Saturday, 4 July 2015

Charts: Topping Action - Is the Train Waiting for the Last Fool to Board?




Monday, 29 June 2015

The Crank Report, Issue #7 (29 June 2015)

In this issue: 
  • Thrift - Though Shall Not Pass
  • The Economic Significance of Saving
  • Combined U.S., Eurozone and UK Money Supply Still Tanking
  • The "Austrian" True Money Supply Weekly: Fatigued Banks?
  • The U.S. Stock Market - These Bulls Have Some Balls!


<click top right corner to enlarge>

Sunday, 28 June 2015

Greece, Mini-bank Queues and Fractional Reserve Banks

Source: wowway.net
People in Greece have been withdrawing deposits from their banks for some time now. With the recent referendum announced by the government following endless talks with the troika, deposit withdrawals are likely to gain further traction the coming days and weeks. People lining up at the mini-banks (ATMs) is a mini-version of a classic bank-run.

When people withdraw deposits from banks, they decide to store the money they own themselves instead of leaving it to the banks. The trigger for such an action is usually that people no longer trust the banks to safeguard their deposits nor make the cash available upon demand. When this happens, banks run into financial difficulties. But why?

Simply put, banks run into problems when people withdraw their deposits as banks use these very deposits to run their daily operations. In simple terms, banks don't keep all your money in a safety deposit box, only a fraction of it. This is why the banking system is called "fractional reserve banking". In real life, this means banks will only be able to pay out a fraction of the deposits, typically around 10%, if all depositors run to the bank to withdraw their funds. This is why banks are financially fragile. It's a flawed system, a house of cards, ready to collapse at any moment once confidence among depositors vanish. But where is the rest of the money customers deposited? It's tied up in assets like bonds and loans that are substantially less liquid than cash.

The current flawed system also explains why all sorts of capital controls and bank holidays likely will be implemented tomorrow and the days and weeks to come in Greece - the banks have been investing and lending, sometimes gambling, not just with their own equity capital (of which banks have very little), but also with the very customer deposits these banks are supposed to keep safe! Alas, that's why banking crisis keep popping up again and again in countries employing a fractional reserve banking system - it's inevitable by design. Sadly, most countries and all "developed" nations today operate in such a banking regime.

The case of Greece is therefore an excellent opportunity for more people to truly understand the misery brought about by fractional reserve banking.


Related:

U.S. Longer Term Saving Trend: Mad Money Outpaces Thrift on a Grand Scale

The U.S. Bureau of Economic Analysis (BEA) this week published the personal income and outlays statistics for May.

The numbers show that personal saving for the month increased just north of 3.8% on May last year while the 5.1% saving rate was unchanged on last year and that it remains dismal in a historical perspective.


The problem with a low saving rate is that the U.S. economy will struggle to produce economic growth without (I explain why here). Another great problem with economic policies in the U.S. as with an abundance of other countries in the world today, is that policy makers allegedly are trying to "manage" and fuel "economic growth" through monetary stimuli.

Visit the "Austrian" True Money Supply archive for the U.S. here.

This is a futile exercise. F.A. Hayek once explained why,
"...saving at a continuously high rate is an important safeguard of stability" and that a high rate of saving would also "...tend to mitigate disturbances arising from fluctuations in credit". 
As fluctuations in credit brings about fluctuations in the quantity of money, an ever expanding money supply hence brings about disturbances to an economy. On the flip side, increased saving is a safeguard of stability.

Based on Hayek's insights, the development in the ratio between money supply and saving especially during the last fifteen years should make economic alarm bells all over the U.S. chime.


The only question is how long the bells will sound the alarm before the markets react with unmanageable force.

Friday, 26 June 2015

"In Gold We Trust 2015"

Ronald-Peter Stoeferle and his team have just published the 2015 edition of the "In Gold We Trust" report. The report, featuring some 140 pages of commentary, analysis and charts, is a yearly must-read for investors, portfolio managers, analysts and students of economics and the financial markets alike. The full version in pdf format can be downloaded here.  Below is the introduction to the 2015 edition.
The 2015 edition of the In Gold We Trust report contains a wealth of insights for all types of investors. In Gold We Trust 2015 takes a look at the big picture in the financial system, from the point of view of the unusual monetary policies. This is the ninth edition of the report. Below is the executive summary from the report, as well as the report itself to be downloaded or read online:
After the barely averted implosion of the financial system in autumn of 2008, we are now in the seventh year of world-wide central bank experimentation. We have all become guinea pigs of an unprecedented attempt at re-inflation, the outcome of which remains uncertain. Questionable monetary policy ventures like quantitative easing and negative interest rates are a direct consequence of a systemic addiction to inflation.
The global financial architecture remains in a fragile state. Disinflationary forces have dominated since 2011. The systemic instability between inflation and deflation – monetary tectonics – culminated in a “disinflationary earthquake” in the second half of 2014, as all industrial commodities and every paper currency lost enormous ground against the US dollar.
Widespread, chronic over-indebtedness is ratcheting up the pressure on monetary authorities to break the deflationary trend and finally generate rising price inflation rates. Gold has always been the best hedge against excessive inflationary efforts.
We are convinced that we are now close to a decisive fork in the road: the disinflationary trend will (have to) be broken. Rising price inflation rates are possible both in conjunction with a revival in economic activity and in a stagflationary environment. In both cases, inflation-sensitive investments including gold and gold mining stocks will benefit.
The majority of market participants have gradually abandoned all concerns over inflation in recent years. This is reflected in exceptionally low inflation expectations and the composition of investment portfolios. The exit from the current “low-flation” phase could prove to be the “pain-trade” for most investors.
From a technical perspective, the picture is not unequivocal. The downtrend hasn’t been broken yet. However, pronounced negative sentiment indicates resignation among gold bulls. We believe a final selloff is possible. During such a sell-off, the support at USD 1,140 could be tested. A reversal following such a test would be a reliable indication of a primary trend change in the gold market.
Based on the “big picture” analysis that is packed into this report, we see no reason for a change of course: In gold we (still) trust. We are firmly convinced that gold remains in a secular bull market that is close to making a comeback.
We expect to see a final trend acceleration at the end of the cycle. We thus decided to set a time horizon of three years – June 2018 – for our long-term price target of USD 2,300 to be reached.


Chart of The Day: Fed Assets and The Stock Market

The y/y growth rate of the Fed balance sheet is swiftly approaching zero as QE3 came to an end in October last year. Will stock market returns soon follow suit?


How is 4% real GDP growth for a decade economically possible for the U.S.?

That's a question professor John H. Cochrane has reflected on. As the biggest obstacle to GDP growth is a political one, Cochrane lists a set of "pro-growth policies" that could help achieve 4% real GDP growth for a decade,
  • The tax code is thoroughly reformed to do nothing but raise revenue with minimal distortion -- a uniform consumption tax and no income, corporate, estate etc. taxes, or deductions.
  • A dramatic regulatory reform. For example 
    • Simple equity-financed banking in place of Dodd-Frank. 
    • Private health-status insurance (with, if needed, on-budget voucher subsidies) in place of Obamacare. 
    • An end to the mess of energy subsidies and interference. No more fuel economy standards, HOV lanes, Tesla tax credits, windmill subsidies, and so on and so on. (If you want to control carbon, a uniform carbon tax and nothing else.) 
    • Many agencies cease to exist. 
    • No more endless waits for regulatory decisions. 
  • No more witch hunts for multibillion dollar settlements.
  • Thorough overhaul of social programs to remove disincentives. Most help comes via on-budget vouchers.
  • No more agricultural subsidies.
  • No more subsidies, period. Fannie and Freddie closed down.  
  • Unilateral free trade. 
  • Essentially open immigration -- anyone can work.  
  • Much labor law rolled back. Uber drivers can be contractors, thank you. Most occupational licenses removed -- anyone can work.  
  • Drug legalization.
  • School vouchers. 
  • And so on. Essentially, every single action and policy is re-oriented toward growth. 
Read the full article here. 

Thursday, 25 June 2015

Greece illustrates 150 years of socialist failure in Europe

By

Greece cannot pay its debts…ever. Nor can several other members of the European Union. That’s why Europe’s elite are loath to place Greece in default. If Greece is allowed to abrogate its debts, why should any of the other debtor members of the EU pay up? The financial consequences of massive default by most of the EU members is hard to predict, but it won’t be pretty. Europe has built a financial house of cards, and the slightest loss of confidence will bring it crashing down.

The tragedy of Europe has socialism at its core. Europe has flirted with socialism since the late nineteenth century. Nineteenth century Bismarckian socialism produced two world wars. Leninist socialism slaughtered and enslaved hundreds of millions until it collapsed, mercifully without a third world war. Yet, not to be deterred, in the ashes of World War II Europe’s socialists embarked on a new socialist dream. If socialism fails in one country, perhaps it will succeed if all of Europe joined a supranational socialist organization. Oh, they don’t call what has evolved from this dream “socialism”, but it is socialism nonetheless.

Mad Money Outpaces Thrift on a Grand Scale

F.A. Hayek once explained "...saving at a continuously high rate is an important safeguard of stability" and that a high rate of saving would also "...tend to mitigate disturbances arising from fluctuations in credit". 

As fluctuations in credit brings about fluctuations in the quantity of money, an ever expanding money supply hence brings about disturbances to an economy. On the flip side, increased saving is a safeguard of stability. 

Based on Hayek's insights, the development in the ratio between money supply and saving especially during the last fifteen years should make economic alarm bells all over the U.S. chime. The only question is how long they will sound the alarm before the markets react.