Co-founder of The Financial Repression Authority, Gordon T. Long has an in-depth discussion on the current financial situation with Charles Hugh Smith, of OfTwominds.com and with Rick Ackerman, trader and forecaster of Rickackerman.com.
The Outlook for Quantitative Easing
"I've been shouting from the rooftops that the fed will never raise interest rates."
If you want to find out if QE is working the first person you have to go to is the retiree. The whole idea of stimulus should have been refuted simply by the fact that savers have been cheated for so long.
They may go ahead and do the quarter point rates increase because they have built up so many expectations to that. They will need to do this to create the allusion that the economy is recovering or else it's robust.
The market may be a key driving factor, not because of the wealth effect; but because of collateral.
The State of Japan:
"The Juggernaut of deflation is so huge now, that there isn't going to be any time to react. Keep a shoebox full of cash because on that day we might wake up and the banks won't be open, we will need that cash."
I don't see the possibility of massive inflation. The only viable way of getting money into the system is to borrow it into existence.
Japan, is a developed economy that has been in a deflationary setting for almost 25 years now. We can see what they've done and what effects it has. They have attempted to stimulate their economy by improving roads and infrastructure. But it has not worked. Japan refuses to cleanse their financial system to allow real investment so they have consequently brought in mal-investment with borrowed money.
Japan had something over the last 20 years that we didn't have, and that is us. Japan has a global economy to export into; we were the buyer of last resort.
Negative Interest Rates
"If you can extrapolate a somehow positive benefit from negative interest rates, where would this benefit be and how long would it last?"
The idea is if people can no longer park money anywhere, they can only spend it or invest it, we have to ask, where are they going to invest or spend it? It's inconceivable that money can find itself into somewhere in the economy that would promote growth and economic health.
In a current example of negative interest rates we see what is happening with Sweden who is actively pursuing negative rates. The net result is that it is taking their housing bubble and inflating it even further. Basically it is pricing everybody out of housing and creating a credit bubble.
"It is in the cards, in the middle of the next crisis."
We have an approximately $500 trillion swaps market that is underpinned with collateral. So if bond prices were to drop it would be a horrendous situation. We were able to stop the 2008 crisis, we did not fix it we only stopped it. Now it will be a global issue, and the central banks will be forced to come in and pay attention to these collateral values. We have a huge pool of bond ETF's that have exploded in the past few years, somebody has to sell these bonds but they are not easily transferred. The central banks will have to intervene in a massive way. I believe many people are betting on this, and are therefore taking risk adjusted positions.
"We are really talking about a quadrillion dollar bubble."
Much of borrowing and leveraging shifted into rehypothecation. It occurred mostly in London markets that were more unregulated than US markets. So when we had the real estate bust in 2008 we needed something to pledge as collateral.
When you look at the entire quadrillion dollar enchilada, somebody may say the actual size of the bubble is only several hundred trillion dollars. When in reality the gross amount is something everyone involved in the daisy chain thinks they have a claim on a particular asset.
We must own real assets, and have no debt. Whatever financial wormhole we are going to go through,we must own the right tools, because the tools will still exist after we get through the wormhole.
The Indirect Exchange:
Regarding a recent show with Warren Buffet, and Ty Andros, Editor at Tedbits Newsletter,
Warren Buffet so masterfully utilizes the indirect exchange. He takes paper, which is his entire insurance side of business and plows it back into real hard assets that will sustain themselves at a fair price. Buffet has don't this so consistently for so many years and that is why balances; paper products (insurances, bonds, and structures against real assets). Buffet has certainly been a consistent winner without question.
Buffet has also resisted the temptation of going after easy money. His money is not in Uber, Dropbox, and Instagram etc. It's simple to see that it is not going to end well, not only for the companies but for the whole city, if I were to short any city in this country it would be San Francisco. Everything is so pumped up in that city because there are companies that hire these people that are extremely overvalued.
Buffet has demonstrated amazing restraint and discipline for sticking with the nuts and bolts, instead of going after the alluring high attraction companies. He has found real businesses with real products that have a sustaining capability to survive during good times and bad.
Raising the issue of risk, how do we deal with the kind of systemic global risk that we currently have? Risk is extremely misrepresented to the average middle class American. We are trying to help people make a realistic assessment of the global risk they are engaged in by having a 401k that is involved in these risky financial assets.
"You can't look at what's in prospect as hypothetical, if you don't think there is going to be a collapse then you don't understand the problem."
There is no way we can continue to muddle on, for one its taking a lot more debt to create the dollars' worth of GDP growth at the margin. We are really going to face a day of reckoning. The most important thing is for us to be resourceful and ready for when it comes.
"This enormous supernova of debt is going to implode and whatever is left will not be a financial instrument."
"Crisis is nothing more than change trying to happen."
We have so many global imbalances. We have political, economic, and financial systems that are not correct, we are still running from a Bretton Woods; post WWII model. And during this process, mal-investment, lack of price discovery and mispricing are rampant.
But on the flip side, for those who have prepared themselves for this storm, I think the world is going to see its greatest years. The advancements in technology, and so many other endeavors is staggering. 15-25 years out will be an incredible time for the world but meanwhile we are going to go through some rough times, but there will be winners and there will be losers, and the winners are always the ones who prepare.
Abstract written by Karan Singh firstname.lastname@example.org