Alternative Bonds

Germany_bonds

I have received a lot of emails about how the goldbugs now adopted the ECM date for the turn in gold  and how governments are planning to roll out alternative financing of debt. India plans to issue a gold backed bond and the state of Saxony-Anhalt on last Wednesday issued its first dollar bond with a maturity of three years and a negative return – but denominated in US dollars. As a result, the government in Magdeburg promises a profit equivalent to 1.5 million euros using dollars as the hedge against the Euro. This is starting to get very interesting to say the least.

Kiss your Pension Fund Good-Bye

supremecourt

I have been warning for some time that government was eyeing up pensions.The amount in private pension funds is about $19.4 trillion. The question that has been debated in secret behind the curtain is how to justify to the people taking that over. I have been warning that if this is seized by government, it will come after 2015.75. Just how that is to be accomplished was finally settled by the Supreme Court without any justification constitutionally.

The US Supreme Court ruled last week in the unanimous, 8-page decision in Tibble v. Edison holding that employers have a duty to protect workers in their 401(k) plans from mutual funds that are too expensive or perform poorly. That is simply astonishing since there is no constitutional requirement for even government to provide social benefits. The Supreme court held in HARRIS v. McRAE, 448 U.S. 297 (1980) it was explained that the constitution is negative not positive. There is no duty imposed upon the state to provide a program for that would convert the constitution from a negative restrain upon government to a positive obligation to provide for everyone.

If we take the fact that the constitution is NEGATIVE and was a restrain upon government, then this latest ruling is completely unfounded. Monday’s unanimous ruling sends a warning to employers that they now must improve their plans and it is now an obligation to project employees. This comes just in time for then the next step is government to seize private funds and prosecute employers who choose badly a fund manager. This fits perfectly just in time for the Obama administration’s next assault as they prepare a landmark change of its own by issuing rules requiring that financial advisers put the interest of customers ahead of their own. This creates a very gray area wide enough to justify public seizure of pension funds under management.

This ruling will have a dramatic impact upon investment management and we have already received calls asking about using our model for management purposes since it has one of the longest track records that can be verified in the industry. What this ruling imposes is a tremendous duty upon the plan fiduciary who must ow back up his decision with proof. This may also have the impact of foreclosing new fund managers from entering the business since they will lake the track record.

Yet this decision is even deeper. It sets the stage to JUSTIFY government seizure of private pension funds to protect pensioners. When the economy turns down and things get messy, they are placing measures in place to eliminate money in and physical dimension, closing all tax loopholes, shutting down the world economy with FATCA, and preparing for the final straw of Economic Totalitarianism with the Supreme Court reversing its entire construction of the Constitution to impose a duty upon employers to ensure the 401K plans perform in a world where interest rates are going negative. You really cannot make up this level of insanity.

The message here is not that all 401(k)s are bad or too expensive. In fact, costs have fallen 30 percent over the past decade as more plan sponsors turn to low-cost passive investing options. But this can be highly dangerous for to lower costs they turn to government debt where there is no need for fund management decisions. Yes, when I did hedge fund management, the cost was 5% annually plus 20% performance. That cost went to staff around the world that had to monitor positions and the world economy on a 24 hours basis. You paid also NOT to trade for most losses took place when traders were bored are would trade to try to make money when there was nothing to be done. Our track record was the best ever in the industry with the lowest drawn down perhaps in fund management. But that risk reduction cost money.

Today, costs vary widely. Plans with more than $100 million in assets usually have total annual costs below 1% whereas the biggest plans usually are below 0.50%. In small plans, the costs can be as high as 2% today. The focus is now on cost – not performance.

Financial service companies can charge a range of management, administrative, marketing, distribution and record-keeping fees for 401(k) plans. Plan sponsors can assume the costs, but employees are paying at least 85% of all fees typically. It is true that most workers do not know they pay the bulk of the share of costs. A 2011 AARP survey found that 71% of retirement savers do not think they pay any investment fees at all. It is true that the fees make a huge difference in returns over time. However, this drive to lower costs has also lowered the quality of funds management.

The U.S. Department of Labor estimates that a 1% point difference on a current account balance of $25,000 will reduce total accumulations by 28% over 35 years, assuming average returns of 7% and no further contributions. The focus is all on these management fees without any consideration of the problem. Trying to manage money varies according to the size of the fund. The more you gather, often the lower the performance because the markets are not unlimited. You can pick up the phone and say “sell at the market” when you have a $100 million fund, you cannot do that with a $100 billion fund. So the management fee was also a means to reduce the number of clients and it was never a question of unlimited capacity to trade. The numbers on performance would decline with greater amounts of money under management for the manager lost flexibility.

The Supreme Court case clearly shows that lack of understanding of the industry yet the battle centered on the 401(k) plan’s use of retail-class mutual funds when less-expensive institutional shares were available. The difference between those classes typically is 25 basis points. This will now  put pressure on large plans to cut costs further but will not have much impact on smaller plans. That is because big plans have the buying power to negotiate better deals but at the same time they are the easy target for lawyers making them much more attractive targets for litigation.

Cutting management fees to the bone may in fact set the stage for massive losses for many of the older better traders are now just resigning. The quality of the funds management is more likely than not going to decline noticeably.

Between the court ruling and the Obama administration’s push for stronger fiduciary rules send a strong message that government can much easier seize the pension fund management industry of course to “protect the consumer”.

Gold – China – Here We Go Again

Crying-Wolf

QUESTION:

Hi Martin,

I was “of one mind” when it came to gold and silver and the shisters that clam “manipulation to the downside,” “gold is going to 5K,” and “gold has bottomed” and on an on.
Your site is the only source of information that I trust anymore and thanks to you I take a more global view of the markets and the benefits are paying off.
Lately I’ve seen some folks talking about China. They believe that China is close to announcing that they have accumulated 30,000 tons of gold and that once this is announced it will have a devastating effect on the west.
What is your take on this? I think the reaction will simply be “ho hum” similar to the reaction to the bailouts in Cypress.
Thank you so much for all you do for humanity.
Gregg

ANSWER: The arguments for gold never change. The gold promoters keep finding some new theory to explain why gold will rally, ignoring the fact that they have been consistently wrong every time. They say whatever they have to to sell something for a profit. This is why they are not forecasters and certainly offer no real analysis – just salesmanship. They do not differ from the stock promoters of the Great Depression who kept telling people buy all the way down. It took 3 8.6 year cycles to make new highs above 1929 – 1954 (25.8 years). Some now just adopted the ECM to pronounce that gold will rise starting October 1st when that is not the date we gave in the special report on gold.

These gold promoters keep yelling “Wolf!” yet when it comes time to buy gold, nobody will pay attention to them for all they ever say is the same thing – BUY! The threat these promoters present is that they create an illusion that distracts many from what is truly going on behind the curtain. They certainly do not want to talk about the fact you cannot legally store gold in a safe deposit box or hop on a plane to start a new life with a suitcase full of gold. Sure gold COINS will have a role, but this may be simply as a preservation of some wealth in a new age of electronic money where you will not be able to buy or sell legally without the government’s approval. Just as Roosevelt made it illegal to buy or sell gold, the police can just as easily arrest people for money laundering if they buy or sell using gold coins and confiscate everything involved. We have realize that we are in the belly of the beast who is government, which has consumed all out rights, privileges, and immunities – the essence of freedom and liberty. Forget JUSTICE – for that they spell JUST US.

It is always the same plot over and over again that these gold promoters sell. Now they claim China has bought all the gold and will announce they have the largest gold reserve. China also has a debt problem. China’s share market has jumped because the government was clamping down on real estate. These people attribute all buying in China to the government. They are constantly harping that gold is money, claiming that the West will fall because China has gold.

China and Japan rose from the ashes WITHOUT gold. How could they have done that without gold? Gold is not money – it is a commodity that is universally accepted because it is of the same quality and standard – unlike oil, wheat, or rice. There are differences in most commodities moving around the world – but not in gold.

We are heading into the land of electronic money; China is well aware of that. The elimination of paper money is the attempt by government to control everything. They are more likely than not going to seize banks, rather than bail them out. Those days are over. They are even backing away from insuring deposits, raising the age for social programs, and they themselves are not guaranteeing pensions to new employees. Many government are hiring part-time workers to deny benefits. They are starting to fine the banks, publicly making them plead to CRIMINAL charges, rather than civil. Technically speaking, J.P. Morgan Chase is a felon but still no one goes to jail.

Gold is dead as a monetary unit. Get over it. That does not mean gold is worthless or has no role. Just let this go. It is bullshit and not even necessary. The days of a COMMODITY based monetary system have expired, for those were the days of a BARTER ECONOMY. We have progressed as people have a better understand of what money is. Money is the PEOPLE of the nation, not what commodities they possess. If you have no gold, does that mean you are a worthless person? Your value is your productive ability in whatever field that might be, from art to science, or service.

Gold will rise, but it will NOT be due to China’s purchase. Gold will rise because we are in a private wave and CONFIDENCE in government is declining. Gold was once the major means to move money from one place to another. Today, the negative side of gold is that you cannot hop on a plane with a full briefcase and embark to a new land. They have shut down the that as a viable way to move money anymore. Get move up to the 21st century. Most of these argument are from the 19th century and it is time to let them go.

Gold, along with other private assets, will help to make the transition following the Sovereign Debt Crisis. Really, we have to tune out these gold promoters, for they yell nonsense without any factual support. Claims made of Fort Knox possessing no gold and paper being fiat have discredited the gold bugs, making them a laughing stock among the majority who just look at the price action and say – WRONG. They have touted that hyperinflation was coming when they do not understand the economy or how nations collapse. I have warned we are in the age of DEFLATION, not HYPERINFLATION, and the day will come when you will pray for inflation as they are starting to do in Europe and this is the whole trend toward NEGATIVE INTEREST RATES.

We are looking at electronic money that will be controlled by government; nobody will be able to buy or sell without the consent of government. That is the reality. This is why I agreed to even do the movie. I was not thrilled about the personal aspect, but realize that is part of the story in the battle against this trend. The banks have manipulated everything when they moved to Transactional Banking abandoning the traditional Fractional Banking where they actually lent money that at least created businesses and jobs preferring the quick profits of trading. As the banks blew up, politically it is shifting against them and now they are too stupid to realize that may be just nationalized and the people will cheer.

Government will most likely criminalize the underground economy in whatever alternative form it may take for this is now about power. Just as Greece made it illegal to pay for anything with more than €70 euros, they will simply pass a law making it is illegal to pay someone in gold. We have to realize that government feels their power is slipping away. They cannot meet their expenses and the pension crisis is massive. Here too, the graying of society is FAR WORSE in Japan and Europe as well as in China compared to the United States.

Thrasymachus Quote

I have stated many times that I agree with Thrasymachus: there is no justice or rule of law as both are only the self-interest of government. In that respect, ALL GOVERNMENTS are indeed the same no matter what we call their form, be it a dictatorship, aristocracy, republic or democracy. This was proven with the Supreme Court’s ruling to uphold relieving government of any obligation to honor previous commitments.

The U.S. Supreme Court upheld Roosevelt, nullifying what was known as the “gold clause” in all private contracts in the 1935 case PERRY v. UNITED STATES, 294 U.S. 330 in a 5:4 decision with the dissents of Mr. Justice McReynolds, Mr. Justice Van Devanter, Mr. Justice Sutherland, and Mr. Justice Butler. That decision was monumental for it effectively held that current policy requirement allowed the government to change whatever they promised previously. In other words, you cannot take government at its word for they do not have to honor anything. This is the failure of the HYPERINFLATIINISTS – government WILL NOT honor all those promises and they are turning against the people and that is massively DEFLATIONARY. So welcome to the 21st century where government is on a mission to retain power, but in the process, they are extinguishing their own existence.



 

The Supreme Court wrote in upholding the abandonment of what was the gold clause in private and government contracts wrote:

This obligation must be fairly construed. The ‘present standard of value’ stood in contradistinction to a lower standard of value. The promise obviously was intended to afford protection against loss. That protection was sought to be secured by setting up a standard or measure of the government’s obligation. We think that the reasonable import of the promise is that it was intended [294 U.S. 330, 349]   to assure one who lent his money to the government and took its bond that he would not suffer loss through depreciation in the medium of payment…

 

Second. The Binding Quality of the Obligation. The question is necessarily presented whether the Joint Resolution of June 5, 1933, 48 Stat. 113 (31 USCA 462, 463), is a valid enactment so far as it applies to the obligations of the United States. The resolution declared that provisions requiring ‘payment in gold or a particular kind of coin or currency’ were ‘against public policy,’ and provided that ‘every obligation, heretofore or hereafter incurred, whether or not any such provision is contained therein,’ shall be discharged ‘upon payment, dollar for dollar, in any coin or currency which at the time of payment is legal tender for public and private debts.’ This enactment was expressly extended to obligations of the United States and provisions for payment in gold, ‘contained in any law authorizing obligations to be issued by or under authority of the United States,’ were repealed. Section 1(a), 31 USCA 463(a). [294 U.S. 330, 350]   There is no question as to the power of the Congress to regulate the value of money: that is, to establish a monetary system and thus to determine the currency of the country. The question is whether the Congress can use that power so as to invalidate the terms of the obligations which the government has theretofore issued in the exercise of the power to borrow money on the credit of the United States. In attempted justification of the Joint Resolution in relation to the outstanding bonds of the United States, the government argues that ‘earlier Congresses could not validly restrict the 73rd Congress from exercising its constitutional powers to regulate the value of money, borrow money, or regulate foreign and interstate commerce'; and, from this premise, the government seems to deduce the proposition that when, with adequate authority, the government borrows money and pledges the credit of the United States, it is free to ignore that pledge and alter the terms of its obligations in case a later Congress finds their fulfillment inconvenient. The government’s contention thus raises a question of far greater importance than the particular claim of the plaintiff. On that reasoning, if the terms of the government’s bond as to the standard of payment can be repudiated, it inevitably follows that the obligation as to the amount to be paid may also be repudiated. The contention necessarily imports that the Congress can disregard the obligations of the government at its discretion, and that, when the government borrows money, the credit of the United States is an illusory pledge.

Interest Rates & the Collapse of Public Confidence

IntRate-Manipulate

QUESTION: If we truly are a moving to a cashless society as is evident, and that is massively deflationary, which I agree with, wouldn’t that drive govt. yields LOWER?  How do you reconcile a sovereign debt crisis and rising yields with a massive slowdown in inflation and growth that these misguided policies are driving us towards? Given all the cash out there looking for stores of value (like the $170mm Picasso), wouldn’t they just park it into government bonds if there is a massive slowdown of both the velocity of money and economic growth?  Or perhaps we see some sovereign yields like in Europe spike while others like the US go sharply lower based on the cap flows?  Although that wouldn’t match your prediction that ALL sovereign yields will rise together.

JL

ANSWER: This is the complexity that will twist many people’s minds. All of what you say is logical under NORMAL conditions. People park in government bonds when they distrust the private sector. But what happens when they distrust government? The tables reverse and the dealer is now the people.

 

It is always a matter of confidence. When capital loses confidence in government, it flees to the private sector but you have to understand at that point it is not about profit – it is about survival. At the peak of the crisis in 2009, rates on government short-term paper went negative. People were willing to pay for safety. The $170 million Picasso is by no means someone buying expecting to make a profit. They are parking money.

 

Corp-Treas%

 

Yields will rise as we just saw in the Bunds as capital is shifting from long to short end. But then with the first crack in government debt, capital will look around and ask who is next. Read Herbert Hoover’s Memoirs 1931 Chapter and look at what he describes is the movement of capital that is the same way it moved in 2010. Look at the difference between corporate and government bonds during the Depression. Granted, the US did not default, but it did devalue the dollar in 1934. That is a reduction in the value of an outstanding bond so it is a partial default. Capital shifted to the private sector after the first fake out to the upside side in rates with the Sovereign Debt Crisis in 1931. As cities in the US began to default, you can see that the premium on corporate paper over government dropped sharply illustrating that smart money figured out the problem was government despite what the press was reporting.

 

As capital withdraws from the public sector (both federal & state/local worldwide), that will drive rates higher. The lower rates are setting in motion a massive collapse in pensions and the elderly cannot survive off of their savings. Moreover, the Fed will be compelled to raise rates if the share market rises despite the economic decline. If they do not, they will be accused of creating the bubble.

 

This is all intertwined. Try to open your mind and be like a trader just following the trend and the capital flows. The market is always right – it cannot be wrong. Only we are wrong for when the market does something we did not anticipate, our analysis is at fault not the market.

Jean-Claude Juncker is creating a Political EU Commission – Non-Politicians Get Out

Juncker Jean-Claude

Incoming European Commission president Jean-Claude Juncker has cleverly created an EU executive that is essentially former politicians only.His intention has been he wants only political experience to become a commissioner. He began soliciting a number of ex-prime ministers on his team who know the job and how to handle public opinion.

Juncker realized that the EU is on the brink of a meltdown. He wants only politicians who know how to play the game to shift even more power to Brussels. This is a big gamble for it demonstrates they still refuse to reform a serious structural mistake.

Business Cycle & Economists

BusinessCycle-Waves of Creative Destruction

COMMENT: You are correct. I went to the London …. and they said there was a business cycle but it was random and but it could not be defined.

Cheers

RB

REPLY: Yes. Somehow everything inverted after Keynes. Even Marx never said there was no business cycle nor did Keynes. Both sought to manipulate it, but they did not deny its existence. This evolution to a state of denial has taken place post-Keynes. Paul Volcker explained it best in 1978 within his Rediscovery of the Business Cycle:

“The Rediscovery of the Business Cycle – is a sign of the times. Not much more than a decade ago, in what now seems a more innocent age, the ‘New Economics’ had become orthodoxy. Its basic tenet, repeated in similar words in speech after speech, in article after article, was described by one of its leaders as ‘the conviction that business cycles were not inevitable, that government policy could and should keep the economy close to a path of steady real growth at a constant target rate of unemployment.”

The economists who are in a state of denial are extremely dangerous people. Like Rogoff of Harvard, they assume we are sheep and that economists and government possess both the mental/physical capacity and the right to manipulate the people. I disagree with that entirely. So I say stop criticizing and PROVE there is no business cycle and that government has been capable to preventing a recession even one time.

I for one would love to split the country in two and all those people who want to control others should all go to the left side and leave the rest of us alone on the right side of the divide. The problem is, they always want to rob what other people have to make their world better for them. They are not satisfied with their own productivity, they covet what everyone else has without having to work as hard for it. The bottom line – we should have less human rights to be free for we possess something they want.

BREXIT – Bank of England Researching Departing from EU

BREXIT

The Bank of England is studying the implications of a possible British exit from the European Union where it slipped in an email to the Guardian acknowledging such a study. This is standard operating procedure for the BoE and it should be expected. It is by no means confirmation that Britain will leave. Rather, it is studying what if that ends up as the case given the political tensions rising over the Euro and demands upon Britain to send Europe money.

British Prime Minister David Cameron, who was re-elected on May 7, has pledged to reshape Britain’s ties with the EU before holding an in-out membership referendum by the end of 2017. It appears that by that time, the Brits may very well vote to get out. We will run our projection on the political ramifications whether they will vote to exit or not. So far, everything appears more-likely-than-not that Britain will exit the EU for it is unlikely that Brussels will change course. Saving the Euro is all about saving their jobs in Brussels – not about saving the European people.