ECB’s QE programme launched this month is targeting wrong policy and likely to fuel an already massive bubble in stocks and bonds. It is also unlikely to help generate real economic growth, as it simply transfers more wealth to the financial markets.

Look at the facts: 

• The Eurozone is suffering from structural stagnation that is driven by the lack of investment, anaemic domestic demand and policies, including taxation and enterprise regulation, that reduce entrepreneurship and make jobs creation and productivity growth (especially Total Factor Productivity) excessively costly.
• Overall household and corporate indebtedness in the Euro area remain high despite several years of deleveraging.
• Bank lending markets fragmentation contrasted by booming equity and bond markets shows that the problem is not in the lack of liquidity, but in over-leveraging present in the economy.

Experience in other countries that recently deployed QE shows that current measures by the ECB are unlikely to provide sufficient stimulus to drive growth to the new (and higher) ‘normal’:

• Japan, the US, and the UK experiences with QE show that monetary policies are useful to the real economy only when they are combined with either expansionary fiscal policies or real investment increases or both.
• Even in such cases where QE has been successful, sustainability of QE-triggered growth has been weak in the presence of structural debt overhangs (Japan) and had to rely on structural drivers for growth present prior to the deployment of QE (the UK and the US).
• In the Euro area, the idea is to combine QE with austerity policies and in the presence of dysfunctional financial markets. Such a program could increase misallocation of resources via bidding up financial assets prices over and above their long term fundamentals-justified levels.
• Bank of England created £375bn over the course of its QE programme. By the Bank of England’s own estimates, QE in the UK pushed up share and bond prices by around 20%. But because around 40% of stock market wealth is held by the wealthiest 5% of households, QE has made that wealthiest 5% better off by around £128,000 per household.
• You might want to check this post on the potential effects of QE on the real economy:http://www.zerohedge.com/news/2015-03-28/finally-very-serious-people-get-it-qe-will-permanently-impair-living-standards-gener

In short: the QE, as currently being carried out by the ECB, benefits the less-productive holders of financial assets, not the poor, nor the entrepreneurs, nor the real enterprise.

There is an alternative policy, a policy of “Quantitative Easing for the People”, an idea of distributing QE money directly to the citizens of the Euro area.

This is a more efficient approach for stimulating the real economy precisely because it puts liquidity directly at the point where it is needed most and can be used most efficiently, absent intermediaries, to address real structural problems present in the economy.

The plan is identical to the ECB current plan in terms of funds allocated: €60 billion will be created each month for 19 months. The amount each national central bank will create can also depend on its share of capital in the ECB, just as the current ECB QE programme envisages.

Each Eurozone citizen can receive ca €175 on average each month for 19 months.

• The funds are taxable income, so there is a benefit to the Exchequers, allowing the governments to engage in expanded investment programmes or more efficiently close some of the budgetary gaps, while buying more time to implement structural reforms.
• The funds (net of tax) can be used by households to accelerate debt deleveraging and/or repair their pensions funds and/or fund consumption.
• As the result, “QE for the People” will stimulate domestic demand (consumption, investment and Government investment), while increasing the rate of debt deleveraging.
• In addition, “QE for the People” can help improve banks’ balancesheets by increasing loans recovery (as households repay loans). In contrast, ECB QE will not have such an effect as it will be taking off banks balancesheets zero risk-weighted Government bonds.  Thus, “QE for the People” can be seen as a more efficient mechanism for repairing financial system transmission mechanism than ECB own QE policy.
• The quantum of stimulus implied by the “QE for the People” proposal is significant. Take Ireland, for example. “QE for the People” means annual benefit of around EUR8 billion in direct stimulus (depending on how Ireland’s share is estimated). In 2014, Irish Final Domestic Demand grew by EUR6.15 billion. So the direct effect of this measure for just one year would be equivalent to more than full year worth of real economic growth.

19 economists from across Europe and outside signed last week’s FT letter proposing this plan (with some variations) to stimulate the real economy in the euro area. The original letter is available here:http://www.basicincome.org/news/2015/03/europe-quantitative-easing-for-people/.

Source : http://trueeconomics.blogspot.se/2015/03/31315-qe-for-people.html

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Predicting big market crashes is a difficult business, many would say impossible.

A pair of physicists – drawing inspiration from the market for bitcoin, no less –might be on to something.

They turned to the bitcoin market because it has a unique feature, perhaps related to the fact that it is still fairly young and exotic: Traders place their buyand sell orders early and leave them there for all to see.

Of course, the picture is constantly changing as price movements prompttraders to enter new orders.

Still, the orders visible at any moment already make it possible to predictcrashes.

In a recent paper, Donier and Bouchaud found that the market is prone to crash specifically when buy orders are scarce, and estimated how much a typical-sizesell order should move the price when matched with such buy orders.

Participants don’t place orders well in advance.

Bouchaud and some other physicists initially proposed the formula a couple of years ago, and some preliminary tests by economists on data from five historic market crashes – including the crash of 1929 and the Flash Crash of May 6,2010 – suggest that it has promise.

What’s not surprising is that the predictive ability comes from carefully teasing out information on emerging trading imbalances, especially the drying up of buyorders.

Now, you might assume that if the formula does turn out to work, markets willadapt and render it obsolete.

Market movements, in this sense, might not be as unpredictable as we’ve been led to think.

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A month or so ago, I was struck by Ray Dalio’s comments at Davos. He seemed fairly concerned and the major media outlets didn’t really pick it up.

“It’s the end of the supercycle. It’s the end of the great debt cycle.” -Ray Dalio

What does this mean? I think the simplest explanation is that over the past several decades we’ve gone from a nation of savers who paid cash for things including homes and cars to a nation of spenders who use debt like mortgages, car loans and credit cards to pay for things.

And it’s not just on the consumer level. It’s also happened at the corporate level.

“Corporate debt was $3.5 trillion– in 2007, arguably a period and– many would describe as bubbly. It’s 7 trillion now. So it’s gone from 3.5 trillion to 7 trillion. As you know, most of that mix has been in more highly leveraged stuff, Covenant-Lite loans– high yield, that’s where the majority of the rise has been. And if you look at corporations have been using it for, it’s all financial engineering.” -Stan Druckenmiller

Government debt has also grown to multiples of GDP around the world. But it can’t keep growing forever.

“In the past 20 to 30 years, credit has grown to such an extreme globally that debt levels and the ability to service that debt are at risk, relative to the private investment world. Why doesn’t the debt supercycle keep expanding? Because there are limits.” -Bill Gross

The debt boom over the past few decades has been a big economic stimulant. It reminds me of the steroids era in baseball. You take a great player, put him on the juice and he becomes a record-breaking home run machine.

Larry Busacca/GettyRay Dalio

But what happens when he comes off the juice? Have you seen a picture of Mark McGuire or Sammy Sosa lately? They are shadows of their former selves. Now that rates are zero and everyone has borrowed as much as they possibly can debt is no longer the super-stimulant it once was.

“The process of lowering interest rates causing higher levels of debt, debt service and spending, I think is coming to an end.” – Ray Dalio

The steroid era is over. So what are the implications for the economy and the markets?

“The implications are much lower growth, less inflation, lower interest rates, and less profit growth.” -Bill Gross

These are all symptoms that we’ve already witnessed since the financial crisis, right? Slower economic growth has been partially masked by rising asset prices and the wealth effect. Slower profit growth has been masked by the “financial engineering” Druck mentioned above. But that doesn’t change the fact that we are now facing a post-steroid era for the economy.

“We brought consumption forward and issued one giant credit card for the past 30 years. Now the bill is coming due. Investors need to get used to low returns, and low growth, inflation, and interest rates for a long time.” -Bill Gross

JanusBill Gross

What’s probably most troublesome about the whole situation is that now that rates are zero or negative, debt levels have reached their maximum capacity and asset prices are already inflated (and spreads flattened), central banks no longer have the ability to ameliorate an economic slowdown by easing monetary policy.

“Central banks have largely lost their power to ease… We now have a situation in which we have largely no spreads and so as a result the transmission mechanism of monetary policy will be less effective. This is a big thing… So I worry on the downside ’cause the downside will come.” -Ray Dalio

With corporate debt levels twice what they were before the financial crisis, the covenants on much of that debt weaker than ever before and liquidity in the bond market disappearing, the next downturn could present a unique challenge for the Fed. And their traditional tool to address these sorts of challenges is now essentially impotent. No wonder Dalio is worried.

Read more: http://uk.businessinsider.com/dalio-druckenmiller-gross-warn-on-economy-2015-3?r=US#ixzz3Ta0pyIkh

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With the Federal Reserve printing trillions upon trillions of dollars to keep the economic system afloat, many investors and financial pundits have surmised that the fundamental economic problems facing the United States during the crash of 2008 have been resolved. Stocks are, after all, at historic highs.

But the insiders know different. And if there’s any single person out there who understands U.S. monetary policy and its long-term effects on domestic and global affairs it’s former Federal Reserve chairman Alan Greenspan. As the head of the world’s most powerful central bank for nearly two decades he’s privy to the insider conversations and government machinations that have brought us to where we are today.

Greenspan recently joined veteran resource analyst Brien Lundin at the New Orleans Investment Conference to share some of his thoughts. According to Lundin, the former Fed chairman made it clear that the central bank is facing a serious problem and one that will have significant ramifications in the future.

We asked him where he thought the gold price will be in five years and he said “measurably higher.”

In private conversation I asked him about the outstanding debts… and that the debt load in the U.S. had gotten so great that there has to be some monetary depreciation.

Specially he said that the era of quantitative easing and zero-interest rate policies by the Fed… we really cannot exit this without some significant market event… By that I interpret it being either a stock market crash or a prolonged recession, which would then engender another round of monetary reflation by the Fed.

He thinks something big is going to happen that we can’t get out of this era of money printing without some repercussions – and pretty severe ones – that gold will benefit from.

If we are in fact staring a major market event in the face as Alan Greenspan proposes then wealth preservation should be a key tenet of any preparedness strategy going forward. Greenspan himself, somewhat ironically, was a gold bug and proponent of sound money prior to his appointment as the chairman of the Fed. And though he didn’t discuss it much during his tenure, he is now actively saying that we can expect to see gold markedly higher within the next five years.

His assessment is likely based on concerns over the U.S. dollar which will, as Lundin notes, more than likely suffer a currency devaluation at some point in the future.

The end has to come at some point… If you look at a chart of the U.S. dollar index it has gone nearly parabolic in the last few months… In any market that is so one sided, that is accelerating so rapidly, that trend will end… it will most likely end in a fairly violent fashion.

And if gold rises as a result, so too will other resource assets in the energy and mining sectors. What it boils down to is that the assets that are necessary to keep our system operating will always have value, and that is especially true in a situation where the U.S. dollar happens to be crashing. Uranium , for example, powers one in five American homes, which means that it will always be a necessary resource, regardless of what the dollar does or doesn’t do. Lundin’s assessment is echoed by Uranium Energy Corp CEO Amir Adnani, who recently said we may well see a “resurgence” in the price of this and natural resources like gold.

The same can be said for oil and agriculture resources.

They will always have value, regardless of whether the dollar is strong or violently collapses under its own weight.

Thus, when we consider ways to preserve wealth and insulate ourselves from the coming destruction of our currency one must consider holding physical assets. For some that means stockpiling food and other supplies in anticipation of Greenspan’s market event that could adversely affect credit flows and delivery of essential goods. For others who may currently hold stocks, U.S. Treasurys, or cash, diversifying your portfolio with well managed resource-based companies will not only preserve wealth during currency volatility, but build it as the value of real, physical assets rises.

The man who is essentially the architect responsible for domestic monetary policy under four U.S. Presidents has now said that a significant market event will take place when the Fed is eventually forced to exit their monetary easing and zero-interest rate policies

Soource : http://www.shtfplan.com/headline-news/federal-reserve-insider-alan-greenspan-warns-there-will-be-a-significant-market-event-something-big-is-going-to-happen_02222015

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