimately-earned cash is subject to seizure by the government.
Restrictions on the use of cash are just some of the many laws that pervert the actions of a market economy. Rather than serving consumers, businesses are forced to serve the government first and consumers last. Businesses act as unpaid tax agents, collecting sales taxes for state governments and paying excise taxes to the federal government, the costs of which they pass on to their customers. Businesses act as enforcers of vice laws, refusing tobacco sales to those under eighteen or alcohol to those under twenty-one. Financial institutions, which includes coin dealers, jewelers, and casinos, are required to report cash transactions above $10,000 as well as any activity the government might deem “suspicious.” Cash becomes such a hassle that it is almost radioactive, and many businesses would rather not deal with the burden. Using cash to buy a house is becoming impossible and it is probably only a matter of time before purchasing a car with cash will become incredibly difficult also.
Centuries-old legal protections have been turned on their head in the war on cash.
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Yahoo just officially hung up a "for sale" sign.
Company chairman Maynard Webb writes that Yahoo is "exploring additional strategic alternatives" to the four-point growth plan the company laid out in a press release.
The company's stock is down nearly 2% after-hours, despite its fourth-quarter earnings revenue beat.
Here's Webb (emphasis added):
The Board also believes that exploring additional strategic alternatives, in parallel to the execution of the management plan, is in the best interest of our shareholders. Separating our Alibaba stake from our operating business continues to be a primary focus, and our most direct path to value maximization. In addition to continuing work on the reverse spin, which we've discussed previously, we will engage on qualified strategic proposals."
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Willem Middlekoop, author of The Big Reset – The War On Gold And The Financial Endgame, believes the current international monetary system has entered its last term and is up for a reset. Having predicted the collapse of the real estate market in 2006, (while Ben Bernanke didn't), Middlekoop asks (rhetorically) -can the global credit expansion 'experiment' from 2002 – 2008, which Bernanke completely underestimated, be compared to the global QE 'experiment' from 2008 – present? - the answer is worrisome. In the following must-see interview with Grant Williams, he shares his thoughts on the future of the global monetary system and why the revaluation of Gold is inevitable...
And now today, Middelkoop has some even more ominous concerns about the end of Plan A and where Plan B begins...
"By revaluing gold to a much higher level, to over $8000 an ounce, central bankers solve quite a lot of problems"
17:00 - "But we know Plan A - the current financial system - will end soon, we can't go on this way... so we need a monetary reset... and a revaluation of gold has helped central bankers in the past, such as Roosevelt in the 1930s. It would help to restore the balance sheet of The Federal Reserve."
But there are problems...
21:00 - "It always ends in inflation.. certainly in 2016, we can expect more QE... and when that does not defeat deflation (driven by global over-indebtedness), further unorthodox measures will be taken (helicopter money).. and eventually a gold revaluation."
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One month ago, we first revealed that for one prominent winner from the subprime crisis, Hayman Capital's Kyle Bass, "the greatest investment opportunity right now" is to short the Chinese Yuan: as he explained "given our views on credit contraction in Asia, and in China in particular, let's say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there's one thing that is going to happen: China is going to have to dramatically devalue its currency." He even went so far as to give a timeframe: "we think it's going to be in the next 12-18 months."
Then, during the Davos boondoggle, none other than the man who broke the Bank of England, George Soros, noted that he too is shorting the Yuan, which in turn prompted China's communist party mouthpiece, the People's Daily to officially warn Soros to back off adding in a petulant, schoolyard bully-ish voice "You Cannot Possibly Succeed, Ha, Ha." Yes, China really said that.
Then, just last week, in a sad letter in which Bill Ackman blamed everyone and everything for his pathetic performance in 2015, most notably hedge fund herding and hotels, which he was so eager to exploit on the way up with presentation-filled idea dinners, and so eager to blame for dumping his names on the way down, we found out that Ackman had also decided to put on a Yuan devaluation trade just days before the Yuan devaluation announcement (perhaps he read our post from August 8, which said that a devaluation is imminent 3 days before it was revealed):
"Last summer, we built large notional short positions in the Chinese yuan through the purchase of puts and put spreads in order to protect the portfolio in the event of unanticipated weakness in the Chinese economy...Two days after we began to build our position in the Chinese yuan, China did a 2% surprise devaluation which substantially increased the cost of the options we had intended to continue purchasing. We continued to build the position thereafter by buying slightly more out of the money puts and selling further out of the money puts so as to keep the cost and risk/reward ratio of the position attractive."
Sadly, Ackman has still to make money on this trade.
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