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Tuesday
March 24th
2015

SURPRISES & DISAPPOINTMENTS BEGIN

John Rubino

 

SPECIAL GUEST HOST: JOHN RUBINO, Author & Publisher of DollarCollapse.com

OPEN ACCESS

 

SURPRISES & DISAPPOINTMENTS BEGIN!

with John Rubino & Gordon T Long

Published 03-24-15

36 Minute Video

John Rubino and Gordon T Long discuss the overwhelming number of negative economic surprises and disappointments presently occurring.

Against this backdrop within this 36 minute video, they consider what is holding the markets up, how long this is likely to continue and what to expect from the central bankers going forward.

Both are very optimistic about the future but not before the capitalist system is allowed to do its magic of clearing out malinvestment and then through price discovery and the correct pricing risk, allow investment to return and propel the global economy forward.

 

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Monday
March 23rd,
2015

GUIDO HULSMANN talks FINANCIAL REPRESSION

Guido Hulsmann

 

 

SPECIAL GUEST: Jörg Guido Hülsmann , is a professor of economics at the University of Angers in France and adherent of the Austrian School. He has edited six books and is the author of The Ethics of Money Production and Mises: The Last Knight of Liberalism. He has translated several renowned economics books into German and written many articles in English, French, and German. He is a contributor to scholarly journals such as the Quarterly Journal of Austrian EconomicsThe Independent ReviewProcesos de Mercado, and the Journal of Markets and Morality, as well as to magazines and newspapers such as La Tribune (France), Finanz und Wirtschaft (Switzerland), Le Temps(Switzerland), Wiener Zeitung (Austria), and eigentümlich frei (Germany).

Professor Hülsmann is the director of the Austrian Research Seminar in Paris.

FINANCIAL REPRESSION

"Financial Repression is the name we give to all the different government interventions in which governments seek to improve their own bargaining position with financial markets."

"As a consequence of Financial Repression (that is of government intervention) people use their savings differently than they would otherwise have used. Therefore different people benefit from those savings (most probably the government itself) to a greater extent than otherwise would have been the case."

FINANCIAL REGULATION

"The most surprising developments have been regulation, like the Dodd-Frank Act, Basel III, FATCA. They are pretty intrusive. These regulations have been sold to the public as necessary to control the financial markets, which is certainly the case but this is one side, the other is precisely the cause. Governments control the markets and can force Insurance Companies, Banks, Investment Trusts to use their funds in a certain way that governments are then ready to benefit from. This is very often at the expense of the savers."

EXPECTED TRENDS

INCREASED REGULATIONS

The amount of paperwork and red tape that will be required to comply with expanding regulations is already growing dramatically. "We already require by law in Europe, for example, for an Investment Fund to have a Risk Officer who reports directly to the Ministry of Finance. It is absolutely mind boggling and it makes it very difficult for people to continue doing business profitably - it makes it quite miserable unless you are a big firm!" "These rules boil down to squeezing all small and even medium sized businesses out of business!"

'FORCED LENDING TO THE STATE OF FORCED SAVINGS'

"I expect a trend that will become much larger and more important in the future is what I call "Forced Lending to the State of Forced Savings!" Professor Hulsmann sees Pensions as being a particularly attractive target for this sort of trend.

PRICE RIGGING

We have already seen this most evidently in the area of Precious Metals price rigging. "This is because they are the natural alternative to hold savings outside of Financial Markets and Real Estate Markets! Both are artificially bloated thanks to central bank policy."... "it is natural that people turn to Precious Metals because there is no counterparty risk".

LEGAL PRIVILEGE

"Under a fiat money standard, governments (or their central banks) may obligate themselves to bail out, with increased issues of standard money, any bank or any major bank in distress. In the late nineteenth century, the principle became accepted that the central bank must act as the "lender of last resort", which will lend money freely to banks threatened with failure. Another recent American device to abolish the confidence limitation on bank credit is "deposit insurance", whereby the government guar­antees to furnish paper money to redeem the banks’ demand li­abilities. These and similar devices remove the market brakes on rampant credit expansion.

According to Hülsmann, there are four groups of legal privileges granted by the state (usually more than one is granted):

  • Legalized Counterfeiting - the promises of banks are allowed to be more "elastic". For example, a coin marked "an ounce of gold" will be allowed to have any amount of gold or none, and can have any meaning. Banknotes were named "promises to pay", but were obscure on the details.
  • Monopoly - only some monetary products may be produced by law, like a specific metal; or only the banknotes or coins of a certain bank. This limits the freedom of choice of users of money and benefits the producers and first recipients at the detriment of others.
  • Legal Tender is a money, that must be accepted in exchanges under a predefined price. Some monies may be driven out of the market due to Gresham's Law.
  • Legalized Suspension of Payments allows banks to avoid paying their obligations, while receiving payments from their debtors. If a bank is freed from contractual obligations to redeem its money and it is also legal tender, its banknotes become genuine paper money.

With legal privileges the banks are allowed to behave more irresponsibly, which increases moral hazard.

PERMANENT POSITIVE PRICE INFLATION RATE

"Without a Fiat Currency system it is impossible to create a permanent positive price inflation rate. With the gold standard the tendency for the price level was generally deflationary... a constantly declining price levels."

"If you have declining prices then there is a very strong incentive for savers to not worry about any financial investments at all, but to just save in the form of cash ... when you have constantly increasing prices... holding cash becomes suicidal for savers. You then have only two choices. Buy Real Estate or Financial Titles. You get promises of remuneration for your savings so you are partially compensated for the lose of purchasing power."

"Deflationary Recessions are a healing process - it is what precisely gets the economy back in touch with the real world and allow you to move forward event more forcibly!

 

Please link to the page of our Austrian research seminar:

AND ask your readers to get in touch with me (jgh@guidohulsmann.com) to make a donation.

All donations are tax-deductable.

 

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Thursday
March 19th,
2015

MARSHALL AUERBACK talks FINANCIAL REPRESSION

Marshall Auerback

 

 

SPECIAL GUEST: MARSHALL AUERBACK , Director of Institutional Partnerships, Institute for New Economic Thinking. Auerback has over 20 years of experience in the investment management business. He served as a director and global portfolio strategist for the Canada-based fund management group Pinetree Capital. He also was head of economic research for Madison Street Partners, a Denver-based investment management group, and he worked as an economic consultant to PIMCO, the world’s largest bond fund management group.  In addition, Auerback is a Research Associate at the Levy Economics Institute of Bard College and a Research Fellow for the Economists for Peace and Security. (http://www.epsusa.org)

Previously, Auerback managed the Prudent Global Fixed Income Fund for David W. Tice & Associates and assisted with the management of the Prudent Bear Fund. He also worked as an international economics strategist for Veneroso Associates, which provided macroeconomic strategy to a number of leading institutional investors. Prior to that, Auerback ran an emerging markets fund for Tiedemann Investment Group in New York. He began his finance career as an investment manager at GT Management, focusing on the markets of Japan, Australia, and the Pacific Rim, while based in Hong Kong and then Tokyo.

Auerback graduated magna cum laude from Queen’s University in Canada and received a post-graduate masters degree from Oxford University.

FINANCIAL REPRESSION

"Financial Repression can be a fairly loaded word. I think you can say that anytime you have a central bank which is a monopoly of anything, which can establish a price, you can have repression. I am less concerned with the labels and more concerned with the fact that we have been in response to this unprecedented crisis, been increasingly undertaking exotic experiments on behalf of the central banks. Most notably Quantitative Easing. It has had the effect of repressing interest rates or keeping them low. This of course is great for borrowers, but has the unintended by-product of depriving people of income."

A FLAWED SYSTEM

Financial Repression is an experiment that " is flawed in terms of the economics behind it. I don't think it does much to help elevate aggregate demand (spending power) and it turns out to be a large implicit subsidy for the financial sector."

"As far as I am concerned we are already over-financed as an economy and do too much for the banks anyway. It is really a fundamentally mistaken policy approach!"

TRENDS SINCE THE FINANCIAL CRISIS

"We have had three rounds of Quantitative Easing by the Fed, we have undertaken similar policies in Japan and more recently in Europe. If you look at the impact it has been rather minimal! The Japanese economy is still pretty stagnant. The US is growing but I believe that has less to do with QE and more to do with the fact that we had a fairly robust fiscal policy response after the crisis in 2009. Likewise in Europe we have been mired in depression like numbers which is worse than anything we had in the 1930s. It hasn't worked but we keep trying it."

"The economics behind it are flawed. it is based on the notion that if a bank buys a bond and puts reserves into the banking system that somehow it can encourage the banker to lend. We actually don't lend out reserves and are only used for interbank lending amongst banks. Also lending is a two way process. You have to have a credit worthy borrower and a credit worthy lender. If you have individuals or business that are piled down with debt they may not be very credit worthy or they may be less inclined to take on more debt"

"You want to engender rising employment, rising income so people aren't as reliant on credit. I think that is the problem our system has had over the last 30 years. We have become Credit centric versus Income centric!"

"We have been conducting this 'pulmonary resuscitation' to a fundamentally dead financial system rather than use the money to revive the economy and transition it into more productive economic activity."

CONTROL FRAUD

"When you have an economy that is over financialized and banks account for a disproportionate amounts of activity, and you have a compensation incentive system that is highly dependent on share price appreciation, then you provide a very perverse incentive for business not to invest in productive business affairs but to use excessive cash to buyback shares."

"What is worse is you begin to use all sorts of accounting tricks. This is what Professor Bill Black calls 'Control Fraud' . You get a form of casino capitalism. Actually, the casinos in Las Vegas are regulated more favorably than the banks are."

PRIVATE DEBT BUILD-UP

Marshall Auerback believes we have had excessive build-up in Corporate and Household debt. "When you have a demand shock, then servicing that debt becomes a problem. You end up with a large build-up of public debt in response." Unfortunately those who benefited now want cuts to things like Medicare that were not the cause of the problem. "Its a pretty perverse example of the wrong headed people running our system."

EMPLOYMENT - JOB GUARANTEE PROGRAM

TIME FOR A NEW APPROACH ON UNEMPLOYMENT: GOVERNMENT AS EMPLOYER OF LAST RESORT  By Marshall Auerback

At 10.2%, official American unemployment is now at its highest level since 1983 (http://finance.yahoo.com/news/Jobless-rate-tops-10-pct-for-apf-563122944.html?x=0&.v=8 ). 

Nearly 16 million people can't find jobs even though we are constantly being told that the worst recession since the Great Depression has officially ended. Yet instead of trying to revive the productive economy, most of the Obama Administration’s recover efforts still remain focused on cardio-shock treatment for Wall Street. Additionally, the President still seems curiously hamstrung by his Herbert Hoover-like devotion to fiscal rectitude: he wants to spend without “adding one dime to the budget deficit”, as he announced at his Congressional address on health care in September, even though deficits are a natural consequence of slowing economic growth, falling tax revenues and higher social welfare payments. 

To all of the chicken-littles (including the President) who fret about “excessive” government spending, we would simply point out that it is far better to deploy government spending in a way which REDUCES unemployment, rather than arises as a consequence of it.  We therefore suggest a new approach:

Government as Employer of Last Resort (ELR) or a Job Guarantee program.

The U.S. Government can proceed directly to zero unemployment by hiring all of the labor that cannot find private sector employment.  Furthermore, by fixing the wage paid under this JG program at a level that does not disrupt existing labor markets, i.e., a wage level close to the existing minimum wage, substantive price stability can be expected. Other benefits could be provided, including vacation and sick leave, and contributions to Social Security and, most importantly, health care benefits, providing scope for a bottom up reform of the current patchwork health care system.

Government as employer of last resort would not be introducing another element of intrusive bureaucracy into our economy, but simply better utilizing the existing stock of unemployed, now dependent on the public purse – especially the chronically long term unemployed. The current system we have relies on unemployed labor and excess capacity to try to dampen wage and price increases; however, it pays unemployed labor for not working and allows that labor to depreciate and develop behaviors that act as a barrier to future private sector employment.  Social spending on the unemployed prevents aggregate demand from collapsing into a depression-like state, but little is done to enhance future growth and demand, which can be done via the JG by providing them with employment, greater education and higher skill levels.  

The JG program would allow for the elimination of many existing government welfare payments for anyone not specifically targeted for exemption, and would command greater political legitimacy, as society places a high value on work as the means through which individuals earn a livelihood. Minimum wage legislation would no longer be needed as it would be established via the JG. Labor would welcome the safety net of a guaranteed job, and business would recognize the benefit of a pool of available labor it could draw from at some spread to the government wage paid to JG employees. Additionally, the guaranteed public service job would be a counter- cyclical influence, automatically increasing government employment and spending as jobs were lost in the private sector, and decreasing government jobs and spending as the private sector expanded. It would therefore remain a permanent feature of our economy, in effect acting as a buffer stock to put a floor under unemployment, whilst maintaining price stability whereby government offers a fixed wage which does not “outbid” the private sector, but simply creates a stabilizing floor and thereby prevents deflation.

ELR is desired because a more or less free market system does not (and, perhaps, cannot) continuously generate true full employment.  No civilized nation should allow a large portion of its population to go without adequate food, clothing and shelter.  Best of all is that the program would be creating a stock of EMPLOYED people, rather than a buffered stock of unemployed, where social capital depletes rapidly, and several long-term social pathologies develop.  The current policies clearly are not working; it’s time to try something that can put as many Americans as possible into productive employment.

 

 

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Wednesday
March 18th,
2015

KRISTINA HOOPER talks FINANCIAL REPRESSION

Kristina Hooper

 

 

SPECIAL GUEST: KRISTINA HOOPER, CFP, CAIA, CIMA, ChFC Managing Director, US Investment Strategist, Head of US Capital Markets Research & Strategy. Kristina Hooper is a managing director, US Investment Strategist and Head of US Capital Markets Research & Strategy with Allianz Global Investors, which she joined in 1998. She provides financial professionals and their clients with updates on financial-market performance, market trends, economic trends and financial-planning concepts. Ms. Hooper has appeared on CNBC and Reuters TV and is regularly quoted in The Wall Street JournalInvestor’s Business DailyReuters and other financial-news publications. She has 18 years of investment-industry experience and previously worked in product management at UBS (formerly PaineWebber) and at MetLife. Ms. Hooper has a B.A., cum laude, from Wellesley College; a J.D. from Pace University School of Law, where she was a Trustees’ Merit Scholar; and an M.B.A. in finance from New York University’s Leonard N. Stern School of Business, where she was a Teaching Fellow in macroeconomics and organizational behavior. Ms. Hooper holds the Certified Financial Planner, Chartered Alternative Investment Analyst, Certified Investment Management Analyst and Chartered Financial Consultant designations. She is a CFA Level II candidate.


FINANCIAL REPRESSION

What is financial repression?

Government actions (lower interest rates, increased regulations, etc.) to reduce debt while maintaining inflation

Goal: Create negative real (after-inflation) returns and inflate away public debt by forcing real rates below GDP growth

Why does it matter to investors?

It’s a “stealth tax” that systematically strips wealth; “safe” investments no longer generate enough income

It rewards debtors and punishes savers—especially retirees

Financial repression: It’s happening now around the globe

A Financial Repression checklist:

  • Extremely low key interest rates and bond yields
  • Central bank purchases of government bonds
  • Political pressure on banks to purchase government bonds
  • Nationalization of select banks
  • Repression-friendly regulatory measures
  • Restrictions on foreign capital movements
  • Pension asset transfers to governments

 

 

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Tuesday
March 17th,
2015

DOUG NOLAND talks FINANCIAL REPRESSION

Doug Nolan

 

 

SPECIAL GUEST: DOUGLAS C.NOLAND , Former Vice President, Federated Income Securities Trust and serves as senior portfolio manager of Federated Prudent Bear Fund, Federated Prudent DollarBear Fund and Federated Market Opportunity Fund. Before joining Federated, Doug was employed with David Tice & Associates, Inc. where he served as an assistant portfolio manager and strategist of Prudent B F Bear Fund and Prudent Global Income Fund. He earned a bachelor’s degree in accounting and finance from the University of Oregon and a master’s of business administration from Indiana University.

 

FINANCIAL REPRESSION

"Financial Repression is fundamental to current policy to try and sustain a global credit bubble... Policies have become ever more desperate as the credit bubble has gone global! It is a matter of policy makers distorting the incentives, especially the financial incentives. It is particularly painful for savers. Policy makers want to drive money out of savers into risk markets by creating incentives for speculation and leveraging to reflate the system and generate significant credit growth."

"It is flawed economic doctrine, flawed policy making and goes back a long way."

  • After the 1987 Stock Market Crash the Greenspan Fed flooded the market with liquidity,
  • We then had the late 80's excesses and that bubble burst,
  • In the early 90;s the Greenspan Fed came in and aggressively slashed interest rates and created a steep yield curve so the banks could borrow cheap and lend dear,
  • It created leveraged speculation,
  • We have been in serial bubbles ever since then. Each gets bigger and each post reflationary effort is even more extraordinary.
  • The 'Once in 100 Year Flood' was not the 2008 Crisis. We are in an even bigger bubble now. It is a Global Bubble. It is at the heart of money and credit. When the next crisis occurs the policies of Financial Repression won't have much of an impact unfortunately.

THE MARKET BASED CREDIT SYSTEM

"Back in the 1990's I was obsessed with trying to understand how an impaired banking system from the early 1990's morphed into this new age financial system that was fueling historic prosperity and a bull market. By the late 1990's I was convinced we had fundamentally changed finance. That uniquely for the first time in history we had global credit that was unconstrained. The quality and quantity of credit was unrestrained. There was no gold standard, there was no Bretton Woods Monetary regime, there was not even any ad hoc. dollar reserve system to restrain credit. Unlike historically when credit was dominated by bank lending, this new credit that developed in the 1990's was market based - securitization, Fannie Mae, Freddie Mac, Derivatives, Wall Street Finance. I was convinced that credit which is unstable would see this new credit highly unstable."

"I believed the government would reign this credit in. I had no inkling that the government would accommodate this type of credit and use this type of credit for reflationary policy. That is really how it got away from them! Accommodating financial leveraging and speculation etc."

WE HAVE DISREGARDED THE VULNERABILITIES OF CAPITALISM

"I am very much a free market person. I want the market to dictate price. As much as possible I want the government out of it. I look at the Financial Sphere and Economic Sphere. The Financial Sphere needs to be carefully regulated. You cannot have unconstrained credit! You cannot have a Financial Sphere that inflates at a whim because that distorts the pricing mechanism."

"I fear that when the crisis collapses the system it is going to be folks like us and our listeners who will have defend Capitalism by saying:

"Capitalism wasn't to blame. It was a run away Financial Sphere and poor Policy making in managing money & credit that was the culprit!"

Capitalism is not flawed but instead has vulnerabilities. We cannot disregard these vulnerabilities. These vulnerabilities are in Credit. We have disregarded the vulnerabilities within Capitalism. We have not separated the real economy pricing mechanism which operates very differently in the Financial Sphere.

This extensive discussion covers a wide range of subjects including:

  • THE BUILD-UP OF SYSTEMIC RISK
  • A CRISIS OF CONFIDENCE IS AHEAD
  • WHY WE HAVE RECORD ARTIFICIAL HOUSEHOLD WEALTH
  • FINANCIAL FRAGILITY - As long as Credit is expanding things looks good. But it camouflages the underlying financial fragility.
  • 2008 WAS ABOUT PRIVATE CREDIT - THE NEXT CRISIS WILL BE ABOUT PUBLIC CREDIT
  • THE GLOBAL BUBBLE HAS NOW BEEN PIERCED

"You can now expect the unexpected from Policy Makers"

 

 

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Sunday
March 15th,
2015

PETER BOOCKVAR talks FINANCIAL REPRESSION

Peter Boockvar

 

 

SPECIAL GUEST: PETER BOOCKVAR Managing Director, Chief Market Analyst with The Lindsey Group, a macro economic and market research firm. Prior to joining The Lindsey Group, Peter spent a brief time at Omega Advisors, a New York based hedge fund, as a macro analyst and portfolio manager. Before this, he was a partner at Miller Tabak & Co for 18 years where he was recently the equity strategist and a portfolio manager with Miller Tabak Advisors. He joined Donaldson, Lufkin and Jenrette in 1992 in their corporate bond research department as a junior analyst. He is also president of OCLI, LLC and OCLI2, LLC, farmland real estate investment funds. He is a CNBC contributor and appears regularly on their network. Peter graduated Magna Cum Laude with a B.B.A. in Finance from George Washington University.


FINANCIAL REPRESSION

"Financial Repression is the artificial suppression of interest rates well below the rate of inflation and well below what they would be otherwise if set by the supply and demand for money. That is what should determine what the cost of money is!"

SUPPLY & DEMAND CONSEQUENCES

"The central banks are pressuring you to act today in some activity that you would otherwise have done tomorrow. They want you to buy a car today, they want you to buy a house today, they want you to buy that stock today - not tomorrow. It just pulls demand activity forward! When this begins activity in the short term accelerates both in terms of both economic activity and higher asset prices. At some point you reach a wall where you have pulled forward so much activity that you have reached the law of diminishing returns!"

"All of this has pulled forward future returns on asset prices, but that doesn't stop asset prices from going higher! ... "You get short term benefits but at the expense of long term costs. You pay for it over the long term."... "What the central bankers actually end up creating is Deflation because of the excess capacity build-up to match the artificially created demand!"

We have Deflation presently in Commodity prices but in the US we have Inflation in Professional Services.

"Central Bankers have 'mucked' up the entire concept of Supply & Demand and price discovery. All the various inputs are 'out of whack relative to where they would be historically!"

POTENTIAL FED RATE INCREASES

"This ends when Inflation actually starts to increase! When Interest Rates do start to rise and in affect take away the printing press of the central bankers. Right now Central Bankers have given themselves license to do what they want because at these low levels of inflation, but at some point the bond market is not going to be so accommodating!"

The Central Bankers are trapped in a policy they can't get out of. It is ridiculous that after 6 years of ZIRP everyone is 'freaking out' over a mere 25 basis point increase.

The Fed's academic econometric models are flashing red over labor market metrics. Therefore they will increase rates in June irrelevant of whether that is actually the right thing to do (assuming you believe the Labor numbers) . That is what guides them.

"The issue is not whether the Fed raises rates but rather the turbulence it causes and what it means to potential future rate hikes."

A MAJOR CORRECTION IS POTENTIALLY JUST BEGINNING

The combined Fed tightening and a changed earnings picture suggest the basis for rising equity markets is no longer there. The Multiple expansion game is not there.

"How far we decline I am not sure. I am not sure where the Yellen 'Put' is. It is an 'out of the money' Put but I am not sure what the strike price is! I don't know if it is 15% or 25% lower. I am pretty sure if we are down 20-25% Yellen will cut rates below where she has them after raising them in June. I would then not be surprised to see another round of QE."

AT SOME POINT THE FED WILL LOSE CONTROL

"We know the Fed lost control of commodity prices. The Fed is trying to generate inflation and commodity prices have gone the exact opposite way! At some point they are also going to lose control of stock prices."

"ECB QE was the final act of Central Bank Largesse!"

"There is literally Monetary Madness Going On!"

 

 

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Monday
March 9th,
2015

WHAT DO THE TRENDS SUGGEST?

 

Charles Hugh Smith

 

 

Regular Co-Host: CHARLES HUGH SMITH , Author & Publisher of OfTwoMinds.com

OPEN ACCESS

with Charles Hugh Smith & Gordon T Long

33 Minutes - 15 Slides

Charles Hugh Smith and Gordon T Long discuss some of the major secular trends occurring today and give their views on what they may be telling us about what might be ahead.

TECTONIC FORCES

  • Private Sector rapidly decentralizing and networking decision making,
  • Public Sector rapidly centralizing and taking more control through laws, regulations, fees, licenses and taxes.

5 TRENDS TO CONSIDER

TECHNOLOGY PRESSURES

 

GROWING DISRUPTIVE PRESSURES TO A FRAGILE SYSTEM

DISRUPTION:

  • Strengthens Robust, Decentralized Systems,
  • Breaks Fragile, Centralized Systems.

 

DESTABILIZING FORCES AT PLAY IN A FRAGILE ECONOMIC ENVIRONMENT!

 

 

 

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Sunday
March 8th,
2015

AMIN RAJAN talks INVESTING IN A DEBT-FUELLED WORLD

Amin Rajan

 

 

SPECIAL GUEST: PROF. AMIN RAJAN Chief Executive of CREATE (Centre for Research and Technology in Europe)-Research – A network of prominent researchers undertaking high level advisory assignments for governments, global banks, fund managers, multinational companies and international bodies such as the EU, OECD and ILO. He is a visiting professor at the Centre for Leadership Studies at Exeter University, and an associate fellow at Oxford University’s Said Business School. He is an expert on employment and workforce diversity and is one of the most sought after speakers on the future of work, organization and society and its leadership implications.

Prof Rajan has also acted as a senior consultant to companies such as ABN-AMRO, Aegon Group, Barclays, BlackRock, BP, BT, Citibank, Credit Suisse, Deutsche Bank, EDS, Fiat, Ford, GSK, HSBC, IBM, ING Bank, JPMorgan Asset management, Legal & General plc, Lloyds Bank, Microsoft, Morgan Stanley, Motorola, Principal Global investors, RBC Dexia, Royal Bank of Scotland, Prudential, Rolls Royce, Royal SunAlliance, T.Rowe Price, Shell, Storehouse Group and UBS.

FINANCIAL REPRESSION

"Financial Repression is a device used by governments to liquidate their debt."

Financial Repression uses low interest rates (which reduces their financing costs) and inflation (which vaporizes its debt). The Negative Real Interest Rates which the two in combination create, has in the modern era been the way governments reduced their debt burdens.

"Financial Repression brings about an arbitrary redistribution of wealth."

Today it is the governments only politically realistic option.

The critical problem is holders of fixed income debt get hurt where there is a redistribution of wealth:

  1. From Savers to Borrowers.
  2. From Pension Plans to Governments

EXPECTED DURATION

Historically we should expect Financial Repression to last anywhere from 15 to 50 Years. We are now into only the seventh year! In Prof Rajan's opinion "this show has a long shelf life and likely to run another 5 - 10 years"

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PENSION PLANS - Entering "De-Accumulation Stage"

Aging demographics in the debt burdened developed economies is exaggerating the effects of Financial Repression because of the need for Investment Income products by retirees.

Pension Plans are now going into the "De-Accumulation Stage" where there is more money going out of the plan than is going in. Pension plans face problems of both under contribution levels and De-accumulation resulting in serious underfunding positions.

THE RETIREMENT TSUNAMI

The "Baby Boomer' Generation is in the process of retiring. There will be 78 Million in the US and 84 Million. Europe which accounts for 8% of the global population and 25% of global output accounts for a massive 48% of global welfare budgets.

The shift from Defined Benefits (DB) to Defined Contributions (DC) is about the "Personalization of Risk" so we are told, "so people can be 'empowered' and will be less dependent on their employers plans". Instead Prof Rajan argues we have "Personalization of risk has a big downside. It transfers risk from those who couldn’t manage it to those who don’t understand it!"

SOLUTIONS ALPHA

Product alpha is about beating the markets, solutions alpha is however about meeting investors’ predefined needs.

"Solutions Alpha is not about trying to beat the market nor the crowd, because these markets are going to end in tears at some stage. So when thinking about retirement think about exactly what your needs are then think about asset classes that will help you meet these needs. 'Shoot-The-Lights-Out' returns are no longer an option without huge amounts of risk!"

Solutions alpha will remain the epicenter of innovation. Solutions Alpha requires looking for asset classes that deliver:

  1. Regular Income,
  2. Inflation Protection,
  3. Low Volatility.

Examples would be Rental Real Estate, Infrastructure, Timber, Farm Land and many traditional "hard assets".

LIQUIDITY CRISIS - Volcker Rule Has it 'Preordained'

When the next market correction occurs "liquidity is going to dry up in no time at all because of the Volcker Rule. The inventories of Bonds which the Investment Banks are caring are now one-eight of what they were pre-2008. Any mass exit and there will be no liquidity and prices will drop like a stone!"

OBSERVATION

Prof. Amin Rajan observes that two paradigm changes have occurred in capitalism:

  1. Capitalism has Lost Social Expression - It is no Longer Improving and Benefiting Society as a Whole
  2. Over Financialization - Financial Engineering and Trading for Profits had taken control of Capitalism versus Investing In Productive Assets for increasing productivity. Markets no longer channel capital from savers to investments in productive assets. There are neither savers nor productive assets involved in the process but rather financialization.

 

 

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SEE FINANCIAL REPRESSION INTERVIEWS FOR ALL SHOWS IN THIS SERIES || SEE VIDEO ARCHIVES

 

Monday
March 1st,
2015

MEB FABER talks GLOBAL VALUE

 

Mebane Faber

 

 

SPECIAL GUEST: MEBANE T. FABERChief Investment Officer and Portfolio Manager

Mr. Faber is a co-founder and the Chief Investment Officer of Cambria Investment Management.  Faber is the manager of Cambria’s ETFs, separate accounts and private investment funds for accredited investors.  Mr. Faber has authored numerous white papers and three books: Shareholder Yield, The Ivy Portfolio, and Global Value.   He is a frequent speaker and writer on investment strategies and has been featured in Barron’sThe New York Times, and The New Yorker. Mr. Faber graduated from the University of Virginia with a double major in Engineering Science and Biology.

FINANCIAL REPRESSION

"An environment where interest raters are lower than inflation and you have a low or even negative interest rate environment which helps someone and hurts someone else. It hurts savers but is good for borrowers and people who have a lot of debt. The inflation eats away at that debt. It helps someone like the US government"

"Stocks and bonds like high real interest rates. They typically don't like low or negative real interest rates". Other asset classes like gold like negative real rates and have over the last decade, but not so much over the last couple of years."

VALUE & MOMENTUM

Faber likes both value and momentum and believes they can work together as part of a global portfolio, particularly where they intersect. Cambria uses Shiller's 10 Year CAPE benchmark to look at equities. It is typically around 17 and is now around 27 in the US. It presently shows a lot of great valuations around the world however momentum has been in US stocks, bonds and real estate. "Right now we see a lot of opportunity, but particularly abroad".

THE "HOME COUNTRY" BIAS

The US is only about 50% of global market cap but most US investors have a 'hometown bias" of having 70% of their portfolio in US securities. Faber has found that it consistently ranges from as low as 65 to as high as 85%. Meanwhile, when considered on a GDP basis the US is only about a fifth to 25% and on a valuation basis is the third most expensive. This would suggest the US has a headwind, especially after a six year run. An exposure of at least half to foreign investment seems more reasonable to Meb Faber.

DEVELOPED AND EMERGING COUNTRIES

We start with a universe of about 45 countries with reasonable liquidity. One of Cambria's funds buys the eleven cheapest countries in the world. Faber's analysis suggests avoiding countries that create large bubbles can be a critically important when viewed over the longer term because of the size of the inevitable corrections."

"One of the emotional challenges and why value works is because it is hard to do."

CLASSIC MISTAKES

  1. "Not Getting Out of Your Own Way!"
    • Getting Caught Up In Performance,
    • Not Having a Plan,
    • Trying to Time Your Investments,
    • Realistic Expectations.
  2. "Not Paying Attention to Fees"
  3. "Too Wedded to An Investment Style"
    • Need to be Asset Class Agnostic

 

 

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