The Facts on Trade Deficits…

A common refrain this political season from both sides of the political spectrum is concern with American trade deficits.  This is especially true with our alleged trade deficit with China. Continue reading


Retiring to a Jail Cell…

If you’re in need of evidence illustrating the wretched moral character of central bankers and other Keynesian quacks, we have it.

Evidence continues to pile-up showing that negative interest rates are forcing Japanese seniors to prison.  These are people who worked and saved for a lifetime, only to be forced to live in utter poverty by crackpot bureaucrats insulated from the consequences of their incompetence.

Here’s what’s happening…

About one-third of Japanese seniors rely on small savings in combination with their government pensions to make ends meet.  But with the Japanese government’s ill-advised attempt to increase economic demand by pushing interest rates into negative territory, these seniors are being destroyed financially.

With no hope of earning interest on their savings, their pension incomes of just ¥780,000 ($6,900/year) are wholly inadequate to provide the basic necessities of life.  So they’ve turned to a life of shoplifting in hopes of securing a two-year prison sentence typically imposed on such criminals.

Crime figures in Japan show that about 35% of shoplifting offenses are committed by people over age 60.  And some 40% of repeat offenders have committed the same crime more than six times.

Why would people who have been law-abiding citizens for decades turn to a life of crime in their golden years?

That’s easy…

While prison may not be the Ritz, it does offer three square meals, a bed, and the all the health care needs an elderly person could want.  And with two-year cost of a prison term costing the taxpayer more than ¥951 million ($8.4 million), it’s the taxpayers who ultimately pay the price.

Of course, the Japanese prison system is being stretched to its breaking point when nearly 40% of the Japanese population require some level of public assistance.  It’s the highest level of welfare assistance in Japan since the end of World War II.  And it’s a shameful indictment on any government that would foster such grotesque living standards for a once proud nation.

More importantly, it’s proof positive of the absolute failure of the Keynesian system of welfare economics to make the lives of anyone other than government bureaucrats better-off.

Which begs the question…

When do the Keynesian economists admit defeat?

There’s a simple answer to that question.


Admitting failure would mean that a generation of lawyers and government economists would be forced to get real jobs in the private sector and pay actual taxes.  They ‘d sooner destroy their own economies before being forced to earn a legitimate living.

You see, there’s a lot of money to be made in bringing a nation to its knees.

Now, before you think this is isolated to Japan, think again…

More than 40% of elderly Americans have little to no savings outside of their social security.  It’s conceivable that they, too, might look at a prison cell as an attractive alternative to “Dust Bowl” living standards perpetrated by the political class.

And with the failure of the effete elite political class to address the looming bankruptcy of social security, that likelihood grows stronger every day.

Minimum Wage Laws are Immoral…

Governor “Moonbeam” is in the news again.  Instead of fleecing taxpayers into paying for oil, gas, and mineral explorations on family owned property in California, the Governor of California is now forcing his own brand of immorality on taxpayers.

Moonbeam told Democratic leaders in the state Legislature that he would push for a $15 minimum wage by 2022.  His action is an effort to take control of over an issue that was to be decided directly by voters this November.

The plan would raise the minimum wage from $10 an hour to $10.50 on Jan. 1, 2017, followed by a 50-cent increase in 2018.  Yearly $1 increases would continue through 2022, and would give California the highest minimum wage floor in the country.

Of course, the plan will accomplish nothing more than decimate the lives of poor uneducated minorities in the inner cities by driving out small businesses from California.  The irony of a Democrat governor punishing poor uneducated democrats would be humorous if it wasn’t such a monstrously evil act.

You see, minimum wage laws are immoral.

To understand why, one must understand that wages are a contract between two parties: the employer and employee.  These two parties alone are responsible for negotiating a mutually acceptable labor contract.  Any third-party involvement by outsiders is an immoral intervention into the rights of the employer and employee.

What makes this funny is that it’s these same people who decry government intervention into their bedrooms who suddenly have no qualms about bureaucrats making wage decisions for a private business.

“Don’t let the state tell me whom I can marry, or whether a woman can suck the brains out of the back of a baby’s head, but by God, let the state decide how much someone earns flipping burgers!”

Politics is, and shall remain, the playground for the insufferably stupid!

Moonbeam has no understanding that wages are determined by the labor market.  Wages, like other values, are subjective.  They’re determined by supply and demand.  And therein lies the problem.

Moonbeam and others who demand to be heard on this issue continue to subscribe to the tired philosophies of the labor theory of value (Marxism), which makes the error of pinning objective values associated to specific tasks.

But wages cannot be determined by any universal standard of labor compensation.  Rather, like all commodities, labor rises and falls with subjective valuations. And because these valuations are driven by both endogenous and exogenous factors, any political attempts to standardize or regulate them will fail to produce the expected outcomes.

So, in the end, proponents of minimum wage laws make two mistakes.

First, they falsely reason that wages should be determined by what is minimally needed to support a person (living wage).  Let’s discount the fact that a “living wage” is a completely meaningless term in real economics.  The term is nothing more than a prop for those unable (or unwilling) to defend their argument on intellectual grounds. Yet, by relying on an such an objective standard, those advocating for minimum wages ignore the subjective value of real world economics.

And unless Bernie Sanders is elected, it can’t work!

Secondly, the minimum wage represents a breach in the social contract when one party (employee) enlists the help of a brown-shirted Nazi thug (the government) to force the other party (employer) to accept their terms (higher wages).

This means that employers are being compelled against their will to abide by a labor contract with which they do not agree.  This is immoral conduct by unions and activists that harm businesses and tramples the rights of citizens to be free from government intrusion into private affairs.

Since proponents of the minimum wage misunderstand the economics of wages, they falsely appeal to a standard of living to make their case for justifying their coercive acts.  The result is violence against employers and severe distortions in labor markets that lead to higher unemployment and closed businesses.

And less freedom for everyone…


The War on Cash Heats Up…

A few weeks ago, we told you how governments were going to declare war on cash.  They would be forced to do this, we said, in an effort to stop depositors from hoarding their cash under mattresses as interest rates go negative (or further negative in Europe and Japan).

Now comes word that businesses are beginning to take defensive actions to avoid the negative rates being imposed by global central banks.

The world’s second-largest reinsurance company, Munich Re, is pulling its cash out of the European Central Bank (ECB).  Reinsurance is the business of insuring insurance companies for unexpected claims.  And just like regular insurers, they keep lots of cash in the bank for paying claims.

Germany’s Munich Re pulled its cash out of its overnight accounts with the ECB to avoid paying the ECB’s negative interest rates.  This comes after the ECB lowered its interest rates to -0.4% from -0.3% last week.  Of course this makes sense because Munich Re can’t absorb the huge costs of paying interest to the bank on the money it has in its accounts.

What did Munich Re do with its money?

The company decided to warehouse the paper money in a vault in Germany.

Munich Re says this is a test run to see how easy and cost effective it is to hoard paper cash and keep it out of the hands of the central bank.  They expect the costs of warehousing and protecting the cash to be significantly cheaper than paying interest to the ECB for holding the cash.

Why is this important?

Negative rates discourage thrift by imposing what is effectively a tax on cash.  This virtually forces individuals and companies to pull its cash out of the banking system.  This result is a global bank run where the only people getting to keep their cash are those who pull it out first.

Here’s the bottom line…

The War on Cash is intensifying.  Soon, governments will need to get more aggressive in their need to ban cash.  They simply cannot allow companies, like Munich Re, to buck the system and avoid paying interest to central banks.

In the end, desperate economic policies beget desperate measures.  Investors everywhere need to protect themselves from the wealth destroying tactics of out-of-control central banks and the politicians who promote such stupid ideas.


Janet Yellen Strangling Future and Current Retirees…

During Janet Yellen’s recent Congressional testimony, she once again indicated she’s looking carefully at the possibility of a negative federal funds rate.

This is important to income investors and retirees who must protect themselves from this very real possibility. It requires an understanding that should rates go negative, investors must find safe alternatives, while avoiding riskier asset classes.

So let’s start with one truly terrible investment group – banks.

That’s right. Banks do very badly in the presence of negative interest rate policy (NIRP) because they remain unable to pass the negative interest rates on to their depositors. Should they even attempt to do so, customer deposits would vanish into mattresses across the U.S.

Unfortunately, this means that their profits will be squeezed to the point of invisibility. The result is that the cost of their funding will exceed what they receive on risk-free assets – making banks very bad investments.

And that’s just one of many reasons why negative interest rates are a dangerous idea.

Such rates would also cause banks to reduce their leverage and cut back on their lending, because the spreads between deposit and lending rates would no longer be sufficient to cover their expenses. Bank layoffs are already ratcheting upwards.

Ironically, by pushing interest rates negative, central banks actually achieve the opposite of their stated goals.

Of course, the world’s central banks, along with various Keynesian hacks, are pushing the idea of getting rid of cash altogether. The thought here is that by banning cash, depositors would be unable to keep their cash out of the hands of banks. In addition, this gives central banks the ability to set rates at any level they deem necessary.

For retirees and other income investors looking to supplement their income, negative rates have devastated older savers. Japan illustrates the idiocy of going negative on rates.

Japan has suffered with zero interest rates longer than any other country and recently went to a negative rate. How has it worked out?

Fourth-quarter GDP was down at 1.7% (annual rate) and January exports were down 12.9% from a year earlier. Clearly, negative rates have failed miserably at spurring economic growth.

What’s more, Japan Post Bank shares are down 18% from their price in November because Japan’s negative interest rates hamper the bank’s business model (its assets are almost all low-risk Japan Government Bonds, which now yield zero for a 10-year maturity).

Now we’re witnessing Japanese investors becoming increasingly annoyed at their government that lured them into supposedly safe investments, while simultaneously decimating valuations with monetary policies that destroy wealth.

But that doesn’t mean there’s no hope for income investors…

Negative short-term interest rates will produce a few winners, such as large dividend stocks and a group of stocks that pays spectacular dividends: residential mortgage real estate investment trusts (REITs).

Residential mortgage REITs fund themselves in the short-term markets and invest in home mortgages guaranteed by Fannie Mae and Freddie Mac. By using leverage, they’re able to turn the 3-4% yields on mortgage bonds into 10-20% returns, most of which are paid out as dividends.

Now, I’ve been fairly pessimistic on the mortgage REIT sector. They remain relatively high-risk investments when interest rates are rising. You see, if interest rates go up, the “gap” between short-term funding costs and long-term bond income disappears, and the value of the REIT’s bond portfolio declines.

This is exactly what happened in 2012-13, when American Capital Agency Corp. (NASDAQ: AGNC) shares lost half of their value in six months.

But with negative interest rates, the opposite happens. The cost of funding, being based in short-term money markets, declines – probably below zero (the REITs can borrow cheaply because they can “repo” their low-risk bond portfolio).

At the same time, the yield on assets stays well above zero. And if mortgage rates, in fact, decline, the value of the portfolio increases, giving the REIT a capital gain. Thus, either net income increases or capital appreciates – a win/win.

The two largest pure home mortgage REITs are AGNC and Annaly Capital Management Inc. (NYSE: NLY).

AGNC, with a market capitalization of $6.1 billion, is trading at 79% of book value and offering a dividend yield of 13.7% based on quarterly dividends of $0.60 per share.

NLY, which has a market capitalization of $9.4 billion and is trading at 83% of book value, offers a dividend yield of 12.3% based on a quarterly dividend of $0.30 per share.

Neither of these companies earns enough to cover their dividends, based on trailing four quarters earnings, because short-term rates have been trending upwards, narrowing spreads and pressuring capital value.

But if Yellen does decide to lower rates below zero, both companies are poised to benefit spectacularly, probably giving you a capital gain as they come to sell above book value.

Still, don’t put too much in them – they remain above average risks.


Has Oil Finally Bottomed?

According to a Bloomberg report quoting the International Energy Agency, oil prices have finally bottomed. And if you believe them, it’s time to pile back into oil stocks that have been hard hit over the past couple of years.

Their assumptions are based on crude prices showing relatively solid support just shy of $40 per barrel. The IEA says a combination of events have shored up prices:

  1. Lower than expected Iranian oil output following its re-entry into world markets;
  2. A tentative production “freeze” at current levels between Russia and Saudi Arabia; and
  3. Growing numbers of shale producer bankruptcies, which is forcing lower domestic production.

But investors should remain cautious about trusting pronouncements from “oil experts,” whose accuracy remains questionable. The chart below illustrates five previous calls of a bottom in oil since mid-2014.


In each case, the call was premature – by a wide margin, too.

So, are the experts are wrong again?

The answer, of course, is nobody knows.

What we can say is that market timing is a fool’s game. Investing success comes from making long-term decisions about a specific investment thesis – not making bets about market tops or bottoms.

We remain bullish on oil companies over the long term. If you have a longer-term perspective, many oil stocks are bargains at current prices. But until the price of oil solidifies, you will want to stick to the major players, like ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), and ConocoPhillips (NYSE: COP). These businesses are diversified and cash-rich enough to weather additional downturns.

But from a safety point of view, clear evidence of a real bottom in oil prices is required before risks to smaller oil plays are mitigated enough to justify the exposure.

How To Buy Gold Like a Pro…

Gold is 2016’s top-performing asset to date. At current prices, it’s up about 19%, while the S&P 500 has earned a paltry 1.6%.

Gold is the world’s oldest medium of exchange, and unlike currencies, it can’t be created by central banks. In fact, its finite supply is why developed countries abandoned the gold standard last century.

But massive central bank intervention in credit markets over the past decade make it imperative that prudent investors hold some gold in their portfolios to insure against potential currency crises.

That’s why it is recommend to hold between 1-5% of your portfolio in this safe haven.

But as you likely know, buying gold while the value of the dollar rises can be dangerous to your wealth. And we believe the U.S. dollar is going to outperform all other currencies for another year or two.

That’s because America is the only major economy raising interest rates. That makes our currency very attractive to foreign buyers.

But this makes buying gold tricky…

Because the price of gold is quoted in U.S. dollars, as the dollar rises, the price of gold goes down… since it takes more foreign currency to buy the same amount of dollars.

And as gold gets increasingly more expensive to foreign buyers, it can cause gold prices to drop or stagnate. So if the dollar continues rallying, you’re likely to lose money buying gold.

But our fundamental thesis remains intact, investors need to hold some gold in their portfolio as a form of insurance against financial chaos. We just want to do so in a way to avoid losing money.

That’s why we recommend a “pairs trade” as a way to hedge gold purchases. We want to buy gold, while shorting the Japanese Yen – known as a ‘long gold and short Yen trade.

Now, the yen has fallen 17% against the U.S. dollar since 2013. And until the Japanese people wake-up to the failure of “Abenomics,” it will continue to fall.

This is because Japan is an “export economy.”  The country benefits from a weaker yen, which makes its exports cheaper to other countries, like the United States. So Japan will continue to devalue the yen to boost Japanese exports.

And for us, we can take advantage of this trend and use it to protect our gold purchases.

Here’s how…

First, we want to take a long position in gold. But we want physical gold – not the ‘paper gold’ of mutual funds or ETFs. Those are nothing more than IOUs for future gold payments, and in a currency crisis, may not be available for redemption.

Instead, we want to have physical gold. But that poses problems for most investors: finding reputable gold bullion dealers and the subsequent storage of the gold.

Thankfully, there’s an alternative…

Sprott Physical Gold Trust (NYSE Arca: PHYS) provides investors a convenient way to buy physical gold from the convenience of their online brokerage account. Better yet, you don’t have the hassles of worrying about storage, coin premiums, or finding a reputable broker.

It holds all of its assets in physical gold bullion—and stores it securely in a third-party vault in Canada. In other words, Sprott buys physical gold and then stores it in giant safes.

The physical gold is periodically inspected and audited. This means you can be certain it’s actually there (unlike some other gold funds).

And as an investor, you can opt to take delivery of your gold anytime, as long as the amount you want is greater than Sprott’s minimum redemption amount.

You can even buy it and hold it in an IRA—or a Roth IRA. If you hold it in one of these accounts, your capital gains won’t be taxed.

It’s the best way to buy gold and actually own the physical metal. All while protecting your portfolio from the currency wars being waged by the world’s central bankers.

And if you ever decide to sell in a taxable account, you are only taxed at 15% (or whatever your capital gains rate is)—not the higher 28% rate at which most coins and ETFs are taxed.

To execute the second half of this trade, we recommend you buy an “inverse” Japanese fund that goes up in price as the Japanese yen goes down in price. The name of the inverse Japanese currency ETF is called ProShares Ultrashort Japanese Yen ETF (NYSE: YCS).

The fund actually generates about twice the “inverse” return of the Japanese yen against the U.S. dollar. That means if the yen drops by 25% against the dollar, this fund will return approximately 50%.

Based on economic reports originating out of Japan, we believe the fund has the potential to increase another 50% over the next two years as the yen declines by another 20-25%. That gives us a price target of $117.33 (from about $78 today).

So, what’s the takeaway of all this? Well, we get to invest in the safety of gold, without worrying about a stronger dollar. It’s the best of both worlds.

Now, to be properly hedged, you want to own an equal amount of PHYS and YCS. For example if you want to own $5,000 worth of PHYS, but you want to “hedge away” your dollar risk, you would need to buy $5,000 worth of YCS as well.

No matter the amount you want to invest, so long as you own an equal amount of YCS, your currency risk will be fully hedged like a pro.

Best of all, you’re immune to the craziness of central bankers.