The Next Turn on a Blind Path: NIRP

If there is one thing you need to bear in mind regarding the global economy in general and the US economy in particular, it's the fact that since the beginning of the Great Recession and the intervention of the central banks, we have walked in uncharted territory.

Never before has the world been ruled by central banks. And never before have central banks commanded so much influence on the global economy.

In the US, the Federal Reserve has held some sway as more and more people bought into the stock market. As pensions disappeared (and pension managers) and raided by bad management or buyout firms, and more workers were forced into 401(k) plans, the more workers began to care about what the Fed chairman had to say about interest rates.

Bear in mind, most nations in the world don't have the 'investing class' that we do in America. Most retirement funds aren't in the hands of individuals in most nations.

This puts US citizens in a unique position in a very unique period.

But the problem only begins there. Because now, as more nations start to move to what's called a negative interest rate policy (NIRP) things are getting curiouser and curiouser.

Let's go back to the beginning. When the banksters nearly destroyed the world financial system with their newest round of schemes, the central banks were put in a position to either sit idly by and allow market forces to sort things out - likely gruesome amounts of wealth destruction, foreclosures and massive bankruptcies – or try to save what was left of the system with the institutions that were barely standing.

Most regulators now talk about how they couldn't sit idly by when such an event of such enormity was taking place. But now we look back and wonder if it would have been the better course of action.

Now, the entire financial system is as dependent on the generosity of the central banks' monetary policy as a heroin addict is to his dealer.

But after almost a decade of easy money, it looks like there's no end in sight and the central banks have fewer options to prime their economies.

So, they invent things. First it was quantitative easing (QE).

And now it's NIRP.

QE basically amounted to letting the banksters who started the mess borrow for nothing and ostensibly lend it to businesses and individuals, so they could get back on their feet and grow the economy.

The banksters instead, just bought ultra-safe US Treasuries and lent money to only their best customers at similarly low interest rates. That's why the economy has failed to achieve consciousness in 8 years.

Now, other countries' central banks are turing to NIRP. Basically, banks are required to keep a certain percentage of reserves in case something bad happens and there's a run.

Banks could also keep extra reserves in these accounts and just pile up the interest they received.

So, central bankers now want to encourage the banks to start lending this new way – charge the banksters for keeping extra reserves in the system.

The problem is, like QE before it, no one knows how the banksters and their cohorts will react to this. This is uncharted territory and we playing as we go.

More than likely the central banks that have implemented NIRP – according to Barron's, 30% of the value of stocks in the MSCI World Index are now represented by companies in NIRP countries - are trying to get more money into the economy. As of this month, the Bank of Japan, the European Central Bank, Switzerland, Sweden and Denmark are all running NIRP.

Even Fed Chairman Janet Yellen recently discussed NIRP for the US at a recent Congressional hearing.

But don't worry, there are laws – for now – that prevent the Fed from going negative.

Regardless, with Europe and Japan in NIRP economies, that's a lot of gravitational pull. And while the goal may be to spur bank lending, it's also likely to get the banksters to prop up the floundering stock markets.

It's anyone's guess if it's going to work. If the past is prologue, it will only spur another mess.

Apple Is A Red Herring - FBI Has Some Explaining To Do

I wrote this piece a few weeks ago, and I thought I'd share it.

Privacy and Politics Clash Again

NSA whistle blower Edward Snowden says it's the most important court case of the decade. And it very well could be. At stake is our privacy.

Say what you like about Snowden, he certainly knows a thing or two about government snooping and the secret violations of citizens' privacy on a daily basis.

The case in question is the new battle between Apple and the FBI.

And just to be clear, Apple is the point of the spear on this issue, because the FBI has filed a court order demanding they break into the iPhone of one of the San Bernandino shooters.

Apple has refused and the likes of Alphabet (Google), Facebook and the Electronic Frontier Foundation have all stated that they support Apple's position.

Silicon Valley geeks are standing up against Washington, DC security forces.

And neither side is likely to back down. This is going to get ugly.

As usual, it was Washington's agenda that got this whole confrontation started. For years they have asked computer and tech companies to hand over information on individual's accounts when the person was on trial for a crime.

But Apple has always been uncomfortable with this and so, in its newest operating system, iOS8, it made it so that no one, not even Apple could access the information on the phone.

Bear in mind that most of the information on the iPhones is backed up at 12 hour intervals and stored in the Cloud. It's just the latest calls and texts that are only on the handset.

The FBI have been the agency that has taken the lead to demand Silicon Valley build 'back doors' into their operating systems so law enforcement could access specific information if they feel the need.

You can no doubt see the slippery slope here, if law enforcement is able to get warrants to search your phone and access to everyone's most private information.

The FBI specifically chose this case to go after Apple because it was the perfect moral dilemma – allow the FBI access to the phone of a ISIS-supporting mass murderer, or deny access to protect the information for the sake of everyone.

As usual, of course, now that the headlines have had some play, more details on the story are unfolding and it looks like if the FBI hadn't bungled its initial steps right after the shooting, it could have had access without any bother.

Here are a few technical touchpoints so that the details of what happened don't get too complicated.

When the FBI initially found shooter Syed Farook's phone, they were eager to get the data, so they asked a tech to reset the phone's password.

Farook, had an iPhone 5c (an older model that could have been hacked) but Farook updated his operating system with iOS9, which is unhackable, even by Apple.

Had the FBI not made a bull in a China closet move, it simply had to request that Apple refresh its Cloud to recover the most recent data in the cloud. Then it would be off the phone and it would have been a less onerous request of Apple.

But now, since the FBI screwed up, the data is virtually lost, since Apple can't even break the encryption on its phones and by resetting the password, it wiped out the information on the phone.

What's more, it was discovered that Farook's phone hadn't been backed up since October 19, six weeks before the attack. Maybe Farook overrode the auto back-up, or maybe he hadn't used it. We will never know now.

So once again, the government has hyped a situation and is now using it as an excuse to get access to even more information about its citizenry.

Some are even beginning to think that the government allowed this attack to happen just so it could increase its spying on Americans.

The bottom line is, we can be thankful the FBI's ham-handed MO has gotten no more refined, since we now know that it had all the information it needed but destroyed it. And now it wants to use its incompetence as a pretext for forcing tech firms to give them a backdoor into their most sacred files.

Given its current attitude, is it any surprise no one wants to cooperate with the FBI, or any other branch of government that's looking to strip more privacy from its citizens?

This is why I've written a couple articles recently about how to protect your privacy online now. Onion routers for your internet use (browsing, email, etc) – check out my recent article or go to www.torproject.org. And keep an eye peeled for new blockchain technology that will be able to encrypt our most important transactions.

When Central Bankers Rule The Earth

Eight years ago, the US economy started to blaze a trail through uncharted territory.

Soon, the rest of the world was following.

Not much different than the Pilgrims leaving Europe for the New World, or the pioneers headed West, with the near-collapse of the financial system, nation's set out on a new economic path that at once was necessary as well as fraught with the dangers of the unknown.

We have left the world where financial institutions run the day to day activities of free markets. Those days are in the past.

We have arrived where central banks rule the world.

While this isn't the end of our journey, the repercussions of having free markets artificially sustained by national monetary policy is becoming clearer.

Beyond the Point of No Return

There are two things moving the markets right now: oil prices and the US Federal Reserve.

Oil prices are essentially a 'groupthink' indicator on how the global economy is doing. If oil is rising, stocks rise exuberantly, assuming the economy is rebounding. If oil is falling, the economy is losing ground and stocks sell off, hard.

The problem is, stocks are trading this way daily, sometimes hourly. Volatility is extreme because no one wants to be caught holding a position that may head south quickly, especially fund managers and institutional investors that make up most of the trading volume.

This hurts the individual investor more than the big traders. It hurts pensions, 401(k)s, IRAs, and CDs. Simply put, this hurts the individuals who drive the US economy buying, making and selling real goods.

This is why it's crucial that you stop listening to the noise about stocks and oil and understand what underpins all of it: the central banks' role in shaping our economy and the world's economy.

Our New Central Bank World

We are beyond the border of normalcy. We are bushwacking through new territory and no one knows how this will end.

But we do know where we are, relative to where we've been.

For many years, the US put in place 'quantitative easing' (aka QE) which was the Fed's first attempt to re-inflate the economy. But as it continued this, and other major countries joined in, the financial system got used to this 'financial system welfare' and readjusted its business to game the new system.

Now, all these financial institutions are living off the central banks' easy money policies and threatening that if they change their ways, they will collapse. The same argument they made initially – except it's 8 years later. This is the ulitmate realization of artificially saving the financial markets in 2008.

The problem for the central banks is that they really can't do much more to try to reinflate their economies. And knowing what they know, they have no desire to let the free market sort it out because the system would collapse. So, they're pumping air in a tire that still has a hole.

Buzzwords to Know: ZIRP and NIRP

After 4 rounds of QE, the Fed and others went to ZIRP – zero interest rate policy. This meant banks could borrow from the Fed, for example, at 0%. The goal was to get banks lending money again to small businesses and individuals.

But the banks decided that was too risky, so they simply bought US Treasuries and threw some money in the markets (hence the strong dollar and higher stocks for no reason). And continued to make it nearly impossible for any company without excellent credit to borrow at a low rate.

Bear in mind, if you're borrowing at 0% and buying US Treasuries yielding 2%, you've doubled your return.

The latter stage of ZIRP also brought on the junk bond craze, when banks started lending at high rates to lower credit companies. But that only works when an economy is on a growth track.

Growth in the US is a myth perpetrated by the politicians, bankers and corporate leaders to keep consumers cheery and buying.

Now, the junk bond market is collapsing like oil, and the institutions are moving their money back to Treasuries.

ZIRP has failed.

The next step is NIRP – negative interest rate policy. And it's already a fact in Germany, Japan, Sweden and many other nations.

What NIRP means is, companies pay the central banks to keep excess reserve deposits with the central banks. The goal here is to force the financial institutions to lend money to boost the economy and penalize them for not doing so.

What it shows is the banks are unable, even 8 years later, to survive without significant help from the central banks. The financial institution is now built around the central banking system's generosity.

There is a growing amount of discussion in the US about moving to NIRP. But the real question is, whether it's even feasible – or legal.

But the biggest issue is, all the money in money markets (a valued storage spot for individual and institutional short-term cash) would be hurt by NIRP and that would have significant negative repercussions across all markets and economies.

The junkie has a gun to the head of the dealer. Again.

NIRP in the US would be seismic.

As long as the global financial and industrial institutions are more concerned with their own viability than taking their place – and the ensuing responsibility – in the economy, most individuals are far up an unknown creek without a paddle and the sun is setting as it begins to rain.

Seeing Through The Fire and Smoke

If you look at the headlines, it certainly looks grim.

• European stocks are at a 13-month low.

• Oil has hit lows not seen since 2003, and not only are the oil companies suffering, but the banks that are holding all those shale play loans are starting to sweat.

• Tech darling GoPro is laying off 7% of its workforce and restated its expectations for 2016 downward.

• Walmart, the world's largest retailer, is shuttering 264 stores, 154 stores in the US and affecting 10,000 US jobs.

• Federal Reserve hawk (pro interest rate increases) and Chairman of the Federal Reserve Bank of St. Louis James Bullard is now worried that low oil prices may hurt the economy and is backing off another rate increase.

• Inflation is down to 1.2% and with import prices lower, we're not 'importing' any inflation.

• Chinese stocks are off 15% so far this month, and off nearly 50% from their June 2015 highs.

Is it time to panic?

No. Bear in mind that the markets operate like nature. Where there is disadvantage, if you stay dispassionate and see events for what they are – instead of what should be or could be – you can find advantage.

A majestic tree falls in the forest and the animals and plants on the forest floor take advantage feeding on it and breaking it down for the good of the forest. Wolves keep elk populations in check. It's a natural balance.

The point is, a free, undistorted market is self-regulating and instead of worrying about the problems, it's best to figure out who benefits from the new situation.

For example, GoPro (the leader in the mini-digital camera revolution) is having a tough go of it but some of that may be the company's fault by expanding too rapidly, and not necessarily a harbinger of economic doom. But there's a very good chance that now that the high-flying stock has been laid low, companies like Apple or Google may see it as a worthy buy. This is healthy.

The problem really is that this isn't an unfettered market. The big corporate and financial interests have been rigging the game so that they could keep their advantage.

But in the long run, they won't be able to manipulate the markets forever and the game is already unraveling.

First the big companies bought back their stock to keep share prices artificially high. The way it works is, if there are fewer shares on the market, then each share is more valuable. But if you look at the stock chart, it just looks like the stocks are rising because the company is doing well. Complete illusion and major companies are still playing this shell game.

Then they started the merger and acquisition machine up to 'buy' growth because none existed. There's an old saying on Wall Street that if you can't find growth in the economy buy it. That means, if your company isn't growing, you buy another company and use the combination as a way to tell investors that you're still growing. This is what many companies continue to spend their huge pile of money on, not hiring workers or actually expanding. What this really does is usually throw people out of work and because the industry is consolidating, those workers have to find jobs elsewhere or take a cut in pay to stay in the industry because there is now less competition. Good for C-suite bonuses, bad for the economy. This scheme is now at the point of collapse in the biotech sector.

Now, corporations are cutting their 'fixed costs' to keep up the illusion that growth exists. Bluntly put, fixed costs are jobs. Walmart and GoPro are cutting their workforce, Caterpillar is doing it as well. And many other companies across most business sectors are either holding off hiring, hiring temps or cutting their workforce.

This is the final leg to go. And it might take a while, but we're now in the Great Repositioning. Everyone is scrambling to reposition for a slow to no-growth year - and it's ugly.

The undeniable fact is, everything reverts to the mean.

What this means for investors is you need to lighten up on any industrials, big financials or transports that you have. Rail and trucking aren't looking good this year and that means there are few goods to ship because there is lower demand. Regional banks are the choice in financials, but not yet.

Also stay away from the international markets. They're in bad shape.

Utilities may be in good shape, depending on the winter and whether the Fed raises again in the next quarter. Not worth the risk right now.

Energy is still too risky, although if you have some serious risk tolerance you can start to look at select midstream players and some small producers.

Your best bet is taking positions in silver and gold. Buy the bullion or just buy some ETFs. Buying gold or silver miners is a much higher risk way to play this trend. As this fixed market readjusts itself the metals will take off. It's likely to be a multi-year trend, so buying in now is a good choice. 

It May Just Be Time Again For Gold And Silver

Before the first week of the new year is in the books, the Chinese stock market has lost more than 14% and triggered circuit breakers that have led to the shortest trading day in the stock market's 25-year history.

As far as stocks are concerned, the Chinese market made huge gains – up over 100% - from early 2014 into early 2015. Then we had the selloff in the summer and the market came back again. Given the massive gains, it's not surprising that there's going to be a significant correction, circuit breakers or not.

The circuit breakers, which kick in if the market falls 7% during trading, will only slow the correction, not alleviate it. A 30% correction in the Chinese market still leaves it up 70% over the past two years.

The real issues aren't Chinese stocks. These are the 3 main issues as I see them:

1. The massive devaluation of the Chinese yuan against the dollar.
2. The effect this is going to have on Chinese dependent companies like Apple that are over represented in all US financial indexes.
3. The ultimate reckoning this will all have in the energy and transport sectors in the US, which will certainly send the financial sector reeling.

Each of these deserves its own space, so here I will talk broadly about the implications of this entire 3-part scenario playing out before I drill down into each part.

A Cheaper Yuan

Here's how the transmission mechanism works: The Chinese have begun to devalue the yuan against the dollar. That announcement from the Chinese central bank on Thursday is what set off the second massive selloff on the week.

The implications are that the Chinese economy is weaker than it appears and the move is to stimulate growth; and that Chinese businesses and citizens are now holding money that is worth less every day and most can do little about it because the yuan is not yet an openly traded currency.

The US Stock Connection

What that also means is companies like Apple (NASDAQ: AAPL) and Qualcomm (NASDAQ: QCOM) and GM (NYSE: GM) and everyone else looking to China as their main engine of growth are going to earn less money in China on the goods they sell, which will hurt earnings for the company as a whole. Plus, a weaker Chinese economy means less spending and economic expansion.

The slower economic expansion means less need for energy and commodities. That's why oil is down to 12-year lows again and dropping.

US Energy and Banking Problems

This will be another blow to the US energy sector, which needs higher prices than most of its global competition to produce oil profitably. And one area where we can see the problem clearly is in rail transportation numbers, since much of the oil from US shale fields is moved by rail.

Bank of America analyst Ken Hoexter has found that rail loads have fallen 5% year over year for 11 successive weeks, something not seen since 2009.

And the 3 largest drops by sector: coal, metals and ores, and oil, which are are all down by at least 26% year over year.

This is why the Dow Jones Transportation Index was off 20% in 2015 even with record low energy prices. If you're not moving goods, it doesn't matter how cheap the fuel is.

The other shoe to drop here is when the banks have to cover the losses of the US energy companies that go under. The banks have underwritten loans, junk bonds and any manner of investment vehicles into this sector of the years and now they're as exposed as they were during the mortgage debacle 8 years ago.

And in all this doom and gloom: One piece of good news is that gold hit a 9-week high last week. And silver is moving proportionally stronger than gold.

The Coming Hard Assets Rally

The flight to safety is on and gold should see a very good 2016. And as I've discussed in previous articles, silver is a leveraged play on the return to hard assets.

Given the fact that the Chinese prefer hard assets and that most individuals can't trade in the foreign exchange market, there will be a significant increase in gold demand in coming days and weeks.

How Cheap Oil Could Kill The Banks

Energy prices continue to wallow near decade lows, with no real visibility on when that might change.

And while that's good for consumers and businesses that rely on cheap fuel, it also tells a story about a weak global economy that doesn't seem to be getting any stronger. And there's a bigger shadow this energy issue casts.

There's plenty of oil out there and Iran is about to come on line, adding to the glut. And the US in another case of bizzaro-world counter intuitiveness, just lifted the 40-year ban on domestic oil exports.

Now US producers can export oil internationally.

What is the point? Well, in Washington, DC, that's precisely the point. You don't pass this kind of legislation when it's important to pass it, like when oil prices are high. You wait until no one is looking and no one cares – remember it's an election year, so there's no opposition - and it's sitting on the books when you want to use it.

Basically, it's a kickback to big oil companies from Congress for all their support, while no one is looking.

According to oil services firm Baker Hughes, there are 871 wells in operation

in the US right now; last year at this time there were 2266. I don't think US drillers will be exporting any time soon.

Also, there's a more disturbing implication for what this oil glut is doing. But it's not energy firms that are the prime targets; it's the banks.

On Maria Bartiromo's FOX Business show, a hedge fund manager was talking about how the next shoe to drop in the energy sector is the financial sector.

His prediction was that 25-30% of today's oil and gas companies will be bankrupt in the next 3 years. And the bag holders will be the banks that are holding their defaulted loans and lines of credit. And this is partly to blame for why the high-risk credit market is starting to fall apart.

But we're only at the tip of the iceberg. If the US loses all these energy sector firms we could see another collapse the size of the last financial crisis.

Given the bad shape most major banks are in even now, this could be a death blow for some of these 'institutions' and an economic tsunami for all of us.

The Debt Deception

I think it must be scandal fatigue at this point.

First it was the housing scandal that almost collapsed the entire global economy and from which we have yet to recover.

Then it was revealed that the same banks that caused that scandal – and were bailed out by all of us – doubled down in the obscure interest rate swap market. This LIBOR scandal was reported but outside the financial community and the geeks that follow it, it didn't make much noise.

So, here's the deal. LIBOR is a $379 trillion market. That's nearly 100 times bigger than the US economy. It has to do with virtually every interest rate on the planet. That means every loan, credit card and national debt on the planet is part of this scandal. But it's such 'inside pool' that most people don't grasp how massive this scandal has been. Or its long-term implications.

Then there's the admission that the gold markets have been manipulated.

And the silver markets.

And auto loans.

By whom? That's the most galling part. It's the same too big to fail players behind all these crooked schemes.

And the US government continues to allow them to get away with it. And individuals are ignorantly happy to keep their shoulder to the grindstone flashing the plastic for the newest iPhone.

At this point, the institutions that we couldn't let fail are now more powerful than ever. As Matt Taibi reports in an excellent article on the LIBOR scandal for Rolling Stone, the top 6 US banks now hold assets equivalent to 60% of the US GDP.

These are true robber barons in every sense of the words.

But it's what is below these scandals that is even more significant.

Most of us rarely stop to take in The Big Picture as it relates to the global financial picture. But the big financial institutions think about it every day, because they are building it.

And if we're not saying anything, they're going to continue to build it to their advantage.

It would be like hiring a contractor to build you a house. You trust the contractor will hire skilled labor, use quality materials and build it all to code. But the contractor is connected to the inspectors, gets kickbacks from his material suppliers and knows he can do sub-standard work with sub-standard materials and make a killing. You don't watch over him and after the house starts to fall apart the court tells you it's your fault for trusting the contractor.

This is where we are with the global financial system.

Much of the developed world is now not built on money – fiat currency, metals, bitcoin, wampum – it's built on debt. This infographic may help get your mind around what I'm talking about.

But here's the point:

There's about $15 trillion in the broadly defined currency markets of the world.

There's about $200 trillion of debt in the world markets.

And there's about $630 trillion of derivatives on that debt.

Cash is no longer king. Debt is. And the same people that control this $830 trillion in debt and derivatives are also fixing the interest rates.

There are few things that can help get you outside this massive financial tsunami. Go off the grid and wait. But it could take years more of manipulation, collusion and distortion before something big changes everything.

That's why it's increasingly important to stay informed and engaged in the big and the small issues. Become an economic survivalist. Learn the terrain, how to defend what you have and rely on your own training and discipline to thrive.

We're here to help get you there. And as the saying goes, the journey of 1000 miles begins with one step. Let's get moving.