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Posts by: Gary Mead

Soapbox: Negative interest is no answer

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Governments have thrown just about everything at their economies since the terrible impact of lockdowns eliminated millions of jobs and slashed growth.

Their efforts – trillions in ‘stimulus’ spending, helicopter money, interest rate cuts, ‘furlough’ schemes, holidays on this and that tax – have had some hefty unintended consequences. The pace of developments has been remarkable. One of the macro-economic tools that’s been tried is cutting interest rates, and even making them negative – in other words you would have to pay a bank to deposit your money.

In February, the Bank of England (BoE) formally told the UK’s high street banks they had six months to prepare for negative rates. The possibility of negative interest rates should send shivers down everyone’s spine. This week we may learn if the BoE intends following through on its warning.

A shift into negative rates will however do little to get the economy moving again. It may produce its own distortions – and market distortions can last much longer than the policy changes that gave rise to them. There’s always a time lag.

For example, few people this time last year would have forecast that household wealth would have soared under the pandemic – yet it has. In March average US household income went up by more than 21%, the largest monthly rise since 1959. UK households that same month put £16.2 billion into their bank accounts, 3.4 times the monthly average for the year to February 2020, prior to the first UK lockdown.

In the UK, we have an extra twist. The UK Chancellor Rishi Sunak announced in July 2020 a temporary stamp duty holiday. Stamp duty is the tax levied by the UK government on residential property – on homes. Sunak cut the rate to zero for all properties sold for less than £500,000 ($693,000) until the end of March. He later extended this until the end of June this year. It’s not clear why the Chancellor chose this policy instrument in the anti-Covid/economic slump fight but its effect has been to create a “red hot” property market according to one UK mortgage adviser.

 

Governments lack dexterity

Demand for mortgages in the UK has become “red hot” and – the laws of supply and demand being what they are – average UK house prices went up by an astonishing 7.3% in April year-on-year. In the US, house prices rose by 16% in the past 12 months. The price of lumber – the main component in the typical US house – has risen by more than 230% since the start of the Covid-19 pandemic. UK household wealth has risen to record levels, the equivalent of £172,000 ($238,400) per person. In the US, personal incomes went up by 21.1% in March against the previous month – the highest jump since 1946.

US citizens – even those working and living abroad – have received their $1,400 Biden “stimulus check”. Some UK citizens have been paid by the government while their job is put on pause (“furloughed”).

But the hand of government is by definition clumsy. All state instruments are blunt; they’re not built to take account of individual cases. Thus the Legatum Institute, a think-tank in the UK, estimated last November that almost 700,000 people had been pushed into “poverty” in the UK as a result of the Covid-induced economic crisis. Human Rights Watch, the international NGO, said that eight million more US citizens were living in poverty in January this year than six months’ previously.

The gap between the “haves” and the “have nots” has just got bigger; the collective wealth of the more than 600 US billionaires has gone up by 36% during the pandemic. The richest 1% of Americans have added about $4.8 trillion of wealth from the end of March to the end of December 2020.

 

Continental lessons

 

 

We should be wary therefore of any attempt to stimulate growth by making interest rates negative. The money that would supposedly be teased out and put to productive use (into the “real” economy of making things people need to buy) will not necessarily end up there. Those who put their spare cash in banks would find themselves forced to pay for the privilege. Savers in cash are already punished by record low-interest rates; they would suffer even more punishment if rates went negative.

Nor is there any guarantee that the cash would flow into the economy; since the European Central Bank (ECB) introduced a negative deposit rate in 2014 physical cash holdings in Germany have trebled to €43.4 billion ($52 billion, £37 billion). People prefer to hold cash than pay banks, or to risk it by investing it. People have become even more wary of spending on anything but tangible assets in the wake of Covid. In the seven years since then the 19 countries within the Euro area have grown very sluggishly – peaking at 2.6% gross domestic product (GDP) growth in 2017 and as low as 1.3% in 2019 – the year before Covid-19 struck. Their example of negative interest rates does not seem to encourage growth.

Governments right now want to see their populations spending, injecting money into the economy and theoretically driving economic growth. Negative interest rates – which would have a knock-on effect on many financial products and institutions, from tracker funds to banks – are not the answer when economic growth already appears to be rebounding. The “reflation trade” has become a buzz phrase in recent weeks; crafting policy to ensure that inflation does not get out of hand is rapidly becoming the main concern for the US and others.

With interest rates so low, taxes bound to rise, prices soaring – lumber is only one example – protecting what one has is becoming daily more important. The gold price is having one of its periodic dips; but if history is any guide, then gold remains an important part of anyone’s portfolio.

Soapbox: It’s payback time

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US President Joe Biden has given away trillions of dollars to American citizens, is preparing to give trillions more – and then to claw back some of that ‘free’ money.

A President who comes from Delaware, the state which is a kind of US onshore tax haven – companies that are incorporated in Delaware can pay a corporate tax rate of 0% – risks looking like a hypocrite if he clobbers people too much.

The US Congress listened on Wednesday evening this week as the President outlined his ideas as to how to fund his American Families Plan. This plan is the third big economic package since he took office, following his $1.9 trillion fiscal stimulus plan in March and a proposed $2 trillion infrastructure bill, still fighting its way through Congress.

This third plan, called the American Families Plan (who would be so churlish as to oppose a plan for families?) proposes more generous child support until 2025, extra funds for universal pre-kindergarten schooling and community colleges, and other social welfare ideas; to pay for it the total capital gains tax for the richest Americans would go up to almost 44 %. The top rate of income tax would rise from 37% to almost 40%. Americans earning more than $1m a year would face the application of ordinary income tax rates to capital gains and dividend payments.

These ‘reforms’ would also hit private equity and hedge fund managers – easy targets one might think – by effectively eliminating the preferential tax treatment of their profits, or ‘carried interest’. At the moment, carried interest is taxed at the lower capital gains rate rather than ordinary income, but Biden would equalise their tax treatment. The president is also considering taxing unrealised capital gains passed on to heirs at death. Taxes on capital gains and dividends are currently 20%; under Biden’s plans they would be treated as ordinary income, at a 39.6% rate.

The mere whisper of some of this on 22 April invoked an immediate response. The S&P 500 index fell 1%. Next day, Bitcoin fell below $50,000, leaving it almost $14,000 lower in value since it hit a record high the previous week. People were nervous that capital gains tax rises would hit their pockets, so they got out of some assets while the going was good. The gold price also dropped, from $1,793 per ounce at midday on 23 April to $1,774 by 3pm that day. US corporations are well-accustomed to finding tax loopholes – 60 years ago corporations paid around a third of federal tax revenues but today its just 10%. No wonder the US Treasury Secretary is keen to gain support for a global minimum corporate tax rate. Without that, much of the intended corporate tax take will still elude the Treasury.

The ‘wannabe’ FDR

In May 2020, New York magazine ran a feature on Biden under the title “Biden is planning an FDR-size presidency” – the FDR being Franklin Delano Roosevelt, the former Democrat President who in the 1930s faced the Great Depression and started many state-funded programmes to get America working again. FDR is either a US 20th century hero or a bogeyman, depending on whether you believe it’s the state’s duty to rescue a society or that such a rescue should be left to the free market.

Biden sees himself following in the footsteps of FDR; he told CNN in April 2020 that the challenge being faced by a Covid-wracked US economic collapse “may not dwarf but eclipse what FDR faced”. The financial sums are certainly much bigger – under Roosevelt’s New Deal US debts grew from $22 billion in 1933 to $33 billion by 1936. In those days, the word ‘trillion’ was hardly ever used. The devaluation of the US dollar can be felt in the ease with which we have moved from talking about ‘billions’ to ‘trillions’; a US Dollar today buys less than 5% of what it would in 1933.

Under the Biden American Families Plan, the tax rates on individual incomes below $400,000 would not increase. New and expanded tax benefits, including provisions for child care, first-time homebuyers, educational debt relief, retirement savings, health insurance, and long-term care insurance, could reduce taxes for average families. Those who will suffer will be corporations and those taxpayers with incomes of $400,000 or more. Individuals with incomes of more than $1 million would pay the same rate on investment income as on wages.

Will it work?

Raising taxes, especially on the ‘rich’, and spreading money and welfare on the ‘poor’ is a classically populist measure. Whether social engineering will make America ‘more equal’ (whatever that means) is an open question. FDR’s New Deal hired Americans to work on the improvement of their own country; as they worked for the government, so the government worked for them. Legacies of the New Deal can be seen all across the country, from bridges, tunnels, roads, schools and libraries to monuments, murals and sculptures. What the New Deal called for was a greater sense of rights and duties – the state funnelled money into work-creation schemes and the citizenry were called on the step up to the plate and reciprocate and work on behalf for the state’s projects. American society is very different today from 1933; will citizens today step up to the plate or just be happy to take the money?

Imposing more taxes on the ‘rich’ is no doubt politically popular but without addressing loopholes such as the Delaware get-out it will seem unbalanced. Biden has scarcely been in office more than 100 days; his intentions remain a work in progress, and will no doubt face stiff Congressional opposition. The dramatic loss of purchasing power of the Dollar since FDR’s time, however, shows no sign of halting.

Soapbox: China re-opens the gold door

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“May you live in interesting times” runs the old curse, often (erroneously) attributed to a Chinese source. The nearest Chinese expression is believed to be 寧為太平犬,不做亂世人, which translates to “better to be a dog in times of tranquility than a human in times of chaos”. Times are certainly interesting today, not least in China.

Reuters has reported that China “has given domestic and international banks permission to import large amounts of gold into the country”, according to “five sources”. The country’s central bank, the People’s Bank of China (PBoC), controls the amount of gold that can be imported, and has apparently given the green light to these imports, which could total 150 tonnes (worth around $8.5 billion at current prices) and be shipped either this month or next. If this turns out to be true such a big gold import should certainly underpin the gold price, which has been climbing off its recent low and is nudging $1,800 an ounce. Since February 2020, China has imported about 10 tonnes per month; in 2019, it imported about 75 tonnes a month. Importing 150 tonnes over April/May would therefore signify a return to pre-pandemic days.

A source at one of the commercial banks which has been granted permission to import gold told Reuters: “We had no quotas for a while. Now we are getting them… the most since 2019”. I hope they manage to preserve their anonymity – talking to journalists unofficially about China’s gold is a serious no-no.

China is today the biggest miner of gold, producing 380 tonnes in 2020 according to the US Geological Survey. The Chinese state exercises tight control over gold (and silver) and pursues “a policy of unified control, monopoly purchase and distribution of gold and silver”, tightly supervising private individual trading and exports. As of late last year, all China’s commercial banks – including state-owned ones – suspended the opening of new precious metal accounts, under the guise of protecting gold holders from ‘volatility’. Together with India, China accounts for around 40% of annual gold demand. In February, India reduced gold import duties by an effective 1.25% which was seen as an effort to reduce gold smuggling. In March this year, India’s gold imports rose 471% year-on-year to 160 tonnes.

Back to normal or something else?

There are at least two possible views of this re-opening of the door to gold imports.

The first and most likely is that China’s relationship with gold is merely returning to the status quo ante bellum. Chinese citizens like gold, both to wear as jewellery and as a means to tuck away their savings. China’s appetite for gold has led it to explore overseas’ mining ventures, not always successfully – the Canadian government last December blocked on grounds of “national security” the state-owned Shandong Gold Mining Company from taking over and developing a gold mine in the remote Nunavat region. And while China officially acknowledges it holds almost 2,000 tonnes in official reserves – the precise figure is a closely-guarded state secret – the actual figure is believed to be more be 14,500 tonnes, or 1.8 times bigger than US reserves.

But there is another possibility, which ties in with China’s launch of its own Central Bank Digital Currency or CBDC, which eventually will eradicate cash from Chinese society and enable tighter social surveillance.

This state-controlled digitalisation of the Renminbi could also, some are arguing, hasten the decline of the US dollar’s dominance as the global reserve currency and insert the Renminbi instead. The Renminbi was already awarded the status of a reserve currency by the International Monetary Fund (IMF) in 2015.

More than 60% of the world’s currency reserves are dollar-denominated, as they have been for at least the past 20 years. But they fell last year; meanwhile allocations to the Renminbi have risen; that currency is now the fifth most-used for global payments, rising from 35th place in 2010.

China’s President Xi Jinping has grand ambitions and is in a hurry to stamp his place in history. The country’s remarkable 18.3% rate of growth in the first quarter of 2021 over the same period in 2020 has clearly strengthened his hand. He said this week at the Boao Forum for Asia that “bossing others around and interfering in other countries’ internal affairs will not be well received”, which was widely seen as a criticism of the US.

But strong words will not alone be enough to persuade investors and trade to ditch the Dollar in favour of the Renminbi. Greater security regarding foreign investment in China – currently being tested in a Chinese court over the default by Peking University Founder Group (PUFG) of some $7 billion of bonds – is under scrutiny. Foreign bondholders have collectively taken on some $82 billion of China-issued debt backed by nothing more than “keepwell deeds”, a credit protection tool commonly used by Chinese companies issuing debt offshore. These deeds are used in offshore finance transactions, particularly those that use bonds relating to Chinese transactions. Keepwell deeds are used in around 16%, or $96 billion, of outstanding Chinese offshore bonds. The legal enforceability of such deeds is opaque.

Gold behind China’s CBDC?

If the digital Renminbi or CBDC is to truly present a challenge to the US Dollar as the world’s global reserve currency then it will have to overcome deep political and economic scepticism from Western investors as to China’s reliability as a partner. The momentum is moving in that direction, but erratically; the state clearly exerts the kind of interference in corporate life (such as last year’s block against the IPO of the massive Chinese company Ant Group) that private investors find discouraging. If all that ‘backs’ the digital Renminbi or CBDC is the word of the Chinese government, then it is unlikely to ever succeed in knocking the US Dollar off its perch.

But if something universally respected, trusted, and valued – such as gold – was declared by China to back its CBDC – that would be a very different prospect. Stranger things have happened. The implications would be deeply disruptive of the world’s financial system and would anger many policymakers in the West – but President Xi has proved time and again his indifference to such matters.

Fractional banking and gold

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If you hold your gold physically, at home or in your office safe, you are obviously exposed to the risk of burglars stealing it. You’ll be able to take it out and fondle it, but it’s not entirely risk-free.

Maybe you choose to hold your gold in an ‘unallocated’ account. You may be surprised to learn that this unallocated gold, no doubt on deposit in a bullion bank vault, while probably safe from burglars, is not entirely risk-free either. Because when push comes to shove you don’t really own that gold.

That’s because it’s part of the ‘fractional reserve’ system, the system used by commercial banks across the world. Under fractional reserve banking only a fraction of the bank’s deposits are backed by actual cash on hand and immediately available for withdrawal. The clue is in the name. The same is true for that unallocated gold – if everyone who ‘holds’ that gold demanded its redemption there would not be enough to go round. Unallocated gold accounts are really just an exposure to the price of gold.

Proponents of fractional banking argue that such a system creates liquidity; it enables the increase of money and credit supply. Opponents assert that such a system is inherently risky, as it increases the supply of money beyond what actually exists in the bank.

For hundreds of years fractional reserve banking has resulted in bank failures as depositors lost their money because their bank could not immediately pay them the full amount they had on deposit. Anyone who has seen the 1946 movie It’s A Wonderful Life starring James Stewart can see what happens when confidence in fractional banking evaporates. Life falls apart; the difference with real life is that no angel (as in the movie) will come to our rescue. Fractional banking is a kind of Ponzi scheme, whereby fresh deposits are used by the bank to extend credit to new borrowers.

The fractional reserve system underlays the Great Financial Crash of 2007-09; thanks to it, banks such as Northern Rock (in the UK) and Bear Sterns (in the US) succumbed to irrational exuberance and lent excessively, far more than they had on deposit. In the US the fractional banking system enabled banks to give mortgage loans to ‘Ninjas’ – people with ‘no income, no job or assets’. At the height of the boom UK banks were offering so-called ‘suicide loans’ of up to 120% of the value of a house with only self-certification of income.

You would think that banks and regulators had learned some lessons from then. Yet on 26 March 2020 the US Federal Reserve announced it was reducing the reserve requirement ratio for US banks from 10% to 0% across all deposit tiers. The Covid-19 pandemic was used to justify this. There’s no indication that the US Fed is going to re-impose it’s (already light-touch) reserve requirement any time soon. In the UK, the minimum reserve requirement for banks is 12.5% and for ‘finance houses’ at least 10%.

Under a ‘full reserve’ system – whereby a bank would be required to hold sufficient reserves to pay all depositors their full deposit on demand – the inherent risk of that bank collapsing (and the further risk of a systemic meltdown) would disappear. Proponents of a full reserve banking system argue that because it would separate money creation from bank lending, greater economic stability would result – although bankers would no doubt protest at their reduced bonuses, which would happen if they were unable to lend so freely.

What’s this got to do with gold?

Unallocated gold accounts do not physically store ‘your’ gold; they use the gold for other investments or loans, and promise to re-pay you the gold on demand. Unallocated gold accounts are within the fractional reserve system in other words. Unallocated gold is only credited to the investor – the bank or dealer remains the owner. If the gold holder of your unallocated gold goes bust, all you will be left with is a promise that you will get your gold or money back – but you will have to wait in line along with other angry creditors and may eventually lose what you thought you owned.

What about gold held in paper form, in an exchange-traded fund (ETF)? That too is not free of risk. It is standard practice for Authorized Participants, such as banks and brokerage houses, to contribute baskets of purchased or borrowed assets to ETFs; the bullion therein may be borrowed. In the event of a 2008-style financial crisis, the lending institutions would have first claim to the gold when borrowed, leaving shareholders in a precarious position.

Even trying to buy physical gold can run into difficulty. The august Royal Mint in the UK has been swamped recently by customers who have placed orders for gold and silver coins which the Mint has been unable to deliver because the paid-for items are out of stock.

Glint’s allocated gold

If you own gold through Glint you genuinely own it – it’s allocated to you and the gold is held in allocated storage under a custody agreement. Banks or financial institutions cannot lease out those bars, because they can’t access the allocated bullion. Moreover if you buy gold through Glint you have certainty that the price you pay is for the actual amount of gold you want.

And you avoid the inherent risks associated with fractional banking – and burglars. Moreover, unlike physical bullion or unallocated gold, with the gold that you own through Glint, you can also use it for transactions in your daily life, from buying a coffee to a family holiday; online and in-store.

Soapbox: Fractional banking and gold

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If  you hold your gold physically, at home or in your office safe, you are obviously exposed to the risk of burglars stealing it. You’ll be able to take it out and fondle it, but it’s not entirely risk-free.

Maybe you choose to hold your gold in an ‘unallocated’ account. You may be surprised to learn that this unallocated gold, no doubt on deposit in a bullion bank vault, while probably safe from burglars, is not entirely risk-free either. Because when push comes to shove you don’t really own that gold.

That’s because it’s part of the ‘fractional reserve’ system, the system used by commercial banks across the world. Under fractional reserve banking only a fraction of the bank’s deposits are backed by actual cash on hand and immediately available for withdrawal. The clue is in the name. The same is true for that unallocated gold – if everyone who ‘holds’ that gold demanded its redemption there would not be enough to go round. Unallocated gold accounts are really just an exposure to the price of gold.

Proponents of fractional banking argue that such a system creates liquidity; it enables the increase of money and credit supply. Opponents assert that such a system is inherently risky, as it increases the supply of money beyond what actually exists in the bank.

For hundreds of years fractional reserve banking has resulted in bank failures as depositors lost their money because their bank could not immediately pay them the full amount they had on deposit. Anyone who has seen the 1946 movie It’s A Wonderful Life starring James Stewart can see what happens when confidence in fractional banking evaporates. Life falls apart; the difference with real life is that no angel (as in the movie) will come to our rescue. Fractional banking is a kind of Ponzi scheme, whereby fresh deposits are used by the bank to extend credit to new borrowers.

The fractional reserve system underlays the Great Financial Crash of 2007-09; thanks to it, banks such as Northern Rock (in the UK) and Bear Sterns (in the US) succumbed to irrational exuberance and lent excessively, far more than they had on deposit. In the US the fractional banking system enabled banks to give mortgage loans to ‘Ninjas’ – people with ‘no income, no job or assets’. At the height of the boom UK banks were offering so-called ‘suicide loans’ of up to 120% of the value of a house with only self-certification of income.

You would think that banks and regulators had learned some lessons from then. Yet on 26 March 2020 the US Federal Reserve announced it was reducing the reserve requirement ratio for US banks from 10% to 0% across all deposit tiers. The Covid-19 pandemic was used to justify this. There’s no indication that the US Fed is going to re-impose it’s (already light-touch) reserve requirement any time soon. In the UK, the minimum reserve requirement for banks is 12.5% and for ‘finance houses’ at least 10%.

Under a ‘full reserve’ system – whereby a bank would be required to hold sufficient reserves to pay all depositors their full deposit on demand – the inherent risk of that bank collapsing (and the further risk of a systemic meltdown) would disappear. Proponents of a full reserve banking system argue that because it would separate money creation from bank lending, greater economic stability would result – although bankers would no doubt protest at their reduced bonuses, which would happen if they were unable to lend so freely.

What’s this got to do with gold?

Unallocated gold accounts do not physically store ‘your’ gold; they use the gold for other investments or loans, and promise to re-pay you the gold on demand. Unallocated gold accounts are within the fractional reserve system in other words. Unallocated gold is only credited to the investor – the bank or dealer remains the owner. If the gold holder of your unallocated gold goes bust, all you will be left with is a promise that you will get your gold or money back – but you will have to wait in line along with other angry creditors and may eventually lose what you thought you owned.

What about gold held in paper form, in an exchange-traded fund (ETF)? That too is not free of risk. It is standard practice for Authorized Participants, such as banks and brokerage houses, to contribute baskets of purchased or borrowed assets to ETFs; the bullion therein may be borrowed. In the event of a 2008-style financial crisis, the lending institutions would have first claim to the gold when borrowed, leaving shareholders in a precarious position.

Even trying to buy physical gold can run into difficulty. The august Royal Mint in the UK has been swamped recently by customers who have placed orders for gold and silver coins which the Mint has been unable to deliver because the paid-for items are out of stock.

Glint’s allocated gold

If you own gold through Glint you genuinely own it – it’s allocated to you and the gold is held in allocated storage under a custody agreement. Banks or financial institutions cannot lease out those bars, because they can’t access the allocated bullion. Moreover if you buy gold through Glint you have certainty that the price you pay is for the actual amount of gold you want.

And you avoid the inherent risks associated with fractional banking – and burglars. Moreover, unlike physical bullion or unallocated gold, with the gold that you own through Glint, you can also use it for transactions in your daily life, from buying a coffee to a family holiday; online and in-store.

Soapbox: Guard Against Fraud

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Perhaps one of the least expected by-products of the Covid-19 pandemic has been the surge in fraud, no matter where you live.

According to a PwC 2020 global fraud survey of more than 5,000 companies and individuals, 47% said they had experienced fraud in the past two years.

The bottom line of PwC’s findings is staggering – it concluded that in the previous two years $42 billion (more than £30 billion) was reported lost globally as a result of fraud.

In the UK, online fraudsters cheated consumers out of a record £479 million in 2020 according to UK Finance, the banking industry body. UK Finance found there was a 94% increase in “impersonation scams” – criminals posing as trusted organisations conning the public out of money.

Matters are scarcely any better in the US; financial fraud in the US rose by more than 104% in the first quarter of 2020 compared to the same period in 2019. The same source says that on the dark web a social security number – key for many kinds of financial transaction in the US – can be bought for little more than the price of a Starbucks’ latte. Stolen PII (Personally Identifiable Information) packages, which typically include the victim’s name, social security number, driver’s license number, passport number and email address, can be had for as little as $4 (under £3). There has never been a time when your personal data has been so valuable to you and so cheap for criminals.

Fraudsters have taken advantage of the explosion in online activity which has followed Covid; in the UK Office for National Statistics says the proportion of online sales in the UK has surged from 19% in February 2020 to 36% of the total by January this year.

Scammers have used outbreak of online activity as a cover for fake websites for vaccinations, or for false fines for breaching lockdown rules; the rise of online shopping has assisted criminals to target shoppers with fake messages about missed parcel deliveries, and to pose as software providers to target homeworkers.

Source: US Federal Trade Commission

 

UK Finance says that last year saw impersonation registering the “biggest increase of any scam type, almost doubling in 2020 compared to 2019”. Around half of last year’s total fraud loss was via payment cards, with 38% being from “authorised push payments”, i.e. victims of the fraud being manipulated into making real-time payments to fraudsters.

Know your enemy

UK Finance and the UK government have collaborated on a programme – called Take Five – to educate consumers about the nature of potential fraud and ways of mitigating risk. The risk is in a state of permanent flux, as development of the internet and artificial intelligence offer wider possibilities. According to Action Fraud, the UK’s National Fraud and Cyber Crime Reporting Centre, reports of scams relating to cryptocurrency investments went up by 57% (to more than 5,500) in 2020 and victims lost an estimated £113 million last year.

The UK’s banking industry introduced a voluntary code in May 2019 under which victims of authorised push payment scams could be reimbursed but, according to UK Finance this voluntary scheme “is not always working as intended, with a lack of consistency in consumer outcomes and a lack of clarity for signatories in how to implement it”. Caveat emptor is a sensible piece of advice, but criminals are using ever-sophisticated techniques. Banks are spending ever-bigger amounts on combatting fraud, but more can perhaps be done to educate their customers about the threats.

Security at Glint

At Glint, we take security very seriously indeed. We will continue to provide assistance and guidance to Glint clients in the light of new threats and vulnerabilities. We do our utmost to protect clients against fraudulent activity regarding their Glint accounts. If in doubt, clients can always block their Glint card via the Glint app. We always update clients about improvements in our security procedures that may affect them regarding payment services. Nevertheless, clients should immediately raise concerns regarding suspected fraudulent or malicious use of their Glint account.

To arm yourself against the criminal take these steps:

STOP: Taking a moment to stop and think before parting with your money or information could keep you safe.

CHALLENGE: Could an email or SMS be fake? It’s ok to reject, refuse or ignore any requests. Only criminals will try to rush or panic you.

PROTECT: Contact Glint immediately if you think you’ve fallen for a scam or have been the victim of fraud. Always report scams and fraud to Action Fraud in the UK and to the Federal Trade Commission (FTC) in the US.

We believe that gold is the only true form of reliable currency – and we want to make sure you hold onto your gold, so you can use it safely in your everyday life, to either help protect your savings against inflation, or to spend, anywhere in the world that accepts Mastercard®.

Soapbox: Archegos and more toxic bank lending

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A mammoth container vessel gets stuck in the Suez Canal and creates a bottleneck in global trade. Total trading losses from the grounding are calculated at $54 billion. Meanwhile, a ‘family wealth’ firm called Archegos – from the Greek, meaning ‘the one that takes the lead’ – blows up, leads to mammoth losses for banks, and jolts the stability of the global financial system. With another $10 billion down the drain.

A black swan event is something unpredictable, beyond what is normally expected. The grounding of the container vessel Ever Given in the Suez Canal was unpredictable and unexpected – but surely the implosion of Archegos was built-into the financial system, which seems to have learned nothing from the Great Financial Crash of 2007-09? Given the way that banks still operate, where massive leverages (using debt to invest) are commonplace, an Archegos event was just waiting to surface. What is worrying is that, thanks to banks having learnt little from the 2007-09 debacle, there may be more Archegos’ lurking.

Some recent notable ‘black swan events’: Source: Visual Capitalist

 

‘Family office’ sounds cozy

Archegos is (or maybe that should be ‘was’) a ‘family office’ that traditionally handles investment and wealth management for a wealthy family, generally with at least $100 million of investable assets. It started life in 2013. As of last year Archegos managed $10 billion.

That definition – ‘family office’ – is important.

After the Great Financial Crash of 2007-09 the US tried to tighten its scrutiny of the financial services industry. It passed into law the ‘Dodd-Frank Wall Street Reform and Consumer Protection Act’. This was intended to restore stability and resilience to the financial system. However, as the former Economist financial journalist David Shirreff said in his excellent short book, which called for a ‘banking revolution’ after the 2007-2009 systemic meltdown, “the Dodd-Frank Act of 2010…lost its edge in the course of implementation”.

Critically all ‘family offices’ are excluded from some of the criteria of the definition of ‘investment adviser’. The Private Investor Coalition or PIC, which was formed in 2009 and is an opaque “coalition of single family offices” proudly lists as one of its ‘accomplishments’ its successful lobbying in Washington D.C. to get family offices exempted from the US Securities and Exchange Commission (the SEC – America’s financial watchdog) registration as financial advisers.

Archegos was created by Bill Hwang, formerly of Tiger Asia Management, a multi-billion dollar hedge fund. In 2012, Hwang pleaded guilty on behalf of Tiger Asia Management to US charges of fraud. The charge was that through insider trading the firm gained $16 million of illicit profits in 2008 and 2009.

The primary holdings of Archegos were in total return swaps, an arcane financial instrument whereby the underlying stocks are held by banks – which meant that Archegos had no obligation to disclose its large holdings, which it would have had to do if it had dealt in regular stocks.

 

 

How does a man with a criminal record for insider trading get to manage a ‘family firm’? And is that ‘family firm’ definition a mere fiction, constructed so as to avoid SEC scrutiny?

There could be as many as 10,000 ‘family offices’ around the globe, with around $6 trillion of assets under management. The Investment Advisers Act of 1940 – from which ‘family offices’ are excluded – requires registration with the SEC. Had Archegos not been able to elude the SEC’s supervision, it would never have got off the ground – registration with the SEC fails if “the adviser or one of its employees has” committed a securities-related crime.

What has happened?

As recently as 2018, Bill Hwang was deemed by Goldman Sachs to be so risky that it refused to do business with him. That blacklisting didn’t last long. He soon became a valued (and valuable) client of Goldman Sachs, which was joined by the likes of Morgan Stanley, Credit Suisse, Nomura and other investment banks who formed an orderly line to lend him billions of dollars so that he could make his highly leveraged bets on the US media companies ViacomCBS and Discovery, and various Chinese companies such as the internet company Baidu.

Wall Street analysts had begun to feel uncomfortable about the speed of the stock price rise of some of these companies – ViacomCBS had surged past $100 from $14 and Discovery had climbed from $30 to $80 in a few months – and they started to downgrade them, triggering downward spirals in their price.

By Friday last week, the value of Archegos’ holdings had dropped and his banks started to make margin calls – asking Archegos to deposit additional money, or sell some of stock. Archegos started to sell and is thought to have sold shares worth $3 billion, triggering a wider sell-off and price falls, not just in the shares held by Archegos but also the banks that had extended credit to Archegos. The share price of Nomura and Credit Suisse fell by more than 10% on Monday this week.

As in 2007-09, bankers have again been seduced by greed and shown themselves unable to assess their own exposure to risk. In the words of the Financial Times: “Hwang was seen as a compelling prospective client by prime brokers, the potentially lucrative but risky division of investment banks that loans cash and securities to hedge funds and processes their trades. Concerns about his reputation and history were offset by a sense of the huge opportunities from dealing with him…The fee-hungry investment banks were ravenous for Hwang’s trading commissions and desperate to lend him money so he could magnify his bets”.

 

What will happen now?

It’s possible – but unlikely – that we could be headed for a repeat of the 2007-2009 years, when banks blew themselves up via complex derivatives based on their over-leveraging. Some are optimistically pointing to the fact that banks are much better capitalised today, so are more able to withstand this kind of shock. Yet it is thought that around 10 banks racked up more than $50 billion of credit exposure to Archegos. The biggest fear is that what happened at Archegos could be the start of a domino effect; another Japanese bank, Mizhuo, has started an internal investigation into possible losses resulting from its involvement. Two others – Nomura and Mitsubishi UFJ – have warned they face losses of (respectively) $2 billion and $270 million.

Scarcely a decade after the last financial implosion regulatory control and banks’ self-supervision has failed once more. David Shirreff wrote that “‘sophisticated finance’ has developed into a self-serving, self-congratulating culture”; a culture that clearly – from the evidence of the banks’ failure to scrutinise Archegos – remains a threat to the preservation of financial value.

And that’s why Glint was created in 2015 – to enable everyone to own gold, to use gold as money, regardless of how rich or poor. And to be free of the kind of banking culture that is too cavalier about risk. Placing money on deposit with banks is no longer as safe as it used to be. Placing money in gold with Glint does not carry those banking risks – the gold is physically allocated to you (meaning no-one else but you can touch it), and is held in a secure Swiss vault.

Soapbox: What are US bonds telling us?

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The consensus about the US (and the global) economic recovery is that it will be strong, fuelled by a successful and widespread vaccination programme which is likely to ensure herd immunity in the UK and US – perhaps Europe won’t be able to join the party – by the early summer.

In the US, the personal saving rate – personal saving as a percentage of disposable personal income, which may “generally be viewed as the portion of personal income that is used either to provide funds to capital markets or to invest in real assets such as residences” has reached a record high. All that lovely money waiting to escape!

The US Federal Reserve expects growth to be 6.5% this year, unemployment to be 4.5% by the end of the year and “core personal consumption expenditure inflation”, the Fed’s preferred inflation measure, is expected to rise to 2.2%, above its 2% target. The Fed is taking a relaxed view about inflation; Robert Kaplan, president and CEO of the US Federal Reserve, says that he expects the Fed to “start raising rates in 2022”. In March 2020, the Fed said it was expanding its quantitative easing (QE) to unlimited amounts. The Fed will continue to buy US Treasury bonds at the rate of $120 billion a month until “substantial further progress” is made towards its goals – which are, we remind you, two-fold – “stable prices and maximum sustainable employment”. It deliberately avoids defining what “maximum stable employment” might mean. About 41% of Americans who are out of work have been without a job since last August and are classified as ‘long-term unemployed’; in the Great Recession of 2007-09 it took almost two years for the long-term unemployment rate to reach that level.

In February, Janet Yellen, the US Treasury Secretary said although the official unemployment rate was 6.3%, the effective rate was close to 10%; pre-pandemic it was 3.5%. Getting to 4.5% unemployment by the end of this year is a very tall order. Yellen is super-relaxed; she also said that interest payments on the US federal debt were no higher than in 2007 and stood at about 2% of GDP – i.e. about $429 billion. Others have calculated that the US must pay its creditors $1 million (£725,000) every 1.4 seconds.

The Fed used to hike interest rates in anticipation of higher inflation. Now it’s waiting to see how high inflation goes before any rate rises.

All this sounds like mom-and-apple pie. What could upset the apple cart?

The Biden-Yellen gamble

 

What happens in bond markets gives a more objective view of the future than given by any central banker, all of whom have a vested interest in taking a rose-tinted view of likely outcomes.

In this respect, it’s worth noting that the yield on the US 10-year Treasury bond, one of the world’s most closely watched interest rates, rose above 1.7% last Friday, up from 0.92% at the beginning of the year, as investors sold the debt. The yield on the 30-year Treasury bond moved above 2.5%.

This run-up in bond interest rates at the long end of the curve reflects expectations of a higher inflation rate – which is precisely what the Fed wants to see happen. Treasury yields are often seen as a barometer of inflation expectations; when investors expect higher inflation, bonds become less attractive and are sold, while yields, which have an inverse relationship with bond prices, increase.

The question is – who to believe? US bond yields are telling us that inflation is coming back, possibly quite strongly. Yellen and the US Federal Reserve Governor, Jerome Powell, are telling us to stay calm, relax, nothing to see here, move along. What President Joe Biden, architect of a gargantuan $1.9 trillion ‘stimulus’ package, thinks, is anyone’s guess. On top of that $1.9 trillion, Biden is now contemplating an additional $3 trillion splurge on infrastructure, clean energy and education.

The temptation for Yellen and Powell will be to ignore the inflation-is-back market signals until the very last minute; if they pushed up interest rates too soon that would choke off Biden’s stimulus efforts. Rudiger Dornbusch, the late German-born economist who worked at MIT for 27 years, once said that none of the US expansion efforts in the second half of the 20th century died in bed of old age: they were all “murdered by the Federal Reserve”.

The latest expansion effort is so closely aligned with Biden’s electoral success and the Democrat Party’s principle mission – “a better, fairer, and brighter future for every American” – that it is unlikely to be murdered by the Fed moving on interest rates.

But leave it too late and inflation might get a grip and move beyond control. In 1965, the US inflation rate was just 1%; 15 years later it hit 14%. Biden’s $1.9 trillion could turn out to be no more than a sugar rush; where will all this free money go? It’s already had a notable impact on the inflows into equity funds – almost $170 billion have gone into stocks and shares in the past month. US money supply has been growing at an annual rate of 30% and in January this year reached its highest level in history.

 

 

The free money idea is starting to take hold in the US. The Universal Basic Income (UBI) notion is getting wider attention and grassroots’ support, following a two-year experiment conducted in Stockton, California, which gave all its inhabitants $500 a month, no strings attached. Dozens of town mayors have now joined the Mayors for Guaranteed Income organisation. The Stockton mayor said there was a remarkable increase in reported wellbeing among his citizens as a result of the $500 per month. Who doesn’t like free money?

There are two essential forms of inflation – demand-pull and cost-push. In my view –the Fed and the Biden administration are taking “steps into the unknown” in the words of Larry Summers, President Obama’s former top economic adviser. Pumping money into an economy will increase demand for goods and services, businesses will struggle to increase production; supply could remain constant and hey presto! we have demand-pull inflation.

In any case however, more extreme currency movements are likely, bonds will continue to give us inflationary signals, and – despite some short-term volatility, resulting in a 20% or so decline since gold’s peak last August – using gold as money via a Glint account may help you to withstand a weakening fiat currency; and could help offset the likely continued decline this year in the US dollar’s purchasing power.

Soapbox: Helicopter money floats across the US

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Millions of US individuals and families are receiving their federal gifts, in the form of $1,400 ‘stimulus’ checks ($2,800 for married and joint tax-filers) thanks to the passage into law of the American Rescue Plan Act of 2021. If they are a family of four and have two qualifying dependents they could be getting $5,600. These ‘Biden bonuses’ will go to anyone who earns less than $75,000 (around £54,000) a year; in 2019 that was about 53% of Americans.

Can the US afford to give away $1.9 trillion? An absurd question – the answer is clearly both yes and no. It can because the government controls the printing presses and can obviously just churn out more dollar notes. It probably shouldn’t because the US national debt is now more than $28 trillion, with a per citizen debt of some $85,000; the federal debt-to-GDP ratio is now almost 130% – in 1960 it was some 53%. The US spends about $365 billion a year on interest payments on this debt; in 10 years that interest payment will have doubled at least.

The US government has been hyperactive in giving away money in the past year. In total there have been five stimulus-and-relief packages since the pandemic began to make itself felt in March 2020. This latest, called the American Rescue Plan Act, 2021, which will distribute $1.9 trillion in a confusing multitude of ways, follows the Coronavirus Aid, Relief, and Economic Security (CARES) Act of March 2020, which gave $2.2 trillion to businesses, states, municipalities and individuals. The Consolidated Appropriations Act, 2021 (all 5,593 pages of it, the longest Bill ever passed by Congress) gave out $2.3 trillion. Altogether the largesse has been staggering – about $8.5 trillion.

This is a mind-boggling sum. Some are worried that as much as $30 billion will find its way into the US stock markets, pushing asset-price inflation even higher. American day-traders playing the stock markets could put almost $3 billion into equities when they receive their latest cheques.

Modern Monetary Theory

What is the point of doing this ‘stimulus’? Is it to raise the poor out of their poverty? Or to kick-start economic growth? Or both?

In the US, anyone who has an income of $13,011 a year is defined as living in poverty. Total welfare costs have risen from $722 per person in poverty in 1964 to $22,740 per person in 2019. Yet despite the increase in spending, the poverty level ‘status’ has remained fairly constant at between 11% -15% of the population.

It would be churlish to argue that those who are truly poor should not be helped by the state, but living in ‘poverty status’ – which is about 12% of Americans – is very different from the number actually living in poverty, which one source puts at about 3%.

 

Source: http://federalsafetynet.com/poverty-and-spending-over-the-years.html

 

Proponents of Modern Monetary Theory (MMT), who now seem to be in the driving seat of governments and even international institutions, argue that such state largesse doesn’t matter, and especially doesn’t matter at a time of crisis such as in the Covid-19 global pandemic.

MMT argues that governments can spend as much as they like without worrying about paying for it with higher taxes or increased borrowing – they can pay using new money created by their central bank. The only limit is if inflation starts to rise; in which case the solution is to increase taxation and raise interest rates. But those actions would hamper economic growth – hence the dilemma facing the US federal government, and why it is currently taking a relaxed view about the prospects of inflation.

Bubbles getting bigger

Signs of economic and financial bubbles now surround us. In the US, daily stock trading volumes – which averaged 10.9 billion in 2020, more than three billion up year-on-year – are averaging 14.7 billion so far this year. The total value of SPAC (special purpose acquisition companies) deals rose by 400% between 2019 and 2020. Real estate prices are rapidly rising outside of major cities. While many low-end service workers have lost their jobs, higher-paying professional jobs were unaffected and even prospered. Low-skilled jobs such as warehousing, grocery stores, and delivery services have boomed.

“The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000… this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios”. So said Jeremy Grantham, co-founder of GMO asset management, at the start of 2021.

It’s clear that much of the ‘stimulus’ money is going into speculative fervour. A good example is the rise of Bitcoin, which has hit a new record of $60,000. Governments think that giving away money encourages people to buy stuff and get the wider economy moving again; but vast sums have been ploughed into financial assets, or legitimised gambling. This does not drive real economic production, the production of goods and services actually serving a human purpose.

The mission of the US Federal Reserve is to ensure maximum employment and stable prices. With 10 million jobs still lacking from where we were in February 2020, this latest US ‘stimulus’ may not be the last. ‘Stable prices’ however may fall by the wayside.

No-one can tell when or how this bubble will pop. No-one can tell how it will affect the overall economy. No one can tell the future for fiat money (although if the past is any guide the purchasing power of fiat money has only one direction – down). The uncertainty is profound. Of course, at Glint, we understand that the value of gold against fiat currencies doesn’t always increase and right now we are experiencing a dip, but despite the fall in the gold price by some 15% since its peak last August, we believe that gold remains compelling. Twenty years ago, gold traded at around $275 an ounce; even at today’s lower-than-peak price gold has risen by more than 500% over those 20 years.

Soapbox: A Finite Supply of Fools

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Sometimes it’s hard to stand aside and just watch. What would you have done during the tulip mania or South Sea bubble episodes? Would you have had the fortitude to stand back and let others make fortunes (or lose everything) from things that had little or no intrinsic value? Or might you have succumbed at some point and put your life savings into something that you could not exchange and whose use-value was zero?

Yes, we are back in the land of Bitcoin and other cryptocurrencies.

The price of Bitcoin has surged by almost 10% in 24 hours (as of Tuesday afternoon this week) to above $54,000 and within spitting distance of its record price (so far) of $58,000 on 21 February. Bitcoin’s market capitalisation is above $1 trillion (£720 billion) with some exuberant fans saying it could rise to around $100 trillion.

 

 

In the US, Coinbase Global, which claims to have 43 million verified users who can trade Bitcoin and other cryptocurrencies, plans soon to do a public listing on Nasdaq, with a valuation of around $100 billion. On its website, Coinbase, which has been in existence for just nine years, says its genesis was the “radical idea that anyone, anywhere, should be able to easily and securely send and receive Bitcoin”.

As the above chart shows, if Bitcoin is a bubble it’s gone much higher and faster than either tulip-mania or the South Sea version. There’s no conclusive evidence that it either is or is not a bubble. Only time will tell.

The cryptocurrency revolution

One thing is for sure – the 2008 financial crash spawned many profound socio-economic changes and the development and growth of cryptocurrencies is one of them. It’s a revolution and, like many revolutions, the appeal is mostly for younger generations. According to a survey of February this year, 40% of British 18-34 year olds said they had bought at least one type of cryptocurrency, dropping to just 4% for those aged 55+. It’s also more of a male thing – 24% of men have bought some compared to 13% of women. 71% of Brits say they have no intention of ever buying any cryptocurrency.

The most popular reason why people have already bought, or intend to buy, cryptocurrency is that they believe it is going to be very influential in the future (23%). This is closely followed by 21% of people who are frustrated with the interest rates for savings accounts. Other reasons why people include not wanting to miss out (20%). 19% of potential, or existing, crypto buyers said it seems like an easy way to make money. 16% said that influential people, such as Elon Musk, talking about cryptocurrency had convinced them to invest.

Risky investment or money?

We understand why cryptocurrencies were created. It’s about declining faith in fiat currencies, and the desire of people to avoid from becoming hostages to government control over their personal wealth. Fiat money, the money most of us live by, is a currency that a government has simply declared to be legal tender, despite the fact that it has no intrinsic value and is backed by nothing. Cryptocurrencies share those two latter characteristics with fiat money.

 

 

But we think that cryptocurrencies are nevertheless going to become a permanent feature of the financial landscape, if only because the temptation for governments to use blockchain technology (which underpins cryptocurrencies) is just too strong. Governments everywhere, from China to the US, are already rolling out their own state-controlled digital currencies (CBDCs and/or stablecoins) or planning to do so.

What do we want from a currency? A number of things:

1. We want it to be stable – or as stable as possible – over time. If it loses purchasing power then public confidence in it will die.

2. We want it to be free, as much as possible from manipulation, so that we can rely on its value.

3. We want to be able to use it whenever we like or need, to buy a coffee or a home.

4. We want to be able to save it for the future.

5. We want to be able to transport it easily and be able to use it when we go travelling.

6. We need our currency to be easily transportable and liquid (i.e. how quickly it can be used).

These minimal considerations are overlapping, crossing both immediate ease-of-use and investing. In our view holding gold with Glint fulfils all these needs while cryptocurrencies meet only 2 and 4 – and perhaps not even those.

Gold is now transportable

A paper published in January this year argues that Bitcoin’s volatility is almost 10 times higher than those of major exchange rates and that therefore “Bitcoin cannot function as a medium of exchange and has only limited use as a risk-diversifier”, although Bitcoin “shows store of value properties”.While cryptocurrencies are invulnerable to bank robberies and counterfeiting, their computer-based development make them a potential target of “denial of service” attacks.

Bitcoin is massively illiquid; 78% of Bitcoin is illiquid. It is a Godzilla of energy consumption; Bitcoin uses more electricity than Argentina. And there is an increasing likelihood of a tightening regulatory noose around the privacy of cryptocurrencies.

One of the old drawbacks against gold being used as a currency was the (previously justified) claim that it was heavy and not easily transported. With Glint this has been eliminated. Glint enables its users to carry with them any amount of gold, from millions to just a few dollars or pounds, which can be spent and used in daily life – or saved if you prefer. For us, the advantages of securely-held Glint-gold easily trump the slow, energy-heavy, vulnerable and hardly usable Bitcoin – or any other cryptocurrency would-be currency.

Bitcoin and many other of the 3,999 cryptocurrencies now in existence are no doubt here to stay. Governments will use the underpinning technology for their own purposes – but gold is not open to government manipulation. With Glint, gold has already become the alternative currency; immediate, transportable and easily accessible as an instant means of payment.