Tag Archives: Financial asset prices

The credit cycle and zombies’ downfall, by Alasdair Macleod

Once interest rates start moving up in earnest and credit begins to contract rather than expand, financial asset prices will fall and economies will contract. From Alasdair Macleod at goldmoney.com:

Leading central banks like to think that through careful interest rate management, they have tamed the economic cycles which lead to regular economic downturns. Instead, they have only managed to bury the evidence.

To appreciate the extent of their delusion one must understand the source of economic instability. In modern times it has always been driven by a cycle of bank credit. In this article the role of commercial banking in this regard is explained. The effect on non-financial economic sectors in the context of Hayek’s triangle under today’s currency regime is re-examined.

With cyclical variations in the economy buried under a tsunami of currency, market participants are oblivious to the dangers of a cyclical downturn in bank lending and the consequences that flow therefrom.

This article gives the problem its economic and monetary context. It concludes that the global banking system is horribly over-leveraged and, with empirical evidence as our guide, on the edge of a bank credit contraction of historic proportions, likely to undermine the entire fiat currency system.


Readers of articles that dissent from the mainstream media’s complacency might be aware that there are many zombie corporations which only exist courtesy of low interest rates or government support. The story often goes further. These are businesses loaded to the gunwales with unproductive debt, vulnerable to being swamped and sunk by higher interest rates. The extent of the problem is undoubtedly greater than most people think.

We have arrived at this point with economies around the globe cluttered with unproductive businesses which would otherwise have been cleared out in an unsuppressed interest rate environment. Schumpeter’s process of creative destruction would have done its work. Without it, the current situation presents enormous dangers now that with price inflation rising, interest rates will almost certainly increase in the coming months. Central banks appear to be conscious of this danger, given their evident reluctance to permit rates to rise, even fractionally. Rising interest rates also blow holes in their narrative, that they have succeeded in managing economic cycles out of existence.

Continue reading→

Investors Struggle to Make a Profit in an Economy With High Liquidity, by Bill Bonner

Buying financial assets at this point means buying assets whose values have been artificially inflated by an ocean of fiat debt issuance. That means the investor will probably not make money. From Bill Bonner at rogueeconomics.com:

Tell me, friend, when did Saruman The Wise abandon reason for madness?

– Gandalf, Lord of the Rings

YOUGHAL, IRELAND – The Federal Reserve keeps “printing” money – at the rate of about $3 billion per day – and lending it to member banks at a real (inflation-adjusted) rate of MINUS 6%.

Not surprisingly, the hustlers are out in force, figuring out new ways to get their hands on it. Bloomberg reported in November:

[Solar-powered vehicle maker] Sono has racked up about 108.8 million euros ($123 million) in losses since its inception in 2016. When key investors balked at putting in more money roughly two years ago, co-CEOs and co-founders Laurin Hahn and Jona Christians turned to crowdfunding. There was a hitch in that strategy: since March of last year, Sono has been unable to access about 5 million euros from PayPal. The online payment company froze its account, citing risks related to unexpectedly high transaction volume. Sono says it started the process of fighting this as of mid-August.

Without any proceeds from this week’s IPO, Sono estimates it would have been insolvent by next month or shortly thereafter. It expects to lose money for the foreseeable future and continue relying on external financing to stay in business.

But the IPO went forward on November 17 at $15 per share and Sono (SEV) briefly got a market value of $1.8 billion…

And it’s not the only company in FantasyLand drawing in big bucks.

Last month, Bloomberg reported that companies have taken in a record $600 billion in IPOs so far this year. That’s up from $235 billion in 2019 and $370 billion in 2020.

Prior to this, the record stood at about $420 billion… in 2007.

Continue reading→

Once Risk-On Switches to Risk-Off, the Bottom Is Far Lower Than Anyone Believes Possible, by Charles Hugh Smith

In a bear market, it takes a long time before the “buy the dip” crowd realizes they’re trying to catch a falling dagger. Generally they quit trying after impaling themselves repeatedly. They withdraw to lick their wounds, and end up selling their losing positions pretty close to the bottom. From Charles Hugh Smith at oftwominds.com:

So here we are, witnessing the switch from risk-on to risk-off in real time.

All bubbles share common characteristics: during the euphoric expansion, participants are richly rewarded for buying every dip and for confidently embracing the belief that this time it’s different.

(Exactly how it’s different changes from bubble to bubble, but the core mechanism is identical: for these entirely rational and “mathy” reasons, this time is truly different.)

The common characteristic when bubbles pop is the eventual bottom is far lower than anyone believes possible. This confidence in the bubble’s permanence permeates the entire financial system and encourages a faith that buying every dip will continue to be the road to easy wealth.

When euphoric risk-on switches polarity to risk-off, buying every dip becomes the road to ruin as the eventual bottom is incomprehensibly lower than the first stairstep down.

Here’s a composite of what happened during the dot-com bubble burst. An Internet company that hit $90 per share has slipped to $60, and investment banks are recommending it at $60 based on “the Internet has endless growth ahead” and the loss of a third of its valuation makes it a relative bargain. The I>buy the dip crowd has already lost money buying every stairstep down, but a 30% decline must ne the bottom, right?

Perhaps a 30% decline is the bottom in a risk-on market, but in a risk-off market, the eventual bottom isn’t $60, it’s $6 per share. In the optimistic, euphoric “this is permanent” risk-on phase, a $15 drop from $90 to $75 is a screaming buy. A decline to $60 is literally incomprehensible.

The decline to $40 is a shock to the system because the rebound to $90 was the near-universal expectation. Those who could have sold at $85, $75, $65, $55 and $45 but did not are now so shell-shocked they cannot grasp that selling at $40 is the fantastic opportunity of a lifetime compared to selling at $9 or the eventual bottom at $6.

Continue reading→

Stockman: A (Bad) Tale Of Two Inflations

Monetary inflation has inflated the prices of both financial assets, which is good for those who own them, and the necessities of life, which is bad for those who must pay for rent, food, medical care, utilities, and gas. From David Stockman at zerohedge.com:

Authored by David Stockman via Contra Corner blog,

Our paint by the numbers central bankers have given the notion of being literalistic a bad name. For years they pumped money like mad all the while insisting that the bogus “lowflation” numbers were making them do it. Now with the lagging measures of inflation north of 5% and the leading edge above 10%, they have insisted loudly that it’s all “transitory”.

Well, until today when Powell pulled a U-turn that would have made even Tricky Dick envious. That is, he simply declared “transitory” to be “inoperative”.

Or in the context of the Watergate scandal of the time,

“This is the operative statement. The others are inoperative.” This 1973 announcement by Richard Nixon’s press secretary, Ron Ziegler, effectively admitted to the mendacity of all previous statements issued by the White House on the Watergate scandal.

Still, we won’t believe the Fed heads have given up their lying ways until we see the whites of their eyes. What Powell actually said is they might move forward their taper end from June by a few month, implying that interest rates might then be let up off the mat thereafter.

But in the meanwhile, there is at least six month for the Fed to come up with excuses to keep on pumping money at insane rates still longer, while defaulting to one of the stupidest rationalizations for inflation to ever come down the Keynesian pike: Namely, that since the American economy was purportedly harmed badly, and presumably consumers too, with the lowflation between 2012 and 2019, current elevated readings are perforce a “catch-up” boon. That is, more inflation is good for one and all out there on the highways and byways of main street America!

Continue reading→

Eurozone inflation is high when it comes to the prices of daily purchases, by Daniel Lacalle

One way to keep inflation down is to take out the things that people actually buy out of the price indexes. From Daniel Lacalle at dlacalle.com:

For more than ten years, ECB monetary policy has been ultra-expansionary, whether there was crisis, a recovery, economic growth or stabilization. The worst excuse of all that was used to justify endless quantitative easing has been the often-repeated mantra that “there is no inflation.”

Defenders of aggressive monetary policy have always used the same arguments really.

First, they say there is no inflation – as if an average 2% increase in prices during a crisis whereby many salaries fell up to 20% does not constitute “inflation”.

After, they say it is temporary, so to justify maintaining aggressive easing policies.

Next up, the “inflationistas”  seek to blame businesses or some kind of external enemy for the rise in prices, whereby they ask governments to impose price controls.

Important to understand here is that money creation is never neutral. It disproportionately benefits the first recipients of newly created money – governments -, and negatively affects real wages and savings of those that are not able to buy financial assets: the poorest.

There clearly is massive inflation when it comes to financial asset prices. Negative-yielding sovereign bonds of nations with weak solvency ratios amount to massive inflation. Continuous price increases of both quoted and private assets amount to high inflation, and all of this is caused by monetary policy.

Furthermore, anyone can understand that the official headline consumer price index (CPI) is masking the increase in the price of goods and services that we really purchase on a daily basis, relative to the ones we only purchase occasionally, or for leisure. Any European citizen understands that tourism and technology may become cheaper, as a result of competition and innovation, but that the things we purchase every day have increased more in price than reflected by the headline CPI.

Continue reading→

Statistics, lies and the reservoir effect, by Alasdair Macleod

This article is a little denser than usual, but like everything Alasdair Macleod writes, is well worth plowing through. From Macleod at goldmoney.com:

This article debunks the misconception that GDP represents economic health. It explains how monetary flows have led to markets in financial assets inflating while non-financials in the GDP bucket are in deep distress. And why, at a time of rapid monetary expansion, all attempts to quantify the effects of monetary policy on the real economy become even more meaningless.

Financial markets are acting like an inflation reservoir. And when the dam bursts bond yields will rise substantially, undermining values of other financial assets. The non-financial GDP economy will then face the full force of monetary depreciation, with calamitous consequences for ordinary people: the unemployed (of which there will be many), the low-paid and retirees living on meagre pensions and savings.

Macroeconomics have led state planners in all high-welfare economies headlong into policies of monetary and economic destruction from which there is no politically acceptable means of escape. 


Only those with a lack of perception are unaware that their nation’s economy is in deep trouble. It is far worse than just a pandemic-induced disruption in our lives which in a little time will return to normal. Lest we forget, liquidity strains had already appeared in the US repo market and forced the Fed to reverse its policy of reducing its balance sheet before the coronavirus even existed. And before that, the trade tariff war between the US and China had led to international trade grinding towards a halt.

Continue reading

A Shaky Foundation, by Michael Krieger

It doesn’t take much to knock a tottering building over. From Michael Krieger at libertyblitzkrieg.com:

And so castles made of sand fall in the sea, eventually.
– Jimi Hendrix

There’s a widespread belief out there that the U.S. and the global economy in general is on much sounder footing ever since the financial crisis of a decade ago. Unfortunately, this false assumption has resulted in widespread complacency and elevated levels of systemic risk as we enter the early part of the 2020s.

All it takes is a cursory amount of research to discover nothing was “reset” or fixed by the government and central bank response to that crisis. Rather, the entire response was just a gigantic coverup of the crimes and irresponsible behavior that occurred, coupled with a bailout designed to enrich and empower those who needed and deserved it least.

Everything was papered over in order to resuscitate a failed paradigm without reforming anything. Since it was all about pretending nothing was structurally wrong with the system, the response was to build more castles of sand on top of old ones that had unceremoniously crumbled. The whole event was a huge warning sign and opportunity to change course, but it was completely ignored. Enter novel coronavirus.

Continue reading→

The Wealth Redistribution Scam that Is “Inflation”, by Thorstein Polleit

Thorstein Polleit gets off to a good start with the correct definition of inflation, and it gets better from there. From Polleit at mises.org:

The world over people are told that central banks pursue “price stability” by making sure that consumer goods prices do not rise by more than 2 percent per annum. This is, of course, a big sham. If the prices of goods rise over time, it does not take that much to understand that prices do not remain stable. And if the prices of goods increase over time, it necessarily means that the purchasing power of the money unit declines.

As money loses its purchasing power, income and wealth are stealthily redistributed. Some individuals and groups of people are enriched at the expense of others. Savers and workers are swindled out of their deserved income and retirement benefits, while those who own goods that rise in value or who borrow money typically reap a windfall profit. Clearly, the banking industry is a major beneficiary of monetary debasement.

“Inflation” Is a Rise in the Quantity of Money

Central banks are the very source of the phenomenon that all prices of goods tend to rise over time. They hold the money production monopoly and increase — in close cooperation with commercial banks — the outstanding quantity of money through credit expansion, an increase in the supply of credit that is not backed by real savings. It goes without saying that it is rather profitable to be active in the money-production business.

Continue reading