QUESTION:

Hi Martin–

Thank you for your daily blog. I read it first thing each morning.

Regarding the bank liquidity problems with the Eurozone banks: would it make sense to put assets in precious metals as a hedge against problems in the banking sector (i.e., getting capital out of the banks and into a safe harbor of sorts)? Do you see this liquidity problem impacting major brokerage houses in the U.S.?

Thank you

Jack

ANSWER: The only problem with precious metals is that governments are targeting the bullion industry, and by regulation they can also create a real nightmare from a liquidity perspective. They are targeting dealers and compelling them to report on their clients. There used to be a big international coin show in Paris. The government demanded the dealers report everyone who sold and bought at the show. They shut it down and moved. Back in 2015, France targeted gold coins, and they also targeted the ancient coin show in Paris. The French government forbid cash sales and they threatened dealers with fines and imprisonment for failure to report on buyers/sellers who were their clients. The major rare coin show in Paris left as dealers refused to comply with such reporting. The French were driving to Belgium to deal in gold and the French government was complaining about that.

While we could sell some coins from hoards to people who attended our conferences in the USA, we cannot bring such materials to Europe or even Canada. You will find that gold bullion will also get caught up in a liquidity crisis in Europe where you will be unable to sell it even if you have purchased it with cash after taxes. The hunt for taxation is really destroying the world economy. The best hedge is to have it outside of Europe. Even Singapore or Hong Kong is ok as long as you DO NOT have a bank with offices in Europe. They are fond of telling banks to turn over lists of clients who belong to their jurisdiction. Germany did that by paying bribes to Swiss bankers to expose lists of German citizens with accounts in Switzerland. Perhaps the best hedge is paper dollars that you hide someplace.

Gold will survive long-term. But don’t count on it being available during the period before the crash and burn.

QUESTION: I am a mega dollar bull – I totally get how it is the only game in town.  I’ve lived it too, having seen how the big banks work their balance sheets from the inside. However… occasionally people send me charts like the one below and get all excited.  They say we are de dollarizing etc.  My off the cuff remark is that the central bank reserves are a tiny part of daily FX transactions.

Just wondered if Martin might comment on the blog?

Cheers!

T

ANSWER: Hello. Hope the institutional desk is keeping you young these days. Your chart is interesting no doubt. The central banks have been trying covertly to defend against the dollar. Even China and Russia are desperately trying to price things outside the dollar but this is not helping either.

The U.S. dollar’s share of currency reserves as reported by the International Monetary Fund (IMF) fell to a near five-year low going into the end of 2018. The Chinese yuan’s share of allocated reserves shrank for the first time in the third-quarter 2018 since the IMF began reporting its share of central bank holdings in the fourth quarter of 2016. Insofar as the Japanese yen, Reserves reached a 16-year high in the third-quarter 2018 according to the IMF.

The Central banks have been trying to use reserves to help support their respective currencies and suppress the dollar’s rally without any real impact. This is very similar to the crisis of 1927. Back then, there was also a capital flight from Europe. There too, the European share markets all peaked well before the US market in 1929. The capital flight from Europe to the dollar was massive. This was one of the criticisms of the Fed level by Milton Friedman that they did not expand the money supply with all of the refugee gold hopping on every ship to the USA.

The three main central banks of Europe traveled to New York City for a secret meeting. You might call this the first G4 in history. They lobbied the US Fed to lower its interest rates, as they have been doing of late once again, in hopes of altering the capital flows and diverting the flow back to Europe.

The Fed indeed lowered the US interest rates in 1927. However, just as quantitative easing has failed, lowering the US interest rates resulted in the opposite expectation. Instead of the capital diverting back to Europe, it intensified into the US buying real estate creating the Florida land boom, and pushing the US share market to record highs in 1929.

As I have said many times, these people try to reduce everything to a single cause and effect. This is why Keynesian economics has completely failed. Even Paul Volcker back in 1978 in his Rediscovery of the Business Cycle pointed out that this new era of Keynesian economics had utterly failed. Nonetheless, the economic community keep trying to make it work. It is like sticking your finger in a power outlet figuring sometime you will not get shocked.

The Fed lowered the rates in 1927, then as the capital inflow really intensified, they nearly doubled the interest rates into 1929 also without succeeding in prevent the stock market rally. They will most likely make the same mistake once again following Keynesianism. Expect them to chase the stock market raising rates and ignoring the rest of the world