The Fed is Now Flirting With NIRP… But That Won’t Be Its Worst Policy

Posted on November 16, 2015 by Phoenix Capital Research

The War on Cash is now accelerating.

As the financial system lurches towards collapse, the elites and those who derive power from sitting at the top of the food chain are growing increasingly desperate to maintain the status quo.

When 2008 hit, the Fed cut rates to zero and began implementing QE. It has now maintained ZIRP for six years (the single longest period in history) and has grown its balance sheet by over $3.5 trillion (larger than most countries).

ZIRP has made no sense whatsoever since 2011. You cannot continue to babble about a “recovery” when ZIRP is in place. No legitimate “recovery” in economic history required ZIRP four years into a new business cycle.

Moreover, QE was known to be a Wall Street bailout and an economic dud as early as 2010. The man who ran QE 1 admitted the former in an op-ed piece. And anyone who’s examined Japan’s multi-decade, multi-Trillions of Yen QE failures knows the latter.

Despite this, the Fed ran QE ran through 2014 printing another $2 trillion in the process. That is correct, the Fed had rates at zero and was printing over $85 billion per month SIX years into a “recovery.”

With the US now back in recession and another financial crisis at our doorstep, the calls are going up for even more dramatic measures.

Multiple Fed Presidents have called for NEGATIVE interest rate policy (NIRP) in the US. Obviously these “date driven” individuals haven’t bothered to examine the fact that in Europe, NIRP didn’t accomplish ANYTHING as far as inflation targets were concerned.

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The ECB implemented NIRP in June 2014. Europe’s inflation rate actually COLLAPSED in the six months following it, resulting in the ECB announcing QE. THAT policy (the first in Europe’s history) generated five months’ worth of uptick in inflation before rolling over again.

Somehow the Fed missed this when it began calling for NIRP in the US. Even more amazingly, no one has bothered to ask the Fed why six years into this “recovery” the Fed is even discussing NIRP. ZIRP was a disaster. Why would NIRP fix anything?

NIRP will not be the last straw either. If the markets begin the truly collapse, the Fed will likely announce another, even larger QE program. That is precisely what Japan did in April 2013 despite the clear evidence that its previous EIGHT QE programs had failed to accomplish anything of note.

But even NIRP and QE will likely not be the Fed’s worst atrocity against capital formation. Before it’s all said and done, the Fed will likely push to either implement a carry tax on physical cash OR ban physical cash entirely.

This will eventually result in a stock market crash, very likely within the next 12 months… and smart investors would do well to prepare now before it hits.

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The Fed is “Testing the Waters” for NIRP

Posted on October 30, 2015 by Phoenix Capital Research

The US Federal Reserve is obsessed with market reactions to its policies. Because of this, anytime the Fed plans to announce a major change in policy, it preps the markets via numerous leaks and hints… oftentimes for months in advance.

An excellent example of this concerns the Fed’s decision to taper QE back in 2013.
At that time, the Fed had been engaging in two open ended-QE programs… programs that had been running for over six months.

Rather than simply beginning to taper the programs, then-Fed Chairman Ben Bernanke, hinted that the Fed was contemplating a taper in June.

The markets reacted sharply with bond yields rising.

The Fed then spent six months allowing the market to get used to the idea of a taper, before the actual taper finally began in December 2013.

Put another way, the Fed gave the markets a full six months to adjust to a change in policy, before actually implementing said change. This only highlights just how focused the Fed is on market reactions to its policies.

In the simplest of terms: the Fed will NEVER surprise the market. This is particularly true now that the Fed is in the political cross hairs due to ample evidence showing its policies have increased wealth inequality.

If the Fed is planning on something new, particularly something that might have political repercussions, we’ll see numerous hints and suggestions well before the actual policy is unveiled.

With that in mind, we need to consider the number of Fed officials who have recently been hinting at Negative Interest Rate Policy or NIRP.

First we find that a Fed official hinted at NIRP during the Fed’s September 2015 meeting.

Then, on October 9^th, Fed President Bill Dudley stating that negative rates were “an option” though not a “relevant conversation” right now.

This statement was followed up by Minneapolis Fed President Narayana Kocherlakota stating point blank that the Fed should “consider negative rates.”

The Fed has never once hinted at or discussed NIRP during its policy meetings. Then, in the span of three weeks, we’ve not only had an anonymous Fed official state that he or she believes NIRP is coming to the US, but two highly visible Presidents have called to NIRP consideration.

This is simply part of the Fed’s larger War on Cash.

For six years straight, the Fed has been trying to “trash” cash.

First it cut interest rates to zero… making it so that savings deposits produced almost nothing in the way of interest income. Consider that at current rates, a retiree with $1 million in savings earns a measly $2,500 per year in interest income.

The Fed’s hope was that by making it painful for savers to sit in cash, said savers would move into risk assets such as bonds and stocks. This has worked in that stocks are now in one of, if not THE biggest bubbles in history… while bonds are trading at yields never before seen outside of wartime.

However, the Fed overlooked two outlets for investors who didn’t want to be forced into risk. They are: Gold bullion and physical cash.

The Fed has been dealing with bullion via clear manipulation of prices for years (that’s an article for another time). And now it is moving to make physical cash obsolete.

This is just the beginning. Indeed… we’ve uncovered a secret document outlining how the US Federal Reserve plans to incinerate savings in the coming months through NIRP, and possibly even by outlawing physical cash.

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Graham Summers

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Phoenix Capital Research

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More QE Will Not Stop the Coming Crash

Posted on October 21, 2015 by Phoenix Capital Research

The markets are surging this morning based on hype and hope of more QE from Central Banks. This view is overlook the fact that EVERY collapse follows a pattern:

1) The initial drop

2) The bounce to “kiss” former support

3) The real implosion.

We’ve passed #1 and are in the middle of #2. Next up is #3.

Abroad, the damage has been even worse with China, Brazil, and the Emerging Market complex as a whole imploding.

China’s stock bubble has burst.

Brazil has taken out its bull market trendline.

As have the Emerging Markets as a whole.

The hype and hope of more QE misses the point…

The bull market of the last six years is over.

We will get bounces, like the one that has occurred in the last two weeks. But the trend is now down.

Already investors have begun to realize that Central Banks have lost control of the markets. This is why they erased months’ worth of gains in four days’ time.

Indeed, at this point, it looks as though the END GAME has begun, ushering in a crisis that will make 2008 look like a joke.

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The Greatest Central Banking Con Job in History

Posted on October 20, 2015 by Phoenix Capital Research

One of the greatest con jobs in history was convincing ordinary people that Central Bankers care about the “economy” or Main Street.

Aside from the complete lack of relevance that Main Street has for Central Bankers from a professional perspective (more on this in a moment), when do you think was the last time that Janet Yellen or her ilk spent an evening with non-banker/financial types? Years ago? Decades ago?

Yellen lives in a super-affluent, gated part of Washington DC. And even within that subset of the US population she lives in a higher echelon: her entourage of security annoys her wealthy neighbors… though I suspect part of the annoyance stems from jealousy.

Regarding professional significance… why would Janet Yellen care about ordinary people? They’re just data points in her financial models. Ordinary people didn’t place her at the Fed (the big banks did). And they didn’t place her as Fed Chair (the financial/ political elite did… with the express intent of gaining future favors).

Think of it this way… imagine there was a super cartel of English Professors who controlled what words you or I could use in daily conversation. These individuals literally could change the structure of the human language if they wanted… removing words or adding words at random.

Now imagine that they randomly pick out a low level English Professor who they elevate to being the face of their organization. Do you think this professor would give a damn about how her decisions/ words affected speech? She literally was made one of the most powerful people in the world by this cartel.

This is case worldwide. Most Central Bankers came up from the Too Big To Fails or Primary Dealers (or they are academics like Yellen or Bernanke who get their first taste of the “real world” when they’re literally running the financial system).

Literally their entire personal net worth… their professional clout… and their sense of accomplishment was derived from working at these organizations.

And somehow they’re supposed to give a hoot about Joe the Plumber or Bob the Boilermaker? They don’t even deal with those people face to face when they have a problem with their homes. “Hello this is Mario Draghi… the man who controls the currency in your economy… could you please come fix the sink?”

This is why Yellen, Draghi and the like can say with a straight face that maintaining ZIRP or NIRP benefits the economy. It’s why they can spent trillions to bail out/prop up banks without batting an eyelid. It’s why no one who committed fraud went to jail. It’s why lying and cheating in the financial system is allowed… even applauded… because the ones lying and cheating are the same people who picked out/ promoted the regulators.

And this is why we’re heading for another Crisis… one that will be even bigger than 2008. The fraud that caused 2008 was not solved. Instead it was allowed to spread into the public sector. Today most Central Banks are sporting leverage ratios that would put Lehman Brothers (pre-crisis) to shame.

So the next time something breaks in the financial system… it won’t be just individual banks going belly up. It will be entire countries. What’s happened in Cyprus and Greece is coming to your neighborhood… wherever you are.

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Are Stocks About to Repeat the 1929 Crash?

Posted on October 15, 2015 by Phoenix Capital Research

In the early 2000s, Alan Greenspan was worried about deflation. So he hired Ben Bernanke, the self-proclaimed expert on the Great Depression from Princeton. The idea was that with Bernanke as his right hand man, Greenspan could put off deflation from hitting the US. Indeed, one of Bernanke’s first speeches was titled “Deflation: Making Sure It Doesn’t Happen Here”

The US did briefly experience a bout of deflation from late 2007 to early 2009. To combat this, Fed Chairman Ben Bernanke unleashed an unprecedented amount of Fed money. Remember, Bernanke claims to be an expert on the Great Depression, and his entire focus was to insure that the US didn’t repeat the era of the ‘30s again.

Yellen and Bernanke Are the Same

Current Fed Chair Janet Yellen is cut of the same cloth as Bernanke. And her efforts (along with Bernanke’s) aided and abetted by the most fiscally irresponsible Congress in history, have recreated an environment almost identical to that of the 1920s.

Let’s take a quick walk down history lane.

In the 1920s, most of Europe was bankrupt due to after effects of WWI. Germany in particular was completely insolvent due to the war and due to the war reparations foisted upon it by the Treaty of Versailles. Remember, at this time Germany was the second largest economy in the world (the US was the largest, then Germany, then the UK).

Germany attempted to deal with the economic implosion created by WWI by increasing social spending: social spending per resident grew from 20.5 Deutsche Marks in 1913 to 65 Deutsche Marks in 1929.

Since the country was broke, incomes and taxes remained low, forcing Germany to run massive deficits. As its debt loads swelled, the county cut interest rates and began to print money, hoping to inflate away its debs.

When the country lurched towards default, US and other banks loaned it money, doing anything they could to keep the country from defaulting on its debt. As a result of this and the US’s relative economic strength compared to most of Europe, capital flew from Europe to the US.

How the 1929 Crash Happened

This created a MASSIVE stock market bubble, arguably the second largest in history. From its bottom in 1921 to its peak in 1929, stocks rose over 400%. Things were so out of control that the Fed actually raised interest rates hoping to curb speculation.

The bubble burst as all bubbles do and stocks lost 90% of their value in a mere two years. This was the dreaded 1929 Crash.

Today, the environment is almost identical but for different reasons. The ECB first cut interest rates to negative in June 2014. Since that time capital has fled Europe and moved into the US because 1) interest rates here are still positive, albeit marginally, and 2) the US continues to be perceived as a safe-haven due to its allegedly strong economy.

This process has accelerated in 2015.

Globally, there have been over 20 interest rate cuts since the years started a mere 10 months ago.

Interest rates are now at record lows in Australia, Canada, Switzerland, Russia and India.

Many of these rates cuts have resulted in actual negative interest rates, particularly in Europe (Denmark, Sweden, and Switzerland).

Both the ECB and the Bank of Japan are actively engaging in QE programs forcing rates even lower.

All told, SEVEN of the 10 largest economies in the world are currently easing.

Because the US is neutral, money has been flowing into the country by the billions. A lot of it is moving into luxury real estate (particularly in LA and York), but a substantial amount has moved into stocks as well as the US Dollar.

Stocks Are Almost As Rich As They Were Before the 1929 Crash

As a result of this, the US stock market is trading at 1929-bubblesque valuations, with a CAPE of 27.34 (the 1929 CAPE was only slightly higher at 30. And when that bubble burst, stocks lost over 90% of their value in the span of 24 months.

Another Crash is coming… and smart investors would do well to prepare now before it hits.

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Graham Summers

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Phoenix Capital Research

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Recession Watch: We’re Back in One

Posted on October 15, 2015 by Phoenix Capital Research

The Fed has now kept interest rates at zero for 81 months.

This is the longest period in the history of the Fed’s existence, lasting longer than even the 1938-1942 period of ZIRP.

And the US economy is moving back into recession. Consider that…

Industrial production fell five months straight in the first half of 2015. This has never happened outside of a recession.

Merchant Wholesalers’ Sales are in recession territory.

The Empire Manufacturing Survey is in recession territory.

All four of the Fed’s September Purchasing Manager Index (PMI) readings (Philadelphia, New York, Richmond, and Kansas City) came in at readings of sub-zero. This usually happens when you are already 4-5 months into a recession. (H/T Bill Hester)

Why do these issues matter?

Because they are happening at a time when interest rates are already at zero.

Never in history has the US entered a recession when rates were this low. And it spells serious trouble for the financial system going forward.

Firstly, with rates at zero, the Fed has next to no ammo to combat the contraction. Some Central Banks have recently cut rates into the negative. But this is politically impossible in the US, particularly with an upcoming Presidential election.

This ultimately leaves QE as the last tool in the Fed’s arsenal to address an economic contraction.

However, at $4.5 trillion, the Fed’s balance sheet is already so monstrous that it has become a systemic risk in of itself. And the Fed knows this too… Janet Yellen, before she became Fed chair, was worried about exiting the Fed’s positions back when its balance sheet was only $1.3 trillion.

Moreover, it’s not clear that the Fed could launch another QE program at this point.

For one thing there is the upcoming Presidential election.

Regardless of one’s political affiliation, it is clear that wealth inequality has become one of the big issues for the election. With numerous media outlets catching on to the fact that QE exacerbates this, the Fed’s hands are tied unless we get a full on market meltdown.

So, the US economy is weakening at a time when the bar is set quite high for the Fed to enact any significant policy changes. With interest rates already at zero, the Fed cannot cut rates. And with Congress breathing down its neck and an election looming the Fed won’t be able to launch another QE program unless we experience a full-scale financial meltdown.

Thus, the Fed’s hands are tied… at a time when the economy is faltering and the stock market is beginning to weaken dramatically.

Another Crisis is brewing. Smart investors are preparing for it now while stocks are still holding up.

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Graham Summers

Chief Market Strategist

Phoenix Capital Research

Our FREE daily e-letter: http://gainspainscapital.com/

Fed Experts Call for NIRP… is a Physical Cash Ban Next?

Posted on October 13, 2015 by Phoenix Capital Research

More and more “experts” are calling for Negative Interest Rate Policy or NIRP.

An excellent example of this concerns the Fed’s decision to taper QE back in 2013.

At that time, the Fed had been engaging in two open ended-QE programs… programs that had been running for over six months.

Rather than simply beginning to taper the programs, then-Fed Chairman Ben Bernanke, hinted that the Fed was contemplating a taper in June.

The markets reacted sharply with bond yields rising.

The Fed then spent six months allowing the market to get used to the idea of a taper, before the actual taper finally began in December 2013.

If the Fed is planning on something new, particularly something that might have political repercussions, we’ll see numerous hints and suggestions well before the actual policy is unveiled.

With that in mind, we need to consider the number of Fed officials who have recently been hinting at Negative Interest Rate Policy or NIRP.

First we find that a Fed official hinted at NIRP during the Fed’s September 2015 meeting.
Then, on October 9^th, Fed President Bill Dudley stating that negative rates were “an option” though not a “relevant conversation” right now.
This statement was followed up by Minneapolis Fed President Narayana Kocherlakota stating point blank that the Fed should “consider negative rates.”

This is simply part of the Fed’s larger War on Cash.

For six years straight, the Fed has been trying to “trash” cash.

However, the Fed overlooked two outlets for investors who didn’t want to be forced into risk. They are: Gold bullion and physical cash.

The Fed has been dealing with bullion via clear manipulation of prices for years (that’s an article for another time). And now it is moving to make physical cash obsolete.

We detail this paper and outline three investment strategies you can implement

right now to protect your capital from the Fed’s sinister plan in our Special Report

Survive the Fed’s War on Cash.

We are making 1,000 copies available for FREE the general public.

To pick up yours, swing by….

http://www.phoenixcapitalmarketing.com/cash.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Our FREE daily e-letter: http://gainspainscapital.com/

Governments Have Begun Moving to Ban Physical Cash

Posted on October 8, 2015 by Phoenix Capital Research

The Central Banks hate physical cash. So much so they there will likely try to ban it in the near future.

You see, almost all of the “wealth” in the financial system is digital in nature.

The total currency (actual cash in the form of bills and coins) in the US financial system is a little over $1.36 trillion.

When you include digital money sitting in short-term accounts and long-term accounts then you’re talking about roughly $10 trillion in “money” in the financial system.

In contrast, the money in the US stock market (equity shares in publicly traded companies) is over $20 trillion in size.

The US bond market (money that has been lent to corporations, municipal Governments, State Governments, and the Federal Government) is almost twice this at $38 trillion.

Total Credit Market Instruments (mortgages, collateralized debt obligations, junk bonds, commercial paper and other digitally-based “money” that is based on debt) is even larger $58.7 trillion.

Unregulated over the counter derivatives traded between the big banks and corporations is north of $220 trillion.

When looking over these data points, the first thing that jumps out at the viewer is that the vast bulk of “money” in the system is in the form of digital loans or credit (non-physical debt).

Put another way, actual physical money or cash (as in bills or coins you can hold in your hand) comprises less than 1% of the “money” in the financial system.

As far as the Central Banks are concerned, this is a good thing because if investors/depositors were ever to try and convert even a small portion of this “wealth” into actual physical bills, the system would implode (there simply is not enough actual cash).

Remember, the current financial system is based on debt. The benchmark for “risk free” money in this system is not actual cash but US Treasuries.

In this scenario, when the 2008 Crisis hit, one of the biggest problems for the Central Banks was to stop investors from fleeing digital wealth for the comfort of physical cash. Indeed, the actual “thing” that almost caused the financial system to collapse was when depositors attempted to pull $500 billion out of money market funds.

A money market fund takes investors’ cash and plunks it into short-term highly liquid debt and credit securities. These funds are meant to offer investors a return on their cash, while being extremely liquid (meaning investors can pull their money at any time).

This works great in theory… but when $500 billion in money was being pulled (roughly 24% of the entire market) in the span of four weeks, the truth of the financial system was quickly laid bare: that digital money is not in fact safe.

To use a metaphor, when the money market fund and commercial paper markets collapsed, the oil that kept the financial system working dried up. Almost immediately, the gears of the system began to grind to a halt.

When all of this happened, the global Central Banks realized that their worst nightmare could in fact become a reality: that if a significant percentage of investors/ depositors ever tried to convert their “wealth” into cash (particularly physical cash) the whole system would implode.

As a result of this, virtually every monetary action taken by the Fed since this time has been devoted to forcing investors away from cash and into risk assets. The most obvious move was to cut interest rates to 0.25%, rendering the return on cash to almost nothing.

However, in their own ways, the various QE programs and Operation Twist have all had similar aims: to force investors away from cash, particularly physical cash.

After all, if cash returns next to nothing, anyone who doesn’t want to lose their purchasing power is forced to seek higher yields in bonds or stocks.

The Fed’s economic models predicted that by doing this, the US economy would come roaring back. The only problem is that it hasn’t. In fact, by most metrics, the US economy has flat-lined for several years now, despite the Fed having held ZIRP for 5-6 years and engaged in three rounds of QE.

As a result of this… mainstream economists at CitiGroup, the German Council of Economic Experts, and bond managers at M&G have suggested doing away with cash entirely.

If you think this sounds like some kind of conspiracy theory, consider that France just banned any transaction over €1,000 Euros from using physical cash. Spain has already banned transactions over €2,500. Uruguay has banned transactions over $5,000. And on and on.

This is just the beginning. Indeed… we’ve uncovered a secret document outlining how the US Federal Reserve plans to incinerate savings.

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To pick up yours, swing by….

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Best Regards

Phoenix Capital Research

It’s Official: Central Banks Are Losing Control

Posted on October 6, 2015 by Phoenix Capital Research

For six years, the world has operated based on faith and hope that Central Banks somehow fixed the issues that caused the 2008 Crisis.

All of the arguments supporting this defied common sense. A 5^th grader knows that you cannot solve a debt problem by issuing more debt. If the below chart was a problem BEFORE 2008… there is no way that things are better now. After all, we’ve just added another $10 trillion in debt to the US system.

Similarly, anyone with a functioning brain could tell you that a bunch of academics with no real-world experience, none of whom have ever started a business or created a single job can’t “save” the economy. Indeed, few if any of the Fed Presidents have even run a bank before. And yet they’re in charge of the banking system.

The Elite Have a Vested Interest in Maintaining the Illusion

However, there is an AWFUL lot of money at stake in maintaining the illusion of Central Banking omniscience. So the media and the banks and the politicians were happy to promote them. Indeed, one could very easily argue that nearly all of the wealth and power held by those at the top of the economy stem from this fiction.

So it’s little surprise that no one would admit the facts: that the Fed and other Central Banks not only don’t have a clue how to fix the problem, but that they actually have almost no incentive to do so.

So here are the facts:

The REAL problem for the financial system is the bond bubble. In 2008 when the crisis hit it was $80 trillion. It has since grown to over $100 trillion.

The derivatives market that uses this bond bubble as collateral is over $555 trillion in size.

Many of the large multinational corporations, sovereign governments, and even municipalities have used derivatives to fake earnings and hide debt. NO ONE knows to what degree this has been the case, but given that 20% of corporate CFOs have admitted to faking earnings in the past, it’s likely a significant amount.

Corporations today are more leveraged than they were in 2007. As Stanley Druckenmiller noted recently, in 2007 corporate bonds were $3.5 trillion… today they are $7 trillion: an amount equal to nearly 50% of US GDP.

The Central Banks are now all leveraged at levels greater than or equal to where Lehman Brothers was when it imploded. The Fed is leveraged at 78 to 1. The ECB is leveraged at over 26 to 1. Lehman Brothers was leveraged at 30 to 1.

The Central Banks have no idea how to exit their strategies. Fed minutes released from 2009 show Janet Yellen was worried about how to exit when the Fed’s balance sheet was $1.3 trillion (back in 2009). Today it’s over $4.5 trillion.

Lies, Fraud, and Deceit: the Building Blocks of the Financial System

We are heading for a crisis that will be exponentially worse than 2008. The global Central Banks have literally bet the financial system that their theories will work. They haven’t. All they’ve done is set the stage for an even worse crisis in which entire countries will go bankrupt.

This process has already begun abroad.

Switzerland, China… Who’s Next?

In January 2015, the Swiss National Bank (SNB), backed into a corner by the ECB’s QE program, had a choice: print an obscene amount of money to defend the Franc’s peg or break the peg.

The SNB chose to break the peg. In a single day, the bank lost an amount of money equal to somewhere between 10% and 15% of Swiss GDP. More than that, it let the Franc appreciate… in a country in which 54% of the GDP is based on exports.

The next bank to lose its grip is the Central Bank of China.

With an economy in free-fall (GDP is growing by 3% at best), a dual house and stock bubbles bursting simultaneously, China’s regulators went on the offensive: freezing the markets, banning short-selling, arresting short-sellers, and pumping tens of billions of Dollars into the market per day.

Despite this, Chinese stocks continue to crater. And the economy hasn’t budged.

The fact of the matter is that despite public opinion, there are problems that are so big that the Central Banks cannot fix them. We’ve seen this in Switzerland and China. It will be spreading to other countries in the near future.

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One by One Central Banks Are Losing Control

Posted on September 25, 2015 by Phoenix Capital Research

Since 2008, the Keynesians running global Central Banks had always suggested that there was no problem too great for them to handle. They’d promised to do “whatever it takes,” to maintain the financial system and print the world back to growth.

Thus far, we’d seen some pretty aggressive moves. The most aggressive was committed by the Bank of Japan, which announced a single QE program equal to 24% of Japanese GDP in April 2013.

However, the SNB was the first Central Bank to actually reach the point at which it had to decide between printing a truly insane amount of money relative to GDP (50%+) or simply giving up.

It chose to give up.

In many ways, the SNB was cornered by the ECB into this situation. I think this is why the SNB decided to make its announcement on a Thursday as opposed to over the weekend (when Central Banks usually announce bad news to minimize the market impact). The SNB wanted to cause mayhem, likely because it was frustrated by the ECB’s upcoming QE program of which the SNB was undoubtedly aware in advance.

This situation has since progressed with an even larger, more important Central Bank buckling to market forces.

That Central Bank is China.

As we’ve noted before, China’s economy is in tatters. At best it is growing around 3.5%. At worst it isn’t growing at all. And with its currency closely linked with the US Dollar (which is in a bull market) Chinese exporters were getting destroyed.

So what did China do? It chose to devalue the Yuan.

In short, a new player is in the global currency war. And it represents the second largest economy in the world. Having said that, we want you to take note of a few lessons from this situation:

There are in fact problems that are too big for Central Banks to manage.

Central Banks are in fact individual entities. True, they try to coordinate their moves, but when push comes to shove, it will be each Central Bank for itself. This trend will be increasing going forward.

Central Banks have no problem lying about the significance of a situation right up until they shock the market (both the SNB and the PBOC’s moves were suddenly announced).

Of these, #1 is the most important. Since the mid-‘80s, the general consensus has been that there is no problem too great that Central Banks cannot fix it. This has been the case because most crisis that have occurred during that period were either isolated to a particular market (Asian Crisis, Latin American Crisis, Russian Ruble Crisis, etc.) or a particular asset class (Tech Bubble, Housing Bubble, etc.).

This situation has resulted in less and less volatility in the financial system, combined with increased risk taking on the part of investors. As a result, the necessary deleveraging has never been permitted to occur and the financial system has become increasing leveraged (meaning more and more debt).

You can see this in the below chart revealing total credit market instruments in the US (this only includes investment grade bonds, junk bonds, and commercial paper). The deleveraging of the 2008 crisis which nearly took down the entire financial system was a mere blip in a mountain of debt (and this doesn’t even include US sovereign debt, emerging market debt, derivatives, etc.).

Today, when you include global debt issuance, we are facing a debt super crisis, the likes of which has never existed before: $100 trillion in global bonds, with an additional $555 trillion in derivatives.

Central Banks, by printing money, began a war of competitive devaluation in 2008. This worked fine when they were coordinating their moves to prop the system up from 2009-2011. We even had some coordinated efforts by the Fed and the ECB to push the markets higher in 2012 in order to benefit President Obama’s re-election campaign.

However, 2012 marked the high water mark for Central Bank intervention without political repercussions. From that point onward, all Central Bank began to lose their political capital rapidly.

In Japan, the Bank of Japan’s policies are demolishing the Middle Class. The number of Japanese living on welfare just hit a record and real earnings and household spending have been in a free fall since the middle of 2014.

In Europe, the ECB’s President Mario Draghi has admitted in parliament that he was concerned about a “deflationary death spiral” and admitted that QE was the last tool left. Half of the ECB’s Board is against his direction.

In the US, the Fed is now being targeted by Congress. Legislation has been introduced to audit the Fed AND force it to abide by the Taylor Rule.

In China, deflation is spiraling out of control with a stock market crash, housing bubble bursting, and economic downturn that is more serve than most realize.

The significance of these developments cannot be overstated. Central Banks will be increasingly acting against one another going forward. There will more surprises and more volatility across the board. Eventually it will culminate in a Crash that will make 2008 look like a picnic.

Smart investors are preparing now, BEFORE it hits.

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Phoenix Capital Research

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The Real Reason the Fed Won’t Raise Interest Rates

Posted on September 21, 2015 by Phoenix Capital Research

Another Fed FOMC meetings has come and gone and interest rates remain at zero.

The investing world is obsessed with guessing when the Fed will raise rates and by how much. The Fed has been dangling the “rate hike” over the markets since the beginning of the year.

First we were lead to believe a rate hike was coming in April, then it was June, then September, and now it might possibly be well into 2016.

The fact of the matter is that no one knows when the Fed will raise rates nor by how much. However, one thing is clear: the Fed cannot and will not allow rates to normalize (meaning the 10-year Treasury yields 5% or more).

The reason for this is that it would implode the bond bubble.

As you know, I’ve been calling for a bond market crisis for months now. That crisis has officially begun in Greece, a situation that we addressed at length other articles.

This crisis will be spreading in the coming months. Currently it’s focused in countries that cannot print their own currencies (the PIIGS in Europe, particularly Greece).

However, China and Japan are also showing signs of trouble and ultimately the bond crisis will be coming to the US’s shores.

However, it’s critical to note that crises do not unfold all at once. The Tech Bubble, for instance, which was both obvious and isolated to a single asset class, took over two years to unfold.

As terrible as the bust was, that crisis was relatively small as far as the damage. At its peak, the market capitalization of the Tech Bubble was less than $15 trillion. Moreover, it was largely isolated to stocks and no other asset classes.

By way of contrast, the bond bubble is now well over $100 trillion in size. And if we were to include credit instruments that trade based on bonds, we’re well north of $600 trillion.

Not only is this exponentially larger than global GDP (~$80 trillion), but because of the structure of the banking system the implications of this bubble are truly systemic in nature.

Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile).

The reason for this is because it is far more likely for a company to go belly up than a country.

Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc.) as the senior most asset on bank balance sheets.

Because banking today operates under a fractional system, banks control the amount of currency in circulation by lending money into the economy and financial system.

These loans can be simple such as mortgages or car loans… or they can be much more complicated such as deriviative hedges (technically these would not be classified as “loans” but because they represent leverage in the system, I’m categorizing them as such).

Bonds, specifically sovereign bonds, are the assets backing all of this.

And because of the changes to leverage requierments implemented in 2004, (thanks to Wall Street lobbying the SEC), every $1 million in sovereign bonds in the system is likely backstopping well over $20 (and possibly even $50) million in derivatives or off balance sheet structured investment vehicles.

Globally, the sovereign bond market is $58 trillion in size.

The investment grade sovereign bond market (meaning sovereign bonds for countries with credit ratings above BBB) is around $53 trillion. And if you’re talking about countries with credit ratings of A or higher, it’s only $43 trillion.

This is the ultimate backstop for over $700 trillion in derivatives. And a whopping $555 trillion of that trades based on interest rates (bond yields).

With that in mind, the bond bubble has already begun to burst. The fuse was lit by Greece, but it is already spreading. The Federal Reserve is well aware of this situation, which is why it continues to hem and haw about raising rates, despite the fact that we are now six years into the “recovery.”

True, the Fed could raise rates this year, but the fact that it is so concerned about how the markes will react to a measly 0.1% rate hike after SIX YEARS of ZIRP only confirms the scope of the bond bubble.

Moreover, any rate hike that the Fed initiates would likely be largely symbolic as the US is already teetering on the verge of recession (if not already in one). The Fed could raise rates to 0.35% this year, but doing so would only accelerate the US’s economic contraction and trigger a flight of capital into quality sovereign bonds (pushing yields even lower).

In this regard the Fed is truly cornered. If it fails to hike rates it will have no ammo for when the next crisis hits the US. But it if hikes rates now while the economy is so weak (more on this in a moment), it’s likely to kick off or deepen a recession.

A second, larger than 2008, Crisis is approaching. Smart investors are preparing in advance.

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Graham Summers

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Why What’s About to Begin Will Dwarf 2008

Posted on September 17, 2015 by Phoenix Capital Research

Earlier this week I outlined how the next Crash will play out.

Today we’ll assess why this Crisis will be worse than the 2008 Crisis.

By way of explanation, let’s consider how the current monetary system works…

The current global monetary system is based on debt. Governments issue sovereign bonds, which a select group of large banks and financial institutions (e.g. Primary Dealers in the US) buy/sell/ and control via auctions.

These financial institutions list the bonds on their balance sheets as “assets,” indeed, the senior-most assets that the banks own.

The banks then issue their own debt-based money via inter-bank loans, mortgages, credit cards, auto loans, and the like into the system. Thus, “money” enters the economy through loans or debt. In this sense, money is not actually capital but legal debt contracts.

Because of this, the system is inherently leveraged (uses borrowed money).

The Structure of the Financial System

Consider the following:

Total currency (actual cash in the form of bills and coins) in the US financial system is little over $1.2 trillion.

If you want to include money sitting in short-term accounts and long-term accounts the amount of “Money” in the system is about $10 trillion.

In contrast, the US bond market is well over $38 trillion.

If you include derivatives based on these bonds, the financial system is north of $191 trillion.

Bear in mind, this is just for the US.

Again, debt is money. And at the top of the debt pyramid are sovereign bonds: US Treasuries, German Bunds, Japanese Government Bonds, etc. These are the senior most assets used as collateral for interbank loans and derivative trades. THEY ARE THE CRÈME DE LA CRÈME of our current financial system.

So, this time around, when the bubble bursts, it won’t simply affect a particular sector or asset class or country… it will affect the entire system.

The Bond Bubble is Exponentially Larger Than Stocks

So…. the process will take considerable time. Remember from the earlier pages, it took three years for the Tech Bubble to finally clear itself through the system. This time it will likely take as long if not longer because:

The bubble is not confined to one country (globally, the bond bubble is over $100 trillion in size).

The bubble is not confined to one asset class (all “risk” assets are priced based on the perceived “risk free” valuation of sovereign bonds… so every asset class will have to adjust when bonds finally implode).

The Central Banks will do everything they can to stop this from happening (think of what the ECB has been doing in Europe for the last three years)

When the bubble bursts, there will very serious political consequences for both the political elites and voters as the system is rearranged.

First of all, this bubble is larger than anything the world has ever seen. All told, there are $100 trillion in bonds in existence.

A little over a third of this is in the US. About half comes from developed nations outside of the US. And finally, emerging markets make up the remaining 14%.

The size of the bond bubble alone should be enough to give pause.

However, when you consider that these bonds are pledged as collateral for other securities (usually over-the-counter derivatives) the full impact of the bond bubble explodes higher to $555 TRILLION.

To put this into perspective, the Credit Default Swap (CDS) market that nearly took down the financial system in 2008 was only a tenth of this ($50-$60 trillion).

Moreover, you have to consider the political significance of this bubble.

For 30+ years, Western countries have been papering over the decline in living standards by issuing debt. In its simplest rendering, sovereign nations spent more than they could collect in taxes, so they issued debt (borrowed money) to fund their various welfare schemes.

This was usually sold as a “temporary” issue. But as politicians have shown us time and again, overspending is never a temporary issue. This is compounded by the fact that the political process largely consists of promising various social spending programs/ entitlements to incentivize voters.

In the US today, a whopping 47% of American households receive some kind of Government benefit. This type of social spending is not temporary… this is endemic.

Most Western Nations Are Bankrupt

The US is not alone… Most major Western nations are completely bankrupt due to excessive social spending. And ALL of this spending has been fueled by bonds.

This is why Central Banks have done everything they can to stop any and all defaults from occurring in the sovereign bonds space. Indeed, when you consider the bond bubble everything Central Banks have done begins to make sense.

Central banks cut interest rates to make these gargantuan debts more serviceable.

Central banks want/target inflation because it makes the debts more serviceable and puts off the inevitable debt restructuring.

Central banks are terrified of debt deflation (Fed Chair Janet Yellen herself admitted that oil’s recent deflation was economically positive) because it would burst the bond bubble and bankrupt sovereign nations.

So how will all of this play out?

The bond markets have already begun a revolt in the Emerging Market space. There we are on the verge of taking out the bull market trendline dating back to 2009.

When this hits, capital will fly to high quality bonds particularly US treasuries. However as the bond market crisis accelerates eventually it will envelope even safe haven bonds (including Treasuries).

At that point the bad debts in the financial system will finally clear and we can begin to see real sustainable growth.

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Graham Summers

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Phoenix Capital Research

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These Two Assets Show Us a Crash is Coming

Posted on September 16, 2015 by Phoenix Capital Research

If the foundation of the financial system is debt… and that debt is backstopped by assets that the Big Banks can value well above their true values (remember, the banks want their collateral to maintain or increase in value)… then the “pricing” of the financial system will be elevated significantly above reality.

Put simply, a false “floor” was put under asset prices via fraud and funny money.

Consider the case of Coal.

In the US, Coal has become a political hot button. Consequently it is very easy to forget just how important the commodity is to global energy demand. Coal accounts for 40% of global electrical generation. It might be the single most economically sensitive commodity on the planet.

With that in mind, consider that Coal ENDED a multi-decade bull market back in 2012. In fact, not only did the bull market end… but Coal has erased virtually ALL of the bull market’s gains (the green line represents the pre-bull market low).

Those who believe that the global is in an economic expansion will shrug this off as the result if the US’s shift away from Coal as an energy source. The US accounts for only 15% of global Coal demand. The collapse in Coal prices goes well beyond US changes in energy policy.

What’s happening in Coal is nothing short of “price discovery” as the commodity moves to align itself with economic reality. In short, the era of “growth” pronounced by Governments and Central Banks around the world ended. The “growth” or “recovery” that followed was nothing but illusion created by fraudulent economic data points.

We get confirmation of this from Oil.

For most of the “so called” recovery, Oil gradually moved higher, creating the illusion that the world was returning to economic growth (demand was rising, hence higher prices).

That blue line could very well represent the “false floor” for the recovery I mentioned earlier. Provided Oil remained above this trendline, the illusion of growth via higher energy demand was firmly in place.

And then Oil fell nearly 80% from top to bottom.

As was the case for Coal, Oil’s drop was nothing short of a bubble bursting. From 2009 until 2014 Oil’s price was disconnected from economic realities. Then price discovery hit resulting in a massive collapse.

Moreover, the damage to Oil was extreme. Not only did it collapse 80% in a matter of months. It actually TOOK out the trendline going back to the beginning of the bull market in 1999.

This is a classic “ending” pattern. Breaking a critical trendline (particularly one that has been in place for several decades) is one thing. Breaking it and then failing to reclaim it during the following bounce is far more damning.

In short, the era the phony recovery narrative has come unhinged. We have no entered a cycle of actual price discovery in which financial assets fall to more accurate values. This will eventually result in a stock market crash, very likely within the next 12 months.

You can pick up a FREE copy at:

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Best Regards

Graham Summers

Phoenix Capital Research

Is the Treasury Preparing For a Systemic Event?

Posted on September 15, 2015 by Phoenix Capital Research

Behind the veneer of “all is well” being promoted by both world Governments and the Mainstream Media, the political elite have begun implementing legislation that will permit them to freeze accounts and use your savings to prop up insolvent banks.

This is not conspiracy theory or some kind of doom and gloom. It’s basic fact.

In the last 24 months, Canada, Cyprus, New Zealand, the US, the UK, and now Germany have all implemented legislation that would allow them to first FREEZE and then SEIZE bank assets during the next crisis.

With that in mind, I want to devote some time to what has come out concerning the Cyprus “bail-in” and its implications. The reason for this is that this tiny country has provided the world with a template of what is eventually going to be a global phenomenon.

The quick timeline for Cyprus is as follows:

June 25, 2012: Cyprus formally requests a bailout from the EU.
November 24, 2012: Cyprus announces it has reached an agreement with the EU the bailout process once Cyprus banks are examined by EU officials (ballpark estimate of capital needed is €17.5 billion).
February 25, 2013: Democratic Rally candidate Nicos Anastasiades wins Cypriot election defeating his opponent, an anti-austerity Communist.
March 16 2013: Cyprus announces the terms of its bail-in: a 6.75% confiscation of accounts under €100,000 and 9.9% for accounts larger than €100,000… a bank holiday is announced.
March 17 2013: emergency session of Parliament to vote on bailout/bail-in is postponed.
March 18 2013: Bank holiday extended until March 21 2013.
March 19 2013: Cyprus parliament rejects bail-in bill.
March 20 2013: Bank holiday extended until March 26 2013.
March 24 2013: Cash limits of €100 in withdrawals begin for largest banks in Cyprus.
March 25 2013: Bail-in deal agreed upon. Those depositors with over €100,000 either lose 40% of their money (Bank of Cyprus) or lose 60% (Laiki).

The most important thing I want you to focus on is the speed of these events.

Cypriot banks formally requested a bailout back in June 2012. The bailout talks took months to perform. And then the entire system came unhinged in one weekend.

One weekend. The process was not gradual. It was sudden and it was total: once it began in earnest, the banks were closed and you couldn’t get your money out (more on this in a moment).

There were no warnings that this was coming because everyone at the top of the financial food chain are highly incentivized to keep quiet about this. Central Banks, Bank CEOs, politicians… all of these people are focused primarily on maintaining CONFIDENCE in the system, NOT on fixing the system’s problems. Indeed, they cannot even openly discuss the system’s problems because it would quickly reveal that they are a primary cause of them.

For that reason, you will never and I repeat NEVER see a Central banker, Bank CEO, or politician admit openly what is happening in the financial system. Even middle managers and lower level employees won’t talk about it because A) they don’t know the truth concerning their institutions or B) they could be fired for warning others.

Please take a few minutes to digest what I’m telling you here. You will not be warned of the risks to your wealth by anyone in a position of power in the political financial hierarchy (with the exception of folks like Ron Paul who are usually marginalized by the media).

With that in mind, now is a good time to prepare for systemic risk. I cannot forecast precisely when things will get as ugly as they did in Cyprus for the financial system as a whole (no one can).

However, the clear signals are clear that the Feds are preparing for something big. The Treasury Department has ordered survival kits for the Big Banks’ employees… and the NY Fed is expanding its satellite office in Chicago in case something major happens that forces the market to collapse.

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Graham Summers

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Phoenix Capital Research

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Could the Fed Implement a “Carry” Tax on Physical Cash?

Posted on September 14, 2015 by Phoenix Capital Research

The Fed meets this week on Wednesday and Thursday.

Many in the investment world believe the Fed will finally raise interest rates during this meeting.

If it does, this will be the first rate hike since 2006. And it will represent the first time in six years that rates are not effectively at zero.

Will the Fed raise rates or won’t it? Honestly, I don’t know and neither does anyone else.

The Fed Has a History of Moving Its “Targets”

Back in 2012, the Fed claimed it would start to raise rates when unemployment fell to 6.5%. We hit that target in April 2014.

Here we are a full 17 months later with the unemployment rate at 5.1% and the Fed has yet to raise rates even once.

Indeed, projecting a rate hike at some point in the future, only to hit that point and offer some other excuse to not raise rates has become something of a pattern for the Fed.

Everyone was convinced the Fed would raise rates in April 2015.

It didn’t.

Then everyone became certain a rate hike would come in June 2015.

It didn’t.

It’s now September and less than half of private economists believe a rate hike is coming this week.

Bottomline: no one has a clue when the Fed will raise rates. This includes Fed officials who continue to make various arguments for not raising rates this week.

However, one thing is relatively certain, whenever the Fed does raise rates, the tightening will be short-lived.

Why the Fed Won’t Let Rates Normalize

With over $555 trillion derivatives trading globally based on interest rates, the Fed cannot normalize rates without triggering a crisis that would make 2008 look like a picnic.

This is not just idle talk either.

Consider that as early as 1998, soon to be chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born, approached Alan Greenspan, Bob Rubin, and Larry Summers (the three heads of economic policy) about derivatives.

Born said she thought derivatives should be reined in and regulated because they were getting too out of control. The response from Greenspan and company was that if she pushed for regulation that the market would “implode.”

So Greenspan knew about the derivatives problem in 1998. Bernanke, knows about it as well. This is why he admitted that rates would not normalize anytime during his “lifetime” during a closed-door luncheon with several hedge funds last year.

Janet Yellen is also aware of the derivatives issue. This is why she has continued to refuse to raise rates for months after hitting the Fed’s unemployment “target.”

The fact of the matter is that the Fed has backed itself into a corner. It should have raised rates in 2012 or 2013 so that it would have some dry powder now. Instead, it continued to ease and now it has nothing left in its arsenal.Well, almost nothing…

Is a Carry Tax Coming For Physical Cash?

More and more outlets have begun to call for imposing a “carry” tax on cash.

The idea here is that since it costs relatively little to store physical cash (the cost of buying a safe), the Fed should be permitted to “tax” physical cash to force cash holders to spend it (put it back into the banking system) or invest it.

The way this would work is that the cash would have some kind of magnetic strip that would record the date that it was withdrawn. Whenever the bill was finally deposited in a bank again, the receiving bank would use this data to deduct a certain percentage of the bill’s value as a “tax” for holding it.

For instance, if the rate was 5% per month and you took out a $100 bill for two months and then deposited it, the receiving bank would only register the bill as being worth $90.25 ($100* 0.95=$95 or the first month, and then $95 *0.95= $90.25 for the second month).

It sounds like absolute insanity, but I can assure you that Central Banks take these sorts of proposals very seriously. QE sounded completely insane back in 1999 and we’ve already seen three rounds of it amounting to over $3 trillion.

No one would have believed the Fed could get away with printing $3 trillion for QE in 1999, but it has happened already. And given that it has failed to boost consumer spending/ economic growth, I wouldn’t at all surprised to see the Fed float one of the other ideas in the coming months.

This is just the start of a much larger strategy of declaring War on Cash.

Indeed, we’ve uncovered a secret document outlining how the Fed plans to incinerate savings to force investors away from cash and into riskier assets.

We detail this paper and outline three investment strategies you can implement right now to protect your capital from the Fed’s sinister plan in our Special Report Survive the Fed’s War on Cash.

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Phoenix Capital Research

Three Reasons the Fed Cannot Let Rates Normalize

Posted on September 9, 2015 by Phoenix Capital Research

Analysts and commentators remain hung up on whether or not the Fed will raise rates next week.

Certain Fed officials have been stating that the Fed should commence tightening. However, with China’s bubble collapsing, dragging down the Emerging Markets, there are plenty of excuses for the Fed to postpone yet again.

Ultimately, I remain convinced that whenever the Fed does hike rates, it will largely be a symbolic rate hike, say to 0.35% or 0.5%. That will be it for some time.

I say this because the Fed cannot afford raising rates anywhere near historical norms (4%). There are three reasons for this:

The $9 trillion US Dollar carry trade
The $156 trillion in interest-rate based derivatives sitting on the big banks’ balance sheets.
The weak US economy cannot handle rate normalization

Regarding #1, there are over $9 trillion in borrowed US Dollars floating around the financial system invested in various assets. When you borrow in US Dollars you are effectively shorting US Dollars. So if the US Dollar strengthens, you very quickly blow up (carry trades only work when the currency you are borrowing in remains weak or stable).

The US Dollar has rallied over 20% in the last year. It is currently consolidating. But if the Fed were to raise rates significantly, the interest rate differential between the US Dollar and other major currencies (the Yen is at zero, while the Euro is negative) would result in large amounts of capital moving out of the Yen and Euro and into the US Dollar. This would blow up that $9 trillion carry trade leading to systemic risk.

Regarding #2, bonds are the senior most collateral backstopping the derivatives markets. Over 77% of derivatives are based on interest rates. This comes to roughly $156 trillion in interest rate-based derivatives… sitting on the big banks’ balance sheets.

If even 0.1% of this money is “at risk” it would wipe out 10% of the big banks equity. If 1% were “at risk” it would wipe out ALL of the big banks’ equity.

Suffice to say, the Fed cannot afford a spike in interest rates without imploding the big banks: the very banks it has spent trillions of Dollars propping up.

Finally, the US economy cannot handle a normalization interest rates.

This is not the usual “the Fed cannot raise rates ever” nonsense. It is more a structural argument. A sharp drop in business investment is what causes recessions. When businesses stop investing, job growth slows and the layoffs start soon after. This is how a recession begins.

With corporate profits already falling, US corporations already have less cash available to pay off the gargantuan debt loads they’ve accrued in the last six years (courtesy of the Fed keeping rates at zero). A spike in rates would only accelerate the pace at which corporations cut back on investment, as they have to spend more money on debt payments. This in turn would trigger a recession.

At the end of the day, the Fed has failed to implement any meaningful reform. The very issues that caused the 2008 Crisis (excessive debt, particularly in the opaque derivatives markets) are at even worse levels than they were in 2008.

Another Crisis is coming. Smart investors are preparing now.

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Graham Summers

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Phoenix Capital Research

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Yellen and Bernanke Are the Same

How the 1929 Crash Happened

Stocks Are Almost As Rich As They Were Before the 1929 Crash

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The Elite Have a Vested Interest in Maintaining the Illusion

Lies, Fraud, and Deceit: the Building Blocks of the Financial System

Switzerland, China… Who’s Next?

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The Structure of the Financial System

The Bond Bubble is Exponentially Larger Than Stocks

Most Western Nations Are Bankrupt

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The Fed Has a History of Moving Its “Targets”

Why the Fed Won’t Let Rates Normalize

Is a Carry Tax Coming For Physical Cash?

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