Janet Yellen: The Best Pick Pocket in the USA

By Tony Sagami

“Some of the experiences [in Europe] suggest maybe we can use negative interest rates.”
—William Dudley, President of the New York Federal Reserve Bank

“We see now in the past few years that it [negative interest rates] has been made to work in some European countries. So I would think that in a future episode that the Fed would consider it.”
—Ben Bernanke

“Indeed, I would be open to the possibility of reducing the fed funds target funds range even further, as a way of producing better labor market outcomes.”
—Narayana Kocherlakota, President of the Minneapolis Federal Reserve Bank

If you are planning to travel to any major European city, you better watch your wallet because there are thousands of very skilled pickpockets looking to separate you from your valuables. Those pickpockets, however, will only get away with however much money you have in your wallet. Sure, a pickpocket can throw a major monkey wrench into your vacation, but the amount these European thieves take from you is peanuts compared to what Fed head Janet Yellen wants to steal from your bank account.

While Wall Street experts and CNBC talking heads regularly debate the "will they or won’t they" interest rate liftoff, a more important question is whether or not the Federal Reserve will follow the European model of negative interest rates. Negative interest rates are nothing unusual in Europe as several central banks lowered key interest rates below 0%.

Yup, that means investors essentially pay a fee to park their money.

That parking fee just got higher last week when the European Central Bank cut its already negative deposit rate from minus 0.2% to minus 0.3%. The ECB also expanded is current quantitative easing program. The European Central Bank, the Swiss National Bank, and the Danish National Bank all have interest rates below zero. In fact, the Danes have held their overnight rates at negative 0.75% since 2012.

The Swiss, however, are the undisputed leaders of the negative interest rate experiment. The SNB first moved to negative rates in December 2014 and then dropped rates to negative 0.75% in January of this year. The Swiss National Bank, by the way, meets in a couple of days, on December 10, and is widely expected to cut rates again.

The question, of course, is how negative can interest rates go? Before the end of December, I expect deposit rates in Switzerland to be between -100bps and -125bps. Remember, we’re not talking about some backwater, third world countries here. Switzerland and Germany are two of the wealthiest countries in the world, as well as the home of major financial and political centers.

And I’m not just talking about short term paper either. Finland, Germany, France, Switzerland, and Japan are all selling five year debt with negative yields. In fact, Switzerland became the first country in history to sell benchmark 10 year debt at a negative interest rate in April.

Don’t think that negative interest rates can happen in the US? Wrong!

You may have missed it, but the United States is now also a member of the “0% club”—most recently in October, when it sold $21 billion worth of 3 month bills at 0% interest.

However, that is not the first time. Since 2008, the US government has held 46 Treasury bill auctions where yields have been zero. The next step after zero is negative… and it’s becoming a real possibility. Welcome to the European model of starving savers to death!

The implications for investors are monumental.

Ask yourself, what would you do with your money if your bank started to charge you to deposit it there? Would you pay hundreds, perhaps thousands of dollars a year just to keep your money in a bank?

Option #1: Hold your nose and pay the fees.
Option #2: Move those dollars into the stock market; perhaps into dividend paying stocks.
Option #3: Buy real estate; perhaps income generating real estate.
Option #4: Invest in collectibles, like art or classic cars.
Option #5: Stuff your money under a mattress.

The point I am trying to make is, the rules for successful income investing have completely changed. If you are living (or plan on living) off the earnings of your savings, you better adapt your strategy to the new world of negative interest rates…..or plan on working as a Walmart greeter during your golden years.

Even if you think I’m nuts about negative interest rates coming to the US, there is no doubt that interest rates are not climbing anytime soon.

According to the Federal Reserve.....
"The Committee anticipates that inflation will remain quite low in the coming months.”
“The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate.”

With the US national debt approaching $19 trillion, our government doesn’t have any choice but to keep interest rates low. Sadly, our politicians are paying for their spendthrift ways by starving responsible savers.
But you can (and should) fight back by changing the way you think about investing for income. You can start by giving my high yield income letter, Yield Shark, a risk free try with 90 day money back guarantee.


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.

The article Connecting the Dots: Janet Yellen: The Best Pick Pocket in the USA was originally published at mauldineconomics.com

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The “Bloodbath” in Canada Is Far From Over

By Justin Spittler

The oil price crash continues to claim victims…and many of them are in Canada.The price of oil hovered around $100 for most of last summer. Today, it’s trading for less than $45. Weak oil prices have pummeled huge oil companies. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks the performance of major U.S. oil producers, has declined 36% over the past year. The Market Vectors Oil Services ETF (OIH), which tracks U.S. oil services companies, has declined 30% since last November. Weak oil prices have even pushed entire countries to the brink. Saudi Arabia, which produces more oil than any country in the world, is on track to post its first budget deficit since 2009 this year. If oil prices stay low, the country could burn through its massive $650 million pile of foreign reserves within five years.

Oil’s collapse is also creating big problems for Canada’s economy.....

Canada is the world’s sixth largest oil producer. Oil makes up 25% of its exports. Last month, The Conference Board of Canada said it expects sales for Canada’s energy sector to fall 22% this year. It also expects the industry to record a net loss of about C$2.1 billion ($1.6 billion) in 2015. That’s a drastic change from last year, when the industry booked a C$6 billion ($4.5 billion) profit.

Major oil firms are slashing spending to cope with low prices. Last month, oil giant Royal Dutch Shell plc (RDS.A) said it would stop construction on an 80,000 barrels per day (bpd) project in western Canada. The company had already abandoned another 200,000 bpd project in northern Canada earlier this year. The Canadian Association of Petroleum Producers estimates that Canadian oil and gas companies have laid off 36,000 workers since last summer. Most of these layoffs happened in the province of Alberta.

For the past decade, Alberta was Canada’s fastest growing province.....

Its economy exploded, thanks to the booming market for Canadian tar sands. Tar sand is a gooey sand and oil mixture that melts down with heat from burning natural gas. More than half of Canada’s oil production comes from tar sands. In Alberta, they account for 75% of oil production.

Tar sand is generally more expensive to produce than conventional crude oil. Canadian tar sand projects made sense when oil hovered around $100. But many of these projects can’t make money when oil trades for $45/barrel. Last year, Scotiabank (BNS) said the average breakeven point for new Canadian oil sand projects was around $65/barrel. This is why giant oil companies are walking away from projects they’ve spent years and billions of dollars developing.

All these cancelled oil projects are making Alberta’s economy unravel.....

Alberta lost 63,500 jobs from the start of year through August. It hasn’t lost that many jobs during the first eight months of the year since the Great Recession. The decline in oil production is also draining government resources. Last month, Reuters reported that Alberta was on track to post a $4.6 billion budget deficit this year. Economists say it could be another five years before Alberta runs a budget surplus. The crisis isn’t confined to the oil patches either.

A real estate crisis is unfolding in Calgary.....

Calgary is home to 1.2 million people. It’s the largest city in Alberta and the third largest in Canada. On Tuesday, Bloomberg Business reported that Calgary’s property market is starting to crack:

Vacancy is already at a five-year high in Calgary and rents are the lowest since 2006 after thousands of office jobs were cut. In downtown Calgary, the vacancy rate jumped to 14 percent in the third quarter, the highest since 2010 and compared with 5 percent for downtown Toronto, according to CBRE Group Inc. .... That doesn’t include as much as 2 million square feet of so-called "shadow vacancy" or space leased but sitting empty, which would push vacancy to 16 percent, the most since the mid-1980s.

Demand for office space is falling because of massive layoffs in the oil industry. That’s because oil companies didn’t just lay off roughnecks. They also laid off oil traders and middle managers, which means they need a lot less office space. According to Bloomberg Business, a principal at one Calgary real estate office called the situation “a bloodbath” and said “we’re at the highest point of fear and uncertainty now.”

Casey readers know the time to buy is when there’s blood in the streets.....

But it looks like Calgary’s property crisis is just getting started. Bloomberg Business reports that the city has five new office towers in the works. These projects will add about 3.8 million square feet to Calgary’s office market over the next three years. More office space will only put more pressure on rents and occupancy rates. Real estate developers likely planned these projects because they thought Canada’s oil boom would last. It’s that same thinking that made oil companies invest billions of dollars in projects that can’t make money when oil trades for less than $100/barrel.

Doug Casey saw this coming.....

In September, Doug went to Alberta to assess the damage first-hand. E.B. Tucker, editor of The Casey Report, joined Doug on the trip. Doug and E.B. spoke with the locals. They even tried to buy a Ferrari. They shared their experience in the October issue of The Casey Report.

E.B. went on record saying Canada was in for “a major wakeup call.” He still thinks that’s the case. In fact, he thinks the situation is going to get a lot worse.

When we were in Alberta, we heard over and over again "It'll come right back...it always does." It's not coming back. I expect the situation to get worse. And I see the Canadian dollar going much lower.

When that happens, E.B. thinks Canada’s central bank might do something it’s never done before:

Vacancy rates are rising in Canada’s heartland cities. Jobs in Alberta are disappearing. Unemployment is climbing. And there’s still a global oversupply in oil. None of this bodes well for Canada’s economy. Canada’s economy is in a midair stall. The locals certainly didn’t grasp this when we visited Alberta last month. That's usually the case when things are going from bad to a lot worse. If you’re a central banker in Canada looking at the data, there’s only one decision: print.

E.B. says Canada’s central bank will launch its own quantitative easing (QE) program.....

QE is when a central bank creates money and pumps it into the financial system. It’s basically another term for money printing. Since 2008, the Fed has used QE to inject $3.5 trillion into the U.S. financial system. If the Fed’s experience with QE is any indication, money printing wouldn’t help Canada’s “real” economy much. But it would inflate asset prices. That, in turn, would only make Canada’s economy even more fragile. E.B. is confident the situation in Canada will get worse. And he can’t wait to go back to Canada to collect on bets he made during his last visit:

Doug and I made a lot of side bets with business owners during our visit. One of them promised to sell us a Ferrari if things got worse...that's how sure he was that we were wrong. Looks like we'll be headed back to collect on that one.

You can read all about Doug and E.B.’s visit to Alberta by signing up for a risk free trial of The Casey Report. You’ll even discover how to make money off the oil industry, despite the collapse in the price of oil. Click here to learn more.

The article The “Bloodbath” in Canada Is Far From Over was originally published at caseyresearch.com.

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Jim Rogers on Timeless Investing Strategies You Can Use to Profit Today

By Nick Giambruno

Recently I spoke with Jim Rogers about the most important investment lessons he has learned over the years.
Jim is a legendary investor and true international man. He’s always ahead of the game. Jim made a bundle by investing in commodities in the 1990s when they were out of favor with Wall Street. He’s also made large profits investing in crisis markets.

Jim and I spoke about timeless strategies that are truly essential to being a successful investor.
You won’t want to miss this fascinating discussion, which you’ll find below.

---

Nick Giambruno: You’ve said that many times throughout history, conventional wisdom gets shattered. What are some widely held beliefs that will be shattered in the next 10 years?

Jim Rogers: That’s a very good question. Well, for one thing, I know bond markets are at all-time highs almost in every country in the world. Interest rates have never been so low. Everybody is convinced that bonds are a good thing to invest in. Otherwise, they wouldn’t be at all time highs.

I’m sure that 10 years from now, we are all going to look back and say, how could people have even been investing in bonds with negative yields? How could that possibly have been happening? But at the moment, everybody assumes it’s okay, and it’s the normal and natural thing to do. Ten years from now, we’re going to look back and say, gosh, how could we ever have done something so foolish?

So one of the things I do is I look to see - when everybody’s convinced that X is correct - I look to see, well maybe X isn’t correct. So when I find unanimity of a view, I look to see, maybe it’s not right. And it usually isn’t right, by the way. I have learned that from experiences and from lots of reading.

Nick: How does an investor deal with being accurate but early?

Jim: Oh, that’s the story of my life. I’ve always been accurate but early. If I’m convinced something is going to happen or if I should make an investment, I have learned that I should wait for awhile, because maybe it is too early. And it usually is too early.

I try to discipline myself to wait longer or to put in orders below the market and let the market come to me. But even then, sometimes I’m still too early.

Nick: How did studying history help you in investing?

Jim: Well, the main thing it taught me was that everything is always changing. If you go back and look at before the First World War, nobody could ever have conceived in 1910 that Germany and Britain would be slaughtering millions of people four years later. Yet it happened.

No matter what we think today, no matter what it is, it is not going to be true in 15 years. I assure you. You pick any year in history, and look at what everybody was convinced was correct and then look 15 years later, and you’d be shocked and astonished. Look at 1920, 15 years later. Look at 1930, 15 years later.

Any year you want to pick - 1900, 1990, 2000. Pick any year and I assure you, 15 years later everything is going to be different. I guess that’s the first thing I learned from the study of history.

Nick: What mistakes do empires always make?

Jim: They get overextended. They think they’re smarter than everybody else. They think they cannot make mistakes, and even if they are making mistakes they are so powerful they think that they can correct the mistakes. And then they become overextended. Usually they become overextended financially, militarily, geopolitically, in every way.

Nick: Is the US repeating those same mistakes?

Jim: Well, the US is the largest debtor nation in the history of the world now, and the debts are going higher and higher. The people in the US think it doesn’t matter that we’ve got all these debts and there’s no problem. People in the US don’t think that it’s a problem that we’ve got troops in over 100 countries around the world. I mean, when Rome got overextended militarily, it paid the price. Spain and many other countries have had this problem. Maybe it’s not a problem. Maybe America can have troops in 200 countries around the world and it won’t matter, but America has certainly gotten itself overextended in many ways.

Nick: Do you think wealth and power will continue to move East?

Jim: Wealth and power are moving East now, and that is going to continue. That’s because of historic reasons. There’s little doubt in my mind that China is going to be the next great country in the world. Most people are still skeptical of that. Most people know something is happening in China. They don’t really quite understand the full historic significance of what is happening in China including many Chinese.

Jim Rogers and Nick Giambruno

Nick: You mentioned in your most recent book, Street Smarts, about the lesson you learned when Nixon closed the gold window in 1971. At the time you were long Japan and short the US, and you just got killed. Can you tell us the lessons you learned from that experience?

Jim: That was a perfect example of what I’m talking about. Even if you have it right, or you think you have it right, something can always come along and change that, especially with politicians.

Politicians play by different rules from the rest of us. They just change the rules. Mr. Nixon just changed the rules because he was having a serious problem, and he thought America was having a serious problem. And when they changed the rules against all logic or against history, something is going to give. If you are on the wrong side, you are the one who is going to give, and I’ve learned that.

Nick: Any other investing lessons you’d like to mention?

Jim: Well, when you see on the front page of the newspaper that there’s a disaster - natural disaster, economic, any kind of a disaster - just pick up the newspaper and think, now wait a minute, everybody’s panicked right now. The blasting headlines are that the world is coming to an end. Stop and think, is the world really coming to an end? Is this industry going to survive? Is this country going to survive? Is this market going to survive? Because normally it is going to survive.

If you can just first stop and have that thought process, then you can think it through. Let’s say that these headlines are wrong. “What should I do?” You are probably going to be a successful investor. Be prepared for the fact that you are probably going to be early. If you can figure out how to spot the exact bottom and the exact turn, please call me.

Nick: This is exactly what Doug Casey and I do in our Crisis Speculator publication (click here for more details). Shifting gears now, you’ve also said that Harvard and other universities could go bankrupt. Why do you think that?

Jim: Well, first of all, some of the American universities have a very, very high cost structure. It’s astonishing.
Let’s pick on Ivy League. I went to an Ivy League school, so I can pick on them a little bit. They have a high cost structure. They think that what they know is correct and that people will always pay higher and higher prices.

To go to Princeton for four years now is probably going to cost you $300,000 in the end when you figure out the tuition, room and board, books, beer, travel, and everything else. It’s extraordinarily expensive to go to these places. Now what Princeton would tell you - and I didn’t go to Princeton but that’s why I’m picking on them - what Princeton would say is, yeah, but it’s better education. But I’m not sure it’s better education.

I know that many of the things that they teach in Ivy League schools these days are absurd and totally wrong. It’s conventional wisdom run amuck, so it’s not necessarily better what you learn at those places. If you go to the right universities, and you learn the wrong things, it’s going to cost you in the end.

Then they say, yes, but it’s a brand, it’s a label that’s good. Sure, it’s a label, it’s a very expensive label, but it’s going to take a lot more than that to make you successful. Just because your grandmother gives you a Cadillac, which is a good brand, it’s not going to make you successful at finding dates, or having a good job or anything else. You have to produce on your own.

Throughout history you've had many institutions that have been world famous and top of the line. They’ve disappeared. It doesn’t mean Harvard can’t too. I didn’t go to Harvard, so I shouldn’t pick on any of these places that I didn’t go to. So we’ll see. I’m skeptical of all of them.

Nick: Why do universities and governments embrace Keynesian economics? Why do they hate Austrian economics?

Jim: That’s a good question. Keynes himself, at the end, didn’t embrace what is now known as Keynesian economics. Keynes would probably be an Austrian now, because at the end of his life, he came to understand that some of the stuff was being misused.

The main reason people like Keynesian economics is because they think they can be powerful. They can change things. “I’m a smart guy. I went to an Ivy League school, therefore I know what’s best.

And if I say it’s best, let’s do it, and it will make things better.” That’s essentially what Keynesianism is now. The market is a lot smarter than all of us, and I wish we would all learn that. It always has been and it always will be.

Nick: Thanks for your time, Jim.

Jim: My pleasure.

Editor’s Note: Jim Rogers told us about the importance of looking past the news that frightens others away. It’s the key to finding deep value investment opportunities that can make you enormous profits. It’s one of the world’s greatest wealth creation secrets.

It’s been used by Warren Buffett, Doug Casey, John Templeton, Baron Rothschild, and many other successful investors. It’s a strategy that you can use too.

It’s exactly these kinds of opportunities we cover in Crisis Speculator. Click here for more details.

The article was originally published at internationalman.com.

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The Next Financial Disaster Starts Here

By Dan Steinhart

Individual investors take note….

Some of the world’s best money managers are betting on the biggest financial disaster since 2008. You won’t hear about this from the mainstream media. Networks like NBC or CBS don’t have a clue… just like they didn’t have a clue the US housing market would collapse in 2007.

Carl Icahn, a super successful investor who’s the 31^st richest person in the world, said this investment is in a bubble. He said that it’s “extremely overheated”… and that “there’s going to be a great run to the exits.” And this investment isn’t some complex derivative that only Wall Street and hedge funds can buy. Millions of investors hold it in their brokerage accounts.

The dangerous investment is junk bonds.

Junk bonds are usually issued by companies with shaky finances. They pay high interest rates to compensate investors for their high risk. Low interest rates have pushed investors into these risky bonds. Junk bonds are one of few places where investors have been able to get a decent income stream.

In 2008, the Federal Reserve cut interest rates to near zero to fight the financial crisis. It has held rates near zero ever since. Right now, a 10 year US government bond pays just 2.3%. That’s half its historical average, and near its all time low.

Investors looking for income have turned to junk bonds. This chart shows the growth in junk bonds since 2002. As you can see, junk bonds didn’t grow much from 2002 to 2008. But when the Fed cut rates to zero in 2008, junk bond issuance took off:

JPMorgan reports that the number of junk bond issues soared 483% between 2008 and 2014. You might be thinking that you don’t own junk bonds… so why should you care? It’s true that many investors don’t own junk bonds directly. But many do own them through junk bond ETFs.

The Financial Times recently explained why junk bond ETFs are dangerous.… junk bond ETFs give the illusion of liquidity. Not all that long ago, bankers and asset managers promised to turn subprime mortgages into gold plated, triple A rated bonds.

Today, the apparently miraculous transformation is of deeply illiquid credit instruments, such as junk bonds and leveraged loans, into hyper-liquid exchange traded funds. Junk bonds are not “liquid.” That means there aren’t many investors buying and selling them every day. The Wall Street Journal reported that each of the top 10 bonds in the largest junk bond ETF traded just 13 times a day on average.

That’s not a typo. Investors only buy and sell these junk bonds 13 times per day on average. For comparison, investors buy and sell 47 million shares of Apple (AAPL) on average every day. Junk bond ETFs are extra dangerous because they make junk bonds appear liquid. HYG, the largest junk bond ETF, trades more than 6.8 million shares per today on average. That’s more than McDonald’s stock.

But as Howard Marks, hedge fund manager and one of the most respected investors in the world recently explained:

No investment vehicle should promise greater liquidity than is afforded by its underlying assets. If one were to do so, what would be the source of the increase in liquidity? Because there is no such source, the incremental liquidity is usually illusory, fleeting, and unreliable, and it works (like a Ponzi scheme) until markets freeze up and the promise of liquidity is tested in tough times.

Because junk bond ETFs create the illusion of liquidity, most investors don’t see the danger. They think they can sell their junk bonds ETFs just as easily as they could sell shares of Apple. They’re wrong. If too many people sell junk bonds at once, it could overwhelm the market and cause prices to crash.

Now, none of this has been a problem yet because junk bonds have been in a bull market. According to Bank of America, junk bonds have gained 149% since 2009. But as Howard Marks added, ”Nothing is learned in the investment world in good times.” … “Most of these vehicles haven’t been tested in tough times.”

All bull markets eventually end. When this one ends, junk bonds could cause huge losses to investors who don’t know about these risks. Junk bonds could easily drop 15% or more in one month.

And here’s the craziest part….Some of the world’s smartest and most successful investors are are betting on this exact outcome. They’re betting that the junk bond market will crash.

They’re calling it “The Next Big Short.”

You probably heard about the few hedge fund managers who made a killing when US housing collapsed in 2007. Dallas-based hedge fund manager Kyle Bass made $500 million by betting against housing. John Paulson made $4.9 billion by betting against mortgages. Today, one of the largest private equity firms in the world is raising money to bet against junk bonds... just like Bass and Paulson bet against housing in 2007.

The Wall Street Journal reports:

Apollo [one of the world’s largest private equity firms] has been raising money from wealthy investors for a hedge fund that snaps up insurance-like contracts called credit-default swaps that benefit if the junk bonds fall. In marketing materials reviewed by The Wall Street Journal, Apollo predicted: “ETFs and similar vehicles increase ease of access to the high yield [junk] market, leading to the potential for a quick ‘hot money’ exit.”

Other hedge funds like Reef Road Capital and Howard Marks’ Oaktree Capital are also raising money to bet on a junk bond crash.

As you can see from the chart of HYG’s (the largest junk bond ETF) price, junk bonds are down since June:

There’s no way to know if this is the beginning of the end of the junk bond bull market. But if it is, huge losses could come very soon. If you’ve made money investing in junk bonds, it’s time to cash in. Don’t bet against some of the best investors in the world who expect junk bonds to crash. We recommend selling junk bonds now.

P.S. Because this risk and others have made our financial system a house of cards, we’ve published a groundbreaking step by step manual on how to survive, and even prosper, during the next financial crisis. In this book, New York Times best selling author Doug Casey and his team describe the three ESSENTIAL steps every American should take right now to protect themselves and their family.

These steps are easy and straightforward to implement. You can do all of these from home, with very little effort. Normally, this book retails for $99. But I believe this book is so important, especially right now, that I’ve arranged a way for US residents to get a free copy. Click here to secure your copy.

The article The Next Financial Disaster Starts Here was originally published at caseyresearch.com.

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The Next Silver Bull May Have Already Started

By Laurynas Vegys

Silver is down 7.1% this year. Will this weakness persist? To find out, let’s look at the key factors in the silver market this year.

• Like gold, silver fell as the US dollar rose on the back of expectations that the Fed will hike rates.
• World demand for physical silver fell 4% in 2014, largely due to a record 19.5% drop in investment demand.
• Silver exchange traded funds (ETFs) did not see big liquidations in 2014. ETF holdings grew by 1.4 million ounces and recorded their highest year end level at 636 million ounces.

The first two factors helped push silver 19.9% lower last year. That’s more than gold or any other precious metal fell. Despite this, silver production rose 5% in 2014. That added to the pressure on prices.

Why did miners produce more silver when prices were falling? Because of:

• By-product metal. Around 75% of the silver mined is a by-product at gold or base metal mines. These producers will keep mining silver, almost regardless of price.
• Reduced cash costs. The primary silver producers have cut costs since they peaked in 2012. The main way miners do that is by boosting production to achieve economies of scale.
• Bull market hangover. Precious metals were in a major bull market from 2001 to 2011. Producers built a lot of mines in response. Nobody wants to pull the plug on a new mine that’s losing money if they think prices will go higher.

That’s the backdrop. Now let’s look at this year’s fundamentals.

Supply

Silver mine output has risen for 12 consecutive years (silver mine supply is a little different, due to hedging, but also trending upward). This year could break this trend. Industry experts at GFMS forecast up to a 4% decline in silver output in 2015. Why? It’s not rocket science. There are now fewer major new mines under construction due to lower metals prices. That leaves scrap supply. But scrap comes from jewelry, and sellers are price sensitive. People like to sell granny’s silver tea set when prices are up. We expect subdued scrap supply until silver heads much higher.

Demand

Investment demand - that’s us - is a big chunk of total silver demand: 18.4% as of the latest figures.
There was a big drop in investment demand last year: 19.5%. This tells us that most short-term investors and sellers have left the market. We don’t know any “silver bugs” who were selling. That means that today’s bullion is in stronger hands. And that means that any new buying will have a strong impact on prices.
But will there be buyers?

The Silver Institute expects more silver demand from investors this year. They say that the first half of 2015 sales of silver bars were the fifth highest on record.

Photovoltaics (PV) is another source of silver demand that many analysts expect to rise in 2015 and beyond. Global PV demand is set to increase by 30% in 2015, according to IHS analysts. China alone has plans to install 17 gigawatts of solar capacity by the end of the year.

The solar industry consumes a small amount of silver compared to jewelry and other electronics. Yet, if PV demand delivers in 2015, it will become the third-largest source of fabrication demand for silver.

Wildcard: Tesla plans to put batteries big enough to power a house in every home. What happens if that takes root is anyone’s guess… but it will be big. Really big. And the impact on demand for silver would be just as huge.

The Deficit

Silver supply went into deficit during much of the big run up from 2001 to 2011. That may happen again. Silver Institute expects the silver supply deficit to grow to 57.7 million ounces in 2015. (Note that even if physical mine supply is up, net supply can be down if a lot of the mine supply was forward sold as hedges.) If the institute is right, it’ll be bullish for silver prices.

The Dollar and the Fed

We believe the dollar is grossly overvalued, and we are not alone. HSBC thinks the greenback’s rise since 2014 could be in its final stage. For the three months between April and June, the US dollar fell against every developed-market currency (save for the yen and the New Zealand dollar).

Many investors seem convinced that the Fed will raise interest as soon as September. We view this as unlikely at this stage. Yes, tightening US monetary policy would propel the dollar to new highs. But an even stronger dollar would mean slicing billions off the US GDP; not exactly a desirable situation from the standpoint of the Fed given the sluggish growth of the economy.  We think the Fed could delay raising rates until 2016. It might even stop talking about rate hikes indefinitely. Each delay, the dollar will get whacked, and that’s good for precious metals.

On the other hand, if the Fed does nudge rates higher this year, it would likely dampen the stock market. That would increase demand for silver and gold. This could push silver prices much higher, given the small size of the market.

The Gold-Silver Ratio

The gold-silver ratio (GSR) tells you how many ounces of silver you need to buy one ounce of gold. The record shows that the GSR often surges during a recession. (See the shaded areas on the chart below.)

Silver is about 17 times more abundant than gold in the earth’s crust. Silver and gold prices were close to this ratio for most of history. These facts make many investors think that the GSR should be 17-to-1 and that eventually it will be.

They may be right, but we’ve never found the GSR to be a strong predictor of gold or silver prices. To us, the GSR “suggests a lot but proves nothing.”

Conclusion

The fundamentals are positive for silver in 2015: less mine supply, and the healthy demand we already see is bullish. The greater demand that’s possible could create a real supply crunch. As a result, we expect silver to hold on throughout 2015 and perhaps even increase faster than gold, if the whole precious metals sector turns positive this year.

As for guessing the future, we have no crystal ball. We can say that Louis’ case for 2015 as a win-win year for silver is backed by the numbers.

P.S. If silver moves off its current level of $15 and into the $20 or $30 areas, silver investors could make large gains. But owners of a unique silver-related security could make gains that are five... 10... even 100 times greater. And right now is a once-in-a-decade chance to buy them very, very cheap.

Our friends at Casey Research are the world’s leading experts in this sector. And they’re EXTREMELY bullish on this rare opportunity. Read on here for details.

The article The Next Silver Bull May Have Already Started was originally published at caseyresearch.com.

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Bears Run For Cover!

From our trading partner Phil Flynn....

Ultra bears are starting to change their tune on oil as weak Chinese manufacturing data and strong manufacturing data in Germany both point to better demand. China's demand may rise as the Chinese government will be forced to act swiftly to reach their growth target and should soon add stimulus increasing oil demand. Factory activity in China fell to 49.2, according to HSBC, a number that should force the Chinese government's hand.

In Germany, we are already seeing the QE impact on oil demand. The Purchasing Managers Index for the manufacturing and services industries across the region rose to a much stronger than expected 54.1 ked by a 0.4 percent expansion in Germany. Germany is the beneficiary of being the strongest economy in the Eurozone at a time when the ECB central bank has launched unprecedented stimulus. On top of that you see the U.K. inflation rate come in at the lowest rate in history. The inflation rate fell below zero for the first time in history and all of a sudden this QE madness is likely to continue.

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Now one might think that might be bearish as the dollar might continue its historic upward move as the rate differential outlook could cause continued safe haven buying. But now it seems that the Fed may be influenced into not rating rates quickly as the dollar strength is causing more problems. We saw in the FOMC that Fed Chair Janet Yellen warned that the Fed will not be impatient in raising rates. The Fed's Stanley Fischer suggested that the Fed will be data, and perhaps dollar dependent on raising rates and warned that there would not be a "smooth upward path" for interest rates hikes.

Oil bears are also counting on another big inventory increase. Yet data from Genscape, the private forecaster, is suggesting that the build might be much less than the 4 million barrel builds that is being bandied about. Genscape reports that the increase of less than 2 million barrels are around 1.6 million. That should reduce fears of storage over flowing. In fact the Energy Information Administration reported that although inventory levels at Cushing are at their record high, storage utilization (inventories as a percent of working storage capacity) are not at record levels. Capacity utilization at Cushing is now 77%, a large increase from a recent low of 27% in October 2014. However, utilization reached 91% in March 2011, soon after EIA began surveying storage capacity twice a year, starting in September 2010."

See Phil on the Fox Business Network and follow him on Twitter @energyphilflynn!

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Why the Fed Is So Wimpy

By John Mauldin

Another in what seems to be a small parade of scandals involving secretly recorded tapes of Federal Reserve regulators emerged last week. What a number of writers (including me) have written about regulatory capture over the past decade was brought out into the open, at least for a while. My brilliant young friend (40 seems young to me now) Justin Fox, editorial director of the Harvard Business Review and business and economic columnist for Time magazine, published a thoughtful essay this week, outlining some of the issues surrounding the whole concept of banking regulations.

Yes, the latest scandal involved Goldman Sachs, and it took place in the US, but do you really think it’s much different in Europe or Japan? Actually, there are those who argue that it’s worse in those places. This does not bode well for what happens during the next crisis (and there is always a next crisis, hopefully far in the future, though they do seem to come more frequently lately).

Writes Justin:

The point here is that if bank regulators are captives who identify with the interests of the banks they regulate, it is partly by design. This is especially true of the Federal Reserve System, which was created by Congress in 1913 more as a friend to and creature of the banks than as a watchdog. Two-thirds of the board that governs the New York Fed is chosen by local bankers. And while amendments to the Federal Reserve Act in 1933 shifted the balance of power in the Federal Reserve System from the regional Federal Reserve Banks (and the New York Fed in particular) to the political appointees on the Board of Governors in Washington, bank regulation continues to reside at the regional banks. Which means that the bank regulators’ bosses report to a board chosen by … the banks.

For those who would like a bit more bearish meat, I offer you a link to John Hussman’s latest piece, “The Ingredients of a Market Crash.”

I’m in Washington DC today at a conference sponsored by an association of endowments and foundations. They have a rather impressive roster of speakers, so I have found myself attending more sessions than I normally do at conferences. Martin Wolf and David Petraeus headline a very thoughtful group of managers and economists, accompanied by an assortment of geopolitical wizards. I’ve learned a lot.
No follow-on note today. I need to get back to my classroom education….

Your loving the fall weather analyst,

John Mauldin, Editor
Outside the Box

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Why the Fed Is So Wimpy

By Justin Fox
Harvard Business Review HBR Blog Network
September 26, 2014

Regulatory capture – when regulators come to act mainly in the interest of the industries they regulate – is a phenomenon that economists, political scientists, and legal scholars have been writing about for decades.  Bank regulators in particular have been depicted as captives for years, and have even taken to describing themselves as such.

Actually witnessing capture in the wild is different, though, and the new This American Life episode with secret recordings of bank examiners at the Federal Reserve Bank of New York going about their jobs is going to focus a lot more attention on the phenomenon. It’s really well done, and you should listen to it, read the transcript, and/or read the story by ProPublica reporter Jake Bernstein.

Still, there is some context that’s inevitably missing, and as a former banking regulation reporter for the American Banker, I feel called to fill some of it in. Much of it has to do with the structure of bank regulation in the U.S., which actually seems designed to encourage capture. But to start, there are a couple of revelations about Goldman Sachs in the story that are treated as smoking guns. One seems to have fired a blank, while the other may be even more explosive than it’s made out to be.

In the first, Carmen Segarra, the former Fed bank examiner who made the tapes, tells of a Goldman Sachs executive saying in a meeting that “once clients were wealthy enough, certain consumer laws didn’t apply to them.”  Far from being a shocking admission, this is actually a pretty fair summary of American securities law. According to the Securities and Exchange Commission’s “accredited investor” guidelines, an individual with a net worth of more than $1 million or an income of more than $200,000 is exempt from many of the investor-protection rules that apply to people with less money. That’s why rich people can invest in hedge funds while, for the most part, regular folks can’t. Maybe there were some incriminating details behind the Goldman executive’s statement that alarmed Segarra and were left out of the story, but on the face of it there’s nothing to see here.

The other smoking gun is that Segarra pushed for a tough Fed line on Goldman’s lack of a substantive conflict of interest policy, and was rebuffed by her boss. This is a big deal, and for much more than the legal/compliance reasons discussed in the piece. That’s because, for the past two decades or so, not having a substantive conflict of interest policy has been Goldman’s business model. Representing both sides in mergers, betting alongside and against clients, and exploiting its informational edge wherever possible is simply how the firm makes its money. Forcing it to sharply reduce these conflicts would be potentially devastating.

Maybe, as a matter of policy, the United States government should ban such behavior. But asking bank examiners at the New York Fed to take an action on their own that might torpedo a leading bank’s profits is an awfully tall order. The regulators at the Fed and their counterparts at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation correctly see their main job as ensuring the safety and soundness of the banking system. Over the decades, consumer protections and other rules have been added to their purview, but safety and soundness have remained paramount. Profitable banks are generally safer and sounder than unprofitable ones. So bank regulators are understandably wary of doing anything that might cut into profits.

The point here is that if bank regulators are captives who identify with the interests of the banks they regulate, it is partly by design. This is especially true of the Federal Reserve System, which was created by Congress in 1913 more as a friend to and creature of the banks than as a watchdog. Two-thirds of the board that governs the New York Fed is chosen by local bankers. And while amendments to the Federal Reserve Act in 1933 shifted the balance of power in the Federal Reserve System from the regional Federal Reserve Banks (and the New York Fed in particular) to the political appointees on the Board of Governors in Washington, bank regulation continues to reside at the regional banks. Which means that the bank regulators’ bosses report to a board chosen by … the banks.

Then there’s the fact that Goldman Sachs is a relative newcomer to Federal Reserve supervision – it and rival Morgan Stanley only agreed to become bank holding companies, giving them access to New York Fed loans, at the height of the financial crisis in 2008. While it’s a little hard to imagine Goldman choosing now to rejoin the ranks of mere securities firms, and even harder to see how it could leap to a different banking regulator, it is possible that some Fed examiners are afraid of scaring it away.

All this is meant not to excuse the extreme timidity apparent in the Fed tapes, but to explain why it’s been so hard for the New York Fed to adopt the more aggressive, questioning approach urged by Columbia Business School Professor David Beim in a formerly confidential internal Fed report that This American Life and ProPublica give a lot of play to. Bank regulation springs from much different roots than, say, environmental regulation.

So what is to be done? A lot of the classic regulatory capture literature tends toward the conclusion that we should just give up – shut down the regulators and allow competitive forces to work their magic. That means letting businesses fail. But with banks more than other businesses, failures tend to be contagious. It was to counteract this risk of systemic failure that Congress created the Fed and other bank regulators in the first place, and even if you think that was a big mistake, they’re really not going away.

More recently, there’s been a concerted effort to take a more nuanced view of regulatory capture and how to counteract it. The recent Tobin Project book, Preventing Regulatory Capture: Special Interest Influence and How to Limit It, sums up much of this thinking. While I’ve read parts of it before, I only downloaded the full book an hour ago, so I’m not going to pretend to be able to sum it up here. But here’s a thought – maybe if banking laws and regulations were simpler and more straightforward, the bank examiners at the Fed and elsewhere wouldn’t so often be in the position of making judgment calls that favor the banks they oversee. Then again, the people who write banking laws and regulations are not exactly immune from capture themselves. This won’t be an easy thing to fix.

update: The initial version of this piece listed the Office of Thrift Supervision as one of the nation’s bank regulators. As David Dayen pointed out (and I swear I knew at some point, but had totally forgotten), it was subsumed by the OCC in 2011.

Justin Fox is Executive Editor, New York, of the Harvard Business Review Group and author of The Myth of the Rational Market. Follow him on Twitter @foxjust.

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The article Outside the Box: Why the Fed Is So Wimpy was originally published at Mauldin Economics

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Three urgent steps to take right now as interest rates begin to explode higher

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Gold and the QE3 Ship – Are Both About to Sail?

From Gold ETF Trader contributor David Banister at Market Trend Forecast.....

Back in Mid-May of this year we had a big rally in the Dollar and Gold was correcting hard. There was a bit of Dollar Bull hysteria at the time which I felt was quite unfounded. I wrote an article entitled, “The Dollar Bull Monkey Dance Will Soon End Badly, QE3 Next?” You see, the collective herd psychology at that time, just a short ten weeks ago, was that Gold would drop hard at the end of QE2, and The Dollar would of course rally as high as 82, maybe more against the weighted index.

The dollar has dropped hard since mid-May as I expected and Gold has continued to rally as well. I had forecasted $1627 for Gold back when we were under $1,500 and last Friday we closed at $1627 on the nose! During the mid May time, most disagreed with my QE3 forecast, and probably still do but I think the ships is soon leaving port. This could blast Gold up to a target of $1805 on the high end and certainly into the low 1700’s to the $1730 per ounce range.

Gold has had a powerful 5 wave rally (Elliott Wave Theory) since the October 2008 lows of $681 per ounce, and certainly one could argue that a correction would make sense fairly soon. However, the fundamentals for Gold are only getting stronger as we have inflation climbing at an 8-9% real rate and interest rates continuing to drop. This is creating a “negative” real interest rate environment amidst a continuing weaker US dollar. Hence it is hard fundamentally to argue against Gold at this time, creating difficulty in forecasting the intermediate highs and lows.

With that said, assuming QE3 or some form takes place soon then my $1805 target is quite likely to be hit before we can look for any meaningful correction in the precious metal complex. With the ISM manufacturing index turning down sharply as reported this morning and other economic indicators and GDP report rolling over, a QE3 ship horn is likely to sound soon. Below is my latest chart dated July 22nd with Gold at $1599 at the time, outlining the likely interim moves in Gold using my crowd behavioral methodology that I employ at my forecasting service.

The combination of crowd behavior and fundamental analysis often delivers stunningly accurate forecasts in advance on the SP 500, Gold and Silver at TMTF. Consider signing up for our regular updates and use our 72 hour coupon code at Market Trend Forecast

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