FEDERAL RESERVE HINTS, NEGATIVE INTEREST RATES A POSSIBILITY FOR THE US

Via Zerohedge.com

  • “The biggest shocker in today’s Fed announcement is not that the Fed did not hike: that was telegraphed far away. It is highlighted on  the chart below in red: for the first time ever, one FOMC predicts negative rates in 2015 and 2016″

[Editors note] – Quite simply, due to the extreme growing levels of sovereign,corporate,financial and private debt world wide, at this point there is little to no chance that loose monetary policy such as low interest rate policy or Quantitative easing will be able to be reversed without a complete collapse of the global financial system.

Today was one of the biggest admissions yet (from the most influential central bank in the world), that there has been no real recovery since the 2008 crisis; as the most important economy in the world cannot even handle a 0.25% interest rate hike.

Read more here…

ARK Invest Becomes First Public Fund Manager to Invest in Bitcoin

Via prnewswire.com..

[Editors note] This is a significant development that could lead to more public funds gaining exposure to Bitcoin; which in turn could fuel retail investment demand in the future. Please also check out my article on Bitcoin retail investment, where I discuss this in more detail.

  • “ARK believes that bitcoin, a digital currency, could disrupt the $500 billion intermediary payment platform industry which includes credit cards, electronic payments and remittances, and might empower the creation of a new group of companies and industries.”
  • “ARK Investment Management LLC (ARK), an active manager of thematic exchange-traded funds (ETFs), is pleased to announce that the ARK Web x.0 ETF (NYSEARCA: ARKW) has become the first ETF to invest in bitcoin. ARK has made its investment for ARK Web x.0 ETF through the purchase of publicly traded shares of Grayscale’s Bitcoin Investment Trust (OTCQX: GBTC)”

Read more here..

 

Korean Based Bitcoin ETF joining ‘BIT’ and ‘COIN’ in race to become first publicly traded Bitcoin ETF

Via Leon Pick @ www.financemagnates.com

“The fund is to be launched by Korea Investment Trust Management, a Seoul-based asset management firm overseeing over $20 billion in investments”

“The fund could become the world’s first bitcoin ETF to trade on a fully regulated venue”

“The ETF would launch sometime next year, subject to the the approval of the Financial Supervisory Service (FSS), the country’s financial regulator”

Read more here…

[Editors note].. The Secondary market funds competing to be the first to offer retail investors Bitcoin ETF investment vehicles, could be key to providing the extra liquidity needed in the next potential bull market run in Bitcoin.

Product Disclaimer

Boon for Bitcoin – EU Bank Directive = Increased Risk of Bail-ins & Capital controls

Posted by Edward Blake..

As well as proposals for an ‘Australian tax on bank deposits’ set to start on January 1st 2016  (A tax on your money you have already paid tax on!); and plans for increased capital controls in France in September 2015, which includes increasingly draconian legislation such as the following (1):

  • “Prohibiting  French residents from making cash payments of more than 1,000 euros, down from the current limit of  3,000 euros.
  • In addition any cash deposit or withdrawal of more than 10,000 euros during a single month will be reported to the French anti-fraud and money laundering agency Tracfin.

It appears that counterparty risk to the existing financial system is set to ratchet up across the entire world in Q3 and Q4, culminating with the EU’s Bank Recovery and Resolution Directive set to go into effect on the 1st Jan 2016.

Just to give you an idea of where capital controls are heading, especially in the EU.  Included in the EU Bank Recovery and Resolution Directive legislation is the following clause: 

68) “In order to ensure that resolution authorities have the necessary flexibility to allocate losses to creditors in a range of circumstances, it is appropriate that those authorities be able to apply the bail-in tool both where the objective is to resolve the failing institution as a going concern if there is a realistic prospect that the institution’s viability may be restored,”

To summarise, when banks and other financial institutions start to fail in the EU, your deposits will be directly on the line to temporarily sure up their balance sheets.

Due to the extreme amount of leverage, derivatives and potential contagion between sovereign states and financial institutions worldwide, I would argue that it is almost impossible to restore the ‘viability’ of highly leveraged financial institutions at this time. This could lead us into incremental never ending bail-ins that gradually erode the hard earned savings citizens have made over generations.

Greece could potentially see the first use of this directive as Zerohedge identifies (2). Whilst the third bailout package for European Banks/Greece  is currently being finalised and stands no realistic chance of spurring enough economic growth to reduce Greece’s debt to GDP ratio.  It is possible that any shortcoming in shoring up Greek bank balance sheets, could end up on the shoulders of depositors following the implementation of the EU Bank Recovery and Resolution Directive legislation on January 1st 2016.

However, comparing the current debt to GDP ratio of Greece to other countries within the EU and we can see that the risk of Bail-ins and capital controls is not just limited to the relatively fringe country of Greece. Several other heavily indebted EU countries below could be next in line to use these bail-in tools when potential economic crises strikes.

Debt GDP Greece and EU 2

Source : McKinsey, Zerohedge

One of my main arguments for owning alternate currencies such as precious metals and Bitcoins has always been to reduce counterparty risk to the existing financial system; and we can see that this risk clearly seems to be in a up-trend as we go into the fall of 2015.

With 2015 world GDP growth estimates dropping and the continued rout in commodity & high yield credit markets indicating real weakness in global demand. We could soon see economic hotspots spreading around the world that could lead us to the very real  implementation of capital controls & bail-ins on a global scale.

Looking at the effect the Cyprus bank bail-in of 2013 and the recent capital controls in Greece had on the price increase of Bitcoin, it could potentially be a opportune time to take advantage of the current price weakness we are seeing in the alternative currency markets.

Disclaimer

End notes:

1) http://www.zerohedge.com/news/2015-03-23/fighting-war-terror-banning-cash

2) http://www.zerohedge.com/news/2015-08-17/greek-deposits-become-eligible-bail-january-1-2016

 

Bitcoin Block size debate hits critical juncture

Epicentre Bitcoin talks with Mike Hearn (Bitcoin developer) about ‘Bitcoin XT’ his modified version of the Bitcoin core protocol that could potentially facilitate larger transaction Block size’s in the future.

The talk centres around scalability of the Bitcoin network and the proposal to increase transaction block sizes from 1mb to 20mb. The potential benefits and risks of making such a change to the Bitcoin protocol are discussed.

Two of the most Important Bitcoin Market fundamentals looking strong

Posted by Edward Blake;

Whilst its easy to get fixated on the speculative price movements of Bitcoin as a main indicator of the health of the Bitcoin economy (as we often see in the Main Stream Media).

In my opinion two of the most important metrics I personally pay close attention to in the is the direction of Venture capital (VC) and the number of Bitcoin transactions per day. 

Both these metrics are very important indicators of the current health of  the Bitcoin network & growing utility.  In addition they are good  for predicting  future growth of the network that will ultimately affect the Bitcoin spot price in the future.

The chart below shows growing divergence between total VC investment and the market price of Bitcoin. The current and potential development of infrastructure, services and utility from VC investment could be starting to indicate that the current spot price of Bitcoin is currently trading, or soon could be trading under the Net Asset Value (NAV) of the Bitcoin economy.

In addition to this, since the 2014 Bitcoin highs which saw Bitcoin trade over a $1000, the number of Bitcoin transactions per day on a  year to year basis are up around 100% from 2014. This is a really important metric showing that Bitcoin use is becoming more and more widespread.

Bloackchain Transactions 2

(Click for larger Image)

Should these statisics continue to climb in the current manor, we should eventually see more and more of this activity and productivity from VC investment being priced into the market.

Australian Senate Committee proposal – Bitcoin should be deemed as regular currency

Via Anthony Cuthbertson @ IBTimes.co.uk

“Bitcoin and other digital currencies will be treated the same way as traditional currencies under expected proposals from the Australian government, reports suggest”

“A Senate inquiry is set to overturn a ruling from the Australian Taxation Office (ATO) from July 2014 that classified bitcoin as an “intangible asset” for Goods and Services Tax (GST) purposes, according to the Australian Financial Review, giving a much needed boost to local bitcoin businesses”

Read More here….

The Distorted UK property market – One big dangerous game?

[The following article is by Renegade Investor Chief Editor – Edward Blake]

It seems today in the UK, that you cannot go anywhere without constant reminders of just how crazy the property market is as we move into Q2 of 2015.

Whether it’s walking down a street and seeing several letting agencies within 100 yards.

Whether it’s the saturation of property related TV programming and daily news articles, either reporting record prices, or bashing ‘Buy to let’ landlords.

Or whether it’s the constant talk of property price speculation from the Baby Boom generation, or Millennials complaining about their extortionate rents. The signs of a late stage property bubble are everywhere.

The housing crash and subsequent financial crash of 2008 it appears is a distant memory. The lessons of the last financial crisis have already been forgotten in this new normal of ‘It’s different this time’ house price nirvana.

Why I’m avoiding this market:

Whenever you see a major excess or shortage of any asset, it’s always a clear indication of massive intervention in the free market, which leads to mispricing. And in this case of the UK housing market it’s no different.

Whilst you have to look at each individual market based on its own merits as an investor; there are 3 main attributes I look for when it comes to long term investments in these types of market.

  • Do the fundamentals indicate future growth, are they sustainable or in-line with the current Net Asset Value (NAV) of the market?
  • Is the market (based on historical measures) overvalued or undervalued?
  • If I plan to sell these assets in the future, who will I be selling them too?

Let’s take a look at the UK housing market based on these attributes:

From my analysis, the underlying supply/demand fundamentals of this market that should give us accurate price discovery, have been completely decimated by out of control money creation through the likes of Quantitative easing (QE) & Fractional reserve banking (FRB). As well as other out of control government policies designed to exacerbate what is in my opinion, an already over valued asset bubble.

These policies have led to extremely low artificial interest rates, which has led to the impotence of yielding assets. This in turn has led to a perfect storm of yield chasing property price speculation, based mainly on the belief of ever increasing extension of credit, debt and low interest rates; in order to justify the current price valuations.

Does this look like well balanced government policy, or a desperate attempt to prop up an overvalued housing market that contributes a disproportionate amount to the UK GDP calculation.

If we took away all of the policies above and allowed the free market to determine price discovery, it is highly unlikely we would have the exuberant house price valuations that we see today.

In the event of a currency crisis and or market forces pushing interest rates higher from there record lows; are these valuations going to stand up to even a modest interest rate rise?

The reason I doubt this is because of the extreme divergence we are beginning to see in the Average House price: Average Income ratio.

Historically, house prices has found a mean of around 3.5X – 4X the average income, from data measured between 1983- 2000.

If we look at the average income now of £27,000 compared to the average house price of £195,000 (1) in Q2 of 2015, it shows a current ratio of 7.2X. This is around double the long running average and in some areas such as London ,South East and the South West we have seen eye watering ratios, ranging anywhere from 10X to 20X the average income.

Guardian £500,000 headline september 2014

We are beginning to see an undeniable large divergence between these 2 key indicators.  

Housing article - growing income - price divergance

Where is the future support for this market going to come from? – A look at ‘demographics’:

Another key aspect of this market  to analyse, especially when looking at the potential sustainability of the graph above is  ‘demographics’.

Is the upcoming millennial generation going to be able to sustain the current level of artificially elevated consumption, in order to support the demand side of this market in the future?

In my opinion, there are 3 important reasons why this will not be the case:

First is the student debt bubble.  Millennials are now leaving University with an average of £40,000 in student debt  (3).It is highly unlikely this demographic will be lining up to buy £200,000 – £500,000 houses in the future, when they already have such huge debt burdens upon graduation

The first point is further exacerbated by the increasing automation of industries all over the world. From the property markets perspective; this is having unwanted side affects of increasing competition in the labour market and reducing quality jobs which puts constant downward pressure on wages.

Things like ‘Blockchain’ technology (decentralised public ledgers) , ‘Industry 4.0’ (4) and the advent of Decentralised Autonomous Corporations (DACS) (5), are also individually & collectively threatening a whole range of long standing professions:

Percentage risk of jobs lost automation

The third reason that Millennials may not be able to support current property price levels going forward, is the general decline in ‘real’ productivity in the UK.  Long extended periods of low interest rates has led to mal-investment and speculation rather than grass root SME development and Capital expenditure.  The graph below shows the real world effects of this; as imports increase and exports decrease, the UK current account deficit hits record highs:

Current accoutn deficit

Summary:

Rather than letting free market forces determine the right price of the housing market, it appears the government has instead decided to play an extremely dangerous game of blowing a short term house price bubble, as a means to support GDP figures.

This favours unproductive speculators & rent seeking activity and has the unwanted side effect of hollowing out the real economy; by punishing workers and wealth creators. Essentially, the government instead of the free market is deciding who wins and who loses in this economy and history has shown repeatedly that this can lead to massively detrimental outcomes in the long run.

It could be argued that the government (as well as the BOE who have failed to raise interest rates here’s why) have created an economic ticking time bomb, that requires an ever increasing extension of debt, credit, and low interest rates in order to sustain current price levels.

Hedging risk:

By partly tying the fate of the UK economy to the housing market and vice versa, I would personally not enter the UK property market today without being hedged with an allocation of sound money like Bitcoin or Bullion; to protect from potential currency collapse and tail risk in the UK and global economy.

Its unlikely big speculators and momentum traders are going to hang around in the property market once interest rates rise and the tide turns. Eventually every market corrects to fair market value.

Personally, I am more focused on what I believe to be undervalued assets with huge growth potential at the moment, such as precious metals and cryptocurrencies.

Whilst these assets are in no doubt still risky to hold, they potentially offer a Risk:Reward perspective that is much more favourable than the current UK property market, especially to millennials, many of which will never even get close to raising the capital required for a mortgage down payment.

It’s not impossible to rule out further nominal gains in UK property prices. However, it’s becoming harder to see in real terms, where future gains in this market are going to come from.

Disclaimer

Foot notes:

1) http://www.theguardian.com/business/2015/jun/03/house-price-rise-puts-average-cost-of-uk-home-at-195k

2) http://www.theguardian.com/business/2014/sep/16/house-prices-record-bubble-interest-rates-uk

3) http://university.which.co.uk/advice/how-much-debt-will-i-actually-get-into-by-going-to-university

4) http://en.wikipedia.org/wiki/Industry_4.0

5) http://en.wikipedia.org/wiki/Decentralized_Autonomous_Organization

 

 

War on Cash – Australia Set to Tax bank deposits

From Simon Black via the Sovereignman.com:

“Several months ago, the government of Australia proposed to tax bank deposits up to $250,000 at a rate of 0.05% (5 basis points).

Their idea was for the money to be invested in a rainy day Financial Stabilization Fund to insure against in the unlikely event of a banking crisis… or all-out collapse.

And as of this morning, it looks like the levy might just pass and become law in Australia. All parties support the idea. Which means that Australia might just have a tax on bank deposits starting January 1, 2016.

To be clear, the proposal seems to plan on taxing the banks based on the amount of deposits they’re holding—but it’s pretty obvious this will be passed on to consumers in the form of lower interest rates”

Read more @ sovereignman.com….

PROSPER IN THE NEW FINANCIAL PARADIGM