Here We Go …

Last week we wrote in the context of Swiss franc denominated loans to consumers in Europe:

 

Another problem is that governments may react to the situation by shifting the losses suffered by mortgage debtors back to the banks – this has e.g. already happened in Hungary. Not surprisingly, this policy has been hugely popular with the country’s population, but very costly for the banks. Since the necessary write-downs have already been taken, no further damage is to be expected from CHF mortgages outstanding in Hungary – the main danger for the banks is rather that the governments of other countries may consider adopting similar policies.”

 

It didn’t take long for a government to get in on the act. Poland’s government faces elections this year (both presidential and parliamentary), which is likely a major motivation for considering going down Hungary’s path with respect to CHF denominated consumer loans. It presumably hasn’t escaped the attention of Poland’s government that Viktor Orban’s Fidesz party has been faring rather well in Hungarian elections. Hence Polish prime minister Ewa Kopacz informed a throng of potential voters up to their eyeballs in CFH denominated debt that she would seek to move their losses to the banks.

 

5740890-marszalek-sejmu-ewa-kopacz-900-626Poland’s prime minister Ewa Kopacz wants to rescue Polish mortgage holders at the banks’ expense.

Photo credit: Sławomir Kamiski/Agencja Gazeta)

 

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Two Comedy Acts

Today, we’re going to tell you why America’s middle class is getting poorer. Or put another way, we’re going to show you how capitalism dies.

The Dow fell 141 points, or 0.8%, on Friday. Gold closed the week below $1,300 an ounce… but not far below.

Two comedy acts appeared last week: President Obama’s State of the Union address and Mario Draghi’s QE announcement.

Mr. Obama claimed credit for a “recovery” that has left the typical American poorer than he was before. And not only is he poorer, but also he is more dependent on the very people who engineered the phony recovery. (See below.)

Mr. Draghi followed up with a series of one-liners, the gist of which was that he now proposes to save Europe from the specter of inadequate inflation.

 

casino royale-1

Europe’s casino boss

Photo credit: Roesseler/EPA

 

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Getting Short Term Overbought

Here is a brief technical and positioning update on gold. In euro terms, gold has just experienced a scorching rally – as a result, the previously discussed resistance levels in gold’s dollar price have been overcome as well. However, gold seems now quite overbought relative to the euro in the short term, and it also seems quite overbought relative to commodities.

The rally in the HUI index has recently been rejected near the 200 day moving average, and the HUI-gold ratio has pulled back somewhat, which also increases the probability that a corrective/consolidation period has begun.

Also shown below is the net hedger short position in COMEX gold futures (the inverse of the net speculative long position), which has in the meantime reached the highest level since early 2013. In short, everything seems to argue in favor of at least a short term pullback.

However, one reason why it is worth keeping a close eye on things now is that a number of markets – especially currencies – have lately tended to ignore such “overbought” signals. Obviously we don’t know with certainty what will happen next in the gold market. Normally, a correction should be expected, i.e., this outcome has the highest probability at the moment (even a resumption of the bear market cannot be ruled out completely yet, although it has become a lot less likely from a technical perspective).

However, should the correction turn out to be only very shallow and the rally resume quickly, it would be a sign of great underlying strength. It would also signal that faith in central banks is slowly but surely crumbling and that economic confidence is continuing to wane in spite of the recent strength in global stock markets.

 

Geldanlage in echtem Gold als Goldbarren und Goldmünzen

 

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Embracing Risk

Dow up big time on Thursday – 259 points, or 1.5% Gold up too – to over $1,300 an ounce. This year is going to be a hoot. Boom, bust, lies and claptrap – we’re going to have it all!

What accounted for Thursday’s big bullish surge? From Bloomberg:

 

“The MSCI Emerging Markets Index added 0.8% to 983.53. Russia’s dollar-denominated RTS Index rose the most in the world and the ruble strengthened as the ECB’s move encouraged investors to buy riskier assets.

Gauges in Poland, Hungary and the Czech Republic increased at least 0.9%. Oil producer Petroleo Brasileiro led gains in Brazil. Asian stocks jumped as China pumped funds into the financial system.

ECB President Mario Draghi unveiled a quantitative easing plan of 60 billion euro a month until at least the end of September 2016. The move, which is intended to counter slowing growth and the threat of deflation, may spur capital inflows into developing countries. China’s monetary authority used open-market operations to add cash to the financial system for the first time in a year and spurred loans amid a fund shortage.”

 

bb

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Greek Election – Decisive Victory by SYRIZA

With more than 95% of the votes in Greece’s parliamentary election counted as of the time of writing, Greece’s far-left Syriza led by Alexis Tsipras was already certain to have won a decisive victory.

 

Greek election resultGreek election results after more than 95% of the votes had been counted – click to enlarge.

 

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Falling Prices are “Really Bad” for You

It is quite comical how the idea that falling prices are somehow bad for society is continually pushed by the establishment and its mouthpieces. We imagine it is not easy to create propaganda in support of such an obvious absurdity. No doubt every consumer in the world would love nothing more than genuine price deflation. After all, what can possibly be bad about one’s income and savings stretching further and buying more, rather than fewer goods and services?

Consumers and savers all over the world must surely be scratching their heads by now after hearing for the umpteenth time that it will be somehow “good” for them if their real incomes decline and the value of their savings is eroded by rising prices. What exactly is the justification for this nonsense?

Bloomberg has a strongly pro-interventionist, pro-central planning editorial line. This is possibly the case because its owner is a well-known champagne socialist and nannycrat. However, the statist quo is actually supported by a great many prominent financial publications, including the Financial Times, the Economist, and several others. As far as we are aware, there are no major mainstream financial media supporting genuine free market capitalism.

 

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Image credit: Dreamstime

 

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Underwater in Their Cars

 

The best things in life are free
But you can keep them for the birds and bees
Now give me money
That’s what I want

– “Money (That’s What I Want)” by Berry Gordy

 

We have high hopes for 2015. It is starting off so well. Only three weeks in and we almost tore a stomach muscle laughing. So many unwitting comedians. So many political pratfalls and financial gags.

No fraud or no foolishness is too absurd. And the spectators are willing not only to suspend disbelief but also to chuck it out the window.

Recently came news that US auto sales were increasing. Everyone hailed this as good news. Then it emerged that auto sales have become the latest subprime finance scheme. Bloomberg:

 

Automakers are increasingly selling vehicles with 84-month loans that reduce monthly payments while making it tougher to repay faster than cars lose value, John Mendel, Honda’s US sales chief, said in an interview.

The Tokyo-based company will avoid longer-term loans even as Nissan tries to supplant it as the fifth-biggest automaker in the US, he said.

Sales will keep growing as the Federal Reserve’s zero-interest-rate policy encourages investors to collect yield from auto loans, said Tom Webb, chief economist at Manheim Consulting.

“We’ve seen this movie before, we know how it ends, and it’s not pretty,” Webb told reporters at an event before last week’s show.

“It can have some negative impact on the market in creating a vicious cycle of negative equity if the consumer doesn’t hold onto their vehicle long enough,” Melinda Zabritski, senior director of automotive finance for Experian, said by phone.

“Something has to be done to keep the market affordable, or consumer buying is going to have to change and we’ll have to return to less frequent purchases.”

 

“Negative equity?”

In other words, auto buyers will be underwater … in their cars. They have, in effect, “taken out” the equity from their wheels just as they once did their bedrooms.

 

underwaterWhere you don’t want to be with your car…(as we detailed here, the problems actually started showing up some time ago already).

Photo credit: jasondecairestaylor.com

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The Utterly Absurd Becomes the “New Normal”

 

“Bankers at the World Economic Forum in Davos are applauding the European Central Bank’s announcement of quantitative easing. Some said they were pleased the ECB’s plan, to buy about €60 billion a month in government bonds, is larger than expected. “It was positive and it was needed,” said Francisco Gonzalez, chairman of Spain’s BBVA. “Having said that, governments have to keep with reforms for the plan to meet its purpose,” he added.”

 

The ECB surprised markets today by unveiling a slightly larger than expected “QE” program. Yesterday’s leak of the decision referred to money printing to the tune of €50 billion per month, so the actual announcement of a €60 billion per month program was seen as a “positive surprise”. Just think about this for a moment. The charlatans running the central bank announce that they will make a grandiose effort to debase their confetti currency even further by printing a huge amount of additional money every month, and this is greeted as a “positive surprise” and is “applauded by bankers”. It should be glaringly obvious by now that the lunatics are running the asylum.

 

draghis-bazooka

This time it will work! Mr. Draghi unwraps the chief weapon of the John Law School of Economics, which has been failing with unwavering regularity since at least the times of Roman Emperor Diocletian.

Image author unknown

 

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Taking Full Advantage of Winners

Investors returned from a three-day holiday and found stocks and gold right where they wanted them. Neither registered any change. So let’s return to the nuts and bolts of investing…

Take a look at your portfolio. Imagine how much better off you’d be if all those 50%… 60%… 80% losses were removed. Unless you’re a true “deep value” investor, and happy to ride out these drawdowns, you could do that by using a trailing stop. That’s the easy part.

“More important,” says TradeStops.com’s Dr. Richard Smith, “is that trailing stops allow you to take full advantage of your winners.”

You buy a stock. It doubles. What do you do? Many investors would sell, feeling that they had made a good profit. Why be greedy?

Often, they then watch as the stock goes higher and higher, as they sit on the sidelines grousing about having gotten out too soon. Old-timer Richard Russell, of Dow Theory Letters fame, tells the story of how he invested in Buffett’s Berkshire Hathaway in the early 1970s.

The stock doubled and he sold. He has been kicking himself ever since. Class A Berkshire Hathaway shares, which Buffett bought for $11 in 1962, are now worth $222,636.

 

Philippine-stock-market-board

Photo credit: Katrina Tuliao

 

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Swiss Franc Revaluation Repercussions – Swiss, Polish and Austrian Banks in the Crosshairs

The SNB’s unexpected suspension of the EURCHF minimum exchange rate continues to claim victims. There have been a number of spontaneous combustion events striking forex brokers and hedge funds, but there are also effects that will only play out over a longer time period.

As Coveredbondreport.com reports, the credit rating agencies feel compelled to reevaluate their ratings of a number of European banks and their covered bond issues, i.e., European-style mortage-backed securities. Contrary to “normal” MBS or ABS, the assets backing covered bonds remain on the balance sheets of the issuing banks. This makes them safer for investors, as e.g. non-performing assets are usually replaced with performing ones, and other safety-enhancing measures are often taken; at the same time, it means that banks issuing these bonds are exposed to risks that in US style MBS are borne by investors. According to the report:

 

“Noting that while the move is credit positive for the Swiss sovereign, Moody’s said that the removal of the peg is credit negative for Austrian, Polish and Swiss banks and to covered bonds exposed to euro/Swiss franc exchange rate risk”

 

Most affected are apparently Austrian banks, with 17% of their mortgage covered bond assets denominated in CHF and Austrian households exposed to the tune of €25 bn. to CHF denominated mortgage loans. The “bad bank” that is administering the wind-down of the assets of Hypo Alpe Adria, an Austrian bank that fell victim to the 2008 crisis and has turned into a major headache for the country’s taxpayers, has taken a hit as well. 21% of its public sector covered bonds are denominated in CHF, which is so to speak adding insult to injury, as it makes the already horrendously expensive wind-down even more so.

 

fat+lady+sings-feature

When this happens, it’s all over.

Photo via grassvalley.com

 

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It’s Tough to Make Predictions, Especially About the Future

Markets were closed in the US on Monday for Martin Luther King Jr. Day. So, today, we really are going to talk about stop losses.

Mathematician Dr. Richard Smith, who runs TradeStops.com, was kind enough to visit us in Nicaragua and allow us to buy him a drink or two. He explained how they worked. And he told us about how he’s made them work even better.

“The world is much more uncertain than people think,” began the man with a Ph.D. in the subject.

“There are always far more potential outcomes than you can imagine. So, you’re going to be wrong about the future more often than you will be right.”

We have demonstrated that often enough ourselves. We needed no more proof. But Richard wouldn’t let up:

“Just look at the price of oil. There must be thousands of analysts and economists following the price of oil. Do you remember a single one forecasting $40 oil?”

 

buffett-uke

Warren Buffett: plays the Ukulele and has so much money he doesn’t need to worry about stops. Not to mention, when push comes to shove, his portfolio is also prone to becoming the beneficiary of bailouts, as demonstrated in 2008.

Photo credit: Dexter Shoes

 

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Decades of Falling Rates

The old joke is, “(with a Russian accent) In America, you correct newspaper, but in Soviet Union, newspaper corrects you.” Switzerland is now experiencing the bond market equivalent. In America, the government pays you to borrow but in Switzerland you pay the government. All Swiss bonds have a negative yield out to 9 years. Negative means you pay them to lend them your money. The 10-year Swiss government bond has effectively zero yield. For comparison, the 10-year US Treasury is 1.8%.

Here is a graph of the Swiss yield curve.

 

chart-1-Swiss Yield CurveSwiss yield curve – bond yields to maturity are now negative out to 9 years – click to enlarge.

 

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Allah’s Credit Card

Today, we were going to talk about stop losses. But we need to look first at what is going on in the markets. In short: Things are starting to happen! The Dow rose 191 points, or 1.1%, on Friday. Gold topped off a 5% rise for the week.

You probably thought we were exaggerating the connection between the Paris terrorist killings and the credit bubble, right? We almost thought so ourselves. But then a report in the French newspaper Libération told us about Amedy Coulibaly, the terrorist who took hostages at a kosher supermarket and killed four of them.

With no job and no income, how did he finance his life? How did he buy his weapons? He borrowed €6,000 ($6,964) from a consumer credit company, Cofidis, which offers online loans. His attack was financed on credit! And not just his. He also helped finance the brothers who attacked Charlie Hebdo. Coulibaly:

 

“I helped him (one of the Kouachi brothers) by giving him a few thousand euro so he could finish buying what he needed.”

 

So, now we see that both sides in the war on terror are financed on credit. But wait. How are those terrorists going to pay back these loans? The local radical imam had a conversation with Coulibaly. Don’t worry about your debts, he told the terrorists, “Allah will take charge of them.”

No kidding. And he’s right, of course. The gods will take care of it.

 

Parking_lot_at_HAA_Kobe-1024x683

Photo credit: Laitr Keiows

 

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Only the Sheeple Are Sane

This post is about an issue that is by now a bit dated (though the topic as such certainly isn’t), but we have only just become aware of it and it seemed to us worth rescuing it from the memory hole. In late 2013, the then newest issue of the American Diagnostic and Statistical Manual of Mental Disorders (DSM for short) defined a new mental illness, the so-called “oppositional defiant disorder” or ODD.

As TheMindUnleashed.org informs us, the definition of this new mental illness essentially amounts to declaring any non-conformity and questioning of authority as a form of insanity. According to the manual, ODD is defined as:

 

[…] an “ongoing pattern of disobedient, hostile and defiant behavior,” symptoms include questioning authority, negativity, defiance, argumentativeness, and being easily annoyed.

 

In short, as Natural News put it: According to US psychiatrists, only the sheeple are sane.

Every time a new issue of the DSM appears, the number of mental disorders grows – and this growth is exponential. A century ago there were essentially 7 disorders, 80 years ago there were 59, 50 years ago there were 130, and by 2010 there were 374 (77 of which were “found” in just seven years). A prominent critic of this over-diagnosing (and the associated over-medication trend) is psychologist Dr. Paula Caplan. Here is an interview with her:

 

Allen Gregg in conversation with psychologist Dr. Paula Caplan

 

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Sitting Tight

 

“If you don’t know who you are, this is an expensive place to find out.”

Adam Smith, The Money Game

 

On Thursday, the Dow slid 106 points, or 0.6%. Gold rose $30, or 2.5%, to settle at $1,264 an ounce – its highest level in four months. As commodities and energy fall, gold goes up. Hmmm ….

Today, we continue our series on investing. Our lunch yesterday was enjoyed in the company of Dr. Richard Smith, the mathematician behind TradeStops.com. He reminded us that investing is more than just numbers; it is flesh and blood… nerves and gut instincts.

“Guess who are the world’s best investors?” he asked.

“Rich people. And it’s not because they have more information or better advisers. It’s because they are calmer. They are not like the little guy who is worried about losing his retirement money.

“They can take the long view. They can follow the best old-timer advice on Wall Street: ‘Get right and sit tight.’”

 

Gold-commoditiesGold relative to commodities: a strong uptrend is underway – click to enlarge.

 

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