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Summer 2014 Euro Pacific Capital Newsletter
Posted by Peter Schiff on 07/28/2014 at 12:13 PM

The Summer 2014 edition of Euro Pacific Capital's Global Investor Newsletter has just been issued. In this issue CEO Peter Schiff, and other analysts at the firm, tackle the following subjects:

 

- A review of first half 2014 financial performance in which defensive and inflation sensitive assets dominated the global marketplace.

 

- An analysis of the increasing U.S. financial regulatory policy on global institutions.

 

- An examination of how Vladimir Putin is working quickly to construct a non-dollar Eurasian trading bloc.

 

- An interview with Peter Boehringer, a  well-known German critic on the inexplicable lethargy of the Bundesbank's gold repatriation policy.

 

- A summation of the consequences that Abenomics has imposed on Japanese citizens.

 

-Also: thoughts on rise of robotics as an investment theme, and the end of the Argentine debt drama.

 

The full newsletter can be viewed here on Euro Pacific Capital's website. Members of the press are invited to except portions of this content for their coverage. Those interested delving deeper into these issues should contact Andrew Schiff at aschiff@europac.net or call 800-727-7922 ext. 135.






Tags:  2014 financial performanceAbenomicsEuro Pacific CapitalGlobal Investor Newsletterinflation sensitive assetsPeter Boehringer,Peter SchiffU.S. financial regulatory policy
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Yellen: Where No Man Has Gone Before
Posted by Peter Schiff on 07/25/2014 at 10:38 AM

Although Fed Chairwoman Janet Yellen said nothing new in her carefully manicured semi-annual testimony to Congress last week, her performance there, taken within the context of a lengthy profile in the New Yorker (that came to press at around the same time), should confirm that she is very different from any of her predecessors in the job. Put simply, she is likely the most dovish and politically leftist Fed Chair in the Central Bank's history.  

 

While her tenure thus far may feel like a seamless extension of the Greenspan/Bernanke era, investors should understand how much further Yellen is likely to push the stimulus envelope into unexplored territory. She does not seem to see the Fed's mission as primarily to maintain the value of the dollar, promote stable financial markets, or to fight inflation. Rather she sees it as a tool to promote progressive social policy and to essentially pick up where formal Federal social programs leave off.

 

Despite her good intentions, the Fed's blunt instrument policy tools of low interest rates and money supply expansion can do nothing to raise real incomes, lift people out of poverty, or create jobs. Instead these moves deter savings and capital investment, prevent the creation of high paying jobs, and increase the cost of living, especially for the poor (They are also giving rise to greater international financial tensions, which I explore more deeply in my just released quarterly newsletter). On the "plus" side, these policies have created huge speculative profits on Wall Street. Unfortunately, Yellen does not seem to understand any of this. But she likely has a greater understanding of how the Fed's monetization of government debt (through Quantitative Easing) has prevented the government from having to raise taxes sharply or cut the programs she believes are so vital to economic health. 

 

But as these policies have also been responsible for pushing up prices for basic necessities such as food, energy, and shelter, these "victories" come at a heavy cost. Recent data shows that consumers are paying more for the things they need and spending less on the things they want. But Yellen simply brushes off this evidence as temporary noise.

 

In her Congressional appearances, Yellen made clear that the end of the Fed's six-year experiment with zero percent interest rates is nowhere in sight. In fact, the event is less identifiable today than it was before she took office and before the economy supposedly improved to the point where such support would no longer be needed. The Bernanke Fed had given us some guidance in the form of a 6.5% unemployment rate that could be considered a milestone in the journey towards policy normalization. Later on these triggers became targets, which then became simply factors in a larger decision-making process. But Yellen has gone farther, disregarding all fixed thresholds and claiming that she will keep stimulating as long as she believes that there is "slack" in the economy (which she defines as any level of unemployment above the level of "full employment.") Where that mythical level may be is open for interpretation, which is likely why she prefers it.

 

The Fed's traditional "dual mandate" seeks to balance the need for job creation and price stability. But Yellen clearly sees jobs as her top priority. Any hope that she will put these priorities aside and move forcefully to fight inflation when it officially flares up should be abandoned.

 

These sentiments are brought into focus in the New Yorker piece, in which she unabashedly presents herself as a pure disciple of John Maynard Keynes and an opponent of Milton Friedman, Ronald Reagan, and Alan Greenspan, figures who are widely credited with having led the rightward movement of U.S. economic policy in the last three decades of the 20th Century. (Yellen refers to that era as "a dark period of economics.")

 

Perhaps the most telling passage in the eleven-page piece is an incident in the mid-1990s (related by Alan Blinder who was then a Fed governor along with Janet Yellen). The two were apparently successful in nudging then Fed Chairman Alan Greenspan into a more dovish position on monetary policy. When the shift was made, the two agreed "...we might have just saved 500,000 jobs." The belief that central bankers are empowered with the ability to talk jobs in and out of existence is a dangerous delusion. As her commitment to social justice and progressivism is a matter of record, there is ample reason to believe that extremist monetary policy will be in play at the Yellen Fed for the duration of her tenure.

 

For the present, other central bankers have helped by taking the sting out of the Fed's bad policy. On July 16 the Wall Street Journal reported that the Chinese government had gone on a torrid buying spree of U.S. Treasury debt, adding $107 billion through the first five months of 2014. This works out to an annualized pace of approximately $256 billion per year, or more than three times the 2013 pace (when the Chinese government bought "just" $81 billion for the entire calendar year). The new buying pushed Chinese holdings up to $1.27 trillion.

 

At the same time, Bloomberg reports that other emerging market central banks (not counting China) bought $49 billion in Treasuries in the 2nd Quarter of 2014, more than any quarter since 3rd Quarter of 2012. These purchases come on the heels of the mysterious $50 billion in purchases made by a shadowy entity operating out of Belgium in the early months of this year (see story).

 

So it's clear that while the Fed is tapering its QE purchases of Treasury bonds, other central banks have more than picked up the slack. Not only has this spared the U.S economy from a rise in long-term interest rates, which would likely prick the Fed-fueled twin bubbles in stocks and real estate, but it has also enabled the U.S. to export much of its inflation.As long as this continues, the illusion that Yellen can keep the floodgates open without unleashing high inflation will gain traction. She may feel that there is no risk to continue indefinitely.

 

But as the global economic status quo is facing a major crisis (as is examined in this newsletter), there is reason to believe that we may be on the cusp of a major realignment of global priorities. Despite her good intentions, if Yellen and her dovish colleagues do not receive the kind of open-ended international support that we have enjoyed thus far in 2014, the full inflationary pain of her policies will fall heaviest on those residents of Main Street for whom she has expressed such deep concern. 

 

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.






Tags:  central bankersJanet YellenNew YorkerprogressiveQuantitative Easingstimulus
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The Bond Trap
Posted by Peter Schiff on 06/23/2014 at 8:13 AM

The American financial establishment has an incredible ability to celebrate the inconsequential while ignoring the vital. Last week, while the Wall Street Journal pondered how the Fed may set interest rates three to four years in the future (an exercise that David Stockman rightly compared to debating how many angels could dance on the head of a pin), the media almost completely ignored one of the most chilling pieces of financial news that I have ever seen. According to a small story in the Financial Times, some Fed officials would like to require retail owners of bond mutual funds to pay an "exit fee" to liquidate their positions. Come again? That such a policy would even be considered tells us much about the current fragility of our bond market and the collective insanity of layers of unnecessary regulation.

 

Recently Federal Reserve Governor Jeremy Stein commented on what has become obvious to many investors: the bond market has become too large and too illiquid, exposing the market to crisis and seizure if a large portion of investors decide to sell at the same time. Such an event occurred back in 2008 when the money market funds briefly fell below par and "broke the buck." To prevent such a possibility in the larger bond market, the Fed wants to slow any potential panic selling by constructing a barrier to exit. Since it would be outrageous and unconstitutional to pass a law banning sales (although in this day and age anything may be possible) an exit fee could provide the brakes the Fed is looking for. Fortunately, the rules governing securities transactions are not imposed by the Fed, but are the prerogative of the SEC. (But if you are like me, that fact offers little in the way of relief.) How did it come to this?

 

For the past six years it has been the policy of the Federal Reserve to push down interest rates to record low levels. In has done so effectively on the "short end of the curve" by setting the Fed Funds rate at zero since 2008. The resulting lack of yield in short term debt has encouraged more investors to buy riskier long-term debt. This has created a bull market in long bonds. The Fed's QE purchases have extended the run beyond what even most bond bulls had anticipated, making "risk-free" long-term debt far too attractive for far too long. As a result, mutual fund holdings of long term government and corporate debt have swelled to more $7 trillion as of the end of 2013, a whopping 109% increase from 2008 levels.   

 

Compounding the problem is that many of these funds are leveraged, meaning they have borrowed on the short-end to buy on the long end. This has artificially goosed yields in an otherwise low-rate environment. But that means when liquidations occur, leveraged funds will have to sell even more long-term bonds to raise cash than the dollar amount of the liquidations being requested.

 

But now that Fed policies have herded investors out on the long end of the curve, they want to take steps to make sure they don't come scurrying back to safety. They hope to construct the bond equivalent of a roach motel, where investors check in but they don't check out. How high the exit fee would need to be is open to speculation. But clearly, it would have to be high enough to be effective, and would have to increase with the desire of the owners to sell. If everyone panicked at once, it's possible that the fee would have to be utterly prohibitive.

 

As we reach the point where the Fed is supposed to wind down its monthly bond purchases and begin trimming the size of its balance sheet, the talk of an exit fee is an admission that the market could turn very ugly if the Fed were to no longer provide limitless liquidity. (See my prior commentaries on this, including May 2014's Too Big To Pop)

 

Irrespective of the rule's callous disregard for property rights and contracts (investors did not agree to an exit fee when they bought the bond funds), the implementation of the rule would illustrate how bad government regulation can build on itself to create a pile of counterproductive incentives leading to possible market chaos.

 

In this case, the problems started back in the 1930s when the Roosevelt Administration created the FDIC to provide federal insurance to bank deposits. Prior to this, consumers had to pay attention to a bank's reputation, and decide for themselves if an institution was worthy of their money. The free market system worked surprisingly well in banking, and could even work better today based on the power of the internet to spread information. But the FDIC insurance has transferred the risk of bank deposits from bank customers to taxpayers. The vast majority of bank depositors now have little regard for what banks actually do with their money. This moral hazard partially set the stage for the financial catastrophe of 2008 and led to the current era of "too big to fail."

 

In an attempt to reduce the risks that the banking system imposed on taxpayers, the Dodd/Frank legislation passed in the aftermath of the crisis made it much more difficult for banks and other large institutions to trade bonds actively for their own accounts. This is a big reason why the bond market is much less liquid now than it had been in the past. But the lack of liquidity exposes the swollen market to seizure and failure when things get rough. This has led to calls for a third level of regulation (exit fees) to correct the distortions created by the first two. The cycle is likely to continue.

 

The most disappointing thing is not that the Fed would be in favor of such an exit fee, but that the financial media and the investing public would be so sanguine about it. If the authorities consider an exit fee on bond funds, why not equity funds, or even individual equities? Once that Rubicon is crossed, there is really no turning back. I believe it to be very revealing that when asked about the exit fees at her press conference last week, Janet Yellen offered no comment other than a professed unawareness that the policy had been discussed at the Fed, and that such matters were the purview of the SEC. The answer seemed to be too canned to offer much comfort. A forceful rejection would have been appreciated.  

 

But the Fed's policy appears to be to pump up asset prices and to keep them high no matter what. This does little for the actual economy but it makes their co-conspirators on Wall Street very happy. After all, what motel owner would oppose rules that prevent guests from leaving? The sad fact is that if investors hold a bond long enough to be exposed to a potential exit fee, then the fee may prove to be the least of their problems.

 

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.







Tags:  bond mutual fundsexit feeFederal ReserveFinancial Timesinterest rates
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Draghi Hits Savers To Salvage Faux Recovery
Posted by Peter Schiff on 06/18/2014 at 2:20 PM
On June 5th, Mario Draghi, President of the European Central Bank (ECB), announced a package of measures, including a policy of negative interest rates, aimed at encouraging or even forcing Eurozone banks to increase their lending to businesses.Although previously imposed by Swiss banks on their depositors, this will be the first time that a central bank has charged negative interest rates. The package also contained a reduction in Base Rate, a further major new Long Term Refinancing Operation (LTRO), a reaffirmation of 'Forward Guidance' to indicate low interest rates for the foreseeable future, and hints that the ECB might in future engage in Bernanke-style Quantitative Easing (QE).
 
Taken together, the total package is manna from heaven, or money for nothing, for the neo-Keynesians now holding power in most Eurozone governments. However, to Austrian School economists, it amounts to a political acceptance by Germany of a further postponement of the price of economic reality. It raises the eventual price to be paid in future for the illusion of economic growth today. In the meantime, the package likely will discourage savings, while perhaps encouraging imprudent lending, mal-investment, an asset price boom and currency distortions due to a carry trade based on low cost euros.
 
Stock markets rose strongly on Draghi's news. Amazingly, the 2.58 percent yield on 10-year Spanish government bonds fell below that of 10-year U.S. Treasuries. Given the continued structural problems that plague the Spanish economy, this fact indicates persistent delusions in markets.
 
It is hoped that charging a negative interest rate of 0.10 percent on bank deposits with the ECB will encourage banks to lend their excess deposits to other banks (in the interbank market) or to lend to corporate or retail borrowers. It is a desperate measure to force banks to take more risks. One of the unforeseen results may be the further development of the so-called "carry trade."
 
Given the relatively low cost of borrowing euros vis-à-vis other currencies, many investors could be tempted to borrow euros to purchase higher yielding currency (either for an interest rate spread or to use the newly raised funds to invest in the host country). For example, an investor may borrow euros, exchange them for British Pounds and invest the proceeds in the London property market, inflating further what the Bank of England has warned is a dangerous property bubble. In addition, upwards pressure is exerted on Sterling rendering British exports less price competitive. Of course, this suits Eurozone members such as Germany.
 
Although Draghi's decision to drop the interest rates on the ECB's  massive 400 billion euros Long Term Refinancing Operation (LTRO)has received less publicity, its impact may be just as great. The lower LTRO rate may encourage further risky lending and dubious investment. In the short-term such lending will conceal current bad loans, boost speculation and financial markets. The future costs of default likely will be socialized. But, by then, it is to be hoped that those bankers and politicians responsible will have been promoted or moved on!
 
In addition, the continuation of ultra low interest rates, under QE, will erode savings further and even discourage the ethos of saving in favor of current spending. The discouragement of saving in favor of current synthetic growth appears to be politically deceptive and deeply destructive of a healthy economy.
 
Furthermore, some would argue that, with bond markets at record highs, most banks are at far greater risk than appears at first sight. Already, Eurozone banks are far more highly leveraged than their American counterparts. As such, they are especially vulnerable to a dramatic rise in interest rates and a collapse in government bond prices.
 
Mario Draghi is acknowledged widely for his PR ability. However, more prudent observers see him more as a conjuror. While his policies have not attracted as many headlines as the Federal Reserve's Quantitative Easing program, the full roster of the ECB's liquidity injectors is perhaps more  injurious to economic growth. Draghi has joined and even exceeded the central bank 'monopoly money' policies of the United States, Great Britain and Japan.
 
It's a shame. The ECB could have been a beacon of sanity in an otherwise insane world.  
 
John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.
 
Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!
 
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Tags:  ECBfederal income taxincome taxtaxtaxes
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Irwin Schiff's motion to the Supreme Court.
Posted by Peter Schiff on 06/16/2014 at 1:00 PM

My father makes a powerful case that the IRS has been collecting the income tax in violation of law, multiple Supreme Court decisions, and the U.S. Constitution.    At the very least his efforts provide compelling evidence of the sincerity with which he holds his beliefs and that his conduct was in no way criminal.   My father is 86, practically blind, in failing health, yet is still fighting for a cause he wholeheartedly believes in.  He is proceeding without a lawyer and despite his physical limitations and the limited computer access provided in federal prisons, he still managed to put this comprehensive motion together.   Read it yourself and share it with as many people as you can.  My father would appreciate your assistance in making sure that his message is heard.   Even if the courts ignore it, let's try and make sure that the American people do not.    Thanks for your help. 

 





Tags:  federal income taxincome taxIRSIrwin Schifftaxtaxes
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Posted by Peter Schiff on 06/13/2014 at 6:40 AM
Thus far 2014 has been a fertile year for really stupid economic ideas. But of all the half-baked doozies that have come down the pike (the perils of "lowflation," Thomas Piketty's claims about capitalism creating poverty, and President Obama's "pay as you earn" solution to student debt), an idea hatched last week by CNBC's reliably ridiculous Steve Liesman may in fact take the cake. In diagnosing the causes of the continued malaise in the U.S. economy he explained, "the problem is that consumers are not taking on enough debt." And that "historically the U.S. economy has been built on consumer credit." His conclusion: Consumers must be encouraged to borrow more money and spend it. Given that Liesman is CNBC's senior economic reporter, I would hate to see the ideas the junior people come up with.
 
Before I get into the historical amnesia needed to make such a statement, we first have to confront the question of causation. Just as most economists believe that falling prices cause recession, rather than the other way around, Liesman believes that economic growth is created when people tap into society's savings in order to buy consumer goods that they could not otherwise afford. But consumption does not create growth. Increasing productive output allows for greater consumption. Something needs to be produced before it can be consumed.
 
But even allowing for this misunderstanding, consumer credit does little to increase consumption. All it accomplishes is to pull forward future consumption into the present (while generating a fee for the banker). This is like giving yourself a blood transfusion from your left arm to your right. Nothing is accomplished, except the possibility of spilling blood on the floor. But it's not even that benign.
If, for instance, a consumer borrows to take a vacation, the debt will have to be repaid, with interest, from future earnings. This just means that rather than saving now (under-consuming) to pay in cash (which under normal circumstances would earn interest and defray the cost) for a vacation in the future, the consumer borrows to vacation now and pays for it in the future. But shifting consumption forward can only create the illusion of growth.
 
Unlike business credit that can be self-liquidating (businesses borrow to invest, thereby expanding capacity, increasing revenue, and gaining a better ability to repay the loan out of increased earnings), consumer credit does nothing to help borrowers repay. Why would a consumer expect it to be easier to pay for a vacation in the future that he can't afford in the present? Especially when he is using credit to pay, which will add interest costs to the final bill. As a result,  consumer loans diminish future consumption more than current consumption is increased.
 
In fact, borrowing to consume is the worst use of society's limited store of savings. As explained in my book, How an Economy Grows and Why it Crashes, savings leads to capital formation and investment, which grows productive capacity. When production grows, goods and services become more plentiful and affordable, thereby raising living standards. Consumer credit interferes with this process. Funds borrowed for consumption are not available for more productive uses. Since consumer credit reduces investment, it also reduces future production, which must also reduce future consumption.
 
Liesman is also mistaken that consumer credit has been the historic foundation of growth in the United States. It may surprise him to know that consumer credit was largely unknown until the second half of the 20th Century. Before that, people simply did not, or could not, buy things on credit. They tended to pay in cash (even for cars) or with the now quaint system of lay-a-way (which is essentially the opposite of consumer credit). Credit cards did not become ubiquitous until the 1970s. It was also much more common for Americans to save money for an uncertain future, the "rainy day," that we were always being warned about. But savings rates now are only a fraction of where they had been for most of our history. Consumers now expect to borrow their way out of any crisis. Yet the American economy enjoyed some of its best years before consumer credit ever became an option.    
 
What Liesman is really advocating is that consumers borrow money to buy things they cannot afford. What kind of economic advice is that? Especially now that one third of Americans have less than $1,000 saved for retirement; a statistic so shocking that even CNBC recently cited it as a cause for concern. Does he really think that these savings-short Americans should take on even more consumer debt? Does creating a nation of bankrupt seniors who are too broke to retire ever create a more prosperous society?
 
Contrary to Liesman's asinine contention, it's not consumer credit that built the U.S. economy but its opposite - savings! Under-consumption not excess-consumption is what made America great. By saving instead of spending, consumers provided society with the means to increase investment and production that led to rising living standards for all. Unfortunately, it's consumer credit that is helping to destroy what savings once built.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Catch Peter's latest thoughts on the U.S. and International markets in the Euro Pacific Capital Spring 2014 Global Investor Newsletter!

Tags:  CPIeconomy
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Posted by Peter Schiff on 06/11/2014 at 12:00 PM

The French economist Thomas Piketty has achieved worldwide fame by promoting a thesis that capitalism is the cause of growing economic inequality. Unfortunately, he is partially right. However, the important distinction missed by Piketty and all of his supporters is that state capitalism, not free market capitalism, has reigned supreme in recent decades in the world's leading democracies. It is this misguided attempt to wed the power of the state to the private ownership of capital that has led to the mushrooming of economic inequality. If the public cannot be made aware of the distinction, we risk abandoning the only system capable of creating real improvements for the vast majority of people.

 

In his book entitled 'Capital in the 21st Century', Piketty, like Karl Marx in 'Das Kapital,' places the hinge of economic tension at the supposed opposition between the competing interest of labor and capital. He believes that "capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based." However, this can only become true if free markets become controlled, or distorted, by the establishment of monopolies, be they private or state owned. 

 

In the early twentieth century, U.S. Governments were alert to the destruction of free markets by monopolistic cartels and enacted strong anti-trust laws to curb their power. The United States thereafter achieved strong economic results in the first three decades of the 20th Century. In contrast, the socialist governments of post WWII Britain used public funds to establish state owned monopolies, similar to those existing in the Soviet Union. This resulted in dramatic economic declines, that continued into the 1980s when the U.K. was rescued by the free market policies of Margaret Thatcher. Her central strategy was to restore individual freedom by breaking state owned monopolies and reducing the coercive control of trade unions. Her actions unleashed a resurgence of prosperity in Britain that was imitated in many other countries. Her policies were adopted with particular enthusiasm by countries, like Poland, which had only recently shaken off the yoke of Soviet Communism. Poland is now one of the strongest economies in Europe.

 

History provides ample evidence that when allowed to function properly free market capitalism generates massive national prosperity with high employment, a strong currency and rising standards of living. It is only when the state manipulates and over regulates free markets that capitalism fails. However, capitalism usually takes the blame for the failures of statism.

Piketty asserts that capitalism is "inherently unstable because it concentrates wealth and income progressively over time, leaving behind an impoverished majority. ..." He proscribes even an international wealth tax and higher income taxes, above 80 percent, to redistribute rather than to invest savings. This would essentially create a state monopoly on wealth. But again, history tends to demonstrate that state monopolies create poverty for all but the politically connected elite. 

 

Even the Soviet Union, a military superpower, was brought to its economic knees by state monopolies. Communist Party Secretaries, Andrapov and Gorbachev, were forced to the recognition that free markets should be introduced within Russia. This led to 'Perestroika' and 'Glasnost' and the freeing of markets in Russia. 

 

By concluding that capitalism, even if it is confined to just a few countries, will lead to increasing poverty among the masses around the world, many cynical observers may conclude that Piketty is laying out a carefully planned case towards global socialism along the lines first attempted by the Bolshevik Commintern. Some conclude that such a move could be spearheaded by international institutions like the UN and IMF. 

 

To achieve inherently unpopular global power, national elites must cooperate to bring about such levels of economic chaos and human suffering that people, despairing of ineffective democracy, will look for strong, global government as a welcome solution. To achieve this end the economic problems and human suffering must be extreme and seemingly beyond solution by any national government. By continuing to debase and destroy fiat currencies while preventing the markets from healing themselves, central banks around the world are doing their part to create these conditions. 

 

However, those who look towards strong global government must realize that likely it will lead to a world of extreme global inequality in which any effective opposition will be impossible. This is the fascistic face behind the cuddly and concerned image that has made Piketty the economic North Star of a new generation. These faulty bearings must be corrected or the world's poor will suffer far more than they need to.

Tags:  CPIeconomy
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Posted by Peter Schiff on 06/06/2014 at 11:08 AM

Economists, investment analysts, and politicians have spent much of 2014 bemoaning the terrible economic effects of the winter of 2014. The cold and snow have been continuously blamed for the lackluster job market, disappointing retail sales, tepid business investment and, most notably, much slower than expected GDP growth. Given how optimistic many of these forecasters had been in the waning months of 2013, when the stock market was surging into record territory and the Fed had finally declared that the economy had outgrown the need for continued Quantitative Easing, the weather was an absolutely vital alibi. If not for the excuse of the bad weather, the entire narrative of a sustainable recovery would have been proven false.

 

Remarkably, this optimism was largely undiminished when the preliminary estimate for first quarter GDP came in at a shocking minus one percent annualized. This number, almost four percentage points lower than the forecasts from the end of 2013, hinted at an economy on a path toward recession. Still, the experts brushed off the report as a weather-related anomaly.

 

In contrast, I spent the better part of the last five months arguing that the weather was a straw man. I saw a fundamentally weak and contracting economy being artificially propped up by Fed stimulus, illusory accounting, and massive federal deficit spending.  However, while it is difficult to precisely measure the effects of bad weather on the economy, a fresh look at the historical data does tell me that a bad winter usually has an economic effect, but not nearly enough to support the oversize excuses being made by our leading pundits.

 

According to Rutgers University's Global Snow Lab, the winter of 2014 was one of 18 winters in which North America experienced demonstrably "above the trend line" snow accumulation since 1967 (this is as far back as Rutgers data goes). But there were at least eight winters in that time period that had more snow than in 2014. So it would be a stretch to say that this past winter made a greater impact than the average of the 10 snowiest winters since 1967. Cross-checking those winters with corresponding GDP figures from the U.S. Bureau of Economic Analysis (BEA) reveals some very interesting conclusions.

 

In general, first quarter (which corresponds to the winter months of January, February, and March) shows annualized GDP growth that is in line with other quarters. For instance, since 1967 average annualized 1st quarter growth came in at 2.7%, slightly above the 2.55% for the average 4th quarter, and below the 2.8% in 3rd quarter and 3.4% in 2nd. But when winter gets nasty, the economy does slow noticeably in the first quarter. So, to that extent my initial analysis likely underestimated its impact.  The bad news for the apologists is that the drag is not nearly enough to explain away the current lethargy.

 

The average annualized GDP growth for the 10 snowiest winters (not counting 2014) was just .5%. This is more than two percentage points below the typical first quarter. It's also more than two percentage points below the average annualized growth for the 4th quarters that preceded those 10 snowiest winters. This is important, because the economy tends to develop in waves that occur outside of the weather cycle. So based on this, we can conclude that the snow of this year likely shaved two percentage points from 1st quarter GDP growth.

 

But the negative one percent growth is almost four points off the initial forecasts. So, at best, the winter accounted for half the disappointment. Imagine if we had a mild winter, and 1st quarter GDP came in at a measly 1%. Without a convenient excuse to blame it on, how optimistic would Wall Street be now? Would the Fed really be continuing to taper in the face of such anemic growth? I doubt it.

 

The apologists also ignore the increased ability of current consumers to shop on the Internet at home even when the snow keeps them from the malls. This is an ability that simply did not exist more than 10 years ago...and should help to minimize the winter slowdowns.

 

An analysis of the bad winters also reveals a clear tendency for the economy to bounce back strongly in the following quarter. This confirms the theory that pent up demand gets released in the spring. In the ten 2nd quarters that followed the ten snowiest winters, annualized GDP averaged a strong 4.4%, or almost four percent higher than the prior quarter. (The snap back was even more dramatic in the five snowiest winters, when the differential was more than five percent.) Based on this, we should see annualized 2nd quarter growth this year of at least three or four percent. 
 
However, the raft of statistics that have come in over the past few weeks does not show that this is happening. A horrific trade deficit report came in this week widening to $47 Billion, the highest since July 2012. The data out this week also showed that consumer spending fell .1% in April (for the first time in a year), and that productivity falling in the 1st Quarter by 3.2% in the face of higher labor costs, which grew at 5.7% annualized. And although May's 217,000 increase in non-farm payrolls was in-line with expectation (following the big miss in ADP data earlier in the weak) it nonetheless represents a significant slowdown from April's 288,000 pace. The level of hiring did nothing to push up the labor force participation rate, which remained stuck at a 35 year low of 62.8%. Predictably, almost all of the jobs added were in low paying sectors that will not contribute much to overall purchasing power, like hospitality (mostly bars and restaurants), healthcare, and education. The report included a big drop in the number of construction workers added, which is the latest sign that the real estate sector is decelerating.

 

But even if growth picks up in the 2nd quarter to 4%, my guess is that most analysts will herald the news as confirmation that the economy is back on track, and discussion of the weather will disappear. However, since half of that four percent will have been borrowed from Q1, Q2's higher growth rate will also be weather-related. But while everyone blamed first quarter weakness on the weather, very few will likely cite it as a cause for any potential second quarter strength. But if you add the minus one percent from Q1 to a potential plus four percent from Q2, the average would still only be just 1.5% growth for the first half of 2014. Despite this, the Fed has yet to revise down its full year 2014 growth estimates of 2.8% to 3.2% that it made at the end of last year. To grow at 3% for the year, even with 4% growth in Q2 (which is above the current consensus estimate), the economy would have to grow at 4.5 percent for the entire second half. Good luck with that. 

 

So yes, the winter was bad, and yes it had an effect. But it was not likely the driving force of the first quarter slow-down and its effects should be very confined. But that won't stop the pundits from gnawing on that particular bone as long as they can get away with it. Unfortunately, they can get away with it for a long time.


Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show. 


Catch Peter's latest thoughts on the U.S. and International markets in the Euro Pacific Capital
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Posted by Peter Schiff on 06/05/2014 at 9:44 AM
Even investors who typically eschew precious metals have been hard-pressed to ignore the platinum industry this year. The longest strike in South African history paired with surging Asian demand is set to push the metal back into a physical deficit in 2014 - and could have repercussions for years to come. While gold remains the most conservative choice for saving, the "industrial precious metal" platinum is a compelling investment for those, like me, who are bullish on global net economic growth.

China in the Driver's Seat

As with gold and silver, examining platinum demand takes us to the Eastern hemisphere and China's rapidly expanding economy. In particular, the growing Chinese middle class is generating massive demand for new automobiles, which in turn is consuming plenty of platinum.

For the last ten years, autocatalysts have composed 40-50% of total global platinum demand. Autocatalysts use platinum to clean the emissions of motor vehicles, and 95% of the world's new passenger cars come equipped with them. Both auto production and emissions standards are steadily increasing around the world, especially in the huge emerging market of China.

Global auto production grew 4% in 2013 to almost 89 million units. According to IHS, Inc., world auto sales will continue to grow to more than 100 million units by 2018 - that's 12% growth in the next five years. And you can bet that growth won't be coming from the US.

China's share of global vehicle production has exploded from under 4% in 2000 to an astounding 25% last year. I expect this demand to keep expanding as more Chinese citizens grow wealthier and are able to enter the auto market.


Chinese vehicle production grew almost 15% in 2013 and should grow another 10% in 2014. New emissions standards that went into effect last year are already forcing Chinese auto manufacturers to use more platinum. Indeed, platinum use in Chinese autocatalysts increased 33% in 2013.

I believe this trend will continue as the Chinese government tries to tackle the country's critical pollution crisis. Just last week, the PRC announced that it would be removing 6 million vehicles from China's roads by the end of the year because they no longer meet emissions standards.

Platinum as an Investment

Though industrial applications have the largest impact on its price, platinum remains a sought-after precious metal with growing demand from the investment and jewelry sectors. Jewelry accounts for well over 25% of platinum demand, and that figure has been steadily increasing. Once again, we look east for the most compelling numbers.

Chinese platinum jewelry demand represents about 65% of the world's total and is expected to expand 5% this year. But India is the real bright point - high import tariffs imposed on gold by the Indian government in 2013 have created shortages and very high premiums on the yellow metal, driving consumers to replace gold with platinum. India's platinum jewelry market has seen 30-50% growth every year so far this decade. 2014 should continue that trend with a 35% projected growth in platinum jewelry sales.

While Eastern investors buy physical platinum in the form of jewelry, Westerners are piling into relatively young exchange-traded funds (ETFs) backed by the metal. Platinum ETFs did not exist until 2007, and the first South African-based platinum ETF began just last year. 2013 saw a 55% increase in the amount of physical platinum held by ETFs, totaling 2.5 million ounces.

As short-term traders wake up to the same supply/demand issues summarized in this commentary, the trend of increasing retail investment may well absorb a greater share of the limited supply.

Just as with gold and silver, I believe platinum ETFs are inferior to physical bullion for long-term investment. However, many investors prefer the liquidity they offer, and as a fundamental data point, they should not be ignored.

Supply Goes from Shaky to Shocked

With promising new sources of demand, platinum supplies have been under pressure. To put into perspective how little platinum is available, simply compare it to gold and silver. Over the past decade, about 13.5 times more gold and 100 times more silver have been mined than platinum. The vast majority of the meager platinum supply comes from just two countries - South Africa and Russia. Troubles in both of these countries are pushing supply constraints into a market shock.

Beginning in January, more than 70,000 South African miners went on strike against the three largest platinum producers in the world - Anglo American Platinum, Impala Platinum, and Lonmin. This is the longest strike in South African history and is estimated to have already reduced global platinum production by 40%. About 1 million ounces of platinum will not be mined this year due to the strikes.

No matter when these wage disputes are resolved, they're going to have a deep impact on the platinum industry. Wages are already one of the biggest expenses of mining, and the Association of Mineworkers and Construction Union (AMCU) is demanding a doubling of wages by 2017. They've already rejected an offer of a 10% increase.

This much seems clear: wages are going to go up and the industry will have to restructure its operations to handle the extra expense. The average global all-in cost of production (including capital expenditures and indirect overhead costs) is already at about $1,595 per ounce of platinum - 10% above the current market price.

As the cost of business rises, some industry analysts are forecasting that Lonmin and perhaps other companies will be forced to keep some of their mines closed after the strikes end. This could affect the platinum market for many years into the future. Large mining operations cannot be started and stopped at the drop of a hat, and it may take a significant increase in the price per ounce to justify reopening any shuttered mines.

Meanwhile, there's the possibility that Russia's annexation of Crimea could draw stricter economic sanctions from the United States and the European Union. How this would affect Russia's giant mining industry is hard to tell, though it has already put a lot of upward pressure on the price of palladium, another important platinum group metal (PGM). Russia is the world's largest producer of palladium and is widely suspected of having exhausted its official reserves of the metal. This rumor, combined with the news that Russia has been exporting abnormally large amounts of palladium to Switzerland in anticipation of economic sanctions, helped to drive the metal's price to its highest since 2011 in May.

The rising price of palladium and its ever-deepening physical deficit might even spur more producers to pay the extra for platinum, which can be more efficient than palladium in some autocatalysts. Generally, any limitations on Russian mining are bullish for all PGMs, and I am waiting for platinum to follow palladium's spike.

An Opportunity to Diversify

All told, Thomson Reuters GFMS is predicting at least a 700,000-ounce physical platinum deficit this year. It projects that platinum will pass $1,700 per ounce by the end of 2014, a 18% increase from today's price. Johnson Matthey is even more pessimistic (or optimistic, from the point of view of a platinum investor), predicting a deficit of more than 1.2 million ounces - the largest since 1975.

Even precious metals bears cannot deny the robust fundamentals for platinum this year. Investors who have already formed a bedrock for their portfolio with gold should consider adding physical platinum to increase future returns.

Peter Schiff is Chairman of Euro Pacific Precious Metals, which sells high-quality physical platinum, gold, and silver coins and bars. 

Click here for a free subscription to Peter Schiff's Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts. 

And now, investors can stay up-to-the-minute on precious metals news and Peter's latest thoughts by visiting Peter Schiff's Official Gold Blog.



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Posted by Peter Schiff on 05/29/2014 at 8:54 AM
There can be little doubt that Thomas Piketty's new book Capital in the 21st Century has struck a nerve globally. In fact, the Piketty phenomenon (the economic equivalent to Beatlemania) has in some ways become a bigger story than the ideas themselves. However, the book's popularity is not at all surprising when you consider that its central premise: how radical wealth redistribution will create a better society, has always had its enthusiastic champions (many of whom instigated revolts and revolutions). What is surprising, however, is that the absurd ideas contained in the book could captivate so many supposedly intelligent people.  

Prior to the 20th Century, the urge to redistribute was held in check only by the unassailable power of the ruling classes, and to a lesser extent by moral and practical reservations against theft. Karl Marx did an end-run around the moral objections by asserting that the rich became so only through theft, and that the elimination of private property held the key to economic growth. But the dismal results of the 20th Century's communist revolutions took the wind out of the sails of the redistributionists. After such a drubbing, bold new ideas were needed to rescue the cause. Piketty's 700 pages have apparently filled that void.

Any modern political pollster will tell you that the battle of ideas is won or lost in the first 15 seconds. Piketty's primary achievement lies not in the heft of his book, or in his analysis of centuries of income data (which has shown signs of fraying), but in conjuring a seductively simple and emotionally satisfying idea: that the rich got that way because the return on invested capital (r) is generally two to three percentage points higher annually than economic growth (g). Therefore, people with money to invest (the wealthy) will always get richer, at a faster pace, than everyone else. Free markets, therefore, are a one-way road towards ever-greater inequality.

Since Pitketty sees wealth in terms of zero sum gains (someone gets rich by making another poor) he believes that the suffering of the masses will increase until this cycle is broken by either: 1) wealth destruction that occurs during war or depression (which makes the wealthy poorer) or 2) wealth re-distribution achieved through income, wealth, or property taxes. And although Piketty seems to admire the results achieved by war and depression, he does not advocate them as matters of policy. This leaves taxes, which he believes should be raised high enough to prevent both high incomes and the potential for inherited wealth.

Before proceeding to dismantle the core of his thesis, one must marvel at the absurdity of his premise. In the book, he states "For those who work for a living, the level of inequality in the United States is probably higher than in any other society at any time in the past, anywhere in the world." Given that equality is his yardstick for economic success, this means that he believes that America is likely the worst place for a non-rich person to ever have been born. That's a very big statement. And it is true in a very limited and superficial sense. For instance, according to Forbes, Bill Gates is $78 billion richer than the poorest American. Finding another instance of that much monetary disparity may be difficult. But wealth is measured far more effectively in other ways, living standards in particular.

For instance, the wealthiest Roman is widely believed to have been Crassus, a first century BC landowner. At a time when a loaf of bread sold for ½ of a sestertius, Crassus had an estimated net worth of 200 million sestertii, or about 400 million loaves of bread. Today, in the U.S., where a loaf of bread costs about $3, Bill Gates could buy about 25 billion of them. So when measured in terms of bread, Gates is richer. But that's about the only category where that is true.

Crassus lived in a palace that would have been beyond comprehension for most Romans. He had as much exotic food and fine wines as he could stuff into his body, he had hot baths every day, and had his own staff of servants, bearers, cooks, performers, masseurs, entertainers, and musicians. His children had private tutors. If it got too hot, he was carried in a private coach to his beach homes and had his servants fan him 24 hours a day. In contrast, the poorest Romans, if they were not chained to an oar or fighting wild beasts in the arena, were likely toiling in the fields eating nothing but bread, if they were lucky. Unlike Crassus, they had no access to a varied diet, health care, education, entertainment, or indoor plumbing.

In contrast, look at how Bill Gates lives in comparison to the poorest Americans. The commodes used by both are remarkably similar, and both enjoy hot and cold running water. Gates certainly has access to better food and better health care, but Americans do not die of hunger or drop dead in the streets from disease, and they certainly have more to eat than just bread. For entertainment, Bill Gates likely turns on the TV and sees the same shows that even the poorest Americans watch, and when it gets hot he turns on the air conditioning, something that many poor Americans can also do. Certainly flipping burgers in a McDonald's is no walk in the park, but it is far better than being a galley slave. The same disparity can be made throughout history, from Kublai Khan, to Louis XIV. Monarchs and nobility achieved unimagined wealth while surrounded by abject poverty. The same thing happens today in places like North Korea, where Kim Jong-un lives in splendor while his citizens literally starve to death.

Unemployment, infirmity or disabilities are not death sentences in America as they were in many other places throughout history. In fact, it's very possible here to earn more by not working. Yet Piketty would have us believe that the inequality in the U.S. now is worse than in any other place, at any other time. If you can swallow that, I guess you are open to anything else he has to serve.

All economists, regardless of their political orientation, acknowledge that improving productive capital is essential for economic growth. We are only as good as the tools we have. Food, clothing and shelter are so much more plentiful now than they were 200 years ago because modern capital equipment makes the processes of farming, manufacturing, and building so much more efficient and productive (despite government regulations and taxes that undermine those efficiencies). Piketty tries to show that he has moved past Marx by acknowledging the failures of state-planned economies.

But he believes that the state should place upper limits on the amount of wealth the capitalists are allowed to retain from the fruits of their efforts. To do this, he imagines income tax rates that would approach 80% on incomes over $500,000 or so, combined with an annual 10% tax on existing wealth (in all its forms: land, housing, art, intellectual property, etc.). To be effective, he argues that these confiscatory taxes should be imposed globally so that wealthy people could not shift assets around the world to avoid taxes. He admits that these transferences may not actually increase tax revenues, which could be used, supposedly, to help the lives of the poor. Instead he claims the point is simply to prevent rich people from staying that way or getting that way in the first place.

Since it would be naive to assume that the wealthy would continue to work and invest at their usual pace once they crossed over Piketty's income and wealth thresholds, he clearly believes that the economy would not suffer from their disengagement. Given the effort it takes to earn money and the value everyone places on their limited leisure time, it is likely that many entrepreneurs will simply decide that 100% effort for a 20% return is no longer worth it. Does Piketty really believe that the economy would be helped if the Steve Jobses and Bill Gateses of the world simply decided to stop working once they earned a half a million dollars?

Because he sees inherited wealth as the original economic sin, he also advocates tax policies that will put an end to it. What will this accomplish? By barring the possibility of passing on money or property to children, successful people will be much more inclined to spend on luxury services (travel and entertainment) than to save or plan for the future. While most modern economists believe that savings detract from an economy by reducing current spending, it is actually the seed capital that funds future economic growth. In addition, businesses managed for the long haul tend to offer incremental value to society. Bringing children into the family business also creates value, not just for shareholders but for customers. But Piketty would prefer that business owners pull the plug on their own companies long before they reach their potential value and before they can bring their children into the business. How exactly does this benefit society?

If income and wealth are capped, people with capital and incomes above the threshold will have no incentive to invest or make loans. After all, why take the risks when almost all the rewards would go to taxes? This means that there will be less capital available to lend to businesses and individuals. This will cause interest rates to rise, thereby dampening economic growth. Wealth taxes would exert similar upward pressure on interest rates by cutting down on the pool of capital that is available to be lent. Wealthy people will know that any unspent wealth will be taxed at 10% annually, so only investments that are likely to earn more than 10%, by a margin wide enough to compensate for the risk, would be considered. That's a high threshold.

The primary flaw in his arguments are not moral, or even computational, but logical. He notes that the return of capital is greater than economic growth, but he fails to consider how capital itself "returns" benefits for all. For instance, it's easy to see that Steve Jobs made billions by developing and selling Apple products. All you need to do is look at his bank account. But it's much harder, if not impossible, to measure the much greater benefit that everyone else received from his ideas. It only comes out if you ask the right questions. For instance, how much would someone need to pay you to voluntarily give up the Internet for a year? It's likely that most Americans would pick a number north of $10,000. This for a service that most people pay less than $80 per month (sometimes it's free with a cup of coffee). This differential is the "dark matter" that Piketty fails to see, because he doesn't even bother to look.
Somehow in his decades of research, Piketty overlooks the fact that the industrial revolution reduced the consequences of inequality. Peasants, who had been locked into subsistence farming for centuries, found themselves with stunningly improved economic prospects in just a few generations. So, whereas feudal society was divided into a few people who were stunningly rich and the masses who were miserably poor, capitalism created the middle class for the first time in history and allowed for the possibility of real economic mobility. As a by-product, some of the more successful entrepreneurs generated the largest fortunes ever measured. But for Piketty it's only the extremes that matter. That's because he, and his adherents, are more driven by envy than by a desire for success. But in the real world, where envy is inedible, living standards are the only things that matter.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Catch Peter's latest thoughts on the U.S. and International markets in the Euro Pacific Capital Spring 2014 Global Investor Newsletter!

Tags:  CPIeconomy
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