Economics, Trading, Investing and I

Bear Dominance and the Death Cross

2010-07-16T15:44:00.000-07:00

Any reference to the death cross is sensational. Statistical analysis on back-testing tells one very little about the value of this indicator. I post the update of my Oscillator which shows the 200 day moving average and the 50 day moving average against a backdrop of the momentum indicator.

(Click on the chart for a larger image)

The golden cross of 12 May 2003 held a long term bull trend (with bearish episodes) until 17 January 2008 when the 50 day moving average broke through the 200 day moving average in a death cross at an angle of about 45 degrees. There was a false break in Sept 04 and near approaches in June 05, November 05 and again in August 06. These approaches are like stones hopping on water but the 45 degree cut is when the stone sinks. Observe and decide if you wish to ignore the approaching death cross. Perhaps also keep in mind that a death cross is in fact a prerequisite for a long term bear trend. No signal is absolute and by sterilizing a signal with statistical back testing without careful thought may score some write-up points while denying one a useful signal within the right context. Take care.

(Click on the chart for a larger image)

Note that the Momentum indicator has been very useful since March 09. It can fail or become erratic when market swings are plentiful like in the period June 05 to August 06. Momentum has now reached the pre-crossover levels as follows for the past week:

Jul 16, 2010 -89.2%
Jul 15, 2010 -50.3%
Jul 14, 2010 -27.9%
Jul 13, 2010 -25.9%
Jul 12, 2010 -19.9%

The bear is growing in strength.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
16 July 2010

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ . Please note that these essays are for information purposes only.

Gold & Fiat Money

2010-07-13T13:40:00.000-07:00

“I do not under any circumstance favor raising the price of gold. It would perpetuate that “barbarous metal” in international monetary use. We have quite rightly broken the link between gold and our domestic money. We should also break the link between gold and international money. The supply of money, neither domestic nor international, should not be dependent over the long run on the accidents of supply and demand in the marketplace for just one commodity.” July 12, 1968 – Darryl R. Francis, President of the Reserve Bank of St. Louis. 1.

And so it came to pass not long after the speech by Mr. Francis that in August 1971 US President Richard Nixon unilaterally broke the US$/gold peg and declared the US$ no longer convertible to gold. The convertibility of US$’s to gold was the last tenuous link between fiat currencies pegged to the US$ and gold. I pick up the tale of Gold and Fiat Money in January 1971 and will tell this tale with graphs. Graphs of fiat money; of consumer inflations and asset inflations; interest rates; central bank activities; gold prices; and official gold movements.

Placing the fiat money year of 1971 in the context of gold requires a pit stop at inflation. Often we are lulled into a sense of security by looking at the inflation rate. This time perhaps we should first look at the traditional inflation index, the CPI.

1971 certainly looks like an important point in consumer inflation history. The index chart is revealing but the traditional inflation rate chart is also required to complete the picture.

The inflation rate was 5.3% in January 1971 and after an initial decline, it increased to peak at 14.4% in May 1980. The actual index data is much more telling than the annual rate of change data.

Consumer inflation is but one facet of inflation. A less obvious inflation is asset inflation. There are no official statistics to extract asset inflations and no consensus measurement of an asset inflation index. The DJIA will be used as a proxy for asset inflation in this analysis.

Gold and the managers of fiat money.

Gold has always been the unofficial informant on inflation activity. A precious metal much maligned and feverishly coveted. It is said that it has no purpose and no industrial application. Snide comments about a barbaric metal ruling human emotions are common. What about the role played by gold in human relationships? Relationships between men and women, lovers, friends and family? What about the gifts of jewelry, of dowry or of inheritance?

Gold has always been a store of value in the history of mankind and still is, despite 1971. In 2010 the gold price confirms that gold as a monetary metal is still the ultimate go-to store of value in times of trouble. Mr. Francis, in the same speech as quoted from above, warned in 1968 that the then international trade and currency crisis may cause a “run on gold”. In 2010 we look back upon the gold price rise since 2000 and again contemplate a run on gold.

The largest concentrations of holdings of this scarce metal, of which the total above ground stock will only make up a cube of less than 20 cubic meters, are still held officially by Sovereigns and International Institutions (IMF, BIS, EPU/EF, EMI and others). The World Gold Council has kept a record from 1948 of the Gold Reserves of Major Official Gold Holders. They held 29,727 tons of gold at the end of 2008, down from a peak of 38,347 tons in 1965. My generous guess of the US$ value of Official Gold Reserves in July 2010 would be about $1.167 trillion (30,000 tons * 32,151 troy oz * $1210).

We can take a picture of the interaction between the $ gold price and the managers of fiat money since 1971 by observing the activity of the Major Official Gold Holders. Did they buy or did they sell?

For now we just gather the components and observe the dynamics. Observe a first phase of official selling activity from 1971 to 1980. Note a second phase of official selling; slow at first from about the middle of the eighties but accelerating into 2006 and easing off since then. Both phases climaxed in a dichotomy of high official sales and a parabolic rise in gold price.

The moves in Official Gold Reserves are a good proxy for gold movement between the “Global Public Sector” and the “Global Private Sector”. The inclusion of International Institutions with the Global Public Sector will avoid the distraction of interactions and gold movements between Sovereigns and International Institutions.

The chart is clear, the Official Holders have sold gold reserves sine 1971 and have been growing total sovereign reserves by buying each other’s sovereign debt rather than increase gold holdings. Gold is nobody’s debt, safe from default. Exchanging fiat money debt for the reality of gold, the plenty for the scarce, an ever increasing promise to pay for a historic store of value will for now remain a logical and philosophical puzzle.

The global Official Foreign Exchange Reserves ratio to the Global Official Gold Reserves valued in US$ has increased from 3.2 to 1 in 1995 to a staggering 10 to 1 in 2008. The increase in currency reserves happened in spite of a doubling of the annual gold price from 1995 to 2008.

Interest rates.

Interest rates feature prominently in any analyses of fiat money and of gold. Gold pays no interest but is claimed to be a better store of value than fiat money, a claim supported by the inflation indexes. The inflation index has shown what happened to fiat money but what about the influence of interest rates?

The Federal Funds Rate will be the proxy for short term rates and the 10 year Treasury Rate (constant maturity) will be the proxy for long term rates.

Here a dominance of the short term rate higher than the long term rate can be observed for the period 1971 to 1981. The short term rate dominates to the downside from the long term rate from 1982 to 2010. The Federal Funds Rate for the two distinct phases was 4.14% in 1971 raising to peak at 19.1% in June 1981 and falling from there to a low of 0.11% in January 2010.

USA Central Bank (Board of the Federal Reserve System) activity.

The on balance sheet fiat money activity of the central bank requires scrutiny.

The first variable is the Currency in Circulation. It grows from $56 billion in January 1971 to $ 941 billion by June 2010. In the context of gold compare the growth in Currency in Circulation with the value of the Global Official Gold Reserves.

The next variable for scrutiny is the Reserve Balances with Federal Reserve Banks from the banking sector. It has a history of almost no significance other than diminishing to mostly below $10 billion by August 2008 when suddenly it gains a significant new prominence.

These two major footprints explain the origin of the liabilities of the central bank, where it gets its balance sheet liquidity from. The near trillion dollar growth in Currency in Circulation (interest free) for the period January 1971 to June 2010 is significant but the explosion in Reserve Balances by $1,02 trillion from August 2008 to June 2010 will require explanation.

Some of the answer lies with the asset side of the balance sheet of the central bank.

The Reserve Bank Credit series defines the asset side of the balance sheet and is described by the Board of the Federal Reserve (the Fed) as:

“Reserve Bank credit is the sum of securities held outright, repurchase agreements, term auction credit, other loans, net portfolio holdings of Commercial Paper Funding Facility LLC, net portfolio holdings of LLCs funded through the Money Market Investor Funding Facility, net portfolio holdings of Maiden Lane LLC, net portfolio holdings of Maiden Lane II LLC, net portfolio holdings of Maiden Lane III LLC, float, central bank liquidity swaps, and other Federal Reserve assets.”

It includes all the facilities and programs implemented by the Fed in acting as the central bank for the banks and as manager of the sales of central government debt including all the emergency measures taken since August 2008. The emergency facilities fill the gap between August 2008 and late November 2008 to January 2009 when purchases of mortgage backed securities were announced and implemented.

The dominant asset component in the Reserve Bank Credit variable is that of Securities Held Outright.

The securities held by the Fed prior to August 2008 were predominantly Public Sector securities. Since introducing emergency measures in response to the Global Financial Crises in August 2008 the mix has changed and the “Securities Held Outright” series is currently defined as:

“The amount of securities held by Federal Reserve Banks. This quantity is the cumulative result of permanent open market operations: outright purchases or sales of securities, conducted by the Federal Reserve. Section 14 of the Federal Reserve Act defines the securities that the Federal Reserve is authorized to buy and sell.”

Mortgage-backed securities as part of Securities Held Outright amounted to $1.119 trillion as at 30 June 2010 and are described as:

“On November 25, 2008, the Federal Reserve announced a program to purchase mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. The goal of the program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets. Purchases of these securities began on January 5, 2009.
Additional information on System transactions in mortgage-backed securities is available at www.newyorkfed.org/markets/mbs/.”

These numbers are important for it shows that the Reserve Balances of the banking sector as a liability of the Fed is near matched with the investment in mortgage backed securities. The monetary activity of venturing into mortgage-backed securities has been sterilized by the growth in the Reserve Balances of the banking sector. Here it is important to understand that the mortgage-backed facility quarantines what would have been a deflationary implosion of the housing bubble (a major debt inflated asset bubble). The Reserve Balances cannot be released into the banking sector while the Fed is invested in mortgage-backed securities without unleashing significant inflation risks. The interest received on the mortgage-backed securities will finance the interest payable by the Fed on the Reserve Balances of the banks.

The activities of monetary authorities as expressed in the assets and liabilities can be summarized in the Reserve Bank Credit series (asset side of the balance sheet) or in the Sum of Currency in Circulation & Reserve Balances (liabilities of the Fed).

The mortgage-backed facility of the Fed is close to full utilization at $1.25 trillion.

The central bank is active in providing liquidity to the banking sector. This activity is behind the achievement of the targeted Federal Funds Rate. Rapid debt formation is the result of stimulatory central bank liquidity provision.

The decline in Household Debt in the presence of historically low interest rates and easy access to liquidity is indicative of debt saturation (see War on Savings available on my blog at http://sareloberholster.blogspot.com/).

Government stepped up Public Debt formation when Household Debt started to collapse.

Liquidity provision also spilled over into the rest of the economy and gave rise to investor facilitation of additional debt formation beyond the banking sector. The chart of Commercial Paper outstanding will be the proxy for this development. The housing bubble and mortgage-backed securities supply accounts for most of the growth from 2004 to 2007 and for most of the decline from 2007 to 2010.

Inflations and the gold price.

How did the gold price perform against the inflation indexes?

The sales activities of the Major Official Holders of gold help to explain the delays in the gold price response to inflations. The relative importance of gold over time as a commodity and as a monetary metal is visible in the gold price. See for example the decline in gold price prior to the decline in the PPI in 2008/09 which raises a question, how did the gold price anticipate the decline in the PPI? The rise in gold price since 2008, given the information presented in these charts, certainly seems monetary in origin.

The relationships are not constant but the influences are visible. Stock exchanges are a popular asset class for asset inflation. Observe the interaction between the traditional inflations and the DJIA as a proxy for asset inflation.

The period from 1971 to 1981 saw significant inflation in both PPI and CPI but no DJIA asset inflation is evident. The rising and high interest rates during this period probably caused the muted asset inflation response but it requires a chart of its own. The DJIA shows significant asset inflation rising from 875 on monthly data in December 1981 to 11,497 in December 1999. Then came the period of instability from 2000 to 2010. First the Tech crash of 2000 to 2003, followed by the housing bubble pick-me-up into late 2007, together with the global economic crises and finally (for now) the rebound out of March 2009.

How did the gold price interact with the DJIA as asset inflation proxy?

The gold price responded to the inflations of the CPI and the PPI in the 1971 to 1981 period when DJIA asset inflation was absent but failed to respond to the intense initial asset inflation period of the DJIA. The gold price only took off with the arrival of the period of instability.

Interest Rates and Inflations.

The presentation of the asset inflation proxy and interest rates in one chart provides valuable insights.

The rising interest rate phase from 1971 to 1981 kept asset inflation at bay but the declining phase from the Federal Funds Rate of 19.1% to around 3% in 1993/94 set the stage for significant asset inflation. Observe also the more stable decline in the long term rate. Interest rates of around 5% and generally declining, on observation, point to strong asset inflation. The invest-with-debt characteristic so evident during the housing bubble may be behind this phenomenon. The asset inflation in the period 2001 to 2010 required additional declines in interest rates to prevent asset deflation. These interventions drove interest rates to near zero while attempting to maintain the asset inflations.

The gold price did not respond in the same manner as asset inflations did towards interest rates.

Note how the gold price rose into a parabolic spike together with interest rates in the period 1971 to 1980. It then declined with interest rates into 2001 just to break away in contradiction, into another parabolic rise but this time with interest rates declining into the absurdity of the zero bound. The gold price responded to factors which had an impact on interest rates but the gold price and interest rates seem to have little in common. This is significant since gold responded to traditional inflations and since 2001 also to asset inflation. Interest rates may have a connection with the rate of change of the inflation index but the actual performance of inflation indexes and asset inflations are not well correlated with interest rates. This statement is consistent with an economy where the interest rate is decided by the managers of fiat money and not established with price discovery in the markets.

The Gold price as a whistleblower on inflation is warning that the cumulative effects of traditional and asset inflations on the gold price in the era of fiat money can no longer be contained by official gold sales. In 2010 as in 1968, again there is global debate with reference to international currency instabilities and international trade structural stress due to merchantalistic currency practices by export orientated countries.

The declining trend in Federal Funds Rate from 2001 to the present is no longer consistent with the movements in the inflation indexes, particularly with asset inflations for the same period. The gold price has decided to side with risk and inflation given this altered state between interest rates and all the inflations.

Multiple Variable Charts

Summary of Observations.

1. Inflation is not as muted as indicated by the consumer inflation rate when viewed form the perspective of the PPI, CPI and asset inflations.
2. Official gold sales have been depressing the Gold Price since 1971 yet failed to contain the 2001/2 to 2010 strong advance in the gold price.
3. Lowering interest rates into the zero bound has contributed significantly to the creation of asset inflations and the zero bound is now a necessity in preventing further collapse of the asset inflations.
4. Balance sheet expansion, lowering interest rates and liquidity provisions by the central bank had facilitated parabolic debt expansions which have lately become unsustainable even with unrestrained liquidity provision and near zero interest rates.
5. Quarantining the housing bubble and sterilizing the potential liquidity spill into the economy have trapped the central bank in stasis between the powerful forces of hyperinflation and deflation.
6. A rising gold price is responding to economic risk generally, store of value risks particularly that of fiat money, economic structural instability and the risk of hyperinflationary events in currencies.
7. Household debt formation and private securities debt markets have turned negative while already high US government debt is rising in a new parabolic spike.
8. Default risk on Sovereign Debt and a rising gold price have restrained gold sales by Major Official Holders of gold reserves since 2006 and may well turn around a philosophy of official selling which have prevailed since 1965.
9. The spike in the gold price since 2009 coincides with the purchase of mortgage-backed securities by the Fed as the main component in placing the housing asset inflation in quarantine.
10. The period from 2007 to mid 2010 is typified by extreme PPI changes, gold price movements, stock exchange movements, central bank balance sheet activity, interest rate adjustments and debt formation activity. Nothing in the charts can be interpreted as economic harmony while extreme volatility writes “risk” in neon letters.

The tale in the charts from the dawn of irredeemable fiat money to a dusk of economic structural distortions is but a footnote in the economic history of gold.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA).
14 July 2010

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

© Sarel Oberholster

Reference:
1. Francis, Darryl R, (1968), The Balance of Payments, The Dollar and Gold, Speech at a Rotary Inter City meeting Webster Groves, YMCA, p 13, published by the Federal Reserve Bank of St Louis at http://fraser.stlouisfed.org/historicaldocs/DRF68/download/38004/Francis_19680712.pdf .

Reprieve: Dow Momentum

2010-07-10T05:13:00.000-07:00

A strong positive move during the past week has contained the momentum and by Friday 9th it registered -16.1% after peaking at -17.7 on Thursday 8th. Momentum at -16.1% is still decidedly bearish. The swing of last week will have to not only continue but will need to return to sustainable levels beyond 10500 before the bearish momentum will become subject to reversal.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
10 July 2010

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ . Please note that these essays are for information purposes only.

Twin Peaks: 200 Day Moving Average turns Negative, here comes the Death Cross.

2010-07-02T14:16:00.000-07:00

The DJII Momentum Indicator is in free fall down to -14.4%. The 200 day moving average turned negative at today’s close (2 July 2010). The Death Cross where the 50 day moving average breaks downward through the 200 day moving average on the DOW is 7 trading days away at current levels but further weakness will bring the crossover forward. An important observation is that the Death Cross will take place with the 200 day moving average in decent. Bearish dominance is now a given. Momentum is decisively downwards with the bull in retreat.

The long term case is still unfolding with a return to the Japan thesis. The DOW will have to succumb to levels of 6000 to 6500 for a return to a stepped march with history. The ghost of Japan just won’t quit.

Previous editions in the Twin Peaks series can be found here:

No More Japan?
The Bear is Back.
Jumping in Mud.
Twin Peaks and the Macro Economic Model of Debt. (Comprehensive)

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
2 July 2010

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ . Please note that these essays are for information purposes only.

Like Hungry Lions

2010-06-29T06:32:00.000-07:00

(Preamble: This essay contains economic charts which are explanatory on a technical level but you can skip them without affecting general content as they are there to underpin technical validity.)

Government is often compared to a parasite in economic context. It produces nothing yet takes from the economy for its own needs and for the needs of voters. I believe that a better analogy for government’s presence in an economic system is that or a predator.

Prey gathers the resources of the earth and converts it into desirable protein. Predators hunt the prey and consume the proteins directly. A sustainable ecosystem in which there is dynamic harmony and balance between predator and prey ensures the survival of both hunter and prey within the boundaries of available resources of food and water. A sustainable dynamic harmony will survive the changing of the seasons, climate cycles and even some catastrophes.

A similar harmony exists inside an economic system between the private sector and the public sector.

Contemplate for a moment that the predators get access to a new refined hunting technique which turns natural prey into abundant “canned prey”. The predators will enter a growth phase that will vastly increase the numbers of predators. The harmony and balance of the ecosystem will slowly change. Initially the targeted canned pay will sustain the growth but the increased numbers of hunting predators will place pressure on the supply chain of prey. Growth of the prey population will contract in a dynamic exchange process relative to the growth of the predator population. This process will accelerate with the growth of predators’ numbers while dwindling numbers of natural prey will force greater harvesting of “canned prey” for predator growth and survival. Natural prey is overharvested and the renewal of the herds gets destroyed. In time natural prey will all but disappear. Hungry predators will hunt all remaining natural prey to extinction with the new irresistible hunting technique, while progressively starving on their way to their own extinction.

It is a somewhat nasty outcome as the change in “hunting technique” must be counterbalanced by a change in “escaping technique” for prey to restore a sustainable harmony in the ecosystem.

Modern monetary policy has handed to the governmental predator a new hunting technique on private sector prey. Digital monetary creation hides the overharvesting of production surpluses mostly manifested in savings and capital, the flesh that governments consume. Predatory government growth explodes and it hunts the production surpluses to extinction. Then it hunts all remaining capital and savings to extinction. Politicians throughout history have often claimed to be at war with the markets. To be at war with the markets or the economy generally is to be at war with one’s own citizens.

The predators in my analogy have a “licence to kill”. We know that as society we give to governments also a licence to kill. We know further that we must diligently watch and monitor government’s use of its licence to kill, for a government that develops an excessive appetite for killing is a dangerous and probably harmful government which will soon find itself at odds with its population. Voters in democratic systems will kick out and probably prosecute such a government in no time.

Society also grants governments a “licence to hunt” in the economy by way of taxation. We diligently watch government’s taxation for a government that similarly develops an excessive appetite for taxation is a harmful government and will soon find itself at odds with its population. Voters in democratic systems will similarly kick out such a government in no time.

Governments being predatory are always on the lookout for ways to grow its presence. It needs taxation or debt to fund its growth. Voters are not too diligent on government debt and if governments can hide debt growth in accounting practices then so much the better. Success means no general voters’ revolt against government debt formation. Government can grow somewhat but before long it vests the majority of economically available savings upon itself and voters get restless.

(Click on the chart for a larger image)

Predatory government then needs to find a new refined hunting technique. A technique that will allow it to continue to grow by way of debt, without causing a voters’ revolt.

It finds the refined new hunting technique in the creation of digital money with which it can increase the liquidity quantity of savings by counterfeiting money. It uses the central bank to achieve this objective and disguises its own hand in the arrangement in the pretence of an independent central bank. In modern monetary economics governments have realised that it need not arrange with the central bank to hand over all the counterfeit money, it only needs to have access to more-and-more debt without appearing to consume all the savings and liquidity for itself. By not claiming all the newly created liquidity governments successfully bribes the institutional economy and private sector leadership with early access to and super profits from the newly created liquidity.

“Money is the root of all evil”, is a general misquote from the Good Book. The more correct quote is "For the love of money is a root of all sorts of evil," [see Wikipedia on Root of all Evil.] Debt is not evil and very useful to the economy when it is utilised in a responsible and sustainable manner. Love of debt from liquidity creation is a root of all sorts of evil.

This sets into motion a process of unsustainable debt formation. A process that once started, is almost impossible to turn around. A process that will destroy the harmonious coexistence between predator and prey until both are extinct. A self destruction process unless the ecosystem/economic system finds a way to rebalance the coexistence between predator and prey.

(Click on the chart for a larger image)

The intervention and liquidity provision not only increase the amount of available debt, it also cause a reduction in interest rates. A fantastic outcome for the predators but for the unintended outcome on supply of savings from production surpluses.

The economic system can only generate sustainable debt at the lower savings supply level before the addition of liquidity provision and at the higher interest rate which sustains that level of savings formation. The new normal for sustainable debt at the lower interest rate is an even lower level of savings formation at that lower interest rate.

The new economic reality is that the economic system can no longer facilitate repayment of the debt levels unless some future external economic rescue happens, for example a major technological advance with significant economic benefits. Thus the system now generates unsustainable debt, not capable of repayment from savings. Debt not capable of repayment from savings is debt not capable of repayment at all. Thus this monetary model generates bad debts. Bad debts that the private sector users of debt will eventually find impossible to repay from private sector savings. Bad public debt that the governments will eventually be unable to repay from politically viable tax collections.

This process of liquidity creation will accelerate and feed upon itself until it drives the economy into zero interest rates and drive savings towards extinction. Zero interest rates are no impediment against further expansions of digital liquidity.

(Click on the chart for a larger image)

This process is hyperinflationary in the extreme but the hyperinflation can manifest in CPI or in asset bubbles. In fact, modern monetary policy prides itself on avoiding the CPI outcome. The most notable asset bubble is the overvaluation of debt based financial assets. The global economy discovered some of that overvalued private debt in 2007. Discovering the overvaluation of government debt lies at the end of this road. Discovering also that government will default on its obligations against all populist expectations is another systemic shock in waiting. Government debt default arrives first covertly, but eventually overtly. We have already seen the incremental defaults on pension liabilities by increasing the pension age. Proportional international debt default is usually achieved through currency devaluation, presently captured in the desperate race between governments towards having the weakest currency. Early signs of public default are governmental debt collapse around the fringes. Will Greek citizens be forced to repay in euro savings or will the Greek government be forced to abandon the euro and devalue a new Greek currency in partial debt default? The true nightmare is the reality of pension fund savings invested in mispriced, hyper inflated private and public debt. Monetary liquidity provision destroys savings with no regard for international borders. Defaults will similarly not pay homage to international borders. Governments will be forced to protect their national savings base against predatory monetary policies of other governments.

Hyper inflated equity prices are yet another manifestation of the digital liquidity hyperinflation wrapped in palatable form, if not extremely attractive marketable form.

The liquidity provisions from digital money must be removed from the global economy for structural harmony to be restored. Either through a long term return to a culture of savings without any further increases in liquidity provision via digital money, debt default or a combination of both. Most of such renewed saving will probably be expropriated through taxes by governments to the extent that they need to reduce their predatory debt levels.

Furthermore, substantial new savings formation cannot happen at zero interest rates. It follows that the division between default and savings formation will be decided at interest rate level. If zero interest rates are a given, then await the default process. Higher taxes and increased interest rates will see a gradual return to harmony. Point out those politicians who will be able to sell higher interest rates and higher taxes and survive at the polls then calculate the odds for systemic default. Voters won’t vote for order and will harvest chaos.

We have already entered the final phase of this process. Look around and know that you are prey even if only for the pension savings flesh that you can provide. Know that governments will hunt your savings like hungry lions in their quest to preserve the pride. Know that your savings cannot prevail against the hungry lions unless you have nimbly removed it from the hunting grounds and placed it into assets far removed from prying eyes of hungry lions. Know also that banks cannot survive without deposits. When most deposits are driven into hyper inflated traded debt or equity in search of alpha, know that a banking system built upon monetary liquidity rather than savings is a system that cannot survive in that form. Know thus that banking systemic risk will untimely rear its ugly head once more when government defaults consume the last available true savings in the system.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA).
1 July 2010

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

© Sarel Oberholster

Twin Peaks: Casting Long Shadows

2010-06-26T13:19:00.000-07:00

This is just an abridged update. The DJII Momentum Indicator spiked down to -6.8% and seems poised to invert in bearish dominance. The +1.5% required to establish bullish momentum is not in sight at this time.

Inverting the momentum indicator is like turning an hourglass and it happens when the 50 day moving average cuts the 200 day moving average. The Dow Oscillator tracks the momentum indicator and the long term moving averages. It is casting long shadows presently with a DOW mired in weakness.

The bear is taking control.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
25 June 2010

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ . Please note that these essays are for information purposes only.

DOW Momentum Indicator

2010-06-21T13:44:00.000-07:00

Dow Momentum Indicator as at 21 June 2010

(Click on the chart for a larger image.)

Bulls still failing to reclaim momentum and Bears holding onto a trend at -3.7% on 21 June 2010 after pulling back to -3.1% on 15 June 2010.

Sarel Oberholster
21 June 2010

DOW Momentum Indicator

2010-06-04T13:46:00.000-07:00

DOW Momentum indicator as at 4 June 2010.

Click on chart for a larger image.

-3.8% as at close 4 June 2010

Sarel Oberholster
4 June 2010

No More Japan? (Part of the Twin Peaks Series)

2010-06-02T07:31:00.000-07:00

The Twin Peaks series of essays have been dedicated to keeping a record of the unfolding decent of the Dow against the decent from the peak in the Nikkei in December 1989. It has been very interesting so far. The bounce from March 2009 has looked at times to having obliterated any comparison between the two markets. The USA Dow peak of 14164.53 on 9 October 2007 remains the USA peak and the Nikkei Peak of 29 December 1989 at 39916 remains the Nikkei peak. The tale of the twin peaks will only become invalid once either peak is taken out and its a reminder that we are yet to hear the song of the fat lady. Early warning of ill winds came when volatility returned in late January 2010 and on the 4th of February 2010 the first warning that momentum was failing was triggered when the -1.5% momentum level was breached. It was to be short lived.

Concerted global Central Government and Central Bank monetary and fiscal interventions managed to swing momentum towards a temporary positive to peak at +1.3% on 22 April 2010. The bull signal, which would have been triggered by momentum breaching the +1.5% level, threatened but never materialized. Alas, 22 April 2010 put in a short term momentum top and it has been failing ever since into a new swing low of -2.8% as at 1 June 2010.

I will for the first time in this essay, also publish the long term swings in momentum but first, here is the momentum chart from March 2009.

(Click on the chart for a larger image.)

It has become important to also show the longer term momentum chart as greater context is necessary at this point. Note first, however, the pivotal event in June 2009 when the 50 Day moving average broke through the 200 day moving average to confirm the bull trend. The momentum started failing and by late October 2009 momentum reached the neutral line.

The momentum indicator in simplified terms indicates if the shorter trend in the market is sufficient to pull the longer trend upwards into a continued upwards move or alternatively if the shorter term trend is weighing on the market pushing downwards to slow the assent. Pushing downwards will eventually have to be relieved or the market will succumb to a bear trend.

A rule of thumb is that a pulling effect of greater than +1.5% will drag the market upwards into a bull trend while a -1.5% will weigh the market down into a bear trend.

The first bear warning failed at -1.9% by 8 February 2010 and relief came in the move into April 2010 which failed to trigger the +1.5% which would have been a new bull signal. Thus the bear warning was not negated.

The current bear warning at -2.8% is significant as it now comes as a second warning of failing momentum after the February 2010 warning. A -2.8% is also significant in extent and is usually indicative of an approaching pivotal event where the 50 day moving average would cross the 200 day moving average to the downside.

Note also the similarities in the swings from July 2005 into the collapse from August 2007. It is setting up in a similar manner but faster and with stronger impulses.

(Click on the chart for a larger image.)

This all brings us back to the Japan/USA market thesis. Are the peaks similar and will they resolve in similar fashion?

I believe that the monetary easing of Japan into zero interest rates was accommodated by a vast pool of Japanese domestic savings. The immediate response on that comment relevant to the USA is that the US savings rate is oscillating around zero and domestic USA savings in relative 2007 terms is not comparable to the pool of Japanese savings that was available to the Japanese government in 1989. True but a special condition is in play for the US.

The eye opener is the fact that the USA has control over the reserve currency of the world. Having that power actually gives the USA the ability to tap into the total global savings when it applies its expansive monetary easing. Having access to a much greater pool of global savings will allow the USA to delay the process of market decay for longer and with greater aggression but it is a cul-de-sac nevertheless.

The Twin Peaks charts are spiking down for now and the possibility that there remains a correlation, which looked somewhat far fetched of late, is beginning to make a comeback.

(Click on the chart for a larger image.)

(Click on the chart for a larger image.)

This is ultimately a tale that is told over years and not months but I will continue to convey its story for as long as it seems relevant. Time will tell if the bear warnings were prophetic or foolish. The reality of a recovery built upon monetary fiction remains with us for now as does the tale of two tops.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
2 June 2010

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ . Please note that these essays are for information purposes only.
he chart for a larger image

Rouletteconomics

2010-05-29T04:25:00.000-07:00

“In December of 1639, Pascal's father had moved the family to Rouen where he took a job as tax collector for the region. Pascal's invention of the mechanical calculator in 1641 was borne out of a desire to help his father in collecting taxes. … Pascal worked on many versions of the devices, leading to his attempt to create a perpetual motion machine. He has been credited with introducing the roulette machine, which was a by-product of these experiments.” - Inventor of the Week Archive, Lemelson-MIT Program, May 2003

The simple economics of supply, demand and price are probably the widest known and most used part of economic life for the majority of all participants. We know the basics, too much supply and the market is flooded with a product, the price drops and the producers are encouraged to produce less of that product and look for another opportunity. Simple, or not? On the other side, rules of demand state that a lower price would actually encourage demand to absorb at least some of the over supply. Huge demand and insufficient supply and the opposite happen.

The truth is that there is an endless interaction between price, supply and demand in a dynamic process of price discovery which, like infinity, can be conceptualised in the abstract but one can never quite get your hands on it. Nobody tries to interfere with infinity or to manage infinity but managing price is always fair game.

Now add the tendency of humans to manipulate their environments to their advantage and we see that economics is studied mostly for insights to manipulate for a gain. Nobody pays more for these insights than government for it has unbridled power to manipulate at a macro level. A myriad of other manipulators are much less ambitious and will stick to “niche” markets where they will often attempt to access government power to manipulate their chosen niche market.

Free market economists are seldom as much in demand as economists specialising in market manipulation so why do these unwanted economists refuse to die out and where do they get gainful employment? These economists have learned to look beyond the manipulation and know that, in time, someone will be needed to attend to the repairs to the economic fabric torn by a multitude of manipulations.

Taking our cue from Pascal, where government economic manipulators are looking to maximise taxes in an economic model of perpetually increased tax flows, a peek into market manipulation can be demonstrated by looking at a roulette table. The rules of the table are devised and the roulette table market is set into operation. All participants to the market event (the betting, the spin of the wheel and the roll of the ball) know the rules and the odds.

Two very important preconditions exist. The wheel and the ball must spin and roll without interference and the fall of the ball be left in the unbiased hands of chance. All the punters must be treated equally.

What happens at the table? A redistribution of the pool of bets at the hands of chance and the “House” as operator of the “roulette market” gets a “house percentage”. That is it, and it repeats endlessly for as long as money enters the table. Pool established, turn of the wheel and roll of the ball, the house cut and redistribution according to the placing of the bets and the outcome of the roll. The house cut in roulette is its statistical edge generally calculated to be 5.26%. The House has to manage its income as it would realise the house edge only once it has a statistically large enough number of events.

The game of manipulation immediately gets under way. Certain punters want to find a system to improve their odds. The House wants to find a way to improve its odds and the “marks” just trust in blind luck.

The House has a vested interest in maintaining a status quo and will go as far as prosecuting punters who “game” the system for the roulette market will collapse should the redistribution be taken from the hands of chance. The House will lose its cut or the punter will walk away from a rigged market. Perpetual motion in the roulette market cannot have a single or a few winners and everybody else a loser, or can it?

Say Mr Well Connected arranges with the House special rules that would ensure that he gets a guaranteed winning percentage of the pool. What would happen? Would the punters simply stop punting?

Say Mr Government wants to do the same but it wants an upfront guaranteed cut irrespective of how the redistribution is done thereafter. What needs to be done? Engage the power of governance.

Say Mr Well Connected wants punters to be forced to continue to punt so he can get his slice. What would need to be done? Engage the power of governance.

Governance is a crude intervention and breeds rebellion so alternatives are always sought. The best solution would be to ensure that there is always a lot of money in the pool for punters, the House and Mr Government to take cuts.

The solution is to flood the betting with counterfeit money of such good quality that nobody can see the difference. Who better to do that than the original source of money, the Central Bank? Central Bank money creation will express as debt and too much of it as reckless private or sovereign debt. No matter, Mr Well Connected and Mr Government enters into a Public Private Partnership whereby Mr Well Connected arranges for the orderly distribution of the counterfeit money on behalf of Mr Government in exchange for a percentage of the cash at the table.

Mr Big Spender at the table soon gets into trouble with too much punting while having too little money and far too much debt. He begs Mr Government for a bailout. Mr Government arranges special “F” chips for Mr Big Spender backed by special counterfeit money because Mr Big Spender must be kept at the table else the whole game collapses.

The House has since also made a deal with Miss Lightning Fast Punt who now has a special arrangement, for a fee. She gets to bet first and can withdraw bets one nanosecond before the ball falls. She manages her bets to time the ball and make sure she hardly ever gets a loosing punt. Mr Government does not like the deal very much but Miss Lightning Fast Punt can sure fill a table fast with bets and makes the game look very good so Mr Government just makes unhappy noises but does not interfere with the arrangement.

Round and round the betting would go, the House makes money, Mr Well Connected makes money, Mr Government makes money, Miss Lightning Fast Punt makes money and even lots of lucky punters on the right side of the wheel make money. Mr Big Spender keeps loosing money but with an unlimited credit line to counterfeit money plays like never before. The money pool at the table is saturated with counterfeit money, gambling on debt, a deadly game that always ends in disaster.

The pool money must remain at the table. It can never be withdrawn from the table to enter the economy of goods and services, of real things. It must remain at the table where the game of illusionary wealth is the reward while Mr Well Connected, the House, Miss Lightning Fast Punt and Mr Government spends their cuts in the real economy. The betting pool, however, must remain at the table or else Mr Government will be called upon to pay its debt, a debt that will have to be taken as taxes while using the power of governance. A debt that may be reneged upon in the interest of "the people".

The roulette market is no longer the willing participants market but a market controlled and managed to maintain the money pool at the table at all costs. It now also needs tinkering with the bets and payouts. For instance, the black and red simple bets may now only be played with “I” chips and Mr Government will decide the payout.

What aught to be and what will be are seldom the same so in the end the pool money will escape or a punter will find that the “chips” simply cannot be cashed in and then the game is up. The game is always up when the “mark” is cleaned out. In the game of economics that is when the savers have been cleaned out.

Until then, Mr Government drains the real money form the roulette pool, spends it and runs up a debt that is impossible to repay. Mr Well Connected and Miss Lightning Fast Punt bets at the table and always win, the House is happy with activity, Mr Big Spender can play at will while the punters enjoy their illusion for as long as it lasts.

In time the rouletteconomy becomes unstable and collapse. Then for a short period there will be strong demand for free market economists to repair what is broken before the counterfeiting of money returns as a pacemaker for economic activity. Benign at first, menacing at the end.

The game at rouletteconomy is a dangerous game but fortunately it is just a figment of my imagination, or is it not?

When the chips are down make sure that your payback will not be all illusion for the “real” economic calculator will apply when more Mr Governments are caught at running up bills they cannot hope to ever repay. If you are a saver, know that you are the mark and convert your savings in good time into a reliable store of value far away from the hands of manipulators.

Sarel Oberholster
BCom (Cum Laude), CAIB(SA).
28 May 2010

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

© Sarel Oberholster

The Independence of the FED

2010-03-07T05:29:00.000-08:00

There is a thesis that the banks are in control of the Fed and as a result had gained control over the issuance of the currency of the US. This thesis is based on the fact that the shares of the Federal Reserve Bank are held by these private banks. Does that mean that the private banks own the Fed? The short answer is yes but it is a hollow ownership with very restricted rights, basically to provide a smokescreen for the claim that the fed is independent. It is appropriately described as follows in the publication by the Fed available on its website, “Federal Reserve System Purposes & Functions” (1):

“The holding of this stock, however, does not carry with it the control and financial interest conveyed to holders of common stock in for-profit organizations. It is merely a legal obligation of Federal Reserve membership, and the stock may not be sold or pledged as collateral for loans. Member banks receive a 6 percent dividend annually on their stock…” (p12)

This is exactly the manner in which Special Purpose Vehicles (or Special Purpose Entities) are created in the corporate world. There is usually a promoter who does not wish to be seen to own an entity but who wishes to derive some benefit from the existence of such an entity without the burdens of ownership, which more often than not, would adversely impact on the presentation of its financial reporting.

The authorities and regulators including the Fed are very aware of these structures as are the accounting profession and rules have been devised and implemented to assess any such arrangement to establish its true nature. It is therefore appropriate to assess the Fed independence or alternatively interdependence according to the very rules that it uses to assess Special Purpose Entities. First let’s draw the simple ownership structure.

Anyone with a rudimentary knowledge of accounting principles would know that ownership of an entity without control over that entity requires further investigation. Consolidation of a group of companies can become complex when ownership and control are split. Ownership will be ignored and focus will be shifted to control according to GAAP (Generally Accepted Accounting Principles).

For example, a right to appoint the majority of the Board of Directors even in the absence of ownership would trigger a consolidation of that entity. Thus the controller and the entity would be seen as part of a group and collectively as a single interdependent consolidated entity. It follows that the above simple structure of the Federal Reserve Banks is a split structure where “ownership” is of limited significance and “control” must be established. Control will tell us whether the entities are independent or interdependent.

All regulation targets “control” and not just the legal form of ownership.

Accounting principles of consolidation have evolved from Special Purpose Vehicles, to Special Purpose Entities and very lately with the revision in June 2009 for implementation in January 2010 of Financial Accounting Standard 46(R) (“FIN 46(R)”) to the concept of a “Variable Interest Entity”. One can simplify the concept to question whether they are a family and the DNA test is to check for a “variable interest”. FIN 46 (R) defines a “variable interest” as follows:

“Paragraph 1A:

The enterprise with a variable interest or interests that provide the enterprise with a controlling financial interest in a variable interest entity will have both of the following characteristics:

a. The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance

b. The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.”(2)

The first test is to check for “the power to direct the activities…” Who exactly holds that power?

Here we turn to the Federal Reserve Act which instructs the Regional Federal Reserve Banks to elect each their own Board of Directors of which the Chairman and Vice Chairman of the Regional Board will be appointed by the Board of Governors of the Federal Reserve System. The Regional Boards must have nine directors in 3 classes of 3 each (A, B and C directors). Three A directors chosen by the stockholders; three B directors to represent the “public”; and three C directors to be appointed by the Board of Governors of the Federal Reserve System. The Board of Governors of the Federal Reserve System will appoint the Chairman and Vice Chairman from the ranks of the three C directors.

Two important concepts now present. The Board of Governors of the Federal Reserve System seems to have powers which could indicate “control” including the appointment of the power positions of Chairman and Vice Chairmen. The second is the question, “do the Regional Boards have independent powers normally associated with ownership and control or are their powers restricted and controlled in any manner?”

The answer again lies in the Federal Reserve Act, Section 4, par 8:

“8. Administration of Affairs; Extension of Credit
Said board of directors shall administer the affairs of said bank fairly and impartially and without discrimination in favor of or against any member bank or banks and may, subject to the provisions of law and the orders of the Board of Governors of the Federal Reserve System, extend to each member bank such discounts, advancements, and accommodations as may be safely and reasonably made with due regard for the claims and demands of other member banks, the maintenance of sound credit conditions, and the accommodation of commerce, industry, and agriculture. The Board of Governors of the Federal Reserve System may prescribe regulations further defining within the limitations of this Act the conditions under which discounts, advancements, and the accommodations may be extended to member banks. Each…”

The Regional Boards are limited in their abilities to perform the primary functions of the Regional Federal Reserve Bank in terms of the act and under the control of the Board of Governors of the Federal Reserve System. It is clear from the Federal Reserve Act that control does not vest in the Regional Federal Reserve Boards, nor are they independent but they take instruction and are controlled by the Board of Governors of the Federal Reserve System.

It is now appropriate to update the simplified structure above to add these two steps of control.

The question of “who has control?” is not yet resolved as the nature of the Board of Governors of the Federal Reserve System must be investigated next. Is the Board of Governors of the Federal Reserve System an independent body or beholden to another entity?

Federal Reserve System Purposes & Functions on page 4 describes the nature of the Board of Governors of the Federal Reserve System:

“The Board of Governors of the Federal Reserve System is a federal government agency. The Board is composed of seven members, who are appointed by the President of the United States and confirmed by the U.S. Senate.”

“The Chairman and the Vice Chairman of the Board are also appointed by the President and confirmed by the Senate. The nominees to these posts must already be members of the Board or must be simultaneously appointed to the Board.”

The Board of Governors of the Federal Reserve System is a federal government agency and power to appoint all its members, Chairman and Vice Chairman is vested in the President of the USA, with a veto power over any appointment for the Senate.

The first requirement for a “variable interest”, “the power to direct the activities…” is answered in the affirmative.

Federal government at Presidential level holds “the power to direct activities”.

The final version of the structure of control is as follows:

The next requirement which must be met for a “variable interest” is any one of (i) an “obligation to absorb losses” or (ii) a “right to receive benefits”.

I would argue that the right to create currency granted to the Fed together with the vested interests of Federal Government are more than sufficient to infer an “obligation to absorb losses”. The Federal Reserve Act adds a complication to this argument by holding the shareholders responsible to the extent of their stockholding for the liabilities of the Regional Federal Reserve Banks. The “obligation to absorb losses” is not a requirement that needs to be met, provided that the alternative “right to receive benefits” requirement is met and since it is not clear cut, it is better to concentrate on the latter right. Note that the obligation or the right need not be an absolute.

Again we can turn to the two sources, the Federal Reserve Act and the Fed publication Federal Reserve System Purposes & Functions for guidance.

Federal Reserve Act:

“Section 7. Division of Earnings

Dividends and Surplus Fund of Reserve Banks(a)

1.

A. After all necessary expenses of a Federal reserve bank have been paid or provided for, the stockholders of the bank shall be entitled to receive an annual dividend of 6 percent on paid-in capital stock.

B. The entitlement to dividends under subparagraph (A) shall be cumulative.

2. That portion of net earnings of each Federal reserve bank which remains after dividend claims under subparagraph (1)(A) have been fully met shall be deposited in the surplus fund of the bank.

(b) Transfer for fiscal year 2000.

1. The Federal reserve banks shall transfer from the surplus funds of such banks to the Board of Governors of the Federal Reserve System for transfer to the Secretary of the Treasury for deposit in the general fund of the Treasury, a total amount of $3,752,000,000 in fiscal year 2000.

2. Of the total amount required to be paid by the Federal reserve banks under paragraph (1) for fiscal year 2000, the Board shall determine the amount each such bank shall pay in such fiscal year.
During fiscal year 2000, no Federal reserve bank may replenish such bank's surplus fund by the amount of any transfer by such bank under paragraph (1).”

Federal Reserve System Purposes & Functions, page 11:

“The income of the Federal Reserve System is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other major sources of income are the interest on foreign currency investments held by the System; interest on loans to depository institutions; and fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations.

After it pays its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. About 95 percent of the Reserve Banks’ net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914. (Income and expenses of the Federal Reserve Banks from 1914 to the present are included in the Annual Report of the Board of Governors.) In 2003, the Federal Reserve paid approxi¬mately $22 billion to the Treasury.”

The statement “about 95% of the Reserve Banks’ net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914” says it well enough. It is an irrefutable fact that the Federal Government is the overwhelming recipient of the “right to receive benefits”.

The outright undisputable conclusion is that the Fed, when tested against GAAP as is used by it in it’s assessment of those it regulates, is a Special Purpose Entity of Federal Government or according to the latest definition is a Variable Interest Entity of Federal Government. The rules of consolidation therefore apply and the Fed must be seen as controlled by Federal Government, indivisiably part of Federal Government. The pretence of independence is no more that that, a pretence.

There is, however, no denying that the banks have tremendous vested interest in influencing the policies of the Fed and that the power so narrowly vested in the President makes the President a special target for influence. Still, the power to control the Fed is not in the hands of the “owners” but firmly in the hands of Federal Government and the President of the USA.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
7 March 2010

© Sarel Oberholster

1. Board of Governors of the Federal Reserve System Washington, D.C., Ninth Edition June 2005, Federal Reserve System Purposes & Functions.
2. Financial Accounting Standards Board of the Financial Accounting Foundation; Connecticut, No 311; June 2009, Statement of Financial Accounting Standards No 167.

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

The Bear is Back. (An edition in the Twin Peaks series)

2010-02-04T13:54:00.000-08:00

At dusk on Friday evenings the black ops teams of the FDIC, the Fed and Treasury descend upon the limping weak, the sick, lame and lazy squad in the banking sector and weed out those already convulsing in the final throes of death, ready to pass on to banking heaven (or is that banking hell). They put them out of their misery, right? No. They feed the dying toxic bank to another and the poison spreads as the half ill consume the rotten like road kill in a quest to keep up pretence of health.

Monetary policies of bad debt generation implemented over the long term have devastated the banking sector and the economy. Excess liquidity creation, ever growing exponentially, compounding and rolling boom bust cycles morphed into an epic global economic debt crises. A structural economic aberration was confirmed in absolute terms when that nonsensical extreme of zero bound interest rates were achieved in all the major global economies.

A super charged bad debt generating system had been created causing massive economic friction and heat. Then it seized up in the first of two crises events. The first was debt saturation for the private sector. The banks could not find sufficient new distribution avenues to maintain the debt creation bubble. Every willing and able debtor had been fed debt until they choked on affordability or over trading. Asset inflations collapsed, collateral values evaporated and nonperforming debt overwhelmed the debt creating and distribution machinery. The modern economies got its first taste of a global debt crises and it faltered.

That set the stage for the second crises event. Governments and central banks stepped in to alleviate the debt crises and to stimulate a global economy in cardiac arrest. An adrenaline shot of government debt with the help of unlimited central bank liquidity was administered directly to the heart of the economy. The 2008/2009 response was even more than that, a triple dose of adrenaline and steroids with a stimulatory propaganda shock or two. The dose was so potent that the economic patient jumped off the operating table and ran the 100 meters in under 9 seconds.

Unfortunately governments must pay for their economic medi-care in either deficits or taxes initially; but eventually tax they must. Thus monetary and fiscal policies evolve into economic policies of Marshall Law, direct interventions and dictatorial regulation. Governments absorbed the debt damage into fiscal policies of extreme deficit creation and central banks cooperated with direct and indirect policies of quantitative easing, commonly known as counterfeiting money. Liquidity was pumped into stock exchanges by opening liquidity channels between investment banks and the central bank. Just as private debt formation hit a wall at debt saturation so must government debt also reach saturation. It usually involves a political process or event. The Greek government encountered a funding revolt, Dubai renegotiated debt repayment, the UK ruling party faces potential defeat at the polls; and a voter revolt in Massachusetts sent a warning to the USA government. Old trouble became the new out of favour as Portugal and Spain joined the queue.

Suddenly the big picture changes. Stimulations which previously flowed freely are now off the table and may even be reversed. Governments find themselves cornered with massive debt to fund, falling tax revenues and taxpayer anger. The bull case which is highly reliant upon endless stimulations now lacks a driving force. All the stimulus bling is on display in the current reporting season but where will the next bling come from? The stimulus cupboard is the future. Drag enough of the future into today and it’s a party but tomorrow is the hangover.

Government jealously eyes the liquidity channel to the stock exchanges and starts formulating plans to redirect the liquidity flow into government bonds. It spawns policies to close the liquidity channel between banks and the stock exchange such as a ban on proprietary trading by banks. Historically these policies eventually evolved into direct interventionist regulation such as prescribed ratios of investments into bonds and stocks for financial institutions. Another favourite is to require higher holdings of government bonds or securities at banks. All in the national interest and in the interest of protecting savers from undue risk in volatile stock exchange investments or risky banks. These processes and the political events herald in the second crises, Government debt saturation.

Budget deficits can be colour coded. Governments running up deficits to 3% of GDP are still in control and would warrant a code green. Cross over the 3% of GDP and it becomes code orange. Cross the 6% of GDP barrier and a government enters the high risk area usually associated with reckless fiscal policy. The 10% of GDP level and beyond is the political instability level where the risk of an out of control spiral of state debt will overwhelm any pretence of stimulating an economy. This effect is not just limited to the debt levels, it also goes to state presence in the economy; reliance on the state for economic survival; state demand on available savings starve the private sector and with low interest rates bring all debt into the short term. Available funding for long term investment is extremely limited. Banks are further driven to risk by pooling short funds for long lending with severe interest rate risk to the upside irrespective if such rate was fixed or variable. A fixed rate will hurt the bank directly while a variable rate will hurt the long term borrower and expose the bank to the risk of default.

At this stage another fork in the road presents. Governments have the opportunity to repent and attend to the economic structural distortions. Recent history shows that there is a clear preference for “extend and pretend” policies rather than for “repent and attend”. We are fortunate to have the example of the Japanese government’s extend and pretend policies to give us an idea of the likely outcome of these policies.

The repent and attend policies would see governments implement policies of free markets in the traditions of Austrian economics. Perhaps we may be surprised by governments moving away from Keynes to Mises but then again we will be equally surprised to find the sun rising in the west. I would therefore guess that we are stuck with the example of Japan and a very historical example of the events after 1929.

That is the thesis for the Twin Peaks essays in which I compare the 1989 peak in the Nikkei with the more recent 2007 peak in the Dow. The ratios are established at the peaks and no adjustments for trading days or rebalancing of the ratios are allowed thereafter. Hence the charts will meander wherever the market takes them.

The March 2009 market rebound produced significant divergence and a growing gap between the evolving Dow and the historical Nikkei until mid January 2010. The up trend reversed in dramatic fashion after 19 January 2010. The gap between the Dow and history is a chasm even though convergence is presently strong.

This is the big picture. Let’s zoom in for the near future, also adding the 1929 top and trend to complete the view.

The burning question on everyone’s lips is how this will trend for the medium to longer term. Does one buy the dips or sell the peaks? The modern example of Japan and the historical example of 1929 Dow are still compelling given the high probability of similar government responses very much steeped in Keynesian traditions. A meeting of the Dow with history indicates a Dow interim drop into a Dow 5000 range. Time will tell.

I have unveiled a momentum indicator in the January 2010 Twin Peaks essay (Twin Peaks – Jumping in Mud) and explained that this indicator tends to confirm a significant trend change when momentum changes direction and achieves a level of 1.5% or more in the opposite direction. I am using closing data. The second half of January 2010 saw the acceleration of negative momentum which showed up for the first time since the start of the March 2009 rally on the 3rd of November 2009. The trend towards negative momentum has been building since. The Dow momentum indicator reached negative 1.6% in a decisive move today, 4th February 2010, emphasising a high risk of a significant negative trend for term. It is a watershed for a confirmed bear trend. Thus the bear is now dominant until the bulls can retake the initiative and reverse momentum back to a 1.5% positive reading.

Momentum is the difference between the June/July 2009 correction and continuing bull trend and the present downward move. The momentum reading on 10th July 2009 was a whopping positive 8.5% which not only stopped the correction in its tracks but followed through with the bullish rebound. Momentum thereafter faded and flattened out around November 2009, oscillating between positive and negative for two and a half months though the negative bias was building. The 1.5% negative reading is the line in the sand. The bulls must now prove their case by taking back the 1.5% positive.

In fact, bulls have been unable to claim positive 1.5% since 28th September 2009. With government support clearly on the side of the bulls it may take time for the bear momentum to build but the onus of proof has shifted and is no longer pinned on the bears. I would expect the bulls to plead for another sugar spike should the bear momentum accelerate. Perhaps by calling spending, “Investing”, they can slip some sugar past bone weary taxpayers but will it be sufficient to swing a 1.5% positive momentum? A holding pattern would not suffice. A stimulus injection of substance will be required as the previous stimulations are decaying fast and are celebrated in the numbers currently being reported. Repeats will require a repeat stimulus effort preferably greater than the previous one. The fact that interest rates are at zero is another obstacle, no further interest rate cuts are forthcoming to help with the lifting.

Professionals may also want to consider shorts on a “Sit and sold” strategy. Just imagine the “investor” who may have invested in a sit and sold strategy on the Nikkei over the past 20 years and don’t forget to throw in the positive carry, compounding for 20 years. Where may the brave investor be who shorted the Nikkei in January 1990 and held onto it into the March 2009 bottom, surely that must be the holding pattern Midas trade of the past two decades. Compare that trade against a buy and hold strategy of the Dow over the same period for an emotional response.

Whichever way you’re leaning, ponder government policies which purport to solve a debt crises with acceleration of debt policies; address bursting asset bubbles with reflating asset bubbles policies; promote government spending to replace private spending; engage in government spending without the equivalent collection of taxes; and encouraging government sponsored central bank counterfeiting with zero interest rates as a substitute for savings. Contemplate perpetual government debt rolling from one generation to the next trapped in an out of control multi generational debt spiral; warehouses stuffed with commodities and oil tankers not moving oil but converted to floating warehouses all funded with zero interest cost counterfeit money; banks rolling and refinancing massive quantities of real estate debt in the absence of adequate collateral and debtor ability to repay; government sponsored entities in a quasi nationalisation of residential mortgage finance with implied large scale government retail real estate ownership as a result of defaulting residential mortgage debt; all that while central bank liquidity is pumped into speculation; and pension savings are driven into risk taking strategies in a desperate search for income and yield.

Structural economic distortions inevitably resolve in crisis for not even modern governments can sustain these imbalances indefinitely. Economic distortions taken to the extreme and the absolute, such as zero interest rates, debt saturation, central bank acquisition of private debt assets of dubious quality (surreal) and money printing to fund government debt must resolve in economic calamity. A 20 year low level depression with a government consuming the total savings base of the population without solving any of the economic structural stress is an economic nightmare not only for Japan but for all in an integrated global economy.

Soon governments will be forced to each pick the method by which it will clean their respective houses, or not. Will it be hard choices today or even tougher choices 20 years down the road to Japan? The same dynamics applied two years ago but without the mountain of additional government debt. Perhaps some will favour a choice to ignore all warning signs yet again and push an economy beyond the brink with counterfeit money into a hyperinflationary depression. The time to arrange massive “stimulations” to be introduced in concert into the global economy has passed. Each sovereign state will now have to turn its attention inward towards dealing with its own structural distortions.

Can the bulls step up to the plate to provide the momentum to turn the tide back in their favour with governments constrained by debt saturation and political instability? The bears are all but extinct at this stage and are not the drivers of the move down (little use to set bear traps) but the longer the bulls fail to prove their case the stronger the bear will get. What exactly is the bull case without government and central bank interventions?

Take a hard look at the macro economic picture and make up your own mind whether it is dusk or dawn?

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
4 February 2010

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ . Please note that these essays are for information purposes only.

Zero Cost Carries

2010-01-31T07:48:00.000-08:00

Interest rates as a pricing mechanism in the economy go much deeper than the superficial assessments of mortgage loan rates or what one earns on deposit. Arguably one of the most significant jobs of interest rates as a pricing mechanism is the “cost of carry”.

This in plain language means how much it would cost to buy any item for resale at a future date. A simplified example may help. Say a store buys a product for resale at $100 with the aim of selling it within one month. Now let us state that interests rates at that time was 12%. That would translate into an interest rate of 1% for one month. So the store owner would have a cost of carry of $1.

The store owner paid $1 to carry the stock for one month. Say in this example that the store owner would have expected to make a net profit of $10 on the sale before paying for the cost of carry. That would imply that the store owner’s cost of carry would have calculated as 10% of the net profit. The importance of cost of carry is yet but partially explained.

What happens should the product not sell as expected in one month and the store owner is only able to achieve the sale after 12 months? Cost of carry now amounts to $12 and has wiped out the entire expected net profit and some. Accountants developed a measure to manage cost of carry in a stock turnover ratio. The manager would ensure that the total stock turns over as fast as possible to keep cost of carry as low as possible. The store owner would be encouraged to purge slow moving unwanted stocks from inventory through the cost of carry mechanism. A desirable and economically efficient behaviour trait operating on autopilot without outside intervention.

The principles of cost of carry translate directly into financial markets and financial speculation. Interest rates are not the only component in cost of carry but have always been an important component, that is before the advent of the zero bound interest rate policies of central banks.

Say you want to speculate on a rising oil price. Calculating the cost of carry on your position follows this economic and accounting logic. You borrow the cash required to make the purchase. Buy the oil and store it. Cost of carry will be the interest paid on the loan and the cost of storage for the period from when you entered into the transaction until you chose to exit. That’s the basics. Why should it be significant?

Cost of carry cascades through the economic fabric in millions of ways. A real estate owner for profit would purchase a commercial or industrial property and the expected profit would be the rental incomes, less cost of carry, less operating expenses. A speculator in shares would expect a profit equal to the difference between the buying and selling prices, plus dividends, less cost of carry. Interfere with this mechanism and it impacts as wide as supply and demand variables of property. Too low interest rate and access to easy credit would drive up demand and prices in no time for example. That is the birthplace of property bubbles (and all other asset inflations also known as asset bubbles).

The whole economic cosmos of derivatives is priced on a cost of carry basis. Forward cover on foreign exchange (say $/Yen) is based on the perfect hedge of borrowing the dollars and purchasing yen at inception. Invest the yen for the period. Cost of carry for the period would be the dollar loan cost less the yen income, both interest rate denominated. Thus the forward price of Yen would be the spot (today’s price) plus the cost of carry, which may be positive or negative. A neat little cross border trick performed by interest rates in this pricing mechanism. Mess with the interest rates in one or both sovereign economies and the exchange rate pricing mechanism get similarly messed up.

Interest rates are an invisible spider’s web influencing every price of every type of good or service produced in the economy. No matter where you touch it, it reverberates throughout the whole structure. Interest rates would regulate the allocation of scarce savings, and yes savings are always scarce without huge quantities of debt facilitating liquidity provision from the central banks. This job of allocation by interest rates when interest rates are free form manipulation or outright control is performed as a delicate harmonious melody throughout the economy in that invisible spider’s web. The dynamic takes cognisance of economic merit right down to the smallest individual transaction maintaining an intricate economic balance which in turn contributes to the harmony of all other pricing mechanisms.

Just try and imagine the corps of central bankers required to perform the same functions previously performed by interest rates without the interfering central bankers. It is not only probable but guaranteed that these delicate operations will no longer take place. At first the interest rates just gets distorted. The distortion in interest rates distorts all other pricing mechanisms and influences the choices and behaviour of economic participants. The previous dynamic harmony is lost.

Sadly it does not stop there. Every intervention breeds another intervention to sustain the distortion of the previous intervention. All interventions breed like germs on rotting flesh left outside in the sun and spread like a virus on a university open website. The interventions accumulate and compound and monetary policy interventions reach the pinnacle of absurdity when it attains that final resting place of the zero bound.

The central bank has effectively discontinued the base interest rate from the economic landscape. Of the spider’s web which were tattered and torn by interventions now only remains a few malfunctioning strands. Interconnecting harmony and relative rebalancing is but an abstract memory.

Then again why would it matter? Unfortunately it matters very much. Visualise an economic pickup truck with no intricate wiring. Nothing works and it is simply being pushed around by government and central bank officials. Having destroyed the fabric of pricing mechanisms are not without consequences. Those consequences are as varied and as complex to pin down as were the contribution of interest rates to the pricing mechanisms.

Cost of carry is but one component where consequences will manifest. Staying with the examples given we can see that inventory management has been compromised and dead stocks can be carried without cost, which will certainly diminish efficient management of stock levels; the oil speculator can double or triple his position and carry it for longer with an immediate consequence that the price of oil may rise for everyone else though the general tendency would be for oil prices to become unstable and subject to violent unpredictable adjustments; the most obvious consequence for real estate is similarly boom bust pricing cycles but a menacing economic rot in the encouragement to banks to roll and refinance bad debs while in reality becoming owners of the properties on a zero interest cost of carry is a less obvious outcome; perhaps the most devastation to pricing mechanisms are the consequences of a zero cost of carry on derivative markets distorting macro pricing of exchange rates between currencies, hedging and arbitrage in all commodities and financial securities across all forms of derivatives from the plain futures and options to the exotics. No pricing mechanism is spared the taint.

A very real example which carries influences from cost of carry on inventory, to finance, to derivatives and even sovereign currency pricing is copper. Thus we can observe the absurdity of huge stockpiling and rising prices concurrently in real time.

The global economy is now cursed with the affliction of the zero bound interest rate policy in all the major economies. Thus all micro and macro pricing mechanisms must function with the heavy hand of central bank bureaucrats allocating with bias, subject to vested interests and central government direction. They only allocate where they can see and how they desire in the absence of the delicate spider’s web of dynamic interest rate allocation on economic merit.

Adam Smith’s invisible hand of the market has been chopped off at the elbow.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
31 January 2010

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

Twin Peaks – Jumping in Mud

2010-01-06T03:54:00.000-08:00

In this edition of Twin Peaks we continue to monitor the unfolding developments in the Global Financial Crises (yes it is still with us) and the developments of the post Dec 1989 crises in Japan as expressed in the Dow and the Nikkei. The thesis as has been discussed at length in previous Twin Peaks series, is that the USA and Japan are following similar monetary policies of excessive monetary stimulation which achieved an artificial market condition described as “the zero bound” where short term interest rates are stuck at zero or near zero for extended periods. The 1989 economic collapse in Japan initiated its drive towards the zero bound and the USA started its march towards the zero bound after the 2007 economic crises. Both economies have achieved the condition of being stuck in the zero bound but the USA is about 18 years behind Japan. The zero bound monetary policy combines with Quantitative Easing and fiscal policies of budget deficits to generate an explosion of public debt.

The present tale of the charts is one of divergence. The USA chose aggressive monetary and fiscal interventions while the Japanese took a more measured approach. It is the Bernanke theory that this difference is what will distinguish the USA from Japan, where the USA will recover to rapid economic growth as opposed to the Japanese experience of a low level deflationary depression stretching over two decades and entering its 3rd.

The aggressive policies of the USA are showing up in the charts. That does not mean that the Bernanke theory is proven, it simply means that the markets reacted in predictable fashion to the very aggressive government policies. Government and central bank interventions are not self sustaining and must be repeated in ever growing tranches to simply maintain a stimulation effect. The next stimulation will need to be even greater than the previous two but it may not be as visible due to the adverse political consequences attached to the previous spectacles.

Stimulation decay sets in after a while unless, and this is what is hoped for, the spark provided by the government is sufficient to get the economy going. The jury is out on whether stimulation will be a gasoline and newspaper bonfire burning fast and bright for a while to sputter and die or not. Everything rides on that outcome.

(Click chart to enlarge.)

The peaks of the Nikkei and the Dow are matched in this chart and not rebalanced thereafter to allow for significant deviances. The peak of the 1929 Dow has been added just to spice up the test against depressionary conditions. The aggressive US intervention has now carried the Dow upwards beyond the levels of the Nikkei, for a similar period as unfolded. The positive divergence in itself is not compelling as the initial equally aggressive reactions to the 2007 crash caused a similar positive divergence then, which was resolved with a dramatic convergence and negative divergence between October 2007 and April 09. This chart does not show it but the long term bottom of the Nikkei since Dec 1989 is as recent as 10 March 2009 at 7054.98.

The decay in the stimulations is already showing up in the momentum inherent to the move from April 2009.

The Momentum chart hereunder needs some explanation in interpretation. It measures the relative change in the gap between the 50 day moving average and the 200 day moving average, counting backwards. A 180 degree flip-over (negative to positive) in data occurs when the 50 dma crosses over the 200 dma.

Here’s what the chart tells us. The momentum in the bear move down was failing for weeks before late March, early April 2009. The bear market momentum gave way to a negative momentum bear, i.e. a bull market momentum since early April 2009. The flip-over/crossover occurred just before the end of June 2009. Momentum still spiked unto mid July but since then bull momentum has been in decline. The “jumping in mud” period started in late October 2009 where the market is still in bullish trend but just can’t get going.

Presently we are still in the “jumping in mud” phase but the beginning of a downward trend is showing up in the negative momentum bull, i.e. the bull marked momentum is failing. We have not yet reached a point where we can make a call to say that the bull marked has failed. The historic indications are that a -1.5% to a -2% recording is required to indicate a high probability that a bear market move is underway. The highest recording was -0.7% on Dec 31st 2009. So for now it is simply “jumping in mud” time until momentum picks up in either direction.

(Click chart to enlarge.)

The here and now is where the bulls will believe in the Bernanke thesis that this time it will be different for we acted faster and with more aggression in our stimulations. The bears will continue to claim that the speed and extent of intervention will not alter the outcome of a deflationary depression only how we get there. They would further insist that the likely outcome of a too fast and too furious monetary response will harvest an even worse outcome of a hyperinflationary depression in an effort to escape the deflationary depression. Already gold, silver, copper and every other commodity are being stuffed in custody and warehouses discounting such excess. Another vote of no confidence in official policies and not a sign of economic recovery.

The Japanese economy in this phase was typified by warehousing growing bad and delinquent debt with central bank and central government support. Mortgage debt for instance was warehoused in the Jusen structures, with similarities to the Freddie Mac and Fannie Mae structures in the USA. Every stimulation, regulation and intervention was aimed at reviving the asset inflation pre 1989 and denying the accumulation of decay in the economy. The economic events forced Japan to disprove the Keynesian theories of sticky downwards salaries and wages when after endemic unemployment, salaries and wages stated falling. Asset inflations never revived and in fact continued to deflate as each stimulation and intervention to prevent that outcome failed. Minuscule rises in interest rates or in direct or indirect taxes dumped the economy right back into crash mode, stumbling through two decades of economic decline until government debt equalled national savings in this previously high net savings nation.

Perhaps this time the outcome of Zero Bound and Quantitative Easing monetary policies combined with budget deficits and excessive government debt will be different, but probably not.

May you trade with wisdom and reward in 2010.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
6 January 2010

Ps. I will post a news flash update should the Momentum chart post a negative 1.5%.

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

Sarel On the Edge with Max Keiser (Part 1)

2009-12-04T11:18:00.000-08:00

Sarel On the Edge with Max Keiser (part 2)

2009-12-04T11:15:00.000-08:00

Parking Space for Non Performing Loans

2009-12-03T07:59:00.000-08:00

The real estate market will soon recover and this whole financial crisis will be just a bad memory. This was exactly the reasoning of the Japanese authorities when the real estate market collapsed in 1990. The very obvious solution was to ensure that the debt accumulated in funding the real estate bubble could be parked safely away from prying eyes while patiently waiting for the real estate market to recover and the real estate prices to grow back to the levels required to settle the loans. Sadly it turned out to be a twenty year wait but the non performing loans could not remain parked in the private sector for such an extended period. Parking space required grew each time the problem was moved and the taint of government with it.

The tale starts in 1970 when eight Jusens were established. Seven by major banks and financial sector players with shareholdings dispersed amongst the players for each Jusen to avoid subsidiary status. The eighth was founded by Agricultural Finance Cooperatives which were banks (also called deposit taking institutions at the time). The Deposit Taking Institution definition was telling as it defined the status of the entity as a bank or not and not the fact that an entity may be making loans. The purpose of the Jusens was to finance mortgage loans for the household sector but they were not to take deposits and would therefore not be banks. The shareholder banks would provide all the funding required.

The non-bank status allowed the Jusens to escape regulatory scrutiny with the full knowledge and blessing of the political regime and the BOJ. The Ministry of Finance (MOF) actively participated with a policy of profit padding reminiscent of a protective cocoon of naval attack craft around vulnerable aircraft carriers nicknamed the convoy system (gosoo sendan hooshiki) to promote cartels and safeguard banking profits from unacceptable competition (Rosenbluth&Thies, 2000). Also called a “survival of the weakest” policy (Milhaupt, 1999).

The basic Jusen setup was a very simple structure which made a mighty contribution to the real estate bubble in Japan.

The Shareholder Banks in turn were also receiving generous liquidity support from the BOJ and all the building blocks for a real estate bubble were in place. Soon other banks described as non-founder banks were also lending into the Jusens. The Jusens in turn did not restrict its mortgage lending only to households but expanded into the (at first) lucrative lending for property development. Globalisation, market liberalisation and internationalisation arrived in Japan in the 1980’s and together with epic loose monetary policy in the wake of the 1987 soon too be forgotten crash of the stock exchanges, accelerated lending growth into real estate to a fever pitch, with the Jusens out front. Dark tales are told of how even the Yakuza got involved in the real estate business in many ways including by providing jiageya (a land turner) who would clear the way for large real estate developments by for example “convincing” obstructive small land owners or tenants to cooperate.

The Nikkei peaked in Dec 1989, the real estate bubble popped and by late 1990 the Jusens were in trouble with non performing loans. The MOF inspected the Jusens for the first time ever in 1991 and concluded that almost 40% of the loans were non performing (Milhaupt, 1999). The response were predictably to underplay the problem as was shown later and to develop plans aimed at parking the problem out of the way while waiting for the real estate market to recover. The initial write off for the Jusens was around $5million. See the table of losses published by the DIC (Deposit Insurance Corporation of Japan) further down for the disclosed losses after a final restructuring effort in 1996 which closed the Jusens down.

The structurers of the Jusens never anticipated any failure and it transpired that clear allocation of losses when they arrived could not be done. Soon the previous partners in the joint ventures were arguing who should bear the losses and in which percentages. Some argued for loan ratios, other argued for control ratios and fingers were pointed at the MOF as responsible. The MOF was forced to intervene in the growing Jusen crisis. MOF involvement “stabilised” the volatile situation within the greater context of the Japanese financial crisis with hints of public support and implied guarantees but was ultimately based on the vain hope that the problem would resolve itself as soon as the economy had been reflated.

The temporary parking space provided for the non performing loans policy was so successful that Visiting Executive Professor Masaru Yoshitomi concluded in his lecture at the Wharton School, University of Pennsylvania published 17 April 1996, thus:

In conclusion, the recent performance and recovery of the real economy is decoupled and isolated from the banking “crisis” in Japan. Therefore if both the Government and the public correctly handle the Jusen liquidation and other banking problems through overhauling the current financial and regulatory system, the Japanese economy will launch on the new underlying growth path of 3 percent or so with better shape of both real and financial sectors. (The “jusen” debacle and Japanese Economy)

The parking space provided by the MOF supported by the BOJ’s ultra loose monetary policy with limitless liquidity provision and zero interest rates or near zero interest rates combined with the envisaged “overhauling of the current financial and regulatory system” failed to generate the 3 percent or so growth path for Japan. In fact, the by then around 75% non performing loan problem of the Jusens grew to an almost total conversion to non performing status. An attempt to raid the treasury to clean the Jusen slate met with fierce political resistance. The Founding Banks and the MOF were forced to thrash out a painful deal in 1997 to “permanently” deal with the Jusen nightmare. It was implemented by dividing up the non performing loans amongst the MOF and the Founding Banks with provisions for greater disclosure and transparency. Yet again the non performing loans were shifted from the previous parking space at the Jusens to the MOF, the Deposit Insurance Corporation (DIC) and the balance sheets of the Founding Banks on a 15 year envisaged repayment structure.

It did not take long to realise that the banks simply could not cope with the additional losses of non performing loans going bad and as early as March 1998 the MOF was obliged to inject capital into failing banks. Nine years into the Japanese Financial Crises having provided parking space for non performing loans for all that time and yet again the Japanese authorities faced another banking crisis. Rosenbluth & Thies (2000) describes it as follows:

“Between October 1998 and October 1999, Long-Term Credit Bank and Nippon Credit Bank were nationalized, five other major banks were declared insolvent (Nikkei 10/18/1999), and many others have merged with healthier institutions.” (The Electoral Foundations of Japan’s Banking Regulation)

The history of the Jusen problem after the parking space deal can be seen in the numbers published by the DIC in the RCC – Secondary Losses of Jusen Account table hereunder:

Source: Deposit Insurance Corporation, Japan

(Click on the table for a larger view)

It is clear, looking back upon the past twenty years of the Japanese Financial Crises that the ultimate parking space for most of the non performing loans were found on the balance sheet of the Japanese Government, those of the Jusen and of the banks alike. The policies of providing parking space to “stabilise” bubble excesses has mired the Japanese economy in a deflationary depression for two decades and saddled a younger generation of Japanese with a depressing Government Debt burden of a quantity that will haunt their economic life for more than a generation.

Only those afflicted with that special kind of blindness of them-who-do-not-wish-to-see would be able to look upon the policies of the FDIC, the FHA and its wards Freddie, Fannie and Ginnie together with the antics of the Fed to provide parking space for non performing loans will fail to see the parallel with the recent history of the Jusens. The not so blind will note how the taint of bailouts and stimulations festers in this still growing parking space and contemplate a future perhaps akin to the vehicles abandoned at the Dubai International Airport car parks. Those who watch the growing sovereign debt burdens may eye the IMF and the World Bank for parking space when the next sovereign debt default announces its arrival.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
3 December 2009

References:

1. Rosenbluth & Thies, 2000 – The Electoral Foundations ofJapan’s Banking Regulation, Electronic copy at: http://ssrn.com/abstract=1158646
2. Milhaupt, 1999 - Japan’s Experience with Deposit Insurance and Failing Banks: Implications for Financial Regulatory Design?, Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, August 1999, pp. 21–46.
3. Yoshitomi, 1996 - The “jusen” debacle and Japanese Economy, The Long-Term Credit Bank of Japan Research Institute.
4. Felson, 1998 - CLOSING THE BOOK ON JUSEN: AN ACCOUNT OF THE BAD LOAN CRISIS AND A NEW CHAPTER FOR SECURITIZATION IN JAPAN, DUKE LAW JOURNAL Vol. 47:567, pp 567-612.
5. Organized Crime Registry, 1996 - Who got Yakuza into our banking system?, http://orgcrime.tripod.com/yakuzabanking.htm

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

The Cruellest Tax of them All.

2009-11-03T01:11:00.000-08:00

Who is John Galt? – Ayn Rand from Atlas Shrugged

Humanity has shown many times that we can be extremely cruel and equally capable at rationalising it away. Taxation comes in many forms and is often not apparent. A well disguised tax is a boon for governments. The cruellest tax of all is a one hundred percent tax on income, disguised and capable of being rationalised as “good”.

Imagine for a moment a peasant farmer who has to hand over a hundred percent of his crop to a feudal lord. It is easy to see the injustice of such a tax. Yet we have a hundred percent tax in our midst and there is no moral outrage. It is the zero interest rate policy. Fortunately that other destroyer of savings, Quantitative Easing, is off the table for the time being.

We rationalise it away as a benign economic policy aimed at restoring economic prosperity. No questions asked. All “policy” happens by government decree. Do not buy into the slight of hand that the central bank is not part of the machinery of government. So the Central Bank can “follow” a zero interest rate policy but the reality of this tax is lost on the population.

Let’s put it up for scrutiny. Would a saver willingly agree to an economic environment of zero interest rates? Certainly not. Would a debtor prefer a zero interest rate? Absolutely. The saver and the debtor would negotiate a “price” for the use of money saved under normal willing economic participant conditions. That price for use of funds is interest.

The Central Bank enters the negotiation between saver and borrower and by counterfeiting money is able to destroy the negotiating base of the saver. Counterfeiting money through policies of unlimited liquidity provision is “price control” over interest rates instituted to force interest rates to zero. The interest income of the saver is completely taxed away.

I want to concentrate on the tax though the plight of the saver haunts me when I interview desperate pensioners who are forced into risk assets in the hope of making up for a loss of interest income. Often they lose capital in this game of risk taking with savings, into a downward spiral of despair. Back to the tax.

Savings will migrate to term assets for meagre interest income but that income has more to do with a term premium than with interest, the cost for use of funds. No-one has any moral standing to defend a policy that dispossesses the interest of the saver however, the indiscriminate redistribution of this “interest” tax is even worse.

The normal standards for a tax are that it must be fair and it must be evenly distributed. The “for the public good” argument is that tax may be levied disproportionately usually with reference to some wealth measure. In simple terms, the rich must pay more and the poor must pay less. A zero interest rate policy tax fails dismally when it is tested against this framework. There is no discrimination. All savers are taxed their entire interest rate. Some savers, usually the wealthier and more sophisticated savers can institute counter tax measures and are able to avoid or escape the zero interest rate tax to some extent. Most can’t and they fund the redistribution.

Looking at the redistribution of the saver’s interest we find the same indiscriminate principles being applied. Is it being distributed by an elected body, fairly and equitably in the interest of society? No. Who are the recipients of the interest that has been stripped from the savers? Obviously the borrowers and it takes place with no reference to the wealth, income or other discerning standards which would normally apply. By which standards do society decide that Homeowner X who bought a property priced beyond his means and who borrowed in excess, must be subsidised by Pensioner Y who had saved to survive the income drought of old age. Why must BIG BANK A have access to zero or near zero cost of funds to carry all those loss making loans while Saver B can no longer afford his child’s tuition?

So the zero interest rate tax strips the interest income from savers and hands it to government, morally justified as stimulating the economy through deficit funding. It is of no use to run up huge deficits if it involves paying a high interest rate, is the justification. Strip the interest and hand it indiscriminately to over-extended borrowers many of which had used the borrowings to speculate on asset inflations. Strip the interest and hand it to the banks to “repair” their balance sheets and to “carry” the bad debts. Strip the interest and hand it to the developers who overinvested in property, capacity or trading. Strip the saver of interest to fund the carry of compounding unliquidated losses.

How totally one sided. Rip off the savers and give to the borrowers. Not even the socialist dictate of Karl Marx which proclaims that everybody should contribute according to ability and receive according to need, can contain the injustice of a zero interest rate policy tax. Surely nobody can have a zero need and a one hundred percent obligation to contribute. Neither can anyone claim one hundred percent contribution from savers against a zero contribution from borrowers (the bank margin excluded).

So, next time when the Fed or the Bank of Japan or the Bank of England proclaims its devotion to a zero interest rate policy, stop and ponder for a moment the injustice to the saver. Think on the co-operative spirit of society and ask why these Central Banks consider it fair, moral and just to strip savers of their income in their quest for self preservation. When you hear the phrase, “interest rates will remain at zero for longer” question the imposition of hardship on the saver for longer. Contemplate the weight of the burden on a small and responsible portion of society and the economic consequences of such self serving behaviour by Central Bankers with the support of Central Government.

In your heart, if you have a heart, you will know that robbing the saver is not moral. You will realise that the indiscriminate redistribution of income rights from the responsible and the cautious to over burdened borrowers, speculators, government and risk seeking banks serve not the short or long term interests of economic society. Most of all do not rationalise this mean policy and indiscriminately cruel tax into a benign and caring action by Central Banks.

Look no further than the escalation in Total Public Debt and compare it to the Federal Interest Outlays to see but a portion of the sacrifice extracted from savers. See how the debt expanded exponentially but the cost of funding the debt dropped dramatically. Interest tax need not be calculated or declared because the tax has already been calculated, declared and transferred to government through the application of the zero interest rate policy of the Fed.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
3 November 2009

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

Ground Zero

2009-10-25T07:14:00.000-07:00

I’ve had many mentors during my career who shared with me their wisdom. One friend told me, Sarel there are two business rules that you must comprehend and apply. The five finger rule and the two finger rule. Showing his right hand and counting from the thumb he said: “The five finger rule is, What’s-In-It-For-Me?” The two finger rule he said is, “Buy low, Sell high.” Silly rules easily made off as platitudes yet they sneak up upon you when you analyze your investment and economic environment.

So we ask of the stock exchange; is it time to buy or time to sell? Buy low and sell high. Perhaps we look at residential property and ask if it is time to buy or sell. Buy low and sell high. What about commercial and industrial property? Buy low and sell high. How about government bonds? Buy low and sell high.

These questions are asked within a relative frame of reference but when we ask the bond question it is when we hit ground zero. The “risk free” short term interest rate is set at zero. Zero is as low as it gets, it simply cannot go lower. Zero interest rates plus a risk premium for term funding and one has the bond rate. Bonds are an inverse investment, thus a zero short interest rate is the highest price base possible for bonds. Bonds are as expensive as they can get. That is ground zero for bonds and it originates from a zero interest rate policy

The zero interest rate policy is at the epicentre of the economic distortion. It sends shock waves via investment channels to distort the investment landscape into a twisted and contorted vision of what aught not be. No market can exist without buyers and sellers yet a zero interest rate policy gives zero interest to the saver. The seller of savings is offered nothing, zero and is driven out of the market to be replaced by the central bank providing liquidity. It is an ultimate distortion, one that cannot be corrected unless the central bank withdraws from the position of the saver. That can only be accomplished by increasing interest rates and the economic consequences that follows such structural re-adjustment. It is a ground zero trap.

Having driven the saver out of interest bearing investments is but the start of the process. Where will the saver turn? The three pillars of investment, interest bearing securities, property and shares. Bonds will suffer huge capital losses if interest rates were to move away from zero. So investors must choose between recovery or permanent zero short interest rates. Residential property is a bubble in deflation. Commercial property is a bubble in deflation. Any professional investor in property will know that property is valued on a yield basis and that yield is tied to interest rates. Property has the same inherent pricing structure as bonds; its value is at a maximum when interest rates are at its lowest. Again lower than zero it cannot be.

The first two pillars of investment look decidedly shaky. The saver moves along and plunges into shares but in the search for yield start behaving just as mortgage bankers did taking on the sub prime debt, the no documents - no questions asked investment decisions. Investment funds are channelled into emerging markets on the flimsy argument that these economies can do the heavy lifting to get the global economy on the road to recovery. Exactly how that is supposed to take place is shrouded in mystery.

So we stand back and observe how the structural aberration of zero interest rates forces investment funds into classic stock exchange inflations and see the absence of harmony with the real economy. The participants in this asset inflation are well aware of it but hoping for a rescue from a recovery which by definition cannot co-exist with zero interest rates.

Yet even the stock exchanges are unable to contain the push of zero interest rates. Investment funds spill over into commodities and further distort emerging market investment. Exchange rates between weak economies and strong economies express as strong currencies for minions and weak currencies for giants. We note leading indicators measuring the stock exchange exuberance and the results of relentless “green shoots”, “better than expected” and “stimulations” propaganda to mislead investors further into risky assets. Emerging markets pile on debt and stock exchange investments in “strong currencies” which their populations can never hope to repay. Debt, which is uncovered for exchange rate risk since the currencies are appreciating. Debt, when it is called will drop their currencies faster than the mercury in a tropical storm. These emerging markets will default as they must just as weak unsuitable debtors had to default on their mortgage loans. The only difference is the bubble in residential property and the bubble in emerging market currencies. “House prices never fall” is a much stronger hope to cling to as opposed to “emerging currencies will keep rising”. Pushing giant economies’ stimulation liquidity into emerging markets is no panacea for the global economic woes, nor will it restore any of the structural deficiencies of abused monetary and fiscal policies. A weak currency policy of giant economies is the script for sovereign defaults. Special Drawing Rights from the IMF cannot prevent sovereign defaults. It will only deepen the debt trap when the illusion of bubble currencies is exposed.

Here is where we need to apply the five finger rule? What’s in it for the emerging markets (or what was in it for the sub prime borrower)? What’s in it for the investor in emerged markets who looks beyond the yield pick-up (or what was in it for the mortgage and investment bankers who dabbled in sub prime debt and its securities and did not consider the liquidity trap of rising residential property prices)? What’s in it for investors to participate in stock exchange inflations, (or what was in it for those who fell over the cliff)?

The ultimate “what’s in it for me?” question is the one governments will soon be asking about stimulations. What is government looking to get out of stimulations? Government will look at its own pocket and will ask the question, “do we get more tax as a result of our stimulations?” and the answer will be patently clear. Ground zero for fiscal policy will be the realisation that stimulations are not a miracle economic cure and as with zero interest rates, a fiscal choice will be made for permanent structural distortion or a new beginning. Japan chose the former on monetary and fiscal policy. Will all leading economies follow the example of Japan into a twenty year economic wilderness?

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
25 October 2009

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

For the Brave - US Government Spending 1933 - 2019

2009-09-29T04:29:00.000-07:00

(Click on Chart for an enlarged view.)

The Taxman’s at the Door

2009-09-28T01:43:00.000-07:00

Tax is about to hit you like a bare fisted punch in the eye. You will be stripped of all your income, assets and savings as government drowns in deficits and debt. Is this the way it will turn out? Not likely. Certainly, government is drowning in deficits and debt but the taxation will arrive wrapped in the silky touch of the best propaganda machinery ever devised by masterful spin doctors. Your unprotected wealth, income and savings will more likely be dragged naked over a coral reef to die a slow death by a million tiny cuts. Then, when you look upon the dry corpse of your once liquid wealth consider this; all stimulations must be paid for in tax!

Here is the need. Would you dare to extrapolate this chart into the future?

How much taxation will it take to turn this chart down?

The tax will arrive in direct taxes for those who cannot revolt. To the others it will arrive in the form of indirect taxes disguised as anything but tax.

The official Corporate and Individual tax data to the end of 2007 look like this.

A bursting tax bubble has thrashed 50% off the previous $400billion corporate income tax take. Who talks their book when they say we have a recovery under way (see also charts further down)? Don’t you just love a bubble economy and the 1, 2, 3, 4 tax spikes? This is the business of maximizing tax income for government. Now visualize in your mind the spike that will be required to replace the direct and indirect tax collections from the 2003-2007 bubble episode.

FED data ends on 01/01/2008 and Personal Income Tax Receipts were still peaking. Growing unemployment is going to play havoc with this number.

Again the 1, 2, 3, 4 tax spikes. For a more up to date macro assessment complete with projections into a murky future we turn to data from the White House Office of Management and Budget.

The question may be asked; how often do we see significant declines in tax receipts? Rarely.

The events of 1929 are clearly relevant given that it was the only other previous incidence in more than a hundred years, apart from the year post WW2 which saw a significant drop in tax income. The data from the White House covers this period in detail.

The 1929 crash and its aftermath share another very important characteristic with the 2007 crash and its aftermath, a significant debt bubble. So how does the fiscal experiences of the depression compare with the modern experience of a debt bubble?

The tax collected by government saw a dramatic decline of 52.6% in the aftermath of the 1929 crash, while government spending was certainly in stimulation mode. Notably, taxation accelerated in spectacular fashion by 251% from $1,9bil in 1932 to $6.4bil in 1938. Growth during this period remained anaemic. In fact, the GDP growth fell dramatically from 1930 to 1933 and even by 1940 had not yet regained the GDP level of 1930 in spite of government stimulations in the 1930’s greater than anything implemented fiscally since 2007. Monetary policy was the dominant choice since 2007 but I have written often on monetary policy, here the focus is on fiscal policy. Observe that a weak economy is no protection against increased taxation.

The modern debt bubble has been under construction from 1980 until it popped in 2007. The chart hereunder picks up the story in 1990.

So much for counter cyclical fiscal behavior when tax receipts fell short of government spending in each of the boom years of 2003 to 2007. Tax collections though down, still held up in 2008 but took a 17.8% tumble into 2009. Again we note the discrepancy between tax collection and all the talk of recovery together with the exceptional performance of stock exchanges. The 2009 estimates have been presented on the 25th of August 2009 and should be close to the expected actual number. Expectations of a rise in tax collections in 2010 may be premature. The experience in 1929 where tax receipts not only dropped by more than 50% but also did not recover to the 1930 level until six years later in 1936 may indicate potential for a less favorable outcome than the current expectation and estimates.

The subset of Income Tax data yields further interesting data.

The official estimates of Income Tax collections are optimistic, particularly regarding individual taxes which are expected to exceed the 2007/08 levels by 2012. No tax recipes are expected to fall below 2009 levels and income tax collections will start rising as early as 2010 according to current estimates. I expect the tendency of downward revisions in actual tax receipts so prevalent in the Mid-Session Review of the Budget released in August 2009, to be with us for at least thru 2010.

Be sure to note the dramatic shift towards relying on personal income taxes in the modern USA budget. What will be the origin of the tax growth when the best case scenario is a “jobless” recovery and unemployment has yet to level out? Also, for a better perspective on a trillion dollar stimulation consider carefully how it equates to the total per annum Income Tax collected from individuals as averaged between 2005 and 2009. It is of particular interest to see that estimates of Corporate Income Taxes are for a fast recovery to 2007 levels and then to remain static until 2019. I find this projection a combination of opportunism and pessimism, even contrived when one observe the relentless growth projected for Individual Income Taxes against the static projection for Corporate Income Taxes. When the politicians say “Read my lips - no increased taxes”. Don’t. Rather read the charts.

Now for a look at Income Taxes during the period 1934 to 1938.

The burden was shared equally between Individual and Corporate Income Taxes during this period of economic history. The real story remains the dramatic increase in tax collected in the shadow of fiscal deficits and stimulations. Taxes in both categories increased more than 3 fold over this period. It is no coincidence that the Emergency Banking Relief Act of 1933 was passed in March 1933 confiscating Gold holdings to boost the coffers of the state. The need was great and gold confiscation was a tax against “hoarding”, popular with all non gold owning voters.

Stimulation remorse will be of no help. What’s done is done. The tax bill is in the post. TAX is what pays back government debt, a bit of inflation just hides the method and hyperinflation pays nobody. Hyperinflation simply destroys the economy and the currency. Hyperinflation means a lot of pain but no net real gain for anybody, including government. Thus do not look upon hyperinflation as an escape route from the inevitable reality of taxation unless you are prepared to pay the ultimate economic price.

The USA has its international debt in US$’s, while most other countries’ international debt is denominated in a currency other than its own. Any depreciation of the US$ against other currencies will depreciate the international debt of the USA but at a huge cost to imported inflation. It is taxation from behind that most precious and coveted international comparative advantage, the reserve and trade currency of the world. Having the reserve currency of the world allows one the use of money creation to sneak taxation across international borders, yet it is but one of many advantages. Only the most desperate politician would cash in this chip for a short term stealth tax gain. When they do, they may prompt the Chinese and all other funding nations to ask the question; “whose tax base is it anyway?”

Stimulations from central government in whatever form they may take are “fly-now-pay-later” schemes. Japan tried the stimulation-and-recovery trick recently and it failed. In 2009 everybody is pinning their hopes on a global stimulation-and-recovery trick to work. Children marvel at magic tricks but they do not actually believe in them. Intelligent adults seem to have bet their entire economic futures and their children’s economic fortunes on the trick of stimulation and recovery. A spontaneous economic recovery may rescue the global economy. In the ensuing boom Government can collect the required tax shortfalls without a taxpayer backlash. That is the wistful thinking. Cause and effect says it is more likely that the excessive abuse of debt may force a realignment of economic structural distortions. No recovery but, as with the housing bubble and like a bad hangover, the government debt will remain after the stimulation bubbly has been consumed.

The bullish thesis is entirely reliant upon the “stimulation-and-recovery” trick. The fear that shows the white of their eyes at any talk about withdrawing “stimulation” is sufficient to expose the anchor of the bullish thesis. The bears fear “stimulation” equally but not for it’s so called potential to heal the economy, rather for its potential to cause bear rallies. Thus the bulls love stimulations for it allows speculative trading with the support and blessing of government while slaughtering the bears. It may be a tragic drama or an exiting adrenalin rush depending on your favourite candidate but in the bigger picture it is the cost of the game and who will foot the bill that counts.

Government will kick the tax can down the road until it runs out of credit like every reckless borrower eventually must. The alternative is debt revulsion for public debt but that is a responsible outcome where the opportunism of cashing in on stimulations is more likely to draw the crowds. Again, Japan has set the example running up public debt four fold since 1990 and reaped only a 20 year deflationary slump in return.

Consider the harm to the Japanese taxpaying generation who will have to pay for that gratuitous spending frenzy.

Look upon the projected US Government Spending from 2010 to 2019 (hereunder) and the very first chart in this essay of US Total Public Debt, then contemplate who will pay, when the taxman comes knocking…

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
28 September 2009

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

Dr Copper speaks on the economic recovery

2009-09-22T09:16:00.000-07:00

It is said that copper (Cu) has a PhD in economics. The logic is that copper is found in almost every human economic endeavour and it is representative in all economies around the globe. The simplistic approach is that all the pertinent information about copper will be reflected in its price. Bare bones, look at the price action of copper and it will tell you what is happening in the economy.

Well, let’s interview Dr Copper and find its views on the state of the global economy.

First the basics, where are we?

Source: Kitco.com

The five year price action says “V” shape recovery. That is when one does not place too much emphasis on the bubble-like behaviour between 2004 and 2009. The five year volume data brings some uneasiness to the basic price action observation. Stock levels are still high and they are now also rising in a “V” shape. Where is the devil’s ton, that one ton of extra production which tips the price into a downward plunge?

One year price action is, of late more muted. The rising stock levels are seemingly in harmony with a lateral movement in the US$ price action since July 2009.

Looking only at copper in US$ terms does not represent a global picture. How does Dr Copper express itself in the major economies and some regional economies? It would also be useful to have a global benchmark which will be representative of currencies and commodities. Gold is the natural choice.

GOLD

Copper is expressed in ounces of gold in the same way as the copper price can be expressed in any currency. The price action of copper expressed in gold shows a peak and decline as opposed to the lateral price movement in US$.

Price action is what we are interested in and having established a gold benchmark we can now observe the relative currency performance against the benchmark.

US$

Short term flat and in step with benchmark but copper is becoming more expensive in US$ than in gold of late.

Euro (EU)

Short term flat and the Euro price trend for copper relative to the benchmark is about the same.

Japanese Yen

Short term trending down in Yen but copper relative to the benchmark is becoming more expensive in Yen.

UK Pound Sterling

Short term trending down and copper is becoming more expensive relative to gold in terms of Sterling.

Chinese Yuan

A short term rising copper price in Yuan and only very recently becoming more expensive relative to the benchmark.

Brazilian Real

A short term falling copper price in Reals and more expensive relative to the benchmark.

Indian Rupee

The Indian Rupee copper price has hugged the gold copper price like a lovesick teenager for most of this period. The short trend for the copper price in Rupees is flat and to trend more expensive relative to the benchmark.

Australian $

The short term copper price trend in Aus$’s is down. Price action against the benchmark is in lockstep.

South African Rand (ZAR)

Similar to the Aus$. Short trend copper rand is down.

Polish Zloty

The copper price in Zloty’s is trending flat and is becoming more expensive relative to the benchmark.

Dr Copper is somewhat stingy with its price action information on the economy and the current trends are anything but robust. The copper price was up strong in some currencies, not so strong in others. Now the copper price is trending flat to down in most cases. The results can be summarised in a table.

Chinese stockpiling is probably behind the price trend in the Yuan price of copper. The rest is giving a weak down signal at this stage. Only the two gold producers and the EU managed to hold their own against the gold price of copper.

The tentative results can be supplemented by looking at the relative price change in the various currencies since the beginning of the year. How did these currencies perform relative to copper?

The relative performances can be expanded to also measure the standing of the currencies against the gold price of copper. The Euro no longer performs when assessed in absolute terms and the Real is on top with absolute performance. Now if Dr Copper would just tell us whether we should consider the Brazilian economy strong or weak? Ditto on the Indian economy.

Extracting information from Dr Copper by looking at the price action is a tedious process. The “V” shaped recovery as presented in US$ price of copper has more to do with a weaker US$ than with a recovery in the global economy when one compare the performance of copper against gold and particularly commodity producing country currencies. Stockpiling and diversification from currency risk takes another bite from the uptrend in the copper price, neither of which is indicative of an economic recovery. The short term copper price trend gives a weak downward signal in spite of the continued need for store-of-value diversification.

Dr Copper says that we should be weary of proclaiming a “V” shaped recovery and in fact should be careful with any claims to a recovery until we see some more solid evidence. The warning is a bit more pronounced when Dr Copper and gold speak in unison on currencies and the devil’s ton is lurking in rising stockpiles.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
23 September 2009

© Sarel Oberholster

(Click on any of the charts for a larger version.)

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

Twin Peaks and the macro economic model of debt.

2009-09-18T05:12:00.000-07:00

The correlation between the Dow and the Nikkei has been picked up by a number of other authors since the publication of the first Twin Peaks. It is of limited functional use without understanding the fundamental thesis behind its original creation and also the method of comparison.

It is statistically near impossible to have a visible and enduring correlation between the peak of the Nikkei in 1989 in Japan and the peak in the Dow in 2007 in the USA. To marvel at the correlation is to be distracted by a sideshow. The relationship between the peaks must also only be established at the peaks and not rebalanced thereafter. Rebalancing the correlation will facilitate a very close match but will defeat the whole object of the assessment for it will not allow the market drift to break off the correlation.

The thesis behind the twin peaks correlation is that Japan and the USA were and are implementing a similar macro economic model dominated by similar monetary and fiscal policies in two different economies in two different time periods. It therefore opens the probability that the outcomes in the two economies would tend to be similar. What then is the model?

This macro economic model is built upon dominant Central Government and Central Bank policy interventions based on mutually complimentary Monetary and Fiscal policies.

The first phase is dominated by a loose monetary policy whereby liquidity flows to the markets are maximised. These flows are channelled through the use of regulation and institutional design into asset inflations which are described as “wealth effects”. The conduit for the liquidity is mostly private debt formation anchored in asset collateral. Inflation in consumables is actively managed and discouraged. The underlying monetary policy floods the economy with liquidity to the point of debt saturation and follows the inevitable course to zero interest rates. Boom conditions are created during this first phase which boosts Central Government tax flows for “easy” fiscal conditions.

The advent of debt saturation in the private sector causes the collapse of the asset bubbles and the boom conditions disappear. The economic model now enters a second phase where Central Government is starved of taxable income. Monetary policy is shifted to accommodate rapid debt formation for Central Government. Every attempt is made to re-inflate the asset bubbles. Central Government in turn accelerates its spending, usually under the guise of so called “stimulation” ignoring falling tax inflows. Central Government will enjoy a “honeymoon” period within which it accelerates spending while placing no additional tax burden on its citizens. In fact, Central Government may even be using some of the debt to subsidise some or all taxpayers. Examples are tax rebates or “cash-for-clunkers” programmes. Monetary policy continues to maximise liquidity absorption but it manifests predominantly as Government debt. The honeymoon period is accommodated by a widening of the tax gap, the gap between Government spending and Government income from taxation. The “deficit”. The government pledging its future taxes to the money lenders.

The liquidity not destroyed in the collapse of the asset bubbles now teams up with the Central Government supply of liquidity to search out anything that may function as a store of value. Favourites are long life commodities and Stock Exchanges. The market for “stores of value” is soon in “inflation” conditions which will last for the duration of the “honeymoon” period of tax deferment.

The third phase is a long drawn out stage of stagnation and deflation. The unbreakable, undeniable law of taxation will assert itself. Government must tax for its spending. Dollar for dollar, pound for pound, yen for yen, yuan for yuan, euro for euro or whichever currency you wish to work in. The tax may be direct and visible or indirect through redistribution of the value of money away from taxpayers towards Government. A portion of the tax will be deferred to the future through Central Government borrowing but such borrowings are also subject to the laws of diminishing returns. Central Government debt formation is not divorced from the markets even with monetary policy support and will face increased resistance with each dollar increase in borrowing. The third phase is entered at the point where Central Government is forced to start closing the tax gap.

An alternative outcome for the third stage is economic and currency destruction in a hyperinflationary depression. It requires a policy of relentless “quantitative easing” whereby the Central Government ignores markets altogether to process its debt formation via unbridled money creation. I discuss this potential outcome in “War on Savings” which can be found on my blog.

Keynesian lore will propose that the economy will start growing as a result of the “stimulations” but it is simply a wish for rescue and certainly not a forgone conclusion. The irrefutable truth is that debt is not income and government spending can never be “income” for it can only originate as direct taxes (redistribution of someone else’s income), indirect taxes (monetary redistribution of purchasing power), or as debt which is simply deferred tax. There is no way around the law of taxation. Government must eventually tax dollar for dollar for its spending (the only question is who it will be – citizens of the USA or perhaps the savers of China?). That is the stasis trap of the third phase. Government debt formation slows down as it must. The tax gap can no longer be financed or expanded. Government and society now face the consequences of having spent the future.

Central Government must deal with the tax gap and the consequences of its own debt while the private sector must content with the consequences of its debt. Bubble formation is no longer an option as both the private sector and the public sector are soaked to saturation in debt. This is the set-up for the “lost decades” economic model.

The stock exchanges are but one place where we can monitor the development of the phases. We are presently in the tax honeymoon phase where society is growing polarised into “debtors” (often also called optimists, patriots or consumers) who believe that given enough “stimulation” a new boom will defer consequences once again; opposed by “savers” (often also called pessimists, traitors or hoarders) who are desperately trying to preserve the value of their savings. Both groups are looking at stock exchanges to obtain capital appreciation for debt repayment or capital protection against money creation. The Nikkei tells us a part of the story of the outcome for the Japanese participant who had to deal with this economic model. In the Twin Peaks charts I track and compare the outcomes of Japan and the USA as but one facet of the developments in an economic model built upon foundations of debt.

Here are the updated charts to Thursday 17th September 2009.

(Click to enlarge)

The Dow has moved above the Nikkei much like the first phase of the correlation after falling below the lows of the Nikkei in March 09. The correlation will have to reassert in a downward move towards a Dow of 5000 at around the end of May 2010 (Data table points; 5208 on 29 May 2010) to remain valid. It will take longer and go lower if recent history were to repeat. This correlation now runs over 488 data points from 9 October 2007 to 17 September 2009.

That is the near picture. Now for a look at the macro chart.

(Click to enlarge)

The keen observer will note the first bounce peak in the Nikkei (on the October 2008 grid) against the current levels of the Dow. I can give the data points for the 2020 lows or the 2026 lows but it would assume this correlation staying in place until then. For now, observation will do. I would prefer to heed the warning inherent to these charts and hope for outcomes which are not steeped in habitual debt formation, private or public.

I repeat my previous observation. These charts are not for day trading. These are trends within a macroeconomic argument. There is no statistical basis for a correlation of this duration and its continuation will be supportive of the underlying economic thesis. The thesis will have to be re-assessed in time, based on the outcome of this facet as well as all the other dynamics. I see no reason to revise or abandon the thesis at this stage and now am keenly interested to see if or when the correlation in the downswing reasserts.

Happy hunting.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
18 August 2009

Ps. I will continue to track the peaks and will publish another update should we see an interesting development. Otherwise expect an update in another two months.

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

Bank Corpses on Friday Nights

2009-08-24T13:30:00.000-07:00

“The pursuit of the Bank's vision will express itself through leadership in the formulation, implementation and monitoring of policies and action plans for fighting inflation, stabilisation of the internal and external value of Zimbabwe's currency and of the financial system in a manner that gives pride of achievement to Zimbabweans across the board.” Mission Statement of the Reserve Bank of Zimbabwe

The banking Angel of Death descends like a curse on Friday nights to claim the lives of banks. Bankers must fear this weekly curse sufficiently to pack their cardboard boxes on Friday nights. One has to avoid the embarrassment of the Lehman employees who had to run from press photographers clinging to their boxes. Most unflattering and not good press for their next employment interview. So they probably keep their personal belongings at home over week-ends.

I want to concentrate on the vulnerabilities of systemic risk but a list of which bank died when for those interested can be found at this link http://www.fdic.gov/BANK/HISTORICAL/BANK/index.html . This Friday it was Guaranty Bank with assets of $13billion and a few others, last Friday it was Colonial Bank the 27th largest bank commercial bank in the USA according to Wikipedia and assets of $25billion and a few others. The fact is these banks are dead. The FDIC had 305 problem institutions and 21 failed institutions on its list as at 31 March 2009. We'll have to count the corpses at year end again. The reality of systemic failure is alive and well.

Negotiations over the week-end between survivors of the Friday Night Curse, the Fed and State Regulators will arrange for the removal of healthy organs, the surviving portfolios of debt. Deposit insurance from the FDIC will kick in to guarantee the courageous survivor brave enough to “take-over” the dead bank and will “share” losses. The Fed will shield the brave warrior from defaults with asset buybacks and showers of liquidity. Central Government will throw in a few more loss absorbing arrangements to sweeten the deal if needed. Until next Friday’s visit from the banking Angel of Death.

The reality is that these banks have died. It is no takeover. It is a redistribution of portfolios while the structure and business of the dead bank is cremated before sundown on Saturday night. All in all a morbid event reserved for week-ends. The hole in the economy is re-inflated with printing press money. Comes Monday the sunshine of a growing economy and the success of the Fed in saving the global economy from systemic collapse must be celebrated. On Mondays we joyously dance on the graves of the dead banks; long live the FED.

It is the systemic cycle of death. The Japanese came to know it well. Their politicians also celebrated recovery at every possible opportunity while hiding the systemic decay under the printing press. Reassurances of a return to the boom only faded after about 7 years had elapsed from that fateful December 29th 1989. If on Mondays the stock exchanges of the world look a bit shaky, it’s because of healthy profit taking (we certainly won’t mention dead banks and other doom and gloom events that firmly belongs to Saturday mornings).

What is all this raving about you may ask? It is about the process of systemic risk and a characteristic that systemic failure will never be admitted even when it is patently visible to all. There is a very good reason.

Systemic failure has two components. The first is failure of debt formation and the rise of a seemingly endless stream of defaults. It is in this phase that banks fail and creditors are parted from their savings by government sponsored initiatives to “forgive debt” offering creditors a fraction of their capital, or else… Having stripped the creditors of their savings does not repair the hole in the economy. It only moves the hardship from one spot in the economy to another. One which everybody seems to think is more able to absorb the loss. As Karl Marx has said, each to contribute according to his ability and each to receive according to his need. GM needs the money, AIG needs the money, CIT needs the money, Chrysler needs the money and even Readers Digest has negotiated a pre-arranged bankruptcy. A carwash system whereby any old dirty debt riddled business is taken to the drive through bankruptcy carwash to emerge sparkling clean and debt free on the other side compliments of a benign government and flabbergasted creditors. Thus the creditor had the “ability” and the debtor has the “need”. Sorry creditor, it’s not personal (it is political). The broken business model is saved until the next crises.

Transferring defaults to creditors is just one more way of discounting the future to today. The saver intended to use the savings for some future consumption which will no longer happen. It is replaced by the consumption that has happened and is now paid for by way of default. Most important, the saving has been wiped out, gone, transferred form the future to the past. Down we go on a slippery slope towards the second systemic event.

The destruction of the functional value of the currency. There are a number of components to this phase.

1. The destruction of the store of value characteristics of a currency.
2. The destruction of the value of the currency for settlement of cross border transactions (the exchange rate).
3. The destruction of the currency as a sovereign means of exchange thus destroying its ability to function as a money in any way (domestic settlements).

Zimbabwe knows all about currency destruction despite their very ironic mission statement. They no longer have a currency and mostly uses US$’s as a surrogate. Talk is they are contemplating a new currency backed by gold. Their stock exchange acted as a pretender store of value for a while and in the initial stages of the hyperinflation process was the best performing stock exchange in the world. The Zimbabwean Stock Exchange totally collapsed even before the Zimbabwean dollar was discontinued and only opened in February 2009 as a dysfunctional exchange hardly trading at all. Perhaps that is why the Zimbabwe government is not offering to back their currency with the stock exchange, only a real store of value will do. (Will all governments only offer responsible monetary management at the very end?) I have been told by Zimbabweans that the gold jewelers did very well during the rise and fall of hyperinflationary Zimbabwe.

Where the first phase is a deflationary phase, the second is the transition to asset bubbles, inflation and hyperinflation. A global deflation is terrifying but an economic process that we can survive. A global or just USA hyperinflation is an economic event of such finality that I place it on faith in the hands of intelligent people to prevent this outcome. The hardships of deflationary adjustment will be candy floss to the poison of a hyperinflationary event in the USA. I stubbornly believe that this outcome will be prevented politically.

The extent of undermining the functional value of the currency will dictate the extent of the inflationary pressure. Channeling money creation to assets is the preferred activity in a post debt bubble monetary environment. At first it will lead to the development of asset inflations in perceived stores of value. This does not yet alter the deflationary bias of the economy.

Hyperinflations across sovereign economies are associated with the destruction of the currency as a means of settling international transactions and in the final instance in the destruction of a currency to the extent that it can no longer function as a means of settlement of transactions within its sovereign borders. The epicenter again is money creation particularly in the interaction between the Central Bank and the banking sector of which the new open channel between the Fed and the erstwhile Investment Banks is a money creation distribution channel which pose severe asset inflation risks. This risk will be exacerbated where such banking entities are also primary dealers of Central Government debt securities. This channel is a money creation highway.

A government cannot debase through money creation its debt obligations by undermining the international value of its currency without severely damaging its ability to settle international transactions. There is no easy raid on foreign savings down this road.

It required the political desperation of a Weimar Germany or the monetary and fiscally but also politically reckless unrepentant political systems typical to recent hyperinflationary emerging economies to push an economy into hyperinflation. There is as yet no example of a failure of political processes in a modern democratic developed economy, which opened the door to hyperinflation. I sincerely hope to never see one.

Japan’s economy has very strong governmental control elements and a history of hyperinflations, yet they have averted the destruction of the currency since the advent of the Japanese crisis almost 20 years ago. They opted in stead for the stasis of monetary carries, i.e. the practice of creating money to contain any systemic collapse.

Destruction of a money is a relative process, one currency’s value against the value of all other currencies in the world and against all potential alternative stores of value. Stores of value will become extremely popular when all governments globally were to engage in policies aimed at destroying or undermining the relative value of their currencies. Even dubious “store of value” asset classes such as shares may be regarded as stores of value. From this is born the unique power of the US$ as reserve currency of the world to transfer the savings of the international saver in UD$ debt assets to a US$ creditor.

Second phase money creations are not a solution for the problems of the first phase. Currency destruction or a lesser undermining of the relative value of the currency in “carries”, will accelerate and deepen economic collapse from the monetary excesses of the first phase. Containment of the systemic events does exactly that. It undermines the sovereign and international value of the currency and postpones any recovery further into the future when it discounts income and tax receipts to today while transferring savings from those perceived by government as “able” to those perceived by government as “in need” (the government also has needs of its own).

Relative political power comes into play. Voting strength and the numbers are weighed in favor of the debtors. The power of the printing press is only a power to redistribute the wealth of a nation or in the case of the US$ the wealth of nations. It certainly does not create wealth. The redistribution allocations of the printing press are crude, patently unfair, fraught with self preserving ideals of politicians (and the head of the FED is certainly a politician), corrupt in allocating to powerful self serving interest groups and devastating to savers of which pension savings as a class is probably the most vulnerable.

Do not bow down and pay homage to the printing press for its ways are not the way to economic salvation. Do not succumb to the lure of asset inflations in your search for value. Take control of your savings and pick your stores of value with great care when you hear the beat of hammers nailing up the corpse of just one more bank on a Saturday morning.

“Admission’s free you pay to get out” Hellacious Acres (Words & Music by Paul Williams and Kenny Ascher – from a Star is born.)

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
25 August 2009

27 August 2009. The latest information from the FDIC is: 416 troubled banks. 81 banks have been taken over so far for 2009.

© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

Run from your Money

2009-08-23T04:38:00.000-07:00

Cash is trash, they say. You have to be fully invested, they say. Oil is going to $85, they say. The Dow Jones is going to 10,000, 12,000, 16,000 or more, they say. Buy copper, they say. Fill the warehouses with commodities or float fully loaded oil tankers but whatever you do you must run from your money. Interesting, why?

Because the central banks of the world has slipped the leach on the printing presses and the global economy is drowning in liquidity. The new game in town is to get hold of printing press money, preferably first and to convert it into a “store of value”. Flipping cash for stores of value is the way to go. Cash burning a hole in your pocket has a whole new meaning.

Funny thing about stores of value is the market chemical reaction to cash-is-trash liquidity flows. It changes colour like a magical chemical experiment and previous stores of value turn into red hot speculative assets, the next big thing. No longer is there any store of value intentions. All that remains is speculation on the next price increase. Flipping to the next big fool with a wad of cash to get rid of.

China said we will rid ourselves of the dollars and buy commodities. The Chinese population gets access to easy debt and floods the Hang Seng and Shanghai Composite with buy orders. “Investors” and Investment Banks draw down the cash and buy oil and the Dow. Get away from the sidelines and commit your cash is the refrain. The dollar is going to crash get out. Who knows what the miners do when they end up with all the cash?

Bubble, bubble, toil and trouble goes the nursery rhyme. Inflation is alive and well and living with the previously known as “stores of value”. Incredibly, gold is the Cinderella of the stores of value. Perhaps gold’s money prince will meet her at midnight when all other so called stores of value will be exposed as the ugly sisters.

Keynes’ saying “the market can be irrational longer than you can stay solvent” is another misguided observation of an interventionist. Are all these people really stupid? Were they stupid when they flipped houses? No, they were and are riding the wave of massive debt formation (then) and liquidity formation (now). The behaviour to get rid of the cash is fully consistent with the very logical and rational conclusion that the printing press money is actually worthless. Get it, get rid of it and let some other idiot hold the worthless trash.

Sharing the same thought is a recipe for group hysteria and bubble formation. Those who bought as a store of value are mightily pleased that their store of value has appreciated by 20%, 50%, 100% or more. Soon all thought of “store of value” is gone and rabid speculation takes its place. Value is counted daily with soaring stock exchanges and multiplication in commodity prices. Look at that, I was trying to preserve value and boy, did I preserve value…

It becomes the bluff and the double bluff, the triple agent on the inside. The stores of value can only be stores of value when they are firmly entrenched in the real economic environment. The flow of liquidity detaches these stores of value form reality and the noisy crowds form. Reasons to anticipate a reconnect to reality at some future date are legion. Shares in bubble, no way – the economy is in recovery and the stock exchange is anticipating that recovery by at least 6 months (property never goes down in price, you know). I suppose that the “stock exchange” was anticipating a boom until it crashed. Oil is running out and there is an economic recovery underway (I have seen a green shoot with my own eyes). Soon the lack of demand will catch up with the heady price, which in fact is still far too low for the serious shortages which may occur then.

Economics is about “cause and effect”. The reality disconnect is “effect and cause”. Companies post excellent results (not better than expected low ball estimates but the real thing) and the effect is that the share price rise. Cause = profitability and increased income stream. Effect = rising share price.

The liquidity disconnect turns it on its head. Effect = rising share price. Cause = profitability will improve at some stage in the future. The real cause is printing press money. Hoping for something is not the same as identifying a real cause. I can start a rabbit farm anticipating a massive demand for cheap red meat but I suspect I will end up with lots of rabbits to feed and no money. Well, at least I would have rid myself of all that trashy printing press money.

The world is running out of oil but the effects may only be felt in 20 or 30 years provided nothing happens to change that outcome. The dramatic demand adjustment to an oil supply squeeze in the 1970's proved the case for economic rebalancing to oil shocks. It is not wise to invest in or trade oil as if the “peak oil” day is today when the rest of the economy is not adjusted for that event. Ask the question, is it demand or printing press money in the driving seat? High and rising oil prices are a disconnect with the economic reality of demand today. Price distortion caused by printing press money will cause economic rebalancing. Incessant meddling with price formation and discounting future income to today (cause) will perpetuate and accelerate violent economic adjustments (effect) in proportion to the distortions caused. What an excellent example the cash for clunkers programme is of meddling with price formation and discounting future income to today. The giant of all gigantic meddlings with price formation and discounting future income to today is the policies of zero interest rates which abolish interest on savings (just add the banking margin to zero for the lending rate) and Quantitative Easing allowing Central Government to excessively discount its future income (taxes!) to today. Christians will know that even Jesus demanded the usury that the saver is owed (Mat 25:26-27 “His lord answered and said unto him, Thou wicked and slothful servant, thou knewest that I reap where I sowed not, and gather where I have not strawed: Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”).

Understanding the inflations of the printing press requires an understanding that inflation will express where the printing press money ends up. Meat and potatoes prices will inflate if the money ends up in meat and potatoes. House prices will inflate if the money flows via debt formation into houses. Zero interest rates, Quantitative Easing and unlimited liquidity drive investors out of money and into stores of value. The inflation goes with the flow. Follow the flow to identify the inflation. Asset inflations always end up deflating when the flow slows. There is no need to remove the flow. The cycle of exponential growth only needs to be broken and the money flow asset inflation will deflate.

Run from your money and rush into inflated assets. Run from the US$ and into some inflated 3rd world currency (emerging markets are the next big thing, you know; they say emerging markets will save the global economy). Emerging economies with a dictatorial political or utterly corrupt political system where politicians are not inflating their money supply (or are they printing at 25%pa or even 50%pa and have been engaging in unofficial Quantitative Easing for ages). How promiscuous savings can be, whoring in dark corners with the printing press crowd.

Make sure your savings avoid the STD’s of printing press money when you pick your stores of value. Buying into asset inflations sets you up for the next bubble collapse from which only the nimble or the lucky escapes.

Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
23 August 2009

© Sarel Oberholster

Ps This is a rambling satire on the insanity of building economic foundations on printing press money and the self congratulations that goes with it. I logically and a bit more boringly explain the process of a flight to stores of value in “War on Savings” which is available as a PDF download on my blog.

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .