These two only agree on one thing Yield hungry and capital starved Donald Trump has found his next fall guy
By Selva Freigedo in Albert Park Madrid and Barcelona — Spain’s two main cities — are major rivals. Much like Sydney and Melbourne, they are in constant competition. Bring up the issue that Madrid has better shopping — and tourism…and culture…and food…and nightlife…living…you name it — with a Barcelonian (or vice versa) and you are sure to spark endless discussion. And, nowhere is this rivalry clearer than in sports…yep, I’m talking about football. Think Lionel Messi versus Christiano Ronaldo. The Real Madrid–Barcelona rivalry has turned into a classic, literally. The ‘classic’ draws in viewers from all over the world. Which city is better? Well, it all depends on who you ask. ..............................Advertisement..............................
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But there is one thing these two cities agree on: they both want their own digital currency. Madrid is already studying how to develop its own crypto project. Barcelona is a bit ahead of the game on this one. It started its own crypto last week. The REC (Recurso Economico Ciudadano or Citizens Economic Resource) is Barcelona’s new coin. The name comes the Rec Comtal, an irrigation channel that supplied water to the city. The idea is that the new coin will make the city flourish much like the Rec did. REC is completely digital and based on blockchain technology. It has no costs and transactions are instant. The way REC works is you download the app, exchange your euros for RECs and use them to pay through your phone or a card with a QR code. Anyone with a smartphone (Android at this point in time) anywhere in the world can download the app. According to the REC website, ‘It is a citizen exchange system complementary to the euro, allowing transactions in a community between individuals, institutions and businesses that accept it. It provides an alternative to the globally dominant financial and monetary system.’ With REC, Barcelona is looking to strengthen its local businesses. It sees REC as a way to keep money in the neighbourhoods and to encourage users to spend their cash in local businesses rather than larger chains. You see, local businesses are losing the fight against online and super stores, which means closing stores, deserted neighbourhoods, increased insecurity and more city costs. The project starts with about 42,000 RECs in circulation and 86 local businesses accepting them. It will be on trial for a year. But RECs are a bit different from traditional cryptos. They are something known as alternative or social cryptocurrencies. The digital coin will run parallel to the euro and will exchange one to one, which takes away volatility. And, it is not for profit. What I mean is, only registered businesses can exchange RECs back to euros. Users cannot exchange them back to euros, they can only exchange them for goods. Barcelona is by no means the first city to think of this. Bristol, Nantes, Berkeley, they all are in different stages of developing these. What are the benefits? Obviously, there are great benefits for local businesses. More trade, more customers, more loyalty. The money stays in the neighbourhood. For users, it is a great way for people to get more familiar with blockchain and to know that they are investing in where they live. Why do more cities want their own cryptocurrency? For cities it is a way to get funding, at a time when funding from central government may be scarce. Take Berkeley’s crypto for example. As Citylab recently wrote (emphasis mine): ‘Berkeley’s cryptocurrency, for example, is meant to offer citizens an easier way to buy municipal bonds, which could help the city build affordable housing, rebuild transit systems, and support social services. ‘It’s still in its proposal and development stages, but if implemented, it would be “like a non-profit, special-purpose vehicle, meant to fund social good,” Berkeley Vice Mayor Ben Bartlett told CityLab in February. Instead of selling bonds to underwriters, who resell them to brokers and institutions at mounting prices, the government would sell bonds directly to citizens, who would essentially crowdfund each one. It’s a cheaper and easier system than traditional municipal bonds, and less volatile than traditional cryptocurrencies: The tokens would be digitized and blockchain-based, but they’d act as a security, not as a speculation tool.’ The big benefit for cities is that they get rid of intermediaries, a.k.a. fees. They create an alternative and more efficient way of funding by taking intermediaries out of the way. And that is the whole point of cryptos. To make money more efficient by taking it away from big financial institutions and give people more control over their money. Best, Selva Freigedo, Editor, Markets & Money PS: The crypto revolution is just starting. If you are keen to get into the crypto space but are not sure how, editor Sam Volkering has developed a step by step guide. Check out all the details here. ..............................Advertisement..............................
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Yield Hungry and Capital Starved By Vern Gowdie in Gold Coast, Australia Cast your mind back to 2012…the RBA cash rate started the year at 4.25%. Within the space of two years, our central bank (following the lead of its overseas counterparts) had reduced rates on six occasions (there was a 0.5% reduction in May 2012 and the rest were 0.25% reductions). At the end of 2013, tour cash rate was down to 2.50%. Borrowers — encouraged by the RBA’s ‘accommodative’ interest rate setting — formed long queues at their local bank. With nothing more than a pay slip and a heartbeat to prove their creditworthiness, they were given whatever (and sometimes, more than what) they asked for. The RBA-sponsored credit boom was a boon for banks. The lower rates went, the higher share prices. The biggest of the Big Four — CBA — saw its share price rise from $50 in early 2012 to around $95 in March 2015. The RBA’s low-calorie interest rate diet forced yield hungry investors to look elsewhere for a ‘meal rich in income’. Those big, juicy, fully franked dividends from the banks had them salivating…especially self-managed super funds in pension mode. From 2012 to 2015, ravenous investors entered into a bidding war. As usual in a booming market, investors lose peripheral vision. The focus is solely on one thing and one thing only…the offer of higher returns. Little, if any, heed is given to potential downside. The common refrain in a market feeding frenzy is…‘you can’t go wrong buying…’ and in this case, the final two words in the sentence were ‘bank shares’. When it came to investing in bank shares, the combination of rising value PLUS higher dividends was (way) too tempting to ignore…especially when compared with the lousy 2%–3% being paid for depositing money in those very same banks. In November 2013 — in the midst of this boom in banking shares –– I was asked to recommend five stocks I would recommend selling. Those five stocks were…the big four banks and BHP. The rationale behind the recommendation was that these five companies constituted a large part of the All Ordinaries Index. In the event the US market tanked, then our market would follow…taking the five largest stocks with it. As it’s turned out, the US market did not tank...that fate still awaits the financial world. However, the call on selling the top five shares — in the context of the medium term — was reasonably accurate.
Company | November 2013 share price | 10 October 2018 share price | % gain/loss | CBA | $76.50 | $68.00 | -11.1% | ANZ | $32.00 | $26.30 | -17.8% | NAB | $34.00 | $26.25 | -22.7% | Westpac | $33.00 | $26.60 | -19.4% | BHP | $38.00 | $33.70 | -11.3% | Average return | -16.5% |
Over the past five years the capital value of the five shares has fallen 16.5 percent. Offsetting the shrinkage in capital has been the fully franked dividends…approximately 7% per annum (grossed up). Investors have lost 16.5% in exchange for (on average) 35% in dividends…a net return of 18.5%. Over the same five-year period, money in the bank (if you shopped around) would have returned ‘more or less’ the same figure. But what about those who bought in at the peak…in March/April 2015? How have they fared?
Company | March/April 2015 share price | 10 October 2018 share price | % gain/loss | CBA | $95.00 | $68.00 | -28.4% | ANZ | $36.20 | $26.30 | -27.3% | NAB | $37.00 | $26.25 | -29.0% | Westpac | $39.00 | $26.60 | -31.8% | BHP | $27.00 | $33.70 | +24.8% | Average return | -18.4% |
Without BHP’s positive number, the result would have been ‘ugly’. The Big Four have dropped around 30% in value. Again, dividend payments — over the three-and-a-half-year period — of (say) 25% have pushed the overall return into the positive…at +6.6%. Whereas, those with money in the bank have averaged around 10–11% over the same period…with no risk to capital. But that was then, what about now? What do investors with bank shares do in the face of… Looming legal battles Provisioning for customer refunds and compensation Tighter lending restrictions Rising cost of accessing offshore funding The downturn in the property market impairing balance sheets The need to provision for an increase in bad debts And, last, but by no means the least…the recent downturn in the US market is the forerunner of what’s to come…the cratering of an over-over-valued market. Investors seeking yield are caught between ‘the devil and the deep blue sea’. Do you stay around for the income? Maybe. But what happens to corporate profits (and dividend payouts) if things do go ‘to mud’? That big, juicy dividend income — the one you’ve paid a heavy price (as in capital losses incurred) to receive — could be slashed…like we’ve seen with Telstra shares. It’s ironic that it takes hindsight to restore peripheral sight. Investors start looking anxiously to the left and right, up and down, wondering what lies ahead. Whereas in the boom, eyes are fixed firmly on the golden path in front of them…never wavering, never doubting, never glancing sideways. What would I do if I owned bank shares? For the record, I don’t own any. SELL. The Dow’s 800-point loss on Wednesday was another faltering step towards a long overdue correction. And, if history is any guide, the coming correction is going to be one for the history books. The following chart — compiled by Hussman Strategic Advisors — tracks the movement of five different market valuation measures since 1947. The 0% line is the long-term average — when the US market is fairly valued. As you’d expect, valuations ‘ebb and flow’ with market mood. Going from under to over-valued and back again. Since the late 1980s — when Greenspan started tinkering with markets — the rolling ‘under and over’ pattern of previous decades has been replaced with sharper series of ‘peaks and troughs’. The Fed’s relentless interference has stopped the market from fully expressing itself on the downside. In restricting the market’s journey into under-valued territory, the Fed has created a pressure cooker. Pushing markets higher and higher has taken a tremendous amount of resources…ultra-low interest rates for an extended period of time and at least US$14 trillion in freshly minted currencies. Reaching those post-1987 valuation peaks has required more and more energy. My guess is the Fed has all-but-exhausted itself. When the market rout begins in earnest, what’s the Fed got left? Even lower rates for longer? Perhaps. Print even more money? Perhaps. But who (in the numbers required) is going to be willing and able to stand in the way of a market force that’s intent on purging the system of nearly three decades of excess? Should the US market valuation measurements fall to the level of the early 1980s, it means the US share market has lost 80% of its value. Impossible? Only if you have a blinkered view of history…one that’s only ever seen Fed intervention. But what if the Fed’s best efforts are no longer effective in fighting the will of the market? The last good cleanse of excess debt in the system was in the 1930s. Back then the Dow lost over 80% in value. Should history — even somewhat — repeat itself, then yield hungry investors are going to find themselves starved of capital. In this scenario, I’ll take 100% of my capital earning 2% every day of the week and twice on Sundays. Regards, Vern Gowdie, Editor, The Gowdie Letter ..............................Advertisement..............................
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Donald Trump Has Found His Next Fall Guy By Bill Bonner in Berlin, Germany Yesterday, we saw the past, the present, and the future…all stumbling over one another. On the march were the mistakes of the past 20 years — funded by trillions in fake money flushed into the markets by central banks worldwide. The headlines, however, ignored the past and looked at the present. The markets were falling, with an 800-point drop in the Dow. And then, there was the future…Donald J Trump explained what was going on: ‘Actually, it’s a correction that we’ve been waiting for a long time, but I really disagree with what the Fed is doing… ‘I think the Fed has gone crazy… ‘The problem [causing the market drop] in my opinion is Treasury and the Fed. The Fed is going loco and there’s no reason for them to do it. I’m not happy about it.’ Trump is on the move, too. He’s pointing his finger at the Fed, preparing to make it the fall guy, while he sets up a whole new round of claptrap ‘stimulus’ to distort markets and put off the reckoning with the past. Beginning of the end But let us begin with the Dow. Does this 800-point drop mark the beginning of the end of the boom? We don’t know. But it hardly matters. Because what we do know is that the end is coming. Booms don’t run out of money; they run out of time. And time can’t be cheated, stretched, or ‘printed’ by the Fed. Even a healthy boom — sustained by rising output, sales, incomes, and profits — runs out of time. Mistakes accumulate. They need to be corrected. But this was never a ‘healthy’ expansion — it was funded by stealing from the future. That is to say, it was made possible by some $250 trillion of worldwide debt borrowed at artificially low interest rates. Fake money and fake interest rates produced a fake boom, with runaway asset prices on Wall Street and falling real incomes on Main Street. Here is the reality, from The Hill: ‘Almost two-thirds of Americans polled say they haven’t seen an increase in their take-home pay as a result of last year’s Republican tax-reform bill, according to a new survey. ‘A Gallup poll published Wednesday found that 64 percent of respondents said they haven’t seen a raise in their take-home pay as a result of reduced federal income taxes. That finding is identical to results in Gallup’s February/March poll taken shortly after the tax changes went into effect.’ The boom, in other words, is a fraud. It was bought and paid for with $4 trillion of fake money created by the Fed…and a total of about $20 trillion from central banks all over the world over the last 20 years. Fraudulent tax cut The tax cut, too, was essentially fraudulent. Without a spending cut, the lost tax revenue had to come from somewhere… The money spent to ‘stimulate’ the economy today was taken from tax revenues, which must be covered by loans — to be paid off tomorrow. That extra borrowing has pushed up interest rates, which now threaten the whole tower of bling. Yesterday, today, and tomorrow come together in the credit markets. Yesterday’s savings (theoretically) are lent at today’s interest rates, to be paid back with tomorrow’s income. As the weight of yesterday’s debt increases…and the expectation of tomorrow’s income declines…the universal joint of interest rates goes haywire. After 36 years of lower yields and higher bond prices, Treasury yields bounced off a bottom in 2016. Today, the benchmark 10-year US Treasury yields almost 200 basis points more than it did at the bottom. This is a new world for most people. Americans haven’t known a real bear market in bonds since 1980. In other words, a whole generation has grown up in a fake world of falling interest rates, as if easy credit terms were just the way of the world — like gravity and the TSA. But gravity is real. And so are bear markets in bonds. Falling interest rates have only been a fact of life for the last 38 years. Before that, interest rates were going up! The last bear market in bonds took us from 1946 to 1980 — about a generation in length. By the time it was over, you could buy the entire Dow for just one ounce of gold…and six times earnings. Mortgage rates were over 12%, and the Fed had boosted its key interest rate to 20%. In short, if this new bear market in bonds was allowed to play out as usual, there would be hell to pay. You could, for example, expect to see the Dow at 10,000 or less…house prices cut in half by higher mortgage rates…and as much as $30 trillion in ersatz US wealth wiped out. But remember, we’ve glimpsed the future as well as the past and the present. The Trump team is already preparing to step in — with the collusion of Congress and the Fed — to prevent a bond bear market. Instead, they will stifle the correction…and make things much, much worse. Stay tuned… Regards, Bill Bonner ..............................Advertisement..............................
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