What Will Gold And The Dollar Do Next?

- Gold will fall below $1,000 an ounce.
- The dollar will move past 100 to 120.
- Why didn't the Fed holding off on raising rates help gold this time? 

The story going around of late has been if the Fed raises rates, it's bad for gold The last Fed meeting the Fed held off on raising rates, and gold moved higher.

For the subscribers of my ETF Leveraged Daily Trading Service I wrote the following Tuesday leading up to Wednesday's Fed interest rate decision.
It's kind of strange actually. All the while gold was moving lower, interest rates were falling. Now all of a sudden the threat of interest rates rising is bad for gold and no rate rise is good? Seriously? I'll stick with my stronger dollar weaker gold theory thank you very much. But I don't ignore what main street thinks for the short term and trade it accordingly.
It's not just gold but also the stock market that is affected by the Fed's interest rate decisions. The threat of higher rates is thought to be negative for stocks. This is what I wrote in my Current Thoughts on Wednesday about what stocks and gold did after the Fed rate decision.
Today we got a taste of Fed policy and we see what it means for the stock market as that's all the stock market knows to do is follow the Fed. It reminds me of that silly song that came out awhile back; "What does the fox say?" Of which no one knows the answer. In this case, "What does the Fed say?" is what the market waits for with baited breath. It's ridiculous the market behaves this way and it will come back to haunt those invested in it at some point just like it did in 2009. But for now we lean long the markets. 
Gold didn't take the news as well as the stock market. It sold off and gave back all it gained and then lost $14 more dollar before settling at $10 down for the day. It's less than $100 from it's 52 week low and everyone is out buying mining stocks like it's the bottom, but I have stuck with and still will stick with my lower low calls below $1,000 for gold. It was a $33 drop from high to low on Wednesday.
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Gold fell because the dollar shot up. The first rise after the ECB decision to increase QE didn't affect gold but I had been writing that eventually something would break. The inverse relationship of the gold and dollar since 2011 has been pretty clear and in this case, with the Fed holding off on raising rates, the dollar shot up and gold fell.

Does Debt Matter?

I've said this before but I think it needs repeating as many are not on the same page as me, especially those who sell gold for a living. How can a country that is mired in debt to the tune of almost $20 trillion, has future obligations of $70 trillion for Medicare, Social Security and other government programs, including the retirement of millions who have served their country in the Armed Forces, civil service political arena, have such a strong currency in the dollar? Anyone who can do simple math knows this is unsustainable, right?

What you have to remember is our GDP as a nation is also rising every year and is over $16 trillion. But here's the difference. Through the end of 2014 and actually beginning during that year, Europe and Central Asia began contracting as their Debt to GDP ratios keep increasing.

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In most of our lifetimes we have not experienced a deflationary credit contraction like what I think is still coming our way and has actually been occurring all year long if you look at the data.

We're still growing at present but I think future growth will be stymied more as the world goes through this contraction cycle. You already see it in the chart with Japan, which has weathered over 20 years of deflation. We're now seeing it with Europe and I see this escalating in the next year as they deal with their Volkswagen scandal which saw the company report their first loss in 15 years.

Germany's economy is sputtering but don't tell German businessmen this as they have to stay positive and keep the backbone to the Euro charging forward.

Japan can print it's own money and has, but the "forgotten by the media" problem child Greece had to ask Germany and others for help and if you look at the problems with other European countries debt to GDP issues, you can see they are much worse off than the U.S.

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As you can see, the U.S. still is lower in debt to GDP than Germany, France, England, and Japan and viewed (perception) as a safe place to put your wealth. Why else would the dollar be going up?

Because those countries make up 83.1% of the dollar. The dollar simply cannot "crash" as many gold bugs say it will unless by default, these nations with much worse debt to GDP situations than the U.S. were to skyrocket. Is that possible? If so, explain in the comments below as I'd like to hear the reasoning.

Even treasuries that pay investors virtually nothing have done nothing but get stronger the last 10 years. How can this be so?

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With all our problems in the U.S., the world looks at the U.S. as the last bastion of safety.

Maybe it's because the U.S. has the largest military in the world and is willing to use it. Maybe.

What About Gold?

But here's what you that own and are planning on buying gold need to know. None of the above is sustainable. The reason you own gold is insurance against governments and central banks eventually messing things up. The Federal Reserve almost messed up leading to the 2009 with the help of Congress and shady banking that included subprime loans and derivative gambling.

The last crisis the Fed and Congress threw $9 trillion at it. Other countries aren't as proactive as the Fed and I think they can crack up first let by Japan (not counting African, South America and other countries that are not part of the dollar index. China itself has their own shadow banking crisis to experience and we can't count on them to lead the world out of the mess it got itself into.

Gold has had a nice bounce higher but we have been through this before. Gold is only $80 away from it's July 2015 closing low of $1,180. Is it far fetched to think that with a rising dollar gold can't go below $1,000?

That said, I have been recommending investors dollar cost average into a position and hope their last purchase is at the lows. I also have many waiting for my "all in" article and that's ok too. I am confident I will be early in writing that article but I am also not concerned about the future price of gold moving much higher.

To take advantage of riding the gold wave up and cost averaging into a position, I do recommend buying the physical metal like the American Eagles, Canadian Maple Leafs or the 1 ounce bars and holding it yourself. But some may not want to do that and prefer the liquidity of an ETF like (NYSEARCA:GLD) or (NYSEARCA:PHYS). And when I say gold in my articles I refer to silver also without having to write "gold and silver" every time I speak of precious metals. For silver I recommend the 1 ounce rounds and 1, 10 and 100 ounce bars as they are the lowest cost to spot. My last article Is Silver Really In Short Supply? I recommended the 1000 ounce bars too which are great for IRA's. Or one could buy the ETF (NYSEARCA:SLV) or (NYSEARCA:PSLV).

The Fed and Clueless Commentators

The Fed knows it has problems and yes, helicopter Ben will come out of retirement and drop money on everyone's homes or the Fed will resort to negative interest rates, more QE or some other rabbit they pull out of a hat to get the economy going. Why else haven't they raised rates like those at CNBC have been calling for? CNBC commentator Melissa Lee the last time the Fed didn't raise rates said they "chickened out." No, they didn't chicken out. They see the problems abroad and they know it will come to our shores soon enough. More on that in my next article which will dive into the deflationary credit contraction and how I see things unfolding a bit more.


The great chain of being sure about things

The technology behind bitcoin lets people who do not know or trust each other build a dependable ledger. This has implications far beyond the cryptocurrency

WHEN the Honduran police came to evict her in 2009 Mariana Catalina Izaguirre had lived in her lowly house for three decades. Unlike many of her neighbours in Tegucigalpa, the country’s capital, she even had an official title to the land on which it stood. But the records at the country’s Property Institute showed another person registered as its owner, too—and that person convinced a judge to sign an eviction order. By the time the legal confusion was finally sorted out, Ms Izaguirre’s house had been demolished.  

It is the sort of thing that happens every day in places where land registries are badly kept, mismanaged and/or corrupt—which is to say across much of the world. This lack of secure property rights is an endemic source of insecurity and injustice. It also makes it harder to use a house or a piece of land as collateral, stymying investment and job creation.

Such problems seem worlds away from bitcoin, a currency based on clever cryptography which has a devoted following among mostly well-off, often anti-government and sometimes criminal geeks. But the cryptographic technology that underlies bitcoin, called the “blockchain”, has applications well beyond cash and currency. It offers a way for people who do not know or trust each other to create a record of who owns what that will compel the assent of everyone concerned. It is a way of making and preserving truths.

That is why politicians seeking to clean up the Property Institute in Honduras have asked Factom, an American startup, to provide a prototype of a blockchain-based land registry.

Interest in the idea has also been expressed in Greece, which has no proper land registry and where only 7% of the territory is adequately mapped.

A place in the past
Other applications for blockchain and similar “distributed ledgers” range from thwarting diamond thieves to streamlining stockmarkets: the NASDAQ exchange will soon start using a blockchain-based system to record trades in privately held companies. The Bank of England, not known for technological flights of fancy, seems electrified: distributed ledgers, it concluded in a research note late last year, are a “significant innovation” that could have “far-reaching implications” in the financial industry.

The politically minded see the blockchain reaching further than that. When co-operatives and left-wingers gathered for this year’s OuiShare Fest in Paris to discuss ways that grass-roots organisations could undermine giant repositories of data like Facebook, the blockchain made it into almost every speech. Libertarians dream of a world where more and more state regulations are replaced with private contracts between individuals—contracts which blockchain-based programming would make self-enforcing.

The blockchain began life in the mind of Satoshi Nakamoto, the brilliant, pseudonymous and so far unidentified creator of bitcoin—a “purely peer-to-peer version of electronic cash”, as he put it in a paper published in 2008. To work as cash, bitcoin had to be able to change hands without being diverted into the wrong account and to be incapable of being spent twice by the same person. To fulfil Mr Nakamoto’s dream of a decentralised system the avoidance of such abuses had to be achieved without recourse to any trusted third party, such as the banks which stand behind conventional payment systems.

It is the blockchain that replaces this trusted third party. A database that contains the payment history of every bitcoin in circulation, the blockchain provides proof of who owns what at any given juncture. This distributed ledger is replicated on thousands of computers—bitcoin’s “nodes”—around the world and is publicly available. But for all its openness it is also trustworthy and secure. This is guaranteed by the mixture of mathematical subtlety and computational brute force built into its “consensus mechanism”—the process by which the nodes agree on how to update the blockchain in the light of bitcoin transfers from one person to another.

Let us say that Alice wants to pay Bob for services rendered. Both have bitcoin “wallets”—software which accesses the blockchain rather as a browser accesses the web, but does not identify the user to the system. The transaction starts with Alice’s wallet proposing that the blockchain be changed so as to show Alice’s wallet a little emptier and Bob’s a little fuller.

The network goes through a number of steps to confirm this change. As the proposal propagates over the network the various nodes check, by inspecting the ledger, whether Alice actually has the bitcoin she now wants to spend. If everything looks kosher, specialised nodes called miners will bundle Alice’s proposal with other similarly reputable transactions to create a new block for the blockchain.

This entails repeatedly feeding the data through a cryptographic “hash” function which boils the block down into a string of digits of a given length (see diagram). Like a lot of cryptography, this hashing is a one-way street. It is easy to go from the data to their hash; impossible to go from the hash back to the data. But though the hash does not contain the data, it is still unique to them. Change what goes into the block in any way—alter a transaction by a single digit—and the hash would be different.

Running in the shadows
That hash is put, along with some other data, into the header of the proposed block. This header then becomes the basis for an exacting mathematical puzzle which involves using the hash function yet again. This puzzle can only be solved by trial and error. Across the network, miners grind through trillions and trillions of possibilities looking for the answer. When a miner finally comes up with a solution other nodes quickly check it (that’s the one-way street again: solving is hard but checking is easy), and each node that confirms the solution updates the blockchain accordingly. The hash of the header becomes the new block’s identifying string, and that block is now part of the ledger. Alice’s payment to Bob, and all the other transactions the block contains, are confirmed.

This puzzle stage introduces three things that add hugely to bitcoin’s security. One is chance.

You cannot predict which miner will solve a puzzle, and so you cannot predict who will get to update the blockchain at any given time, except in so far as it has to be one of the hard working miners, not some random interloper. This makes cheating hard.

The second addition is history. Each new header contains a hash of the previous block’s header, which in turn contains a hash of the header before that, and so on and so on all the way back to the beginning. It is this concatenation that makes the blocks into a chain. Starting from all the data in the ledger it is trivial to reproduce the header for the latest block. Make a change anywhere, though—even back in one of the earliest blocks—and that changed block’s header will come out different. This means that so will the next block’s, and all the subsequent ones.

The ledger will no longer match the latest block’s identifier, and will be rejected.

Is there a way round this? Imagine that Alice changes her mind about paying Bob and tries to rewrite history so that her bitcoin stays in her wallet. If she were a competent miner she could solve the requisite puzzle and produce a new version of the blockchain. But in the time it took her to do so, the rest of the network would have lengthened the original blockchain. And nodes always work on the longest version of the blockchain there is. This rule stops the occasions when two miners find the solution almost simultaneously from causing anything more than a temporary fork in the chain. It also stops cheating. To force the system to accept her new version Alice would need to lengthen it faster than the rest of the system was lengthening the original. Short of controlling more than half the computers—known in the jargon as a “51% attack”—that should not be posible.

Dreams are sometimes catching
Leaving aside the difficulties of trying to subvert the network, there is a deeper question: why bother to be part of it at all? Because the third thing the puzzle-solving step adds is an incentive. Forging a new block creates new bitcoin. The winning miner earns 25 bitcoin, worth about $7,500 at current prices.

All this cleverness does not, in itself, make bitcoin a particularly attractive currency. Its value is unstable and unpredictable (see chart), and the total amount in circulation is deliberately limited. But the blockchain mechanism works very well. According to blockchain.info, a website that tracks such things, on an average day more than 120,000 transactions are added to the blockchain, representing about $75m exchanged. There are now 380,000 blocks; the ledger weighs in at nearly 45 gigabytes.

Most of the data in the blockchain are about bitcoin. But they do not have to be. Mr Nakamoto has built what geeks call an “open platform”—a distributed system the workings of which are open to examination and elaboration. The paragon of such platforms is the internet itself; other examples include operating systems like Android or Windows. Applications that depend on basic features of the blockchain can thus be developed without asking anybody for permission or paying anyone for the privilege. “The internet finally has a public data base,” says Chris Dixon of Andreessen Horowitz, a venture-capital firm which has financed several bitcoin start-ups, including Coinbase, which provides wallets, and 21, which makes bitcoin-mining hardware for the masses. 

For now blockchain-based offerings fall in three buckets. The first takes advantage of the fact that any type of asset can be transferred using the blockchain. One of the startups betting on this idea is Colu. It has developed a mechanism to “dye” very small bitcoin transactions (called “bitcoin dust”) by adding extra data to them so that they can represent bonds, shares or units of precious metals.

Protecting land titles is an example of the second bucket: applications that use the blockchain as a truth machine. Bitcoin transactions can be combined with snippets of additional information which then also become embedded in the ledger. It can thus be a registry of anything worth tracking closely.

Everledger uses the blockchain to protect luxury goods; for example it will stick on to the blockchain data about a stone’s distinguishing attributes, providing unchallengeable proof of its identity should it be stolen. Onename stores personal information in a way that is meant to do away with the need for passwords; CoinSpark acts as a notary. Note, though, that for these applications, unlike for pure bitcoin transactions, a certain amount of trust is required; you have to believe the intermediary will store the data accurately.

It is the third bucket that contains the most ambitious applications: “smart contracts” that execute themselves automatically under the right circumstances. Bitcoin can be “programmed” so that it only becomes available under certain conditions. One use of this ability is to defer the payment miners get for solving a puzzle until 99 more blocks have been added—which provides another incentive to keep the blockchain in good shape.

Lighthouse, a project started by Mike Hearn, one of bitcoin’s leading programmers, is a decentralised crowdfunding service that uses these principles. If enough money is pledged to a project it all goes through; if the target is never reached, none does. Mr Hearn says his scheme will both be cheaper than non-bitcoin competitors and also more independent, as governments will be unable to pull the plug on a project they don’t like.

Energy is contagious
The advent of distributed ledgers opens up an “entirely new quadrant of possibilities”, in the words of Albert Wenger of USV, a New York venture firm that has invested in startups such as OpenBazaar, a middleman-free peer-to-peer marketplace. But for all that the blockchain is open and exciting, sceptics argue that its security may yet be fallible and its procedures may not scale. What works for bitcoin and a few niche applications may be unable to support thousands of different services with millions of users.

Though Mr Nakamoto’s subtle design has so far proved impregnable, academic researchers have identified tactics that might allow a sneaky and well financed miner to compromise the block chain without direct control of 51% of it. And getting control of an appreciable fraction of the network’s resources looks less unlikely than it used to. Once the purview of hobbyists, bitcoin mining is now dominated by large “pools”, in which small miners share their efforts and rewards, and the operators of big data centres, many based in areas of China, such as Inner Mongolia, where electricity is cheap.

Another worry is the impact on the environment. With no other way to establish the bona fides of miners, the bitcoin architecture forces them to do a lot of hard computing; this “proof of work”, without which there can be no reward, insures that all concerned have skin in the game.

But it adds up to a lot of otherwise pointless computing. According to blockchain.info the network’s miners are now trying 450 thousand trillion solutions per second. And every calculation takes energy.

Because miners keep details of their hardware secret, nobody really knows how much power the network consumes. If everyone were using the most efficient hardware, its annual electricity usage might be about two terawatt-hours—a bit more than the amount used by the 150,000 inhabitants of King’s County in California’s Central Valley. Make really pessimistic assumptions about the miners’ efficiency, though, and you can get the figure up to 40 terawatt-hours, almost two-thirds of what the 10m people in Los Angeles County get through. That surely overstates the problem; still, the more widely people use bitcoin, the worse the waste could get.

Yet for all this profligacy bitcoin remains limited. Because Mr Nakamoto decided to cap the size of a block at one megabyte, or about 1,400 transactions, it can handle only around seven transactions per second, compared to the 1,736 a second Visa handles in America. Blocks could be made bigger; but bigger blocks would take longer to propagate through the network, worsening the risks of forking.

Earlier platforms have surmounted similar problems. When millions went online after the invention of the web browser in the 1990s pundits predicted the internet would grind to a standstill: eppur si muove. Similarly, the bitcoin system is not standing still. Specialised mining computers can be very energy efficient, and less energy-hungry alternatives to the proof-of-work mechanism have been proposed. Developers are also working on an add-on called “Lightning” which would handle large numbers of smaller transactions outside the blockchain.

Faster connections will let bigger blocks propagate as quickly as small ones used to.

The problem is not so much a lack of fixes. It is that the network’s “bitcoin improvement process” makes it hard to choose one. Change requires community-wide agreement, and these are not people to whom consensus comes easily. Consider the civil war being waged over the size of blocks. One camp frets that quickly increasing the block size will lead to further concentration in the mining industry and turn bitcoin into more of a conventional payment processor. The other side argues that the system could crash as early as next year if nothing is done, with transactions taking hours.

A break in the battle
Mr Hearn and Gavin Andresen, another bitcoin grandee, are leaders of the big-block camp.

They have called on mining firms to install a new version of bitcoin which supports a much bigger block size. Some miners who do, though, appear to be suffering cyber-attacks. And in what seems a concerted effort to show the need for, or the dangers of, such an upgrade, the system is being driven to its limits by vast numbers of tiny transactions.

This has all given new momentum to efforts to build an alternative to the bitcoin blockchain, one that might be optimised for the storing of distributed ledgers rather than for the running of a cryptocurrency. MultiChain, a build-your-own-blockchain platform offered by Coin Sciences, another startup, demonstrates what is possible. As well as offering the wherewithal to build a public blockchain like bitcoin’s, it can also be used to build private chains open only to vetted users. If all the users start off trusted the need for mining and proof-of-work is reduced or eliminated, and a currency attached to the ledger becomes an optional extra.

The first industry to adopt such sons of blockchain may well be the one whose failings originally inspired Mr Nakamoto: finance. In recent months there has been a rush of bankerly enthusiasm for private blockchains as a way of keeping tamper-proof ledgers. One of the reasons, irony of ironies, is that this technology born of anti-government libertarianism could make it easier for the banks to comply with regulatory requirements on knowing their customers and anti-money-laundering rules. But there is a deeper appeal.

Industrial historians point out that new powers often become available long before the processes that best use them are developed. When electric motors were first developed they were deployed like the big hulking steam engines that came before them. It took decades for manufacturers to see that lots of decentralised electric motors could reorganise every aspect of the way they made things. In its report on digital currencies, the Bank of England sees something similar afoot in the financial sector.

Thanks to cheap computing financial firms have digitised their inner workings; but they have not yet changed their organisations to match. Payment systems are mostly still centralised: transfers are cleared through the central bank. When financial firms do business with each other, the hard work of synchronising their internal ledgers can take several days, which ties up capital and increases risk.

Distributed ledgers that settle transactions in minutes or seconds could go a long way to solving such problems and fulfilling the greater promise of digitised banking. They could also save banks a lot of money: according to Santander, a bank, by 2022 such ledgers could cut the industry’s bills by up to $20 billion a year. Vendors still need to prove that they could deal with the far-higher-than-bitcoin transaction rates that would be involved; but big banks are already pushing for standards to shape the emerging technology. One of them, UBS, has proposed the creation of a standard “settlement coin”.

The first order of business for R3 CEV, a blockchain startup in which UBS has invested alongside Goldman Sachs, JPMorgan and 22 other banks, is to develop a standardised architecture for private ledgers.

The banks’ problems are not unique. All sorts of companies and public bodies suffer from hard-to-maintain and often incompatible databases and the high transaction costs of getting them to talk to each other. This is the problem Ethereum, arguably the most ambitious distributed-ledger project, wants to solve. The brainchild of Vitalik Buterin, a 21-year-old Canadian programming prodigy, Ethereum’s distributed ledger can deal with more data than bitcoin’s can. And it comes with a programming language that allows users to write more sophisticated smart contracts, thus creating invoices that pay themselves when a shipment arrives or share certificates which automatically send their owners dividends if profits reach a certain level. Such cleverness, Mr Buterin hopes, will allow the formation of “decentralised autonomous organisations”—virtual companies that are basically just sets of rules running on Ethereum’s blockchain.

One of the areas where such ideas could have radical effects is in the “internet of things”—a network of billions of previously mute everyday objects such as fridges, doorstops and lawn sprinklers. A recent report from IBM entitled “Device Democracy” argues that it would be impossible to keep track of and manage these billions of devices centrally, and unwise to to try; such attempts would make them vulnerable to hacking attacks and government surveillance. Distributed registers seem a good alternative.

The sort of programmability Ethereum offers does not just allow people’s property to be tracked and registered. It allows it to be used in new sorts of ways. Thus a car-key embedded in the Ethereum blockchain could be sold or rented out in all manner of rule-based ways, enabling new peer-to-peer schemes for renting or sharing cars. Further out, some talk of using the technology to make by-then-self-driving cars self-owning, to boot. Such vehicles could stash away some of the digital money they make from renting out their keys to pay for fuel, repairs and parking spaces, all according to preprogrammed rules.

What would Rousseau have said?
Unsurprisingly, some think such schemes overly ambitious. Ethereum’s first (“genesis”) block was only mined in August and, though there is a little ecosystem of start-ups clustered around it, Mr Buterin admitted in a recent blog post that it is somewhat short of cash. But the details of which particular blockchains end up flourishing matter much less than the broad enthusiasm for distributed ledgers that is leading both start-ups and giant incumbents to examine their potential. Despite society’s inexhaustible ability to laugh at accountants, the workings of ledgers really do matter.

Today’s world is deeply dependent on double-entry book-keeping. Its standardised system of recording debits and credits is central to any attempt to understand a company’s financial position. Whether modern capitalism absolutely required such book-keeping in order to develop, as Werner Sombart, a German sociologist, claimed in the early 20th century, is open to question. Though the system began among the merchants of renaissance Italy, which offers an interesting coincidence of timing, it spread round the world much more slowly than capitalism did, becoming widely used only in the late 19th century. But there is no question that the technique is of fundamental importance not just as a record of what a company does, but as a way of defining what one can be.

Ledgers that no longer need to be maintained by a company—or a government—may in time spur new changes in how companies and governments work, in what is expected of them and in what can be done without them. A realisation that systems without centralised record-keeping can be just as trustworthy as those that have them may bring radical change.

Such ideas can expect some eye-rolling—blockchains are still a novelty applicable only in a few niches, and the doubts as to how far they can spread and scale up may prove well founded.

They can also expect resistance. Some of bitcoin’s critics have always seen it as the latest techy attempt to spread a “Californian ideology” which promises salvation through technology-induced decentralisation while ignoring and obfuscating the realities of power—and happily concentrating vast wealth in the hands of an elite. The idea of making trust a matter of coding, rather than of democratic politics, legitimacy and accountability, is not necessarily an appealing or empowering one.

At the same time, a world with record-keeping mathematically immune to manipulation would have many benefits. Evicted Ms Izaguirre would be better off; so would many others in many other settings. If blockchains have a fundamental paradox, it is this: by offering a way of setting the past and present in cryptographic stone, they could make the future a very different place.


Europe Debates Initial Reception Centers for Refugees

By Peter Müller in Brussels

A 90-year-old warms herself by a fire at the increasingly overwhelmed Moria camp on the island of Lesbos on Oct. 23, 2015 in Mitilini, Greece.
Getty Images
A 90-year-old warms herself by a fire at the increasingly overwhelmed Moria camp on the island of Lesbos on Oct. 23, 2015 in Mitilini, Greece.
Angela Merkel is hoping that a proposal for more reception centers in areas where refugees land at Europe's external borders will ease the influx into Germany. Unfortunately, it's unlikely to happen anytime soon.

Jean Asselborn generally views the world through the sober lens of a diplomat. The Luxembourg politician is one of Europe's longest-serving foreign ministers and his country currently holds the six-month rotating presidency of the European Union. A short while ago, however, during a visit to the Greek island of Lesbos, Asselborn lost his composure.

Thousands of migrants are setting off from Turkey to Lesbos each day, families with children included. Yet despite the efforts made by the Greeks, there is still a lack of pretty much everything: toilets, rest areas, private sphere. "If I were the father of a family, would I have confidence here that I was in good hands with the EU authorities?" Asselborn wondered aloud.

Lesbos and other such hotspots are a significant focus of efforts by the European Commission and German Chancellor Angela Merkel to find a solution to the refugee crisis. They would like to establish initial reception centers where refugees will not only be registered, but also housed until a cursory review is conducted to determine whether they might qualify for asylum or protection under the Geneva Convention on refugees.

Under the second part of the plan, refugees from countries with an average EU-wide asylum recognition rate of 75 percent would then be distributed among the rest of the member states.

The others would face deportation.

If the plan were to go through, it would be a success, especially for Merkel because it would slow the flow of refugees toward Germany. Unfortunately for her, though, the plan isn't yet working. And those, lilke Asselborn, who have seen the conditions on Lesbos first hand, are left with the concern that refugees will not see these facilities as the start of a new life in Europe.

Rather, they will likely see the centers as a dead-end.

"The hotspots can only work if we have fair distribution of refugees within Europe," says European Parliament President Martin Schulz of Germany. An "EU that disintegrates into its component parts" will not be able to handle the refugee crisis, he says.

A Lack of Unity

That becomes clear at the hotspots. The primary problem is that there is currently no unity in the EU regarding what tasks the centers should handle. Leading European politicians don't share Merkel's idea -- chief among them is Italian Prime Minister Matteo Renzi and his interior minister, Angelino Alfano. The two feel that Italy has already done its share in registering refugees, particularly on the island of Lampedusa.

Renzi isn't even considering the idea of caring for tens of thousands of refugees for weeks on end until it is clear whether they can stay in Europe or not, especially not without aid from the EU. "Italy is ready for hotspots," he said back in September, "but Europe has to redistribute the migrants."

During a recent meeting of a small group of European officials, including French Prime Minister Manuel Valls, Renzi bluntly stated that, if necessary, he would simply send refugees north.

Renzi's obstructionism has not gone unnoticed in Berlin, and it was no coincidence that no representative of Italy was invited to a meeting in Brussels on Oct. 25 of countries along the so-called West Balkan route, the path that most refugees are now taking as they make their way from Turkey to Germany. Renzi saw the lack of an invitation as an affront. The official line in Berlin was that Italy is not located along the route, but at the same time, sources said they wanted to send the message that Italy hasn't done enough to help manage the crisis.

It's questionable whether things are going any better in Greece. The country is still suffering considerable hardship and although the number of refugees traveling across the Mediterranean to Italy has decreased significantly, the influx coming into Greece on their way along the Balkan route to Germany has not slowed. In order to handle the crowds, four new hotspots are to be created on Greek islands located close to the Turkish coast later this month. The country is currently receiving aid from Germany, including 12 devices worth €200,000 used to collect refugees' fingerprints during registration. In addition, Germany's federal police have deployed around 300 officials this year as part of the European border agency Frontex.

'A Community Task'

But in order to support countries like Greece in the construction and operation of accommodations that can handle up to 50,000 refugees, European Parliament President Schulz is calling for EU aid.

"Those who are securing the EU's external borders are taking over a community task. That's why it is only logical that they receive financial and staffing assistance from the EU."

But it's right at these hotspots where the first problems start to develop. Often, the refugees put greater faith in the dubious tips provided to them by the human-traffickers than in the information they are provided by EU staff. And, unfortunately, the smugglers have been spreading fears that the migrants will simply be deported once they arrive in the centers. This is keeping many from submitting asylum applications there.

The biggest problem, however, is the lack of a clear answer to the question as to what happens to refugees who have little chance of remaining in Europe. How will these people be prevented from heading towards Germany on their own?

"It's a delicate issue," says one high-ranking EU official. "After all, the Greek government doesn't want to be accused of putting migrants in internment camps."

Indeed, refugees attempting to escape from fenced-in camps is the one image that has yet to plague this European refugee crisis.

It is already too late to scrap China's one-child policy

The IMF warns that China's workforce is going into drastic decline. There will be a labour shortage of 140m people by the early 2030s

By Ambrose Evans-Pritchard

A family making their way along a lane in Beijing

The policy shift will make no difference to the workforce for almost 20 years Photo: AFP

China’s Communist Party has scrapped its hated one-child policy in a bid to shore up political support, but the move comes far too late to avert a collapse of the workforce and a demographic crisis by the late 2020s.

All couples will be allowed to have a second child under new rules agreed at the party’s closely-watched 5th Plenum in Beijing. The ban on larger families in cities will remain despite pleas from Chinese academics for total freedom.

The policy shift will make no difference to the workforce for almost 20 years and by then China will already be in the full grip of a demographic crunch.

“They have merely moved to a two-child policy. The family planning authorities are still there, and there is still an apparatus of state power intruding into people’s intimate lives,” said Jonathan Fenby, a China veteran at Trusted Sources.

The coercive anti-natalist policies begun by Mao Zedong in the early 1970s – and pushed further by ideologues in thrall to the Club of Rome’s Malthusian doomsday theories, the "Limits of Growth" – have had powerful and perverse effects. They freed workers from family duties and created a “demographic dividend” of sorts that until recently flattered China’s growth rate. Now the process is kicking violently into reverse.

The workforce began to decline in absolute terms in 2012 and has since been shrinking by 3m people a year.

The International Monetary Fund says the reserve army of labour peaked five years ago and is going into “precipitous decline”, threatening a labour shortage of 140m by the early 2030s.

This is happening just as life expectancy soars to 75.2 – with a target of 77 in 2020 – causing a drastic deterioration in the ratio of workers to pensioners, and unlike the demographic decline in Japan it will start to bite before the country is rich. The ratio was 6.6 in 2000. It is expected to be 2.37 in 2030 and 1.25 in 2060.

The Chinese Academy of Social Sciences says the fertility rate has collapsed to 1.4 and is nearing the danger line of 1.3, the so-called “low fertility trap” where it becomes culturally self-perpetuating.

This has already happened in Japan, Korea and Taiwan, and in some of China’s richest cities.

The rate in Shanghai has fallen to 0.8 for complex social reasons that no longer have anything
 to do with one-child policy. A relaxation of the rules in 2013 has not led to a pick-up in the city.

“Having children is simply too expensive. Working couples can’t afford private hospital costs, childcare and kindergartens,” said Mr Fenby.

China may already have left it too late to ditch the one-child policy. Critics say the damage has been evident for years, leaving aside the traumatic suffering of poor women seized by police after tip-offs and forced into late-term abortions, the indignity of “menstrual monitors” and the status of “illegal” children denied ration coupons and schooling.

Chinese demographers say the distorted family structure undermines support for the elderly and has led to a 20pc surplus of boys over girls, leaving a volatile army of frustrated single males. The Politburo refused to listen. Harvard professor Martin King Whyte said the policy had become “sacrosanct", frozen by bureaucratic inertia.

The long-awaited reform eclipsed the launch of the Communist Party’s latest five-year plan, intended to close the chapter on a series of errors and policy pirouettes over the past 12 months that have shattered global confidence in Chinese economic management.  

The sketchy communique, rich in praise for comrade Xi Jinping, speaks of achieving a “moderately well-off society” (xiaokang shehui) by 2020, doubling per capita income from 2010 levels.
The plan is to lift China up the technology ladder towards “high-end” industries, moving to a “lean, clean and green” economy driven by consumer growth and services.

But first China must break the stranglehold of the state-owned industrial behemoths, the patronage machine of the regional party bosses and a bottomless pit of wasted credit. A cull of these beasts was announced with much fanfare at the 3rd Plenum two years ago, when the party vowed to give market forces the “decisive role” in the economy.

It was never, in fact, executed. Vested interests have put up a heroic resistance. Plans to let farmers trade land scarcely got off the ground either. The feudal Hukou system trapping peasants in their villages lives on.

Premier Li Keqiang, a realist, has warned that this five-year plan is the last chance for China to grasp the nettle of market reform and avert a slide into the “middle income trap”. He allegedly told party leaders that the new growth target is 6.53pc, a strangely precise figure that raises as many questions as it answers. Few economists believe the data, in any case.

This is lower than the 7pc number floated by President Xi Jinping on the eve of his visit to London, and suggests that there is still a serious dispute at the top of the party over strategy: whether to bite the bullet now and purge the excesses from the country’s $28 trillion debt spree, or keep the game going with yet more stimulus.

Capital Economics says China has reached a juncture where it can no longer reconcile the conflicting objectives of deep reform and steroid-level growth rates. It has to choose.

For now stimulus is winning. Fiscal spending is rising at double-digit rates again after the crunch earlier this year, when local government reform went off the rails and tipped the economy into recession. A fresh credit cycle has been under way for the past three months.

Caixin Magazine warned in a bold editorial that neither fiscal nor monetary stimulus can lift China out of the doldrums, and time is “running out”. The only option is to tackle massive over-capacity head-on, allow Schumpeterian creative destruction to run its course and stop trying to inflate artificial growth.

“Japan lost two decades largely because it failed to deal with zombie enterprises after its real estate bubble popped in the 1990s. China must avoid repeating the same mistakes. The government must act – before it's too late.”

A dark narrative about the stock market is starting to take hold on Wall Street

By Linette Lopez 45 minutes ago

man tornado watersprout

A man looks at a watersprout in the sea near Bitung, in the Indonesia's north Sulawesi province, May 12, 2009.

A new narrative about today's stock market is starting to take hold on Wall Street. 

It's a throwback to a time when many Wall Street titans had never even dreamed of investing — the 1960s conglomerate boom.
Here's how the story goes: Today's merger mania — which investors say looks a lot like what happened in the 60s — has been fueled by low interest rates and a 'bigger is better' philosophy among CEOs.
This combination of factors has led to the creation of massive companies. Think: Valeant, Anheuser-Busch InBev, and Pfizer's potential acquisition of Allergan.
"We've seen periods when conglomeratization went too far, and one of the reasons you're seeing so many de-mergers, and split-ups, and so many activists are pushing for that, is we saw too much of that," Evercore ISI CEO Roger Altman said in an interview on CNBC on Monday. 

"Too many companies are just being big for the sheer sake of it. Too many CEOs thinking bigger is better. I think that has gone too far."
The same thing happened in the '60s. Back then the companies were Leasco and International Telephone and Telegraph (ITT) — the players were legendary investor Saul Steinberg and ITT CEO Harold Geneen.
They built massive companies through M&A much like today, but had their worlds rocked when the market turned on them — when interest rates rose from 4% in 1963 to 8% in 1968.
Earnings started to disappoint, stock prices fell, and all of a sudden companies couldn't close the acquisitions they needed to grow and maintain momentum.
That's when the music stopped. 
"Top lines are weak and therefore to get growth, synergies are appealing,"  Altman said in his interview. "...mergers generate substantial synergies so that provides for earnings and cash flow growth, even if it doesn't provide for revenue growth and I think that's a big driver, so at the margin, [this shows] weakness."
The first we heard of this narrative was from a presentation at the James Grant Interest Rate Observer Conference, when an investor names James Litinsky of Chicago-based JHL Capital Group presented his slide deck, 'Conglomerate Boom 2.0: A Stable Platform?'
Litinsky created an index of conglomerates from the 1960s —Teledyne, Textron, Ogden Corp and more — and charted their boom and bust cycle against the S&P 500's performance over the same period.
It looks like this:
jhl bOOM bust 1960s

Litinsky discussed the same factors — a merger mania fueled by low interest rates, aggressive CEOs and investors hungry for earnings growth.
This sounds a lot like today. It all ended with higher interest rates, lower earnings growth, and a sudden inability to do big deals. We know that higher interest rates are coming, we've seen earnings growth slow, and soon companies won't be in an environment favorable to big deal making.
Especially those with a lot of debt, like embattled drug company Valeant Pharmaceuticals, face a dark future.
Indeed, Valeant is on Litinsky's index of conglomerates poised to suffer from the market's changing environment. He calls this index The Platform Boom Index, and it includes companies Anheuser-Busch InBev, Danaher and Allergan Pharmaceuticals.
Just like the companies in the 1960s conglomerate boom index, these companies have outperformed the S&P 500 in a big way.
platform boom

Over the last month Valeant's share price has been cut in half on accusations of fraudulent accounting and other nefarious activities perpetrated by its once-secret distributor, Philidor Pharmacy.
But there were some that decried its business model even before allegations of fraud threw the company into the spotlight.
One of them was short-seller Jim Chanos, who over a year ago said the company was an accounting roll-up. A roll up is a company that does not grow organically, but relies on serial acquisitions and aggressive accounting to show growth.
Charlie Munger, Warren Buffett's 91 year-old partner, said the same thing at an investor conference months ago. He compared Valeant to 1960s conglomerate ITT, which made money in an "evil way."
“Valeant, the pharmaceutical company, is ITT come back to life,” Munger said to investors. “It wasn’t moral the first time. And the second time, it’s not better. And people are enthusiastic about it. I’m holding my nose.”
In an interview with Bloomberg last week, Munger said created a “phony growth record” through "gamesmanship."
The problems with games, though, is that they all must come to an end, and someone eventually must lose.

The Fraught Politics of the TPP

Koichi Hamada
. Man pushing large cargo.

TOKYO – This month, 12 countries on both sides of the Pacific finalized the historic Trans-Pacific Partnership trade agreement. The scope of the TPP is vast. If ratified and implemented, it will have a monumental impact on trade and capital flows along the Pacific Rim. Indeed, it will contribute to the ongoing transformation of the international order. Unfortunately, whether this will happen remains uncertain.
The economics of trade and finance that form the TPP’s foundations are rather simple, and have been known since the British political economist David Ricardo described them in the nineteenth century. By enabling countries to make the most of their comparative advantages, the liberalization of trade and investment provides net economic benefits, although it may hurt particular groups that previously benefitted from tariff protections.
But the politics of trade liberalization – that is, the way in which countries proceed to accept free trade – is much more complex, largely because of those particular groups it hurts. For them, the overall economic benefits of trade liberalization matter little, if their own narrow interests are being undercut. Even if these groups are relatively small, the discipline and unity with which they fight trade liberalization can amplify their political influence considerably – especially if a powerful political figure takes up their cause.
That is what is now happening in the United States. Former Secretary of State Hillary Clinton undoubtedly understands the economics of the TPP, which she once called the “gold standard” in trade agreements. But now that she is on the presidential campaign trail, she has changed her tune. The reason is apparent: she has judged that she cannot afford to lose the support of American trade unions such as the United Automobile Workers, whose members fear a reduction in tariffs on car and trucks.
This shift may make sense politically, but it is abysmal economics. In reality, the TPP is a great bargain for the US. The concessions it contains on manufactured products like automobiles are much smaller than those on, say, agricultural products, which will involve profound sacrifices from other TPP countries, such as Japan. After all, existing tariff levels on manufactured goods are already much lower than those on agriculture or dairy products.
In short, with the TPP, the US is catching a big fish with small bait. But the increased trade and investment flows brought about by the TPP’s ratification and implementation will benefit even the countries that must make larger sacrifices.
Japan, for example, will find that the TPP enhances “Abenomics,” the three-pronged economic-revitalization strategy introduced by Prime Minister Shinzo Abe in 2012. The third component, or “arrow,” of Abenomics – structural reforms – aims to restore growth by raising productivity. But increasing efficiency in a wide variety of sectors, as Japan must do, can be a long, difficult, and piecemeal process, as it involves the upgrading of virtually every technology and process.
By connecting Japan’s industries more closely with those of other countries, the TPP can accelerate this process considerably. Moreover, it can spur faster administrative reform. Simply put, the TPP will amount to a powerful tailwind for Abenomics.
It should be noted that liberalization does involve some economic tradeoffs, as protection can, in some areas, serve an important purpose. As the economist Jagdish Bhagwati points out, maintaining increased protections for, say, intellectual property may encourage research and innovation. At the same time, however, excessive IP protections can deter the proliferation of existing knowledge and the development of high-tech products. In the case of pharmaceuticals, for example, this tradeoff can be difficult to navigate. Nonetheless, Bhagwati maintains, when it comes to overall trade and capital movements, freer is better.
Given all of this, one hopes that opposition from political figures like Clinton amounts to naught – an entirely plausible outcome, in Clinton’s case, because the TPP should be enacted before the presidential election in November 2016. This would, to some extent, be in line with the TPP negotiation process, in which the political challenges associated with trade liberalization have been handled remarkably well. It seems that involving so many sectors in so many countries actually made it easier to overcome resistance, as it diffused the opposition and prevented any single specific interest from getting the upper hand.
Of course, that does not mean that the negotiations were easy. On the contrary, trade representatives had to display impressive endurance and patience – for more than five years, for some countries. To enable progress, confidentiality was vital (despite US negotiators’ claims that the discussions were wholly transparent).
Failure to ratify the TPP in all 12 countries would be a major disappointment, not just because of the tremendous amount of effort that has gone into it, but also – and more important – because of the vast economic benefits it would bring to all countries involved. In Japan, as long as most of the ruling Liberal Democratic Party stands firm in supporting the TPP, it should be ratified. But the situation in the US Congress is more dubious. One hopes that America’s leaders do not miss a golden opportunity to give US businesses – and thus the US economy – a significant boost.

The Gold Rally Is Coming Regardless Of Interest Rates

- Gold prices and interest rates are normally inversely related.
- Traders are betting on a gold rally regardless of rates.
- Gold will always be sought as an inflation hedge and safe haven.
(click to enlarge)

Not surprisingly, the Fed kept interest rates unchanged and there will be at least another month and half of a zero rate. However, Yellen and company have softened their language on economic headwinds, indicating that there may finally be a bump in December.

While theoretically gold and interest rates are inversely correlated, this link can be exaggerated at times. If the economy is indeed performing better than expected and inflation picks up, there will actually be an increased demand for gold as an inflation hedge.

Furthermore, it is no secret that we believe the S&P 500 is overbought. A tightening of monetary policy will likely trigger a sell-off in equities, also increasing the demand for gold as a safe haven.

Regardless if rates stay low (good for gold) or finally increase (in this case, also good for gold), traders agree that the inevitable bull is coming, holding more long positions than short for the first time in two years.

miércoles, noviembre 04, 2015



Brazil’s economy

Broken lever

Are dire public finances hindering the central bank from tackling inflation?

BRAZIL does not look like an economy on the verge of overheating. The IMF expects it to shrink by 3% this year, and 1% next. (The country has not suffered two straight years of contraction since 1930-31.) Fully 1.2m jobs vanished in the year to September; unemployment has reached 7.6%, up from 4.9% a year ago. Those still in work are finding it harder to make ends meet: real (ie, adjusted for inflation) wages are down 4.3% year-on-year. Despite the weak economy, inflation is nudging double digits. The central bank recently conceded that it will miss its 4.5% inflation target next year. Markets don’t expect it to be met before 2019.

If fast-rising prices are simply a passing effect of the real’s recent fall, which has pushed up the cost of imported goods, then they are not too troubling. But some economists have a more alarming explanation: that Brazil’s budgetary woes are so extreme that they have undermined the central bank’s power to fight inflation—a phenomenon known as fiscal dominance.

The immediate causes of Brazil’s troubles are external: the weak world economy, and China’s faltering appetite for oil and iron ore in particular, have enfeebled both exports and investment. But much of the country’s pain is self-inflicted. The president, Dilma Rousseff, could have used the commodity windfall from her first term in 2011-14 to trim the bloated state, which swallows 36% of GDP in taxes despite offering few decent public services in return.

Instead, she splurged on handouts, subsidised loans and costly tax breaks for favoured industries. These fuelled a consumption boom, and with it inflation, while hiding the economy’s underlying weaknesses: thick red tape, impenetrable taxes, an unskilled workforce and shoddy infrastructure.

The government’s profligacy also left the public finances in tatters. The primary balance (before interest payments) went from a surplus of 3.1% of GDP in 2011 to a forecast deficit of 0.9% this year. In the same period public debt has swollen to 65% of GDP, an increase of 13 percentage points. That is lower than in many rich countries, but Brazil pays much higher interest on its debt, the vast majority of which is denominated in reais and of relatively short maturity. It will spend 8.5% of GDP this year servicing it, more than any other big country. In September it lost its investment-grade credit rating.

Stagflation of the sort Brazil is experiencing presents central bankers with a dilemma. Raising interest rates to quell inflation might push the economy deeper into recession; lowering them to foster growth might send inflation spiralling out of control. Between October last year and July this year, the country’s rate-setters seemed to prioritise price stability, raising the benchmark Selic rate by three percentage points, to 14.25%, where it remains.

The alluring real rates of almost 5% ought to have made reais attractive to investors. Instead, the currency has lost two-fifths of its value against the dollar over the past 12 months. It is this pattern of a weakening currency and rising inflation despite higher interest rates, combined with a doubling of debt-servicing costs in the past three years (see chart), that has led to the diagnosis of fiscal dominance. The cost of servicing Brazil’s debts has become so high, pessimists fear, that rates have to be set to keep it manageable rather than to rein in prices. That, in turn, leads to a vicious circle of a falling currency and rising inflation.

Monica de Bolle of the Peterson Institute for International Economics reckons that the Selic should be 2-3 percentage points higher than it is in order to anchor inflation expectations. If the selic rose by that much, however, it might actually stoke inflation, by adding to the government’s already hefty interest bill and thus raising the risk of default—a prospect that would cause the real to slump and inflation to jump. Alternatively, the central bank could print money to buy government bonds. But such monetisation would itself fuel inflation. Either way, spooked investors would surely dump government bonds for foreign assets, speeding the currency’s fall and inflation’s rise.

Brazil has been caught in such a trap before, most recently just over a decade ago. In a paper published in 2004 Olivier Blanchard, the former chief economist of the IMF who is now at the Peterson Institute, found evidence that rate rises in Brazil in 2002-03 spurred inflation rather than reining it in. Prices were brought under control only owing to the fiscal restraint of Ms Rousseff’s predecessor and patron, Luiz Inácio Lula da Silva, who took office in 2003.

The situation today is different, Mr Blanchard stresses. Real rates are less than half what they were in the early 2000s and only about 5% of government debt is denominated in dollars, compared with nearly half back then. The central bank’s reluctance to raise the Selic further may have more to do with the impact on output than with fiscal concerns. Currency depreciation, too, could be down to general gloom about the economy rather than fear of default or money-printing. It has also made Brazil’s $370 billion in foreign reserves more valuable in domestic-currency terms—a handy cushion.

There is no question, however, that Brazilian monetary policy is at best hobbled. State-owned banks have extended nearly half the country’s credit at low, subsidised rates that bear little relation to the Selic—at a cost of more than 40 billion reais ($10 billion) a year to the taxpayer. As private banks have cut lending in real terms in the past year, public ones have continued to expand their loan books.

All this hampers monetary policy, says Marco Bonomo of Insper, a university in São Paulo. If left unchecked, this spurt of lending may itself threaten price stability.

Joaquim Levy, the finance minister, has ordered a spending review. But unlike Lula in 2003, Ms Rousseff has hardly any political capital left to push through painful reforms. The downturn is now deeper, too; tax receipts are falling sharply, making it harder to trim the deficit. Mr Levy’s (modest) fiscal measures have faced stiff opposition from Congress, where much of Ms Rousseff’s coalition is embroiled in a bribery scandal and fearful of angering voters further with spending cuts or tax rises.

Fiscal dominance may be no more than a theory, but the political burden that is dragging Brazil down is plain for all to see.