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This time, the Federal Reserve has created a truly global problem. A big chunk of the trillions of dollars that it pumped into the financial system over the past several years has flowed into emerging markets. But now that the Fed has decided to begin “the taper”, investors see it as a sign to pull the “hot money” out of emerging markets as rapidly as possible. This is causing currencies to collapse and interest rates to soar all over the planet. Argentina, Turkey, South Africa, Ukraine, Chile, Indonesia, Venezuela, India, Brazil, Taiwan and Malaysia are just some of the emerging markets that have been hit hard so far. In fact, last week emerging market currencies experienced the biggest decline that we have seen since the financial crisis of 2008. And all of this chaos in emerging markets is seriously spooking Wall Street as well. The Dow has fallen nearly 500 points over the last two trading sessions alone. If the Federal Reserve opts to taper even more in the coming days, this currency crisis could rapidly turn into a complete and total currency collapse.
A lot of Americans have always assumed that the U.S. dollar would be the first currency to collapse when the next great financial crisis happens. But actually, right now just the opposite is happening and it is causing chaos all over the planet.
For instance, just check out what is happening in Turkey according to a recent report in the New York Times…
Turkey’s currency fell to a record low against the dollar on Friday, a drop that will hit the purchasing power of everyone in the country.
On a street corner in Istanbul, Yilmaz Gok, 51, said, “I’m a retiree making ends meet on a small pension and all I care about is a possible increase in prices.”
“I will need to cut further,” he said. “Maybe I should use my natural gas heater less.”
As inflation escalates and interest rates soar in these countries, ordinary citizens are going to feel the squeeze. Just having enough money to purchase the basics is going to become more difficult.
And this is not just limited to a few countries. What we are watching right now is truly a global phenomenon…
“You’ve had a massive selloff in these emerging-market currencies,” Nick Xanders, a London-based equity strategist at BTIG Ltd., said by telephone. “Ruble, rupee, real, rand: they’ve all fallen and the main cause has been tapering. A lot of companies that have benefited from emerging-markets growth are now seeing it go the other way.”
So why is this happening? Well, there are a number of factors involved of course. However, as with so many of our other problems, the actions of the Federal Reserve are at the very heart of this crisis. A recent USA Today article described how the Fed helped create this massive bubble in the emerging markets…
Emerging markets are the future growth engine of the global economy and an important source of profits for U.S. companies. These developing economies were both recipients and beneficiaries of massive cash inflows the past few years as investors sought out bigger returns fostered by injections of cheap cash from the Federal Reserve and other central bankers.
But now that the Fed has started to dial back its stimulus, many investors are yanking their cash out of emerging markets and bringing the cash back to more stable markets and economies, such as the U.S., hurting the developing nations in the process, explains Russ Koesterich, chief investment strategist at BlackRock.
“Emerging markets need the hot money but capital is exiting now,” says Koesterich. “What you have is people saying, ‘I don’t want to own emerging markets.'”
What we are potentially facing is the bursting of a financial bubble on a global scale. Just check out what Egon von Greyerz, the founder of Matterhorn Asset Management in Switzerland, recently had to say…
If you take the Turkish lira, that plunged to new lows this week, and the Russian ruble is at the lowest level in 5 years. In South Africa, the rand is at the weakest since 2008. The currencies are also weak in Brazil and Mexico. But there are many other countries whose situation is extremely dire, like India, Indonesia, Hungary, Poland, the Ukraine, and Venezuela.
I’m mentioning these countries individually just to stress that this situation is extremely serious. It is also on a massive scale. In virtually all of these countries currencies are plunging and so are bonds, which is leading to much higher interest rates. And the cost of credit-default swaps in these countries is surging due to the increased credit risks.
And many smaller nations are being deeply affected already as well.
For example, most Americans cannot even find Liberia on a map, but right now the actions of our Federal Reserve have pushed the currency of that small nation to the verge of collapse…
Liberia’s finance minister warned against panic today after being summoned to parliament to explain a crash in the value of Liberia’s currency against the US dollar.
“Let’s be careful about what we say about the economy. Inflation, ladies and gentlemen, is not out of control,” Amara Konneh told lawmakers, while adding that the government was “concerned” about the trend.
Closer to home, the Mexican peso tumbled quite a bit last week and is now beginning to show significant weakness. If Mexico experiences a currency collapse, that would be a huge blow to the U.S. economy.
Like I said, this is something that is happening on a global scale.
If this continues, we will eventually see looting, violence, blackouts, shortages of basic supplies, and runs on the banks in emerging markets all over the planet just like we are already witnessing in Argentina and Venezuela.
Hopefully something can be done to stop this from happening. But once a bubble starts to burst, it is really difficult to try to hold it together.
Meanwhile, I find it to be very “interesting” that last week we witnessed the largest withdrawal from JPMorgan’s gold vault ever recorded.
Was someone anticipating something?
Once again, hopefully this crisis will be contained shortly. But if the Fed announces that it has decided to taper some more, that is going to be a signal to investors that they should race for the exits and the crisis in the emerging markets will get a whole lot worse.
And if you listen carefully, global officials are telling us that is precisely what we should expect. For example, consider the following statement from the finance minister of Mexico…
“We expected this year to be a volatile year for EM as the Fed tapers,” Mexican Finance Minister Luis Videgaray said, adding that volatility “will happen throughout the year as tapering goes on”.
Yes indeed – it is looking like this is going to be a very volatile year.
I hope that you are ready for what is coming next.
December 12, 2013
Sovereign Valley Farm, Chile
The IMF just dropped another bombshell.
After it recently suggested a “one-off capital levy” – a one-time tax on private wealth as an exceptional measure to restore debt sustainability across insolvent countries – it has now called for “revenue-maximizing top income tax rates”.
The IMF’s team of monkeys has been working around the clock on this one, figuring that developed nations can increase their overall tax revenue by increasing tax rates.
They’ve singled out the US, suggesting that the US government could maximize its tax revenue by increasing tax brackets to as high as 71%.
Coming from one of the grand wizards of the global financial system, this might be the clearest sign yet that the whole house of cards is dangerously close to being swept away.
Think about it– solvent governments with healthy economies don’t go looking to steal 71% of people’s wealth. They’re raising this point because these governments are desperate. And flat broke.
The ratio of public debt to GDP across advanced economies will reach a historic peak of 110% next year, compared to 75% in 2007.
That’s a staggering increase. Most of the ‘wealithest’ nations in the West now have to borrow money just to pay interest on the money they’ve already borrowed.
This is why we can only expect more financial repression from desperate governments and established institutions.
This means more onerous taxation. More regulation. More controls over credit and capital flows.
And that’s only the financial aspect; the deterioration of our freedom and liberty will continue at an accelerated pace.
Can a person still be considered “free” when 71% of what s/he earns is taken away at the point of a gun by a bankrupt, bullying government? Or are you merely a serf then, existing only to feed the system?
This is why we often stress having a global outlook and considering all options that are on the table.
Because the other side of the coin is that while some countries are tightening the screws and making life more difficult, others are taking a different approach.
Whether out of necessity or because they recognize the trend, many nations around the world are launching new programs to attract international talent and capital.
I’ve mentioned a few of these already– economic citizenship programs in places like Cyprus, Malta, and Antigua (I met a lot of these programs’ principals at a recent global citizenship conference that I spoke at in Miami).
[Note to Premium Members: you’ll receive the details and contact information for the Antigua program today.]
Then there are places like Chile and Colombia which have great programs for entrepreneurs and investors. Other places like Georgia and Panama have opened their doors to nearly all foreigners for residency.
Bottom line– there are options. Some countries are really great places to hold money. Others are great to do business. Others are great places to reside.
The era we’re living in– that of global communications and modern transport– means that you can live in one place, your money can live somewhere else, and you can generate your income in a third location.
Your savings and livelihood need not be enslaved by corrupt politicians bent on stealing your wealth… all to keep their destructive party going just a little bit longer.
The world can truly be your playground. You just need to know the rules of the game.
October 29, 2013
Sovereign Valley Farm, Chile
Do you remember the $700 billion bailout of the financial system in 2008?
It seems these days that most investors do not. People are partying like it’s 1929… as if all the issues and challenges that plagued the banking sector just a few years ago have miraculously vanished.
This thinking is absurd, and even a casual glance at the balance sheets of so many banks in the West shows objectively that the entire system is still precariously leveraged, undercapitalized, and illiquid.
In the wake of the bailout, Congress created a special position to oversee how the funds were spent. Like anything else in government, they used an unnecessarily long name followed by a catchy acronym–
Special Inspector General for the Troubled Asset Relief Program, or SIGTARP.
(The first SIGTARP was a former federal prosecutor who had previously indicted 50 leaders of the Revolutionary Armed Forces of Colombia… just the right man to keep a watchful eye on bankers.)
SIGTARP just released its quarterly report to Congress… and it’s scatching, suggesting that “the toxic corporate culture that led up to the crisis and TARP has not sufficiently changed.”
There are some real zingers in the 518 page report, including:
- “[F]raudulent bankers. . . sought TARP bailout dollars to have taxpayers fill in the holes on their fraud-riddled books.”
- “Some bankers cultivated a culture of self dealing, criminally concealing that the bank was funding their luxury lifestyles, believing they were entitled to the finest money could buy. . .”
- “They were trusted to exercise good judgment and make sound decisions. However, they abused that trust. Many times they abused that trust for their own personal benefit.”
Moreover, the report calls into question the Treasury Department’s administration of the bailout.
For example, many banks have been delinquent in making TARP payments, or payments to one of TARP’s sub-programs.
Yet while many banks are delinquent by 1-2 quarters, according to the report, roughly 3% of the banks who received funds under the Community Development Capital Initiative are more than –two years– behind in their payments.
Yet the Treasury Department has done nothing to enforce terms on behalf of taxpayers.
Most alarmingly, though, the report throws a giant red flag on the Treasury Department’s deceit.
In 2011, the report states, 137 banks took in billions of dollars of funding from the Treasury under the Small Business Lending Fund (SBLF). They then used those funds to repay their TARP loans.
In other words, they repaid taxpayer money with more taxpayer money.
But the Treasury Department still reported that TARP was being repaid, suggesting in a May 2013 press release: “Taxpayers have already earned a significant profit from TARP’s bank programs.”
Total BS, says the report.
SIGTARP writes that “Treasury should not. . . call these funds “repayments” or “recoveries”. Treasury owes taxpayers fundamental, clear, and accurate transparency and reporting on monies actually repaid.”
Something tells me this woman isn’t going to have a particularly long career in government.
And given the Obama’s administration’s track record against whistleblowers, SIGTARP had better start booking her flight to Moscow. Or better yet, marry a Brazilian.
- ‘Toxic’ corporate culture remains unchanged 5 years after U.S. financial meltdown (lunaticoutpost.com)
- Watchdog: Five Years After Wall Street Meltdown, ‘Toxic Culture of Greed and Risk’ Remains (commondreams.org)
- Barrick Fined $15.8 Million Over Chile Environmental Concerns (hispanicbusiness.com)
- Chile’s Indians take on world’s largest gold miner (news.yahoo.com)
- Chile Blocks World’s Highest Mine Project (abcnews.go.com)
- Barrick fined $16m for Pascua-Lama violations (news.yahoo.com)
- Chile blocks Pascua-Lama mine, fines Barrick Gold $16-million for serious environmental violation (business.financialpost.com)
- Barrick Gold fined for Chile project (bbc.co.uk)
- Chile’s president says UN should reject Bolivia’s demand for border talks – @AP (miamiherald.com)
- Bolivia sues Chile for access to Pacific (bigpondnews.com)
- Bolivia to take sea dispute to court (bbc.co.uk)
- Chile Chief Rejects Bolivia Call for Border Talks (abcnews.go.com)
- Bolivia’s Morales ‘can run’ for third term (aljazeera.com)