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Fed’s Policy of Price Stability Results in More Instability

For most economists the key factor that sets the foundation for healthy economic fundamentals is a stable price level as depicted by the consumer price index.

According to this way of thinking, a stable price level doesn’t obscure the visibility of the relative changes in the prices of goods and services, and enables businesses to see clearly market signals that are conveyed by the relative changes in the prices of goods and services. Consequently, it is held, this leads to the efficient use of the economy’s scarce resources and hence results in better economic fundamentals.

For instance, let us say that a relative strengthening in people’s demand for potatoes versus tomatoes took place. This relative strengthening, it is held, is going to be depicted by the relative increase in the prices of potatoes versus tomatoes.

Now in a free market, businesses pay attention to consumer wishes as manifested by changes in the relative prices of goods and services. Failing to abide by consumer wishes will lead to the wrong production mix of goods and services and will lead to losses.

Hence in our case businesses, by paying attention to relative changes in prices, are likely to increase the production of potatoes versus tomatoes.

According to this way of thinking, if the price level is not stable, then the visibility of the relative price changes becomes blurred and consequently, businesses cannot ascertain the relative changes in the demand for goods and services and make correct production decisions.

This leads to a misallocation of resources and to the weakening of economic fundamentals. Unstable changes in the price level obscure changes in the relative prices of goods and services. Consequently, businesses will find it difficult to recognize a change in relative prices when the price level is unstable.

…click on the above link to read the rest of the article…

The Fed Will Blink

Honest Profession

GUALFIN, ARGENTINA – The Dow rose 174 points on Thursday. And Treasury Secretary Steve Mnuchin said we’d have a new tax system by the end of the year.

Animal spirits were restless. But which animals? Dumb oxes? Or wily foxes? Probably both.

Since Thursday there have been two additional very spirited up days with large gaps – this is very rare in the DJIA, particularly from such a high level after a ~240% rally since the lows made 8 years ago… it continues to feel like a blow-off (and it happens against the backdrop of a sharp slowdown in money supply growth) – click to enlarge.

But what caught our attention were the central bankers strutting across the yard and crowing with such numbskull cackles that even barnyard animals would be embarrassed by them. There was a time when central banking was an honest profession.

Central bankers provided financing for the government. They backed the banking system, too, by holding savings as reserves, which they lent to solvent member banks in emergencies. They were tight-lipped, tight-laced, and tightwads. Their role was to say “no” more often than “yes.”

When the king wanted money to fight in a war… or build a bridge… the banker would give the terse reply: “Sire, we don’t have any.” Real money was backed by gold. And credit had to be backed by real money, which meant it had to be saved. Savings were limited, as was money.

Cackling central planners – this reminds us of the “FOMC meeting laughtrack” of 2003-2007 – the more Fed members laughed at their meetings, the closer the economy and financial system came to the near fatal implosion of 2007-2009. Do today’s monetary bureaucrats have more of a clue than their predecessors just before the GFC? The answer is an emphatic no – they have simply doubled down and blown an even bigger credit and asset bubble.

…click on the above link to read the rest of the article…

You Are Not An Investor


Giotto Legend of St Francis, Exorcism of the Demons at Arezzo c.1297-1299
You are not an investor. One can only be an investor in functioning markets. There have been no functioning markets since at least 2008, and probably much longer. That’s when central banks started purchasing financial assets, for real, which means that is also the point when price discovery died. And without price discovery no market can function.

You are therefore not an investor. Perhaps you are a cheat, perhaps you are a chump, but you are not an investor. If we continue to use terms like ‘investor’ and ‘markets’ for what we see today, we would need to invent new terms for what these words once meant. Because they surely are not the same thing. Even as there are plenty people who would like you to believe they are, because it serves their purposes.

Central banks have become bubble machines, and that is the only function they have left. You could perhaps get away with saying that the dot-com bubble, maybe even the US housing bubble, were not created by central banks, but you can’t do that for the everything bubble of today.

The central banks blow their bubbles in order to allow banks and other financial institutions to first of all not crumble, and second of all even make sizeable profits. They have two instruments to blow their bubbles with, which are used in tandem.

The first one is asset purchases, which props up the prices for these assets, through artificial demand. The second is (ultra-) low interest rates, which allows for more parties -that is, you and mom and pop- to buy more assets, another form of artificial demand.

…click on the above link to read the rest of the article…

Where There’s Smoke…

Where There’s Smoke…

…There’s central bank manipulation

Central banks around the world have colluded, if not conspired, to elevate and prop up financial asset prices.  Here we’ll present the data and evidence that they’ve not only done so, but gone too far.

When wee discuss elevated financial asset prices we really are talking about everything.

we’re talking not just about the sky-high prices of stocks and bonds, but also of the trillions of dollars’ worth of derivatives that are linked to them, as well as real estate in dozens of countries and locations.  All are intricately linked together. For instance, stocks are elevated, in part, because bond yields are so low.  Sam for real estate.

Here are three questions most alert investors are asking:

  • Question #1: When will financial assets ever ‘correct’ and fall in price?
  • Question #2: How much does overt propping by the central banks have to do with today’s elevated prices?
  • Question #3: How much does covert propping by central banks play a role in these inflated markets?

These are important questions to consider because if central banks have been too involved and gotten themselves mixed up in trying to ‘wag the dog’ by using elevated financial asset prices as a means to drive economic expansion — then the risk is a big implosion in financial asset prices if their efforts fail.

The difficulty, as always, is that you can’t print your way to prosperity.  It’s never worked in history and it won’t work this time either.  You can, however, print (or borrow) to delay a correction, after which a boost in real economic growth (or additional income) had better materialize to save your bacon.   But if enough growth does not emerge to both pay back all the old outstanding loans plus all the newly created debt and currency, then you’re going to experience a worse correction than if you had not tried to print/borrow your way to prosperity.

…click on the above link to read the rest of the article…

The End of Quantitative Easing – Perhaps Now It Will Be Inflationary?

If QE failed to produce inflation, then ending QE may actually produce the inflation people previously expected. Where’s the strange logic in that one? Well you see, it really does not matter how much money you print, if it never makes it into the economy, it will not be inflationary. Additionally, even if it makes it into the economy and the people hoard for a rainy day, it still will not be inflationary.

The craziest thing the Fed did was create excess reserves. The bankers complained that the Fed was buying the government debt so they would have no place to park their money. The Fed then accommodated them creating the Excess Reserves facility and paid them interest for absolutely no reason whatsoever.  Almost $3 trillion was parked at the Fed collecting interest so that $4.5 trillion of “printing” money never made it out the door. Hence, there was no inflation to speak of (outside of healthcare which always rises no matter what), and people hoarded. The pundit kept calling for a crash in the stock market but overlooked the fact that retail participation was at historic lows. Why? They were hoarding their money.

…click on the above link to read the rest of the article…

Hell To Pay

Economic nonsense comes a dime a dozen.  For example, Federal Reserve Chair Janet Yellen “think(s) we have a healthy economy now.”  She even told the University of Michigan’s Ford School of Public Policy so earlier this week.  Does she know what she’s talking about?

Somehow, this cartoon never gets old…

If you go by a partial subset of the ‘official’ government statistics, perhaps, it appears she does.  The unemployment rate is at 4.5 percent, which is considered full employment.  What’s more, inflation is ‘reasonably close’ to the Fed’s 2-percent inflation target.  But what does this mean, really?

According to Fed Chair Yellen, it means that now’s the time to tighten up the nation’s monetary policy.

Behold this display of awesomeness, citizen. Doesn’t it prove that central planning “works” after all? Unfortunately the ointment is never entirely fly-free, especially when one is pondering statistical aggregates – click to enlarge.

By now you’ve likely seen this upcoming – choice – quote from Yellen.  Nonetheless, we can’t resist repeating its remarkable idiocy.  For Yellen, who was in the greater Detroit metropolitan area, was kind enough to humor us all with a nifty automotive analogy to explain how to go about normalizing monetary policy.  Here Yellen elaborates with a variety of technical terms:

Whereas before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now allowing the economy to kind of coast and remain on an even keel – to give it some gas but not so much that we are pressing down hard on the accelerator – that’s a better stance of monetary policy.  We want to be ahead of the curve and not behind it.”

 

…click on the above link to read the rest of the article…

 

Fake News From the Fed

Fake News From the Fed

Fake News From the FedWhat you see in the media is mostly “fake news.”

Reuters had this story recently:

Most Federal Reserve policymakers think the central bank should take steps to begin trimming its $4.5 trillion balance sheet later this year as long as the economic data holds up, minutes from their last meeting showed…

Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee’s reinvestment policy would likely be appropriate later this year,” the Fed said in its minutes.

This is the public spectacle – where tiny and often trivial bits of real news are conflated with vast myths and illusions.

The Fed fiddles with short-term interest rates… President Trump tweets a threat to the Freedom Caucus… the GOP proposes a new health-care plan…

You can’t know what any of these “facts” mean without reference to a huge body of non-facts – beliefs, ideas, and prejudices, many of them absurd.

Remember, a “myth” is not necessarily untrue; it just can’t be tested or disproven.

And since reality is infinitely complex, and a myth can only reflect a small trace of it… no matter how attractive or “true” it is, the myth always leaves out more truth than it describes.

Critical Narrative

We make no pretense of ever knowing the “truth.”

That would be impossible. All we can do is try to identify the most ridiculous myths… and find the most useful one, the one we can believe without getting kicked in the pants.

Imagine you were a Jew in Germany in the 1930s… or a stock market investor in the US in 1929… or a merchant in Mosul, Iraq, in 2003.

In each case, there were plenty of ways to understand what was going on. But the critical narrative was: Time to get out of town.

…click on the above link to read the rest of the article…

Pulling Levers to Steer the Machine

Ticks on a Dog

A brief comment on Fed chief Janet Yellen’s revealing speech at the University of Michigan. Bloomberg:

“Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could,” Yellen said Monday in Ann Arbor, Michigan. The Fed is now trying to “give it some gas, but not so much that we’re pushing down hard on the accelerator.” […]

“The appropriate stance of policy now is closer to, let me call it neutral,” Yellen said in response to questions during an event at the Gerald R. Ford School of Public Policy at the University of Michigan. Yellen said she expected the economy to continue to grow at a moderate pace and that gradual interest rate increases “can get us where we need to be.”

Central planners groping in the dark…

Every society is ruled by an elite. They prey upon the common folks like ticks on a dog. They work their way into positions of power and influence, using a combination of brains, connections, and claptrap.

The mob generally looks up to them, impressed by the hocus pocus. And then, eventually, the ticks grow too many and too fat. The poor dog weakens… and the magic fails.

Where exactly we are in the process, we can’t be sure. But surely, we took another step toward the eventual catastrophe when Ms. Yellen spoke.

Everything she said was preposterous.

No Oomph

The economy is not growing at a “moderate speed.” If it is growing at all – it depends on how you calculate consumer price inflation – it is doing so only at stall speed.

Officially, per capita growth is less than 1% a year. What kind of “oomph” is that?

…click on the above link to read the rest of the article…

Yellen’s Balance Sheet Baloney

Of the many questions reporters asked Janet Yellen on Wednesday, at her press conference following the FOMC’s decision to raise the Fed’s policy rates, my favorite was the very first, posed by the Financial Times‘ U.S. Economics Editor, Sam Fleming.

Here is Mr. Fleming’s question:

[You’ve stated that the Fed wants to delay*] balance sheet normalization until [interest rate*] normalization is well under way. Could you give us some sense about “what well under way” means, at least in your mind — what kind of hurdles are you setting, what kind of economic conditions would you like to see, is it a matter of the level of the short term federal funds rate as being the main issue? What kind of role do you see the role of the balance sheet playing in the mobilization process over longer term? Is it an active tool or passive tool? Thanks.

And here is Chair Yellen’s response:

Let me start with the second question first. We have emphasized for quite some time that the committee wishes to use variations in the fed funds rate target or short term interest rate target as our key active tool of policy. We think it’s much easier, in using that tool, to communicate the stance of policy. We have much more experience with it, and have a better idea of its impact on the economy. So, while the balance sheet asset purchases are a tool that we could conceivably resort to if we found ourselves in a serious downturn where we were again up against the zero bound, and faced with substantial weakness in the economy, it’s not a tool that we would want to use as a routine tool of policy.

…click on the above link to read the rest of the article…

The American Dream, Twice Removed


Vincent van Gogh Corridor In The Asylum 1889
 

Nicole Foss is in Christchurch, New Zealand right now for the Living Economies Expo, and sent me, I’m still in Athens, Greece, a piece written by yet another longtime Automatic Earth reader, Helen Loughrey (keep ’em coming!), who describes her efforts trying to find a rental home in Fairfield County, Connecticut.

The first thing that struck me is how effortless and global sending information has become (category things you know but that hit you anyway occasionally, which is a good thing). The second is that the fall-out of the financial crisis has followed the same path as the information ‘revolution’: that is, it’s spreading faster than wildfire.

And I can’t avoid linking that to earlier periods of American poverty (see the photos), times in which ‘leaders’ thought it appropriate to let large swaths of the population live in misery, so everyone else would think twice about raising their voices. A tried and true strategy.

But of course there are large differences as well today between the likes of Greece and Connecticut. In Athens, there’s a poverty problem. In Fairfield County, there’s a (fake) ‘wealth problem’. Ever fewer people can afford to buy a home, so the rental market is ‘booming’ so much many can’t even afford to rent.

We can summarize this as ‘The Ravages Of The Fed’, and its interest rate policies. Or as ‘The Afterburn of QE’. That way it’s more obvious that this doesn’t happen only in the US. Every country and city in the world in which central banks and governments have deliberately blown real estate bubbles, face the same issue. Toronto, Sydney, Hong Kong, Stockholm, you know the list by now.

…click on the above link to read the rest of the article…

 

Maybe The Recovery Wasn’t Real After All

Maybe The Recovery Wasn’t Real After All

Then it all started to evaporate. Lackluster manufacturing and consumer spending reports sent the Atlanta Fed’s reading of Q1 GDP off a cliff to less than 1%:

And this morning the Wall Street Journal highlighted some recent changes in the yield curve that point towards further slowing:

Flatter Yield Curve in 2017 Shows Growth Concern Lingers

Long-term Treasury yields have declined modestly, while short-term yields have risen.A flattening of the Treasury yield curve in 2017 is a worrying sign for investors banking on resurgent U.S. inflation and growth.

Long-term Treasury yields, which are largely driven by the U.S. economic and inflation outlook, have declined modestly this year, following a sharp rise in the wake of the November election of Donald Trump as president. The 10-year U.S. Treasury yield has fallen to 2.396% from 2.446% at the end of 2016.

At the same time, short-term yields, which are more influenced by monetary policy, have risen in 2017 as Federal Reserve officials have made clear that they expect to continue raising the fed-funds rate through the rest of the year.
As a result, the yield premium on the 10-year note relative to the two-year note—known in the market as the 2-10 spread—slipped Wednesday to 1.107 percentage points, its lowest level since the election.

FIRST QUARTER REPORT CARD
While the yield curve, like all market indicators, is subject to the ebb and flow of investor sentiment, economic data and political developments, a flattening yield curve gets special attention from investors world-wide because it can serve as an early signal of both economic slowing and overpricing in riskier asset classes.

…click on the above link to read the rest of the article…

Jim Rogers Warns, The Fed “Has No Clue… Will Ruin Us All”

Jim Rogers Warns, The Fed “Has No Clue… Will Ruin Us All”

“What worries you?” asks a Bloomberg TV anchor of billionaire investor Jim Rogers. Rogers was not shy in his response: “The Federal Reserve… has no clue what they are doing. They are going to ruin us all.”

Having driven rates to record lows and with debt sky-rocketing, Rogers warns “this is all going to end very, very, very badly.” Rogers slams the ‘counterfactual’ arguments that things would have been a lot worse if The Fed had not done all this, “propping up zombie banks and dead companies is not the way the world is supposed to work.”

“It’s been nine years and we have nothing to show for it [economically] except staggering amounts of debt.”

We have missed Mr. Rogers plain, if often painful, truthiness.

Why This Market Needs To Crash

bofotolux/Shutterstock

Why This Market Needs To Crash

And likely will 

Like an old vinyl record with a well-worn groove, the needle skipping merrily back to the same track over and over again, we repeat: Today’s markets are dangerously overpriced.

Being market fundamentalists who don’t believe it’s possible to simply print prosperity out of thin air, we’ve been deeply skeptical of the financial markets ever since the central banks began their highly interventionist policies. Since 2009, they have unleashed over $12 Trillion in new money into the world, concentrating wealth into the hands of an elite few, while blowing asset price bubbles everywhere in the process (see our recent report The Mother Of All Financial Bubbles).

Our consistent view is that price bubbles always burst. Which is why we predict the world’s financial markets will implode spectacularly from today’s heights — destroying jobs, dreams, hopes, economies and political careers alike.

When this happens, it will frighten the central bankers enough (or merely embarrass them enough, being the egotists that they are) that they will respond with even more aggressive money printing — and that will then cause the entire money system to blow up.  Ka-Poom!  First inwards in a compressed ball of deflation, then exploding outwards in a final hyperinflationary fireball (see our recent report When This All Blows Up…).

It really cannot end any other way.  Money is not wealth; it is merely a claim on wealth.  Debt is a claim on future money.  The only way to have faith in our current monetary policies is if one believes that we can always grow our debts at roughly twice the rate of GDP — forever.   That is, compound the claims at twice the rate of income year after year from here on out.

…click on the above link to read the rest of the article…

Bank Loan Creation Crashes At Fastest Pace Since The Financial Crisis

Bank Loan Creation Crashes At Fastest Pace Since The Financial Crisis

Last weekend, after looking at the latest H.8 statement by the Fed, we noted something concerning: total loans and leases by U.S. commercial banks were rising at an annual pace of about 4.6%, based on weekly Fed data. That is down from a 6.4% pace for all of last year and peak rates of around 8% in mid-2016. This is the slowest pace of debt creation since the spring of 2014. This deceleration has prompted numerous questions about the sustainability of the recovery, and led the WSJ to noted that the slowdown, “is at odds with the idea of a stronger economy and rising sentiment.”

But the slowdown was especially acute in the all important for growth Commercial and Industrial loan category, which after growing at a pace of 10% in the first half of 2016, had unexpectedly slowed to just 4.0%, nearly 50% lower than the 7% growth notched at the start of the year.  This was the lowest pace of loan growth since July of 2011.

Fast forward one week, when after the latest update to the Fed’s latest weekly commercial bank loan data, we find that the trends have deteriorated substantially.

As shown in the chart below, after growing 4.6% one week ago, total loans and leases grew only 4.2% in the week ended March 8: the lowest growth rate since May 2014. However, it was once again the Commercial and Industrial loans creation – or lack thereof – which was more problematic, because after growing 4.0% on a year over year basis as of March 1, and 5.7% one month ago as of February 8, the growth rate has since tumbled to just 2.9%, a 1.1% decline in the growth rate over the past week.

As shown in the chart below, on a cumulative 4-week basis the slowdown in C&I loan creation tumbled by 2.8% as of the latest period: this was the biggest monthly slowdown going back to the financial crisis.

…click on the above link to read the rest of the article…

Banks Are Evil

Barandash Karandashich/Shutterstock

Banks Are Evil

It’s time to get painfully honest about this 

I don’t talk to my classmates from business school anymore, many of whom went to work in the financial industry.

Why?

Because, through the lens we use here at PeakProsperity.com to look at the world, I’ve increasingly come to see the financial industry — with the big banks at its core — as the root cause of injustice in today’s society. I can no longer separate any personal affections I might have for my fellow alumni from the evil that their companies perpetrate.

And I’m choosing that word deliberately: Evil.

In my opinion, it’s long past time we be brutally honest about the banks. Their influence and reach has metastasized to the point where we now live under a captive system. From our retirement accounts, to our homes, to the laws we live under — the banks control it all. And they run the system for their benefit, not ours.

While the banks spent much of the past century consolidating their power, the repeal of the Glass-Steagall Actin 1999 emboldened them to accelerate their efforts. Since then, the key trends in the financial industry have been to dismantle regulation and defang those responsible for enforcing it, to manipulate market prices (an ambition tremendously helped by the rise of high-frequency trading algorithms), and to push downside risk onto “muppets” and taxpayers.

Oh, and of course, this hasn’t hurt either: having the ability to print up trillions in thin-air money and then get first-at-the-trough access to it. Don’t forget, the Federal Reserve is made up of and run by — drum roll, please — the banks.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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