FED DECISION - EQUITIES WIND UP? OR UNHOLY UNWIND?

I know that I have written about the coming equities market correction for about 3 months now. I am also acutely aware that there will be a growing band of my readers beginning to doubt the call.
It is also evident even some of the brighter economic thinkers are questioning if there is an equities bubble!  Are they joking? Poking at me for a reaction? SERIOUSLY!

With all this in mind, the Fed decision tomorrow is the biggest decision since October when the infamous taper “head fake” caught the market by surprise. It seems to be some kind of game for the Fed, jawboning, taper talk, on again off again. Is it a test of market reaction? If it is then the Fed members are clueless. Market reaction should be obvious, just look at how it panned out in October!

The fact is, the decision that will be handed down tomorrow is HUGE. Make no mistake, I would love to see a taper for the economy, to end this insanity. I want my readership to understand that the underbelly of debt cannot be sustained and that that the only thing preventing the ultimate deleveraging depression is the Fed intervention in the bond market, the $85bn in QE life support.

So what do I see happening tomorrow? What will the Fed do? How will that play out for the equities market? What impact will it have on both the USA domestic economy and the global economy?


WHAT DO I SEE THE FED DOING TOMORROW?
Tomorrow I am tipping something special. Firstly I am going to go on the record tipping NO TAPER. The Fed has said time and time again that a tapering of QE is DATA DEPENDENT. If you take the Fed at their word, then how could they taper into the weakest employment environment in over 35 years?

It is not just the weak employment environment that is of concern. If you delve deeper into the data recently released on personal income and outlays for October, the case for a Fed NO TAPER is all the more evident. Looking at the report, it states that personal savings as a percentage of income had fallen to 4.8% from 5.2%. It also lowlights the fact that proprietors income decreased by $19.7bn. Below is the link for your perusal.


http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm


 If the Fed were to taper into weakness it will trigger an equities market correction, the “unholy unwind” as investors are forced into deleverage mode amidst rising interest rates and increased margin demands. There is no doubt in my mind thata December taper will only be temporary and its effect on markets will have the Fed doing the UNTAPER dance early next year, followed by the INCREASE QE groove not long after.

With household savings at a mere 4.8% of total household income, the economy would fracture if a Taper induced interest rate rise were to manifest itself. To give readers an idea, an interest rate hike from say 4.5% to 5% on a $350,000 mortgage would cost the borrower around $110 per month extra on their mortgage.

 Assuming that the borrower has an income of $800 per week, saving 5% of that is $40 per week or $160 per month. That 0.5% interest rate hike reduces household savings by $110 per month on the mortgage repayments alone. This in effect, reduces the borrowers’ ability to save by more than half!

With savings already at critically low levels this taper inflicted interest rate blow would take all the steam out of the property market. It is for this reason along with the poor employment outlook that the Fed, in my opinion, will maintain the status quo of QE $85bn per month.
I feel that if the Fed maintains the status quo the equities market will flat line, rather than rise as the law of diminishing returns reduces the boost the standard $85bn gives to the markets.

Setting aside the NO TAPER which I feel is a given, what could the Fed do to try and get some more activity out in the economy? When you analyse the recent Fed minutes the topic of lowering the 0.25% interest the Fed pays banks for excess cash reserves is mentioned as a solution to stimulating bank lending into the economy. Right now the banks have around $2.5Tn dollars in excess reserves parked at the Central bank earning a pitiful 0.25%.

I believe the Fed will maintain the $85bn in QE and at the same time reduce this 0.25% interest rate to perhaps 0.15% in an attempt to drive banks away from hoarding cash at the Fed and lend a part of the $2.5Tn in reserves into the economy.


The reason I believe this reduction in interest rates WILL take place is simple. There is not enough credit being created, or money loaned into the economy to sustain current asset prices. Margin loans used to prop up the stalling equities market have surpassed levels prior to 2007 and available “margin credit” is almost dry.

When this margin credit dries up, there is no more play money to continue inflating the asset prices and the game is OVER.  Below is an article in Zero Hedge that supports my argument that margin debt has peaked and that the equity markets are now stalling due to “the ongoing collapse in investor net worth”


http://www.zerohedge.com/news/2013-11-26/margin-debt-soars-new-record-investor-net-worth-hits-record-low


The above article suggests that the collapse in investor net wealth means available “credit” with which to continue increasing leverage into the market is approaching critically low levels. The article was written at the end of November and it appears that the Dow Jones Industrial Average peaked on November 27th at 16,100 points. Since then there has been some deleveraging in an attempt to try and free up some credit and as I type this blog the Dow closed at 15,875 points.


A link to the DJIA monthly chart is copied below :


http://au.finance.yahoo.com/q/bc?s=%5EDJI&t=1m&l=on&z=l&q=l&c=

The margin loan credit availability case has strength and merit. It supports my view that the equities market is on the edge, a debt bubble edge! The market is screaming for gas, sputtering like an old beat up car running on fumes hoping the Federal Reserve gas station is just around the corner.


The Fed knows that QE is now not enough to keep the equities and property market bubbles from bursting. It needs to get the banks creating the endogenous money gasoline and lend to the economy, something they have been unwilling to do as is evident by the mushrooming $2.5Tn in excess cash reserves.


The Fed will, in my opinion surprise everybody tomorrow with NO TAPER and at the same time a cut in the interest rate they pay for excess cash reserves. This must happen if the Fed want to keep the economic improvement illusion going.


If they do that tomorrow, Gold goes much higher, equities go higher also, and the bearded man BERNANKE gives Yellen the hand pass from hell, the ultimate poisoned chalice… couldn’t have happened to a nicer man… oops I mean Woman!

 

FINANCIAL SECTOR – THE PARASITE SUCKING THE BLOOD OUT OF THE REAL ECONOMY – MINSKY MOMENT PART II

So when is it going to happen Phil? That is the question I am constantly asked. I am sure many think that I am simply an economic doomsayer. I am guessing the next stage will be trolls calling me a stop clock, when it happens they will say, yeah yeah you were saying that 3 years ago… GIMME A BREAK!!  So I soldier on trying to convey and build my case.

It is becoming more apparent to me that the ultimate implosion is upon us. A Federal Reserve Minsky Moment that is imminent and when it strikes it will be the pin that pricks and bursts the biggest economic bubble the global economy has ever built, the global debt bubble.

I have written about this topic in an earlier blog titled “Global Debt Bubble Set To Burst – The Next Minsky Moment”. This blog will extend on my Minsky Moment analysis. I will set out to describe the bubble I feel will pop first along with the pin that pricks and ultimately bursts it.

There is no doubt in my mind that the global economy is on the cusp of one of the greatest economic calamities the world has ever seen. The economy, has, for far too long operated and relied upon a consumption based debt driven system. This is completely unsustainable as inequalities in foreign debt will eventually spill over when the time comes to finally settle.

The day of reckoning has already been seen in Cyprus, Greece, Italy, Spain, Ireland and Portugal just to name a few. We are also witnessing currency collapses and inflation breakouts in Venezuela and Argentina both of which are destined to enter the hyperinflation HALL OF SHAME.


I am sure many that are reading are thinking but aren’t these small economies, not worth a mention in the big picture? The short answer to this question is YES. The long answer is much more complicated because those that have that view are ignoring the risks the parabolic growth of the finance sector of developed economies have created.

The finance sector of an economy contributes very little in real production and savings, two key drivers to a prosperous and sustainable growth economy. The explosive growth in the financial sector has, metaphorically, developed into the leech that is sucking the blood out of the real production and savings economy, the engine room for sustainable economic growth.

The finance sector has grown exponentially and in many ways is strangling the real economy, ironic, given that it depends on the real economy for its very survival! The inherent risks this growth imbalance promotes stem from the systemic instability it creates.  As Minsky put it :


“The Financial Instability carries important real economic consequences. Financial markets are not quarantined casinos. Both their manias and their crises have powerful consequences for the real economy, where people work to produce real goods and services of real value”

Minsky understood that for an economy to grow sustainably a balance between the financial sector and the private sector real economy that produces REAL goods and services of VALUE needs to be struck. This equilibrium is assisted when the cost of borrowing (interest rates) are allowed to be set by a greater free market influence.

In a free market, interest rates are more likely to reflect the risks involved in a potential investment. This leads to the channelling of financial and other resources into avenues which develop and produce an increase in REAL production of goods and services of REAL value at the most economical PRICE. When the global financial crisis struck in 2008 the economy aimed to reset, equities markets collapsed in an attempt to balance the financial sector back on a path of sustainability. The fact is that 2008 was a market sent message that the financial sector had grown much to aggressively and was unsustainable.

As the financial sector of the major economies grew exponentially, there was a need to find new ways to feed the growth. Bank loan to deposit ratios were increased, equities trading added derivatives trading including options trading, forwards, credit derivatives, CFD’s and so on. Commodity markets followed and so did the forex markets and the financial sector growth spiralled out of control. The debt bomb was officially on steroids.

 The markets were turning into one giant casino, awash with speculators, speculating on what others may be speculating on might move the market not just today but into the future. Three, four, five levels of speculation, cycles, spinning so fast they make you so dizzy you felt like throwing up.
Derivative markets, a bet on a bet, margin lending, seriously people, STEP RIGHT UP, EVERYONE’S A WINNER!

Everybody thought it would just keep going, the stock market, the property market. Debt did not matter, the assets were going up. The growth in the financial sector has turned the global economy into, at best , a giant casino and at worst a miniature Ponzi scheme where success and profit is dependent on the next sucker stepping up to buy the old sucker out.


The financial sector is leeching the money from the real economy to create a money washing machine that achieves nothing more than aiding and abetting high grade speculation.
Global Central bank and policy makers have been complicit in attempting to keep this grand illusion going. Their joint interventions have attempted to pick up the pieces after each correction by reinflating the global economy in an attempt to paper over the structural economic problems that exist beneath the surface. It seems both are intent on applying a Keynesian monetary based solution to a global economy that clearly has a structural problem.


The world just needs a bigger bubble to get over the last bubble bursting right? For those that answered yes, you need to look up the definition of insanity! As the immortal Albert Einstein stated “insanity is doing the same thing over and over and expecting a different result”

With the Central Banks applying the “insanity” monetary QE approach to the structurally fractured economy, the real problems of 2008 are being exacerbated. The QE induced economy is growing the financial sector at an even greater speed and exposing the global economy to an almost guaranteed period of chaos and correction. Make no mistake, the result will be devastating.


If you do not believe this is happening you are ignoring the facts. Take a look at JP Morgan’s recent spate of fines for one misdemeanour after another. The LIBOR rigging scandal, the chatter about the precious metals market riggings. Another day, another scandal in the financial sector that is on steroids in fact the sector has grown so big that it is holding the whole economy hostage.


The growth in the financial sector has been precipitated by the multiples of EBIT applied to a new IPO vs the multiple an owner could get through a private offering. This has forced the shift in thinking from the private sector ownership to public listed companies.


The story of multiples of returns for an IPO compared to a private sale is compelling. When a company is sold from one private owner to another the company valuation almost always attracts a lower EBIT multiple than a publically listed company would. The reason for this is simple, the multiple will factor in perceived risk, growth evaluation and potential and the work of the new owner to achieve the outcomes they desire for the investment.


The private sector is more likely to evaluate key drivers to the success of a business. That is because the new owners are more often than not, stakeholders in the business and not just shareholders. Stakeholders are more likely to play a part in setting the direction of the business, formulating a business plan and playing an active role more generally. Surely this is a more prudent approach to investment than a publicly listed company where the shareholder is lured into a dividend yielding comparison apathy? Where trust is put in a CEO and not the combined thoughts and passions of stakeholders?


With this debt bomb building it is becoming more apparent that the global economy needs to reset and rethink its attitude to debt and the deflationary effects that it creates. It seems China has identified the fact that whilst creating a credit/debt driven growth economy may seem sustainable at first, the liquidity trap eventually captures the economy. This means that there is a diminishing rate of return with respect to dollar returned in GDP for each dollar of credit/debt created. In essence this what fosters a DEBT DEFLATION riddled economy.


It seems China is now recognising the fact that piling up debt and building a credit reliant economy is not the solution. China has noted that its own central bank balance sheet cannot keep expanding the way it has been to provide credit for its domestic economy and facilitate the debt driven economies of the world.

In a recent announcement on new economic reforms China signalled its intentions of exiting US Treasury purchases. In mocking the Federal Reserve monetary policy position, Peter Schiff quipped recently “While the Fed is talking about tapering, China is actually going to do it”. This highlights a significant shift in China’s attitude toward USA Debt and their exposure to it.

The reforms also included a more open approach to the once centrally planned dominated economy which will allow increases in foreign investment dollars to supply the debt it needs to keep economic growth going. The aim is to import some inflation through foreign investment.


There is also the looming question on whether a deal was reached between the USA and its major creditors that was settled with the implementation of “operation twist”. While the Federal Reserve was buying the Long term treasuries and swapping them for short term treasuries, was China on the other side of that trade? This ensures China has less exposure to long term treasury risks allowing them to "manage" their USA debt holdings in the event of a looming bond market collapse!

While the world focuses on The Fed’s ballooning balance sheet, many are ignoring the explosion of the Bank Of China’s balance sheet. Since 2008 China’s assets on the balance sheet expanded $15.4 Trillion. This is approximately four times the speed of the Fed bank balance expansion.


The fact is China cannot support USA debt any longer as domestically more credit creation is needed to keep economic growth going. It seems that the more credit and debt that is created, the less efficient that credit/debt creation becomes at assisting sustainable GDP growth. The evidence is that China will soon join the global economy in experiencing a debt deflationary economic environment.
Below is an article from Zero Hedge which discusses the underlying debt bubble in China.

 http://www.zerohedge.com/news/2013-11-19/big-trouble-massive-china-nation-might-face-credit-losses-much-3-trillion


The key point for me is not just the balance sheet explosion but the hidden erosion in effectiveness of debt/credit expansion in generating GDP growth.

As the article states “China’s lending spree has created a debt burden similar in magnitude to the one that pushed Asian nations into crisis in the late 1990s, according to Fitch Ratings”.
The article highlights the liquidity trap that unsustainable growth in credit/debt levels creates. The law of diminishing returns applies so as the article points out:
“As companies take on more debt, the efficiency of credit use has deteriorated. Since 2009, for every Yuan of credit issued, China’s GDP grew by an average 0.4 Yuan, while the pre-2009 average was 0.8 Yuan, according to Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein & Co”



With all of this said it is clear that China has its own problems, they are “all in” with their USA debt holdings and have burdened their great productive economy with a credit/debt time bomb that will be almost impossible to control.
Make no mistake the global debt bubble will burst soon. There is now a raft of supporting data that show the global economy has a debt deflation issue. Professor Steve Keen had written a piece debunking neo classical view on economics. The piece focused on the role of the banking sector and is a great read. The article is posted below.

http://www.businessspectator.com.au/article/2013/12/3/economy/neverending-debt-trap

Whilst Professor Keen focuses his attack on the ignorance of neo classical modelling for not incorporating the banking sector, my post has aimed at illustrating the flow on effects the banking sector has through credit/debt expansion and the impact it ultimately has on the “real” economy.
With all of this being said it appears that global Central bank balance sheets are imploding at a greater velocity than the growth in real GDP or economic growth it is aiming to generate. It seems to me that this accelerated central bank balance sheet implosion may likely be the pin that will eventually burst the global debt bubble and trigger the next MINSKY MOMENT.

BITCOIN – IS MAX KEISER LIVING IN TULIPOMANIALAND? JUDGE FOR YOURSELF

WAKE UP!!! Can somebody tell me what the date is? What year are we living in? Why does it feel like we are living in the 1630’s and not the 21st Century? Are we headed for a revolution? Ushering in a new Era , zeitgeist?

Max Keiser, a world famous shock jock economist would have you think so. His obsession with Bitcoin so strong he refers to it as BITCHRIST along with making other references to the old book, the BIBLE.

After my last post here regarding Bitcoin, Max acknowledged in a tweeted reply that it was an “interesting read…but obviously I disagree”. My blog entry attracted commentary from supporters of bitcoin. It is amazing how the trolls come out when someone questions the reality of something they are so deeply attached to.

Bitcoin has had that effect on people, I mean, Max Keiser is the prime example. For those that follow Max on twitter, you know what I am talking about. It is a tireless promotion, Max is attached to Bitcoin like a two year old is attached to their security blanket.

Max has a huge following, his twitter page littered with pro Bitcoin rants, heck Max even retweeted and heralded the return of Silk Road after it was shut down by federal law enforcement for illicit drug supply.
I have tried to engage Max Keiser in a debate on Twitter post my blog. After reading a post where Keiser referred to bitcoin as having intrinsic value, like gold does, I was fed up and demanded an explanation.

It seems to me that asking for an explanation along with questioning Max on a number of key issues was enough for him to block me on twitter. All I wanted was an explanation Max. I felt this was a misrepresentation and sought some clarification.

As it turns out my tweets attracted staunch supporters justifying Max’s assertions. Some supported my position, some didn’t. One of my followers that also follows Keiser tweeted “Come on Max, grow a pair. Do you believe in BTC or no? Back It up man!


At the risk of sounding bitter, I assure you I am not. I enjoy watching Max Keisers other economic commentary, that can be sourced through youtube. Max probably did me a favour, rid me of the angst and aggravation of the endless Bitcoin tweet dump. The fact is all  I wanted was an open forum debate with Max Keiser. In the end I got one from others that live in twittersphere. To those that got involved, thank you, it was a great debate. As one of the onlookers put it “Good show fellas” 


The title of this blog expresses how I feel. It seems Max did not want to address my concerns. It is not just my concerns over Bitcoin that he has chosen to ignore or block out. It seems when it comes to the topic of Bitcoin, if Max wants YOUR opinion on the topic He Will give it to YOU!


Recently Max Keiser hosted a show with one of my favourite economics commentator, Jim Rickards. I enjoy Jim’s commentary because he remains on point, explains his position and is not one to shut down or block someone simply for disagreeing or debating his comments.
Jim Rickards has a huge Twitter following, a promotional tool I thought Max Keiser would pounce on and exploit in his recent Keiser Report with Jim. After an endless tirade of bitcoin promotion on his twitter page, surely he was going to use Rickards’ popularity to push Bitcoin knowing the clip would be watched by Rickards supporters?


In his opening segment Max talks about Bitcoin with Stacy Herbert but when Jim took the seat, Max missed his opportunity. Gold was talked about, Currency wars were mentioned, so was inflation and a potential dollar crisis. Max had nearly 13 minutes with Rickards and no mention of Bitcoin.
Below is the Keiser report relating to this. Jim Rickards Joins Keiser at aroun the 12min mark.



http://www.bloomberg.com/video/malka-rickards-debate-bitcoin-utility-longevity-662IxXXTQl2e~49s0UZNhw.html



I wonder what Rickards  would have said if propositioned on the topic of Bitcoin? Judging by some of Jim’s commentary on Bitcoin I am guessing it would not have been a Bitcoin backslapping party.
Below is a debate Jim Rickard’s engaged in. For those interested in Bitcoin, this is a robust debate, informative and enlightening.


http://www.bloomberg.com/video/malka-rickards-debate-bitcoin-utility-longevity-662IxXXTQl2e~49s0UZNhw.html


After watching it you will see Rickard’s has highlighted the weaknesses that lie within the Bitcoin protocol. Perhaps that is why Max Keiser chose to no broach the topic, perhaps Max could address that question if enough of his followers tweet him. I have started a HASHTAG on twitter #askmaxkeiser for those who that feel there are some questions they want Max to answer. Perhaps he could start with how Bitcoin has intrinsic value like gold does?

I started the thread because I am sure many have questions they want answered but cannot get through amongst all of Keisers Twitter noise. He does have 76,000 followers. If the HASHTAG gets enough questions perhaps Max could select some to answer.
It appears to me that Max also missed an opportunity to debate the Bitcoin phenomenon with Peter Schiff. Peter is a well respected economic mind and was one of the few outspoken voices predicting the Global Financial Crisis.

One of Schiffs clips on youtube dubbed “Peter Schiff was right” the early edition went viral and had over 1 million views. Another worthwhile  Youtube clip to watch was Peter Schiff and another economics commentator Professor Steve Keen discuss the economy at the beginning of the '08 Crisis.

Max had Peter Schiff on his show a couple of weeks ago. Again, no mention of Bitcoin. Was this an opportunity missed given Peter Schiff’s profile? Imagine the marketing opportunity, Peter Schiff endorsing Bitcoin!
Why did Max Keiser not ask Peter Schiff about Bitcoin on his show? He posted a piece from a pro bitcoin blogger which insinuated that Schiff did not understand Bitcoin, but when Peter was on his show he did not debate it.  As the tweet said “Come on Max, grow a pair. Do you believe in BTC or no? Back It up man!
Below is Peter Schiff explaining his view on Bitcoin.



http://www.youtube.com/watch?v=0L7SOPDOvvI



Again after watching the clip Peter Schiff’s position is clear. Schiff debunks Max Keisers’ assertion that Bitcoin has intrinsic value like gold does.
With all of this in mind I return to the title of this blog.
Is Max Keiser living in a Bitcoin induced Tulip Mania? Is he so immersed in the Bitcoin concept he has lost touch with reality?
Wikipedia defines Tulip Mania as the following -  “Tulip mania or tulipomania (Dutch names include: tulpenmanie, tulpomanie, tulpenwoede, tulpengekte and bollengekte) was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed.”



“At the peak of tulip mania, in March 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble (or economic bubble),[3] although some researchers have noted that the Kipper- und Wipperzeit episode in 1619–22, a Europe-wide chain of debasement of the metal content of coins to fund warfare, featured mania-like similarities to a bubble.[4] The term "tulip mania" is now often used metaphorically to refer to any large economic bubble (when asset prices deviate from intrinsic values).[5]”


The tulip mania took over the economy for a period, its effects so profound that a book was penned by Charles Mackay entitled “Extraordinary Popular Delusions And The Madness Of Crowds”. It highlighted, amongst other things, the ability for crowds to act irrationally in a setting of a popular delusion. Back then it was Tulips, right now is it Bitcoin?

I am not questioning Max Keiser’s belief in the concept of Bitcoin, his genuine feeling that it is revolutionary. I am not asserting he does not believe what he is preaching to his followers. I am a fan of what Bitcoin tries to achieve and also the competition it creates within both the banking and forex sectors of the economy.

The aim of this blog is not to be the Devil in Keiser’s Bitchrist story. The purpose is more to ask the readers how they see it, present a balanced debate for Max Keisers followers and readership. So…
If I am missing something, If I am lost on a point and confused, I would appreciate an explanation. Right now it feels like the 1630’s. Tulip Mania was a part of history and as the old Santayana saying goes “those who cannot remember the past, are doomed to repeat it”

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IF YOU ARE A SUPPORTER OF BITCOIN TWEET PLEASE TWEET ME A TULIP

DEBUNKING BITCOIN - IT'S JUST A CRYPTO FIAT CURRENCY WITH NO INTRINSIC VALUE OR STORE OF WEALTH

The Bitcoin bug is biting… And HOW.. The bug is infecting the globe with this clouded and misrepresented notion that it is a currency that can be trusted. The Bitcoin currency is decentralised therefore not controlled by any one person and so offers protection from the endless rounds of Central Bank money printing. This assists the promoters of Bitcoin in peddling the fallacy that it offers a safe haven away from invasive government spying, and of course, those evil parasites they refer to as the "banksters" (banker/gangsters).

The pitch is a good one, aimed at ushering in the new "zeitgeist" in exploring a world on the edge of a revolution. Bitcoin is marketed as a way to liberate oneself from the shackles of government and central bank policy, a revolutionary new currency that erodes the power of the government and banking sector oppressors.

For those of you that are new to my blog, I wrote a piece on the 28th of October titled "Bitcoin , The Canary in the Gold mine". Within it I explored where I felt the world was headed with regards to the perception of money. I asked my readers to assist me in answering the question, what is money? The aim of the blog was to establish or determine whether the world stood ready to perhaps embrace a new monetary paradigm.

The money question I posed to my readers was aimed at stirring up analysis, thought and evaluation, heck I wanted to try and guage if the world was transforming. Was it evolving and unearthing a new spirit of the age, a revolutionary spirit much like the "free love" Woodstock era of peace and harmony. Was the growth of Bitcoin just the start of the revolution?

Not long after my blog Russell Brand confirmed my thesis about a new revolutionary spirit and uprising. It got huge media coverage due to Brand’s impassioned debate and call for change. According to Brand “profit is a filthy word” and he appears clearly agitated at the current system which is promoting an ever increasing disparity between the wealthy and the poor.

For those that missed the interview I have added the YouTube clip below.

http://www.youtube.com/watch?v=BHDcOBgWZqc

This interview was pounced upon by one of my favourite economic commentators Mad Max Keiser. I really enjoy the way he thinks, bright, insightful, with entertainment value. For those of you that do not follow him, Max heads up the "Keiser Report", a brutal, honest and factual program that educates you at the same time as entertaining you.

Setting the big plug for Max Keiser and his partner in crime Stacy Herbert aside I want to point out the fact that both are huge supporters of this "Bitcoin Revolution". In response to Russell Brands interview Max and Stacy linked Bitcoin to the upcoming revolution, mocking Russell Brand for not seeing it as an opportunity to "stick it to the establishment".

With typical Keiser flair, Max states that there is a revolution in motion, there is a solution to take the power away from the banks and put it in the hands of the people. The answer is "bitcoin mate" as Keiser puts it.

Below is the introductory clip of the Keiser report I refer to above.

http://www.youtube.com/watch?v=GZNW3LUszjg

Max is a huge supporter of Bitcoin and has been calling it a great investment from the outset. He called it at $5 a coin, from my memory, again at $30 a coin, and they are now trading in the range of $650 and $850 a coin, up from around $250 a coin when the "canary in the gold mine" blog was posted.

Before anyone thinks that I am going all the way with Maxy K, I am not. Do I see more potential in Bitcoin? Yes, Is it possible it could go much higher? You bet it could. Where is the limit? Who knows, I don’t know, no one knows.

The title of this blog expresses how I feel about Bitcoin, perhaps not in the short term, but definitely long term. Bitcoin IS another form of a fiat currency, albeit a digital one that is decentralized.

A bitcoin has no store of wealth, no intrinsic value, just like the paper dollars printed by Central Banks around the world. Many of the Bitcoin Illuminati are peddling the fallacy that it does have a store of wealth as physical gold does. That is FALSE and MISLEADING in my opinion.

Gold has a store of value because it can be used as a method for payment, it can be used to make jewelry and in the manufacturing of consumer products like electronics. Gold has a precious nature, a finite supply that will eventually run out along with an increasing difficulty to mine.

Many supporters of Bitcoin have been sold the story of Bitcoin having a "finite" number of coins. The idea is that the bitcoin is like gold in the sense that one day all the coins will be mined and there will be none left. Whilst this has some substance on face value when you delve deeper into bitcoin you will see the truth.

Yes there are only ever 21 million coins that can be mined. Yes each time a new block of coins are mined, the next block are more difficult to unlock, much the same as depleting the gold supply.

Still you cannot melt a Bitcoin down to make Jewelry, use it in commercial products, and so it has no intrinsic value. This means it carries the same flaws the current Fiat Monetary system has.

Before the Bitcoin maniacs start screaming to loudly at me about me missing the fact that there will only ever be 21 million coins I wish to dull that noise before it becomes to loud.

FACT

YES there will only ever be 21 million "Bitcoins" BUT these 21 million coins can be broken down in "bits" through 8 decimal points. One "Satoshi" named after the Bitcoin mastermind is the smallest denomination of a Bitcoin that can be traded. This denomination is 0.00000001 of 1 Bitcoin.

Dragging this through a simple multiplication process, though there may be 21,000,000 total Bitcoins, there are, however, a massive 2,100,000,000,000,000 or 2.1 quintillion tradable bits that will be available when all the coins are mined. This figure also needs to be multiplied by the dollar value assigned to each 0.00000001 or "satoshi" highlighting the fact that its finite status is at best one hell of a stretch.

In addition to the above point of limited supply I wish to point out that "Bitcoin" does not own the monopoly on digital currency. In fact Bitcoin was not even the first digital currency developed and used. A digital currency called "QQ" was developed in China and gained a big following in much the same way Bitcoin has captured the minds of many a speculator.

Below is an article I found on China's fascination with Bitcoin. Within it the virtual currency "QQ" is discussed, how it grew, and how it was eventually controlled.

http://money.cnn.com/2013/11/18/investing/bitcoin-china/

The undeniable fact is, that although Bitcoin has a finite supply of 2.1 quintillion bits, it is not alone in trying to capture the markets attention and exploring the virtual crypto currency space. There is a new crypto currency entering the fray now to offer investors in this phenomenon another option. This new crypto is called "litecoin".

Below is a website dedicated to informing potential investors about its platform.

https://litecoin.org/

Right now, with limited competition in the virtual currency space, the answer to the Bitcoin success maybe as simple as answering a question I was asked on twitter by one of my economics Idols, Jim Rickards.

Upon posing the question is Bitcoin the canary in the goldmine? And posting my blog. Rickards responded by tweeting, is it about Bitcoin? Or about the dollar?

Jim Rickards had answered the question, and in doing so highlighted the issue of the Crypto Currency phenomenon going forward.

Rickards' answer highlights the endemic problems the Virtual Crypto currencies have. They are identical to the problems being faced in the current monetary system. Put simply, as time evolves, as more crypto currencies enter the virtual currency space, the Bitcoin phenomenon and hysteria may be eroded. Whilst it has dominated the virtual currency space, Bitcoins 2.1 quintillion bit supply may be finite to Bitcoin itself, the space for new virtual crypto currencies is growing.

I would argue, just like central banks printed dollars, the virtual crypto currencies are doomed for the same extinction. As Litecoin along with the other new Crypto currencies are developed and marketed it will become abundantly obvious that Bitcoin is not special or unique. Bitcoin will be to the virtual Crypto world what the Euro, the Yen or The US Dollar are to the central bank world… FIAT MONEY WITH NO STORE OF WEALTH.

GLOBAL DEBT BUBBLE SET TO BURST – THE NEXT “MINSKY MOMENT”

As the sun rises each morning and sets each night, the global population meanders through their daily routine with a great majority totally oblivious to the dark economic clouds that are gathering in the horizon.
Human Beings , are, for the most part, an optimistic bunch. They are resilient and resourceful and have a natural instinct for survival. These are going to be important tools when the next economic crisis hits.
I know by now many that read my blog feel all I preach is doom and gloom. That I write a blog that tries to direct my followers in how to prepare for the next “black swan” event with an ad nauseam Henny Penny like
droning and repetitious message of how the “sky is falling” This blog entry will be no different when it comes to the message, but will be a more detailed and succinct explanation for why I feel the time is getting near.

The global economy is in the worst state it has ever been in. It has created a global set of asset bubbles that the entire world economy now trapped in one GIANT DEBT bubble. The Global Financial Crisis of 2007/08 was triggered by the bursting of the real estate bubble in the USA. A debt  driven, leverage driven bubble that brought down Lehman Brothers and would have seen the collapse of many more banks in the USA had the government not determined them “Too Big To Fail”.

It seems such a long time ago but the effects of that crisis are still dominating economic policy and in particular monetary policy settings by all the Central Banks around the world. The ’08 Crisis that hit was a sign that the economy was in poor shape, that it needed to restructure, redirect finance from debt to savings, consumption to production. In short the economy needed a recession.

Rather than allowing this to happen Central banks around the world have embarked on one of the greatest economic gambles in recorded history. Quantitative Easing and easy monetary policy including the lowest set of global interest rates ever seen have been implemented in an attempt to import inflation, target economic growth and boost economic growth. In the USA this aggressive QE program and low interest rate policy has done very little to curb the unemployment problem, in fact the unemployment rate ticked up 0.1% on the latest figures. The latest jobs report had many media spin merchants heralding the economy was strengthening on a better than expected jobs report which indicated that 204,000 new jobs had been created beating the miserly expectations of 130,000.

It seems that the media was in such a delirious state that they spun themselves into a dizzy haze of confusion. Sure 204,000 jobs were created but as I stated earlier, the unemployment rate went up. Once again, the
devil is in the detail with this jobs report. The jobs created are predominately in the service sector and the retail sector, the boost coming as businesses prepare for the holiday season rush. The jobs created
are temporary “anticipation” jobs that will disappear as soon as the Christmas sales are over. Within the 204,000 jobs created, and judging by the fact that the overall unemployment number went up, it can be assumed that many of these part time jobs are being filled as second or even third jobs by people that are currently part of the existing work force. My assumption above comes from the following data released by the BLS which stated “The civilian labor force was down by 720,000 in October. The labor force participation rate fell by 0.4 percentage point to 62.8 percent over the month”.

The above figures show that while 204,000 new jobs were created, the labor participation rate fell by 720,000. With all this being said I am absolutely flabbergasted that this jobs report is being heralded as a strong one and a sign the USA economy is in recovery. Just for a start this participation rate of 62.8% is the lowest labor participation rate recorded since August 1978. In considering this date one must understand that it was around this time that women were beginning to enter the workforce and so there was an increasing rate of people searching for a job. This is a natural part of the explanation of why the participation rate was so low during this period. Put simply the labor force demographic was changing at a faster rate than jobs could be created.

Below is a historical chart that illustrates the sharp decline. Note the shaded areas are recorded periods of recession.

The adverse effects of a declining workforce participation rate are numerous. The effects impact on a broad range of economic, socioeconomic, social and political conditions. To begin with, the economy is adversely
affected simply by the fact that the tax base will be reduced. The 700,000 people now not actively seeking work diminishes the amount of potential people that will be earning an income and in turn paying taxes
on that income. Furthermore those not working may also require Government subsidies such as food stamps or welfare just to survive. Social impacts for the hard core or long term unemployed may include
depression, a loss of self worth. It will also see a drain on skilled workers as long term unemployed are not in a position to keep pace with the dynamic global economy and technological advances. This makes
retraining necessary when the economic conditions improve. Political climate can be impacted as the unemployed or underemployed join in protests and movements driven by a feeling of inequality and
exploitation. Occupy Wall St was a prime example of what I feel will be an ever increasing global trend as the gap between the “haves and have nots” is widened.

With a deteriorating participation rate and employment outlook the psychological and emotional drivers of the economy turn negative. The velocity of money which is a behaviorally driven phenomenon declines
driven by the negative feeling that engulfs the market. Central banks right now are attempting to fight this negativity off with endless rounds of QE and easy monetary policy designed to create a “wealth
effect” by inflating asset prices. The boom in the property market in Australia right now is an interest rate inflated property market bubble that will soon burst.

Australia is set to follow in the footsteps of the USA. There is no doubt in my mind that the property market in Australia could fall between 15 and 35% in the medium term. This property market surge has been driven by the lowest interest rates in Australian recorded history. The fact is people do not care about HOW MUCH they are paying for the home they buy, they care more about HOW MUCH the repayments are. Speculators have rushed into the property market as the Reserve Bank lowered interest rates. The Federal Governments first home buyers grant has fueled the property market fire driving it to unsustainable levels.
As the property market goes up the Keynesian “wealth effect” kicks into action. People that see their homes go from their purchase price of $500,000 one year to $600,000 the next feel they are $100,000 better off
because the value of their home has increased. This triggers more debt as some borrow against their increasing home value to go on a vacation, buy a car or remodel the home.

While this so called “wealth effect” is aimed at creating economic growth and inflation through consumption and spending, what it really creates is a prolonged course of debt driven deflation. The “wealth effect” is based on flawed logic. Sure you get a period of asset price inflation like the Australian property market and the USA’s equity market, but those increases in asset prices are driven by an increase in leverage and debt.
One must be aware that if you buy a home for $500,000 and sell it for $600,000, there is still an increase in debt lumped on the economy of $100,000 for the person that has purchased the asset for the inflated price.

This misdirected increase in debt does nothing to grow an economy. What it really does is creates a bigger problem for those that get caught in the downward debt spiral when the economy needs to deleverage and reduce debt. Below is an article which highlights the point that even with the Federal Reserves $4 trillion worth of asset purchases so far, the trickle down contribution to GDP is a miserly 0.25%.

http://rt.com/usa/quantitative-easing-fed-official-610/

In many ways I feel we are heading for a “Minsky Moment” for the global economy. Investopedias definition of a 'Minsky Moment' is summarized below.

“When a market fails or falls into crisis after an extended period of
market speculation or unsustainable growth. A Minsky moment is based on
the idea that periods of speculation, if they last long enough, will
eventually lead to crises; the longer speculation occurs the worse the
crisis will be”

I believe the next global economic “Minsky Moment” will soon be upon us. It is a Federal Reserve and Central Bank policy induced crisis which will be almost impossible to escape. Each individual country has it’s own individual bubble or bubbles that are being inflated. Australia has a property bubble, the USA has a property bubble and an equities bubble. Canada and the UK both have property bubbles. The list goes on and on. The asset bubbles once popped will expose the underbelly of debt that lies beneath the surface. It will unravel with greater speed than in the last economic crisis and will expose the systemic problems associated with a debt driven global economy. With so much debt weighing the global economy down, most of which borrowed during this low interest rate environment, the global economy and the people it supports stay waiting. Some are aware of the dark clouds that are forming but sadly many are not. In my opinion the “Minsky Moment” is upon us, and when it hits it will be seen as the moment that brought about the Keynesian theory demise.

MARKET TIPS

JC PENNY (JCP) SHOULD BE SOLD AT $8.30 – A 10% PROFIT ON MY BLOG BUY
SIGNAL AND A 20% PROFIT FOR THOSE WHO FOLLOW ME ON TWITTER THAT GOT MY BUY SIGNAL AT $6.90. – NOTE I FEEL THESE COULD GO HIGHER BUT SEE SOME TRADE
RISK ON THE DOWNSIDE IN THE LEAD UP TO THE EARNINGS ANNOUNCEMENT DUE IN A LITTLE OVER A WEEK.

Gold wars - Miners versus the Manipulators of Wall Street

It has been a well reported FACT that the central banks around the world have been in a competitive drive to debase their respective currencies. The currency wars that are rolling through the economy are obvious and clear for all to see as central banks engage in the direct manipulation of both the foreign exchange and the bond  markets through Quantitative Easing (QE). The evidence of the QE trickle down can be seen in other asset classes such as the property market rebound and in the huge equity/stock market rally to record highs.

The GOLD WAR is the hidden war. It is being waged behind the scenes and is getting less coverage in mainstream media. Central banks, The Department of Justice along with the big players in the banking sector and the government want to try and cover this up. Below is an article published in the Wall St Journal which highlights governmental resistance to funding the in depth investigations needed to bring the market manipulators to justice.

http://stream.wsj.com/story/markets/SS-2-5/SS-2-370323/

There is no doubt that there are valid cases amongst some of the ongoing investigations. As the article above reported:

“J.P. Morgan agreed in October to pay $100 million to settle CFTC allegations its aggressive trading bets recklessly manipulated derivatives markets. The firm admitted the agency’s factual findings, that its traders acted recklessly and dumped huge amounts of swaps in trying to defend their positions”. 

This settlement agreement along with JP Morgans admission to the agency’s factual findings shows the need for a more stringent set of rules and punishments for market manipulation. The huge increase in banking sector fines being dished out show that current measures and penalties are more a joke than a deterrent.

Below is an article highlighting a gold trade that took place where 500,000 ounces of gold were dumped on to the market in one hit for sale at market price. A market price order has no restrictions and means the sell order keeps driving the price down until all the gold is sold. Logic says that if you had 500,000 ounces of gold you wanted to sell, to maximize the price you could you would be better served sprinkling the gold on to the market in an orderly fashion. The market dump, therefore, had traders screaming MANIPULATION and the gold miners seeking revenge.

http://www.moneynews.com/StreetTalk/Traders-Gold-Price-Manipulation/2013/10/15/id/531238

I believe the largely unreported GOLD WAR that is ramping-up is one that investors need to be on top of and exploit over the upcoming months. With the lack of adequate punishments being dished up to the manipulators, it seems that Gold Mining companies are taking matters into their own hands. I feel the Miners are fed up with the manipulation game. They were played into mining expansion by the manipulators pushing gold prices past $1,900 an ounce back in 2011 only to see prices fall  approximately 50% once supply came on line. Before you say 'well an increase in supply vs demand will cause the price to fall naturally' I want you to read the article below.

http://www.bloomberg.com/news/2013-11-01/u-s-gold-coin-sales-this-year-top-2012-as-futures-slump.html

The fact is physical gold purchases are solid and on the rise. Gold miners are doing all of the hard work often producing less than 3 grams of gold to a tonne of dirt while Wall St. and the manipulators control the price they get through paper trade and derivatives.

It seems that all of the gold miners are rallying together now and are engaging in the war. They can see, what I have been pointing out for a while now, that they have been used and abused, chewed up and spat out. It seems like the memo has gone out to all the miners. The memo is their plan of attack, their war strategy. Physical gold demand is increasing yet the paper price is not reflecting this. Miners are questioning why they should sell at a discounted price to the all time high of $1,900 + an ounce just because the manipulators and Wall St. want them to. With all of this in mind it seems the gold miners have formulated a simple, effective and almost vindictive plan to choke the supply of physical gold to expose the manipulation of the paper and derivatives markets.

This choke down of supply is a retaliatory response designed to leave those that have shorted the metal in a vulnerable position. Covering the short positions may become increasingly difficult as I believe gold has moved from weak traders hands into strong investor hands. Below is an article published by Reuters that highlights the response by miners mentioned above.

http://www.reuters.com/article/2013/10/31/barrick-results-idUSL1N0IF1UF20131031

Barrick Gold is one of the stocks I have been signalling as a strong buy at the price range it is currently trading of $18 to $19. Refer to my previous blogs for more discussion. Many other gold miners are restructuring and moving towards only mining highly productive mines. Even Newcrest Mining - another of my strong buy recommendations - at the recent $10 to $10.50 trading range signaled profitability rather than production was key. Here is an article published in July this year indicating the direction Newcrest Mining was going to take in the face of falling gold prices.

http://www.theaustralian.com.au/archive/business/newcrest-cuts-production-costs-as-gold-fails-to-shine/story-e6frg9do-1226685262756

Newcrest Mining has implemented the changes and joined in the war against the market manipulators by beginning the supply choke-down. Gold mining and physical gold production has a very inelastic time frame. Closing a mine or shelving it takes time, reopening it and ramping up to full production even longer. This being said the effects of Newcrest Mining and Barrick Golds moving to reduce costs will impact supply as non productive mines face either a temporary pause or potential closure.
Make no mistake, this is trench warfare, miners vs manipulators. I say the miners will get what they want as demand for physical product will create an even bigger disconnect between the paper/derivatives market and the real physical market.

So just as the pillar of trust among central banks has been broken via currency wars, the trust between the miners and Wall St. has been shattered by the manipulators and lack of penalties or enforcement. The war is now ramping up. It is about to get ugly. Those that ignore the signs and do not buy the miners and physical gold NOW will more than likely end up a casualty in the upcoming stampede of the Gold Bulls.

GOLD is currently trading at $1,315 oz – recommend strong buy
Barrick Gold (ABX) – $18.31 – STRONGER BUY
Newcrest Mining (NCM) on Aussie Stock market – Currently trading $10.00 STRONG BUY
Silverlake Resources (SLR) on Aussie Stock Market – Trading under 70c – STRONG BUY

I hope blog followers bought some JC PENNY at $7.50 – they are up more than 10% since my recommendation about a week ago.

Please do not miss this opportunity on the Gold mining stocks mentioned above. They are an absolute gift as a long term investment with loads of upside in the next few months as the pendulum shifts the money out of equities and back into the precious metals.

If you like this article please forward it on to whoever you feel may be interested. For those of you on twitter you can add me @carneycapital

Important update to yesterdays blog

Yesterday I posted some market tips that I feel will be good long term investments. I want to reaffirm those positions in this blog and at the same time suggest that my followers buy the dip in the market on all of the mining stocks mentioned. Both the equities markets and the precious metals markets suffered losses today. The DOW was trading higher for a large portion of the day before sentiment turned negative and the market which was up around 30 points at one point closed down 73 points.

Gold traded down about 2% and this hammered Barrick Gold which finished down about 5% for the day. I am expecting similar percentage corrections in the Australian metal stocks Newcrest Mining (NCM) ,  Silverlake Resources (SLR) and Cobar Consolidated Resources (CCU). I have written this updated blog today to suggest that if you invested yesterday you should increase your holding by at least 50% today after the market resets downward. As I stated in yesterdays blog trading within current market conditions is more a game of risk management than it is profiteering.

My blog yesterday also suggested that cash be held in reserves for when opportunities present themselves and it has not taken long for that to happen. Newcrest Mining Could go below $10 today and Silverlake Resources could retreat to 74c. Both are a gift at those prices and even at yesterdays closing prices of $10.30 and 77c they are still a STRONG buy for me. Do not fear the dip in price, BUY the dip, average down and reap the rewards when the bounce happens. Nothing has changed but the price of Gold and Silver.

One thing I have learned watching the precious metals sector is that trying to predict daily or even weekly movements in precious metals prices can be a road to ruin.

When I began studying Gold, Silver and the mining stocks that produce these metals I thought I could predict the weekly if not daily moves in the metals prices. It is truly crazy to think that you can predict, with any degree of certainty the short term move in the metals.

My approach now, is to price the market in terms of downward risk and upward reward. Sure, at times I find myself reverting back to old habits that trigger an emotional feel for what I see happening in the short term, but my final consideration is the risk reward trade off long term. So perhaps readers might be assessing my precious metals tip of silver at $24.50 within 2 weeks to be now dead in the water. If you are thinking that, you would be repeating my mistake where the trigger for a short term market prediction is based on an educated yet tainted emotional feel.

Right now I would say exposure to the equities market should be limited in scope and concentrated in specific targeted market segments that have been battered and offer more potential upside and sustainable organic growth. BUY BUY BUY the dips in these quality stocks, bring your average cost per share down and reap the rewards when the stocks bounce. Make no mistake, Barrick Gold (ABX), Newcrest Mining (NCM), Silverlake Resources (SLR) and Cobar Consolidated Resources (CCU) all have major upside. ABX, NCM and SLR are financially sound and if you can afford to buy more when these stocks fall today buy some!

My advice would be to double down if you can, it will average your cost per share down and magnify the upside when it comes. These are all great long term investments with a huge short term upside if that is the way you wish to explore them. When I say short term I mean with a 6 month outlook.

Cheers for your support!

Follow me on twitter @carneycapital for more updates.

Investment tips for the next week

Judging by the fact that the equities market declined 60 or so points after the Federal Reserve announcement, I feel there is no good news left for the market to rally on. I watched the market closely today, in particular the VIX Index which gauges volatility in the market.

The VIX index finished 1.79% higher. This is a sure sign that fear is starting to enter into equities market. This volatility could trigger an even bigger sell off in equities market tomorrow and for the rest of the week.
Earnings season continues to be sluggish at best, the employment figures were extremely disappointing. The housing market here in the USA is stalling and the global set of housing bubbles appear to be frothy and
ready to pop.

Right now I think the price of silver  is about to move up over $23.50 and possibly testing $24. For all those that have access to an Australian Stock Exchange Trading account I would be looking at a company called
Cobar Consolidated Resources or CCU code on the ASX. CCU is currently trading at 14c a share and is worth a little play as I can see upside to at least 18c if the silver price breaks through the $24.50 price. This is a distinct possibility as I feel investors may first seek to shop for a less expensive way to gain exposure to precious metals before moving into gold.

I would also suggest NCM and SLR for Australian investors. I have mentioned my reasoning for these two as long term investments and are two stocks that should be in ever investors portfolio. Currently NCM is
trading at $10.47 and SLR is trading 77c.

For those investing in the USA I feel investors should continue buying ABX (Barrick Gold).

Another stock I still see some upside in and I have mentioned this to some friends over here in the USA already is JC Penny or JCP on the USA stock Market.  I am a little more reluctant to signal a strong buy on JCP as the stock has already seen a rally since I tipped it at $6.90. For those that have twitter you can follow me @carneycapital .

If you follow me you can no doubt track my JCP tip from last week where I signaled it was a buy at $6.90. Today JCP closed at $7.60 up more than 11% since my buy signal. To buy JC Penny you have to buy the story. The company was experiencing some major cash-flow issues and raised some capital through a private placement. The cash-flow the placement generated in addition to the inventory the company has at its disposal, will give management and marketing time to get back to what JC Penny used to be good at; which was sales and turnover. The brand got away from its core business and lost focus and let go of the niche that made it so successful. The cash raised in the private placement in addition to a regrouped marketing focus will give JC Penny time to restructure and re-energize.

Christmas is coming up and although I am not a fan of the retail sector right now, in fact I hate it, I believe JC Penny has been oversold and at the price of $7.60 offers upside of possibly 50% with downside risk
limited to perhaps 10-12%.

Hope all of this helps in a time where trading is more about risk management than profiteering! My advice is to keep your exposure to the equity markets limited, hold cash and then when the correction comes we will be there ready to pounce!

As per previous blog entries, if you liked this blog pass it on to anyone you feel may be interested and follow me on twitter @carneycapital where you will receive updated commentary and market tips as opportunities
present themselves

There will be another blog coming over the weekend to assess the market tips and reflect on the trading week that was.

Bitcoin – the canary in the goldmine?

Nothing has troubled my mind more in recent times than MONEY.

Please don't write me off and by thinking: Well isn't everyone concerned? or
Doesn't everyone worry about having enough or wanting more?
After all they say money makes the world go around right?

Those that have lots of it say 'money doesn't buy happiness', while those that have very little say 'that’s easier for you to say because you have a lot while I struggle to survive!'.

My mind has been working overtime trying to rationalize what it all means and how it may all play out in the future. I say this for a reason, paper money is a perception. Its worth is only as strong as the behavioral
and psychological belief in its value.

Since the abandonment of the gold standard, or the pegging of currencies to a of store wealth like gold, the “concept” of central-bank printed money has drifted further and further from traditional normality and reality. The fallacy that has been perpetuated and accepted is that a piece of paper still has the same worth it once did when backed by gold. And even more so, that it can be trusted to stand the test of time.

The truth is that thousands of “fiat” currencies or money not backed by something like gold have failed over the years while gold and silver, used by the Egyptians thousands of years ago can still be used to purchase
and trade today.

The question and circumstances surrounding this concept of money still bothers me.

• Has the human psyche changed that much? 
• Is our current generation dispatching tradition and is more willing to accept paper as being representative of the same store wealth as something like gold? 
• Will the value of gold ever be held in the same esteem as it has been for thousands of years or has the paper illusion caused delusion?

In examining the questions above, I wish to point out the emergence of a new form of “digital currency” called “Bitcoin”.  Taken from the Bitcoin website

“Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of Bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part. Through many of its unique properties, Bitcoin allows exciting uses that could not be covered by any previous payment system”

Bitcoin is, in basic terms, a digital currency or a new form of money. The price for a Bitcoin has fluctuated since its inception and the road has been rocky with huge volatility. One would expect that from a new form of money trying to break through the human perception and acceptance barriers. I guess my point is that a Bitcoin, just like a $US or Japanese $Yen is only worth what it is perceived and accepted to be worth. This
perception and acceptance drives human behavior which in turn drives the price.

Bitcoin, like other Fiat currencies is not backed by anything intrinsic and depends heavily on the willingness of people to both use it and accept it. It is for this reason that I have tracked the Bitcoin story and analysed
its performance since its launch. I have studied the spikes in Bitcoin prices and the set of economic conditions/circumstances that have prevailed or were prevailing at the time.

If you analyse price fluctuations during financial crisis news like Cyprus bank runs, it is difficult not to see the correlation between a potential currency crisis and an increase in the Bitcoin price. I have also noted that many bloggers and media outlets have reported that in moments of reflective economic crisis, a surge in consumer sentiment on Bitcoin is experienced.

Below is an article which supports this discussion and theory.
http://www.bloomberg.com/news/2013-03-20/fleeing-the-euro-for-bitcoins-.html
With all of this being said, the one obvious point to be taken is that the emergence of Bitcoin into the money arena cannot be ignored. The growth in the Bitcoin perception and acceptance has seen the price reach new highs in recent times. The growth is coming from an ever growing break down in trust in the existing monetary system. The growth could also be coming as the world embraces technology and the new generation of human beings are more accepting of a dynamic yet controlled change to the global monetary system.

After rationalising and pondering these thoughts. Twisting and turning the facts, turning it inside and out. Driving myself crazy.

• Is Bitcoin the answer? 
• Or is it the canary in the coal mine? 
• Is Bitcoin the way to measure the degree of the next big financial crisis and perhaps a tool to determine the timing?

The USA has a stock market volatility index called the VIX index. This index is used by market analysts as a guide for market risk and is often referred to as a “fear driven” guage. Perhaps Bitcoin could be used in a
similar fashion as a forward looking tool to be exploited on a vast array of upcoming and potential market and economic conditions.

And so I pass on to you, my thoughts and ramblings on the issue hoping you can solve the mystery I cannot, for the value of money is not just what I perceive it to be, but what everyone that reads this blog and the rest of the world perceives it to be. Perception and trust is everything. It gives money worth through the belief in its worth. Gold has stood the test of time, thousands of years and still worth something, still believed in, people still have faith and it is still perceived as being precious.

With all this in mind I ask, is Bitcoin the canary in the coal mine? Or is
it the canary in the GOLD MINE?

Investors asleep at the wheel as equities market loses its compass

This crazy world we live in got just a little bit crazier as the USA’s equity markets rallied to new highs on a NEGATIVE Jobs report released by the Department Of Labor today. My previous blogs have expressed that I expected a soft and weaker report than most economists. I indicated that a poor jobs report, and the recent government shutdown/debt ceiling dispute would be enough to postpone the Federal Reserve “tapering” asset purchases. And I predicted that once again QE would be injected into the system and ultimately all asset classes. Here is an article written about economist’s forecasts on the jobs report yesterday.
http://www.usatoday.com/story/money/markets/2013/10/21/delayed-sept-jobs-report-set-for-release/3147237/

From the same newspaper the results were reported in the following article;
http://www.usatoday.com/story/money/business/2013/10/22/september-jobs-report/3146693/

The US equities markets (Dow & S&P 500) rallied to near record highs on the NEGATIVE jobs data which reported the slowest jobs growth since June 2012. I want to reiterate my point that apparently NEGATIVE news is actually GOOD for the equities markets. The stock market goes UP as Job creation goes DOWN. The market rallies because poor job creation will be the catalyst for the Federal Reserve to continue injecting cash into the system which will eventually find a place across all asset classes including equities/stock-market. This QE money injection is fueling the markets and distorting the value of certain asset classes relative to their GENUINE ability to give you an adequate return on investment. It is causing malinvestment and a misdirected allocation of financial resources to asset classes that, put simply, cannot and will not give the return on investment to justify their price.

A Reuters article released confirms what I had said to expect and was reported today as the Federal Reserve’s likely game plan going forward.
http://www.reuters.com/article/2013/10/22/us-usa-economy-idUSBRE99L04G20131022

The investment strategy going forward, in my opinion is a simple one. It is obvious that the equities market has lost touch with reality and is a bubble which will ultimately burst. Until that happens the QE injections
fueled by NEGATIVE news may stabilize or continue to inflate the market. The strategy is not to pick the asset class that will go up, perhaps all asset classes will go up with the QE cash injections. The game is to pick the asset class that will increase at a faster rate. I would like to reinforce my case for the precious metals sector in particular gold mining stocks - which were an absolute gift a week or so ago when I first mentioned them. Since that blog a week ago gold has risen approximately 5% from $1,280 to $1,340 today. My gold stock picks have outperformed the respective rise in the price of gold as predicted in the blog also. Barrick Gold (ABX) on the USA stock market has seen an approximate 17% increase in price which is a multiple of 3 times the rise in the physical price of gold. Newcrest Mining (NCM) listed on the Australian Stock Exchange has gone from approximately $10.20 to an intraday high of $11.35 today or up 11%. Silverlake Resources (SLR) on the ASX has seen its price extend from 65c to an intraday high of 76.5c or
approximately 18%. I expect this trend to continue over the medium term, but definitely the long term. The correction in the equities markets that will come when earnings season rolls through its process will see a shift in momentum out of equities into the precious metals. There will be a mad scramble by those that have shorted the precious metals as they try and recover their positions. This may already be gaining momentum as I write this blog.

I hope that those that have read my blog have made some money, I hope that I have entertained whilst I have informed. If you like my blog I would appreciate the feedback and also the exposure so pass it on to whoever you feel may be interested. Remember, the equities market may have lost it’s compass, but if you keep following my blog, I will try and make sure you don’t lose yours!

Government shutdown and debt ceiling – political cover for the federal reserve

Like sands through the hourglass, so are the days of our lives. It was supposed to be the final episode of the ongoing soap opera Americans call Government, a drama built blockbuster that has had viewers glued to their screens. The plot has rolled through stories of debt crisis, government shutdowns, sequesters, hell it even included a “green eggs and ham” bed time story from Senator Cruz for his kids just to lighten the mood In the end it finished with a bait for next season which begins in February. Will they resolve another debt crisis? Will the USA default? What will the Federal Reserve do now that they have killed off Bernanke and Replaced him with YELLEN? All I know is we are all in for a treat! With all of that being said, I have talked about a market correction of 10-15% based on what I think will be a dismal earnings season and even worse potential downgrades in next year forecasts.

The market used to be a case of 'buy the rumor and sell the news'. Perhaps times have changed. Times may have changed because of the soap opera, the media and the propaganda. This latest episode of government shutdown and default was nothing more than a new direction in an economic plot which needs to be sold to Main st. America to convince them all is ok. The plot to tell the American people, that the Government has your back. As the story unfolded, the stock market rallied. Apparently it is great news that the USA can borrow more money that they cannot afford to pay back, and even better that the Government is reopened to fast-track the spending.  It is always good when your credit card company sends you one of “those" letters that says you have been approved for a limit increase. It is hard not to feel a buzz.

Right now the USA stock market is reacting to that buzz and relief. It will be short lived. Soon the credit card will be maxed out again and the drama will build as these ugly actors we call politicians hunker down for
their 2 weeks of “look at me” political debate. At some stage this story will get old. Viewers will tune out. They have already seen this episode a few times. They know how it ends! While people in the USA may become numb to the whole soap opera, economies like China are numb for a different reason. They are the largest holders of USA treasury debt and have not yet secured enough physical gold to hedge against the $US collapse. Political pressure from China on USA to get a deal done highlights their vulnerability.
Right now China is accumulating physical gold at an alarming rate both on their official reported holdings and the even bigger unofficial stock pile. China is waging a silent war to purchase gold to hedge against inflation and the potential collapse in confidence in the $US. This latest round of USA debt drama had elements of the old, tail wagging the dog scenario. Political parties bickering, debt default all aiming to fuel a push for the depreciation in the $USD. This depreciation is necessary to promote growth in local jobs by making USA exports cheaper after currency conversion and at the same time imports more expensive. The USA currency war is being waged both on a Federal Reserve front with the USA Government marching to the same drum beat. The Government, through the Federal Reserve will get their $USD depreciation one way or the other. No doubt the latest round of shutdowns and debt default debates have given more than enough cover for the Federal Reserve to postpone a “taper” and perhaps even increase Quantitative Easing. The currency wars are really heating up to the point that they are about to internally combust into a ball of fire.

Continued QE WILL depreciate the $USD and drive gold prices. Other commodities such as oil will also move to the upward side. The interesting asset class will be equities where psyche of the market will be a whole different story. The market is trading, across the board at approximately 18 times earnings. It has also seen fresh new highs in recent times.

When I look at equities from a long term perspective and I try and "price" the market, I like to examine the following:

1. Where the market is trading now
2. What sort of returns are investors going to get at current market value
3. What returns will an investor need to feel comfortable being in the investment
4. The likelihood of growth both in earnings and dividends
5. The economic outlook both from a micro and macro perspective including fiscal and monetary policy trends.
6. Other investment opportunities in different asset classes both at current time and over prospective investment period.
7. The eventual potential exit price.

Navigating this period from an investment perspective looking at the above points is difficult. The market is currently trading near its all time high. Earnings season has started in a weak manner. We are awaiting
employment numbers which were delayed due to the government shutdown but I am anticipating these to also be poor. The retail sector is still sluggish and home builder sentiment has slipped to its lowest reading since July according to the NAHB/Wells Fargo Housing Market Index. The report directly relates to the interest rate rises that have impacted on new homes and also refinances. As I have said in previous blog entries, this is an interest rate recovery. As interest rates rise the economy, in its most fragile state in years will be hit hard. The question is now how will the Federal reserve act in the face of a potential stock market fall? What decisions will it make if unemployment figures are soft? History says that they will act decisively and inject more QE liquidity into the economy to prop it up. This would support the equities market
when it should not be supported. I feel it would be more bullish and positive for Gold.

My market tips are that even though the Dow and other equities markets should be falling perhaps the Federal Reserve will intervene to stop this. The one sure play is to be long gold. Gold is currently trading at $1,320 and change an ounce which is up around 2%. For those of you who read my blog yesterday Barrick Gold ($ABX) is up over $.88 or more than 5% today from yesterday’s price. I am expecting Newcrest Mining ($NCM.AX) listed on my beloved Australian equities market  the ASX to have a strong gain today also.

I am also tipping a rocky road ahead for the DXY which is a $USD index which measures the performance of the $US against a basket of other currencies. I would be short the DXY and as I write this blog it is
currently down 1% for the day trading at $79.66. I still think it is going much lower long term.
Time will tell, the soap opera will roll on, like sand through the hourglass…

UFC comes to politics and economics

Nothing brings out the gladiatorial side in a human being like heat, turmoil, desperation, and the instinct for survival. Win at all costs we say, fight to the end. No compromise. Sound familiar? President Obama,
clinging to whatever shred or presidential muscle he has left, will not compromise. In the face of what could be a cataclysmic economic event felt globally - triggering recession or even depression, desperate times, but no compromise. It is an epic fight fought in idealistic principles not sound economic reasoning. A failure to compromise may lead to Obama’s historical demise as the president or commander in chief when the whole economy implodes.

It has been a tight battle as alternate media outlets and political parties engage in a blame game. CNN calls it the “Republican shutdown” whilst Fox News cover it as the “Obama shut down”. To The victor go NO
SPOILS because when you shine a light on it, the situation is dire. The option to kick the debt tin down the road works until you run out of road!

Already we are seeing foreign countries criticizing the stalemate. China in particular is calling for sweeping changes including a new “world currency”. Here is an article I found interesting published yesterday.
http://www.globalresearch.ca/china-agency-calls-for-new-reserve-currency-and-new-world-order/5354190
The article is an interesting one from the perspective that China has had a huge appetite for physical gold. There are many conspiracy theorists saying that the behind the scenes physical gold purchasing by central
banks is a sign that trust in fiat currencies is being eroded by the UFC style currency wars and money printing. The theory is based on the fact that central banks purchasing physical gold is a sign that trust between the central banks as well as other banking giants has been fractured if not broken.

It makes sense that this trust would be strained. The misleading “tapering” non action by the US Federal Reserve is latest of a long running set of broken promises in this ongoing currency war. The first QE
was supposed to be the last, that was why it was called QE. When the second round of QE was injected into the markets economists had to dub the first round QE1. We have since had QE2, QE3, Operation Twist and many are saying it will now be QE Infinity.

This brings me to the next UFC fight amongst Keynesians and Austrian economists. The Inflation/Deflation debate has hit fever pitch amongst the respective economic theorist believers. Austrian economists believe in sound money, a free market devoid of government involvement an which the market equilibrium is set based on the meeting point of supply and demand. That intervention, policy, market regulations, laws and central bank monetary policy interrupts this equilibrium fostering distortions and misdirected investments. These
distortions create “bubbles” which eventually burst causing a recession/depression. Keynesians feel that through Central bank monetary policy, fiscal policy and Government intervention through spending/tightening that an economy can avoid recession and depression. Many Keynesians have pointed to the
USA economy and the fact that the CPI is indicating that inflation is being contained. I would like to point out that we live in a global economy now, where trade has never been so open and where a country can
both import or export its inflation through trade, currency exchange rates and the like.

So where are we now?

We know that the Fed has more than quadrupled its balance sheet. Something that, to my knowledge has never happened in recorded economic history. That being said, we have no precedent to look back to, only theory. Your future investment strategy depends on whether you are in the Keynes corner or in the Austrian corner for this blockbuster Fight. I am in the purist corner, the sound money corner, the Austrian corner. If
money is a concept not backed by anything tangible or precious, it is a concept I find difficult to feel comfortable relying on. When I look at the idea of safety I want to have something unique or precious. That is why I am suggesting gold as a hedge against the inevitable inflation. Gold can be explored as a hedge in a number of ways for the everyday investor. My thoughts are to buy some physical gold, remember you don’t
own what you can’t touch and possession in 9/10ths of the law! I also feel that Gold producing stocks are an absolute gift and the right ones could give you a multiple payout ratio relative to the rise in price of gold. My thinking behind this is simple. Currently it is accepted that mine production costs to produce physical gold vary but not many mines can produce gold at under $1,000 an ounce. With the gold price trading in the $1,200-$1,300 many mining stocks have been battered as mines have gone from being highly profitable when gold was at say $1,600 oz to a break even scenario at current price levels. As gold has fallen roughly 50% off its $1,900 odd highs, some quality gold producing stocks have been hammered.

Barrick Gold (ABX) is a prime example. Barrick Gold has traded as high as $55 when the price of Gold hit its peak. Gold is down roughly 50% off its peak yet Barrick Gold’s stock price is now trading in the $17-19 range. I make the point that a 50% rise in the gold price could, if past trading prices can be relied upon, see the stock trade at more than 300% higher than current price.

Newcrest Mining (NCM) listed on the Australian Stock Market is another with what I consider very little down side risk with huge upside. It is now trading at between $10 and $11 which is well off its high of $40 plus dollars when Gold hit its high.

The whole Gold mining sector needs to be broken down for those interested as it is not just the big mines that could benefit. Smaller miners like Silverlake Resources (SLR) on the Australian market could become takeover targets if the Gold price flat lines for a period before a quick spike. A spike in the market followed by a period of stability will have the big miners looking toward the juniors to further exploit strengthening
marketing positions. Time will tell who/what will win out in each battle, but for the war, I want to be sound, safe and keep some cash for the potential market correction. Make a shortlist of strong companies I think can withstand the conditions I think will prevail, pounce when they are oversold. In between time the only sector I feel is worth playing right now is the precious metals sector. It is the logical and sensible play in an economic environment that appears perilous at best. The precious metals are off their highs by 50% or more, The markets, the Dow included are all but back to their highs. I want to be buying low and selling high, not buying into the high hoping it keeps going!

Ben Bernanke – QE – and economic post acute withdrawal syndrome (PAWS)

Today marked another twist in the Quantitative Easing (Q.E) taper or not to taper debate. As news filtered through of the Federal Reserve September minutes it became evident to me that the Fed has finally come to the realization that it has backed itself into a trap, boxed in with no way out.

The fact is that even the immortal escape artist Houdini could not escape the dire situation that now confronts the Fed. The rounds of QE, operation “twist” has left the economy drug dependent, with each round of QE giving the addicted economy the boost it needed just to stay high. With QE and monetary policy involving the Fed buying USA treasuries to keep interest rates artificially low, the economy has entered a delusional
state again. The QE drug masking the truth, enabling the drug induced economy to cloud any sense of reality.

It also became evident that the Fed itself is wrestling with its own sense of reality. Some members of the Fed brought forward heated debate regarding Fed credibility, like they have any left after inflating the dot com bubble and the housing bubble and not realizing or acknowledging they existed until after they POPPED!

Some members of the Fed board turned up the heat on the potential loss of control over bond yields and the flow on to interest rates for the domestic economy. Remember the drug induced delusional recovery is based
on low interest rates. The housing market rebound and in particular the stock market have rallied for the simple reason that low interest rated give savers no other option than to speculate for better returns as bank
term deposits net you little if any return.

One point the Fed minutes made clear was that the decision to Taper or scale back asset purchases was data dependent. It is the single point the Federal Reserve has relied on to make continual excuses why they cannot taper. The Federal Reserve has admitted the economy is addicted to the QE drug. The wording “data dependent” means ONLY when the Fed feels the QE drug has worked will it wean the economy off it.

What I see happening to the economy is the worst case of economic Post Acute Withdrawal Syndrome (PAWS) as it is known in the medical field. PAWS is a physiological and psychological lag that is left behind after prolonged substance abuse. The fact is the longer the abuse, the longer the lag in the effects of Post Acute Withdrawal Syndrome.

PAWS is broadly defined as withdrawal symptoms that continue to bother a person after a withdrawel or detoxification of drugs has taken place. Post Acute Withdrawal Syndrome often includes symptoms such as confusion, anxiety and DEPRESSION. How severe and long lasting the Post Acute Withdrawal symptoms and side effects last depends on factors such as the level of substance abuse and how much physical and psychological damage was caused by the drug and the addiction.

PAWS could bring on side effects to the economy like a correction of 10-15% or perhaps more in the DOW. There may also be another big correction in property prices again in the USA. A huge spike in inflation coupled with a $US currency crisis could also be amongst potential side effects. With all of these dangerous and problematic situations that will need to be managed, each and every person needs to formulate an economic plan, support, and a safety net for when times get rough.

The fact is that the economy needs to take the bitter medicine pill. This will not taste good but will set it on the path to recovery. Doping the economy up with the QE drug and enabling the user to become more
“dependent” will just prolong the final rehabilitation time and magnify the side effects after withdrawal.

Right now Bernanke and the Fed are the enablers. Making excuses for the addict. The excuses are the data dependent numbers they are so rigidly sticking to. Like a drug addict proclaiming “I had a rough day at work so I needed to get high”, or the morbidly obese person saying “I will start my diet on Monday”.

Sometimes it is difficult facing reality but one day it will confront you head on. One day the addiction will become so strong that an overdose is inevitable. With this in mind I am taken to a line out of a song from a
band called The Verve which says “now the drugs don’t work, it just makes things worse”. It made me chuckle. If a rock band can see it, WHY can’t Bernanke and the Federal Reserve?

Perhaps Bernanke and the Fed would be best advised to get a copy and listen!