Saturday, October 31, 2015

Mike Seerys Weekly Recap of the Crude Oil, Natural Gas, Silver, Dollar, Coffee and Sugar Markets

Is being on the sidelines a good trade? Of course it is and sometimes we just have to step back and being honest with ourselves when there just is not any trends that work to our advantage. And that's never been more the case than it is right now in the commodity markets. So who better to have than our trading partner Mike Seery back to give our readers a recap of this weeks trading and help us put together a plan for the upcoming week. 

Crude oil futures in the December contract are trading below its 20 and 100 day moving average hitting an eight week low in Tuesdays trade only to rebound in Wednesdays trade off of a bullish API report as prices remain choppy as I’m currently sitting on the sidelines just like I have been in many different markets as there are very few trends that are currently developing.

Crude oil prices settled last Friday in New York at 44.60 while currently trading at 46.18 slightly higher for the trading week as the U.S dollar is at an eight week high putting pressure on many commodities especially the precious metals over the last several days, but it looks to me that crude oil prices are stabilizing around the mid-40 level.

Gasoline prices have fallen dramatically over the last several months and has put pressure on crude oil prices as I paid $2.14 in the suburb of Chicago yesterday for gas which was the lowest price since 2009 but at the current time this market remains choppy, but the chart structure still remains very solid as there could be a possible trade in the next week or two.
Trend: Mixed
Chart Structure: Solid

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Natural gas futures in the December contract are trading lower for the 8th consecutive trading session finishing down 25 points for the trading week hitting a 3 ½ year low currently trading at 2.25 as I’ve been recommending a short position for the last eight weeks and if you took that trade congratulations as this market has completely collapsed due to the fact of extremely warm weather in the Midwestern part of the United States. Natural gas prices are trading far below their 20 and 100 day moving average telling you that the trend is sharply lower as the November contract right before expiration actually traded below 2.00 as the next level of support on the December contract is this Fridays low of 2.18 and if that is broken I think we can retest 2.00 once again as the forecast of warmer weather continues.

The chart structure will start to improve dramatically in Wednesdays trade as the 10 day high currently stands at 2.70 but that will be lowered on a daily basis so be patient as the risk will come down so accept the monetary risk. Many of the commodity markets are dictated by a strong or weak U.S dollar, but natural gas is a domestic product as price fluctuations depend on weather conditions as the weather in the Midwest has been extremely warm therefore depressing demand lowering prices as well so remain short in my opinion, however if you have missed this trade move on as you have missed the boat.
Trend: Lower
Chart Structure: Poor

Silver futures in the December contract settled the trading week on a sour note closing around 15.55 an ounce unchanged this Friday afternoon after hitting a 4 month high in Wednesdays trade, but then the Federal Reserve stated that they will possibly raise interest rates in the month of December sending silver prices sharply lower hitting a three week low in today’s trade.

I was recommending a long position from around 16.25 while getting stopped out around 15.60 taking a small loss as I can’t remember the last time the Federal Reserve actually benefited my trades which is very frustrating as I just wish they would raise interest rates and get it over with.

At the current time I’m sitting on the sidelines waiting for another trend to develop as gold prices look very weak in my opinion as I’m sitting on the sidelines in that market as well while focusing at other markets that are beginning to trend as silver prices remain extremely choppy despite the recent bullish momentum.
Ttend: Mixed
Chart Structure: Solid

The U.S dollar is trading above its 20 and 100 day moving average in a very volatile trading week surging higher in Wednesdays trade as the Federal Reserve stated that they might possibly raise interest rates in the month of December, however prices have fallen back 100 points in the last two trading days finishing down on the week by about 50 points. The dollar hit a 10 week high in Wednesday’s trade as I’ve been sitting on the sidelines in this market as well as this remains extremely choppy as the 10 day low is over 200 points away therefore not meeting my risk criteria.

The problem with many of the commodity markets at the current time is that they remain choppy as the U.S dollar is sharply higher one day and then sharply lower the next day so be patient. I’m still looking at a possible bullish position but the chart structure has to improve and that’s going to take another five days so keep a close eye on this market to the upside, but at this point in time look at other markets that are beginning to trend. One bullish fundamental factor that could prop up the dollar is fact that the U.S will raise interest rates it’s just a matter of time while Europe and many other foreign countries continue to lower interest rates.
Trend: Higher - Mixed
Chart Structure: Poor

Coffee futures in the December contract settled last Friday in New York at 118.45 a pound while currently trading at 121.15 as I’m currently sitting on the sidelines waiting for another trend to develop. I was recommending a bullish position several weeks ago when prices traded as high as 138 on concerns about dry weather in Brazil but adequate rains hit key coffee growing regions sending prices to today’s levels.

Major support in coffee is at the contract low around 115 which was hit in the month of September as I think I will be on the sidelines for quite some time as the chart structure is very poor which means that the monetary risk is too high to enter into the trade so look at other markets that are beginning to trend. Volatility in coffee is relatively high as that’s not surprising as coffee historically speaking is one of the most volatile commodities as in 2014 a drought hit Brazil sending prices up about 80% very quickly, but at the current time there are no weather problems existing.

In my opinion I do believe coffee prices are bottoming out as it would surprise me if we headed much lower and if you are a producer I would still be buying at today’s prices as I think the downside is limited.
Trend: Mixed - Lower
Chart Structure: Poor

Sugar futures in the March contract settled last Friday in New York at 14.28 a pound while currently trading at 14.68 up 40 points for the trading week continuing its bullish momentum hitting a 5 1/2 month high. Sugar prices are trading far above their 20 and 100 day moving average telling you that the short term trend is to the upside as I have missed this trade due to the fact that the chart structure was poor at the time of the breakout, but my recommendation would be if you are currently long a futures contract place your stop loss below the 10 day low which stands at 13.94 as the chart structure will start to improve in next week’s trade therefore lowering monetary risk.

The next major level of resistance is at 15.00 as prices bottomed out around 11.50 in September due to less production coming out of Brazil due to heavy rains as well as strong demand changing the supply/demand table very quickly as we will not produce a record crop in 2016 like we have over the last several growing seasons.

As a trader you must have an exit strategy as I had many short positions in sugar over the last year, however I always use the 10 day high if I am short as an exit strategy because holding on and never getting out is a very dangerous way to trade because commodity prices can change very quickly.
Trend: Higher
Chart Structure: Improving

What does Mike mean when he talks about chart structure and why does he think it’s so important when deciding to enter or exit a trade?

Mike tells us "I define chart structure as a slow grinding up or down trend with low volatility and no chart gaps. Many of the great trends that develop have very good chart structure with many low percentage daily moves over a course of at least 4 weeks thus allowing you to enter a market allowing you to place a stop loss relatively close due to small moves thus reducing risk. Charts that have violent up and down swings are not considered to have solid chart structure as I like to place my stops at 10 day highs or 10 day lows and if the charts have a tight pattern that will allow the trader to minimize risk which is what trading is all about and if the chart has big swings your stop will be further away allowing the possibility of larger monetary loss."

Mike has been a senior analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets. Get more of Mike's calls on this Weeks Commodity Markets


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Thursday, October 29, 2015

The Financialization of the Economy

By John Mauldin


Roger Bootle once wrote:
The whole of economic life is a mixture of creative and distributive activities. Some of what we ‘‘earn’’ derives from what is created out of nothing and adds to the total available for all to enjoy. But some of it merely takes what would otherwise be available to others and therefore comes at their expense.

Successful societies maximise the creative and minimise the distributive. Societies where everyone can achieve gains only at the expense of others are by definition impoverished. They are also usually intensely violent. Much of what goes on in financial markets belongs at the distributive end. The gains to one party reflect the losses to another, and the fees and charges racked up are paid by Joe Public, since even if he is not directly involved in the deals, he is indirectly through costs and charges for goods and services.

The genius of the great speculative investors is to see what others do not, or to see it earlier. This is a skill. But so is the ability to stand on tip toe, balancing on one leg, while holding a pot of tea above your head, without spillage. But I am not convinced of the social worth of such a skill.

This distinction between creative and distributive goes some way to explain why the financial sector has become so big in relation to gross domestic product – and why those working in it get paid so much.

Roger Bootle has written several books, notably The Trouble with Markets: Saving Capitalism from Itself.

I came across this quote while reading today’s Outside the Box, which comes from my friend Joan McCullough. She didn’t actually cite it but mentioned Bootle in passing, and I googled him, which took me down an alley full of interesting ideas. I had heard of him, of course, but not really read him, which I think may be a mistake I should correct.

But today we are going to focus on Joan’s own missive from last week, which she has graciously allowed me to pass on to you. It’s a probing examination of how and why the financialization of the US and European (and other developed world) economies has become an anchor holding back our growth and future well being. Joan lays much of the blame at the feet of the Federal Reserve, for creating an environment in which financial engineering is more lucrative than actually creating new businesses and increasing production and sales.

There are no easy answers or solutions, but as with any destructive codependent relationship, the first step is to recognize the problem. And right now, I think few do. What you will read here is of course infused with Joan’s irascible personality and is therefore really quite the fun read (even as the message is sad).

Joan writes letters along this line twice a day, slicing and dicing data and news for her rather elite subscriber list. Elite in the sense that her service is rather expensive, so I thank her for letting me send this out. Drop me a note if you want us to put you in touch with her.

I am back in Dallas after a whirlwind trip to Washington DC. I attended Steve Moore’s wedding at the awe-inspiring Jefferson Memorial; and then we hopped a plane back to Dallas and Tulsa to see daughter Abbi, her husband Stephen, and my new granddaughter, Riley Jane, who was delivered six weeks premature while we were in the air.

The doctors decided to bring Riley into the world early as Abbi was beginning to experience seriously high blood pressure and other problematic side effects. Riley barely weighs in at 4 pounds and will spend the first three years of her life in the NICU (the neonatal intensive care unit). Having never been in one before, I was rather amazed by all the high tech gear surrounding Riley and all of the usual medical devices shrunk to the size where they can be useful with preemie babies.

The doctors and nurses assured me that the frail little bundle I was very hesitant to touch would be quite fine. And Abbi is much better and already up and about.

As I was flying back to Dallas later that afternoon, it struck me how, not all that long ago, in my parents’ generation, both mother and daughter would have been at severe risk. Interestingly, both Abbi and her twin sister were significantly premature as well, some 30 years ago in Korea. The progress of medicine and medical technology has allowed so many more people to live long and productive lives, and that process is only going to continue to improve with each and every passing year.

And now, I think it’s time to let you get on with Joan McCullough’s marvelous musings. Have a great week!
Your glad I’m living at this time in history analyst,
John Mauldin, Editor
Outside the Box

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The Financialization of the Economy

Joan McCullough, Longford Associates
October 21, 2015

Yesterday, we learned that lending standards had eased and that there was increased loan demand from institutions and households, per the ECB’s September report. (Which was attributed to the success of QE and which buoyed the Euro in the process.)

This has been bothering me. Because it is a great example of the debate over “financialization” of an economy, i.e., is it a good thing or a bad thing?

The need to further explore the topic was provoked by reading this morning that one of the larger shipping alliances, G6, has again announced sailing cancellations between Asia and North Europe and the Mediterranean. This round of cuts targets November and December. The Asia-Europe routes, please note, are where the lines utilize their biggest ships and have been running below breakeven. So it’s easy to understand why such outsized capacity is further dictating the need to cancel sailings outright. G6 members: American President, Hapag Lloyd, Hyundai Merchant Marine, Mitsui, Nippon and OOCL. So as you can see from that line-up, these are not amateurs.

We have already discussed in the past in this space, the topic of financialization. But seeing as how the stock market keeps rallying while the economic statistics have remained for the most part, punk, time to revisit the issue once again. Is it all simply FED or no FED? Or is the interest rate issue ground zero and/or purely symptomatic of the triumph of financialization over the real economy?

Further urged to revisit the topic by the seemingly contradictory developments of the ECB banks reportedly humming along nicely while trade between Asia and Europe remains obviously, significantly crimped. Let’s make this plain English because it takes too much energy to interpret most of what is written on the topic.

Snappy version:
Definition (one of quite a few, but the one I think is accurate for purposes of this screed):
Financialization is characterized by the accrual of profits primarily thru financial channels (allocating or exchanging capital in anticipation of interest, divvies or capital gains) as opposed to accrual of profits thru trade and the production of goods/services.

Economic activity can be “creative” or “distributive”. The former is self- explanatory, i.e., something is produced/created. The latter pretty much simply defines money changing hands. (So that when this process gets way overdone as it likely has become in our world, one of the byproducts is the widening gap called “income inequality”.)

You guessed correctly: financialization is viewed as largely distributive.

So now we roll around to the nitty-gritty of the issue. Which presents itself when business managers evolve to the point where they are pretty much under the control of the financial community. Which in our case is simply “Wall Street”.

This is something I saved from an article last summer which ragged mercilessly on IBM for having kissed Wall Street’s backside ... and in the process over the years, ruined the biz. “And of course, it’s not just IBM. ... A recent survey of chief financial officers showed that 78 percent would ‘give up economic value’ and 55 percent would cancel a project with a positive net present value—that is, willingly harm their companies—to meet Wall Street’s targets and fulfill its desire for ‘smooth’ earnings.... http://www.forbes.com/sites/stevedenning/2014/06/03/why-financialization-has-run-amok/

IBM is but one possible target in laying this type of blame where the decisions on corporate action are ceded to the financial community; the instances are innumerable.

You probably could cite the well-known example of a couple of years back when Goldman Sachs was exposed as the owner of warehouse facilities that held 70% of North American aluminum inventory. And how that drove up the price and cost end-users dearly. (Estimated as $ 5bil over 3 years’ time.)

First link: NY Times article from July of 2013, talking about the warehousing issue.
http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?pagewanted=all&_r=0

Second link: Senate testimony from Coors Beer, complaining about the same situation.
http://www.banking.senate.gov/public/index.cfm? FuseAction=Files.View&FileStore_id=9b58c670-f002-42a9-b673- 54e4e05e876e 

Well, here’s another from the same article which makes the point quite clearly: Boeing’s launch of the 787 was marred by massive cost overruns and battery fires. Any product can have technical problems, but the striking thing about the 787’s is that they stemmed from exactly the sort of decisions that Wall Street tells executives to make.

Before its 1997 merger with McDonnell Douglas, Boeing had an engineering driven culture and a history of betting the company on daring investments in new aircraft. McDonnell Douglas, on the other hand, was risk-averse and focused on cost cutting and financial performance, and its culture came to dominate the merged company. So, over the objections of career long Boeing engineers, the 787 was developed with an unprecedented level of outsourcing, in part, the engineers believed, to maximize Boeing’s return on net assets (RONA). Outsourcing removed assets from Boeing’s balance sheet but also made the 787’s supply chain so complex that the company couldn’t maintain the high quality an airliner requires. Just as the engineers had predicted, the result was huge delays and runaway costs.

Boeing’s decision to minimize its assets was made with Wall Street in mind. RONA is used by financial analysts to judge managers and companies, and the fixation on this kind of metric has influenced the choices of many firms. In fact, research by the economists John Asker, Joan Farre-Mensa, and Alexander Ljungqvist shows that a desire to maximize short term share price leads publicly held companies to invest only about half as much in assets as their privately held counterparts do.”

That’s from an article in the June, 2014, Harvard Business Review by Gautam Mukunda, “The Price of Wall Street’s Power” also cited in the Forbes article. This is the link; it is worth the read though you may not agree with parts of the conclusion: https://hbr.org/2014/06/the-price-of-wall-streets-power

The upshot to this type of behavior is that the balance of power ... and ideas ... then migrates into domination by one group.

Smaller glimpse: Over financialization is what happens when a company generates cash then pays it to shareholders and senior management which m.o. also includes share buybacks and vicious cost cutting. This is one way, as you can see, in which the real economy is excluded from the party!

Part of the financialization process also includes ‘cognitive capture’ where the big swingin’ investment banking sticks have the ear of business managers.

And the business managers/special interest groups, in turn, have the ear of the federal government. See? The control by Wall Street is still there, but sometimes the route is a tad circuitous! The clandestine formulation of the TPP agreement is a perfect example of this type of dominance. (Congress shut out/ corporate lobbyists invited in.)

So the whole process goes to the extreme. Therein lies the rub: the extreme. So that business obediently complies with the wishes of these financial wizards. Taken altogether, over time, our entire society morphs to where it assumes a posture of servitude to the interests of Wall Street.

An example of that? John Q.’s sentiment meter (a/k/a consumer confidence) is clearly known to be tied most of the time to the direction of the S&P 500. Which of course, is aided and abetted by the foaming at  the mouth Talking Heads who pretty much .... dictate to John Q. how he is supposed to be feeling.

Forty years on the Street, I am still agog at the increasing clout of the FOMC to the extent where we are now hostages to their infernal sound bites and communiqu├ęs. Another example of the process of creeping financialization? I’d surely say so!

This is not an effort to try and convict “financialization” as indeed it has its place. When it is used prudently. Such as to facilitate trade in the real economy! Sounds kind of Austrian, eh? You bet. The simplest example of this which is frequently cited is a home mortgage. The borrower exchanges future income for a roof via a bank note.

And so it goes. Financialization humming along nicely, facilitating trade in the real economy. Unfortunately, along the line somewhere, it got out of hand. Which is where the World Bank comes in.
http://data.worldbank.org/indicator/FS.AST.PRVT.GD.ZS

As they have the statistics on “domestic credit to private sector (% of GDP)”

Why do we wanna’ look at that? Well the answer is suggested by yet another institution who has studied the issue. Correct. The IMF. Which espouses the notion that “the marginal effect of financial depth on output growth becomes negative ... when credit to the private sector reaches 80-100% of GDP ...
https://www.imf.org/external/pubs/ft/wp/2012/wp12161.pdf

Does the above sound familiar? Right. Too much financialization crimps growth.
That’s when we turn to the above-referenced World Bank table. Which shows the latest available worldwide statistics (2014) on domestic credit to private sector % of GDP.

Okay. Maybe we oughta’ read this bit from the World Bank before we get to the US statistic:
... “Domestic credit to private sector refers to financial resources provided to the private sector by financial corporations, such as through loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment. ...
The financial corporations include monetary authorities and deposit money banks, as well as other financial corporations ...
Examples of other financial corporations are finance and leasing companies, money lenders, insurance corporations, pension funds, and foreign exchange companies.” ....

Clear enough. Again, the IMF suggests that 80 to 100% of GDP is where it gets dicey in terms of impact on growth.....

In 2014, the US ratio stood at 194.8. In 1981 (as far back as the table goes), our ratio stood at 89.1.
For comparison, also in 2014, Germany stood at 80.0; France at 94.9. China at 141.8 and Japan at 187.6. Which is suggestive of what can be called “over-financialization”. So what’s the beef with that, you ask?
For all the reasons mentioned above which led to increasing dominance by the financial sector on corporate and household behavior, the emphasis leans heavily towards making money out of money. Which I’d like to do myself. You?

But when massaged into the extreme which is clearly, I believe, where we find ourselves now ... at the end of the day, we create nothing.

By creating nothing, the economy relies on the financialization process to create growth. But the evidence supports the notion that once overdone, financialization stymies growth.

“ ... The whole of economic life is a mixture of creative and distributive activities. Some of what we “earn” derives from what is created out of nothing and adds to the total available for all to enjoy. But some of it merely takes what would otherwise be available to others and therefore comes at their expense. Successful societies maximize the creative and minimize the distributive. Societies where everyone can achieve gains only at the expense of others are by definition impoverished. They are also usually intensely violent.” ... Roger Bootle quoted here: http://bilbo.economicoutlook.net/blog/?p=5537

In short, corporate behavior is dictated by Wall Street desire which in turn results in a flying S&P 500. Against a backdrop, say, of a record number of US workers no longer participating in the labor force.
So instead of cogitating the entire picture and all of its skanky details, we have so farbeen willing to accept a one-size fits all alibi for stock market action where financialization still dominates; the only choice is what financialization flavor will trump the other: “FED or no FED”.

I now wonder if when Bootle said a few years back ... “they are usually intensely violent”, if this wasn’t prescience. Which can be applied to the current political landscape in the US where the financialization of the economy has so excluded the average worker ... that he is willing to put Ho-Ho the Clown in the White House. Just to change the channel. And hope for relief.

As you can see, I am trying very hard to understand how as a society we got to this level.

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Monday, October 26, 2015

The Global Depression and Deflation Is Currently Underway!

"The clear and present danger is, instead, that Europe will turn Japanese: that it will slip inexorably into deflation, that by the time the central bankers finally decide to loosen up it will be too late." Paul Krugman, "The Euro: Beware of What you Wish for", Fortune (1998)

Most central bank policy makers, investors, and analysts around the world today are gripped by the worry of declining growth rates, dwindling international commodity prices, high unemployment, and other macroeconomic figures.

The Global Depression and Deflation Is Currently Underway!

However, not many have given much consideration to one economic factor that has the potential to disrupt global economies, shut down economic activities, and become a catalyst for a worldwide depression. We are talking about 'deflation' that if not tamed, could bring global economies to their knees creating a worldwide chaos never seen before in scale or length.

Paul Krugman, the renowned American economist and distinguished Professor of Economics at the Graduate Center of the City University of New York, had forewarned about the threat of deflation for European economies. He suggested that the European Central Bank policy makers need to look into the situation now before it's too late for them to do anything about the situation.

The Eurozone today has well entered into a deflationary phase with other major economies including the US, UK, and Japan slowly heading into the same direction. In Japan and many European economies such Greece, Spain, Bulgaria, Poland, and Sweden, prices have been decreasing gradually for the past decade. This has created a number of problems for the central bank policy makers as they try to find out ways to diffuse the negative effects of deflation such as a slump in economic activity, drop in corporate incomes, reduced wages, and many other problems. What the World can Learn from Japan's Lost Decade (1990-2000)

The impact of the ongoing global deflationary trends on economies can be gauged by what Japan had experienced during the period between 1990 - 2000, which is also known as Japan's lost decade. The collapse of the asset bubble in 1991 heralded a new period of low growth and depressed economic activity. The factors that played a part in Japan's lost decade include availability of credit, unsustainable level of speculation, and low rates of interest.

When the government realized the situation, it took steps that made credit much more difficult to obtain which in turn led to a halt in the economic expansion activity during the 1990s.

Japan was fortunate to come out of the situation unhurt and without experiencing a depression. However, the effects of that period are being felt even today as corporations feel threatened of another deflationary spiral that could eat away at their profits. The situation analysts feel is about repeat in the Western economies, and that includes the US.

Deflationary Trend Could Threaten the Fragile US Economy

Inflation rates in the US is hovering near zero percent level for the past year. The Personal Consumption Expenditure Price Index has stayed well below the Fed's 2% target rate since March 2012. Although, the US economy hasn't entered into a deflationary stage at the moment, the continuous low level inflation despite the fed's rate being at near zero levels for about a decade has increased the possibility that the US economy could also plunge into a deflationary stage similar to that of the Euro zone.

The deflationary trend could turn out to be a big concern for policy makers and investors that may well lead to a global depression. The lingering memories of the 2008 financial crises that had literally rocked the world are still fresh in the minds of most people. That is why it's important for central banks to implement policies to fight the debilitating effects of deflation.

But, the question is how can the central banks combat the current or looming deflation trend? The Japan's lost decade has taught us that trying to contain the possibility of deflation and its negative effects can be difficult for policy makers. Economists have suggested various ways in which the debilitating effects of deflation can be countered.

However, one policy that central banks can use to fight off deflation is what economists call a Negative Interest Rate Policy (NIRP).

NIRP simply refers to refers to a central bank monetary measure where the interest rates are set at a negative value. The policy is implemented to encourage spending, investment, and lending as the savings in the bank incur expenses for the holders. On October 13ths I wrote in detail about NIRP. Then on October 23rd Ron Insana on CNBC talk about it here.

This unconventional policy manipulates the tradeoff between loans and reserves. The end goal of the policy is to prevent banks from leaving the reserves idle and the consumers from hoarding money, which is one of the main causes of deflation, which leads to dampened economic output, decreased demand of goods, increased unemployment, and economic slowdown.

Central banks around the world can use this expansionary policy to combat deflationary trends and boost the economy. Implementing a NIRP policy will force banks to charge their customers for holding the money, instead of paying them for depositing their money into the account. It will also encourage banks to lend money in the accounts to cover up the costs of negative rates.

Has the Negative Rates Policy Been Implemented in the Past?

Despite not being well known or publicized in the media, NIRP has been implemented successfully in the past to combat deflation. The classic example can be given of the Swiss Central Bank that implemented the policy in early 1970s to counter the effects of deflation and also increase currency value.

Most recently, central banks in Denmark and Sweden had also successfully implemented NIRP in their respective countries in 2012 and 2010 respectively. Moreover, the European Central Bank implemented the NIRP last year to curb deflationary trend in the Eurozone.

In theory, manipulating rates through NIRP reduces borrowing costs for the individuals and companies. It results in increased demand for loans that boosts consumer spending and business investment activity. Finance is all about making tradeoffs and decisions. Negative rates will make the decision to leave reserve idle less attractive for investors and financial institutions. Although, the central bank's policy directly affects the private and commercial financial institutions, they are more likely to pass the burden to the consumers.

This cost of hoarding money will be too much for consumers due to which they will invest their money or increase their spending leading to circulation of money in the economy, which leads to increase in corporate profits and individual wages, and boosts employment levels. In essence, the NIRP policy will combat deflation and thereby prevent the potential of global depression knocking at the door once more.

Final Remarks

The possibility of deflation causing another global recession is very real. Central policy makers around the world should realize that deflation has become a global problem that requires instant action. In the past, even the most efficient and robust economies used to struggle in taming inflation rates. In the coming months, most economies around the world, including the US, will have difficulty curbing the effects of deflation.

The fact is that central bank policy makers have largely ignored the possibility of deflation causing havoc in the economy similar to what happened in Japan during its "lost decade". The quantitative easing program that is being used in the US by the Feds to boost economy is not proving effective in raising the inflation rate to its targeted levels. In fact, the inflation level is drifting even lower and is hovering dangerously close to the negative territory.

Blaming the low inflation levels on the low level of oil prices is not justified. Inflation levels were hovering at low levels well before the great plunge in commodity prices. Moreover, low level inflation rates cannot be blamed on muted wage levels. The fact is that unemployment rates have decreased both in the US and the UK in the past few years, but consumer spending has largely remained unmoved.

Taming deflation is necessary if the central banks want to avoid its debilitating effects on the economy. Policies like the Quantitive Easing program used by the Feds may allow easy access to credit, dampen exchange rate, and reduce risks of financial meltdown; but it cannot prevent the possibility of another more severe situation of deflation wreaking havoc on the economy.

The concept of NIRP may seem counter intuitive at first, but it is the only effective way of combating the deflationary trend. The world economy could sink further into a deflationary hole if no action is taken to curb the trend. And the time to start thinking about it is now. Any delay could result in a global economic meltdown that may cause deep financial difficulties for millions of people around the world.

We as employees, business owners, traders and investors are about to embark on a financial journey that couple either cripple your financial future or allow to be more wealthy than you thought possible. The key is going to that your money is position in the proper assets at the right time. Being long and short various assets like stocks, bonds, precious metals, real estate etc.

Follow me as we move through this global economic shift at the Global Financial Reset Wealth System

See you in the markets,
Chris Vermeulen

Our trading partner Chris Vermeulan originally posted this article at CNA Finance

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Someone Is Spending Your Pension Money

By John Mauldin 

“Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money.”– Jonathan Clements

“In retirement, only money and symptoms are consequential.”– Mason Cooley



Retirement is every worker’s dream, even if your dream would have you keep doing the work you love. You still want the financial freedom that lets you work for love instead of money. This is a relatively new dream. The notion of spending the last years of your life in relative relaxation came about only in the last century or two. Before then, the overwhelming number of people had little choice but to work as long as they physically could. Then they died, usually in short order. That’s still how it is in many places in the world.

Retirement is a new phenomenon because it is expensive. Our various labor-saving machines make it possible at least to aspire to having a long, happy retirement. Plenty of us still won’t reach the goal. The data on those who have actually saved enough to maintain their lifestyle without having to work is truly depressing reading. Living on Social Security and possibly income from a reverse mortgage is limited living at best.

In this issue, I’ll build on what we said in the last two weeks on affordable healthcare and potentially longer lifespans. Retirement is not nearly as attractive if all we can look forward to is years of sickness and penury. We are going to talk about the slow motion train wreck now taking shape in pension funds that is going to put pressure on many people who think they have retirement covered.

Please feel free to forward this to those who might be expecting their pension funds to cover them for the next 30 or 40 years. Cutting to the chase, US pension funds are seriously underfunded and may need an extra $10 trillion in 20 years. This is a somewhat controversial letter, but I like to think I’m being realistic. Or at least I’m trying.

The Transformation Project
But first, let me update you on the progress on my next book, Investing in an Age of Transformation, which will explore the changes ahead in our society over the next 20 years, along with their implications for investing. Our immediate future promises far more than just a lot of fast paced, fun technological change.

There are many almost inevitable demographic, geopolitical, educational, sociological, and political changes ahead, not to mention the rapidly evolving future of work that are going to significantly impact markets and our lives. I hope to be able to look at as much of what will be happening as possible. I believe that the fundamentals of investing are going to morph over the next 10 to 15 to 20 years.

I mentioned a few weeks ago at the end of one of my letters that I was looking for a few potential interns and/or volunteer research assistants to help me with the book. I was expecting 8 to 10 responses and got well over 100. Well over. I asked people to send me resumes, and I was really pleased with the quality of the potential assistance. I realize that there is an opportunity to do so much more than simply write another book about the future.

What I have done is write a longer outline for the book, detailing about 25 separate chapters. I’d like to put together small teams for each of these chapters that will not only do in-depth research on their particular areas but will also make their work available to be posted upon publication of the book. We’re going to create separate Transformation Indexes for many of the chapters, which will certainly be a valuable resource and a challenge for investors. And now let’s look at what pension funds are going to look like over the next 20 years.

Midwestern Train Wreck
Four months ago we discussed the ongoing public pension train wreck in Illinois (see Live and Let Die). I was not optimistic that the situation would improve, and indeed it has not. The governor and legislature are still deadlocked over the state’s spending priorities. Illinois still has no budget for the fiscal year that began on July 1. Fitch Ratings downgraded the state’s credit rating last week. It’s a mess.

Because of the deadlock, Illinois is facing a serious cash flow crisis. Feeling like you’ve hit the jackpot through the Illinois lottery? Think again. State officials announced Wednesday that winners who are due to receive more than $600 won’t get their money until the state’s ongoing budget impasse is resolved. Players who win up to $600 can still collect their winnings at local retailers. More than $288 million is waiting to be paid out. For now the winners just have an IOU and no interest on their money (Fox).

As messy as the Illinois situation is, none of us should gloat. Many of our own states and cities are not in much better shape. In fact, the political gridlock actually forced Illinois into accomplishing something other states should try. Illinois has not issued any new bond debt since May 2014. Can many other states say that?

Unfortunately, that may be the best we can say about Illinois. The state delayed a $560 million payment to its pension funds for November and may have to delay or reduce another contribution due in December.

Illinois and many other states and local governments are in this mess because their politicians made impossible to keep promises to public workers. The factors that made them so impossible apply to everyone else, too. More people are retiring. Investment returns aren’t meeting expectations. Healthcare costs are rising. Other government spending is out of control.

Nonetheless, the pension problem is the thorniest one. State and local governments spent years waving generous retirement benefits in front of workers. The workers quite naturally accepted the offers. I doubt many stopped to wonder if their state or city could keep its end of the deal. Of course, it could. It’s the government.

Although state governments have many powers, creating money from thin air is, alas, not one of them. You have to be in Washington to do that. Now that the bills are coming due, the state’s’ inability to keep their word is becoming obvious. Now, I’m sure that many talented people spent years doing good work for Illinois. That’s not the issue here. The fault lies with politicians who generously promised money they didn’t have and presumed it would magically appear later.

On the other hand, retired public workers need to realize they can’t squeeze blood from a turnip. Yes, the courts are saying Illinois must keep its pension promises. But the courts can’t create money where none exists. At best, they can force the state to change its priorities. If pension benefits are sacrosanct, the money won’t be available for other public services. Taxes will have to go up or other essential services will not be performed. This is certainly not good for the citizens of Illinois. As things get worse, people will begin to move.

What happens then? Citizens will grow tired of substandard services and high taxes. They can avoid both by moving out of the state. The exodus may be starting. Crain’s Chicago Business reports: High end house  hunters in Burr Ridge have 100 reasons to be happy. But for sellers, that’s a depressing number. The southwest suburb has 100 homes on the market for at least $1 million, more than seven times the number of homes in that price range – 14 – that have sold in Burr Ridge in the past six months.

The town has the biggest glut by far of $1 million-plus homes in the Chicago suburbs, according to a Crain’s analysis. “It's been disquietingly slow, brutally slow, getting these sold,” said Linda Feinstein, the broker-owner of ReMax Signature Homes in neighboring Hinsdale. “It feels like the brakes have been on for months.”

We don’t know why these people want to sell their homes, of course, but they may be the smart ones.

They’re getting ahead of the crowd – or trying to. Think Detroit. I have visited there a few times over the last year, and the suburbs are really quite pleasant (except in the dead of winter, when I’d definitely rather be in Texas). But those who moved out of the city of Detroit and into the suburbs many decades ago had a choice, because Michigan’s finances weren’t massively out of whack. I’ve been to Hinsdale. It’s a charming community and quite upscale. It is an easy train commute to downtown Chicago.

Look at it this way: with what you know about Illinois public finances, would you really want to move into the state and buy an expensive home right now? I sure wouldn’t. That sharply reduces the number of potential homebuyers. The result will be lower home prices. I’m not predicting Illinois will end up like Detroit…...but I don’t rule it out, either. Further, more and more cities and counties around the country are going to be looking like Chicago. Wherever you buy a home, you really should investigate the financial soundness of the state and the city or town.

Pension Math Review
Political folly is not the only problem. Illinois and everyone else saving for retirement – including you and me – make some giant assumptions. Between ZIRP and assorted other economic distortions, it is harder than ever to count on a reasonable real return over a long period. Small changes make a big difference. Pension managers used to think they could average 8% after inflation over two decades or more. At that rate, a million dollars invested today turns into $4.7 million in 20 years. If $4.7 million is exactly the amount you need to fund that year’s obligations, you’re in good shape.

What happens if you average only 7% over that 20 year period? You’ll have $3.9 million. That is only 83% of the amount you counted on. At 6% returns you will be only 68% funded. At 5%, you have only 57% of what you need. At 4%, you will be only 47% of the way there.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.



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Friday, October 23, 2015

Another Government Ponzi Scheme Starts to Crack - Do You Depend on It?

By Nick Giambruno

Government employees get to do a lot of things that would land an ordinary citizen in prison. For example, it’s legal for them to threaten and commit offensive, rather than defensive, violence. They can take property from others without their consent. They spy on anyone’s email and bank accounts whenever they please. They go into trillions of dollars in debt and then stick the unborn with the bill. They counterfeit the currency. They lie with misleading statistics and use accounting wizardry no business could get away.

And this just scratches the surface…...

The U.S. government also gets to run a special type of Ponzi scheme. According to the Merriam-Webster dictionary a Ponzi scheme is.....An investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.

In the private sector, people who run Ponzi schemes are rightly punished for their fraud. But when the government runs a Ponzi scheme, something very different happens. It’s no secret that the Social Security system is effectively one giant Ponzi scheme.

Actually, I think it’s worse. That’s because the government uses force and the threat of force to coerce people into it. People don’t have the option to opt out. They either pay the tax for Social Security or someone with a gun will show up sooner or later. I imagine Bernie Madoff’s firm would have lasted a lot longer had he been able to operate this way.

This whole practice is particularly egregious for young people. They have no chance at collecting the future benefits the government has promised to them. But they’re hardly the only people that are going to be disappointed in the system, which will eventually break down.

There are simply too many people cashing out at the top and not enough people paying in… even with the government’s coercion. That’s a function of demographics, but also the economic reality in which there are fewer people with quality jobs for the government to sink its fangs into. I expect both of those trends to increase and strain the system.

Actually, it’s already starting to happen.

Recently, the government announced that there would be no Social Security benefit increase next year. That’s only happened twice before in the past 40 years. You see, the government links Social Security benefit increases to their own measure of inflation. If the government says “no inflation” then there are no benefit increases. It’s like letting a student grade his own paper.

So it’s no surprise that the official definition of inflation is not reflective of the real increases in the costs of living most people feel. Medical care costs are skyrocketing. Rent and food prices are reaching record highs in many areas. Electricity and utility costs are soaring. Taxes, of course, are going nowhere but up.

But the government says there’s no shred of inflation. In actuality, it amounts to a stealth decrease in benefits.
One reason for this is that they constantly change the way they calculate inflation so as to understate it. Free market analysts have long documented this sham. If you take a global view, it’s easy to see that fudging official inflation statistics is standard operating procedure for most governments.

Incidentally, governments and the financial media don’t even understand what inflation is in the first place.
To them, inflation means an increase in prices. But that is not at all how the word was originally used. Inflation initially meant an increase in the supply of money and nothing else. Rising prices were a consequent of inflation, not inflation itself.

It’s not being overly fussy to insist on the word’s proper usage. It’s actually an important distinction. The perversion of its usage has only helped proponents of big government. To use “inflation” to mean a rise in prices confuses cause and effect. More importantly, it also deflects attention away from the real source of the problem…central bank money printing. And that problem shows no signs of abating. In fact, I think the opposite is the case. The money printing is just getting started.

At least this is what we should prudently expect as long as the U.S. government needs to finance its astronomical spending, fueled by welfare and warfare policies. As long as the government spends money, it will find some way to make you pay for it - either through direct taxation, money printing, or debt (which represents deferred taxation/money printing).

It’s as simple as that.

Like most other governments that get into financial trouble, I think they’ll opt for the easy option…money printing. This has tremendous implications for your financial security. Central banks are playing with fire and are risking a currency catastrophe.

Most people have no idea what really happens when a currency collapses, let alone how to prepare. How will you protect your savings in the event of a currency crisis? This video we just released will show you exactly how. Click here to watch it now.
The article was originally published at internationalman.com.


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Thursday, October 22, 2015

The Government’s Fun with (Inflation) Numbers

By Tony Sagami


My normally super sweet baby sister barked at me like an angry dog when I told her that there simply isn’t any inflation in the US. “You need to go to the grocery store with me. You are completely out of touch with reality,” she snapped.   Geez. Excuse me!

My sister, however, should know. She has two boys—one teenager and one college student that still lives at home—with big appetites, so she spends a lot of time and money at her local grocery store.

The topic came up because of the latest Producer Price Index (PPI) numbers from the Labor Department, which said that prices at the wholesale level actually declined by 0.5% in September. Over the last 12 months through September, the PPI has dropped by 1.1%... that’s the eighth consecutive 12-month decrease in the index.


Even if you exclude food and energy—the so-called core prices were down 0.3% in September.
Is my sister crazy? That depends on whether you believe the government’s heavily massaged numbers or people like my sister and farmers. Here’s what I mean. While the Labor Department was spitting out its PPI numbers, the Wisconsin Farm Bureau Federation (WFBF) begged to differ.




The Wisconsin Farm Bureau Federation tracks the prices of key agricultural commodities that most American households use every day. Sure, the price of a gallon of milk may be slightly different in Texas than in Wisconsin… but not by that much, and the price trends are usually very similar.

Well, according to the WFBF, the prices of basic grocery staples are rising.


The bureau tracks the cost of 16 widely used food items to come up with its Marketbasket index. The newest semi annual survey of the 16 items rose to $53.37, up $1.41 or 2.7% compared with one year ago.
Nine of the 16 items surveyed increased in price while six decreased in price compared with WFBF’s 2015 spring survey. One item, apples, was unchanged.


“The survey’s meat items are the heaviest price pullers. As high-value items, they influence our survey’s overall price even if they only change slightly,” said Casey Langan of the WFBF. So my baby sister was right!

Moreover, the WFBF doesn’t have an ax to grind when it comes to inflation. It is simply reporting the prices of a static basket of commonly used food items. I don’t bring this up to prove how smart my sister is. Heck, any housewife in America could have told you the same thing. Moreover, my sister also complained about big price increases for pharmaceutical drugs, college tuition, and services like dry cleaning and automotive repair.

My points are that (a) you should always look at government produced numbers with a skeptical eye, and (b) understand that the government, particularly the Federal Reserve, uses these heavily massaged numbers to justify its agenda. For example, the lower the cost of living, the less the US government has to pay out in cost of living adjustments for Social Security and federal pension recipients.

And when it comes to interest rates, the Federal Reserve has proven that it doesn’t want to raise interest rates—and it will happily use the latest PPI numbers to prove its point that inflation isn’t a problem.
Fed officials have said they want to be “reasonably confident” inflation will move toward their 2% target before they raise interest rates. The latest PPI numbers will keep rates at zero for at least the rest of 2015 and well into 2016.

Daniel Tarullo, a member of the Fed’s Board of Governors, said last week that the Federal Reserve should not increase interest rates this year. “Right now my expectation is—given where I think the economy would go—I wouldn’t expect it would be appropriate to raise rates.”

Fellow Fed Governor Lael Brainard echoed that view and made the case for more patience last Monday.
Bottom line: You should absolutely believe the Fed when it says that it will “remain highly accommodative for quite some time.”

If you’re an income-focused investor, that conclusion has gigantic implications for how you should invest your money, and if you’re keeping your money in short term CDs, T-bills, and money funds in anticipation of higher rates….. you are making a big mistake.

Try my monthly newsletter, Yield Shark, for stock recommendations with high yield and great potential upside—with a 90 day money back guarantee.
Tony Sagami
Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.



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Thursday, October 15, 2015

This Unique Oil Stock is Offering A Huge Dividend Yield

By Justin Spittler

One of Casey Research's biggest calls this year is paying off.....…
In early August, E.B. Tucker, editor of The Casey Report, told subscribers how to profit from the world’s oversupply of oil. If you read financial newspapers for more than a week, you’ll notice that global oil production is near record highs. Last year, global oil output reached its highest level in at least twenty five years, according to the U.S. Energy Information Administration (EIA).

High oil prices were a big reason for the surge in production. Between 2011 and mid 2014, the price of oil hovered around $90/barrel. But oil peaked at $106 last June, and it’s been falling ever since. Today, a barrel of oil goes for about $45. Even though the price of oil has been cut in half, global oil production is still near all time highs. The Organization of the Petroleum Exporting Countries (OPEC), a cartel of 12 oil producing nations, is still pumping a record amount of oil. And it plans to increase production next year. In the U.S., oil supplies are still about 100 million barrels above their five year average.

E.B. explains why some countries have no choice but to keep pumping oil.....
Oil is the foundation of many countries’ economies. Take Venezuela, for example. Venezuela produces over 2.5 million barrels per day (BPD) of oil. Oil exports make up half of the country’s economic output. The country is so dependent on oil that cutting production would be economic suicide. This is happening across the globe. Giant state run oil companies continue to pump because it’s the only way for these countries to make money. This is why global oil production has not fallen even though the price of oil has been cut in half. In many areas, production has actually increased.

The extra oil has weighed on oil prices......
Weak oil prices have hammered virtually all oil companies…including the biggest oil companies on the planet. Profits for ExxonMobil (XOM), the largest U.S. oil company, fell 52% during the second quarter due to weak oil prices. Its stock is now down 24% since oil peaked last summer. Chevron (CVX), America’s second biggest oil company, earned its lowest profit in twelve years during the second quarter. Its stock price is down 34% since last summer’s peak. The entire industry is struggling. XOP, an ETF that holds the largest oil explorers and producers, has dropped 52% over the same period.

But oil tanker companies are making more money than they have in seven years...…
Unlike oil producers, oil tanker companies don’t need high oil prices to make big profits. That’s because they make money based on how much oil they move. Their revenues aren’t directly tied to the price of oil.
On Monday, Bloomberg Business explained why oil tankers are making the most money they’ve made in years. The world’s biggest crude oil tankers earned more than $100,000 a day for the first time since 2008. Ships hauling two million barrel cargoes of Saudi Arabian crude to Japan, a benchmark route, earned $104,256 a day, a level last seen in July 2008, according to data on Friday from the Baltic Exchange in London. The rate was a 13 percent gain from Thursday.

Casey Research’s favorite oil tanker company is cashing in on higher shipping rates...…
On August 13, E.B. Tucker told readers of The Casey Report about a company called Euronav (EURN).
According to E.B., Euronav is the best oil tanker company in the world. The company has one of the newest and largest fleets on the planet. Euronav’s sales more than doubled during the first half of the year.

The company’s EBITDA (earnings before taxes, interest, and accounting charges) quadrupled. And because Euronav’s policy is to pay out at least 80% of its profits as dividends, the company doubled its dividend payment last quarter.

Investors who acted on E.B.’s recommendation have already pocketed a 5% quarterly dividend. Based on its last two dividends, Euronav is paying an annualized yield of 12%. That’s not bad considering 10 Treasuries pay just 2.07% right now. Euronav’s stock is up big too. It has gained 15% in the past month alone...while the S&P just gained 1%.

E.B. thinks Euronav is just getting started.....
Euronav’s stock price has rocketed in recent weeks, but it’s going to go much higher. Euronav is a great business and the economics of shipping oil are improving. The market hasn’t fully caught on to how good things are in the industry right now. Shipping rates are ripping higher, but the supply of ships can’t keep up with demand. The largest supertankers can carry 2 million barrels of oil at a time. They measure three football fields long. These ships take years to build and cost about $100 million each. Shipping rates should stay high as the world works through this huge oil glut.

It’s a great time to own shipping companies. And Euronav is the best of the bunch. Euronav has shot up since E.B. recommended it, but the buying window hasn’t closed. In fact, Euronav is still below E.B.’s “buy under” price of $17.50. You can learn more about Euronav by taking The Casey Report for a risk free spin today. You’ll also learn about E.B.’s other top investment ideas, including a unique way to profit from the “digital revolution” in money. Click here to get started.



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Wednesday, October 14, 2015

The Options Market Has Changed and Here's Why

As you know, bigger changes in the market bring potential for bigger profits. This isn’t a new concept. However, I bring it up because our trading partner Doc Severson just released a new video tutorial detailing a major change making its way through the options.

Check This Out

In fact, Doc, a world renowned Options trader, traveled to Chicago to get a first hand account of what’s happening. And here’s why his trip is important to you:

He discovered that the big institutional investors aren’t gaining an advantage this time. Instead, the change underway is bringing a unique advantage to retail traders like you and me. About time, right? But unfortunately, too many traders are using strategies that don’t match today’s market conditions.

That’s why you must watch Doc’s presentation right away. He’s showing you how to adapt, so you can make a consistent weekly income as a trader and prepare for today’s “new normal” market. Doc gives you the full scoop in this tutorial.

Click here to watch....and of course it's free.

See you in the markets,
Ray @ The Crude Oil Trader

P.S. What we’ve seen lately with how the global economy has affected U.S. markets is only part of the story....Get the full story here.

Sunday, October 11, 2015

The Real Reason for the Refugee Crisis You Won’t Hear About in the Media

By Nick Giambruno

There’s a meme going around that the refugee crisis in Europe (the largest since World War II) is part of a secret plot to subvert the West. I completely understand why the locals in any country wouldn’t be happy about waves of foreigners pouring in. Especially if they’re poor, unskilled, and not likely to assimilate.

It leads to huge problems. Infrastructure gets strained. More people are sucking at the teat of the welfare system. The unwelcome newcomers compete for bottom of the ladder jobs. Things easily turn nasty and then turn violent. But the idea that the refugee crisis in Europe is part of a hidden agenda - rather than a predictable outcome - strikes me as strange. And it’s a notion that conveniently deflects blame away from the people and factors that deserve it.

Interventions Destabilize the Middle East

The civil war in Syria has turned the country into a refugee maker. Syria’s neighbors have reached their physical limit on their ability to absorb refugees. That’s one of the reasons so many are heading to the West. Lebanon has received over 1 million Syrian refugees. That’s an enormous number for a country with a population of only 4 million - a 25% increase. Jordan and Turkey also have millions of Syrian refugees.

They’re saturated.

The number of refugees heading to the West, by contrast, is in the hundreds of thousands. So far. But it’s not just Syria that’s sending refugees. Many more come from Iraq and Afghanistan, two other countries shattered by bungled Western military interventions. Then there are the refugees from Libya. A country the media and political establishment would rather forget because it represents another disastrous military decision. Actually, it’s not just Libyan refugees. It’s refugees from all of Africa who are using Libya as a transit point to reach Europe.

Before his overthrow by NATO, Muammar Gaddafi had an agreement with Italy, which is directly to Libya’s north, across the Mediterranean Sea. Gaddafi agreed to prevent refugees heading for Europe from using Libya as a transit point. It was an arrangement that worked. So it’s no shocker that when NATO helped a coalition of ambitious rebels overthrow the Gaddafi government, the refugee floodgates opened.
When there’s war, there are refugees. It’s a predictable outcome.

It’s like kicking a bees’ nest and being surprised that bees fly out. Nobody should be surprised when that happens. And nobody should be surprised that people are fleeing war zones in Libya, Syria, Iraq, and Afghanistan.

If Western governments didn’t want a refugee crisis, they shouldn’t have been so eager to topple those governments and destabilize those countries. The refugees should camp out in the backyards of the individuals who run those governments. I also have to mention the Saudis. They were very much involved in the Libyan war. They’ve also devoted themselves to ousting the Assad government in Syria, for geopolitical and sectarian reasons.

Then there’s the war in Yemen that the Saudis have sponsored. It’s another mess the media doesn’t discuss often. But it will likely produce even more refugees. The Saudis make no secret about not welcoming refugees, even though the Kingdom is a primary instigator of the wars that are forcing people to flee their homelands. One reason is the Saudis don’t want more people leeching off their welfare system, especially amid budget crunches from lower oil prices.

This brings up another interesting point. For the first time in decades, observers are calling into question the viability of the Saudi currency peg of 3.75 riyals per US dollar. The Saudi government spends a ton of money on welfare to keep its citizens sedated. But with lower oil prices cutting deep into government revenue, there’s less money to spend on welfare. Then there’s the cost of the wars in Yemen and Syria.

There’s a serious crunch in the Saudi budget. They’ve only been able to stay afloat by draining their foreign exchange reserves. That threatens their currency peg. The next clue that there’s trouble is Saudi officials telling the media that the currency peg is fine and there’s nothing to worry about. An official government denial is almost always a sign of the opposite. It’s like the old saying…“believe nothing until it has been officially denied.”

If there were a convenient way to short the Saudi riyal, I would do it in a heartbeat.

Don’t Give the Welfare State a Pass

It’s no coincidence that the refugees are flowing to the countries with the most generous welfare benefits, especially Germany and the Scandinavian nations. If there weren’t so many freebies in these countries, there wouldn’t be so many refugees showing up to collect them.

The whole refugee crisis was easily predictable. It was the foreseeable consequence of shortsighted interventions in the Middle East and the welfare state policies of nearby Europe. Instead of facing facts, blaming it all on a scheme to subvert the West conveniently deflects any responsibility from the authors of the mess.

If the individuals who run Western governments really wanted to solve the refugee problem, they would throttle way back on welfare state policies and then stay out of the Middle East free for all. It’s really as simple as that. But don’t count on the mainstream media to figure this out. They effectively operate as an organ of the State. I bet they’ll keep prescribing more of the same bad medicine that caused this crisis to begin with.

This will help to cover the tracks of the real perpetrators, and it will obscure other real problems. I expect the media to ramp up the “blame the foreigner” sentiment, as it helps the US and EU governments distract the anger of their citizens from the sputtering economy and the shrinking of their civil liberties. From the politicians’ perspective, it’s a win win. But it’s a lose lose for citizens hoping for accountable government.

And this brings up another uncomfortable truth for Americans and Europeans. The way the political and economic winds are blowing, things could get much worse. Central banks around the globe have created the biggest financial bubble in world history. The social and political implications of this bubble bursting are even more dangerous than the financial consequences.

An economic depression and currency inflation (perhaps hyperinflation) are very much in the cards. These things rarely lead to anything but bigger government, less freedom, and shrinking prosperity. Sometimes they lead to much worse.

One day the shoe could be on the other foot. We could see American and European refugees fleeing to South America or other havens to escape the problems in their home countries. It would be an ironic twist.
Now, this outcome isn’t inevitable. But the chance it will happen isn’t zero, either, and the risk seems to grow each day.

Because of these enormous risks in the financial system, we’ve published a groundbreaking, step by step manual that sets out the three essential measures all Americans should take right now to protect themselves and their families.

These measures are easy and straightforward to implement. You just need to understand what they are and how they keep you safe. New York Times best selling author Doug Casey and his team describe how you can do it all from home. And there’s still time to get it done without extraordinary cost or effort.

Normally, this get it done manual retails for $99. But I believe it’s so important for you to act now to protect yourself and your family that I’ve arranged for anyone who is a resident of the U.S. to get a free copy.

Click here to secure your free copy now.


The article was originally published at internationalman.com.


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Thursday, October 8, 2015

How the Chinese Will Establish a New Financial Order

By Porter Stansberry

For many years now, it’s been clear that China would soon be pull­ing the strings in the U.S. financial system. In 2015, the American people owe the Chinese government nearly $1.5 trillion.

I know big numbers don’t mean much to most people, but keep in mind… this tab is now hundreds of billions of dollars more than what the U.S. government collects in ALL income taxes (both cor­porate and individual) each year. It’s basically a sum we can never, ever hope to repay – at least, not by normal means.
Of course, the Chinese aren’t stupid. They realize we are both trapped.

We are stuck with an enormous debt we can never realistically repay… And the Chinese are trapped with an outstanding loan they can neither get rid of, nor hope to collect. So the Chinese govern­ment is now taking a secret and somewhat radical approach.

China has recently put into place a covert plan to get back as much of its money as possible – by extracting colossal sums from both the United States government and ordinary citizens, like you and me.

The Chinese “State Administration of Foreign Exchange” (SAFE) is now engaged in a full fledged currency war with the United States. The ultimate goal – as the Chinese have publicly stated – is to cre­ate a new dominant world currency, dislodge the U.S. dollar from its current reserve role, and recover as much of the $1.5 trillion the U.S. government has borrowed as possible.

Lucky for us, we know what’s going to happen. And we even have a pretty good idea of how it will all unfold. How do we know so much? Well, this isn’t the first time the U.S. has tried to stiff its foreign creditors.

Most Americans probably don’t remember this, but our last big currency war took place in the 1960s. Back then, French President Charles de Gaulle denounced the U.S. government’s policy of print­ing overvalued U.S. dollars to pay for its trade deficits… which allowed U.S. companies to buy European assets with dollars that were artificially held up in value by a gold peg that was nothing more than an accounting fiction.

So de Gaulle took action...…

In 1965, he took $150 million of his country’s dollar reserves and redeemed the paper currency for U.S. gold from Ft. Knox. De Gaulle even offered to send the French Navy to escort the gold back to France.

Today, this gold is worth about $12 billion.

Keep in mind… this occurred during a time when foreign govern­ments could legally redeem their paper dollars for gold, but U.S. citizens could not. And France was not the only nation to do this, Spain soon re­deemed $60 million of U.S. dollar reserves for gold, and many other nations followed suit. By March 1968, gold was flowing out of the United States at an alarming rate.

By 1950, U.S. depositories held more gold than had ever been assembled in one place in world history (roughly 702 million ounces). But to manipulate our currency, the U.S. government was willing to give away more than half of the country’s gold. It’s estimated that during the 1950s and early 1970s, we essentially gave away about two thirds of our nation’s gold reserves, around 400 million ounces, all because the U.S. government was trying to defend the U.S. dollar at a fixed rate of $35 per ounce of gold.

In short, we gave away 400 million ounces of gold and got $14 billion in exchange. Today, that same gold would be worth $620 billion, a 4,330% difference. Incredibly stupid, wouldn’t you agree? This blunder cost the U.S. much of its gold hoard. When the history books are finally written, this chapter will go down as one of our nation’s most incompetent political blunders. Of course, as is typical with politicians, they managed to make a bad situation even worse.

The root cause of the weakness in the U.S. dollar was easy to understand. Americans were consuming far more than they were producing. You could see this by looking at our government’s annual deficits, which were larger than ever and growing… thanks to the gigantic new welfare programs and the Vietnam “police ac­tion.” You could also see this by looking at our trade deficit, which continued to get bigger and bigger, forecasting a dramatic drop (eventually) in the value of the U.S. dollar.

Of course, economic realities are never foremost on the minds of politicians – especially not Richard Nixon’s. On August 15, 1971, he went on live television before the most popular show in Ameri­ca (Bonanza) and announced a new plan. The U.S. gold window would close effective immediately – and no nation or individual anywhere in the world would be allowed to exchange U.S. dollars for gold. The president announced a 10% surtax on ALL imports!

Such tariffs never accomplish much in terms of actually altering the balance of trade, as our trading partners simply put matching charges on our exports. So what actually happens is just less trade overall, which slows the whole global economy, making the impact of inflation worse. Of course, Nixon pitched these moves as patriotic, saying: “I am determined that the American dollar must never again be a hos­tage in the hands of international speculators.”

The “sheeple” cheered, as they always do whenever something is done to “stop the speculators.” But the joke was on them. Within two years, America was in its worst recession since WWII… with an oil crisis, skyrocketing unemployment, a 30% drop in the stock market, and soaring inflation. Instead of becoming richer, millions of Americans got a lot poorer, practically overnight.

And that brings us to today…..
Roughly 40 years later, the United States is in the middle of anoth­er currency war. But this time, our main adversary is not Europe. It’s China. And this time, the situation is far more serious. Our nation and our economy are already in an extremely fragile state. In the 1960s, the American economy was growing rapidly, with decades of expansion still to come. That’s not the case today.

This new currency war with China will wreak absolute havoc on the lives of millions of ordinary Americans, much sooner than most people think. It’s critical over the next few years for you to understand exactly what the Chinese are doing, why they are doing it, and the near certain outcome.
Regards,
Porter Stansberry

(This is an adaptation of an article that was originally published in Porter's Investment Advisory.)
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The article was originally published at internationalman.com.


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Mrs. Magoo, Deflation, and Commodity Woes

By Tony Sagami 

Did you read my September 22 issue? Or my July 14 column? If you did, you could have avoided the downdraft that has pulled down stocks all across the transportation sector or even made a bundle, like the 100% gain my Rational Bear subscribers made by buying put options on Seaspan Corporation, the largest container shipping company in the world.


Don’t worry, though. Transportation stocks still have a long ways to fall, so it’s not too late to sell any trucking, shipping, or railroad stock you may own—or profit from their continued fall through shorting, put options, or inverse ETFs. This chart of the Dow Jones Transportation Average validates my negative outlook on all things transportation and shows why we’ve been so successful betting against the “movers” of the US economy.


However, the bear market for transportation stocks is far from finished.

Federal Express Crashes and Burns

Federal Express, which is the single largest weighting of the Dow Jones Transportation Average at 11.6%, delivered a trifecta of misery:
  1. Missed on revenues
     
  2. Missed on earnings
     
  3. Lowered 2016 guidance

I’m not talking about a small miss either. FedEx reported profits of $2.26 per share, well below the $2.46 Wall Street was expecting. Moreover, the company should benefit from having one extra day in the quarter, which makes the results even more disappointing.

What’s the problem?

“Weak industry demand,” according to FedEx. By the way, both Federal Express and United Parcel Service are good barometers of overall consumer spending/confidence, so that should tell you something about the (deteriorating) state of the US economy. Oh, and Federal Express announced that it will increase its rates by an average of 4.9% beginning in January 2015. Yeah, I bet that rate increase will really help with that already weak demand. The decline is even more troublesome when you consider that gasoline/diesel prices have fallen like a rock this year.

Speaking of Falling Commodity Prices

Oil, which dropped by 23% in the third quarter, isn’t the only commodity that’s falling like a rock.
  • Copper prices plunged to a six-year low.
     
  • Aluminum prices have also dropped to a six year low.
  • Coal prices have fallen 40% since the start of 2014.
     
  • Minerals aren’t the only commodities that are dropping. Sugar hit a 7-year low in August.
Commodities across the board are lower; the Thomson Reuters CoreCommodity CRB Index of 19 commodities was down 15% for the quarter and 31% over the last 12 months. Since peaking in 2008, the CRB Index is down 60%.

That’s why anybody and anything associated with the commodity food chain has been a terrible place to invest your money. Just last week:

Connecting the Dots #1: Caterpillar announced that it was going to lay off 4,000 to 5,000 people this year. That number could reach 10,000 by the end of 2016, and the company may close more than 20 plants. Layoffs are nothing new at Caterpillar—the company has reduced its total workforce by 31,000 workers since 2012.


The problem is lousy sales. Caterpillar just told Wall Street to lower its revenues forecast for 2016 by $1 billion. $1 billion!

How bad does the future have to look for a company to suddenly decide that it is going to lose $1 billion in sales? “We are facing a convergence of challenging marketplace conditions in key regions and industry sectors, namely in mining and energy,” said Doug Oberhelman, Caterpillar chairman and CEO.

Like the layoffs, vanishing sales are nothing new. 2015 is the third year in a row of shrinking sales, and 2016 will be the fourth. Caterpillar, by the way, isn’t the only heavy-equipment company in deep trouble.

Connecting the Dots #2: Last week, UK construction machinery firm and Caterpillar competitor JCB announced that it will cut 400 jobs, or 6% of its workforce, because of a massive slowdown in business in Russia, China, and Brazil.


“In the first six months of the year, the market in Russia has dropped by 70%, Brazil by 36%, and China by 47%,”said JCB CEO Graeme Macdonald. Caterpillar, the world’s biggest maker of earthmoving equipment, cut its full-year 2015 forecast in part because of the slowdown in China and Brazil.

Connecting the Dots #3: BHP Billiton announced that it is chopping its capital expenditure budget again to $8.5 billion, a stunning $10 billion below its 2013 peak. Moreover, BHP Billiton currently only has four projects in the works, two of which are almost complete, compared to 18 developments it had going just two years ago.


Overall, the mining industry—according to SNL Metals and Mining—is going to spend $70 billion less in 2015 less than it did in 2012. And in case you think metals prices are going to rebound, consider that the previous bear market for mining lasted from 1997 to 2002, which suggests at least another two years of shrinking budgets and pain.

Repeat After Me!

I have said this many, many times before, but repeat after me.....ZIRP (zero interest rate policy) and QE are DEFLATIONARY!

The reason is that cheap (almost free) money encourages over-investment as well as keeping zombie companies alive that should have gone out of business. Both of those forces are highly deflationary, and unless you think that Mrs. Magoo (Janet Yellen) is going to aggressively start jacking up interest rates, you better adjust your portfolio for years and years and years of deflation.

While the rest of the investment world has been struggling, here at Rational Bear, we’ve been doing just fine.

Here are the results of six recent trades: 38% return from puts on an oil services fund, 16.6% return from an ETF that shorts industry sectors, 200% return from puts on an auction house, 50% return from puts on a jeweler, 50% return from puts on a social media giant and 100% return from puts on a container shipping company.

And we still have more irons in the fire. It’s time to be bearish, so I suggest you give Rational Bear a try—like it or your money back.
Tony Sagami
Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.



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