Separating You From Your Money

Nope, it's not me, it's those guys - the infamous 'they' in the basement.

Since putting up my post about the bond funds being gated the other day, I've continued to read and if I had any investments at all I would be worried.

You know those "safe" money market funds I mentioned? Those least-return-on-investment-but-safest-bet-if-the-bank-has-your-money funds that are allegedly the most stable of the stable in a 401k.

Well, I've got bad news for you. Governments, banks and fund managers are casting a longing eye over your nest egg. If they have their way, you might just get gated there, too.

Back on November 24, 2015 the Financial Times had this article:

http://www.ft.com/intl/cms/s/0/3ff3dcce-928e-11e5-bd82-c1fb87bef7af.html#axzz3uMDzeC9z

Bond Market Seeks Repo Clearing Solution

The short course here, Econ 101:

A "repo" is a repurchase. A repurchase is when a bank wants something but it doesn't have the money it needs for that something. It looks in the sofa. It digs around in the cushions - the accounts of the bank's depositors. Without asking your permission it uses your money as collateral to fund the loan that it needs for the something it wants. After all, your money is just numbers in a computer, not piles of bills in a lock-box. So if you show up at the teller's cage but your money isn't at home, the teller takes money from someone else's account to fulfill your request. At some point the bank is supposed to put that money back.

This process keeps the liquidity of the bank liquid - they don't have to wait until some future date when their earnings and profits meet up with their want or need - they can have it now.

However, since the financial meltdown of 2007-2008 there have been a plethora of regulations and restrictions put in place to help stabilize the too-big-to-fails. The intent was to prevent a future crisis like that one. One regulation is Stress Testing - a form of "means testing" - if a crisis hit, would the bank be able to survive on its own? This means that banks can't use most of the funds available to invest in things. They have to keep enough money on hand that if there is a crisis, they'll be in a position to weather it.

That's irritating, almost galling, to the banks. They don't want to be restricted. They're like a spoiled three-year old who hasn't the first foggiest clue what the word "no" means. All that three-year old knows is that he's not getting what he wants, so he tries to figure out how to get it. In this case, the three-year olds are eyeing your savings - the nest egg in a money market account.

This is the key excerpt from the Financial Times article I linked above:

"At an annual private meeting between industry participants and the US Treasury Department last week, discussion focused on a proposed solution of placing repo trades between banks and investors, such as money market funds, into a clearing house."

Now the only thing I added there is the bold text. The words are not mine - they're from the Financial Times article - but what's highlighted is key.

There has been a meeting between the bankers, the Federal Reserve and the US Treasury in which they discussed putting your money into a clearing house. A single basket from which the bankers can borrow for their somethings.

That might not seem like a bad idea, until you think about the potential of gating.

What if that fund gets dipped into so often that it's depleted when investors need or want their money? What if there's another massive rumble through the financial markets and people want to get their money out to make sure they know where it is when they need it? What if, and this is the big one, it comes down to a tug-of-war between you and the bank - who do you think will win that battle? What if you have $100,000 of your $300,000 savings in that money market account that's in that single clearing-house basket and what if that basket is suddenly, without warning, 'gated'? Well, golly, sorry but you just lost 1/3 of your savings. 33.3333...% of your money is gone, just like that and you have no recourse.

In the years since 2007-2008 there have been a lot of changes in the financial markets and financial regulations. Unfortunately, these new regulations have had zero effect on the morals, ethics, characters and downright greed of the people who run our financial institutions. It's power and control and greed in its worst possible form.

Someone a whole lot smarter than me once said: "Power Tends to Corrupt, and Absolute Power Corrupts Absolutely" (he was John Dalberg-Acton, 1st Duke of Acton, and a pretty smart guy).

When the banks have as much power as they have, in collusion with the World-wide Central Banking system aiding and abetting their every unsavory move, and the Treasury Department standing by to do their bidding (printprintprintprintprint), there is little hope for the individual investor.

Personally, I have minimal exposure to cash in any form. I own no stocks, no bonds, no investment vehicles. When I started at my new job last January and was offered a 401k I immediately, and with zero regret or hesitation, opted out.

I prefer it this way. I have what I need and I know where it is. Do you?

I hope so. In the meantime, have a lovely financially secure day. There is more coming: the Baltic Dry Index and a potential bail-out for these junk bond funds. Tomorrow, though, tomorrow because I think I've given you enough food for thought for today.

Best~
Philippa

Follow me on Twitter: https://twitter.com/PhilippaStories

Is This the Canary in the Economic Coalmine?

I don't normally tell people to read my stuff but, in this case, it's important. Particularly if you have even a penny invested in stocks, bonds or ETFs (electronically traded funds). Whether as stand-alone investments outside of a 401k or Keogh or, particularly, if you are invested in a pre-tax payroll investment account such as a 401k. If you think what I say here is interesting, share it with others you know because this could be the canary in the coalmine for another financial / economic meltdown.

Late last week both Stone Lion Capital Partners and Third Avenue "gated" junk bond funds. That means that if you had money invested in junk bond funds at either of these firms, or with any others that have been 'gated', you cannot redeem your holdings. The fund is closed with your money inside - the gate has come down separating investors from their investments and there is no recourse. That money is, for all intents and purposes, gone. News of these funds is all over the place in the news - I've posted just three links, and here's an excerpt from the CNN report (link below): 

"Opportunity in the junk bond crisis: Junk bond ETFs get hit hard in the wake of Third Avenue Management's decision to liquidate its junk bond fund and activist investor Carl Icahn weighed in on this move. Greg Peters from Prudential joins to discuss.

 

Hedge fund Stone Lion suspended redemptions in its oldest fund Friday, the latest pain in the high-yield debt market, The Wall Street Journal reported.

"The firm said its $400 million portfolio fund received "substantial redemption requests," according to the paper. Stone Lion says it manages around $1.3 billion, and focuses on distressed debt. Stone Lion's move follows steps taken by Third Avenue Management, which on Thursday said it would stop withdrawals from a high-yield bond fund that it is attempting to liquidate. The value of many distressed and risky investments has plummeted recently."

http://money.cnn.com/2015/12/11/investing/junk-bond-fund-blows-up-third-avenue/

http://www.marketwatch.com/story/now-stone-lion-capital-suspends-redemptions-as-junk-bond-market-fears-accelerate-2015-12-11

http://investmentresearchdynamics.com/second-warning-get-out-of-your-bond-fund-before-its-gated/

As I do to make sure that what I present here is accurate, I went out to the larger web and Googled "Junk Bond Market News". That resulted in a list of pretty scary headlines if you own mutual funds - most of which also include investments in bond funds because bond funds are generally seen as being "safer" and less volatile than stock holdings.

Because of the attractiveness of return on investment of junk bonds, a lot of brokers buy some to add to their mix of more stable offerings. If a lousy bond or stock priced at $1.50 or $2.00 per share jumps 50 basis points, that's a significant ROI.

http://www.wsj.com/articles/junk-bond-selloff-intensifies-after-funds-demise-1449857705

The opening paragraph in the article linked above says:

"U.S. junk bonds posted their steepest decline since 2011, intensifying fears that a six-year bull market in stocks and other risky assets is nearing an end."

Based on these articles, and other articles I found, the junk bond market - those investments that are the riskiest of the risky - is unraveling. If this follows past patterns - like the financial crisis of 2007-2008 which led to the "deepest recession since the Great Depression" - we are gonna be in a world of economic hurt sometime next year or in 2017.

Googling "junk bond 2007" brings up this, among other articles:

http://www.investopedia.com/ask/answers/041515/what-role-did-junk-bonds-play-financial-crisis-200708.asp

More worrying is this article from MarketWatch from last Friday:

http://www.marketwatch.com/story/high-yield-debt-meltdown-is-so-similar-to-2007-gundlach-says-2015-12-11

So, what does it all mean? It may well mean that the house of cards we've been seeing in the financial markets - the Dow Jones Index, the S&P 500, etc. - is starting a harmonic breakdown as Gundlach says in this article:

"“People are too long credit and the credit is melting down and the stock market is whistling through the graveyard. It is so similar to 2007, it’s scary,” said Gundlach, who oversees $80 billion at the Los Angeles-based DoubleLine Capital."

But what about the NYSE, the Dow Jones? The stock market is up above 17,000 points!

Back in 1987, on Black Monday, world financial markets "crashed", losing twenty percent of their value. This was in the days before the automatic trading stops. In fact, this was the root cause for the development of the automatic trading stops. Now, if a single stock or the entire market drops a certain percentage, trading is halted in that stock or in that market. In 1987 it took months to recover from that drop. You can see from this chart (yes, I know charts aren't fun or sexy, but they are telling) that a recovery hadn't even begun three months later:

Attribution: "Black Monday Dow Jones" by Autopilot - Own work by uploader; DJIA values from http://www.cs.princeton.edu/introcs/data/DJIA.csv. Licensed under CC BY-SA 3.0 via Commons - https://commons.wikimedia.org/wiki/File:Black_Monday_Dow_Jones.svg#/media/File:Black_Monday_Dow_Jones.svg

https://en.wikipedia.org/wiki/Black_Monday_%281987%29

Today, this drop would have been reversed in a matter of just a couple of days, at most, because of U.S. Federal Reserve intervention - POMO - but I'll get to that in a minute.

Starting last week, ahead of the Federal Reserve's meeting next week to pronounce whether interest rates are going up, going to negative or staying where they are, people started moving their money:

Equity funds saw $6.4 billion in outflows over the past week while market participants pulled $6.1 billion from fixed income, according to BofAML. Yield plays suffered in particular, with high-yield funds losing $3.8 billion — the most in 15 weeks, while bank loans and master limited partnerships also sustained losses.

http://www.cnbc.com/2015/12/11/investors-flock-to-cash-ahead-of-fed-meeting.html  

And those high-yield funds mentioned there are the junk bond funds - like Stone Lion and Third Avenue.

So with equity funds - stocks - seeing a $6.4 billion outflow last week, the markets are starting to roll over - and, according to the guys I've been reading, it's only going to get worse.

Following the 2007-2008 financial meltdown, the U.S. Federal Reserve, Congress and the Treasury department instituted "fail safes" to protect the Too Big To Fail Banks. Remember those financial institutions the US taxpayer bailed out? Yeah - those guys. At the G20 a couple of years ago everyone in attendance all signed off on "Bail-Ins" in case the banking and investment industry goes back down the 2007-2008 road.

A bail-in is simply a nice way of saying "stealing". In a bail-in, the banks, by law, can take money from investor's accounts in order to keep their operation going. It was done in Cypress a few years back, and it's been signed off on by the Central Banks (including the Federal Reserve in the US) around the world.

The US Federal Reserve in collusion with the US Treasury Department also instituted Permanent Open Market Operations (POMO) which is convoluted talk for monetary intervention in the financial markets if things look shaky. Here's the definition of POMO:

DEFINITION of 'Permanent Open Market Operations - POMO' When the Federal Reserve buys or sells securities outright in order to permanently add or drain the reserves available to the U.S. banking system.

So what's the problem? Well - it leads to a false idea about the economic health of America. We are being spoon-fed a bright and glowing picture that is based on false data.

If the securities markets - stocks, bonds, banks, anything monetary - shows a less than rosy picture, the Federal Reserve does an asset swap to shore it up and make it look less sickly. The following excerpt is from a 2010 article (emphasis added in places with bold text), and the Fed's continued interjections into the financial marketplace have accelerated since then, inflating the DJIA far higher than it would be were the numbers real.

"For the period of POMO’s from 2005-2007 there were 50 operations and the market advanced a grand total of +0.35% on these days.  Since the market collapse, however, there have been 155 operations and the market has advanced a total of +26.95% on these days. So, the outsized returns could merely be a function of coinciding with one of the greatest bull markets in history.

"What’s so interesting about all of this is the real world impact, however.  These operations don’t alter net private sector financial assets.  Therefore, it’s really just asset shuffling.  The Fed is not printing new money when it conducts these operations.  They’re simply asset swaps.  They don’t add to the private sector’s income, they don’t create jobs, they don’t make the economy better off (aside from a highly debatable and marginal interest rate effect).  There is, however, an obvious argument that there is a high correlation between market response and POMOs.  So while there is no reason to believe that these operations actually make us all better off there is considerable evidence supporting the idea that these operations correlate with periods of assets being “higher than they otherwise would be” – in other words, assets tend to be disconnected from their fundamentals during these Fed operations.

"I’ll be honest with the reader.  When I ran this data I was really hoping that I would find evidence showing that the POMOs have no impact on market direction.  The conclusion is unsettling for obvious reasons.  And while this might be nothing more than a case of datamining, the evidence is convincing that the Federal Reserve is helping to boost equity prices without creating an equally positive change in SUSTAINABLE economic growth.  I’m not a conspiracy theorist, but when I’ve got the Manager of the System Open Market Account for the Federal Open Market Committee telling me that he wants to keep “prices higher than they otherwise would be” combined with this evidence it makes it very hard to believe that the Fed isn’t attempting to outdo Bernie Madoff."

http://www.businessinsider.com/a-case-study-does-the-feds-permanent-open-market-operations-actually-lift-stock-prices-2010-10

In other words, ladies and gentlemen, the US government, in collusion with the US Federal Reserve, is running a Ponzi scheme and this Ponzi scheme, if the shakiness starting in the bond market is anything to go by as it was pre-2008 economic collapse, is about to come down.

If this 'gating' of junk bonds is the dying canary in the goldmine and if the equity markets do collapse, we will be in for a really wild ride. There will more than likely be another financial collapse. Unemployment will resurge to something much higher than the purported (and purely BS) 5.1% being touted by our government*. Welcome to the Third World, America!

http://www.cnbc.com/2015/10/02/chart-whats-the-real-unemployment-rate.html

So, call your broker and put at least some of whatever holdings you have into the safest thing you can find. Money market is marginally safe, liquidation is safer because our financial institutions have the option of bailing-in the monies they have on their books if they get too tightly squeezed. Then hold onto your hat because I'll wager that no matter what happens, those paper assets are gonna take a ginormous hit, and there's nothing you can do about it.

Good luck!

Philippa

Follow me on Twitter: https://twitter.com/PhilippaStories

Drama Queen and the Dragon in the Room

No doubt most people who have read this blog in the past few days think I’m a blithering idiot and I’ll admit, maybe I am. Then again, maybe I’m not.

I am not a market investor. I do not trust brokerage houses, or Wall Street, or anything to do with stocks, bonds, commodities or equities of any kind. If I cannot hold ‘it’, whatever ‘it’ is, in my hot little hand, I want no part of it.

My husband, back in 1989, quit his job to become a day trader. He began playing the market – longs and shorts, puts and calls – and we made some money. In the process, he became fascinated by the operation of the various markets: stocks, bonds, commodities. His enthusiasm spilled over onto me, willing or not. It has, for the past twenty-five years, been the primary topic of conversation in our house.

We talk at length about market manipulation and algorithms and all sorts of other shady things. Watching the markets as we do we were not surprised to hear about ‘front running’ markets. That is a trick where fund managers intercept electronic transactions and trade ahead of them via algorithm. That way they are guaranteed to have the price of their ‘whatever’ go up. Their order hits, they buy and golly gee whiz be damned, a second later another order shows up and boosts the price. Then the first guys have a choice: buy, hold or sell?

They can buy more or hold what they have if they think another order is going to come through. Otherwise they can sell and take the profit off their trade, then do it again the next time and again and again and make a whole load of money.

‘Flash Boys’ is a book on the subject that was released a while back. When it was talked about all over the financial news stations, no eyebrows in our house were raised. It was a shrug and a ‘yeah, so?’ Since then a number of other books on the subject have been released.

Naturally, a bunch of people “inside” rushed forward and tossed the BS flag. But if the guy who wrote the book, Michael Lewis, was on the inside, saw it happening and didn’t like it because he actually has a moral compass so outted what’s well known within the industry, isn’t it just possible that the naysayers are just covering their hinies?

Whatever.

The point is that I am not a complete nincompoop when it comes to markets and trading and understanding the lingo. I’m not an expert, either. I’m a person who knows more than the average person because I’ve been talking the talk for a quarter of a century. I pay attention and I graze, looking through a variety of sources and putting the pieces of the puzzle together until it makes sense and fits the overall scheme under discussion by all parties.

So, back to the economies and the news.

Up until today, what Greece is going through, the speculation, referendum and talk about a ‘Grexit’ has been overshadowing, to some extent, what’s been happening in China. With all eyes focused on the drama queen in the Med nothing was left to spare to the dragon in the room. Now, though, that focus is changing – rapidly.

Starting last night, during the early morning in China and Bloomberg’s looking up from Greece for a moment, there was an ‘oh shit’ moment. They started talking, actively and with some energy, about China and the Chinese markets.

In China over the past few years, stocks have flown high on speculative trading. Now, as usually happens, the parabolic curve has tipped over and the market is in free-fall. The government has stepped in, throwing money at the conflagration to no effect.

Since June 12 – in less than four weeks – the Shanghai Composite has lost 32% of its value. Almost $33 or €33 or whatever currency marker you want to use out of every one-hundred is gone. Vaporized because it was paper and there was nothing supporting its value.

More than one-half of all of the companies listed on the exchange have decided to pull their stocks – they will no longer offer shares for sale. That is as of this week.

The People’s Bank of China is stepping up, offering money – but it is government money. The government will print, the people will be taxed, and nothing will fundamentally change. According to Bespoke Investment Group, China’s stock markets have lost a whopping $3,250,000,000,000 ($3.25 trillion).

In China, regulators are now allowing people to put up their homes – the houses in which they live – as collateral against margin trades! I kid you not, the report about that is here, in this article (fourth bullet point near the bottom of the first page):

http://www.marketwatch.com/story/chinas-stock-market-crash-is-just-beginning-2015-07-08

I graze broadly when I’m interested in something. Forbes, CNN, CNBC, The Economist, Financial Times, New York Times, whatever. In my graze last night, reading and skimming, I saw several interesting, and alarming, points.

First, several articles and Op Ed pieces commented on the similarities between what’s happening in the world economies now and what happened in the run-up to the 1929 crash on Wall Street. Just because Wall Street has moved to the Far East doesn’t change the effects a major market crash would have on everyone and everything else.

Hong Kong, India and a number of other markets, including currencies, are already feeling the pinch, and it’s only going to get worse. As one starts to rattle, it’s going to shake the next, all the way around the world, through all of the markets. It’s just as is happening in Europe on a much smaller scale since Greece’s referendum. Only China is the elephant and Greece is the gnat.

This is the biggest problem with having things so inter-related. It’s like being a conjoined twin. If the system of one fails, the system of the second will follow suit and there’s no getting around or saving it. Same thing here. We are too tightly conjoined to be able to stand alone, on our own.

What happens in China is not going to stay in China. At 11:11 this morning local time, the Dow Jones Industrial Average was off slightly more than 180 points. This afternoon, ten minutes before the NYSE closes for the day, it’s down 231 points. It was down yesterday and I’m pretty sure it’s going to be down again tomorrow. Looking at the one month chart, it’s off about 700 points, so it’s much less than 1% of the overall market value. However, is this the start of a major bear market?

If we are a conjoined twin with China and the EU, how far down will we go?

How is the China effect going to impact business and production here, in the US? If we cannot buy cheap goods from China, our prices will go up, what effect will that have on the cost of living?

Lots of questions – far more than I have room to ask here.

Another issue is the commodities markets and, no, I’m not talking about pork bellies. It’s the metals that are interesting.

China has vast gold holdings – bullion, the hard stuff, not the paper ETFs that aren’t worth the ink with which they’re printed.

(Aside: take a tree, a single tree and make it into sawdust – that is what the gold ETFs do to gold bullion. The tree had value, until it was ground into sawdust. Then it has no value, just like the gold ETF you probably hold in your retirement account. It’s a paper IOU, a promise that cannot be redeemed even if you wanted to. Try – take your shares of paper gold and try to redeem one ounce worth. You will be laughed at and told ‘sorry, you can’t do that’ or ‘sorry, it’ll be six months before we can deliver it to you’.)

So, will China dump gold into the world market in order to cover their economic implosion? If they do, that will be a temporary punch in the gut to the price of gold. All gold prices – bars, rounds, ETFs, stocks of gold producers – everything will drop like a rock. But when the paper money reaches its intrinsic value (zero), gold will revert to its historic relevance and become ‘money’ again. Then the value of it will soar because physical gold is in limited supply. Paper gold – those ETF shares so many hold – will have value only as toilet paper.

Time will tell and guessing is simple exercise to no real purpose. So, I’ll sit here on the sidelines and watch the action unfold.

Good luck to you in this mess!

Best~

Philippa

Follow me on Twitter: https://twitter.com/philippastories