How To Hedge Against Financial Repression .....

[LuckyOne]

Financial repression is essentially the planned theft of savings through central bank actions which result in negative real government bond yields across much of the yield curve after losses through default and eventual inflation.

There is an old adage in financial markets which advises participants to "not fight the Fed". These days "the Fed" is simply shorthand for central banks.

What the Fed are telling us to do via their actions is to become rent seekers and to take on long term fixed rate debt as this is the only way to protect ourselves.

Savers using traditional vehicles will see their wealth being massively eroded. People attempting to seek rent using floating rate leverage will be wiped out when the Fed eventually succeeds in creating inflation with rising nominal yields due to timing problems. People attempting to seek rent and paying cash for assets will also suffer as the discount rate applied to their rents will rise with inflation while rents will lag inflation reducing the real value of their assets.

The only hedge that I can see is to buy rent seeking assets and fund them with long term fixed rate deals. 20 year German mortgages are available at mid swaps + 130 bps or somewhere near 4%.

You can't beat them so you may as well join them.

[24gray24]

Barter only.

[bmf]

I've posted this as a reply to about 5 different questions now:

emigrate

[JimDiGritz]

I've posted this as a reply to about 5 different questions now:

emigrate

Well, as a family with higher than average incomes, good qualifications and 15+ years each in our respective fields we have been turned down by NZ, Canada and Australia.

It is a myth that you can just 'emigrate' these days. If you happen to have a long standing career as a Petro Geologist or a Heavy Crane Operator or indeed have a Phd and a job offer then you are fine. Otherwise, forget it.

So stuck in f*#%king Blighty it is.

[Ah-so]

The only hedge that I can see is to buy rent seeking assets and fund them with long term fixed rate deals. 20 year German mortgages are available at mid swaps + 130 bps or somewhere near 4%.

You can't beat them so you may as well join them.

What is a "rent seeking asset"?

I consider myself fairly financially literate but you have bamboozled me.

[zugzwang]

Gold loves financial repression

All of a sudden, everyone's talking about financial repression, the capture and torture of domestic savers with below-inflation rates of interest, so that banking and government debt shrinks in real terms.

"Such policies," explains economic historian and author Carmen Reinhart for Bloomberg, "usually involve a strong connection between the government, the central bank and the financial sector." Check.

Given the post-war size of our debts, she goes on, "financial repression…with its dual aims of keeping interest rates low and creating or maintaining captive domestic audiences… will likely be with us for a long time." Check.

"[it's] equivalent to a tax on bondholders and, more generally, savers." Check.

Now if, like me, you already gave, then you might want to look for the exits – and you really don't need to look very far. Yet to date, this sudden burst of comment on financial repression can only counsel despair, despite the greatest liberty of capital movement in 100 years. More oddly still, the classic escape-route of buying gold – an escape-route blocked worldwide when governments wore down their 20th century wartime debts – has scarcely been mentioned.

"In [our] age of free capital movement, financial repression is still possible," reckons another historian, Edward Chancellor, in the FT, "Negative real interest rates are to be found not only in the US, but also in China, Europe, Canada and the UK."

But so what? No one's yet forcing U.S. citizens to keep their money inside the States, and no one's forcing them to choose a euro, loonie or sterling savings account if they go elsewhere either. Which is lucky, with rates at 1%, 2% and 3% below inflation respectively.

Yes, the finance industry is paying the price of getting bailed out, with the world's $30 trillion in pension funds forced to hold ever-greater quantities of sub-zero-yielding debt. But outside the still-repressed East, private savings today enjoy unheard of freedom to go where they wish and do as they please. And even there, in India and China most notably, the freedom to buy gold – the universal financial escape – is similarly at a 100-year peak.

"In [our] mildly reflating world" however, advises Bill Gross of Pimco, "unless you want to earn an inflation-adjusted return of minus 2%-3% as offered by Treasury bills, then you must take risk in some form." And buying gold is just such a risk – a uniquely simple and obvious one, offering a stateless escape to a borderless market. But make no mistake: Swapping the credit and inflation risk of cash and bonds for physical gold means exposing yourself to price risk.

[concerned_money]

Well, as a family with higher than average incomes, good qualifications and 15+ years each in our respective fields we have been turned down by NZ, Canada and Australia.

It is a myth that you can just 'emigrate' these days. If you happen to have a long standing career as a Petro Geologist or a Heavy Crane Operator or indeed have a Phd and a job offer then you are fine. Otherwise, forget it.

So stuck in f*#%king Blighty it is.

system is tuned for illegal immigration NOT little englander trying to make a better life leaving the farm immigration

you can go to any country;

[Panda]

Well, as a family with higher than average incomes, good qualifications and 15+ years each in our respective fields we have been turned down by NZ, Canada and Australia.

It is a myth that you can just 'emigrate' these days. If you happen to have a long standing career as a Petro Geologist or a Heavy Crane Operator or indeed have a Phd and a job offer then you are fine. Otherwise, forget it.

So stuck in f*#%king Blighty it is.

NZ, Canada and Australia. This is not personal, not directed at you....... but these places are not what London offered Dick Whittington.....

Believe me there are many in as much sh!t as we are, as much debt, a bigger housing bubble, the grass is not greener.......just a different pile of sh!t......maybe warmer, but as for NZ and OZ, the cost of living is crazy, the wages do not add up for mere mortals who don't "dig up sh!t".....and sell it to the chinks.......

[AC44]

I would instead think going to

-Germany. Low unemployment, logical house prices and growth. If they ditch the euro they will even do better..

-Norway. Petrol.

Regarding the long seeking assets please do give more examples..

For my perspective have decided that $/Euro is more safe than £.

[Bland Unsight]

The only hedge that I can see is to buy rent seeking assets and fund them with long term fixed rate deals. 20 year German mortgages are available at mid swaps + 130 bps or somewhere near 4%.

You can't beat them so you may as well join them.

Counterparty risk?

buy a BTL with a long term fixed mortgage or maybe ag land with a long term fix.

but after the recent warning shot fired by Manchester BS wiht their trackers niot really being trackers after 5 years,I'd read the small print and hoep the bank doesn't go bump.

+1

(Counterparty risk)

Good luck with your money for nothing plans. Meanwhile, back in the real world, work is your wealth.

The real hyperinflation hedge - learn how to farm, buy a farm, farm.

[Traktion]

I'm hedging with Bitcoins, mostly. I've been watching the Bitcoin community and I think it has the potential for massive growth. The volatility seems to have died down and the value is steadily growing again now.

I also hold some gold and silver as insurance, should government fiat money start to implode.

[200p]

I have £1000 in a safe, that is burried under ground, surrounded by 10 foot concrete walls,and barbed wire. An army stands outside armed with aK-47's, RPGs, tanks, SAMS, attack dogs, and the area patrolled with AWACs, F22s.

They can still steal the £1000 without physically going into the safe! That is the work of the devil!

[200p]

As with any trade, it comes with a risk to obtain a reward. If one cannot see the risk, then there must be a miscalculation in the trade. I refer to LTCM's downfall.

[19 year mortgage 8itch]

I have £1000 in a safe, that is burried under ground, surrounded by 10 foot concrete walls,and barbed wire. An army stands outside armed with aK-47's, RPGs, tanks, SAMS, attack dogs, and the area patrolled with AWACs, F22s.

They can still steal the £1000 without physically going into the safe! That is the work of the devil!

All that for a grand?

Methinks you're a little paranoid

[200p]

All that for a grand?

Methinks you're a little paranoid

I've left £1000 of baked beans in the shed, it is unprotected but priceless when the time is right!

[LuckyOne]

What is a "rent seeking asset"?

I consider myself fairly financially literate but you have bamboozled me.

From Wikipedia

The simplest definition of rent seeking is to expend resources in order to gain wealth by increasing one's share of currently existing wealth instead of trying to create wealth. Since resources are expended but no new wealth is created, the net effect of rent-seeking is to reduce total social wealth. It is important to distinguish between profit-seeking and rent-seeking. Profit-seeking is the creation of wealth, while rent-seeking the use of social institutions such as the power of government to redistribute wealth among different groups without creating new wealth.

The easiest assets to acquire that allow one to seek rent seem to be property related : farmland, multifamily residential and some commercial property and ground leases (especially CPI / RPI / average wage linked).

Furthermore, the Fed are telling us that they have purposefully engineered below market long term interest rates through bond buying / operation twist etc. Implicitly, they are telling us that these assets are overpriced as the discount rate being used to value cashflows is too low. The only hedge against this is to join them by borrowing money at very long term fixed rates (20 years plus).

Due to capital rules, banks are ver unwilling to lend on "ideas" and more keen to lend on cashflow and collateral which further encourages rent seeking rather than wealth creation (in therms of the link above).

In my opinion, central banks are telling us that it is their intent to debase savings in bonds and bank deposits. The regulatory regime is stifling wealth creation. Rent seeking is the only alternative left.

This malinvestment forced by central banks is somewhere between immoral and criminal.

[Democorruptcy]

The only hedge that I can see is to buy rent seeking assets and fund them with long term fixed rate deals. 20 year German mortgages are available at mid swaps + 130 bps or somewhere near 4%.

You can't beat them so you may as well join them.

Are you buying a house and living in Germany or seeking rent on it?

http://www.housepricecrash.co.uk/forum/index.php?showtopic=118844

[LuckyOne]

Counterparty risk?

+1

(Counterparty risk)

Good luck with your money for nothing plans. Meanwhile, back in the real world, work is your wealth.

The real hyperinflation hedge - learn how to farm, buy a farm, farm.

If a lender goes under, the terms of the loan remain as they were and someone else acquires it. There is no acceleration of the loan or any change in terms.

I don't believe that there is money for nothing. I am just thinking about what central banks are forcing people to do.

To your point about work beng wealth : I agree completely. The primary goal in wealth preservation should be to maximise one's current and future productive capacity. When one is in a fortunate position that one's rewards for productive capacity exceed consumption, it is sensible to think about what to do with the surplus for two primary reasons :

- Consumption may start to rise faster than the rewards for productive capacity (I believe that we are seeing this now).

- One's productive capacity might become under utilised (I also believe that we are seeing this in aggregate now).

[LuckyOne]

Are you buying a house and living in Germany or seeking rent on it?

http://www.housepricecrash.co.uk/forum/index.php?showtopic=118844

I have been through that thread before.

I believe that those "investors" were very naive. Handing over as much control as they did to an unregulated, non-listed partnership was an accident waiting to happen. Either do everything yourself from first principles or choose a listed vehicle that meets your criteria about things like fees, pricing, debt rollover risk etc.

Rent seeking is absolutely not risk free. That is sort of my point. Central banks are leaving people with savings with no alternative but to seek rents which is a risky business which can only be partially hedged by taking on very long term fixed rate debt. Taking interest rate risk (SVR / trackers etc) or rollover risk (loans which are not self extinguishing / need to be refinanced etc) on rent seeking assets will almost certainly lead to tears due to the lag between inflation, interest rates, wages, asset prices and rents.

[LuckyOne]

I've posted this as a reply to about 5 different questions now:

emigrate

To where though? Financial repression is currently a global phenomenon.

[porca misèria]

Rent seeking is absolutely not risk free. That is sort of my point. Central banks are leaving people with savings with no alternative but to seek rents which is a risky business which can only be partially hedged by taking on very long term fixed rate debt.

The rent-seeking economy can be modelled using game theory.

If everyone were to be a pure rent-seeker, then noone is wealth-creating, so everyone gets rapidly poorer (though a rent-seeking bubble might give an illusion of prosperity for a time: let's call that time 2007/8).

As rent-seekers abandon wealth-creation, the wealth-creators find themselves in an ever-stronger position as competition declines. So a balance is found. In an ideal world that balance is a steady equilibrium, but in reality it fluctuates in a cycle we call boom-and-bust.

In the real world, we also have governments interfering. The defining interference in the UK is a tax-and-benefits system that heavily penalises wealth-creation and rewards rentiers. The current government has made some small improvements compared to its disastrous predecessor, but has also introduced its own anomalies.

There's also a much longer-term cycle: the shifting of world wealth. So long as we can import wealth, we can and do support an oversized rentier sector. Our ability to do that lies in an exchange rate that arises from our status as a very stable society and is a legacy of our history as wealth-creators. Oh, and the modern empire: the export around the world of 'western values'.

And the biggest elephant in the room: the population bubble. The wealth we import to service our rentiers includes cheap labour, but we already need to import lots of resources to sustain our existing population. And cheap labour comes at a long-term price: one generation of cheap workers grow old and draw pensions, while their children expect equal status with the children of the rentier class who imported them.

[LuckyOne]

As with any trade, it comes with a risk to obtain a reward. If one cannot see the risk, then there must be a miscalculation in the trade. I refer to LTCM's downfall.

Agreed.

Assets which give rise to economic rent are exposed to at least some of the following :

- Demographics

- Changes in shopping habits

- Globalisation / outsourcing

- Energy / transportation costs

- Regulatory risk

- Interest rate risk

- Refinancing / rollover risk

- Disasters

Some of these can be mitigated against through asset choices but they certainly can't be eradicated. Risk adjusted returns are well below published "headline" returns. Central banks are doing all that they can to make the weighted average cost of capital as low as possible to encourage people to accept lower risk adjusted returns to prop up asset prices.

[The Masked Tulip]

Financial repression is essentially the planned theft of savings through central bank actions which result in negative real government bond yields across much of the yield curve after losses through default and eventual inflation.

There is an old adage in financial markets which advises participants to "not fight the Fed". These days "the Fed" is simply shorthand for central banks.

What the Fed are telling us to do via their actions is to become rent seekers and to take on long term fixed rate debt as this is the only way to protect ourselves.

Savers using traditional vehicles will see their wealth being massively eroded. People attempting to seek rent using floating rate leverage will be wiped out when the Fed eventually succeeds in creating inflation with rising nominal yields due to timing problems. People attempting to seek rent and paying cash for assets will also suffer as the discount rate applied to their rents will rise with inflation while rents will lag inflation reducing the real value of their assets.

The only hedge that I can see is to buy rent seeking assets and fund them with long term fixed rate deals. 20 year German mortgages are available at mid swaps + 130 bps or somewhere near 4%.

You can't beat them so you may as well join them.

It has taken me 3 years to work this out and come to the same conclusion.

BTFD seems to be right - you just have to wait for the next big dip, get in and wait for them to pump it higher and higher.

Edit:

Look at the earnings coming out of the US this week - companies have missed earnings forecasts with sometimes much lower earnings... but still their share prices have shot up, sometimes as high as 10%. How nuts is that?

The only conclusion I have is that all the money printing to the banks has to find a home somewhere so they are buying the shares of firms that they think will benefit in any upcoming boom, and also they realise that cash is being inflated to nothing so may as well get into shares. In such an environment you can begin to understand those who claim that Apple's share price is not nuts.

Moneyweek, FWIW, has an article today saying that savers are being wiped out so the advice is to get into blue chip dividend paying shares.

Edited April 26, 2012 by The Masked Tulip

[OnlyMe]

I couldn't agree with you more that the game plan of CB's is forcing people into risk asstes for yields that imho in no way reflect the long term risk to their financial health.

given how hard it is for joe public to access long term fixed rate debt,he's going to be the pansy for the next wash,rinse, repaet in the deflationary cycle.

This is not the first round, the 2001 onwards period was not even the first round but it was entirely intentional - the credit/debt bubble - MBS and CDS all driven by interest rate policy, investors knowing that inflation would eat their income from gilts/treasuries unless they bought the retail and investment bank effluent.

[19 year mortgage 8itch]

nicely argued.I'm off the opinion that I'll be making that move into steering toward wealth creation in the next few years.when I watch btlers buying on gross yields of 4%,you know the game is up.tiem to work for a living.

We need to creat wealth from the rent-seekers?

Protection rackets? :rubschin: