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A Warmed-Up “Chicago Plan”

Many of our readers may be aware by now that a Swiss initiative against fractional reserve banking has gathered the required 100,000 signatures to force a referendum on the matter. Is is called the “Vollgeld Initiative”, whereby “Vollgeld” could be loosely translated as “fully covered money”.

logo_vollgeld-initiative_mit_Titel_hoch_2014_05 Swiss initiative against fractional reserve banking

Austrian School proponents will at first glance probably think that it sounds like a good idea: After all, it is the creation of uncovered money substitutes ex nihilo that leads to the suppression of market interest rates below the natural rate and consequently to a distortion of relative prices, the falsification of economic calculation and the boom-bust cycle.

However, a second glance reveals that the initiative has a substantial flaw. One may for instance wonder why the Swiss National Bank hasn’t yet let loose with a propaganda blitz against it, as it has done on occasion of the gold referendum. The answer is simple: the “Vollgeld” plan only wants to prohibit the creation of fiduciary media by commercial banks.

The power to create additional money from thin air is to be reserved solely to the central bank, which would vastly increase its power and leave credit and money creation in the hands of a few unelected central planning bureaucrats. In other words, it is a warmed-up version of the “Chicago Plan” of the 1930’s, which Chicago economists led by Irving Fisher and Frank H. Knight presented in the wake of the Great Depression (the debate over the plan led to the establishment of the FDIC and the Glass-Steagall Act, but its central demand obviously remained unfulfilled).

Irving and Knight Irving Fisher and Frank H. Knight, the lead authors of the original Chicago plan

As Hans Hermann Hoppe has pointed out, the Chicago School (F. H. Knight is today regarded as one of its most important founders), was seen as “left fringe” in the 1940s.

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

Stock Market Suffers Worst Start to the Year Ever – What Does it Mean?

January 12, 2016

Stock Market Suffers Worst Start to the Year Ever – What Does it Mean?

From December 30 to the end of the first week trading week of January, the DJIA has declined by roughly 7.7% (approx. 1,370 points) and the SPX by roughly 7.6% (approx. 160 points). This was nothing compared to the mini-crash suffered by China’s stock market early this year, which continued this morning with the Shanghai Composite (SSEC) declining by another 5.33%. The SSEC has put in an interim peak at approx. 3684 on December 23 and has since then fallen by slightly less than 670 points, or about 18%. Most of the decline occurred in the first week of January.

S&P 500 Index, daily. The year has begun with a big sell-off in stock markets around the world – click to enlarge.

Although the sell-off in the US stock market was comparatively mild, it still ended up as the worst first trading week of January in history. Had January started out on a positive note, the mainstream financial media would have been full of reminders of how bullish a strong showing in the first week of January was, and what a good omen it represented for the rest of the year. Instead they felt compelled to tell us why a weak start to the year should be ignored.

The contortions went as far as one analyst informing us last week that the sell-off was actually happening “in a parallel universe”. As our friend Michael Pollaro has pointed out to us, central planning worshiper Steve Liesman told CNBC viewers last week that the terrible trade numbers (both imports and exports kept declining) were actually a positive, because they would “subtract less from GDP” – as imports have declined at an even faster pace than exports. Such unvarnished nonsense can only spring from the fevered minds of Keynesians and Mercantilists.

2-US exports and imports …click on the above link to read the rest of the article…

The EU Bail-In Directive: Dark Clouds are Gathering

January 10, 2016

The EU Bail-In Directive: Dark Clouds are Gathering

Portugal’s Rickety Banking System

After the unseemly bankruptcy of the Espirito Santo Group and the associated bank, then Portugal’s second biggest (likely a result of not praying enough, see: “Big Portuguese Bank Gets Into Trouble” and “Fears Over Banco Espirito Santo Escalate” for the gory details), Portugal’s state-run deposit insurance fund basically ran out of money.

It turns out that Europe’s new Bank Recovery and Resolution Directive (BRRD for short) came just in time for Portugal. At the end of 2015, another Portuguese bank bit the dust, the country’s seventh largest lender by assets, Banif. Portugal’s government once again decided to bail the bank out, but with strings attached. Subordinated bondholders and shareholders were essentially wiped out, which is as it should be.

Banif SA, weekly. Although this is hard to see on this linear chart, the stock rose by 40% today, to €0.002. Shareholders are allegedly planning to throw a wild party in Lisbon over the weekend (we were unable to confirm this rumor) – click to enlarge.

Senior bondholders and depositors were spared however, with Portugal’s overburdened taxpayers once again footing the bill. According to the FT:

Portugal has agreed a €2.2bn state rescue for Banco International do Funchal (Banif), splitting the Madeira-based lender into “good” and “bad” banks and selling its healthy assets to Spain’s Santander for €150m in the country’s second bank bailout in less than 18 months.

António Costa, Portugal’s new socialist prime minister, said the bailout would involve “a high cost for taxpayers” but had the advantage of being “a definitive solution”. Branches would open normally on Monday, he said. The rescue, which “bails in” shareholders and subordinated creditors, follows the €4.9bn bailout in August last year of Banco Espírito Santo, once Portugal’s largest listed bank, whose healthy assets, split off into Novo Banco, remain unsold.

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

How Big is the Bust in Commodities Really?

January 8, 2016

How Big is the Bust in Commodities Really?

We have frequently come across articles lately that are purporting to show that commodity prices have in the meantime declined below the lows that obtained at the start of the last bull market. Yesterday Zerohedge e.g. posted a chart from Sean Corrigan’s True Sinews Report, which depicts the GSCI Excess Return Index. The following remark accompanied the chart:

“Returns from being long the commodity super-cycle have evaporated in the last 18 months – to 42 year lows.”

So are commodities as a group really at 42 year lows? Here is a little test: can you name even a single listed commodity that currently trades at a lower price than at any time since January 1974?

Image credit: Ian Berry / CNN

There is actually no need to check, because there isn’t one. So how can an entire commodity index, which presumably includes a whole range of commodities, have fallen to a 42 year low? Below is a chart that provides us with a hint. It shows the performance of the crude oil ETF USO since its introduction and compares it to the performance of WTIC crude.

Performance of WTIC (red line) vs. the crude oil ETF USO (black line) since mid 2006. USO has declined by nearly 31% more than the commodity the price of which it purports to reflect – click to enlarge.

In one sense, the remark accompanying the GSCI excess return index chart is entirely correct: Had one invested in commodities via this index, the nominal value of the investment would now be at a 42 year low. However, the same is not true of the commodities the index is composed of (although buying them directly wouldn’t have helped much, as we will explain below). The cause of the GSCI’s dismal performance is also the reason why USO has so vastly underperformed crude oil.

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

US Economy – on the Verge of Recession?

January 6, 2016

US Economy – on the Verge of Recession?

US Manufacturing Sector Weakens Further – Alea Iacta Est?

On the first trading day of the year, China’s stock market crumbled, seemingly waylaid by yet another weak manufacturing PMI report and a further slide in the yuan. On the same day, a few Fed members came out affirming that several more rate hikes would be seen in the US this year (such as SF Fed president Williams and Cleveland Fed president Loretta Mester).

dice

Image vie pixabay.com

Meanwhile here is the latest update of the Atlanta Fed’s GDP Now indicator:

A-gdpnow-forecast-evolution The GDP Now model declines to just 0.7%, once again way below the consensus range

When we last mentioned this indicator in passing, it still stood at 1.7% – and that was on December 18! Not long after that, we posted a year-end overview of US manufacturing data with updated charts from our friend Michael Pollaro. This was on December 23, but in the meantime a wealth of additional data has been released, primarily in the form of district surveys and finally the manufacturing ISM release on January 4.

Michael has provided us with a fresh set of charts, showing the evolution of the most important data points of the district surveys as an average and comparing them to the respective National ISM data. In previous updates on manufacturing data, we have mentioned that we see little reason why the trends that have been in motion since early 2015 should reverse. And indeed, they haven’t – on the contrary, they seem to be accelerating.

The most upsetting releases of late have been the Chicago ISM (which contains services as well) and the national ISM released on January 4. Both came in way below already subdued expectations, with the Chicago number falling totally out of bed, posting a headline reading of just 42.9 – well in contraction territory.

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

Our “Storm Warning” for the Year Ahead …

January 5, 2016

Our “Storm Warning” for the Year Ahead …

Our “Storm Warning” for the Year Ahead …

Ils viennent jusque dans vos bras / They’re coming right into your arms
Égorger vos fils, vos compagnes! / To cut the throats of your sons, your women!
Aux armes, citoyens / To arms, citizens
Formez vos bataillons / Form your battalions
Marchons, marchons! / Let’s march, let’s march!
Qu’un sang impur / Let an impure blood
Abreuve nos sillons! / Soak our fields!
– “La Marseillaise”

Choppy Waters

PARIS – And so the old year ended…

closerie des Lilacs La Closerie has been around for some time – and it seems it has always been popular.

The Closerie des Lilacs brasserie was packed. Every table was taken. On the corner of the Boulevard de Montparnasse and the Boulevard Saint-Michel, this was one of Hemingway’s favorite restaurants. It is now popular with tourists as well as locals.

Coming in, we heard familiar American accents behind us, but almost everyone else appeared to be native to the city. It was bright, the way brasseries are supposed to be…

“The way things are supposed to be” is our beat at the Diary. The way they really are is beyond us. Far too complex. Infinitely nuanced. Mind-blowingly intricate.

“Is,” as President Clinton noted, is too high a standard. “Ought to be” is the best we can do. Only the gods can know what is really going on. All we can do is to observe certain superficial patterns and rules – like waves on the surface of a deep sea – and wonder how they might slap against our little bark.

One observation: Markets bob up and down. Yes, dear reader, it is a new year… and we face new conditions. New challenges. New threats. But at least we know how the waves work… floating prices up one side and down the other.

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

Money Market Distortions at Year-End

January 4, 2016

Money Market Distortions at Year-End

Major Window Dressing Exercises and a Dead Federal Funds Market

Many of our readers are probably aware of the quarterly spike in reverse repos, which has previously been amply documented and discussed elsewhere. The Fed has introduced these overnight reverse repos two years ago, and has made them accessible to a wide range of counterparties (altogether 163 at last count), including banks, primary dealers, mutual funds, brokers and GSEs. In these transactions the counterparties are essentially depositing cash with the Fed overnight in exchange for treasury securities.

defying gravity Photo via izismile.com

The Fed’s counterparties receive interest rather than having to pay interest (currently 25 basis points) when borrowing treasuries in these transactions. By setting the rate it pays at a higher level than the rate on short term t-bills, the Fed encourages participation. The reason for introducing the facility was that the Fed wanted to test various “exit” procedures from its extraordinary monetary accommodation.

Sing The flow of money and securities in repo markets, from a 2013 IMF working paper by Manmohan Singh

Reverse repos will temporarily withdraw liquidity from the financial system, which will ceteris paribus tend to put upward pressure on short term market interest rates. Here is what has happened since the facility was introduced:

On December 31, overnight reverse repo transactions with the Fed spiked to a record $475 billion. The green line is the general collateral repo rate (more on this further below) – click to enlarge.

At the same time, the repos are supposed to relieve shortages of high quality collateral, which have reportedly become a problem as the Fed’s QE programs have lowered the amount of treasury bonds available for trading and swapping. Originally capped at a maximum of $300 billion, the RR facility has been expanded to a maximum of $2 trillion after the rate hike of December 16, which seemingly underscores its primary function as a tool to remove excess liquidity.

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

Doom and Gloom for North American Oil Producers

January 1, 2016

Doom and Gloom for North American Oil Producers

Oil Prices

To the dismay of U.S. shale producers, oil prices continue their long slow slide into the abyss. Perhaps the current price of $35 per barrel – an 11 year low – is the final destination. More than likely, however, it’s a brief reprieve before the next descent.

Photo credit: Mohammed Ameen / Reuters

Oil exporters, including Saudi Arabia and Russia, have maintained high production rates. Their goal is to bankrupt U.S. shale companies and preserve market share. At the same time, oil demand is tapering as the global economy cools.

Global crude oil and condensate (c+c) production as of June 2015. In record high territory.

The combination of high production and declining demand has resulted in excess supply, and lower prices. The trend of lower prices won’t change until either demand increases or production decreases. At the moment, it doesn’t appear that either of these factors will change any time soon.

So how low can oil prices go? If you recall, in the late-1990s, oil prices dropped below $20 per barrel. Goldman Sachs thinks we’ll see $20 per barrel oil again.

Obviously, oil prices can’t go to zero. However, this offers little consolation for the many oil companies that borrowed gobs of money from Wall Street to leverage development of fracked wells that require $60 per barrel oil to pencil out.

Contrary to widespread expectations, Russian production has proved more than resilient in the face of low prices. The decline in the ruble and high export taxes on oil (which are based on threshold prices) have left Russian producers in a competitive situation.

Declining Hedges

So while it isn’t possible for oil prices to go to zero. It is possible for the stock prices of oil companies to go to zero. In fact, over the next 12 months there could be a rash of bankruptcy’s that results in delisted, worthless shares.

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

Doom and Gloom for North American Oil Producers

December 30, 2015

Doom and Gloom for North American Oil Producers

Lower Oil Prices

excess natural gas burns southeast of Baghdad Photo credit: Mohammed Ameen / Reuters

1-World3 Global crude oil and condensate (c+c) production as of June 2015. In record high territory.

So how low can oil prices go? If you recall, in the late-1990s, oil prices dropped below $20 per barrel. Goldman Sachs thinks we’ll see $20 per barrel oil again.

2-Russia3 Contrary to widespread expectations, Russian production has proved more than resilient in the face of low prices. The decline in the ruble and high export taxes on oil (which are based on threshold prices) have left Russian producers in a competitive situation.

Declining Hedges

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

Professor Fekete About Gold And The Debt Society

December 21, 2015

Professor Fekete About Gold And The Debt Society

Claudio Grass interviews Professor Antal E. Fekete

GLOBAL GOLD: “Prof. Fekete, it is a pleasure to have this opportunity to talk to you. You are a fierce critic of the current monetary system and a strong proponent of the gold standard, particularly the variety that combines with the Real Bills Doctrine (RBD) of Adam Smith which we shall get into later. We are very much interested to learn how this interest of yours started in the first place and what led you to believe in gold and Austrian Economics in general.”

Antal Fekete Professor Antal E. Fekete (see further below for biographical details) Photo credit: verlagjohannesmuller

AF: “I have been a lifelong student of gold money which led me to Austrian economics. However, I find that the writings by Austrian authors such as Hayek and Mises on gold somehow deviated from Carl Menger’s basic idea of marketability of goods in favor of the Quantity Theory of Money. For this reason, I find they did not address the nexus between gold and interest. I take pride in pioneering a new departure to develop a theory of interest based on the idea of marketability of goods (also known as hoardability) that puts this nexus right into the center. My own view is that gold and silver are the only monetary metals for reasons having to do with the fact that they are the most hoardable substances in existence. I also believe that if Menger had lived longer, he himself would have developed his theory of interest along the lines of indirect exchange of income and wealth that are an improved version of hoarding and dishoarding (direct exchange). As a matter of fact, here we are talking about the dual theory of the evolution of direct exchange (barter) into indirect exchange of goods and services (monetary economy).

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

The FOMC Decision, US Money Supply and the Economy

December 19, 2015

The FOMC Decision, US Money Supply and the Economy

Giving the Kremlinologists Something to Do

As is well known by now, on Wednesday the US central monetary planning bureau finally went through with its threat to hike the target range for overnight bank lending rates from nothing to almost nothing.

2-nauticalmodernboatinterior

Photo credit: Luca Brenta

The very next day, the effective federal funds rate had increased from 15 to 37 basis points – moreover, as illustrated by the trend in short term rates prior to the FOMC meeting, the markets had already fully anticipated the rate hike:

US 3-month t-bill discount rate and the one year t-note yield: between the October and December FOMC meetings, the markets fully discounted the impending rate hike. Once again we can see that there is actually a feedback loop between the Fed and the markets, and that it is not true that the Fed has absolutely no control over interest rates (even though the degree of its control is limited) – click to enlarge.

Of course, some markets still managed to act surprised (and/or confused), most prominently the US stock market, which is traditionally the very last market to get the memo, regardless of what is at issue. This is why asset bubbles so often end in crashes – market participants tend to very “suddenly” realize that something is amiss.

This time, the trusty WSJ FOMC statement tracker reveals that the planners have given us Kremlinologists something to do, by changing the statement’s content quite a bit. By contrast to the previous carbon copy approach, it tells a completely new story. Well, almost.

Between the October and the December meetings, the minds of the committee members have evidently experienced a great epiphany. Suddenly they have realized that the economy is indeed just awesome.

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

The Statist Mindset

December 18, 2015

The Statist Mindset

The Key Logical Fallacy of Statism

I just read an article in Bloomberg View yesterday by Cass Sunstein, who is a law professor at Harvard. It was a roundup of a number of books published last year on “behavioral economics”. For those who don’t know it, behavioral economics typically focuses on the biases and systematic errors in human behavior.

communist angels Surely everyone has heard an argument along these lines before: socialism would really work if only it were done right! For starters, it would need to be administered by a host of angels, so what you see above should be considered the ideal communist bureaucrats. Image via pixgood.com

In his review of the book Phishing for Phools by George Akerloff and Robert Shiller, Sunstein concludes that one of the major contributions of the authors “is to show that if we care about people’s well-being, the invisible hand (i.e., free markets) is often the problem, not the solution.”

cass-sunstein-cia Cass Sunstein, a committed, and as we believe, truly dangerous statist, who would likely have felt right at home in Stalin’s politburo. We have discussed this crypto-communist weirdo previously in these pages (see The Taming of Deluded Conspiracy Theorists) and so has incidentally Dr. Machan (see Rights and Government). Sunstein is not only an enemy of the free market, he inter alia once opined (in an academic paper, no less) that Americans should henceforth only be fed government-approved information. In order to achieve this, he proposed that government agents should infiltrate the web sites of “conspiracy theorists” (=anyone who thinks the government may be lying about something) to spy on them and discredit them, and if that doesn’t help, government should tax them oroutright ban “conspiracy theorizing” (wise men like Mr. Sunstein would presumably determine what does and doesn’t constitute a “conspiracy theory”). He failed to mention how those breaking the ban should be punished (forcible relocation into a reeducation camp perhaps?) Photo via 911blogger.com

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

The Trouble with the Future

December 12, 2015

The Trouble with the Future

Feeeeeelings

PARIS – Yesterday, we got so much mail on our recent issue on Donald Trump we couldn’t read it all. Pro… con… off the wall – readers’ sentiments were all over the place.

But a clever reader mercifully brought the discussion to an end with this quote from fellow Baltimorean H.L. Mencken:

“As democracy is perfected, the office of the President represents, more and more closely, the inner soul of the people. On some great and glorious day, the plain folks of the land will reach their heart’s desire at last and the White House will be occupied by a downright fool and complete narcissistic moron.”

HLMencken HL Mencken as a young man in front of his pre-war word processor. There’s a trenchant Mencken quote for nearly every occasion. If we could, we’d resurrect him.

Photo via Wikimedia Commons

All over the world, elections allow the people to express their innermost thoughts and feelings. This is a big day in Argentina, for example. Outgoing president Cristina Kirchner is supposed to hand over power to her successor, Mauricio Macri.

But when we looked yesterday, there was dispute as to exactly what time the baton would be passed. And Cristina has let it be known she would not attend the inaugural and would generally make life as difficult for Mr. Macri as possible.

meeting This photo is simply too funny not to show it – it cries out for a caption contest actually. Background: Kirchner asked Macri to visit her in the presidential palace, so she could personally congratulate him on his victory. And she said to him to “come alone”, which immediately spawned the twitter hashtag #VeniSolo (#ComeAlone)

Photo via tn.com.ar

CUoS_ZqW4AEcc-5 Image from an #VeniSolo tweet …Photo via pravda-tv.ru

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

The Poison of Central Planning

December 9, 2015

The Poison of Central Planning

As is well known, central banks around the world have deployed a range of “unconventional policies” in recent years, ranging from imposing zero to negative interest rates, to outright money printing (QE).

Silvana Comugnero

Photo via americanpatriotdaily.com

We have seen a number of people argue that “QE” does not really involve “money printing”, but as we have explained at length, these arguments are misguided (see e.g. our in-depth discussion of the modus operandi of the Fed here: “Can the Fed Print Money?”).

Additional money created in the US economy since January of 2008 (inside the blue rectangle). The Fed created most of it – click to enlarge.

As far as we understand it, the first error is the belief that only bank reserves are created, when in reality, bothbank reserves and deposit money are created in QE operations (the latter is clearly “money”, as it can be used for the final payment of goods and services in the economy). The second error is to argue that because new money isn’t just dropped from helicopters (not yet, anyway), but involves asset purchases, it somehow doesn’t qualify as “printing”. However, it is important to keep in mind that the money used for these purchases is still created ex nihilo, at the push of a button.

As an aside, it has by now become clear that the ECB also creates both reserves and deposit money to the extent of its securities purchases, whereas Japan’s case still requires some digging on our part which we haven’t gotten around to yet (Japan e.g. excludes deposits held by securities companies from its money supply data; in some ways this is sensible, as it allows for a more fine-grained analysis of money and its potential uses, but it may also disguise how much money the BoJ is really creating).

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

US Stock Market – An Accident Waiting to Happen

December 1, 2015

US Stock Market – An Accident Waiting to Happen

Monetary Inflation Becomes Less Supportive of Asset Prices

We have recently discussed the sorry state of the junk bond market, as well as the noteworthy decline in the annual growth rate of US money supply aggregates. The latter has finally manifested itself not only in terms of narrow monetary aggregates like M1 (see chart) and AMS (“Austrian money supply”, a.k.a. TMS-1, the narrow true money supply), but also in the broader true money supply aggregate TMS-2.

awh Photo credit: Keith Maniac

As a reminder, here is the most recent chart of the year-on-year growth rate of TMS-2 :

Year-on-year growth in money TMS-2 has declined to its slowest pace since November of 2008, shortly after Ben Bernanke’s money printing orgy had been unleashed – click to enlarge.

Below is a chart of the annual growth rate of narrow money AMS from the transcript of the October advisory board meeting of the Incrementum Fund. US money AMS is calculated by Dr. Frank Shostak. The chart shown below originally appeared in his AAS Economics Weekly Report of October 5, 2015.

As you can see, the growth rate of the narrow true money supply has fallen off the proverbial cliff recently. It is fair to assume that it will continue to be a leading indicator for the growth rate of TMS-2. Steven Saville of the Speculative Investor has recently mentioned that the sharp growth in euro area money supply (a chart of the growth differential between US and euro area AMS can be seen here) could well help to keep asset prices up longer, by offsetting the slowdown in US money supply growth to some extent.

This idea certainly has merit, as there exists empirical evidence to this effect. However, the US stock market will likely continue to be the leading international stock market. Should leveraged positions in the US market run into trouble, it will affect “risk asset” prices nearly everywhere. The danger that this could soon happen is clearly growing:

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

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