Tuesday, October 24, 2017

Warning Signs on the Economy

Last month we wrote about rising debt levels in the U.S. and worldwide. They are too high to be paid now and will never be paid because they are rising faster than incomes. And in July we wrote that central banks are buying not only government debt—thereby increasing their money supplies—but are buying common stocks in American companies, which has the same effect. The leader in this has been the Swiss National Bank, which is the Swiss central bank just as the Federal Reserve is the U.S.'s central bank.

Four-fifths of the SNB's reserves are in bonds. Euro denominated assets make up about 40% of its reserves; dollar-denominated assets, 35%; with the rest being yen, sterling and others. Japan's central bank buys government bonds, common stocks, and even real estate to increase its money supply. It owns 62 percent of the Japanese market in ETFs (exchange traded funds).

Stock markets worldwide have been on a tear, just like the rise in worldwide debt. In the last eighteen months the increase in the market capitalization of global stocks has been roughly equal to the entire value of world stocks in 2009. The Dow Jones Industrial average advanced a thousand points, from 20,000 to 21,000, in just 24 days. The DJIA is composed of large, profitable companies which are what is desired by central banks—which helps to explain why the DJIA has been outperforming smaller, less well known stocks. As we pointed out in a previous posting, the SNB bought almost 4 million shares of Apple in the first three months of this year and also has over $1 billion each in the stocks of the giants Exxon Mobile and Johnson & Johnson, which are in the DJIA.

Stock prices have been bid up on the anticipation of rising earnings, but in the third quarter, investors pulled $36 billion out of U.S. stock mutual and exchange traded funds. Thus far in 2017 more money has flowed out than has flowed in, and trading volumes have been collapsing. The stock indexes have been going higher, but investors are trading them less and less. Volumes and volatility go hand in hand. The CBOE Volatility Index this month fell to its lowest level in over 20 years. The average daily trading volume this month across the NYSE, Nasdaq, NYSE American, and NYSE Arca is 12% below below this year's average and 22% below last year's average. MCSI Europe, which tracks stocks across 15 developed European countries has fallen to its lowest level in five years.

An inflow of money from foreign investors and sovereign wealth funds helped to offset outflows from U.S. stock funds. So far this year, foreign investors have put $40 billion into U.S. stocks, compared to about $3.5 billion in net outflows last year, according to Deutsche Bank. The foreign inflow is unlikely to continue at the recent rate, according to some analysts, because foreign opportunities are beginning to appear more attractive due to the relative value of the dollar to other currencies.

The decline in trading volume isn't good news for banks that generate fees from investors trading. At J.P. Morgan Chase & Co., third quarter equity trading revenue fell 4% in the third quarter, and Goldman Sachs reported 7% decline for that revenue over the same period.

We ended our posting last month by noting that the Fed completely missed predicting the Great Recession. So today's forecasts of continued good times—despite the warning signs listed above—should perhaps be regarded with some skepticism. Need another reminder? Here's a quote by Ben Bernanke himself, when he was chairman of the Fed in 2007 before the collapse of the economy:

We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” —Ben Bernanke, May 17, 2007.

Friday, September 29, 2017

DANGER: Rising Debt Levels

Global debt levels reached an astronomical $217 trillion in the first quarter of 2017. That's 327 percent of the entire world's economic production (GDP.) Before the financial crisis, global debt was “only” around $150 trillion, meaning almost $120 trillion have been added to the debt in a mere decade.

For individual countries, analysts generally consider a debt-to-GDP ratio above 80-85 percent to be “unsustainable.” A “sustainable” debt-to-GDP ratio is one in which payments are made on time and in full and with the expectation the debt will ultimately be eliminated. The U.S. debt-to-GDP was 106.1 percent in December 2016.

Neither U.S. debt nor global debt will ever be repaid, because both are not only too large to pay now but growing faster than incomes, putting repayment further out of reach. This is true not only for government debt but private debt as well. According to the Bank for International Settlements, household and corporate debt in the world economy, as a share of GDP, amounted to 138% in 2016, compared with 115% at the end of 2007. For advanced economies, that ratio was even more dangerous, averaging 195% last year, compared with 183% at the end of 2007.” And with only a few exceptions, most countries' public debt rose significantly over the same period. So indebtedness in the world is far higher today than at the start of the financial crisis.

At the depth of the financial crisis a decade ago, the Fed launched a huge increase in the money supply to prevent collapse of the banking system. The government rescued Fannie Mae and Freddie Mac and bought hundreds of billions of dollars of their debt and mortgage-backed securities. Later it decided more monetary stimulus was needed because the economy was not rebounding as hoped. So two other bond-buying programs (“quantitative easing”) were initiated in the hope driving down interest rates to stimulate consumer buying and spur the economy. While some financial markets enjoyed a recovery, the expected overall economic growth proved elusive.

After a decade of relative economic stagnation, the Fed has now decided to unwind the $4.5 trillion of Treasury bonds and mortgage-backed securities it has accumulated. It cannot hold interest rates near zero forever since there are market forces at work for higher rates and ignoring them would create further economic imbalances with adverse consequences worldwide. The Fed will reduce its holdings very slowly, at first by $10 billion a month for three months, and then by a further $10 billion every quarter to a maximum of $50 billion a month, or $600 billion per year.

No central bank has ever been in the position the Fed is now in. None has ever had a trillion dollars and tried to divest itself of them. Austan Goolsbee, who headed the White House Council of Economic Advisers under Obama, said, “The final exam, with the grade yet to be determined, is can the Fed actually get out of this stuff.”

David Blanchflower, an economist who was on the Bank of England's monetary policy board, which faced the same problem as the Fed, says when the bank began this unconventional campaign (i.e., quantitative easing) “we had no idea what we should buy, how much, for how long,” and there was no idea on the way of getting out.

Double-entry bookkeeping is the basis of accounting. If asset values fall, then so too must total liabilities. As explained by Mervyn King, former governor of the Bank of England (the central bank of England, like the Federal Reserve in the U.S.): “For companies and banks, their assets are the future stream of earnings discounted back to the present, while their liabilities are the amounts owed to creditors...and the residual value of equity. So as interest rates rise, the discount rate will increase and asset prices will fall relative to incomes. A squeeze on the value of total liabilities falls initially on the value of their equity, making it more difficult to borrow. But it also increases the likelihood that some companies and banks will default on their debts. We could see a sequence of defaults in different sectors of the economy and in different countries.”

The problem of the Fed in shrinking its balance sheet by unloading its bonds and mortgages is discussed more fully in my book The Impending Monetary Revolution, the Dollar and Gold, including penetrating inputs by monetary experts Gramm and Saving. Here are some samples:

"Fed will have to divest its $1.4 trillion of mortgage-backed securities (MBS). This would send mortgage rates spiraling even if sales were spread over several years.

"Fed would still need to sell about $600 billion of U.S. Treasuries to reduce excess reserves in the banking system.

"Every increase in interest rates drives down the market value of Fed's Treasuries and MBS holdings, forcing it to sell more and more to lower the monetary base by the required amount. This depletes both the Fed's asset holdings and earnings.

"The monetary expansion that started as a response to the subprime crisis has evolved into a prolonged and largely unsuccessful effort to offset the negative impact of the Obama administration's tax, spend and regulatory policies....No such explosion of debt has ever escaped a day of reckoning and no such monetary surge has ever had a happy ending." (Italics added.)

It should be remembered that the Fed totally missed predicting the Great Recession. It said the worst that could happen would be a very mild recession. Recently the Wall Street Journal recalled this by writing on September 21, 2017: “Given the way that investors are obsessing over the Federal Reserve's most recent economic projections, it is a good time to look back on where they were 10 years ago...In September 2007, it was clear something was amiss with the U.S. economy...Fed policy makers were worried...But their projections show they expected the storm to pass quickly. They thought unemployment would only inch up a bit over the next several years, never topping 5%. The economy would expand 2.2% in 2008 before picking up to 2.5% in the following years. Inflation would settle into just under a 2% rate. Three months later the recession began.”



Friday, August 11, 2017

The Fed and Gold

On August 11, 2017, the Wall Street Journal carried a front-page article on the Fed, raising a question of its storage of gold. In my latest book I provide much more information on this subject. The following is excerpted from my book The Impending Monetary Revolution, the Dollar and Gold, Second Edition:

After WWII when there were fears of an invasion from the Soviet Union, Germany—which was facing hundreds of thousands of Soviet troops just across its border—stored much of its gold in the U.S., London, and France. In 2012 the German federal audit office told legislators that the nation's gold in foreign storage had never been audited and called for this be corrected. In previous years, dating at least as far back as 2007, the German government requested return of at least part of its gold stored at the U.S. Federal Reserve Bank in New York but without success. The Fed refused to allow German representatives even to see their gold, offering instead a variety of excuses, including “security” and “no room for visitors.”
 
Eventually, visiting German officials were shown five or six gold bars and told these were “representative for Germany's holding.” But the gold bars were not numbered and allocated, so they could be shown to any number of banks as “their” gold. For years the Fed website stated “All bars brought into the vault for deposit are carefully weighed, and the refiner and fineness (purity) markings on the bars are inspected to ensure they agree with the depositor instructions and recorded in the New York Fed’s records. This step is vital because the New York Fed returns the exact bars deposited by the account holder upon withdrawal—gold deposits are not considered fungible.” (emphasis added). That message was withdrawn in 2014 and replaced with “page unavailable.”

In October 2012, Germany said it would repatriate 300 tons of its gold from the Fed. Three months later, in January 2013, it was announced that the U.S. and Germany agreed the U.S. would return 300 tonnes of gold to Germany in a series of shipments that would take until 2020 to complete. The U.S. would continue to store the remaining 1,236 tonnes of Germany's gold.

All this certainly gives the appearance the New York Fed did not actually have the gold. If the bank had it, why not simply give it to Germany instead of stalling and offering excuses? It was, after all, their gold. And why would it take 7 years to return 300 tons? It could be done in a week if necessary; certainly several weeks or even months would be more than adequate—but 7 years? Germany had previously repatriated 940 tons of its gold from the Bank of England without undue delay.

If the New York Fed bank did not have gold for Germany, it would have to buy it to repay Germany, and a large purchase would push up the price, which the bank certainly did not want. Or the bank may have the gold, but it may have been leased, hypothecated or encumbered in some manner so that it could not be transferred to Germany. These possibilities, too, would require additional time to unwind.

It is significant that back in 1999 a study by the International Monetary Fund found that central banks of 80 nations were lending out their gold reserves. The loans amounted to 15 percent of their gold. The central banks were operating as fractional reserve banks, not custodians.

In 1998 Fed chairman Alan Greenspan testified at a House Banking Committee, “Central banks stand ready to lease gold in increasing quantities, should the price of gold rise.” In other words, if gold prices go up, the Fed would make sure they come back down. Why? Apparently because of fear a rising gold price would weaken the dollar's exchange rate and the Fed's control of interest rates, but it would also discourage people from buying gold as an investment, which would also be negative for the dollar. In 2013, gold prices were much higher than in 1998, giving the Fed a stronger reason for knocking down the gold price. And Germany's request to repatriate its gold would be an even stronger reason if the Fed did not actually have all the gold it was supposed to have.

Most Americans would be incredulous that the Fed could be involved in manipulations that left it unable to honor its custodial agreement with Germany. But the European Central Bank website states, regarding statistical treatment of Eurosystem's International Reserves: “reversible transactions in gold do not have any effect on the level of monetary gold regardless of the type of transaction (i.e. gold swaps, repos, deposits or loans), in line with the recommendations contained in the IMF guidelines.” (emphasis theirs). Thus central banks are permitted to carry physical gold on their balance sheet even if they've swapped it or lent it out entirely

Perhaps as a reaction to criticism of its own lack of transparency and cooperation on the German repatriation, the Fed itself in September 2012 asked the Office of the Inspector General of the Treasury to audit the gold. This was to be an audit of gold in the Federal Reserve System and did not include Fort Knox.

The audit took place on September 30, 2012, and the Treasury Report on it is dated January 4, 2013. The report states 99.98% of all Fed gold is held at the New York Federal Reserve Bank. The remaining 0.02% is in coins at other Fed banks around the country. The audit found the New York Fed had 13,378,981.032   troy ounces of gold bars and 73,829.500  troy ounces of gold coins. Converting those troy ounces to metric tons results in a combined total of 419 metric tons. That's all. Yet Germany was supposed to have 1,500 tons of its gold here. And at least 60 other sovereign nations believe their gold is being stored by the Fed there, too.

Further doubt about whether the Fed actually has German gold is raised by the Fed's performance since it agreed in mid-January 2013 to repatriate 300 tons to Germany in seven years. In all of 2013 it sent Germany a paltry 5 tons. In 2011 when Venezuela decided to repatriate its gold from foreign banks, its 160 tons of gold were brought home in two months and five days, ending in January 2012.

Dr. Long Xinming writes that after WWII

The FED came to all countries in Asia, Latin America and Africa and told them their gold holdings might not be safe because of the war, and they should permit the FED to take all of it to the US for safekeeping. Many countries obliged, receiving FED gold certificates in exchange, but when they later tried to cash in those certificates and reclaim their gold, they were told the certificates were fake, that they contained spelling and other mistakes which the FED would never have made, and that the serial numbers were wrong. And the FED still has all that gold.…
Apparently a few people have been successful in presenting their certificates to the FED, with documentation that was irrefutable, but even in those cases the owners were forced to settle for only 1% or 2% of the actual value. And most other people or nations who attempt to redeem these certificates are arrested by the FBI for fraud – at the request of the FED.
Late last year, a Canadian businessman had some of these certificates and tried to use them as collateral for a loan, and the FED had him arrested, extradited to the US, and charged him with fraud. Insiders claim this is common practice to frighten every one away...
For many years after the war, the FED denied these transactions and even denied the existence of these certificates. But a crashed US military plane was found in the Philippine jungle with heavy wooden boxes full of metal containers, all with FED markings, and all containing hundreds of billions of dollars of these same certificates. That was when the entire story finally became public, but the Western media have never cared to report on it.

I have many photos of the content of that aircraft, of the boxes and the cans and the certificates, if anybody cares to see.”

The Fed says it is storing gold for more than 60 central banks, governments, and a few institutions such as the International Monetary Fund in 122 separate accounts at the New York Federal Reserve Bank. How many of these would have to request repatriation or audits of their accounts before an avalanche of similar requests will follow? If there is not enough gold to cover all accounts, no central bank will want to be one of the last to claim its share. There will be a run on the bank such as the world has never seen.

Hyperlinks are not available for sources in the above, but sources are referenced in the print version. Be sure to get the second edition of The Impending Monetary Revolution, the Dollar and Gold because it contains six new chapters not found in the earlier edition. Amazon, Barnes & Noble and other sellers offer only the first edition. The second edition is available only from American Liberty Publishers. (amlibpub.com)

Monday, July 31, 2017

What's Keeping the Stock Market UP?

Central banks are buying stocks. As you probably know, when the Federal Reserve buys bonds from the U.S. Treasury, it creates—out of thin air—a corresponding deposit in one of the large commercial banks where the Treasury has an account. The money from that deposit gets into circulation when the government spends it by buying something with it, for which the seller makes a deposit in his own account. The seller then spends the money from his account to buy something else, and the process of sales and deposits is repeated as the money is circulated in accounts throughout the economy.

The Fed is not the only central bank increasing its money supply in this manner. Other central banks are doing the same thing with their national currencies in the hope of stimulating growth in their economies. Japan is a prime example, having employed this and other “stimulative” policies for more than two decades with poor results. Those decades are called the “lost decades.” From 1991 to 2011 Japan's annual economic growth averaged less than one percent. It now has a debt-to-GDP ratio of 250 %, the highest in the world, and more than three times what it was (65 %) in 1990 when the first of its ten stimulus programs began. But that hasn't stopped Japan from trying larger doses of the same failed policies.

Shinzo Abe was elected prime minister of Japan in large measure on his campaign for monetary easing. In 2013 he said, “Countries around the world are printing more money to boost their competitiveness. Japan must do so too.” He called for more aggressive action along the lines of the Fed and the European Central Bank. That was his prescription for a degree of “needed” inflation to bring Japan out of two decades of economic stagnation and avoid the growing fear that deflation was now a greater threat than inflation. Whereas the Fed buys only U.S. Treasury securities, the central bank of Japan would henceforth buy at the market more than twice the amount of new bonds issued by its government, and it would buy not just government bonds but stocks, ETF's (exchange traded funds), and real estate funds.

Other central banks also broadened the scope of their buying, particularly for common stocks. After all, with near zero interest rates on government securities, buying common stocks at least offered the prospect of higher yield. The chart below shows how the five largest central banks raised their financial assets in ten years from less than $4 trillion to $14.6 trillion. This includes adding a record $1 trillion in just the first four months of 2017. Annualized, that would be $3.6 trillion for the year.

 

The bank of Japan is already a top-five owner of 81 companies in Japan’s Nikkei Stock Average and is on course to become the No. 1 shareholder in 55 of them by the end of next year, according to Bloomberg. And it owns 62 percent of the domestic ETF market.

Swiss National Bank purchased a record $17 billion in US equities in just the first quarter 2017, bringing its total US equity holdings to an all time high above $80 billion, 29% more than at the end of 2016.

Have you wondered why stocks like Apple, Microsoft and Google continue to make big gains in the U.S. indexes such as the Dow-Jones Industrials? These are the kind of big, successful companies that central banks favor. The Swiss National Bank bought almost 4 million shares of Apple in the first three months of this year. It owns more publicly-owned shares of Facebook than founder Mark Zuckerberg, whose holding is worth almost $24 billion. SNB also has over $1 billion each in Exxon Mobile and Johnson & Johnson stocks. SNB is the world's eighth largest public investor.

Until 1996 the Swiss constitution required the Swiss Franc to be 40% backed by gold. In 1992 Switzerland joined the International Monetary Fund. In 1996 an amendment to the Swiss constitution ended the Swiss Franc's gold backing, with the Swiss Parliament stating, “gold no longer has any meaning for monetary policy.”

Switzerland began selling its gold in 2000 when gold was just beginning a powerful 12-year price surge. Since 2000, the SNB has sold about 60% of Swiss gold reserves, about 1,500 tons. It is, therefore, perhaps surprising that in 2013 the SNB began quietly assembling a portfolio of gold and silver mining stocks, which in 2016 consisted of $1 billion of stocks in 32 mining companies. As of August 5, 2016, its two largest holdings were $186,092,033 in Newmont Mining and $157,318,092 in Goldcorp.