Mensa Emag 2015 - The Upcoming Financial and Economic Crisis.

Short Version of the Presentation : Mensa Emag 2015 - The Upcoming Financial and Economic Crisis.
The Entire Uncut Video : https://youtu.be/IRv-eegN37k
The presentation was recorded at the following event: 

Economic Cycles are a natural phenomenon. Booms and busts are clearly identified with hindsight in the financial markets. Lately many political institutions such as governments, central banks, IMF, World Bank etc. have tried to corner natural economic cycles. This has an accumulating effect on the crisis to follow. With little tools to contain the next inevitable crisis, we will try to foresee what could be the solutions, what is the most likely outcome and perhaps, how to protect or gain from the future events.

First we will study through the concept of economic cycles and how it applied to the last crisis from 2008-2009. Then we will study the different economic indicators as well as indexes that clearly drive the markets and economies.

The Stock market inflation periodicity theory will be explained using mostly Central banks interest rates as a driver for the markets.

Finally, a warning about the next potential crisis unfolding from june 2015 will be explained as well as different outcomes and ways to prevent, protect or profit from potential future events.

To have more details about "The Stock Market Periodicity Theory" relate to the old post:

-JoëThierry Arys Ruiz


The Demise of the US Dollar, Why and How

Bullet Points and Thought Process

·         The US Dollar and Bonds may face devaluation and/or a partial default.
§  Fact Sheet: US National Debt 15, 9 Trillion (104% of GDP), that’s 50K per citizen to pay now, or 140K per tax payer to pay now…. Albeit Interest rates are still running at historic lows, when interest rates go back up, it will be unsustainable.
§  More importantly, unfunded liabilities are 119.8 Trillion equivalent of 1 million liability per tax payer…
> No need to be a rocket scientist to figure out they cannot pay back the debt. They are insolvent just as many European countries are it is only a matter of time. There will positively be Municipal defaults … As a result, whatever exposure a business has in US Dollars will somehow be impacted.
Risk: right fat tail (major depreciation, asset inflation) followed by left fat tail (major depression, deflation…)

Ø   Hedge or diversify FX exposure:
§  What others are doing is getting out of the USD when possible.
§  There are signs that macroeconomic policy insiders consider there is No need of USD to trade with China. Japan, Brazil, Australia and Russia, and the list is growing…
-          China, Russia to dump US dollar for bilateral trade: The International Business Times - 24/11/2010
-          India and Japan sign new $15bn currency swap agreement: BBC - 29/12/2011
-          Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says: Bloomberg – 07/01/2012
-          China and Australia in $31bn currency swap: FT – 22/02/2012
-          Iran accepts renminbi for crude oil: FT – 7/05/2012
-          Japan, China to launch direct yen-yuan trade on June 1: Reuters - 28/05/2012
-          India, Iran to settle some oil trade in rupees: Reuters 20/01/2012
-          …etc…

Conclusion: There is evidence of USD as primary commodity and reserve currency is ending

1)      Countries trading with each other without the use of USD
2)      Less Global exchanges of goods are made with the USD.
-          IMHO, I believe the US tried to prevent it with embargoes i.e:  Iraq wanting to trade Oil in EUR, not Dollars ; and now Iran and others who want to trade in Gold vs. Petrol…

Thesis:  There will be a gradual debasement1 or a sudden devaluation2 of the dollar or both1à2.
Before that, I believe there is 3 Signs to watch for:
1-      Major Crack in the Derivatives Market (The leverage will collapse)
-          Fact: Top 9 Banks Exposure $228.72 Trillion = Roughly 3 times the entire world economy (See: Infographics)
-          I suspect at some point there will be a deleverage process; the issue is to know when…
-          JPMorgan May Lose $5 Billion on Derivatives, WSJ Reports: Bloomberg - 18/05/2012
àThis could be only the tip of the iceberg. There is way more to come…

2-      Currency Wars: US QE3 and China RMB floating currency & Trade Wars
-          China gives currency more freedom with new reform: Reuters – 14/04/2012

3-      When the Fed Increase of 1% in interest rates: At that point it is too late.
-          The mechanisms would suddenly increase the notional interest on the debt as well as strangle the economy basis economic players (banks , businesses, student loans…) who profited artificially low interest rates could face some type of margin calls…
-          For the record: In my humble opinion the solution could either be a collapse or renewal of the US dollar perhaps merging Canadian, Mexican and Amercian reserves under an Amero. (particularly if the euro remains particularly strong vs the US dollar i.e > 1. Showing a relative success.
But this will not happen soon...

The Gold Trap: Get physical

 Industry players which are somehow locked:
·         Mining Producers use forward sales and have locked in their production.
·         As we have seen, financial institutions leverage up to 100’s of times in the market vs. the physical reality. They do not have the collateral. Hence they sold futures 24th Sept. 2011.
·         Funds and ETF so called “physically backed”, have clauses, for which in case of default, they would settle in cash or nothing, in other words they have no purpose at all. Note: GLD is the largest gold trust in NAV. As an example for gold:
à“Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss” – GLD Prospectus, Page 11.
àBecause neither the Trustee nor the Custodian oversees or monitors the activities of subcustodians who may temporarily hold the Trust’s gold bars until transported to the Custodian’s London vault, failure by the subcustodians to exercise due care in the safekeeping of the Trust’s gold bars could result in a loss to the Trust. GLD Prospectus, Page 11.
à“The ability of the Trustee and the Custodian to take legal action against subcustodians may be limited, which increases the possibility that the Trust may suffer a loss if a subcustodian does not use due care in the safekeeping of the Trust’s gold bars.” – GLD Prospectus, Page 12.
à“In addition, the Trustee has no right to visit the premises of any subcustodian for the purposes of examining the Trust’s gold or any records maintained by the subcustodian, and no subcustodian is obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such subcustodian.” – GLD 10-K Filing, Page 18
·         Nothing guarantees these trusts and vaults to swap several times the Bullion in order to get additional income.
·         Who own the gold? I suspect it is eventually the physical holder who will be in position of power.
Transforming Crisis into Opportunity
Now that you know, It is for you to find a way to profit from that.


Global Market Analysis/Forecast: Phase II : Central banks solution: EU QE2 (double EFSF), Fed Cap Yield (QE3)

The job numbers were a surprise for the market with only 18k jobs created against 97-105K expected. Meanwhile the important data is not the 9.2% unemployment rate but the participation rate at 64.1 percent. The employment-population ratio decreased by 0.2 percentage point to 58.2 percent yet this data does no not include the so called “discouraged workers”. Besides a week economic reality, the greater the economic concerns the better chances for a quick fix stimulus. Therefore, counter-intuitively the short term view on the market is rather positive assuming more stimuli is to come allowing assets to inflate for an other round.
Following we will interpret the most relevant market-moving headlines:

Ø  Greece, Italy top agenda at EU finance chiefs meeting – Reuters:  Top EU officials hold urgent debt crisis talks
         ECB's Trichet, Eurogroup's Juncker to join Monday meeting
         Concern grows over 2nd Greek bailout, threat to Italy
         Getting private sector role in Greece may require default
ð     Since the Greek rescue package is almost a done deal, the way to open for a second bailout in September is first to increase the European Financial Stability Facility (EFSF) which is the asset purchasing program in Europe. There is a possibility of the EFSF to double in size. This would also allow Europe to put a safety net under Italy and calm the Markets.

Treasury Secretary Timothy F. Geithner said the Obama administration wants the most comprehensive deficit-cutting deal possible and reiterated that failing to raise the debt limit could have “catastrophic” consequences.
ð     As far as the US is concerned, this week-end, T. Geithner said he expects the debt ceiling to be raised by the end of next week. The debt ceiling needs to be raised before the eventuality of QE3. In fact, once they raise the debt ceiling, the problem of “who is going to buy the debt” will begin. To avoid interest rates to go out of control, the fed could launch a QE3 in a form of Interest rate cap.
An, Interest rate cap is even worse than a defined QE program. Interest rate caps could mean a yield curve predefined by the Fed, where the Fed would buy as much US debt as necessary to meet the desired yield. Effectively, rather than a defined amount of QE we can suppose an unlimited budget, the last round of asset purchases was around 600billion. Note QE2 did not end since the amount is reinvested as maturity comes due… Here is the issue, The Fed representing already 70% of US Debt purchases:
- An unlimited program would allow the remaining US Debt holders to exit US treasuries by dumping them to the Fed.
- In this case there would be a systemic risk if the Fed end up buying more than 90% of Treasuries, this would mean a phony market or no market at all and could be the beginning  of a greater crisis based on subprime governments across the world. Meanwhile, this could take some time, first to materialize and then to be pointed out.

Warning: Risk Premium.
“No incentive in holding CDS and the ECB accepting junk bonds as collateral adds a risk premium to the market.”

Ø  ECB Suspends Ratings Threshold On Portuguese Debt As Collateral – Nasdaq: The governing council of the European Central Bank has decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for euro-system credit operations involving marketable debt instruments issued or guaranteed by the Portuguese government, the ECB said in a statement Thursday. The suspension will be maintained until further notice…
ð     After raising Interest rates to 1.50% on July 7th, Jean Claude Trichet also revealed a change in the rules binding the EFSF and the ECB. Suspending the rating requirement for the bailout fund gives a clear message to the market: The ECB rejected the assessments of the rating agencies and The ECB is willing to bend their own rules to rescue the Euro.
ð     During the question session J. C. Trichet reiterated:”No credit event, no selective default”. To the question: Is the ECB denying evidence or do they have a backup plan? We can argue that they have a plan which could be to increase the bailout facilities as this is in line with their latest proceedings.

Ø  Greek Rollover Probably Won’t Trigger CDS, ISDA – Bloomberg : “If it’s voluntary, any rollover or exchange doesn’t trigger CDS.”…
ð     First we can question how “voluntary” the restructuration is. Rolling over is reinvesting at maturity whereas in this case the maturity is prolonged without necessarily considering the liquidity neither the solvency of the Bonds. The liquidity issue is fixed but not the core problem which is the long term insolvency.
ð     Second, we can question the message sent to the markets: Because of the European countries and the ECB seem to be willing to bailout Greece at no matter what cost and given that such rollover wouldn’t be considered as valid to trigger CDS it clearly becomes less attractive to hold CDS. By following this logic there would be no incentive in seeking protection through CDS.

Market Recommendations:

Long term, buy on Dips: BG, FRES, XTA & BRBY,IMT, EMG

Longer Term:

è We could see a progressive money flow from bonds back to equities. We hope the liquidity injected by major Central banks to maintain bond prices will find a way into equities and other “hard assets”.
è  Recommended to hedge against inflation and a relative appreciation of emerging market currencies; shares of companies having a large part of foreign operations and with high pricing power (ability to raise prices easily due to a non elastic demand and very price elastic products) such as luxury goods operating in emerging markets and tobacco companies. Energy companies are limited to this effect due to government price regulation. In this case The underlying commodities such as Oil and Gas as well as Corn and other agriculturals are better off. Since they benefit directly from the ongoing "money printing" and stimulus.
For the end of July- August: ≈26/08/11
Ø  If the debt ceiling is raised and QE3/Yield Cap materializes bond and particularly US Treasury rates could go back to near October lows based on growing recession fears and negative Economic numbers.
Ø  More stimulus would turn “risk on” trades and inflation concerns where of more risky investments such as high yield emerging market bonds and Stocks could benefit.
Ø  Most importantly commodities and precious metals will benefit from the unintended consequences of the stimulus: Inflation
Macro Forecast for the next 2 months:
Economic concerns, jobs and debt crisis => Central banks solution: EU QE2 (double EFSF), Fed Cap Yield (QE3)
“When the debt ceiling is lifted, the US Treasury will need buyers. There are still no jobs and growth objectives are not being met, a good reason to launch QE/Cap yield plan while the European debt crisis makes America look good.”
From the previous report we are ending the 1st Phase:

1st phase: Recession Fears - June ~ Mid August 2011

ü  Fears that the Debt ceiling will need to be approved with deep cuts in government spending which can lead to a revision of GDP growth (less stimulus) 
ü  The Market will anticipate interest rate hikes from the ECB and/or the BOE. This can have a negative impact on growth prospects and exacerbate debt concerns (Greek restructuring…) in the EU 
ü  Most importantly, the end of QE2 was a strong test on how strong the recovery was and how much has been an artificial effect of the stimulus.
We have seen a counter- intuitive effect, whereas the stimulus is in the money market (bond purchasing program…) Equities and commodities were the ones dropping over recession fears (Less Stimulus or artificially low interest rates  = less cheap credit  = less consumption èless growth)

We are now heading to:
2nd phase: A Short Term solution –~ Mid & End August 2011
  • The Debt ceiling is raised but not enough cuts in government spending are done despite what republicans will certainly display as a “win”. The government is allowed to keep going into debt and push consumption (rather than production) 
  •  Major Central banks lack of rigor and do not raise interest rates despite the potential inflation for the UK. As far as the ECB despite having rates at 1.5% the European Debt concerns will exige an other round of bailouts and a bigger EFSF fund which in effect adds further potential monetary injection (EU QE2)
  • An increasing propaganda of QE3in a form of a Yield Cap is announced as a possibility and a “good thing” to ensure economic growth.
We could still see one or two weeks of downside, the real trigger will be either an increase of the European bailout fund or the US debt ceiling being lifted. Due to disappointing economic numbers and less inflation, Bernanke will have more arguments to push QE3/Yield Cap as a “necessary measure” to “ensure a recovery and for JOBS” whereas the real reason will be to stop the stock market fall, push inflation, depress the US dollar and try to boost exports. Perhaps QE3 could happen in August after a more disappointing economic numbers.

The Market Strategy:
         Phase 1 was: Good for Bonds and Currency.
         Phase 2: Is very good for Commodities (blue) and Precious metals (Yellow) and positive for the Equities (to a certain extent between 0 and 5% inflation.
 Mini Charts 12-07-2011 
(Click Image to Enlarge)


    Global Equity Market Analysis/Forecast: End of QE2, Market correction, Panic, QE3

    Forecast for the next 2-3 months :  
    End of QE2=> Market correction, Panic => Bernanke Solution: QE3
    When QE2 ends, we can see a de-leverage process. If the FED try QE3 now it wouldn't be accepted. We need a market panic for the FED to have arguments so even those who are against QE3 will ask for it.

    In my humble opinion the market is going to see an important correction over the next 6 weeks the reason being:

    Scenario 1:
    • The Debt ceiling will need to be approved with deep cuts in government spending which can lead to a revision of GDP growth (less stimulus) 
    • The Market will anticipate interest rate hikes from the BOE and ECB. This can have a negative impact in the UK economy and exacerbate debt concerns (Greek restructuring…) in EU 
    • Most importantly, the end of QE2 will be a strong test on how strong the recovery is and how much has been an artificial effect of the stimulus.
    ?         We may see a counter- intuitive effect, whereas the stimulus is in the money market (bond purchasing program…) Equities and commodities could be the ones dropping over recession fears (Less Stimulus or artificially low interest rates  = less cheap credit  = less consumption = less growth) A similar movement to what we have seen when S&P Downgraded the US economic forecast.

    What could invalidate my views is:
    Scenario 2:
    • The Debt ceiling is raised but no major cuts in government spending is done. Government keeps going into debt and push consumption (rather than production) 
    •  Major Central banks lack of rigor and do not raise interest rates 
    • An increasing propaganda of QE3 as a possibility and a “good thing” to ensure economic growth.

    IMHO, What is more likely to happen is a correction as explained in Scenario 1. This, in effect will allow a technical correction after the sharp rise since march 2009. Then, this will give more arguments to Bernanke to push QE3 as a “necessary measure” to “ensure a recovery and for JOBS” whereas the real reason will be to stop the stock market fall, push inflation and devalue the US dollar to gain competitiveness (more exports). Perhaps QE3 could happen end of July beginning of August after the market drop and QE2 ended.
    I attached the previous document with the different sectors,
    • Scenario 1 is Good For Bonds and US currency (Gray Colour)
    • Scenario 2 is very good for Commodities (blue) and Precious metals (yellow) and positive for the Equities (to a certain extent <0-5%inflation>)

    Following, Charts and illustrations:

    (Click the image to enlarge)

    For the FTSE, markets are interconnected:

     *Models by: Joé Thierry Arys Ruiz , 11/05/2011 - All rights reserved


    Forex Market Analysis 29-09-2010

    Long Term Perspective:
                    The last big drop of the dollar grew concerns about the US economic and budgetary situation. The dollar could be in a downward spiral in the long term caused by the repeated Quantitative Easing. Investors expect the Fed to increase its balance sheet by at least half a trillion dollars by November [1] (see survey). The next Fed minutes are going to provide a clearer perspective. By increasing its balance sheet the Fed is boosting the US Bond market. In fact, many market watchers do believe for many good reasons that the Fed will always prefer inflation to deflation. The current policy is proving by multiplying the Quantitative Easing that they will use all available resources to avoid a deflation that could put America back to recession. Meanwhile, The secondary effect of such a longer than expected stimulus is a long term downward pressure on the US dollar and a systematic risk of hyperinflation.
                    Another important issue rises as the global community could question the US dollar as the world's primary reserve currency as well as to be the international pricing currency for commodities. The political pressure between the United States and China regarding the currency market could fuel eventual conflicts during the G20 as U.S. lawmakers believe that China should revalue the Yuan by as much as 40 percent[2].
                    After a big mediatized decline from October 2009 to June 2010, the Euro has passed the stress test of the European government debt crisis in the euro zone (Portugal, Ireland, Italy, Greece and Spain). Chances are that proposals concerning a change in the status of the reserve currency and commodity pricing currency surge as China and others have been calling for a new world reserve currency[3]. Even if this is not official, other countries such as Mexico have been diversifying their balance sheet with other currencies to limit exposure to the US Dollar to a certain extent[4].
                    That being said it is very unlikely that the shift away from the dollar is to happen in the short term. Meanwhile it is important to consider that G20 in collaboration with the IMF might be working towards a gradual change in this domain possibly by implementing a basket of currencies (i.e Euro, Dollar ,Yen , Yuan...) ,commodities or an index as accepted reserve and mean for commodity pricing. In such a scenario, world political hierarchy and economic changes could accelerate with the trend of a growing share of emerging countries in the global economic landscape. This could lead to a big downward pressure on the US Dollar.
                    Even if the long term perspective on the US Dollar can be shown as bearish, the Euro area has its own difficulties and continues to deal with the recent government debt crisis. Because of the current levels of the US Dollar, technical analysis and midterm perspective show a strong probability of a large drop of the US Dollar especially relative to the Swiss Franc (CHF) and to the Yen (JPY). In the longer term, The Australian dollar (AUD) and other "future safe heaven currencies" such as the Singaporean dollar (SGD) could gain power as well.

    Medium Term perspective:
    The recent decline in the Dollar has raised some concerns regarding other countries' ability to export.  There is recent speculation that the BOJ could ease next week[5] .We can talk about a competitive depreciation de facto weather it is in purpose or not. The process can easily be seen with the evolution of gold prices. The following charts show the overall downtrend of major currencies relative to gold.

    Weekly bar chart - semi-log scale. Gold in Euros, U.S. Dollars, Aus. Dollars, and Yen. All charts with 20 week (100-day) Moving Averages.
    If this process continues we can imagine the currencies going back and forth relative to one-another while the basket of the major currencies continues to depreciate relative to Gold. This could consequently boost commodity prices in the midterm and remove deflation fears associated with a double dip recession by many economists leading to a inverse risk of hyperinflation.

    Short Term Perspective:

                    Technical analysis suggest a possible upward move for the US Dollar in the short and medium term. This could be triggered by new mediatization of Europe's sovereign debt crisis. We could be seeing growing concerns within the next week about possible Greek debt restructuring[6] and Ireland following Greece's steps[7].

    © Joé Thierry Arys Ruiz 29/09/2010.

    Please feel free to contact me

    FR: +33 6 45 37 08 46
    UK: +44 7 88 088 32 14

    Adapt Chapter 9 bankruptcy code for Greece. Financial Times, Sept 28 2010.
    [7] Markets fear Ireland is another Greece. Financial Times, Sept 27 2010.