Insanity is coming at US in huge waves. This week really saw a lot of new tea leaves presented to those working through the puzzle of the MAN MADE disaster. We are indeed living in interesting times, and I believe they will be studied and written about for decades and centuries into the future. I also believe this time period offers the greatest opportunity's in history if played from an applied Austrian economic perspective, and a good handle on history. They are one and the same actually. So let's look at some of the vignettes we covered this week:
- An Islamic Caliphate has been born, World War III has BEGUN!
- Central Banks Lifeboating themselves
- Highest Market Cap for US bank since 2001?
- The Dollar and the DODO bird
- Friday night info dump
- UNRELIABLE SUPPLY
- SILVER coiled and ready to LAUNCH?
- Federal Reserve FOLLIES
- Political correctness that short circuits an invaluable gathering of EXPERIENCE
An Islamic Caliphate has been born, World War III has BEGUN!
Lightly covered by the Mainstream News, a new and vicious ISLAMIC caliphate has been born and World War III has commenced. The Middle East will be irreparably changed in the near future or should I say engulfed in FLAMES. The spineless leaders of the developed world have allowed order to be DESTROYED rather than place the proper emphasis on peace through strength. Now we will pay the price of the breach for their fiduciary duties. Teddy Roosevelt in 1907 said: "walk softly and carry a big stick", sadly those wise words have been lost and forgotten. Relearning this will be extremely difficult as humpty dumpty has fallen, and putting him back together again may be an impossible task. Global and regional leadership is dead in the developed world: where are the Reagans, Churchill's and Thatcher's of the world for this generation. The bold leaders NOW with visions for the future reside in the Chinas, Russias, Singapores and al Qaedas of the world.
"If history teaches anything, it teaches that simple-minded appeasement or wishful thinking about our adversaries is folly. It means the betrayal of our past, the squandering of our freedom."
- President Ronald Reagan, 1983
The Caliphate calls itself ISIS (the Islamic States of Iraq and Syria) and is a ruthless Al Qaeda political force. Numerous reports of beheadings, mass executions and random killings to foster TERROR in the eyes of their opponents are occurring and it is working. If you are a Christian or Shiite Muslim, the sentence is immediate death upon discovery or capture. Thousands have already been executed already and posted on the internet. A small army of less than 10,000 men has faced and beaten forces 10 times their size.
Soldiers are taking off their uniforms to avoid certain death that capture insures. Then, the terrorists take the discarded uniforms and use them to move freely behind enemy lines. They have now captured major IRAQI military bases and are well armed and supplied with MODERN WEAPONS. At this point, stopping them is not an option. They then retain the territory, oil fields, refineries and the funds for future JIHAD. I can promise you 10's of thousands of jihadists are making their way there from around the world to participate in the JIHAD state. They have already looted over $450,000,000 million dollars from banks, while the oil insures ongoing income. This is not a group that wants to live peacefully with their neighbors. No, they want to consolidate long enough to develop plans for the next excursion to expand their territory, treasure and sharia law.
"The Syrians and the Iraqis have made their own beds--so why stick our noses in now? The answer is that al Qaeda, ISIS and others will not stop at Iraq and Syria. Lebanon, Jordan, Israel, Turkey, Egypt, Yemen, Saudi Arabia, the United Arab Emirates and others will be next."
- General Jack Keane ret.
To them, it is convert to Sunni Islam or be killed as INFIDELS. For many of the terrorists that will not be enough and if they capture the US embassy (to me this is just a matter of time, just like the Viet Nam War). The carnage and death to many Americans is assured. Mercy is and will not be considered. It is part of their power over their adversaries. The power of abject FEAR!
In my opinion the greatest manmade disaster and OPPORTUNITY in history is unfolding in every corner of the world. Are you diversified or operating with EYES WIDE SHUT? Are you prepared to turn it into opportunity by properly diversifying your portfolio? Adding absolute return investments which have the potential to thrive (up and down markets) regardless of what unfolds economically or politically? This is what I do for investors; help them diversify into investments which are created to potentially thrive in the storm. For a personal FREE consultation with me CLICK HERE!
The main stream news breathlessly reports the news without telling the audience the grim conclusions that can already be made. The administration is calling for a multi ethnic reconciliation of the Sunnis, Shiites and Kurds before help is considered, placing an impossible task for the Iraqi government on the table to prevent the US from having any possibility providing assistance. This type of reconciliation takes weeks and months to accomplish... do you really think that republicans and democrats could reconcile overnight in Washington? The world knows through the experience of the last 6 years that there is no challenge or previous commitment from which America will not retreat. This administration in Washington has systematically undermined the strongmen of the Middle East and, if we ever find out the truth, maybe had a hand in overthrowing them. Did any of you think someday you would be rooting for IRAN to prevail in IRAQ? Me neither but now it is in my daily prayers as the developed world will just sit around and let us be destroyed. There is no shrinking from this moment. We must confront it or be killed by it as we shall soon see!
"Think subcontracting the job to Iran is the right call? Surely, no one wishes a Middle East managed by the ayatollahs in Tehran. Don't care? Remember the admonition of the 9/11 Commission: "The most important failure was one of imagination." Imagine what controlling vast areas of the Middle East will do for extremists of all stripes."
- General Jack Keane ret.
Say what you will about Saddam Hussein, Moamar Qaddafi and Hosni Mubarak, strong men and dictators who held power in an iron and sadistic grip. But they all understood the DEADLY NATURE of FUNDAMENTALIST ISLAM and DID NOT ALLOW IT TO GAIN FOOTHOLDS in their COUNTRIES. They also controlled the thousands of years of tribal animosities in their countries, which as we can see was and is enormous. Just stopping ISIS is insufficient. They must completely be vanquished and the territory they hold liberated. Nothing less, or a regional war will widen into conflicts/attacks throughout Europe and then the world. Nothing like that will be considered by the developed world and many in the Middle East wish to see the latter happen. ISIS has been primarily funded by Saudi Arabia, Qatar, and Kuwait up to this point. Since the conflict has flared, Putin has sent arms, tanks and supplies into Ukraine in the last week. When can we expect the next move by China to be? Will they widen their grasp of the South China Sea? SOON! A weak US military and NATO will be challenged as NEVER BEFORE around the world. The socialists and leaders of the developed world are weak as kittens and spineless as worms. Mark my word, World War III has JUST BEGUN!
It has been a wild and woolly weekend as the news just keeps shocking a numb population too weary to keep up with the tea leaves: Important announcements about central banks lifeboating themselves from their own money printing, rotating HUGE parts of their reserves from INTANGIBLE financial assets to tangibles.
Central Banks Lifeboating themselves
Regardless of their words, the highest echelons of the Central banks know some history. Their rhetoric and obfuscation of their true motives remain indecipherable. But sometime we get a glimpse of their actions to find out the true story. In this case, it is being reported by the financial times and Official Monetary and financial institutions forum that they have ACCUMULATED over $29 TRILLION dollars ($29 million million) of REAL THINGS such as Gold, Stocks, Real estate, etc. This report is due to be released on June 17, 2014. Of course, a lot of the money they are SPENDING was PRINTED out of THIN air. Now, instead of buying WORTHLESS government bonds and calling them assets on their balance sheets they are buying REAL tangible property in exchange for their worthless IOU's known as sovereign currencies. The sum of the currencies that the sellers are reaping would appear to be gains, thus becoming the future victims of the systems they live in (who do not teach them what money is). Money in the developed world is mathematically WORTHLESS; we are just waiting for the public to WAKE UP to the crime perpetrated on them by their central banks and public servants.
Highest Market Cap for US bank since 2001?
Today's Wall Street Journal TRUMPETS the new high equity valuation by some of the nation's BIGGEST banks;
Look at all the dinosaurs that went extinct over the last 13 years, rolled up just as banks were during the GREAT DEPRESSION. An 'apples to apples' comparison would not include the assets that were gathered. The WSJ wants you to believe it signifies a recovery of asset values, which couldn't be further from the truth. The purchasing power of the currency they are dominated (dollar) has been cut in half since 2001. So have the values of these behemoths in purchasing power terms (what you can by with the same amount of money). Hugely misleading to those who do not know the dollar is an IOU (printed endlessly) and no longer MONEY (store of value) in the historical sense. Do you really think the dollars have the same value (purchasing power) after this?
M2 Chart
M2 up 200% in 10 years! Base money supply up 500%! Do you really believe that PILE of worthless paper can be RESOLVED in a SAFE manner? Do you think the value (purchasing power) of the dollars is worth the same as it was in 2000 (or is it down 50 to 80%)? Do you think the value of a dollar has held constant after these moon shot of money printing? Nominally (in fiat currency) they are approaching old highs, by this measure alone Banks are still down about 75% from those values. Do you believe in the tooth fairy? Santa Claus?
Friday night info dump
Friday nights are typically the days governments release information they do not want reported or noticed by the public. Last Friday was a doozy as the administration er IRS said they had lost several years of emails from Lois Lerner's computer who had had a hard drive failure. What a hoot. For you readers who do not know, nothing is ever LOST on the internet, ever. You can delete it over and over again and it will never be lost. These files are not lost either, if you or I attempted this we would be obstructing justice and destroying evidence among a number of other felonies we would be charged with. But the administration has shown many times that laws can be used or ignored at will and do so with regularity. This is just another constitutional crisis going unreported or addressed.
The internet is like a postcard and YOUR privacy is the victim. Do not ever write something you don't want another to see. It becomes public information for governments and anyone else...
Unreliable Supply
The unrest unfolding in the Middle East has far more implications for the price of energy than can be seen in the mild breakout of recent TRADING ranges actually portends an explosive move in energy markets. A rising wedge can be clearly seen and OIL is COILED for an explosive move higher. Take a look at this weekly chart formation:
This pattern has been under construction for almost 4 ½ years and it is a rising wedge. When we move through the high trend line priced should quickly move $20 dollars a barrel and ultimately should move at least 40 dollars higher. During the time it was being formed we have seen shale oil production in the US skyrocket, while production out of OPEC members Libya, Iran, Nigeria, and Venezuela (don't leave Mexico out where production has declined by over 1 million barrels a day) tumbling with losses of production outpacing the increases. Now Oil production looks set to tumble in Iraq as it breaks apart before our eyes. The IEA expects Oil consumption is set to rise about 6.58 million barrels a day by 2018, with most of the additional supply forecast to come out of North America and Iraq. Forecasted supply and demand growth per year:
Do you really think any investment is going to enter Iraq? Do you think the ISIS will attack the oil fields of their foes? Do you think instability or stability will grow in the Middle East? My bet is on INSTABILITY! Do you think this will be good for economic growth?
SILVER coiled and ready to LAUNCH?
Silver has been undergoing in my opinion a cyclical bear market since 2011in a secular bull market which began with the gold bull market back in 2001. It has been correcting and moving sideways just as crude oil has done above virtually the same amount of time. Bear markets don't last forever just as bulls don't. Take a look at this weekly chart:
RSI which is the first study under the chart has CLEAR BULLISH Divergences, slow stochastic's is clearly giving a buy signal and MACD show virtually no Volatility. In terms of time and price Fibonacci has been quite an accurate overlay and trend lines are now under challenge from BELOW. A clear Bear wedge is in place and the market would look to be coiled like a spring to leap higher. Now let's look at a graph of gross SHORTS provided by www.theshortsideoflong.com :
Any kind of move higher should light a BONFIRE under the shorts. Typically when it has been this high a powerful move is in the offing. Could this be the beginning of the end of the bear market that began in 2011?
It doesn't matter whether it is food, energy or precious metals it appears the next legs higher for the commodity complex could be on the near horizon after almost 4 years of corrective activity.
Federal Reserve FOLLIES
The market saw a crash yesterday after Janet Yellen gave her remarks. The crash was in the VIX volatility index and it was down almost 13% signifying the magnitude of the moral hazard her words meant to the markets, market makers and investors. Worldwide stock and bomb er bond markets have NO FEAR and she fed the beast of insane behavior. She also ventured where no Fed Chairman had publicly gone before in that she commented on Stock market valuations. Saying she saw no problems with valuations. Well a quick look at www.dshort.com market valuations reveals a Janet in Wonderland perspective on a historical basis.
Look carefully at this chart. We are at valuations which have PRECEDED every crash in the last 100 years (1929, 1937, 2000, and 2008) except 2000, which went insanely above current levels. What do you think is the chance that this is not a prelude to a similar resolution? That this time is different?
In my opinion the greatest manmade disaster and OPPORTUNITY in history is unfolding in every corner of the world. Are you diversified or operating with EYES WIDE SHUT? Are you prepared to turn it into opportunity by properly diversifying your portfolio? Adding absolute return investments which have the potential to thrive (up and down markets) regardless of what unfolds economically or politically? This is what I do for investors; help them diversify into investments which are created to potentially thrive in the storm. For a personal FREE consultation with me CLICK HERE!
Political correctness that short circuits an invaluable gathering of EXPERIENCE
John Stossel writing at reason.com, June 4:
I've had hundreds of employees whom I paid nothing: student interns. Unpaid internships were allowed for years, because it was understood that interns learn by working. My interns learned a lot. Many went on to successful careers in journalism. One won a Pulitzer Prize. Many said they learned more working for me than at college (despite $50,000 tuition). They benefited and I benefited. Win-win.
So for year's government ignored Labor Department rules that decreed unpaid internships legal only if an employer gets "no immediate advantage" from the intern. Geez, who wants that? Of course I got an advantage from my interns. That's why I employed them!
Recently, President Barack Obama's Labor Department announced it would enforce the internship rules, and some interns sued their former employers, claiming internships were "unfair." Charlie Rose forked over a quarter of a million dollars. Word spread, so now unpaid internships are vanishing.
Some people say it's good that unpaid internships are gone, because they are unfair to poor people, who can't afford volunteer work. But getting rid of opportunities does nothing to help anyone. Employers lose and students lose.
Difficult as it can seem to make your own way in this world without a phony government promise that you'll be taken care of, or that every job will pay at least $15 an hour, success happens when markets are relatively free. Individual initiative creates new things, companies, job opportunities--whole new ways of life--that make the world better for all of us.
In closing, Iraq just keeps going down the rabbit hole and will continue to do so. Southern Iraq is where the bulk of Iraqi oil production takes place and probably will soon be a territory of Iran. In anticipation of the battlefront to move to them the oil majors in southern Iraq are pulling out their personnel. How long do you think oil production will continue without the professionals that keep it GOING? What do you think the price of oil will be if OPEC quits supplying the 10% of production Iraq represents? Keep in mind that the EPA is effectively shutting down the coal fired electric supply's (about 40%) in the United States over the next several years. A perfect storm is rapidly unfolding in the energy sector and the next decade could be brutal. Do you think the blind ideologues in Washington care about the public at large? The answer is self-evident. Think about what impact their policy's may have 1, 5 or 10 years into the future.
See you next week, Ty
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Replies
The FIFA World Cup and market predictions have in common that we are tempted to create a world of make-believe when it comes to predicting outcomes. While others ponder about the meaning of a round ball, well focus on the implications of a make-believe world comprised of ever-higher asset prices. Our caution: look out below!
Investors have a tendency to ignore the hidden risks in their investments, even if those risks may be hiding in plain sight. You may recall the references to a goldilocks economy in the run-up to the 2008 credit crisis. Similarly, in the 1990s, what could possibly go wrong investing in tech stocks? What these episodes have in common is that the downside volatility of asset prices was unusually low. The pessimists warn of pending collapse, yet are ignored.
As an optimist, I agree with the pessimists. Not because I think the world will come to an end, but because the path from euphoric to normal is a rough one. When low asset price volatility lulls investors into believing the markets have become safer than they really are, folks take risks that they are bound to regret. Those that pile into the equity markets on the backdrop of ever shorter corrections, of ever higher asset prices, of historically low volatility, may be running for the exit fast when they realize they had no business being over-exposed to the equity markets in the first place.
Some laugh at gold investors that saw the price of gold drop sharply in 2013. What many fail to realize is that the very same can happen in the equity markets just as easily. When an asset (gold in this case) rises for 12 years in a row, there will be those taking out a loan to invest in the yellow metal. Similarly, investors have taken out ever more debt to buy stocks. For such euphoria to end, we dont need a crisis, all we need is fear levels to return to normal.
Liquidity is dead
The low volatility environment has been accompanied by what is historically low volume. When liquidity in the market is low, it provides fertile ground for more abrupt price moves. One reason why liquidity may be low is due to the DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Dodd-Frank, with its good intentions, has banished a lot of risk taking by financial institutions. That may be a good thing in some ways, but it has also curtailed major liquidity providers. The next sharp correction in the markets may well be an indication of whether the dearth of market participants is a problem.
Other markets infected
The above symptoms dont just affect the equity markets. In the fixed-income markets, our analysis shows:
Currency markets have also experienced extraordinarily low volatility of late. Having said that, we have not seen leverage increase much in this market, as folks abstain rather than take huge positions.
Policy makers concerned
Folks at the Fed have started to talk about complacency, with New York Fed President Dudley saying, Volatility in the markets is unusually low. At a dinner of the Hoover Institution I attended, Kansas City Fed President George mentioned in a speech: The incentives to reach for yield extend to smaller financial institutions as well If longer-term interest rates were to suddenly move higher, these institutions could face heavy losses.
Should you be concerned?
If you are not concerned, you are not paying attention. The reason I say this is because when the masses are complacent, it is my assessment that it is prudent to be fearful. The time to prepare for the next correction is now. And you dont need to think a crash is imminent to endorse the idea that it might be a good idea to rebalance a portfolio when equity securities have taken on a greater portion of ones portfolio.
Do I think a crash may be coming our way soon? Yes. What can trigger such a crash? Nothing in particular, yet anything can, given the high degree of complacency we see in the markets. Could I be wrong? Certainly.
What can you do about it?
First, if the equity exposure in your portfolio has grown, consider rebalancing in the context of your longer-term goals. This is a prudent exercise no matter what your long-term outlook is. Beyond that, to the extent you want to be invested in equities:
Even these types of strategies may experience negative returns in a down market, but you may consider yourself a winner with many of these strategies if you lose less than the market.
Second, diversify. As already eluded to with the reference to different types of equity strategies, key to thriving when equity returns sour is to have assets that produce a return stream with low or even negative correlation to the equity markets:
As one can see from the illustration, bonds have historically been powerful diversifiers for equity portfolios. Trouble is that investors not only want low correlation, but they also like positive performance. And while bonds have historically done just fine with regard to performance, many investors, including yours truly, arent so sure that this will be the case going forward. However, rather than finding an incarnation of a new generation fixed income fund that engages in what may be unnecessarily risky bets or masks an emerging market equity strategy as a fixed income play (because those stocks pay a dividend), we prefer to look elsewhere.
As many of our readers know, we have increasingly been looking at gold as a long-term diversifier as we think real interest rates, i.e. interest rates after inflation, may be negative for a long time. Today, we take it a step further, focusing on our currency outlook for the second half of the year. We like the currency market for a couple of reasons, including:
That said, heres a summary of our current outlook. For more in-depth information, make sure to also register for our free Webinar on Tuesday, June 24, at 4:15pm ET.
U.S.
The U.S. dollar has not been acting as a safe haven currency. Part of it may be because of a lack of leadership. We are not referring to Mr. Obama, but Ms. Yellen. And its not personal. The Fed has, in our interpretation, communicated that monetary policy shall be increasingly ad hoc. In fact, the best indicator of where rates will go may be whether the convicted felons that the head of the Federal Reserve profiled in her first public speech have a job by now. I wish this were a joke, but Im rather serious about it: Yellen has indicated she wants to keep rates low as long as necessary to boost employment as long as inflation does not cause too much of a problem.
Curiously, when inflation numbers come out higher than expected, a currency often appreciates versus its peers, as investors anticipate the central bank will do the right thing and raise rates. Its then, over time, that the currency reflects whether the central bank walks the talk. In the case of the Fed, we dont think the Fed is likely to walk the talk. As such, we continue our overall negative view with regard to the dollar.
Eurozone
Mr. Draghi, the head of the European Central Bank (ECB) has thrown in all but the kitchen sink in an effort to weaken the euro. It's not working very well. Its not working very well because negative rates on the deposits at the ECB dont matter much when there are few deposits. The new initiative, the TLRTO (targeted long-term refinancing operation), while creative and well intended, is unlikely to weaken the euro. What weighs on the euro is that rates are expected to be lower for longer. However, what ultimately matters are real interest rates, not nominal interest rates. And there, we think the U.S. will have lower real interest rates even with the latest efforts of the ECB.
U.K.
The UK has had numerous tailwinds in its economy. Recently, Bank of England (BoE) head Mark Carney told us he was just kidding with his forward guidance that rates will stay low for a long time. He didnt use exactly these words, but made it clear that a rate hike might come sooner than the market anticipates. One of Carneys concerns is rising home prices; monetary policy cant do much there, though, as it is cash payers, including Russian oligarchs, looking for safe haven assets many of these investors are not particularly sensitive to rise in interest rates.
The main thing going against the sterling is that it has already appreciated quite a bit. Still, in our assessment, Carney is likely to walk the talk, providing support to the sterling in the coming months.
New Zealand & Australia
Talk about walking the talk. Rates are on the rise in New Zealand. Again the only negative is that the New Zealand dollar isnt cheap. Of late, we had gotten a bit cautious about valuations, especially versus the Australian dollar. However, New Zealand has continued to march ahead, bolstered by a hawkish central bank; in contrast, Australia has continued to lag further behind.
We still think that the Australian dollar will ultimately play catch up (at least a little bit) to the New Zealand dollar.
Talking about Australia, the Australian dollar is proof that China is not falling apart. We think positive surprises for the Australian dollar may be triggered by good news out of China.
China
China is one of the most misunderstood places. The volatility in the yuan earlier this year was intentionally introduced by policy makers to put an end to highly levered arbitrage games between the onshore and offshore versions of Chinas currency. The unwinding has been the cause for many headlines, including the fallout in the copper market (copper was used as collateral for speculators; except that some of the collateral appears to have been pledged multiple times); another fallout was that economic indicators were useless, as many financial transactions were disguised as real trade to circumvent capital controls.
As the dust settles, higher volatility will teach businesses to put proper hedging techniques in place, forming the basis for a further liberalization of the market.
We are less concerned about the housing bubble in China, notably because consumers rarely take out a loan; and while banks, municipalities and developers may face challenges, the fallout from a housing crash may be more similar to a stock market crash rather than what we experienced in the US as our housing market crashed.
Finally, China has made it a priority to provide small and medium sized enterprises (SMEs) access to credit. A major entrepreneurial boom could be unleashed as the allocation of credit matures.
Japan
While we have a long-term price target of infinity for the Japanese yen, i.e. we don't think the currency will survive, in the short-term, Abenomics has taken a breather. In recent months, we interpreted pricing action in the yen to suggest a failing reform agenda. Of late, however, the yen is failing to rally on occasions where historically it would have.
As such, we think the trend of a weaker yen is likely to resume.
Emerging Markets
Emerging markets in general have had reprieve from quiet global markets. Dont count on that to continue. India is a bright star in the space, as capital is likely to flow back into India with the new government and a strong central bank in place. Some of that has already happened, but we think the Indian rupee may continue to outperform.
Norway, Sweden, Canada
Norway should raise rates, but will be reluctant. Sweden should lower rates, but will be reluctant. Canada has reached new records in being boring the currency that is. Various models favor the loonie as a safe haven. Except that I don't trust the calm: if we get volatility emanating from the U.S., we dont think the loonie can stay out of the fray.
For more, again, make sure to also register for our free Webinar on Tuesday, June 24, at 4:15pm ET. If you find value in our analyses please encourage your friends to sign up for this free newsletter, have them follow me on twitter, and/or post a link to this newsletter on your favorite social media site.
In the context of many disliking China these days, we are increasingly optimistic about the outlook of the renminbi.
Add to that the overall negative sentiment regarding the euro and we think the euro should appreciate versus the greenback for the remainder of the year.
Again, please make sure to also register for our free Webinar on Tuesday, June 24, at 4:15pm ET. If you find value in our analyses please encourage your friends to sign up for this free newsletter, have them follow me on twitter, and/or post a link to this newsletter on your favorite social media site. ou have signed up for our newsletter so you never miss a Merk Insight again. Also, if you find these analyses valuable, spread the word on social media by posting a link to this article. Follow me on Twitter to receive real-time an alysis of market-moving events.
Axel Merk
Axel Merk is President and Chief Investment Officer, Merk Investments,
Manager of the Merk Funds.