Weather out the winter

Nature functions in cycles. Each 24-hour period can be divided into smaller cycles of morning, afternoon, evening, and night. The whole year can be divided into seasonal cycles. Similarly, one’s life can also be divided into cycles. Cycles are abundant in nature – we just have to spot them, understand them, and be prepared for them, because they happen whether we like it or not. Likewise, economic experts have noticed that the world also follows different cycles. An important pioneer in this field was the Russian social economist, Nikolai Kondratiev, also called Nikolai Kondratieff, a relatively unknown genius.

Who Is Kondratiev?

Geniuses have been known to defend their principles and beliefs, even at the cost of losing their lives; they may die but their legacy lives on, as did Kondratiev. He was an economist who laid down his life defending his beliefs. He was the founding director of the Institute of Conjuncture, a famous research institution, which was located in Moscow. He devised a five-year plan for the development of agriculture in Russia from 1923-1925.

His book, “The Major Economic Cycles,” was published 1925, in which his policies were in stark contrast to that of Stalin’s. As a result of this, Kondratiev was arrested in 1930 and given a prison sentence. This sentence was reviewed, and, consequently, he was executed in 1938. What a tragic loss of such a genius at only 42 years of age. He was executed because his research proved him right and Stalin wrong! Nonetheless, his legacy lives on and, in 1939 Joseph Schumpeter named the waves Kondratiev Waves, also known as K-Waves.

What Are Kondratiev Waves?

Investopedia defines the Kondratieff Wave as, “A long-term cycle present in capitalist economies that represents long-term, high-growth and low-growth economic periods.” The initial study by Kondratiev was based on the European agricultural commodity and copper prices. He noticed this period of evolution and self-correction in the economic activity of the capitalist nations and felt it was important to document.

Chart 1 CNA

These waves are long cycles, lasting 50-60 years and consisting of various phases that are repetitive in nature. They are divided into four primary cycles:

  1. Spring-Inflationary growth phase: The first wave starts after a depressed economic state. With growth comes inflation. This phase sees stable prices, stable interest rates and a rising stock market, which is led by strong corporate profits and technological innovations. This phase generally lasts for 25 years.
  1. Summer-Stagflation (Recession): This phase witnesses wars such as the War of 1812, the Civil War, the World Wars and the Vietnam War. War leads to a shortage of resources, which leads to rising prices, rising interest rates and higher debt, and because of these factors, companies’ profits decline.
  1. Autumn-Deflationary Growth (Plateau period): After the end of war, people want economic stability. While the economy sees growth in selective sectors, this period also witnesses social and technological innovations. Prices fall and interest rates are low, which leads to higher debt and consumption.  At the same time, companies’ profits rise, resulting in a strong stock market. All of these excesses end with a major speculative bubble.
  1. Winter-Depression: This is a period of correcting the excesses of the past and preparing the foundation for future growth. Prices fall, profits decline and stock markets correct to the downside. However, this period also refines the technologies of the past with innovation, making it cheaper and more available for the masses.

Accuracy Of The Cycle Over The Last 200 Years

The K-Waves have stood the test of time.  They have correctly identified various periods of important economic activity within the past 200 years. The chart below outlines its accuracy.

Very few cycles in history are as accurate as the Kondratiev waves.

Chart 2 CNA

Criticism Of The Kondratiev Waves

No principle in the world is left unchallenged.  Similarly, there are a few critics of the K-Waves who consider it useful only for the pre-WWII era. They believe that the current monetary tools, which are at the disposal of the monetary agencies, can alter the performance of these waves. There is also a difference of opinion regarding the timing of the start of the waves.

The Wave Is Being Pushed Ahead But The Mood Confirms A Kondratiev Winter

Chart 3 CNA

Chart 4 CNA

A closer study reveals that the cycles are being pushed forward temporarily. Any intervention in the natural cycle unleashes the wrath of nature, and the current phase of economic excess will also end in a similar correction. The K-Wave winter cycle that started in 2000 was aligned with the dot-com bubble.

The current stock market rise is fueled by the easy monetary policy of the global central banks. Barring a small period of time from 2005-2007 when the mood of the public was optimistic, the winter had been spent with people in a depressed social mood. The stock market rally from 2009-2015 will be perceived as the most hated rally and the one most laden with fear.

Every dip of a few hundred points in the stock market starts with a comparison to the Great Recession of 2007-2009. The mood exudes fear and disbelief that the efforts of the central banks have not been successful and are unable to thwart off the winter, as predicted by the K-Waves. The winter is here and is reflected in the depressed social mood.

How To Weather Out Brutal Winter

In the last phase of the winter cycle, from 2016-2020, which is likely to test us, the stock market top is in place. Global economic activity has peaked, terrorism further threatens our lives, geopolitical risks have risen, the current levels of debt across the developed world are unmanageable, and a legitimate threat of a currency war occurring will all end with the “The Great Reset.” Gold will be likely to perform better during this winter cycle. Get in love with the yellow metal; it’s the blanket which will help you withstand the winter.


Cycles are generally repetitive forces that give us an insight into the future so we can be prepared to face it and prosper. Without excessive intervention, nature is very forgiving while correcting the excesses.  But if one meddles with nature, it can be merciless during the correction. The current economic condition will end with yet another reset in the financial markets. Prices will not rise forever, and a correction will take hold eventually. Until then, we follow and trade accordingly. I will suggest the necessary steps to avoid losses and prosper from market turmoil when it unfolds.

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Chris Vermeulen

[Image Courtesy of Wikipedia]

All bubbles burst; the question is when? Quantitative Easing (QE) is much like an addiction. One needs more and more to get the initial effect, however, this becomes an asymptotic result, whereas, eventually, one needs an infinite amount that will no longer give a positive effect! So, now that QE has failed, I believe there will now be the introduction of “Helicopter Money”.

Global central bankers constantly continue to spend their way out of their contracting economies, which are now resulting in large budget deficits. The deficits that these policies have produced are unsustainable and have now created a new fiscal crisis within their countries. A second response has been to expand the central banks’ balance sheets as a way of providing liquidity to the private sector.  These policies have also sent interest rates into unprecedented historical lows. European countries and Japan have sent their rates into negative territory, thereby reducing returns to fixed-income investors. Low interest rates have encouraged corporations to borrow more money but, in turn, harm the investors savings for their future.

chart 1

Implementation of these monetary policies temporarily assisted the economy so as to reduce the impact of a new economic and financial crisis back in 2008. However, it was not the prudent policy to continue after everything became stabilized. The real solution was for an implementation of a new round of fiscal policies. This would have restructured the debt and allowed the global financial system to reset itself. Unfortunately, we are currently sitting on a ticking time bomb in all of the global financial markets.

True GDP growth comes from increasing productivity and real employment and allocating resources for proper economic activity. Global Central Banks have been applying monetary policies for so long, now, that they have become reckless and never created an exit plan. They never created any real required economic growth. The global central banks’ intervention, over eight years ago now, was to be the initial response in preventing a financial meltdown, however, monetary policy did not generate changes in productivity nor in the amount of economic resources that are required for any economy to expand. It is only the private sector that can generate the economic growth necessary to increase corporate profits and equity prices. As the size of the private sector shrinks, it becomes more difficult to generate growth within that economy.

Earnings Management

“Earnings Management” is the practice of attempting to intentionally bias financial statements in order for them to appear better looking than they actually are! Managers, in fact, make their earnings appear better, as well as their incentives for manipulating earnings, which is calculated and misleading to the shareholders. There are red flags for two different forms of revenue manipulation. One is manipulating earnings through aggressive revenue recognition practices, which is the most common reason that companies get in trouble with government regulators for their accounting practices. The other red flag for manipulating earnings is through aggressive expense recognition practices, which is the second most common reason that companies get in trouble for their accounting practices.

Share buybacks allow companies to repurchase their own shares on the market. Why do those companies want to do this? The number of shares held by the public will be reduced, which will increase the earnings per share, even if the total earnings are the same. The value of shares being traded will increase. It is valuable for a firm’s manager to buy back shares when it believes that the firm’s stock is currently trading below its intrinsic value. Executive compensation is often tied to executives’ ability to meet earnings-per-share targets. When it is difficult to meet the targets, the executives may repurchase shares in order to receive their executive or managerial bonuses.

Buybacks are not all created equal. The skills of the management in capital allocation and the culture of the company can make a difference in the outcome of the buybacks. Although buybacks are viewed as positive for stock prices, a lot of them happen at exactly the wrong time and destroy value for shareholders. I did talk with HoweStreet radio about how these high stock prices are deceiving.

Take a look at the chart below. This is a real eye opener for most, as it clearly shows how aggressively publicly-traded company executives are buying back shares to keep the earnings-per-share number high and cover up their lack of sales and growth. Eventually, this will come to an end, as does everything.

Currently, buybacks are at the same level reached before the last stock market top. I expect buybacks will end sooner than later, but the cover-ups will continue as long as executives have capital to spend.

chart 2

You should know how to spot and recognize earnings management and get a more accurate picture of earnings so you will be able to spot the bad person(s) in finance reporting!

A variety of assumptions and accounting estimates are used in arriving at the final earnings figures. In assessing the health of a company, both lenders and investors alike almost always look at the quality of it’s earnings first. However, it is nearly impossible for a company to consistently report stellar periodical earnings over a lengthy period of time. This is because a company’s business activities are affected by changes in economic cycles, seasonal changes, new legislation, and other extraordinary events that occur.

In order to normalize the continuous succession of ebbs and flows in financial results that are characteristic of any typical business, company managers, more often than not, resort to a practice known as earnings management. Earnings management occurs when managers use judgment in financial reporting and in structuring transactions in order to alter financial reports so as to either mislead some stakeholders in regards to the underlying economic performance of a company or to influence contractual outcomes that depend on reported accounting numbers. In other words, earnings numbers are deliberately manipulated by management for the purpose of meeting their company’s objectives, whatever they might be!

The Death of Investing!

Why is it that banks are holding so many excess reserves? What does the data tell us about current economic conditions and about bank lending behavior and practices? Some observers claim that the large increase in excess reserves implies that many of the policies introduced by the Federal Reserve in response to the financial crisis have been ineffective. Rather than promoting the flow of credit to firms and households, the data, as shown in the chart below, indicates that the money lent to banks and other intermediaries by the Federal Reserve since September of 2008 is simply sitting idle in banks’ reserve accounts. The FED has been intentionally discouraging banks from lending to Main Street, which has increased unemployment and stalled out the economy.

There is a new crisis just around the corner known as The Long Wave Winter Of Discontent.

Chart 3

Global governments have built up large debts that far exceed their GDP. They have even larger future liabilities in terms of pension and health care for retired workers. So how is it that investors can anticipate an increase in profits, which is necessary to generate and maintain higher stock prices?

Chart 4

It is quite evident to me that it is because of these conditions that expectations of future corporate profitability will fall and that equities will experience a substantial decline very shortly. This also means that unless the conditions, as cited above, change, equity prices could be the same as they were in the early 1980’s or lower.

Bill Gross, noted bond investor of Janus Capital Group Inc., stated that “investors should worry, for now, about the return of one’s money, not the return on it. Our credit-based financial system is sputtering, and risk assets are reflecting that reality even if most players (including central banks) have little clue as to how the game is played.” Global central banks have gone way too far!

Recently I have share some insight on a new and fast-growing type of money or asset class, which removes the central banks from the entire equation. It’s just a matter of time before these assets explode in value and the FED/central banks are scrambling to gain control again.

Concluding Thoughts

In short, I have been talking/warning about the US stock market topping out for about a year now. This lengthy process is taking a long time to play out, as most major market tops do, but each month we move closer to another life-changing financial event for the global economy.

While I am not yet short the US stock market so that I can profit from falling prices, subscribers and myself have been long bonds and precious metals for a while and enjoying the ride up.

Various markets are starting to become VERY interesting, and huge opportunities are just around the corner!

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Chris Vermeulen

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At the present time, deflation is the greatest and most urgent concern throughout the global economy. Over the past couple of years, producer prices have fallen throughout the developed economies. Consumer prices have been falling for the last consecutive six months in France, Germany, Hong Kong, and China. Japanese wages have actually fallen by 4 percent over this past year.

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Deflation is a widespread global problem. The global central bankers had believed that printing more money would be the answer. And yet, deflation is now a more serious threat, as global central bankers are presently realizing that it cannot be prevented or reversed.

These ‘academic pinheads’ have failed to realize that we are in the contraction phase of a much larger business cycle which can NOT be eliminated. We are currently experiencing excess capacity with crashing aggregate demand. All that the central banks have managed to accomplish was the “wealth effect” which, in turn, created an artificial rise of global equity markets and nothing more.

The global economy is now experiencing the Kondratieff Winter! In March of 2000, the start of the imploding tech shares bubble marked the beginning of Kondratieff’s Winter Correction Wave. After 1971, money creation became limitless and debt kept on growing, despite entering Kondratieff’s Winter. This system by the central banks is doomed to fail before the end of the cycle, which will occur sometime between 2020-2021.

When gold is part of the monetary system, excessive debt is always eliminated from the system during Kondratieff’s Winter (deflation).

Since that time, the Fed has fought by all possible means the installation of the “Correction Wave,” since the amount of debt is so high that allowing deflation to occur would lead to a never before seen catastrophe. As a matter of fact, we have long passed the point of no return, and the only solution that the FED has is to devaluate the dollar, regardless of whether that means creating a new currency.

The FED is systematically keeping Kondratieff’s Winter from taking hold and feeding a series of speculative bubbles. It is my view that the debt margin for playing the stock market is linked to the euphoria as seen at each peak period of time (2000, 2007, 2014). In both the peaks of 2000 and 2007, the FED’s easy money fueled speculation (stocks and real estate) during each time and thereby marked the start of a new crisis. Those three pivotal periods, 2000-2001, 2007-2008 and 2014-2015, are each separated by a seven-year period.

chart 1

The unsung genius, Kondratieff, and his economic business cycles will, in fact, play out. We will witness a debilitating period of contraction and crisis. This period is most likely to appear obvious to Main Street very soon and will continue to persist for an additional three to five years! I am titling this as The Great Reset”.

Chart 2

The FEDs’ balance sheet will continue to grow. Public debt will never be paid back.  In fact, there is legislation pending that currently avoids any debt cap. The FED is looking out for Wall Street and, most certainly, not the general public.

The collapse in global economic activity is a direct result of too much debt. Debt was intended to increase consumer consumption, but there was a total lack of global aggregate demand. We are currently in the bust of a classic boom/bust cycle, however, this is the key point – it is not only companies and individuals with excessive debt, but, countries, as well.  

Whatever the trigger point is, failing is inevitable, according to IMF’s Managing Director Christine Lagarde, (, who herself states, “the crisis isn’t over,” and no real economic recovery will occur without this crisis finishing the job it has started.

Just like all major long term/big picture trends and cycle changes, nothing happens quickly. Its very much a process, and the market will continue to move in a direction that makes no sense longer than most traders and investors think. Just like those who warned about the 2001 market crash, 2008 financial crisis, real estate crash, and now the 2016 stock market crash, most of these big picture analysts (like myself) see these things coming well in advance – sometimes 1-2 years before they happen.

We warn about these events happening and slowly position ourselves to not only avoid the crashes, but to profit from them. But these take time to unfold as these are multi-year cycles, and they do not turn on a dime.

Things are maturing and many asset classes are starting to make moves, as expected, but US stocks have not fully topped just yet…

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Chris Vermeulen

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Following the outcome of the United Kingdom’s ‘Brexit’ referendum last week, Standard & Poor’s has downgraded the UK’s sovereign credit rating from AAA to AA, leaving only twelve AAA-rated countries left. However, soon there might only be eleven, as Australia’s credit rating is also starting to look shaky in the wake of the Federal Elections, which were held on Saturday July 2nd.

Australia GraphicAustralia’s AAA credit rating is now under threat due to the political uncertainty stemming from the outcome of the Federal Elections. The elections could result in a hung parliament, as no clear winner was produced during Saturday’s voting session. As postal votes are still being counted, it is considered unlikely that current Prime Minister Malcolm Turnbull will reach the needed 76 seats in the parliament to form a new administration. Counting will continue until Tuesday when all postal votes have been tallied up. After the initial election results, Labor leader Bill Shorten stated that Prime Minister Turnbull’s coalition had lost its mandate to govern.

In the current status quo, both parties could end up forming coalitions with independents to form a hung parliament, which would pave a very bumpy road towards a new budget. That, in turn, will affect how markets and credit rating agencies perceive Australia and its future economic performance. If a new budget is not signed off soon, it will be unlikely that Australia will manage to curb its increasing sovereign debt levels. Hence, it is rumored that rating agencies will act soon and downgrade Australia’s sovereign rating.

How would a downgrade affect Australian assets?

If Standard & Poor’s, or either of the other two main rating agencies (Fitch and Moody’s), decides to downgrade Australia, it would increase the cost of borrowing for the Australian government and local governments, such as Queensland and New South Wales.

Australian banks would also come under pressure if Australia were to be downgraded. A credit ratings downgrade would increase interest rates on home loans, adding at least $200 million a year to Australia’s big four banks’ funding requirements, according to conservative estimations. As a result, spreads on bank bonds would widen, which would increase funding costs for the banks, and bank’s share prices would take a hit. Some of the banks would potentially have to raise more equity to capitalize their balance sheets.

Currency GraphicCurrency traders looking to capitalize on the event will keep a close eye on the Australian dollar in the next few days and weeks, as political uncertainty will lead to volatility and downward pressure on the currency. A downgrade of Australia’s credit worthiness would cause the Aussie dollar to weaken against other currencies, especially the US dollar. The Aussie dollar has taken a hit, recently, due to overall market uncertainty stemming from the UK’s vote to leave the EU, which, in turn, has lead investors to move their funds into ‘risk off’ currencies, such as the US dollar and the Swiss franc, and away from ‘risk on’ currencies, such as the Australian dollar.

The values of Australian property would most likely also decline, should its sovereign rating be cut. If investors can get similar returns from bond yields, which would increase after a ratings downgrade, there will be less demand for property, as rental yields wouldn’t be as attractive as before. Hence, foreign investors would think twice before buying an Australian property if they can get similar returns by investing in Australia’s government bonds instead. While rental yields in Australia are still quite a bit higher than government bond yields, a convergence of the two could decrease Australian property values across the board.

[Image Courtesy of Wikipedia]

The ECB President, Mario Draghi, forced interest rates even further into negative territory, last Friday, March 11th, 2016. Nations like Sweden, Switzerland, Denmark and Japan have also initiated negative interest rates. The FED Chairwoman Dr. Yellen, confirmed having considered it, as well, at an earlier time and kept her options open to implement it in the future, if the situation warrants it.

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Lower interest rates were intended to facilitate ‘easy credit’ to corporations, which, in turn, was supposed to create new jobs and increase wages. This money was used by the corporations to repurchase their stocks and implement dividends; thereby, leading to an ‘artificial’ massive stock market rally.

These funds were not allocated properly. They were to provide job security and extra disposable income into the hands of working people, hence, consumption would then increase, resulting in a lower growth environment in the economy. However, since the ‘last financial crisis’, the new jobs that were created, however, lacked in wage increases and are languishing at their slowest pace, since 1997.

chart 1

Despite several rounds of money printing and a zero interest rate policy, the Central Banks have not been able to achieve their objective. Hence, in desperation, they have resorted to negative interest rates, whereas, one will have to pay the banks an interest rate fee just to maintain cash in one’s account. Why would any sane person deposit money into the bank, rather than stuffing in their mattresses or in the wall. With no confidence in the Central Banks, chances are that people will want to save more for a rainy day, rather than spend, as shown in the chart below. People are saving more these days as compared to that of a decade earlier.

Chart 2

With the Central Banks resorting to negative interest rates and pushing it yet further into negative territory, it is possible that we will witness a run on the banks and they will close down indefinitely.

Currently, the banks have not yet passed on the negative rates to the retail customers, as their margins will take a hit. In order to save their reputation, chances are that they will lend recklessly, similar to what occurred in 2006 and the entire world will end up in a much larger disaster causing a crisis which cannot be controlled. Hence, the Central Banks are now out of ‘ammo’ and are the cause of this reoccurring crisis.

Some shocking data, as reported by The Telegraph;

  1. Currently $8 trillion of sovereign debt is trading at a negative yield.
  2. Interest rates have been cut 637 times by the Central Banks, globally, since March of 2008.
  3. The Central Banks have printed a staggering $12.3 trillion of money, since March of 2008.
  4. What have they achieved? Since ‘The Great Recession’, the nominal GDP, of the world, has grown by a paltry 11 percent, according to Bank of America Merrill Lynch.

With all of the resources and the expertise which are available, the only actions that Central Bankers performed, was to come forward on the day of the monetary policy announcement and declare a rate cut and a certain amount of money printing. If this is the only solution they can find to do a better job everyone is in trouble. It seems as though any fifth grader is capable of performing these responsibilities and repeating the same process. After all, the world has survived for thousands of years, without the Central Banks and probably prospered better during the ‘Gold Standard’, at which time, the Central Banks had limited scope to alter monetary policies, as they are now doing.

How can you save yourself and your family from this madness?

Banks will charge you for holding on to your own cash, hence, there is no point in parking your money in such funds. The stock markets are in a ‘Asset Bubble’ and a “Earnings Bubble’ just waiting to’ burst’, I witnessed a precursor to this situation in the first two months of this year. Currency wars are escalating in the world and are moving towards ‘economic self-destruction’.

Gold is the only asset which will increase value:

Gold is the only asset class, which will maintain its value during times of ‘financial crisis’. It has done so previously in the past and I observed its performance during the beginning of the year, in which its status affirms it as the preferred safe haven. There will be times during this ‘crisis’ when different assets classes will be in focus. I will continue to guide you as to the best profit making assets, during these periods of time. If you are holding any stocks, this current rally is the last chance to liquidate your holdings; gold will give one an excellent buying opportunity within a few weeks of time and should be used to purchase this for the long-term period.

Chris Seebert the President and CEO Gold Gate Capital where they specialize in helping clients roll over there  IRAs and 401k into Physical Gold that they can store at their house or in a depository, to help protect their assets from the next crash said this to me.

For Institutional portfolios a typical classic asset mix achieves a higher long term return with a percentage gold component depending on base currency (based on research going back to 1987). With likely further acceleration of money printing by the largest economies in the world, leading to further destruction of paper money, investors will become even more aware of the necessity to owning real money. Gold has been money for 5,000 years and maintained its purchasing power throughout history because it cannot be printed.”

Mr. Seebert also agrees with my forecast of what is to unfold and his free book called “The Looming Financial Crisis” that focuses on how to properly invest in metals and how to do it properly. He also mentioned their key clients who can benefit the most are those between the ages of 65-85.

Unfortunately, I foresee very difficult economic times ahead for all. Therefore, it is best to be prepared and take proactive measures, in advance, so as to avoid the pain rather than regret it later!

Follow my lead if you want to safely navigate the financial markets over the next couple year to protect and profit from the coming the bursting of some asset classes and rise of bull markets emerging in others.

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Chris Vermeulen

[Image Courtesy of Wikimedia]

Global Economy

With the entire world struggling to ward off global deflation, it is prudent to understand why the current actions by the Central Banks are not heading in the correct direction. The massive amount of Quantitative Easing by the Central Banks, globally, have not been converted into inflation as was earlier anticipated. This article will shed light on various aspects leading to deflation.

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Investopedia defines ‘deflation’ as “Deflation is a general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.”

Japan in the grips of ‘deflation’ with zero interest rates in effect for 20 years:

The chart below displays the interest rate of Japan, which is closer to zero percent, since 1995. Economic principles suggest that Japan should have witnessed high inflation during these past twenty years. After all, with interest rates at zero percent, borrowers should have taken the opportunity to spend more. However, the chart below depicts the reality.

chart 1

Japan Inflation Rate

The chart of inflation below paints a clear picture. Barring three spikes in inflation, Japanese inflation has been close to zero and has entered periods of ‘deflation’. After a brief enthusiastic period of time, Japan remains in the ‘deflation zone’, although the Bank of Japan has announced negative interest rates.

Chart 2

A few experts believe that Japan did not inject sufficient Quantitative Easing and did not maintain it long enough in order for results to come to fruition. Let’s study what the remaining Central Banks have done since the financial crisis in 2007. They continue to inject monetary stimulus in hopes of stoking inflation, but have they been successful?

Most central banks have recently cut rates to negative territory

Chart 3

The European Central Bank President Mario Draghi maintains that his “Big Bazooka” has not been able to keep the European Union out of ‘deflation’. He stated “We will do whatever it takes to save the ‘Euro’.” has not been effective. Let’s compare this with what the FED has been able to achieve.

The situation in the US is somewhat better compared to that of the EU. However, even in the US, the FED has not been able to consistently keep inflation anywhere close to its target rate of 2%.

Chart 4

Have the Central Banks not injected sufficient liquidity into the economy?

From the below chart, it is clear to see that the Central Banks have resorted to massive Quantitative Easing programs, with little to if any results. Why has it not led to inflation?

Chart 5

Why is there no inflation in the economy?

Since the end of the financial crisis, despite the FED and the other Central Banks having released massive amounts of QE, corporations and the public are not experiencing any economic recovery. The failure of the FED to induce growth and induce inflation, to desired levels, has further dented sentiment.

Companies have used the “easy lending” opportunity to clean up their books and have resorted to massive “buyback” programs rather than using the monies for infrastructure, R&D and upgrading their existing technologies.

According to a Reuters research report, since 2010, there have been 1900 companies that have resorted to ‘buybacks’ and ‘dividend’ payouts which have amounted to 113 percent of their capital spending. The proportion of net income spent on innovation has dropped from 60 percent in the 1990s to less than 50 percent since 2009 and consequently has risen only in 2014, because net incomes dropped, according to the analysis of some 1000 odd firms, which buy back shares and report Research & Development spending costs.

Reuters reports that almost 60 percent of 3,297 publicly traded non-financial companies have bought back ‘shares’ since 2010. In 2014, companies spent a staggering $520 billion in ‘buybacks’ and paid out $365 billion in ‘dividends’, for a total of $885 billion more than the combined net income of $847 billion. This has led to the benefits of an artificial ‘roaring stock market’.

Without any economic recovery, how has wage growth performed?

It is clear from the below chart that the wage growth has been far from satisfactory. It continues to languish, at dismal levels, compared to the desired wage target of 3.5 to 4.00 percent. Alhough the unemployment rate is down, employers continue to refrain from raising wages, seeing as they are able to keep their employees’ wages low.

The below chart indicates the ‘depressed’ levels of wages received by employees as compared to the corporate income. The post crisis period continues to be among the worst period in the last 35 years. With no wage growth, employees continue to save rather than spend, as indicated in the chart below.

Will negative interest rates help?

The ECB was the first major Central Bank to resort to negative interest rates, then followed by Japan and meanwhile, experts believe that the U.S. will also soon follow. However, this extreme measure has not provided any relief to the ailing European Union. The Central Banks, in spite of their implemented measures, have encouraged businesses and people to hold on to their cash. Lower spending will lead to less demand, which will, in turn, lead to increased job losses and lower profits, which will encourage people to hoard their money. As prices fall, due to lower demand, people continue to postpone their purchases while waiting for prices to fall further.


The Central Banks are reinforcing the fear that they are not in control of this situation, which has led to the ‘global current deflationary pressure’. When the firms and people look at the desperate attempts made by the Central Banks failures, they resort to saving their money so as to shield themselves during this current ‘financial crisis’.

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The ‘deflationary pressures’ will continue to increase as various Central Banks resort to further QE, by different means. The world will have to incur a period of pain and the ‘The Global Reset’ will allow the market forces to return to normal. The harsh economic winter will continue for a period of 4-5 years. Continue following my reports for more insight of how to trade and safeguard your financial future through trading ETFs, during the forthcoming crisis.

Chris Vermeulen –

[Image Courtesy of Flickr]

Federal Reserve

The idea of a Central Bank Put originated as the ‘Greenspan Put’ – and came into being after the Fed (under Greenspan) typically reacted to crises by lowering the Fed Funds rate and/or providing liquidity to markets. This in turn would calm markets hence participants came to the conclusion that whenever markets are in trouble the Fed (or other Central banks) would come to the rescue.

The Central Bank Put has been an integral part of our markets for around twenty years as a result of the many crises we have faced in that time.

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It can actually be argued that at least some of the crises have in fact been caused by risk taking that in turn may be due to the Central Bank Put. While that would certainly be an irony it is not necessarily an invalid suggestion.

But what if the Central Bank Put is losing its power? What if, after 20 years (more in the case of the bank of Japan), Central Banks have either run out of ammunition or their traditional tools are no longer seen as having a calming effect by markets?

I view this possibility as one of the biggest risks to markets in the coming months.

Over the past few weeks we have seen action by the PBoC in China and the BoJ in Japan as well as rhetoric from the ECB in Europe. All were met by only limited enthusiasm by markets and volatility continued within a day or so from each announcement.

The US Federal Reserve is now in a delicate position. If they slow down their interest rate hikes or indeed resort to easing due to the market turmoil, this may well be taken as a sign of panic by markets; so it may actually have the opposite effect to what they desire. Yet continuing to hike during market volatility and while risk assets are dumped is unhelpful too. Being a Presidential election year further complicates matters (I understand the Fed are supposed to be politically impartial but at the end of the day the Governor is a political appointee).

If more QE is required in the US would it not be a sign that previous QE has failed to provide lasting help? Therefore, even further QE may be taken negatively by the markets (perhaps after a day or two of relief rally by risk assets).

So I believe we face a huge test of Central Banks this year. They are likely to need far stronger measures than before to calm the markets if market participants no longer react to or believe in, the Central Bank Put.

A world without a Central Bank Put could be a very volatile one but it is a world which I believe is an increasing possibility.

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Organic Financial Group Pty Ltd (ACN: 142 666 162) is a Corporate Authorised Representative (CAR No. 348956) of HLK Group Pty Ltd (ACN: 161 284 500) which holds an Australian Financial Services Licence (AFSL no. 435746). Any information or advice contained on this article is general in nature only and does not constitute personal or investment advice.

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Federal Reserve

With the fall in crude oil prices, the average American’s gas expense is now more affordable. Similarly, the transportation sector should normally benefit from lower crude oil prices. Most of the companies in the transportation sector should post strong results, as crude oil prices are expected to remain low for most of 2016 (according to the EIA).

As the stock markets reward clarity in earnings, the participants are known to reward high valuations to such companies. Under normal conditions, prices of such stocks should rise. However, the chart below shows a different story. The Dow Transportation Index, which was regularly making new highs, made a dash to the upside when crude oil started falling (as indicated in the chart).

Whenever, we have such “disconnects”, it leads to a larger fall (similar to the one we had in 2008). During that crash, the Dow Transportations Index followed the drop in crude oil prices. Are we going to see a repeat of 2008? Yes, all signs are pointing in that direction.

Chart 1

Dow Transports vs Crude Oil price

Why are we referring back to the 2008?

After any crisis, the economy goes through a corrective phase during which time the excesses of the crisis are washed away. This is generally a painful period, but it is the only solution. The excesses before the beginning of “The Great Depression”, took many years to correct. It was followed by a long-term growth throughout the world, which was followed by a very strong bull market.

The US had similar excesses in the 2007-2008 period, during “The Great Recession”, but the FED panicked and did not allow the excesses to be washed away.

The FED has been wrong all along in its perceived solution of the financial crisis:

Many experts have criticized the FED for the 2007- 2008 financial crisis, and rightly so. The crisis was due to the easy monetary policy of the FED and the need to earn quick profits by the large financial institutions in order to support the “lofty valuations”.

With all of these resources, at hand, it is surprising how the FED wanted to solve the problem with the very same instruments, which, in fact, caused the crisis. Since 2008, they maintained an “easy monetary policy”. All of the financial institutions have used the “easy money” in order to strengthen their balance sheet and earn returns by pumping money into the stock markets. The famous Albert Einstein once stated “Insanity: doing the same thing over and over again and expecting different results”, is very reflective of the FED actions.

The FED has blown the problem into an unmanageable proportion:

In 2008, the problem was manageable, with only a few large financial institutions having balance sheets full of bad debts. Rather than solving the problem, the FED has blown it into such large proportions that now it needs insolvency of the nation in order to sort out the “excesses”. Who has been the beneficiary of all of this excess liquidity? The Stock Markets….

Chart 2

Looking at the chart above, it seems that the FED was working as a personal banker to the stock markets and supporting it each time the markets went down. The market participants brought the SPX down by 5%-7%, causing the FED to “panic” and announce another QE as well as a rate cut. After the recent drop, there are whispers of a likely QE4. by the FED, and reflecting on their history, it does seem like a possibility.

This will end with ‘The Great Reset’:

If you thought that ‘The Great Recession’ was bad, wait for ‘The Great Reset’. The Chinese stock market is a good example of how QE might work in the short-term, but in the long-term, it is not the solution. The US markets are nearing the same period within the stock market. The QE4 and other announcements by the FED, will not be able to stem the forthcoming slide with in the stock market thought it may provide a temporary lift last a few months, but the downside pressure and weight the market is carriing I think will overpower QE4 eventually. The world will have to go through ‘The Global Reset’ in order to wash away the excesses.


If the stock markets are going to tank and the commodity markets are already scraping the bottom (led by crude oil) where does one invest? Over the next five years, the best investment in terms of currency is likely to be ‘Gold and Silver’, which are currently out of favor.

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Chris Vermeulen

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Last week was the most significant week in regards to the currency markets, the stock market, the bond market and the energy markets. All of these markets were directly impacted by the events which were relayed via the news. Additionally, another significant week will be when the FED meets on December 15th and 16th, 2015, in order to make a decision on their lift off of a new short-term interest rate hike (before the holiday season commences). It appears, as though, we will finish the year off with a bang and with plenty of volatility. So, why was this last week so significant, and why did it lead to such large volatile movements within the respective markets? This article will shed light on the reasons why.

The ECB Meeting on Thursday, December 3rd, 2015

The first significant event of the week was the ECB meeting, which occured on Thursday, December 3rd, 2015. The three charts displayed below, indicate the kind of volatility and the impact that the ECB Presidents announcement had on the markets.

Chart 1

Chart 2

Reasons for such large moves:

With dovish comments made by the ECB President, within the last few weeks, the markets were expecting something BIG from the ECB! However, the ECB President brought a “smaller bazooka”, which spooked the markets. “Super Mario”, a nickname assigned to him, due to his history of meeting and exceeding expectations of earlier occasions, surprisingly, could not meet market expectations, this time around. The dissidence during the meeting, also spooked the observers, which indicates the limited freedom that Mr. Draghi has for the future.

The ECB President announced the following measures:
Extended monthly bond purchases:

Chart 3

The ECB did not increase the amount of its bond purchases per month from the existing €60 billion, but instead extended its duration of the QE program, by an additional six months. This announcement was considered below expectations of the marketplace. The market was anticipating an additional amount of its current monthly QE as well as a further extension of the QE.

Reduction of official discount rate by 0.1%

The markets expected the discount rate to be pushed further into the negative territory so as to discourage the banks from “parking” their money with the ECB. The expectations were to the tune of a 0.2% reduction, which would have brought down the effective rate to -0.4%. However, the ECB announced only a 0.1% reduction. The Street was disappointed.
Other measures of diversifying its purchases include bond purchases of local and regional government debt, reinvesting proceeds received from matured bonds and no plans to ration liquidity until the end of 2017. These announcements were not received well and caused a global market sell off. The US Dollar- Euro parity will have to wait for a future date.

The US jobs report on Friday, December 4th, 2015:

After the disappointment of the markets, due to the ECB measures, the next significant event was the US jobs report released on Friday, December 4th, 2015. This is critical data as it forms a part of the dual mandate of the FED. With the FED due to meet on December 15th and 16th, 2015, and the Chairwoman having raised expectations of the first rate hike in almost a decade, this is going to be a keenly watched jobs report. Though Chairwoman Janet Yellen reiterated not to read too much into this report, the market participants thought otherwise.

The non-farm payrolls came in at 211,000 against an expected 200,000. The figures of the last two months were also revised upwards by a combined total of 35,000. The unemployment number remained at a low of 5%. The hourly wage increase was 0.2% in November 2015, and over the year, the wages increased by only 2.3%.

The data showed the strength in the US economy, which remained unaffected by lower energy prices and the economic slowdown in China. The hope of a stronger economy buoyed the stock markets higher, by more than 2%, on Friday December 4th, 2015.

Looking Forward:

The interest rates have remained at record lows for a very long time. The effects of the interest rate hike on the economy will be known in a few months, which will decide the trajectory of further rate hikes and the movement of the stock markets.

The OPEC meeting on Friday, December 4th, 2015:

Chart 4

With energy prices reeling near their lows, it was expected that OPEC would support the prices with a production cap. Many OPEC nations are reeling under pressure due to subdued crude oil prices. OPEC has not reduced their production as they want to maintain their market share and expected the other non-OPEC major producers like the US and Russia to cut their production.

With no reduction in output by either the OPEC, the US or Russia, an excess supply compared to the consumption, may lead to a shortage of space to store crude oil, in the future. There was an unconfirmed divide in the OPEC member nations with Saudi Arabia and Iran at opposing ends. Iran, which will restart supplying oil after the lift off of the Western sanctions, is keen to ramp up its production in the next few months. With non-OPEC nations supplying almost two-thirds of the worlds demand of crude oil, a small reduction by the OPEC nations is unlikely to have any lasting effect. The members could not arrive at any conclusions, and no formal announcement was made after the meeting on Friday, December 4th, 2015.

Looking Forward:

With US shale oil pumping at record levels, the power of the OPEC nations, which are led by Saudi Arabia, seem to be reducing. Additionally, pumping by Iran, in the near future, may keep the upside capped. I expect crude oil prices to fall further to $30/barrel.


The world is going through a major shift, which will create historic opportunities for unprecedented profits to be made in our lifetime, beginning in 2016 and beyond. Energy prices will continue to carve out a bottom in 2016. Meanwhile, the FED is about to raise rates, Europe is increasing its QE, China’s growth is under the scanner and Japan is not able to generate growth, even with Abenomics. These are extraordinary circumstances, which require extraordinary actions from both the investors and the traders in 2016.

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From Major Shifts In The Financial Market:

Chris Vermeulen

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This single signal alone is absolutely screaming that a major financial crisis is imminent. The US Dollar surged right before the financial crisis of 2008 and now it’s occurring again.

On November 12th I shared with you one sector that would have a huge moved based on a strong dollar rally titled: What does the breakout of the US dollar mean?

Below are two charts showing what happened with stocks and the dollar index during financial uncertainty:



A rising US Dollar puts pressure on emerging markets all around the globe. These emerging markets have been on a massive ‘debt binge’ since 2008. Currently, most of that debt is denominated in US Dollars.  Emerging markets are finding that it takes more from their own local currencies to service and pay back those debts.  Defaults are rapidly rising, resulting in emerging market economies all over the world plunging them into “severe economic contraction”.

If the FED does follow through with an interest rate hike in December 2015, it will make things even worse.  The U.S. Dollar will surge even more, leaving emerging markets in more trouble.

The prospect of the FED hiking interest rates in December has pushed the dollar higher. The question is; how fast will it raise interest rates in a world where other central banks are moving in the opposite direction, toward easier policy.

The US Dollar in the Asian markets last night, November 22, 2015, broke above the 100.00 mark to register a recent new high of 100.04. Its multi-year high so far has been 100.72 on March 16, 2015.

It’s my belief that the FED may very well raise their short-term rates. I believe that they will initiate a new quantitative easing programs to ease rates for the long term to counter the rise in the short term rate increase. This would flatten the yield curve and in return support the housing market.

The FED expect that the US economy will meet the conditions for raising interest rates by their mid-December 2015 meeting. If and when the FED moves rates higher, the subsequent path of increases would be exceptionally shallow and gradual.

All of the financial markets are waiting for the FED to act in December 2015.

The minutes from the October 2015 Federal Open Market Committee meeting revealed that “most of the 10 FOMC members thought that conditions for a rate hike could well be met by the time of the next meeting “

Another passage noted that “it may well become appropriate to initiate the ‘normalization process’ at the December 15-16 FED policy meeting “. The minutes also stated that “economic conditions may, for some time, warrant keeping the target federal-funds rate below levels that the Committee views as ‘normal’ in the longer run”

It’s a holiday week in the USA, markets will be closed on Thursday, November 26, 2015, in observance of Thanksgiving. This is really the start of the holiday season in the United States, which will last through the rest of 2015. For retailers, success or failure for the year depends on sales during this season.

Stay ahead of the market and make money trading ETF’s with me at:

Chris Vermeulen

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