THESE ARE NOT RECOMMENDATIONS - ONLY MACRO COMMENTARY - Investments of any kind involve risk.� Please read our complete risk disclaimer and terms of use below by clicking HERE

FLOWS - Liquidiy, Credit & Debt

The Most Important Number In The World - 05-30-14 Richard Duncan

My finance professor at business school once told my class that the most important number in the world of finance is the yield (i.e. the interest rate) on the 10-year US government treasury bond. US government bonds are considered risk-free. The interest rate at which all other bonds can be sold is determined by this risk-free rate on US government bonds plus a risk premium, which depends on the credit worthiness of the debt issuers. Therefore, when the yield on the government bond rises, the interest rates on mortgages, corporate bonds, credit cards and student loans also rise. Similarly, when the yield on the government bond falls, the cost of all borrowing falls.

Most financial analysts expected the government bond yield to rise significantly this year. Instead, it has fallen sharply. This week, it fell to 2.40%, an 11 month low. May will be the fifth month in a row that yields have fallen. In this blog, I would like to give you my explanation for why interest rates are falling.

In business, everything has a price; and that price is determined by supply and demand. Interest rates are the price a borrower is willing to pay to borrow money. In the past, when gold was money, the supply of money did not change (or it changed very slowly). So, then, it was only changes in the demand for money that caused interest rates to rise and fall. For example, if the economy was growing rapidly, businesses would tend to borrow more to take advantage of the profitable investment opportunities the booming economy presented. The business sector’s increased demand to borrow money would cause the price of borrowing (interest rates) to rise. And, by the way, after some time, the higher interest rates would make investing less profitable, so the economy would slow again.

Using another example, if the government borrowed a lot of money to finance a large budget deficit, that government demand for money would push up interest rates. Higher interest rates would make it less profitable for the business sector to borrow and invest. In such an instance, it was said that government borrowing was “Crowding Out” the business sector, and thereby damaging the economy’s growth prospects.

These days, the situation is more complicated. Once the government stopped backing dollars with gold in 1968, the supply of money was no longer fixed because the government was free to create as much money as it thought desirable. So, now, it is both the demand for and the supply of money that determines interest rates. In other words, to understand why the interest rates on government bonds are now falling, we must consider not only how much money the government is borrowing, we must also consider how much money the government is supplying (i.e. creating) through Quantitative Easing (QE).

When we look at it that way, it becomes immediately apparent why interest rates are currently falling. During this quarter (the second quarter of 2014), the government expects to have a large budget surplus of $78 billion. That means the government will not have to borrow any money at all on a net basis this quarter. Meanwhile, the Federal Reserve will create $145 billion through QE and inject it into the financial system by acquiring bonds. Therefore, the government supply of money will greatly exceed its demand for money this quarter. That, in my opinion, is why the yield on government bonds is falling.

Falling interest rates help the economy expand by making investments more profitable and by causing property and stock prices to rise. Unfortunately, this favorable balance between the government demand for and supply of money will disappear during the third quarter. The government is expected to once again have a large quarterly budget deficit, which will require it to borrow more. However, the Fed, which is tapering its QE program, will supply a great deal less new money. Consequently, the balance between the government demand for and supply of money will once again turn unfavorable, and that is likely to cause government bond yields to start rising again. By the fourth quarter, when QE is scheduled to end altogether, the balance between the government’s demand for and supply of money will become very unfavorable. That could cause interest rates to move considerably higher. If so, business investment would suffer, property and stock prices would probably fall sharply and the economy would very likely move back toward recession.

That is the scenario I consider most probable for the second half of this year. If it unfolds as I expect, I believe the Fed will be forced to launch a new round of Quantitative Easing, QE4, to prevent a severe new deflationary global economic downturn. If the Fed does inject additional liquidity through QE4, it would very likely push bond yields lower and stock prices and property prices higher again.

In this new age of fiat money, Liquidity (or, in other words, the balance between the government’s demand for and supply of money) determines the direction in which stock prices, property prices and commodity prices move.

ANNUAL SUBSCRIPTION $500/yr����$300 USD (with discount) Use Promo Code: flows to get 40% off. Click Here to Subscribe Now

QUARTERLY SUBSCRIPTION Get your feet wet with a trial quarterly subscription $90 USD �

ECB MEETING - Rate Decision

Congratulations Europe: you now get to pay your insolvent bank to keep your deposits for you. Today's cuts summarized and largely as expected:

• Main Refinancing Rate cut by 10 bps to 0.15%
• Marginal lending facility cut by 35 bps to 0.40%
• Deposit facility rate cut by 10 bps to -0.10%

And the ECB leave with the cryptic: "Further monetary policy measures to enhance the functioning of the monetary policy transmission mechanism will be communicated in a press release to be published at 3.30 p.m. CET today."

The�full announcement:

ECB MEETING - Rate Decision

What Exactly is in the ECB’s Toolkit? 06-04-14 WSJ

Thursday’s ECB meeting is shaping up to be one of the most important in recent years. The bank’s president, Mario Draghi, put financial markets on high alert for June action four weeks ago when he said the ECB was “comfortable acting next time.”

Other officials have since struck a similar tone. Time is running out. Annual euro-zone inflation weakened last month to just 0.5%, far below the ECB’s target of just below 2%. Grim economic reports have led to widespread expectations that the ECB will unveil a package of stimulus measures Thursday but stop short of large-scale asset purchases.

What will the European Central Bank do Thursday?

The ECB is widely expected to reduce all three of its key interest rates, on deposits, normal bank loans and emergency lending by 10-15 basis points (though it could go a bit more on the emergency rate because that is the highest of the three). That would bring the main lending rate at which banks can tap the ECB for cash–currently 0.25%–close to zero. The deposit rate, currently zero, would turn negative (see the chart below to see why that’s necessary). The ECB may also extend its policy of making unlimited loans available to banks well into 2016 and unveil a targeted lending program to help steer money to the private sector.

Is there anything else in the toolkit?

Other possibilities include a suspension of its weekly absorption of bank funds–called sterilization–under a previous bond-purchase program. That would add as much as €165 billion to the banking system. It could also do more on the liquidity side by making cheap loans available at long maturities with no strings attached or announce their intention to buy some asset-backed securities at a later date.

Which of these is the biggest deal?

Of the likeliest measures,�a negative deposit rate�would probably have the biggest effect. No central bank as large as the ECB has tried this policy, which would effectively penalize banks for storing excess funds at the central bank. The most immediate effect would probably be on the euro. By making euro assets less attractive, a negative deposit rate should weaken the exchange rate, adding a little juice to exports and inflation (though a negative deposit rate is already largely priced into currency markets). The flip side is it could weaken bank profits or spur banks to try to recoup the added costs from customers.

Why act now, hasn’t inflation been super low a long time?

For a central bank with an inflation target of just below 2%, it is a bit head-scratching why the ECB hasn’t acted sooner. But Mario Draghi came as close to pre-committing as any central banker can do on May 8 when he said the ECB was “comfortable acting next time.” Since then, economic numbers have screamed for ECB stimulus. GDP expanded feebly during the first quarter and private-sector credit is still shrinking. With annual euro-zone inflation falling to 0.5% last month—and expected by some analysts to slide more this summer–the ECB would risk major damage to its credibility if it stood pat.

What about QE?

The ECB has so far refrained from large-scale asset purchases, or quantitative easing, that other big central banks such as the Federal Reserve, Bank of England and Bank of Japan have used to add to their balance sheets and reduce long-term interest rates. It’s more complicated to design such a program in the euro zone, which has 18 different public and private debt markets. Buying government bonds is taboo in Germany, and there isn’t a large pool of securitized private assets for the ECB to buy. But Mr. Draghi will probably keep this option firmly on the table.

The ECB’s Negative Deposit Rate 06-04-14 WSJ

• What are negative deposit rates?

  European banks lodge money with the European Central Bank. Some is a regulatory requirement as a reserve against their normal lending operations. Some of it is because they have too much money on their hands that they’re unable or unwilling to lend elsewhere.

  The ECB cut the rate on those excess deposits to zero in July 2012. By cutting it further, to a negative rate, the ECB would, in effect, be charging banks for holding surplus cash on deposit with it–as a sort of tax on risk aversion.

• Would negative rates get banks lending?

  Euro-zone banks could already make an average of 5.7% in interest on one-year loans to households, or 4.5% on loans to small businesses, according to the latest ECB data. If banks were reluctant to lend with ECB deposit rates at 0%, it’s unlikely they will they be much more willing at a deposit rate of -0.1%.

• So why do it?

  Most economists think the ECB’s primary aim in introducing negative rates is to drive down the value of the euro. ECB President Mario Draghi has argued the currency is too strong and has pushed euro-zone inflation down to levels where descent into a deflationary spiral becomes a risk.

• How will that work?

  The hope is that negative deposit rates will push down euro-zone market interest rates more generally, thus dissuading flows of yet more money from foreigners into the euro zone and encourage investors to seek higher returns on their investments elsewhere. This was the Danish central bank’s aim when it introduced a negative deposit rate in the summer of 2012. And there, it was effective in helping to reverse the currency’s appreciation back to the central bank’s target.

• How low can they go?

  Lower deposit rates too much and banks will merely shift to holding cash in their own vaults rather than deposits with the central bank. Cash might not earn interest, but banks wouldn’t have to pay a tax to the central bank on it either. That’s not to mention money market complications a deeply negative rate potentially poses.

  In effect, introducing negative deposit rates is probably a one-shot affair, according to Jonathan Loynes, chief European economist at Capital Economics, a London-based consultancy.

  The message negative rates sends is likely to be more important than the rate itself.

�

US ECONOMIC OUTLOOK

WE HAVE NEVER SEEN ANYTHING LIKE THIS BEFORE!

Why??

The Short Answer: Cheap Money

THE APPARENT GOOD NEWS

1. Cheap Money Brings DEMAND foreward and thereby Increases Profits Relative to Fixed Costs,
2. Cheap Money accelerates Capital & IT driven automation and COST EFFICIENCIES,

THE REALITY

1. BAD MONEY (Malinvestment) Drives out Good Money,
2. SUPPLY soon outstrips DEMAND

THE CONSEQUENCES

ARTIFICIAL GROWTH & UNSUSTAINABLE RATES & RETURNS

THE INEVITABLE ADJUSTMENT IS EXTREMELY DISRUPTIVE & PAINFUL

- Weakening Breadth Sending a Warning

�

US - Patterns Suggest ~ 16% Correction / Consolidation

�

THE MACRO ANALYSIS OVERLAY

�

�

US - Post Financial Crisis Investor Sentiment shows pattern nearing completion.

Watch:

1. July Bradley Turn Date - July 16th
2. July Phi Cluster Zone - July 17th
3. July Options Expiration - July 18th

GOLD - More Downside Left

A ‘death cross’ is haunting gold 06-02-14 MarketWatch

Talk of further declines for gold intensified Monday as analysts pointed out that moving price averages hit a so-called “death cross” last week.

The 50-day moving average for gold� GCQ4 +0.14% has now crossed below the slower-moving 200-day average, creating a “death cross,” said Fawad Razaqzada, technical analyst at Forex.com, in a note Monday.

“This bearish technical development last occurred in mid-February of last year when the metal was trading at around $1,600,” he said. “Although it did not immediately lead to a selloff then, as gold had already fallen sharply in advance to the crossover, prices started to move lower once again a couple of months down the line.”

The market saw the 50-day moving average cross the 200-day moving average on Friday, according to Ole Hansen, commodities strategist at Saxo Bank.

“For the death cross to have any significance, the slope of the two moving averages both have to point lower, and this was the case on Friday’s cross,” he said. “From a purely technical perspective, this could indicate that deeper losses lie ahead.” August gold futures traded at $1,245.20 an ounce on Comex Monday afternoon, down about 80 cents for the session.

Gold prices may have even reached a price ceiling already. Read about Monday’s Comex gold trading.

In a note dated Monday, analysts at Citi Research pointed out that while gold rallied in February, supported by the restocking needs of the jewelers after Christmas and Chinese New Year, that caused gold to approach $1,400 an ounce.

Exchange-traded fund holders saw an “opportunity to offload into the jewelry demand,” they said, and “that set a ‘ceiling’ of $1,400 an ounce, the apparent level at which ETF holders are willing to return as sellers.”

“The threat is that those ETF holders may be lowering their ceiling constantly such that any jewelry-driven rise above $1350/oz may now trigger the same ETF sales,” they said. “The year is therefore turning out to be a tussle between jewelry-trade buying and ETF selling.”

Gold holdings in the world’s largest gold-backed ETF, the SPDR Gold Trust GLD -0.06% , �stood at 785.28 metric tons as of May 30, up from 776.89 metric tons on May 23, but they ended the month of February at 803.7.

STATISM - Collectivism

�

IS THERE A CONNECTION BETWEEN THESE TWO GRAPHS?

Click to Enlarge

YES - Cloward Piven Is Working!

WHAT IS THE CLOWARD PIVEN STRATEGY

The Cloward–Piven strategy is a political strategy outlined in 1966 by American sociologists and political activists Richard Cloward (1926–2001) and Frances Fox Piven (b. 1932) that called for overloading the U.S. public welfare system and government in order to precipitate a crisis that would lead to a replacement of the constitution and the free enterprise capitalist economy with a new socialist/marxist centrally planned economy and an end to poverty through redistribution of wealth".

THE CORE OF THE STRATEGY

View Video

"THE CLOWARD PIVEN STRATEGY"

Click to Play

"THE NEW BILL OF RIGHTS"

�

Click to Play

�