A Turbulent Year
In the course of 2015 we have witnessed several events that had, and will have, negative repercussions on individual freedom. Orwellian totalitarianism is increasingly creeping into our everyday lives. How much more intrusive will the violations of our liberties become and for how long will the establishment get away with this? These are questions that remain unanswered.
United we move toward a perfectly monitored society – the US Congress has just passed the controversial CISA spying law – the worst possible version of it – by sneaking it into a budget bill. This utterly corrupt method of enacting laws that would not get passed on their own because they are such a huge affront to decency and civilization has become the norm in the “land of the free” – which ironically is “exporting democracy” by force of arms all over the world!
With regards to the financial system, no real solution was found to issues such as those in the euro zone. Furthermore, the financial system as a whole once again got deeper into debt. For how much longer can central banks and governments continue kicking the can down the road without any real reform? I will try to answer these questions and identify trends for 2016 by looking at six key issues that have had an impact this year.
We have witnessed a number of troubling geopolitical developments during this past year. From the continuing conflict between Russia and Ukraine, territorial disputes between Japan and China, the escalating proxy war in Syria, the refugee crisis in Europe, the rise of religious tensions all over world to the rise of the Islamic State, the world has become increasingly unstable.
Yet another finger-wagger: Abu Bakr al-Baghdadi, the self-anointed “Caliph” of the medieval retro-state that has sprung up in Syria and Iraq.
Photo credit: Reuters
Going into the details of these conflicts is beyond the scope of this article, but the fact is that all of these developments harbor the potential for large-scale escalation. From the perspective of the West, the conflicts and wars of the past decades were for the most part far away. Only now do we realize that this will change as we have already begun to see in 2015. The times of conventional warfare, when two armies met on the battlefront, are over. Future conflicts and wars will be fought closer to home. We should get ready for a period of increased instability, particularly with respect to politics and security issues.
Totalitarianism is on the Rise
The sudden rise of ISIS and its affiliates is a disturbing development that has produced a smorgasbord of feelings, ranging from fear to rage to sadness and more. Ultimately though, they all lead to the same result: States are seeking more control over their citizens by curbing individual liberties.
One example is that Western countries are limiting the use of cash, under the guise of fighting terrorism and illicit activities. JP Morgan has placed restrictions on the amount of cash one is allowed to deposit and several European countries have banned cash transactions exceeding a certain size. Looking to the future, it seems that this trend will continue to worsen and that we are headed toward an Orwellian police state in which no one is entitled to financial privacy anymore.
Another hot-button issue is gun control. Since it became known that the San Bernardino shooting and the Paris attacks were apparently carried out with legally obtained arms, there have been increased calls for massive restrictions on private gun ownership. Disarming the masses is a necessity to control them and that is exactly what our governments are gradually doing.
“The strongest reason for the people to retain the right to keep and bear arms is, as a last resort, to protect themselves against tyranny in Government” – Thomas Jefferson.
FRONTEX operational territory; insert: Frontex uniform. This paramilitary bureaucracy is headquartered in Warsaw and threatens to override the sovereignty of EU member nations.
Image credit: arte
On the EU level, a disturbing development is the fact that FRONTEX (the EU agency responsible for border management) has stated that it will intervene to secure the EU’s borders should the refugee crisis get out of hand, even if the respective countries oppose its action. On a global level, the Transatlantic Trade and Investment Partnership (TTIP) says that arbitration courts will have the potential to annul national sovereignty when it comes to jurisprudence. We expect this trend toward ever greater centralization to continue.
The “Rescue” of Greece: Coming to a Country Near You?
At the beginning of this year, the topic of a potential “Grexit” dominated news cycles over several weeks. It seemed like a realistic possibility that Greece might leave the euro zone. Instead, after yet another one billion euro bailout package, Greece was “saved” and a “Grexit” was off the table (for the time being). Once again, political idiocy prevailed over economic rationale. In the end, delaying the inevitable failure of the Greek financial system is all that was achieved.
Desperate Greek pensioners queuing at an ATM during the “bank holiday”. Many of them realized a number of facts far too late: a) that fractionally reserved banks are de facto insolvent and cannot pay the vast majority of their depositors in extremis (especially if the central bank backstop is withdrawn); b) that the European elites would expropriate them in an eye-blink for “their own good”; and c) that any vote that doesn’t conform to the wishes of the EU bureaucracy is worth precisely nothing – even in the “cradle of democracy”.
Photo credit: Panagiotis Maidis
More astonishing than the fact that Greece – a country that represents less than one third of one percent of the world GDP – received another huge bailout package, was how it all played out. A bank holiday was announced, capital controls were implemented, cash withdrawals were massively restricted, the stock market closed and any assets inside the banking system (even safety deposit boxes) were no longer accessible to their owners. This is an unprecedented level of infringement on private ownership that has never been seen in a modern Western country.
Fed Hikes Interest Rates
The Fed hikes interest rates for the first time since the financial crisis of 2008. For the past 7 years we have had an interest rate band between 0-0.25%, which is essentially “money for nothing”. With its decision, the Fed became the first large (and the leading) central bank to effectively hike interest rates.
Meanwhile, on the other side of the Atlantic, the ECB cut its deposit rate (slightly) deeper into negative territory and prolonged its QE program that is now expected to continue until March 2017. Since last summer, the media continuously speculated about a rate hike and its timing. So, will interest rates start to normalize after the long-awaited change in monetary policy? We don’t think so! We believe that the main reason the Fed decided to hike rates was to regain some of its lost credibility.
For the past seven years the monetary floodgates have been open with no clear positive effect on the real economy. A continuation of zero interest rate policy (ZIRP) would have been an admission of failure. With this slight rate hike of 25bps, the Fed is trying to show the world that its policy during the financial crisis worked.
We all know that the economy in the US is not as healthy as the Fed would like us to believe. When we throw in the potentially explosive impact the failing shale industry could have on the economy and the strength of the dollar, that is likely to increase further due to this rate hike, we doubt that this move by the Fed is the turning point and that the Fed will continue hiking rates as it has done previously in such cycles. The Fed raised interest rates because it had to, but don’t expect the monetary shenanigans to be over. There are a lot more to come!
Defaults Surge as Global Debt Explodes
2015 has seen the greatest number of corporate defaults since the financial crisis. Many of the companies that are defaulting are from the energy and materials sector. Why? It is the logical outcome of the excessive borrowing by corporations who were misled by close-to-zero interest rates. And, of course, we must not forget the boom in the shale industry.
With a barrel of oil costing over USD100, shale oil was a very interesting investment. Now with oil hitting rock bottom, some oil producers are operating at a loss and only continue operations to be able to make their interest payments. The number of corporate bonds Standard & Poor’s rates as junk or speculative, has gone up to 50% from a previous 40%. Unfortunately, the world did not learn its lesson after the financial crisis and instead of deleveraging, it has accumulated even more debt, as the chart below illustrates. Of course it not only corporations that are responsible; governments have not learned their lesson either.
The issue of debt will continue to be with us for some time to come; the house of cards will eventually collapse, but we think that politicians and central bankers have the will to “do whatever it takes” to prolong its eventual demise. What we will likely see in 2016, however, is a massive increase in defaults. Yields on high-yield bonds are already at alarming levels.
What exactly will be responsible for the next crisis is hard to foresee. The trigger might be the possible collapse of the shale industry, or the strengthening dollar, that will make it very hard for emerging market countries to repay their debts, or a completely unexpected sector (who knew what sub-prime was back in 2006?).
Oil Price Collapse
Crude oil prices fell to their lowest levels in nearly 11 years, as crude oil declined to nearly USD35 per barrel. The price of oil has been on a continuous downward trend and has plunged nearly 70% since the summer of 2014. From our perspective, the main factor that led to this decline is the US shale oil “revolution”.
It was truly a revolution, considering that the boom in shale oil production allowed production in the US to surpass that of Saudi Arabia, previously the world’s largest oil producer. Meanwhile, OPEC hasn’t changed its stance as it insists on maintaining its strategy to increase its market share, even if this comes at the expense of further oil price declines.
US crude oil production has more than doubled from the multi-decade lows reached in 2008/9
I am not an expert on oil and therefore it am not going to provide predictions on where the oil price is heading next. I would rather want to discuss the impact of the oil price movement to date. First of all, a collapse of the oil price, a commodity that is widely used in industry, has historically always been a herald of recessionary tendencies. In my view, the oil price clearly signals that the economy is not as healthy as is portrayed by the mainstream media.
Secondly, the ongoing failure of companies in the shale industry has the potential to bring on a crisis that could dwarf the previous financial crisis. Last, but definitely not least, is the question of how oil exporters such as Saudi Arabia, will finance their budgets when oil revenues massively decrease and they are no longer able to buy their population’s silence with gifts.
How can we Position Ourselves in such an Environment?
The outlook for the future looks bleak: continuously growing debt, looming defaults on a major scale and geopolitical tensions. So how can we best position ourselves?
In times like these, when it seems impossible to predict even the near future, we seek security. Precious metals like gold and silver represent wealth and value. They give their owners a degree of independence and protection from the whims of governments. In light of recent events in Greece, it turns out that gold and silver are only a safe investment as long as one has full control over it and can access it at any time. Holding gold outside of the banking system is therefore essential in my view.
Those who know me know that I am Swiss and rather biased towards my home country. To me, Switzerland strikes the perfect balance between international neutrality with a history of a safe and stable political landscape, and an environment that encourages investment and guarantees private ownership rights.
Subscribe for future updates at www.globalgold.ch
About the author: Claudio Grass is a passionate advocate of free-market thinking and libertarian philosophy. Following the teachings of the Austrian School of Economics he is convinced that sound money and human freedom are inextricably linked to each other.
Charts by: St. Louis Federal Reserve Research, BofA / Merrill Lynch, Market Realist / EIA
Image captions by PT
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- How the Welfare State Dies
Hollande Threatens to Ban Protests Brexit has diverted attention from another little drama playing out in Europe. As of the time of writing, if you Google “Hollande threatens to ban protests” or variations thereof, you will find Russian, South African and even Iranian press reports on the topic. Otherwise, it's basically crickets (sole exception: Politico). Gee, we wonder why? They don't like him anymore: 120.000 protesters recently turned Paris into a war zone. All...
- Toward Freedom: Will The UK Write History?
Mutating Promises We are less than one week away from the EU referendum, the moment when the British people will be called upon to make a historic decision – will they vote to “Brexit” or to “Bremain”? Both camps have been going at each other with fierce campaigns to tilt the vote in their direction, but according to the latest polls, with the “Leave” camp’s latest surge still within the margin of error, the outcome is too close to call. The battle lines are...
- Going... Going... Gone! The EU Begins to Splinter
Dark Social Mood Tsunami Washes Ashore Early this morning one might have been forgiven for thinking that Japan had probably just been hit by another tsunami. The Nikkei was down 1,300 points, the yen briefly soared above par. Gold had intermittently gained 100 smackers – if memory serves, the biggest nominal intra-day gain ever recorded (with the possible exception of one or two days in early 1980). Here is a picture of Haruhiko Kuroda in front of his Bloomberg monitor this...
- A Market Ready to Blow and the Flag of the Conquerors
Bold Prediction MICHAELS, Maryland – The flag in front of our hotel flies at half-mast. The little town of St. Michaels is a tourist and conference destination on the Chesapeake Bay. It is far from Orlando, and even farther from Daesh (a.k.a. ISIL) and the Mideast. St. Michaels, Maryland – the town that fooled the British (they say, today). Photo credit: Fletcher6 Out on the river, a sleek sailboat, with lacquered wood trim, glides by, making hardly a...
- Rule Britannia
A Glorious Day What a glorious day for Britain and anyone among you who continues to believe in the ideas of liberty, freedom, and sovereign democratic rule. The British people have cast their vote and I have never ever felt so relieved about having been wrong. Against all expectations, the leave camp somehow managed to push the referendum across the center line, with 51.9% of voters counted electing to leave the European Union. Waving good-bye to...
- The Problem with Corporate Debt
Taking Off Like a Rocket There are actually two problems with corporate debt. One is that there is too much of it... the other is that a lot of it appears to be going sour. Harvey had a good time in recent years...well, not so much between mid 2014 and early 2016, but happy days are here again! Cartoon by Frank Modell As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us: “Businesses racked up debt in the...
- The Fed’s Doomsday Device
Bezzle BALTIMORE – Barron’s, in a lather, says the market is facing the “Two Horsemen of the Apocalypse.” Huh? Only two? There were four last time! Supposedly, the so-called Brexit – the vote in Britain this Thursday on whether to leave or remain in the European Union (EU) – and uncertainty over where the Fed will take U.S. interest rates are cutting down stocks faster than a Z-turn mower. But Brexit is a side show. As our contacts in London...
- Janet Yellen’s $200-Trillion Debt Problem
Blame “Brexit” BALTIMORE – The U.S. stock market broke its losing streak on Thursday [and even more so on Monday, ed.]. After five straight losing sessions, the Dow eked out a 92-point gain. The financial media didn’t know what to say about it. So, we ended up with the typical inanities, myths, and claptrap. “Investors” are pushing the DJIA back up again..apparently any excuse will do at the moment. The idea may backfire though, as exactly the same thing happened...
- In Gold We Trust, 2016
The 10th Anniversary Edition of the “In Gold We Trust” Report As every year at the end of June, our good friends Ronald Stoeferle and Mark Valek, the managers of the Incrementum funds, have released the In Gold We Trust report, one of the most comprehensive and most widely read gold reports in the world. The report can be downloaded further below. Gold, daily, over the past year - click to enlarge. The report celebrates its 10th anniversary this year. As...
- Gold and Brexit
Going Up for the Wrong Reason Gold is soaring. It should—and a lot—but in my view not for the reason it is. Indeed gold is insurance for uncertain times, a time that Brexit seems to represent. But insurance is an administrative cost — one must minimize its use. August gold contract, daily – gold has been strong of late, but this seems to be driven by “Brexit” fears - click to enlarge. Moreover, insuring against Brexit might ironically be equivalent...
- Brexit Paranoia Creeps Into the Markets
European Stocks Look Really Bad... Late last week stock markets around the world weakened and it seemed as though recent “Brexit” polls showing that the “leave” campaign has obtained a slight lead provided the trigger. The idea was supported by a notable surge in the British pound's volatility. Battening down the hatches... On the other hand, if one looks at European stocks, one could just as well argue that their bearish trend is simply continuing – and...
- Claudio Grass Talks to Godfrey Bloom
Introductory Remarks – About Godfrey Bloom [ed note by PT: Readers may recall our previous presentation of “Godfrey Bloom the Anti-Politician”, which inter alia contains a selection of videos of speeches he gave in the European parliament. Both erudite and entertaining, Mr. Bloom constantly kept the etatistes of the EU on their toes.] Godfrey Bloom, back in his days as UKIP whip Photo credit: Reuters Before becoming a politician, Godfrey Bloom worked for 35 years...