Tag Archives: Central banks

Crisis Progress Report (15): Happy New Year, by Robert Gore

Posted on January 10, 2016 | 7 comments

In 2016, investors need to understand three things.

This economic and financial contraction will not be an ordinary cyclical recession. It is the backside of decades of debt growth in excess of economic growth and the peak of underlying social optimism which produced that unsustainable disparity.

Debt contraction and reversing social mood will be the unifying element of many seemingly unconnected stories this year. Raúl Ilargi Meijer at theautomaticearth.com noted this unification in an article featured on SLL.

If there’s one thing to take away from this year’s developments in markets and economies so far, it’s that they are all linked, they’re all part of the same thing. If you can’t see that, you’re not going to understand what’s happening.

Looking at falling oil prices as a separate thread is not much use, and neither is doing the same with Chinese stocks, or the yuan, or the millions of Americans who are one paycheck away from poverty, for that matter. It’s all one story.

This linkage extends beyond markets and economics. A driver of the mounting discord in the Middle East and consequent refugee flow has surely been the 65 percent decline in the price of oil, the region’s chief resource, since mid-2014.

Finally, while announcements of government and central bank measures during the downturn will trigger bursts of optimism and soaring short-covering rallies, everything they do will prove at best ineffectual and, much more likely, counterproductive. That is not, as some commentators argue, because they have exhausted their remedies addressing the last financial crisis—there is no limit to their stupidity and desperation—but because their remedies were never remedies in the first place. Government issued debt and its exchange for central bank debt at suppressed interest rates did not solve the problem of debt that was unsustainable in 2007, it only added to it. Debt has increased over 58 percent, from $142 trillion in the fourth quarter of 2007 to an estimated $225 trillion now. Consequently, this crisis will be that much worse than the last one.

Long running bull markets in equities and bonds have entrenched tenacious optimism. Seventeen out of seventeen Wall Street strategists polled by USA Today expect the stock market to be higher at the end of 2016, and 60 out of 60 economists surveyed by The Wall Street Journal’s Economic Forecasting Survey see no possibility of even one quarter in which GDP contracts. The quickest part of the debt contraction will probably be the financial crash phase if, as SLL has conjectured, markets fall like a guillotine blade after participants lose faith in governments and central banks. The timing of that realization is uncertain, but brutal as the new year’s first week was, it’s just a warm up.

Based as it is on debt, a lot of what people think of as wealth will simply disappear as debt vanishes through defaults and write-offs, financial assets are sold, and prices deflate. Depending on just how counterproductive governments’ and central banks’ efforts are, the necessary adjustments in the real economy will take years. Superfluous mines, factories, infrastructure, skyscrapers, warehouses, retail establishments, and so forth will have to be eliminated to resolve gluts and uneconomic prices. On this front, pessimism is in order, as many projects begun during the boom are coming on-line in the next few years. They will have relatively low cash operating costs and add to already substantial gluts. Despite crashing prices last year, global production of many raw materials and factory goods, including oil and steel, actually increased, and more of the same is in store this year.

Where things are going and why they are going there are not difficult to understand, but at this point those that do so are ahead of 99-plus percent of the population.

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

It will be years before most of the herd comes to its senses and the adjustments necessary to foster bona fide recovery are made. Review the natural gas price chart in “The Shape of Things to Come” (LINK) and the article for an idea of how long that process may take. On the financial side, the Japanese stock market made its high in 1989 and has yet to regain even half of that former height.

Patience as an investment strategy has traded at a deep discount to its intrinsic value for years. It will be one of the few assets whose value climbs during the coming depression. The wise investor will resist the siren song of temporary rallies and the supposed safety in numbers of 17-out-of-17 and 60-out-of-60 consensus calls, and lay in a goodly store of patience while it is still a screaming bargain.

A NOVEL TO BRIGHTEN UP THE DEPRESSION!

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China, Oil and Markets: It’s All One Story, by Raúl Ilargi Meijer

Posted on January 7, 2016 | 2 comments

From Raúl Ilargi Meijer (who definitely gets the joke about the global economy) at theautomaticearth.com:

If there’s one thing to take away from this year’s developments in markets and economies so far, it’s that they are all linked, they’re all part of the same thing. If you can’t see that, you’re not going to understand what’s happening.

Looking at falling oil prices as a separate thread is not much use, and neither is doing the same with Chinese stocks, or the yuan, or the millions of Americans who are one paycheck away from poverty, for that matter. It’s all one story.

And the take-away from that, in turn, is that focusing too much on ‘narrow’ conditions in your particular part of the globe has only limited value. We’re very much all in this together. In the UK today, it matters very little what George Osborne says or does, or Mark Carney, because they don’t shape the future of the economy.

The same goes for all finance ministers and central bank governors across the planet, Yellen, Draghi, Koruda, the lot: the influence they exert on their own economies, which was always limited from the start, is running into the boundaries imposed by global developments.

Even if central bankers could ever have ‘lifted’ anything at all (a big question mark), their power to do so is rapidly diminishing. The constraints global developments place on their powers will now be exposed -even more. And of course they’ll try to deny and ignore that, as naked emperors are wont to do.

And with the exposure of the limits to their abilities to make markets and economies do what they want, come the limitations of the mainstream financial press to make their long-promoted recovery narratives appear valid. Before we know it, we might have functioning markets back.

Oil -both Brent and WTI- have breached the $32 handle, and are very openly flirting with the $20s. China’s stock market trading was halted for a second time this year, just 14 minutes after the opening. This came about after the PBoC announced another ‘official’ devaluation of the yuan by 0.5% (stealth devaluation has been a daily occurrence for a while).

$2.5 trillion was lost in global equities in three days this year even before the Thursday China trading stop and ongoing oil price decline. Must be easily over $3 trillion by now. And counting: European markets look awful, and so do futures.

For the first time in years, markets begin to seem to reflect actual economic activity. That is to say, industrial production, factory orders, exports, imports and services sectors are falling both in China and the US. Many of these have been falling for a prolonged period of time.

To continue reading: It’s All One Story

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Posted in Collapse, Debt, Debtonomics, Economics, Economy, Governments

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The Government Must Stop Printing Phony Money, by Richard M. Ebeling

Posted on January 5, 2016 | Leave a comment

From Richard M. Ebeling at the Future of Freedom Foundation, fff.org:

If advocates of freedom were to make up a list of New Year’s resolutions for 2016, one of the most important items should be ending government’s monopoly control over money. In a free society, people in the marketplace should decide what they wish to use as money, not the government.

For more than two hundred years, practically all of even the most free market advocates have assumed that money and banking were different from other types of goods and markets. From Adam Smith to Milton Friedman, the presumption has been that competitive markets and free consumer choice are far better than government control and planning – except in the realm of money and financial intermediation.

This belief has been taken to the extreme over the last one hundred years, during which governments have claimed virtually absolute and unlimited authority over national monetary systems through the institution of paper money.

At least before the First World War (1914-1918) the general consensus among economists, many political leaders, and the vast majority of the citizenry was that governments could not be completely trusted with management of the monetary system. Abuse of the monetary printing press would always be too tempting for demagogues, special interest groups, and shortsighted politicians looking for easy ways to fund their way to power, privilege, and political advantage.

To continue reading: The Government Must Stop Printing Phony Money

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Charles Gave: “I Cannot Remember A Time When Less Thinking Has Ever Been Done In The Financial Markets”

Posted on December 10, 2015 | Leave a comment

From Charles Gave, via zerohedge.com:

The Apex Of Market Stupidity

In some 40 years of watching financial markets, my dominant emotion has been a mixture of curiosity, amusement and despair. It seems the stock market must have been invented to make the maximum number of people miserable for the greatest possible amount of time. The bond market, meanwhile, has just one goal in life: to make economists’ forecasts for interest rates look even more silly than their other predictions.

Over the years I have often observed how most market participants are able to concentrate on only one set of information at a time. For example, in the 1970s, the only data release that mattered was the consumer price index. In the days leading up to the CPI’s publication, everybody dropped all other considerations to speculate feverishly about what the number might be. And then following the release, they would spend the next week or two commenting sagely on what the number actually had been. Eventually Milton Friedman convinced the Federal Reserve (and from there the markets) that there was some kind of relationship between the money supply and the CPI. So everyone stopped looking at the CPI, and instead started to focus on the publication every Thursday evening of M1 (or was it M2?). Inevitably each week would see an immediate rash of commentary on these arcane matters from the leading specialists at the time, Dr. Doom and Dr. Gloom.

This gave way to a period in which the US dollar went through the roof on the covering of short positions established during the era of the minister of silly walks in the 1970s. For a few years, the only thing that mattered was the spread between the three-month T-bill yield and the three-month rate on dollar deposits in London (an indication of the shortage of dollars outside the US). The beauty of this one was that the scribblers on Wall Street could comment on it twice a day or more, which of course had no discernible impact on reality, except for the destruction of the forests needed to print so much waffle.

To continue reading: The Apex of Market Stupidity

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America 2.0, by Robert Gore

Posted on November 5, 2015 | 19 comments

Let’s assume everything collapses. The skyscraper of cards tumbles; parasitic, unsustainable governments fail; chaos reigns. For all its flaws, living today, especially for those of us in the more advanced economies, is a lot easier than during any prior time. As late as 1900 US life expectancy was less than fifty years. However, there are reasons to root for collapse; it would present a huge opportunity to keep the good parts of the present age and build upon them, while at the same time changing the things that will have been manifestly responsible for the collapse, i.e., the incompetence and corruption of governments. However, to avail ourselves of the opportunities, it is necessary to consider what will replace that which has failed. SLL will kick off the process with a few modest proposals.

Freedom: The lodestar of what emerges must be individual freedom. History’s greatest quandary has been how to secure the fruits of production—essential to the survival of the producer and the species—to those who produce it. Government started as a protection racket; some production was diverted to it in exchange for safety from theft and violence, both internal and external. The danger of this arrangement is obvious: governments become the most rapacious criminals. How does a society protect itself and its property not just from criminals and invaders, but from its own government?

The sad fate of the US Constitution demonstrates that any founding principle or document can be perverted and corrupted. However, a building is better with a blueprint than without. The foundational principle, stated clearly in a new and improved Constitution, must be that individual freedom and the protection of individual rights and liberties are paramount. The corollary: the government shall be subordinate, its duty to use its monopoly on initiatory force to secure and protect those paramount rights and liberties and nothing else. Obviously, many details will have to be worked out, but the standard libertarian formulation of government limited to police, judicial, and military functions captures the basic idea. Will power-seekers try, and eventually succeed, in subverting a new Constitution? Probably, but nobody has figured out how to cure human nature’s malignancies. Clean slates get dirty, but at least they start out as clean.

Voting: The founders envisioned a republic, not a democracy, which they abhorred as mob rule. History has proven them right. Democracy is two wolves and a sheep deciding what’s for dinner. An arrangement that might stop people from voting other people’s means for their own ends is to restrict the franchise to those who receive no money from the government, either directly or indirectly. Politicians, government employees, including the military, and contractors and their employees would not vote. What politician is going to pander to a bloc that cannot vote? The ban on voting would only be in effect while an individual receives money from the government, a sacrifice required for “public service.” The government under this set of proposals will be a shadow of its current behemoth self—the voting prohibition will apply to a very small percentage of the population. This is admittedly an extreme proposal. If you have something less extreme that will keep the productive citizenry from being turned into lamb chops, please submit it in the Comments section below.

Involuntary redistribution: There shall be none, no government-provided anything other than the military, police, and courts. Nothing the government provides through coercion cannot be provided better by free individuals, businesses, and markets. Much of what the government provides shouldn’t be provided at all. This seems fanciful now, but will seem much less so after the government goes broke. There will be no problem of fulfilling legacy promises to those counting on goodies from the government; those promises will have already been broken.

Defense: Defense will be limited to the defense of US territory: no allies, no “interests,” no Pax Americana. Military action will be limited to wars duly declared and specified (no more open-ended wars) by Congress within a short period after the first hostilities. The US enjoys the greatest geopolitical blessings of any nation in history. To the east and west lie the Atlantic and Pacific moats. To the north and south are friendly, militarily weaker nations. It has the world’s largest and most advanced economy, huge raw-material-extraction and industrial capabilities, a formidable arsenal of conventional and nuclear weapons, a well-armed populace that includes millions of potential guerrilla fighters, and a host of geographically inhospitable features—mountains, deserts, rivers, lakes, forests, swamps, and always tough urban environments. Even the contemplation of invasion amounts to insanity, which is why nobody has tried for two centuries. A US military limited to defense of the US could be funded for a fraction of what is spent now.

Money and debt: Historically, governmental mismanagement of money and debt has caused more misery than any other activity, save war, in which they engage. Logically, there is no reason why governments have to be involved with money issuance. They are almost always hostile to privately-developed money because they accrue economic advantages through money issuance: monopoly control of the medium of exchange; legal tender laws that mandate acceptance of their money and debt; the seignorage privilege of being the first user of money or debt, and inflation, the hidden tax of depreciating exchange value that non-first users bear (for a more extensive discussion, see “Real Money,” SLL, 9/9/15).

The estimated 96 percent depreciation of the dollar since the establishment of the Federal Reserve in 1913, and its deterioration from a unit freely convertible to gold to one freely convertible only to another paper dollar, cinches the case that the government should be barred from any monetary role at all. Such depreciation is the rule, not the exception, when governments and their allied central banks control monetary issuance. The alternative? Let the market decide on acceptable money or monies. Undoubtedly it will choose money that holds its value. Along the same lines, the enslavement of future generations engendered by issuing debt must be severely circumscribed, perhaps only permissible upon a declaration of war; limited to the duration of the war, with redemption within a few years after the war.

Funding: The funding requirements of the new regime will be minuscule compared to what the government takes in now, probably less than 10 percent of the GDP, compared to the present 40 percent (for local, state, and the federal government). Not only will the revenue numerator be much smaller, but the GDP denominator will be much larger as the newly unshackled economy makes a joke of today’s 2 percent (if that much) growth rates. The income tax, one of the most pernicious thefts ever invented, will be abolished. Government revenue will come from the imposition of non-income based fees, taxes, and assessments. You might be able to fund this government just by passing the hat to newly unshackled, grateful producers. A fee could be charged on all contracts that parties agree are to be enforced in government courts (although nobody will be required to use government courts for contractual dispute resolution). A per capita flat fee could be accessed for the national defense and police. Excise taxes could be levied on imported goods; they were the chief source of funds for the federal government prior to imposition of the income tax. Most public lands would be sold off, and the proceeds could be held in a trust that will throw off revenues to the government.

Trade and immigration: Freedom is freedom, and that means free trade and open borders. Free trade doesn’t mean the current managed trade snuck under cover of agreements labelled “Free Trade.” Real free trade can be instituted by any nation in a sentence or two that prohibit tariffs or trade barriers for the goods and services of any foreign entity exporting to the US market, except perhaps for excise taxes, applied at a uniform rate regardless of the country of origin. Free trade redounds to the benefit of any nation that practices it, regardless of whether or not any other nation does so.

Immigration is most problematic for welfare states with shrinking or barely growing economies. Welfare states attract immigrants looking for freebies, and even those looking for work are demonized for taking “scarce” jobs from citizens. There will be no government handouts or benefits in America 2.0, and the newly freed economy is more likely to suffer from labor shortages than surpluses. That was certainly the case during the booming Industrial Revolution, the heyday of American immigration. The new wave of immigrants will be looking for their piece of the American pie through hard work and eventual assimilation, just as previous waves—up until elements of the current one—have.

These proposals are meant not as immutable proposals, but to prompt those of us who anticipate a dramatic change from the current “way things are” to think and discuss beforehand the “way things ought to be.” We can’t let a once-in-many-generations opportunity slip away for lack of intellectual preparation for it.

A NOVEL SET WHEN AMERICA 1.0 WORKED

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Posted in Civil Liberties, Collapse, Debt, Government, Immigration, Law, Military, Philosophy, War

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It’s Absurd – Do Not Fool Yourself, from Artemis Capital Management

Posted on October 23, 2015 | Leave a comment

Excerpts from an Artemis Capital Management letter to investors, via theburningplatform.com:

Risk cannot be destroyed, it can only be shifted through time and redistributed in form.

Vibrant life and rebirth comes from the acceptance of change and death in many complex systems:

The forest service has long understood that controlled burns are a more effective tool for fighting forest fires than total suppression. The act of subduing forest fires results in a dangerous build up in dry foliage that counterintuitively causes larger and larger fires. Mother Nature will initiate controlled burns naturally via lightning strikes and this is essential to the rebirth of the forest. The trees of the great sequoia forests will not release seeds without first sensing heat from a wildfire.

The art of avalanche prevention in backcountry snow terrain is based on a similar philosophy. Rangers use controlled blasts to reduce snow pressure rather than risk massive uncontrollable slides.

Marriage therapists observe that couples that do not fight are at the greatest risk of a divorce. The couples that fight actively bring core issues to the forefront instead of suppressing their problems. Apathy is worse than anger.

Treatment of cancer requires extensive chemotherapy to kill the cancerous agents from the body and allow healthy cells to multiply.

Treatment of addiction requires brutal recognition of the reality of the problem, personal responsibility, and immediate withdrawal from the source despite painful short-term effects.

The act of pruning a garden requires forcefully removing sick leaves to promote the vibrancy of the healthy plants.

In management science the ability to address problematic or below average employees is an essential value in the culture of many successful organizations.

The classic trading axiom of “cutting your losers and letting your winners ride” is an alternative form of the same idea.

All of the aforementioned natural and social phenomena have great positive exposure to change but at the expense of a short-term loss. In other words, they are long convexity.

The mainstream view that central banks have suppressed tail risk is absurd and runs counter to common sense.

Policy makers have done the opposite.

Central banks have taken asset returns from the future and brought them to the present…

they have taken tail risk from the present and shifted it into the future…

that have turned private risk into public risk.

The risk is not gone… do not fool yourself.

http://www.theburningplatform.com/2015/10/23/its-absurd-do-not-fool-yourself/

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Herd Extinct, by Robert Gore

Posted on September 24, 2015 | 10 comments

The crowd never thinks. People are only comfortable in a pack, and they’re most comfortable in one that’s racing off a cliff.

The Golden Pinnacle

Herd animals herd because there is safety in numbers. Even if the wolves or lions attack, they’re only going to get a small percentage of the herd. Such attacks even have an evolutionary advantage: they eliminate sick or weak members. Those who think humans are not herd animals labor under such vast misconceptions that they are beyond the reach of SLL.

One herd, Wall Street-Washington economists, surpass wildebeests and sheep. Their behavior, because it is so uniform, can easily be described. Membership in one of two subspecies is required: Keynesians or monetarists. Both have long histories of predictions that didn’t predict and policy remedies that didn’t remedy, but they all believe because they all believe. Intellectual foundations this shaky increase individual and group insecurity, so they base their work on the same set of statistics emanating from the government. The government’s assumptions, methodologies, and conclusions are never questioned, except by outcasts from the herd. After all, those assumptions, methodologies, and conclusions come from the herd itself.

The instinctive defensive tactics of the herd are the consensus and the wavering straight line. Economists are well aware of the expectations and predictions of other economists, and tend to cluster tightly around a given consensus. Occasionally an economist will deviate by a quarter or a half of a percentage point from the consensus, instead of the usual range of a tenth of a percent either way. It is thought by those who study these matters that this exaggerated and ostentatious display of independence can, if done only occasionally, make the individual stand out and thus promote advancement within the herd. Or perhaps it’s to attract a mate. Further study is required.

The wavering straight line projects the most recent past into the future. It is considered good form not to make perfectly linear projections, thus the “wavering.” The standard projection will be: We (as herd animals, plural pronouns are preferred) see GDP increasing from 2.2 to 2.4 percent this quarter. Or: We see inflation moderating from .3 to .2 percent. It is also considered good form to make projections that show increases in desirable variables and decreases in undesirable variables. What is not good form is to predict a clean break, a clearly nonlinear outcome, especially if it can be characterized as negative (e.g., the economy is headed into recession). Such a prediction will lead to expulsion from the herd, unless the prediction is correct, in which case the predictor will be killed.

The herd has called for an imminent “lift off” in the US economy, and it has been doing so for six years. During that time the US government has issued unprecedented amounts of debt (Keynesianism), the Federal Reserve has engaged in unprecedented debt monetization and interest rate suppression (monetarism), and the US has been unable to achieve even one year of the 3 percent annual growth that used to be routine. The herd has responded by either calling for more debt, monetization, and suppression, or positing that for some reason there have been structural changes in the US economy that have led to “secular stagnation.” The herd has not explored the possibility that all that debt, monetization, and suppression are part of the problem rather than the solution. Herds never question their own articles of faith.

However, just as the more astute and aware sheep and wildebeests will sense the wolves and lions stalking the herd, a few of the economists sense something amiss. Slow growth may not give way to lift off, but rather recession, or worse. Ominous portents are piling up.

Assurances have been given that the carnage in natural resources will remain contained, echoing assurances made in 2006 and 2007 concerning housing and mortgage finance. However, there has been no V-shaped recovery in oil, natural gas, copper, coal, fertilizer components, zinc, nickel, and other natural resources; the prices of many are still going down. Producers are reluctantly concluding that no happy outcomes are in the offing. Projects are being shelved and inventories and other assets dumped on the market at whatever prices they can fetch. Glencore, the Swiss mining company, has halted production at two huge African copper mines and pledging to sell up to $10 billion to cut its debt. It’s no sure thing that the company will survive; the exploding premiums on credit default swap (CDS) protection for its debt indicate substantial credit-market doubt.

Cutting debt has become all the rage. If you wanted to put together a fracking firm, now would be the time to do so. Prime drilling rigs and properties are available cheap as debt incurred when oil was $100 a barrel weighs heavily now that oil is in the forties (“Shale Drillers Turn to Asset Sales as Early Swagger Wanes,” by Bradley Olson, SLL, 9/11/15). Oil and gas producer Samson Resource Corp., midwifed by private equity firm KKR, just filed for bankruptcy. KKR and its partners will take a $4.1 billion hit, not chump change even for KKR. And so the not-contained carnage in natural resources ripples out in all directions. The losses inflicted on creditors are just one of the more obvious ripples.

The debt-fueled Chinese “miracle” is over. China was the engine of global demand on the way up; it’s at the epicenter of debt contraction on the way down. It was the dream of perpetual Chinese hyper-growth that led so many companies to take on debt and ramp up capital spending and production. China has built infrastructure and whole cities on spec, debt-funded malinvestment on command and control steroids. Even communists have their “uh oh” moments, when they realize that something has to give. Let a thousand, or a million, or a billion, debts contract. China’s demand is dropping like a stone and it is exporting goods—steel, aluminum, and diesel—that for years it imported. Everyone knows that its claimed 7 percent growth is fiction, but nobody knows what the real number is. Lurking within the state-dominated banking system is a lot of rancid debt. The cherry on the sundae: last year the government promoted a margin-fueled stock bubble that has now burst.

Not surprisingly, the money that flowed into China from trade surpluses and foreign investment has reversed as well, pressuring the yuan’s exchange value. In a stark illustration of the Command and Control Futility Principle (governments and central banks can control one, but not all variables in a multi-variable system), China needs to lower the yuan’s value to remain competitive in global trade, but needs to raise its value to keep capital from fleeing. It recently undertook a token devaluation against the dollar that precipitated global financial panic, but at the same time it has been selling some of its hoard of US Treasury debt to buy yuan to support its value. The Chinese government has made schizophrenia official policy because it is impotent against the great global debt contraction now underway. It feels compelled to do something because governments always do something, invariably making matters worse.

The Chinese ramifications aren’t ripples; they’re shockwaves. Brazil, its economy grown dependent on exports to China, has entered recession; had its debt rating knocked down to below investment grade; seen its currency make new lows almost daily, and has been rocked by a scandal implicating much of its elite—including President Dilma Rousseff, whose approval rating is a single digit—and the national oil company, Petrobras, upon whose massive debt, much of it dollar-denominated, traders are making book on bankruptcy. Brazil is the poster child for many China-dependent emerging market nations.

Will the world pull out of this debt contraction? Will plunging high-yield, equity, commodity, and emerging market currency markets reverse course? Can governments and central banks save the day? Will the economic tsunami miss US shores? Not a chance, not a chance, not a chance, and not a chance, no matter how many mainstream economists swear otherwise on their stacks of Keynes and Friedman.

World trade volumes and shipping rates are going from new lows to new lowers. In credit markets, the interest spread between what the US Treasury and bank borrowers of Eurodollars pay (a measure of bank risk) is growing, junk bond yields are rising, CDS spreads are widening, and default rates are notching up, tolling bells for other markets, especially equity markets. (The same things happened in 2007; the following year was not a good one for equities). Stock markets have sold off since the head of the world’s most important central bank put a dovish spin on her announcement that free money would not be terminated; the black magic no longer works.

In the US, second quarter S&P earnings growth was negative, even while corporations spent 108 percent of their free cash flow on dividends and buybacks (“Why Stocks Are Sliding: For The First Time Since 2009 Spending On Buybacks Surpasses Free Cash Flow,” by Tyler Durden, SLL, 9/23/15). Nothing offers a connect-the-dots illustration better than industrial bellwether Caterpillar, which makes many of the machines used around the world to extract minerals and build buildings and infrastructure. Today, after 33 straight months of declining year-over-year sales, it announced it will lay off 10,000 workers.

While the broad contours of what’s to come are visible, the details will only emerge over time. There is one certainty. When things have gotten considerably worse, a panicked cry will sound from the economist herd: Nobody could have seen this coming! It is to be hoped that it sounds just before they run off a cliff, extinguishing the species.

STEP OUT FROM THE HERD

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German Stocks Crush Dream of Central-Bank Omnipotence, by Wolf Richter

Posted on September 19, 2015 | Leave a comment

That’s all central-bank omnipotence ever was—a dream, only a dream—in Germany, Europe, Japan, China, the US, and in Never-never Land, too. From Wolf Richter, at wolfstreet.com:

The German DAX stock index plunged 3.1% today. It’s now in a bear market, down 20% from its all-time high of 12,391 in mid-April. It fell from five digits to four digits: 9,916. A level it had first encountered in May 2014.

Germans aren’t exactly big stock-market investors. Only 7% of their wealth is tied up in stocks, globally. And only a portion of that is in German stocks. So the movement of German stocks doesn’t impact Germans much.

Despite zero interest rates at the bank, and in some cases negative interest rates, Germans hang on to their beloved idea of cash-in-bank. They might not make any money, but at least they don’t have to deal with a rigged market, pay unknown amounts in fees out the back of their brokerage accounts and mutual funds, and then get whacked by a 20% loss, watching 10 years’ worth of savings dissolve into the ether in five months. And Germans with more money pour it into real estate.

But foreign investors are on the hook, particularly American investors via hedge funds, stock mutual funds, and ETFs. Over the past couple of years, brokers and financial advisors have been pushing Americans to diversify into European stocks. And some of the biggest European stocks are German stocks.

The German economy wasn’t exactly roaring ahead in the second half of 2014 and in the first half of 2015, with GDP growth bouncing between 1.2% and 1.6% annualized. Even the US did better than that.

But German stocks soared, starting in mid-October, 2014. Well-placed rumors started to circulate that the omnipotent ECB would launch a big round of QE in 2015. These rumors were supported by more rumors and a combination of official non-denials and vague indications that a big round of QE would indeed be forthcoming. Details emerged over time. American investors, having gotten richer and richer with each round of the Fed’s QE, piled into the German miracle market, and it simply soared and soared. Bonds soared too, and yields became more and more negative. Those were amazing times.

Then the omnipotent ECB actually announced QE: it would be huge. More details trickled out later. It would be an even huger €60 billion a month. But it wouldn’t start until March. The buying frenzy kicked off in earnest, and eventually even the German 10-year yield approached zero, and the DAX hit 12,391, having skyrocketed 48% in six months.

It was April 9, and QE was pouring into the markets. Folks were practically praying to the omnipotent ECB. But it was the final paroxysm of a QE front-running frenzy by American hedge funds and everyone else. It was the end of the bull market.

And then came the rout.

To continue reading: German Stocks Crush Dream of Central-Bank Omnipotence

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Real Money, by Robert Gore

Posted on September 9, 2015 | 55 comments

Here’s a definition of money that will be rejected by conventional economists of all persuasions, but will clear up analytical confusion for those outside the dismal science. Money is that which serves as a medium of exchange, a store of value, and a unit of account, has intrinsic value, and which is not a liability of an individual or entity, including that of a government. The immediate objection to this definition is that it does not describe anything that currently functions as a medium of exchange. Something must be wrong with a definition of money that excludes everything that people now think of as money.

Perhaps it’s not the definition of money that’s flawed, but present monetary arrangements. Everything that now serves as a medium of exchange, a store of value, and a unit of account has minimal or no intrinsic value and is somebody’s liability. Even the US currency is a note, or debt instrument, of the Federal Reserve. These notes pay no interest and have no maturity date, and they can only be redeemed at the Fed for more notes, but they are liabilities on the Fed’s books. Precious metals, on the other hand, which have served as money, or have been the basis of fully convertible paper currencies, are not liabilities.

Behind the curtain of present institutional arrangements, the US government issues IOUs, which are payable in IOUs issued by the central bank, which themselves are only redeemable for more central bank IOUs. The law mandates that these central bank IOUs are “Legal Tender” for settlement of all debts, public and private. While the debt ceiling limits the amount of IOUs the government can issue (although it is invariably raised), there is no limit on the IOUs the Federal Reserve can create. These IOUs are either Federal Reserve Notes or member bank deposits with the Fed (just as a customer deposit with a bank is a bank IOU, a member bank deposit with the Fed is a Fed IOU).

So why not just call these government and central bank IOUs what they are: debt? And why not call precious metals money? They are not debt and they also have the intrinsic value embedded in the resources necessary to find, mine, smelt, and refine them, their use in various industrial and consumer goods, and their indestructibility, divisibility, portability, measurability, and beauty. If used as a medium of exchange, store of value, and unit of account, they satisfy the conventional definition of money, although they are not currently being used as such.

These bright-line distinctions have the virtue of being definitionally accurate. They also remove the definition of money from being a social convention: that is, if people use something as money, it’s money. People today use debt as money, but that doesn’t make it money under the proposed definition, anymore than a social convention to think of cats as dogs and call them dogs will make them bark or slobber with joy when called by their masters (cats don’t have masters). Most importantly, calling things what they are allows intellectual clarity about their role in economics.

Debt imposes obligations; it must be repaid, even if it is only rolled over or paid with more debt, and in the interim the debtor pays interest to the creditor. Interest and debt repayment are the costs of debt, which can fund investment, speculation, or consumption. For a rational investor or speculator, their expected return on investment or speculation will exceed the cost of the debt used to fund it. Markets arbitrage such opportunities, borrowing to fund investment and speculation. The increasing demand to borrow pushes up the interest rate; the increasing investment and speculation reduces the expected return. A point is reached where, for the economy as a whole, the expected return on investment and speculation equals the prevailing interest rate. (Consumption yields no return on investment, Thus, borrowing to fund consumption, because of debt’s interest and repayment burden, is economically counterproductive.)

Debt, as someone’s liability, is someone else’s asset. As an asset, it can be exchanged for goods, services, investments, or speculative instruments. It can also serve as collateral against debt incurred by the asset-holder. That creditor can in turn use that debt, the creditor’s asset, as collateral for debt, as so on. In this way, debt serves as the basis for further expansion of debt. Central banks’ debt to member banks often has this multiplier effect, as the banks use their deposits with the central bank (in excess of required reserves) to fund lending and new debt that pyramids as it is progressively deposited and lent out in the banking system.

Central bank fiat debt creation increases the amount of debt above what it would be in a free-market, real-money economy and lowers its price, the interest rate. This leads to excessive investment—malinvestment—overproduction, and more speculation and consumption than would prevail without a central bank. However, it does not change the diminishing returns inherent in increasing debt. Even if interest rates were zero and debt was free for everyone, at some point the expected return on investment and speculation goes to zero, and the debt used to fund consumption has to be repaid. People are emotional and prone to crowd psychology. In the throes of a debt boom they are invariably too optimistic, misjudging returns on investment and speculation and their ability to repay debt. The actual return on additional debt then goes negative.

At the peak, debt begins to contract through both debt repayment and debt repudiation. Debtors will sell assets to raise funds to satisfy debts, but if those funds are insufficient, they will repudiate some or all of their debt. Because debts are creditors’ assets, repudiation imposes losses on creditors, reducing their investment, speculation, consumption, or using assets as collateral for more borrowing. Debt contraction begets economic contraction and deflation, but because of the distortions introduced into the economy by central bank fiat credit during the expansion, they are worse than they would have been in a free market, real money economy. The inward force of debt contraction, when aggregate debt has—through debt’s multiplicative properties—been expanded to its fullest extent, far outweighs central bank’s capacity to stop it through the creation of still more debt, which is at this point counterproductive.

Central banking and fiat debt are but new wrinkles—facilitators—of an age-old and pernicious practice: governments issuing as much debt as credit markets will allow before they impose ruinous interest rates. One of the leitmotifs of history, a recurring phenomenon, has been governments bankrupting their countries. The qualities of real money—that it has intrinsic value requiring resources to produce, and is not a liability—tether the amount of debt to the real economy and hinder governmental borrowing, slowing, and perhaps preventing, the oft-repeated march towards bankruptcy. Yet people posing as sophisticates praise central banking and fiat credit, enablers of government indebtedness, as “innovations,” while denigrating real money—precious metals—as “barbarous relics.”

This intellectual depredation is so complete that virtually everyone thinks of value in terms of central bank fiat debt, not real money, which is ass-backwards. Real money will always have value, and thus will always be exchangeable for real goods and services. Fiat debt comes and goes. Shouldn’t our notions of value be tied to the enduring, not the ephemeral? We say: “An ounce of gold is worth 1100 dollars,” but shouldn’t we say: “A dollar is worth 1/1100 of an ounce of gold”?

At this juncture, with massive debt and economic contraction, deflation, and social chaos looming, many people ponder the purchase of precious metals solely in terms of whether such metals will be worth more or less fiat debt in the future. Precious metals should instead be evaluated in terms of their exchangeability for real goods and services, come hell or high water. Here the barbarous relics’ record is quite good, far better than that of fiat debt. There are fluctuations in real money prices due to fluctuations in the supply and demand for it, but those are driven by organic developments in a market economy, not the whim of government officials and central bankers.

Over time real money retains, and actually increases, its purchasing power for real goods and services. An old adage holds that through the centuries, an ounce of gold has bought a good mens suit. Now, if one knows where to shop, an ounce of gold will buy at least two good mens suits. This is to be expected with real money. As an economy becomes more productive, everything else being equal, a given quantity of real money will have more purchasing power. This is what happened under the gold-exchange standard during the latter part of the 19th and early part of the 20th centuries, before the adoption of central banking and fiat debt. A given quantity of gold or silver buys more goods and services than it did in 1913, while a given quantity of the Fed’s fiat debt buys less. Barbarous relics indeed! For those determined to survive hell or high water, think in terms of real money and what it will buy, not fiat debt, which sooner or later will be what it’s destined to be: worthless.

REAL MONEY, REAL PEOPLE,

A REAL NOVEL, AS GOOD AS IT GETS

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Macroeconomics Is The Root Of All Error, by Bill Frezza

Posted on September 2, 2015 | Leave a comment

Another in a growing group who recognize that the economics that holds sway on Wall Street and in Washington has no clothes. From Bill Frezza at dailycaller.com:

Will Fed chief Janet Yellen pull the trigger to raise interest rates in September or not? Only the soothsayers at Jackson Hole know for sure. But while the world awaits the decision, ponder this. What do the following have in common?

• Asset bubbles fueled by monetary policy.
• Unsustainable sovereign debts threatening government bankruptcies.
• Government economic “cures” worse than the diseases they are supposed to treat.
• Questionable GDP statistics.
• Recurring bank bailouts.

Figured it out yet? They are all driven by an overweening state religion called macroeconomics.

Friedrich Hayek said it best. “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

A pity this simple, yet profound insight remains at the fringes of a field that continues to wreak havoc in the hands of those who imagine they can design economic outcomes.

Think about it. We are currently watching global stock markets gyrate toward breakdown trying to anticipate the whims of a cloistered professor who never launched a business, never met a payroll, never shipped a product, and never won an election, yet has been empowered to determine the price of money. What’s even stranger is that people consider this normal. Ask yourself: Why do we wait on pins and needles for Janet Yellen to set interest rates yet laugh at the idea that kings once set the “just price” for a loaf of bread?

That’s where Hayek’s curious task comes in.

The human inclination to seek order in a seemingly chaotic world has long been exploited by generations of pundits, professors, and politicians eager to convince us they can impart certainty to the unknowable.

To continue reading: Macroeeconomics Is The Root Of All Error

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