Ominous Banking Event Taking Place

Over at The Wall Street Journal, they have discovered an ominous event taking place; identifying a "NIRP (negative interest rate policy) "Doom Loop" that threatens to wipeout banks and the global economy".

Europe has just passed #8 while the US just passed #5. Once an "event" takes place, hypothecation reigns supreme and the loop begins to swirl at exponential speed. As the WSJ noted, "the consequences are deeply worrying" and Zero Hedge is correct in advising to "buckle up".

As painful as it will no doubt be, the correct course of action would be to allow a crash and reset rather than extending quantitative easing with bailouts, or God forbid, a new idea of bailing IN.

This Is The NIRP "Doom Loop" That Threatens To Wipeout Banks And The Global Economy--Zero Hedge

Free Markets, Not Affordable Housing, Cure to Housing Crisis

Numerous articles have recently appeared describing an alarming prospect for renters moving forward.

The Atlantic describes a "bleak future for renters" and Zero Hedge noted the "missing" inflation is located in rental rates, which have been on a historic rise. Bloomberg noted "the rent crisis is about to get much worse."

Many have used the fallout of the housing crisis to advance an agenda centralized on the transformation of wealth. An orchestrated series of events, from the FED's ZIRP (zero interest policy), quantitative easing (the printing of money) and the bailout of the nations banking system has led to an inflated stock market where counter party risks have escalated and an increasing disconnect between the worlds of equity and fixed income has emerged. Hypothecation is certain to be an upcoming buzzword.

The economic policies of the left have left those seeking to move up the ladder of prosperity shackled to the ground. Potential home buyers are unable to pull the trigger on purchases of new or existing homes, as median income is stagnant and full time employment growth is non-existent.

In fact, home ownership is at a 40 year low.

Chart via ZeroHedge.com

Left leaning policy wonks, who never let a crisis go to waste, think the government has opportunities to correct the situation, by stepping in to ensure affordable housing.  Stepping in to correct the "situation" they created?  One thing I know; it is not prudent to engage those who caused the problem to fix the problem.

“The economy alone is not going to solve this problem," said Andrew Jakabovics, senior director of research at Enterprise Community Partners, said in a conference call to discuss the findings. "It brings us back to the need to expand affordable housing.”

False.

Presently, consumers are boxed in with historic rises in rental rates (inflation), with little avenue of escape.

More government intervention in the market is the opposite of what is needed. As Ronald Reagan once said, The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'

For the problem to be solved, regulation and taxation must retract to allow increases in full time employment, median incomes and entrepreneurship. Further, QE, which devalues the currency, must cease and interest rates must rise.

As the brilliant Thomas Sowell appropriately notes upon the visit of Pope Francis to America, "Pope Francis’ own native Argentina was once among the leading economies of the world, before it was ruined by the kind of ideological notions he is now promoting around the world".

Without question, free market capitalism is the best path to prosperity, where most who achieve it significantly expand their participation in charity efforts. This is not only true in America, but across the globe.

Providing an environment for potential home buyers to escape from being trapped in rental homes is essential to solve the housing problem, and a integral part of that landscape would be free market capitalism unleashing the entrepreneurial spirit of the individual, placing the federal government back operation within its means and a reduction in punitive regulatory and taxation burdens.

As former Rep. Thaddeus McCotter, R:MI, noted, "Reagan trusted in Americans' entrepreneurial spirit, innovative talents, and industriousness, and he agreed with Adam Smith's insight that freedom and prosperity are inextricably entwined and mutually reinforcing. The flexibility of our markets is endangered by excessive regulation, onerous litigation, and government redistribution of wealth".

The blueprint to solve all the nations economic ills has already been written, if our elected leaders chose to engage it.  The current group will not, choosing to increase power over the citizenry through increasing tyranny utilizing divisive policies laced with socialism.

In November of 2016, we have A Time for Choosing.

Is There Gold In The Hills

Procuring physical gold seems to be a rather problematic and time-consuming process.

While most of America was fully immersed in the Christmas holiday, Glenn Beck and his team noted a troubling story presented on the fantastic financial website Zero Hedge.

The story centers around a request from the German government to repatriate portions of their gold reserves held in America by The FED.  There are many tentacles to this story, which would leave many of my readers deep in the weeds, but the story itself from Zero Hedge offers a strong overview of the situation, complete with opportunities to seek additional depth on the story.  Please see the Zero Hedge blogpost HERE.

There are seemingly logical reasons for the retrieval of physical gold to issue plagued.  Perhaps foremost on the list is covered at the end of the Zero Hedge piece, in that China and India are hoarding physical gold.  An overview of the reasons behind this demand shines a spotlight on the real elephant in the room.

Meet the theory of hypothecation.

David Buckner joined Glenn Beck back a year or so ago to effort to explain hypothecation in what most would consider English. Please take a listen:



In reflecting on the Christmas season, the wonderful Frank Capra movie Its A Wonderful Life comes to mind when attempting to provide a basic overview of hypothecation.

The Bailey Building and Loan Association, of which the central character George Bailey was the president, engaged in mortgage lending, lending out portions of monetary deposits to qualified buyers in an affordable housing project.  Provided the association retained proper reserve requirements without commingling funds, this was a quite ordinary and profitable enterprise for such a loan association.  Failure to adhere to regulatory banking laws would appropriately lead to fraud likely commensurate with incarceration upon conviction.

Enter The Federal Reserve.  The FED, as the holder of the physical gold, may lend to banks, and others, utilizing the gold as collateral, provided the depositors have consented to such an agreement.  An agreement in this regard would certainly have reserve requirements, although the FED, not being a public company and a quasi-governmental firm, has no regulatory requirement to publicly release terms of such agreements or asset balances.

Back to the request by Germany to obtain portions of their physical gold deposits from The FED.  The Zero Hedge piece noted the agreed upon amount of the first batch to be delivered was short, and Germany noted it was not the same gold initially deposited, as it was marked.

Why was did The FED short the batch size, and why were the gold bars not the original ones deposited?  Glenn Beck asks some legitimate questions about the batch and potential reasons for the alteration of the originally deposited gold bars, and the conclusions drawn are hair on fire troubling.





Has The FED deviated from common banking guidelines with respect to collateral requirements of gold reserves?  Does The FED actually possess the physical gold?  Are adequate reserves in place to accommodate the subsequent levels of hypothecation?

Where would these reserves be if not in the possession of The FED.  The financial crisis of 2008 was the greatest theft in history, and we still wonder who got all the loot.

If the gold is not possessed by The FED, given gold the position gold holds as the cornerstone of finance, the result would be catastrophic for everyone, and global collapse would be imminent.

Even Mr. Drysdale won't be able to fix this.

Tacking Tangible

The market indexes have been on quite some run.

If I could get a handle on all the lines of action going on on Wall Street, not only would I be a ventriloquist, I would be beyond wealthy. I am not.

The FED has increased the money supply by engaging in monetizing the debt, otherwise considered printing money, and that has resulted in excess money chasing too few assets, pushing the asset prices higher.

Due to the abysmal housing market, which cannot gain ground due to a horrendous job market and extensive regulation through Dodd-Frank, real estate investing has not been the avenue of choice for investors.  Gold and the stock market has.

A review of the NASDAQ after the close today shows the index increasing five year highs, and this has been a great run if you have been along for the ride. Take a look, but note the market level variance from the relative strength:



Weekly NASDAQ chart/Investors.com

While markets are forward looking and do not always reflect the current status of the economic realities on the ground, given our economy, it is reasonable to conclude the stock market should not be lurching into a parabolic assault on historical highs.  With an employment participation rate having retracted to levels not seen since the Reagan administration, a manipulated unemployment rate parked at levels not witnessed since The Great Depression, governmental assaults on small business, class warfare on the wealthy and putrid growth in the Gross Domestic Product, one has to wonder why the dichotomy between the capital markets and the reality on the ground.

As the excellent blog Zero Hedge accurately pointed out, many economic measures are breaking down, and while the Case Schiller Housing Index has shown signs of life depending on how you analyze the data, even though a shadow inventory remains, the housing market remains bottoming.

If housing is improving, with the state of the economy, one must conclude rising investor participation as first time home buyers are scarce.  If investors are becoming more interested in real estate, what market has fallen into disfavor and why? The stock market?

Indications are yes.

In fact, as BloombergBusinessweek reported, some $114 billion US Bank deposits have been withdrawn, at the fastest pace since the September 11, 2001 attacks. 

Apparently, few know why.

Paul Miller, a bank analyst with FBR Capital Markets, cautions against reading too much into the Fed’s weekly data. “It’s a noisy database,” he says.  No kidding.  With a media complicit in propaganda, and the FED intervening in market action in unprecedented levels, it is most difficult to accurately value equities.  It is the FED behind the curtain who is crowding banks out of the mortgage origination market and setting unreasonable credit requirements for lending practice, handicapping the housing market even with manipulated easy money.

But is there a correlation between rising housing investment and what looks to be a topping out of the DOW and NASDAQ?  Further, in anticipation of a market collapse, would tangible assets such as real estate become the favored investment?

Without government interaction, even though they have been replenishing their balance sheets borrowing free money from the Fed, banks could not withstand a major economic collapse.  Further, unwinding the hypothecation would be catastrophic.  If the clients of Jon Corzoine at MF Global are any indication, get your money while you can.  Maybe investors are.

No matter what market developments lay in store for us, a few things are certain in my view.  The housing market remains broken and cannot recover without a recovering job market. The market has been compromised and true evaluation is not possible. And, unfortunately and most notably, the rule of law and trust of the marketplace, integral for the survival of a free market capitalist system, has been violated.

As I have previously mentioned, until the rule of law is reestablished with the government becoming a bystander, allowing the FED to resume normal open market operations, the market place will remain compromised and a playground for the crony crowd.

Given the increasing turbulence, while I don't know what I am having for lunch tomorrow, I sense a major storm brewing both port and starboard. Caveat Emptor.