Store of Value

Doug Nolan

Friday, February 13, 2015

If I had my druthers, politics would be kept a safe distance apart from economic analysis.  The economics profession, however, is guided by a policymaking focus.  Economists are compelled to choose sides – Democrat or Republican - “liberal” or “conservative.” This arrangement has proved the death knell for objective analysis.  Worse yet, such divergent views of how the world works ensure there can be no meeting of the minds or compromise – especially during crucial periods of economic instability.

I admit to providing space for Krugman on my bookshelves.  There was a time when I respected the Nobel prize-winning economist as a thoughtful and provocative economic thinker. He’s evolved into a forceful political commentator.  Paul Krugman’s New York Times’ columns are widely read.  Of importance to me, Krugman has become the most public figure espousing the virtues of inflationism.   

It’s crunch time for money and Credit analysis – discredited Greek debt and the question of ongoing participation in the euro monetary experiment; faltering currencies and Credit at the EM “periphery”; a runaway Credit Bubble in China; flagrant competitive currency devaluation; ongoing open-ended QE by the world’s major central banks; collapsing commodities markets, general global disinflationary forces in real economies and record securities prices; and generally unprecedented central bank intervention at home as well as around the globe.   A Friday headline from the Financial Times:  “Central Banks Take Extreme Action to Stave off Deflation.”  Thursday from Bloomberg:  “Central Banks Now Open 24/7 Fighting Currency Wars and Deflation.”  

After six years of unprecedented central bank monetary measures, an end is still nowhere in sight.  The highly abnormal has become the enduring normal.  Indeed, the global monetary backdrop gets crazier by the week – and everyone’s fine with it.  Federal Reserve policymaking is now celebrated as an indisputable success – testament to what injecting $3.6 TN of new “money” into securities markets can accomplish.  And each week the world seems a bit closer to coming completely unglued.  

Of late, Dr. Krugman has directed his attention – and caustic partisan aggression – around the critical issues of money and Credit.  There was Monday’s “Nobody Understands Debt”, Tuesday’s “There’s Something About Money (Implicitly Wonkish)” and Friday’s “Money Makes Crazy.”
From “Money Makes Crazy: Monetary policy probably won’t be a major issue in the 2016 campaign, but it should be. It is, after all, extremely important, and the Republican base and many leading politicians have strong views about the Federal Reserve and its conduct… So it matters that the emerging G.O.P. consensus on money is crazy — full-on conspiracy-theory crazy. Right now, the most obvious manifestation of money madness is Senator Rand Paul’s ‘Audit the Fed’ campaign. Mr. Paul likes to warn that the Fed’s efforts to bolster the economy may lead to hyperinflation; he loves talking about the wheelbarrows of cash that people carted around in Weimar Germany. But he’s been saying that since 2009… So now he has a new line: The Fed is an overleveraged bank, just as Lehman Brothers was, and could experience a disastrous collapse of confidence any day now. This story is wrong on so many levels that reporters are having a hard time keeping up, but let’s simply note that the Fed’s ‘liabilities’ consist of cash, and those who hold that cash have the option of converting it into, well, cash. No, the Fed can’t fall victim to a bank run.

“Monetary policy… after all, is extremely important” – is an understatement.  I have argued misguided policy activism unleashed the “global government finance Bubble” - the “Granddaddy of All Bubbles”.  I remain a proponent of sound central banking, having never called for abolishing the Federal Reserve.  I have pleaded instead for a disciplined rules-based approach to monetary management.  Giving a small group of unelected officials full discretion to experiment with “printing” Trillions of new “money” is a recipe for unmitigated disaster. 

Indeed, global central bankers are these days at the precipice of a crisis of confidence in the “money” they too freely propagate.  This runaway six-year (plus) monetary experiment should be hotly debated right now – outside the realm of political mudslinging.

From “There’s Something About Money (Implicitly Wonkish)”: “Here’s my current thought: in some sense money is a really weird thing, which can look to individuals like a real asset — cold, hard, cash — but is ultimately, as Paul Samuelson put it, a ‘social contrivance’ whose value is more or less conjured out of thin air. Mainstream macroeconomics acknowledges the weirdness — in particular, makes heavy reliance on the ability of central banks to create more fiat money at will — but otherwise treats money a lot like ordinary goods. But that intellectual strategy doesn’t come naturally to many people, so there’s always a constituency for monetary cranks.”

Finding rare common ground, I agree “there’s always a constituency for monetary cranks.” Throughout hundreds (for that matter, thousands) of years of history, inflationism has time and again been debunked and the inflationists revealed as “monetary cranks.” Yet these days monetary inflation’s sordid history goes completely neglected – as if it doesn’t even exist.  Krugman’s discussion touches upon money as a “medium of exchange.”  Naturally, the critical issue/attribute of money as a “Store of Value” goes, as it invariably does, unmentioned by inflationists and monetary quacks alike.  And using monetary inflation to inflate securities and asset markets ensures an inflation constituency of tens of millions (certainly including the “rich and powerful”).   

This gets to the heart of today’s critical issue – just as it did about 300 years ago with John Law’s failing paper money experiment in France (“Mississippi Bubble” period):  Once commenced, monetary inflation and resulting unsustainable Bubbles and economic maladjustment swell beyond control.  At some point, money’s critical “Store of Value” attribute begins to be questioned.  Officials invariably counter with a (terminal) reckless Credit expansion in a desperate attempt to sustain the teetering financial scheme.  A crisis of confidence becomes inevitable.  

Krugman: “But the conclusion of generations of macroeconomists has been that for most purposes models that treat money as if it were an ordinary good are good enough; whereas attempts to ground everything in models in which the role of money is in some (weak) sense derived rather than assumed have been generally useless. Still, there’s always an undercurrent of unease. And you can find heterodox economists on the left as well as the right unhappy with the standard approach. Now, the elder and younger Pauls know nothing of this, nor, I suspect, does Paul Ryan. But that may be the point: having no contact with the intellectual tradition of macroeconomics, they find the role of money in the economy a great mystery and possibly an outrage — how dare banks/governments/the Illuminati pretend to create value out of nothing! Fiat money, whether created by the government or by banks, seems to them to be a violation of natural law; creating more fiat money in an attempt to relieve economic distress must surely lead to disaster.”

Unless they’ve exposed themselves to a lot of “outside” reading, contemporary economists are poorly prepared for today’s Great Monetary Debate.  After all, economic curriculums are sadly devoid of money and Credit history and theory.  As lunatic fringe as it sounds, one can throw out virtually everything conventional economics has to say on the subject. “The intellectual tradition of macroeconomics” – at least from the fashionable American perspective – leads to misunderstanding, confusion, misdiagnosis and deeply flawed policies.

“This in turn leads to the basic Hicks model of an economy in which there are three markets — for money, bonds, and goods — which are treated symmetrically; add price stickiness and that model becomes IS-LM. New Keynesian economics pretty much takes that base and adds explicit modeling of intertemporal choices and rational expectations. Dealing with monetary economics this way lets you address monetary and fiscal policy in terms of lucid, elegant little models that are quite intuitive once you get used to them, but not at all intuitive to people who haven’t learned to think this way — witness the debates we’ve had since 2008… The sad thing is that this epistemological panic is gaining a growing hold over American conservatives at a time when the standard way of dealing with money has, in fact, been covering itself in glory. That Hicksian approach, in which money is treated symmetrically with bonds and goods, made strong predictions about what happens with interest rates near zero — predictions that the Fed could expand its balance sheet many times over without inflation, that governments could borrow vast sums without driving up interest rates, that slashing government spending would cause private spending to fall rather than rise.”

“The standard way of dealing with money has, in fact, been covering itself in glory.”  Showing restraint, I’ll simply say, “history will be unkind”.  And toss out the “Hicks model,”  “IS-LM” modeling and econometric models in general.  They add no value when discussing today’s world dominated by market-based finance and aggressive market-distorting monetary management. Today’s inflationists call upon archaic econometric tools, at best, as pretext for sophistication and analytical credibility.  At worst, it’s blatant obfuscation.

From “Nobody Understands Debt.”  “All this austerity has, however, only made things worse — and predictably so, because demands that everyone tighten their belts were based on a misunderstanding of the role debt plays in the economy. You can see that misunderstanding at work every time someone rails against deficits with slogans like ‘Stop stealing from our kids.’ It sounds right, if you don’t think about it: Families who run up debts make themselves poorer, so isn’t that true when we look at overall national debt? No, it isn’t. An indebted family owes money to other people; the world economy as a whole owes money to itself. And while it’s true that countries can borrow from other countries, America has actually been borrowing less from abroad since 2008 than it did before, and Europe is a net lender to the rest of the world. Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer). True, debt can pose a threat to financial stability — but the situation is not improved if efforts to reduce debt end up pushing the economy into deflation and depression.”

Credit is an economy’s lifeblood.  Mismanage Credit and a system will eventually confront myriad problems – financial, economic and social.  This truism has been on full display for a number of years now. Early economic thinkers were preoccupied with how seemingly sound economic booms could end in such mayhem.  Post-mortem analysis inevitably came back to debasement of money and Credit.  

“Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer).”  

One of monetary inflation’s myriad problems is that it instills a (fleeting) perception of rising wealth.  Meanwhile, pernicious underlying forces perpetuate economic wealth destruction through the forces of misdirected spending, malinvestment and general misallocation of real and financial resources.  

Resulting wealth destruction, redistribution and misperceptions are for the most part masked so long as monetary inflation runs unabated.  Hence, the more protracted the boom the greater the pressure for “activist” policy measures that inflate and obfuscate.  In the end, systemic risk rises exponentially – in the face of rising perceptions of wealth and policy success – ensuring policymakers won’t either rock the boat or come clean on policy failings.    

U.S. securities prices are at record highs.  After peaking at about 14,000 in 2007, the DJIA Friday traded above 18,000.  Friday’s record S&P 500 level is about a third higher than 2007 record highs.  Broader market gains have been even more spectacular.  The S&P 400 Mid-Cap index is up almost 270% from 2009 lows, with Friday’s close near 1,500 compared to 2007’s high of 927.  The point is that perceived wealth has never reached such lofty levels.  Monetary inflation has well-masked underlying maladjustments – at least at home.  Elsewhere, the forces of monetary inflation – along with wealth misperceptions – are not holding up as well.

“You can see that misunderstanding at work every time someone rails against deficits with slogans like ‘Stop stealing from our kids.’”  

The social instability resulting from wealth redistribution – between generations, classes and nations – is on increasing display throughout Europe.  Indeed, the Greek economy, society and politics are today’s global poster child for the consequences of unsound money and Credit.  As part of the euro experiment, Greek debt luxuriated in the perception of moneyness.  This, in concert with global monetary abundance, ensured that Greece issued way too much Credit – extraordinarily loose finance that fueled unsustainable booms and attendant maladjustment.  Over-issuance ensured Greek debt destroyed its moneyness attribute.  

The powerful perception of a “Store of Value” was lost, with the resulting crisis of confidence in Greece’s debt having devastating consequences.  After years of recurring crises, bailouts and failed policy responses, the Greeks have given up on the conventional.  Too much of their population has come to believe they have little to lose.  Desperation has taken over and the status quo is no longer acceptable.  Radical policymakers have been elected to lead the country in a different direction.  It’s time to regain sovereignty and dignity.  Indicating the end of the status quo with important global ramifications, Greece will be forging closer relationships with Russia and China.

The Russian ruble has collapsed 43% in six months.  It appears Russia’s leaders have also given up on the conventional. It’s time to regain sovereignty and respect – at the barrel of a gun if necessary.  In Putin’s eyes, the status quo of a U.S.-dominated world is no longer acceptable.  Both Russia and China are moving aggressively to build alliances, trading blocks and a financial apparatus that will function outside of U.S.-dominated systems.  The Russians and Chinese have taken issue with U.S. monetary management – policies they now see as running counter-productive to their nations’ interests.

I have posited that recent decades have been unique in economic history.  For the first time on a global basis, there were no constraints on either the quantity or quality of Credit.  History has shown Credit’s proclivity for instability.  I have argued that the transformation to market-based Credit – first in the U.S. and then globally – ensured acute instability.  We’ve now seen global monetary managers go to incredible extremes – zero rates, massive ongoing monetization and previously unthinkable market intervention and manipulation – desperate to keep this financial scheme from imploding.

Inflationism is always the same.  There’s never recognition that money printing is the root of the problem.  Instead, the inflationists proclaim that policy has actually not been forceful enough.  The answer is always to be found with just one more round of monetary inflation.  The propaganda drifts precariously farther and farther away from reality.  

“But I also suspect that conservatives have a deep psychological problem with modern monetary systems. You see, in the conservative worldview, markets aren’t just a useful way to organize the economy; they’re a moral structure: People get paid what they deserve, and what goods cost is what they are truly worth to society… Modern money — consisting of pieces of paper or their digital equivalent that are issued by the Fed, not created by the heroic efforts of entrepreneurs — is an affront to that worldview.”

By now, many should view “modern monetary systems” with deep concern.  But record securities prices and market exuberance provide powerful palliative.  They clearly ensure that the widening cracks in the global financial system go unnoticed.  The inflationists have at this point succeeded fully in convincing everyone that deflation is the greatest risk to mankind.

Meanwhile, the “Store of Value” issue festers.  Gangrene is apparent at some extremities, as central bank “money printing” (as far as the eye can see) holds a crisis of confidence in global “money” and Credit at bay.  Still, global policymakers won’t be able to create new debit and Credit electronic journal entries and convince folks it’s real wealth forever.  

There will be no separating economics from politics – monetary management from ideologies.  

But could we at least debate the issue of sound money and Credit without resorting to partisan demagoguery.  Considering what’s at stake, it is so pathetic it’s embarrassing.   

Getting Technical

Why the Bond Bull Market Isn’t Over

The recent decline in bond prices is spooking investors. But the charts suggest that this is just a correction and not the start of a bear market.

By Michael Kahn           

February 11, 2015

Persistently low yields on fixed-income investments have not stopped investors from flocking into U.S. Treasuries and all other types of bonds. But after the 30-year Treasury bond rallied and its yield reached an all-time low on Jan. 30, it’s been all bad news for bond bulls. Has the rally ended?
The short answer is no. No matter how strong, every bull market has corrections. And so far, the decline in the Treasury market looks to be just that – a short-term dip in a long-term rising trend.
To be sure, I am not calling for the long-term trend to continue indefinitely although some of the reasons from inside and outside traded markets might support that idea. Bonds do not seem to be overly worried about the Federal Reserve raising interest rates sometime this year, although it is widely expected. Inflation is virtually absent and oil prices, while firming, are still at multiyear lows. All of these are reasons to believe bonds are not about to roll over and die.
On the charts, the iShares 20+ Year Treasury Bond exchange-traded fund sported an accelerated trend in January after interest rates, which move inversely with prices, had one of their biggest monthly declines on record (see Chart 1). Technical indicators showed prices to be overbought, and indeed several interest rate sensitive sectors in the stock market confirmed this (see Getting Technical, “Yield Hunt Brings Risk to REIT, Utility Investors,” Jan. 28).

Chart 1

iShares 20+ Year Treasury Bond ETF

With a steep trendline broken to the downside, the ETF, now trading near $130, eyes its next support at a shallower trendline in the $127 area, based on the market’s current rate of decline. If and when it gets there, we can determine if it sets up a good buying opportunity or not.
In the stock market, following the technical warning, utilities investors also suffered a steep drop in January.
The Select Sector SPDR-Utilities ETF is currently trading more than 7% below its recent peak (see Chart 2).

Chart 2

SPDR Utilities ETF

Here, too, we can see several support features in place that may ultimately provide good buying opportunities. For example, while we cannot draw the same crisp trendlines on this chart as we could in the bond ETF chart above, we can use Fibonacci retracements just as effectively.
Fibonacci retracements are specific percentages based on the mathematical sequence of the same name. The formulas are not important here, but the resultant percentages are often used to give us an idea of where buying pressures may begin to increase again.
Starting with the August low, a 50% pullback from the January high is $44.93 (the ETF traded at $46.07 Wednesday afternoon). There is also support in the area from the bottom of a trading range from late last year.
Next, if we look at a 38.2% retracement of the entire rally from December 2013 through January, we get almost the exact same price level. The combination of short- and long-term retracements gives us a powerful tool and a strong support to target. And with the 200-day moving average on track to be in the same area in just a few weeks, there is something for every type of chart analyst to like.
The next question investors are likely to ask is whether high yield, or junk, bonds are worthy investments, too. ETFs such as SPDR Barclays High Yield Bond are correlated more with the broader stock market than with bonds. As such, they are not correcting lower as other bonds are doing and therefore not presenting a similar opportunity.
Personally, I like to look at the trends in the junk bond market as a tell on the stock market and not for direct investment. So far, the indication is still more bullish than bearish, Greek debt notwithstanding.
The bottom line is that the bond market, confirmed with interest rate sensitive areas of the stock market, is in a correction and not likely in a bear market. There are many reasons to expect that buyers will become active again at lower prices and dividend yields, especially in utilities, real estate investment trusts, and perhaps other sectors will be too attractive to ignore.
Michael Kahn, a longtime columnist for, comments on technical analysis at A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.

The unbalanced global economy

American shopper

The world is once again relying too much on American consumers to power growth

Feb 14th 2015 

A GLOBAL economy running on a single engine is better than one that needs jump leads. The American economy is motoring again, to the relief of exporters from Hamburg to Hangzhou.

Firms added more than 1m net new jobs in the past three months, the best showing since 1997.

Buoyed up by cheap petrol, Americans are spending; in January consumer sentiment jumped to its highest in more than a decade. The IMF reckons that American growth will hit 3.6% in 2015, faster than the world economy as a whole. All this is good. But growing dependence on the American economy—and on consumers in particular—has unwelcome echoes.

A decade ago American consumers borrowed heavily and recklessly. They filled their ever-larger houses with goods from China; they fuelled gas-guzzling cars with imported oil. Big exporters recycled their earnings back to America, pushing down interest rates which in turn helped to feed further borrowing. Europe was not that different. There, frugal Germans financed debt binges around the euro area’s periphery.

After the financial crisis, the hope was of an end to these imbalances. Debt-addicted Americans and Spaniards would chip away at their obligations; thrifty German and Chinese consumers would start to enjoy life for once. At first, this seemed to be happening. America’s trade deficit, which was about 6% of GDP in 2006, had more than halved by 2009.

But now the world is slipping back into some nasty habits. Hair grows faster than the euro zone, and what growth there is depends heavily on exports. The countries of the single currency are running a current-account surplus of about 2.6% of GDP, thanks largely to exports to America. At 7.4% of GDP, Germany’s trade surplus is as large as it has ever been.

China’s growth, meanwhile, is slowing—and once again relying heavily on spending elsewhere. It notched up its own record trade surplus in January. China’s exports have actually begun to drop, but imports are down by more. And over the past year the renminbi, which rose by more than 10% against the dollar in 2010-13, has begun slipping again, to the annoyance of American politicians.

America’s economy is warping as a result. Consumption’s contribution to growth in the fourth quarter of 2014 was the largest since 2006. The trade deficit is widening. Strip out oil, and America’s trade deficit grew to more than 3% of GDP in 2014, and is approaching its pre-recession peak of about 4%.

The world’s reliance on America is likely to deepen. Germans are more interested in shipping savings abroad than investing at home. Households and firms in Europe’s periphery are overburdened with debt, workers’ wages squeezed and banks in no mood to lend. Like Germany, Europe as a whole is relying on exports. China is rebalancing, but not fast enough: services have yet to account for more than half of annual Chinese output.

Diverging monetary policies will exacerbate the problem. The prospect of quantitative easing by the European Central Bank has sent the euro tumbling against the greenback, further helping European exporters. Central banks in Tokyo, Beijing and Mumbai are all easing. The Federal Reserve appears ready to begin raising interest rates this summer. That is sending yield-hungry capital to America, and the dollar skyward.

Shop until you droop
Two dangers loom. The short-term worry is that weak exports, a rising dollar and a slowdown in energy investment (because of falling oil prices) will stifle the American expansion. Rather than pull others along, America will be dragged down by their weakness. That is why the Fed should be none too eager to raise interest rates. With inflation below target it has no need to rush to tighten.

The longer-term fear is that growing imbalances will repeat the financial cycle of the 2000s, in which exporters to America once again finance reckless consumer borrowing. The ratio of Americans’ debt to income has fallen from a pre-crisis high of more than 120% to around 100%, but consumers still have too much incentive to load up on debt. Politicians would do well to get rid of subsidies like tax relief on mortgage interest.

But the burden to act does not lie just on America. Leaders from Brussels to Beijing should not allow falling currencies to become a substitute for structural reform, or for efforts to boost spending at home. A strong American economy is a boon to the world. It should not be taken for granted.

You Can’t Stop Progress, Supposedly

By Jared Dillian

February 12, 2015 

I am a sometimes gold bug and hard-money advocate, and a hard-core fiscal conservative. I have a pretty bearish outlook on the markets, I am generally skeptical of company management and especially journalists, and I think most investors, even the professional ones, are clueless.

I’m one of those hopeless romantics who pays down his debt (often ahead of schedule), would never ask for a bailout, and would be loath to sign up for unemployment benefits or even Social Security. If I looked hard enough, I could probably find a tinfoil hat that fits.

However, people who fit this profile are not typically big advocates of technology. You can’t use social media after the Snowden revelations, your phone is like a LoJack for the government, and who would trust a self-driving car?

I would. Do you know how much reading you could get done?

I love technology, and in spite of my bearish bent, I am a huge technology optimist and futurist. I was foaming-at-the-mouth bullish on Facebook back in 2008, when it was not yet public, at a $20 billion valuation. I said it would someday be worth $100 billion. People threw rotten eggs at me. It is now worth twice that.

I said it would be worth a trillion. It’s not there yet. Back then, in 2008, in the middle of the gosh-darn financial crisis, people were already talking about the bubble brewing in Silicon Valley.

Seven years later, I think that is a more reasonable discussion to have.


But it’s hard to know where to begin.

Let me start by saying the level of opulence in Silicon Valley has far exceeded what was present in the Bay Area 15 years ago. The developers with the $350 ripped jeans and $125 flip-flops have been around for years, but this is different.

Check out San Francisco Magazine’s description of the food court at a well-known tech company:

There’s a produce section that’s forging farm-direct relationships. A whole-animal butcher who makes bone broth in-house. A fish counter that sources its own fish with the help of the sushi bar. Which—by the way, there’s a sushi bar and an oyster depot. Four Barrel coffee and Blue Bottle coffee. The obligatory Project Juice kiosk. A cheese guy. Tapas. Noodles. A wine shop. Ice cream. Pizza. Tacos. A salad bar. A bakery.

You might be deceived into thinking this is normal, especially in San Francisco where you are occasionally forced to dodge sidewalk poop (there’s an app for that), but it’s not.

The real estate market, too, has gone parabolic. See for yourself: pull up Zillow and cruise around Palo Alto to see the two-bedroom ranch houses going for $3-4 million.

But these sorts of things are never reliable signs of a top, because stupid can always get stupider, and it usually does. As I wrote in last week’s piece about trend following, it’s not productive to try to top-tick things anyway. But if Silicon Valley has a meaningful correction, it’s going to send shockwaves throughout the economy.
What Cycle?

For starters, seven years ago, people were saying California was ungovernable. And bankrupt. This was back when muni bonds had a bit of a scare. People really thought that California would default.

Fast forward to 2015, and Jerry Brown is a hero—even being mentioned as a presidential candidate. But anyone who knows California knows that state revenues are almost entirely dependent on capital gains. All it takes is a few WhatsApps and Moonbeam can dream big about $70 billion snail rails.

I believe that someday we will have self-driving cars. And I believe that Uber and Airbnb will start a revolution. And I believe that Elon Musk will one day get us to Mars, and that all cars will someday be electric. And I believe in Moore’s Law for solar and that someday we will render conventional utilities completely useless. And I believe in Moore’s Law for the human genome, too.

I believe in all of these things. But I also know that there are people in their early twenties who are getting impatient that they’re not yet decamillionaires, that seed round valuations are getting so big that venture capitalists are doing “pre-seed rounds,” and that these obnoxious tech CEOs behave like oracles, telling us how we should run our lives.

The technologists believe in the future, but they don’t know what the financier knows: that there is a cycle and all of human progress is three steps forward, two steps back.

The tech people have forgotten that there is even a cycle at all.

Some of them never knew. In fact, most of the Silicon Valley folks weren’t old enough to be working during the last big bear market 15 years ago that wiped everyone out. Think about that.

The technology guys take a very dim view of the Wall Street guys with their Ferragamo ties and bold pinstripes, and yes, the Wall Street guys tend to run from one side of the boat to the other.

But what they know that the rest of the world doesn’t know is that overinvestment leads to malinvestment, which leads to a bear market to work off the excesses.

Just look at the energy sector, for example. In the just-released issue of Bull’s Eye Investor, I recommend to my subscribers a play on an industry that hugely benefits from the protracted slump in natural gas.

A client of mine runs a very successful hedge fund in San Francisco. I don’t want to speculate about his net worth here, but let’s just say it’s a lot. He tells me of cocktail parties he is invited to, where he’s easily the poorest person in the room.

If you want to know where the next bear market is, look around at the people who are enjoying unimaginable wealth. Mr. Market has a habit of correcting things over time.

My guess is that you won’t be paid $200K/year to drive trucks in North Dakota for much longer.

The best thing about capitalism is that everything is temporary. The last time around, people had the stock, could have sold it, and didn’t.

It will be the same this time. They will ride it all the way to the bottom. It’s human nature.

Everyone gives the GoPro guy so much crap for stuffing everyone with stock, but maybe he knows something the rest of us don’t.

Nothing lasts forever.

Jared Dillian
Editor, The 10th Man

February 11, 2015 8:16 pm

Private banks must be more than laundries

John Gapper

Sector should protect and invest legal wealth not aid tax evasion and money laundering

Ingram Pinn illustration
 Money laundering is when someone channels the cash from robbery, fraud or expropriation into a Swiss bank account, or an expensive apartment in Manhattan, to make it look clean. So what is the term for sullying profits from legal enterprise with tax evasion and shenanigans?

Money staining, perhaps.
That question came to mind this week when reading about the 30,000 clients of HSBC’s Swiss private bank in the mid-2000s. Some were apparently avoiding domestic taxes; others were behaving lawfully but very oddly, emerging from its branch in Geneva holding cases of used banknotes. The activity was not black but nor was it entirely white: there were various shades of grey.
The pariah of the age is the non-dom, a rootless mogul lured to the property and financial safe havens of New York and London with the promise of peace, quiet and generous tax treatment.

He buys his apartment on Central Park or house in Mayfair through a shell company, and puts cash in a Swiss bank account, paying the UK government £30,000 in lieu of tax.
It is all quite legal but highly aggravating to other taxpayers facing budget deficits and government cutbacks, while struggling to obtain a large enough mortgage to pay for a home that has spiralled in price thanks to low interest rates and a flood of overseas money. The privilege of what the UK government itself calls “a very generous tax regime” is confined to the offshore few.

Spare a thought for the billionaire, whose life is in some respects more challenging than ours.

The property story of the week, amid those in Le Monde and The Guardian about HSBC, and a New York Times series about foreigners buying apartments on Central Park, was how Mark Zuckerberg, founder of Facebook, came to acquire all of the property around his house.
A property developer who bought a house behind Mr Zuckerberg’s in Palo Alto told him that he intended to build a huge new one that would overlook his bedroom. Not only did Mr Zuckerberg then pay $1.7m to Mircea Voskerician, the developer, for the right to buy the property, according to the latter, but his financial adviser acquired three other nearby properties for $39m.

Even so, Mr Voskerician sued for breach of contract, claiming that his neighbour had promised both to compensate him and to introduce him to useful contacts in Silicon Valley, which Mr Zuckerberg denies. The pressure worked because Facebook’s founder is a billionaire living in an ordinary, if expensive, neighbourhood.
A rich person’s problem, but it indicates why many of the wealthy — especially the 128,000 global citizens estimated by Credit Suisse to hold assets of more than $50m — stay hidden. One banker told The Guardian that he put £5m in HSBC’s private bank to keep his bonus secret from colleagues.
There are decent reasons apart from tax evasion, or even legal tax avoidance, for the wealthy to put their money in Swiss banks. The traditional one is that it is not secure at home, where it may be taken by a different government or, in Russia’s case, the same president in a different mood. There is a history of the arbitrary seizure of European citizens’ property, after all.

Even when all is above board, however, holding wealth in a private bank or in a shell company looks quite like money laundering. The cash ends up in similar places, equally concealed from public view. When the legitimately wealthy also evade tax, the distinction starts to wear thin.

This is not a healthy state of affairs for governments that appear to be cutting a tax break for the global elite at the expense of their own citizens, or for private banks that tarnish the reputations of all clients by facilitating the sins of a few, or for entrepreneurs who work very hard to create their wealth. They could all do more to fix it.

For the UK government, that means reforming the non-domiciled tax break, which favours the wealthy by allowing people who pay a £30,000 to £50,000 annual levy to shelter offshore income and assets. Many qualify by virtue of a parent being foreign, which is bizarrely arbitrary.

The UK and other countries, including the US, should also crack down on abuse of shell companies, the financial vehicle of choice for money launderers. Most of the looting of wealth from developing countries is carried out using shell companies and offshore accounts. Using the same mechanism to hide the true ownership of expensive homes is increasingly common.

For private banks, it means protecting and investing legal wealth, rather than aiding tax evasion and money laundering. There are enough people with clean money — including 45,000 with assets of more than $100m — for this alone to be a very profitable business.

“In the past, the Swiss private banking industry operated very differently to the way it does today,” HSBC said this week in its mea culpa. Perhaps so, but I recall Swiss banks claiming in the mid-1990s — a decade before this happened — that tax evasion was in the past. After a while, one stops believing.

As for the rich, it means asking themselves if they want to resemble money launderers, carrying piles of notes out of private banks to sidestep taxes that other people pay. Even if they are within the local law, even if they are not mugged by the banks of the Rhône, is it any way to behave?

Fourth Turning - The Shadow of Crisis Has Not Passed: Part Three

By: The Burning Platform

Thu, Feb 12, 2015

In Part One of this article I attempted to illuminate the concept of generational theory as articulated by Strauss and Howe in The Fourth Turning. In Part Two I provided proof this Crisis is far from over, with ever increasing debt, civic decay and global disorder propelling the world towards war.

As The Sky Darkens

  Seeds of Crisis & War

"The seasons of time offer no guarantees. For modern societies, no less than for all forms of life, transformative change is discontinuous. For what seems an eternity, history goes nowhere - and then it suddenly flings us forward across some vast chaos that defies any mortal effort to plan our way there. The Fourth Turning will try our souls - and the saecular rhythm tells us that much will depend on how we face up to that trial. The saeculum does not reveal whether the story will have a happy ending, but it does tell us how and when our choices will make a difference." - Strauss & Howe - The Fourth Turning

American Cycles and Turnings

When you accept the fact history is cyclical and continuous linear progress is not what transpires in the real world, you free yourself from the mental debilitation of normalcy bias and cognitive dissonance. Things do get worse. There are dark periods of history and they recur on a regular cycle.

And we are in the midst of one of those dark periods. This Crisis will not be resolved without much pain, sacrifice, bloodshed, and ultimately war. Catastrophe is a strong possibility. The core elements of this Crisis - debt, civic decay, global disorder - are coalescing into a perfect storm which will rage for the next ten to fifteen years. The rhythms of history only provide a guidepost of timing, while the specific events and outcomes are unknowable in advance. The regeneracy of society into a cohesive, unified community, supporting the government in a collective effort to solve society's most fundamental problems seems to have been delayed. Or has it?

Maybe the answer can be found in the resolution of the last Fourth Turning. The seeds of the next crisis are always planted during the climax of the previous crisis, when the new social order is established. The American Revolution Crisis created a new nation, but left unresolved the issue of slavery. This seed grew to become the catalyst for the Civil War Crisis. The resolution of the Civil War Crisis greatly enhanced the power of the central government, while reducing the influence of the States. The rise of central authority led to the creation of the Federal Reserve, the implementation of income taxes to fund a vastly larger Federal government and the belief among the political class that America should intervene militarily in the affairs of other countries. The Great Depression was created by the monetary policies of the Federal Reserve; the New Deal programs were a further expansion of Federal government; FDR outlawed the ownership of gold; and America's subsequent involvement in World War II created a military and economic superpower.

After sixty-two years of ever increasing debt; ever increasing taxes to support an ever growing governmental bureaucracy; ever expanding laws, regulations, and rules; currency debasement by the Federal Reserve; complete abandonment of the gold standard; and never ending wars of choice around the world, the next Crisis grew and blossomed from the seeds planted during the previous Crisis. The New Deal social programs, along with the extension of the welfare state by LBJ and subsequent administrations, have swelled to unprecedented unsustainable levels with unfunded liabilities exceeding $200 trillion. The promises cannot be fulfilled. The $18 trillion national debt increases by $2.3 billion per day; $96 million per hour; $1.6 million per minute; $27,000 per second.

Does that sound sustainable? The legacy media sycophants cheer when consumer debt outstanding surges past $3.3 trillion, as their warped worldview applauds spending versus saving, consuming versus investing, and living for today rather than striving for a sustainable future.

The American people have lost their ability to think, reason, question, do math, control their urges, defer gratification, or realize when they are being lied to by the people they elected to public office. A culture of ignorance, celebration of the absurd, salutation of stupidity, honoring of the inane, being mesmerized by electronic gadgets, and satiating their egocentric shallow impulses on social media, is a sure recipe for societal collapse. Victory in World War II and becoming a modern day empire created the dynamic Eisenhower warned about. An immense military industrial complex has created enemies around the globe in order to keep the profits flowing in this welfare/warfare empire of debt.

War is a racket for the rich. The peasants who buy into the incessant patriotic propaganda and volunteer are nothing but cannon fodder for the .1%. Keeping the masses fearful of phantom enemies and portraying foreign leaders as evil, is essential for the oligarchs to retain their wealth, power and control. Truth, facts, and long-term consequences are of no interest to the sociopaths running the show and pulling the levers. The dissent into darkness has been gradual and unnoticed by a purposefully distracted populace.

"As nightfall does not come at once, neither does oppression. In both instances, there is a twilight when everything remains seemingly unchanged. And it is in such twilight that we all must be most aware of change in the air - however slight - lest we become unwitting victims of the darkness." - Supreme Court Justice William O. Douglas
What I've begun to realize about Fourth Turnings is how slow and methodical they are in reality. They will play out over twenty years at a pace dictated by events and the actions of the major players. I had been looking for a regeneracy event that would unify the country behind one leader. It is not to be. Since Fourth Turnings are driven by mood changes amongst the generational cohorts, the changes are subtle, incremental and not visible as identifiable events.

Looking back in history, the election of FDR and the rollout of his New Deal policies began the regeneracy of the nation, but did not create unity or solve the economic problems of the country. There was an actual plot by prominent businessmen to conduct a coup and overthrow the government. A large contingent of the population did not support the New Deal or our entry into World War II.

The first battle of Bull Run and the subsequent mobilization of a half million more men by Lincoln marked the beginning of the regeneracy during the Civil War Crisis. It certainly did not unify the nation or even the North. It just marked the point where there would be no turning back or compromise. There were draft riots in New York City in 1863 and Lincoln thought he would lose the 1864 election. The Declaration of Independence and mobilization of an army in 1776 marked the regeneracy during the Revolutionary Crisis period, but did not unify the colonies or colonists into a cohesive unit. The Revolution was piloted by a minority of freedom minded colonists, while the majority remained neutral or obedient to the Crown.

I now believe the focus of this Fourth Turning will be the conflict between the government and its supporters, and those who oppose the welfare/warfare surveillance state controlled by Wall Street vested interests. The overbearing, militarized, captured Federal government has treated citizens like suspects since 2001. Those in the highest echelons of wealth and power have captured the three branches of government (executive, legislative, judicial) and are ruthlessly ransacking the remaining wealth of the nation. Their unquenchable desire for more wealth and power has never been more blatantly obvious than in the aftermath of the 2008 financial collapse created by their derivative orgy of debt which blew up in their faces.

Dollar Bill

All the "solutions" implemented since 2008 (TARP, ZIRP, QE1, QE2, QE3, $800 billion stimulus plan, government takeover of student loans, subprime auto loan bonanza, waging wars of choice, doubling of food stamp households, and the Wall Street foreclosure/buy/rent scheme) have been designed to benefit the vested interests in this corporate fascist authoritarian regime. The average person has been left nearly destitute, unemployed or underemployed, bereft of savings, stuck with declining real household income, and left with political candidates hand-picked and bought off by the men running the show behind the curtain. The mood of the country has darkened significantly since 2008 and will darken further when the bubbles in stocks, bonds and real estate, created by the "solutions", pop simultaneous in the near future.

The wave of dismay, disillusionment and blinding rage that will sweep across the land will mark the next phase of this Fourth Turning. The mistrust and cynicism toward government and politicians has already reached historic highs. Congressional approval levels reached 56% in 2001 and have been in a downward spiral since, with a plunge to single digits since the 2008 Crisis began. The number of people classifying themselves as independents reached an all-time high of 47% in 2014, up from 27% in 2006. An awakening minority now realize Democrats and Republicans are nothing but brands appealing to liberals or conservatives, but representing the ruling Party and beholden to Wall Street, the military industrial complex, mega-corporations, and not the American people.

Congressional Job Approval

As trust in the political, economic and financial systems implodes, the existing social order will crumble and be swept away in a torrent of chaos and upheaval. Severe misery will settle on our land and tear the fabric of our society. Internal strife will be compounded by external threats, with citizens fighting each other and nations going to war on a large scale. It has happened before and it will happen again. The realization this Crisis would be driven by the conflict between government and the people occurred to me in 2013 when Edward Snowden revealed the depth and depravity of a government which believes it to not be bound by the constraints of the Constitution, laws, regulations, or human decency.

The political class, along with the government apparatchiks, protected by their propaganda mouthpieces in the media, used the 9/11 attack as the basis to implement command, control and surveillance measures which make Orwell's Big Brother seem like amateur hour. The hyperbolic level of propaganda in support of the vested interests is actually a sign of weakness, as their grip on the masses is weakening rapidly. Chris Hedges explains Washington as it functions today:

"Washington has become our Versailles. We are ruled, entertained, and informed by courtiers -- and the media has evolved into a class of courtiers. The Democrats, like the Republicans, are mostly courtiers. Our pundits and experts, at least those with prominent public platforms, are courtiers. We are captivated by the hollow stagecraft of political theater as we are ruthlessly stripped of power. It is smoke and mirrors, tricks and con games, and the purpose behind it is deception.
The mass media blindly support the ideology of corporate capitalism. They laud and promote the myth of American democracy -- even as we are stripped of civil liberties and money replaces the vote. They pay deference to the leaders on Wall Street and in Washington, no matter how perfidious their crimes. They slavishly venerate the military and law enforcement in the name of patriotism.
They select the specialists and experts, almost always drawn from the centers of power, to interpret reality and explain policy. They usually rely on press releases, written by corporations, for their news. And they fill most of their news holes with celebrity gossip, lifestyle stories, sports and trivia. The role of the mass media is to entertain or to parrot official propaganda to the masses. 
It plays an essential role in the dissemination of official propaganda. But to effectively disseminate state propaganda the press must maintain the fiction of independence and integrity. It must hide its true intentions."
The Duty of a Patriot...

It isn't hard to connect the dots if you choose to open your eyes and not be blinded by normalcy bias or the nationalist propaganda spewed by the mass media. Snowden's revelations of an NSA global surveillance network spying on U.S. and foreign citizens and approved by the highest levels of government should have caused outrage and mass protests. Instead, the media propaganda arm portrayed Snowden as a traitor and spy. Snowden revealed that the NSA was harvesting millions of email and instant messaging contact lists, searching email content, tracking and mapping the location of cell phones, undermining attempts at encryption via Bullrun, and the agency was using cookies to "piggyback" on the same tools used by internet advertisers to pinpoint targets for government hacking and to bolster surveillance.

The NSA was shown to be "secretly" tapping into Yahoo and Google data centers to collect information from hundreds of millions of account holders worldwide by tapping undersea cables using the MUSCULAR surveillance program. The NSA's top-secret "black budget," obtained from Snowden by The Washington Post, exposed the "successes and failures" of the 16 spy agencies comprising the U.S. intelligence community, and revealed that the NSA was paying U.S. tech companies such as Apple, Google, Facebook, Microsoft, Verizon, and AT&T for "clandestine access" to their communications networks. Every electronic communication of every American is being collected by the government to be used at their discretion. It will be used against you when the time is right.

Edward Snowden

What kind of government clandestinely spies on its citizens; militarizes local police forces; conducts military training operations in major cities; wires its streets and highways with surveillance cameras; disperses peaceful protestors with water cannons, tear gas, pepper spray, and rubber bullets; and treats the U.S. Constitution like toilet paper? An authoritarian regime treats its people like this. Authoritarian regimes treat everyone like a potential enemy. They trust no one. Those in power care only for themselves and their lackeys.

The extreme wealth inequality created by dishonest means is leading towards strife and a systematic breakdown. Our entire system is built on lies, monetary machinations, propaganda and strict obedience to a vast array of laws, regulations and mandates. The ruling elite are desperate to keep their despotic bacchanal empire of debt from disintegrating in a catastrophic apocalypse of derivative time bombs, bank failures, corporate bankruptcies, and denial of their guilt. They recognize the consequences they face when the music stops. When people realize their money system is a fraud they'll lose faith in all the institutions that make up a civilized society. Trust in politicians, corporate leaders, bankers, institutions, the media, parents, neighbors, and ourselves will evaporate in an instant. The anger and pursuit of those responsible will result in governmental collapse and domestic anarchy. The guilty and innocent alike will die.

Those in power are preparing for war - against you. Executive orders already in place, when executed, give the executive branch the ability to lockdown the country the same way they locked down Boston while bumbling about trying to capture two teenage kitchen utensil bombers. There are two things the ruling class fear the most - the internet and the approximately 300 million guns owned by citizens in 50 million households. The State, through the FCC, wants to "regulate" the internet to "protect" people from being told something other than what the State wants them to hear.

Tyranny, James Madison

That First Amendment, with its free speech and freedom of assembly, is dreadfully inconvenient for the oligarchs. Truth and dissent will not be tolerated. Every mass shooting incident, caused by the shooters being pumped full of anti-psychotic prescription drugs, is used as an excuse to disarm the public. The Second Amendment right to bear arms makes it more difficult for government thugs to ignore the Fourth Amendment when they kick your door down during an illegal search and seizure operation. An armed populace is our only defense against the tyranny of a draconian government bent on retaining its stranglehold on the country.

After the 2008 financial collapse the guilty were not punished, prosecuted nor reproached for their criminally destructive schemes to loot the American people and the world. Instead they were bailed out, allowed to retain their wealth and power, and rewarded for their misdeeds with further riches provided by their politician puppets in Washington D.C. Evil won. The masses were frightened into keeping silent and believing bankers, politicians, and government bureaucrats had saved their world of bread (debt based consumption) and circuses (iGadgets & HDTVs). Ultimately, this Fourth Turning Crisis will come down to a battle between good and evil. It would be easy if the evil people revealed themselves and the good people could destroy them, but evil and good exist within all human beings.

As witnessed in previous Fourth Turnings, the majority will sit idly by paralyzed by fear or apathy. Most people wait to be led. But, as Samuel Adams profoundly noted:

"It does not take a majority to prevail ... but rather an irate, tireless minority, keen on setting brushfires of freedom in the minds of men."

Goods-Producing Workers versus Government Payroll

The Federal and State government directly employs over 20 million Americans and millions more indirectly through their largess to arms dealers and other crony capitalist corporate entities. Over 145 million Americans receive a check of some sort from the Federal government every month, with over 100 million enrolled in a government welfare program. It is unlikely that many of these people will rise up against the government, unless their checks stop flowing (a distinct possibility). Every instance of governmental overreach, corruption, malfeasance, un-Constitutional act or ineptitude tips the scale further towards more people waking up and resisting. I believe the good in most people's hearts outweighs the evil. Once a tipping point is reached and enough people defy the government, an avalanche of consequences will sweep away the existing social order. Justice for unborn generations will be sought. Keeping silent only allows the evil to grow ever more formidable and entrenched.

Conventration Camp
"In keeping silent about evil, in burying it so deep within us that no sign of it appears on the surface, we are implanting it, and it will rise up a thousand fold in the future. When we neither punish nor reproach evildoers, we are not simply protecting their trivial old age, we are thereby ripping the foundations of justice from beneath new generations." - Aleksandr Solzhenitsyn, The Gulag Archipelago 1918-1956

In Part Four of this article I will focus on the drumbeats of war getting louder on a daily basis. Fourth Turnings always climax with war on a grand scale. There will be no escape.

Gold Cup with Handle Ready to Blast Higher

By: Dan Basch

Sunday, February 15, 2015

For the past couple of months, I've watched with great interest the development of a possible bullish cup with handle (CwH) formation on the gold price chart, perhaps one of the most reliable and readily identifiable in the entire pantheon of chart patterns. Whole websites are dedicated to screening for and taking advantage of this pattern, so you can imagine my keen interest in this discovery on the second most traded commodity on the planet. Over the past few weeks, the development on the GLD index has been "textbook" relative to the example and so I thought I'd share my findings with you, my colleagues here on SafeHaven. Perhaps I've missed someone else's observation of this specific pattern and if so, then I am repeating what someone else has already discussed, but to my knowledge, no one has yet written of this particular chart pattern on gold.

I now reveal all I have perceived about this powerful pattern's evolution to date and its likely imminent upward blast off to target, estimated to reach its target by mid-March 2015. Of course take the following information with the standard caveat that this is purely for entertainment purposes and any action on your part based on the content of this missive is purely of your own volition. Technical chart patterns are notorious for flopping over on themselves and dashing hopes which fortunately really do spring eternal, however sometimes they work like a charm which is what I expect here. Call me an idealist.

I first noticed this potential as gold formed a base in December, did a visual comparison with many patterns using a standard Google image search (GIS) and quickly realized the StockCharts example of Jabil Circuits (JBL) had an interesting correlation to the left side of the cup. Here is a recreation of the chart with the 50 day moving average (DMA). Note on both of the charts a brief dip through the 50 DMA and briefly consolidating before the move higher as seen by the third green arrow on the right. Also consider the MACD histogram turning up on today's chart and at the same relative area on the example chart.

Jabil Circuit Cup-with-Handle Chart

Compare to today's GLD chart:

SPDR Gold Trust Shares Daily Chart

Relative to today's GLD chart, the base and development of the right side of the cup was not quite as closely developed due to a dip in the price in mid-December, however shortly thereafter it quickly moved to a relative target level above 125 which established a cup. Now, with the fully formed cup in place, the handle required a decline from that level which would slightly violate the 50 DMA and then shortly thereafter bobble around it before rocketing higher. So far, the chart has progressed exactly as expected, hence the timing to release this notification now because after all, financial gain from forecasting using reliable patterns is the name of the chartist's game. All that's missing is the imminent last move up.

Do be aware that the majority of traders and even hard core gold bugs will not believe the speed and intensity of the rise in gold price should it rocket to target. Sometimes the most fundamental basics of TA are all you really need to make a profitable call and hopefully play out as expected.

Specifically, the CwH target for this move on the GLD is 16 points higher than today's 50 DMA which would take it to roughly 134 and the gold price to around $1,400, a gain of $170/oz. from today's levels. We'll see whether gold pops from Valentine's Day through St. Patty's day as the pattern indicates. Good luck and expect fireworks soon in the precious metals!

Sweden cuts rates below zero as global currency wars spread

Morgan Stanley warns that the world is revisiting the “ghosts of the 1930s” as one country after another tries to steal a march on others by devaluing first

By Ambrose Evans-Pritchard

4:58PM GMT 12 Feb 2015

Janet Henry from HSBC said Sweden's measures are clearly a “beggar-thy neighbour” manoeuvre to weaken the krone. Photo: CORBIS
Sweden has cut interest rates below zero and launched quantitative easing to fight deflation, becoming the latest Scandinavian state to join Europe’s escalating currency wars. 
The Riksbank caught markets by surprise, reducing the benchmark lending rate to minus 0.10pc and unveiled its first asset purchases, vowing to take further action at any time to stop the country falling into a deflationary trap. The bank presented the move as precautionary step due to rising risks of a “poorer outcome abroad” and the crisis in Greece.
Janet Henry from HSBC said the measures are clearly a “beggar-thy neighbour” manoeuvre to weaken the krone, the latest such action in a global currency war that does little to tackle the deeper problem of deficient world demand.
The move comes as neighbouring Denmark takes ever more drastic steps to stop a flood of money overwhelming its exchange rate peg to the euro and tightening the deflationary noose.
The Danes have cut rates four times to minus 0.75pc in a month to combat fall-out from the European Central Bank’s forthcoming QE. They have even taken the unprecedented step of halting all issuance of government bonds.

Jens Nordvig from Nomura said the Danish central bank has spent €32bn so far this year intervening in the exchange markets to defend its euro peg in the Exchange Rate Mechanism, almost 10pc of GDP. “This is the fastest pace of reserve accumulation by the Danish National Bank in its history.

There is no doubt that the pressure on the krone is very significant, and that the fight for the peg will be tough,” he said.
Steen Jakobsen from Saxo Bank said a rupture of Denmark’s euro-peg would be dangerous since the country’s private pension system is heavily invested in EMU bonds and assets, yet its liabilities are in Danish krona.
“There is a currency mismatch which could leave some of these pension funds technically insolvent. I wager that if push comes to shove, Denmark would rather join the euro than allow a 10pc revaluation. It could happen very fast if things come unhinged in Greece,” he said.

The fall-out from QE in Europe has already smashed Switzerland’s currency defences, triggering a 14pc surge in the franc against the euro and threatening to erase the last safety buffer for struggling Swiss exporters.

Exchange rate mayhem in Europe is matched by a parallel saga in Asia, where Japan’s vast monetary stimulus and barely disguised efforts to drive down the yen are causing heartburn in China.
The Chinese yuan is linked to the US dollar through a “dirty float”. Yet the dollar is rising relentlessly against other Asian currencies as the prospect of monetary tightening by the Federal Reserve lures a flood of capital into the US, a replay of the strains that led to the East Asia crisis in 1998.
This is compounding China’s problems at a delicate time when the economy is already facing a property crunch. The country’s factory gate deflation has deepened to minus 4.3pc.
China’s yuan has jumped 50pc against the yen since early 2012. There are growing fears that China may be forced to drive down the yuan to protect its export base and avert a possible hard-landing. This would transmit a deflationary shock worldwide, given the sheer scale of China’s excess capacity.
Manoj Pradhan, Morgan Stanley’s global economist, said the world is revisiting the “ghosts of the 1930s” as one country after another tries to steal a march on others by getting in devaluation first.

“The lesson from the 1930s is that those who do so early benefit at the expense of those who wait too long,” he said.
Mr Pradhan said it is becoming harder to extract advantage from this ploy now that “everyone is doing it”. China faces strong pressure to defend itself while it still can. “The longer they wait, the harder it will be for China’s policy-makers,” he said.
The United States has so far acquiesced in the surging dollar but there are growing calls for a shift in policy on Capitol Hill. Both Republicans and Democrats in Congress back new legislation that introduces binding currency rules for trade deals and imposes punitive import taxes on countries deemed to be “currency manipulators”. The move is explicitly aimed at China and Japan, but might also include Germany given the size of its current account surplus.
Sweden also risks falling foul of Washington. The Riksbank’s move has raised eyebrows since the bank itself says economic growth is picking up. The country is in the midst of a property boom and mortgage debt is already 81pc of GDP, one for the highest ratios in the world. It is extraordinary to launch QE in such circumstances.

The Riksbank insists that the only motive is to stave off deflation but there are widespread suspicions that Sweden is in fact protecting its industrial and export base. It is no stranger to controversy. The oldest central bank in the world, it took radical action early in the 1930s to liberate Sweden from the constraints of the Gold Standard. Its prescience shielded the country from the worst of the Great Depression.
Stephen Lewis from Monument Securities says the emergency actions are getting out of hand: “The chief threat from a global currency war is that it will lead central banks to take up monetary stances so extreme that they damage the smooth functioning of financial markets. It is remarkable that they should be closing their minds to the possibility that they are undermining the basic motive to save and invest as they blindly wage their currency wars.”