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Five Steps To Help You Avoid Investment Fraud | Bob Stammers
Five Steps To Help You Avoid Investment Fraud | Bob Stammers.
Bob Stammers
CFA, Director of Investor Education
On the fifth anniversary of Bernie Madoff’s conviction, it might be tempting to try and forget about investment fraud. After all, one of the most notorious con men in modern history has been locked away until Nov. 14, 2139. So does that mean investors are safe from fraud?
Unfortunately, there will always be bad apples in the financial system and if you have money to invest then you are vulnerable to potential fraudulent behaviour. Latest figures from the Canadian Securities Administrators show that 56 per cent of Canadians agree they are just as likely to be a victim of investment fraud as anyone else.
The following five steps will help to minimize your chances of falling victim to investment fraud and limit your exposure in the unfortunate case that you do.
1. Clearly understand the investment strategy
The venerable portfolio manager, Peter Lynch, consistently advises people to invest only in what they understand. Investors should be alert to the possibility that complex jargon often hides suspicious inconsistencies. Some investment opportunities appear alluring simply because they are described in impressive, complicated terms and of course as investors we want to appear smart so we often nod, smile and agree to something we don’t actually understand. Investment strategies and financial products should be clear and understandable, and the professional advisers that you hire should ensure you’re comfortable with them before you take the plunge.
2. Be wary of “sure things”, quick returns and special access
Legitimate investment professionals do not promise sure bets; remember there is no such thing! Scammers often make the combination of safety and high returns seem plausible by granting you “special access” based on your relationship with a mutual acquaintance or affiliation with a specific group. Be sure to judge investments on their merits alone — do your best to ignore the social pressure that can often lead investors to misery and remember if it seems too good to be true, it probably is!
3. Is the investment subject to regulation and what if any protection does it provide?
Regulation varies by country and investment type. Hedge funds, for example, are less regulated than mutual funds and off-shore advisers may be subject to less stringent supervision in some countries. Regulation does not mean lower risk. A common mistake that investors make is to assume that because their investments are regulated the risks involved are reduced. Before making an investment decision, make sure you are aware of the relevant regulation and then you can fully assess the merits of the investment. It’s still possible to lose money in well-regulated markets so you need to make sure your investment decisions match your overall risk profile.
4. Trust, but verify
Ultimately, the reliability of any operation is predicated on the integrity and competence of its people. Remember that the company you choose to invest with could be overseeing your assets for many years to come so it’s important to build a trusting relationship with them. One of the best ways to do this is to adopt a “trust, but verify” mentality. Look for professionals who have achieved a mark of distinction in their career–like the Chartered Financial Analyst (CFA) designation–and professionals who abide by a Code of Ethics that requires them to place clients’ interests ahead of their own. Trust is built with consistency so looking at past experience can reveal a lot – what is their investment track record, can they provide references, are they registered with the national regulator? The more you know, the easier it is to detect a scam!
5. Don’t forget to use standard investing discipline
When the conversation turns to fraud, investors can sometimes forget that tried-and-tested investment management principles still need to be applied. Even though diversification is one of the most fundamental and enduring investment principles, many investors forget to ensure their assets are diversified widely enough. Doing so will help to limit the catastrophe associated with investment fraud but it is also more likely to provide a higher average return at lower average risk. Make sure that all investment decisions you make are aligning with your long-term financial goals and never invest in anything you don’t fully understand.
When navigating the markets, it will always be important to keep a watchful eye out for fraud. Throughout history, whenever money is involved there will tend to be an opportunity for unscrupulous people to take advantage of others. CFA Institute provides some helpful tools to educate investors on how to make informed investment decisions, so be prepared, do your homework and remember that taking steps to avoid fraud is part of a good investment strategy.
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Five Steps To Help You Avoid Investment Fraud | Bob Stammers
Five Steps To Help You Avoid Investment Fraud | Bob Stammers.
Bob Stammers
CFA, Director of Investor Education
On the fifth anniversary of Bernie Madoff’s conviction, it might be tempting to try and forget about investment fraud. After all, one of the most notorious con men in modern history has been locked away until Nov. 14, 2139. So does that mean investors are safe from fraud?
Unfortunately, there will always be bad apples in the financial system and if you have money to invest then you are vulnerable to potential fraudulent behaviour. Latest figures from the Canadian Securities Administrators show that 56 per cent of Canadians agree they are just as likely to be a victim of investment fraud as anyone else.
The following five steps will help to minimize your chances of falling victim to investment fraud and limit your exposure in the unfortunate case that you do.
1. Clearly understand the investment strategy
The venerable portfolio manager, Peter Lynch, consistently advises people to invest only in what they understand. Investors should be alert to the possibility that complex jargon often hides suspicious inconsistencies. Some investment opportunities appear alluring simply because they are described in impressive, complicated terms and of course as investors we want to appear smart so we often nod, smile and agree to something we don’t actually understand. Investment strategies and financial products should be clear and understandable, and the professional advisers that you hire should ensure you’re comfortable with them before you take the plunge.
2. Be wary of “sure things”, quick returns and special access
Legitimate investment professionals do not promise sure bets; remember there is no such thing! Scammers often make the combination of safety and high returns seem plausible by granting you “special access” based on your relationship with a mutual acquaintance or affiliation with a specific group. Be sure to judge investments on their merits alone — do your best to ignore the social pressure that can often lead investors to misery and remember if it seems too good to be true, it probably is!
3. Is the investment subject to regulation and what if any protection does it provide?
Regulation varies by country and investment type. Hedge funds, for example, are less regulated than mutual funds and off-shore advisers may be subject to less stringent supervision in some countries. Regulation does not mean lower risk. A common mistake that investors make is to assume that because their investments are regulated the risks involved are reduced. Before making an investment decision, make sure you are aware of the relevant regulation and then you can fully assess the merits of the investment. It’s still possible to lose money in well-regulated markets so you need to make sure your investment decisions match your overall risk profile.
4. Trust, but verify
Ultimately, the reliability of any operation is predicated on the integrity and competence of its people. Remember that the company you choose to invest with could be overseeing your assets for many years to come so it’s important to build a trusting relationship with them. One of the best ways to do this is to adopt a “trust, but verify” mentality. Look for professionals who have achieved a mark of distinction in their career–like the Chartered Financial Analyst (CFA) designation–and professionals who abide by a Code of Ethics that requires them to place clients’ interests ahead of their own. Trust is built with consistency so looking at past experience can reveal a lot – what is their investment track record, can they provide references, are they registered with the national regulator? The more you know, the easier it is to detect a scam!
5. Don’t forget to use standard investing discipline
When the conversation turns to fraud, investors can sometimes forget that tried-and-tested investment management principles still need to be applied. Even though diversification is one of the most fundamental and enduring investment principles, many investors forget to ensure their assets are diversified widely enough. Doing so will help to limit the catastrophe associated with investment fraud but it is also more likely to provide a higher average return at lower average risk. Make sure that all investment decisions you make are aligning with your long-term financial goals and never invest in anything you don’t fully understand.
When navigating the markets, it will always be important to keep a watchful eye out for fraud. Throughout history, whenever money is involved there will tend to be an opportunity for unscrupulous people to take advantage of others. CFA Institute provides some helpful tools to educate investors on how to make informed investment decisions, so be prepared, do your homework and remember that taking steps to avoid fraud is part of a good investment strategy.
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Things That Make You Go Hmmm… Like “Anti-Gold Idiots” | Zero Hedge
Things That Make You Go Hmmm… Like “Anti-Gold Idiots” | Zero Hedge.
This next paragraph contains what Grant Williams believes is the fundamental principle of investing in gold and silver, which so few people genuinely understand — despite the multitudes of commentators expending countless thousands of words.
“So these anti-gold idiots are just that, idiots, or else they have the memory of a goldfish, because currencies come and currencies go, as sure as night follows day. It is the natural order of things. And as you can see, it’s not about trading gold to get rich or getting long gold or buying one by two call spreads or getting fancy, it literally is about protecting yourself in the end.It’s not like Williams got rich. He just stayed rich. Everyone else got poor.“
It’s not like Williams got rich. He just stayed rich. Everyone else got poor.
That’s it. Right there.
…
If you talk to most people in the West about gold, they have no idea about the price or its recent direction. Narrow your sample audience down to those with a passing interest in finance, and they will likely know that gold is an awful investment whose price only goes down. (Had we conducted this little survey in 2011, the results would have been different, but that only illustrates the point.)
Ask a random group of people in the East about gold, however, and the conversation is completely different.
In this part of the world, people talk about how much gold they (or their parents or their grandparents) own. They will tell you stories of the first time they handled a gold coin (usually as a child), and they will know the price but not have much of an opinion on how good or bad gold’s performance has been — it will be far less relevant to them. They just know that you don’t trade gold; you own it.
To further illustrate this point, let’s talk about our old friends the world’s central banks.
The chart showing the 25 largest central bank holders of the world’s gold looks like this:
If we take a look at the changes in those holdings between 2008 and 2013, an interesting phenomenon emerges: central banks in the East, as their reserves have grown, have been accumulating gold:
Since 2008, the central banks of China, Russia, India, Turkey, Saudi Arabia, Thailand, and the Philippines have increased their gold holdings on average by 119.67%.
…
Central banks continually rubbish gold as a worthless asset class because it constricts their ability to produce money at the push of a button. Not only that, but it offers their citizens the means to reduce their reliance upon a nation’s fiat currency — one has only to look at the goings-on in India last year to see what THAT looks like.
Deep down, though, central bankers know what gold is for and why you hold it. They know.
In 1999, a group of central banks came together through the Washington Agreement on Gold to jointly manage sales of the precious metal.
…
The Washington Agreement worked when central banks were selling their gold because there were always buyers, at lower and lower prices — those were the investors soaking up the bullion.
NOW we have a bunch of central banks aggressively trying to BUY gold; and what they’re finding (unsurprisingly) is that the investors aren’t sellers, so the only people left from whom to acquire gold are the traders — and they have a very limited supply of actual metal
When Western central bankers rubbish gold as a “barbarous relic” or, as in the case of Ben Bernanke shortly before he started his job at The Brookings Institution left office in January, admit to a complete lack of understanding of it, does it not strike you as strange that, having accumulated significant stockpiles of gold over the years, they aren’t in a hurry to swap any of it for paper money(well, with the notable exception perhaps of the United Kingdom, thanks to the antics of Gordon Brown, King of the Idiot Chancellors)?
It shouldn’t.
Gold is held by Western central banks for exactly the same reason individuals ought to hold it: protection.
Central banks are accumulating gold because it cannot go BANG! like fiat currencies do.
Individuals should be doing the same — not being sidetracked by the distractions.
It’s not about price. The story Jared shared with us demonstrates that beyond any doubt.
If you own gold, it will do all the heavy lifting for you when the time comes
And that’s where Grant Williams gets really deep in his latest excellent letter…
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The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?
The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?.
Did you know that financial institutions all over the world are warning that we could see a “mega default” on a very prominent high-yield investment product in China on January 31st? We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in “sky-high interest rates” and “a precipitous plunge in credit“. In other words, it could be a “Lehman Brothers moment” for Asia. And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well. Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion. That is an increase of $14 trillion in just a little bit more than 5 years. Much of that “hot money” has flowed into stocks, bonds and real estate in the United States. So what do you think is going to happen when that bubble collapses?
The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen. Never before has so much private debt been accumulated in such a short period of time. All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads. In fact, it is being projected that Chinese companies will pay out the equivalent ofapproximately a trillion dollars in interest payments this year alone. That is more than twice the amount that the U.S. government will pay in interest in 2014.
Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for creating too much money. But the truth is that what has been happening in China surpasses all of their efforts combined. You can see an incredible chart which graphically illustrates this point right here. As the Telegraph pointed out a while back, the Chinese have essentially “replicated the entire U.S. commercial banking system” in just five years…
Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire U.S. commercial banking system in five years,” she said.
The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.
As with all other things in the financial world, what goes up must eventually come down.
And right now January 31st is shaping up to be a particularly important day for the Chinese financial system. The following is from a Reuters article…
The trust firm responsible for a troubled high-yield investment product sold through China’s largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday.
Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.
If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly. A recent Forbes article explained why this is the case…
A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well. In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk. Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both. The result? The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.
The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China. According to Forbes, M2 in China increased by 13.6 percent last year…
And at the same time China’s money supply and credit are still expanding. Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth. Optimists say China is getting its credit addiction under control, but that’s not correct. In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.
Overall, M2 in China is up by about 1000 percent since 1999. That is absolutely insane.
And of course China is not the only place in the world where financial trouble signs are erupting. Things in Europe just keep getting worse, and we have just learned that the largest bank in Germany just suffered ” a surprise fourth-quarter loss”…
Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.
Germany’s biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.
If current trends continue, many other big banks will soon be experiencing a “bond headache” as well. At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years. Investors overwhelmingly believe that yields are heading higher.
If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the “nightmare scenario” that I keep talking about.
But I am not the only one talking about it.
In fact, the World Economic Forum is warning about the exact same thing…
Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.
Ahead of next week’s WEF annual meeting in Davos, Switzerland, the forum’s annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash.
This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.
So will a default event in China on January 31st be the next “Lehman Brothers moment” or will it be something else?
In the end, it doesn’t really matter. The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.
It is just a matter of time.
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Shale gas, peak oil and our future
Shale gas, peak oil and our future.
The following interview with Richard Heinberg was originally published in Flemish at the Belgian website De Wereld Morgen. The interview was given in conjunction with the release of the Dutch translation of Richard’s Book Snake Oil: How Fracking’s False Promise of Plenty Imperils Our Future. The Dutch title is Schaliegas, piekolie & onze toekomst.
Josh Fox, director of the Gasland documentaries, recently said that the fossil fuel industry is so powerful that “democracy in the 21st century is impossible as long as we rely on fossil fuels”. What are your thoughts?Share this:
Gonzalo Lira: The Fed Is Playing Global Pump-and-Dump
Gonzalo Lira: The Fed Is Playing Global Pump-and-Dump.
The Fed Is Playing Global Pump-and-Dump
People often criticize me for objecting to the Federal Reserve’s Quantitative Easing (QE) and Zero Interest-Rate Policy (ZIRP) on the grounds that they are setting the stage for hyperinflation and a dollar collapse. Since neither has arrived—yet—people mock me, often pretty badly: “Hey Lira! How’s that 2% ‘hyperinflation’ working out for ya!”
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| “The left side reminds me of Dow Jones.” “Hmm! There does seem to be a family resemblance . . .” |
Funny-funny hardy-har-har.
.!..
But even if you don’t buy that QE and ZIRP will lead to a dollar collapse, you do have to admit that these Fed policies have severely brainwashed investors.
Why ‘brainwashed’? Because today, due to the Fed’s policies, stock prices are booming—we’re about to crack 16,500 on the Dow Jones, NASDAQ is well on its way to 4,200, and the S&P is close to 1,850—all record highs.
What’s wrong with record highs? What’s wrong with booming stock prices? Absolutely nothing—unless you look at the two-year charts and realize that these three indices are not reflecting a robust, booming economy. Rather, they have had unrelenting climbs that have been openly—and exclusively—caused by QE and ZIRP.
Which has brainwashed investors into dismissing value. Today,all investors are momentum-chasing pump-and-dumpers who are not worrying about fundamentals, or worrying about the long-term health and well-being of a company.
All they have been brainwashed into caring about is the rise in a stock’s price.
Which is pretty funny, if you think about it: These investors might shun penny-stocks, they might buy and sell stocks by way of “respectable” brokerage houses—but these investors are behavingexactly like the suckers taken for a ride by sketchy boiler rooms operating out of north Jersey.
And we all know how those poor saps usually end up: Broke, holding on to worthless stock certificates not worth the paper they’re printed on.
Why is this happening? Easy, because of the Fed’s QE and ZIRP have so flattened the yield curve across Treasuries and the rest of the bond markets, that anything yielding better than 5%—in anyasset class, not just bonds—quickly gets priced up.
They call Treasuries the “benchmark” for a reason: As the (supposedly) safest asset class, they set the yield curve for allassets in all classes—not just in other bonds, but in equities and real estate as well. If Treasury yields are minimal, then a “normal” yield in a riskier asset class will also be minimal.
Look at the following chart:
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| Click to enlarge. |
These are the Top 20 Dow Jones stock as measured by expected stock dividend yields for 2014. The mean of these Top 20 is 3.16%, the average 3.28%.
Now, these are the bluest of the blue-chips—repeat, the Top 20 as measures by yield. If you get dividends of 3.28% on these blue-chip stocks, and pay an income tax rate of say 35% combined State and Federal, you’re looking at a yield of 2.13%.
That’s yearly. That’s less than inflation.
So why are the yields on these oh-so-blue-chips so low? Because of QE and ZIRP’s unrelenting asset price inflation. That’s why you have companies like twitter—which does not have any income to speak of—with a market valuation of $38 billion or whatever.
Since nothing yields a healthy 6% or better, the only thing investors care about today is whether the price of the asset they “invest in” will rise within the year—so that they can sell it at a profit.
That’s not investing—that’s speculating.
By the way, unrelenting asset price inflation was the whole point of the Federal Reserve’s policies. Yeah, I know I went overboard with the combined bold-italics-underlined thing, but I just wanted to emphasize that point, and one other:
The Federal Reserve is the boiler room operation that has pumped up the equities market by way of QE and ZIRP. You are investing in a pump-and-dump scam. And like in all such scams, you will lose.
Clear enough for ya?
Crazy as this may sound, when you look at those measely yields for the Top 20 performer, you realize that investors for the time being are acting rationally: Since yields are minimal—in fact negative, after you factor in income tax and inflation—it pays investors to speculate, rather than to properly invest. Not only are the Fed’s policies goosing the equities markets, the tax code privileges speculators as well, by way of a capital gains tax rate which is lower than the income tax rate. You pay less taxes if you speculate than if you invest responsibly. (!)
Thus both the Federal Reserve and the IRS are encouragingspeculation. That’s how investors have become brainwashed: They think that this low-yield, high-asset price inflation, low-capital gains tax environment is the way things ought to be.
But even though the Fed is deliberately, openly goosing the market, no different from a Jersey boiler room operation, nobody’s complaining—or even realizing it—because at this time, investors are making money with this Global Pump-and-Dump.
It ought to be beautiful, right? Everybody making money, all happy in the world. Only problem is, these pump-and-dum scams always end. When do they end? When people stop believing in the hype. When people realize that the global economy is in the toilet, companies are not booming but barely getting by, and there’s nothing on the horizon which will restart the economy. When people—and not a lot of people, mind you, just a tipping point estimated at about 10%—realize that this game that the Fed is playing with QE and ZIRP is a game of musical chairs.
That’s when the Fed’s Global Pump-and-Dump Scam will blow up.
You don’t think as I do that QE and ZIRP will lead to hyperinflation and dollar collapse? Fine, that’s cool—but admit that these Fed policies are skewing the market: They are turning investors into speculators—scratch that, brainwashing them intogamblers.
And it will all end in tears—these schemes usually do. I for one am keeping an ear on this game of musical chairs, trying to anticipate when the music will stop.
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Precious Metals in 2014
“Now the New Year reviving old desires
The thoughtful Soul to Solitude retires”
Rubaiyat of Omar Khayyam
Yes folks, it’s that time of year again; but unlike old Khayyam who reflected bucolically on the continuing availability of wine, we must turn our thoughts to the dangers and opportunities of the coming year. They are considerable and multi-faceted, but instead of being drawn into the futility of making forecasts I will only offer readers the barest of basics and focus on the corruption of currencies. My conclusion is the overwhelming danger is of currency destruction and that gold is central to their downfall.
As we enter 2014 mainstream economists relying on inaccurate statistics, many of which are not even relevant to a true understanding of our economic condition, seem convinced that the crises of recent years are now laid to rest. They swallow the line that unemployment is dropping to six or seven per cent, and that price inflation is subdued; but a deeper examination, unsubtly exposed by the work of John Williams of Shadowstats.com, shows these statistics to be false.
If we objectively assess the state of the labour markets in most welfare-driven economies the truth conforms to a continuing slump; and if we take a realistic view of price increases, including capital assets, price inflation may even be in double figures. The corruption of price inflation statistics in turn makes a mockery of GDP numbers, which realistically adjusted for price inflation are contracting.
This gloomy conclusion should come as no surprise to thoughtful souls in any era. These conditions are the logical outcome of the corruption of currencies. I have no doubt that if in 1920-23 the Weimar Republic used today’s statistical methodology government economists would be peddling the same conclusions as those of today. The error is to believe that expansion of money quantities is a cure-all for economic ills, and ignore the fact that it is actually a tax on the vast majority of people reducing both their earnings and savings.
This is the effect of unsound money, and with this in mind I devised a new monetary statistic in 2013 to quantify the drift away from sound money towards an increasing possibility of monetary collapse. The Fiat Money Quantity (FMQ) is constructed by taking account of all the steps by which gold, as proxy for sound money, has been absorbed over the last 170 years from private ownership by commercial banks and then subsequently by central banks, all rights of gold ownership being replaced by currency notes and deposits. The result for the US dollar, which as the world’s reserve currency is today’s gold’s substitute, is shown in Chart 1.
The graphic similarities with expansions of currency quantities in the past that have ultimately resulted in monetary and financial destruction are striking. Since the Lehman crisis the US authorities have embarked on their monetary cure-all to an extraordinary degree. We are being encouraged to think that the Fed saved the world in 2008 by quantitative easing, when the crisis has only been concealed by currency hyper-inflation.
Are we likely to collectively recognise this error and reverse it before it is too late? So long as the primary function of central banks is to preserve the current financial system the answer has to be no. An attempt to reduce the growth rate in the FMQ by minimal tapering has already raised bond market yields considerably, threatening to derail monetary policy objectives. The effect of rising bond yields and term interest rates on the enormous sums of government and private sector debt is bound to increase the risk of bankruptcies at lower rates compared with past credit cycles, starting in the countries where the debt problem is most acute.
With banks naturally reluctant to take on more lending-risk in this environment, rising interest rates and bond yields can be expected to lead to contracting bank credit. Does the Fed stand aside and let nature take its course? Again the answer has to be no. It must accelerate its injections of raw money and grow deposits on its own balance sheet to compensate. The underlying condition that is not generally understood is actually as follows:
The assumption that the Fed is feeding excess money into the economy to stimulate it is incorrect.
Individuals, businesses and banks require increasing quantities of money just to stand still and to avoid a second debt crisis.
I have laid down the theoretical reasons why this is so by showing that welfare-driven economies, fully encumbered by debt, through false employment and price-inflation statistics are concealing a depressive slump. An unbiased and informed analysis of nearly all currency collapses shows that far from being the product of deliberate government policy, they are the result of loss of control over events, or currency inflation beyond their control. I expect this to become more obvious to markets in the coming months.
Gold’s important role
Gold has become undervalued relative to fiat currencies such as the US dollar, as shown in the chart below, which rebases gold at 100 adjusted for both the increase in above-ground gold stocks and US dollar FMQ since the month before the Lehman Crisis.
Given the continuation of the statistically-concealed economic slump, plus the increased quantity of dollar-denominated debt, and therefore since the Lehman Crisis a growing probability of a currency collapse, there is a growing case to suggest that gold should be significantly higher in corrected terms today. Instead it stands at a discount of 36%.
This undervaluation is likely to lead to two important consequences. Firstly, when the tide for gold turns it should do so very strongly, with potentially catastrophic results for uncovered paper markets. The last time this happened to my knowledge was in September 1999, when central banks led by the Bank of England and the Fed rescued the London gold market, presumably by making bullion available to distressed banks. The scale of gold’s current undervaluation and the degree to which available monetary gold has been depleted suggests that a similar rescue of the gold market cannot be mounted today.
The second consequence is to my knowledge not yet being considered at all. The speed with which fiat currencies could lose their purchasing power might be considerably more rapid than, say, the collapse of the German mark in 1920-23. The reason this may be so is that once the slide in confidence commences, there is little to slow its pace.
In his treatise “Stabilisation of the Monetary Unit – From the Viewpoint of Monetary Theory” written in January 1923, Ludwig von Mises made clear that “speculators actually provide the strongest support for the position of notes (marks) as money”. He argued that considerable quantities of marks were acquired abroad in the post-war years “precisely because a future rally in the mark’s exchange rate was expected. If these sums had not been attracted abroad they would have necessarily led to an even steeper rise in prices on the domestic market”.
At that time other currencies, particularly the US dollar, were freely exchangeable with gold, so foreign speculators were effectively selling gold to buy marks they believed to be undervalued. Today the situation is radically different, because Western speculators have sold nearly all the gold they own, and if you include the liquidation of gold paper unbacked by physical metal, in a crisis they will be net buyers of gold and sellers of currencies. Therefore it stands to reason that gold is central to a future currency crisis and that when it happens it is likely to be considerably more rapid than the Weimar experience.
I therefore come to two conclusions for 2014: that we are heading towards a second and unexpected financial and currency crisis which can happen at any time, and that the lack of gold ownership in welfare-driven economies is set to accelerate the rate at which a collapse in purchasing power may occur.
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Ponzi World (Over 3 Billion NOT Served): The Promise of the Joker and the Fool
Ponzi World (Over 3 Billion NOT Served): The Promise of the Joker and the Fool.
Blogs like this one are a total fucking waste of time. We are a handful of hardcore realists reading each others’ blogs and reinforcing what we already know. All while the stoned masses sit at home fat and happy watching the Kardashians, hypnotized by Dow Casino ticking higher with every passing day. After 2008, the comfort-seekers at large curled up into the fetal position and have remained that way ever since. Regardless, how can we possibly warn the oblivious masses about today’s economic risks when it’s all doomed to collapse under the weight of its own moral depravity? Basic logic dictates that the majority can’t all get out of a house of cards intact. The Idiocracy at large is totally bought in and sold out to the promise of the jokers and fools who run this globalized catastrophe, you know, the same ones who collapsed it the last time…
There is nothing any bearish blogger can do to bring about the collapse of this fabrication that global thought dealers are not already doing. They collapsed world markets in 2008 and they are fully capable of doing it again all on their own. These people went to the top schools in the U.S., the UK, Canada – across the world. They know what they are doing. They generated the 2008 clusterfuck, profited from it, and now are guiding us straight ahead to the next catastrophe. Who was at the helm of the Federal Reserve in 2006, 2007 and 2008? Bernankenstein of course. And who until this very month has steadfastly been Wall Street’s largest leveraged banker? Bernankenstein. He saved us from a catastrophe that he himself subsidized. Soon he will hand over the reins to Janet Yellen, who has degrees from Yale and Brown, two more Ivy Leagues. Surely she can finish the job and pile drive this fucker straight into the ground. Yellen admits that she didn’t see the 2008 financial crisis coming – apparently giving subprime loans to illegal immigrants and watching Goldman invent the self-imploding CDO didn’t raise any alarm bells with her. So she is definitely the right person to finish the job. Speaking of which, the self-imploding CDO that took out AIG and Lehman was invented at Goldman Sachs under current chairman Loyd Blankfein (see: Ayn Rand Gone Wild), who was Harvard roommate to the Bennie Bernank. Fortunately Goldman was bailed out by that other Harvard/Goldman alum Hank Paulson as Treasury Secretary (and Bernanke). The Credit Default Swap (CDS) was invented by JP Morgan/Cambridge superstar Blythe Masters who was just let go from JPM for her alleged role in an energy market manipulation scheme a la Enron. The CDS may well be the ultimate financial weapon of mass destruction (WMD) – still out there working its magic. Meanwhile, Central Bankster Mark Carney, another Harvard/Goldman Sachs alum, just finished inflating Canada’s massive real estate bubble and has now moved to the UK to help top off their real estate bubble. And if only Larry Summers, Dean of Harvard, had been picked as Fed chairman, surely this clusterfuck would already have collapsed by now. It was Summers who suggested just last year that the secret to improving a nation’s credit rating was to borrow more not less. Genius ! Summers also of course was a key proponent of repealing Glass-Steagall, the Depression-era law meant to preclude another financial crisis. The other key proponent behind Glass-Steagall repeal was Robert Rubin (Goldman/Citigroup/Yale/Harvard). Obama/Bush, two more Harvard frat boys gleefully sowing the seeds of anarchy. This is all well in hand. Clearly, we need to sit back and wait. There is nothing we can do to end this shit show that the dumbfucks from Harvard and other Ivy League schools are not doing on their own. No offense, but I highly doubt if anyone reading this blog could collapse the world financial system – I doubt if I could. So the longer we doom forecasters warn of risks and otherwise prescribe caution, the longer this circus will continue. Think about it. Harvard dunces will end this globalized catastrophe once and for all. We just need to be a bit more patient and give them time to work.
Bernanke fixed Wall Street by giving them $3 trillion to play with…
Fed balance sheet (blue line) with Dow Casino. Fast, slow, fast. Sounds familiar…
Apparently we’re still waiting for the melt-up to occur. Sure, whatever…
Nasdaq 100 – 70% retracement
Speaking of melt-ups…
And Priceline (Nasdaq in background)
Top performing S&P stock – Up 2200% in five years
Are we in a bubble? I can’t tell. Although the last time this stock went parabolic I lost a shit ton of money shortly thereafter that’s all I know. It’s a good thing I’m not bitter, especially towards Central Banksters and their continued market manipulations…
IPO Casino
Twitter (below) priced at $26 and recently traded at $75 for a 200% gain in 6 weeks. Its price to sales ratio is a ludicrous 75. Apple’s price/sales ratio is 3. Twitter’s profit margin is -25% so it sells dollar bills for 75 cents and yet its market cap is greater than that of 80% of S&P companies. It’s the most overvalued piece of shit on the entire planet.
Meanwhile, per IBD on Friday, “Investor’s Intelligence (sentiment) bulls v.s. bears ratio is in the silly zone” That’s because there are no bears left except for a handful of bloggers engaged in a mutual admiration circle jerk…
Ode to Ponzi Capitalism and Securitization
In a big FU to customers, BusinessWeek informs us last week that companies with the poorest customer service have outperformed in the stock market. There is actually negative correlation between customer satisfaction and stock performance. Time Warner Cable is the reference company (appearing on the list multiple times); however, Facebook is at the very bottom of the ratings.
Fadebook: Shitty service and abuse of customer data privacy
The strategy is working – Booyah Skidaddy !
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Ponzi World (Over 3 Billion NOT Served): Choosing the Mass Delusion
Ponzi World (Over 3 Billion NOT Served): Choosing the Mass Delusion.
One of these countries monetizes its debt in order to levitate asset markets, the other does not. One reflects reality – the other one, not so much…
Applying Krugmanite/Bernanke Idiocratic logic, it’s abundantly clear that Canadians don’t borrow enough, print enough or outsource enough of their economy and that’s just bad management.
Guzzling the Kool-Aid from a fire hose. No risks are priced in right now. Not one.
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oftwominds-Charles Hugh Smith: The Only Leverage We Have Is Extreme Frugality
oftwominds-Charles Hugh Smith: The Only Leverage We Have Is Extreme Frugality.
Debt is serfdom, capital in all its forms is freedom. The only leverage available to all is extreme frugality in service of accumulating productive capital.
There are only three ways to better oneself financially: marry someone with money, inherit money or accumulate capital/savings and invest it in productive assets. (We’ll leave out lobbying the Federal government for a fat contract, faking disability, selling derivatives designed to default and other criminal activities.)
The only way to accumulate capital to invest is to spend considerably less than you earn. For a variety of reasons, humans seem predisposed to spend more as their income rises. Thus the person making $30,000 a year imagines that if only they could earn $100,000 a year, they could save half of their net income. Yet when that happy day arrives, they generally find their expenses have risen in tandem with their income, and the anticipated ease of saving large chunks of money never materializes.
What qualifies as extreme frugality? Saving a third of one’s net income is a good start, though putting aside half of one’s net income is even better.
The lower one’s income, the more creative one has to be to save a significant percentage of one’s net income. On the plus side, the income tax burden for lower-income workers is low, so relatively little of gross income is lost to taxes.
The second half of the job is investing the accumulated capital in productive assets and/or enterprises. The root of capitalism is capital, and that includes not just financial capital (cash) but social capital (the value of one’s networks and associations) and human capital (one’s skills and experience and ability to master new knowledge and skills).
Cash invested in tools and new skills and collaborative networks can leverage a relatively modest sum of cash capital into a significant income stream, something that cannot be said of financial investments in a zero-interest rate world.
We hear a lot about the rising cost of college and the impossibility of getting a degree without loans or tens of thousands of dollars contributed by parents. I think my own experience is instructive, as there is another path: extreme frugality.
At 19, my two sets of parents were unable to provide me with more than a rust-bucket old car. My father sent me an airline ticket to visit him, but nobody ponied up any cash for tuition, books, or living expenses.
Step One was eliminating housing costs until I earned enough to pay rent. By good fortune, I was able to secure a work-trade housing situation: I was given a room filled with boxes of accounting records, and a path through the boxes to a bathroom and tiny kitchenette in trade for yard work.
Step Two: cut all other expenses to the bone. Since I was working for a remodeling contractor, I needed the car to get to the various jobsites, but I bicycled whenever possible to save on gasoline. I prepared all my own meals and avoided buying snacks, drinks, etc. until my income rose enough to swing such luxuries. I can count the number of drinks or meals I bought on campus in four years on one hand.
Music purchased: none. (We played our own music or listened to the radio on the jobsite.) Clothes purchased new: none. (That’s what church jumble sales/bazaars are for: $1 shirts, etc.) And so on.
Step Three: find a job with upside earnings and skills. I’d worked in snack bars and mowed lawns, but construction opened up opportunities to advance my skills and gain sufficient proficiency to deserve a raise in pay.
Since I wasn’t guaranteed any opportunity for advancement, I volunteered to work Saturdays for my bosses or anyone else on the crew who had sidework on the weekends. I volunteered my construction services to community groups to gain experience (there’s nothing like being responsible for the project, as opposed to just following orders) and open access to new networks of productive, accomplished people.
For example, I rebuilt the rotted redwood rear steps to the historic Agee House in the back of Manoa Valley for free. (Sadly, this wonderful building burned down a few years later.)
In business, the word “hustle” has the negative connotation of high pressure sales or a scam. In sports, it has a positive connotation of devoting more energy and effort as a means of compensating for lower skills or physical size. Step Three requires hustle: when you don’t have any advantages of capital, connections or skills, you have to acquire those by hustle and initiative.
Step Four: apply for obscure, small-sum scholarships. $500 may not sound like a lot, but it means competition will be lower and if you get it, that’s $500 you don’t have to earn. As you build your networks in the community, put the word out you’re looking for small scholarships for next semester’s tuition. In general, people tend to respond more positively to helping you with a specific goal rather than an open-ended or undefined goal such as “I need money for college.”
Step Five: work productively and ambitiously, i.e. work a lot but work smart. It never occurred to me that working 25+ hours a week and taking a full load of classes (4-5 classes and 15+ credits a semester) was something to bemoan–I was having a great time, and earned a 3.5 grade point average and my B.A. in four years.
60-hour work weeks should be considered the minimum effort necessary–but only if those hours are 100% productive work, not hours interrupted with games, phone calls, goofing off, etc. Those 60 hours are flat-out, power-out-the-work hours, not hours diluted by half-effort, distractions, etc.
Step Six: learn to do things yourself that cost money, such as maintaining your car. It’s not that hard to change the oil and other basics of maintenance.
If you push yourself and maintain a disciplined life, huge amounts of work can be ground through in a few hours. This is as true of digging a ditch as it is of plowing through texts and writing papers.
Tuition at the state university I attended (the University of Hawaii at Manoa) has risen enormously in the decades since I worked my way through college (roughly $9,000 a year now), but it’s still possible to work one’s way through if the student pursues all six steps assiduously and with perseverance and hustle and secures full-time work in summers.
One reason I did not bemoan working long hours and practicing extreme frugality was that this was still the default setting in a few dwindling enclaves of our culture and economy. The idea that you could borrow money for everything you wanted had not yet conquered the culture and economy: thrift in service of big goals was still a cultural norm.
In other words, what I did wasn’t heroic or unusual; it was the norm.
I should mention that my university years overlapped with the deepest recession (at that time) since the Great Depression: 1973-74. Work was hard to come by, gasoline skyrocketed in price, and inflation started to outpace wages, especially in the low-wage jobs typically available to college students.
It was not a cakewalk by any means.
The upside of relentlessly pursuing Steps One – Six is tremendous: personal integrity, financial independence, and the other powerful freedoms that accrue to these foundations. Measured by income and things I owned, I was “poor.” But measured by independence and by skills and networks gained, I was wealthy in many important ways.
Extreme frugality enabled me to not just finish college in four years but to buy a (cheap) parcel of land while still a student with cash and have a substantial savings account by graduation day.
I don’t look back on those years of voluntary deprivation in service of independence, freedom, knowledge, and social and human capital as “poor me:” I see them as the extremely positive, productive template that I have followed in the decades since. I never did marry or inherit money, and so whatever I have now is the direct result of extreme frugality in service of integrity, independence and the accrual of capital that can be productively invested.
The only leverage available to all is extreme frugality in service of accumulating savings that can be productively invested in building human, social and financial capital.
Debt is serfdom, capital in all its forms is freedom.
Debt = Serfdom (April 2, 2013)
How Frugal Are You? (August 7, 2010)
Olduvaiblog: Musings on the coming collapse 