IceCap: Most Investors Aren't Prepared To See What Is Behind Draghi's Scheme To Delay The Inevitable

From Keith Decker of IceCap Asset Management

“The Beautician”

In 1888, Martha Matilda Harper became the world’s first professional beautician. In addition to inventing the first reclining shampoo chair, Ms. Harper became famous for opening the first ever, stand alone beauty salon.

Next up to dominate the industry was Elizabeth Arden. Her success was founded upon expanding the salon concept to 1000s of stores around the world, and for the distribution of her self made products, most notably lipstick.

Today’s top beautician is breaking the mold. His product and distribution are light years ahead of anything dreamed of by both Harper and Arden, and best of all he truly believes if he applies just the right amount of foundation, concealer and lipstick (especially lipstick), then he can make anything beautiful and attractive.

Up to this point, his business has been a self-declared, resounding success. His salon is in Frankfurt, Germany. His company has gathered over $5 billion in assets, and his clients total over 340 million people.

Yet recently, more and more people are realising that all isn’t as beautiful as meant to be. Cracks are building in the foundation, mascaras are running long, and worst of all, the lipstick has been smeared.

Mario Draghi’s days as both Beautician and President of the European Central Bank are starting to show their wear. While the headline news celebrates the outcome of France’s election, Europe’s governments and banks remain burdened in a financial struggle that even the very best lipstick cannot hide.

Two things are for certain.

  • One, underneath all the financial make-up applied by Mario Draghi remains a fractured, unworkable Eurozone system.
  • Two, the majority of investors around the world are not prepared to see what is truly behind Draghi’s scheme to delay the inevitable.

* * *


Chart 1 below details the evolution of the global financial system since the 2008-09 credit crisis.

The good news is that after 7 years of financial oppression, those who have not benefitted from extreme monetary stimulus, the playing field will once again be level for all players.

The bad news is that after 7 years of financial oppression, those who cannot recognise the risks that have accumulated, are about to be red carded right off the field.

Let us explain.

For a number of reasons, the vast majority of investors around the world solely look at the stock market. Everything good and everything bad always comes from and away from the stock market.

In truth – the grease that keeps the world’s mighty economy and debt eating machine chomping through the night is ladened with interest rates.

Yet, few are able to see, speak or even dream about interest rates. The big banks are especially unable to articulate their importance.

Instead, their compliance-approved, snooze-worthy market commentaries occasionally dare to mention everyone’s favourite financial axiom – valuation. And even then, the trained eye can see the rather lack of conviction in the use of the word.

To better grasp the vital importance of this discussion, just know that long-term interest rates are to the bond market as oil prices are to the energy market.

From 2003 to 2008, oil prices shot to the moon dragging along every investment with even the slightest positive linkage.

The same also occurred in 2014 – but with a negative reaction when oil prices crashed from $100 to $50.

Yes, prior to the most recent devastating oil correction, people couldn’t get enough real estate in Alberta and Texas. And they couldn’t get enough energy stocks and their high paying dividends.

In both cases, the perceived risk was non-existent. Oil prices would only go in one direction – up, and that was the end of story. Well, we all know now that it wasn’t the end of the story. In fact, it was only the beginning of another story, one in which turned into a nightmare for all of those riding the great oil express.

Today, the exact same story is playing out.

Instead of it occurring in the oil patch and affecting a smaller segment of the investment universe, the story today is occurring in a field that covers the world from east to west, north to south and every nook and cranny in between.

This field of course, is the interest rate field and the entire bond structure used by investors everywhere.

As easy as 1-2-3

Returning to Toronto – understand that when the long-term interest rate bubble pops, two things happen:

  1. bond investments lose a lot of money
  2. piles of jobs are lost from the many companies dependent upon interest rates which so happens to include practically every bank, insurance and financing company.

So, from a pure fundamental, aggregate income and valuation perspective; the breaking of the bond market will have a serous downward impact on salaries, bonuses and perks in Toronto. That alone creates heavy pressure on house prices.

But, the other simultaneous whammy is the surge in mortgage rates which makes the amount qualified to borrow to decline as well. In other words, there will be less money available to buy houses and the money that is available, will not be able to borrow as much as it could before.

The result: prices go down, way down.

Understanding why this is about to occur is really the key to happiness.

The happiness occurs as there are several ways to prosper significantly once the crisis begins.

The process of why it will occur is explained in 3-easy steps.

Step 1: >$14 Trillion in QE

The foundation of the current bubble in the Toronto housing market (and the bubble in bond markets) was firmly established in 2008-09. Recall, that was the year the Americans and their Wall Street financial assassins created deathly lending products which eventually went boom in the middle of the night. It was the response to this boom that sowed the seeds for the next crisis, which just so happens to be manifesting itself today in Toronto’s housing market, and even more concerning – in the world’s bond market.

The chart next page, shows collectively, central banks of USA, Japan, Eurozone, and Britain created over $14 trillion out of thin air. Top government economists swore printing money would stimulate the economy, creating new jobs, raising taxable income which would pay down debt everywhere. But, instead of actually printing money and mailing a cheque to everyday average people to actually spend, economists decided to make an easy stimulus plan a complicated stimulus plan. It became complicated when the money was instead use to buy government bonds. The thought was that by buying government bonds, interest rates everywhere would decline which would benefit everyone.

In effect, this entire money printing or Quantitative Easing (QE) experiment was really one arm of the government lending to the other arm of government.

The intentions were good – after all, the thought was that this $14 trillion would be swished around the global economy faster than the speed of light. Instead, it actually had the opposite reaction as seen in Chart below that shows the Velocity of Money actually declining.

Now, just in case this $14 trillion wasn’t enough to heal the wounds, all of the world’s central banks agreed to add an extra layer of stimulus. Which brings us to Step 2.

Step 2: 672 interest rate cuts

Simultaneous to printing $14 Trillion, government economists also announced they would cut interest rates to the bone. And when we say bone – we mean 672 interest rate cuts over 7 years.

The thought was that 672 interest rate cuts would stimulate the global economy by making money super cheap to borrow, which would creates jobs and create more tax revenues for governments.

But central banks still weren’t done. Just to ensure their plan would work the ultimate cherry on top was added in the form of NEGATIVE INTEREST RATES.

Step 3: Negative Interest Rates

Just in case the $14 trillion of new money + 672 interest rate cuts were not enough, 5 of the world’s central banks played the sneakiest card of them all by creating NEGATIVE interest rates across Europe and Japan.

Whereas the thought that $14 trillion of money printing and 672 interest rate cuts would encourage people to borrow and spend, the thought was that the use of NEGATIVE interest rates would force people to spend.

Either way – savings and savers would really going to struggle.

In the end, the combination of steps 1 + 2 + 3 didn’t provide nearly the amount of global stimulus as thought.

The Bottom Line

Instead, it lowered short term, medium term, and long term interest rates to never before seen levels, merely encouraging borrowing from 2 groups of investors:

  1. Home buyers
  2. Governments

Which of course squares the peg as follows:

$14 Trillion money printing

+ 672 interest rate cuts

+ Negative interest rates

= record low interest & mortgage rates

What investors must realize and understand today is that interest rates are the key cog in the global money wheel.

And over the past 7 years, this wheel has been flattened, pushed around and outright forced to look, feel and behave in a certain way.

However, where this becomes the most important foresight to hear – interest rates (and especially long-term interest rates) cannot remain in its current, forced/coerced/manipulated state forever.

Eventually it will change. The change will be abrupt. And it will definitely be the shock that breaks the housing market in Toronto and it will certainly be the shock that forces the Eurozone to restructure.

* * *
The Majority are always wrong

IceCap is a global macro manager, and like other global macro managers, we see the risks and imbalances in the world today have very clearly been created by governments and their central banks. We know this. Governments know this. And the central banks especially know this.

Yet, just about everyone else doesn’t know this. And since the risks and imbalances created have reached astronomical levels, it has become very important to the central banks to ensure those that don’t know what is happening remain in the dark and are unable to see these risks and imbalances.

This is where all kinds of make-up, mascara and lipstick is needed to make everything look pretty and beautiful.

And when it comes to lipstick, no one in the financial world is better at applying it than the President of the European Central Bank. And, no one is better at wearing it than Italy.

Let us explain.

Chart 2 next page shows the interest rate Italy had to pay to borrow money for 10 years.

Everyone ought to know that the less you pay in interest the better – it means you can borrow more, your interest payments take up less of your income, and more importantly, it means lenders view you in a favourable light. When lenders do not view you in a favourable light – bad things happen, with the worst being no one will lend you any money at all. When this happens, you are shut out of the loan market. And when you are a government and sovereign state, you cannot ever be shut out of the lending market.

Once this happens – it is game over and out. As a country, being unable to borrow, means you are unable to pay policemen, the military, nurses, doctors, teachers, and garbage collectors. You are also unable to pensioners, engineers, social workers, and snow plough operators. And of equal importance, you are unable to repay old debt that is coming due. In other words – you’re in deep doo.

And, this is exactly what happened to Italy in 2011.

* * *

Continue reading in the slideshow below (link)


booboo Sun, 06/25/2017 - 22:14 Permalink

"Unwanted consequences..... Trump"So this was written for the globalist? If the majority of states voted for the guy who was the "unwanted one? Hildabeast would be the correct answer

Mini-Me Sun, 06/25/2017 - 22:19 Permalink

Central banks are counterfeiting.  Period.  It's theft on the largest scale in human history.  These crooks need to be strung up.

absente reo Sun, 06/25/2017 - 22:32 Permalink

More of the same end of the world claptrap.Well, at some point it might not be claptrap but that's the devil of the thing - it's all in the timing. 

JailBanksters Sun, 06/25/2017 - 22:32 Permalink

The only thing I Fear is the Uncertainty and Doubt.I think Dragy and Old Yeller should start doing Infomercials.Done in the style of the those awesome get fit InfomercialsThat's right Mario, for just $666.33 a day and you can have the lifestyle you've always wanted.Mario: $666.33 Janet, that's crazy. Janet: Yes, this is a special offer we are only offering to our special customers, so dial 555-666-33 and order your lifetime supply of a better lifestyle NOW!That number again 555-666-33, at this crazy low low price, they won't last long. 

Cephisus Sun, 06/25/2017 - 22:43 Permalink

This is like playing Monopoly with a crooked banker.  Nothing is real anymore.The ethics of hard work and sacrifice mean nothing to those who would be our leaders.Everyone just goes out for Pizza and leaves morality behind.  There is nothing but corruption and Nero is breaking out his lighter.

Horse Pizzle (not verified) Sun, 06/25/2017 - 23:05 Permalink

Normal interest rates would be 7% without Central Bank interference.  President Trump could allow 7% in his first year of his second term.

gregga777 Sun, 06/25/2017 - 23:23 Permalink

Americans just need to remember on thing when the economic system crashes and your pension plans ALL go bust: it's ALL the fault of the Goldman Sachs Feral Reserve System. You can blame everything on the MORONS running the Goldman Sachs Feral Reserve System.

BlauGloriole Sun, 06/25/2017 - 23:35 Permalink

Just wind down the Fed's balance sheet and rates will find their natural level. Unsurprisingly, I suspect, the long end will not budge much. Why? Because the real economy sinks.

BlauGloriole indygo55 Mon, 06/26/2017 - 09:39 Permalink

Fed reserves and cash forms base money. Fed liabilities are reserves and Fed treasuries are it's assets (besides other assets). As treasuries mature the Fed retires it's reserves (if it does not reinvest). This is a reduction in its balance sheet. The Fed can also sell its Tresuries and retire its associated balance sheet liabilities, this too reduces its balance sheet. Reducing its balance sheet will normalize interest rates to its natural equilibrium. Long term rates are driven by real growth plus inflation. Cumulatively both of these are at about 3% which viola are close to what the long bond currently delivers. 

In reply to by indygo55

decentraliseds… (not verified) Mon, 06/26/2017 - 01:00 Permalink

 Why waste time on this alligator when the swamp’s most critical economic and political problems revolve around the hegemony of a global corporate cartel, which is headquartered in the US because this is where their dominant military force resides. The US Constitution is therefore the “kingpin” of an all-inclusive global financial empire. These fictitious entities now own the USA and command its military infrastructure by virtue of the Federal Reserve Corporation, regulatory capture, MSM propaganda, and congressional lobbying. The Founders had to fight a bloody Revolutionary War to win our right to incorporate as a nation – the USA. But then, for whatever reason, our Founders granted the greediest businessmen among them unrestricted corporate charters with enough potential capital & power to compete with the individual states, smaller sovereign nations, and eventually to buy out the USA itself. The only way The People can regain our sovereignty as a constitutional republic now is to severely curtail the privileges of any corporation doing business here. To remain sovereign we have to stop granting corporate charters to just any “suit” that comes along without fulfilling a defined social value in return. The "Divine Right Of Kings” should not apply to fictitious entities just because they are “Too Big To Fail”. We can't afford to privatize our Treasury to transnational banks anymore. Government must be held responsible only to the electorate, not fictitious entities; and banks must be held responsible to the government if we are ever to restore sanity, much less prosperity, to the world. It was a loophole in our Constitution that allowed corporate charters to be so easily obtained that a swamp of corruption inevitably flooded our entire economic system. It is a swamp that can't be drained at this point because the Constitution doesn’t provide a drain. This 28th amendment is intended to install that drain so Congress can pull the plug ASAP. As a matter of political practicality we must rely on the Article 5 option to do this, for which the electorate will need overwhelming consensus beforehand. Seriously; an Article 5 Constitutional Convention is rapidly becoming our only sensible option. This is what I think it will take to save the world; and nobody gets hurt: 28th Amendment: Corporations are not persons in any sense of the word and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to: 1, prohibitions against any corporation; a, owning another corporation; b, becoming economically indispensable or monopolistic; or c, otherwise distorting the general economy; 2, prohibitions against any form of interference in the affairs of; a, government, b, education, c, news media; or d, healthcare, and 3, provisions for; a, the auditing of standardized, current, and transparent account books; b, the establishment of state and municipal banking; and c, civil and criminal penalties to be suffered by corporate executives for violation of the terms of a corporate charter.    

Paracelsus Mon, 06/26/2017 - 11:09 Permalink

   Greece not fixed. Spain going down the gurgler. Italian Banks very shaky. Non-performing loanseverywhere. Puerto Rico? Illinois? CALPERS pension fund? Iceland?