• Anxiety levels are quietly rising — part two
• Three reasons why America can’t get a grip

By Selva Freigedo in Albert Park

It’s 1962 and German leader Adolf Hitler is very much alive and kicking.

He didn’t perish during The Second World War. In fact, the Axis Powers control most of the world now because…they won the war.

The United States doesn’t exist anymore.

The Nazis control eastern US, now known as the Greater Nazi Reich.  They also occupy most of Europe and Africa.

The German mark is the currency in circulation, people greet each other with Hail Hitlers and a swastika lights up New York’s Times Square.

It’s a world full of fear and persecutions.

No, we haven’t lost the plot.

This is the premise for The Man in the High Castle, a TV serial based on the novel by Philip K Dick.

The series shows an alternative reality in which the Axis Powers wins the Second World War. It ponders at what the world could look like if the war results had been different.

But, SPOILER ALERT, as the characters find out, theirs isn’t the only reality. In fact, there are many parallel realities playing at the same time, and some people — the travellers — can travel between them.

Are multiple realities possible?

Well, as it turns, they are…at least in quantum physics.

Obviously I’m no physicist…not even close. But I read an interesting article on this in Live Science recently.

From what I could grasp, two physicists observing a photon in different places can see the photon in two different states. That is, the proton has two different realities happening at the same time…and they are both true.

At present time, we see at least two parallel versions of the economy playing out.

One is a bull market, based on strong profits and a strong economy.

The other is a bleak recovery pushed by central bank manipulation, that has resulted in stagnant wages and more debt.

As an aside, Money Morning editor Harje Ronngard and I recently filmed a video in which we discuss central banks’ changing strategy, the falling Aussie housing market and if even lower interest rates could jumpstart the property market. You can watch it here.

Anyway, if you are a regular reader of this newsletter, you know which parallel reality we see.

Conceivably, they could both keep playing out for a while.

The US Federal Reserve has done a 180 this week.

They don’t see any more rate hikes this year.

We could see lower rates and money printing come back to play.

We are struggling to get back to a ‘normal’ economy and very much moving more towards a ‘twilight’ economic reality.

As reported by Bloomberg, negative yielding debt had started to drop…until central banks started changing their tune:

‘Last October, the world’s stock of negative-yielding debt had tumbled by more than half from its record high as investors adjusted to the end of super-loose monetary policy. Now it’s soaring again after the dovish pivots around the world.

‘The Bloomberg Barclays Global Aggregate Negative-Yielding Debt Index has increased in value by well over $3 trillion since its low five months back, to $9.3 trillion Wednesday. […]

‘As warnings over the global growth outlook abound, bond yields have been in retreat. One risk-free benchmark -- 10-year Treasury yields -- are close to their lowest in about a year. Japan’s equivalent is back in negative territory, while that on German Bunds is teetering on the brink -- about six basis points above zero. Even in Australia, which hasn’t seen a recession since the 1990s, 10-year yields are now below 2 percent.

‘“The bond market is correctly adjusting that growth is going to be slower in developed markets next year,” Andrew Sheets, chief cross-asset strategist at Morgan Stanley, told Bloomberg TV in London.’

That is, we are looking at lower growth in the future. As we move into lower growth, we could see central banks move closer to zero interest rates, or lower…

We could see negative rates come into play, like we have seen in Europe and Japan. That is, people would be getting paid to borrow money. Or even more unconventional monetary policies.

The thing is, zero interest rate policies affect the economy…and banking health.

As we heard recently from our strategist in London, Charlie Morris, on the Fleet Street Letter:

‘While it seems that all major markets are experiencing falling inflation and bond yields, this is exacerbated within the ZIRP countries. At the heart of the problem is that the ZIRP bond markets have nothing left to give. […]

‘Above all, this means the economy is cool, and is the worst environment not just for industry in general, but for the banks. […]

‘As stocks have got off to a good start this year, one group stands out for making new lows, and that is the European banks.’

European banks have been flatlining…

As you can see in the graph below, banks’ profitability has been dropping following European Central Bank policies: 

Lower interest rates may be pushing asset prices higher, but they won’t bring growth.

Instead, they are signalling that we will be looking at lower growth in the future.

Best,

Selva Freigedo,
Editor, Markets & Money

PS: Charlie Morris is one of our experts from our exclusive insider group based all around the world.

Many of the experts in our network have already gone through some of the same scenarios we could be facing here in Australia, and can share with you what they have learned through their experiences.

But, these experts aren’t just looking at protecting their wealth. They are also looking at the best ideas and trends to invest in.

Our exclusive insider group is made up of economic experts, traders, investment specialists, geologists…the list goes on.

And I can get you direct access.

You can find all the details in my latest report. To read it click here.

Anxiety Levels are Quietly Rising — Part Two
By Vern Gowdie in Gold Coast, Australia

‘Before anything else, preparation is the key to success.’

Alexander Graham Bell

My approach to long term capital preservation and appreciation is to prepare for the worst, but hope for the best.

Having been through three major market crashes — 1987, 2000/02 and 2008/09 — the instinctive reactions range from concern to panic.

All it takes is a few to create enough momentum for the many to escalate their concern into fear.

Rumours abound. Rational thinking is abandoned. Indiscriminate selling takes hold. Queues form outside banks. 

And that’s just what I’ve witnessed from what have been ‘average’ market downturns.

While society is plagued with anxiety, economic activity tends to contract. People act with restraint on both discretionary and major spending.

However, as mentioned in Monday’s Market & Money, the economy does NOT come to a grinding halt. The wheels of commerce still turn…albeit at a slower rate.

Should we suffer a significant fall in global asset markets, then knowing this fact in advance should stop you from falling for the panicked response of ‘the economy is going to come to a complete standstill.’

As we’ve seen in the case of Greece (often referred to as ‘an economic basket case’) this simply is not true.

But what about The Great Depression?

According to History.com…

‘The Great Depression was the worst economic downturn in the history of the industrialized world, lasting from 1929 to 1939. It began after the stock market crash of October 1929, which sent Wall Street into a panic and wiped out millions of investors. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and employment as failing companies laid off workers. By 1933, when the Great Depression reached its lowest point, some 15 million Americans were unemployed and nearly half the country’s banks had failed.‘

How bad did it get?

‘The Great Depression affected all aspects of society. By its height in 1933, unemployment had risen from 3 percent to 25 percent of the nation’s workforce. Wages for those who still had jobs fell. U.S. gross domestic product was cut in half, from $103 billion to $55 billion, due partly to deflation. The Consumer Price Index fell 27 percent between November 1929 to March 1933, according to the Bureau of Labor Statistics.‘

Balance.com

They're pretty devastating statistics...the likes of which we have no comprehension of.

On the flip side, a 25% unemployment rate meant there were still 75% employed.

While GDP fell in half, there was still US$55 billion circulating in the economy.

Deflation lowered the CPI by 27%…meaning it was only costing US73 cents to buy something that was previously valued at US$1. That’s good news for those with cash.

Should (or, when) the US share market suffers a fall far in excess of recent market crashes, then we should be prepared for statistics that will take us well outside our comfort zone. Unemployment will rise. Wages will fall. GDP and CPI will both go into negative territory.

This is the contractionary ‘yin’ to the expansionary ‘yang’.

Given that the banking system is at the heart of our economy — as the economic news worsens — we can expect anxiety (along with blood pressure) levels to go through the roof.

This is what happened during The Great Depression…

‘In the fall of 1930, the first of four waves of banking panics began, as large numbers of investors lost confidence in the solvency of their banks and demanded deposits in cash, forcing banks to liquidate loans in order to supplement their insufficient cash reserves on hand.

‘Bank runs swept the United States again in the spring and fall of 1931 and the fall of 1932, and by early 1933 thousands of banks had closed their doors.’

‘By [Presidential] Inauguration Day (March 4, 1933), every U.S. state had ordered all remaining banks to close at the end of the fourth wave of banking panics, and the U.S. Treasury didn’t have enough cash to pay all government workers.‘

History.com

The newly elected President, Franklin D Roosevelt (FDR), moved to reassure the American people of the safety of the banking system.

Part of FDR’s administration’s reform was the introduction of the Federal Deposit Insurance Corporation (FDIC).

The FDIC still exists today…providing a US Government insurance limit of US$250k per account held by FDIC-approved institutions.

The FDIC was a game changer for social mood.

We saw the same psychological effect here in Australia — in late 2008 — when the Federal Government introduced the Deposit Guarantee scheme.

The following is an edited and updated extract from The Gowdie Letter published in August 2017…

The world does not come to a grinding halt

There’s this mistaken belief that the world comes to a grinding halt. All commerce ceases.

That’s simply not true. Even during the Great Depression businesses did business.

One reader posed the question… ‘Would it be better buying precious stones or something that will be tradable for food when it happens?’

Given that the vast majority of Australians buy their groceries from Woollies, Coles, Aldi, Costco, IGA et al, I struggle to see a cashier accepting precious stones and/or metal as payment for what’s in my trolley.

However, I can envisage them asking me to swipe my EFTPOS card — to transfer funds electronically from my bank account to the company’s account — as payment for the goods.

Then, Woollies, Coles et al will pay their employees and suppliers electronically.

From what I observed in Athens in 2016, more transactions will be conducted electronically.

In Athens, properties are still being bought and sold. Settlements are transacted electronically.

While the black economy is alive in well in Greece, substantial levels of business to business trade are conducted electronically.

If you sell your shares on CommSec how do you think this trade will be settled? In bitcoin, gold or with an electronic transfer of cash between buyer and seller?

Are distressed sellers of property going to accept gold, bitcoin or electronically transferred cash to payout the bank debt?

Gold and cryptocurrencies will have a market on the fringe, but day to day dealings with the major suppliers — paying council rates, paying motor vehicle registration fees, paying fines, paying power bills, paying insurance premiums, buying groceries, purchasing fuel — will all be done with the electronic transfer of cash.

The suppliers of these goods and services are not equipped to handle alternative payment methods.

Also, what are gold and cryptocurrencies valued in?

Oh that’s right…US dollars — cash.

Anyone wanting to realise the US dollar value of these alternative currencies is going to have to find someone who has cash.

Whether we like it or not, the system is (literally) geared to operate on a cash basis.

What I see happening is this:

• A bank freeze — so keep a stash of cash (3–6 months living expenses) on hand.
• Deposits under $250k to be guaranteed by the Government BUT you will not be able to physically access this cash. Which means the Government really doesn’t have to come good with the money. However, when you look at your bank statement it’ll show that you have 100 cents in the dollar if your deposit is under $250k.
• Capital controls will be introduced — restricting access to physical cash of $100 or so a day.
• Still being able to buy and sell assets with the electronic transfer of cash. That suits me fine. If shares are trading at 50% to 70% below current values, I’m happy to swap my cash for a share certificate and have the dividends paid electronically into my account.
• Eventually the freeze will thaw. This could take years

If I have missed something, please let me know.

But until someone can come up with a viable alternative — and by that I mean not putting all my money in gold or bitcoin OR putting cash under the mattress — then I’m sticking with spreading our money around several Approved Deposit-taking Institutions (ADIs).

Hopefully, none of the banks we’ve chosen will be caught up in the Financial Claim Scheme (FCS) — triggering the need for the Government’s deposit guarantee.

Next week we’ll take a look at how the Financial Claim Scheme operates.

Stay tuned.

Regards,

Vern Gowdie,
Editor, The Gowdie Letter

Three Reasons Why America Can’t Get a Grip
By Bill Bonner in Gualfin, Argentina

First, we discover that inflation here in the Andes is worse than we thought…

Economist Steve Hanke in Forbes:

‘[Last week] Argentina released its February inflation statistics. Inflation spiked, again. Indeed, the official annual inflation rate jumped to 51.3%/yr.

‘While this spike caught most observers off balance, it didn’t surprise me. Each day, I accurately measure Argentina’s inflation using high-frequency data and Purchasing Power Parity theory. By my measure, Argentina’s annual inflation rate is 100%/yr. That’s nearly double the official rate reported for the end of February.’

What’s it like to live with 100% inflation? So far, so good. Yesterday, we organised an ‘asado’ for the ranch.

It’s too late

But let’s get back to business. We were looking north of the 49th Parallel. The Canadians managed to come to grips with their government debt, noted a Dear Reader.

Why can’t we?

Here, we give you three reasons:

1. It’s too late.
2. Our insiders don’t want to.
3. It’s not the way of the world.

As to the first point, the time to pay down debt is when the economy is running hot. That was the situation (roughly) for the last four years, when the Fed should have normalised rates. And the feds should have cut spending.

The first barely began…the second, not at all.

The Obama team just went right along with all the goofy spending programmes it inherited from the Bush years — from Afghanistan to Albany — adding an open-ended medical giveaway program to boot. And then the Trump crowd just kept going…but faster.

The last year of Obama’s reign saw a deficit of ‘only’ $587 billion. That seems modest, even sensible, when compared to Trump’s $1 trillion deficits.

Mr Trump came into office promising to ‘drain the swamp’ and to ‘pay off the debt.’ Neither of those things happened, either. Instead, The Swamp has gotten deeper and the debt has grown by $2 trillion.

And now, by July, this recovery phase — if it lasts that long — will be the longest ever recorded.

‘Never say never.’ The expansion could last a few months longer. But don’t bet on it. And any ‘tightening up’ now — either with higher interest rates or lower deficits — will likely tip the economy into recession (where it is headed, anyway).

That is why the Fed decided to ‘hold the line,’ yesterday. There will be no further rate hikes this year, it said. It sees the economy weakening; it doesn’t want to get the blame for the coming downturn.

So, it’s too late. The sweet spot — the expansion between 2014 and 2018 — is over.

Second reason

Which brings us to the second reason a ‘save’ is almost impossible. Neither party…and no major presidential hopeful…worries about debt.

Just look at the news. You’ll find claptrap about Mueller…or a presidential tweet about someone who is married to one of his lieutenants…or the latest bogus unemployment number.

But almost nothing about debt. Like war, people don’t care about it until they lose…

And show us the politician who wins the White House by promising to cut the voters’ benefits, raise their taxes, and end military boondoggles all over the planet?

He doesn’t exist. And Fed governors? Where is the Paul Volcker or Maggie Thatcher of 2019, who will stand against the howling mob and say: ‘The lady’s not for turning’?

Doesn’t exist, either.

Instead, the Fed says it is ‘data dependent.’ As soon as stock prices go down, in other words, the Fed turns…tucks tail…and runs for the cover of lower rates, QE (quantitative easing) Redux, and who-knows-what-jackass-monetary hijinks it might get up to.

American empire

And, finally, we come to reason No. 3: that ain’t the way things work.

The US is now an empire. It is controlled by a class of insiders (aka the Deep State), who benefit from government spending and debt.

They send troops all over the world, financed by debt, which makes them feel like big shots…and rewards their crony friends in the weapons industry.

They offer free education, free medical care, welfare, income redistribution, and every other cockamamie Bread and Circuses program to keep the mob satisfied — also financed by debt — and it helps them stay in power.

A small nation — such as Canada — that didn’t have the world’s reserve currency…and didn’t aspire to be the world’s hegemon…and where people had a realistic idea of what was being spent and why…and a residual sense of shame…might be able to buck its insiders.

But an empire? Its insiders have been corrupted by power. They don’t turn around…they don’t stop and ask themselves: ‘Are we doing the right thing?’ They don’t say ‘please’ or ‘thank you.’ And they don’t abide by the rules of a civilised, win-win society…not even the financial rules.

Instead, they lurch and stumble…from embarrassment to absurdity to catastrophe…until they are defeated…or go broke.

Usually both.

Regards,

Bill Bonner

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