jueves, octubre 01, 2015

VACACIONES OCTUBRE 2015

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VACACIONES OCTUBRE 2015

 
Jueves 1 de Octubre del 2015

Queridos amigos,

Les escribo estas líneas con motivo de mi próximo viaje que me tendrá ausente de la oficina y de nuestras lecturas cotidianas, desde el lunes 5 de Octubre hasta la segunda semana de Noviembre próximo.



Durante estos días no tendré acceso regular al Internet ni a mis correos.
 
 
En los últimos meses la situación económica y financiera internacional se ha seguido deteriorando según lo previsto en mi carta de mayo pasado, replicada en algunos párrafos líneas más abajo para mayor abundancia, impactando duramente a los países emergentes, las monedas, el petróleo y los precios de los "commodities", el fortalecimiento notable del dólar norteamericano, típico de las épocas de crisis, y una retracción cada vez más marcada del crecimiento del producto mundial, ahora ya reconocido por todos los bancos centrales, lo que nos coloca claramente bajo la sombra del temor de una potencial deflación y de la recesión global, cada vez más inevitable.  
 
El artículo de principios de este mes de Doug Nolan, "The Unwind", al que pueden acceder mediante el "link" anterior, describe claramente la situación precaria de la economía global, los mercados financieros, las deudas y el crecimiento económico mundial, por lo que me abstendré de mayores comentarios.  También pueden acceder al ultimo articulo de Doug Nolan,
 
La reciente creciente y notable volatilidad de los mercados financieros, las dudas hamletianas de la Reserva Federal sobre las tasas de interés y la reciente caída de las bolsas, son solo una pequeña muestra de la descomposición de las economías y los mercados globales.

En realidad no podía ser de otra manera, si tenemos en cuenta que no se ha hecho nada en los últimos años para reparar los profundos desequilibrios estructurales en los fundamentos de la economía global, sino que más bien, por el contrario, se ha seguido "maquillando" por parte de los bancos centrales la insostenible situación económica y financiera global, profundizando los desequilibrios y la inestabilidad vía el constante crecimiento de las deudas, aumentando las ineficiencias y dilatando el necesario ajuste. El crecimiento estructural de la economía global es cada vez más frágil, dudoso e insostenible.

Hasta la crisis del 2000 y luego de la del 2008, ahora así llamada la Gran Recesión, la demanda global había sido “subvencionada” por un sistema financiero manipulado e intervenido, creando una demanda y una economía global ficticia, una recuperación así llamada "subprime", liderada por la FED mediante un crecimiento desproporcionado de las deudas, imposible de auto-sustentarse en un crecimiento de la economía real en el largo plazo. 

Deuda, deuda y más deuda, parece ser el mantra de la FED.

Desde entonces, la FED y el resto los bancos centrales de todos los países más importantes del mundo se han negado y se siguen negando a reconocer esta realidad, aceptando el inicio de un ajuste inevitable y estructural, regresando a un nivel real de la economía global de alguna manera manejable. Aún siguen abocados al esfuerzo de una gran represión financiera, manipulando e inflando irresponsablemente los mercados financieros vía una política monetaria de emisiones inorgánicas de papel moneda sin respaldo y muy bajas tasas de interés.

Las deudas de consumidores, empresas y gobiernos, eran y son insostenibles.

Por ello creemos que los bancos centrales no aumentarán de "motu propio" las tasas de interés de manera importante a corto plazo, salvo que este aumento provenga final y sorpresivamente de una crisis generada por la desaparición de la confianza de los inversionistas globales en los mercados financieros.

Inmediatamente sus deudas se volverían obviamente impagables y la crisis que tanto han tratado de evitar reconocer, sobrevendría inevitable.

Solo para mencionar al país con la economía más importante, la deuda de los Estados Unidos de Norteamérica ha crecido por encima de los 18 trillones de dólares, a más del 100% de su PBI. Y si incluimos las deudas contingentes internas, como el Seguro Social y los Fondos de Pensiones, algunos analistas calculan que la deuda norteamericana podría llegar a sumar entre los 80 a 120 trillones de dólares, es decir, entre 5 a 7 veces el producto bruto anual.

Para un análisis detallado del desarrollo de esta problemática y la verdadera situación actual, ver los artículos del blog, aquí, aquí y aquí.

Esta situación se ha seguido agravando en los últimos años y es insostenible en el mediano y largo plazo.  (ver articulo)

Para evitarlo, es que los bancos centrales han tenido que esforzarse en mantener ficticiamente una apariencia de normalidad en el "statu quo", inyectando cantidades innombrables de papel moneda sin respaldo a los mercados financieros y reducido las tasas de interés a niveles nunca vistos por largo tiempo, desde que la historia económica recuerda. (QE1, QE2, QE3, Q4, Abenomics, China, etc….)

Todo ello nos hace presumir que todo ello se lleva a cabo por el fundamentado temor a perder el control del esquema Ponzi mundial, que es lo que son ahora la economía global y los mercados financieros, y por ende se derrumbe el castillo de naipes enfrentando de golpe un ajuste económico enorme y hasta la posibilidad de una revolución social incontenible, guerras, etc.

El hecho es que el esfuerzo de política monetaria intervencionista llevada a cabo por la mayoría de los bancos centrales del mundo, en los últimos 15 años, más intensa y desproporcionadamente desde los últimos siete años, además, ha producido la transferencia más importante de riqueza que se recuerda en la historia, de manos de los pensionistas y los ahorristas, hacia las clases privilegiadas y los bancos. 

Mas importante todavía, se ha distorsionado y manipulado fundamentalmente las reglas de la economía del libre mercado con consecuencias funestas y aun impredecibles en el mediano y largo plazo para los consumidores e inversionistas del mundo, incrementando la locación  ineficiente de los recursos de inversión, además de multiplicar el costo de la inevitable implosión de los mercados financieros, tanto de las acciones, como de los bonos y otros instrumentos de inversión financiera.

Todo esto para no mencionar a los derivados financieros, estimados por algunos analistas en más de 1 cuatrillón de dólares (1000 trillones de dólares),  que se ciernen como una espada de Damocles, sobre todo el sistema financiero y económico internacional.

El mismo FMI ha advertido hace ya unos meses de la posibilidad que la economía global está entrando a un periodo de "stagnación" y a una probable nueva recesión, con las consecuencias que ello implicaría. (ver articulo)

Obviamente estos organismos no pueden decirnos toda la verdad. Ello sería propiciar ellos mismos el adelanto inevitable del descalabro global, el caos y el ajuste sin anestesia, con resultados imprevisibles. 

La pregunta de fondo es ¿hasta cuándo se podrá o podrán mantener esta realidad bizarra?
Y eso nadie lo puede responder con seguridad. La confianza de los inversionistas en los mercados financieros es la verdadera incógnita.

Por ello ahora tenemos que seguir preguntándonos seriamente, ¿Cuál de todos los potenciales "cisnes negros", conocidos o no, que hoy se ciernen sobre la economía global ,y que son muchos, económicos, sociales y geopolíticos, podrían ser el detonante de la nueva catástrofe?

Solo la historia nos responderá a esta crucial pregunta.

Mientras tanto, en medio de este mundo bizarro, tenemos que insistir nuevamente y más que nunca, que la experiencia y la prudencia, el análisis y la inteligencia, la vigilancia y la paciencia, son los socios más importantes en las decisiones de políticas y estrategias de inversión a corto y mediano plazo.

En un cambio importante de ciclos como en el que pensamos que estamos envueltos hoy día, y en el que más allá de lo circunstancial, el pasado y el futuro se bifurcan y se oponen, los riesgos para los inversionistas son profundos. (ver articulo)

Con estas  anotaciones y advertencias que espero les sean de utilidad, me despido de Uds. con un cordial abrazo hasta el regreso a mis actividades, Dios mediante, a inicios de la segunda semana de Noviembre próximo, cuando estaré nuevamente a su gentil disposición.

Gonzalo

PD. Para leer los artículos pueden subscribirse directamente al blog:  www.gonzaloraffoinfonews.com


Balloons in Search of Needles

By John Mauldin


I love waterfalls. I’ve seen some of the world’s best, and they always have an impact.


The big ones leave me awestruck at nature’s power. It was about 20 years ago that I did a boat trip on the upper Zambezi, ending at Victoria Falls. Such a placid river, full of game and hippopotamuses (and the occasional croc); and then you begin to hear the roar of the falls from miles away. Unbelievably majestic. From there the Zambezi River turns into a whitewater rafting dream, offering numerous class 5 thrills. Of course, you wouldn’t want to run them without a serious professional at the helm.

When you’re looking at an 8-foot-high wall of water in front of you that you are going to have to go up (because it’s in the way); well, let’s just say it’s a rush.

If there were rapids like this in the United States, it’s doubtful professional outfits could get enough liability insurance to make a business of running them. In Zimbabwe we just signed a piece of paper. Our guides swore nobody had ever been lost – well, except for a few people who disobeyed the rules and leaped in the water in the calm sections because it was 100° out. That’s where the crocs are. They promised we wouldn’t run into any in the rapids, which was good. More than a few of us got dumped in the water trying to run the rapids, but they had teams of kayakers who got you out quickly. The canyon below the falls is unbelievable, and below that is the even more impressive Bakota Gorge. And yes, you then had to walk to the top of the canyon up a switchback trail to get home. I would do it all over again in a heartbeat, but I would spend at least three months training for the hike out. That was most definitely not in the full-disclosure-of-risks one-page piece of paper.


It would be hard to miss an analogy to the stock market. Everything’s peaceful and calm, you’re drinking some fabulous wine, eating some fantastic fresh game and fish, looking at all the beautiful animals as you drift easily with the current. Anybody can steer the boat in a bull market. Until the rapids hit and the bottom falls out.

As an aside, while the large waterfalls are majestic and awe-inspiring, the smaller ones are more hypnotic. I love the sound of falling water. I could listen for hours.

The one place I don’t like to see waterfalls is on stock charts. Those leave me awestruck at the market’s power. They do have the power to focus the mind, however, especially when we own the shares that just went over the falls.

The US stock market is having the most turbulent year we’ve seen in a while.  It’s not terrible by historical standards, but we have a full quarter to go. And next week it’ll be October, a month in which the stock market has run into trouble before. With all that in mind, this week I want to take a look at where stocks stand and maybe offer a thought or two about the events that could bring us to the next waterfall.

Not Niagara Falls Yet

Here is how the waterfall looks so far this year. Barely a 10% move peak to trough, and it lasted for just a few days. We see a lot of jostling, followed by the harrowing plunge in August, and then a partial (less than halfway) recovery. Where do we go from here?


Let’s start with the macro view. Back in July I showed you some research that I did with Ed Easterling of Crestmont Research. This was before the China sell-off accelerated into the headlines, so it is very interesting to read again in hindsight. (See “It’s Not Over Till the Fat Lady Goes on a P/E Diet”).

Our view is that we are still in a secular bear market, and have been since the 2000 Tech Wreck. You may find that view surprising, since the benchmarks have roughly tripled since the 2009 low. Our analysis looks at price/earnings ratios to identify when bull and bear markets begin or end. P/E multiples were close to 50 in year 2000. In order for that bear market to end, they needed to drop into the very low double-digit or single-digit range, which has been the signal for the end of every long-term secular bear cycle for over 100 years. That hasn’t happened during the intervening 15 years.

Can a secular bear market last 15 years? Yes. Some have lasted even longer, like 1966-1981 and 1901-1920. So this one isn’t unprecedented. And please note that the long-term secular cycles can have cyclical movements inside them. Again, we see secular cycles in terms of valuation and the shorter cyclical cycles in terms of price. (Unless this time is different) long-term secular bear market cycles will always end in a period of low valuations.

Currently, P/E ratios (or any other valuation metric you want to use) are not low enough to provide the boost that typically starts a new bull market. They were closer in 2009 than today, but have never dipped into the area that would mark the end of the bear market and the onset of the new bull. We’re still riding the same bear.


What’s taking so long? Our best guess is that stocks were so richly valued at the 2000 peak that it is taking the better part of a generation to work off that excess. In order for this bear to end – and the new bull cycle to begin – valuations need to tumble. That can happen only if prices drop considerably or earnings rise without pulling prices higher.

Obviously, there can be many trading opportunities within a secular bull or bear cycle, but Ed’s research says we have three long-term options from here.

  1. If P/E ratios decline toward 10 or below, we will be near the end of this secular bear. A new bull cycle should follow.
  2. If P/E ratios stay near where they are, we will be in what Ed calls “secular hibernation.” This would mean a lot of sideways price movement, with dividends having to deliver the lion’s share of stock market returns.
  3. If P/E/ ratios rise further, we will go back into the kind of “secular bubble” that created the Tech Wreck. I recall those years vividly, and I would rather not relive them.

Now, combine this market situation with what appears to be a global economic slowdown. China is a big factor, but not the only one. The entire developed world is in slow-growth mode. At some point it will likely dip into recession territory. Canada is already there. I don’t think they will be alone for long. Japan and Europe are weak.

I think the next true move to lower valuations will be a cyclical bear market combined with a recession. Can the stock market hold on to today’s valuations in a recession? Nothing is impossible, but I wouldn’t bet the farm on it, either. I can’t find an example of stock prices and valuations staying in place in the midst of a recession. Prices can fall slowly or they can fall fast, but I feel confident they will do one or the other.

Speaking of Bubbles

Our old friend Robert Shiller popped up last week in a Financial Times interview. Shiller is the father of CAPE, the cyclically adjusted price/earnings multiple, which looks back ten years to account for earnings cyclicality. He is also a Yale professor and a Nobel economics laureate.

Shiller’s CAPE has been saying for several years that stocks are seriously overvalued.

In his FT interview, Shiller dropped the “B” word:

It looks to me a bit like a bubble again, with essentially a tripling of stock prices since 2009 in just six years and at the same time people losing confidence in the valuation of the market.

When will the bubble burst? Shiller is less helpful there. He said the recent bout of volatility “shows that people are thinking something, worried thoughts. It suggests to me that many people are re-evaluating their exposure to the stock market. I’m not being very helpful about market timing, but I can easily see aftershocks coming.

Now, if you aren’t very confident about timing, it’s arguably better not to use words like bubble and aftershock. You can be sure the media and analysts will jump all over them, just as I’m doing right now.

In any case, Ed Easterling and Bob Shiller reach similar conclusions (though for different reasons). Neither sees a very bullish future, though both are unsure about timing. So when will we know the end is nigh? Sadly, we probably won’t, unless we begin to see signs that a recession is building in the United States.

Balloons in Search of Needles

As the old proverb goes, no one rings a bell at the top. The same applies at the bottom.

Let’s imagine the stock market as a whole bunch of balloons. One or two can pop loudly and everyone will jump and then laugh it off. You now have deflated debris hanging from your string.

Eventually, enough balloons will pop that the weight of the debris overwhelms the remaining balloons’ ability to keep the string aloft. Then your whole bunch falls down.


The last balloon to pop wasn’t any bigger or smaller than the others; it just happened to be last. In like manner, some kind of catalyst sets off every market collapse. It is usually something that would be survivable by itself. The plunge occurs because of all the previous balloons that bit the dust, but pundits and the media always like to point the finger at the most recent event.

So, if Easterling and Shiller are right, balloons are popping and making investors nervous, but there’s not enough damage yet to drag down the whole bundle. What are some candidates for the last balloon?

A Chinese “hard landing” is probably the biggest, most obvious balloon right now. And actually, China is big enough for multiple balloons. Their stock market downturn produced one pop already. Beijing’s currency adjustment may have been another one.

On the other hand – seriously – a bubble created by millions of new, massively overleveraged rookie retail investors who then panicked and all tried to get out at once should not have much effect on US stocks. If that event was a truly signal of an imminent hard landing for China, I’d be concerned. But as I have written in the last month, the data from China shows their growth to be slowing but still likely to be above 4%. Not exactly disaster territory.

We say in our new China on the Edge video (which premiered this week – click here to watch it) that the country is making a huge transition. Xi Jinping knows he must escape dependence on exports and build a consumer-driven domestic economy. This transition is having a global impact by virtue of China’s sheer size. On the other hand, the data I trust from China Beige Book and other sources indicates the economy is in better shape than most Westerners think. President Xi’s government has been up to the challenge so far.

If China turns out to be the last balloon, it will have to be popped by something we don’t currently anticipate: a military coup, a vast peasant uprising, military clashes with the United States, a major corporate accounting scandal, etc. I am NOT predicting any of these; I mention them precisely because they are so unlikely.

Does China have big challenges? Absolutely, but in general I think we know what they are, and the market is ready for them. I think the last balloon will pop elsewhere in the world. In the following sections I’ll run quickly through some other possibilities that come to mind. Again, I’m not predicting any of these will happen. My point is that they are real possibilities that could set off wider problems.

German Engineering Goes Too Far

The management of Volkswagen pricked its own balloon last week. In case you haven’t heard the news, the company appears to have engineered some 11 million diesel cars with software that lies to the owners and regulators on emissions tests.

The stupidity of this is just overwhelming. This was not an accident, and it wasn’t one rogue programmer. Experts say many people within the company would have known about it. How far up the management chain it went, we don’t know yet. The now-former CEO, Martin Winterkorn, claims not to have known.

I don’t see how in the world they thought they could get away with this scheme. The lawsuits, branding damage, and regulatory penalties are, at the very least, going to consume the company’s energy for several years. The chance exists that they could bring the company down.

This is not a small company. It is the largest company in Germany, and Germany is the largest economy in Europe. Volkswagen has 600,000 employees and accounts for a big chunk of the country’s exports. Those exports are what make Germany the continent’s de facto leader.

Not to mention that 40% of Volkswagen’s asset base is in its financing arm, which lends money to finance its automobiles; but the company borrows that money in the short-term markets. This short-term borrowing is what got GMAC and other financing companies in trouble during the last credit crisis. Attention must be paid.

If the worst happens to Volkswagen, the impact on Germany, Europe, and the euro will be noticeable. I see media speculation that other German manufacturers could have taken similar shortcuts. If that’s the case, then all bets are off.

Shale Field Storm Warning

OK, next balloon. I said a few weeks ago in “Riding the Energy Wave” that new technology was bringing down production costs in US shale oil and gas fields.
 
Further, I hear stories from friends about auctions of drilling equipment where the prices are 20 cents on the dollar, thanks to cheaper rigs, the growing number of idle oilfield workers who will take lower pay, and declining drilling costs. There are winners and losers. Some of the overleveraged players are in deep trouble. So are their lenders and shareholders. Those with access to capital could do really well.

Recall the sequence here. Crude oil was near $100 a barrel in mid-2014. Then it started to slide and moved into outright collapse when OPEC said in November that it would not cut production quotas.

By this point many of the shale firms were running in the red. The lucky ones had hedged production at higher prices, but no one was happy. There was much talk about loan defaults and bankruptcy. Then it all faded away. Why?

I saw the answer in an OilPrice.com article by Nick Cunningham. In the first half of this year, the US shale industry raised an estimated $44 billion in fresh debt and equity. Companies could roll over or refinance debt, taking on new loans in order to retire old ones. In a low-interest-rate environment, lenders were very willing to cooperate. More importantly, in the first and second quarters of 2015, many lenders expected oil prices to rebound.

Yes, you read that right. After the 2014 collapse subjected many companies to a near-death experience, investors and lenders tossed another $44 billion in cash at them.
 
Their faith in oil prices is touching. You gotta love old-time Texas religion. But the oil price rebound didn’t last,and now those same companies are on the ropes again.

Cunningham refers to an Energy Information Administration study that found 44 top producers were spending an average 83% of operating cash flow on debt payments, double what they were paying three years ago.


You can see in the chart above that debt service was below 60% of cash flow in 2Q 2014. If it was 83% in 2Q of this year, I can see it going over 90% for 3Q. That is simply insane. You cannot run a business with that kind of debt overhead. Either you borrow more – which is also insane (on both sides of the deal) – or you throw in the towel.

I’ve read that over $1.2 trillion of scheduled Big Oil investments have been delayed or taken off the table. The majors have a depletion problem. They have to find new oil, and in size, to be able to make up their losses from reduced production from older fields. While small, independent companies can do very well drilling 10 or 20 wells at reduced costs, the majors need to find huge “plays,” which are typically in inhospitable places and cost more per barrel to pull out of the ground. $50 oil just doesn’t cut it.

Someone is going to eat those losses. Depending who it is and how big they are, we could see some sizable energy industry defaults and bankruptcies over the next year. There’s an outside chance the spillover could affect some hedge funds and make them unwind other positions. That’s how you get a “contagion” going.

Euro Crackup

I wrote last week that the flood of Middle East refugees into Europe is setting up a new clash between Germany and several countries to its east. That’s already happening. This week, EU ministers voted to allocate refugees throughout the continent – against national wishes in some cases. Hungary is particularly angry. I’ve seen estimates of a cost of over €1 trillion for settling the present flood of refugees, and that’s just for openers. My bet is that more and more refugees are going to be fleeing the Middle East (honestly, wouldn’t you?) and trying to find homes in Europe. God forbid that major instabilities crop up in Egypt or Turkey. Right now that’s unthinkable, but a lot of things have happened in the Middle East over the past 15 years that were unthinkable. This problem is going to apply even more strain to already stretched European country budgets.

So far this year, we’ve seen Eurozone leaders (headed by Germany) force their will on Greece over its debt payments, and now they’re applying pressure with regard to refugees. This again highlights the degree to which countries are ceding their sovereignty to Brussels.

Are there enough voters in these countries angry enough to make their countries leave the Eurozone or EU? Probably not, at least not yet, but the anger isn’t going away. And it may intensify as the refugee flow continues and grows.

Now, combine this with the Volkswagen situation. If VW starts laying off workers, a domino effect will tumble through the economy. Merkel’s clever plan to bring in thousands of new workers suddenly won’t look so smart. Will she be able to reverse the flow of migrants? That would just send more of them into Eastern Europe, where they aren’t wanted.

There’s more: the UK will likely hold a referendum sometime in 2016 on whether to stay in the European Union. Anti-immigration and populist movements are gaining strength in Spain and France. The continent’s linchpins are under stress. These trends could take Europe in many directions, but few will be positive for European stocks.

Muddling sans Drama

I just gave you a few possible scenarios, any one of which could be the last balloon whose popping sets off a serious market downturn. It’s possible more than one could pop.

But it’s just as likely that we Muddle Through over the next year. While the data suggests that US GDP is likely to be softer in the near term, there are no real warning signs. Still, it makes me a little nervous to have GDP growth sitting close to stall speed when a global event could push us into outright recession quicker than we currently imagine.

Again, let me emphasize that I’m not predicting anything especially dire here. The most likely scenario is that markets will continue to muddle along without such drama.

Nevertheless, I think we need to think ahead. Examine your portfolio now and think about how the scenarios above might affect you. Have a plan in place for what you will sell first. Put on hedges, or at least plan how to hedge if events suggest you need to.

The best traders I know are smart people who think ten steps ahead, with a plan for everything. They tend to be good chess players. To some degree, this is what we all have to do. “I’ll decide when I get there” is not a winning strategy in most cases. Far better to decide long before you get there.

Detroit, Toronto, San Francisco, Portland, and New York

Tuesday I leave to go see my friends Jerry Wagner and Peter Mauthe for a day in Detroit before heading out early the next morning to Toronto, where I will be doing speeches the next two evenings, getting up at a ridiculous hour on Friday morning to be back in Dallas for a lunch presentation to the National Center for Policy Analysis (NCPA).

The editor of Transformational Technology Alert, my close friend Patrick Cox, will be coming in Sunday, October 11, for a dinner and to meet a few of his readers before we head out the next day to San Francisco, where we will hopefully meet with Dr. Mike West of Biotime and then spend the next day at the Buck Institute, the premier antiaging research center in the world. I hop a later flight to Portland, where I will be doing a speech for Aequitas Capital. Then the plan is now that we’ll somehow wind up in New York.

Time is speeding by. There is so much to do. The book on transformation and how the world will look in 20 years is starting to take shape, but it is a much bigger project than I originally envisioned. A friend sent me the cartoon below; and while I may be using more modern technology, the process is just as time-consuming.


 
Sunday night, though, I will stop to take advantage of a rare event. Some of my kids are planning to join to watch the eclipse of the super harvest moon at a reasonable time in the early evening. You have a great week!

Your trying to find more time analyst,

Buy Gold While You Still Can
             

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One of our long-running themes here is that the truly historic and massive flows of gold from West to East is (someday) going to stop, for the simple reason that there will be no more physical bullion left to move.

It's just a basic supply vs. demand issue. At current rates of flow, sooner or later the West will entirely run out of physical gold to sell to China and India. Although long before that hard limit, we suspect that the remaining holders of gold in the West will cease their willingness to part with their gold.

So the date at which "the West runs out of gold to sell" is somewhere between now and whenever the last willing Western seller parts with their last ounce. As each day passes, we get closer and closer to that fateful moment.

This report centers on preponderance of fascinating data revealing the extent of the West's massive dis-hoarding of physical gold, for the first time, begins to allow us to start estimating the range of end-dates for the flow to the East.

Here's the punchline: there's an enormous and growing disconnect between the cash and physical markets for gold. This is exactly what we would expect to precede a major market-shaking event based on a physical gold shortage.

Stopping the Flows

There are only two outcomes that will stop the process of Western gold flowing East, one illegitimate and the other legitimate.
  1. It becomes illegal to sell gold. This is the favored approach of central planners who prefer to force change by dictate rather than via free markets and free will. Unfortunately, this strain of political intervention is dominant in the West, particularly in the US and EU.
  2. The price of gold dramatically rises. A large increase in the price of gold will (paradoxically) cause greater demand for gold in the West and (sensibly) less demand in the East. This is what should legitimately happen given current supply and demand dynamics. But it may not.
There's always a 3rd option, we suppose: economically carpet-bombing China and India's financial systems to scare/force some gold back out. Consider such an approach along the 'economic hitman' lines of thinking.

This would be done, for example, by having outside interests sell the Rupee furiously, driving down its value and forcing the Indian monetary authorities to defend it by using up foreign reserves to buy the Rupee. Then wait for India to run out of foreign reserves and then casually 'suggest' that its government use gold sales to continue defending its currency. India's leaders would have to find ways to somehow 'coax' gold from its citizens. I think we can all imagine the sorts of draconian rules and penalties that desperate governments would deploy in such a situation.

As a side note, I believe this is the same process that was used to 'coax' a lot of gold out of the SPDR Gold Trust ETF (NYSEARCA:GLD) since 2012. After enough bear raids on the price of gold, which began somewhat suspiciously almost exactly on the date that QE3 was announced, Western gold 'investors' lost interest in the yellow metal, sold their GLD shares in droves and hundreds of tons of gold were liberated from that stockpile.

What is truly odd from a chart perspective: this hammering down of gold started just after it had broken to the upside out of a textbook perfect triangle, when it looked seemingly ready to head off to higher values:



But in the days immediately following the QE3 announcement, gold shed $100, then barely recovered, and just wandered lower until it was violently slammed from $1,550 to $1,350 over one night (of course) in April 2013.

Now this was highly fortuitous for the ever-lucky Federal Reserve. After launching the largest money printing campaign in US history, the Fed did not need gold heading any higher, possibly providing a signal that would cast doubt on the wisdom or possible effectiveness of its easy-money policies. Policies, mind you, that the years since have proven to do little more than enrich the banker class and the 0.1%, as well as lard the system with extraordinary levels of new indebtedness and liquidity.

The Fed Indeed Cares About Gold

Gold, when unfettered, has a habit of sending signals that the Fed really doesn't like. Therefore, the Fed is at the top of everyone's suspect list when it comes to wondering who might be behind the suspicious gold slams. Whether the Fed does it directly is rather doubtful, but they have a lot of useful proxies out there in their cartel network.

To reveal the extent to which gold sits front and center in the Fed's mind and how they think of it, here's an excerpt from a 1993 FOMC meeting's full transcript. Note that the full meeting notes from Fed meetings are only released years after the fact. The most recent ones available are only from 2009. Listen to what this FOMC voting member had to say about gold:
At the last meeting, I was very concerned about what commodity prices were doing. And as you know, they got lucky again and told us that the rate of inflation was higher than we thought it was. 
Now, I know there's nothing to it but they did get lucky. I've had plenty of econometric studies tell me how lucky commodity prices can get. I told you at the time that the reason I had not been upset before the March FOMC meeting was that the price of gold was well behaved. 
But I said that the price of gold was moving. The price of gold at that time had moved up from 328 to 344, and I don't know what I was so excited about! I guess it was that I thought the price of gold was going on up. Now, if the price of gold goes up, long bond rates will not be involved.

People can talk about gold's price being due to what the Chinese are buying; that's the silliest nonsense that ever was. The price of gold is largely determined by what people who do not have trust in fiat money system want to use for an escape out of any currency, and they want to gain security through owning gold.

A monetary policy step at this time is a win/win. I don't know what is going to happen for sure. I hope Mike is correct that the rate of inflation will move back down to 2.6 percent for the remaining 8 months of this calendar year. If we make a move and Mike is correct, we could take credit for having accomplished this and the price of gold will soon be down to the 328 level and we can lower the fed funds rate at that point in time and declare victory.
(Source - Fed)
There it is, in black and white from an FOMC member's own mouth spelling out the primary reason why I hold gold: I lack faith in our fiat money system. He nailed it. Or rather, I have very great faith that the people managing the money system will print too much and ultimately destroy it. Same thing said differently.

And of course, the people at the Fed are acutely aware of gold's role as a barometer of people's faith in 'fiat money.' Of course, they track it very carefully, discuss it, and worry about it when it is sending 'the wrong signals.' I would, too, if in their shoes.

The Federal Reserve Note (a.k.a. the US dollar) is literally nothing more than an idea. It has no intrinsic value. America's money supply is just digital ones and zeros careening about the planet, accompanied by a much smaller amount of actual paper currency. The last thing an idea needs is to be exposed as fraudulent. Trust is everything for a currency - when that dies, the currency dies.

The other thing you can note from these FOMC minutes is that gold pops up 19 times in the conversation. The Fed members are actively and deliberately discussing its price, role in setting interest rates, and the psychological impact of a rising or falling gold price.

Later in that same meeting Mr. Greenspan says:
My inclination for today - and I'm frankly most curious to get other people's views - would be to go to a tilt toward tightness and to watch the psychology as best we can. By the latter I mean to watch what is happening to the bond market, the exchange markets, and the price of gold… 
I have one other issue I'd like to throw on the table. I hesitate to do it, but let me tell you some of the issues that are involved here. If we are dealing with psychology, then the thermometers one uses to measure it have an effect. I was raising the question on the side with Governor Mullins of what would happen if the Treasury sold a little gold in this market. 
There's an interesting question here because if the gold price broke in that context, the thermometer would not be just a measuring tool. It would basically affect the underlying psychology. Now, we don't have the legal right to sell gold but I'm just frankly curious about what people's views are on situations of this nature because something unusual is involved in policy here. We're not just going through the standard policy where the money supply is expanding, the economy is expanding, and the Fed tightens. This is a wholly different thing.

The recap of all this is that the Fed watches the price of gold carefully, frets over whether the price of gold is 'sending the right signals' to market participants, and pays attention to gold's impact on market psychology (with an eye to controlling it).

In short, the Fed keeps a close eye on the "golden thermometer".

Back to the supply story for gold. Not long after gold began its downward price movement in 2012, the GLD trust began coughing up a lot of gold, eventually shedding more than 500 tonnes, a truly massive amount.


(Source)

In my mind, the absolute slamming of gold in 2013 was done by a few select entities and represents one of the clearest cases of price manipulation on the recent record. While we can debate the reasons 'why' gold was manipulated lower or 'who' did it, to me, there's no question about how it was done.

Or that it was done.

Massive amounts of paper gold were dumped into a thin overnight market with the specific intent of driving down the price of gold.

It's an open and shut case of price manipulation. Textbook perfect.

Even if these bear raids were performed by self-interested parties that made money while doing it, you can be sure the Fed was smiling thankfully in the background and that the SEC wasn't going to spend one minute looking into whether any securities laws were broken (especially those related to price manipulation). Gold's falling "thermometer" was exactly what the central planners wanted the world to see.

Down and Out

The paper markets for gold are centered in the US while the physical market for gold is centered in London (but increasingly Shanghai). It's safe to say that the paper markets set the spot price while the physical movement of gold originates in London.

What's increasingly obvious is the growing disconnect between the paper and physical markets.

This is exactly what we'd expect to see if the paper markets were pushing in one direction (down) while physical gold was heading in a different direction (out).

The tension between these 'down and out' movements is building and, according to a senior manager of one of the largest gold refineries in the world located in Switzerland, the current price of gold "has no correlation to the physical market."

He notes a lot of ongoing tightness in the physical market. Unsurprisingly, gold is moving from West to East with vaults in London supplying much of the physical metal that's being refined into fresh kilo bars and sent off to China and India.

But given the astonishing amount of physical demand, why has the price of gold been heading steadily lower over the past several years?

The aforementioned Swiss refiner is equally perplexed:
If I am honest, the only thing I could share now with you would be that I'm perplexed about the discrepancy between the prices and the situation of the physical market. This is something I still do not understand and is a riddle for me every day. For all people who are interested in precious metals, the physical side of this business should be given more emphasis.
(Source - Transcript)
There's no mystery as to demand going up in China and India as the price went down. Interested buyers will buy more at a lower price.

But it's a big mystery as to why Western "investors" seem more interested in selling gold than buying it right now.

Evidence of Physical Tightness

Besides the first-hand experience of the Swiss refiner, there have been numerous stories in the mainstream press also pointing to tightness in the London physical gold market as well as relentless demand from China and India being the driver of that condition:

Gold demand from China and India picks up
Sep 2, 2015 
London's gold market is showing tentative signs of increased demand for bullion from consumers in emerging markets after the price of the precious metal fell to its lowest level in five years in July. 
The cost of borrowing physical gold in London has risen sharply in recent weeks.  
That has been driven by dealers needing gold to deliver to refineries in Switzerland before it is melted down and sent to places such as India, according to market participants 
"[The rise] does indicate there is physical tightness in the market for gold for immediate delivery," said Jon Butler, analyst at Mitsubishi. 
The move comes as Indian gold demand picked up in July, with shipments of gold from Switzerland to India more than trebling. Most of that gold is likely to originally come from London before it is melted down into kilobars by Swiss refineries, according to analysts. 
In the first half of this year, total recorded exports of gold from the UK were 50 percent higher than the first half of 2014, on a monthly average basis, according to Rhona O'Connell, head of metals for GFMS at Thomson Reuters. More than 90 percent was headed for a combination of China, Hong Kong and Switzerland. 
London remains the world's biggest centre for trading and storing gold.
(Source)
Shipments and exports are up very strongly and nearly all of that gold is headed to just two countries; China and India.

India Precious Metals Import Explosive - August Gold 126t, Silver 1,400t
Sept 10, 2015 
In the month of August 2015, India imported 126 tonnes of gold and 1,400 tonnes of silver, according to data from Infodrive India. Gold import into India is rising after a steep fall due to government import restrictions implemented in 2013.

Year-to-date India has imported 654 tonnes of gold, which is 66 % up year on year. 6,782 tonnes in silver bars have crossed the Indian border so far this year, up 96 % y/y.

Gold import is set to reach an annualized 980 tonnes, which would be up 26 % relative to 2014 and would be the second-highest figure on (my) record - my record goes back to 2008.

Silver import is on track to reach an annualized 10,172 tonnes, up 44 % y/y! This would be a staggering 37 % of world mining.

(Source)

With China and India's combined appetite for gold being higher than total world mining output, it only stands to reason that somebody has to be parting with their physical gold and those entities appear to be substantially located in the US and UK.

IMF Flashes Warning Lights for $18 Trillion in Emerging-Market Corporate Debt
 
ByIan Talley
A worker collects sugar cane at a farm in Brazil, where firms bulked up on cheap debt.
ERALDO PERES/ASSOCIATED PRESS
Emerging markets should brace for a rise in corporate failures as a debt-bloated firms struggle with souring growth and climbing borrowing costs, the International Monetary Fund warned Tuesday in a new report.

From sugar firms in Brazil to pipe makers in Russia, firms in developing countries bulked up on cheap debt as central banks gassed the easy-money pedal in the wake of the financial crisis.

Then, emerging markets were the drivers of global growth. Developing-country firms quadrupled their borrowing from around $4 trillion in 2004 to well over $18 trillion last year, with China accounting for a major share.

Now, prospects in industrializing economies are weakening fast even as the U.S. Federal Reserve is getting set to raise interest rates for the first time in nearly a decade, a move that will raise borrowing costs around the world. The burden of 26% larger average corporate debt ratios and higher interest rates come as commodity prices plummet, a staple export for many emerging-market economies. Compounding problems, many firms borrowed heavily in dollars.

As the greenback surges against the value of local currency revenues, it makes repaying those loans increasingly difficult.
That massive debt build-up means it is “vital” for authorities to be increasingly vigilant, especially to threats to systemically important companies and the firms they have links to, including banks and other financial firms, the IMF said.

“Monitoring vulnerable and systemically important firms, as well as banks and other sectors closely linked to them, is crucial,” said Gaston Gelos, head of the fund’s global financial stability division.
 
Shocks to the corporate sector could quickly spill over to the financial sector “and generate a vicious cycle as banks curtail lending,” the IMF said.
 
And emerging markets should also be prepared for the eventuality of corporate failures, it warned: “Where needed, insolvency regimes should be reformed to enable rapid resolution of both failed and salvageable firms.”
 
The issue, presented in a report prepared ahead of the IMF’s annual meetings next week in Lima, Peru, will likely take center stage at the gathering of the world’s finance ministers and central bankers.
 
The Institute of International Finance on Tuesday estimated global investors have sold roughly $40 billion worth of emerging-market assets in the third quarter of the year, which would make it the worst quarter of net-capital outflows since late 2008. The IIF represents around 500 of the world’s largest banks, hedge funds and other financial firms.
 
Besides the petroleum sector, where borrowing didn’t anticipate the nosedive in prices, the construction industry is particularly exposed to the changing business climate, the IMF said.

Worried about the building risks, investors have been selling out of many emerging markets, pushing down equity and exchange-rate prices, and pushing up borrowing costs. That market turmoil is exacerbating their economic woes.

In Latin America’s six largest economies, for example, the average growth rate has fallen from 6% in 2010 to around 1% this year. Brazil’s central bank last week said the country’s recession is far worse than expected.

China’s recent market turmoil and faster-than-expected economic slowdown is in large part fed by worries over the massive rise in China’s borrowing and whether the economy is vulnerable to a host of credit-driven bubbles in real estate, construction and other sectors.
 
Rapid credit growth has been a harbinger of previous emerging market crises. While economists say many countries have learned from the past by building up currency reserves and allowing flexible exchange rates to buffer against downturns, the mounting risks for many emerging markets are fueling worries across the globe.
 
Further complicating emerging market problems, the changing structure of financial markets leaves many developing economies exposed to major outflows of capital as investors scramble to exit. That can lead to fire sales and a breakdown in markets.
 
“In extreme conditions, markets can freeze altogether, and affect the financial system more broadly, as seen during the global financial crisis,” Mr. Gelos said.
 
To help guard against building risks, the IMF said policy makers should introduce stronger financial regulations such as higher cash buffers for exchange-rate exposures and conduct stress tests to weed out problem firms.

The Price We Pay for Sitting Too Much

New formulas for how long we should spend sitting and standing in a workday

By Sumathi Reddy

New research is helping medical experts devise formulas for how long a typical office worker should spend sitting and standing.

Studies have found that sedentary behavior, including sitting for extended periods, increases the risk for developing dozens of chronic conditions, from cancer and diabetes to cardiovascular disease and nonalcoholic fatty liver disease. Some ergonomics experts warn that too much standing also can have negative effects on health, including a greater risk for varicose veins, back and foot problems, and carotid artery disease.

“The key is breaking up your activity throughout the day,” said Alan Hedge, a professor of ergonomics at Cornell University. “Sitting all day and standing all day are both bad for you,” he said.

For every half-hour working in an office, people should sit for 20 minutes, stand for eight minutes and then move around and stretch for two minutes, Dr. Hedge recommends, based on a review of studies that he has presented at corporate seminars and expects to publish. He says standing for more than 10 minutes tends to cause people to lean, which can lead to back problems and other musculoskeletal issues.

Alan Hedge, a professor of ergonomics at Cornell University, recommends alternating between sitting and standing while at work. ‘Sitting all day and standing all day are both bad for you,’ he says.             

Alan Hedge, a professor of ergonomics at Cornell University, recommends alternating between sitting and standing while at work. ‘Sitting all day and standing all day are both bad for you,’ he says. Photo: Alan Hedge

The British Journal of Sports Medicine earlier this year published guidelines for sitting from an international panel of experts, including Dr. Hedge. The panel recommends a combined two to four hours of standing and light activity spread throughout the workday. And research from NASA has found that standing up for two minutes 16 times a day while at work is an effective strategy for maintaining bone and muscle density, Dr. Hedge says.

“The current scientific evidence shows that when people have occupations in which they are on their feet for more than two hours a day, there seems to be a reduction in the risk of developing key chronic diseases,” said John Buckley, a professor of applied exercise science at the University of Chester in England and lead author of the published guidelines. Among the guidelines’ eight authors, one of the other panel members disclosed a competing interest as owner of a website that sells sit-stand work products.

Other research aims to find ways to mitigate the adverse effects of too much sitting. A curious study, published last week in the American Journal of Preventive Medicine, looked at fidgeting. The researchers examined data from the UK Women’s Cohort Study, which has followed a large group of women for about 20 years. Nearly 13,000 of the women were asked to rate on a scale of 1 to 10 how much they fidget. Among women who were rated as the most sedentary, those who fidgeted a lot had the same risk of dying as those who weren’t especially sedentary.

But women who didn’t fidget had an increased risk for mortality.

Janet Cade, professor of nutritional epidemiology at the University of Leeds, in England, and senior author of the paper, said the study found an association between the two factors and didn’t prove causality.

Many standing desks allow office workers to alternate between sitting and standing.            
Many standing desks allow office workers to alternate between sitting and standing. Photo: Jenna Shahak/Corbis
 
 
“In order to get benefits from nonsedentary behavior maybe you don’t have to go out and run a marathon,” Dr. Cade said. “Maybe you can do small amounts of movement and that would give you some benefit.”

Various studies have shown that even regular exercise won’t compensate for the negative effects from sitting too much during the day. Sitting causes physiological changes in the body, and may trigger some genetic factors that are linked to inflammation and chronic conditions such as diabetes and cardiovascular disease, said Dr. Buckley, of the University of Chester. In contrast, standing activates muscles so excess amounts of blood glucose don’t hang around in the bloodstream and are instead absorbed in the muscles, he said.

Standing burns one-half to one calorie more a minute than sitting. In four hours, that represents as many as 240 additional calories burned. Sitting more than an hour lowers the levels of the enzyme lipoprotein lipase, which causes calories to be sent to fat stores rather than to muscle, Dr. Hedge said.

The effects of prolonged sitting on blood flow were examined in a recent small study involving 11 young men published in the journal Experimental Physiology. After six hours of sitting, the vasculature function in one of the leg’s main arteries was reduced by more than 50%, but was restored after 10 minutes of walking, said Jaume Padilla, an assistant professor in the department of nutrition and exercise physiology at the University of Missouri in Columbia and senior author of the study.

“More research is needed to determine if reduced vascular function with prolonged sitting leads to long-term vascular complications,” said Dr. Padilla.
                                                          
Dr. Michael Jensen, a professor of medicine at Mayo Clinic, uses various ways to reduce daily sitting time. When he has meetings with one or two people, for example, he finds a place where they can walk together instead of sitting.              
Dr. Michael Jensen, a professor of medicine at Mayo Clinic, uses various ways to reduce daily sitting time. When he has meetings with one or two people, for example, he finds a place where they can walk together instead of sitting. Photo: Mayo Clinic       

Scientists also are studying how to induce people to sit less. An article published online in the journal Health Psychology Review last week reviewed various studies looking at 38 possible interventions to get people out of their chairs. Among those that worked: educating people about the benefits of less sitting time; restructuring work environments, such as adding standing or adjustable desks; setting goals for the amount of time spent sitting; recording sitting times; and creating cues or alerts for people when they need to stand, said Benjamin Gardner, senior lecturer at the Institute of Psychiatry, Psychology & Neuroscience at King’s College in London and first author of the article.

The majority of interventions that didn’t work were aimed at getting people to do more physical activity, Dr. Gardner said. “We need interventions that are designed specifically to break up sitting as well as interventions that try to get people to move about more,” he said.

Michael Jensen, a professor of medicine at the Mayo Clinic in Rochester, Minn., who specializes in obesity and diabetes, uses various ways to reduce daily sitting time that he also recommends to his patients. When he has meetings with just one or two people he finds a place where they can walk together instead of sitting. And he tells his patients who are parents to use their children’s athletic events as a time to be on their feet. “There’s no reason you have to sit and watch those games,” Dr. Jensen said.

Tiffany Mura, who has been using a standing desk since 2012, says it increases her concentration.

The 45-year-old, who works at a biotech company near Boston, says she also makes a point of standing at most meetings despite the fact that it was awkward at first. “I’m an avid runner and agree that standing is necessary even for fit people like myself,” she said.

Marc Ebuña builds standing time into the 25-minute train ride to his work at a public-relations firm in Boston. “People fight for a seat, I’m happy to stand out of the way and let them fight,” said the 28-year-old.