Category: Financial System

I borrowed $2.2 million once.

I couldnt pay it back.

But it wasnt my fault.

It had been the coloured family down the road. They had borrowed $40,000, and couldnt pay that back.

They ruined it for everyone. Not me personally.

OK. Thats not a true story. Not really in the way Ive told it. But theres an even more unbelievable version. The issue here is, this story is true. As well as its set to have dire consequences

Lets put some numbers in framework.

By 2013, total world debt was US$223.3 trillion.

That was 313% of world GDP.

Of which, US$157 trillion was Western debt. US$66.3 trillion was rising market debt.

Keep those numbers in mind as you take in this particular comment from the International Financial Fund (IMF), as reported within the Age:

Governments and central banks danger sparking a fresh global financial crisis, the actual International Monetary Fund has stated, as it called time on a corporate debt binge within the developing world.

Emerging market companies possess over-borrowed by an estimated $US3 trillion ($4.Two trillion) in the last decade, threatening to trigger a sharp capital crunch and capital outflows within economies that have already been hit hard by low commodity prices, the fund cautioned on Wednesday in its newest Global Financial Stability Report.

Its typical of a Western establishment. On one hand, its saying Western countries should go further into debt. At the same time, it blames the developing world for the global debt binge.

Its a new take on accusing foreigners for everything that goes wrong. Its like a bad 1970s sitcomblame the darkies with regard to stealing all the jobs! In this instance, its blaming them for taking on all the debt.

In reality, just as immigrants dont take all the jobs, the emerging markets havent incurred all the debt either.

IMF attempts to shift the blame

But relative to how big the Western worlds debt, the actual over-borrowing by emerging market businesses is the equivalent to them borrowing an extra $40,000 while the Western binges on $2.2 million of debt.

And bear in mind the IMF has this particular to say about the actions of the US Fed, again from the Age:

Monetary policies in key advanced economies must remain accommodative and responsive, the actual IMF said.

The report called on the US Federal Reserve to hold off on its first interest rate hike in nine many for the authorities in the eurozone and Japan to continue with unparalleled stimulus measures.

The word hypocrite one thinks of.

So lets get this straight: emerging marketplace companies have borrowed $4.1 trillion more than they should possess (according to the IMF). The IMF wants these to stop borrowing.

At the same time, the IMF says Western governments should keep pumping out debt, as well as Western central banks should keep buying it.

Something aint right.

Its the clown show

This whole story has a particular ring to it.

Think back to the actual 2008 meltdown. What or whom did the popular media and Wall Street blame for that crash?

They blamed subprime mortgage borrowers. Many of who lived paycheque to paycheque. But the banking institutions told them they could afford multi-hundred thousand-dollar mortgages.

It wasnt the borrowers who were to blame. It was those in government, in the central banks, retail banking institutions, and investment banks who created the conditions for the subprime meltdown.

Subprime borrowers couldnt get into such a chaos on their own. They needed the facilitator. The facilitator had been Wall Street.

Subprime borrowers had been the victims of the last turmoil. Emerging market companies will be the victims of the next turmoil. But theyll still cop the culprit.

In truth, blaming emerging market companies for the coming financial crisis is akin to blaming a rape victim for being assaulted, or blaming a patient for any doctors malpractice, or native Africans for that barbarity of the slave trade.

The IMF is really a clown show. And those running it are the biggest Bozos youll find inside any government or lender.

But the latest report from the IMF confirms one thing that we already know: a significant financial crash is coming, and also the IMF is powerless to stop this.

In fact, its thanks to the IMF that the next crisis is certain to happen.

Cheers,

Kris

Yesterday the S&P/ASX 200 index was up 98.5 points. Thats a 2% gain.

European stocks acquired too.

The FTSE 100 index closed trading up 2.8%.

The gains carried through to US trading, where the Dow Jones Industrial Average gained 1.9%, or even 304 points.

Has the world averted another crisis?

Is the worst over? Or is this just the newest false dawn for the markets before the last crash begins?

One of the things we enjoy most about the markets is the accidental positioning of news tales particularly in recent years.

Take this screen shot from Bloomberg:

Its a great contrast.

One news item screeches about the strength people company earnings. Meanwhile, the story below it reports on the collapse of retailer, American Clothing [NYSE:APP].

Its no wonder the company collapsed. It features a market capitalisation of US$20 miland more than US$200 mil in outstanding debt.

Even reduced rates couldnt save this business

It just goes to show that even record low interest rates cant help every business.

Even with report low interest rates, American Apparels annual interest costs have increased from US$11.Eight mil in 2006, to US$39.9 mil this year.

As usually, the best way to show the performance and the success of a organization and its stock, is to look at the price chart. Here it is:

Source: Bloomberg

The inventory is down 98.5% because 2006.

After peaking above US$15 in 2007, it last traded upon Friday at 11.2 cents.

But this isnt just about a middle-of-the-road retailer.

That companys debt position is definitely an example of whats happening right across corporate America. Its why weve said to closely watch the yields on junk bonds.

To measure individuals yields, we follow the SPDR Barclays Higher Yield Bond ETF [NYSE:JNK]. Its an ETF that holds higher yielding, non-investment grade bonds.

Today, the yield on this ETF is 6.27%. One month ago, it was 6.1%. One year ago, it was 5.83%.

This is how bonds work

While the actual yield on a bond ETF may not seem important, it gives you a peek inside the mind of investors.

In order to understand why, well give you a quick lesson in Ties 101.

Bond prices and bond yields move inversely. The easiest way to explain this is to use a bond that matures in one year having a face value of $100, and an rate of interest of 5%.

When you buy a relationship, youre lending money. So, if you lend $100 when buying a bond in this example, youre expectation is the fact that youll get your $100 back one year from now. In return for lending the $100 you also expect to receive a few compensation for it. In this case, youll receive a coupon (interest rate) of 5%.

In short, following one year, youll have made $5 on the $100 a person loaned, plus youll get your $100 back again.

OK, thats simple. But now lets include an additional variable. Lets say that the bond you bought is tradeable. Now lets say that other investors like that bond, simply because they see it as a safe wager. So, they decide that theyd prefer to buy it from you a month after you bought it. But because they see it as a safe bet, theyre happy to pay more for it compared to you paid.

In this instance, theyre happy to buy it from you with regard to $101. Why would they do that, although the face value is just $100? Since they know theyll also receive the $5 discount.

So, at the end of the year, theyll receive $100 back from the company, as payment of the bond (loan), plus theyll have earned the $5 coupon. They lose $1 on the bond, but gain $5 on the discount, leaving them $4 better off.

For the customer, the yield theyll get from the investment is only 4.9%. Remember, these people paid $101 in order to make get that $5 discount. And their total return around the investment is only 3.9%. Once again, because they paid a higher cost for a fixed return.

For your part, sure, you didnt get to get the $5 coupon, but you sold the text for $1 more than you bought itand you probably did so just a month after buying the bond. On an annualised basis, thats not necessarily a bad return.

However, what happens if lot of money swings the other way?

When things go wrong

As with any investment, theres always a downside.

Lets say you buy the bond for $100 face value, but several weeks later the company that issue the text reports a big loss and investors start worrying about the way forward for the business.

In that case, youve got $100 on the line. The bond doesnt mature until the end of the season, and you wont get the coupon for now either.

Youre worried. What if the company goes bust? What if the organization is unable to repay the loan, let alone the coupon?

In this case, you go to the market to see how much other investors are prepared to pay. Simply because they know the same information as you, theyre unlikely to pay the full face value.

In fact, because of the risks of buying this bond, additional investors are now only ready to pay $60 for the bond with a $100 face value. You have a option: risk losing everything, or at least get back 60% of your investment.

You take the latter choice. Youre out. But what about the new owner of the text? Well, theyre taking a calculated risk. Theyre betting that either the organization will be able to meet its financial debt obligations, or that if the company goes bust and is broken up or sold off, that theyll still make back more than their $60 investment.

Thats because bond holders spend time at the front of the queue when companies go bust.

If the company comes through and repays the bond at face value, and pays the coupon, the new owner will cash in the text to receive $100, plus theyll get the $5 couponall for making a $60 bet.

In terms of the impact that has on the investors returns, in effect theyre getting an 8.3% yield ($5 on the $60 investment), but the general return is around 57%, once they cash in the bond at face value.

Theres no new way to go broke

Perhaps you can see why its important to watch these junk bond yields.

If companies can continue to meet their financial debt obligations, then everything is going to be fine. Investors who bought from a panic will have lost, however investors who bought opportunistically may have gained.

But what if companies cant repay their debts?

The fact that the produces on junk bonds have risen by half a portion point over the past year is significant. It shows that investors are worried about the ability of a few companies to repay debts.

If companies are struggling to pay back loans when interest rates are at record lows, it just goes to show there are many much more problems with the worlds economy than most people think.

As our old buddy Vern Gowdie often says, There isn’t any new way to go broke. Hes right, its the same way every time too much debt.

Cheers,

Kris

PS: Vern explains all this in great detail in his new guide, The End of Australia. Weve already imprinted and posted more than Sixteen,000 copies, but we cant keep printing them permanently. Go here to find out how to claim your copy now.

Have you heard of Carl Icahn?

You should have.

The Wall Street veteran made his multibillion dollar fortune buying controlling stakes in companies and then selling off their assets to settle the debt he used to purchase them.

As a broker on Wall Road since 1961, he knows an undervalued company when he views it. He also understands putting on a costume financial details to make a company look better than it is.

Corporate raider may be the nickname for Icahn.

The point Im attempting to make is, Icahn has been around. Hes seen it all before.

And lately the price of high yielding bonds is troubling him.

So much so, that he just released the 15 minute video known as danger ahead. In it he explains which falling commodity prices are just part of the problem.

Thats not new information to most market watchers. But Icahn reckons the real danger is based on these high yielding bonds. Or junk bonds, as he loves to call them.

High yield really stands for junk bonds. People are purchasing these not really understanding what they’re buying. If you look at the numbers, they are amazingly risky. You will find US$2.2 trillion ($3.15 billion) in junk bonds, upward a trillion dollars in five years.

On the other side of this theres information site Barrons.com. They think Icahns video is nothing more than scaremongering.

Despite fear-mongering through?Carl Icahn, the junk-bond market is starting to look appealing.?

Icahn even showed the cartoon in the video of Federal Reserve Chair Janet Yellen as well as BlackRock CEO Larry Fink pushing the bus full of retail investors to the edge of a high cliff.

His concerns, however, look over-stated. While there are troubled areas in the junk market, mainly in energy and mining-company bonds, most industries are in decent shape

The average energy issue yields more than 10% now, and alloys and mining, nearly 15%.

The post then explains that these so called junk bonds Icahn is talking about are coming back around 8% per annum.

Theres a reason why Icahn is drawing attention to higher yielding bonds. He reckons they’ll catch out retail investors in the next market crash.

The problem in Icahns opinion is that mum & dad investors look to higher yielding exchange traded funds (ETFs) investing in junk bonds. While the come back is high, the risk of default is much higher.

He says that traders have a false sense of security about these products. Too many regular investors reckon theyre a safe investment, and easy to sell in a market downturn.

The reality is very different. Because Icahn told Business Insider:

It’s like a movie theatre and somebody yells fire. There is only one little exit door. The exit door is fine when things are Okay but when they yell fireplace, they can’t get through the exit doorand there’s nobody to purchase those junk bonds.

A death by a thousand cuts

Dont for a 2nd think Icahns video is scaremongering.

There is definitely an imbalance in the economy, and junk bonds will be the next reason for a market meltdown.

Most market viewers in Australia are busy commenting on the falling mineral and metal prices. Yet theyve overlooked the long term effects of a slipping oil price for Aussies.

However, if Jim Rickards, the strategist behind Strategic Intelligence, is right, energy prices particularly oil are set to cripple the worldwide markets.

As I explained to subscribers last week, Jims had energy junk bonds on his radar since The month of january this year.

The way he views it, theres trillions of bucks in energy related debt that cant be paid.

The result is the $14 trillion pile of company debt that cannot possibly be repaid or rolled over below current economic conditions. Not all of this debt will default, but a lot of it will. Most of the power related debt was released in the expectation that essential oil would remain in the $80 to $130 dollar per barrel range.

Energy-sector debt has been called into question because of the collapse of oil prices. And rising markets debt has been called into question because of a global growth slowdown, global deflation, and also the strong dollar.

Jim reckons we are taking a look at a much larger debt problem than subprime. He reckons if default rates are only 10% something he or she considers a conservative estimate it would be six times bigger than the subprime losses in 07.

The magnitude of this crash will like the subprime one leave the actual regulators completely unprepared.

The great news for investors is that this disaster will not happen overnight. It will require a year or two to experience out. The panic associated with September 1998 started last year, in Thailand in June 1997. The panic of Sept 2008 also started last year, in August 2007.

This new junk debt fiasco going in the summer of 2014 but will not really reach its peak until 2016 or later.

As Jim points out, market crashes dont happen immediately. If anything, the looming meltdown will be a death by a 1000 cuts.

Regards,

Shae Russell,

Editor, Strategic Intelligence

From the Port Phillip Publishing Library

Special Report: The End of Australia Vern Gowdies new book is known as The End of Australia: The Real Story Behind Australias Economic Fall and What You Can do to Survive It. We’re mailing free copies of this book to anyone who requests 1 online. It does not make for pleasant reading. But the idea is that youll be safer (and much wealthier) in 10 years time through receiving a more sober and realistic analysis of whats heading onwhat happens nextand what you should be doing about it now (more)

That however is just the beginning. We suspect that this is the oncoming of a long, slow and painful loosen up of the excesses of the last five years.

Along with decompression comes a tick up in defaults, and we anticipate those to increase in 2016 and 2017.

Bank of America Merrill Lynch Credit Analysis, September 2015

(Along with my emphasis)

There is no brand new way to go broke. It is always too much debt.

This has been the case since the development of money and credit. Be lent more than you can service, and you and your creditors have a problem.

This is exactly what happened in 2007 along with subprime borrowers. When the honeymoon curiosity period was over, they quickly learned their incomes could not service the debt costs. Default.

On a daily basis the financial press is full of trees and shrubs. The dietary plan of detail is fine if you want to trade the market. And quite frankly, by the time its in the paper, the inside money has already been there and done that.

For the rest of us, who’re looking to protect or market our capital, we have to remain back and see the woodland.

The world is sitting on top of an official debt pile associated with US$200 trillion and counting. Because the GFC, global debt has increased by around US$60 trillion.

Low interest rates facilitated this six-year long debt binge.

Corporates chasing cash (to fund reveal buy-backs, triggering hefty executive bonuses) and investors chasing cash, were a perfect match. Company borrowers offering a % or two above the cash rate or a swap rate were swamped with dollars from investors eager to get some return on their capital.

Its long been my personal contention the next and far stronger GFC will come from a credit fall behind on such a scale that all the Feds horses and men will not put the system together again.

The US$60 trillion in post GFC debt that poured into the worldwide economy was a masking broker. It looks like genuine economic activity however it was nothing more than a stimulant with no lasting productive worth.

Now that investors are drawn on out or not stupid enough to give cash to junk bond rated corporates offering pennies the game of finding a larger fool to give you money is ending.

The credit squeeze is influencing business revenues lower prices mean more sales are needed to create the revenue required to meet costs. The more prices fall, the greater sales needed. The problem is: there is only so much demand. Creating more doesnt necessarily translate into product sales. But over-production does lead to a deflationary spiral.

Heavily indebted corporates think Glencore are rushing to shore up their own balance sheets with assets sales and capital increasing.

What happens when more corporates start to have the revenue pinch? More asset sales and more capital increasing? Good luck with that.

Distressed sellers hardly ever if ever manage to extract a reasonable price for assets. Much less indebted competitors will be snapping up bargains.

When your solvency is questionable only lotto winning idiots would participate in the capital raising.

When you cant lower your debt to a level your revenue can service, you default or you ask for a financial debt restructure.

According to Bank of the usa the level of defaults in 2016C17 are expected to increase.

The Bank of America Merrill Lynch statement describes the current situation in the US as a slow moving train wreck that seems to be speeding up.

At present investors in company debt are probably going to hang in therethey need the return on their money.

But there will be a tipping stage when investors switch their own investment priority from return on their money to return of their money. So when they do it will be a stampede.

A fortunate few might get out. But most will be trampled in the rush to the exits. Most investors, through greed or the fear of missing out, leave the Im outa here decision until a minute too late. The tipping point can come very quickly.

Imagine a packed auditorium of a handful of thousand people, and one individual leaves. No one takes much notice. If that one person is actually followed by five others, individuals might start to wonder whats going on. If those five are suddenly followed by another Ten people in a hurried method, the crowd becomes a little worried. Itll only take another 20 people to scurry out and pretty soon the crowd is on its ft rushing the exits. It takes only around 2% to panic the rest of the 98%.

When the panic sets in, industry will be crowded with troubled corporates desperately selling assets to remain afloat. Cashed up traders are going to be able to buy property at deeply discounted amounts.

Yes that right, cashed up investors you know those silly investors who were told by the investment industry that cash is trash; cash is dead money; cash is not really an asset. The ones who refused to be pushed into playing the central lenders chase the higher yield game.

While cashed up investors are having the time of their lives selecting and choosing from the bargain box, bond holders will be in a world of hurt. They wont get their much needed interest payments and can only sit and wonder how much, if any, of their capital will be returned to them in the years to comeafter the lawyers have feasted on the corporate carcass.

This folks, may be the bigger picture. Bank of America put it succinctly with this commentary (emphasis is actually mine):

The weakness in high yield credit is to all of us not just a commodity story; it is about highly indebted borrowers can not grow, an investor base that can’t digest more risk, a market that has usually struggled along with liquidity and an economy that refuses to rise above mediocrity.

I can assure you there will be nothing mediocre about the next GFC.

The implosion of a few hundred billion dollars of subprime debt delivered us the GFC in 2008a time period that at the time drew comparisons with The Great Depression.

Pray let me know what is it going to be like when trillions of dollars within corporate and sovereign debt is destroyed?

There is no new way to go shattered. And with US$200 trillion in debt available Ill bet were going to see some very spectacular blow-ups in the next couple of years.

The destruction of wealth which awaits us is going to make the losses of the past couple of months seem like pocket change.

The Greater Depression is comingeven Wall Street is beginning to sound the caution bells.

Regards,

Vern Gowdie,

Editor, The Gowdie Letter

Editors Note: The above article was originally published within The Daily Reckoning.

If you read Fridays Money Morning, youll know about a disturbing speech given by the Bank of Englands chief economist, Andrew Haldane.

Heres the key quote from the speech:

One interesting solution, then, would be to maintain the principle of a government-backed currency, however have it issued in an digital rather than paper form. This could preserve the social convention of a state-issued unit of accounts and medium of exchange, albeit with currency right now held in digital rather than physical wallets. But it would allow unfavorable interest rates to be levied upon currency easily and quickly, so relaxing the ZLB restriction.

Its a cold and wordy statement in the central bank official.

The last sentence really made our mouth drop.

But theres even more to it compared to that

Were sure you know what Mr Haldane means by negative interest rates.

If not, its quite simple. When you have money in the bank, youll generate interest. Until a few years ago, you could earn between 4C7% interest.

Today, youre fortunate if you can get a rate that starts with a two.

If a positive interest rate means that you earn interest on your savings, were sure you know what this means to have negative interest rates. Thats correct, rather than the bank paying you interest, the bank would deduct interest from your savings.

How lengthy to halve your money

A 2% positive interest rate on $10,000 would earn a person $200. That would leave you with $10,200.

A 2% negative rate of interest on $10,000 would cost a person $200. That would leave you with $9,800.

Got which? Right now, central bankers are looking for more ways to take money out of your pocket in order to give it to government authorities, vested interests, and monetary elites.

Interestingly, if youve heard of the Rule associated with 72, you should know that it works with unfavorable interest rates too. The Guideline of 72 is simple. This shows you how long it takes in order to double your money with a constant interest rate.

You take 72 after which divide it by the interest rate.

If the interest rate is 6%, it will take you 12 years to double your money. 72 divided by six is actually 12. Easy.

If the interest rate is 2%, it will take you 36 years to dual your money. 72 divided by two is 36. Simple.

But when it comes to negative interest rates, youre not working out how long it will take to double your money. You need to know how long it will take to halve your money. In this case, the formula is the same.

You take 72 and then divide this by the negative interest rate.

So, when the negative interest rate is -3%, it will lead you 24 years to cut in half your money. 72 divided through -3 is 24. (Its actually -24, but we can ignore the minus sign.)

If the negative interest rate is actually -2%, it will take you 36 years in order to halve your money. 72 divided by -2 is 36 in this instance.

If the negative interest rate is actually -5%, it will take you just over 14 many years to halve your money. Seventy two divided by -5 is Fourteen.4.

You get the drift.

This isnt nearly super, its about all your savings

The challenge with most mainstream Keynesian economists is that they spend so much time knee deep in statistics, spreadsheets, and numbers, that they forget what economics is all about.

Economics isnt theory. As the Austrian School economists say, economics is all about human motion and interaction. But popular economists dont see that.

They see the economy as something to fine-tune through shifting interest rates, printing money, and raising or cutting taxes. Its all about the numbers.

For 6 years, weve written about the Australian governments plans to grab private prosperity. We warned about it captured in the Exodus Initiative report.

But this just isnt about governments taking private super savings.

The truth is that many people already pay for items electronically. It wouldnt take a lot to make electronic payments the only form of legal tender. The government could outlaw financial institution notes and coins, using the ruse of counter-terrorism or the war on drugs as a way to justify it.

Then, the government would just decide which banks it would allow to hold this electronic currency. Once the government did that, it could outlaw all competing forms of electronic currency say goodbye to Bitcoin for a start.

Whenever we talk about this kind of thing, folks always state that its far-fetched. They say were part of the tinfoil hat brigade. Hey, thats fine with us. Were not interested in convincing everyone. We just want to tell as many people as possible, and then leave it up to them to decide.

If you think Andrew Haldanes plans for unfavorable interest rates and electronic foreign currencies could never happen, go about your business. If however, you think theres a chance it could happen, we suggest you read the Exodus Initiative and start placing some of the ideas into motion.

You can find out how to get hold of a copy here.

Cheers,

Kris

In the past people knew that the worlds leaders were.

They were Kings, Queens, Crown Princes, Presidents, Emperors, and Prime Ministers.

They lived (and still perform) in palaces, castles, as well as fancy homes.

But today, the titles of those running the planet have changed. Today, they have comparatively non-descript titles such as chairman and governor.

Todays world leaders are the chiefs of the worlds central banks. And based on recent comments from one of the worlds most effective central banks, they are set on achieving total world control.

If that sounds extreme, wait until here hear what they had to say…

This was in a speech given by Financial institution of England chief economist, Andrew Haldane, on 18 September:

One fascinating solution, then, would be to keep up with the principle of a government-backed currency, but have it issued in an digital rather than paper form. This could preserve the social convention of a state-issued unit of accounts and medium of trade, albeit with currency now held in digital rather than bodily wallets. But it would allow negative interest rates to be levied upon currency easily and quickly, so relaxing the ZLB constraint.

Like all central bank speeches, the aim is to confuse or hide the real message. But when you read it a couple of times, youll get the drift.

Well explain in clear language what hes saying in a moment. But first, heres the context.

For central bankers, this is better than inflation

One of the things that has annoyed central bankers is the fact that when interest rates are so reduced, there is no incentive for saving bed to keep money in the bank.

Thats especially so if savers are worried concerning the stability of the banking system.

If youre earning next to nothing on a financial institution deposit, why risk letting a bank look after your money? The folks in Greece realised this particular. Thats why they started pulling out cash and stashing it in fridges, medicine cabinets, and even vacuum cleaners!

Why is that a problem?

Its an issue because banks need to have a certain amount of capital on hand. This is usually in the form of deposits or financial debt issued by the bank, or government securities.

So if people pull away their savings from the bank, it affects the amount of capital the bank has on hand to cover the loans it has written.

The solution? Make it impossible for people to withdraw cash. And instead have the government issue money in electronic form, which must then be kept in a government-approved bank account.

To repeat Mr Haldanes comments:

This would preserve the social convention of a state-issued device of account and moderate of exchange, albeit along with currency now held in electronic rather than physical wallets. However it would allow negative interest rates to be levied on currency effortlessly and speedily, so calming the ZLB constraint.

Read the last phrase from the quote again: But it would allow negative interest rates to be levied on currency effortlessly and speedily.

Mr Haldane is saying that this would allow the central bank to confiscate money easily and speedily through savers. Because that is what main bankers mean by negative interest rates.

Hes also saying that plain seizure of savings by using unfavorable interest rates is a lot easier and faster than inflation. Inflation may take months or years to develop.

So, aside from assisting the banks, why else would a central bank want to do this?

Its confiscation by another name

One of the big frustrations for governments is that people arent spending enough cash.

They see that as the main cause of the current low levels of economic development. Thats why theyve told their central banks to print countless billions and trillions of dollars.

Its why in 2009 the Australian government sent cheques in the post, in order to get people to invest.

But when people are worried about the future, theyre less likely to spend. People are generally sensible. They want to set money aside, budget, and not end up being wasteful.

So, governments have gone additional into debt in order to counter this. Its why the Aussie government is now in debt to the tune of $391.4 billion.

Its why, according to the report from McKinsey & Co, government debt has grown faster than any other field. Global government debt is continuing to grow 9.3% each year from 07 to 2014. By contrast, household financial debt has only increased 2.8% each year.

Perhaps youre starting to get it. If the just form of money is electronic cash, its easy for the government to seize this through negative interest rates.

The only way the government cant seize your savings isif you dont have any savings. And you wont have any savings if you invest your money because youre afraid of the government taking it with negative interest rates.

The trend is clear. Weve cautioned for more than six years that the government was planning to grab private superannuation wealth. But weve also warned that regular cost savings were at threat as well.

A new form of financial captivity is fast approaching. Your employer will pay your wages into the bank (as it does now). However in the near future, itll be a race to spend your wages as quickly as possible before the federal government swipes it all.

If you think this is far-out and whacky, thats fine. Just remember that central bankers dont say things that will make them look silly amongst their peers. Mr Haldane has published these views simply because its an idea that governments and central bankers are thinking about right now.

You ignore this risk at the peril.

Cheers,

Kris

PS: This is all proportional to what Vern Gowdie calls the Great Credit score Contraction. After decades of fast money and low interest rates, Vern says the worlds economy (including Australia) is on the verge of a Long Bust. It has stressing implications for all Australians. Find out more here.

As it turns out, the decision by the Fed in the US not to raise rates last week was a pretty near call. Over the weekend, four from the 10 voting members that make up the government Open Market Committee (FOMC) said they still expect the cash rate to rise before the finish of the year.

Chair Janet Yellen gave two main reasons for the delay within liftoff, as theyre calling it right now. Firstly, the massive market unpredictability that hit global financial markets in August. And secondly, the potential impact on the US through the slowdown in the Chinese economy.

How these two factors flow into growth in the US economy, and also the inflation rate, will determine what the Fed will do from here.

We witnessed much of this market volatility within the huge daily swings within the Chinese stock market over the last couple of months. This affected all the major search engine spiders worldwide.

Similar to the role the RBA plays here in Australia, the Federal Reserve seeks full employment as one of its primary goals. The unemployment rate in america is currently 5.1% a level the Fed considers close to complete employment.

This satisfies one of the criteria for lifting rates back to more normalised levels.

By the way, if youre wondering what the normalised interest rate degree is, officials at the Fed put it at 3.75%. Although Yellen is softening the market upward by saying that it might take several years to reach this goal.

Another primary goal of the Fed is to achieve a desired inflation target about 2% per annum. Again much like the RBA here in Australia. Currently this sits at around 0.3% in the US nicely below their target degree.

Typically central banks lower the money rate to spur development in the economy. This can also increase inflation as extra money bids up the costs of goods as well as services. To curb extreme growth and inflation, main banks do the opposite and increase the cash rate.

Increasing rates at this time in the US seems to go against this economic theory. It could further dampen inflation just as they need it to get back to their focus on level.

However, the four dissenting members of the actual FOMC see the labour market because the biggest contributor to fixing the actual inflation problem.

The cost of labour impacts all goods and services throughout an economy. While joblessness is high there is little in the way of wages growth that will increase these costs. The employee offers little bargaining power.

With complete employment, though, this balance starts to move back into their own favour. With a tight work market, employers need to pay more to stop staff leaving for better paying jobs.

Its this particular rationale that those governors in favour of raising rates this year are banking on. That is, an increase in work costs should help pump motor the inflation rate back up to the desired 2% level.

Of course, any kind of downturn in the labour marketplace puts a hole in the theory. Thats why, according to Bloomberg, the futures market only points to a 20% probability that theyll raise rates in October.

This number improve to just under 50% for the December meeting. Although, this is the exact same number who thought theyd raise the cash rate last week.

In the meantime, the US has plenty of others giving them free guidance. Among them, the IMF and the World Bank.

Theyre worried that an increase in US rates will drag yield hungry capital from emerging markets and back into the US. This will further worsen the huge sell-offs that have smashed these types of markets and will drag the world economy down further.

Regardless, We still think theyll raise prices. Maybe not by October. Perhaps it will be in December or early next year.

Again though, I wont believe it until I see it.

The problem is this. If they didnt enhance the cash rate will complete employment and the markets buying and selling at all time highs, how will these people raise rates if the markets continue to tumble or unemployment starts ticking up?

Maybe theyve missed their own chance.

One thing the markets loathe is uncertainty. Jesse Yellen is scheduled to speak within Massachusetts on 24 Sept. Needless to say, the markets all over again will be hanging off the woman’s every word. So weve obtained that to look forward to.

Chinese traders dont want to play

While Janet Yellen and her posse of Federal Reserve officials try to guess whats happening in China, it seems even those on the floor there are still trying to work out whats going on.

The Chinese language government has been very energetic in trying to stem the rout that hit their markets after they peaked in June. You can see the run up within the following chart:

Shanghai Composite Index

Source: Google finance

The government is desperately trying to avoid the huge swings as well as volatility from the stock market flowing into the rest of the economy. It has been pumping what seems like an endless supply of money into the market to stem the flows.

The problem now, though, is that nobody has any idea how much the marketplace is being propped up by the government, or how much comes from real demand from long term traders.

The measures undertaken by the federal government were designed to lower volatility as well as restore liquidity to the market. However, it might now be having the opposite effect as traders time frames become even shorter.

There appears to be one trade in town that the most nimble investors are trying to profit from. Its trying to guess a level in which the Chinese government buying may enter the market, and slide in ahead of them.

As the buying might only last a day or two, of course, the short term investors try to jump out prior to the buying stops. It becomes a vicious circle, and all it does is scare more investors from the market.

Bloomberg puts the total trading volume in shares down by a staggering 75% over the last 4 months. At the same time, volatility has more than doubled. And the number of new investors entering the market offers dropped by over 80%.

The government has also intervened in the futures market, nearly bringing it to a stop. Short selling and margin lending have been severely limited as authorities hunt away those deemed responsible for getting the market to its knees.

30 day volatility chart of the main markets

Source: Bloomberg

The above 30 day volatility graph highlights just how wild the actual ride has been in China. Its certainly quite sobering when you compare it to our experience here. Im much less sure Id have the stomach to become wading into their market in the near future.

When will it all settle down? Thats what Yellen and her officials will be trying to work out. While speculators might dominate a market temporarily, the weight of real money money focussing on the fundamentals will determine when the market has bottomed.

Right now, still it seems like it has further to visit.

Regards

Matt Hibbard,

Editor, Total Income

Editors note: The above article is definitely an edited extract from Complete Income. To find out more about Matts strategy for income investing in a low-interest rate world, click here.

From the Port Phillip Publishing Library

Special Report: The End of Australia Vern Gowdies new book is called The End of Australia: The actual Story Behind Australias Economic Collapse and What You Can do to Survive It. We are mailing free copies of this book to anyone who requests 1 online. It does not make for cheerful reading. But the idea is that youll be safer (and much richer) in 10 years time from receiving a more sober as well as realistic analysis of whats going onwhat happens nextand what you should be doing about this now (more)

Here we go again.

It appears like only last week that A holiday in greece was in the headlines about elections and its debt problem.

Now its back.

Alexis Tsipras is back as Greeces prime minister.

What may happen this time? Its something else for traders to worry about. But in truth, its only a sideshow. The real worry for Aussie investors is right here in Australia.

And theres no sign it’ll get better anytime soon

From a report in the Age:

Foreign investors have turned especially bearish on the Australian economy, along with one describing it as toast, the National Australia Bank statement says.

Chief economist Ivan Colhoun said a recent visit to clients in Britain, continental Europe and the Middle East exposed uniformly negative view on Australias prospects.

This is why all of us took the controversial choice to publish Vern Gowdies new book, The End of Australia.

You can find out how to get your hands on a copy here.

Cue the next recession

Now, although we see bad news ahead for that Aussie economy, seeing the actual mainstream take the same view gives us pause for thought.

But not for too long.

Its true that the mainstream usually arrives past due on the scene with things like this.

But its not true to say that the mainstream is a counter indicator.

Typically, the actual mainstream will grab your hands on a story once the impact has already been underway.

Then, as the message (positive or negative) filters through to the bulk public, youll start to see the biggest reaction in the market.

Thats because, until that point, the mainstream is possibly ignorant of whats going on, or hasnt taken it seriously.

Thats where we’re with the Aussie economy right now.

Remember, its a long time since the last Foreign recession. Its a shame Joe Hockey wont be around to see the next one

Source: Bloomberg

Also keep in mind that foreign investors still see Australia as a resources economy. Foreign investors also begin to see the Aussie dollar as a goods currency.

When the commodities sector was strong, the Aussie dollar was strong. Whenever commodities weakened, so did the Aussie dollar.

An indisputable link

Today, the iron ore price is US$57.30 per tonne.

Thats a long fall in the giddy heights above US$180 per tonne in 2011.

Here, well show you another chart. If you need more evidence of the link between the value of the Aussie dollar and the price of commodities, this is it.

Below is a chart of the Aussie dollar (yellow line) from the price of iron ore (white line):

Source: Bloomberg

You dont need to be Columbo to interpret which chart.

Of course, some will state that the Aussie economy is evolving. Mr Colhoun, from National Australia Bank, told Bloomberg:

At the present period, the improvement in the non-mining economy is more than outweighing the drag from mining, particularly in an employment feeling.

That may be true. But how about in an export sense?

That doesnt seem so clear. Look, were not saying that the Aussie economy is only good for digging things out of the ground as well as selling them to China.

As somebody who has followed small-cap and microcap stocks around the Aussie market for more than a 10 years, we know there is plenty of development in Australia.

But digging up sources and selling them to China is different to innovating within technology and selling that technology to the world.

The world doesnt need Australia for this resource

When it comes to sources, Australia is one of the worlds leaders. In the event that China wants iron ore, it has two options Australia or Brazil.

But when China (or any other country) wants a different kind of resource technology Australia isnt the initial place that springs to mind.

China includes a home-grown technology industry. If it cant get what it wants at home, it can get it from the US, Singapore, Hong Kong, Europeand somewhere else.

For years investors, commentators, and economists worried if The far east could adjust its economy to the future. They may well have a cause for concern. But here in Australia, folks need to worry regarding Australias ability to adjust.

It may achieve this. But even if it does, it will take a long time. Its why we recommend investors get hold of Vern Gowdies new book now.

It has the details on how issues will pan out for that Aussie economy, and what investors (and non-investors) can do to prepare for it. Go here for details.

Cheers,

Kris