The Madness Of Crowds

A perfect example of something completely out of whack, but melded into the new "normal”, are negative interest rates throughout much of the world.  These negative interest rates are no longer for only short dated maturities.  Rates are negative in some cases out past 7-10 years!  

How can this possibly be?  Investors are willing to lock in a guaranteed loss for 10 years or more?  Rates have been pushed negative of course because the central planners want people to spend their money rather than save it.  You see, "velocity" has crashed because people have tightened their belts in a move toward austerity ...something the sovereign treasuries and central banks cannot even spell.  Please keep in mind whether it be Yuan, Euros, Yen or Dollars, the central banks have the ability to print as many of these currency units as they choose to.  Negative interest rates guarantee less "units" returned upon maturity and give less than zero risk compensation to offset the "printing" that has already been promised.  In essence, savers are PAYING for the privilege to lose "units" even when central banks are doing everything in their power to reduce the value of these units.  The madness of crowds I guess?

SAVINGS AND INVESTMENT

As for savings being the foundation and source for all investments,  that has fallen by the way side as we are now working with the new Economics and everything from the Bible through Austrian Economic theory has been thrown out with the new baby’s bath water.

MANIPULATION IS CATCHING UP TO THE MANIPULATORS

According to Peter Schiff (former adviser to President Ronald Reagan), “Americans should prepare for a horrible Christmas.” We are going to face a severe recession due to the Fed’s wrongheaded policies. Going against the Natural Laws of Economics eventually catches up to you and especially to the manipulators!

Large job layoffs should start picking up by the end of Christmas led by the retailers. Advertisement

The Federal Reserve has been distorting market pushing investors into high-risk investments by keeping interest rates near 0% since 2008.

America and Americans are technically by and large DEAD BROKE.

Retailers have overestimated the ability of their customers to pay for their purchases. They are loaded up with debt and regardless of how low the interest rates are, the Principle as well as the  Interest must be paid in due time. America is teetering on the edge of an official recession and the labor market is softening. The Fed’s vacillation in hiking interest rates is a sign that the chickens are coming home to roost.  They can’t keep fooling all the people all the time. Eventually some one realizes that “The Emperor Has No Clothes”.  Though the dire predictions for a stock market and dollar crash are yet to happen, the Fed is not being allowed to act as they should as its hands are being tied by political expediency.

The world’s central banks are also following the Socialist regime of easy money and have created a bubble that could spin out of control at any time and if they don’t know it they should.  That is why the Fed is hesitating to hike interest rates.  The Fed has to talk about raising rates to maintain the pretense that the whole recovery is real, but they dare not actually raise them as their whole charade will come crashing down.  Janet Yellen cannot admit that she cannot raise rates because then she will be admitting the whole recovery is a sham.

The recent rally in the dollar is “the biggest bubble that the Fed has ever inflated” and “it's the only thing keeping the economy afloat.” The dollar hit a three-month high in November after Yellen said a December rate hike was a “live” possibility. According to the Contrarian Investor”, the inflated dollar is keeping the cost of living from rising rapidly and keeping interest rates from finding their true level. This allows the Fed and especially the Government to pretend everything is hunky-dory.  Eventually the bottom is going to drop out of the dollar and we are going to have to deal with reality. That reality is: we are staring at a financial crisis much worse than the one we saw in 2008.

Role of central banks

Exploding debt, financial distortion, prolonged stagnation, recurring recession and increased government interference in industry and the economy won’t fare any better than anything else the government sticks its nose into.  Many governments including the US Government are playing behind the scene games in expanding the role of central Government and its central banks and trying to control the workings of the free markets.

(Ipso Facto - There are no longer FREE MARKETS, the Government thinks it knows better.) 

This country was built upon FREE MARKETS and its demise will be brought about by their destruction of ours and the world’s free markets, which is the preferred alternative of politicians and bankers who refuse to let the free markets function the way they are supposed to. Those idiots think they know better than GOD, the creator of free markets.  This is one of God’s main gifts to mankind!

Japan’s model

We can see a parallel in Japan which also tried to revive its stagnant economy since the 1990s by expanding the interventions of the Bank of Japan.  This not only kept interest rates at record lows, but also supported the country’s equity market by buying individual as well as exchange-traded funds in their failed attempt to manipulate their stock market. WILL THEY EVER LEARN? The Bank of Japan is now planning its next step of direct purchases of stocks. Such purchases would allow the Japanese government to accumulate sizable voting interests in some of Japan's biggest companies.”  It was not enough that the Government destroyed the economy and stock markets; now they want to destroy their biggest and best companies!  Will our Government continue to follow their mistakes and destroy our markets as well as our biggest and best companies?

At some point near here, the PPT and all their king's horses are not going to be successful in holding this market up with their overnight coordinated deals with Wall Street surrogates and their futures purchases. For all their efforts, they have been successful in leaving stock markets frozen in 2015. Stocks remain below their May highs this weekend and almost precisely where they closed a year ago on December 31st.

Free markets began with Adam and Eve and their 2 sons. Each had a different job (profession) and each produced the most that could be produced: A lot more than they could have, had they all worked together, which would have produced a lot less causing a great deal of friction between them. 

That was God’s first lesson to man when it came to commerce. The Pilgrims, after 3 failed harvests, finally realized that Socialism doesn’t work. They then divvied up the land so that each family had their own plot to work and they kept all that they produced. The resulting fledgling America became the richest country in the world in an unbelievably short period of time.  But that wasn’t good enough because there was no ruling class. And, of course, they tried to create a Ruling Class when they tried to appoint George Washington as King. He then tried to institute term limits; (by example) 

when he refused to accept the kingship and a second term . He reluctantly accepted a second term, but only on the condition that there would be never be third term (the first attempt to establish term limits by example, instead of through legislation.). Everybody hated their King (of England); they wanted their own king and all the privileged classes that came with a king.  Although there was no official Privileged class, they all died in office with each taking their chance at becoming President or any other privileged classes they could invent. For example, Hamilton seized on the second most important job, President of the 1st central bank.  Jefferson, being the smartest of the lot, was vehemently opposed to this.  All the laws of Government and commerce were taken out of the Bible because they were sure to work.   Somehow they lost their way when the desire for wealth and personal aggrandizement came into play. Nevertheless, the American Constitution turned out to be the absolute best that any country had ever devised(until this very day) and America turned out to be not only the freest country ever, but the foundation was laid for the strongest and most prosperous as well.

Unfortunately, each successive politician under the guise of improving on the Constitution (but in reality in their ever increasing grab for more individual power) weakened the Constitution in spite of Jefferson’s vehement opposition (he was only one against many).  Once he died, there was no longer any strong opposition.   

You can now witness for yourself the ultimate trouble when a president acts as if there is no Congress or Supreme Court. America is now run by edict from the President. Obama now has supreme power only because Both the Democratic and Republican Parties lets him. We will all live to rue the eventual results.

But hopefully its not too late. With the Republicans still in control of congress should They Win the White House it may be possible to stop the mad dash to acquire complete control by the President, should they not fall into the same trap. But that remains to be seen. A Cursory or even an in depth examination would confirm that FREE Markets work and SOCIALISM DOES NOT. 

THE FED

First of all, I think we’re all a little sick of hearing whether the Fed will raise rates this month or whether they should’ve done it sooner. I’m talking about 0.25% if they do it at all.  After seven years of zero interest rate policies, economists should be much more worried about the damage done from speculative bubbles and mal-investments created due to such low rates.

But the reason the markets could have a larger response to a hike is that they’re not used to a one-and-done, which is what I see happening. Instead, they’ve witnessed the Fed going in one direction or the other for significant periods of time. So they assume that once they start hiking, they’ll continue to do so for years, even if very slowly.

But I don’t see that happening here. If the Fed finally does raise rates, a whopping 0.25%, I predict that will be the last rate hike for a long time. And with worsening demographic trends here and around the world (especially in Europe), I don’t see much of a debate on the matter.  Just think – Japan’s fallen back into recession after the strongest QE ever.  Meanwhile, Europe is languishing, China and emerging countries continue to slow and retail sales are weakening in the U.S.

Top it off with escalating geopolitical events and tensions – even a possible stock correction just ahead – and there’s a chance the Fed may hold off at the last minute. But for now, the markets are largely convinced a hike will happen. So let’s just cover our bases: what will that look like if it occurs?  For starters, I think stocks would react favorably just a little, but only at first. In the short-term, it would be a sign that the Fed felt confident in the economy enough to finally raise rates.

And for bonds, it would only be a negative for prices as yields would naturally start inching up.  But that’s just the beginning. At some point, now very likely in 2016, there will be another financial crisis that will send the yields on riskier bonds soaring exponentially.  We could even see an initial, smaller spike in longer-term Treasury bonds. But before you know it, those yields will head down and prices up, as Treasuries become the safe haven again.

That’s just what happened in late 2008. But let’s look more closely at a much more extreme example that came from 1932 to 1940. In late 1931, when the Fed was faced with growing deficits, they decided to hike short-term rates big time – from 0.6%, all the way to 3.3%, which is now looked back on as a huge mistake. At first, long-term Treasury yields bounced from 3.2% to 4.2%. But then, it switched, and eventually yields fell from early 1932 into late 1941 to as low as 1.8%. And if that sounds bad, corporate bonds reacted much more extremely. Take a look:

During this time, the highest quality Aaa bonds spiked from 4.2% to 5.7% into mid-1932 as stocks bottomed. (Note the yields here are inverted, with rising rates pointing downward, to reflect lower bonds prices and a growing financial crisis.)

Next in line, AA bonds rose from 4.7% to 6.9%... A bonds from 5.8% to 9.0%...And the lower grade BAA bonds from 7.0% to 13.0%!  Now, I don’t expect our much more accommodative Fed of today to react like this – not in an economy that’s been weak for seven years after a crisis. This is just meant to illustrate that yields spike in the short-term when the markets figure out everything’s crashing!  But I do still see a spike ahead – just one that comes from a worsening economy and higher default rates.

That is why I could care less about miniscule Fed rate hikes, and am a lot more concerned about economic weakness. I do see a short-term spike happening in 10- and 30-year Treasurys. But I don’t expect it to last for long – especially when deflationary trends become more obvious. Higher risk bonds, however, I expect will rise in rates and plummet in value for years.

Ultimately, deflation in the years ahead will bode well for the highest-quality bonds and poorly for the lower-quality ones. Just look at junk bonds, which are down nearly 20% from their highs!  That’s why I advise you get out of higher-risk bonds sooner rather than later.  But don’t load up on longer-term Treasuries just yet.

GOOD LUCK AND GOD BLESS

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Dr. Aubie Baltin

UNCOMMON COMMON SENSE

Palm Beach Gardens, FL 33418

uncommon@aubiebaltin.com

Uncommon Common Sense is an educational service providing a body of technical and Fundamental analysis that measures the possibility and probability of future changes in mass psychology (swings from pessimism to optimism and back) which identifies possible new trends in major markets within various time frames, from very short term (daily) through very long term (years and decades). The tools I use are based upon price patterns, volume indicators and other proprietary measures that I have identified as correlative to future market trends. While an investor or trader could come up with ideas and strategies from the information published in my reports, at no time should a reader be justified in inferring that any such advice is intended by this publication.

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Gold is using for heat dissipation in some cars.