Fed Comments Help To Settle Global Market Expectations

The recent Fed comments should have helped settle the global market expectations related to if and when the Fed will start raising rates and/or taking further steps to curb inflation trends. 

Additionally, the Fed has been telegraphing its intentions very clearly over the past few months, providing ample time for traders and investors to alter their approach to pending monetary tightening actions. Read the full Fed Statement here.

In my opinion, foreign markets are more likely to see increased risks and declining price trends for two reasons. 

First, at risk nations/borrowers struggle to reduce debt levels. 

Second, foreign market traders/investors struggle to adapt to the transition away from speculative “growth” trends. 

I think the U.S. Dollar may continue to show strength over the next 4+ months as the foreign traders pile into U.S. economic strength while the Fed initiates their tightening actions.

So it makes sense to me that global markets would recoil from Fed tightening while debt-heavy corporations/nations seek relief from rising debt obligations....Continue Reading Here.

Bonds And Stimulus Are Driving Big Sector Trends And Shifting Capital

Falling Bonds and rising yields are creating a condition in the global markets where capital is shifting away from Technology, Communication Services and Discretionary stocks have suddenly fallen out of favor, and Financials, Energy, Real Estate, and Metals/Miners are gaining strength. The rise in yields presents an opportunity for Banks and Lenders to profit from increased yield rates. In addition, historically low interest rates have pushed the Real Estate sector, including commodities towards new highs.

We also note Miners and Metals have shown strong support recently as the US Dollar and Bonds continue to collapse. The way the markets are shifting right now is suggesting that we may be close to a technology peak, similar to the DOT COM peak, where capital rushes away from recently high flying technology firms into other sectors (such as Banks, Financials, Real Estate, and Energy).

The deep dive in Bonds and the US Dollar aligns with the research we conducted near the end of 2020, which suggested a market peak may set up in late February. We also suggested the markets may continue to trade in a sideways (rounded top) type of structure until late March or early April 2021. Our tools and research help us to make these predictions nearly 4 to 5+ months before the markets attempt to make these moves....You Can Read This Research Here.

Global Markets Break Hard to the Downside - Watch These Support Levels

Research Highlights....

• New reports of widespread financial corruption likely triggered the current sell off.

• Watch out for market support levels to see if this is a short term correction or the start of a downtrend.

• Support for the DOW is just above 26,000.

• Support for the SP500 is around 3,100.

U.S. and global markets were already under pressure over the past few weeks related to COVID-19 issues and global economic expectations. The technology sector had driven valuations to levels not seen since the DOT COM bubble near the end of August and many of the US Indexes has reached or breached all time highs again.

My research team and I warned followers to “stay cautious” throughout much of the price rally as our proprietary price modeling systems suggests the rally was isolated and not organic. The U.S. Fed has spewed capital into the markets and speculative traders piled into the “excess phase” of the market to drive price levels higher. Take a moment to review these recent research posts to learn more....Continue Reading Here.

VIX Spikes Showing Massive Volatility Increase

Today, we are going to revisit some of our earlier analysis regarding the VIX and our beloved VIX Spikes.  Over the past 3+ months, we’ve been predicting a number of VIX Spikes based on our research and cycle analysis.  Our original analysis of the VIX Spike patterns has been accurate 3 out of 4 instances (75%).  Our analysis has predicted these spikes within 2 to 4 days of the exact spike date.  The most recent VIX Spike shot up 57% from the VIX lows.  What should we expect in the future?

Well, this is where we should warn you that our analysis is subjective and may not be 100% accurate as we can’t accurately predict what will happen in the future. Our research team at Active Trading Partners.com attempt to find highly correlative trading signals that allow our members to develop trading strategies and allow us to deliver detailed and important analysis of the US and global markets.

The research team at ATP is concerned that massive volatility is creeping back into the global markets. The most recent VIX spike was nearly DOUBLE the size of the previous spike. Even though the US markets are clearly range bound and rotating, we expect them to stay within ranges that would allow for the VIX to gradually increase through a succession of VIX spike patterns in the future.

Let’s review some of our earlier analysis before we attempt to make a case for the future. Our original VIX Spike article indicated we believed a massive VIX spike would happen near June 29th. We warned of this pattern nearly 3 weeks ahead of the spike date. Below, you will see the chart of the VIX and spikes we shared with our members. This forecast was originally created on June 7th and predicted potential spikes on June 9th or 12th and June 29th.

What would you do if you knew these spikes were happening?

Currently, we need to keep in mind the next VIX Spike Dates

Sept 11th or 12th and finally Sept 28th or 29th.

Our continued research has shown that the US markets are setting up for a potential massive Head-n-Shoulders pattern (clearly indicated in this NQ Chart). The basis of this analysis is that the US markets are reacting to Political and Geo-Economic headwinds by stalling/retracing. The rally after the US Presidential election was “elation” regarding possibilities for increased global economic activities. And, as such, we have seen an increase in manufacturing and GDP output over the past 6+ months. Yet, the US and global markets may have jumped the gun a bit and rallied into “hype” setting up a potential corrective move.

Currently, the NQ would have to fall an additional 4.5% to reach the Neck Line of the Head-n-Shoulders formation. One interesting facet of the current NQ chart is that is setting up in a FLAG FORMATION that would indicate a massive breakout/breakdown is imminent. The cycle dates that correspond to this move are the September 11th or 12th move.

Please understand that we are attempting to keep you informed as to the potential for a massive volatility spike in the US and Global markets related to what we believe are eminent Political and Geo-Economic factors. Central Banks have just met in Jackson Hole, WY and have been discussing their next moves as well as the US Fed reducing their balance sheets. Overall, the US economy appears to show some strength, yet as we have shown, delinquencies have started to rise and this is not a positive sign for a mature economic cycle. Expectations are that the US Fed will attempt another one or two rate raises before the end of 2017. Our analysis shows that Janet Yellen should be moving at a snail’s pace at this critical juncture.

So, now we get to the VIX Spike Data!

The last, most recent, VIX Spike was nearly DOUBLE the size of the previous Spike. This is an anomaly in the sense that the VIX has, with only a few exceptions, continued to contract as the global central banks continued to support the world’s economies. In other words, smooth sailing ahead as long as the global banks were supplying capital for the recovery.

Now that we are at a point where the central banks are attempting to remove capital from their balance sheets while raising rates and dealing with debt issues, the markets are looking at this with a fresh perspective and the VIX is showing us early warning signs that massive volatility may be reentering the global markets. Any future VIX Spike cycles that continue to increase in range would be a clear indication that FEAR is entering the markets again and that debt, contraction and decreased consumer participation are at play.

I don’t expect you to fully understand the chart and analysis below, but the take away is this. Pay attention to these dates: September 11, September 28 and October 16. These are the dates that will likely see increased price volatility associated with them and could prompt some very big moves.

This analysis brings us to an attempt at creating a conclusion for our readers. First, our current analysis of the Head-n-Shoulders pattern in the NQ is still valid. We do not have any indication of a change in trend or analysis at this moment. Thus, we are still operating under the presumption that this pattern will continue to form. Secondly, the current VIX spike aligns perfectly with our analysis that the markets are becoming more volatile as the VIX WEDGE tightens and as the potential for the Head-n-Shoulders pattern extends. Lastly, FEAR and CONCERN has begun to enter the market as we are seeing moves in the Metals and Equities that portend a general weakness by investors.

We will add the following that you won’t likely see from other researchers – the time to act is NOT NOW. Want to know why this is the case and why we believe our analysis will tell us exactly when to act to develop maximum profits from these moves?

Join the Active Trading Partners to learn why and to stay on top of these patterns as they unfold. We’ve been accurate with our VIX Spike predictions and we will soon see how our Head and Shoulders predictions play out. We’ve already alerted you to the new VIX Spike dates (these alone are extremely valuable). We are actively advising our ATP members regarding opportunities and trading signals that we believe will deliver superior profits. Isn’t it time you invested in your future and prepared for these moves?

Join the Active Trading Partners HERE today and Join a team dedicated to your success.

The Dancing Bears

By Jeff Thomas

In the early 2000s, I recommended to associates that we were in for a major gold boom. Most thought that this was a ridiculous suggestion and didn’t buy a single ounce. I continued to recommend the purchase of gold regularly over the ensuing years, and the price continued to rise. Only in 2011 did they start to buy, at a time when gold was peaking. We were due for a correction and in late 2011, it arrived. For several years, the price has remained in the neighbourhood of $1,200—roughly the price it needs to be to bother removing it from the ground.

During that time, gold has periodically risen a bit, then gotten knocked down again. It’s understandable that this should happen. Central banks have a stake in holding down the gold price, since a rising gold price makes it appear more attractive than storing cash in banks. We’ve reached the point that the central banks have run out of tricks to float the economy and we’re already past due for a crash.

But crashes don’t always occur as soon as they become logical. As long as the public can be fooled into remaining confident in the system, a doomed economy can limp along for a bit before toppling. Statistics on unemployment and inflation can be fudged (and they have been). The stock market can be falsely pumped up (and it has been) in order to create the illusion that all is well. These factors, taken together with knocking down the price of gold periodically, helps to convince people that they should keep their money in cash and their cash in the bank, not in gold.

Just as in 2000, the number of people who understand that gold is not the equivalent of a stock but a store of wealth during dramatically changing times is quite small—certainly less than 1% and more likely less than 1/10th of 1%. Those that possess this understanding tend to hold gold long-term and are relatively unconcerned about fluctuations—even if they’re over $100 in a given month. They’re in it for the long haul and believe that, eventually, gold will rise dramatically and may well be the only safe haven after a crash.

But let’s go back to those speculators that waited until gold had risen dramatically before jumping on board the gold train. During the last four-year period, whenever gold rose as a result of economic and political developments, many of them would buy in once more, after it had risen significantly. Then, when it had been knocked down again, they tended to sell—often at the new bottom.

Of course, this behaviour is not limited just to the purchase of gold. In fact, a very high percentage of investors “play” the stock market in this way. They wait until everyone and his dog is buying in and the price is peaking, often buying on margin in order to maximize their positions. Then, when the bubble pops, they tend to ride the market down, hoping in vain that the price will return at least to what it was when they bought in. In essence, they tend to buy high and sell low almost every time.

The gold bears—those investors who don’t truly understand that gold is a very different animal from stocks—typically dislike gold but buy high when it becomes trendy to do so and sell low after it’s been knocked down. This dance is guaranteed to cause the gold bears to lose money time after time.

The dance is sometimes described as “chasing the market,” or “following the trends.” Brokers keep the dance going by advising their clients of established trends, telling them that they’re “missing out if they don’t get in now.” They serve as the market’s equivalent of a caller in a square dance: “Swing your client to and fro—watch his investment dollars go.”

Just as few investors understand the economic nature of gold, they also tend to overlook the fact that the broker doesn’t benefit from the success of the client—he makes his money when the client buys and sells frequently. So, of course his advice is going to be for the client to keep dancing.

So, will this dance go on as it is, ad infinitum? Well, no. There will be a dramatic change following a crash in the markets. Following any major crash, a panic occurs and whatever money is left on the table scrambles to find a new (hopefully safe) home. Following the coming crash, a portion of that money will head into gold. The price will rise dramatically, very possibly to such a degree that it can no longer be easily knocked down by the central banks.

At first the gold bears will assume that it’s an anomaly. Then, as gold passes $1,500, some will dip their toes in. As it passes $1,800, some will wade in. Beyond $2,000, this trend will strengthen quite a bit. As the crash deepens, stocks will tumble further. The bond bubble may also pop, increasing gold’s shine. At some point, bankers may begin to freeze accounts, create bank holidays, and/or confiscate deposits. At that point, gold will head into its long-predicted mania phase and the bears will be falling over each other, chasing the buying trend.

Gold will rise to a logical price in keeping with its value as a hedge against a collapsing economy. At that point, it would make sense for it to stop, but that’s not what will happen. Those who understand gold will cease their purchases and sit on what they have. But then a new dance will begin. The bears will become decidedly bullish. It’s important to note that, at this point, they will not fully understand why gold is rising so dramatically; they’ll just know that it is. They’ll want to get in on the gold rush and will do whatever they have to in order to keep buying.

They’ll find that physical gold is in short supply, as traditional holders are unwilling to sell, seemingly at any price. Potential buyers will offer $50 above spot, then $100 above spot, then more. They’ll additionally buy on margin in order to increase their position. It will be at this point that the mania will take hold. Irrationally high prices will become the new norm. How high will it go? $10,000? $20,000? Impossible to say. It will rise as high as desperation makes it rise, and we cannot now determine what that level of desperation will be.

A new bubble will be created, but this time, it won’t be in stocks or bonds. It’ll be in gold and, like all bubbles, it will eventually pop. This will occur when those who understand the nature of gold recognize that the price has far exceeded what’s logical and, as much as they value gold, they’ll sell a portion of their holdings and use the proceeds to invest in whatever assets have already bottomed and have nowhere to go but up.

They’re likely to retain a portion of their gold holdings for the same reason they always have, but will be happy to release a portion when it becomes significantly overvalued. This will cause the gold bubble to pop and the gold bears, who have recently become bulls, will wonder where it all went wrong. At this point, they still won’t understand gold; they’ll simply have chased yet another trend and lost.

So, is there a moral here? Well, if so, it’s simply that an investor should not become involved in a market that he doesn’t understand. Nor should he trust his broker to understand it for him. Ironically, as long as there have been markets, there have been those who go out on the dance floor without first learning the dance. A great deal of profit will be made by some gold investors, but the majority are likely to leave the floor with empty dance cards.

Regards,
Jeff Thomas

Editor’s Note: Gold is crisis insurance. Without it, you’re highly vulnerable. And there’s a good chance the next financial crisis could wipe you out.

New York Times best selling author Doug Casey thinks that crisis is coming soon. He shares all the details in this urgent video. Click here to watch it now.

The article The Dancing Bears was originally published at caseyresearch.com

The Subprime Loan Crisis Is Back…Here’s What It Could Mean for the Economy

By Justin Spittler

Subprime loans are going bad again. A “subprime” loan is a loan made to someone with bad credit. If the term sounds familiar, it’s because lenders issued millions of subprime loans during the early to mid-2000s. Banks made these risky loans thinking housing prices would “never fall.” When they did, subprime borrowers stopped paying their mortgages. The U.S. housing market collapsed, triggering the worst economic downturn since the Great Depression.

These days, lenders aren’t making as many reckless mortgages. But subprime lending is alive and well in the auto market. Since the financial crisis, subprime auto lending has exploded. According to Experian, subprime auto loans now make up more than 20% of all U.S. auto loans. Millions of Americans with bad credit now own cars they should have never bought in the first place. Risky subprime loans have also made the auto loan market incredibly fragile.

Right now, people are falling behind on their car loans at an alarming rate. As you'll see, this isn't just a big problem for lenders and car companies. It could also spell trouble for the entire U.S. economy.

Subprime auto loan delinquencies are skyrocketing…..
CNBC reported on Friday:

Delinquencies of at least 60 days for subprime auto loans are up 13 percent month over month for July, according to Fitch Ratings, and 17 percent higher from the same period a year ago.

Folks with good credit are falling behind on their car loans too. CNBC continues:

Even prime delinquencies are on the rise — Fitch Ratings' survey said that last month's prime auto loans were 21 percent more delinquent than in July 2015.

Prime loans are loans made to people with good credit.

The auto industry is preparing for more delinquencies…..
Last month, Ford (F) and General Motors (GM) warned that rising delinquencies could hurt their businesses in the second half of this year.
According to USA Today, both giant carmakers have set aside millions of dollars to cover potential losses:

In a quarterly filing with the Securities and Exchange Commission, Ford reported in the first half of this year it allowed $449 million for credit losses, a 34% increase from the first half of 2015.
General Motors reported in a similar filing that it set aside $864 million for credit losses in that same period of 2016, up 14% from a year earlier.

Investors who own subprime loans are taking heavy losses.....

USA Today reported on Thursday:

[T]hese loans are packaged into bundles which are sold to investors, much like mortgages were packaged into bundles a decade ago before rising interest rates caused many of them to default, eventually triggering the deepest economic crisis since the Great Depression. The annualized net loss rate — the percentage of those subprime loan bundles regarded as likely to default — rose 7.39% in July, up 28% from July 2015.

You may recall that Wall Street did the same thing with mortgages during the housing boom. They made securities from a bunch of bad mortgages. They marked them as safe and then sold them to investors. When the underlying mortgages went bad, folks who owned these securities suffered huge losses. These dangerous products allowed the housing crisis to turn into a full-blown global financial crisis.

By itself, a collapse of the auto loan market probably won’t trigger a repeat of the 2008 financial crisis..…

That’s because the auto loan market is much smaller than the mortgage market. The value of outstanding auto loans is “only” about $1 trillion. While that’s an all-time high, the auto loan market comes nowhere close to the $10 trillion residential mortgage market. Still, we’re keeping a close eye on the auto loan market.

If Americans are struggling to pay their car loans, they’re going to have trouble paying their mortgages, student loans, and credit cards too. This would obviously create problems for lenders and credit card companies. It will also hurt companies that depend on credit to make money.

E.B. Tucker, editor of The Casey Report, is shorting one of America’s most vulnerable retailers..…
In June, E.B. shorted (bet against) one of America’s biggest jewelry companies. According to E.B., credit customers make up 62% of its customers. These customers are 350% more valuable to the company than cash customers.

In other words, this company depends heavily on credit. This is a huge problem…and will only get worse as more folks continue to fall behind on their credit card bills—or stop paying them altogether. This is already happening at the company E.B shorted. He explained in the June issue of The Casey Report:

And the company is facing another problem…consumers failing to pay back their loans. From 2014 to fiscal 2016, its annual bad debt expenses rose from $138 million to $190 million. That’s a 30% increase. Over the same period, credit sales grew by only 20%. That means bad debt expenses rose 50% faster than credit sales.

He warned that “tough times are coming for the jewelry business.”

E.B.’s call was spot on..…
Last Thursday, the company reported bad second quarter results. For the second straight quarter, the company’s earnings fell short of analysts’ estimates. The company’s stock plummeted 13% on the news. It’s now down 10% since E.B. recommended shorting it in June. But E.B. says the stock is headed even lower:

We think there’s more pain to come as credit financing dries up…sales continue to drop…and more loans go unpaid.

You can learn more about this short by signing up for The Casey Report. If you act today, you can begin for just $49 a year. Watch this short video to learn how.

This is easily one of the best deals you'll come across in our industry..…
That’s because Casey readers are crushing the market. E.B.’s portfolio is up 19% this year. He’s beat the S&P 500 3-to-1. What’s more, Casey Report readers are set up to make money no matter what happens to the economy—and that’s never been more important. To learn why, watch this short presentation.

Chart of the Day

Not all dividend-paying stocks are safe to own..…

Today’s chart compares the annual dividend yield of the U.S. 10-year Treasury with the annual dividend yield of the S&P 500. Right now, 10 years are paying about 1.5%. Companies in the S&P 500 are yielding 2.0%.

You can see the S&P 500 almost never yields more than 10 years. It’s only happened two other times since 1958. The first time was during the 2008 financial crisis. The other time was just after the recession.
If you’ve been reading the Dispatch, you know the Federal Reserve is partly responsible for this. For the past eight years, the Fed has held its key interest rate near zero. This caused bond yields to crash. With Treasuries yielding next to nothing, many investors have bought stocks for income. But there’s a problem.

Companies in the S&P 500 are paying out $0.38 for every $1.00 they make in earnings. That’s close to an all time high. About 44 companies in the S&P 500 are paying out more in dividends than they earned over the past year. Meanwhile, corporate earnings have been in decline since 2014. Clearly, companies can’t continue to pay out near-record dividends for much longer.

As we explained yesterday, some companies may cut their dividends. This could cause certain dividend-paying stocks to crash. Some investors could see years’ worth of income disappear in a day. If you own a stock for its dividend, make sure the company can keep paying you even if the economy runs into trouble. We like companies with healthy payout ratios, little or no debt, and proven dividend track records.

The article The Subprime Loan Crisis Is Back…Here’s What It Could Mean for the Economy was originally published at caseyresearch.com.

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Why These Huge Bank Stocks Could Go to Zero

By Justin Spittler

Europe’s banking system looks like it’s about to implode. As you probably know, Europe has serious problems right now. Its economy is growing at its slowest pace in decades. Policymakers are now more desperate than ever and are on the verge of introducing more "stimulus" measures. And Great Britain just voted to leave the European Union (EU).

These are all major concerns. But Europe’s biggest problem is its banking system. Over the past year, the Euro STOXX Banks Index, which tracks Europe’s biggest banks, has plummeted 46%. Deutsche Bank (DB) and Credit Suisse (CS), two of Europe’s most important banks, are down 63%. Both are trading at all time lows. We've warned you to stay away from these stocks. As we explained two weeks ago, Europe’s banking system is a complete disaster.

And it’s only getting worse by the day..…

European bank stocks have crashed over the past couple days. Yesterday, every major European bank stock ended the day down. Several fell more than 5%. A few plunged more than 10%. These are giant declines. Remember, these banks are the pillars of Europe’s financial system. Today, we’ll explain why this banking crisis could reach you even if you don’t live in Europe. But first, let’s look at why European bank stocks are crashing.

Europe’s banking system has major problems..…
Europe’s economy is barely growing. And negative interest rates are killing European banks. Regular readers know negative rates are a radical government policy. The European Central Bank (ECB) introduced them in 2014, thinking they would “stimulate” Europe’s economy. You see, negative rates basically turn your bank account upside down.

Instead of earning interest on your money in the bank, you pay the bank to hold your money. The geniuses at the ECB thought they could force people to spend more money by “taxing” their savings. But Europeans aren’t spending more money right now. They’re pulling cash out of the banking system and sticking it under their mattresses…where negative rates can’t get to it.

Negative rates are also eating into European bank profits…
Today, the ECB’s key interest rate is at -0.4%. This means European banks must pay €4 for every €1,000 they keep with the ECB. That might not sound like much. But it’s a big problem for European banks that oversee trillions of euros. According to Bank of America (BAC), European banks could lose as much as €20 billion per year by 2018 if the ECB keeps rates where they are.

The Euro STOXX Banks Index plunged 2.8% on Monday..…
Yesterday, it fell another 4.9%. The selloff hit everywhere from Frankfurt to Milan. Spanish banking giant Santander closed the day down 5%. The Bank of Ireland fell 8%. And Commerzbank AG, one of Germany’s biggest lenders, fell 9% to a record low. Commerzbank’s stock plunged after it said negative rates were eating into its profits.

Meanwhile, Deutsche Bank and Credit Suisse fell 3.7% and 4.7%, respectively. Investors dumped these stocks after learning that both are going to be dropped from the Euro STOXX 50 index, Europe’s version of the Dow Jones Industrial Average.

Italian stocks fell even harder yesterday..…
UniCredit, Italy’s largest bank, fell 7% before trading on its stock was halted. Regulators stopped the stock from trading due to “concerns about its bad loan portfolio.” The stock has plunged 72% over the past year. Bank Popolare di Milano, another large Italian bank, fell 10%. And Banca Monte dei Paschi di Siena, Italy’s third biggest bank, plummeted 16%. Monte Paschi plunged after a banking watchdog said it was in the worst shape of all European banks. It’s down 85% over the past year.

Italy is ground zero of Europe’s banking crisis..…
Right now, Italy’s banks are sitting on about €360 billion in “bad” loans, or loans that trade for less than book value. That’s almost twice as many bad loans as Italian banks had in 2010. According to the Financial Times, bad loans now account for 18% of all of Italy’s loans. That’s more than four times as many bad loans as U.S. banks had during the worst of the 2008–2009 financial crisis.

Policymakers are scrambling to contain the crisis..…
Last month, the Italian government said it may pump €40 billion into its banking system to keep it from collapsing. A couple weeks later, Mario Draghi, who runs the ECB, said he would support a public bailout of Italy’s banking system. That’s when the government gives troubled banks money and makes taxpayers pay for it.

We said these emergency measures wouldn’t fix any of Italy’s problems. At best, they’ll buy the government time. Unfortunately, policymakers will almost certainly “do something” if Europe’s banking system continues to unravel.

The ECB could cut rates again, which would only make it harder for European banks to make money. It could also launch more quantitative easing (QE). That’s when a central bank creates money from nothing and pumps it into the financial system. Right now, the ECB is already “printing” €80 billion each month. But again, this hasn’t helped Europe’s stagnant economy one bit.

Whatever the ECB does next, you can bet it will only make things worse..…
As we've shown you many times, governments don’t fix problems. They only create them or make problems worse. If you understand this, you can make a lot of money betting that governments will do the wrong thing.

Casey Research founder Doug Casey explains:

The bad news is that governments act chaotically, spastically.
The beast jerks to the tugs on its strings held by various puppeteers. But while it’s often hard to predict price movements in the short term, the long term is a near certainty. You can bet confidently on the end results of chronic government monetary stupidity.

According to Doug, gold is the #1 way to protect yourself from government stupidity..…
That’s because gold is real money. It’s protected wealth for centuries because it’s unlike any other asset. It’s durable, easily divisible, and easy to transport. Unlike paper money, gold doesn’t lose value when the government prints money or uses negative interest rates.

These stupid and reckless actions push investors into gold. They can cause the price of gold to soar. This year, gold is up 27%. It’s trading at the highest level since 2014. But Doug says it could go much higher in the coming years. If Europe’s banking system continues to unravel, investors will panic. Fear could spread across the world like a wildfire. And gold, the ultimate safe haven, could shoot to the moon.
If you do one thing to protect yourself, own physical gold.

We also encourage you to watch this short video presentation.
It talks about a crisis that’s been brewing since the last financial crisis—one that's currently being fueled by government stupidity. The bad news is that we’re already in the early stages. The good news is that you still have time to seek shelter. You can learn about this coming crisis and how to protect yourself by watching this free video. We encourage all of our readers to do so. It’s one of the most important warnings we’ve ever issued. Click here to watch it.

Chart of the Day

Deutsche Bank’s stock is in free fall. You can see in today’s chart that Deutsche Bank has plummeted 75% since 2014. Yesterday, it hit a new all time low. If Deutsche Bank keeps falling, investors could lose faith in the financial system. And a panic could follow. At least, that’s what Jeffrey Gundlach thinks.

Regular readers know Gundlach is one of the world’s top investors. His firm, DoubleLine Capital, manages about $100 billion. Many investors call him the “Bond King,” a title that PIMCO founder Bill Gross held for years. Like us, Gundlach thinks Europe’s banking system is in serious trouble. And like us, he thinks European policymakers will spring into action if things start to get ugly. Reuters reported last month:

"Banks are dying and policymakers don’t know what to do," Gundlach said. "Watch Deutsche Bank shares go to single digits and people will start to panic… you'll see someone say, 'Someone is going to have to do something'."

Right now, Deutsche Bank is trading under $13. Less than three years ago, it traded close to $50. If Europe’s bank stocks continue to plunge, the ECB will likely “double down” on its easy money policies. This won’t repair Europe’s economy… It will destroy the euro, the currency that the ECB is supposed to defend.
This is why it’s so important that you “crash proof” your wealth today. Click here to learn how.

The article Why These Huge Bank Stocks Could Go to Zero was originally published at caseyresearch.com.

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This 5,000 Year Low Is Ruining Your Retirement

By Justin Spittler

The global banking system, and your financial future, are at serious risk right now. To understand why, just look at what's going on with the government's latest radical policy. Regular Dispatch readers know we're talking about rock bottom interest rates. According to MarketWatch, global interest rates are at the lowest level in 5,000 years. Credit is cheaper right now than at any point since the First Dynasty of ancient Egypt, around the 32nd century BC. Today, we'll explain what this means and how to protect yourself going forward..…

Interest rates didn’t get this low “naturally.” They’re at record lows because central bankers put them there..…
In 2008, the Federal Reserve dropped its key rate to near zero to fight the financial crisis. It’s kept rates there for eight years to encourage borrowing and spending. Other major central banks did the same thing. According to MarketWatch, there have been more than 650 rate cuts since September 2008. Rates in Canada and England are also near zero. In Europe and Japan, rates are below zero.

As we’ve explained before, negative interest rates basically tax your bank account. Instead of earning interest on the money in your bank account, you pay the bank. Not long ago, negative rates were unheard of. Today, more than $12 trillion worth of government bonds pay negative rates, up from $6 trillion in February. 

They’ve even seeped into the corporate debt market. According to Bloomberg Business, more than $300 billion worth of corporate bonds now “tax” bondholders. Central bankers told us low and negative rates would “stimulate” the economy. But, as you’re about to see, they’ve done far more harm than good.

Central bankers made it much harder to retire..…
That’s because rock bottom rates don’t just make it cheap to borrow money. They make it tough to earn a decent return. From 1962 to 2007, a U.S. 10 year Treasury paid an average annual interest rate of 7.0%. Today, a U.S. 10 year Treasury yields just 1.5%, an all time low. It’s the same story around the world. Last week, 10 year bonds in Ireland, England, Germany, France, and Japan all fell to record lows. In Japan, you actually have to pay the government 0.23% every year you own one of its 10 year bonds.

This is a serious problem for hundreds of millions of people. For decades, retirees could earn a safe, decent return owning these bonds. Some folks even lived off the interest they earned from these bonds. These days, you have to own riskier assets like stocks to have any shot at a decent return. Central bankers have effectively forced retirees to gamble with their life savings. Rock bottom rates are a serious threat to major financial institutions too.

According to U.S. banking giant Citigroup (C), low and negative rates are “poison” to the global financial system..…
They could make pension funds, insurance companies, and banks “no longer viable in the long term.” Business Insider reported last week:

As Citi notes: "Viability in its strong sense means profitability (a rate of return on equity at least equal to the cost of capital). In its weak sense, viability means solvency." Basically, Citi is warning that the negative rates may stop institutions being able to make money, which in turn would hit their ability to pay out on things like pensions and insurance policies.

This is a major risk even if you don’t have a pension or life insurance policy. That’s because pension and insurance companies oversee trillions of dollars. They’re pillars of the global financial system…and negative rates are destroying them.

Rock bottom rates could also put some of the world’s biggest banks out of business..…
You see, banks earn most of their money making loans. When rates are high, they make more on each loan. When rates are at record lows, like they are today, banks often lose money. Business Insider explains how today’s record-low rates are starving banks of income:

Citi points out that: "Banks in large part live off the differentials between lending and borrowing rates or between investment returns and funding rates." Persistently low interest rates could hit these differentials, lowering profitability and seriously harming banks in the long run.

Profits at America’s four biggest banks fell by an average of 13% during the first quarter…
This group includes Citigroup, Wells Fargo (WFC), Bank of America (BAC), and JPMorgan Chase & Co. (JPM). European banks are doing even worse. Swiss bank UBS’s (UBS) profits plunged 64% during the first quarter. Profits at Deutsche Bank (DB), Germany’s biggest lender, fell 58%. Spanish banking giant BBVA’s (BBVA) earnings fell 54%. The CEO of Deutsche Bank warned last month:

In the banking world, we are currently struggling with negative interest rates.
We will struggle more as the effect of those negative interest rates plays out into our deposit books.

Dispatch readers know some of Europe’s most important financial institutions are looking for ways to get around negative rates..…
Commerzbank, one of Germany’s largest banks, said last month that it was thinking of pulling money out of Europe’s banking system to avoid paying negative rates. Other banks have started making riskier loans and buying riskier assets to offset rock-bottom rates. The Financial Times reported in March:

Gonzalo Gortázar, chief executive at Spain’s Caixabank, expressed concerns about a build up of risk in the banking system as a whole. “In a world of low or negative interest rates, that is a possible consequence; you could see banks taking more risk,” he said.

Longtime readers know excessive risk-taking by banks contributed to the 2008 financial crisis. As a result, the S&P 500 plunged 57% from 2007 to 2009. And the U.S. entered its worst economic downturn since the Great Depression.

Bank stocks are already trading like a financial crisis has begun..…
Swiss bank Credit Suisse (CS) has plummeted 63% over the past year. Deutsche Bank is down 60%. Royal Bank of Scotland (RBS) is down 59%. Mitsubishi UFJ Financial Group (MTU), Japan’s biggest bank, is down 39%. These are huge drops in short periods. Remember, these are some of the most important financial institutions on the planet.

We encourage you to take action now..…
Our first recommendation is to avoid bank stocks. Low and negative rates are eating these companies alive right now. And it could be years before governments abandon these failed policies. According to Fed Chair Janet Yellen, low interest rates are the “new normal.” We also encourage you to own physical gold. As we like to remind readers, gold is real money. It’s preserved wealth for centuries because it has a rare set of characteristics: It’s durable, easy to transport, and easily divisible. A gold coin is valuable anywhere in the world.

This year, gold has jumped 26%. It’s trading at its highest price in two years. But Casey Research founder Doug Casey says this rally is just getting started. According to Doug, gold could soar 500% or more in the coming years. If you’re nervous that central bankers will take this interest rate experiment too far, own gold. It’s the best way to protect yourself from desperate governments.

We also encourage you to watch this short presentation. It explains how these failed monetary policies could spark something much worse than a banking crisis. As you’ll see, this is a threat to you even if you don’t a have a single penny in the stock market. Click here to watch this free video.

Chart of the Day

Deutsche Bank is trading like a financial crisis has begun. Today’s chart shows the performance of the German banking giant. You can see its stock is down more than 50% over the past year. Last Thursday, it hit it a new record low. Like other European lenders, low rates are killing Deutsche Bank. Last year, the company lost $7.5 billion. It was its first annual loss since the 2008 financial crisis. And yet, its plunging stock suggests more bad results are on the way.

According to the International Monetary Fund (IMF), Deutsche Bank is the world’s riskiest financial institution. That’s a problem even if you don’t keep money with Deutsche Bank or own its shares. The Wall Street Journal reported last week:

The IMF also said the German banking system poses a higher degree of possible outward contagion compared with the risks it poses internally. “In particular, Germany, France, the U.K. and the U.S. have the highest degree of outward spillovers as measured by the average percentage of capital loss of other banking systems due to banking sector shock in the source country,” the IMF added.

In other words, problems at Deutsche Bank could spread to other banks around the world. It’s another reason why you should avoid bank stocks and own gold right now.

The article This 5,000-Year Low Is Ruining Your Retirement was originally published at caseyresearch.com.

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Warning: This Could Be the Start of a Global Banking Crisis

By Justin Spittler

Europe’s banking system is collapsing. Over the past year, shares of Deutsche Bank (DB), Germany’s biggest bank, have plunged 56%. Swiss banking giant Credit Suisse (CS) is down 62% over the same period. Yesterday, both stocks hit record lows.

Dozens of other European bank stocks have also crashed. The Euro STOXX Banks, which tracks 48 of Europe’s largest banks, is down 48% over the past year. This is a major issue. That's because banks are the cornerstone of the financial system. They keep money flowing through the economy. If they’re struggling, it often means the economy is having major problems. Right now, European banks are flashing bright warning signs. That’s not just bad news for Europe—it’s also a serious threat to the rest of the world.

In today’s Dispatch, we’ll show you why Europe’s banking crisis could turn into a global banking crisis. You’ll also learn how to transform this threat into a chance to make big gains.

European banks are struggling to make money..…
Spanish banking giant BBVA’s (BBVA) profits fell 54% last quarter. First quarter profits at Deutsche Bank were down 58%. Swiss bank UBS’s (UBS) profits plunged 64%. European banks are hurting for a couple reasons. One, Europe is growing at the slowest pace in decades. Banks are making fewer loans as a result.

Two, negative interest rates are eating European banks alive. If you’ve been reading the Dispatch, you know negative rates are the latest radical government policy. They basically flip your bank account upside down. Instead of earning interest for keeping money in the bank, you pay the bank to hold your money.

Negative rates are clearly bad for savers. They’re also hurting Europe's biggest banks. That’s because these huge institutions have to pay their “bank,” the European Central Bank (ECB). Today, European banks pay £4 for every £1,000 they store at the ECB for a year. That might not sound like a lot. But it adds up quick when you manage trillions of euros like these banks do.

Last week, investors got another reason to avoid European banks..…
On Thursday, Great Britain voted to leave the European Union (EU), which it’s been in since 1973.
The “Brexit,” as the media is calling it, blindsided investors. As we explained yesterday, the market was expecting Great Britain to stay in EU. The unexpected outcome triggered a global stock market crash.

U.S. stocks had their worst day since August. Japanese stocks had their worst day in five years. European stocks had their biggest decline since the 2008 financial crisis. Friday’s global selloff erased $2.1 trillion in value from global stocks. It was the global stock market’s worst day in history. The panic didn’t die down much over the weekend. By the end of Monday, another $930 billion had disappeared from the global stock market.

European bank stocks were hit the hardest..…
Deutsche Bank plunged 22% between Friday and Monday. Credit Suisse fell 23%. UBS fell 20%. Barclays (BCS) and Royal Bank of Scotland (RBS) each plunged 37%. Both stocks are down more than 57% over the past year. These are gigantic moves in a matter of days. Remember, we’re not talking about small biotech stocks. These are some of the most important financial institutions on the planet.

Government officials are scrambling to contain the crisis..…
Today, the Bank of England (BoE) injected £3.1 billion into Britain’s banking system. It’s pledged to inject as much as £250 billion to stabilize its financial system. The BoE made its cash injection hours after the Bank of Japan (BOJ) pumped $1.5 billion into its banking system. As we'll show you in a second, we don't believe this will end well. That's because this excessive money printing (sometimes called "quantitative easing") doesn't stimulate the economy like governments intend it to.

Credit Suisse says other central banks could soon print more money too. Bloomberg Business reported on Friday:

“Market liquidity and overall liquidity in the U.K. is drying up as we speak in a very rapid way,” said John Woods, chief investment officer for Asia-Pacific at Credit Suisse Private Banking, told Bloomberg TV in Hong Kong. “It’s highly likely that we see monetary easing in a coordinated response” from central banks across the world, he said.

Great Britain is headed for a recession..…
A recession is when an economy shrinks two quarters in a row. Goldman Sachs (GS) says Britain could be in a recession by early 2017. But here’s the thing. We don’t think the BoE will let this happen. That’s because central bankers will do anything, including using reckless, unproven monetary policies, to avoid a recession these days.

Credit rating agency Standard & Poor’s agrees with us. Reuters reported today:

"Brexit is likely to represent a drag of about 1.2 percent of GDP for the UK in 2017," Jean-Michel Six, S&P's chief economist for Europe, the Middle East and Africa told a conference call for investors on Tuesday. "We have a significant slowdown but growth remains positive although obviously in a much more disappointing way. That is because we anticipate a very strong monetary response on the part of the Bank of England, in the form of additional quantitative easing, in the form of a further cut in interest rates," he added.

Bank of America (BAC) and Deutsche Bank also expect the BoE to fire up the printing press again. Bank of America says it could happen as soon as August.

QE won’t help Great Britain’s economy..…
As we told you above, QE doesn’t work. As regular readers know, the Federal Reserve pumped $3.5 trillion into the U.S financial system after the 2008 financial crisis. This massive money printing effort was supposed to juice the economy. But the U.S. is growing at its slowest pace since World War II. QE also failed to jumpstart Japan’s economy, which hasn’t grown in two decades. There’s no reason to think it will work this time.

If you’re nervous about the global financial system, we encourage you to take action today.…
The first thing you should do is own physical gold. Gold is real money. It’s held its value for thousands of years because it has a unique set of attributes: It’s easy to transport, easily divisible, and durable. You can take a gold coin anywhere in the world and folks will immediately recognize its value.

Unlike paper money, central bankers cannot create gold from nothing. It’s the ultimate antidote to crumbling paper currencies. That’s why the price of gold often soars when governments print money. This year, gold is up 24%. It’s trading at the highest price in two years. But it could go much higher as governments continue to run reckless monetary experiments.

If you want big profits from rising gold prices, own gold stocks..…
Dispatch readers know gold miners are leveraged to the price of gold. A small jump in the price of gold can cause gold stocks to surge. Gold’s 24% jump this year has caused GDX, a fund that tracks large gold stocks, to soar 96%. We believe this gold stock rally is just getting started. During the 2000 and 2003 gold bull market, the average gold stock gained 602%. The best ones soared 1,000% or more.

Nick Giambruno, editor of Crisis Investing, has recommended two gold stocks this year..…
He already closed out one of them for a quick double. It surged 103% in 14 months. Nick’s other gold stock is up 30% since March and is still dirt cheap at today's levels. Nick currently rates this stock a "Buy"…and says it could soon start paying a double digit dividend yield if gold keeps rising.

You can learn more about Nick’s gold stock by taking advantage of our special 60%-off sale for Crisis Investing. If you sign up today, you’ll be enrolled in a trial membership, which gives you 90 days risk-free to decide if the service is for you. But we encourage you to act soon. This special offer ends soon, and we likely won’t open this offer again for a long time.

You can learn more about this incredible offer by watching this video presentation. You’ll also learn about an even bigger threat to your wealth than Europe’s banking crisis. As you’ll see, almost no one is talking about this coming crisis. Yet, it could cause millions of Americans to lose their entire life savings. By the end of this video, you’ll know how to protect yourself. And just as importantly, you’ll know how to profit from this coming crisis. Click here to watch this free video.

Chart of the Day

U.S. bank stocks are also headed lower. Today’s chart shows the performance of the Financial Select Sector SPDR ETF (XLF) over the past year. XLF holds 94 major U.S. financial companies including behemoths JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC). You can see XLF is down 11% since last June. While that's not as severe as the near 50% drop in European banks over the same period, it's still a clear sign to stay away.

U.S. banks have many of the same problems as European banks. Like Europe, the U.S. economy is growing at the slowest pace in decades. And while the U.S. economy doesn’t have negative rates yet, Fed Chair Janet Yellen has said they aren’t “off the table” if the U.S. economy runs into trouble. The arrival of negative rates to the U.S. could tip bank stocks into a crisis, just like they have in Europe.

The article Warning: This Could Be the Start of a Global Banking Crisis was originally published at caseyresearch.com.

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Why Now Is the Best Time to Buy Gold in a While

By Justin Spittler

Bank stocks are slumping. Wells Fargo (WFC), the largest U.S. bank, has fallen 11% this year. JPMorgan Chase (JPM), the second largest, has fallen 14%. Bank of America (BAC), the third largest, has plunged 21%. And those are just the household names.

The Standard & Poor’s 500 Financials Index, which tracks 87 large U.S. financial stocks, has dropped 12% this year. For comparison, the S&P 500 has dropped 8%. On Monday, Bloomberg Business reported that financial stocks are off to their worst start in years.

The Standard & Poor’s 500 Financials Index has tumbled 11 percent in 2016, putting it on track for its worst month in more than four years. More than $360 billion of market value has been wiped out of financial companies in January, more than all but one month since data began in 1990.

The performance of banks says a lot about the health of an economy..…

Banks make money by loaning money to businesses and real estate buyers. The more good loans a bank makes, the more interest paid to the bank. But when an economy is doing badly, demand for loans falls. Also, when an economy is doing badly, some borrowers don’t pay loans back in full. This increases the cost of bad loans…which is one of a bank’s biggest expenses. This eats away profits from the bottom line.

When the economy slows, people cut back on extra expenses like vacations. People shop less. There are fewer dollars around at the end of each month, so less money ends up in the bank…giving the bank less money to loan out. Since banks “touch” almost every aspect of the economy, bad performance by banks is often an early sign that the economy is turning down.

While bank stocks are down big, bank profits are still solid..…

JPMorgan Chase’s profits jumped 10% from the prior year...Bank of America’s rose 9%...and Wells Fargo’s were flat. You’d expect to see much worse results in an industry where stocks are breaking down. This likely means investors are expecting bank profits to shrink soon. Markets tend to “price-in” things before they happen.

Bloomberg Business reports:

Commercial and industrial loans have flat lined in recent weeks after steadily climbing throughout 2015…Growth in such loans offers investors an idea of potential interest income, as C&I loans typically produce more revenue for banks than parking funds in cash or Treasuries.

Bloomberg Business also explained that banks are bracing for losses on oil loans.

Bigger picture uncertainties are weighing on the group, not least of which is how wounds at energy companies will bleed into this sector. Bank of America, Citigroup Inc., JPMorgan and Wells Fargo have set aside more than $2.5 billion to cover souring energy loans and will add to that if oil prices remain low.

If you’ve been reading the Dispatch, you know the oil industry is in crisis mode..…

The price of oil has plunged 70% since June 2014. Yesterday, oil closed at $32. Energy consulting company Wood Mackenzie estimates $1.5 trillion worth of oil projects in North America can’t make money even at $50 oil. With oil at $32 today, the value of money-losing projects has likely climbed above $2 trillion.

Many oil companies are struggling to pay back loans. Credit rating agency Fitch expects 11% of U.S. energy bonds to default this year. That would be the highest default rate for the energy sector since 1999. This is bad news for banks that have loaned money to oil companies.

Moving along, if you’ve been reading Crisis Investing, you know the “opening up” of Cuba is a huge investment opportunity..…

Nick Giambruno, editor of Crisis Investing, expects to make a lot of money investing in Cuba. Nick specializes in buying high-quality assets made cheap by crisis. According to Nick, a crisis is the only time you can be sure to get assets at bargain prices.

Cuba has been in a slow-motion crisis for decades. In short, its Communist government has wrecked the economy. And the United States’ ban on trade with Cuba killed any chance at economic growth. However, after decades of isolating Cuba, the U.S. government recently changed its policy. It reopened an embassy in Cuba in August. And last week, the U.S. took another promising step toward Cuba.

Here’s the New York Times:

The Obama administration announced Tuesday that it was removing major impediments to contact between the United States and Cuba by lifting restrictions on American financing of exports to the island nation and relaxing limits on the shipping of an array of products, from tractors to art supplies.

The revised rules that will take effect on Wednesday will allow United States banks to provide direct financing for the export of any product other than agricultural commodities, still walled off under the trade embargo.

Nick notes that American companies are pushing to do business in Cuba. He says the “cat’s out of the bag,” and Cuba will soon open up.

Cuba has over 2,000 miles of pristine coastline and the potential to be a top tourist destination. When the embargo ends, the U.S. government estimates 12 million Americans will visit Cuba within the first year.

There’s no denying it. If Cuba ever opens up, there’s potential to make a fortune. Doug Casey has long been interested in the investment potential of Cuba, and I couldn’t agree more that there is huge opportunity there.

You can learn how Nick is playing the “opening up” of Cuba by taking a risk-free trial of Crisis Investing. It’s an investment Americans can easily buy with a standard brokerage account…and it yields 9.3%.

Our friend Tom Dyson just came back from a trip to Cuba..…

If you don’t know Tom, he's founder of Palm Beach Research Group, a publishing company dedicated to helping readers get a little bit richer every day. Since he launched The Palm Beach Letter in 2011, it has built a reputation as one of the world’s most respected investment advisories. You can check it out here.

Tom was in Cuba looking for investment opportunities. Here’s his take…

There are billions of dollars just waiting to flood into Cuba the moment their economy opens. There’s a whole industry poised to invest in Cuba: Cuban people living in Florida and other parts of America...the big hotel chains...the big real estate companies.

Tom says it’s not easy for Americans to invest in Cuba yet…but the potential is huge.

It’s a beautiful island with amazing beaches. Cuba could also be a huge cruise ship destination. It could end up looking like Cancun.

Chart of the Day

Gold has climbed to a three month high. Yesterday, the price of gold closed at $1,125 an ounce, its highest level since November. Gold is also up 6.1% since the start of the year. U.S. stocks are down 8% in the same period.
Today’s chart shows that gold is “carving out a bottom”.  On Monday, we explained why “carved out bottoms” are important. An asset carves out a bottom when it stops falling…forms a bottom for a period of time…then starts climbing higher. A stock that’s carving out a bottom should hold above a certain price for a period of time. This is a key signal that buyers are stepping in at this price, giving it a floor.

Buying an asset that has carved out a bottom is much less risky than buying an asset that’s trending down. As you likely know, gold has been in a downtrend since 2011. However, since November, gold has stopped going down. It has held above $1,050. This is a clue that gold prices are heading higher.

Casey readers know we own gold because it preserves wealth over the long term. We try not to get caught up in its daily price movements. However, gold is at a potential “turning point” today. If you’ve been meaning to buy gold, now’s a good time.

The article Why Now Is the Best Time to Buy Gold in a While was originally published at caseyresearch.com.

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How The Best of Intentions Destroyed Liquidity

By Jared Dillian

I just got done grading the final exams for my class (took me 12 hours). It’s 100 short answer questions and two essays. One of the essay questions is about the Volcker Rule. “Paul Volcker, former Federal Reserve chairman, as part of the rulemaking process for Dodd-Frank, included a provision prohibiting proprietary trading by banks, known as the Volcker Rule. Do you agree or not agree with the Volcker Rule? Explain.”

The funny thing about asking someone what they think of a law is, if you leave the question open ended and you don’t really describe what the law does, the response is generally favorable. Out of a class of 20 students, only two or three opposed the Volcker Rule. Most of them were in favor of it, as they were in favor of Glass-Steagall when I asked them to write a paper on that.

Seems pretty straightforward. If you have these banks that you call “systemically important,” such that they could go out of business and get rescued by taxpayers, then you don’t really want them taking risks with their own capital, right?

I mean, look how this worked out in the past.

Milton Friedman once said that laws should be judged by their results rather than their intentions. Liquidity has disappeared, and it is directly attributable to the Volcker Rule. If you hear someone try to make an argument that it’s not, that person is probably a journalist or a professor with no first hand knowledge of the situation.

I remember when the Volcker Rule first passed, years ago, someone senior in the equity derivatives market asked me, “Do you really think they will have regulators going through your trades, one by one, line by line, asking you if it was your intent to make money?”

“That seems very unlikely,” I told him.....But that is what we got.

In addition to confiscating cell phones and monitoring phone conversations, chats, and emails, the vast army of compliance officers at investment banks really will go through a trader’s blotter line by line and determine if each trade was a bona fide hedging transaction or if he was trading for his own account. In single stocks, this is pretty straightforward—either you were buying GE for a client or you were buying it for yourself. But in derivatives, it’s not. If you get hit on the GE Jan 30 calls, you’re not going to be able to turn around and sell them—you have to sell something else.

For example, if you’re long too much vega, you may want to sell some short-dated stuff against it, putting on a term structure trade. Is that a hedge, or prop trading? It’s impossible to make that distinction. But the compliance guys try. The interpretation varies. In equity derivatives, traders generally get the benefit of the doubt. In credit, they don’t. You can’t sell bond B to hedge bond A. You literally have to sit there and try to sell bond A. This is why the bond market is such a mess, which we have talked about in this space before.

Of course, none of this gets us any closer to preventing an investment bank from blowing up, because the guy trading 500 call options on GE was never going to blow up the bank in the first place. On the other hand, the Volcker Rule never would have prevented Jon Corzine from blowing up MF Global with European sovereign bonds. If a CEO really wants to do something like that, is some compliance dork really going to stop him? To say that this regulation is a catastrophic failure would be an understatement. Liquidity has disappeared, with no discernible benefit. I’m a middlebrow market commentator, and I’m not supposed to say things like “This is dumb,” but this is really dumb. It doesn’t take an Austrian economist to figure out the unintended consequences.

In the old days (10 years ago), banks were the big liquidity providers. Let’s look at this a different way: do we want banks to continue to be liquidity providers, yes/no? Banks were not always liquidity providers. In the ‘90s, in equity options, it was the physical trading floors where all the risk was handled. Stocks, too. But the bond market has always been an upstairs phenomenon.

If banks aren’t going to be liquidity providers, then we need non bank entities to provide liquidity, and we need to encourage it. Some large hedge funds and some second tier (i.e., not systemically important) broker dealers are starting to do this. But it’s not enough.

The goal was to take a bank and turn it from a risk taking institution to a toll taking institution, where everything is traded on an agency basis, with a commission applied. The FX markets, which were once all risk, are starting to look like this. In equities, traders don’t do much aside from maintain relationships and plunk orders into auto trader, where they are preyed upon by the algorithms.

This is unsustainable, because how can you hire all these smart people from fancy schools and pay them all this money just to push a button—while all their communications are monitored? Nobody is happy with the current state of affairs. 10 years ago, you could sell 250,000 shares on the wire. Or $25 million of bonds.

I have two radical solutions. Here they are:

1. Repeal the Volcker Rule
2. End decimalization

When I came into the business, stocks still traded in fractions. On the options floor, I had to learn to add and subtract fractions in my head. Seriously—I ran drills on this, testing myself for speed. When I got to Lehman, to the program trading desk, I noticed something remarkable—we could send our orders to “wholesalers” like Spear, Leeds & Kellogg or Knight Trading. They would auto execute the orders up to 2,000 shares on the bid or the offer—for free.

Then decimalization happened. The preferential treatment lasted about another month, then they started charging us a penny a share. Market making went from being a profitable business to an unprofitable one.
Guess what—if market making is profitable, a lot of people will want to do it, and you will have a lot of liquidity. If market making sucks, nobody will want to do it, and you will have no liquidity.

Did the retail investor benefit? Maybe. Now he could go into his E-Trade account and execute something for a penny instead of 1/16. But if he was a shareholder in a mutual fund, the mutual fund portfolio manager now had to drop 250,000 shares into auto trader, getting preyed upon by the aforementioned algorithms, instead of getting it done for 1/8.

Then SEC Chairman Arthur Levitt led the charge for decimalization. More unintended consequences.
It’s not likely we’ll go back. Levitt was having conniptions about the length of time it was taking for the options market to decimalize, even though the computing power didn’t even exist.

Ask any portfolio manager today: Liquidity is the number one concern. That’s bullcrap. It’s like buying a house and having plumbing be your number one concern. It should just take care of itself.

Jared Dillian

If you enjoyed Jared's article, you can sign up for The 10th Man, a free weekly letter, at mauldineconomics.com. 

The article The 10th Man: How The Best of Intentions Destroyed Liquidity was originally published at mauldineconomics.com.

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