Whether you live in Cyprus, England, Japan, the United States, or elsewhere,
the battle for financial survival is taking on new dimensions. At issue is
the steady dilution of the purchasing power of money that is perpetrated by
the world's central banks, and worries about confiscation and taxation of monies
by government authorities. Even the giant Multi-Nationals, that stashed trillions
of dollars in offshore tax havens, are feeling a bit uneasy about reports that
the G-20 plans to crackdown on their money laundering schemes in the future.
However, - what's most urgent right now, is learning how to profit from the
QE-Wars and competitive currency devaluations that have become the "New Normal" of
in today's marketplace. And as long as governments' budget deficits continue
to spiral out of control, presumably, there's no end in sight to how much currency
that central banks will print, or how much politicians will try to tax. A key
question facing investors is - what is the best strategy for staying ahead
of the money printing schemes and currency devaluations that are expected to
unfold in the year ahead? For many investors, the best way to hedge is by investing
in selected stock market index funds, (ETF's). In several countries, the precious
metals market for Gold and Silver are seen as the best way to protect wealth.
On Wall Street, the "least loved" stock market rally in history has restored
$11-trillion of wealth to the top-10% of the richest Americans. As the cyclical
Bull has reached its fourth birthday, on March 10th, to become the eighth longest
bull market since 1928, there are many latecomers to the game that are starting
to jump on the bandwagon. Many investors are just beginning to realize that
the Federal Reserve is empowered with a third mandate, - to artificially inflate
the value of the stock market and to ride to the rescue of the stock market
Bulls whenever unforeseen developments threaten to trigger a correction.
Whereas the FDIC guarantees up to $250,000 of monies that are deposited in
US-bank accounts, the Fed acts to protect the wealth of the Ultra-rich in the
stock market, 24-hours per day, with a handful of price rigging techniques,
although minor bouts of pullbacks in the market are allowed, so as to give
the appearance of a so-called free market. Yet even as the Dow Industrials
hit record heights, it might require even bigger dosages of money injections
from the sugar daddy at the Fed, in order to fuel a full fledged secular Bull
market.
For the past 4-years, the US-stock market rally has been climbing the proverbial "Wall
of Worry," overcoming numerous obstacles and panic attacks along the way. Most
recently, the key driver that's lifting stock markets higher around the world
is the massive flow of liquidity via the infamous Japanese "Yen Carry" trade.
The Bank of Japan and the Federal Reserve are telling traders through the media,
that they're poised to print a combined $2-trillion worth of yen and US-dollars,
in the year ahead. Expectations of a sharply lower yen exchange rate has already
catapulted the Australian Stock Exchange's top-200 index above the psychological
5,000-level and lifted Germany's DAX-30 index above the 8,000-level.
Still, the average lifetime of a stock market Bull on Wall Street since World
War II is roughly 52-months. The current Bull market is 48-months old. It's
important to note that the average age of 52-months is skewed by the performance
of giant Mega-Bulls that lasted for 18-years and 24-years respectively. Subtract
out the two Mega-Bulls, and the average lifetime of a cyclical Bull is closer
to 2-years of age. If history is any guide to the future, this Bull market
will start to show a touch of gray, and produce more muted returns and more
erratic behavior future in its fifth year of age. However, many investors believe
that a third Mega-Bull is in the making, and that this rally has legs that
can run for several more years .
Wall Street's Guardian Angel - the Fed , Stock market Bulls are able to sleep
well at night, knowing their wealth is protected by a guardian angel - the
Bernanke Fed, which is working every single day and night to guide the stock
market along an upward trajectory. The Fed, the White House, and the US Treasury,
otherwise known as the "Plunge Protection Team (PPT), have tossed aside "free
market" principles, and any notions of moral hazard, and instead have instilled
a tyrannical policy of price rigging, through a few unorthodox measures, -
namely Quantitative Easing (QE), the Zero Interest Rate Policy (ZIRP), and "Operation
Twist," sprinkled with brainwashing messages, - "Jawboning" that are fed to
the media.
There's also a technique known as "Financial Repression," in which the Fed
submerges the yield on the US Treasury's 10-year note to below the dividend
yield that's paid by the blue-chip companies listed in the S&P-500 index.
Today, the dividend yield on the S&P-500 index is 2.05%, which is slightly
above the 10-year T-note yield of 1.96%. That helps to make US-companies that
increase their dividends look more attractive to the Ultra-wealthy. In December,
the Fed super-charged it's QE-scheme, saying it will pump $85-billion of high
octane liquidity into the money markets each month. In turn, a total of $1-trillion
of QE injections this year is expected to drive the stock market indexes sharply
higher.
Jeremy Grantham, an investment strategist who is best known for his bearish
call on the US stock market in 2000, is a long-time critic of both Fed chief
Ben Bernanke and his predecessor Alan Greenspan. In a series of his regular
letters he has blamed them for creating asset bubbles by holding interest rates
at artificially low levels. "The Fed is trying to "badger" people into making
riskier investments in order to push up equity prices," Grantham said. "This
strategy will be seen as typical of the "Greenspan-Bernanke era."
The Bank of England is also a Serial Bubble Blower - The Fed is not the only
schemer, that's rigging the stock markets these days. The Bank of England (BoE)
is also engaging in QE and Financial Repression. After slashing its overnight
base rate to a historic low of 0.50% in February of 2009, the BoE switched
its monetary policy from regulating the cost of money to managing the quantity
of British pounds sloshing in the London money markets (QE). The BoE launched
its QE-scheme with an initial dose of £75-billion in March of 2009, and
steadily upped the dosage of the hallucinogenic drug to £375-billion
by July of 2012. Since then, the BoE has tried to go cold turkey on QE, but
the withdrawal symptoms from the addictive drug is painful. It's already flashing
signals that it wants to resume QE in the months ahead.
These high-octane QE-injections combined with "negative" interest rates offered
on British Gilts, fueled a spectacular rally that's lifted the Footsie-250
index to an all-time high of 14,000. The FTSE-250 index, a measure of 250 mid-sized
UK-companies, has rocketed +135% above its March of 2009 low. What caught many
macro-traders off guard however, was the fact that the FTSE-250's spectacular
price gains were achieved during a time period when the local UK-economy was
sputtering and grew by an anemic +3.4-percent.
Furthermore, the FTSE-250 index soared +16% above its highs of 2007 even though
the size of the UK- economy is still -3.2% smaller than its peak in Q'1 of
2008. In other words, there's been a big disconnect between the spectacular
gains of the local UK-stock market and the anemic growth of the local UK-economy.
For this reason, many traders believe the BoE has inflated a stock market bubble
that would begin to slowly deflate under its own weight if the BoE decided
to kick the QE-addiction, or worse yet, the FTSE-250 index bubble would burst
more rapidly if British gilt yields turn sharply higher.
QE-injections buoy London Gold above £1,000 /oz, - The British government
has issued £580-billion of new debt since the start of 2009, and the
BoE has purchased (ie monetized) nearly two-thirds of it. While Britain's economy
teeters on the edge of a "triple-dip" recession, - between now and 2016, even
if Britain's austerity program is fully implemented, the UK's national debt
is expected to increase to around £1.6-trillion - more than five times
what it was at the turn of the century, and 3-times more than in 2008. This
enormous debt of £1.6-trillion doesn't include public-sector pension
obligations of another £1.2-trillion, - the bulk of which will be paid,
over time, directly from future taxation.
As a result, Moody's stripped Great Britain of its coveted AAA-rating, and
lowered its credit profile to AA1. For the first time since 1978, Britain has
lost its triple-A rating. And another downgrade could follow, Moody's added,
if it sees "a reduced political commitment to fiscal consolidation." Signals
that the Bank of England could soon resume its QE injections have already knocked
the British pound -7% lower against the US$ since the beginning of this year,
and the pound has been flirting with the psychological $1.500 level this month.
On a trade-weighted basis, the British pound has fallen about -30% since 2008. "Without
the fall in the exchange rate that did occur from before the crisis to now,
our export industry would not be growing as they are and unemployment would
be a good deal higher," said BoE chief Mervyn King on March 15th. "Sterling
is now broadly stable and "at the same level we were after the impact of the
financial crisis. The markets have judged that this is the right level for
the pound. We're certainly not looking to push sterling lower," he said.
The London Gold market has been a rock solid defender of the purchasing power
of British citizens against the insidious effects of the BoE's money printing
schemes and the devaluation of sterling. In London, the price of Gold has tripled
compared with six years ago. That's an annualized gain of +50-percent. For
the past 1-½ years, London Gold has found good support at the psychological £1,000
/oz level. Traders expect the yellow metal to resume its Bull market run, once
the BoE resumes its QE injections, which are absolutely necessary in order
to finance the bulk of the UK-government's future supply of gilt offerings.
Tokyo Gold hits ¥150,000 /oz ahead of Big-Bang QE, The danger with a
resumption of QE in London, is that a gradual depreciation of the British pound
could escalate into currency freefall that in turn, could trigger an inflation
spike, and leave the British economy with an even deeper economic slowdown.
However, the possibility of a freefall for sterling seems unlikely to materialize,
since the Bank of Japan and the Fed are expected to flood the world markets
with a staggering $2-trillion of freshly printed Japanese yen and US-dollars
in the year ahead that would greatly dwarf the size of England's QE-scheme.
The Bank of Japan is expected to start Big-Bang QE as early as April. The
newly installed BoJ chief Haruhiko Kuroda is anxious to unleash a more aggressive
approach to boosting the value of the Japanese stock market. Given a +34% jump
in Japanese stocks and -20% slide in the yen since mid-November in anticipation
of Big-Bang QE, any failure to act in April risks disappointing investors,
said ex-Bank of England central banker Adam Posen on Feb 28th.
The Nikkei-225 index has enjoyed its longest monthly winning streak since
2006, while the benchmark 10-year Japanese bond yield has dropped to just 0.59%,
its lowest level in a decade. Japanese Prime Minister Shinzo Abe said on Feb
17th, that Big-Bang QE would result in a weaker yen and boost share prices,
thus helping to lift corporate earnings. However, the biggest winners in Japan
over the past 4-½-years are investors in Tokyo Gold, - the price of
the yellow metal has doubled to above ¥150,000 /oz today. The BoJ is expected
to vastly increase the size of Japan's monetary base, and in turn, the BoJ
is aiming to lift the US$'s exchange rate to above ¥100 in the months ahead.
A weaker yen could fuel further gains for the Nikkei-225-index and the price
of Tokyo Gold.
Is Cyprus - a Game Changer for Gold? - Cyprus is a small island in the eastern
portion of the Mediterranean Sea that is inhabited by only 1-million people.
The northern half of the island is mostly populated by Cypriots of Turkish
origin, while the south is dominated by Greek Cypriots. The Turkish Republic
of Northern Cyprus is a puppet state recognized by no country other than Turkey,
while the Republic of Cyprus governs the south. The Republic of Cyprus - the
southern, Greek one, joined the European Union in 2004, and with poor timing,
joined the Euro zone in January 2008, just before the Western financial crisis
hit.
The Cypriot banking system is an offshore haven for Russian companies that
have set-up subsidiaries in Cyprus, seeking to evade a 20% Russian tax rate
on income that is earned abroad. That has provoked accusations that Cyprus
is a banking haven for Russian tycoons who launder dirty money. According to
German intelligence, at least €20-billion belonging to Russian Oligarchs
are stashed away in Cypriot banks. In January, Germany's Finance chief Wolfgang
Schaeuble demanded an investigation to learn whether Russian companies are
using the island as a destination for money laundering.
The amount of customer deposits that's held in Cypriot banks is now 8-times
the size of its economy, with approximately € 136-billion on deposit.
However, Cypriot banks bought large amounts of Greek debt, both public and
private. The value of that debt took a nosedive, destroying the balance sheets
of Cypriot banks. As part of Greece's debt restructuring, private creditors
including banks, funds and insurance companies agreed to swap their old Greek
government bonds for new securities with haircuts of 53% of the nominal value
of their Greek bond holdings. Two of the island's biggest banks, - Cyprus Popular
Bank and the Bank of Cyprus ended up losing €2.5-billion and €1-billion,
respectively.
Troubles on the Mediterranean island have resembled those of Iceland, which
seized control of its banks in 2008 when they were unable to finance debt 12-times
the size of its economy. Some of Cyprus' banks are already bankrupt. Nicosia
nationalized the banks and asked the Troika (the European Commission, ECB,
and IMF) for a bailout to cover both the government's financial needs, and
the shortfalls of capital faced by its largest banks. The Troika offered €10-billion
to fund Cypriot banks and the government. However, deposits in Cypriot banks
are insured up to € 100,000, and about €30-billion are in insured.
Cypriot banks are paying an average 4.45% on deposits of less than two years,
and as a result, they've amassed large amounts of funds from wealthy foreigners.
Berlin insists that all depositors in Cypriot banks should pay €5.8-billion
towards the bailout, a startling condition that's never been imposed before
on any banking system in the Euro-zone. European finance ministers on March
16th ordered Cyprus to impose a levy of 6.75% on deposits of less than € 100,000
- the ceiling for European Union account insurance -- and 9.9% on funds above € 100,000,
in order to finance one-third of the necessary bailout funds.
Although Cyprus is the smallest Euro-zone country, accounting for just 0.2%
of the bloc's GDP, the idea of a government confiscating customers' deposit
monies, without warning, sent shockwaves throughout the global markets. It
was the first time that the EU formally targeted savers' banks accounts for
confiscation. Yet a bailout without the levy would be perceived as a bailout
of the Russian Oligarchs. If Cyprus rejects the deal it could force the bankruptcy
for the island nation, and it's eventual exit from the Euro. As a result, the
cost of protecting $10-million of Cypriot government debt against default for
1-year using credit-default swaps soared to 1,300-basis points this week, -
equal to $1.3-million.
There could be a run on the Cypriot banks. And since no bank has enough cash
on hand to pay off all its depositors at once, runs on the bank cause banks
to go bust. That's what happened to Bear Stearns, Lehman Brothers, and big
banks in England during the financial crisis and in Ireland and Spain more
recently. Thus, the Cypriot banking crisis could be a game changer for the
Gold market, as depositors in Italian and Spanish banks seek to switch some
of their savings to the "safe haven" currency, - perhaps, parked in Swiss banks.
As a matter of practicality, the price of Gold in Euro terms has been tracking
the credit default swap market for Cypriot debt. If Nicosia ends up with no
choice but to leave the Euro, there could be contagion effects that ricochet
around the Euro-zone and world markets.
Argentines Switching Pesos into Gold, It's not just Cyprus that could be
on the brink of default on its debts. The cost to protect against a default
by Argentina on its restructured debts, soared to a 4-year high, after Buenos
Aires said it would halt payments on restructured bonds if a US-court ordered
it to pay $1.3- billion to holders of defaulted bonds. Argentina's 2-year credit-default
swaps soared to 5,070- basis points this week. One-year swaps have soared to
7,610-bps, the highest in the world. Speculation is mounting that Argentina
will opt to default on its performing debt if the three-judge panel declines
to overturn a lower-court ruling forcing the country to pay a group of investors
who hold debt from the nation's 2001 default. Argentina's attorney, Jonathan
Blackman, said at the Feb 27th hearing that Argentina wouldn't "voluntarily
obey" such an order.
Argentina, South America's second largest economy, is treated as a pariah,
and is effectively shut out of the global bond markets. It hasn't borrowed
money from overseas debt markets since its $95-billion default in 2001. Instead,
Argentina's central bank is printing pesos to finance the government. Argentina's
M2 money supply has increased +36% in the past year, which in turn, is fueling
a sharp devaluation of the Argentine peso. Earlier this week, the US$ rose
to 5.1-Argentine pesos, up from 3-pesos five years ago. The price of Gold has
more than tripled to 8,400-pesos per ounce, as local investors seek a hedge
against the central bank's massive money printing operation and the country's
25% inflation rate.
Confiscating the savings of citizens and denying access to their property
without warning, is something that Argentines have already experienced. In
the last three years, Argentina's government seized private pensions to pay
for pork barrel social programs, and other government spending that amounts
to 38% of GDP. After losing $1-billion a month to capital flight by small investors
in 2011's fourth quarter, and capital flight that reached $23 billion last
year, President Cristina Fernandez banned the purchase of US-dollars in a bid
to keep enough dollars in the central bank's reserves to services Argentina's
$141-billion of foreign debts while preventing already high inflation from
spiraling out of control.
The Argentine government is allowing the official exchange rate of the Argentine
Peso to slide against the US dollar. A top official from the Fernandez administration
said the US-dollar could reach 6 Pesos by the end of the year. While the official
exchange rate is controlled by the central bank, - for the average Argentine,
there's a black market on the streets of Buenos Aires that's populated with
illegal currency dealers. On the black market, the US-dollar soared on March
20th to as high as 8.70-Pesos, - leaving a gap of 70% with the official rate
of 5.1, and sparking fears that Argentina may eventually be forced to set up
a 2-tier currency market. Each day, the financial newspaper El Cronista, publishes
an average of black market exchange rates collected from underground traders.
Other options for acquiring US$'s are - buying Argentine shares in Buenos
Aires and reselling them in New York. Businesses, on the other hand, have been
exploiting the loop-hole known as blue-chip swaps, where companies buy dollar
denominated sovereign bonds in pesos, transfer them to the US and then sell
them for dollars. Reflecting expectations of higher inflation rates, due to
a rapidly weakening currency, the yield on Argentina's 20-year note denominated
in pesos rose to 15.5% this week, up from 10.25% in June of 2011.
At the root of Gold's popularity is Argentina's runaway +25% inflation rate.
With concerns mounting over a -70% devaluation of the peso, - wealthy Argentines
are looking for ways to protect their purchasing power. By moving money to
Uruguay, Argentines benefit from a more market-friendly regime and a Swiss-like
tradition of banking secrecy. Fifteen percent of Uruguay's bank deposits, about
$3-billion, come from abroad and most of that is from Argentina, according
to Uruguay's central bank.
For the first time since 2009, Argentina's foreign exchange reserves have
fallen to $41-billion. As the government uses the reserves to pay its debts
and fund its spending, within a few years, it could run out of hard currency
to defend the peso. The government announced some unique ideas to combat capital
flight. Argentina's tax agents are now deployed at airports with sniffer dogs
that are trained to detect the ink used to print US-bills. The goal is to catch
Argentines trying to leave the country with more than the $10,000 legally allowed
out of Argentina without declaring it to the government. - Argentina is under
tyrannical rule.
