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Outsmarting The Monkey

user profile picture charleshughsmith Mar 11, 2016
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Executive Summary

  • Beware of increasing financial Repression
  • Watch where the global flows of capital are heading
  • Expect further strengthening of the US dollar
  • Realize that cash is not a bad position in an extremely volatile market. Same with precious metals.
  • Why the best opportunities for capital preservation will be local

If you have not yet read The Year of the Red Monkey: Volatility Reigns Supreme, available free to all readers, please click here to read it first.

In Part 1, we looked at the ways fiscal and monetary authorities have attempted to stave off business-cycle washouts, i.e. recessions, and how the fixes have created a global Great Stagnation that is characterized by uncertainty  and volatility.

Here in Part 2, we investigate whether the global economy slide into recession, or will new policies such as capital controls save the day? And more importantly, we look to the asset classes where investors can seek safety from the red monkey's antics.

Capital Controls

The latest fixes being rolled out by central banks and governments are capital controls—essentially, policies designed to force people to spend their saved-up capital in the home country or invest it in whatever the central bank/state deems supportive of the hoped-for exit from the Great Stagnation.

Negative interest rates are a form of capital control: by charging interest on cash held in banks, governments hope to force people to spend their cash rather than “hoard” it.

Since cash currency is a safe haven from this expropriation, governments are actively seeking to eliminate or limit cash.

When private banks are revealed as insolvent, governments can recapitalize the banks by expropriating depositors’ cash held in the bank—“bail-ins.”

Another expropriation idea making the rounds among “serious policymakers” is forcing everyone with retirement savings to put a percentage of this cash in government bonds—in effect, funding state deficit spending by force.

All of these controls are forms of financial repression—limiting the freedom of people and their capital in order to prop up the privileges of a tiny financial and political elite at the top of the status quo.

To the degree that capital controls inevitably spark blowback and unintended consequences, they add to volatility by increasing uncertainty and risk.

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Short term gains, short term thinking, is anybody worried tomorrow?  Paul Craig Roberts summarizes things very well. We are indeed turning in on ourselves as...
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