Why Serial Asset Bubbles Are Now The New Normal
June 6, 2013
The problem is central banks have created a vast pool of credit-money that is far larger than the pool of sound investment opportunities.
Why are asset bubbles constantly popping up around the globe? The answer is actually quite simple. Asset bubbles are now so ubiquitous that we’ve habituated to extraordinary excesses as the New Normal; the stock market of the world’s third largest economy (Japan) can rise by 60% in a matter of months and this is met with enthusiasm rather than horror: oh goody, another bubblicious rise to catch on the way up and then dump before it pops.
Have you seen the futures for ‘roo bellies and bat guano? To the moon, Baby! The key feature of the New Normal bubbles is that they are finance-driven: the secular market demand for housing (new homes and rental housing) in post-bubble markets such as Phoenix has not skyrocketed; the huge leaps in housing valuations are driven by finance, i.e. huge pools of cheap credit seeking a yield somewhere, anywhere:
Asset bubbles are inevitable when the pool of good investment opportunities is much smaller than the pool of credit-money sloshing around seeking a higher yield. It really is that simple. It’s astonishingly easy to create hot money: just create the money in a central bank and then make it available to financiers, investment banks, global corporations and other Financial Elites at near-zero real rates of interest.
It’s considerably more difficult to create a good investment opportunity: an investment that is worthy of the risk must have a sound base in fundamentals such as cash flow, return on investment, etc.
With so much hot money sloshing around, the only investments left are either highly risky (just ask the oil companies whose rigs were nationalized by Gabon) or plays on retaining purchasing power, for example, real estate in central London, where roughly half the buyers of tony townhouses are foreigners who don’t even occupy their luxe digs: the last thing they need is another mansion in a global money center, but they’re so desperate to park their capital somewhere low-risk that overpaying for a London manse makes excellent sense.
The problem is central banks have created a vast pool of credit-money seeking a return that is far larger than the pool of sound investment opportunities. In a world burdened by over-capacity in almost every sector, hot money is driven to seek the next emerging asset bubble as the only place to skim a yield. Empty flats in London, Manhattan or Shanghai, oil leases in Gabon, 10,000 sun-baked rental homes in Arizona, The Nikkei stock market, shares in U.S. utilities, bat guano futures–none of these asset bubbles make any sense in a world where credit is costly and scarce.
There are two other characteristics of this New Normal Bubble Economy:
1. Everyone who doesn’t have privileged access to vast sums of money at near-zero real interest rates is left out; no bubble gravy for the debt-serfs, except for those who qualify for socialized mortgages from FHA or other federal agencies. (And the idea behind these government-backed mortgages isn’t to enable serfs to gamble and win in the latest housing bubble, it’s to lock them into debt-serfdom where they’re making mortgage payments forever on a depreciating asset.)
2. All asset bubbles pop, destroying the phantom wealth of those holding claims on the underlying assets.
Is this a healthy economic system? No. Is it sustainable? No. Is it even capitalism? No. It’s a Neofeudal Debtocracy of rentiers and debt-serfs and hot-money driven asset bubbles that are passed off as "investments" to the credulous and unwary.
One question distills the dynamics down to their essence: cui bono, to whose benefit?
Statistics: Posted by yoda — Thu Jun 06, 2013 9:31 am
View full post on opinions.caduceusx.com
Why Central States/Banks Inflate Asset Bubbles, and Why They Implode
February 28, 2013
Inflating phantom assets to collateralize expanding debt is failing due to diminishing returns on stimulus, zero-interest rates, money-printing and monetization of Federal debt.
That the policies of central states and banks have led to one disastrous asset bubble after another over the past 15 years is undeniable. This poses the question: is this serial bubble-blowing intentional, or are the bubbles merely unintended consequences of the neoliberal, neofeudal model of financialization that dominates global finance?
The answer boils down to this: inflate assets or die. The only way to support consumption in an era of declining wages is to enable more borrowing, and the only way to enable more borrowing is to:
1. Lower interest rates to near-zero so stagnant income can leverage higher debt
2. Inflate assets to create phantom collateral that can then support additional debt.
Central states live off taxes skimmed from wages and profits. If wages are stagnant, the state needs profits and capital gains to rise to support higher tax revenues.
In other words: inflate assets or die.
The entire scheme of generating GDP with more and more debt now yields diminishing returns.
Unfortunately for the central states and banks, though their unprecedented fiscal stimulus and money-printing has doubled the stock market off its 2009 lows, efforts to reflate housing have been tepid at best.
This matters because only the top 10% own enough stocks and bonds to make a difference in household net worth, while two-thirds of households own a home. Inflating another asset bubble in stocks was nice for the financial Aristocracy and their technocrat-class, but it didn’t do much to boost the net worth of the bottom 90% or enable more borrowing.
Let’s look at some charts that reflect the failure of massive money-printing and credit expansion to actually boost wages and household borrowing.
First up: real income (adjusted for inflation) has been flat to down since 2000:
Meanwhile, the ratio of household net worth to total credit market debt owed has plummeted, meaning that debt is rising much faster than net worth. This is called debt saturation: adding more debt generates less and less expansion of wealth.
Cheap credit and financialization has boosted stock valuations far above the real economy, as reflected by the GDP. This chart shows just how disconnected stocks have become from the real economy.
We can see this same expansion of asset valuations in global assets, which quadrupled in a mere 17 years (1990 – 2007) of financialization and bubble blowing:
The diminishing return on stimulus and credit expansion is revealed by money velocity, which has fallen off a cliff:
The Fed has gone all-out to lower interest rates to near-zero and mortgage rates to historic lows, as well as monetize Federal borrowing via purchasing Treasury bonds (Chart courtesy of mdbriefing.com):
Despite these unprecedented measures to boost asset valuations and borrowing, household debt expansion remains below zero: debt is declining faster than it is being created, i.e. deleveraging.
The central state has tried to prime the debt pump by taking up the slack left by private-sector deleveraging by ramping up massive public-sector borrowing:
This has created structural deficits as tax revenues–despite the tailwind of highest-ever corporate profits and a stock market that more than doubled in four years– are far below spending.
Unfortunately for Central Planners, all their unprecedented efforts to reflate the housing bubble’s phantom assets are not getting much traction. What did they expect in an economy with 19 million vacant dwellings and declining real income for 90% of households?
Bottom line: inflating phantom assets to collateralize expanding debt is failing due to diminishing returns on stimulus, zero-interest rates, money-printing and monetization of Federal debt. Once debt stops expanding, the house of cards that is dependent on ever-expanding debt collapses.
Statistics: Posted by yoda — Thu Feb 28, 2013 1:22 am
View full post on opinions.caduceusx.com
Prepare for the Great Wealth Destruction and Asset Extraction
By: Tom Chatham – Author of Rebuilding The Republic
Every liberal I see on TV keeps yelling tax the rich more. I don’t think they really understand how that will work so lets look at it. Most rich people get a majority of their income through capital gains so raising the income tax rate will do little. For someone that is mega rich , they don’t need to make any money during the year. They already have enough to live on the rest of their lives, several times over. That being the case, they have no need to make any money from capital gains either.
The rich are currently selling off their paper assets and putting this money into hard assets to preserve it for later. If you have a vault full of gold, you won’t pay any taxes on the gains until you sell it so it can go up in price multiple times without the owner having to pay any annual taxes on it. They can sell off small amounts as they need it and pay only minor taxes every year.
George Lucas recently sold the Star Wars franchise to Disney for mega millions. He sold it now so he could save many millions of dollars in taxes that will take effect next year. Sotheby’s has been selling record amounts of art, jewelry and other tangibles as the owners take advantage of this last opportunity to save on higher taxes. The buyers are buying to lock in their asset values for future use. This is exactly what I mentioned in The American Dream Lost. Between the new taxes and monetary devaluation, the rich will increasingly convert their wealth into hard assets to preserve it. Those that stay in paper assets will have it taxed and devalued away until nothing remains.
This wealth preservation is lost on those who think taxing more will get the money from the rich. When the tax revenues fall, as they always do when something like this is done, the government will have to do something else to appease their base. The only way to get money from someone that has plenty and pays no taxes is to create a new tax. The only tax that accomplishes this is a wealth tax. If you tax someone on their net worth, it makes no difference when or how they got it. This is a tax that would seriously hurt the super rich and is why I think they would not allow it. All of those good liberal millionaires and billionaires that talk of not being taxed enough would change their tune very fast if this type of tax were proposed.
If the rich do not pay then someone must. Even if they did pay, it would not be enough to keep up with government spending. The advent of new taxes such as the VAT or Carbon tax would hit everyone at every level and those in power would see this as preferable to giving up their wealth for redistribution. Keep in mind that half of the elected officials in D.C. are millionaires or multi millionaires.
These taxes are only the beginning. You can also expect them to come after your savings and retirement plans as well. As the government coffers empty they will need more fixes to keep the mill running. The current government will begin to resemble something like the Ottoman Empire where such things as each tree was taxed so most were cut down by the owners to avoid the tax. This type of environment is what causes the massive wealth destruction that impoverishes nations as people destroy assets and capital to avoid the horrendous taxes they cannot afford.
In the end the government will own everything that has not been destroyed. This is the creation of the socialist state where the people rely on government for everyday needs. This is a process that can take years or even decades to complete. It can be done so slowly that most cannot identify the reasons they are becoming impoverished. The ones who fail to see the reasons are the same ones who ignore the warnings of others who see clearly and avoid the losses.
Many now see the writing on the wall and some have even petitioned the White House for session. Many liberals have launched counter petitions to have the secessionists stripped of their citizenship and be deported. I find humor in this train of thought. If you secede you revoke your citizenship and self deport, and you do so while taking the land with you.
The coming years will be difficult and nothing like anyone could ever imagine. As the government becomes more desperate it will take measures that seem illogical and unproductive but it will do so as a means of self preservation. If the people sit idly by and allow the destruction of their economy and private property and do nothing, they deserve what they end up with. That may be nothing more than a hole in the ground, which they will be taxed on.
Statistics: Posted by yoda — Thu Nov 29, 2012 11:52 am
View full post on opinions.caduceusx.com
I’ll give you a hint. It’s not stocks.
If you can’t read the tiny lettering above, the asset class is the barbarous relic, gold.
Why is gold out performing?
Could it be that Europe continues to implode and Germany now looks like it will confront a fairly nasty recession?
Could it be that the “fiscal cliff” is now just a bit too close?
Could it be that Obama was re-elected?
Could it be that with the Obama re-election, Bernanke will be that much freer to continue operating with abandon?
Gold is out performing because of all of these things, plus a few others. The financial cumulonimbus clouds continue to gather and funds, governments, even retail investors are looking for shelter from what may be a very nasty storm in the relatively near future. A storm which could even overwhelm treasuries.
That’s crazy talk though right? Frankly, I hope so. But do YOU continue to consider treasuries a truly ”riskless” asset any longer? (If you ever did, and I’m not talking just about inflation risk.)
Gold is one of the few ways investors can hedge against the rampant crony capitalism which defines much of the economic world these days. It is a check on (though not a total cure for) the current economic insanity we are witness to. It is one of the reasons the Federal Reserve hates the yellow metal.
Saying that, how much do you want to bet that Bernanke has a little (or perhaps not so little) stash of gold somewhere?
The post Guess Which Asset Class Has Crushed All Others Since Tuesday? appeared first on AgainstCronyCapitalism.org.
View full post on AgainstCronyCapitalism.org
Is Gold a Zero Risk Financial Asset?
By Eric McWhinnie
June 27, 2012
Gold has been called many things over the past several years. The shiny yellow metal is seen as a safe-haven to some, but a barbaric lifeless asset by others. In short, gold has trouble receiving a wide range of support as a key player in the global financial system. However, new developments may slowly change how investors and institutions view the precious metal.
Earlier this month, U.S. federal bank regulators issued a proposed rule-making note regarding capital risk-weightings for various assets. The Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Federal Reserve asked for comments on a move that would place a “zero-risk-weight” rating on gold bullion held in banking organization’s own vaults, or held in another depository institution’s vaults on an allocated basis.
The full note can be found at FDIC.gov and Section 11 on page 57 states, “A zero percent risk weight to cash owned and held in all of a banking organization’s offices or in transit; gold bullion held in the banking organization’s own vaults, or held in another depository institution’s vaults on an allocated basis to the extent gold bullion assets are offset by gold bullion liabilities; and to exposures that arise from the settlement of cash transactions with a central counterparty where there is no assumption of ongoing counterparty credit risk by the central counterparty after settlement of the trade and associated default fund contributions.”
The move will essentially place gold on the same risk level as cold hard cash, zero percent. Historically, gold has received a risk weighting of 50 percent. If the proposal stands, it appears that banks will have more flexibility and will not have their regulatory capital ratios punished for holding gold as a safe-haven, instead of government bonds or fiat currency. This will likely help gold be seen more as a true safe-haven in financial markets and further drive gold bullion demand, which is already at historic highs among central banks.
John Butler, chief investment officer at Amphora, explains, “A key reason why gold has not been acting like a safe-haven asset in recent months is because banks are so capital impaired that they are scrambling to reduce their holdings of risky assets in favour of so-called ‘zero-risk-weighted’ assets, against which they needn’t set aside any regulatory capital. As it stands, gold has a 50 percent risk-weighting. But some government bonds, including US Treasuries, German Bunds and British gilts, are zero-risk-weighted.” Interestingly, Standard and Poor’s downgraded the United States’ credit rating for the first time ever last year. Yesterday, Egan-Jones credit ratings agency downgraded Germany by one notch from AA- to A+ with a negative watch. The effort to reevaluate the meaning of “zero risk” appears to be long overdue.
While we do not expect the proposal to make gold prices skyrocket overnight if approved, as gold bullion positions will be hedged, it does aid the recognition that gold is an important financial asset that lacks counterparty and downgrade risk, making it the ideal safe-haven. Some of the world’s largest and most powerful organizations have already realized this. The Bank for International Settlements, which is basically an international central bank looking over other central banks, recently released its latest annual report. It showed that the BIS reported a profit of Special Drawing Rights 758.9 million. However, about 15 percent of that profit came from the sale of physical gold and the repayment of gold loans. Apparently, gold is not as lifeless as some may think.
Statistics: Posted by yoda — Wed Jun 27, 2012 8:45 pm
View full post on opinions.caduceusx.com
Gold Becomes a Tier 1 Asset Class for Banks
TDV Golden Trader Posted on Wednesday, June 20, 2012
Misdirection by MSM as Gold Moves Towards The Banking System
Despite what the Main Stream Media (MSM) or “Financial Pundits” tell you, the gold bull market is far from over. In fact, it is just starting, in our opinion. While the misdirected financial world tell you that gold is in a bubble and it has burst, the central bankers and government organizations all know it is far from over. In fact, gold is moving towards the banking system and not away from it. We all know that many central banks are now net buyers of gold and their holdings are increasing as their need to diversify away from risky assets and foreign bonds only grows.
Central banks around the world are continuing to stock up on gold. We can now add Kazakhstan’s central bank to the grow list of bankers wanting to hold gold as a part of their currency reserve. The Kazakh central bank intends to have 20% of reserves in gold, this is up from the current 14-15% currently held. They plan to purchase 20 tonnes of gold this year, mostly from local producers. They also mentioned a few weeks ago that they would cut their Euro holding to 25 % from 30%. We can also add Kazakhstan to the growing number of central bankers which are building up gold holdings including China, Russia, Mexico, Colombia and South Korea.
The price of gold is now hitting all time highs in India, one of the biggest buyers of gold around the world. Prices have reached an all-time high of $544.74 US (Rs 30420) per 10 grams. With a slowing economy and low demand for the Indian rupee, it has been losing value lately and still remains weak. However, gold demand is still robust even at these elevated prices as investors in India still consider gold a safe haven as it counters the effects of inflation and exchange rate fluctuations.
Over the past five years, gold has provided Indian investors with a 27.19% annualized return versus a pathetic 2.67% in the equity market. This trend and move to gold has only grown in the last year. Gold assets under management by funds have increased almost 100% $1.83 billion by April 2012, last year the value was $981 million. In 2011, the gold ETFs in India saw a net inflow of $725 million. For thousands of years the Indian culture has had an affinity for gold, and that will never change, and neither will their demand for physical at elevated prices. Why? Indians understand that gold is money and a true form of saving. It’s the only way to protect assets and wealth from government theft, something the West is still learning.
Even the good ol’ USSA is starting to recognize gold as a tier one asset class. The Federal Deposit Insurance Corporation (FDIC) just issued a notice regarding a new policy proposal on how banks should revise the measurement of risk-weighted assets by implementing changes made by the Basel Committee on Banking Supervision (BCBS) to international regulatory capital standards and by implementing aspects of the Dodd-Frank Act. Under the proposal the following assets would carry a zero percent risk weighting, notice how gold bullion is listed as the second item:
A. Zero Percent Risk-Weighted Items
The following exposures would receive a zero percent risk weight under the proposal:
?Claims on certain supranational entities (such as the International Monetary Fund) and certain multilateral development banking organizations
?Claims on and exposures unconditionally guaranteed by sovereign entities that meet certain criteria (as discussed below).
So regardless of what the MSM says, we continue to see more central bankers buying and hoarding gold. New proposals by government banking agencies are being introduced into the system and gold is included as a tier one asset to hold with ZERO RISK. All the signs are in place and what the MSM hasn’t been told yet is that gold is coming back into the banking system.
We are in a world where currency wars are being fought daily, and as the system continues to collapse under its own weight of paper printing, gold will be the go to asset and possibly the last man standing. Don’t be fooled by what the MSM says, they rarely know what they are talking about and are paid to misdirect the puppets. Gold is here to stay.
European Capital Controls and a Flight to Safety
The Greek Elections are over and the pro-bailout New Democracy party won with approximately 29.7% of the vote. By winning the popular vote, they were given a 50-seat bonus. This combined with the support of the Pasok Socialist (who took 12.3% of the vote), will have 162 seats in the 300 seat parliament. Combined, they have the ability to pass government policy with a majority vote, so they can now rig policy for keeping with the Euro.
The Euro experiment may have been saved from breaking up for now, but the bailouts will continue for the foreseeable future. Since the socialists are realizing that austerity is not working, a new movement and calls for a policy of growth are afoot. We can expect lots more money printing coming out of Europe now and in the foreseeable future. While in a normal world that would hurt the Euro, the markets relief that the Euro will not collapse immediately should stop the downward pressure on the Euro. In fact, we could see a slight bounce off the recent lows from this news, but I suspect that will be short lived. None of the problems have been addressed and printing money to fund the bailout will still be the cure central bankers will prescribe to the Euro financial system mess.
Capital controls are already in place within Euroland and this trend is growing quickly as the hot days of summer go on. Recently, major Italian banks have given notice that customer’s accounts would be frozen for one month because of financial difficulties. This caught many bank customers off guard and completely unaware that they would not have access to their funds. This should not be startling news for TDV subscribers as we have been warning for months that capital controls are coming and Europe is fast out of the gates in implementation. For weeks, Europe has been planning bank withdrawal restriction to deal with Greece exit, the only one that hasn’t told you about it is the MSM.
Recently, a businessman was stopped at the Swiss border with £1.6m worth of gold in his car only to have it confiscated by the authorities and was subsequently charged with smuggling. Italians know very well that the trend of confiscation by the “Mafia” government has only grown recently. They have been exporting gold to Switzerland and this trend has grown 35% year over year in February 2012. About 120 tonnes of gold have left Italian boarder in 2011, that is up 65% from 2010. The Italian Prime Minister Mario Monti has been promising a crackdown on tax evasion as he continues to fight the trend of people wanting to avoid paying extortion fees (taxes). It was estimated that more than £96 billion [€119.6bn] in taxes were dodged in Italy during 2009.
As much as we like gold as an investment and store of wealth, you must take the necessary precaution of protecting your gold from confiscation. As desperate European governments continue to steal your wealth via inflation and outright theft, you must create a plan of protecting your gold. Keeping it close at hand where only you have access to it is the first step.
Secondly, you should consider diversifying your precious metals holding internationally, which seems to be more difficult as capital controls in Euroland become stricter. At TDV, we saw this trend coming a long time ago and have been warning subscribers to plan ahead. Earlier this year, we published a 100 page report on how to diversify and internationalize your precious metals holding called Getting Your Gold Out Of Dodge (GYGOOD). If you live in Europe and are interested in protecting your precious metals, this report is something you should consider getting right away; your time to act may be limited by your own government.
The price of gold is still consolidating. The price needs to stay above support at the 50 dma of $1615. If this support holds, then it could move toward resistance at $1675 and the 200 dma. A break below $1610 could trigger selling and the price could still see one more wave of selling to test support at $1530 or slightly lower again. If we do get one more wave of selling, I suggest you consider backing up the truck as this could be that last time we see prices this low, possibly forever.
Statistics: Posted by yoda — Fri Jun 22, 2012 9:34 pm
View full post on opinions.caduceusx.com