Thursday, January 22, 2015

NO GENUINE MARKETS - JUST CAPITAL FLOWS

It seems that the Central Banks have an endless supply of coins to keep feeding the jukebox. The contestants are still walking the circle, jostling for positions as the tunes keep playing and the game of musical chairs continues. The longer the music plays the higher the stakes become for the players to avoid the disaster of being left without a spot to park their derriere when it the music finally stops.

It is an exciting game for those playing, but for the 99.9% of the population not playing it must feel like listening to an endless countdown of songs you love to hate. I thought it was over when I heard Billy Ray Cyrus puking out "Achy Breaky Heart" right after the Spice Girls "Wannabe" but sadly it wasn't.

It might be close though, closer than many think, you see we don't have markets any more, we have central bank manipulated capital flows. Capital flows is the game, especially at the zero lower bound where the miniscule cost to leverage up encourages speculation. This is driving volatility early in 2015, a trend I expect to continue when it becomes more and more evident that there is no real recovery in the USA because the real economy is laden with debt.

I expect 2015 to be a year where global financial markets could be hit with a crisis that could be much worse than the one seen in 2008. The scene is set and the mistakes have been made, private debt levels have not been reduced to the levels needed to spur demand and easy monetary policy has failed to generate real growth in anything other than asset bubbles.

We no longer have genuine markets, we really just have central bank manipulated capital flows. I cannot believe how much power a panel of unelected individuals have over the way all financial and capital markets move. The prime example of this was the foreign exchange markets frenzy last week when the Swiss National Bank announced that it would no longer maintain its Swiss Franc/Euro peg. Accompanying that announcement was the shock introduction of a negative 0.75% interest rates on all on sight cash deposits which are basically the cash type holdings big commercial banks have with the Swiss National Bank. The policy was supposed to reduce the capital flows out of the Euro and into the Franc but the negative rates were seen more as just a yield penalty that would be more than offset by the Franc/Euro cross rate appreciation.

The negative 0.75% rates are more akin to buying a membership at Costco, where you pay a fee to join but save money by getting more bang for your buck in the store. Same with the negative 0.75% cost of membership to the Franc. If you were an early membership taker in the Franc, well it cost you 0.75% to save 20% as the Franc/euro cross rate settled 20% higher than the previous days trade.

Currency wars, artificial pegs and a deeply flawed Euro currency design show how irrelevant reality is when it comes to Central Bank manipulated capital flows. Wealth preservation rather than chasing yield is the new game as the bets keep rolling in for a global debt deflationary bust. I expect the gold price to rally and see great investment opportunities for gold mining stocks around the world outside of the USA.  I expect the trend in gold prices in other currencies to continue their upward trend as the gold market grapples with an appreciating dollar as capital flows out of emerging markets wash back into the USA economy.

This money flowing back has up to this point been pushed into the US treasury market and  also the local US equities market. The yield on the 10 year UST is as low as it was in 2011 when gold hit its high of over US$1900/oz. With the equities markets trading at record highs, the yields on UST at all time lows, the gold contrarian argument that the yellow metal is a poor investment because it is a non yielding asset is rapidly weakening.

If the reaction to the Swiss National Bank ending the Euro peg and imposing a NEGATIVE yield on cash deposits didn't deter capital flows out of the Euro and into the Franc, perhaps the day is near that people will see that a 0% yield in gold, that is priced more than 50% off its all time high is a more attractive play than paying for the privilege to own another fiat currency. I think there are little other attractive options in a world where the dark macro clouds are building and where all other investment options that carry a perceived minimal risk have become overcrowded. The gold trade is the only unpopulated place right now but this may soon change as the artificial sea of liquidity searches for a place to weather the next global economic storm.

I have been wanting to write this blog for about a month now so have missed out on the recent gold price rally, I have commented on twitter engaging Barry Ritholtz on my reasons why I see a gold bull market emerging. At the time of this post gold is trading at $1301/oz and the ECB is set to make a huge announcement on their own launch/version of QE. So for now the music keeps playing, but get ready, stay alert and focus. Those that assume that the ECB  paying for 5 more songs on the jukebox means the game goes on are ignoring the possibility that the musical chairs game may be stopped by a lightning strike from one of the dark macro clouds that are gathering on the horizon. Those playing and ignoring the random chance of a lightning strike power outage may be the very players without a spot to sit as the game comes to an uncontrollable end.