The Submerging-Market Threat

Anders Åslund
 Buildings reflected in water

WASHINGTON, DC – It is time to put the rise of the emerging economies in perspective. The rapid economic growth in much of the developing world since the beginning of the century was fueled by a commodity boom and an overextension of credit. But, because the emerging-market boom was not accompanied by sufficient structural reforms, it was not sustainable.
Today, most of the major emerging economies have experienced a severe reversal of fortune.
Russia and Brazil have plunged into severe crises, with double-digit inflation accompanying a 4% contraction in GDP last year. South Africa is barely growing. China’s phenomenal rate of expansion has slowed to below 7%. Unsurprisingly, Goldman Sachs has closed its money-losing BRIC fund for investment in Brazil, Russia, India, and China.
Indeed, the future of the BRICS (including South Africa) – and that of other emerging markets – looks gloomy. Outside of Asia, most developing economies are principally commodity exporters, and thus are highly exposed to price shocks. Plunging oil prices have cut the value of the Russian ruble by more than half against the US dollar, and further declines appear likely – especially if the US Federal Reserve continues to hike interest rates.
Commodity prices are likely to stay low for one or two decades, as they did in the 1980s and 1990s. When it comes to oil, for example, shale gas, tight oil, liquefied natural gas, and increasingly competitive solar and wind energy are boosting energy supply, even as a decade of high prices has spurred conservation and reduced demand.
The commodity crunch is likely to prove painful to people in emerging markets, who often measure their income in US dollars. As exchange rates fall, they will quickly feel much poorer.

Governments will suffer, too, as their foreign debt – boosted by fiscal and monetary expansion that yielded little growth – becomes much more burdensome, while the export stimulus from lower exchange rates will be small, owing to the absence of new capacity outside the commodity sectors. As countries come under pressure to make payments, multiple emerging-market debt crises are likely.
In the short term, Brazil arouses the most worry, given its large public debt and its vast budget deficit.
In the medium term, however, China appears even more frightening. As a rule of thumb, an emerging economy’s total private- and public-sector debt should not exceed 100% of GDP. China’s total debt is now more than 250% of GDP.
The BRICS countries’ critical shortcoming is poor governance. On its corruption perception index of 175 countries, Transparency International ranks South Africa 61st, Brazil and India 76th, China 83rd, and Russia 119th. Poor governance limits a country’s ability to create lasting wealth and productive capacity – even if the shortcomings become evident and damaging only when booms turn to busts. As Warren Buffet has put it, “You only find out who is swimming naked when the tide goes out.”
To combat corruption effectively, people need to oust corrupt leaders, which is why democracy is vital. The regime changes in Ukraine and Argentina, and the opposition’s victory in Venezuela’s recent parliamentary election, are harbingers of what is to come. Brazil may be next.
The emerging markets may rise again, if and when improved governance and structural reforms are implemented to boost potential growth. But that will take time. We should not be surprised to see two decades of slow global growth.
The West cannot afford to be complacent. After having focused too much on demand management, Europe should be trying to reduce the fiscal and regulatory burden of the state, so that its economies can start growing again. It should also open up stunted markets for labor, services, capital, and digital products.
The West needs to work together to set global standards while it still can. Democracy, the rule of law, and market-based economies are all worth fighting for. Russia’s aggression in Ukraine and the wars in North Africa and the Middle East have demonstrated why NATO should be strengthened, and that Europe must become serious about defending itself – rather than simply continuing to depend on the United States.
In coordinating Western sanctions against Russia, the G7 has already achieved renewed significance.
This should be followed by efforts to manage the coming stagnation. The Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership are both important initiatives in this regard.
Western-led organizations and institutional arrangements will become especially important as international organizations struggle to remain relevant. The United Nations, in particular, will likely be crippled by Russian and Chinese vetoes in the Security Council. Only the International Monetary Fund can be expected to rise in prominence, as major emerging economies – most likely Venezuela, Argentina, and Brazil – end up as its wards.
Economics aside, China and Russia are likely to pose the biggest challenge. These two large emerging countries are still led by authoritarian governments, headed by ruling elites who – given how much wealth they have amassed – may be the most corrupt in history.
As they come under pressure, their transformations are unlikely to be peaceful. The Kremlin has already shown, with its wars in Ukraine and Syria, that it is ready to counter domestic malaise with external aggression. That is unlikely to change unless something is done to stop it. The fall of the emerging economies could have a far more lasting impact than their rise.

sábado, febrero 20, 2016




Rigging Peru’s election

A court puts Julio Guzmán’s presidential campaign on ice. Bad idea   

A COUPLE of years ago Julio Guzmán decided he wanted to run for president of Peru. On the face of things, that was implausible. He had never been a candidate for political office before. His experience of government was confined to two short stints as a deputy minister in the administration of the current president, Ollanta Humala. An economist, he had spent much of his working life abroad as an official at the Inter-American Development Bank.

A small and dormant political party called Everyone for Peru (TPP in Spanish) agreed to field him as its candidate. For months he made no perceptible impact on the campaign for the election due on April 10th. But by street leafleting and through social media he gained support, especially among young people. This year he has surged in the opinion polls to 17%, behind only the long-standing front-runner, Keiko Fujimori (35%). In a run-off ballot, which would take place in June, he is the only candidate who might come close to beating Ms Fujimori.

So it matters greatly that on February 16th the electoral court in effect stalled Mr Guzmán’s campaign. By three votes to two, it refused his appeal against an administrative ruling that TPP had broken its own statutes in the way that it organised the meeting in October that chose him as its candidate. Confusingly, the court’s decision does not in itself annul his candidacy: a separate tribunal must now decide on that. But in practice the court has disabled it. Unless the court quickly reverses itself, weeks of legal argument may lie ahead.

“It’s the political system [uniting] against a new option,” declared Mr Guzmán, though he insisted he would carry on campaigning. It is part of his pitch that he represents a middle-class insurgency against an entrenched reactionary “establishment”, a word he uses a lot.

The court’s majority deployed pettifogging legalism, giving more value to secondary regulation than to Mr Guzmán’s constitutional right to run and the right of the people to choose whomever they please—the essence of democracy. Even in narrow terms, the decision is questionable: the dissenting two pointed out that TPP later held a congress which endorsed the choice of Mr Guzmán and that no party member had complained.

The underlying problem is that Peru is a democracy in which hardly any of the 25 registered political parties is worthy of the name. “They are shells,” says Fernando Tuesta, a political scientist and former electoral official. “No party conducts an internal election as it should be done.” César Acuña, the owner of three private universities who is accused of serial plagiarism and vote-buying (which he denies), remains in the race.

The absence of parties is both a cause and an effect of the general contempt in which Peruvians hold their politicians. It injects unpredictability into elections and explains why Mr Guzmán could come from nowhere. Aged 45, he is slim, short, articulate and relaxed. He presents himself as a post-ideological candidate situated firmly in the political centre. “What’s demanded today is accountability, authenticity and effectiveness,” he told Bello earlier this month.

He reeled off his priorities for government: pre-school education, promoting innovation and a higher-tech economy, reform of the state and so on. He stresses policies to help the middle class. Many of these are sensible but not especially novel, as he admits. He gives the sense of making some things up as he goes along, and sometimes contradicts himself. That hasn’t halted his surge. For it is Mr Guzmán himself, as a fresh face and political outsider, who provides the novelty that Peruvians crave.

Peru has fared well for most of the past 15 years, as faster economic growth has slashed poverty and paid for social progress. But growth has slowed, crime has risen and corruption scandals have proliferated. Peruvian democracy has been held together not so much by parties as by economic success and a consensus that the government should be run by technocrats (such as Mr Guzmán). But are these still enough?

It is ironic that the only semi-serious party is that of Ms Fujimori, whose father spurned political parties when he ruled the country as an autocrat in the 1990s. To her credit, she has been firmer than other rivals in defending Mr Guzmán’s right to run. In the short term, she may be the main beneficiary if he is disqualified: she might then win without a run-off. But it is in no one’s interest that the electoral court has disrupted Peru’s election and potentially undermined the legitimacy of its eventual winner.

Gold's Macrocosm: The Planets Align

By: Gary Tanashian

We introduced the graphical view of the preferred counter-cyclical environment for gold and especially the gold stock sector in July: Macrocosm. We have updated the view several times since at, with the macro backdrop getting more and more supportive of the gold sector over the last half a year.

The Planets Align

Now that the world knows gold is bullish and those pumping gold for the wrong reasons are finally right anyway, let's take each of these macro indicators one by one. We will start with the little planets and work our way up.

  1. "Chindia Love Trade": This has little to do with gold's rise. China demand, Indian weddings and manipulative capers on the COMEX for that matter were pumped throughout the bear market, and the price kept dropping like a stone.
  2. Overt Inflationary Effects: This may yet come into play, but gold has not been rising on readily observable inflation or inflationary fears. Indeed, we are at peak deflation anxiety although I expect a transition out ahead. Watch silver vs. gold among other indicators.
  3. Gold Community Throws in the Towel: Some people are still waiting for that event, but I think this cycle is much like the 1999-2001 bottoming cycle. It was a process and gold bugs in my opinion have long since thrown in the towel when some of their most staunch members got in line behind a forecaster and his computer (which just lately seems to have altered its code, by the way). The gold "community" may have been ground to a pulp as opposed to making a final puke.
  4. Gold Rises vs. Commodities: This is actually an important planet and should be larger (but what are ya gonna do?). Since gold has been rising vs. commodities for years it has been an indicator of global economic contraction and deflation. It has been a 'steady as she goes' indicator and continues to indicate the right environment for the birth of a gold sector bull market (although when silver takes over leadership from gold later on, the dynamics are going to change as an 'inflation trade' whips up).
  5. Gold Rises vs. Currencies: This one has been in process. I have marveled at how desperately millions of market participants have clung to their confidence in monetary authorities who routinely tramp out paper and digital money units. That is now cracking and recently we have introduced a new indicator, risk 'off' metal (gold) vs. risk 'off' currency (Swiss Franc) and gold has broken out vs. Swissy, indicating a waning confidence in paper/digital money.
  6. Yield Spreads Rise: The 30yr-5yr yield spread has been making a very bearish signal for the US stock market. See this post: The Scariest Stock Market Chart in the World. It is potentially bottom making, but not conclusively. The 10yr-2yr is bouncing a bit but has not made any definitive signal yet. This remains a holdout fundamental to gold's case.
  7. Confidence Declines: Confidence is declining the world over. See ECB jawbone QE, see market bounce and drop. Same thing with BoJ NIRP policy. This week Janet Yellen both stood firm behind the Fed's rate hikes and openly pondered the prospects of NIRP in the US. One big chink in the formerly impenetrable armor around the Federal Reserve.
  8. Economic Contraction: We got on this first with the gold vs. commodities ratios' bull market and then with palladium dumping vs. gold in June. We then added multiple posts showing machine tools decelerating (Machine Tools Fading, in July) and finally, a new downtrend in Semiconductor equipment bookings and billings. Okay, I think we can rest our case. As for declining confidence in monetary authorities, see this Biiwii post for more on Yellen, in which she finally indicates that "there's a chance of a downturn ahead." Unbelievable, 6 months too late for that admission, I'd say.
  9. Gold Out Performs Stock Markets: The big one, and it is the reason that our Macrocosm theme got rammed front and center over the last couple of weeks, going from the realm of the theoretical and likely to the probable and proven (to paraphrase a term from our friends, the miners :-). Here is gold vs. S&P 500. It is getting repelled a bit today with the stock market bounce we anticipated, but which sure tested my patience. Stocks probably need to relieve some of the short-term pressure. Sentiment had become a Tinder Box again, and the bounce was on.
Gold:SPX Weekly Chart

That folks, is a trend being changed. The implications will be that traditional money managers (instead of just we lowly gold bugs) will be moving into the gold mining sector because their mandate is to herd into what is working.

For years now NFTRH has noted that it is the counter-cycle (h/t Bob Hoye) that is going to bring on the right environment for the gold sector, not the widespread hallucinations about inflation and Asian demand in the face of global deflation. That comes later, and it will come sooner or later as the deflation play gets... played out.

For now, gold and the miners are doing exactly what they are supposed to do at the start of a new cycle. With that knowledge in hand, I am finally able to manage the sector for subscribers not in the defensive way of the last several years, but an offensive way. The pullbacks will come and they look to be opportunities. We have our fundamentals coming into place, finally. Well Hallelujah!

Latin American currencies

Border bazaar

The weak peso draws Ecuadorean shoppers to Colombia


THE backwater Colombian town of La Hormiga near the border with Ecuador has experienced many booms and busts. In the 1990s there was coca, the raw material for cocaine.

That frenzy ended when herbicide-spraying aeroplanes destroyed the crops. In the 2000s a pyramid scheme made many townsfolk rich, then ruined them. The government shut it down in 2008.

Today La Hormiga, a sweltering town surrounded by pasture in the department of Putumayo, is experiencing a somewhat more salubrious sort of boom. Merchants are cashing in on the sharp depreciation of the Colombian peso against the United States dollar, which Ecuador uses as its currency. The peso lost a quarter of its value in 2015 and continues to slide this year. This has been a windfall for Ecuadorean shoppers living near—and sometimes not so near—the border, and for Colombian shopkeepers who serve them.

“We can buy things 50% cheaper here than at home,” says Juan Carlos Andrade, who on a recent weekend drove for four hours from Coca in Ecuador to Putumayo with his family. They returned in a car laden with clothes and nappies for their two small boys. In Ecuador a pack of 50 Huggies nappies costs $18; the Andrades bought one in La Hormiga for the equivalent of $7.

As well as selling more, merchants in La Hormiga are charging higher prices. The price of clothes has doubled over the past year while that of fruit and vegetables has risen by 30-40%, according to Fernando Palacios, the town’s mayor. Shops and bakeries are diversifying by providing pop-up currency-exchange services. A ticket seller at a roadside bus terminal moonlights as a money changer, buying dollars at 2,800 pesos and selling them to banks at a rate of around 3,200, making a handsome profit for little effort.

Not everyone is happy. Residents of La Hormiga accuse shopkeepers of price-gouging. Mr Palacios has urged local merchants to show restraint. “I told them that if they keep raising prices the Ecuadoreans will shop elsewhere and locals will, too,” he says.

Retail tourism is also a worry for Ecuador’s government. The country adopted the dollar as its currency in 2000 to escape from hyperinflation. Its current strength, along with weak productivity and low prices for oil, Ecuador’s biggest export, helped make the economy contract by an estimated 0.6% in 2015. Colombia, by contrast, grew by around 3% last year and should grow by more than 2% in 2016 despite the oil slump, in part because its weaker currency is expected to boost non-oil exports.

To fight the downturn, Ecuador’s government is calling on its citizens to shop at home. “Prefer what’s ours,” pleaded a government statement issued in September. As long as the dollar is strong, many Ecuadorean shoppers will prefer Putumayo.

Unsound Banking: Why Most of the World’s Banks Are Headed for Collapse

by Doug Casey

You’re likely thinking that a discussion of “sound banking” will be a bit boring. Well, banking should be boring. And we’re sure officials at central banks all over the world today—many of whom have trouble sleeping—wish it were.

This brief article will explain why the world’s banking system is unsound, and what differentiates a sound from an unsound bank. I suspect not one person in 1,000 actually understands the difference.

As a result, the world’s economy is now based upon unsound banks dealing in unsound currencies. Both have degenerated considerably from their origins.

Modern banking emerged from the goldsmithing trade of the Middle Ages. Being a goldsmith required a working inventory of precious metal, and managing that inventory profitably required expertise in buying and selling metal and storing it securely. Those capacities segued easily into the business of lending and borrowing gold, which is to say the business of lending and borrowing money.

Most people today are only dimly aware that until the early 1930s, gold coins were used in everyday commerce by the general public. In addition, gold backed most national currencies at a fixed rate of convertibility. Banks were just another business—nothing special. They were distinguished from other enterprises only by the fact they stored, lent, and borrowed gold coins, not as a sideline but as a primary business. Bankers had become goldsmiths without the hammers.

Bank deposits, until quite recently, fell strictly into two classes, depending on the preference of the depositor and the terms offered by banks: time deposits, and demand deposits. Although the distinction between them has been lost in recent years, respecting the difference is a critical element of sound banking practice.

Time Deposits. With a time deposit—a savings account, in essence—a customer contracts to leave his money with the banker for a specified period. In return, he receives a specified fee (interest) for his risk, for his inconvenience, and as consideration for allowing the banker the use of the depositor’s money. The banker, secure in knowing he has a specific amount of gold for a specific amount of time, is able to lend it; he’ll do so at an interest rate high enough to cover expenses (including the interest promised to the depositor), fund a loan-loss reserve, and if all goes according to plan, make a profit.

A time deposit entails a commitment by both parties. The depositor is locked in until the due date.

How could a sound banker promise to give a time depositor his money back on demand and without penalty when he’s planning to lend it out?

In the business of accepting time deposits, a banker is a dealer in credit, acting as an intermediary between lenders and borrowers. To avoid loss, bankers customarily preferred to lend on productive assets, whose earnings offered assurance that the borrower could cover the interest as it came due.

And they were willing to lend only a fraction of the value of a pledged asset, to ensure a margin of safety for the principal. And only for a limited time—such as against the harvest of a crop or the sale of an inventory. And finally, only to people of known good character—the first line of defense against fraud. Long-term loans were the province of bond syndicators.

That’s time deposits. Demand deposits were a completely different matter.

Demand Deposits. Demand deposits were so called because, unlike time deposits, they were payable to the customer on demand. These are the basis of checking accounts. The banker doesn’t pay interest on the money, because he supposedly never has the use of it; to the contrary, he necessarily charged the depositor a fee for:

1. Assuming the responsibility of keeping the money safe, available for immediate withdrawal, and

2. Administering the transfer of the money if the depositor so chooses by either writing a check or passing along a warehouse receipt that represents the gold on deposit.

An honest banker should no more lend out demand deposit money than Allied Van and Storage should lend out the furniture you’ve paid it to store. The warehouse receipts for gold were called banknotes. When a government issued them, they were called currency. Gold bullion, gold coinage, banknotes, and currency together constituted the society’s supply of transaction media. But its amount was strictly limited by the amount of gold actually available to people.

Sound principles of banking are identical to sound principles of warehousing any kind of merchandise, whether it’s autos, potatoes, or books. Or money. There’s nothing mysterious about sound banking. But banking all over the world has been fundamentally unsound since government-sponsored central banks came to dominate the financial system.

Central banks are a linchpin of today’s world financial system. By purchasing government debt, banks can allow the state—for a while—to finance its activities without taxation. On the surface, this appears to be a “free lunch.” But it’s actually quite pernicious and is the engine of currency debasement.

Central banks may seem like a permanent part of the cosmic landscape, but in fact they are a recent invention. The US Federal Reserve, for instance, didn’t exist before 1913.

Unsound Banking

Fraud can creep into any business. A banker, seeing other people’s gold sitting idle in his vault, might think, “What is the point of taking gold out of the ground from a mine, only to put it back into the ground in a vault?” People are writing checks against it and using his banknotes.

But the gold itself seldom moves. A restless banker might conclude that, even though it might be a fraud on depositors (depending on exactly what the bank has promised them), he could easily create lots more banknotes and lend them out, and keep 100% of the interest for himself.

Left solely to their own devices, some bankers would try that. But most would be careful not to go too far, since the game would end abruptly if any doubt emerged about the bank’s ability to hand over gold on demand. The arrival of central banks eased that fear by introducing a lender of last resort. Because the central bank is always standing by with credit, bankers are free to make promises they know they might not be able to keep on their own.

How Banking Works Today

In the past, when a bank created too much currency out of nothing, people eventually would notice, and a “bank run” would materialize. But when a central bank authorizes all banks to do the same thing, that’s less likely—unless it becomes known that an individual bank has made some really foolish loans.

Central banks were originally justified—especially the creation of the Federal Reserve in the US—as a device for economic stability. The occasional chastisement of imprudent bankers and their foolish customers was an excuse to get government into the banking business. As has happened in so many cases, an occasional and local problem was “solved” by making it systemic and housing it in a national institution. It’s loosely analogous to the way the government handles the problem of forest fires: extinguishing them quickly provides an immediate and visible benefit. But the delayed and forgotten consequence of doing so is that it allows decades of deadwood to accumulate. Now when a fire starts, it can be a once-in-a-century conflagration.

Banking all over the world now operates on a “fractional reserve” system. In our earlier example, our sound banker kept a 100% reserve against demand deposits: he held one ounce of gold in his vault for every one-ounce banknote he issued. And he could only lend the proceeds of time deposits, not demand deposits. A “fractional reserve” system can’t work in a free market; it has to be legislated.

And it can’t work where banknotes are redeemable in a commodity, such as gold; the banknotes have to be “legal tender” or strictly paper money that can be created by fiat.

The fractional reserve system is why banking is more profitable than normal businesses. In any industry, rich average returns attract competition, which reduces returns. A banker can lend out a dollar, which a businessman might use to buy a widget. When that seller of the widget re-deposits the dollar, a banker can lend it out at interest again. The good news for the banker is that his earnings are compounded several times over. The bad news is that, because of the pyramided leverage, a default can cascade. In each country, the central bank periodically changes the percentage reserve (theoretically, from 100% down to 0% of deposits) that banks must keep with it, according to how the bureaucrats in charge perceive the state of the economy.

In any event, in the US (and actually most everywhere in the world), protection against runs on banks isn’t provided by sound practices, but by laws. In 1934, to restore confidence in commercial banks, the US government instituted the Federal Deposit Insurance Corporation (FDIC) deposit insurance in the amount of $2,500 per depositor per bank, eventually raising coverage to today’s $250,000. In Europe, €100,000 is the amount guaranteed by the state.

FDIC insurance covers about $9.3 trillion of deposits, but the institution has assets of only $25 billion. That’s less than one cent on the dollar. I’ll be surprised if the FDIC doesn’t go bust and need to be recapitalized by the government. That money—many billions—will likely be created out of thin air by selling Treasury debt to the Fed.

The fractional reserve banking system, with all of its unfortunate attributes, is critical to the world’s financial system as it is currently structured. You can plan your life around the fact the world’s governments and central banks will do everything they can to maintain confidence in the financial system. To do so, they must prevent a deflation at all costs. And to do that, they will continue printing up more dollars, pounds, euros, yen, and what-have-you.

Editor’s Note: Most people have no idea what really happens when the banking system collapses, let alone how to prepare…

Owning gold is essential.

Gold is a commodity like coffee, copper, or aluminum. But unlike other commodities, gold is money. It’s held its value for thousands of years. Gold has preserved wealth through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.

Gold is also the key to making triple-digit investment gains possible.

The Market Vectors Gold Miners ETF (GDX), which tracks large gold miners, is up around 20% this year.

Gold miners offer leverage to the price of gold. For example, a 10% rise in the price of gold can cause gold stocks to rise 30% or more.

GDX has surged around 21% over the last two weeks. It was one of the fund’s best week since December 2008, during the global financial crisis.

GDX is trading near its highest level since July. This is a very bullish sign for gold miners.

During gold’s last bull market, gold stocks soared 273%. During the gold bull market before that, gold stocks soared 206%. And gold stocks soared 602% during the gold bull market from 2000 to 2003.

We think gold stocks could surge as much or more during the next rally…

To make the biggest gains, you need to own the best mining companies…

A fund like GDX owns both low-quality and high-quality miners. It will likely gain at least 200% in the next gold bull market…but the best gold stocks will go much higher.

The U.S. Dollar is a Crowded Trade – Why this Matters for Gold

By Sprott US Media

In a recent report by Sprott Senior Portfolio Manager Trey Reik, he points out several reasons why gold remains not only an important portfolio diversification tool, but also an asset class ripe for a rebound. In his full length report, available here Trey notes that one of the reasons to look to gold is the current state of the U.S. dollar: “U.S. dollar sentiment among western investors has become close to unanimously bullish.” We examine the impact of this on gold.

A strengthening dollar is good for American consumers. We are able to buy more goods at a lower price than the rest of the world. However, for American producers who export, a strengthening dollar means fewer international customers are able to buy our goods, and quantity demanded often declines in such an environment. That’s where Economics 101 ends and Trey begins.

Trey cites a CFTC chart that shows the combined net speculative long and short trades of the euro, the Yen, and the pound against the dollar. 

Take a look at 2015. After a big jump throughout the first half of the year, there has been somewhat of a reversal, indicating that speculative traders would now rather have yen, euros or pounds than U.S. dollars. This is a signal that the U.S. dollar has potentially already topped in value, relative to the currencies of other developed nations. But how does this relate to gold?

Trey’s chart shows the combined speculative demand for USD relative to other currencies. To show a bit more detail, we also broke out the different currencies, and marked the foreign exchange rates of the yen, the euro, and the Canadian dollar to zero as of January 1, 2010.

While the above graph combines all CTFC (a.k.a. futures traders’ expectations), this chart shows the spot (actual) Price movement of the currencies over the last four years. Gold is often considered a corollary currency, so we’ve added in the spot gold price (like the forex rates, gold is denominated in USD. The line is marked in red).

This chart illustrates not only the strengthening of the USD over the other currencies, but also gold’s resilience during an inflationary environment. While gold prices have certainly declined as the USD rises, it might be small comfort to see that gold loses less value than other currencies, it also appears to recover more quickly. This chart also shows that gold behaves like a currency, but one that is not easily manipulated by central bank policy. Gold mitigates some deflationary risks.

Trey speculates that the USD is as strong as it will get in this current market cycle, and we may be looking at the top of the market for the USD. Indeed, his next chart, titled “Net Foreign Purchases of Treasuries” demonstrates that foreign buyers are now net sellers of U.S. Treasuries (in reality, this is an indication that they have nothing left to sell, or that everything else that they hold is marked below cost. They don’t want to take a loss any more than you do!)

Happy hunting.

Britain, Better Off Out of Europe


Photo Credit Kelly Blair       

Valentine’s Day is the traditional feast of love. But this February, Britons are more fixated on a political divorce.

“Brexit,” the shorthand term for a British exit from the European Union, is finally on the table.
For many of my compatriots, the idea is not a negative one; indeed, an escape from the ever greater encroachment of the European superstate on our national sovereignty is a goal we have devoutly wished for since Prime Minister John Major signed the Maastricht Treaty back in 1992. Today, at last, we are positively giddy at the thought of freedom.
The Conservative prime minister, David Cameron, is delivering on his election promise of a referendum on membership in the union, with a vote due by the end of 2017. It will probably be held sooner, in June or September.

Mr. Cameron would prefer Britain to stay in the union. Polls indicate that he is likely to be disappointed. Earlier this month, he returned from Brussels with a package of proposals so weak that Britain’s newspapers united against it.
His so-called brake on welfare benefits for European immigrants, for example, would require the agreement of other countries, would not be applied for more than a year and would eventually be phased out. Mr. Cameron also failed in his attempt to prevent child benefits being sent abroad for workers in Britain with dependents elsewhere in Europe.
After these terms were announced, the pro-exit camp’s lead in polls soared to nine points. One recent survey of Conservative Party members found that more than 70 percent supported Brexit.
The European summit meeting next week could be Mr. Cameron’s last chance to improve his deal. But with the president of the European Parliament, Martin Schulz, touring Britain and helpfully telling us that he would reverse any British gains, Mr. Cameron’s prospects are not promising.

The mood of the country, though, is optimistic. An amicable divorce, many consider, is better than a bad marriage. Brexit campaigners are excited by the possibilities of an independent future in the world. We believe that this vision is better not just for Britain, but also for our European allies.
Brexit offers Britons more money, more control, free trade and planned immigration.
First, the cash. Britain sends about £55 million, or about $80 million, per day to Brussels. To place that in context, Daniel Hannan, a Conservative member of the European Parliament, calculated that all the austerity cuts that the chancellor of the Exchequer, George Osborne, made during the last Parliament, amounted to £36 billion, while Britain’s contribution to the European Union in the same period was £87 billion. Mr. Osborne could reverse every cut in public spending and still pay the deficit down faster if Britain were outside the European Union.

Of course, it is not quite that simple. The European Union returns some of that money through spending in Britain, though not nearly the amount it takes out. In 2015, Britain’s net contribution was £8.5 billion; in 2016, it is forecast to top £11 billion. If we ended these payments, we could end our austerity measures.

The second issue is the wave of illegal immigrants effectively invited into Europe by Germany’s chancellor, Angela Merkel. A growing proportion of Britons believes their country should accept fewer refugees; Turkey, where a majority of these migrants have come from, is already a safe destination.
We also note that many are young men, of fighting age, who appear to have abandoned their families; the recent sexual assaults on women in Cologne, Germany, by marauding groups of migrants have confirmed the fears of many in Britain. With no curbs on the free movement of migrants under Europe’s Schengen Agreement, British voters expect a wave of unwanted immigration once these migrants are given asylum elsewhere in Europe. We are unwilling to close our eyes to this, and we want our borders back.
Brexit was never a left-right issue. In the 1970s and ’80s, it was supported by both Margaret Thatcher and the left-wing politician Tony Benn. The Labour member of Parliament Kate Hoey told me she believes the European Union stands for big business and tramples down British workers’ wages even as it exploits Eastern European ones. Ms. Hoey’s view is supported by the left-wing labor union R.M.T. The fact that Conservative budget cuts are dwarfed by payments to the European Union is also not lost on liberal voters.
On the right, Conservative cabinet ministers likely to lead the “out” campaign are the business secretary, Sajid Javid, son of a bus driver from Pakistan, and Priti Patel, the employment minister, daughter of Indian immigrants from Uganda (they became shopkeepers, as Mrs. Thatcher’s parents were). Facing such campaigners, the bien-pensant pro-European left will have a hard time stigmatizing the Brexit coalition as anti-business “Little Englanders.”
The case for leaving the union is, indeed, a positive one. Britain is the world’s fifth largest economy, with deep cultural and economic ties to the English-speaking world. We are not anti-immigrant; rather, we wish to manage our own immigration policy. We are pro-free trade, and as the European Union’s chief export market, we will not need to pay for access to its markets; and we want more freedom to trade with India, China and the rest of the world.

The pro-European camp used to tell us that joining the euro was a good idea, and that to stay outside presaged disaster; instead, we’ve seen a meltdown in Greece. The sky did not fall in Britain because we kept the pound and prospered.
We do not plan to cut off our European allies. Britain’s treaty with Portugal is the oldest formal alliance in the world. Post-Brexit, we would continue to trade with our European friends as we have for a thousand years. The European Union, however, is a relic of the ’70s — about as relevant as bell-bottom jeans. Indeed, the last time Britons were consulted on membership was 1975, when I was 4 years old.
Europe is our past and future. We don’t want to leave the Continent, just a failing bureaucracy.