Central bankers are threatening the engine of the economy

Job cuts, reduced pensions, defaults — all can create a cycle of decay, writes Bill Gross
FED SEES 'RESTRAINED' RECOVERY IN US...(FILES)The US Federal Reserve building is seen on July 30, 2009 in Washington, DC. Federal Reserve officials see the US economy emerging from recession but in a recovery "restrained" by difficult credit conditions and high unemployment, minutes from a policy meeting showed October 14, 2009. AFP PHOTO / Karen BLEIER / FILES (Photo credit should read KAREN BLEIER/AFP/Getty Images)©AFP
The US Federal Reserve building in Washington, DC. The Fed began a quantitative easing programme in 2010
You can pay me now . . .” counsels the sensible mechanic promoting Fram oil filters in the old-time advert, “ . . . Or pay me later,” interjects his pricier associate, as he tinkers with the broken engine of a customer who has ignored the advice. Central bankers should take heed. Dirty oil and artificially priced financial markets have much in common. Both can destroy engines eventually — and in the case of central banking it is the motor of the real economy that is at risk.
Historically, it has generally been assumed that lower bond returns would eventually lead to higher bond and equity prices, and that the capital gains and lower commercial and consumer interest rates associated with them would stimulate additional investment and consumption — a virtuous circle leading to job growth, mild inflation and higher profits.
The US Federal Reserve began a quantitative easing programme in 2010; interest rates are historically lower across much of the developed world. Meanwhile, gross domestic product is growing in many eurozone nations, even if unemployment is higher than many would like. An unbiased observer ought to admit that the model is working. So why change the oil filter?
But are near-zero interest rates and a global store of about $13tn worth of negative-yielding bonds actually good for the real economy? Recent data suggests they may not be. Productivity growth, perhaps the best indicator of an economy’s vitality, is abysmal in most developed countries. It has been declining in the past half-decade or so, not coincidentally tracking the advent of QE and zero lower bound interest rates.
In the US the year-on-year trend for productivity has turned negative . Most central bankers dismiss this fact as a short-term aberration. But the Japanese economy provides an example of what interest rates at or near zero can do to a large, developed economy. The answer is not much: not much real growth; not much inflation — and, together, not enough nominal GDP growth to repay historic debt should yields on sovereign debt ever return to normal.
In other large economies, a further negative effect of zero lower bound yields and interest rates can be observed. Investment — an important source of productivity growth — has never returned to the norms seen before the global crisis of 2008. Corporations are using an increasing amount of cash flow to buy back shares as opposed to investing for growth. In the US, more than $500bn is spent annually to boost investors’ incomes rather than future profits.
Money is diverted from the real economy to financial asset holders — where in many cases it lies fallow, earning little return if invested in government bonds and money markets.
Why would the private sector or governments not borrow at practically no cost to invest in a centuries’ old capitalistic model proven to reward risk-taking in the real economy? Well, for governments and supranational agencies such as the International Monetary Fund, balanced budget orthodoxies and even national laws as in Germany rule the day. We are not “all Keynesians now”.

The private sector may be reluctant to invest because of a host of secular forces that increase risk, including ageing populations that temper consumer spending and an anti-globalisation trend of which the Brexit vote is an example. Savvy corporate chief investment officers who know anything about bond pricing may also recognise that an investment in the real economy — albeit at historically low borrowing costs — will pose its own risks once yields begin to return to normal and borrowing costs increase.

There are other obvious drawbacks to near-zero yields and interest rates. Historic business models with long-term liabilities — such as insurance companies and pension funds — are increasingly at risk because they have assumed higher future returns and will be left holding the short straw if yields and rates fail to return to more normal levels.
The profits of these businesses will be affected as will the real economy. Job cuts, higher insurance premiums, reduced pension benefits and increasing defaults: all have the potential to turn a once virtuous circle into a cycle of stagnation and decay.

Central bankers are late to this logical conclusion. They, like most individuals, would prefer to pay later than now. But, by pursuing a policy of more QE and lower and lower yields, they may find that the global economic engine will sputter instead of speed up. A change of filters and monetary policy logic is urgently required.

The writer is the portfolio manager of the Janus Capital Group Global Unconstrained Bond fund strategy

Weathering Out the Winter

By: Chris Vermeulen

Nature functions in cycles, each 24-hour period can be divided into smaller cycles of morning, afternoon, evening and night. The whole year can be divided into seasonal cycles. Similarly, one's life can also be divided into cycles. Cycles are abundant in nature, we just have to spot them, understand them and be prepared for them because they happen wether we like it or not.

Likewise, economic experts have noticed that the world also follows different cycles. An important pioneer in this field was the Russian social economist, Nikolai Kondratiev, also called Nikolai Kondratieff, a relatively unknown genius.

Who is Kondratiev?

Geniuses have been known to defend their principles and beliefs, even at the cost of losing their lives; they may die but their legacy lives on as did Kondratiev. He was an economist, who laid down his life defending his beliefs. He was the founding director of the "Institute of Conjuncture", a famous research institution, which was located in Moscow. He devised a five-year plan for the development of agriculture in Russia from 1923-1925.

His book, "The Major Economic Cycles" was published 1925, in which his policies were in stark contrast to that of Stalin's. As a result of this, Kondratiev was arrested in 1930, and given a prison sentence. This sentence was reviewed and consequently, he was executed in 1938. What a tragic loss of such a genius, who was only 42 years of age He was executed because his research proved him right and Stalin wrong! Nonetheless, his legacy lives on and in 1939, Joseph Schumpeter, named the waves as "Kondratiev Waves"; also known as "K-Waves".

What are Kondratiev Waves:

The Investopedia defines the" Kondratieff Wave" as: "A long-term cycle present in capitalist economies that represents long-term, high-growth and low-growth economic periods". The initial study by Kondratiev, was based on the European agricultural commodity and copper prices. He noticed this period of evolution and self-correction in the economic activity of the capitalist nations and felt it was important to document.

The Kondratieff Wave

These waves are long cycles lasting 50-60 years and consisting of various phases, which are repetitive in nature. They are divided into four primary cycles:
  1. Spring- Inflationary growth phase: The first wave starts after a depressed economic state. With growth comes inflation. This phase sees stable prices, stable interest rates and a rising stock market which is led by strong corporate profits and technological innovations. This phase generally lasts for 25 years.
  2. Summer-Stagflation (Recession): This phase witness's wars such as the War of 1812, the Civil War, World Wars and Vietnam. War leads to a shortage of resources, which leads to rising prices, rising interest rates and higher debt, and because of these factors, companies' profits decline.
  3. Autumn-Deflationary Growth (Plateau period): After the end war, people want economic stability. While the economy sees growth in selective sectors this period also witnesses social and technological innovations. Prices fall and interest rates are low which leads to higher debt and consumption, while company's profits rise, resulting in a strong stock market. All of these "excesses" end with a major speculative bubble.
  4. Winter-Depression: This is a period of correcting the "excesses" of the past and preparing the foundation for future growth. Prices fall, profits decline and stock markets correct to the downside. However, this period also refines the technologies of the past, with innovation, making it cheaper and more available for the masses.

Accuracy of the cycle in the last 200 years:

The "K-Waves" have stood the test of time, they have correctly identified various periods of important economic activity within the past 200 years. The chart below outlined its accuracy.

Very few cycles in history are as accurate as the Kondratiev waves.

  Kondratieff Waves

Criticism of the Kondratiev Waves:

No principle in the world is left unchallenged, similarly, there are a few critics of the "K-Waves" who consider it useful only for the pre-WWII era. They believe that the current monetary tools, which are at the disposal of the monetary agencies, can alter the performance of "These Waves". There is also a difference of opinion regarding the timing of the start of the waves.

The wave is being pushed ahead but the mood confirms a "Kondratiev Winter":
four long economic waves in the US
four long economic waves in the US Chart 2

A closer study reveals that the cycles are being pushed forward temporarily. Any intervention in the natural cycle unleashes the wrath of nature while the current phase of economic "excess" will also end in a similar correction. The "K-Wave" winter cycle which started in 2000, was aligned with the "dot-com bubble".

The current stock market rise is fueled by the easy monetary policy, of the global central banks.  Barring a small period of time, from 2005-2007, when the mood of the public was optimistic, the winter had been spent with people in a depressed social mood. The stock market rally, from 2009-2015, will be perceived as the most hated despised rally, and the one most laden with fear.

Every dip of a few hundred points, in the stock market, starts with a comparison to the "Great Recession of 2007-2009".  The mood exudes fear and disbelief that the efforts of the central banks have not been successful and are unable to thwart off the winter as predicted correctly by the" K-Waves". The winter is here and is reflected in the depressed social mood.

How to "weather" out brutal winter:

In the last phase of the winter cycle, from 2016-2020, (which is likely to test us), the stock market "top" is in place. Economic activity globally has peaked, terrorism further threatens our lives, geopolitical risks have risen, the current levels of debt, across the developed world, are unmanageable, and a legitimate threat of a "currency war" occurring will all end with the "The Great Reset". Gold will be likely to perform better during this winter cycle. Get in love with the yellow metal, it's the blanket which will help you withstand the Winter.


Cycles are generally repetitive forces, which give us an insight into the future so as we can be prepared to face it and prosper.  Without excessive intervention, nature is very forgiving, while correcting the "excesses", but if one meddles with nature, it can be merciless, during the correction.

The current economic condition will end with yet another reset in the financial markets. Prices will not rise for ever and a correction take hold eventually. Until then we follow and trade accordingline. I will suggest the necessary steps to avoid losses and prosper from market turmoil when it unfolds.

domingo, agosto 28, 2016



Did the Soviet Union Really End?

Masha Gessen

 Waving a Russian flag in Moscow for victims of the failed coup in August 1991 — a Russian version of a velvet revolution — that has been memorialized as the end of the Soviet Union. Credit Dimitri Korotayev/Agence France-Presse       

Aug. 22 is a holiday in Russia: It’s Flag Day. But it ranks low in the hierarchy of holidays. There will be no parade, like there is on Victory Day. Russians will not get a day off, like they do on May Day, Russia Day, International Women’s Day, Defenders of the Fatherland Day and a half-dozen other holidays. A visitor to the country would be unlikely to notice that this month Russia is marking the 25th anniversary of a historical milestone.
What happened a quarter-century ago? On Aug. 18, 1991, four top Soviet officials flew to Crimea, where President Mikhail S. Gorbachev of the Soviet Union was on vacation, and placed him under house arrest. The following day Soviet citizens awakened to the news that a committee of K.G.B., military and Soviet Communist Party leaders had declared a state of emergency. Then, over the course of three days, the coup crumbled.
On Aug. 21, its failure became evident, and Moscow authorities soon removed a giant statue of the founder of the secret police, Felix Dzerzhinsky, from its pedestal in the center of the city. A Russian flag — white, blue and red stripes – went up over the building of the Russian Supreme Soviet, the nominal legislative body, in Moscow. Only three people died in Moscow streets before the attempted coup was over.
Two years earlier, a series of popular protests led by young pro-democracy activists had brought down the Communist governments of several Eastern European countries. These became known as the Revolutions of 1989. Most had been peaceful; the Czechs called theirs “velvet.” The ruling parties had simply capitulated. In many books published in the West, and in the minds of some Russian intellectuals, the three days of August 1991 were the Russian version of a velvet revolution, and they have been memorialized as the end of the Soviet Union.
But they were neither the end of the Soviet Union nor a velvet revolution. Twenty-five years later, this is perhaps clearer than ever.
By the summer of 1991, the Soviet empire had been in agony for a couple of years. Each of its 15 constituent republics, including Russia, had popular pro-independence movements. Ethnic conflicts and border disputes were flaring up all over; blood had been shed. Mr. Gorbachev was zigzagging between military and peaceful solutions to the mounting crises. The Soviet state had used force in Azerbaijan, Georgia and Lithuania, killing scores of people and bitterly disappointing all who wanted change. Yet the hard-liners, who made up the majority of the Soviet leadership, saw Mr. Gorbachev as too soft. Like any leader who tries to appease everyone, Mr. Gorbachev was hated by many and disliked by most. But his fiercest struggle was with Boris Yeltsin, a former party boss who in June 1991 became the popularly elected leader of the Russian republic within the U.S.S.R.
The failure of the hard-liners’ coup created an opening for Mr. Yeltsin. While Mr. Gorbachev was a hostage in Crimea, Mr. Yeltsin was in Moscow. He spoke to the anti-coup protesters in the city – from atop a tank, no less. After the coup was over, he was widely seen as the leader of a victorious resistance. He was now in a position to tell Mr. Gorbachev what to do.
Through the fall of 1991, constituent republics declared their independence from the U.S.S.R., one after another, while Mr. Gorbachev, who was still the Soviet president, scrambled to keep the union together. In December, Mr. Yeltsin and the leaders of Belarus and Ukraine met and agreed on the dissolution of the Soviet Union. Mr. Gorbachev was not invited. He was not even the first to know: He was informed by the Belarusian leader after Mr. Yeltsin had called President George H. W. Bush with the news. In the end, Mr. Gorbachev had to resign as president because his country was no more. Most of its institutions, along with its memberships in international organizations, passed to a new country called the Russian Federation.
Mr. Yeltsin and his aides believed that what happened in Russia was better than any revolution, even a velvet one. They were convinced that by taking over existing institutions they would bring democracy to Russia faster, and less painfully, than they would by destroying them. They gave little thought to the fact that these were the institutions of a long-running totalitarian regime: They did not doubt that they had the will and strength necessary to transform them.
But these institutions have turned out to be stronger than the men who had set out to reform them. They resisted change for nearly a decade, and once Vladimir V. Putin became president, they fell into place, easing Russia’s regression. Today, life in Russia – where everything is political, where the population is mobilized around leader and nation, where censorship and one-party rule have effectively been restored – is more similar to life in the Soviet Union than at any point in the last 25 years.
The monument to the three men who died during the failed coup of August 1991 – a plaque that few people know exists – is in disrepair, and discussions about erecting a proper, visible monument in its place died down years ago. But the Dzerzhinsky statue, which is displayed in a park not far from the Kremlin, was lovingly restored this summer, for at least the fourth time in the last few years. There is also talk of putting it back in its old place.

Finding Freedom in an Unfree World: A Reality Check

by Nick Giambruno


About 10 years ago, Doug Casey set out to create something no one else had successfully done before…

In a world where freedom is increasingly scarce, Doug wanted to create a freedom seeker’s paradise.

But is that even possible? Can you actually break the chains government sociopaths have put you in?

The answer, as you’re about to find out, is yes and no.

Here’s my discussion with Doug.

Until next time,

Nick Giambruno
Senior Editor
International Man

Nick Giambruno: Hello, Doug. Today we’re talking about whether it’s actually possible to find freedom in an unfree world, to paraphrase the title of Harry Browne’s book.

You’ve spent most of your adult life looking for freedom. Your involvement with La Estancia de Cafayate in Argentina is part of that quest. The project started in earnest about 10 years ago. From your perspective, how's it going?

Doug Casey: It's going better than even I anticipated—and I had high expectations. The main reason is that birds of a feather like to flock together. If I just wanted to live in a pleasant place, I could’ve stayed in Aspen, which is a small town about the size of Cafayate that already has all the facilities and amenities you could possibly want. But Aspen has two problems from my point of view.

Number one, it's in the United States, and I'm afraid the U.S. has become the epicenter of much of what is to be feared in the world. And number two, the people that wind up living in Aspen are no longer the kind of people I want to associate with—as often as not, rich statists.

As a result, even when I'm invited to cocktail parties and such, I find that I'm the skeleton at the feast because I don’t have any values in common with them.

So where do you go if you're a libertarian? In actual fact, there is no place in the world where it’s known that libertarians can hang out together… especially successful libertarians. If I could have found a place like that, I simply would have bought a lot there and made my life a lot easier. But there wasn't, and so after searching for the right place to create it—and I've been to 145 or more countries—we wound up where we are.

Nick: What's your vision for La Estancia de Cafayate? Is the idea to build a community of like-minded people, where they can enjoy the good life in good company, or is there more to it than that?

Doug: Well, the people who have bought lots there are from 33 different countries, so obviously everybody is not moving in exact philosophical lockstep, if only for that reason. I'd say around half of the buyers are American, another 20% are Canadian, the next largest contingent is Argentine, and then there are people from over two dozen other countries.

So that's where the people come from geographically. But philosophically and psychologically, I'd say there is a definite get-along/go-along libertarian attitude common to the owners. So the chances are excellent that when you meet your neighbor, you are going to like them. And you'll find that the people you meet from the Estancia community are the kind of people you'd like to have over for a drink or a barbecue. I can't say that about my neighbors in Aspen, most of whom are antagonistic to each other.

Nick: As you know, I've spent a lot of time down there myself. I’m also an owner and a happy member of the community. While the place is beautiful and the weather and the caliber of food and so forth are excellent, people who’ve bought property there tend to mention those things as secondary reasons for buying. By a wide margin, the number one reason is the strong sense of connection to community coalescing around La Estancia.

Doug: Yes. It’s a little like analyzing mining stocks. People are, by far, the most important thing.

Next is the property, and I think that’s spectacular in all regards. I was very particular about the physical beauty and the weather, both of which are important, but I was adamant about having the kind of amenities that would make it enjoyable to live there. By the time the place is fully buffed out—and we are well advanced at this point—I'm of the opinion that, from a physical amenity point of view, it will be one the best places in the world to live at any price.

This is the reason we’ve put in a world-class gymnasium of 3,500 square feet and a separate yoga and aerobics room, all outfitted with top-of-the-line equipment. That's why the spa not only has an outdoor lap pool, but an indoor resistance swimming pool. Plus, there’s a kids’ clubhouse with the kinds of things kids like.

We’ve tried not to miss a trick: a basketball court, three tennis courts, a squash court, a volleyball court, a bocce ball court, and a regulation croquet course. Those last two are great fun with a few drinks after dinner.

Nick: And you haven’t even mentioned the polo field and Bob Cupp-designed golf course, or the clubhouse.

Doug: Yes. I may be getting a little too long in the tooth to play polo properly, but I don’t feel like I'm quite old enough to play golf yet. I know golfers love their golf courses, though, and we have one of the best golf courses in the hemisphere, I'm told. Anyway, riding either one of my polo thoroughbreds or a Paso Peruana on the trails through the woods and the vineyards is likely to be a daily thing for me.

In the evening, I often spend time at the social clubhouse. It’s very “gemütlich”—a home away from home.

Nick: Okay, so that’s the vision for La Estancia, which you could describe as a libertarian enclave, with people from different walks of life and various countries and cultures coming together in an amenity-rich community. You picked Argentina. Why?

Doug: Once I had decided that the U.S. was not the place to be, I began a process of elimination. Canada was out, partially because it’s U.S.-lite, partially because the weather is not acceptable there six months of the year.

Central America crossed my mind, but it’s backward, lacks class, and is completely overrun with gringos looking for cheap beer. Mexico has a lot of problems, especially when it comes to land tenure.

So where else are you going to go?

Europe has been on the frontline of serious wars for the last 2,000 years and there is no reason to think that's going to end at this point. In addition, Europe is fiscally bankrupt, highly socialist, and quite expensive. It is in demographic decline and has serious problems developing from the Muslim world. Switzerland is way too uptight. All of Europe is a sinking ship; very expensive, extraordinarily bureaucratic, and not really an alternative to the U.S. at all.

In Asia, the only place that made sense to me was Thailand, but you'd never become a part of Thai society. And they have begun to enforce regulations that make it harder for a foreigner to buy property and live there. Singapore is very meticulous about everything, including the application of its immigration laws. Plus it’s very expensive, and it’s a city.

Australia and New Zealand are entirely too collectivist. I thought of some South Pacific Islands, but they’re way too far off the beaten path. In the end, it boiled down to the Southern Cone—Argentina, Uruguay, and Chile—where typically there are no squatter problems, good property rights, no racial tensions, and European traditions.

Within those three countries (and I’ve travelled extensively in all three), I was drawn to Cafayate as the place that I liked best in terms of just about everything.

I like Argentina's wide-open spaces. I like the fact that it's culturally more like Europe than Europe itself is at this point, and that the costs are quite low. I like the sophisticated culture.

This is not to say it's the perfect place because, if it were, it would have almost no government.

Nick: Let’s talk about that for a second. You're not saying Argentina is perfect in all respects.

You're saying it's the best option. So even though you decided Argentina was the best place for the sort of community you wanted to build, the country itself isn’t a libertarian paradise, a laissez-faire society where anything goes. Is that a fair statement?

Doug: Yes, that is a fair statement. Though one of the many nice things about Argentina is that, because of decades of poor government, people have developed what appears to me to be a fairly widespread disregard for the institution. It’s possible to live there with very little aggravation—I’d say, as a practical matter, much less so than in the U.S.

For instance, if we tried to build La Estancia in the United States in, say, Colorado, where I'm somewhat familiar with the political situation, after five years we would still be arguing with the county commissioners about how much welfare housing we were going to have to put in and a dozen other things we’d have to resolve before getting the permits needed to even break ground. But in roughly that same time period, we've built all the primary infrastructure at La Estancia. There are 50 completed houses and another 15 are under construction. Most of the lots have been sold. The property has zero debt against it. It's been amazingly easy and, based on the net result of what’s been accomplished, efficient.

In addition, an important part of the vision for La Estancia from the very beginning is as a hedge against having all your assets in the U.S., Canada, or similarly degrading countries in the more developed world. If history has taught no other lesson, it’s that having all your eggs in one political basket can be a very big mistake.

The most important diversification you can make, by far, is political diversification. That’s because the biggest risk to your wealth today isn’t fluctuations in the market (although that's a big risk). Your biggest risk is a political risk from your own government. So no matter where you live—but especially if you are an American—it's very important to have significant assets outside the bailiwick of your government. Sure, you may be able to open a foreign bank account, which you have to report, and you may be able to find a foreign broker who will still let you open an account. But the U.S. government could still force you to close those and repatriate the assets.

About the only thing that's really politically safe is property, and ideally property you can enjoy if, for any reason, things become too unpleasant in your home country. If history has taught anything over the last century, it has taught the importance of that diversification. Just look at the Russians in the 1910s, the Germans in the 1930s, the Cubans in the 1950s, the Vietnamese in the 1970s, the Iranians and Rhodesians in the 1980s, the Yugoslavs in the 1990s.

That’s just off the top of my head.

I expect upsets like that are going to increase, not decrease, in the years to come because we’re going into another period of global war, and the U.S. is going to be in the middle of it. That’s something else that drew me to Argentina: it not only stayed out of the last two world wars, but profited from them. I don’t expect a change in their approach to foreign adventures.

But you must be diversified, because anything can happen anywhere today, even though most people ignore that simple fact.