Money Flow Trading Method along with Risk Management

IMPORTANT - SUBJECT - MONEY FLOW

http://www.gata.org/node/18034


Benjaminis

GBP/USD Fundamentals

https://news.goldcore.com/uk/gold-bl..._hsmi=60573380


Benjaminis

http://traderfeed.blogspot.ca/2018/0...chology-3.html

Exploiting the edge from historical market patterns
SATURDAY, FEBRUARY 10, 2018
Lessons in Trading and Psychology - 3: Identifying Intraday Reversals
https://4.bp.blogspot.com/-eeLRL6JBQ.../SPY020918.jpg
OK, so recall what we talked about in the previous post that looked at how we can use volume to understand market movements: each day in the market offers us one or more important learning lessons. Our job in reviewing the day is to extract these lessons, so that we can improve our ability to recognize opportunities in real time.

Above we see yesterday's market (SPY) plotted against five minute closing values for the NYSE TICK. Recall that we visited the $TICK measure in the first lesson post that dealt with changes of market regime over a period of days. Now we are examining the change of market character that occurred intraday in Friday's market. Note that the scale for the $TICK values is in standard deviation units, so that we can see how stocks are trading relative to a recent lookback period.

Note how the $TICK line quickly moved below zero during the morning session and largely stayed below zero for most the morning. This tells us that stocks were persistently trading with weakness (on downticks) throughout those morning hours. Something interesting happened midday, however. As we made new lows in SPY, we were seeing much less selling pressure. Indeed, the final low was preceded by a sizable spurt in buying. From that final low, we saw a significant spurt in buying and stayed above the zero line for most of the remainder of the day.

In short, we saw in transition from selling pressure to buying pressure, with a waning of selling preceding the upsurge in buying. The trader seeing this shift in supply/demand was alerted to the likelihood that this was not a trend day to the downside and, indeed, there were many traders leaning short who might need to cover.

Notice also that once we surged above two standard deviations in the $TICK measure (both to the downside in the morning and to the upside during the afternoon), we tended to get follow through of price movement (momentum). Just noticing these dynamics helps keep a trader on the right side of market movement, knowing when to trade a market move and when to fade it.
Further Reading:

Trading With the U.S. TICK Measure

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Posted by Brett Steenbarger, Ph.D.at 5:55 AM

A REAL GAME CHANGER - EVERYONE PLEASE READ AND COMMENT

http://www.gold-eagle.com/article/qu...ters-inflation

THE WHOLE ARTICLE !!!

Antal E. Fekete

January 9, 2003

That central bankers are the quartermasters of inflation is no longer a controversial assertion. That much was admitted by central banker Alan Greenspan in his speech before the Economic Club of New York on December 19, 2002 (see: www.federalreserve.gov/BoardDocs). He observed that as long as the gold standard was in charge of money-creation the price level was relatively stable. For example, in 1929 it was hardly different from that in 1800. But, after gold was banned and central bankers were put in charge in 1933, the consumer price index nearly doubled in two decades. And in the four decades after that prices quintupled. In other words, under the watch of the gold standard the dollar preserved its purchasing power for a period of one and one third of a century, but under the watch of the central bankers it managed to lose 90 percent of it in half of that time-period.


The Specter of Deflation
Presently the specter of deflation is haunting the world, so much so that central banker Ben Bernanke felt obliged to address the problem in a speech before the National Economists Club in Washington, D.C., on November 21, 2002 (see: www.federalreserve.gov/BoardDocs). He presented a simplistic view of deflation defining it as a general decline in prices. Actually, it would be more accurate to say that deflation manifests itself through a general decline in prices andinterest rates. Mr. Bernanke identified the source of deflation as a collapse in aggregate demand -- a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Of course, this is the view of an unreconstructed Keynesian. But Keynesianism has been brain-dead for some three decades, so we ought to feel emancipated from its tyranny. We identify the source of deflation as reluctance of producers to take the loans that bankers try to push on them through ongoing interest-rate cuts. Uncharacteristically, producers are pessimistic about future profit opportunities. Instead of contracting new debt, they scramble to get out of the old, and try to retrench by reducing inventory.


Guided Tour of the Star Chamber
Messrs. Greenspan and Bernanke claim that the Federal Reserve has the situation firmly in hand. If deflation were to develop, options for aggressive monetary policy response such as lowering interest rates are available. They admit that the zero lower bound on nominal interest rates presents a problem. Even if debtors were able to refinance loans at zero nominal interest, they may still feel excruciating economic pain caused by high and rising real rates due to the falling price level, as shown by their deteriorating balance sheet. However, Messrs. Greenspan and Bernanke reassure us that monetary policy will never lose its ability to stimulate aggregate demand and the economy, zero interest notwithstanding.

Mr. Bernanke gives us a guided tour of the Star Chamber, showing all the instruments of torture and explaining how they are to be used. The first of these is the printing press. Under a fiat money system the central bank generates inflation by this technology allowing it to create as many dollars as it wishes at essentially no cost. But it is not enough to create fiat money; you must also be able to put it into circulation or, at least, to make credible threats (sic!) to do so. Normally the Fed puts newly created fiat money into circulation through asset purchases. This particular torture instrument is used by the Fed to reduce the value of the dollar in terms of goods and services. Under a paper-money system a determined government and its central bank can always generate higher spending and induce positive inflation, we are told.


Pushing on a String
If this has the result of pushing short-term interest rates to zero, the Fed will still not be at the end of its rope. It can further stimulate aggregate spending by expanding the menu of assets that it buys. If we do fall into deflation, we can take comfort in the thought that "the logic of the printing press" will ultimately assert itself. Sufficient injections of new money must eventually reverse a deflation.

So what may the Fed do if its target rate, the overnight federal funds rate, has fallen to zero? Why, it will change the target, that's what. It will stimulate spending by lowering interest rates further along the maturity spectrum. It will target the two-year rate by committing to make unlimited purchases of securities maturing in two years or less. But suppose that deflation is so stubborn that spending is not stimulated even as the two- year rate is pushed down to zero. Well, then change the target again, this time, say, to the ten-year rate, committing to make unlimited purchases of securities maturing in ten years or less. And so on, ad libitum. Mr. Bernanke says that lower rates over the entire maturity spectrum of public and private securities should strengthen aggregate demand "in the usual ways", and thus help end deflation.

This betrays our central bankers' ignorance of the nature of the beast. The Fed may be pushing on a string. People may refuse to spend the money in the "usual ways". It is one thing to print fiat dollars, and another to make people spend them. No problem, Mr. Bernanke says. If lowering yields on longer-term securities proved insufficient to re- start spending, the Fed might next consider offering fixed-term loans to banks at zero interest, with a wide-range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.


Operation Helicopter-Drop
But the banks may not use the loans at zero interest in the way intended by the Fed. They may not want to make further loans to their clients whose prospects to turn a profit are dim at best. The banks may find it far more attractive to invest in bonds for the capital gains guaranteed by the central bank's zero-interest policy. Business lethargy may not react to loans offered at ever lower rates. In this case Mr. Bernanke recommends the helicopter-drop of money, an idea first suggested by Milton Friedman. There must be a way to put fiat money into circulation, if not by hook then by crook! A broad-based tax- cut financed by open market purchases of securities by the Fed should do the trick. This "manna from heaven" should re-start spending. The Federal Reserve and other policymakers are far from helpless in the face of deflation, even if the rate of interest is already pushed all the way to zero.


Taking Risks out of Bond Speculation
All this talk is old hat, except for the fact that heretofore it hasn't been considered polite behavior for central bankers to flaunt their authority to create fiat money in unlimited quantities, and to boast their power to drive down the value of the dollar in terms of goods and services. More interesting than what these gentlemen say is what they don't say. They studiously avoid reference to the 100 trillion dollar behemoth: the interest-rate derivatives market, and to bond speculation. Derivatives are a tell-tale, revealing the big picture. Far from trying to prevent or to combat it, the Fed is promoting deflation. It does, in fact, act as the quartermaster of deflation. Every one of the torture instruments in the Star Chamber enumerated above is making deflation worse, not better.


What the $100 trillion derivatives market shows is that the main feature of deflation is the invisible but nonetheless real bull market in bonds. Nobody is talking about it, although the bull market in bonds that started in 1980 has been the largest of all bull markets of all kinds in all history. Fabulous fortunes have been made and will be made before it is over, thanks to the Fed that has taken the risk out of bond speculation.

The speeches of Messrs. Greenspan and Bernanke are the best example to demonstrate the charge. Speculators are told that the Fed is prepared to buy unlimited quantities of securities across the entire maturity spectrum. What is this if not an invitation to get aboard the bandwagon and share the ride to infinite riches? Come and get the bonds before we snap them up. Fear not, your investment is absolutely safe. Your friendly central banker has made bond speculation risk-free. He underwrites the unlimited capital gains you are going to make on your speculative bondholdings (or on your long positions on bond futures, or on your call options on bond futures). The figure $100 trillion shows the extent to which speculators have rallied to the call of the Pied Piper. It measures bets in the aggregate that speculators have made on ever-increasing bond prices or, what is the same to say, on ever falling interest rates.
Multiplying Asset Values a Thousand-fold

Of course, interest rates will never go to zero. They just keep getting halved. The yield on long-term Treasury bonds was 16% in 1980. It has been halved to 8% and will be halved again to 4%, according to the script of Messrs. Greenspan and Bernanke. After that the target at successive halvings will be: 2%, 1%, 0.5%, 0.25%, 0.125%, 0.0625%, etc. As you see, it never gets to 0%. Yet at each halving, the market value of the long-term bond will practically double. Suppose that in 1980 you invested $1,000 in a 30-year bond. Suppose further that the rate of interest would continue to be halved again and again. Your investment after each consecutive halving would increase in value to $2,000, $4,000, $8,000, $16,000, $32,000, $64,000, $128,000, $256,000, $512,000, $1,024,000, etc. On the top of that, by clipping coupons you would be reaping a nice income, too. Thus, as a rule of thumb, the value of your investment would be multiplied by a factor of 1,000 as the rate of interest fell to 0.03%. Although this result cannot be guaranteed, the downside risk is nil, thanks to Messrs. Greenspan and Bernanke. (My example is a simplification for purposes of illustration. In the actual case bond speculators may use strip bonds, and they may roll forward the maturity several times.)
Needless to say, bond speculators are very much alive to the risk-free opportunity to multiply the value of their assets 1,000-fold. Already they have amassed wealth greater than any group of speculators has ever done in history. Their combined financial resources exceed that of central banks and governments. Naturally, they have a vested interest, and the financial strength, to keep the merry-go-round going -- and they will.


Essence of Deflation
The U.S. government may well be unconcerned about the fact that the liquidation-value of its debt is escalating 1,000-fold due to the falling interest-rate structure. After all, the Fed has the printing press to create dollars with which to liquidate any liability, however large. The producers are not so fortunate. They have to produce more and sell more if they want to get out of debt before maturity. Producing more and selling more in a falling interest-rate environment may not be possible, however. What this shows is that the essence of deflation is not falling prices. Rather, it is falling interest rates, being pushed down by bond speculation that has been made risk-free by the central bank. Falling interest rates bankrupt productive enterprise by rendering it unable to extricate itself from the clutches of debt contracted at higher rates. The debt becomes ever more onerous as its liquidation value threatens to increase 1,000-fold.

What these central bankers don't understand is that, while they have the power to put unlimited amounts of fiat money into circulation, they have no power to make it flow in the "approved" direction. Money, like water, may refuse to flow uphill. In a deflation money shall not flow to the commodity market to bid up prices as central bankers hope that it will. Instead, it shall flow downhill to the bond market where the fun is, to bid up prices there. When the central bank makes bond speculation risk-free, then the bond market will act like a gigantic vacuum cleaner, sucking up dollars from every nook and cranny of the economy. In putting ever more fiat money into circulation the central bank cuts the figure of a cat chasing its own tail. More fiat money pushes interest rates lower; falling interest rates put more pressure on producers to cut prices, calling for still more fiat money, completing the vicious circle. The interest rate structure and the price level are linked. Subject to leads and lags, they keep moving together in the same direction. It is not funny to watch the Fed chasing its own tail. In doing so it generates a deflationary spiral that may ultimately bankrupt the entire producing sector. Like the Sorcerer's Apprentice, the central banker can start the march to zero interest, but it hasn't got a clue how to stop it when the deflationary spiral gets out of control.


Falling Interest Rates Squeeze Profits
Paradoxically, falling interest rates squeeze profits. Conventional wisdom suggests otherwise: lower interest rates are considered salubrious to business. However, we ought to distinguish between a low interest rate structure and a falling one. Only the former is salubrious; the latter is lethal. Falling interest rates reveal that past investments in physical capital have been made at too high a rate of interest in view of lower rates presently available. Furthermore, even the low rates of today will appear too high tomorrow. This explains business lethargy. Expanding production would appear foolhardy as long as the decline in the rate of interest continued. Falling interest rates make the cost of servicing past investments soar. As bond prices rise, the present value of debt will rise as well. So does the cost of liquidating a liability. These increases hit the profit margin, regardless whether the fact is realized by the producers or not. If not realized, the outcome will be that much worse. As the firm is paying out phantom profits in dividends, it is undermining its own financial strength already weakened by the falling price level. At one point the firm will be unable to pay its bills and will be forced to seek bankruptcy protection. Then there is the matter of the domino-effect. Even perfectly healthy firms are hit by deflation: they may find it impossible to collect their receivables and go under after their debtors have -- all because of the falling interest rate structure.


Financial Vampirism
In the view presented here deflation is a huge wealth-transfer scheme from the producing sector to the financial sector, denuding the former of its capital, and enriching the latter with risk-free capital gains. Indeed, the beneficiaries of the falling interest-rate structure, making risk-free profits thanks to the zero-interest policy of the central bank, are the principals of the financial sector, chief among them those of the big money-center banks. Their obscene profits do not come out of thin air. Their wealth is not newly created wealth. It is existing wealth siphoned off the balance sheet of producing enterprise, forced into bankruptcy by the falling interest-rate structure. This is modern vampirism practiced by the financial sector, aided and abetted by the central bank, and its victim is the producing sector.
The bear market in stocks is not the cause but the effect of deflation. The cause is the artificial bull market in bonds financed by the central bank. If you ask the bond speculator about his obscene profits while the rest of the economy crumbles around him, he will shrug: "I play by the rules. And I did not make those rules either."


Bond Speculation Is No Zero-Sum Game
The proof of complicity of the banks in the bond-speculation-scheme is the $100 trillion derivative monster. No small-time speculators could create such a Moloch. It was created by the big money-center banks, for their own benefit, with complete disregard for the disastrous effect it has on the producers of goods and services. The total face value of outstanding bonds falls far short of the colossal figure of $100 trillion. It is against common sense, and an invitation to disaster, to allow speculative long positions to exceed total supply. Messrs. Greenspan and Bernanke have no comment on all this, except to confirm policies that are conducive to further increasing the debt behemoth and further whetting the appetite of the $100 trillion derivatives Moloch.

We are told that the sum of $100 trillion is "only a notional amount". However, the profits of the bond speculators are not notional. They are payable in cold cash. If indeed interest rates did go down, and the price of bonds did go up, say, one percent, then the speculators' profit would be $1 trillion in cash. Who is going to pay that?

Economists will tell you that the profit of one bond speculator is the loss of another. Don't buy that. It would be true only if speculation was a zero-sum game, and it was a case of stabilizing speculation. It is true that some speculative markets answer that description. An example is the commodity market trading agricultural goods. It fits the model of a zero-sum game. This is so because the risks involved in commodity trading are nature-given, having to do with the fickleness of the weather and the unpredictability of natural catastrophes such as a flood or a tornado. Human mortals are not privileged to see the future. Speculators in agricultural commodities make money by resisting the formation of price trends. But in markets where the risks are made (unmade!) by man such as the market for bonds and their derivatives, speculation is not a zero-sum game. There, speculators make money not by resisting price trends but by riding them. This is the case of destabilizing speculation.

But if the profit of one bond speculator is not paid by another, then who is paying it? This is a critical question and it deserves a careful answer. The other side of the bet of A, the bull speculator in bonds, is taken by a banker B for hedging rather than speculative purposes. He has sold the bond to A in order to hedge his exposure in lending money to C, an entrepreneur in the producing sector. His risk is that interest rates might rise before his loan to C matures that would punch a big hole in his balance sheet. With his hedge on, the position of B is neutral with regard to changes in the rate of interest. His position is that of a straddle with a long and a short leg. Losses on one leg are canceled by profits on the other. Therefore, if there is a loss on B's short leg, as is virtually certain in view of the "threats" made by Mr. Bernanke, then it is simply transferred to C, the counter-party to the long leg of B's straddle. The loss is charged to C. The profit of bond speculator A is paid by C. This means that, ultimately, the losers paying the $1 trillion in gains to the bond speculators are the producers. To add insult to injury, they are kept in the dark about the existence of Mr. Bernake's casino where the fleecing takes place.


Power to Create Is Power to Destroy
The producers are sitting ducks in this speculative shoot-out. They have no choice. They must carry the risk of owning productive capital, without which there will be no consumer goods for Mr. Greenspan and Mr. Bernanke, or for you and me. This is an accurate description of the mechanism whereby the capital of the producing sector is surreptitiously siphoned off for the benefit of the financial sector as the rate of interest is driven down to zero. The producing sector is condemned to bankruptcy. It is a victim of plunder sanctioned by the Criminal Code. This is the essence of deflation: speculators aided and abetted by the central bank are allowed to bid bond prices sky-high, in complete disregard for the havoc that falling interest rates will wreak with the capital accounts of the producing sector, not to mention losses inflicted on stockholders. The $100 trillion derivatives market is a monument to the folly of man in delegating unlimited power to the central banker to create as much fiat money as he wishes. Former central banker Paul Volcker knows. He has been there. He is quoted as saying that "the truly unique power of a central bank is to create money and, ultimately, the power to create is the power to destroy." If the central banker has unlimited power to create, then he has unlimited power to destroy. And destroy he does, especially the savings of ordinary people.


Why Are Economists Silent?
I am aware that my warnings will be received with a great deal of skepticism. The central banker as the quartermaster-general of deflation? Arrant nonsense! Not only does the central bank has its own army of research economists, it also has the benefit of the knowledge and research of the entire profession. There can be no question that the central bank wields its awesome power while enjoying the best economic advice money can buy! Siphoning off wealth from the balance sheet of others is straight out of science fiction, my critics charge. The allegedly injured party, the producing sector, hasn't complained that its capital is open to pilferage. The media in reporting the crash of Swissair and United did not suggest foul play in plundering the airlines' balance sheets.

Yet you may dismiss my charges only at your own peril. The awareness is growing that not just the media, but the entire profession of monetary economists has been bought off by the central banking establishment in order to put the best possible spin on our fiat money system. In an interview on December 17, 2002, entitled "Our Dishonest and Corrupt Monetary System" (www.kitco.com), Dr. Larry Parks recalled that John Kenneth Galbraith, the Paul M. Warburg Professor Emeritus of Harvard University, had published a book in 1975 entitled Money, Whence It Came, Where It Went. In this book the professor wrote: "The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it." In other words, Galbraith is saying that when it comes to money, economists lie! Dr. Parks asks: why do they lie? They have tenure. Why don't they tell the truth? He concludes that the monetary economists, for the last fifty years or more, have been bought off. With Nobel-prizes, endowed chairs, research grants, board memberships, and other perks. Monetary economists have betrayed their Muse, to serve Mammon.


Off-Balance-Sheet Wizardry
That the profession of the accountants has been bought off by the financial sector came to light recently in the wake of the Wall Street accounting scandals. But in spite of the great publicity given to these scandals by the media, the problem has not been fixed. A few small-time crooks may have been apprehended, but none of the authors of the scheme whereby banks are allowed to cook their books has been charged. The truth is that banks can carry assets, such as bets in the derivatives markets, "off balance sheet". They do this in order to find shelter from the scrutiny of depositors, creditors, shareholders; more generally, from the scrutiny of taxpayers at large. Accountants, regulators, and bank inspectors know this, but that's a different matter. Apparently, they have been bribed, too. They are part of the conspiracy. This is how Dr. Parks describes the fraud:
"Fractional reserve lending is jargon for creating money out of nothing. That's what that means. In the case of derivatives, these are bets that the banks make. The banks today in the aggregate worldwide have made roughly $110 trillion worth of bets. That's all they are. Banks are making bets and creating money. One of the things that obscures this for everybody is that banks alone do not have to reveal their entire balance sheets, as all other public companies must do under Securities and Exchange Commission regulations. Banks have the option, with some of their assets, to put them in a basket that they call "held for investment". When they put assets in that basket (they could be stocks, bonds, or whatever), then those assets are held at historical costs, rather than at market value... Nobody else gets away with this except for them. The reason they get away with it is because they say, in effect: 'If we had to mark everything to market, there would be too much volatility in our earnings. We don't want you to find out.' All this is secret. It's called bank secrecy... There are winners and there are losers. The losers are the ordinary people who lose their pensions, their savings, their jobs. The winners are the financial guys... These guys have no downside... Do you know what the banks took out of the economy last year? Nearly $400 billion. The Wall Street firms who get transaction fees for moving the newly created money around took another roughly $250 billion. Between them they took out nearly three times the amount of money that the auto industry took out. But from the auto industry we got 20 million cars. What did we get from these guys? We got cancelled checks and bank statements. This is monstrous, don't you think?"


Playing with Fire
I am not predicting that interest rates will keep falling to zero and that the world economy will succumb to deflation. I just want to sound the alarm that it might, in view of the counter-productive monetary policy of central bankers. Other scenarios, no less frightening, are also possible. Paradoxically, the threat of zero-interest (deflation) and that of infinite-interest (hyperinflation) are separated only by the knee-jerk reaction of the marginal bond speculator. He may get scared by the threats of Mr. Bernanke to undermine the purchasing power of the dollar further. As he becomes persuaded by the "logic of the printing press", the marginal bond speculator may cut and run. Then other bond speculators, especially those abroad, could dump their U.S. Treasury bonds, too, and run for the exit. Quite possibly Mr. Bernanke thought that he was just "fine-tuning" the purchasing power of the dollar. Under this scenario he would destroy it. When the central banker threatens to reduce the value of the dollar in terms of goods and services, as Mr. Bernanke does, he is playing with fire. After dumping the bonds, people may dump the dollars, too. First the foreign and then the domestic holders. They need not be reminded that the central banker has the card to trump deflation -- by triggering hyperinflation. How desperate must the specter of deflation appear to Mr. Bernanke that he has seen it fit to flaunt his possession of that card!


Congress, Not the Fed, Has the Solution
It is not too late for the U.S. Congress to act to fend off disaster. It should immediately take away the unlimited power from Messrs. Greenspan and Bernanke to create as much fiat money as they wish, and to drive down the value of the dollar in terms of goods and services. Not only are the present monetary arrangements blatantly unconstitutional, they are responsible for the destabilization of the rate of interest allowing it to swing from one extreme to the other, causing grievous economic damage along its path. The House of Representatives, to which the Constitution delegated the monetary powers, can rectify this by going back to constitutional money. It should stabilize interest rates without any further delay, and remove the threat of both zero and infinite interest, by opening the Mint to gold and silver. This is a Republic based on checks and balances. It has a government of limited and enumerated powers. Neither arm: not the legislative, not the executive, nor the judiciary may claim to have unlimited powers under the Constitution. Why should officers of the Federal Reserve be allowed to make such claims?
Free coinage, a right of the people enshrined in the U.S. Constitution, would remove the greatest threat this Republic has faced in its entire history up to now, greater even than that of foreign terrorists. This is the threat to destroy the capital of the producing sector, through the machinations of the financial sector, aided and abetted by the Federal Reserve.


January 1, 2003
Copyright 2003 by Antal E. FeketeJanuary 18, 2003

CORRECTION
I am very grateful to James E. Schoenbeck for calling my attention to a mathematical error in the example I used in my latest article The Central Banker As the Quartermaster-General of Deflation. I also used the same example in earlier articles such as Wrecker's Ball of Swinging Interest Rates. Mr. Schoenbeck wrote me on January 8, 2003, as follows:
"Professor:
While I enjoyed reading your article, I take dramatic exception to your pricing of the hypothetical bond as interest rates decline. If the interest rate dropped from 16% to 0% overnight, the price on the 30-year bond with 16% coupon, $1,000 par, would go to $5,800. A nice increase, to be sure, but nowhere near the 1,000-fold capital gains of which you talk

While it is true that the value of a 30-year bond will almost double when the rate is halved from 16 to 8%, it is no longer true as it is halved further from 8 to 4%, from 4 to 2%, from 2 to 1%, etc. Below is a table showing how the value of a $1,000 investment in a 30-year bond goes up with each halving (after which the investor takes profits and rolls out to a new 30-year maturity)

16 to 8%$1,000 to $1,900- - - - - - - - - - - - - - -
8 to 4%$1,000 to $1,700or $1,900 to $3,200
4 to 2%$1,000 to $1,450or $3,200 to $4,684
2 to 1%$1,000 to $1,260or $4,684 to $5,855
1 to 0.5%$1,000 to $1,140or $5,855 to $6,675
0.5 to 0.25%$1,000 to $1,070or $6,675 to $7,142
0.25 to 0.125%$1,000 to $1,037or $7,142 to $7,406
0.125 to 0.0625%$1,000 to $1,019or $7,406 to $7,546
Wouldn't you agree that we are fast approaching a limit here? The value of the $1,000 investment will stay below $10,000 no matter how many times the rate of interest is cut into half, and will never be worth anything like $1,024,000 under any circumstances. Sorry... but making money is not that easy..."

James E. Schoenbeck
[email protected]
I concede that under the simple strategy of buying and holding the 30-year bond, or continually rolling it over to new 30-year bonds, the $1,000 investment cannot be doubled in value with each successive halvings of the rate of interest. But there are other more sophisticated strategies available involving strip bonds, and derivatives such as: bond futures, call and put options on bond futures, knock-out calls and knock-out puts, interest-rate swaps, and various combinations of these which bond speculators can use, and do use, in order to double their investment (or do even better) every time the rate of interest is halved. I quote from J. Taylor's Gold & Technology Stocks newsletter, January 7, 2003, issue (www.miningstocks.com):

"Michael B. O'Higgins was able to turn $1,000 into $415,302 by being in bonds, not stocks... If you invested $1,000 in the Dow in 1972, that investment would have been worth only $27,347 as of December 27, 2002. But had you invested $1,000 mostly in bonds during that time, your initial investment would have turned into $422,819." (Visit www.miningstocks.com for more information on this amazing but true story which can be fully documented. The point is that lenders make a killing during periods of falling interest rates at the expense of debtors.)



But even these fabulous profits could not explain the creation of the $100 trillion derivatives market coming, as it did, out of nowhere. Individual bond speculators could not possibly accomplish this feat. It was accomplished by the big money-center banks. They are responsible for the prolonged agonizing fall of the interest-rate structure, the flipside of which is the snowballing of the derivatives monster. They make up the bond market. They run it. They buy the bonds and interest-rate derivatives before the Fed can buy, since the Fed buys through services they can provide. If there has ever been socially devastating insider trading, then this is it.
My point is that Keynesian monetary policy takes the risk out of bond speculation. It makes it extremely profitable and a sure bet. This explains the persistent fall in interest rates, and the snowballing of the derivatives market, all of which spell deflation. Deflation is not merely falling prices; it is falling prices plus falling interest rates, squeezing the debtors. This deadly combination is not an Act of God. It is caused by unlimited speculation in bonds, with profits underwritten by the central bank.

Keynesian contra-cyclical monetary policy and "deflation control" is a disaster. Nostrums advocated by Milton Friedman and other monetarists are equally disastrous. Far from containing deflation, the central bank is causing it, through its counter-productive measures such as bond-buying programs widely advertised through speaking engagements such as those of Messrs. Greenspan and Bernanke, prompting more and more bond speculators to climb on the bandwagon to have a free ride to riches. Rather than relieving debt-implosion, this mindless monetary policy is, in fact, the one identifiable cause of it through the bankrupting of the producing sector.

Mr. Bernanke made a solemn vow to Milton Friedman at his 90th birthday party at the University of Chicago. He vowed that the Fed would not repeat the mistakes it had made in the 1930's in not whipping and chastizing deflation vigorously enough. This brings to mind the Biblical story of King Rehoboam, the son of King Solomon, who answered the people when they petitioned him to lighten their burden: "My father hath made your yoke heavy; I will add to your yoke. My father chastized you with whips; I will chastize you with scorpions." (First Book of Kings, 12:11.) May God save the producers of this country from the yoke and the scorpions of the Fed.
January18, 2003

Antal E. Fekete

THE REST OF THE STORY

https://www.bloomberg.com/news/artic...le-blower-says


Benjaminis

https://www.zerohedge.com/news/2018-...ops+to+zero%29

Party Time!
So now, it’s party time.


“Laissez les bons temps rouler,” as they say in New Orleans.

As predicted in our “headlines from the future” on Friday, look for $2 trillion deficits – 10% of GDP!

By 2027, we should have a federal debt near $40 trillion.

But that’s the easy part…

The actions of politicians are more or less predictable; the market’s reaction is not. Most likely, the unstoppable force of fed borrowing will collide with the immovable object of the bond market.

The feds are already scheduled to borrow more than $1 trillion over the course of the next year – even without a recession.

This coincides with the Fed unloading bonds at a $600 billion annual pace.

Let’s see: Much less demand for credit… and much more supply.

And no “Powell Put.”

For the moment, the new Fed chief, Jerome Powell, and his governors are staying home, catching up on their Bible reading. The party poopers have forsworn further bond purchases.

So no one is guaranteeing to buy the government’s paper.


Crescendo of Dumbness
Most likely, interest rates will rise… and speculators will begin front-running the Fed.

One of the most looney features of the Bernanke-Yellen leadership years was the “transparency” doctrine.

Unlike their predecessor Alan Greenpsan, who famously spoke in mumbo-jumbo, Ben Bernanke and Janet Yellen telegraphed their intentions to investors.

Unfortunately, neither Fed chief had experience in business… or markets. And they seemed to have no idea how they worked.

Real investing is a win-win proposition: You put your money into a real business. It makes real money. You share in the profits.

Speculating, on the other hand, is win-lose.

Speculators do not buy and sell based on their assessment of the intrinsic value of a given asset. Instead, they look across the table and try to guess what cards other speculators are holding… and what they will do with them.

They look for the “fool at the table” and try to anticipate what dumb mistake he will make.

For the last 10 years, the fool was easily identifiable. It was the Fed.

The U.S. central bank slashed interest rates to near zero to juice up the stock market.

Then under three separate QE programs, it bought more than $4 trillion worth of government bonds at some of the highest prices in history.

And in a breathtaking crescendo of dumbness, it signaled to speculators exactly what it intended to do ahead of time.


Piece of Cake
Naturally, the other players – hedge funds, Wall Street banks, pension funds, etc. – took advantage.

They bought stocks and bonds knowing they could unload them at higher prices.

Uncertainty is what keeps traders honest. They take chances. But they know their bets could go bad. So they are cautious… and often corrected.

But when the Fed – by far the largest player at the table – tells them in advance what it will do, uncertainty declines.

In this way, the Fed greatly reduced risk. And it was “Party On!” – from excess to more excess, with nothing to stop them.

Now, the Fed – clueless as ever – has once again made its intentions known. It’s going to raise interest rates and let the bond pile it built up during QE shrink… removing an important prop from the market.

How long will it take traders to put two and two together now?

Betting against it – by selling stocks and bonds – should be a piece of cake.
Regards,
https://ci6.googleusercontent.com/pr...-signature.png
Bill

Good Morning Everyone

I am going to tie this recent article written by Bill Bonner and shared here this morning and the predictive and factual article written by Professor Fekete on January 9, 2003.

http://www.gold-eagle.com/article/qu...ters-inflation

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Antal E. Fekete

January 9, 2003

That central bankers are the quartermasters of inflation is no longer a controversial assertion. That much was admitted by central banker Alan Greenspan in his speech before the Economic Club of New York on December 19, 2002 (see: www.federalreserve.gov/BoardDocs). He observed that as long as the gold standard was in charge of money-creation the price level was relatively stable. For example, in 1929 it was hardly different from that in 1800. But, after gold was banned and central bankers were put in charge in 1933, the consumer price index nearly doubled in two decades. And in the four decades after that prices quintupled. In other words, under the watch of the gold standard the dollar preserved its purchasing power for a period of one and one third of a century, but under the watch of the central bankers it managed to lose 90 percent of it in half of that time-period.

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The Specter of Deflation
Presently the specter of deflation is haunting the world, so much so that central banker Ben Bernanke felt obliged to address the problem in a speech before the National Economists Club in Washington, D.C., on November 21, 2002 (see: www.federalreserve.gov/BoardDocs). He presented a simplistic view of deflation defining it as a general decline in prices. Actually, it would be more accurate to say that deflation manifests itself through a general decline in prices andinterest rates. Mr. Bernanke identified the source of deflation as a collapse in aggregate demand -- a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Of course, this is the view of an unreconstructed Keynesian. But Keynesianism has been brain-dead for some three decades, so we ought to feel emancipated from its tyranny. We identify the source of deflation as reluctance of producers to take the loans that bankers try to push on them through ongoing interest-rate cuts. Uncharacteristically, producers are pessimistic about future profit opportunities. Instead of contracting new debt, they scramble to get out of the old, and try to retrench by reducing inventory.

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Guided Tour of the Star Chamber
Messrs. Greenspan and Bernanke claim that the Federal Reserve has the situation firmly in hand. If deflation were to develop, options for aggressive monetary policy response such as lowering interest rates are available. They admit that the zero lower bound on nominal interest rates presents a problem. Even if debtors were able to refinance loans at zero nominal interest, they may still feel excruciating economic pain caused by high and rising real rates due to the falling price level, as shown by their deteriorating balance sheet. However, Messrs. Greenspan and Bernanke reassure us that monetary policy will never lose its ability to stimulate aggregate demand and the economy, zero interest notwithstanding.

Mr. Bernanke gives us a guided tour of the Star Chamber, showing all the instruments of torture and explaining how they are to be used. The first of these is the printing press. Under a fiat money system the central bank generates inflation by this technology allowing it to create as many dollars as it wishes at essentially no cost. But it is not enough to create fiat money; you must also be able to put it into circulation or, at least, to make credible threats (sic!) to do so. Normally the Fed puts newly created fiat money into circulation through asset purchases. This particular torture instrument is used by the Fed to reduce the value of the dollar in terms of goods and services. Under a paper-money system a determined government and its central bank can always generate higher spending and induce positive inflation, we are told.

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Pushing on a String
If this has the result of pushing short-term interest rates to zero, the Fed will still not be at the end of its rope. It can further stimulate aggregate spending by expanding the menu of assets that it buys. If we do fall into deflation, we can take comfort in the thought that "the logic of the printing press" will ultimately assert itself. Sufficient injections of new money must eventually reverse a deflation.

So what may the Fed do if its target rate, the overnight federal funds rate, has fallen to zero? Why, it will change the target, that's what. It will stimulate spending by lowering interest rates further along the maturity spectrum. It will target the two-year rate by committing to make unlimited purchases of securities maturing in two years or less. But suppose that deflation is so stubborn that spending is not stimulated even as the two- year rate is pushed down to zero. Well, then change the target again, this time, say, to the ten-year rate, committing to make unlimited purchases of securities maturing in ten years or less. And so on, ad libitum. Mr. Bernanke says that lower rates over the entire maturity spectrum of public and private securities should strengthen aggregate demand "in the usual ways", and thus help end deflation.

This betrays our central bankers' ignorance of the nature of the beast. The Fed may be pushing on a string. People may refuse to spend the money in the "usual ways". It is one thing to print fiat dollars, and another to make people spend them. No problem, Mr. Bernanke says. If lowering yields on longer-term securities proved insufficient to re- start spending, the Fed might next consider offering fixed-term loans to banks at zero interest, with a wide-range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.

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Operation Helicopter-Drop
But the banks may not use the loans at zero interest in the way intended by the Fed. They may not want to make further loans to their clients whose prospects to turn a profit are dim at best. The banks may find it far more attractive to invest in bonds for the capital gains guaranteed by the central bank's zero-interest policy. Business lethargy may not react to loans offered at ever lower rates. In this case Mr. Bernanke recommends the helicopter-drop of money, an idea first suggested by Milton Friedman. There must be a way to put fiat money into circulation, if not by hook then by crook! A broad-based tax- cut financed by open market purchases of securities by the Fed should do the trick. This "manna from heaven" should re-start spending. The Federal Reserve and other policymakers are far from helpless in the face of deflation, even if the rate of interest is already pushed all the way to zero.


Taking Risks out of Bond Speculation
All this talk is old hat, except for the fact that heretofore it hasn't been considered polite behavior for central bankers to flaunt their authority to create fiat money in unlimited quantities, and to boast their power to drive down the value of the dollar in terms of goods and services. More interesting than what these gentlemen say is what they don't say. They studiously avoid reference to the 100 trillion dollar behemoth: the interest-rate derivatives market, and to bond speculation. Derivatives are a tell-tale, revealing the big picture. Far from trying to prevent or to combat it, the Fed is promoting deflation. It does, in fact, act as the quartermaster of deflation. Every one of the torture instruments in the Star Chamber enumerated above is making deflation worse, not better.


What the $100 trillion derivatives market shows is that the main feature of deflation is the invisible but nonetheless real bull market in bonds. Nobody is talking about it, although the bull market in bonds that started in 1980 has been the largest of all bull markets of all kinds in all history. Fabulous fortunes have been made and will be made before it is over, thanks to the Fed that has taken the risk out of bond speculation.

The speeches of Messrs. Greenspan and Bernanke are the best example to demonstrate the charge. Speculators are told that the Fed is prepared to buy unlimited quantities of securities across the entire maturity spectrum. What is this if not an invitation to get aboard the bandwagon and share the ride to infinite riches? Come and get the bonds before we snap them up. Fear not, your investment is absolutely safe. Your friendly central banker has made bond speculation risk-free. He underwrites the unlimited capital gains you are going to make on your speculative bondholdings (or on your long positions on bond futures, or on your call options on bond futures). The figure $100 trillion shows the extent to which speculators have rallied to the call of the Pied Piper. It measures bets in the aggregate that speculators have made on ever-increasing bond prices or, what is the same to say, on ever falling interest rates.


Of course, interest rates will never go to zero. They just keep getting halved. The yield on long-term Treasury bonds was 16% in 1980. It has been halved to 8% and will be halved again to 4%, according to the script of Messrs. Greenspan and Bernanke. After that the target at successive halvings will be: 2%, 1%, 0.5%, 0.25%, 0.125%, 0.0625%, etc. As you see, it never gets to 0%.

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Falling Interest Rates Squeeze Profits
Paradoxically, falling interest rates squeeze profits. Conventional wisdom suggests otherwise: lower interest rates are considered salubrious to business. However, we ought to distinguish between a low interest rate structure and a falling one. Only the former is salubrious; the latter is lethal. Falling interest rates reveal that past investments in physical capital have been made at too high a rate of interest in view of lower rates presently available. Furthermore, even the low rates of today will appear too high tomorrow. This explains business lethargy. Expanding production would appear foolhardy as long as the decline in the rate of interest continued. Falling interest rates make the cost of servicing past investments soar. As bond prices rise, the present value of debt will rise as well. So does the cost of liquidating a liability. These increases hit the profit margin, regardless whether the fact is realized by the producers or not. If not realized, the outcome will be that much worse. As the firm is paying out phantom profits in dividends, it is undermining its own financial strength already weakened by the falling price level. At one point the firm will be unable to pay its bills and will be forced to seek bankruptcy protection. Then there is the matter of the domino-effect. Even perfectly healthy firms are hit by deflation: they may find it impossible to collect their receivables and go under after their debtors have -- all because of the falling interest rate structure.


Financial Vampirism
In the view presented here deflation is a huge wealth-transfer scheme from the producing sector to the financial sector, denuding the former of its capital, and enriching the latter with risk-free capital gains. Indeed, the beneficiaries of the falling interest-rate structure, making risk-free profits thanks to the zero-interest policy of the central bank, are the principals of the financial sector, chief among them those of the big money-center banks. Their obscene profits do not come out of thin air. Their wealth is not newly created wealth. It is existing wealth siphoned off the balance sheet of producing enterprise, forced into bankruptcy by the falling interest-rate structure. This is modern vampirism practiced by the financial sector, aided and abetted by the central bank, and its victim is the producing sector.
The bear market in stocks is not the cause but the effect of deflation. The cause is the artificial bull market in bonds financed by the central bank. If you ask the bond speculator about his obscene profits while the rest of the economy crumbles around him, he will shrug: "I play by the rules. And I did not make those rules either."


Bond Speculation Is No Zero-Sum Game
The proof of complicity of the banks in the bond-speculation-scheme is the $100 trillion derivative monster. No small-time speculators could create such a Moloch. It was created by the big money-center banks, for their own benefit, with complete disregard for the disastrous effect it has on the producers of goods and services. The total face value of outstanding bonds falls far short of the colossal figure of $100 trillion. It is against common sense, and an invitation to disaster, to allow speculative long positions to exceed total supply. Messrs. Greenspan and Bernanke have no comment on all this, except to confirm policies that are conducive to further increasing the debt behemoth and further whetting the appetite of the $100 trillion derivatives Moloch.

We are told that the sum of $100 trillion is "only a notional amount". However, the profits of the bond speculators are not notional. They are payable in cold cash. If indeed interest rates did go down, and the price of bonds did go up, say, one percent, then the speculators' profit would be $1 trillion in cash. Who is going to pay that?

Economists will tell you that the profit of one bond speculator is the loss of another. Don't buy that. It would be true only if speculation was a zero-sum game, and it was a case of stabilizing speculation. It is true that some speculative markets answer that description. An example is the commodity market trading agricultural goods. It fits the model of a zero-sum game. This is so because the risks involved in commodity trading are nature-given, having to do with the fickleness of the weather and the unpredictability of natural catastrophes such as a flood or a tornado. Human mortals are not privileged to see the future. Speculators in agricultural commodities make money by resisting the formation of price trends. But in markets where the risks are made (unmade!) by man such as the market for bonds and their derivatives, speculation is not a zero-sum game. There, speculators make money not by resisting price trends but by riding them. This is the case of destabilizing speculation.

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Power to Create Is Power to Destroy
The producers are sitting ducks in this speculative shoot-out. They have no choice. They must carry the risk of owning productive capital, without which there will be no consumer goods for Mr. Greenspan and Mr. Bernanke, or for you and me. This is an accurate description of the mechanism whereby the capital of the producing sector is surreptitiously siphoned off for the benefit of the financial sector as the rate of interest is driven down to zero. The producing sector is condemned to bankruptcy. It is a victim of plunder sanctioned by the Criminal Code. This is the essence of deflation: speculators aided and abetted by the central bank are allowed to bid bond prices sky-high, in complete disregard for the havoc that falling interest rates will wreak with the capital accounts of the producing sector, not to mention losses inflicted on stockholders. The $100 trillion derivatives market is a monument to the folly of man in delegating unlimited power to the central banker to create as much fiat money as he wishes. Former central banker Paul Volcker knows. He has been there. He is quoted as saying that "the truly unique power of a central bank is to create money and, ultimately, the power to create is the power to destroy." If the central banker has unlimited power to create, then he has unlimited power to destroy. And destroy he does, especially the savings of ordinary people.


Why Are Economists Silent?
I am aware that my warnings will be received with a great deal of skepticism. The central banker as the quartermaster-general of deflation? Arrant nonsense! Not only does the central bank has its own army of research economists, it also has the benefit of the knowledge and research of the entire profession. There can be no question that the central bank wields its awesome power while enjoying the best economic advice money can buy! Siphoning off wealth from the balance sheet of others is straight out of science fiction, my critics charge. The allegedly injured party, the producing sector, hasn't complained that its capital is open to pilferage. The media in reporting the crash of Swissair and United did not suggest foul play in plundering the airlines' balance sheets.

Yet you may dismiss my charges only at your own peril. The awareness is growing that not just the media, but the entire profession of monetary economists has been bought off by the central banking establishment in order to put the best possible spin on our fiat money system. In an interview on December 17, 2002, entitled "Our Dishonest and Corrupt Monetary System" (www.kitco.com), Dr. Larry Parks recalled that John Kenneth Galbraith, the Paul M. Warburg Professor Emeritus of Harvard University, had published a book in 1975 entitled Money, Whence It Came, Where It Went. In this book the professor wrote: "The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it." In other words, Galbraith is saying that when it comes to money, economists lie! Dr. Parks asks: why do they lie? They have tenure. Why don't they tell the truth? He concludes that the monetary economists, for the last fifty years or more, have been bought off. With Nobel-prizes, endowed chairs, research grants, board memberships, and other perks. Monetary economists have betrayed their Muse, to serve Mammon.


Off-Balance-Sheet Wizardry
That the profession of the accountants has been bought off by the financial sector came to light recently in the wake of the Wall Street accounting scandals. But in spite of the great publicity given to these scandals by the media, the problem has not been fixed. A few small-time crooks may have been apprehended, but none of the authors of the scheme whereby banks are allowed to cook their books has been charged. The truth is that banks can carry assets, such as bets in the derivatives markets, "off balance sheet". They do this in order to find shelter from the scrutiny of depositors, creditors, shareholders; more generally, from the scrutiny of taxpayers at large. Accountants, regulators, and bank inspectors know this, but that's a different matter. Apparently, they have been bribed, too. They are part of the conspiracy. This is how Dr. Parks describes the fraud:
"Fractional reserve lending is jargon for creating money out of nothing. That's what that means. In the case of derivatives, these are bets that the banks make. The banks today in the aggregate worldwide have made roughly $110 trillion worth of bets. That's all they are. Banks are making bets and creating money. One of the things that obscures this for everybody is that banks alone do not have to reveal their entire balance sheets, as all other public companies must do under Securities and Exchange Commission regulations. Banks have the option, with some of their assets, to put them in a basket that they call "held for investment". When they put assets in that basket (they could be stocks, bonds, or whatever), then those assets are held at historical costs, rather than at market value... Nobody else gets away with this except for them. The reason they get away with it is because they say, in effect: 'If we had to mark everything to market, there would be too much volatility in our earnings. We don't want you to find out.' All this is secret. It's called bank secrecy... There are winners and there are losers. The losers are the ordinary people who lose their pensions, their savings, their jobs. The winners are the financial guys... These guys have no downside... Do you know what the banks took out of the economy last year? Nearly $400 billion. The Wall Street firms who get transaction fees for moving the newly created money around took another roughly $250 billion. Between them they took out nearly three times the amount of money that the auto industry took out. But from the auto industry we got 20 million cars. What did we get from these guys? We got cancelled checks and bank statements. This is monstrous, don't you think?"


Playing with Fire
I am not predicting that interest rates will keep falling to zero and that the world economy will succumb to deflation. I just want to sound the alarm that it might, in view of the counter-productive monetary policy of central bankers. Other scenarios, no less frightening, are also possible. Paradoxically, the threat of zero-interest (deflation) and that of infinite-interest (hyperinflation) are separated only by the knee-jerk reaction of the marginal bond speculator. He may get scared by the threats of Mr. Bernanke to undermine the purchasing power of the dollar further. As he becomes persuaded by the "logic of the printing press", the marginal bond speculator may cut and run. Then other bond speculators, especially those abroad, could dump their U.S. Treasury bonds, too, and run for the exit. Quite possibly Mr. Bernanke thought that he was just "fine-tuning" the purchasing power of the dollar. Under this scenario he would destroy it. When the central banker threatens to reduce the value of the dollar in terms of goods and services, as Mr. Bernanke does, he is playing with fire. After dumping the bonds, people may dump the dollars, too. First the foreign and then the domestic holders. They need not be reminded that the central banker has the card to trump deflation -- by triggering hyperinflation. How desperate must the specter of deflation appear to Mr. Bernanke that he has seen it fit to flaunt his possession of that card!

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Congress, Not the Fed, Has the Solution
It is not too late for the U.S. Congress to act to fend off disaster. It should immediately take away the unlimited power from Messrs. Greenspan and Bernanke to create as much fiat money as they wish, and to drive down the value of the dollar in terms of goods and services. Not only are the present monetary arrangements blatantly unconstitutional, they are responsible for the destabilization of the rate of interest allowing it to swing from one extreme to the other, causing grievous economic damage along its path. The House of Representatives, to which the Constitution delegated the monetary powers, can rectify this by going back to constitutional money. It should stabilize interest rates without any further delay, and remove the threat of both zero and infinite interest, by opening the Mint to gold and silver. This is a Republic based on checks and balances. It has a government of limited and enumerated powers. Neither arm: not the legislative, not the executive, nor the judiciary may claim to have unlimited powers under the Constitution. Why should officers of the Federal Reserve be allowed to make such claims?
Free coinage, a right of the people enshrined in the U.S. Constitution, would remove the greatest threat this Republic has faced in its entire history up to now, greater even than that of foreign terrorists. This is the threat to destroy the capital of the producing sector, through the machinations of the financial sector, aided and abetted by the Federal Reserve.



Copyright 2003 by Antal E. Fekete

January 18, 2003

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CORRECTION
I am very grateful to James E. Schoenbeck for calling my attention to a mathematical error in the example I used in my latest article The Central Banker As the Quartermaster-General of Deflation. I also used the same example in earlier articles such as Wrecker's Ball of Swinging Interest Rates. Mr. Schoenbeck wrote me on January 8, 2003, as follows:
"Professor:
While I enjoyed reading your article, I take dramatic exception to your pricing of the hypothetical bond as interest rates decline. If the interest rate dropped from 16% to 0% overnight, the price on the 30-year bond with 16% coupon, $1,000 par, would go to $5,800. A nice increase, to be sure, but nowhere near the 1,000-fold capital gains of which you talk

While it is true that the value of a 30-year bond will almost double when the rate is halved from 16 to 8%, it is no longer true as it is halved further from 8 to 4%, from 4 to 2%, from 2 to 1%, etc. Below is a table showing how the value of a $1,000 investment in a 30-year bond goes up with each halving (after which the investor takes profits and rolls out to a new 30-year maturity)

16 to 8%$1,000 to $1,900- - - - - - - - - - - - - - -
8 to 4%$1,000 to $1,700or $1,900 to $3,200
4 to 2%$1,000 to $1,450or $3,200 to $4,684
2 to 1%$1,000 to $1,260or $4,684 to $5,855
1 to 0.5%$1,000 to $1,140or $5,855 to $6,675
0.5 to 0.25%$1,000 to $1,070or $6,675 to $7,142
0.25 to 0.125%$1,000 to $1,037or $7,142 to $7,406
0.125 to 0.0625%$1,000 to $1,019or $7,406 to $7,546
Wouldn't you agree that we are fast approaching a limit here? The value of the $1,000 investment will stay below $10,000 no matter how many times the rate of interest is cut into half, and will never be worth anything like $1,024,000 under any circumstances. Sorry... but making money is not that easy..."

James E. Schoenbeck
[email protected]
I concede that under the simple strategy of buying and holding the 30-year bond, or continually rolling it over to new 30-year bonds, the $1,000 investment cannot be doubled in value with each successive halvings of the rate of interest. But there are other more sophisticated strategies available involving strip bonds, and derivatives such as: bond futures, call and put options on bond futures, knock-out calls and knock-out puts, interest-rate swaps, and various combinations of these which bond speculators can use, and do use, in order to double their investment (or do even better) every time the rate of interest is halved. I quote from J. Taylor's Gold & Technology Stocks newsletter, January 7, 2003, issue (www.miningstocks.com):

"Michael B. O'Higgins was able to turn $1,000 into $415,302 by being in bonds, not stocks... If you invested $1,000 in the Dow in 1972, that investment would have been worth only $27,347 as of December 27, 2002. But had you invested $1,000 mostly in bonds during that time, your initial investment would have turned into $422,819." (Visit www.miningstocks.com for more information on this amazing but true story which can be fully documented. The point is that lenders make a killing during periods of falling interest rates at the expense of debtors.)



But even these fabulous profits could not explain the creation of the $100 trillion derivatives market coming, as it did, out of nowhere. Individual bond speculators could not possibly accomplish this feat. It was accomplished by the big money-center banks. They are responsible for the prolonged agonizing fall of the interest-rate structure, the flipside of which is the snowballing of the derivatives monster. They make up the bond market. They run it. They buy the bonds and interest-rate derivatives before the Fed can buy, since the Fed buys through services they can provide. If there has ever been socially devastating insider trading, then this is it.
My point is that Keynesian monetary policy takes the risk out of bond speculation. It makes it extremely profitable and a sure bet. This explains the persistent fall in interest rates, and the snowballing of the derivatives market, all of which spell deflation. Deflation is not merely falling prices; it is falling prices plus falling interest rates, squeezing the debtors. This deadly combination is not an Act of God. It is caused by unlimited speculation in bonds, with profits underwritten by the central bank.

Keynesian contra-cyclical monetary policy and "deflation control" is a disaster. Nostrums advocated by Milton Friedman and other monetarists are equally disastrous. Far from containing deflation, the central bank is causing it, through its counter-productive measures such as bond-buying programs widely advertised through speaking engagements such as those of Messrs. Greenspan and Bernanke, prompting more and more bond speculators to climb on the bandwagon to have a free ride to riches. Rather than relieving debt-implosion, this mindless monetary policy is, in fact, the one identifiable cause of it through the bankrupting of the producing sector.

Mr. Bernanke made a solemn vow to Milton Friedman at his 90th birthday party at the University of Chicago. He vowed that the Fed would not repeat the mistakes it had made in the 1930's in not whipping and chastizing deflation vigorously enough. This brings to mind the Biblical story of King Rehoboam, the son of King Solomon, who answered the people when they petitioned him to lighten their burden: "My father hath made your yoke heavy; I will add to your yoke. My father chastized you with whips; I will chastize you with scorpions." (First Book of Kings, 12:11.) May God save the producers of this country from the yoke and the scorpions of the Fed.
January18, 2003

Antal E. Fekete

“Monetary Policy’s” Engine-of-Inflation

Mark J. Lundeen
[email protected]
09 February 2018

Two Friday’s ago, (January 26th) the Dow Jones made its latest BEV Zero, new all-time high. Nine trading days later (Thursday Feb 8th) it broke below its BEV -10% line in a very dramatic fashion.

The BEV plot seen below begins at the absolute low of the October 2007 to March 2009 -54% bear market. The post credit-crisis advance took the Dow Jones up over 20,000 points in nine years. But you wouldn’t know that by looking at the Bear’s Eye View (BEV) chart below. What we see below is the advance as seen in the eyes of Mr Bear; each new post credit-crisis high in the Dow Jones is equal to a Big-Fat Zero (0.00%) as that’s how Mr Bear sees them. What the big furry fellow wants to see is how many percentage points he can claw back from each of the bulls’ new highs. And that’s exactly what we see below; new highs (BEV Zeros) and percentage declines from each BEV Zero since 09 March 2009.

Since March 2009, the Dow Jones has seen deeper corrections from a BEV Zero. But this was the first double-digit percentage decline that took only nine trading days. That’s got to make us wonder if something is different this time.
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So I took a historical look at those times the Dow Jones moved +/- 10% (or more) in only nine days in the chart below. And yes such moves, and much greater ones are common, if not always frequent occurrences – IN BEAR MARKETS.

The latest nine day -10% move occurred on Thursday last week. Is this an isolated spike in volatility occurring outside the context of a bear market? There are a few of these seen below, but not many. Or are we seeing the first volatility spike in a bear market cluster yet to be formed?
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The past week has seen more than its fair share of excitement. In Mr Bear’s report card below we see seven extreme days, three NYSE 70% A-D days (extreme breadth) and four days of extreme market volatility. From a market that refused to correct a simple 5% in the past eighteen months, it has now collapsed by over 10% in only nine NYSE trading sessions. This makes me suspect something has changed in the past two weeks. Historically, such concentration of extreme days doesn’t happen unless something ugly is bubbling beneath the surface of the market.
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Again this week I searched my files for old charts I haven’t published for a while and came across one plotting the Dow Jones daily volatility’s 200 Day M/A, using the absolute value of each day’s percent movement from the previous day’s closing price. Its resemblance to the Dow Jones’ 200 count, the number of Dow Jones 2% days (four seen above) in a running 200 day sample, is remarkable.


With rare exception, seeing the Dow Jones daily volatility’s 200 Day M/A spike above the 1% line marks a bear market bottom, and the degree to which it rises above the 1.0% line indicates the severity of the market decline. I marked the April 1942 -52.2% bear market with a green triangle as this massive bear market is one of those exceptions, a huge bear market that few people paid any attention to.

After the market catastrophe of 1929-32 and the 1937-38 bear market, both events clearly seen in the chart below, the public was out of the market and would not return until a generation with no personal memories of the trauma of the 1930s came into adulthood. Hey Baby Boomers, I’m talking about us and our retirement funds invested in the stock market. At present, my generation is very exposed to the ups and downs of Wall Street, but I’m digressing from the April 1942 -52.2% bear market bottom.
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After the depressing 1930s, my parents and grandparents’ generation were more concerned about the return of their money than the return on it, and kept their savings in the bank. In truth, for them it wasn’t a bad decision. But today that option isn’t available to us baby boomers.


Decades ago deposits from savers were essential for the banking system, so they encouraged people to save money and banks offered competitive interest rates for deposits. But banks today get their money from the Federal Reserve (at the Fed Funds Rate) so banks don’t need deposits from savers or have to pay a decent rate of return on saver’s deposits. In fact, the banking system find people who want to save money annoying. Rather, they encourage people to bury themselves in consumer debt and to invest for “the long term” in the stock market to fund their retirements. What could go wrong with that?

At the time of writing this article, the “policy makers” have fixed interest rates for savings accounts at an annual return of 0.14% and the five year US Savings Bond (Series EE) pays only 0.10%. Junk bonds yielding over 6% (what banks used to pay) looks pretty good in comparison to income-starved retirees.

But back to April 1942 in the chart above, considering the pubic was out of the stock market, and a World War the United States entered just four months before, I’m not surprised this -52% decline in the Dow Jones was mostly ignored as people had more important things on their minds. But that April 1942 bottom was the beginning of a huge bull market that didn’t peak until 1966.

The next three decades saw little volatility, until after August 1971 when the US Treasury officially severed the dollar’s link to the Bretton Woods’ $35 gold peg. The effects on market volatility were soon to come. Two years later began the January 1973 to December 1974, -45% bear market, the first 40% decline in the Dow Jones since April 1942. Note also how from August 1971 to this day, the Dow Jones’ daily volatility’s 200 Day M/A rarely declined below its 0.50% line, a level of volatility the Dow Jones frequently found itself below from 1942 to 1971.

Which brings me to the next point I want to make about this chart; in the past year daily volatility (Black Circle) in the Dow Jones had declined to levels not seen since 1945 and 1966. This is only the third time since January 1900 daily volatility for the Dow Jones has been this low. Is that good or bad? For someone who entered the market in past years, and got out today, I’d say this low volatility was good. The question in everyone’s mind is; will it continue being good for people who remain in the stock market for the “long term?”

The point to keep in mind with this chart going back to January 1900 (118 years) is how bull markets terminate, and bear markets originate at volatility troughs (bottoms) seen in the chart above. With the Dow Jones once again seeing frequent days of extreme volatility (2% days), the case that an important market top is now behind us can be made, and should be respected by investors. This is not the time to fall in love with the stock market.

Of course today’s big bulls are central banks, whose ability to fund purchases with monetary inflation is theoretically unlimited. So we may still see the Dow Jones making additional new all-time highs in the months to come, with more than just a little help from the Plunge Protection Team (PPT). Here’s a clipping from John Crudele covering Monday’s day of extreme volatility:
By John Crudele February 5, 2018 | 11:05pm


NEW YORK POST
Did Washington save the stock market on Monday?

“It may be hard to make the case that anyone or anything helped Wall Street as stocks lost about 4 percent of their value and the Dow Jones industrial average tumbled 1,175 points — after a 666-point decline on Friday.

“But the Dow and other indices were in complete collapse right before the start of Monday’s final hour of trading. At one point the Dow, which represents only 30 stocks but is still a widely followed indicator, tumbled to a loss of about 1,600 points.

That’s as big of a decline as ever.”
Of course the “policy makers” came into the market. They’ve been doing exactly that since October 1987 when Alan Greenspan turned around a market meltdown.
However, should bond yields continue rising, even the global central banking cartel will find it impossible to resist Mr Bear. But with or without the PPT’s interference, I believe the party on Wall Street is over. There will be more pain than pleasure to be had in staying in the market for the next few years. It’s time to go. If not into gold and silver related assets, then into short-term US Treasury bills currently yielding about 1.5% for protection of principle.

In Mr Bear’s report card above we also saw three new NYSE 70% Days, or days of extreme market breadth. These are computed as follows.
Advancing Shares – Declining Shares / Total Shares Traded that Day.

I find the number of shares trading that day by adding the advancing + declining + unchanged shares listed for the day.

Should this ratio break above +69.999% or break below -69.999%, the NYSE just saw a day of extreme market breadth, a NYSE 70% A-D Day, and these are rare market events. Since 1924 there have only been 386 such days, with the bulk of them occurring during the depressing 1930s and again since the beginnings of the sub-prime mortgage crisis. I highlighted these two clusters of extreme market breadth in the chart below.

It’s a point of interest how during the Greenspan Fed (August 1987 – March 2006) the NYSE only saw eleven days of extreme market breadth as he first inflated a massive inflationary bubble in the high-tech shares, and then into the retail real estate market.
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The table below gives the specifics. In the 1930s cluster they occurred at a rate of 10.13 a year. In our current cluster they have occurred at a rate of 11.55 a year. During the sixty-five years spanning these two clusters (1942 to 2007), they occurred at a rate of only 1.49 a year.
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Our cluster of extreme market breadth began in February 2007. Three months later Fed Chairman Dr. Bernanke began uttering total nonsense to a gullible media.
"We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

- Fed Chairman Ben Bernanke, May 17, 2007
Eleven years later we all know how that worked out. In the following year the global financial system almost collapsed, and would have, had not the global central banking system entered into the financial system in a manner it had never done before. The explosion of reserves in the banking system below in the wake of the sub-prime mortgage crisis is shocking. One doesn’t need a Ph.D. in economics to realize the Federal Reserve was forced to “inject” massive amounts of “liquidity” into the banking system in response to the mortgage crisis.

This chart also puts to rest the false belief that price movements in gold and silver are driven by trends in monetary inflation. There’s enough inflation seen below to drive the old monetary metals to prices that are simply not believable, yet prices in gold and silver continue to be in a funk.

No, I still stand by my belief that bull markets in gold and silver are driven by deflation in financial assets whose valuations were first inflated by the “monetary policy” seen below. So, if you want higher gold and silver prices, you’re just going to have to wait until the stock and bond markets are deflating once again. It’ll happen; we just have to be patient.
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If I were forced to say why I believe our current cluster of NYSE 70% A-D days has continued to grow since February 2007, I’d say it’s because for the past eleven years the “policy makers” have found it necessary to continue managing the financial markets as they never had to before February 2007, because for the last decade the financial markets remain dangerously unstable.

The Dow Jones (Blue Plot) in the step sum chart below seems to support that view of the market. Markets priced at fair value simply don’t see their valuation evaporate by 10% in just nine trading days, as we see below.
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Also, trading volume (Red Plot chart below) for the Dow Jones once again exploded on the current decline. As with the sub-prime bear market (2007-09), we all know who is selling; the public. The question is; who’s buying? I believe it’s the “policy makers” doing their “market stability” thing one more time.
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So how is gold doing? Considering the big drop in the COMEX open interest (Red Plot below), actually pretty darn good! The big banks on Wall Street ramp up OI as the price of gold advances, and then dump their contracts to drive the price of gold down. Well, we can all see the big decline in OI in the chart below. However, though the price of gold did decline, its decline doesn’t seem proportionate to the decline in OI.
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So we know how, beginning at the end of January, the gold cartel has activated yet another assault on the price of gold. However, so far it hasn’t really taken down the price of gold as much as they must have wanted it to go. But then there is always next week.

The “policy makers” still have control over the gold and silver markets. I say that because the Silver to Gold Ratio (SGR below) remains very high. It closed the week at 80.49 ounces of silver for one ounce of gold. That makes the price of gold cheap and the price of silver ridiculous.
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We’ll know when the grip of their malignant fingers begin to slip off the valuations of the old monetary metals, by seeing the above ratio beginning to decline, as seen from October 2008 to April 2011. Seeing the SGR once again below 40 should set the “policy makers” into full panic mode of operation, as it did in 2011.
But the next time, will they be able to put the old monetary metals back into their box, as they did in 2011? Well, in 2011 bond yields were still declining and stock valuations continued to advance. Since then interest rates have bottomed and have been advancing for the past few years, if not by much, as seen with mortgage rates below.
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Rising mortgage rates is yet another example why higher bond yields and interest rates will cause huge problems for the “policy makers” efforts in controlling the valuations of the old monetary metals. In past weeks, I’ve mentioned how rising bond yields will trigger Wall Street’s interest-rate derivative neutron bomb. But it’s no different for real estate (mortgages).

Look at the table in the chart. Using an amortization table, I computed the size of the mortgage principle (house price) for the maximum and minimum mortgage rates since 1964, and for three other mortgage rates. Home owners tend to focus on how much a house (mortgage principle) they can afford. This isn’t so for the banks writing their mortgage; they focus on how large a mortgage the prospective house buyers’ MONTHLY PAYMENTS will afford.

And that is exactly what is seen in the chart’s table, the principle afforded to a $1,000 monthly payment on a 30 year mortgage. There are lots of variables in why a house goes up in price, but seldom mentioned was the decline in mortgage rates from 1981 to 2012. In fact, you can see how Dr. Bernanke from November – December 2008, during the mortgage crisis, drove down mortgage rates from 6% down to 4% in just a couple of weeks to reflate the deflating real estate market.
Imagine what happens when this monetary engine-of-inflation goes into reverse, when mortgage rates once again begin to rise in earnest. For example: a $255,500 home purchased in October 2012 when mortgage rates were at 2.43% may still have lots of perspective buyers who can afford a $1,000 monthly payment. But should mortgage rates increase to where they were before the mortgage crisis, 6%, a $1,000 a month mortgage payment will only be able to afford a $168,000 mortgage.

And that’s the best case scenario. Who believes in a massive bear market, which I’m assuming is coming our way, where the pool of perspective home homeowners who can afford a $1,000 monthly payment isn’t going to do anything but shrink? The deflationary implications of rising interest rates and bond yields on real estate, stocks and bonds are huge!

Given this deflationary situation in financial assets, I can’t imagine where gold and silver, assets with no counterparty risk, won’t benefit from the flight of refugee dollars, fleeing the previously mentioned financial asset valuations “monetary policy” had grotesquely over inflated.

So let’s take a look at gold (Blue Plot) and its step sum below. I don’t know what it will look like next week, but at the end of THIS week, gold looks good. It could be better, but as it is gold came very close to making a new high in an advance that began in December 2015 and is now correcting – period.
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One thing is certain, when the Dow Jones dropped 10% in nine days, gold itself only lost 2.31% over those same days as Wall Street did everything to support the Dow Jones, and to undermine the price of gold. As James Dines used to say: it’s a game fish that swims upstream!

The difference between gold and the Dow Jones can be seen in their step sum tables below. In the past twenty-five trading days gold’s step sum has advanced by a net of 4 advancing days, while the Dow Jones only +2. And then the Dow Jones from January 5th to the 26th went up 1,321 points (5.22%). That’s sounds like irrational exuberance to me, just before the Dow Jones sheds 10.36% on February 8th. All in all, gold is looking much better than the Dow Jones in the tables below.
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As I’ve said before, I’m out of the market-prediction business. I do all this work researching the market, from which I make a prognostication of what is going to happen next week, next month, and then the market makes a monkey out of me.

Well to hell with that. But I’m willing to dive into the possibilities of what the future may hold for us by reading the market’s tea leaves. And I expect we’ll see both gold and the Dow Jones going up in the following weeks, but with a difference.

Gold will be advancing within the context of an extended bull market that began in December 2015. The advancement in the Dow Jones as a dead-cat bounce back towards its last all-time high. Though I have to say that the Dow Jones could make a new all-time high if the dudes at the FOMC make the effort, but the days where they have that option are numbered.

WATCH BOND YIELDS AND INTEREST RATES!

Benjaminis: You can see by the last few articles that I have posted starting back during 2003 , 15 years ago the REAL TRUTH about what has been going on with the help of the "BIS" Bank of International Settlements (The Central Bank of Central Banks) Read "Tower Of Basel" by Adam Lebor "The Shadowy History Of The Secret Bank That Runs The World"

The only way that I can help anyone reading my posts is to make sure that you understand and you can only understand by asking questions or sharing your own thoughts so I STRONGLY ENCOURAGE anyone reading this to post here on my thread. Thank You...

The following PDF file from Ice Cap Global published October 2017 should allow the reader to understand the change in the STATUS QUO in the Bond World.

http://icecapassetmanagement.com/wp-...et-Outlook.pdf

Snippet (1)

Darlin’ you got to let me know After all, avoiding near-certain losses should be the most important goal for every investor. Yet, the confusion today is that practically every talking and writing head has declared everything to be at extreme risk levels. In reality, everything cannot decline at once – money and capital just doesn’t move that way. Yet, as chaos continues to engulf our world, traditional investment metrics seemingly make less and less sense. And once you understand this all important fact – then and only then, will you be able to ignore the hyperbole, tune out the 24-7 talking heads, and dismiss the irrelevant quarterly commentaries from the big bank mutual funds.

For investors, these are exciting times. Markets are on the cusp of some of the most dramatic movements we’ve never seen. In this latest IceCap Global Outlook, we examine where and why you should be nervous, what to do, and along the way – sing and enjoy the show. During the 1970s, The Clash pushed rock and roll to the edge. Their hard charging, explosive, and anger-filled style, inspired spiked hair, rocked generations and forced people to question conventional thinking. Along the way, they rocked the casbah. They called London. They got lost in a super market and then they went straight to hell. For many – The Clash was the only band that mattered.

For investors, they are more – much more. Today, as investors around the world become increasingly anxious, one of the greatest Clash songs of all time is making a comeback. In board rooms, on trade desks, in living rooms and around kitchen tables – investors everywhere are nervously singing “Should I Stay or Should I go.” Stock market investors are nervous. Housing market investors are nervous. Gold and oil investors are nervous. US Dollar and Euro investors are nervous too.

Our view on global investment markets: October 2017 – “Should I Stay or Should I Go?” Keith Dicker, CFA President & Chief Investment Officer [email protected] www.IceCapAssetManagement.com Twitter: @IceCapGlobal Tel: 902-492-8495 www.IceCapAssetManagement.com


1 Darlin’ you got to let me know After all, avoiding near-certain losses should be the most important goal for every investor. Yet, the confusion today is that practically every talking and writing head has declared everything to be at extreme risk levels. In reality, everything cannot decline at once – money and capital just doesn’t move that way. Yet, as chaos continues to engulf our world, traditional investment metrics seemingly make less and less sense. And once you understand this all important fact – then and only then, will you be able to ignore the hyperbole, tune out the 24-7 talking heads, and dismiss the irrelevant quarterly commentaries from the big bank mutual funds. For investors, these are exciting times. Markets are on the cusp of some of the most dramatic movements we’ve never seen. In this latest IceCap Global Outlook, we examine where and why you should be nervous, what to do, and along the way – sing and enjoy the show.

During the 1970s, The Clash pushed rock and roll to the edge. Their hard charging, explosive, and anger-filled style, inspired spiked hair, rocked generations and forced people to question conventional thinking. Along the way, they rocked the casbah. They called London. They got lost in a super market and then they went straight to hell. For many – The Clash was the only band that mattered. For investors, they are more – much more. Today, as investors around the world become increasingly anxious, one of the greatest Clash songs of all time is making a comeback. In board rooms, on trade desks, in living rooms and around kitchen tables – investors everywhere are nervously singing “Should I Stay or Should I go.” Stock market investors are nervous. Housing market investors are nervous. Gold and oil investors are nervous. US Dollar and Euro investors are nervous too.

October 2017 Should I Stay or Should I Go www.IceCapAssetManagement.com

2 Should I stay or should I go? Instead – investment managers can be slotted into 3 groups: Group 1 – this manager works for a mega-big investment firm, that is typically a part of an even bigger firm – a bank. These firms are devoid of dynamic thinking. All peripheral visions have been checked at the door. Client money comes in through the same door and then it is always invested the same way, with no consideration of any significant and obvious events on the horizon. These managers have no market view, and if for some strange reason they possessed a market view, the compliance and enterprise risk management departments would sniff it out and exterminate it faster than a speeding macchiato. These firms did not see the tech bubble breaking until it was too late. These same firms did not see the housing bubble breaking until it was too late. And, today these same firms continue to whistle, Disney-themed tunes as the world passes them bye.

Group 2 – these managers were burnt badly by the last crisis and therefore continue to fight the last war. In many ways - these managers are to be commended. They understand risk. They understand how the loss of capital can be devastating for their clients. The Stock Market What can we say – there’s an awful lot of people out there saying an awful lot of awful things about the stock market. The central theme or reason for these negative views is entirely based upon stock market valuation. This view is of course wrong. And to understand why, first you must understand the background supporting these awful claims. For starters, many who proclaim stock investors are living on the edge, have actually been living on the edge themselves. Many of these bearish investors have shockingly been out of the stock market since the 2008 crash, with others selling out just a few years later. Investors must know that despite the marketing machines, the Hollywood movies, and the internets – many investment managers are simple humans; full of emotion, full of pride, and perhaps worst of all – more stubborn than a goat. Yes, many managers today are not insensitive, objective androids possessing the gift, the ability, the process and the flexibility to change their investment mind.

October 2017 Should I Stay or Should I Go www.IceCapAssetManagement.com

3 If you say that you are mine And since stocks are more expensive today than compared to immediately before the 2000 and 2008 bubbles, then stocks must therefore be on the verge of crashing yet again. But they haven’t. Another commonly trolled chart shows the VIX or market fear index: And since this data point shows current markets are also at the exact same level as they were prior to the 2000 and 2008 bubbles, then stocks therefore must also be on the verge of cracking again. But they haven’t. Next, the stock bears whip out charts showing the deterioration in Consumer Credit, the effect of Stock Buy Backs on Earnings per Share, These managers have really nice intentions. Yet their deepest concerns about another stock market crash has kept them out of stocks during one of the largest rallies in stock market history. These managers are so geared towards another market crash that they epitomize confirmation bias. Every single waking hour, day and week – which have turned into months and now years are spent agonizing over how markets are not correctly priced.

The confirmation bias first begins with showing how stocks are more expensive today than they were immediately before the 2008 crash and immediately before the 2000 crash.

October 2017 Should I Stay or Should I Go 2000 2008 2017 www.IceCapAssetManagement.com

4 I’ll be here ‘til the end of time record high profit margins, lower trending GDP, Donald Trump, Brexit, Marine Le Penn, North Korea, Russia, and the beat goes on. Yet, stocks continue to defy gravity. Then there’s the money printing, zero interest rates, negative interest rates, financial oppression, and the socialized bad debt. And yet, stock markets just won’t go down. In fact, not only will stocks not go down, but they continue to go up. Yes – it’s confusing. But it’s only confusing for those using linear thinking, one dimensional perspectives, and the refusal to consider that maybe there’s something else a foot. Here at IceCap, we completely agree with this negative assessment of all the above factors. Yes, on a stand alone and consolidated basis, a stock market specific focus concludes nothing good is about to happen. Yet – this is the very point that is completely missed by managers in Group 2. They absolutely refuse to even consider for a moment that their analysis of risk is correct BUT maybe the risk will not be reflected in the stock market. Throughout all of these negative reports and analysis, one major

October 2017 Should I Stay or Should I Go point is missing – the consideration that all of the risk in the world today certainly does exist, yet this risk lies within a market completely different than the stock market. And since, none of these managers in Group 2 believe a major risk can ever occur outside of the stock market – then it is completely missed and dismissed. Whereas the managers in Group 2 are singularly focused on the stock market, other managers have assessed the exact same global macro dynamics but came to a different conclusion as to where the risk really lies. Which naturally brings us to investment managers in Group 3. Group 3 – in many ways, these managers are similar to those in Group 2. They also have terrific intentions, possess a laser-like attention to avoiding capital losses, and a strongly held belief that markets can be pushed and pulled into extreme positions. Yet, the difference between the two groups lies in the ability to remain asset class agnostic. Whereas the managers in Group 2 are solely focused on the stock market as being the center of all evil. Managers in Group 3 believe that at different times, any market can be either good or evil. www.IceCapAssetManagement.com

5 So you got to let me know October 2017 Should I Stay or Should I Go What we mean by this, is that these managers in Group 3 never fall in or out of love with any investment market. Just as there are times to embrace and avoid stocks, the same is true for bonds, gold, currencies and different commodities. When market conditions change, so too will the investment view of these managers. But the key point to understanding this seemingly obvious expectation – and is completely missed by those managers in Group 2; all markets are interconnected. In other words, stock markets cannot move in isolation without impacting other markets. And of the utmost importance – other markets cannot move in isolation without impacting the stock market. And, perhaps the single, biggest revelation of all and commonly missed by many – the financial world does not revolve around the stock market. Yes, the global stock market is big. But it is dwarfed by bond markets, interest rate markets and currency markets. Walk onto the trading floor of any major bank and you’ll see that over 75% of the floor is dedicated to bond, interest rate & currency trading. The remaining sliver is for the stock market. Believing the stock market is the king of the hill, is akin to believing the tail wags the dog.

Understanding this all important point, will help you see the why the conclusion of the managers in Group 2 has been wrong. Whether they realise it or not, all of their analysis has assumed that everything is fine in the bond, interest rate and currency world. The reason for this is quite obvious. For many, the stumbling block today is the fact that during the past 35 years – every market crisis has eventually manifested itself in the stock market. And since few in the industry today have worked beyond the last 35 years, then they inherently believe that every crisis is eventually reflected in the stock market. Here at IceCap, we clearly see that today’s global financial world contains risk unlike anything we’ve seen before in our lifetime. After all, 35 years of accumulated effects of central bank policies, bailouts, fiscal deficits, and excessive borrowings have culminated in today’s rather awkward financial position. www.IceCapAssetManagement.com

6 Should I stay or should I go? October 2017 Should I Stay or Should I Go Yet, the culmination of these awkward moments, lies in the fact that central banks and their craft have finally hit rock bottom. And in the confusing world of bonds, interest rates, debt and currencies – hitting rock bottom is really the opposite of what you’d expect. It is bad. The reason it is bad, is because when interest rates are falling – the bond market zooms higher and higher. Reality is also true. When interest rates begin to zoom higher – the bond market drops like a stone. And because this stone is multiple times bigger than the stock market, the ripples turn into waves that will gush investors out of the bond market seeking safety. And contrary to every manager in Group 2 – this safety zone will be the USD, gold and yes, the stock market. So, to answer the classic question from The Clash about the stock market – absolutely stay.

The ride will be a bit rough, but it will be nothing compared to what is about to happen in the bond market. The Bond Market It’s coming. And when it hits, it is going to be a doozy. The global bond market is on the verge of doing something never before seen in our lifetime. Of course, the trick to seeing and understanding this certain risk is simply acknowledging the length of your current investment experience. Just because something hasn’t occurred over the last 35 years, doesn’t mean it can never happen. The near-complete lack of acceptance of a bond bubble is partly due in course to the fact that over the past 35 years, the investing world has only ever seen crises in the stock market. To understand why investors see it this way, see Chart 1 on the next page. The chart shows the history of long-term interest rates in the United States from 1962 to 2017. Note how from 1962 to 1982, long-term interest rates increased from 3% all the way up to 16%. During this 20 year period of rising long-term rates, financial markets were a disaster. No one made money.

Stock investors lost money. And bond investors lost a lot of money.

www.IceCapAssetManagement.com

7 Chart 1: Historical US 10-year Treasury Yield October 2017 Should I Stay or Should I Go 1982 1962 2017 Everyone today has only experienced this period No-one today has ever experienced this period Source: US Federal Reserve www.IceCapAssetManagement.com

8 If I go, there will be trouble Life was so bad – especially for bond investors, that by the time 1982 rolled around you couldn’t give a bond away. If you were an investor or working in the investment industry at the time – you were painfully aware of the bond market and you were schooled to never, ever buy a bond again. Of course, 1982 was actually the best time ever to buy a bond. With long-term rates dropping like a stone over the next 35 years, bond investors and bond managers became known as the smartest people in the room. But, that was then and this is now. There are 2 points to remember forever here: 1) What goes down, must come up 2) There’s no one around today to remind us of what life was like for bond investors when long-term rates marched relentlessly higher Interest rates are secular. And with interest rates today already hitting the theoretical 0% level – they have started to rise. And when long-term rates begin to rise, (unlike short-term rates) it happens in a snapping, violent manner. Neither of which is good for bond investors.

October 2017 Should I Stay or Should I Go Of course, there’s another important point to consider, the rise in long rates from 1962 to 1982 occurred when there wasn’t a debt crisis in the developed world. And since 99% of the industry has only worked since 1982 to today, then 99% of the industry has never experienced, lived or even dream of a crisis in the bond market. This of course is the primary reason why all the negative stories about the stock market are alive and well played out in the media – they simply don’t know any better. And this is wrong. Very wrong. After all, the bond bubble dwarfs the tech bubble and the housing bubble. Think about it. www.IceCapAssetManagement.com

9 And if I stay it will be double To grasp why the bond market is on the verge of crisis, and why trillions of Dollars, Euros, Yen and Pounds are about to panic and run away, we ask you to understand how free-markets really work. For starters, all free markets have two sides competing and participating. There are natural buyers and there are natural sellers. The point at which they meet in the middle is the selling/purchase price and the entire process is called price discovery. Price discovery is a wonderful thing. It always results in the determination of a true price for a product or service. However, a big problem arises when there is an imbalance between the buyers and sellers, and when one of the sides isn’t a natural buyer or seller. This is what has happened in the bond market. And this is why bond prices (or yields) have become so distorted; the true price of a bond hasn’t existed now for almost 9 years. When the 2008-09 housing crisis crippled the world, central banks decided they would help the world recover by providing stimulus. The stimulus to be provided was in the form of Quantitative Easing, or money printing.

October 2017 Should I Stay or Should I Go

What happened next has long been forgotten by the majority of the market, and is the prime reason why so few today understand and appreciate the magnitude of the stress that has been created in the bond market. When the central banks printed money, they actually used this printed money to buy government bonds. And with central banks suddenly becoming “buyers” of government bonds, the number of “buyers” in the bond market had instantly increased. And with the number of buyers increasing, the price of bonds increased – which caused long-term interest rates to come down. [note that in the bond world, when prices go up, interest rates go down, and vice-versa]. In effect, the global adoption of Quantitative Easing/Money Printing meant the entire price discovery process would become suspended. And with a suspended price discovery process, the real or true price for bonds, has not been seen for 9 years. The big point here, and it’s especially big in Europe – the elimination of the price discovery process has resulted in all countries paying lower rates of interest when they borrow. www.IceCapAssetManagement.com


10 So come on and let me know October 2017 Should I Stay or Should I Go Which, to the average person may seem good. After all, paying lower rates of interest has to be a good thing. But it isn’t. Instead, the manipulation of the global yield curve has created an interest rate environment that has become so stretched, shredded and tattered – that even the slightest hint of an end to this financial nirvana is enough to send investors off the deep end. Case in point - over the last year, we’ve seen the most significant market reaction in the history of the bond world, not once but twice. Yet, the talking heads, the big banks and their mutual fund commentaries, and the stock market focused world have completely missed it.

Almost a year ago in November immediately after the American Election, over a span of 54 hours – the bond market blew up. To put things into perspective, Chart 2 next page shows what happened during those fateful days. Ignoring the why’s, the how’s and the who’s – the fact remains that this tiny, miniscule increase in long-term interest rates caused the bond market to vomit over itself. Yes, a +0.7% increase in the US 10-Year Treasury market yield created chaos, havoc and over $1.7 Trillion in losses around the world. We’ve spoken before how we had meetings the day after with the world’s largest bond manager and they described the previous few days as registering an 8 out of 10 on the holy smokes scale. Let that sink in. This +0.7% increase in long-term rates caused this bond behemoth to go down for an 8-count. Folks – this is not reassuring. Next up to hit the bond market was perhaps the most astonishing reaction by a central bank since the discovery of fire. On July 5th, 2017, after 5,952 days of printing money to buy Japanese Government Bonds – the unthinkable happened. Long-term interest rates in Japan increased from +0.10% to +0.125%, and all hell broke loose. The Bank of Japan officials quickly cranked up the printing press and announced that they would buy every single Government of Japan bond on the market at a price of 0.10% or better. In other words, whereas a +0.70% move was enough to cause complete panic in the USA, it only took a +0.025% increase in longterm rates to cause the Bank of Japan to freeze the market. www.IceCapAssetManagement.com

11 This tiny increase in long-term interest rates created massive $1.7 Trillion losses for bond investors Chart 2: Market Reaction to 0.70% change in rates October 2017 Should I Stay or Should I Go www.IceCapAssetManagement.com

12 Chart 3: Market Reaction to 0.025% change in rates October 2017 Should I Stay or Should I Go To put this into perspective see our Chart 3 above which details the history of Japan’s long-term interest rate from 1988 to 2017. This recent crisis is so small on an absolute scale that it cannot even be deciphered by the human eye. But make no mistake – this was yet another cry for help from the bond market. A few weeks ago, the US Federal Reserve announced that it would begin to unwind their balance sheet. This unwinding actually means they will no longer reinvest any of the maturing bonds they have purchased from the US Treasury over the last 9 years. Together with the Americans signalling that they will continue to raise short-term rates – this is a big deal. This means the US Treasury market is taking a step closer to returning to a genuine market of price discovery. Yet, and contrary to the cheering from all of those bearish on the USD, this is in fact bullish for the green back. www.IceCapAssetManagement.com

13 This indecision's bugging me Yes, although the US Dollar and short-term treasuries will eventually hit the ground pretty hard – it is no where close to achieving this in the near-term. We know the world is full of investors and pundits who are beyond bearish and negative on the United States of America. The crux of this bearish view is based upon the continuous build of debt through deficits, unfunded liabilities, a severed political environment, and the overall decline of the American empire. This is correct in some ways – yes, the Americans will eventually give way to someone else as the world’s economic & political super power. However, a few other things have to happen first. But, what is completely missed, misunderstood and ignored is the fact that the USD is the world’s reserve currency and there is no other currency or basket of currencies or basket of commodities remotely close to knocking this horse over. Obviously, the United States uses the USD for its domestic economy and government fiscal policies – but so do many, many others. Numerous other countries, multi-national companies, international bodies as well as the entire commodity complex (oil, ore, natural gas etc) all use US Dollars.

October 2017 Should I Stay or Should I Go

No other country or currency comes even close to matching this dominance. The point to understand is that the global demand for US Dollars (which is really short-term US Treasury Bills) is astronomical. This is important for 2 reasons: 1) When the US Federal Reserve begins to reduce its balance sheet, the slack isn’t one for one. The overall demand for USD will remain very, very strong. 2) When the debt crisis re-escalates, money and capital will run for cover and safety – and the only game in town is the USD. Not the Euro, not the Yen, certainly not the commodity currencies (CAD/AUD/NZD), and not the British Pound. Recently there has been announcements how the Chinese would begin to value oil in Yuan-backed by gold and that this would destroy the USD’s reserve status. This is wrong. Simply valuing the price of oil this way does not affect US Dollars flowing through the system. At the end of the day, if Russia sells $10 Billion of oil to China, valued in Yuan – Russia still has to park $10 Billion USD somewhere in the system. www.IceCapAssetManagement.com

14 If you don't want me, set me free October 2017 Should I Stay or Should I Go Think as you may, but Russia cannot simply put this in a Yuan bank account. The underlying bank then has $10 Billion USD and they now have to do something with. Please understand the $10 Billion USD just does not disappear, and neither will the dominance of the world’s reserve currency. Now, to really understand why and how and where this bond market bubble breaks – look no further than Europe. European Union and Eurozone The Eurozone will fail and restructure. The mathematics behind a failed common currency are quite obvious. Creating a common currency without a common debt, without a common tax policy and without a common spending policy, combined with printing money out of thin air to support it all; has created a financial bubble unlike anything we have seen in our lifetimes. Yet, running parallel to the mathematics are the non-quantitative reasons as to why the Eurozone project will fail. Quite simply – 30%-40% of the population despises the structure and make-up of the Eurozone, the European Union and all of its rules and regulations. The following map details the number of sub-regions across Europe who are simply not happy with the status quo. As you’ll agree – there are quite a few. Whereas elsewhere in the world, people see themselves as American, Japanese, Chinese, Canadian, Brazilian etc. In Europe, it is a very different story. In fact, few people in Europe see themselves as Europeans. Instead, they first identify themselves as being Irish, French, Italian, German etc. Regional, cultural and historical differences have been running for hundreds of years. And throughout these hundreds of years, there have been many wars, splits and lines drawn and crossed. This is natural. Not only does it happen in Europe, but it also happens in the Americas, Asia and Africa. Source: ZeroHedge www.IceCapAssetManagement.com

15 Exactly whom I'm supposed to be fist, arm, batons and guns. Yes – he was ruthless. And especially ruthless to Catalonia and other regions which he conquered along the way (including the Basque region). Franco banned everything associated with Catalonian nationalism including books, education, and even the language. To further squash any hope of independence, Franco even had the head of the Catalonians, Llouis Companys executed in the town square by a firing squad. Seconds before being killed, Companys shouted ““For Catalonia!” During this White Terror, 10,000s were imprisoned, beaten, tortured and enslaved. After Franco’s death, Catalonia remained a part of Spain but as a separate autonomous region. In effect – it is a part of Spain, but it isn’t a part of Spain. Which brings us to the events of October 1, 2017. A few months earlier, the Catalonia regional government announced it would have a referendum for its people to decide for once and for all whether it wished to separate from Spain and become an independent country, all on its own. Yet, the developed world’s ignorance in recognising this fact today, is due to no major separation or disagreement occurring during our lifetime. And, due to linear thinking, since something hasn’t happened in our lifetime, then we mistakenly believe it can never happen in our future lifetime.

This is a mistake, and it is the same view used by everyone ignoring the crisis and bubble in the bond market as well. As we’ll all see soon enough – the mathematics supporting the bond bubble combined with the growing unhappiness of certain groups will create the financial market movement of our lifetime. Which of course brings us to Spain. For those who are not aware, the Catalonia region of Spain has always been different than the rest of the country. With Barcelona as its capital, the Catalonia region has a long and rich cultural history full of fantastic stories, traditions, football teams and above all, a very deep dislike for Spain. For those who are unaware, Francisco Franco ruled Spain as a dictator from 1939 to his death in 1975. Today he is remembered as a fascist dictator who ruled with an iron October 2017

Should I Stay or Should I Go www.IceCapAssetManagement.com

16 Don't you know which clothes even fit me? Catalonia announced they would have the vote anyway. Next up, the Spanish government announced it is illegal for any government owned or sanctioned agency to physically enable the referendum. This of course meant all municipalities in Catalonia are forbidden to allow any government premises to provide a voting booth. Catalonia responded by saying they would simply shift to other buildings. With the embarrassment growing, Rajoy next made an even bigger mockery of democracy by ordering the police to enter printing shops in a desperate bid to find the actual ballots and have them destroyed. Catalonia simply printed more. Next up, the Rajoy government ordered Google and Facebook to take down all web pages, groups, and anything else supporting the Catalonian referendum. Catalonia simply shifted online access to other platforms. With the hours counting down to the vote, Rajoy became even more desperate by importing 16,000 Spanish police into Barcelona via cruise ships and ferries. October 1 was to be the big day. And leading up to the referendum, polls routinely placed the “Leave” campaign at close to 40% - which is of course, considerably less than the 60% who wanted to “Stay” a part of Spain. If October 1 rolled around and everyone voted as expected, maybe the “Leave” side would have picked up 42-44% at the most. Yet, considering this is Europe, and also considering that those pulling the EU strings from Brussels know full well that the fabric holding the EU together is tattered and frayed – interference was obviously needed. And interfere it did.

The EU response will be remembered as one of the harshest political crackdowns since the Chinese rolled the tanks across Tiananmen square and killed 500-1000 political demonstrators. Prior to the October 1 vote, Spanish President, Mariano Rajoy simply decided (with permission and guidance from Brussels and the EU) that the vote must not occur. The first response was to have Spain’s supreme court conveniently rule that the referendum was illegal. In fact, not only was it declared illegal, the courts announced it is undemocratic to have a democratic election on an issue desired by the people. (remember, this is the EU). October 2017 Should I Stay or Should I Go www.IceCapAssetManagement.com

17 Come on and let me know In the end, it wasn’t an enjoyable Sunday afternoon as over 840 people had their skulls, knees, arms and fingers cracked with steel police batons. While the rest of the world watched in horror, President Rajoy said the police response was “firm and serene.” Also in the end, 90% of voters (nearly 2 million people in total) voted a resounding yes – they want independence. If Rajoy and the EU did not respond, the vote would have petered away, and forgotten about in a few days. Instead, actions by the EU has created a storm which will certainly escalate further. Spain and the EU made their message loud and clear – if you want to leave the current EU structure, you will feel the pain. Although the level of violence dished out to voters was unprecedented, it should not have been a surprise.

After all, the EU has a long history of either preventing people from voting on specific issues, or better still – forcing them to re-vote if Brussels is unhappy with the outcome. Yet, when asked about the heavy handed approach by the Spanish police, Margaritis Schinas, the European Commission's chief Catalonian dockyard workers refused to help them dock and unload. Grasping for straws, Rajoy next announced that over 700 mayors in Catalonian towns would be arrested. No luck – Catalonia would proceed. Finally the day arrived – October 1, 2017 would be the day Catalonians would decide once and for all if they should remain a part of Spain or once again return to being an independentsovereign state. Rajoy responded with this: October 2017 Should I Stay or Should I Go www.IceCapAssetManagement.com

18 Should I stay or should I go? To better grasp the magnitude of this deliberate attempt to suspend the price discovery process in Europe, consider the below chart which shows the dramatic increase in money printing by the European Central Bank (ECB) from 2015 to 2017. Prior to the 2008 housing crisis, the ECB had printed exactly 0 Euros. In fact, the mere suggestion of such a desperate, economic and monetary act was enough to ruin an even bad glass of Burgundy. Yet, it’s funny what people will do when faced with having their entire belief system torn apart. As you can see, for the next 9 years (and especially since 2015), the Europeans have printed to their hearts desire all in the name of saving the European financial project. spokesman said "We call on all relevant players to now move very swiftly from confrontation to dialogue. Violence can never be an instrument in politics.“

When asked to compare the Catalonian conflict with Spain to the Kosovo conflict with Serbia, Mr. Schinas responded that they are two entirely different situations. Now, here’s a moment where the EU executive is actually stating a fact. Yes, Kosovo and Catalonia are completely different. Different in that, Kosovo separating from Serbia would have zero effect on the Eurozone, whereas Catalonia separating from Spain would likely cause the Eurozone to break. These are the qualitative reasons why the European bond market is the one to watch. Of course, the quantitative reasons are equally as strong. Since 2008, in an effort to stimulate the global economy, central banks in USA, Japan, and the Eurozone have printed in excess of $14 Trillion dollars. As you are now aware, this $14 Trillion has been used to buy government bonds, which effectively suspended the price discovery process for the bond market. October 2017 Should I Stay or Should I Go 2015 to 2017 Source: Yardini.com www.IceCapAssetManagement.com

19 Should I stay or should I go now? Of course, the result today is an economic fantasy that can only exist in Europe, yet be completely ignored by everyone else. The fantasy of the bond market has reached such extremes, that today Chart 4 (next page) shows how European Junk Bonds are now priced at the exact same levels as US Treasury Bonds. This is the same as saying the Cuban national ice hockey team is equal to the Canadian ice hockey team. Or for our European readers, it’s similar to saying the English national football team is equal to the German national football team. You get the point. For those with a clear and objective mind, signs that the last days of the bond bubble are near, are everywhere: October 2017 Should I Stay or Should I Go www.IceCapAssetManagement.com

20 Chart 4: European Money Printing October 2017 Should I Stay or Should I Go Money Printing by the ECB has forced the price of junk bonds to equal the price of American Treasury Bonds www.IceCapAssetManagement.com

21 So ya gotta let me know Now, despite this overwhelming evidence and logic that the bond market is in a rather peculiar spot – the majority of bond investors are either not aware of the situation, or worse still, refuse to believe the risk exists. After all, if it hasn’t happen before in your lifetime – then the risk doesn’t exist. Our Strategy Bonds There’s been no change to our long-term outlook for bonds. All of our portfolios continue to hold minimum allocations to bonds, with no high yield, no emerging market debt, and no long duration. We continue to see bonds as the riskiest long-term investment in the market place. Stocks We’ve added further to equity holdings. Equity markets continue to have strong technical support, and unless these levels are broken, we’ll remain invested.

Currencies For non-USD investors, we added further to our USD strategies. Since these trades, USD has declined which has been negative for our portfolios. This cyclical counter-rally has now been completed and the world has returned to a strengthening US Dollar. Commodities There’s been no change to our outlook for gold and other commodities. We remain especially bullish on gold in the long-run. Yet, near-term weakness continues and until a breakout is confirmed we’ll remain un-invested in this market. Energy, base metals and soft commodities all remain on our radar and anticipate these groups offering strong upside. Yet it’s our view, turning points for non-USD investors will not occur until after USD rally strengthens considerably. October 2017 Should I Stay or Should I Go www.IceCapAssetManagement.com

22 Should I stay or should I go? As always, we’d be pleased to speak with anyone about our investment views. We also encourage our readers to share our global market outlook with those who they think may find it of interest. Keith earned the Chartered Financial Analyst (CFA) designation in 1998 and is a member of the Chartered Financial Analysts Institute. He has been recognized by the CFA Institute, Reuters, Bloomberg, BNN and the Globe & Mail for his views on global macro investment strategies. He is a frequent speaker on the challenges and opportunities facing investors today, and is available to present to groups of any size.

Our Team: Keith Dicker: [email protected] John Corney: [email protected] Haakon Pedersen: [email protected] Andrew Feader: [email protected] Conor Demone: [email protected]

Keith Dicker, CFA founded IceCap Asset Management Limited in 2010 and is the President and Chief Investment Officer. He has over 20 years of investment experience, covering multi asset class strategies including equities, fixed income, commodities & currencies. We want Partners Since 2010, IceCap Asset Management has consistently demonstrated a unique and correct understanding of the world’s global macro environment. Our ability to communicate this understanding in both our investment portfolios and through our highly successful Global Market Outlook is a feature we would love to leverage. IceCap Asset Management is a growing firm, and we are completely open to discussing all opportunities, ideas and ventures with other firms, fiduciaries and individuals anywhere in the world.

Opportunities may include: 1. white labelling of funds 2. sub advisory of funds or managed platforms 3. speaking engagements for small or very large groups 4. joint ventures 5. other corporate opportunities We want Partners The Canadian investment industry is rapidly changing. If you are a licensed Advisor, Financial Planner or Portfolio Manager give us a call to see how you would benefit by joining our team. Contact Keith Dicker 1-902-492-84985 or [email protected]

October 2017 Should I Stay or Should I Go


Benjaminis

1. Post 4,347
2. Cleanup
3. Quote
4. Merge
5. Edit
6. Feb 13, 5:39am (15 hr ago) | Edited Feb 13, 6:13am

1. BenjaminIs
2. | Commercial Member | Joined Dec 2014 | 3,511 Posts | Online Now

Party Time!
So now, it’s party time.


“Laissez les bons temps rouler,” as they say in New Orleans.

As predicted in our “headlines from the future” on Friday, look for $2 trillion deficits – 10% of GDP!

By 2027, we should have a federal debt near $40 trillion.

But that’s the easy part…

The actions of politicians are more or less predictable; the market’s reaction is not. Most likely, the unstoppable force of fed borrowing will collide with the immovable object of the bond market.

The feds are already scheduled to borrow more than $1 trillion over the course of the next year – even without a recession.

This coincides with the Fed unloading bonds at a $600 billion annual pace.

Let’s see: Much less demand for credit… and much more supply.

And no “Powell Put.”

For the moment, the new Fed chief, Jerome Powell, and his governors are staying home, catching up on their Bible reading. The party poopers have forsworn further bond purchases.

So no one is guaranteeing to buy the government’s paper.


Crescendo of Dumbness
Most likely, interest rates will rise… and speculators will begin front-running the Fed.

One of the most looney features of the Bernanke-Yellen leadership years was the “transparency” doctrine.

Unlike their predecessor Alan Greenpsan, who famously spoke in mumbo-jumbo, Ben Bernanke and Janet Yellen telegraphed their intentions to investors.

Unfortunately, neither Fed chief had experience in business… or markets. And they seemed to have no idea how they worked.

Real investing is a win-win proposition: You put your money into a real business. It makes real money. You share in the profits.

Speculating, on the other hand, is win-lose.

Speculators do not buy and sell based on their assessment of the intrinsic value of a given asset. Instead, they look across the table and try to guess what cards other speculators are holding… and what they will do with them.

They look for the “fool at the table” and try to anticipate what dumb mistake he will make.

For the last 10 years, the fool was easily identifiable. It was the Fed.

The U.S. central bank slashed interest rates to near zero to juice up the stock market.

Then under three separate QE programs, it bought more than $4 trillion worth of government bonds at some of the highest prices in history.

And in a breathtaking crescendo of dumbness, it signaled to speculators exactly what it intended to do ahead of time.


Piece of Cake
Naturally, the other players – hedge funds, Wall Street banks, pension funds, etc. – took advantage.

They bought stocks and bonds knowing they could unload them at higher prices.

Uncertainty is what keeps traders honest. They take chances. But they know their bets could go bad. So they are cautious… and often corrected.

But when the Fed – by far the largest player at the table – tells them in advance what it will do, uncertainty declines.

In this way, the Fed greatly reduced risk. And it was “Party On!” – from excess to more excess, with nothing to stop them.

Now, the Fed – clueless as ever – has once again made its intentions known. It’s going to raise interest rates and let the bond pile it built up during QE shrink… removing an important prop from the market.

How long will it take traders to put two and two together now?

Betting against it – by selling stocks and bonds – should be a piece of cake.
Regards,
https://ci6.googleusercontent.com/pr...-signature.png
Bill

Good Morning Everyone

I am going to tie this recent article written by Bill Bonner and shared here this morning and the predictive and factual article written by Professor Fekete on January 9, 2003.

http://www.gold-eagle.com/article/qu...ters-inflation

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Antal E. Fekete

January 9, 2003

That central bankers are the quartermasters of inflation is no longer a controversial assertion. That much was admitted by central banker Alan Greenspan in his speech before the Economic Club of New York on December 19, 2002 (see: www.federalreserve.gov/BoardDocs). He observed that as long as the gold standard was in charge of money-creation the price level was relatively stable. For example, in 1929 it was hardly different from that in 1800. But, after gold was banned and central bankers were put in charge in 1933, the consumer price index nearly doubled in two decades. And in the four decades after that prices quintupled. In other words, under the watch of the gold standard the dollar preserved its purchasing power for a period of one and one third of a century, but under the watch of the central bankers it managed to lose 90 percent of it in half of that time-period.

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The Specter of Deflation
Presently the specter of deflation is haunting the world, so much so that central banker Ben Bernanke felt obliged to address the problem in a speech before the National Economists Club in Washington, D.C., on November 21, 2002 (see: www.federalreserve.gov/BoardDocs). He presented a simplistic view of deflation defining it as a general decline in prices. Actually, it would be more accurate to say that deflation manifests itself through a general decline in prices andinterest rates. Mr. Bernanke identified the source of deflation as a collapse in aggregate demand -- a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Of course, this is the view of an unreconstructed Keynesian. But Keynesianism has been brain-dead for some three decades, so we ought to feel emancipated from its tyranny. We identify the source of deflation as reluctance of producers to take the loans that bankers try to push on them through ongoing interest-rate cuts. Uncharacteristically, producers are pessimistic about future profit opportunities. Instead of contracting new debt, they scramble to get out of the old, and try to retrench by reducing inventory.

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Guided Tour of the Star Chamber
Messrs. Greenspan and Bernanke claim that the Federal Reserve has the situation firmly in hand. If deflation were to develop, options for aggressive monetary policy response such as lowering interest rates are available. They admit that the zero lower bound on nominal interest rates presents a problem. Even if debtors were able to refinance loans at zero nominal interest, they may still feel excruciating economic pain caused by high and rising real rates due to the falling price level, as shown by their deteriorating balance sheet. However, Messrs. Greenspan and Bernanke reassure us that monetary policy will never lose its ability to stimulate aggregate demand and the economy, zero interest notwithstanding.

Mr. Bernanke gives us a guided tour of the Star Chamber, showing all the instruments of torture and explaining how they are to be used. The first of these is the printing press. Under a fiat money system the central bank generates inflation by this technology allowing it to create as many dollars as it wishes at essentially no cost. But it is not enough to create fiat money; you must also be able to put it into circulation or, at least, to make credible threats (sic!) to do so. Normally the Fed puts newly created fiat money into circulation through asset purchases. This particular torture instrument is used by the Fed to reduce the value of the dollar in terms of goods and services. Under a paper-money system a determined government and its central bank can always generate higher spending and induce positive inflation, we are told.

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Pushing on a String
If this has the result of pushing short-term interest rates to zero, the Fed will still not be at the end of its rope. It can further stimulate aggregate spending by expanding the menu of assets that it buys. If we do fall into deflation, we can take comfort in the thought that "the logic of the printing press" will ultimately assert itself. Sufficient injections of new money must eventually reverse a deflation.

So what may the Fed do if its target rate, the overnight federal funds rate, has fallen to zero? Why, it will change the target, that's what. It will stimulate spending by lowering interest rates further along the maturity spectrum. It will target the two-year rate by committing to make unlimited purchases of securities maturing in two years or less. But suppose that deflation is so stubborn that spending is not stimulated even as the two- year rate is pushed down to zero. Well, then change the target again, this time, say, to the ten-year rate, committing to make unlimited purchases of securities maturing in ten years or less. And so on, ad libitum. Mr. Bernanke says that lower rates over the entire maturity spectrum of public and private securities should strengthen aggregate demand "in the usual ways", and thus help end deflation.

This betrays our central bankers' ignorance of the nature of the beast. The Fed may be pushing on a string. People may refuse to spend the money in the "usual ways". It is one thing to print fiat dollars, and another to make people spend them. No problem, Mr. Bernanke says. If lowering yields on longer-term securities proved insufficient to re- start spending, the Fed might next consider offering fixed-term loans to banks at zero interest, with a wide-range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.

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Operation Helicopter-Drop
But the banks may not use the loans at zero interest in the way intended by the Fed. They may not want to make further loans to their clients whose prospects to turn a profit are dim at best. The banks may find it far more attractive to invest in bonds for the capital gains guaranteed by the central bank's zero-interest policy. Business lethargy may not react to loans offered at ever lower rates. In this case Mr. Bernanke recommends the helicopter-drop of money, an idea first suggested by Milton Friedman. There must be a way to put fiat money into circulation, if not by hook then by crook! A broad-based tax- cut financed by open market purchases of securities by the Fed should do the trick. This "manna from heaven" should re-start spending. The Federal Reserve and other policymakers are far from helpless in the face of deflation, even if the rate of interest is already pushed all the way to zero.


Taking Risks out of Bond Speculation
All this talk is old hat, except for the fact that heretofore it hasn't been considered polite behavior for central bankers to flaunt their authority to create fiat money in unlimited quantities, and to boast their power to drive down the value of the dollar in terms of goods and services. More interesting than what these gentlemen say is what they don't say. They studiously avoid reference to the 100 trillion dollar behemoth: the interest-rate derivatives market, and to bond speculation. Derivatives are a tell-tale, revealing the big picture. Far from trying to prevent or to combat it, the Fed is promoting deflation. It does, in fact, act as the quartermaster of deflation. Every one of the torture instruments in the Star Chamber enumerated above is making deflation worse, not better.


What the $100 trillion derivatives market shows is that the main feature of deflation is the invisible but nonetheless real bull market in bonds. Nobody is talking about it, although the bull market in bonds that started in 1980 has been the largest of all bull markets of all kinds in all history. Fabulous fortunes have been made and will be made before it is over, thanks to the Fed that has taken the risk out of bond speculation.

The speeches of Messrs. Greenspan and Bernanke are the best example to demonstrate the charge. Speculators are told that the Fed is prepared to buy unlimited quantities of securities across the entire maturity spectrum. What is this if not an invitation to get aboard the bandwagon and share the ride to infinite riches? Come and get the bonds before we snap them up. Fear not, your investment is absolutely safe. Your friendly central banker has made bond speculation risk-free. He underwrites the unlimited capital gains you are going to make on your speculative bondholdings (or on your long positions on bond futures, or on your call options on bond futures). The figure $100 trillion shows the extent to which speculators have rallied to the call of the Pied Piper. It measures bets in the aggregate that speculators have made on ever-increasing bond prices or, what is the same to say, on ever falling interest rates.


Of course, interest rates will never go to zero. They just keep getting halved. The yield on long-term Treasury bonds was 16% in 1980. It has been halved to 8% and will be halved again to 4%, according to the script of Messrs. Greenspan and Bernanke. After that the target at successive halvings will be: 2%, 1%, 0.5%, 0.25%, 0.125%, 0.0625%, etc. As you see, it never gets to 0%.

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Falling Interest Rates Squeeze Profits
Paradoxically, falling interest rates squeeze profits. Conventional wisdom suggests otherwise: lower interest rates are considered salubrious to business. However, we ought to distinguish between a low interest rate structure and a falling one. Only the former is salubrious; the latter is lethal. Falling interest rates reveal that past investments in physical capital have been made at too high a rate of interest in view of lower rates presently available. Furthermore, even the low rates of today will appear too high tomorrow. This explains business lethargy. Expanding production would appear foolhardy as long as the decline in the rate of interest continued. Falling interest rates make the cost of servicing past investments soar. As bond prices rise, the present value of debt will rise as well. So does the cost of liquidating a liability. These increases hit the profit margin, regardless whether the fact is realized by the producers or not. If not realized, the outcome will be that much worse. As the firm is paying out phantom profits in dividends, it is undermining its own financial strength already weakened by the falling price level. At one point the firm will be unable to pay its bills and will be forced to seek bankruptcy protection. Then there is the matter of the domino-effect. Even perfectly healthy firms are hit by deflation: they may find it impossible to collect their receivables and go under after their debtors have -- all because of the falling interest rate structure.


Financial Vampirism
In the view presented here deflation is a huge wealth-transfer scheme from the producing sector to the financial sector, denuding the former of its capital, and enriching the latter with risk-free capital gains. Indeed, the beneficiaries of the falling interest-rate structure, making risk-free profits thanks to the zero-interest policy of the central bank, are the principals of the financial sector, chief among them those of the big money-center banks. Their obscene profits do not come out of thin air. Their wealth is not newly created wealth. It is existing wealth siphoned off the balance sheet of producing enterprise, forced into bankruptcy by the falling interest-rate structure. This is modern vampirism practiced by the financial sector, aided and abetted by the central bank, and its victim is the producing sector.
The bear market in stocks is not the cause but the effect of deflation. The cause is the artificial bull market in bonds financed by the central bank. If you ask the bond speculator about his obscene profits while the rest of the economy crumbles around him, he will shrug: "I play by the rules. And I did not make those rules either."


Bond Speculation Is No Zero-Sum Game
The proof of complicity of the banks in the bond-speculation-scheme is the $100 trillion derivative monster. No small-time speculators could create such a Moloch. It was created by the big money-center banks, for their own benefit, with complete disregard for the disastrous effect it has on the producers of goods and services. The total face value of outstanding bonds falls far short of the colossal figure of $100 trillion. It is against common sense, and an invitation to disaster, to allow speculative long positions to exceed total supply. Messrs. Greenspan and Bernanke have no comment on all this, except to confirm policies that are conducive to further increasing the debt behemoth and further whetting the appetite of the $100 trillion derivatives Moloch.

We are told that the sum of $100 trillion is "only a notional amount". However, the profits of the bond speculators are not notional. They are payable in cold cash. If indeed interest rates did go down, and the price of bonds did go up, say, one percent, then the speculators' profit would be $1 trillion in cash. Who is going to pay that?

Economists will tell you that the profit of one bond speculator is the loss of another. Don't buy that. It would be true only if speculation was a zero-sum game, and it was a case of stabilizing speculation. It is true that some speculative markets answer that description. An example is the commodity market trading agricultural goods. It fits the model of a zero-sum game. This is so because the risks involved in commodity trading are nature-given, having to do with the fickleness of the weather and the unpredictability of natural catastrophes such as a flood or a tornado. Human mortals are not privileged to see the future. Speculators in agricultural commodities make money by resisting the formation of price trends. But in markets where the risks are made (unmade!) by man such as the market for bonds and their derivatives, speculation is not a zero-sum game. There, speculators make money not by resisting price trends but by riding them. This is the case of destabilizing speculation.

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Power to Create Is Power to Destroy
The producers are sitting ducks in this speculative shoot-out. They have no choice. They must carry the risk of owning productive capital, without which there will be no consumer goods for Mr. Greenspan and Mr. Bernanke, or for you and me. This is an accurate description of the mechanism whereby the capital of the producing sector is surreptitiously siphoned off for the benefit of the financial sector as the rate of interest is driven down to zero. The producing sector is condemned to bankruptcy. It is a victim of plunder sanctioned by the Criminal Code. This is the essence of deflation: speculators aided and abetted by the central bank are allowed to bid bond prices sky-high, in complete disregard for the havoc that falling interest rates will wreak with the capital accounts of the producing sector, not to mention losses inflicted on stockholders. The $100 trillion derivatives market is a monument to the folly of man in delegating unlimited power to the central banker to create as much fiat money as he wishes. Former central banker Paul Volcker knows. He has been there. He is quoted as saying that "the truly unique power of a central bank is to create money and, ultimately, the power to create is the power to destroy." If the central banker has unlimited power to create, then he has unlimited power to destroy. And destroy he does, especially the savings of ordinary people.


Why Are Economists Silent?
I am aware that my warnings will be received with a great deal of skepticism. The central banker as the quartermaster-general of deflation? Arrant nonsense! Not only does the central bank has its own army of research economists, it also has the benefit of the knowledge and research of the entire profession. There can be no question that the central bank wields its awesome power while enjoying the best economic advice money can buy! Siphoning off wealth from the balance sheet of others is straight out of science fiction, my critics charge. The allegedly injured party, the producing sector, hasn't complained that its capital is open to pilferage. The media in reporting the crash of Swissair and United did not suggest foul play in plundering the airlines' balance sheets.

Yet you may dismiss my charges only at your own peril. The awareness is growing that not just the media, but the entire profession of monetary economists has been bought off by the central banking establishment in order to put the best possible spin on our fiat money system. In an interview on December 17, 2002, entitled "Our Dishonest and Corrupt Monetary System" (www.kitco.com), Dr. Larry Parks recalled that John Kenneth Galbraith, the Paul M. Warburg Professor Emeritus of Harvard University, had published a book in 1975 entitled Money, Whence It Came, Where It Went. In this book the professor wrote: "The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it." In other words, Galbraith is saying that when it comes to money, economists lie! Dr. Parks asks: why do they lie? They have tenure. Why don't they tell the truth? He concludes that the monetary economists, for the last fifty years or more, have been bought off. With Nobel-prizes, endowed chairs, research grants, board memberships, and other perks. Monetary economists have betrayed their Muse, to serve Mammon.


Off-Balance-Sheet Wizardry
That the profession of the accountants has been bought off by the financial sector came to light recently in the wake of the Wall Street accounting scandals. But in spite of the great publicity given to these scandals by the media, the problem has not been fixed. A few small-time crooks may have been apprehended, but none of the authors of the scheme whereby banks are allowed to cook their books has been charged. The truth is that banks can carry assets, such as bets in the derivatives markets, "off balance sheet". They do this in order to find shelter from the scrutiny of depositors, creditors, shareholders; more generally, from the scrutiny of taxpayers at large. Accountants, regulators, and bank inspectors know this, but that's a different matter. Apparently, they have been bribed, too. They are part of the conspiracy. This is how Dr. Parks describes the fraud:
"Fractional reserve lending is jargon for creating money out of nothing. That's what that means. In the case of derivatives, these are bets that the banks make. The banks today in the aggregate worldwide have made roughly $110 trillion worth of bets. That's all they are. Banks are making bets and creating money. One of the things that obscures this for everybody is that banks alone do not have to reveal their entire balance sheets, as all other public companies must do under Securities and Exchange Commission regulations. Banks have the option, with some of their assets, to put them in a basket that they call "held for investment". When they put assets in that basket (they could be stocks, bonds, or whatever), then those assets are held at historical costs, rather than at market value... Nobody else gets away with this except for them. The reason they get away with it is because they say, in effect: 'If we had to mark everything to market, there would be too much volatility in our earnings. We don't want you to find out.' All this is secret. It's called bank secrecy... There are winners and there are losers. The losers are the ordinary people who lose their pensions, their savings, their jobs. The winners are the financial guys... These guys have no downside... Do you know what the banks took out of the economy last year? Nearly $400 billion. The Wall Street firms who get transaction fees for moving the newly created money around took another roughly $250 billion. Between them they took out nearly three times the amount of money that the auto industry took out. But from the auto industry we got 20 million cars. What did we get from these guys? We got cancelled checks and bank statements. This is monstrous, don't you think?"


Playing with Fire
I am not predicting that interest rates will keep falling to zero and that the world economy will succumb to deflation. I just want to sound the alarm that it might, in view of the counter-productive monetary policy of central bankers. Other scenarios, no less frightening, are also possible. Paradoxically, the threat of zero-interest (deflation) and that of infinite-interest (hyperinflation) are separated only by the knee-jerk reaction of the marginal bond speculator. He may get scared by the threats of Mr. Bernanke to undermine the purchasing power of the dollar further. As he becomes persuaded by the "logic of the printing press", the marginal bond speculator may cut and run. Then other bond speculators, especially those abroad, could dump their U.S. Treasury bonds, too, and run for the exit. Quite possibly Mr. Bernanke thought that he was just "fine-tuning" the purchasing power of the dollar. Under this scenario he would destroy it. When the central banker threatens to reduce the value of the dollar in terms of goods and services, as Mr. Bernanke does, he is playing with fire. After dumping the bonds, people may dump the dollars, too. First the foreign and then the domestic holders. They need not be reminded that the central banker has the card to trump deflation -- by triggering hyperinflation. How desperate must the specter of deflation appear to Mr. Bernanke that he has seen it fit to flaunt his possession of that card!

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Congress, Not the Fed, Has the Solution
It is not too late for the U.S. Congress to act to fend off disaster. It should immediately take away the unlimited power from Messrs. Greenspan and Bernanke to create as much fiat money as they wish, and to drive down the value of the dollar in terms of goods and services. Not only are the present monetary arrangements blatantly unconstitutional, they are responsible for the destabilization of the rate of interest allowing it to swing from one extreme to the other, causing grievous economic damage along its path. The House of Representatives, to which the Constitution delegated the monetary powers, can rectify this by going back to constitutional money. It should stabilize interest rates without any further delay, and remove the threat of both zero and infinite interest, by opening the Mint to gold and silver. This is a Republic based on checks and balances. It has a government of limited and enumerated powers. Neither arm: not the legislative, not the executive, nor the judiciary may claim to have unlimited powers under the Constitution. Why should officers of the Federal Reserve be allowed to make such claims?
Free coinage, a right of the people enshrined in the U.S. Constitution, would remove the greatest threat this Republic has faced in its entire history up to now, greater even than that of foreign terrorists. This is the threat to destroy the capital of the producing sector, through the machinations of the financial sector, aided and abetted by the Federal Reserve.



Copyright 2003 by Antal E. Fekete

January 18, 2003

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CORRECTION
I am very grateful to James E. Schoenbeck for calling my attention to a mathematical error in the example I used in my latest article The Central Banker As the Quartermaster-General of Deflation. I also used the same example in earlier articles such as Wrecker's Ball of Swinging Interest Rates. Mr. Schoenbeck wrote me on January 8, 2003, as follows:
"Professor:
While I enjoyed reading your article, I take dramatic exception to your pricing of the hypothetical bond as interest rates decline. If the interest rate dropped from 16% to 0% overnight, the price on the 30-year bond with 16% coupon, $1,000 par, would go to $5,800. A nice increase, to be sure, but nowhere near the 1,000-fold capital gains of which you talk

While it is true that the value of a 30-year bond will almost double when the rate is halved from 16 to 8%, it is no longer true as it is halved further from 8 to 4%, from 4 to 2%, from 2 to 1%, etc. Below is a table showing how the value of a $1,000 investment in a 30-year bond goes up with each halving (after which the investor takes profits and rolls out to a new 30-year maturity)

16 to 8%$1,000 to $1,900- - - - - - - - - - - - - - -
8 to 4%$1,000 to $1,700or $1,900 to $3,200
4 to 2%$1,000 to $1,450or $3,200 to $4,684
2 to 1%$1,000 to $1,260or $4,684 to $5,855
1 to 0.5%$1,000 to $1,140or $5,855 to $6,675
0.5 to 0.25%$1,000 to $1,070or $6,675 to $7,142
0.25 to 0.125%$1,000 to $1,037or $7,142 to $7,406
0.125 to 0.0625%$1,000 to $1,019or $7,406 to $7,546
Wouldn't you agree that we are fast approaching a limit here? The value of the $1,000 investment will stay below $10,000 no matter how many times the rate of interest is cut into half, and will never be worth anything like $1,024,000 under any circumstances. Sorry... but making money is not that easy..."

James E. Schoenbeck
[email protected]
I concede that under the simple strategy of buying and holding the 30-year bond, or continually rolling it over to new 30-year bonds, the $1,000 investment cannot be doubled in value with each successive halvings of the rate of interest. But there are other more sophisticated strategies available involving strip bonds, and derivatives such as: bond futures, call and put options on bond futures, knock-out calls and knock-out puts, interest-rate swaps, and various combinations of these which bond speculators can use, and do use, in order to double their investment (or do even better) every time the rate of interest is halved. I quote from J. Taylor's Gold & Technology Stocks newsletter, January 7, 2003, issue (www.miningstocks.com):

"Michael B. O'Higgins was able to turn $1,000 into $415,302 by being in bonds, not stocks... If you invested $1,000 in the Dow in 1972, that investment would have been worth only $27,347 as of December 27, 2002. But had you invested $1,000 mostly in bonds during that time, your initial investment would have turned into $422,819." (Visit www.miningstocks.com for more information on this amazing but true story which can be fully documented. The point is that lenders make a killing during periods of falling interest rates at the expense of debtors.)



But even these fabulous profits could not explain the creation of the $100 trillion derivatives market coming, as it did, out of nowhere. Individual bond speculators could not possibly accomplish this feat. It was accomplished by the big money-center banks. They are responsible for the prolonged agonizing fall of the interest-rate structure, the flipside of which is the snowballing of the derivatives monster. They make up the bond market. They run it. They buy the bonds and interest-rate derivatives before the Fed can buy, since the Fed buys through services they can provide. If there has ever been socially devastating insider trading, then this is it.
My point is that Keynesian monetary policy takes the risk out of bond speculation. It makes it extremely profitable and a sure bet. This explains the persistent fall in interest rates, and the snowballing of the derivatives market, all of which spell deflation. Deflation is not merely falling prices; it is falling prices plus falling interest rates, squeezing the debtors. This deadly combination is not an Act of God. It is caused by unlimited speculation in bonds, with profits underwritten by the central bank.

Keynesian contra-cyclical monetary policy and "deflation control" is a disaster. Nostrums advocated by Milton Friedman and other monetarists are equally disastrous. Far from containing deflation, the central bank is causing it, through its counter-productive measures such as bond-buying programs widely advertised through speaking engagements such as those of Messrs. Greenspan and Bernanke, prompting more and more bond speculators to climb on the bandwagon to have a free ride to riches. Rather than relieving debt-implosion, this mindless monetary policy is, in fact, the one identifiable cause of it through the bankrupting of the producing sector.

Mr. Bernanke made a solemn vow to Milton Friedman at his 90th birthday party at the University of Chicago. He vowed that the Fed would not repeat the mistakes it had made in the 1930's in not whipping and chastizing deflation vigorously enough. This brings to mind the Biblical story of King Rehoboam, the son of King Solomon, who answered the people when they petitioned him to lighten their burden: "My father hath made your yoke heavy; I will add to your yoke. My father chastized you with whips; I will chastize you with scorpions." (First Book of Kings, 12:11.) May God save the producers of this country from the yoke and the scorpions of the Fed.
January18, 2003

Antal E. Fekete

 

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6. Feb 13, 6:47am (14 hr ago) |

http://fa.morganstanley.com/david.ja...TTER%20_1_.pdf

Good Morning Everyone

Here is the PM that I got in the last 24 hours from my greatest fan. SMILE

Can you post screenshot of your account now?

That question is the reason why the person that sent it and others like him cannot succeed as a professional Forex trader.

The last article that I linked here was published by my friend at Morgan Stanley. It is a brilliant article.

That is the starting point for my MORNING THOUGHTS. I am going to look back on my first post here on my thread from December 3, 2016 and decide which posts will be the basis for my new corporate website to be ready for public use by May 31, 2018.

Have a great trading day.


Benjaminis

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5. First Post: Dec 3, 2016 10:30pm

1. BenjaminIs
2. | Commercial Member | Joined Dec 2014 | 3,513 Posts | Online Now

Good day fellow traders on Forex Factory. I have been trading Forex for over 10 years now and with the incredible movements on a monthly basis which has been caused by the intervention efforts of the world's central banks trading today is much different trading before 2008. Thus RISK MANAGEMENT must be a priority for any serious forex currency trader. You should never RISK more than 5% of your trading capital on any one trade plan. I also strongly suggest that you never trade more than 20% of your total trading capital at anytime. Example - If you are trading $50,000 in US Funds NEVER have more than 20% or $10,000 US Dollars on your various trade plans always using the 5% rule for risk on each trade plan being used.

The Money Flow Trading Method is based each trading day on Risk On or Risk Off which means are the markets heading down or heading up. I use the DOW to determine this each day. When the markets head down and we have Risk Off the money flows into US Dollars first and then the money is parked usually into US Bonds so the bonds go up and the yield goes down. Money also flows to USD/JPY. I will give more explanations when the forex markets reopen on Sunday. If you have any comments or questions please post them on this thread. Tomorrow we have two important events the most important being the referendum in Italy.

The results will move the markets whichever result we see. This is a Fundamental Fact and that combined with Technical Indicators as to Support and Resistance along with investor perception of the meaning of the results short term will lead the direction of the market. I will be thinking of going short on USD/JPY depending on the results of course and Risk being off.

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4. Dec 3, 2016 11:44pm

1. BenjaminIs
2. | Commercial Member | Joined Dec 2014 | 3,514 Posts | Online Now

USD/JPY has had a great run up and if the Dow reverses then USD/JPY will reverse for safe haven. This is now one of my Trade Plans once executed.

Great Visual Resource that I use.

http://finviz.com/forex_charts.ashx?p=d1&t=USDJPY

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4. Dec 4, 2016 11:00am

1. BenjaminIs
2. | Commercial Member | Joined Dec 2014 | 3,515 Posts | Online Now

Good Morning Fellow Traders which includes men and women. This morning I will talk about GOLD which is also a currency and the safest store of value in the world and has been for 5000 years. It is no person's debt and it is a store of value. However in many ways SILVER is the better store of value since there is a shortage of silver in the world and as an investment using the ratio during 1980 when Gold was over $800 US and Silver was at $50 US for a ratio of 16 to 1.

When money flows into US Bonds and US Dollars and other currencies it also flows into hard assets such as copper and zinc however Gold and Silver are also currencies. If anyone would like to discuss this further please register with Forex Factory so we can communicate if you are not a member at present time. Have a great Sunday and by 5 PM EST we should have the exit poll results on the Italian Referendum.

Edit to add a good resource site concerning Gold. https://www.bullionstar.com/blogs/koos-jansen/

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4. Dec 4, 2016 1:37pm | Edited at 5:30pm

1. BenjaminIs
2. | Commercial Member | Joined Dec 2014 | 3,516 Posts | Online Now

Before I do any FX currency trade I always develop a Trade Plan as previously explained. So my Trade Plan will be to SHORT (Sell) 3 $100,000 US Dollar contracts of USD/JPY in 3 stages. My first trade will be my base trade and my MAXIMUM LOSS would be 100 PIPS or $1000 US Dollars. My second position when opened would also have a ENTERED STOP LOSS of $1000 US Dollars and so would my third and LAST position. With this strategy my MAXIMUM loss is $3000 US Dollars or 6% of my trading capital. After I enter the 3 positions I will print out a updated statement in Real Time so we all can follow along.

Again if you are a member of Forex Factory all feedback or questions are welcome and appreciated. If you are not registered as a member please register so that you can participate in this thread and other threads of course. Thank You !!!

Opening Balance in US Funds !!!

Time PostedCodeDescriptionAccount #Ticket #AmountBalance

12/4/16 1:20 PMDeposDeposit02706903 50,000.0050,000.00

Total:50,000.00
ACCOUNT SUMMARY

Beginning Balance0.00
CommTrading Commission0.00
RolloverRollover Fee0.00
PnLProfit/Loss of Trade0.00
DeposDeposit50,000.00

WithdWithdrawal0.00
OptionOptions Payout0.00
CommOptions Commission0.00
AdminFeeAdministrative Fee0.00
MngFeeManagement Fee0.00
PerfFeePerformance Fee0.00
VoidDeposit Rollback0.00
ASPCommASP Commission0.00
MargInterestInterest on Usable Margin0.00
SubscriptionFeeSubscription Fee0.00
RRebRollover Rebate0.00
Div_AdjDividend adjastment0.00

Ending Balance 50,000.00
Floating P/L0.00
Equity50,000.00
Necessary Margin0.00
Usable Margin50,000.00

Notes:
"THIS IS A DEMO ACCOUNT WHICH IS TRADED WITH VIRTUAL FUNDS. NO REAL MONEY IS USED IN TRADING THIS ACCOUNT. Demo accounts are used primarily for education purposes, testing of strategies, and familiarizing traders with market movement and the FX Trading Station. There are inherent risks associated with online trading that may arise due to downtime, currency fluctuation and other risks associated with currency speculation. Only risk capital should be used when trading a real account."

On Edit corrected to 6% of my trading capital.

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4. Dec 4, 2016 7:41pm

1. BenjaminIs
2. | Commercial Member | Joined Dec 2014 | 3,517 Posts | Online Now

Just for the record I normally only trade from 2:00 AM EST at the Frankfurt open until 5:00 PM EST when the North American markets are closed. There is just not enough volume and my Money Flow Method works when all the Equities are trading so we start with the DAX , FTSE and CAC. By 6:00 AM when North America comes on board and the MSM gives their two cents worth. By 9:30 AM to 11:30 AM when Europe goes home and most major news comes out between 8:30 AM and 10:00 AM and daily Options on currencies close out for some of them at 10:00 we have plenty of material to work with. I do use technical indicators to determine entry and exit. We are in interesting times for the rest of December with the Electoral college declaring on December 19, 2016 and on December 31, 2016 we shall see the Shanghai Gold Exchange become very important because for the FIRST TIME Muslims can trade Gold and associated products as Comex which is effectively a paper market becomes less relevant. 2017 will be an extraordinary FX trading year.

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4. Dec 4, 2016 8:03pm

1. BenjaminIs
2. | Commercial Member | Joined Dec 2014 | 3,518 Posts | Online Now

Quoting PipThePanda
{quote} $3000 of your $50000 demo account is 6% not 3%? Maths is KEY!
Thanks :-) You are correct it is 6% and since that post I have added a second trade plan and am now short $200,000 EUR/USD and short $200,000 USD/JPY

The reason that I do NOT put on my third position on either of my trade plan is it is because it is usually my third position that is the most profitable as I scale in my positions rather than buy them all at the same time. The next 24 hours will most likely see many movements in the currencies and keep in mind that since the Trump rally is way overdone we may see a MAJOR reversal in Risk Off and money will flow to Gold and USD/JPY and with the weakness in EUR/USD it will be interesting to see how the US Bond market and the other Bond markets react.

Edit to Add FINVIZ link - 10 Year US Bonds. http://www.finviz.com/futures_charts.ashx?t=ZN&p=d1

You can see money FLOWING into the 10 Year US Bond for safety and look at the gap on the 5 Minute chart. MONEYFLOW is my KEY to successful forex trading.http://www.finviz.com/futures_charts.ashx?t=ZN&p=m5

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4. Dec 4, 2016 9:44pm

1. BenjaminIs
2. | Commercial Member | Joined Dec 2014 | 3,519 Posts | Online Now

https://www.armstrongeconomics.com/i...rend-votes-no/

This is a GREAT Resource to use and it is a free resource.

We are witnessing what a Private Wave is all about. The Italian Referendum came in on point with the NO vote at 59.4% against 40.6%. Our model is now four for four with BREXIT, Trump, Hollande in France exiting the election, and now Italy. We will see the same defeat for Merkel.

What politicians do not grasp is that they have destroyed the world economy with taxes and regulation. Enough is enough. In Europe, the single currency has totally failed because it required a single debt. The refusal to consolidate the debts has been the death of the Euro.

This is all playing out into a major dollar rally for like a game of musical chairs, it’s the last place to park money.

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4. Dec 5, 2016 6:43am | Edited at 7:13am

1. BenjaminIs
2. | Commercial Member | Joined Dec 2014 | 3,520 Posts | Online Now

Good Morning Everyone

My subject this morning is PERCEPTION and REALITY. The results of the Italian referendum last night are a perfect example of that. In normal times which means free markets where we have proper price discovery, it is easier to make speculative decisions on market trades. Today we all live in a financial world where the truth is always distorted by those in control. The control for the moment rests with the Central Banks of the world led by The Federal Reserve and followed by the ECB and the BOJ and the BOE.

After the financial meltdown of 2008 involving Lehman Brothers and TARP, which originally was voted down in the USA and then approved, the financial world entered into uncharted waters never ever seen before. It started with QE in the USA and it continued with Draghi in Europe saying he would do whatever had to be done. We also see the failed monetary policies of the last ten years in Japan by the BOJ.

So now we live in a world of NIRP and the attempt all over the world especially recently in India removing the 500 Rupee and 1000 Rupee as legal tender. Because of the Money Printing and Helicopter Drops clearly stated by Bernake in his role as Fed Chairman, there has been so much electronic cash created that now the Central Banks of the World must remove actual cash from the World before the Public figures out that the real cash does not exist and if everyone realized the truth that all monies would be removed from the banks of the world and our financial systems would immediately collapse.

So with the first two paragraphs as background is it any wonder that at times the ability to understand day to day movements in the various currencies is impossible. The fact that EUR/USD has gone up and the markets are ignoring the REALITY and looking as the market psychology of the PERCEPTION then it follows that the MARKET is always right until it is not. Another excellent example with real life consequences is the behavior of the US Stock Markets and the World Bond Markets since November 8, 2016 and the election of Donald J Trump.

Based only on hope and surely, NOT REALITY the wrong assumptions of stimulus in the USA with the NEW Trump Presidency has lead to over Two Trillion Dollars of loss in the World Bond Markets and new highs in the Dow and SP500. There is no possibility that everything will NOT reverse, when REALITY TRUMPS PERCEPTION and that is the whole point. It is in knowledge of reality and the timing of the reality taking effect.

It would be most appreciated to have some feedback so intelligent discussions can be entertained. This week might be the week for REALITY when we hear from the ECB on Thursday and of course next week the FED meets on December 13, 2016 and comes out with their Rate Decision on December 14, 2016. This could be the principle of buy the rumor and sell the news which is what seems to have happened with Italy and the referendum results. When the FED raises rates for the first time in one year even though last December when they raised there was strong indication by them of 4 more raises during 2016. We live in interesting times.

Benjaminis

I have now finished bringing forward the posts from page 1 of my thread started on December 3, 2016. It is very useful for me to do this as I can see where we were then and where we are now. If you really want to learn then you either need to post to tell me that you are here and if you are not registered to post on Forex Factory then you should if you want results. Since the information offered is entirely free other than the time it will cost you to read and post here and ask me questions then your input is needed for yourself if you really want to improve your trading results.

YOUR EDGE and mine is MONEY FLOW.