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Economy

A Massive Surge In GLD “Inventory”

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Yesterday saw the 2nd-largest one day surge in GLD “inventory” in the past five years. What does this signal, if anything at all?

I think most everyone here knows how I feel about the GLD. It’s a scam. It’s a sham and it’s a fraud. Oh sure, there’s almost certainly some gold held in the HSBC vaults but how much is truly, 100% allocated to just the GLD? Recall the whole charade from back in 2011 when Bob Pissonme of CNBS was allegedly driven in circles for hours before being allowed into the super-secret vaults that house the GLD’s gold:http://www.silverdoctors.com/gold/gold-news/ned-naylor-leyland-reveals-actual-owner-of-bob-pisanis-gld-gold-bar/

Meh, whatever. There’s no sense in re-litigating this nonsense today. What is curious sometimes is the timing of the the Authorised Participant (Bullion Bank) alleged additions and withdrawals. Most recently we noted a stretch of 16 consecutive withdrawals over the period from June 26 through August 7. The total amount of “gold” withdrawn from “inventory” over that time was 66.81 metric tonnes.

However, since August 7, the GLD has seen seven consecutive additions to inventory. The first six, from August 14 to August 30, were for a total of 29.56 metric tonnes. This is astonishing in its own right as it’s difficult to imagine this gold just laying around, waiting for HSBC to pick it up when needed. And then yesterday, we got the coup de grace… an incredible 23.65 metric tonnes were allegedly added yesterday alone.

How much gold is 23.65 metric tonnes? That’s about 760,000 troy ounces.





And is that a lot? Well, there are about 400 troy ounces in every London Good Delivery Bar so 23.65 metric tonnes equates to about 1,900 of these babies:

If you stack 192 of them to a pallet, it also means you’re looking at 10 pallets as shown below:

So, I’m sure this is all totally on the up-and-up and honest. Remember, the custodian for the GLD gold is HSBC and they have a stellar and impeccable reputation: http://www.corp-research.org/HSBC

Again…whatever. This is all old news. The only reason I bring this up is to remind you of the last two times the GLD saw such a massive addition to “inventory”.

Recall the heady days of June and July 2016. The Brexit vote had just shocked the financial world. Negative rates abounded and even the 10-year US treasury note traded at a yield of just 1.50%. Comex Digital Gold began the year near $1100 but had risen to $1300 and beyond.

On June 24, 2016…the day after the Brexit vote…the GLD “inventory” surged by 18.41 mts. “Inventory” continued to rise into early July and then, with the largest one day surge that we have on record since 2012, “inventory” jumped 28.81 metric tonnes on July 5. Hmmmm….July 5. What else happened on July 5? That was the very day of the 2017 price peak near $1375! How about that?

Cause and effect? Effect and cause? Simple coincidence? Maybe there’s no connection at all as the APs (Bullion Banks) can simply stuff the GLD “inventory” with as many delivery receipts and promissory notes as they deem necessary to give the appearance of propriety. But then again, maybe not.

However, I don’t want to leave you with the impression that this HAS TO BE a bad sign and signal of a short-term price top. According to our records over the past five years, there was one other massive GLD inflow. It was for 18.74 metric tonnes and it came in on December 18, 2015. And where was price then? Near $1060 and the absolute bottom of the 2012-2015 bear market. From that point, price soared nearly 30% in 6 months and the GLD “inventory” rose with it from 630.17 mts on December 17, 2015 to that July 5, 2016 peak noted above at 982.72 mts.

At any rate, we hope that by now you realize that, in the end, anyone holding anything but true physical gold is going to be left holding the bag when this entire paper charade system comes crashing down. Just yesterday, even the criminals at TungstenmanSachs admitted as such. Be sure to see this link though the money shot is pasted below: http://www.zerohedge.com/news/2017-09-05/using-gold-hedge-korea-nuclear-war-risk-how-do-it-according-goldman

Today is a day of relative market calm before the dual storms of Irma and Kim rear their ugly heads again later this week. Use this time to prepare wisely and accordingly.

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Economy

The $2.4 Trillion Hidden “Fed Tax”

Jerome Powell’s support for the Federal Reserve’s low interest rate regime has long benefited investors, who reacted favorably to news that he would be Donald Trump’s nominee as its new chair.

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Jerome Powell’s support for the Federal Reserve’s low interest rate regime has long benefited investors, who reacted favorably to news that he would be Donald Trump’s nominee as its new chair.

Economists argue that those “unconventional monetary policies” helped the US economy avert a major depression following the 2008 financial crisis and have kept it afloat since then.

However, we couldn’t however find a single estimate of the costs of those policies.



That should come as no surprise. Free market economists have been essentially banned from academia, governments and the banking system, all of whom have a direct interest in masking the costs of public sector involvement in the economy.

So we did a “back of the envelope” calculation on our own, which suggests that ongoing Fed market manipulations equate to a $2.4 trillion annual wealth distribution from savers to borrowers.

The rest of this article is technical, and relates to the calculation of these distortions, which we refer to as the “Fed Tax”, and which the new Fed governor may, or may not address during his mandate.

However, the key takeaway for most readers is that this wealth redistribution (12.9% of GDP, almost as much as the $2.6 trillion Americans will pay in personal income taxes this year) is significantly hiding the scale of the US government’s involvement in the economy.

This in turn is making it impossible for policy-makers, researchers and voters to measure the costs and benefits of these wealth transfers.

*****

First a word of caution. These calculations were made on the back of an envelope, in a Montreal basement, by a non-economist.

As such, although we believe $2.4 trillion to be a useful working estimate of the Fed-managed annual wealth transfer from US savers to borrowers, considerable refinement and nuance is needed to come up with a more precise result.

Readers who have better ideas regarding methodology are invited to contact the writer or to comment below.

To determine the scale of Federal Reserve’s hidden manipulations we start by estimating what interest rates would be in a free market* and then we subtract the level they are at are right now.

We then multiply the difference (which equates to how much interest rates are being suppressed) by all outstanding debt in the US economy. **

*****



As we noted in a recent article, history suggests that the Fed’s and US government’s current interventions, could be depressing interest rates by at least 5.0 percentage points across the yield curve.

To get an idea of where interests rates would be in a free market environment (with a currency backed by gold and little inflation, credit risk or taxes on the interest), we cite the example of British consuls. As Richard Sylla and Sydney Homer note in their magisterial work A History of Interest Rates, consuls were perpetual bonds that yielded between 2.5% and 3%*** during much of the 100+ years that the British Empire was at its peak.

To give an idea of what 30-year US Treasuries (which have similar long-duration characteristics as British Consuls) would trade for in a free market, you’d start with the level their current yields are at (approximately 3%)**** in today’s managed economy.

You would add an inflation compensation premium (say 2%+, which investors would surely demand if there was no Fed money printing to buy up excess debt), a risk premium to account for the US government economy’s current record debt levels (of at least 1%) and compensation because interest payments are currently taxable (at a marginal rate of say 2% percentage points, or 25%), which they were not during the time of the British Consuls.

So, a theoretical minimum US Treasury yield in a free market environment under rough current economic conditions would be 3% + 2% + 1% + 2% = 8%.

This suggests that Fed manipulations are currently depressing yields on US 30-year Treasuries by 5 percentage points (8% – 3%) throughout the yield curve.

If we apply that rate to all $47.9 trillion in US non-financial debt, as per the Fed’s second quarter Z.1 Flow of Funds report, that suggests that government manipulations are transferring $2.4 trillion each year from savers to borrowers.

*****

Footnotes:

* Estimation of a free market rate of interest (which would vary depending in part on how much inflation, credit risk and taxation there is in the system) implies a free US currency market. This would put constraints on the Fed’s ability to tax savers by printing money, because if they did so, savers would abandon the dollar and instead opt for alternate, sounder currencies.

This rate should in no way be confused with Knut Wicksell’s “natural” rate of interest (which refers to an economy with stable prices) or the Federal Reserve’s “neutral” rate of interest (which refers to a rate that neither is neither expansionary or contractionary in an economy with 2% inflation).



** We assume that the interest rate distortions will occur throughout the yield curve.

*** We use gross, rounded approximations in this estimate, to make the calculation easier for the laymen to grasp.

**** We are rounding here. Actual rates on the day of this was written were 2.8%, the
approximate mid-point of the rough 2.5% -3%, range of the British consuls during minimal inflation and sovereign risk periods.

Questions or comments about this article? Leave your thoughts HERE.

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Economy

The Yield Curve Hasn’t Been This Flat In 10 Years. Recession Ahead?

Whenever we see an inverted yield curve, a recession almost always follows, and that is why many analysts are deeply concerned that the yield curve is currently the flattest that it has been in about a decade.

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Whenever we see an inverted yield curve, a recession almost always follows, and that is why many analysts are deeply concerned that the yield curve is currently the flattest that it has been in about a decade. In other words, according to one of the most reliable indicators that we have, we are closer to another recession than we have been at any point since the last financial crisis.

And when you combine this with all of the other indicators that are screaming that a new crisis is on the horizon, a very troubling picture emerges. Hopefully this will turn out to be a false alarm, but it is looking more and more like big economic trouble is coming in 2018.

The professionals on Wall Street take the yield curve very, very seriously, and the fact that it has gotten so flat has many of them extremely concerned. The following comes from Business Insider

In the past, including before the Great Recession of 2007-2009, an inverted yield curve, where long-term interest rates fall below their short-term counterparts, has been a reliable predictor of recessions. The bond market is not there yet, but a sharp recent flattening of the yield curve has many in the markets watchful and concerned.

The US yield curve is now at its flattest in about 10 years — in other words, since around the time a major credit crunch of was gaining steam. The gap between two-year note yields and their 10-year counterparts has shrunk to just 0.63 percentage point, the narrowest since November 2007.

If the yield curve continues to get even flatter, it will spark widespread selling on Wall Street, and if it actually inverts, that will could set off total panic.

And with each passing day, even more “experts” are warning of imminent market trouble. For example, just consider what Art Cashin told CNBC the other day…

Investors may want to take cover soon.

Art Cashin, UBS’ director of floor operations at the New York Stock Exchange, says a “split personality” is manifesting itself in the stock market, and it could hit Wall Street where it hurts at any moment.

“We’ve been setting record new highs, and often the breadth has been negative. We’ve had more declines than advances,” Cashin said Thursday on CNBC’s “Futures Now.”

When the financial markets finally do crash, it won’t exactly be a surprise.

In fact, we are way, way overdue for financial disaster.

Since the last financial crisis, we have been on the greatest debt binge in human history. U.S. government debt has gone from $10 trillion to $20 trillion, corporate debt has doubled, and U.S. consumer debt has now risen to nearly $13 trillion.

Debt brings consumption from the future into the present, and so it increases short-term economic activity at the expense of long-term financial health.

But we simply cannot continue to grow debt much, much faster than the overall economy is growing. I have never talked to anyone that believes that our debt binge is sustainable, and I doubt that I ever will.

The only reason why we have even gotten this far is because interest rates have been pushed to historically low levels. If the average rate of interest on U.S. government debt even returned to the long-term average, we would be paying more than a trillion dollars a year in interest on the national debt and the game would be over. Unprecedented intervention by the Federal Reserve and other global central banks has pushed interest rates way below the real rate of inflation, and that has bought us extra time.

But now the Federal Reserve and other global central banks are reversing course in unison, and global financial markets are already starting to decline.

The only way we can keep putting off the next financial crisis is if we continue our unprecedented debt binge and if global central banks continue to artificially prop up the financial markets.

Of course more debt and more central bank manipulation would just make the eventual financial disaster even worse, but that is what we are faced with at this point.

Most people simply don’t understand the gravity of the situation. Nothing was ever fixed after the last financial crisis. Instead, we went on the greatest debt binge that humanity has ever seen, and central banks started creating trillions of dollars out of thin air and recklessly injected that hot money into the financial system.

So now we are in the terminal phase of the largest financial bubble in human history, and there is no easy way out.

We basically have two choices. We can have a horrific financial crisis now, or we can have one a little bit later.

Usually the choice is “later”, and that is why our leaders have been piling on the debt and global central banks have been recklessly creating money.

But it is inevitable that our bad choices will catch up with us eventually, and when that happens the pain that we are going to experience is going to be absolutely off the charts.

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Economy

Is Financial Argmageddon Bullish For Stocks? One Bank’s Surprising Answer

Everyone knows that after nearly a decade of capital markets central planning by the world’s central banks, “good news is bad news.”

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Everyone knows that after nearly a decade of capital markets central planning by the world’s central banks, “good news is bad news.” But did you also know that financial armageddon has become the most bullish catalyst to buy stocks? That’s the understated take-home message from the year ahead preview by Macquarie’s Viktor Shvets published last week. It is also the conclusion that One River Asset Management’s Eric Peters reached in his latest weekend notes.

While we will have much more to comment on Macquarie’s rather macabre 2018 preview, which is arguably one of the most honest, comprehensive, and objective predictions of what to expect from the “central bank/market confidence boosting nexus”, we will highlight the one argument that has served to promote countless BTFD algo-driven stock rips, summarized in the following blurb, which is a sublime explanation by Viktor Shvets the worst things are, the more you should buy:

If volatilities jump, CBs would need to reset the ‘background picture’. The challenge is that even with the best of intentions, the process is far from automatic, and hence there could be months of extended volatility (a la Dec’15-Feb’16). If one ignores shorter-term aberrations, we maintain that there is no alternative to policies that have been pursued since 1980s of deliberately suppressing and managing business and capital market cycles. [T]his implies that a relatively pleasant ‘Kondratieff autumn’ (characterized by inability to raise cost of capital against a background of constrained but positive growth and inflation rates) is likely to endure. Indeed, two generations of investors grew up knowing nothing else. They have never experienced either scorching summers or freezing winters, as public sector refused to allow debt repudiation, deleveraging or clearance of excesses. Although this cannot last forever, there is no reason to believe that the end of the road would necessarily occur in 2018 or 2019. It is true that policy risks are more heightened but so is policy recognition of dangers.

We therefore remain constructive on financial assets (as we have been for quite some time), not because we believe in a sustainable and private sector-led recovery but rather because we do not believe in one, and thus we do not see any viable alternatives to an ongoing financialization, which needs to be facilitated through excess liquidity, and avoiding proper price and risk discovery, and thus avoiding asset price volatilities.

Translation: central banks remain trapped by the mountain-sized bubble they have blown with years of QE and ZIRP/NIRP, and once volatility returns, and risk assets plunge, CBs will have no choice but to scramble right back and prevent the pyramid from keeling over and undoing a decade of fake “wealth creation” which was pulled from the future to the tune of $15 trillion in central bank asset purchases, which while still rising is about to go into reverse in just over a year’s time. 

If that’s not enough, here is One River’s Eric Peters, with the exact same conclusion:

Anecdote

“The market has an accident, the Fed returns to QE, slashes interest rates, bonds surge, stocks recover,” said the CIO, high atop his prodigious pile, alone. Staring into the distance. Squinting, straining.

“The correlation between bonds and equities remains negative, the risk parity equity/bond portfolios are dented but not destroyed. And we descend to the next lower level in real interest rates. US bond yields turn negative. In essence, we prolong the paradigm that has driven markets for a few decades.”

Far below, economies hummed in harmony, capitalists collecting their expanding share. “A continuation of this paradigm is what everyone believes. And I just doubt that outcome so sincerely.” Hidden within the distant economic whir, labor strived, struggled. Their wage growth anemic, their children indebted, career prospects uncertain.

“It has taken time, but the political context for a regime shift is now established; populism is evident in recent elections. And the academic context for a seismic economic policy shift is in place too.”

The extraordinary response to the global financial crisis prevented depression. But the price of salvation is proving to be as profound as it is impossible to precisely measure — unexpected election outcomes, political paralysis, an isolationist America, de-globalization, fake news, opioid epidemics.

And connecting it all, a corrosive, woven thread; injustice, unfairness, inequality, hypocrisy, distrust, endemic, growing. “We are on the cusp of great change, the old paradigm is set to shift,” he said, at altitude, the air crisp, clear.

“The market has an accident, monetary policy is seen to be bust, the models have been wrong, we have to change what we do, we can’t go down the same route, we need to move to a different policy mix. Fiscal expansion, infrastructure, labor over capital. We’re moving to something that may be great for the economy, but no good for asset markets. New Regime — end of story.”

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