Bail-Ins And Deposit Confiscation Confirmed At ‘Future of Banking in Europe’ Conference

A major conference on the future of banking yesterday heard contributions on a European banking union which is being negotiated by Eurozone finance ministers. One of the aspects of that union will be a ‘bail-in’ of deposits when banks fail in the future. Michael Noonan, Ireland’s Minister for Finance confirmed yesterday that bail-ins or deposit confiscation will be used.
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From Goldcore:
Today’s AM fix was USD 1,219.00, EUR 898.50 and GBP 743.07 per ounce.
Yesterday’s AM fix was USD 1,237.50, EUR 913.08 and GBP 754.30 per ounce.
Gold fell $32.20 or 2.57% yesterday, closing at $1,219.00/oz. Silver slid $0.84 or 4.2% closing at $19.15/oz. Platinum dropped $20.95, or 1.5%, to $1,336.25 /oz and palladium fell $9.78, or 1.4%, to $708.72/oz.

Gold advanced from nearly a five-month low, after the biggest one-day drop since October, as investors assessed whether the U.S. economy is strong enough to warrant a move away from ultra loose monetary policies.
Gold fell despite the data yesterday being mixed. It showed that while U.S. manufacturing unexpectedly accelerated in November at the fastest pace in more than two years, retail spending fell on the weekend after Thanksgiving for the first time since 2009. The overly indebted U.S. consumer is struggling which does not bode well for the consumer dependent U.S. economy.

Gold in US Dollars, 5 Year (Bloomberg)
Bulls took solace in the fact that the price falls came on very low volumes – volume was 20% below the average for the past 100 days at this time of day, data compiled by Bloomberg showed.
Gold is down 26% year to date and many analysts agree that it is now very oversold.  The 14-day relative-strength index fell to 30 yesterday, signaling to some analysts who study charts that the price may be set to rebound.
Physical demand picked up on lower prices overnight – particularly in China and Asia. In China, now the largest buyer of gold in the world, premiums of 99.99% purity gold climbed to about $11 an ounce from $7 on Monday on the Shanghai Gold Exchange (SGE).
Bail-Ins And Deposit Confiscation Coming Noonan Confirms At ‘Future of Banking in Europe’ Conference
A major conference on the future of banking yesterday heard contributions on a European banking union which is being negotiated by Eurozone finance ministers. One of the aspects of that union will be a ‘bail-in’ of deposits when banks fail in the future. Michael Noonan, Ireland’s Minister for Finance confirmed yesterday that bail-ins or deposit confiscation will be used.

The toolkit underpinning the Single Resolution Mechanism is provided for in the bank recovery and resolution proposal (BRR) which was agreed last June in Council under the Irish Presidency. The proposal provides a common framework of rules and powers to help EU countries manage arrangements to deal with failing banks at national level as well as cross-border banks, whilst preserving essential bank operations and minimising taxpayers’ exposure to losses.
One of the main pillars to the BRR framework to facilitate a range of actions by authorities are “resolution tools”. Noonan confirmed yesterday that resolution tools include the sale of business, bridge bank and asset separation tools and also the use of bailins.
The era of bondholder bailouts is ending and that of depositor bail-ins is coming.
Preparations have been or are being put in place by the international monetary and financial authorities for bail-ins. The majority of the public are unaware of these developments, the risks and the ramifications.
It is now the case that in the event of bank failure, your deposits could be confiscated.
Let’s be crystal clear: The EU, UK, the U.S., Canada, Australia and New Zealand all have plans for bail-ins in the event of banks and other large financial institutions getting into difficulty.

China’s Official News Outlet: “World Should Start Considering a De-Americanized World”

Geopolitical events are usually bullish for US Treasuries, as investors take refuge in US Government debt. But not when such events directly involve the US — the world’s second largest economy — and its allies on the one side, and China, the world’s second largest economy and a major holder of US Treasuries, on the other.

In this case, the geopolitical event – an air standoff — may roil US Treasuries, if it turns into a financial standoff.

http://www.forbes.com/sites/panosmourdoukoutas/2013/12/01/us-china-air-standoff-could-roil-us-treasury-market/

From Tehran to Tokyo, U.S. Geo-Strategic Shifts in Motion

From the Middle East to the East China Sea, the last week’s events have offered a particularly vivid example of the much-heralded shift in foreign policy priorities under the administration of President Barack Obama.

But, taken in combination, September’s last-minute U.S.-Russian accord that effectively averted a U.S. strike against Syria, last week’s nuclear agreement with Iran, and Rice’s message to Karzai clearly convey the message Obama is indeed determined to minimize U.S. military commitments and resources in the region to free them up for use elsewhere.

In that context, Tuesday’s B-52 flights over the Senkaku/Diaoyu islands appeared designed to highlight that impression.

http://iranian.com/posts/view/post/24961

Japan, US to coordinate stance on China’s air zone expansion

“We want to hold consultation with US Vice President Biden who will visit Japan this week and deal with the matter by coordinating closely between Japan and the United States,” Abe said.

The Pentagon has indicated that American military forces would continue normal operations, despite China scrambling fighter jets to monitor US and Japanese aircraft in the zone.

http://voiceofrussia.com/news/2013_12_01/Japan-US-to-coordinate-stance-on-Chinas-air-zone-expansion-8292/

And they’re off…

China Launches Moon Rover Mission

China’s military drives the country’s space program, and that has caused wariness among Western governments. Suspicions have been magnified by allegations that China has stolen information for its space and missile programs. Congress passed a law in 2011 that bans the National Aeronautics and Space Administration from developing bilateral contacts with China, although multilateral contacts are not proscribed.

But China’s program has reached a point where deeper cooperation with the United States or Russia would make little difference, said Gregory Kulacki, China project manager at the Union of Concerned Scientists. He nonetheless supports closer contacts to foster cooperation and reduce mistrust. “They don’t really need to rely on any outside sources to continue to make the progress that they’re making,” Mr. Kulacki said.

http://www.nytimes.com/2013/12/02/world/asia/china-prepares-to-launch-moon-rover-mission.html?_r=1&

China’s an opportunity, not a threat, gushes Cameron:

The Prime Minister, who is leading Britain’s largest ever trade delegation to China, suggests the country is on the brink of becoming the leading global economic superpower and it is pointless to see it as a ‘threat’.

http://www.dailymail.co.uk/news/article-2516619/Chinas-opportunity-threat-gushes-Cameron-PM-uses-interview-say-nations-rise-defining-fact-age–West-doesnt-like-it.html#ixzz2mN0le9If

Melrox

Too Big To Fail Banks Are Taking Over As Number Of U.S. Banks Falls To All-Time Record Low

By Michael Snyder

The too big to fail banks have a larger share of the U.S. banking industry than they have ever had before.  So if having banks that were too big to fail was a “problem” back in 2008, what is it today?  As you will read about below, the total number of banks in the United States has fallen to a brand new all-time record low and that means that the health of the too big to fail banks is now more critical to our economy than ever.  In 1985, there were more than 18,000 banksin the United States.  Today, there are only 6,891 left, and that number continues to drop every single year.  That means that more than 10,000 U.S. banks have gone out of existence since 1985.  Meanwhile, the too big to fail banks just keep on getting even bigger.  In fact, the six largest banks in the United States (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) have collectively gotten 37 percent larger over the past five years.  If even one of those banks collapses, it would be absolutely crippling to the U.S. economy.  If several of them were to collapse at the same time, it could potentially plunge us into an economic depression unlike anything that this nation has ever seen before.

Incredibly, there were actually more banks in existence back during the days of the Great Depression than there is today.  According to the Wall Street Journal, the federal government has been keeping track of the number of banks since 1934 and this year is the very first time that the number has fallen below 7,000…

The number of federally insured institutions nationwide shrank to 6,891 in the third quarter after this summer falling below 7,000 for the first time since federal regulators began keeping track in 1934, according to the Federal Deposit Insurance Corp.

And the number of active bank branches all across America is falling too.  In fact, according to the FDIC the total number of bank branches in the United States fell by 3.2 percent between the end of 2009 and June 30th of this year.

Unfortunately, the closing of bank branches appears to be accelerating.  The number of bank branches in the U.S. declined by 390 during the third quarter of 2013 alone, and it is being projected that the number of bank branches in the U.S. could fall by as much as 40 percent over the next decade.

Can you guess where most of the bank branches are being closed?

If you guessed “poor neighborhoods” you would be correct.

According to Bloomberg, an astounding 93 percent of all bank branch closings since late 2008 have been in neighborhoods where incomes are below the national median household income…

Banks have shut 1,826 branches since late 2008, and 93 percent of closings were in postal codes where the household income is below the national median, according to census and federal banking data compiled by Bloomberg.

It turns out that opening up checking accounts and running ATM machines for poor people just isn’t that profitable.  The executives at these big banks are very open about the fact that they “love affluent customers“, and there is never a shortage of bank branches in wealthy neighborhoods.  But in many poor neighborhoods it is a very different story…

About 10 million U.S. households lack bank accounts, according to a study released in September by the Federal Deposit Insurance Corp. An additional 24 million are “underbanked,” using check-cashing services and other storefront businesses for financial transactions. The Bronx in New York City is the nation’s second most underbanked large county—behind Hidalgo County in Texas—with 48 percent of households either not having an account or relying on alternative financial providers, according to a report by the Corporation for Enterprise Development, an advocacy organization for lower-?income Americans.

And if you are waiting for a whole bunch of new banks to start up to serve these poor neighborhoods, you can just forget about it.  Because of a whole host of new rules and regulations that have been put on the backs of small banks over the past several years, it has become nearly impossible to start up a new bank in the United States.  In fact, only one new bank has been started in the United States in the last three years.

So the number of banks is going to continue to decline.  1,400 smaller banks have quietly disappeared from the U.S. banking industry over the past five years alone.  We are witnessing a consolidation of the banking industry in America that is absolutely unprecedented.

Just consider the following statistics.  These numbers come from a recent CNN article…

-The assets of the six largest banks in the United States have grown by 37 percent over the past five years.

-The U.S. banking system has 14.4 trillion dollars in total assets.  The six largest banks now account for 67 percent of those assets and all of the other banks account for only 33 percent of those assets.

-Approximately 1,400 smaller banks have disappeared over the past five years.

-JPMorgan Chase is roughly the size of the entire British economy.

-The four largest banks have more than a million employeescombined.

-The five largest banks account for 42 percent of all loans in the United States.

-Bank of America accounts for about a third of all business loans all by itself.

-Wells Fargo accounts for about one quarter of all mortgage loans all by itself.

-About 12 percent of all cash in the United States is held in the vaults of JPMorgan Chase.

As you can see, without those banks we do not have a financial system.

Our entire economy is based on debt, and if those banks were to disappear the flow of credit would dry up almost completely.  Without those banks, we would rapidly enter an economic depression unlike anything that the United States has seen before.

It is kind of like a patient that has such an advanced case of cancer that if you try to kill the cancer you will inevitably also kill the patient.  That is essentially what our relationship with these big banks is like at this point.

Unfortunately, since the last financial crisis the too big to fail banks have become even more reckless.  Right now, four of the too big to fail banks each have total exposure to derivatives that is well in excess of 40 TRILLION dollars.

Keep in mind that U.S. GDP for the entire year of 2012 was just 15.7 trillion dollars and the U.S. national debt is just 17 trillion dollars.

So when you are talking about four banks that each have more than 40 trillion dollars of exposure to derivatives you are talking about an amount of money that is almost incomprehensible.

Posted below are the figures for the four banks that I am talking about.  I have written about this in the past, but in this article I have included the very latest updated numbers from the U.S. government.  I think that you will agree that these numbers are absolutely staggering…

JPMorgan Chase

Total Assets: $1,947,794,000,000 (nearly 1.95 trillion dollars)

Total Exposure To Derivatives: $71,289,673,000,000 (more than 71 trillion dollars)

Citibank

Total Assets: $1,319,359,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $60,398,289,000,000 (more than 60 trillion dollars)

Bank Of America

Total Assets: $1,429,737,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $42,670,269,000,000 (more than 42 trillion dollars)

Goldman Sachs

Total Assets: $113,064,000,000 (just a shade over 113 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $43,135,021,000,000 (more than 43 trillion dollars)

Please don’t just gloss over those huge numbers.

Let them sink in for a moment.

Goldman Sachs has total assets worth approximately 113 billion dollars (billion with a little “b”), but they have more than 43 TRILLON dollars of total exposure to derivatives.

That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 381 times greater than their total assets.

Most Americans do not understand that Wall Street has been transformed into the largest casino in the history of the world.  The big banks are being incredibly reckless with our money, and if they fail it will bring down the entire economy.

The biggest chunk of these derivatives contracts that Wall Street banks are gambling on is made up of interest rate derivatives.  According to the Bank for International Settlements, the global financial system has a total of 441 TRILLION dollars worth of exposure to interest rate derivatives.

When that Ponzi scheme finally comes crumbling down, there won’t be enough money on the entire planet to fix it.

We had our warning back in 2008.

The too big to fail banks were in the headlines every single day and our politicians promised to fix the problem.

But instead of fixing it, the too big to fail banks are now 37 percent larger and our economy is more dependent on them than ever before.

And in their endless greed for even larger paychecks, they have become insanely reckless with all of our money.

Mark my words - there is going to be a derivatives crisis.

When it happens, we are going to see some of these too big to fail banks actually fail.

At that point, there will be absolutely no hope for the U.S. economy.

We willingly allowed the too big to fail banks to become the core of our economic system, and now we are all going to pay the price.

WARNING! Nobel Prize Winner Robert Shiller Fears Stock Market Bubble

VAPORIZED: Detroit Obliterates Retirement Funds: 80% Cuts to Pensioners: “This Is Going to Affect Everyone”

Though a decade ago civil servants and union members would never have believed it could happen, the stark reality of the situation came to pass this morning.
We now know the answer to the question: What happens when a government makes promises it can’t keep and borrows so much money it can never be repaid?
This morning a judge overseeing the City of Detroit’s fiscal sustainability ruled that the City can be afforded bankruptcy protection, meaning that all 100,000 of its creditors now stand to lose a significant portion of monies owed to them.
The most notable victims are the tens of thousands of retirees living off of pensions – many of whom will see an 80% obliteration of the retirement funds they believed they’d receive until they died.

Creditor attorneys have repeatedly speculated they expect Orr’s plan of adjustment to mirror the June 14 proposal he offered creditors to avoid bankruptcy. That deal proposed giving unsecured creditors such as pensioners and bondholders a $2 billion note for $11.5 billion in estimated debts — or less than 18 cents for every dollar owed.

Most of those affected assumed the government would simply find a way to borrow more money or fabricate it out of thin air. They were wrong and now they are paying the price:

“Oh my, oh my. Everyone is worried. When we think about what could happen, it’s scary,” said Larsen, 85, who moved to Palm Harbor, Fla., outside of Tampa after he retired in 1976.

“If they take our health insurance? Oh god. Cutting pensions? It’s terrible. The city of Detroit was our pride. Honest to goodness. We loved it.”

…

“We are all worried,” said Nancy Schmidt, the group’s secretary. “This is going to affect everyone in different ways. If it comes to fruition, I’ve got two empty bedrooms and I may end up having to rent them out.”

…

“My net pension is $2,300 a month,” said Kammer, 77, who moved to Englewood, Fla., not long after retiring with a disability in 1977.

“I could make it for a while, go through savings, but pretty soon, I’d end up in bankruptcy.”

…

“(Retirees) feel like something that they’ve earned and were promised is being taken away from when they’re not in a position in their lives to plan for it and fight back,” Plecha said. “They’re at a time in their lives when they’re most vulnerable.”

Detroit is the first and they have now set a precedent for other cities in similar situations. You can be assured that more will follow.
First it will be the cities. Then the states will go under. And finally, the Grand-Poobah – our own Federal government. Detroit’s debts are pocket change compared to the $200 trillion in future liabilities owed by the United States of America.
If you are depending on a government retirement package to be there for you for the rest of your life, you’d better think again. Over twenty thousand Detroit retirees thought the same thing – and as of today they have been wiped out.
When this crisis hits the Federal Government – and it will – you’d better be ready for them to take drastic measures. This means they’ll be forced to not only cut retirement benefits promised to federal employees, but will make the case that if they have to give up their retirement funds, you’ll have to give up your 401k, IRA or personal savings.
Sounds impossible, right? Congressional members have already gotten the ball rolling on a nationalization of America’s retirement funds, and when they are ready to do it they’ll pass the legislation just like they did when they seized 1/6th of our economy by nationalizing health care.
They are coming for the money – YOUR money – because they will be left with no other choice.
If you’re not planning on a secondary income stream or preserving wealth in the form of gold and silver, productive land, or other tangible assets, you’ll end up just like the retirees from Detroit. Having additional resources, like a well stocked long-term pantry and a preparedness plan for financial disaster, can mean the difference between living in poverty or thriving when best laid plans fall apart.
Plan for the worst, because that’s what’s coming.

Time to Move to Iceland? …Iceland Defies IMF/Western Banksters AGAIN — The Last Honorable Government?

Fr. Coughlin Exposes the Federal Reserve, it "thrives on misery!: 1940

Russian Legislator: U.S. Dollar will Collapse in ’2017′

In what can only be taken as a probability, a russian legislator claims the U.S. dollar will collapse in 2017 and wants to outlaw the currency in Russia.

MOSCOW (INTELLIHUB) — Russian legislator Mikhail Degtyarev, 32, rightfully claims that he U.S. dollar is nothing more than a Ponzi scheme, claiming the dollar will blowout fully in 2017.
“If US national debt continues to grow at its current rate, the dollar system will collapse in 2017,” the submitted draft legislation says. 
“In light of this, the fact that confidence in the US dollar is growing among Russian citizens is extremely dangerous,”  Degtyarev wrote in his explanatory note attached to the bill. 

The bill would impose a ban on dollars within a year of its passage, and any private citizen holding accounts in dollars would either need to spend the money or convert it to another currency. There is no proposed ban on the euro, British pound, yen, or yuan.
If one doesn’t exchange or transfer dollars within a year, the dollars will be seized by officials, and reimbursed in rubles within 30 calendar days.”, reported RT.
Tabitha Wallace and Tyrel Ventura reported on Buzzsaw, that while this may be a Russian “power grab” or an “overreach” on the Russians part, our economy in America is not doing well. Ventura reiterated that “we are in deep shit”.

Default: Puerto Rico’s Inevitable Option

Source: Forbes

This article was written in conjunction with Justin Vélez-Hagan is executive director of The National Puerto Rican Chamber of Commerce. (See more bio. below) Washington politicos aren’t the only ones instigating a perpetual debt crisis.  Puerto Rico too is experiencing a political stalemate-induced fight for their financial lives that affects not only its 3.7 million residents, but millions of others who have purchased bonds to help finance its government, causing us to wonder if the next logical step is a debt default.
Some Painful Facts
With triple tax exemption (federal, state, and local), combined with higher-than-average yields, Puerto Rican bonds became so popular in recent years that it was able to rack up $70 billion of debt now held by institutional investors and mutual funds alike.  The debt-to-GDP ratio is now nearly 70% and growing, not including pension obligations, which raises the ratio to over 90%. With a per capita debt load of $19,000 and growing, Puerto Ricans shoulder almost 4 times the burden of U.S. leader Massachusetts which carries a deficit of $5,077 per citizen. Even the fiscally retarded number three ranked Illinois shows only a per capita load of $2,539. For another vista California, with $97.6 billion in absolute debt has a population about ten times that of Puerto Rico but only carries 1.4 times the debt. A seemingly perpetual recession has enshrouded this island paradise for the last eight years which has seen its economy contract by over 16%. If you don’t get it yet, Puerto Rico has entered a debt vortex that is inexorably sucking the life from its economy and its continuously shrinking populace.
The 2013 deficit was around $2.2 billion. A $9.8 billion budget was approved for fiscal year 2014, with a still significant deficit of nearly $300 million. Some investors expect the shortfall to be as much as $800 million. Puerto Rico will have no choice but to answer in typical American fashion:  finance debt with more debt. But will investors answer the call to, in my opinion, throw good money after bad?
Many experts say Puerto Rico is entering the eighth year of a recession, with at least one who considers it to be in the midst of an all-out depression.  Gustavo Vélez, former economic adviser to the Governor, is one such analyst, acknowledging that the economy has been kept afloat by increasing taxes, with little or no effort to fix underlying structural problems.
Some reforms have been enacted with the recent passage of a pension reform bill and the relatively bold 2014 budget. (Pensions are only 7 percent funded). The fix will again fall short, with substantial tax increases (another $1 billion) and a dash of restructuring (a mere $575 million of restructured bond debt, equal to less than 1% of total debt, and a reduction of $600 million in pension contributions) that offers little incentive for economic growth.
A government shutdown (sound familiar?) brought Puerto Rico to the brink of default in 2006, so the government passed its first sales tax.  In 2009, under a new administration, payroll tax reduction and regulatory reform hoped to incent new growth.  The Governor even reduced the overall corporate tax rate and fired tens of thousands of government employees, ideas mocked by Democrats in Washington.  All of which contributed to debt reduction and a light, albeit a dim one, at the end of the tunnel.
Nonetheless, new taxes couldn’t be avoided.  When little growth ensued, bondholders and rating agencies again applied the pressure to increase revenues, leading to a new tax on foreign corporations, the one stable group of taxpayers Puerto Rico can’t afford to scare away.  Puerto Rico has long been a hub for American and international pharmaceutical manufacturing, but fears of another round of tax increases combined with looming patent expirations are forcing one of the island’s most reliable sectors to reconsider its presence in the Caribbean. A 2006 repeal of IRS rule 936 which exempted Puerto Rican subsidiaries from Federal income tax was the first wheel to fall off. In 2011 a 4% excise tax on corporations hastened the exodus. Teva, (TEVA) Merck (MRK), Bristol Myers Squibb (BMY), and Actavis (ACT) are all giant pharmaceuticals that have either closed and/or announced they will be leaving the island altogether. Manufacturing jobs have contracted over 30 percent since 2006.
Gustavo Vélez thinks Puerto Rico will continue to meet its sales tax, general obligation, and other bonds in the short-term.  But in the long-term his opinion shifts.  In order to avoid a forced default, politicians are going to have to risk their jobs by making decisions that voters aren’t going to like.  A creative and substantial economic plan that combines tax incentives to attract investment and regulatory reform to streamline it will be necessary to counter a welfare state so dependent on transfer payments from the U.S. that only 40% of eligible workers are even trying to work. On top of this there is only 41 percent labor force participation rate. (The U.S. is 63 percent down from more normal levels of 66 to 67 percent.) Food Stamps, or NAP or Nutritional Assistance Program as they are euphemistically referred to in Puerto Rico, were over $2 billion for 2012 and as many as one third of the island’s population availed themselves to this accoutrement. Over all, including Section 8 Housing, Head Start, Social Security, disability, VA benefits, Medicare, Medicaid, and others, the mainland in 2012 contributed $21.8 billion or over 21% of Puerto Rico’s slightly greater than $100 billion economy.
With $70 billion in debt outstanding – let’s estimate an average 3 percent coupon – then $2.1 billion or over 20 percent of the budget would go to service debt. As Puerto Rican bonds have fallen so much in price they now yield above 9 percent in many cases, so refinancing maturing debt at these levels would be crippling. If Puerto Rico was forced to issue new debt at 9 percent, it wouldn’t be too long before debt service would start to eat up 30, 40, or even 50 percent of its budget…….not too unlike the scenario in mainland America should rates spike by several hundred basis points.
Other Factors
At over 29 cent per kilowatt hour Puerto Rico has double the average electricity costs of the rest of the US. Powerful unions make meaningful pension reform difficult.  The last reform was fought all the way to territory’s Supreme Court, makings this option politically dangerous if not unfeasible.  Privatization of state-owned firms, like the Puerto Rico Electric Power Authority (PREPA), would offer some relief with better management and a reduction in the high energy prices. Politicians don’t seem interested in tackling these issues head on. Perhaps they realize the inevitable and believe that devaluing bonds will make it easier to significantly restructure them.  Or maybe they are just apathetic financial managers more interested in saving their political careers than making structural changes.
Bankruptcy, Default, and Investors and Moral Hazard
This past July Detroit filed the largest Chapter 9 municipal bankruptcy in U.S. history. As the judge sorts out fire and police pensioners’ claims versus creditors’, some eyes are shifting south and wondering whether this may be a template for what happens in Puerto Rico. It is clear that the current business model is unsustainable and default or restructure is not if, but when. Restructure to avoid bankruptcy would imply an agreement by bondholders to take a principal haircut usually with some demonstration of fiscal reform or an increase in collateral. A voluntary restructuring like this is unlikely given the vast numbers of bondholders and their disparate opinions to achieve their goal of getting paid back.
Since there doesn’t seem to be the political will to reform the economy, in my opinion, some sort of bankruptcy scenario is inevitable. And the sooner the Band-Aid is ripped off the better. The big pushback will be from all the literally hundreds of mutual funds that hold Puerto Rican bonds. Oppenheimer funds hold almost $5 billion of “paper” or 14 percent of total holdings. Franklin Templeton group of funds owns over $4.8 billion, which represents 6.5 percent of overall positions.
These and other firms may push for some sort of bailout or invent some new reprieve for beleaguered Puerto Rico. The Obama Administration too will be tempted to woo the nearly four million potential Democrat voters into their good graces with another option:  the cushy bailout.  Politically, there’s about as much chance of this happening as there is Boehner and Obama enjoying cocktails together on weekends.  Bailouts, however, aren’t always comprised of direct cash injections and the Obama Administration has proven its adroitness in finding behind-the-scenes alternatives.
It would be interesting to know if Dodd-Frank has any language prohibiting financial assistance for municipalities. These mutual funds must simply be responsible, take their lumps, and do better homework next time. In fairness though, any municipal fund that indexes in any way, by definition, would be required to hold Puerto Rican bonds in their portfolios.
Puerto Rico has to restructure.  They can’t keep borrowing at 8 and 9%, raising taxes on the only ones paying any, and chasing away its brightest contributors to the relative economic paradise of the mainland.  Bondholders have already taken a big hit and are going to take a long, slow and inevitable bigger one if they don’t restructure now.
Even if there is a bankruptcy, and even if bondholders get 30 or 40 or 60 cents on the dollar and even if pension obligations are reduced 30 or 40 percent, Puerto Rico must undergo an economic structural reform and create a competitive economy that incentivizes new business and creates an atmosphere that that makes it more profitable to work than to be on the dole. With 13.9 percent current unemployment and 25 percent of the workforce employed by the government the kind of change needed requires a change in ethos……a change in attitudes by the populace from being dependent on the government to being much more independent and self-reliant. Effectively a suzerainty of America, Puerto Rico is encumbered with the welfare state mentality that discourages work, much less innovation. Subsistence on the largesse of America is now endemic to the psyche of the populace…..and once established, it is a cycle nearly impossible to break.
Some giant bond funds, think PIMCO and Blackrock (BLK), predict tumult for the markets if Puerto Rico defaults or if Fitch downgrades bonds to junk status. Puerto Rico is less than 2 percent of the total municipal market. There might be some bumps but this is not a falling rock that will start a landslide. The truth is, Puerto Rican debt is junk and should have been rated as such long ago. In my opinion, it is but one more example of disingenuous behavior on the part of our rating agencies. Think Washington knows a thing or two about kicking the can down the road?  Puerto Rico could teach a class.

Justin Vélez-Hagan is executive director of The National Puerto Rican Chamber of Commerce, economic policy researcher at the University of Maryland-Baltimore County, and author of the upcoming book, Nousonomics: The Common Sense behind Basic Economics.

Incredible Minutes from a 1974 Henry Kissinger Staff Meeting on Gold

The following excerpts are from a transcript of a 1974 meeting held by the then Secretary of State Henry Kissinger and his staff. This particular meeting was held on April 25, and focused on an European Commission Proposal to revalue their gold assets. What follows is an incredible insight into the minds of powerful American leaders scheming to maintain power and show other nations their place. What is most significant is how clearly they understood that demonetizing gold was a critical strategy to maintaining a dominant power position in the world.

So to those who continue to say that “gold doesn’t matter” because it hasn’t been used as an official asset in the monetary system for decades, I say give me a break. In fact, the reality of gold having been largely demonetized makes it an even greater threat going forward if the U.S. does not have all the gold it claims to, and other nations have more than they admit to.
Thanks to In Gold We Trust for bringing this to my attention. Choice excerpts are provided below, and breaks in the conversation are denoted with an “…” Enjoy.
Secondly, Mr. Secretary, it does present an opportunity though—and we should try to negotiate for this—to move towards a demonetization of gold, to begin to get gold moving out of the system.
Secretary Kissinger: But how do you do that?
Mr. Enders: Well, there are several ways. One way is we could say to them that they would accept this kind of arrangement, provided that the gold were channelled out through an international agency—either in the IMF or a special pool—and sold into the market, so there would be gradual increases.
Secretary Kissinger: But the French would never go for this.
Mr. Enders: We can have a counter-proposal. There’s a further proposal—and that is that the IMF begin selling its gold—which is now 7 billion—to the world market, and we should try to negotiate that. That would begin the demonetization of gold.
Secretary Kissinger:  Why are we so eager to get gold out of the system?
Mr. Enders: We were eager to get it out of the system—get started—because it’s a typical balancing of either forward or back. If this proposal goes back, it will go back into the centerpiece system.
Secretary Kissinger: But why is it against our interests? I understand the argument that it’s against our interest that the Europeans take a unilateral decision contrary to our policy. Why is it against our interest to have gold in the system?
MORE @ http://libertyblitzkrieg.com/2013/11/30/incredible-minutes-from-a-1974-henry-kissinger-staff-meeting-on-gold/

Banksters Plot Publicly To Keep Your Deposits In Their Pockets

Leaders of the global banking cartel have publicly stated that they are planning to impose charges on depositors should the U.S. Federal Reserve cut the interests rate it pays banksters for deposits it holds from individuals and companies. Meanwhile, Federal Reserve Board Governor, Daniel Tarullo, proposed this week measures to avoid what he called “massive runs on the banks”.
As it is well known, the United States Federal Reserve, the head of the international banking cartel, pays banks interests on the amount of money they hold from depositors. Some Fed representatives have circulated the possibility of cutting the payment of those interests, which prompted the banks to propose measures to sequester the money that belongs to individuals and companies alike. A possible solution to the potential cut in interests, according to bank heads, would be to charge depositors a fee for maintaining their accounts open should the Fed decide to reduce the payments.
Earlier this year, rumors told of the possibility that the Fed stopped, partially or completely, pumping fake money into the markets at the rate of $85 billion a month, which is the only articificial lifeline that the central bank has in hand to keep a moribund economy afloat.
As a result of the inflation of fake currency, the stock market has seen record highs, even though employment and industrial production continue to show that the American economy, and the world economy as a whole are in deep trouble. Last October, the Federal Reserve, which is a private banking entity, entertaned the idea to taper the pumping of free money early in 2014, which sent a loud rumble of fear all throughout the global financial markets.
continue article http://www.thesleuthjournal.com/banksters-plot-publicly-keep-deposi...
If you recall last year, there were thousands of dead people that voted in the primary and general elections.  Despite efforts of Republicans to clean up voter registration rolls to eliminate dead people, non-citizens and convicted felons, US Attorney General Eric Holder used his Justice Department to block all cleanup efforts.  After all, the Democrats needed all of the dead people’s votes along with the votes of convicted felons and non-citizens in order for Obama to win re-election.
Now we are seeing the opposite problem with the Obamacare exchange program.  Living Americans are being denied healthcare because the government has declared them dead, even though they are alive and well.  It seems that every month the federal government declares at least 750 people to be dead when they are very much alive.  With the new government databases for healthcare, being declared dead has a drastic negative impact on a person’s ability to seek medical treatment and it’s even affecting their doctors.
Here is how the problem works.  The Social Security Administration maintains a Death Master File which is then shared by a number of other government agencies including Medicare and the IRS.  When the SSA receives a notice that someone has died, they automatically enter the information into their master file without any verification of the information.  Once a death has been wrongfully entered into the system, it is very difficult to get it corrected because it has already been disseminated to other agencies.  Dr. Lawrence Huntoon, a neurologist from Derby, New York explained:
 Read more at http://godfatherpolitics.com/13403/dead-people-vote-live-people-den...

Carrier sells for a penny

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The U.S. Navy announced Tuesday that the former aircraft carrier USS Forrestal had been sold for scrap for one penny. The ship will be towed from its berth in Philadelphia to Brownsville, Texas, for dismantling. The Forrestal, named after former Secretary of Defense James Forrestal, was decommissioned in 1993. Here, it is is guided into Coddington Cove in Middletown, Rhode Island, in September 1998.

Flagship back-to-work scheme for troubled families gets just 720 people off the dole

• David Cameron ordered £450million crackdown in the wake of 2011 riots
• Teams of experts get children back to school and adults into work
• National Audit Office warns work project is under-performing

By Matt Chorley, Mailonline Political Editor

A flagship government scheme to tackle Britain’s troubled families has helped just 720 people back to work.
The Whitehall spending watchdog warned the scheme, which set an overall target of getting 20,000 into jobs, was ‘under-performing’ and urged ministers to intervene more quickly when things go wrong.
The project is supposed to turn around so-called ‘Shameless’ families, with children back in school, crime cut and thousands of parents back in work.

The Department for Work and Pensions project managed to get only 720 into a job, against a target of almost 20,000

Ministers said they wanted to end the ‘it’s not my fault’ culture which allowed up to 120,000 problem families to avoid taking responsibility for their own lives.
The Department for Communities and Local Government’s ‘troubled families’ programme has a budget of £448 million.

The Department for Work and pensions (DWP) aimed to get 22 per cent of people on the programme into work employment over three years to March 2015, with a budget of £200 million.
But the National Audit Office (NAO) said the DWP programme had achieved only resulted in 720 people finding work, just 4 per cent of its target.
None of the firms it was using to provide services had met the department's target.
The NAO said that while there was evidence that families were beginning to benefit from the programmes, there was a risk that expectations will not be achieved.
Amyas Morse, head of the NAO, said: ‘These innovative and ambitious programmes are beginning to provide some benefits but elements of both are underperforming.

Community Secretary Eric Pickles said the 'no nonsense' approach of the scheme was working

‘This is the result of poor co-ordination between the departments when designing and implementing their programmes and of the risks taken in launching the programmes quickly.’
She claimed there was a lack of understanding about how councils and companies would use the payment by results scheme.
‘To achieve their objectives, the departments need to continue to liaise with one another and monitor the success rate of both programmes, adjusting them when necessary.
‘They must continue to work with local authorities and contractors to understand why performance is so varied, intervene if it does not improve, and quickly build an evidence base to show which interventions work best.’
Local authorities in England have turned around 22,000 families, exceeding a 3 per cent target, but they have attached only 62,000 families to the programme, 13 per cent below an NAO estimate.
The Government has estimated that the cost to the taxpayer of troubled families was around £9 billion annually for the spending review period of 2010-2015, before the programme was introduced.
Of the total, the Government estimated that £1 billion was spent tackling issues including mental health and drug and substance misuse, and £8 billion was spent reacting on areas including social care and the costs of crime, such as court costs.
Mark Serwotka, general secretary of the Public and Commercial Services union, said: ‘It's difficult to see the DWP programme as anything other than a catastrophe for the vulnerable families who deserve our help but are being let down.
‘First with the work programme and now this, private companies are proving themselves incapable of providing the kind of complex, dedicated support necessary, despite the hundreds of millions of pounds of public money being funnelled their way.’
Mr Serwotka said the poor results also showed that giving work to private firms was ‘fantastically misguided.’

David Cameron launched the troubled families programme in the wake of the 2011 riots in London and other English cities

A DWP spokesman said the numbers reported by the NAO only told part of the story, adding: ‘Jobcentre Plus is doing far more for members of troubled families, including loaning 150 jobcentre advisers to local authorities to help them support people into work.
‘Data published last week showed that since the troubled families programme started in April 2012, 2,400 members of troubled families started a job. This data only covered fewer than half the number of people from troubled families local authorities are currently working with, so we expect the real number helped into work to be much greater.’

Biggest drop in savings for 40 years, Bank of England figures reveal

Bank figures show £23 billion taken out of long-term savings in past 12 months, equivalent to £900 for every UK household

Bank of England figures show that savers have been withdrawing money from their accounts at the fastest rate for nearly 40 years Photo: ALAMY

 

Savers have been withdrawing money from their accounts at the fastest rate for nearly 40 years, Bank of England figures show.

They took £23 billion out of long-term savings in the past 12 months, equivalent to £900 for every household in the country.

They either spent the cash – which in many cases was earning little more than 1 per cent interest – or moved it to easy-access current accounts. The Bank’s figures suggest that record low interest rates have convinced many to give up on the prospect of meaningful returns on their nest eggs.

However, the withdrawals may also have helped to power Britain’s economic recovery, with much of the cash being spent on consumer goods.

The figures represent a reversal of a trend to hold on to money which began in 2007, at the start of the credit crisis. In the year to Oct 2012, £24.8  billion was added to savings accounts overall. But long-term savings fell by almost the same amount, a 4.7 per cent decline, in the year to October 2013.

It marks the biggest fall since the 1970s, analysis by Sky News found.
Meanwhile, cash in consumers’ pockets or instant access accounts went up by 11.2 per cent.
Experts said on Monday night that the figures would raise fresh fears about the sustainability of the recovery. They urged the Chancellor to use his Autumn Statement on Thursday to encourage saving for the future.
Sources have speculated that instead of providing individuals with incentives to put more aside, George Osborne may cap the maximum they can store in tax-free ISAs.
Ros Altmann, a former Downing Street policy adviser, told The Telegraph: “The figures are desperately worrying. People are stopping saving for the long term because all the policies of the last few years mean you would be a mug to save.
“The problem is no economy can thrive in the long run without people saving. You can’t run it on borrowing and debt, you need to save and invest for the future. If you just withdraw money and spend you are talking about a recipe for long-term economic decline.”
Tom McPhail of Hargreaves Lansdown, a fund manager, said: “The problem the Treasury have is that they want us to spend, and at the same time taxing accumulated savings must look quite attractive given the state of the public finances. That’s why they have continually nibbled away at pensions. I just hope that they leave pensions alone in the Autumn Statement. We need stability.”
Consumers increased their saving sharply during much of the credit crisis. In the year to October 2009, the amount put into long-term savings rose by £13.9 billion, the Bank said.
The following year, deposits rose by £14.6 billion. But interest rates on savings accounts have tumbled below 2 per cent, the lowest level since comparable records began in 1999, following the launch of the Bank of England’s Funding for Lending scheme last year.
It is designed to provide cheap funding for high street banks in the hope that they in turn lend the money out to business. Campaigners claim the knock-on effect is that banks no longer need to offer attractive interest rates to raise funds from savers.
In September, the state-backed National Savings & Investments (NS&I) cut its interest rates for hundreds of thousands of savers and reduced the prize money on offer to 22 million Premium Bond holders to reflect falls across the rest of the market.
Separately, economists claim the unprecedented squeeze on incomes from high inflation and low wages means more people are forced to tap into long-term savings to pay their bills.
Simon Ward, an economist at City stockbroker Henderson Global Investors, said: “Consumer strength usually reflects increased borrowing but this hasn’t been the key factor recently.
“Instead households have been running down their savings account balances, probably in reaction to the pathetic interest rates now on offer.
“Increased spending is lifting growth and incomes, and money is flowing back to other households in a virtuous circle.”

 

Russia To Outlaw US Dollar, Predicting Collapse (Video)

Russian lawmakers are debating a bill that would ban the US dollar in Russia as a means of avoiding the negative effects of the dollar collapsing–which they speculate should happen by 2017–and would reinstitute the ban that was in place during the socialist administration of old. We look at how the dollar is getting called out as a “ponzi scheme,” and what this means for our currency and foreign relations in this Buzzsaw news clip with Tyrel Ventura and Tabetha Wallace.

Watch the full episode here:
https://www.youtube.com/watch?v=2TBmA…

Read more at http://investmentwatchblog.com/russia-to-outlaw-us-dollar-predicting-collapse-video/#tRt8mfRRrkjgukj0.99

QE Deflationary? Gold Drops Below Cash Cost, Approaches Marginal Production Costs.

QE Deflationary? No Kidding!
There was a very “wonkish” article by Stephen Williamson over the weekend discussing the impact of quantitative easing on inflationary expectations.  The article is filled with economic equations discussing interest rates and inflationary expectations but the real crux of the article was:

“In general, if we think that inflation is being driven by the liquidity premium on government debt at the zero lower bound, then if the Fed keeps the interest rate on reserves where it is for an extended period of time, we should expect less inflation rather than more.
But that’s not the way the Fed is thinking about the problem. What I hear coming out of the mouths of some Fed officials is that: (i) Things are bad in the labor market, and the Fed can do something about that; (ii) inflation is low. Thus, according to various Fed officials, the Fed can kill two birds with one stone, so it should: (a) keep doing QE; (ii) make it clear that it wants to keep the interest rate on reserves at 0.25% for a very long period of time.
What I hope the discussion above makes clear is that this is a trap for the Fed. There is not much that the Fed can do on its own about the short supply of liquid assets. They can get some action from QE, but the matter is mostly out of their hands, and more QE actually pushes the Fed further from its inflation goal. If the Fed actually wants more inflation, the nominal interest rate on reserves will have to go up. Of course, that will lead to some short-term negative effects because of money nonneutralities.”

This is not “new news” for anyone that has either a) been paying attention or; b) reading my posts (see here, here and here) on the deflationary impact of the Fed’s “QE” programs.  If we set the “math” aside for a moment, and focus on a consumption based economy, it becomes clear that stimulating asset markets will have little effect on economic or labor growth which is ultimately driven by end demand.
http://www.stawealth.com/daily-x-change/1893-qe-deflationary-no-kidding.html
Gold Drops Below Cash Cost, Approaches Marginal Production Costs
As we showed back in April, the marginal cost of production of gold (90% percentile) in 2013 was estimated at between $1250 and $1300 including capex. Which means that as of a few days ago, gold is now trading well below not only the cash cost, but is rapidly approaching the marginal cash cost of $1125… Of course, should the central banks of the world succeed in driving the price of gold to or below its costs of production (repressing yet another asset class into stocks) then we fear therepercussions will backfire from a combination of bankruptcies, unemployment, and as we have already seen in Africa – severe social unrest (especially notable as China piles FDI into that region).


http://www.zerohedge.com/news/2013-12-02/gold-tumbles-towards-marginal-production-costs
Debt Deflation in Spain: Record 4.7% Decline in Household Credit, Business Lending Down 10%
Read more at http://globaleconomicanalysis.blogspot.com/2013/12/debt-deflation-in-spain-record-47.html#jpBoYakydmlTUtK9.99
Ron Paul Rages “‘Easy’ Money Causes Hard Times”
http://www.zerohedge.com/news/2013-12-02/ron-paul-rages-easy-money-causes-hard-times

The Wisdom of Looking Like an Idiot Today

Now is the time to act with the courage of our convictions

by Adam Taggart

 

If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
~ Opening stanza to Rudyard Kipling's "If"

So, let's say you're a prudent person who has concerns that our economy isn't 'recovering' as robustly as you'd like.
Perhaps you still remember the speed and depth of the 2008 credit crisis' arrival, and its toxic impact on asset prices, jobs, and overall trust in the financial system. Maybe you took notes during the preceding tech and housing bubbles and their aftermath. If so, you likely swore that "Never again!" would you put your wealth at risk during such obvious times of public mania.
Chances are, you've probably logged a lot of online hours over the past several years trying to read the economic tea leaves more closely. Are things becoming more stable, or less? What are "safer" measures for protecting and building wealth than simply putting all your chips into the paper markets (stocks & bonds) and real estate?
As a result, you've probably had a smaller percentage of your wealth in the stock/bond markets over the past few years than your peers. You probably also own some gold and silver, likely having bought much of it between 2009-2011 with the stock market collapse still fresh in your memory. Chances are also good that you've made a series of "preparedness" investments (stored food, etc.) as an insurance policy in case really tough times were to break out. Most of your family and friends didn't take these steps, nor are they particularly interested in talking about your reasons for taking them.
So, if this sounds at all like you, five years after the 2008 crisis, how is the "prudent" strategy looking today?

Looking Like an Idiot

As one who took similar steps, I'll confirm that it looks pretty lousy to the casual observer.

Stocks & Bonds

There has been an absolute party in the stock market over the past two years. The S&P is up nearly 40% (!) since early 2012 and has almost tripled since its 2009 lows. It's been nearly impossible not to make money in the stock market recently (unless you've owned mining shares).
Bonds have remained at historically elevated prices. And although 2013 has seen prices come off slightly from their highs, prices are still substantially above pre-crisis levels.
The pumped-up performance of paper assets here is, of course, due to the staggering amounts of new money that the Fed has been creating since 2008. Starting with a balance sheet of $880 billion pre-crisis, the Fed has since expanded it by an additional $3 trillion, in less than 5 years. And it's continuing to expand to the tune of $85 billion (some calculate $100 billion) per month.
Most of that money sits in excess reserves enriching the banks at zero risk, at high hidden cost to the public (a rant for another day). But enough of it is sloshing over into the markets where it does exactly what excess liquidity always does: rise all boats.
So, if you decided to stay out of the markets, you've watched the party boat pass you by. They say don't fight the Fed, and so far, the Fed is indeed winning. In reality, it will likely prove to be the Charlie Sheen version of "winning", but to the casual observer whose 401k is up 20% this year, the Fed definitely appears to be playing the better hand.

Real Estate

How soon we forget. Home prices have resumed climbing at historically aberrant rates. Case-Shiller just reported that year-over-year, its national home price index grew by 11.2%.
A number of markets have re-entered bubble territory. San Francisco, where prices are now higher than at their 2007 peak, saw a 26% year-over-year increase in average prices. Las Vegas, the poster child for housing price excesses six years ago, saw a 29% average price increase from 2012 to 2013.
The tell-tale sign of an overheated housing market – house flipping – is back.
If you've been holding off on purchasing real estate (as I have) – expecting that a stumble back into recession, or higher interest rates, could bring prices down to saner baselines – again, you're watching prices get away from you.

Precious Metals

Ugh. There's no denying that it has been a very rough two years for gold and silver holders. As I'm writing this, gold and silver are dropping to near 4-year lows.
For those burned by the last crisis who purchased precious metals near their zenith in 2011, hoping to protect the purchasing power of their capital, the nauseating declines since early 2012 (especially in silver) have done anything but.
Those who bought PMs pre-2008 enjoyed a long stretch of validation while prices appreciated year after year. With a material percentage of that appreciation now gone, and month after month of relentless losses punctuated by vicious price smashes, it's harder to feel as smart as it once was.
But it's maddening. With the $3 trillion in new currency recently created by the Federal Reserve, shouldn't precious metals be appreciating? Wildly? Isn't that their central promise: to hold value as the purchasing power of paper money inflates away? But instead, they're decreasing in dollar price, even as the money supply continues to expand. How is that possible?
And Bitcoin! From almost out of nowhere, a new alternative currency skyrockets from nearly valueless to (briefly?) match the price of gold. It's like adding insult to injury for the 99.9% of precious metals holders who don't also hold Bitcoin. How can the world suddenly wake up to the advantages offered by non-fiat currency, and yet still treat the granddaddy of sound money like kryptonite?

Sentiment

In 2009 and 2010, those of us who had warned our friends of the lurking risks in our economic and financial system suddenly looked like geniuses, instead of the kooks that folks had dismissed us as. Now, we're back to being kooks.
A chart Chris has been sharing recently with our enrolled members shows that at no time in the past 30 years has sentiment been this bullish, not even during the Internet stock mania of the late 1990s:

Faith in the current system is as high as it has ever been, and folks don't want to hear otherwise.
This extreme optimism extends beyond the Economy. In the Energy sphere, in news headlines discussion of the "shale miracle" is still omnipresent – without, of course, any mention of net energy, extraction costs, or depletion rates. In the Environment, coverage of the real-time collapse of key fisheries or water shortages likely to impact food production rarely gets any mainstream notice.
In short: If you're one of those people who thinks it prudent to have intelligent discussion on some of these risks – that maybe the future will turn out to be less than 100% awesome in every dimension – you're probably finding yourself standing alone at cocktail parties these days.

The Madness of Crowds

Charles MacKay's excellent classic reference book, Extraordinary Popular Delusions and the Madness of Crowds, explains the nefarious nature of public manias: They strive to suck in as many participants as possible before collapsing.
We are seeing classic signs of the abandonment of concern by the public in favor of not missing out on 'easy gains'. In addition to the examples mentioned above, signals that the fear trade has given way to the greed trade are abundant these days:

• Stock chasing - Here's a quote the WSJ recorded from an actual retail investor buying shares on the first day of the recent twitter IPO:  I messed up not buying any Facebook so I want to get some Twitter. I'm just buying because everyone's talking about Twitter. Not because of its product (which she admitted she didn't use). Or its business model (which has never been profitable and unclear whether it ever will be). The purchase decision was based purely on hype.

• Priority abandonment - At Peak Prosperity, we speak with professional financial advisers frequently. The advisers we know best focus on risk mitigation and remain skeptical of the sustainability of the prolonged market rally. Many of their accounts signed on after 2008, clearly declaring that they prioritized protection of their capital over everything else. Yet a growing number of these investors are watching the continued rise in financial asset prices and are now pushing for more aggressive management. They're abandoning the prudence that was so important to them just a few years ago.

• Bear capitulation - The path to a bull market peak is littered with the carcasses of bearish analysts that dared to challenge its rise. As the % bearish Investors Intelligence chart above shows, there are few bears left to be found anymore. Just last week saw a major defection from the bear camp, with the perennially critical Hugh Hendry throwing in the towel, exclaiming:

I can no longer say I am bearish. When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out.

I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends.

 

I may be providing a public utility here, as the last bear to capitulate. You are well within your rights to say ‘sell'. 

• Warning sign dismissal - It's not as if there aren't clear alarm bells being sounded by the very experts the public looks to for such warnings. It's just that these warnings are being ignored by the market. No one wants the party to end:

"All markets are bubbly"
~ Bill Gross, November 29, 2013

"In many countries the stock price levels are high, and in many real estate markets prices have risen sharply...that could end badly. I find the boom in the U.S. stock market most concerning,"
~ Robert Shiller, December 1, 2013

"Now, five years later, signs of frothiness, if not outright bubbles, are reappearing in [at least 17 global] housing markets"
"What we are witnessing in many countries looks like a slow-motion replay of the last housing-market train wreck. And, like last time, the bigger the bubbles become, the nastier the collision with reality will be."
~ Nouriel Roubini, November 29, 2013

When this latest global asset bubble bursts as Roubini reminds us, by definition, it must; the public will cry, "Why didn't anyone warn us?" The media will reflexively utter, "Nobody saw this coming," But the truth is, there is evidence galore for those who choose to look for it.

The Wisdom of Looking Like an Idiot Today

The other key characteristic about popular manias/bubbles is that they collapse suddenly. Much more swiftly than they took to build.
The resultant carnage catches the masses like deer in headlights. The Kubler-Ross stages of grief begin quickly, and since Denial is Stage 1, most folks delay taking action out of disbelief. Soon the Bargaining stage is reached, and they continue to delay reaction as prices continue falling – praying for the chance to get out if a reversal would just happen. It's not until Acceptance that most will take action, selling after the down draft has largely run its course.
Here are some useful stats to keep in mind that show how sudden and savage the 2008 market collapse was:

• Week of Oct 6, 2008 - The Dow Jones drops 18%; its worst week ever in terms of both absolute and percentage loss.
• March 6, 2009 - The nadir for the stock market. By this date, 5 months after the crisis began, the Dow was down 54% since October

The takeaway here is that the wealth destruction caught most investors flat-footed. Most were unprepared – both psychologically as well as with their portfolio positioning – to react.
Many investors thought themselves savvy and nimble enough to avoid the losses they ultimately suffered, telling themselves an ill-fated narrative similar to what Charles Prince told his shareholders:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”

~ Chuck Prince, Citigroup CEO, Jul 9 2007

Most readers remember how Citigroup's price dropped from over $500/share, when Prince made this comment, to $10/share in March 2009. Prince was booted from his CEO role in late 2007 due to emerging losses resulting from the bank's MBS and CDO positions, investment classes which proved to be at the heart of the 2008 crisis.
So, a smart question to ask at this time is: Is the moment in time we're in today closer to January 2006, when there were several years left of exuberance to ride? Or is it more like September 2008, poised at the precipice?
A smarter answer is: There's no way to know with acceptable certainty.
Like grains of sand piling up or snowflakes falling on a cornice, we can assess the growing level of risk, but we can't identify the grain of sand or snowflake that will cause the eventual cascade. We can't predict the collapse timing with confidence. We can – and will – continue to make our best-educated estimates, but the exact timing is unknowable.
So, given that fact, as John Hussman so pithily captures, bubble markets force us to make a choice:

The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak.

And so your choice is upon you. Look at the evidence around you – a movie nearly identical to one you saw in 2000 and again in 2008 – and either decide to party with the herd while the music plays (look smart today), or park yourself in safety now (look smart tomorrow).
Since the timing of the next correction is unknowable, the prudent choice is obvious. But it's not easy, for all of the reasons mentioned at the start of this article.
A helpful question to ask yourself is: If I could talk to my 2009 self, what would s/he advise me to do?
For most of us, our past self, recently reminded of the anguish of wealth destruction, would say, "Run to safety!" at the first whiff of anything bubblicious. Research has shown that when the chips are down, the benefits of loss aversion are always preferred to the joys of gain.
Don't put yourself in a position to relearn that lesson so soon after the last bubble. Exercise the wisdom to look like an idiot today.

The Need for Discipline is Greater Than Ever

Okay, so what should today's "idiot" focus on doing?

• Build cash - It's not sexy. And it's not fun to see the dollar price of nearly every asset known to man escalate while you hold cash. But bubbles are designed to take as much as possible from as many people as possible. During the popping of a bubble, the real wealth (underlying assets like companies, land, minerals, etc.) doesn't vaporize like the high prices do. Those assets are simply transferred at a lower (more attractive) price to those people who still have money. Be one of those people.

• Hold on to your precious metals - I know. It's painful right now. For most PM owners, just hold onto what you have right now. Those with stronger stomachs should be dollar-cost averaging. Remember, the fundamentals for owning gold and silver have not changed AT ALL over the past few years. Stay largely with physical bullion. Don't speculate with the mining stocks at this time unless you're a risk junkie (or masochist?) and then only with money you can afford to lose.

• Scout out locally-based hard-asset investments for the future - Once this bubble pops, higher interest rates and lower prices will result. Look around your local area for assets (businesses, housing, farmland, livestock, etc.) that you would consider holding at least a percentage ownership in. Calculate what price would make you an interested investor. While that price may be years away, when the impact of a market correction hits, you'll be poised to move ahead of the other savvy investors to secure the opportunities you want (and play a role in stabilizing the community in which you live).

• Design your trading plan for a market downdraft - What steps will you/your financial adviser take if the market starts cratering? If you don't currently have a plan in place, now is the time to design it. Will you employ stops? What "safe assets" will you move to? (Treasurys, cash, other currencies?) Will you strictly be a sidelines observer, or will you take any active short positions on the downside? Will there be opportunity to generate income using vehicles like covered calls? Whatever makes sense for you, devise your strategy in the calmness of today vs. on the fly while the markets are melting down around you and everyone is panicking. And if your financial adviser is unable to provide you with a comforting answer as to his/her strategy for captaining your money through another 2008-like (or worse) correction, we have a few recommended advisers you may want to consider talking with.

• Build your roof while the sun is shining - So many of the most valuable investments are not financial (emergency preparedness, energy efficiency, community, health – to name just a few). Use the gift of time we have now to invest in expanding your degree of resilience. If it's been a while, take a fresh skim though our What Should I Do? Guide to identify any areas where you aren't satisfactorily prepared. These are the investments that it's infinitely better to have in place "a year early vs. a day late."

• Increase emotional fortitude - Being "wrong" in the eyes of society is trying. And it's stressful for many, especially if your partner or others of those close to you don't share your views. Keep learning by reading this site and a wide range of others, including those with opposing commentary. Develop your opinions based on the data you determine is most accurate – your ability to stand resolute against popular sentiment will be grounded in your confidence in the "big picture." Seek support from the thousands of other Peak Prosperity readers who are wrestling with the same issue set you are, by participating in our Groups. We created them to help people support each other both virtually and "in person" within their local communities.

• Develop an income loss plan - If we're correct in our prediction of a major downdraft, a return to deep recession is likely, and with it, a return to higher unemployment. Loss of income is a stressful trauma, especially if it happens unexpectedly and is compounded by a hobbled job market. Take some time to assess your job's level of vulnerability to another recession. If it's higher than you'd like, ask yourself what you would do if a sudden layoff occurred. Start doing the work now to at least sketch out the path you would take if that happened. If possible, develop some relationships or related skills now that would give you an exceptional advantage, should you ever need to head down that route. The first third of our book, Finding Your Way to Your Authentic Career has a number of exercises that provide useful guidance for those looking to do this.

• Develop an income enhancement plan - The resilience that comes with multiple income streams really helps you sleep at night, as you're less vulnerable to having your entire life upended if a sudden pink slip appears. Also, having extra income to direct to other goals (retirement, education, homesteading, etc.) enables you to reach them faster. We're all busy, but thinking creatively for a moment: What could you start doing today to secure extra income streams in the future? This is a topic that Chris often helps folks think through in his consultations.

Essentially, the approach here is to dismiss what is not in our control and focus on what we can best do with what is.
Be practical. Be prudent. Be dull to those watching you from the dance floor.
John Hussman signed off his latest report with the advice: "Risk dominates. Hold tight."  I agree. Now is the time act with the courage of our convictions.
As Kipling put it, at the end of his poem:

If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: 'Hold on!'
If you can talk with crowds and keep your virtue,
Or walk with Kings - nor lose the common touch,
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds' worth of distance run,
Yours is the Earth and everything that's in it,
And - which is more - you'll be a Man, my son!

~ Adam Taggart