3 Ways to Quantify Risk in Today’s Murky Markets

Credit Indicators One way to calculate market risk is through bond yields. As risk and return are directly correlated when a bond’s yield rises, it implies the risk of owning it has increased. The main vehicle for measuring risk through yield is the US 10-year Treasury. The 10-year is the bellwether for global bonds as it’s considered a “risk-free” instrument. Since hitting all-time lows in July 2016, its yield has shot up 50%.
The Market Oracle

Penny Costs 1.5 Cents to Make in 2016, Nickel Costs 6.32 Cents; US Mint Realizes $578.7M in Seigniorage

The overall price of producing U.S. circulating coins fell for a fifth straight year even as the cost of making cents and nickels remained above their face values for an eleventh year in a row, the…

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Coin News

Batboy Teaches Buffett a Lesson

This article originally was published here: https://www.wealthdaily.com/articles/batboy-teaches-buffett-a-lesson/8529

You’ve never heard of Eddie Bennett before today.

But I’m going to fill you in on a little secret of his that you can use to take advantage of Wall Street, then spend the rest of your free time working on your golf game.

I’m not kidding.

And if you think Eddie was an investment guru, think again.

Truth is, he probably couldn’t have told you the difference between a stock certificate and a diploma. He didn’t attend an Ivy League college, and he probably never had more than a grade-school education.

Instead, Eddie was smart — street smart — and it was directly connected to Major League Baseball.

No, he never played the field or even stepped up to the plate, yet the teams he was on went to win league titles and even the World Series. Eddie was attributed a share of the winnings when the New York Yankees won the World Series in 1927.

You see, Eddie was a batboy… the kid who lugged around the bats, picked up gloves, and did everything the players asked him to do.

Eddie’s genius, however, was that he was able to spot winners and stick with them.

And it’s easy for you to do the same right now…

In his 2002 letter to shareholders, Warren Buffett wrote about Eddie Bennett, who started as a batboy for the Chicago White Sox in 1919, the year they went to the World Series.

Eddie then switched to the Brooklyn Dodgers, and they too went on to win their league title. He then moved on to the New York Yankees in 1921.

Over the next seven years, the Yankees won five American League titles. In 1927, players such as Babe Ruth and Lou Gehrig voted for him to receive a share of their World Series winnings.

Buffett said that the lesson is not how Eddie lugged bats, but “what counted instead was hooking up with the cream of those on the playing field. It’s simple — to be a winner, work with winners.”

Hooking Up with Winners

Imagine it’s 1956 and you heard about this guy in Omaha, Nebraska who works out of a tiny study that can only be entered by passing through his bedroom. He stays home all day and works in socks.

But this guy is smart — really smart.

Since a few of your friends already vouched for him, you give him $ 10,000… and then go back to do whatever you were doing five minutes before you heard of him.

Now, fast forward to 2016…

Your $ 10,000 investment would now be worth more than $ 300 million.

The “odd guy” from Omaha was Warren Buffett, and if you met him in the early days of his career, you would’ve hit the jackpot.

And yet, there are a whole bunch of “Berkshire Billionaires” living in Omaha, Nebraska who did invest with Buffett.

Now, the biggest decisions they make are whether they should donate $ 100 million to a hospital, fund medical research, build a new wing for a local college… or do all of those things!

Investors such as Buffett come around once in a lifetime, but there are a handful of great investors who are knocking the lights out right now.

In order to take advantage of the “Bennett Investment Approach,” you don’t have to know much about financial statements, interest rates, or the annual GDP — all you need to do is:

  1. Find an excellent manager…
  2. Invest in their companies…
  3. Reap the rewards…
  4. Repeat.

That’s it… Doesn’t sound too difficult, does it?

One of the best-kept secrets on Wall Street is that it’s actually simple to beat the market, or even the insiders who prey off of individual investors.

And my readers and I have seen it work hundreds of times with our own eyes!

Look, let me boil it down like this…

You want to find an investment that fits into the time-tested principle of putting your money on a highly successful “jockey” rather than a horse.

History has shown us that these “jockey” investments — think of legendary managers at the helm of mammoth companies like Walmart and Amazon — can result in unprecedented payoffs.

In my advisory service, Hidden Values Alert, I find companies that have excellent jockeys… and are selling for pennies on the dollar.

I recently found a group of “blue collar” investors who have made millions by using this same approach.

Click here to see how, working in their spare time, and off their kitchen tables, they’ve been able to amass huge fortunes investing with great jockeys.

All my best,

Charles Mizrahi signature

Charles Mizrahi

Twitter: @IWPeditor

Charles cut his chops on the trading floor of the New York Futures Exchange before moving on to become a wildly successful money manager on Wall Street.

And with more than 30 years of recommending stocks under his belt, Charles has knocked the cover off the ball, compiling an amazing record of success and posting gain after gain for his loyal readers. He is the editor of Hidden Values Alert and the Inevitable Wealth Portfolio newsletters.

Charles is also the author of the highly acclaimed book, Getting Started in Value Investing.

This article originally was published here: https://www.wealthdaily.com/articles/batboy-teaches-buffett-a-lesson/8529

Batboy Teaches Buffett a Lesson originally appeared in Wealth Daily. Fortune Favors the Bold

Wealth Daily

The Gold and Silver Mine: 2017 coins celebrate Lions Club, Boys Town, American diversity – Shore News Today

Shore News Today

The Gold and Silver Mine: 2017 coins celebrate Lions Club, Boys Town, American diversity
Shore News Today
As usual the is no shortage of products being offered, and although I have cautioned about buying from the mint from an investment standpoint, if you are a collector who just wants some special coins for your collection, this is the way to go. It's

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View full post on coin collecting investment – Google News

“Unimaginable Radiation Levels”: Robot Probing Melted Core at Fukushima Shuts Down Under Pressure

24hGold.com RSS Feed – 24hGold Editorials and commentaries

US Dollar and Gold Battle of the Cycles

Nothing has changed from my last post on this pair. I mentioned we should expect some backtesting and that is what I am seeing on the charts. This should be expected, IMO as both are at a key inflection point in their longer Intermediate Cycles and the battle is on. https://surfcity.co/2017/02/15/usd-and-gold-update/
The Market Oracle

Checking his change since 1955

I received an email the other day from someone who says he has been a collector since 1955.

That is a long time. I hope he has enjoyed it.

The contents of the email give me the opportunity to stand on my soapbox again to make a point that applies to everyone.

He writes, “I have been collecting coins since 1955, especially pennies. I have pennies from 1940 to present. Looking for the best way to sell  the coins, but I do not have an idea who and where to go. If you could give me some advice, I’ll appreciate it.”

The date he chooses, 1940, just happened to be the end date of one of the first Whitman albums I had as a kid. My very first one was for cents 1941 to date.

Obviously, more than 50 years later, a large number of new dates and mintmark have been added to the Lincoln series.

I sent him a reply including the name of a dealer who should be willing to speak with him or communicate with him by email.

However, I did not beat about the bush with the bad news.

“I do not have good news for you. Unless these pennies are in Mint-State-60 and higher grades and are slabbed, they are probably worth mostly face value. The exceptions would be if you have the doubled dies, 1955, 1972, 1983, 1984 and 1995. Even in circulated grades the doubled  dies are valuable.”

Because he did not tell me what else he might have collected in the last 62 years, I added this:

“Circulated modern silver coins are worth about 12 times face value with scarce dates and Mint State coins worth more.

I hope he has more and will be satisfied with their value.

It is certainly an unhappy possibility that he will be told simply to take his cents to the bank.

But that brings me to  my other point.

Every collector, and I do mean every collector, needs to make contact with dealers from time to time.

Collectors need to learn what they will pay for their coins and how to go about selling them.

Sell off some duplicates from time to time, or a set that you’ve lost interest in.

Do not wait until you need to sell before you begin looking around.

Numismatics is a beautiful hobby. But learn how to end it beautifully before you absolutely have to.

Buzz blogger Dave Harper has twice won the Numismatic Literary Guild Award for Best Blog and is editor of the weekly newspaper “Numismatic News.”

• Like this blog? Read more by subscribing to Numismatic News.

The post Checking his change since 1955 appeared first on Numismatic News.

Buzz – Numismatic News

Gold and Silver in 63 languages

24hGold.com RSS Feed – 24hGold Editorials and commentaries

Here’s How to Stay Ahead of Machines and AI

BY PATRICK WATSON : The Great American Jobs Apocalypse continues to tear our social fabric, and no one really knows what to do about it. If you’re not unemployed or underemployed now, then you know someone who is… and you could always be next. I keep coming back to this theme in Connecting the Dots (subscribe here for free). That’s because it’s a monumental, paradigm-changing problem, and it affects all of us.
The Market Oracle

Trumps ISIS Plan: Another US Invasion?

24hGold.com RSS Feed – 24hGold Editorials and commentaries

2 Stocks to Consider to Invest in a Renewable Energy Future … – Madison.com

2 Stocks to Consider to Invest in a Renewable Energy Future …
Industry Focus: Financials host Gaby Lapera's resolution for the New Year was to buy at least five stocks this year, one from each sector on the Industry Focus …

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Brent Crude Oil Price Technical Update: Low Volatility Leads to High Volatility

Since our last update on oil two months ago (Dec. 22, 2016) Brent Crude has not gone far, rising approximately 2.4% from 54.82 to 56.16 today. During this time it has traded within a relatively tight range (low volatility), from around a low of 53.61 to a high of 58.35. The chart pattern that has formed in the past two months is either a bullish symmetrical triangle trend continuation pattern or a bearish head and shoulders top. Whichever way the breakout goes should confirm the next direction, either a continuation higher of the 13-month uptrend, or a deeper retracement off the 58.35 high.
The Market Oracle

Stock Market Lindsay’s 107-day Interval

George Lindsay wrote of a 107-day interval which he used as a confirming tool for finding highs in the Dow. Like all of Lindsay’s models, this one was not to be used in isolation – a common mistake made by those familiar with his most popular model – Three Peaks and a Domed House.
The Market Oracle

Trump’s Tax System Could Spark The Wave Of Self-Employment

Government is necessary. That means we have to pay for the things government does. Hence, we have taxes. The goal of tax policy should be simple: raise the required revenue to pay for whatever government actually—minimally—needs to do. And government should do those things as fairly and neutrally as possible.
The Market Oracle

Will California Screw Cannabis Investors?

This article originally was published here: https://www.wealthdaily.com/articles/will-california-screw-cannabis-investors/8528

There’s a rumor going around that the state of California may not be ready to collect taxes from adult-use cannabis next year.

Last week, state Senator Mike McGuire said that when it comes to the state’s cultivation tax collection system, they will not be ready on day one.

I can think of no better example of the ineffectiveness of the state than this.

The government makes money, primarily, through theft (crossout) taxation.

Now, new taxes that will end up helping the Golden State generate revenues in excess of $ 1 billion, may not be properly collected because the state may not be ready to collect those taxes.

kdftLet me tell you something …

In the private sector, if you have a company that’s about to generate more than $ 1 billion in revenue, rest assured, procedures would be in place to get that money from day one.

Nothing good can come from this

Don’t get me wrong. I’m pleased that voters in California decided that prohibition is a fool’s errand.

With adult-use cannabis prohibition lifted, the good people of California are about to have a tremendous opportunity to strengthen local economies and generate thousands of new jobs. But I have to say, this idea that the state is not ready to properly profit from legalization is absurd and frustrating.

You see, I love the idea that the state could be unable to collect its tribute from day one. But I don’t love the scenario where officials are going to have to chase down their cash. Nothing good can come from this. It’s going to cause confusion and mistakes that I can assure you will not benefit the hard-working folks of this industry.

The people of California overwhelmingly voted to lift the folly of prohibition. Now it is the government’s responsibility to ensure that this happens within a reasonable time, and without placing further burdens on the industry.

A lot of money is at stake here. Not just for the state, but for investors that are pouring hundreds of millions of dollars into this industry.

Of course, as a legal cannabis investor, I’m not particularly deterred by this recent announcement. Truth is, even if the state does fumble the ball early on, rest-assured, it will find a way to get its money. No institution is better at collecting cash than the government.

So if you’re investing in the California cannabis industry, don’t let this minor hiccup dissuade you from what’s at stake here: A once-in-a-lifetime opportunity to profit from what will prove to be one of the greatest investment opportunities of the 21st century.

This article originally was published here: https://www.wealthdaily.com/articles/will-california-screw-cannabis-investors/8528

Will California Screw Cannabis Investors? originally appeared in Wealth Daily. Fortune Favors the Bold

Wealth Daily

New five pound note: Check which serial numbers are most valuable – The Week UK

The Week UK

New five pound note: Check which serial numbers are most valuable
The Week UK
Those who want to make money on their coin collection will need to invest in truly rare coins, including some minted by mistake. "The most valuable British coin is the Gold Double Leopard from the reign of Edward III in 1344," says the website. "Only

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View full post on coin collecting investment – Google News

The Eurozone isn’t Working … Warns Greenspan, Buy Gold

“The eurozone isn’t working …” warns Greenspan “I view gold as the primary global currency” said Greenspan “Significant increases in inflation will ultimately increase the price of gold” “Investment in gold now is insurance…”

Alan Greenspan, the former head of the Federal Reserve has warned that the euro may collapse, saying that he has “grave concerns” about its future.

The imbalances in the economic strength of euro area countries make the continued function of the single currency area a primary concern, said former US Federal Reserve chairman Alan Greenspan in an interview (February issue of “Gold Investor”) with the World Gold Council.

He suggests the inequality is largely down to a north/south geographical divide which means the division between the northern and southern EU countries is too big. The bloc’s more prosperous nations such as Germany consistently fund the deficits of those in the south, and that simply can’t go on, said Greenspan.

“The European Central Bank (ECB) has greater problems than the Federal Reserve. The asset side of the ECB’s balance sheet is larger than ever before, having grown steadily since Mario Draghi said he would do whatever it took to preserve the euro,” he said.

“And I have grave concerns about the future of the euro itself… The eurozone is not working”, added Greenspan.

Greenspan, chairman of the Federal Reserve from 1987 and 2006 has consistently been critical of the eurozone and the European Monetary Union (EMU). He has long maintained that the eurozone was doomed to fail because the impact of the divergent cultures and economies in the bloc has been grossly underestimated.

Greece is currently in the midst of yet another financial crisis with withdrawals from bank accounts and new bank runs indicating the public is preparing for a crash. Meanwhile Europe’s oldest bank, Banca Monte dei Paschi di Siena, in Italy is on the verge of bankruptcy and needs another bail out to survive.

Even Germany’s largest lender Deutsche Bank is facing a crisis of gargantuan proportions as it struggles with its shadow banking assets book which is plagued with non performing loans (NPLs).

Ireland, Spain and Portugal face their own economic challenges and many are doubtful whether there can be any meaningful recovery given the scale of the national debt and total debt burden in the periphery euro nations.

Mr Greenspan said Brexit will almost certainly trigger a collapse of the ECB despite the UK not having adopted the euro:

“Brexit is not the end of the set of problems, which I always thought were going to start with the euro because the euro is a very serious problem.”

Mr Greenspan says that investors are diversifying into precious metals and increasingly seeking to buy gold, because there is a deepening lack of trust in the euro and in the banking system.

The former Fed chair, correctly pointed out that investment in gold now is insurance; and it’s not for short-term gain, but for long-term protection:

“Significant increases in inflation will ultimately increase the price of gold. Investment in gold now is insurance…” advised Greenspan.

Given the increasing uncertainty regarding the economic outlook, many investors internationally are now considering how to buy gold for the first time. A prudent diversification into non bank, non digital, physical gold will protect and grow their wealth in the coming years.

“Gold Investor” with the World Gold Council can be accessed here

The Market Oracle

Is a Structured Capital Strategy Right for You?

I received a question from Wealth Daily reader Garland W.:

What can you tell us about Structured Capital Strategies (us.axa.com)
Wealth adviser ask me to look at:
A) Structured investment option
B) Variable investment option

Seems to be something that allows you protection with an upside and downside margin.
Please comment.

It seems retirement saving just gets more and more complex. Firms continue to come up with new products to sell to people saving for retirement.

Before I get into the nitty-gritty here, please understand that I use the words “product” and “sell” deliberately. Because this isn’t a case where you’re putting your money with a manager whose job is to grow it over time. With annuities (and a Structured Capital Strategy is a type of annuity), you are buying a product. And the company is trying to make money from selling the product.

Now, any time a company is selling a product, it’s going to try to make it sound as good as possible. This is Marketing 101.

And please note that annuities are sold by insurance companies. And I think we all know the insurance company business model: They take in money on the promise of some sort of payment in the future. Their goal is to invest in that money and make more on it than they will have to pay out.

So when you buy car insurance, you give them a steady stream of cash that they invest. Insurance companies are very good with statistics. They know exactly what the probabilities are that you will get in a wreck.

These probabilities don’t really change. So they know what their potential liabilities are. And they know what they can make by investing in bonds. All they have to do is make sure their investment returns more than they pay out, and they make money.

Warren Buffett’s first investment was a textile company called Berkshire Hathaway in 1965. Two years later he bought an insurance company. In the mid-1990s, he bought GEICO.

Buffett loves insurance because, as he’s said, the “cost of capital is practically zero.” As I said earlier, insurance companies take in money for the promise that they will pay it out again later. Then they invest that money, all the while taking in more money.

Buffett’s big secret is that he used the cash coming in to buy more businesses, instead of simply buying Treasury bonds like most insurance companies do. Insurance premiums from policyholders have provided a steady stream of investment capital that has helped Buffett build an empire.

Anyway, enough with the history lesson…

Is It Right for You? 

My point in explaining all this is so we can be perfectly clear that an annuity, or a Structured Capital Strategy, is basically no different than any insurance policy. The people who will sell you these products are not economists, or stock analysts, or fund managers. They might be Registered Investment Advisors, which means they act as fiduciaries, obligated to put your interests above their own.

But they may simply be wealth advisors, which is just another way of saying broker or salesman. These folks are NOT required to place your interests above their own. They can basically sell you whatever they can convince you to buy. I strongly advise you to find out whether you are talking to a fiduciary or a salesman. Google the name, or ask the individual directly. You might save yourself a bundle in commissions.

I know, nearly 600 words and I haven’t even scratched the surface of what a Structured Capital Strategy is. So let’s get to that…

A Structured Capital Strategy is a type of annuity that promises you some stock market exposure, while at the same time offering you some guaranteed protection against losses. We hear this and we think, “Oh great, I get the upside, but not the downside! Sign me up!”

Of course, it’s not that simple. Two things to cover here: the upside/downside provisions, and exactly what stock market exposure means.

When we hear “stock market exposure,” we tend to think that some or all of the money is invested into actual stocks. That is not what’s going on here. With a Structured Capital Strategy, your money is put into various investments that seek to replicate a benchmark that the insurance company also creates. It’s a little like indexing. So, you can link your performance to gold. Or to the S&P 500. Or small-cap stocks or oil.

I know, it sounds misleading and complicated. But it’s not really that big of a deal. If the S&P 500 goes up 10%, and their benchmark goes up 9.5%, it’s hard to get too upset about that.

The bigger issue is how the upside potential and downside protection work…

Give a Little, Get a Little 

With a Structured Capital Strategy, you get to choose, or structure, how you want your protection and upside to be. And here’s the thing: to get more upside potential, you have to give up downside protection. And vice versa.

Now, some of these Structured Capital Strategy products will offer you downside protection of 10%, 20%, or 30%. Say you take 30%. The benchmark you choose to track falls 30%. You lose nothing. You get all your principle back when the annuity matures. But if you choose the max downside protection, you certainly aren’t going to be allowed to take the max upside, too. You have to give something to get something.

So let’s say that, along with the 30% downside protection, you’re only allowed to get 10% upside. If whatever your benchmark is goes up 8%, you get the 8%. If you’re benchmark goes up 20%, you’re capped at 10%.

So far so good, right? 10% is pretty good. 30% downside protection is really good…

Unfortunately, we haven’t talked about time yet. And time happens to always be the single most important aspect of any investment. The insurance company knows this. You need to know it, too…

I checked out the AXA website and read up on their Structured Capital Strategy products. Let’s have a look at some fine print:

Keep in mind, once your money is invested in a segment, you cannot transfer from the segment into another investment option until segment maturity.

The segment start date is also the same day the segment’s performance cap rate is set by AXA. The performance cap rate is the ceiling on the segment’s rate of return. For example, if the index rate of return is 22% and the performance cap rate is 20%, your actual segment rate of return would be 20%.

Because the performance cap rate will not be known until your money is transferred into a segment, which means you will not know in advance the upper limit on the return, you may set a performance cap threshold. Simply stated, the performance cap threshold is the minimum cap you require of a segment before investing in it. If your performance cap threshold is higher than the segment’s performance cap rate, your money will continue to be held in the segment type holding account until it is met or the entire account value is transferred out of the Segment Type Holding Account.

Segment means the same thing as benchmark. But please note: once your money is in one of these segments, you cannot move it to another segment. You can withdraw it, and there will be penalties. But you can’t move it. So if you’re in the S&P 500 and the market tanks, you suck it up or pay the penalty.

I don’t really like that. If you simply own an index fund, you can buy or sell it whenever you want. Still, there’s an even bigger problem…

Is Time on Your Side?

So, that fine print is pretty tricky. AXA offers Structured Capital Strategy products in one-year, three-year, and five-year time frames. You can choose your downside protection, but you don’t know what the upside is until your money is in there. That’s kind of crappy. So is the blind auction of setting your performance cap and then finding out later which segment/benchmark your money went into.

Let’s assume a best-case scenario, where you get into the five-year S&P 500 benchmark. You take your 30% protection, and they give you a 20% performance cap. I think it’s highly unlikely that you’d get 20% while also being protected from 30% losses, but what the heck, this is an example.

That’s a solid 20% gain — over five years. You know what that works out to? 4.4% a year. That’s really not so great. Especially when you consider that a simple S&P 500 index fund averages about twice that. And even more so when you consider how well stocks have performed since 2009. (Of course, just because stocks have done so well doesn’t mean they will continue to do well. My point is, there is opportunity cost if you’re locked in at 4.4%, when you could be making 10%, and, well, that hurts.)

Now, I understand that the downside protection is an attractive feature. Nobody wants to lose money. And if you’re already retired, it’s even more important. And it’s for that reason that I can’t tell you to simply avoid this type of investment product. It would be irresponsible of me to advise you on your investment decisions without knowing the whole story.

My point with all this has been to sift through the marketing language and get to the meat of what a Structured Capital Strategy product really is, and why insurance companies created them.

On a personal level, I will tell you that I prefer index funds and dividend funds because of the flexibility they give you. I do not like the idea of having my money basically stuck with one company for five years. I am also not clear on what the fees for Structured Capital Strategy products are. This is also a huge concern. If you can only earn 4.4% a year, and fees are 1%, you’re barely beating inflation.

Wealth Daily

Quartermasters of Inflation

Quartermasters of Inflation

That central bankers are the quartermasters of inflation is no longer a controversial assertion. That much was admitted by central banker Alan Greenspan in his speech before the Economic Club of New York on December 19, 2002 (see: www.federalreserve.gov/BoardDocs). He observed that as long as the gold standard was in charge of money-creation the price level was relatively stable. For example, in 1929 it was hardly different from that in 1800. But, after gold was banned and central bankers were put in charge in 1933, the consumer price index nearly doubled in two decades. And in the four decades after that prices quintupled. In other words, under the watch of the gold standard the dollar preserved its purchasing power for a period of one and one third of a century, but under the watch of the central bankers it managed to lose 90 percent of it in half of that time-period.

The Specter of Deflation

Presently the specter of deflation is haunting the world, so much so that central banker Ben Bernanke felt obliged to address the problem in a speech before the National Economists Club in Washington, D.C., on November 21, 2002 (see: www.federalreserve.gov/BoardDocs). He presented a simplistic view of deflation defining it as a general decline in prices. Actually, it would be more accurate to say that deflation manifests itself through a general decline in prices and interest rates. Mr. Bernanke identified the source of deflation as a collapse in aggregate demand — a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Of course, this is the view of an unreconstructed Keynesian. But Keynesianism has been brain-dead for some three decades, so we ought to feel emancipated from its tyranny. We identify the source of deflation as reluctance of producers to take the loans that bankers try to push on them through ongoing interest-rate cuts. Uncharacteristically, producers are pessimistic about future profit opportunities. Instead of contracting new debt, they scramble to get out of the old, and try to retrench by reducing inventory.

Guided Tour of the Star Chamber

Messrs. Greenspan and Bernanke claim that the Federal Reserve has the situation firmly in hand. If deflation were to develop, options for aggressive monetary policy response such as lowering interest rates are available. They admit that the zero lower bound on nominal interest rates presents a problem. Even if debtors were able to refinance loans at zero nominal interest, they may still feel excruciating economic pain caused by high and rising real rates due to the falling price level, as shown by their deteriorating balance sheet. However, Messrs. Greenspan and Bernanke reassure us that monetary policy will never lose its ability to stimulate aggregate demand and the economy, zero interest notwithstanding.

Mr. Bernanke gives us a guided tour of the Star Chamber, showing all the instruments of torture and explaining how they are to be used. The first of these is the printing press. Under a fiat money system the central bank generates inflation by this technology allowing it to create as many dollars as it wishes at essentially no cost. But it is not enough to create fiat money; you must also be able to put it into circulation or, at least, to make credible threats (sic!) to do so. Normally the Fed puts newly created fiat money into circulation through asset purchases. This particular torture instrument is used by the Fed to reduce the value of the dollar in terms of goods and services. Under a paper-money system a determined government and its central bank can always generate higher spending and induce positive inflation, we are told.

Pushing on a String

If this has the result of pushing short-term interest rates to zero, the Fed will still not be at the end of its rope. It can further stimulate aggregate spending by expanding the menu of assets that it buys. If we do fall into deflation, we can take comfort in the thought that “the logic of the printing press” will ultimately assert itself. Sufficient injections of new money must eventually reverse a deflation.

So what may the Fed do if its target rate, the overnight federal funds rate, has fallen to zero? Why, it will change the target, that’s what. It will stimulate spending by lowering interest rates further along the maturity spectrum. It will target the two-year rate by committing to make unlimited purchases of securities maturing in two years or less. But suppose that deflation is so stubborn that spending is not stimulated even as the two- year rate is pushed down to zero. Well, then change the target again, this time, say, to the ten-year rate, committing to make unlimited purchases of securities maturing in ten years or less. And so on, ad libitum. Mr. Bernanke says that lower rates over the entire maturity spectrum of public and private securities should strengthen aggregate demand “in the usual ways”, and thus help end deflation.

This betrays our central bankers’ ignorance of the nature of the beast. The Fed may be pushing on a string. People may refuse to spend the money in the “usual ways”. It is one thing to print fiat dollars, and another to make people spend them. No problem, Mr. Bernanke says. If lowering yields on longer-term securities proved insufficient to re- start spending, the Fed might next consider offering fixed-term loans to banks at zero interest, with a wide-range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.

Operation Helicopter-Drop

But the banks may not use the loans at zero interest in the way intended by the Fed. They may not want to make further loans to their clients whose prospects to turn a profit are dim at best. The banks may find it far more attractive to invest in bonds for the capital gains guaranteed by the central bank’s zero-interest policy. Business lethargy may not react to loans offered at ever lower rates. In this case Mr. Bernanke recommends the helicopter-drop of money, an idea first suggested by Milton Friedman. There must be a way to put fiat money into circulation, if not by hook then by crook! A broad-based tax- cut financed by open market purchases of securities by the Fed should do the trick. This “manna from heaven” should re-start spending. The Federal Reserve and other policymakers are far from helpless in the face of deflation, even if the rate of interest is already pushed all the way to zero.

Taking Risks out of Bond Speculation

All this talk is old hat, except for the fact that heretofore it hasn’t been considered polite behavior for central bankers to flaunt their authority to create fiat money in unlimited quantities, and to boast their power to drive down the value of the dollar in terms of goods and services. More interesting than what these gentlemen say is what they don’t say. They studiously avoid reference to the 100 trillion dollar behemoth: the interest-rate derivatives market, and to bond speculation. Derivatives are a tell-tale, revealing the big picture. Far from trying to prevent or to combat it, the Fed is promoting deflation. It does, in fact, act as the quartermaster of deflation. Every one of the torture instruments in the Star Chamber enumerated above is making deflation worse, not better.

What the $100 trillion derivatives market shows is that the main feature of deflation is the invisible but nonetheless real bull market in bonds. Nobody is talking about it, although the bull market in bonds that started in 1980 has been the largest of all bull markets of all kinds in all history. Fabulous fortunes have been made and will be made before it is over, thanks to the Fed that has taken the risk out of bond speculation.

The speeches of Messrs. Greenspan and Bernanke are the best example to demonstrate the charge. Speculators are told that the Fed is prepared to buy unlimited quantities of securities across the entire maturity spectrum. What is this if not an invitation to get aboard the bandwagon and share the ride to infinite riches? Come and get the bonds before we snap them up. Fear not, your investment is absolutely safe. Your friendly central banker has made bond speculation risk-free. He underwrites the unlimited capital gains you are going to make on your speculative bondholdings (or on your long positions on bond futures, or on your call options on bond futures). The figure $100 trillion shows the extent to which speculators have rallied to the call of the Pied Piper. It measures bets in the aggregate that speculators have made on ever-increasing bond prices or, what is the same to say, on ever falling interest rates.

Multiplying Asset Values a Thousand-fold

Of course, interest rates will never go to zero. They just keep getting halved. The yield on long-term Treasury bonds was 16% in 1980. It has been halved to 8% and will be halved again to 4%, according to the script of Messrs. Greenspan and Bernanke. After that the target at successive halvings will be: 2%, 1%, 0.5%, 0.25%, 0.125%, 0.0625%, etc. As you see, it never gets to 0%. Yet at each halving, the market value of the long-term bond will practically double. Suppose that in 1980 you invested $1,000 in a 30-year bond. Suppose further that the rate of interest would continue to be halved again and again. Your investment after each consecutive halving would increase in value to $2,000, $4,000, $8,000, $16,000, $32,000, $64,000, $128,000, $256,000, $512,000, $1,024,000, etc. On the top of that, by clipping coupons you would be reaping a nice income, too. Thus, as a rule of thumb, the value of your investment would be multiplied by a factor of 1,000 as the rate of interest fell to 0.03%. Although this result cannot be guaranteed, the downside risk is nil, thanks to Messrs. Greenspan and Bernanke. (My example is a simplification for purposes of illustration. In the actual case bond speculators may use strip bonds, and they may roll forward the maturity several times.)

Needless to say, bond speculators are very much alive to the risk-free opportunity to multiply the value of their assets 1,000-fold. Already they have amassed wealth greater than any group of speculators has ever done in history. Their combined financial resources exceed that of central banks and governments. Naturally, they have a vested interest, and the financial strength, to keep the merry-go-round going — and they will.

Essence of Deflation

The U.S. government may well be unconcerned about the fact that the liquidation-value of its debt is escalating 1,000-fold due to the falling interest-rate structure. After all, the Fed has the printing press to create dollars with which to liquidate any liability, however large. The producers are not so fortunate. They have to produce more and sell more if they want to get out of debt before maturity. Producing more and selling more in a falling interest-rate environment may not be possible, however. What this shows is that the essence of deflation is not falling prices. Rather, it is falling interest rates, being pushed down by bond speculation that has been made risk-free by the central bank. Falling interest rates bankrupt productive enterprise by rendering it unable to extricate itself from the clutches of debt contracted at higher rates. The debt becomes ever more onerous as its liquidation value threatens to increase 1,000-fold.

What these central bankers don’t understand is that, while they have the power to put unlimited amounts of fiat money into circulation, they have no power to make it flow in the “approved” direction. Money, like water, may refuse to flow uphill. In a deflation money shall not flow to the commodity market to bid up prices as central bankers hope that it will. Instead, it shall flow downhill to the bond market where the fun is, to bid up prices there. When the central bank makes bond speculation risk-free, then the bond market will act like a gigantic vacuum cleaner, sucking up dollars from every nook and cranny of the economy. In putting ever more fiat money into circulation the central bank cuts the figure of a cat chasing its own tail. More fiat money pushes interest rates lower; falling interest rates put more pressure on producers to cut prices, calling for still more fiat money, completing the vicious circle. The interest rate structure and the price level are linked. Subject to leads and lags, they keep moving together in the same direction. It is not funny to watch the Fed chasing its own tail. In doing so it generates a deflationary spiral that may ultimately bankrupt the entire producing sector. Like the Sorcerer’s Apprentice, the central banker can start the march to zero interest, but it hasn’t got a clue how to stop it when the deflationary spiral gets out of control.

Falling Interest Rates Squeeze Profits

Paradoxically, falling interest rates squeeze profits. Conventional wisdom suggests otherwise: lower interest rates are considered salubrious to business. However, we ought to distinguish between a low interest rate structure and a falling one. Only the former is salubrious; the latter is lethal. Falling interest rates reveal that past investments in physical capital have been made at too high a rate of interest in view of lower rates presently available. Furthermore, even the low rates of today will appear too high tomorrow. This explains business lethargy. Expanding production would appear foolhardy as long as the decline in the rate of interest continued. Falling interest rates make the cost of servicing past investments soar. As bond prices rise, the present value of debt will rise as well. So does the cost of liquidating a liability. These increases hit the profit margin, regardless whether the fact is realized by the producers or not. If not realized, the outcome will be that much worse. As the firm is paying out phantom profits in dividends, it is undermining its own financial strength already weakened by the falling price level. At one point the firm will be unable to pay its bills and will be forced to seek bankruptcy protection. Then there is the matter of the domino-effect. Even perfectly healhy firms are hit by deflation: they may find it impossible to collect their receivables and go under after their debtors have — all because of the falling interest rate structure.

Financial Vampirism

In the view presented here deflation is a huge wealth-transfer scheme from the producing sector to the financial sector, denuding the former of its capital, and enriching the latter with risk-free capital gains. Indeed, the beneficiaries of the falling interest-rate structure, making risk-free profits thanks to the zero-interest policy of the central bank, are the principals of the financial sector, chief among them those of the big money-center banks. Their obscene profits do not come out of thin air. Their wealth is not newly created wealth. It is existing wealth siphoned off the balance sheet of producing enterprise, forced into bankruptcy by the falling interest-rate structure. This is modern vampirism practiced by the financial sector, aided and abetted by the central bank, and its victim is the producing sector.

The bear market in stocks is not the cause but the effect of deflation. The cause is the artificial bull market in bonds financed by the central bank. If you ask the bond speculator about his obscene profits while the rest of the economy crumbles around him, he will shrug: “I play by the rules. And I did not make those rules either.”

Bond Speculation Is No Zero-Sum Game

The proof of complicity of the banks in the bond-speculation-scheme is the $100 trillion derivative monster. No small-time speculators could create such a Moloch. It was created by the big money-center banks, for their own benefit, with complete disregard for the disastrous effect it has on the producers of goods and services. The total face value of outstanding bonds falls far short of the colossal figure of $100 trillion. It is against common sense, and an invitation to disaster, to allow speculative long positions to exceed total supply. Messrs. Greenspan and Bernanke have no comment on all this, except to confirm policies that are conducive to further increasing the debt behemoth and further whetting the appetite of the $100 trillion derivatives Moloch.

We are told that the sum of $100 trillion is “only a notional amount”. However, the profits of the bond speculators are not notional. They are payable in cold cash. If indeed interest rates did go down, and the price of bonds did go up, say, one percent, then the speculators’ profit would be $1 trillion in cash. Who is going to pay that?

Economists will tell you that the profit of one bond speculator is the loss of another. Don’t buy that. It would be true only if speculation was a zero-sum game, and it was a case of stabilizing speculation. It is true that some speculative markets answer that description. An example is the commodity market trading agricultural goods. It fits the model of a zero-sum game. This is so because the risks involved in commodity trading are nature-given, having to do with the fickleness of the weather and the unpredictability of natural catastrophes such as a flood or a tornado. Human mortals are not privileged to see the future. Speculators in agricultural commodities make money by resisting the formation of price trends. But in markets where the risks are made (unmade!) by man such as the market for bonds and their derivatives, speculation is not a zero-sum game. There, speculators make money not by resisting price trends but by riding them. This is the case of destabilizing speculation.

But if the profit of one bond speculator is not paid by another, then who is paying it? This is a critical question and it deserves a careful answer. The other side of the bet of A, the bull speculator in bonds, is taken by a banker B for hedging rather than speculative purposes. He has sold the bond to A in order to hedge his exposure in lending money to C, an entrepreneur in the producing sector. His risk is that interest rates might rise before his loan to C matures that would punch a big hole in his balance sheet. With his hedge on, the position of B is neutral with regard to changes in the rate of interest. His position is that of a straddle with a long and a short leg. Losses on one leg are canceled by profits on the other. Therefore, if there is a loss on B’s short leg, as is virtually certain in view of the “threats” made by Mr. Bernanke, then it is simply transferred to C, the counter-party to the long leg of B’s straddle. The loss is charged to C. The profit of bond speculator A is paid by C. This means that, ultimately, the losers paying the $1 trillion in gains to the bond speculators are the producers. To add insult to injury, they are kept in the dark about the existence of Mr. Bernake’s casino where the fleecing takes place.

Power to Create Is Power to Destroy

The producers are sitting ducks in this speculative shoot-out. They have no choice. They must carry the risk of owning productive capital, without which there will be no consumer goods for Mr. Greenspan and Mr. Bernanke, or for you and me. This is an accurate description of the mechanism whereby the capital of the producing sector is surreptitiously siphoned off for the benefit of the financial sector as the rate of interest is driven down to zero. The producing sector is condemned to bankruptcy. It is a victim of plunder sanctioned by the Criminal Code. This is the essence of deflation: speculators aided and abetted by the central bank are allowed to bid bond prices sky-high, in complete disregard for the havoc that falling interest rates will wreak with the capital accounts of the producing sector, not to mention losses inflicted on stockholders. The $100 trillion derivatives market is a monument to the folly of man in delegating unlimited power to the central banker to create as much fiat money as he wishes. Former central banker Paul Volcker knows. He has been there. He is quoted as saying that “the truly unique power of a central bank is to create money and, ultimately, the power to create is the power to destroy.” If the central banker has unlimited power to create, then he has unlimited power to destroy. And destroy he does, especially the savings of ordinary people.

Why Are Economists Silent?

I am aware that my warnings will be received with a great deal of skepticism. The central banker as the quartermaster-general of deflation? Arrant nonsense! Not only does the central bank has its own army of research economists, it also has the benefit of the knowledge and research of the entire profession. There can be no question that the central bank wields its awesome power while enjoying the best economic advice money can buy! Siphoning off wealth from the balance sheet of others is straight out of science fiction, my critics charge. The allegedly injured party, the producing sector, hasn’t complained that its capital is open to pilferage. The media in reporting the crash of Swissair and United did not suggest foul play in plundering the airlines’ balance sheets.

Yet you may dismiss my charges only at your own peril. The awareness is growing that not just the media, but the entire profession of monetary economists has been bought off by the central banking establishment in order to put the best possible spin on our fiat money system. In an interview on December 17, 2002, entitled “Our Dishonest and Corrupt Monetary System” (www.kitco.com), Dr. Larry Parks recalled that John Kenneth Galbraith, the Paul M. Warburg Professor Emeritus of Harvard University, had published a book in 1975 entitled Money, Whence It Came, Where It Went. In this book the professor wrote: “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” In other words, Galbraith is saying that when it comes to money, economists lie! Dr. Parks asks: why do they lie? They have tenure. Why don’t they tell the truth? He concludes that the monetary economists, for the last fifty years or more, have been bought off. With Nobel-prizes, endowed chairs, research grants, board memberships, and other perks. Monetary economists have betrayed their Muse, to serve Mammon.

Off-Balance-Sheet Wizardry

That the profession of the accountants has been bought off by the financial sector came to light recently in the wake of the Wall Street accounting scandals. But in spite of the great publicity given to these scandals by the media, the problem has not been fixed. A few small-time crooks may have been apprehended, but none of the authors of the scheme whereby banks are allowed to cook their books has been charged. The truth is that banks can carry assets, such as bets in the derivatives markets, “off balance sheet”. They do this in order to find shelter from the scrutiny of depositors, creditors, shareholders; more generally, from the scrutiny of taxpayers at large. Accountants, regulators, and bank inspectors know this, but that’s a different matter. Apparently, they have been bribed, too. They are part of the conspiracy. This is how Dr. Parks describes the fraud:

“Fractional reserve lending is jargon for creating money out of nothing. That’s what that means. In the case of derivatives, these are bets that the banks make. The banks today in the aggregate worldwide have made roughly $110 trillion worth of bets. That’s all they are. Banks are making bets and creating money. One of the things that obscures this for everybody is that banks alone do not have to reveal their entire balance sheets, as all other public companies must do under Securities and Exchange Commission regulations. Banks have the option, with some of their assets, to put them in a basket that they call “held for investment”. When they put assets in that basket (they could be stocks, bonds, or whatever), then those assets are held at historical costs, rather than at market value… Nobody else gets away with this except for them. The reason they get away with it is because they say, in effect: ‘If we had to mark everything to market, there would be too much volatility in our earnings. We don’t want you to find out.’ All this is secret. It’s called bank secrecy… There are winners and there are losers. The losers are the ordinary people who lose their pensions, their savings, their jobs. The winners are the financial guys… These guys have no downside… Do you know what the banks took out of the economy last year? Nearly $400 billion. The Wall Street firms who get transaction fees for moving the newly created money around took another roughly $250 billion. Between them they took out nearly three times the amount of money that the auto industry took out. But from the auto industry we got 20 million cars. What did we get from these guys? We got cancelled checks and bank statements. This is monstrous, don’t you think?”
Playing with Fire

I am not predicting that interest rates will keep falling to zero and that the world economy will succumb to deflation. I just want to sound the alarm that it might, in view of the counter-productive monetary policy of central bankers. Other scenarios, no less frightening, are also possible. Paradoxically, the threat of zero-interest (deflation) and that of infinite-interest (hyperinflation) are separated only by the knee-jerk reaction of the marginal bond speculator. He may get scared by the threats of Mr. Bernanke to undermine the purchasing power of the dollar further. As he becomes persuaded by the “logic of the printing press”, the marginal bond speculator may cut and run. Then other bond speculators, especially those abroad, could dump their U.S. Treasury bonds, too, and run for the exit. Quite possibly Mr. Bernanke thought that he was just “fine-tuning” the purchasing power of the dollar. Under this scenario he would destroy it. When the central banker threatens to reduce the value of the dollar in terms of goods and services, as Mr. Bernanke does, he is playing with fire. After dumping the bonds, people may dump the dollars, too. First the foreign and then the domestic holders. They need not be reminded that the central banker has the card to trump deflation — by triggering hyperinflation. How desperate must the specter of deflation appear to Mr. Bernanke that he has seen it fit to flaunt his possession of that card!

Congress, Not the Fed, Has the Solution

It is not too late for the U.S. Congress to act to fend off disaster. It should immediately take away the unlimited power from Messrs. Greenspan and Bernanke to create as much fiat money as they wish, and to drive down the value of the dollar in terms of goods and services. Not only are the present monetary arrangements blatantly unconstitutional, they are responsible for the destabilization of the rate of interest allowing it to swing from one extreme to the other, causing grievous economic damage along its path. The House of Representatives, to which the Constitution delegated the monetary powers, can rectify this by going back to constitutional money. It should stabilize interest rates without any further delay, and remove the threat of both zero and infinite interest, by opening the Mint to gold and silver. This is a Republic based on checks and balances. It has a government of limited and enumerated powers. Neither arm: not the legislative, not the executive, nor the judiciary may claim to have unlimited powers under the Constitution. Why should officers of the Federal Reserve be allowed to make such claims?

Free coinage, a right of the people enshrined in the U.S. Constitution, would remove the greatest threat this Republic has faced in its entire history up to now, greater even than that of foreign terrorists. This is the threat to destroy the capital of the producing sector, through the machinations of the financial sector, aided and abetted by the Federal Reserve.

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