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Confiscating Your Super

Carrying on from yesterday's article, a little over a year ago we wrote about the dangers inherent in being in the big industry and managed money super funds (it's worth revisiting before reading on). As touched on in that article there is in fact a history of Government's confiscating or raiding super funds, almost without exception at times when the Government desperately needed the money due to their own fiscal mismanagement and all around the time of, or immediately after, a financial crisis. Depending on your view, many believe that is what is coming on the next and unprecedented financial crisis. Here is a list of these instances:

October 2008 Argentina

The Government seized $30b in private pension funds, placing it into their government social security system. Dressed up as protection for its people it also just happened to address a $12b bond payment shortfall issue the government had

December 2010 Portugal

The government moved $2.5b of pension fund assets of the largest Telco into their own social security system. The fund also had to make up for balance sheet shortfalls for 2 years afterward as well and those funds were used to reduce the government's deficit

December 2010 Hungary

Citizens were forced to transfer the private component (1/3) of their pension fund into the government component of the joint $14.2b fund or face losing their government component benefits. The state used the funds to pay state pensions and reduce debt

December 2010 Bolivia

The government simply nationalised the 2 largest private pension funds worth $3b.

May 2011 Ireland

The government unilaterally garnished 2.4% or $2.6b of private pensions over 4 years to fund a spending promise. The 'tax' was not applied to state pensions, only private

December 2011 Portugal

The government moved the assets of their 4 biggest banks, the assets of which were largely private pension funds, onto their own balance sheet. They used the $7.7b seized to meet the EU/IMF bailout requirements for deficit:GDP ratio.

September 2013 Poland

The government confiscated around half of the assets of private pension funds, held as bonds, with the balance to be transferred over 10 years. Held then in the government's state pension system it also reduced their debt to GDP and allowed them to borrow more

March 2015 - Greece

The government passed a bill that allowed all pension funds kept in the Bank of Greece to be fully invested in Greek sovereign bonds (you know, the same Greek bonds that the PM and Treasurer both admitted were "unsustainable" and "will never be repaid".)

SMSF's in Australia would be nigh on impossible to 'nationalise', roll into a state controlled fund, etc etc. An SMSF allows you to get out of these big super (private pension) funds and start protecting your future. Learn more here, call us or visit our store to discuss.

 

The government could simply increase compliance costs to make them unfeasible.

 

After the next GFC the government will make it a compulsory requirement for all Superfund's including SMSF's that have over a certain amount in net assets to hold a minimum percentage in government bonds, for the safety and security of all the super fund members of course. Then all they have to do is raise that minimum percentage year on year to confiscate everyone's super, including SMSF's.

 

Weight of Debt v Hope

We speak often of debt being the core catalyst for the world's next financial crisis, as indeed, it was for the last in 2008/09. As the world learned (and seemingly shrugged its shoulders) in 2014 from the McKinsey report, we have not learned from the GFC but instead doubled down, adding 40% or $57 trillion of debt in the years since to try and reflate the system. A chunk of that debt has been companies borrowing to buy their own shares to prop up their share price. But at some stage the sheer weight of that debt becomes too much. As usual Vern Gowdie says it nicely:

"Global debt has reached the stage where it's now counterproductive. Debt, once the fuel of economic growth, is now a lead weight. Never before in the recorded history of money has there been a cumulative debt pile (measured as a percentage of GDP) as large as there is today. Every recorded period of excessive debt accumulation has ended in a crisis."

If you take that weight analogy and apply it to the chart below of US company earnings it makes a lot of sense. You can see the gradual decline in earnings under the weight of that debt. The really sad thing is (for those believers going 'all in' on shares) is that the projected earnings, to the right of the green line, are so easily and unquestioningly believed by some. This is investment by 'hope' not logic.




It's also a little instructive on the discussion above. The only time such fast growth in earnings occurred before was in the debt and easy money fuelled rebound of 2009. That was both after a crash and in response to new fresh debt. What we have now is the pattern of before the crash under the weight of all that accumulated, and no longer fresh, debt. The evidence just keeps on building, day by day, measure by measure.

 

COMEX Record Commercials Long Jump!

Fresh off our posts on Friday on the London 'Paper' Gold Market and First Majestic's very bullish view on silver going forward it was interesting to note the COT (Commitment of Traders Report) on Saturday. The COT report is issued each week by the CFTC (Commodity Futures Trading Commission) and provides a breakdown of the futures positions in gold and silver (and other commodities) for major traders. As we've reported before the 2 main categories are the "Managed Money" or so called speculators, and the Commercials, the big bullion banks and producers. The latter are often short as they essentially hedge their physical positions with paper. Of late the speculators have taken their long positions to historical highs riding the gold and silver bull markets this year. But the potentially very bullish action this week was the Commercials' all time biggest weekly jump in long positions (check out the vertical blue line below). This indicates the category who are the biggest gold expert participants are making a significant move. The speculators coughed up these long positions amid talk of the June hike and rising USD. Those investors not convinced to date that we've seen the USD spot price bottom in gold and silver will no doubt be looking at this very carefully. For Aussie investors in AUD gold and silver, many believe the bottom has been and gone as any potential further weakness in USD spot gold price would likely be courtesy of a strengthening (for now) USD, which in itself ordinarily sees the AUD fall and buffering out the difference in metal price in AUD.

 

Stepping Back for the Big Picture

Regular readers know we are big fans of Greg Canavan and Vern Gowdie of The Daily Reckoning. They have a great way of explaining what main stream media tends to ignore, looking at the bigger picture, and all with an Aussie context. Those following the gold market know it has had a rough couple of weeks as growing expectations of a June or July US rate hike is seeing a strengthening USD and downward pressure on gold. Our most recent discussion on this is here. Greg recently summarised it in his own way as follows:

"But there is the little issue of the strengthening US dollar. Global interest rate divergence (meaning higher rates in the US and continued easy money in Europe and Japan) is not a positive global macroeconomic backdrop.

This divergence means the US dollar will strengthen against the yen and the euro. It will also put pressure on the Chinese yuan again, as China competes in the export market against Japanese and European goods.

From a macro perspective, a strengthening US dollar is a headwind for the global economy. That's because it's the world's reserve currency. A strong US dollar puts pressure on commodity prices and emerging markets. It represents a tightening of global liquidity.

So, as you can see from this dynamic, the world economy is trapped in a no win situation. Higher rates in the US drains liquidity from the rest of the global economy and leads to a slowdownwhich then leads to lower US interest rates and an increase in global liquidity and economic activity.

And around and around we go. So keep this in mind while the narrative of 'higher interest rates are good' grows stronger over the next few months.

Higher interest rates are indeed good. They are the only mechanism that will rid the economy of speculation and wasteful investment. Higher rates will cause short term pain, but they will also increase long term productivity, which is the Holy Grail of sustainable economic growth.

But it just won't play out like that. Debt levels are too high all around the world to risk higher rates. The only option is to try to generate enough inflation so that nominal rates rise while real rates stay low. The real interest rate is the nominal rate minus inflation.

Right now, the market is buying the Fed's preferred narrative. That is, the US (and global) economy can handle higher rates. That's leading to higher stock prices and an unwinding of bets on gold in particular.

As someone who thinks gold is at the start of a new bull market, this is not too concerning. In fact, after such a strong run, a pullback is always healthy. In the same way that the hedge fund speculators are pouring back into oil (via the futures market), the same thing has happened with gold over the past few weeks."

As a long term strategic investor, one could 'step back' and personally test the logic of Greg's argument. If you agree, as we do, you could see a path that might see you riding the gold bull (being overweight gold and light shares) while the world 'takes its medicine', and has the crash it needs by normalising rates. You might then sell down your higher priced gold weighting and go overweight the bargain shares before the long term productivity wave Greg discusses. The trick of course is the stepping back bit. Not many share-centric advisors or superfunds will do that Note too we are not saying 'sell everything, buy gold and silver'. There is always the fact that no one really knows what will happen next, so a diversified portfolio is always prudent.

 

Brexit Has Citi Say "Buy Gold"

Last night saw both the end of May and also market fears escalate over a "Brexit" with the latest polls showing more in favour of Britain leaving the EU than staying.

The news weighed down on shares and saw big falls last night before a late mini rally got the Dow just over April's close to be just up for the month (but still down 0.5% on the night). Gold went up on the news. It was a month that saw sizeable corrections in both gold and silver, and more particularly the latter with silver seeing its worst month since September 2014, down 10.4%. As we reported yesterday a correction after such a rally was overdue and gold and silver are still up 15.7% and 16.5% respectively for the year, easily outperforming nearly any other asset class. Indeed Citi bank came out yesterday with a report predicting USD1,400 gold by year's end. On the current exchange with AUD that is $1936 in Aussie dollars and if the AUD is down around 60c by year's end as many predict, it would be $2,333. This is what Citi had to say:

"While prices have fallen 3% (month to date) in May, we believe this may in fact prove to be an opportune moment to 'buy the dip,'" "The risk of 'Brexit' is likely to complicate matters for U.S. policymakers, and we do not expect the Fed to move until after the June referendum,"

This makes a lot of sense as the Brexit is probably one of the bigger Black Swans circling our financial skies at the moment (add in Trump victory, post rate hike crash, Chinese Yuan devaluation or major shadow banking default, Euro banks, etc). That the major polls (2 overnight) have "Brexit" clearly in front of "Bremain" makes this look more and more likely. Importantly these are polls taken after the WTO said there would be no easy path for British trade with Europe should they exit. It would seem the British see the EU as the ticking time bomb it is and want out. As Citi suggest, now might be the opportune time to increase your weight in gold amongst all this uncertainty.

 

Why May Was Different to December

There is something very similar about the price action on gold right now and in the lead up to the December US rate hike as the graph below shows:






The settings are similar. At the end of October 2015 we saw US Fed minutes clearly increasing the odds of a December hike, just like we did for the April meeting this year. We subsequently saw gold sell off from $1200 to $1050. May just saw gold come off 5.9%, its worst month since, you guessed it, November 2015 but importantly it didn't breach the support of $1200. However the analysts who produced the above graph at Commerzbank point out one key difference this time. Gold ETF's (such as GLD) saw more big inflows in May this year (80 tonne) whereas November 2015 saw 50 tonnes outflows. This reinforces Citi's advice yesterday that many seeing this as a 'buy the dip' opportunity. Indeed if you consider the graph below, whilst the Managed Money (financial speculators) net longs on COMEX dropped by a record 56,000 contracts to 24 May, you can see below they are still well and truly net long (betting on a rise), whereas last December they went net short. As we reported Monday, there are 2 ways to look at this and some might actually want to see those speculators net short again before feeling this correction is over. However as we pointed out yesterday there are a number of Black Swans circling right now that could see that all evaporate and the rush to safety overcome.

 

Australia A Trillion Reasons to Worry

As we covered in today's Weekly Wrap Podcast, the rejoicing of Australia's better than expected GDP this week needs to be looked at in the broader context. As usual Greg Canavan of The Daily Reckoning explains it so well. Our promise is to keep our news short so we will summarise below but endeavour to get Greg's article up for your reading over the weekend. So in summary:

Headline GDP growth 1.1% March qtr, 3.1% year on year.
1.2% of that growth came from increased net exports. Most of that was on higher ore, coal and natural gas volumes. But that volume is on lower prices. Our terms of trade fell 1.9% for the qtr and 11.5% for the year (!).
Accordingly Real Net National Disposable Income was barely up at 0.2% and is down 1.3% for the year.
Despite those big export numbers, we still import more than we export to the tune of $8 billion in that same March quarter.
Our foreign debt is now over $1 trillion. Just 5 years ago it was 'only' $636 billion. That is a 62% increase! The interest bill on that debt for the last quarter was about $8 billion.
Our debt to GDP ratio now stands at 243%. Yep, nearly 2.5 times more debt than Gross Domestic Output and growing, not shrinking.
Adding the net interest bill and the trade deficit and you get the current account deficit. For the year to end March 16 that was $84.7 billion. As Greg says "That's $84.7 billion dollars flowing out of this country to maintain a standard of living we can't actually afford"
And so you get a little insight into why the RBA is lowering rates (and is very much likely to do so again soon) when the GDP indicates 'everything is awesome'. The fact is we have increased external debt by 62% whilst at the same time national incomes are almost stagnant. Low interest rates help handle that in the short term. Over to Greg:
"But make no mistake; it's a ticking bomb for Australia. Both household and government debt is growing rapidly, while income growth is stagnant. That means the economy is more and more leveraged, and ever more susceptible to an external shock.

When that day comes and it always does the real shock will be felt inside Australia. Most Australians, including our leaders (but not you, dear reader), have no idea just how fragile our economy is."


Our own takeaway is that this also highlights how different it is this time to the GFC. We had relatively low overseas exposure when Lehmans collapsed and liquidity was frozen. All the NIPR and ZIRP fuelled cheap foreign funds combined with Aussies' rapacious appetite for debt into property (in particular) has seen that very much change. We now have the highest personal debt in the entire world. When, not if, we get the next Lehmans event, we are far far more exposed. And this time we won't have China to the rescue. All that might save you is safe haven hard assets.

 

Gold & Silver Jump '33' on Jobs Report

Those who awoke Saturday morning and checked the gold and silver prices were met with a big surprise. Gold jumped $33 and silver 33c.

So what happened? Against expectations of 160,000 new jobs for May in the US we instead saw an NFP payrolls report just 38,000 jobs added, the lowest number in nearly 6 years. Oh, and they quietly revised down the 160,000 last month to just 123,000, and March from the heralded 208,000 down to 186,000 But if that wasn't bad enough, we saw participation plummet by 664,000, with the total of people now not in the labour force at an all time record 94.7m. That meant the now completely meaningless 'unemployment rate' (which only counts people 'participating' in the work force) actually dropped to 4.7%.

The quality continues to decline too, with the last 2 months now seeing a total of 312,000 full time jobs lost, and only partly replaced with 118,000 new part time jobs.

So needless to say expectations of the June rate hike have come off sharply, now sitting at a resounding 'no chance' of 2% odds. A July hike dropped to 36% from 48%. Now remember a rate hike happens when 'everything is awesome'. Yet at the same time we see JP Morgan's Recession Indicator screaming a very clear warning.

 

Buying Bullion not ETF's

We speak regularly of the shear amount of trade in gold and silver that happens in 'paper' markets COMEX futures contracts and Exchange Traded Funds (ETF's) as opposed to physical bullion. There is currently, and we stress currently, the anomaly whereby these trades, where a tiny fraction is backed by real available gold and silver, dominate the price fix that dictates all gold and silver trade.

ETF's are back in favour this year with, according to the World Gold Council, a near record 364 tonne of gold flowing into them in Q1 of this year as even Wall St can see what's coming. ETF's are an easy vehicle, particularly if you are a Wall St type with full faith in the 'system' and don't understand how easy it is to own the physical metal, and that it is usually cheaper than the 0.4% annual fee that usually comes with an ETF. The other lurking threat is counterparty risk, of which there is ZERO if you own your own bullion. Lawyer and financial analyst Avi Gilbert scoured through the PDS of the biggest gold ETF, GLD. This is his conclusion:

"In the event of a default of the trust in which the gold is held, one becomes an unsecured creditor of the trust. That means that the trust will likely be required to liquidate its positions in the metals, and satisfy the unsecured obligations of the trust, usually at pennies on the dollar. None of the gold being held in trust within the GLD is designated to each holder of shares on an individual basis. Therefore, all the owners of the GLD have equal rights to all the gold being held in trust. So, if there is not sufficient gold to satisfy all rights to that collective gold, all the owners are subject to a pro-rata reduction in their ownership interest in the total gold being actually held and on hand."

Just a couple of days ago too we saw Bank of Montreal file their prospectus for their $500m physical gold fund where shares are denominated in ounces not dollars (ala ETF's). There was a startling admission in that PDS, namely that their fund seeks to eliminate:

"derivatives risk (i.e., the use of unallocated gold, gold certificates, exchange-traded products, derivatives, financial instruments, or any product that represents encumbered gold)," as well as "'empty vault risk' or gold bullion lending risk (i.e., the practice of the gold custodian lending, pledging, hypothecating, re-hypothecating, or otherwise encumbering any of the investors' underlying gold bullion)."

That a major bank is essentially calling the others on their dodgy practices in an instrument lodged with the US SEC is incredible. Another sleeper, and one that strikes a chord with the weight of evidence of major banks manipulating these markets, is they warn that the "official sector" is active in the gold market and can affect prices.

We last wrote here of the allegation that J P Morgan are simultaneously suppressing prices with a massive 'paper' short position on COMEX whilst buying up over 400m oz of physical silver. The question is when do they take their foot off the shorts and let her go?

 

Record Silver COMEX Claims Per Oz Available

Yesterday we spoke mainly of the ETF side of the 'paper' or 'digital' trades in gold. Topically, this week also saw a new record reached in the silver COMEX futures market. We now have the epic setup of 42 contractual claims for every 1oz of registered physical silver. This is on the back of Registered silver inventories hitting an over 15 year low as this last week saw a massive 7 million oz removed to leave just 23m oz as you can see in the graph below:







You will note from the chart that the last time registered inventories got this low coincided with silver peaking at $49 in mid 2011. Now there will be the usual responses to this so let's address them.

Firstly, yes there are also the Eligible inventories on COMEX (from which metal moves into Registered for possible delivery) but as we've reported before many an expert believes that at times of particular tightness in the physical market, the COMEX participants move their metal into Eligible so that should the big squeeze occur, they have access to it by simply withdrawing it. The 2011 price spike to $49 saw exactly that. Even counting Eligible inventories we still have nearly 7.5 claims per ounce available. But be clear, those Eligible inventories are not automatically available so right now that 42:1 is more relevant.

Secondly, there's the "yeah but they will just be paid out in cash" crowd. Yes that is absolutely true, but can you just imagine the price action when word got out that there wasn't enough silver to satisfy a contractual claim on the worlds biggest futures exhange. Look what happened in 2011 when it just got a little tight! We are talking about very big numbers and very big players How big?

The two largest silver shorts on COMEX, JPMorgan and Scotiabank, are collectively short around 104 days of world silver production, or almost three quarters of the length of the red bar in chart below. The top 8 traders are collectively short nearly 220 days or 60% of entire world annual production.



For Gold investors, you can see it is the 3rd most strung out commodity traded on the futures market.

Whilst these guys play their precarious game, you have the opportunity to very easily buy physical silver bars and coins at the bargain price all this futures shorting has delivered on a (silver) plate

 

The End of the Grand Credit Cycle

Listen to our Weekly Wrap podcast today and you get a very clear picture of the real global economy poor economic data, official downgrades, and dropping and negative interest rates implemented to try and resurrect growth. What the world is learning the hard way is you can't just keep 'buying' growth with more and more debt.

Zerohedge have just taken the latest official debt and growth rates from the US and paint a sobering reminder of what's playing out. As the graph below shows the US added $645 billion of debt to it's "pile" in just the first quarter of this year, taking total debt to an eye watering and all-time record $64.1 trillion. So what growth did that new $645 billion buy them? Just $65 billion. The US's debt to GDP ratio is now 352%!




One quarter 'does not a summer make' you say? Let's, then, step back and look at the situation. Can we remind you too, that we left the fiscal discipline of the gold standard in 1973 (you'll spot that easily on the graph below) and launched the biggest credit cycle planet earth has even seen.



The thing is credit cycles throughout history have always collapsed, erasing untold amounts of 'paper' wealth. One asset has survived each and every event. Precious metals - gold and silver. 'Smart money' is starting to pile into it in 2016. It's feeling close.

 

Brexit, EU Collapse and Gold

In 10 days the UK votes on staying in or leaving the EU. We reported on this earlier this month but things have escalated since. Polls appear to show a clear lead for the leave case ("Brexit") and, given a lot of the sentiment driving it is immigration based, last night's massacre in the US may well see a groundswell in that regard. However, it is not simply control on immigration that is driving the Brexit movement, but an exit from the very clear signs of financial and political distress in the EU experiment.

Staying in the EU sees the UK tied to a system where there are countries and major banks on the edge of financial collapse. This goes way beyond the basket case, but relatively small, and yet to be 'fixed' Greek problem. Italy, the 3rd biggest economy, has a major systemic financial problem being kept at bay by EU intervention; the European Central Bank (ECB), having bought huge swathes of sovereign debt to print money is now buying corporate debt at a staggering rate in their $1.2 trillion QE program; and European banks, across the board, are crashing, with the last 2 weeks seeing the biggest drop in European bank shares since the Euro crisis of 2012. There is also clear infighting with both the German Finance Minister and Europe's biggest bank Deutsche Bank objecting to the extent of monetary stimulus from the ECB as it desperately tries to breathe life into a dying economy. This from Deutsche Bank late last week:

"ECB policy is threatening the European project as a whole for the sake of short-term financial stability,"

George Soros, who last week dramatically increased exposure of his $30 billion fund into gold had this to say:

"If Britain leaves, it could unleash a general exodus, and the disintegration of the European Union will become practically unavoidable,"

And it's not just financial elites such as Soros. Retail demand for gold in London too has surged. According to the CEO of leading bullion dealer Sharps Pixley:

"It seems to have sunk into people's consciousness that Brexit is a real possibility now. All stocks are being bought out in advance of even being shipped,"

As we discussed in Friday's Weekly Wrap Podcast, it should be no surprise that some of the biggest backers of the "Bremain" camp are the big banks. They have a lot at stake. We often talk about a global financial system artificially inflated beyond fundamentals with debt accumulating monetary stimulus. It is a global financial house of cards. The EU, collectively, is the world's 2rd biggest economy putting it at the bottom of that house of cards. You know what happens to the rest then.

 

Paul Singer Says Buy Gold, Warns of Crash

Fortune magazine described billionaire hedge fund manager Paul Singer as one of the "smartest and toughest money managers" in the hedge fund industry. You don't amass $2.1 billion in personal wealth as a dill.

Over the weekend Paul Singer joined the chorus of billionaires of late (like Soros, Icahn and Druckenmiller) warning of a financial crisis, going short shares and buying gold. Here's a bit of what he had to say:

On central bank stimulus such as quantitative easing (printing money), zero and now even negative interest rates:

"It started out as all bond buying, but now it's leaked into equities. The result of all that I call it monetary extremism is that the economies have held up and had some growth, but that growth has been tepid, with the biggest gains going to those who own financial assets while wage growth has been stagnant."

We've written before, and talk often of it in the podcasts, of this enriching the rich at the expense of low and middle class the inequality effect of monetary stimulus. It is the biggest driver for Trump's success and it could be a big sleeper in how this all unfolds. Trump being elected for a start

Singer goes on to say (emphasis ours):

"The cure for the crisis for the debt crisis, the financial crisis [GFC] has been deemed by the developed world governments to be more debt. There has not been a deleveraging. And after seven and a half years and counting of this mix of policies, at the moment we're either in a stage of stagnation or rollover, possibly in the early stages of a global recession. So I think it's a very dangerous time in the financial markets."

And on investment?

"We're very bullish on gold, which is the antipaper money, of course, and is under owned by investors around the world. And we are very sceptical about markets. We hedge every equity position. We're not in the mood to be surprised surprised in the sense of losing large amounts of money ever, but in particular now with this extraordinary and unprecedented situation where the stability of financial markets is so dependent on confidence in policy makers and central bankers."

 

Bonds "Supernova Will Explode"

Following on from yesterday's article of yet another billionaire warning of what is coming and buying gold, the undisputed "King of Bonds", Bill Gross who headed up the world's biggest bond fund, PIMCO, has intensified his call that we are going to see a massive failure on the bond market.

The prompt, as we discussed in Friday's Weekly Wrap podcast, is that last week saw the historically unprecedented milestone of negative yielding government bonds surpassing a staggering $10 trillion dollars. That means we have around a third of all global government bonds in negative yield territory. Yes, you PAY for the privilege of buying government issued debt! That means that investors around the world are so scared of losing capital in a coming crash that they not only will forego yield income, as you do with gold and silver, but you will pay a 'yield' as an expense. These are not third world counties either. It is the likes of Japan, Germany, Italy and France to name a few. That bonds continue to somehow have 'safe haven' status given how precarious this all is, is nothing short of dumbfounding blind faith in government.

So what did the Bond King have to say?

"Global yields lowest in 500 years of recorded history" "..$10 trillion of negative rate bonds. This is a supernova that will explode one day."

Topically we remind you of 2 famous quotes from some gentlemen you may remember:

"Betting against gold is the same as betting on government He who bets on governments and government money bets against 6000 years of recorded history" Charles De Gaulle

"You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold." George Bernard Shaw

 

Deutsche Bank Warns of "Broken Financial System"

Following on from yesterday's article on the sheer scale of negative yielding bonds we look at yet another warning on the implications as the German 10Y Bund went negative for the first time in history.

Germany's Deutsche Bank is Europe's and one of the world's biggest banks. It would be fair to say things aren't going well for them, what with a record low share price, the threat of Brexit, an ECB hell bent on money printing the EU out of it's deflationary hole, a growing bad loans book and its exposure to the still unresolved Greek debt issue and growing concerns around Italy , et al. Moreover, in an economic environment as over inflated, fragile and interlinked as it is now there is of course their famous Eur54.7 Trillion derivative exposure. That's not a typo, and yes it is about 20 times more than its host nation's GDP






They are one of the more vocal opponents to the current zero and negative interest rate policies too. They said it nicely a couple of days ago (referring to the graph below)

"If one wanted a simple indicator to reflect a broken financial system then this would be a strong candidate. [the chart below] show 10 year Bund yields back to the early 1800s to put this move in some perspective".."Let us stress that until Governments/central banks change policy, yields are likely stay at ultra low levels due to secular stagnation type themes and the overwhelming amount of QE hoovering up bonds. However it still reflects a broken financial system."



Maybe topically, you may have seen the graph before too

 

Government Debt The Real Story

The news this week of the Queensland Government raiding the public service superannuation fund to the tune of $4b certainly grabbed a few headlines. It also reinforced our article on superannuation confiscation recently. Last night Ross Greenwood interviewed actuary Michael Rice of Rice Warner where he revealed that Australia as a whole has unfunded Government superannuation liabilities of $143 billion. That is AFTER the $117 billion allocated in the Future Fund. The ironic bit is that Queensland is the only state that has funds allocated; the $4b was in essence 'surplus' (inverted commas given total budget deep in deficit).

This is something we've raised before and is a quirk of government. Generally Accepted Accounting Principles (GAAP) dictate the rules on which most businesses in the world report their finances. Such liabilities would sit on the balance sheet under such rules. Government it seems can adopt a 'hope' strategy of not including such liabilities on the hope they can raise the funds in time. Given continual deficits that's not going so well

If you though $143 billion was scary, the US unfunded liabilities is just plain horrific. Everyone talks of the already incredible $19.2 Trillion US government debt. In the US, real, unfunded liabilities amount to around $100 trillion. To put that into perspective, if you combined the $19.2t that is on their balance sheet and the $100t that should be on their balance sheet under GAAP, it works out to be nearly $1m per US tax payer.

 

Gold Breaks Record on COMEX Before Brexit

Saturday morning saw us wake to a new COT (Commitment of Traders) report from COMEX. Whilst we reported recently that Managed Money (speculative investment funds etc) 'long' silver futures had hit a record high, on Saturday we learned last week saw a new record high in gold in the lead up to the Brexit vote (see the graph below). Not only was it a record high 'long' position by Managed Money it was also the biggest weekly jump in history. An important observation too is that the 'short' positions (betting on a drop) only dropped marginally which means the majority of these new 'long' position contracts (buying on the basis you think it will go up) were not because of any 'short' covering rally, it was new money coming in expecting a price rise.

 

US Fed Warns of "Extreme Point of Overvaluation"

The very institution largely responsible for the illogically big gains in US shares since the GFC, courtesy of unprecedented money printing and zero interest rates, somewhat ironically, last night told the market that shares were overvalued From US Fed Chair Yellen:

"Forward price-to-earnings ratios for equities have increased to a level well above their median of the past three decades.", and

"investors should understand that beneath the surface of this short-term outcome is singularly the most extreme point of overvaluation for the median stock in history."

As Yellen said, and per the chart below, we've been at historic extremes for nearly a year now. You'll spot the 2 instances when we had those little 'hiccups' last August/September and this February. We are back now, higher than ever. Will the next 'event' be a hiccup/correction or a crash?