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A “Major Concern”

The European Banking Authority EBA, which (we guess) is fighting for its survival after the ECB has become the sole supervisor of Europe’s “systemically relevant” banks, has recently issued a comprehensive report on the European banking system (this included the unintended revelation that its employees have yet to master the intricacies of Exel).

As an aside, we have little doubt that this bureaucracy will survive. Has there ever been a case of an EU bureaucracy not surviving and thriving? We don’t recall one off the cuff, but perhaps we are mistaken. We’re sure some reason will be found to preserve this particular zombie sinecure as well.

eba_2 Hey guys! We’re still issuing reports! See how important it is to keep us well-funded?

Among the things the EBA’s report apprises us of, is that European banks continue to be submerged in bad loans, in spite of all the bailouts and extend & pretend schemes that have been implemented in recent years. As Reuters reports:

“The scale of bad loans held by banks in the European Union is “a major concern” and more than double the level in the United States, despite an improvement in recent years, the EU’s banking regulator said on Tuesday.

Non-performing loans (NPL) across Europe’s major banks averaged 5.6 percent at the end of June, down from 6.1 percent at the start of the year. But that compares with an average of less than 3 percent in the United States and even lower in Asia, according to the European Banking Authority (EBA).

The total of NPLs across Europe is about 1 trillion euros ($1.1 trillion), equivalent to the size of Spain’s annual gross domestic product (GDP) and 7.3 percent of the EU’s GDP.

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

US Money Supply Growth Finally Begins to Crack

November 24, 2015

US Money Supply Growth Finally Begins to Crack

Breaking Below the Shelf

In our recent missive on junk bonds, we inter alia discussed the fact that the growth rate of the narrow money supply aggregate M1 had declined rather noticeably from its peak in 2011. Here is a link to the chart.

As we wrote:

“We also have confirmation of a tightening monetary backdrop from the narrow money supply aggregate M1, the annualized growth rate of which has been immersed in a relentless downtrend since peaking at nearly 25% in 2011. We expect that this trend will turn out to be a a leading indicator for the recently stagnant (but still high at around 8.3% y/y) growth rate in the broad true money supply TMS-2.”

BN-GO061_WAJ_Mo_J_20150121165559

Photo credit: Bari Goodman

In the meantime the data for TMS-2 have been updated to the end of October, and low and behold, its year-on-year growth rate has declined to the lowest level since November of 2008. At the time Bernankenstein had just begun to print like crazy, via all sorts of acronym-decorated programs (they could have just as well called them “print 1, print 2, print 3”, etc.). So we’re now back to the broad true money supply growth rate recorded at “echo bubble take-off time”.

Annual growth rate of US money TMS-2, breaking below the lower end of the range it has inhabited since late 2013 – click to enlarge.

This is the final piece of the puzzle if it keeps up (and why wouldn’t it keep up?). Stock market internals have become ever more atrocious in the course of this year, which we have regarded as a sign that not enough new money was being printed to keep all the pieces of the bubble in the air at once. Now there is even less support.

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

“One Big Shock Away from a Global Downturn…”

November 24, 2015

“One Big Shock Away from a Global Downturn…”

Zombies vs. Cronies

DUBLIN – Most elections these days are contests between cronies and zombies. The left favors the zombies. The right favors the cronies.

In yesterday’s presidential elections in Argentina the zombies lost. It’s time for the cronies to take over.

New Argentine president Mauricio Macri – the era of the Kirchner dynasty is over.
Photo via diarioz.com.ar

The Long, Cold Winter Ahead

November 21, 2015

The Long, Cold Winter Ahead

Not Immune

Cold winds of deflation gust across the autumn economic landscape. Global trade languishes and commodities rust away like abandoned scrap metal with a visible dusting of frost. The economic optimism that embellished markets heading into 2015 have cooled as the year moves through its final stretch.

Photo credit: David Byrne

If you recall, the popular storyline since late last year has been that the U.S. economy is moderately improving while the world’s other major economies – Japan, China, and Europe – are rolling over. The U.S. economy would power through. Moreover, stock prices had achieved a permanently high plateau.

Growth in global trade has been slowing down for some time. This chart is slightly dated, but in US dollar terms, global export growth has recently turned deeply negative – click to enlarge.

But somewhere between collapsing oil prices, dollar strength, and consumer lethargy the economy’s narrative has drifted off plot. The theme has transitioned from one of renewed growth and recovery to one of recurring sickness and stagnation. Mass malinvestments in U.S. shale oil, Brazilian mines, and Chinese factories and real estate must be reckoned with.

Price adjustments, bankruptcies, and debt restructuring must be painfully worked through like a strawberry picker hunkered over a seemingly endless furrow row of over ripening fruits. Sore backs, burnt necks, and tender fingers are what the over-all economy has in front of it. The U.S. economy is not immune to the global disorder after all.

More evidence is revealed each week that the unexpected is happening. Instead of economic strength and robust growth, economic fundamentals are breaking down. Manufacturing is slowing. Consumer spending is soft. For additional edification, let’s turn to Dr. Copper…

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

Is Judgment Day At Hand?

November 12, 2015

Is Judgment Day At Hand?

What is Judgment Day?

It is like ancient times that the Feds, under Greenspan, somehow decided that US needed to follow a zero interest rate policy, a policy now known as the ZIRP. It was 2008 when Bernanke gave birth to the term Quantitative Easing, QE. QE was followed by Operation Twist, and its sequels – QE2 and QE3.

The new buzzword is “normalization”. Normalization is the reversal of the QE operations and the raising of interest rates to above zero. Whether we agree or disagree is irrelevant. The fact is that the BLS just declared the unemployment rate is at 5%, a level that should justify initiating the normalization process starting with the next FOMC meeting in December. In other words, judgment day is at hand.

juday Batten down the hatches, judgment day approacheth
Image credit: World Wrestling Entertainment (WWE)

The following two charts summarize the Fed’s policies nicely. The first shows the Federal Funds rate. It dropped from over 5% in 2007 to zero today. So we are making a big deal over a possible 25 basis points hike? I will leave that question for later.

Effective Federal Funds rate. It may be hiked from nothing to almost nothing soon, but what difference would it really make? – click to enlarge.

The second chart shows the Fed Balance Sheet, also starting in 2007. It went from $875 billion in 2007 to $4.5 trillion today, an increase of $3.625 trillion.

Total assets held by the Federal reserve. This unprecedented intervention has delivered “the weakest economic recovery of the entire post-WW2 era”. This result should be no surprise to anyone, except perhaps the monetary mandarins themselves – click to enlarge.

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

Looking at the two charts above, they beg the question: How do you normalize the extreme policies of the last 8 years? If normal means a return to a 5% federal funds rate and reducing the Fed’s balance sheet back to under $1 trillion, we have a hell of a long way to go.

Why Do We Let Other People Tell Us What to Do?

November 10, 2015

Why Do We Let Other People Tell Us What to Do?

Lame Theories of Government

We have been disappointed with political ideas and theories of government. They are nothing but scams, justifications, and puffery. One tries to put something over on the common man… the other claims it was for his own good… and the third pretends that he’d be lost without it.

Most are not really “theories” at all… but prescriptions, blueprints for creating the kind of government the “theorist” would like to have. Not surprisingly, it is a blueprint that flatters his intellect and engages his imagination.

government need A protection racket based on circular reasoning

But it does not answer the critical questions: Why do we let other people tell us what to do; are we not all equal? What is the purpose of government? What does it cost, and what benefits does it confer? You may find these questions have drifted far afield from our usual fare. But they’ve been on our mind.

We’re coming up on a major election in the U.S. Several men have come forward offering to take charge of the U.S. government. Maybe it would be worth wondering what it is that they are taking charge of. And since our daily letter is free, we feel entitled to write whatever we damned well please.

Government is a fact. It exists. It is as common as stomach gas. It is as ubiquitous as lice and as inescapable as vanity. But what is it? Why is it? And what has it become?

Born in Conquest

We know very little about the actual origins of government. All we know – and this from the archaeological records – is that one group often conquered another. There are skeletons more than 100,000 years old, showing the kind of head wounds that you get from fighting. We presume this meant that “government” changed. Whoever had been in charge was chased out or murdered. Then, someone else was in charge.

Barbarians carefully deliberating post-conquest policies

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

The Next Level of John Law Type Central Planning Madness

November 7, 2015

The Next Level of John Law Type Central Planning Madness

Cries for Going Totally Crazy are Intensifying

What are the basic requirements for becoming the chief economist of the IMF? Judging from what we have seen so far, the person concerned has to be a died-in-the-wool statist and fully agree with the (neo-) Keynesian faith, i.e., he or she has to support more of the same hoary inflationism that has never worked in recorded history anywhere. In other words, to qualify for that fat 100% tax-free salary (ironically paid for by assorted tax serfs), one has to be in favor of central economic planning and support policies fully in line with today’s economically illiterate orthodoxy. Meet Maurice Obstfeld, who has just taken the mantle.

For all we know the man is merely misguided and otherwise a nice person (in fact, he’s laughing a lot in photographs and seems a personable enough fellow). But his proposals could eventually affect the lives of countless people in the whole world, so he is fair game for robust criticism. We personally believe that he and other members of our “enlightened” technocratic ruling class should resign without delay and start looking for productive work instead of parasitizing and hampering the ever shrinking class of genuine wealth producers, but it seems unlikely that they will be interested in our opinion.

There once was a time when monetary cranks of the sort in charge nearly everywhere today were laughed out of the room. Today they are perfectly free to drive what is left of the market economy over the cliff. Mr. Obstfeld turns out to be yet another in a long list of luminaries belly-aching about (non-existing) “deflation” – this is to say, the alleged danger that the purchasing power of consumer incomes and savings might increase at some point. Allegedly, this remote eventuality has to be guarded against at all costs.

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

How China Broke the World’s “Bubble Machine”

November 4, 2015

How China Broke the World’s “Bubble Machine”

Magical Money System

U.S. stocks still going up. What does Mr. Market know that we don’t know? Plenty. He knows everything. Millions of facts. Millions of opinions. Millions of guesses. A damned know-it-all. Mr. Market is always right; there is no higher authority except God Himself So, if Mr. Market says stocks should go up, who are we to argue?

China-crisis

“Don’t fight the tape,” is another old-timer expression on Wall Street. When stocks are going up, you don’t want to be short. When they are going down, you don’t want to be long. As simple as that sounds, it doesn’t help you much. Because you never know which side the tape is on.

DJIA, daily. At some point, the “tape” is going to mislead those “millions of well-informed investors” – click to enlarge.

Mr. Market is a cunning, wily, and tricky fellow. He’s perfectly capable of leading investors up and up… only to knock them down from a higher place. Also, he’s known to give out the word that it’s “all clear” in the stock market… while brewing up the storm of a century.

Or you may hear him singing the blues about how awful everything is… and then discover that he’s been buying the entire time. So, even though the Dow has been trending upward… we’d be careful about drawing any conclusions. Mr. Market could be up to his old tricks; the tape could reverse at any time. And we kinda think it will.

Friend and economist Richard Duncan points out that the booms and bubbles of the last 35 years had a particular cause. They weren’t the product of Mr. Market’s caprice or of investors’ shrewd judgments. Instead, an almost magical money system drove consumption, production, and asset prices to new highs all over the world. What a hoot! Wages rose 10 times in China. Stocks rose 16 times in the U.S. But now the party is over…

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

Garbage In Garbage Out Economics

November 3, 2015

Garbage In Garbage Out Economics

“On two occasions I have been asked, “Pray, Mr. Babbage, if you put into the machine the wrong figures, will the right answers come out? …I am not able rightly to apprehend the kind of confusion of ideas that could provoke such a question.” – Charles Babbage, Passages from the Life of a Philosopher.”

Charles_Babbage_1860 The late Mr. Charles Babbage (1791-1871), an English polymath credited with inventing the first mechanical computer
Image via The Illustrated London News

Crunching Data to Fix Prices

The fundamental problem facing today’s economy is the flagrant contempt by governments the world over for the free exchange of goods and services and private stewardship of property. Perhaps it is power and control governments are after. Maybe they believe they are improving the economy and making the world a better place for all.

No one really knows for sure. But what is lucidly clear is the muddled disorder modern day economic policies have wrought upon us. You can hardly enter into a transaction without a cluster of intervention mucking with the price of payment.

Taxes, tariffs, wage laws, and subsidies. These all impact prices. But the main culprit affecting prices and trade are central bank interventions into money and credit markets. Relentless actions to control the economy by manipulating money and credit stand the price of everything else on end.

Certainly, government intervention into the U.S. economy is much looser than a Soviet style command and control system. But it does share a common refrain. Price fixing is central to its operation.

The Soviets, armed with their Five-Year Plans and the Theory of Productive Forces, deliberately directed how much wheat should be planted and how much a potato should cost. Conversely, the U.S. approach is mostly hidden from the short sighted view of the average lay person. The Federal Reserve allows the government to bypass the nuisance of tinkering with individual prices…though they still do it through subsidies and appropriations.

5 year plan

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

What’s Next: Deflation, Inflation, or Hyperinflation?

November 3, 2015

What’s Next: Deflation, Inflation, or Hyperinflation?

Divided Opinions

POITOU, France – Last week, young colleagues at Bonner & Partners HQ in Delray Beach, Florida, put us on the spot.

“What do we stand for as a publishing business?” they asked. “Who are we? How are we different from anyone else? What do we think that others don’t?”

We are not the only publishers to offer opinions. And not the only ones with alternative points of view. So, to answer these questions, let’s look first at the range of opinions on offer…

First, there is “the authorities must know what they are doing… besides, I have more important things to think about” camp. This is by far the largest group: hoi polloi. The masses. The lumpenproletariat.

Saved by the border collie
Cartoon by Gary Larson

There may be some grumbling and kvetching. But most people count on the feds to manage the economy, foreign policy, the future, and the government. They expect mistakes from time to time. But they also believe the system can be trusted to produce an acceptable, although perhaps not always ideal, outcome.

And if not, God help them. Because the difference between the outcome if they bothered to think about it and the outcome if they didn’t is the same. They have no ability to influence public policy… and not much room to maneuver in their private lives.

They get salaries, pensions, Social Security. They need jobs, mortgages, student loans, and medical insurance. They have little capital to invest or protect. They depend so heavily on “the system” that they can’t afford to believe there is something deeply wrong with it. They go along. They get along.

sheeple

Going along, getting along…
Cartoon by Gary Larson

At the other end of the idea spectrum, there are the edgy, malcontent, and extremely marginal opinions. A man, sitting in his double-wide watching TV can come to hold all sorts of wacky views. There is an entire infotainment industry that provides screwball opinions.

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

Haruhiko Kuroda – The Pressure to “Do More” Rises

November 1, 2015

Haruhiko Kuroda – The Pressure to “Do More” Rises

BoJ Leaves Policy Unchanged, but What Comes Next?

The Bank of Japan has employed QE programs since March of 2001 (in February of 2001, it still claimed that “QE will be ineffective” – it was right then, for the last time). These have had no effect apart from making a Keynesian government spending orgy possible that is unique in terms of its size in the post WW2 developed world. It is also unique insofar as it hasn’t yet blown up.

QE was briefly interrupted in 2006, when the BoJ reduced the monetary base by 25% within a few weeks (this barely affected the money supply, although we have to add the caveat that Japanese money supply data are not directly comparable to Western ones).

2 percent kuroda Kuroda demonstrating the loony-tunes 2% fetish of modern central bankers to journalists
Photo credit: Haruyoshi Yamaguchi / Bloomberg

After the GFC, governor Masaaki Shirakawa (白川方明) reluctantly restarted QE; he was essentially convinced that monetary policy flim-flam of this sort would be useless, but a lot of pressure was exerted and he ultimately gave in. Following Shinzo Abe’s election, it was clear that a more pliant BoJ leadership would be appointed, and not surprisingly, under governor Haruhiko Kuroda (黒田東彦), the BoJ has essentially decided to “go all in”.

The earlier QE programs that began in 2001 were considered “radical” at the time. We’re not sure what kind of adjective would be most fitting to describe the current exercise. “Completely lunatic” will probably do – click to enlarge.

Yesterday, the BoJ decided not to add to its existing monetary pumping program, but voted once again to maintain the parabolic pace in asset purchases already underway. The entire exercise is based on the widely accepted, unproven, and utterly absurd neo-Keynesian shibboleth that the purchasing power of money must decline by 2% per year, as anything less is not considered “price stability”.

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

Time to Keep Your Cash in the Microwave?

October 31, 2015

Time to Keep Your Cash in the Microwave?

The Fed’s Big Pivot

NORMANDY, France – “Now, I think I’ve seen everything” is an expression that – like “this is the end of history” and “I’ll never leave you” – usually turns out to be premature. But it is what we found ourselves saying yesterday. Not out loud. We just moved our lips in mute amazement.

micxrowave Modern cash storage method pioneered by desperate Swedes
Photo credit: SWNS.com

On Tuesday, the Italian government sold a 2-year note yielding MINUS 0.023%. We don’t know what is more preposterous: that the Italians were able to borrow money at a negative nominal interest rate or that the press reported this transaction with a straight face.

Everything is awesome: an essentially bankrupt government sells two year notes at a negative yield! Today’s make-believe world created by central bankers and regulators is probably the biggest economic powder keg yet – click to enlarge.

It should have provoked howls of laughter, withering scorn, and unvarnished derision. But here at the Diary, we will not point the finger and chuckle. We will not invoke our usual tone of sarcasm. We will not damn the whole thing to Hell with loud and blustery cussing.

Instead, we’ll take the high road; we just want to know what it means. But before we get to that, let us pick up the news. Here’s the latest, from Bloomberg:

“Federal Reserve officials pivoted toward a December interest-rate increase, betting that further job gains will lead to higher inflation over time and allow them to close an unprecedented era of near-zero borrowing costs. The Federal Open Market Committee dropped a reference to global risks and referred to its “next meeting” on Dec. 15-16 as it discussed liftoff timing in a statement released Wednesday in Washington, preparing investors for the first rate rise since 2006.”

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

The Latest (and Dumbest) Central Bank Fraud

October 30, 2015

The Latest (and Dumbest) Central Bank Fraud

A Financial Reckoning

You go for a nice picnic on the slopes of Vesuvius… You spread out your tablecloth. You open your picnic hamper. You prepare for a relaxing afternoon in the warm October sun.

And then someone comes running down the mountain, warning that the volcano is going to blow up. You pack up your sausages and put a cork in the wine bottle… and rush to the car and drive away. Better to be safe than sorry. And then? Nothing happens.

Mt.Ontake When these ominous columns of smoke become visible, it may be time to make tracks. Or not. This image shows Mt. Ontake in Japan, which tends to erupt occasionally …
Photo credit: Kyodo / Reuters

Most of the time, you can safely ignore the nervous nellies and prophetic Cassandras. (According to legend, Apollo gave Cassandra the gift of prophecy. When she refused him, he spat into her mouth so she would never be believed.) But sometimes the worrywarts are right…

For the last 16 years, we’ve been writing a daily e-letter – first the Daily Reckoning and now the Diary. We saw the collapse of the dot-com bubble coming and warned readers. Most didn’t want to hear it; they were making good money in the stock market. It was a “new era.” And they didn’t want it to end.

But the Nasdaq collapsed in 2000… and didn’t recover until 15 years later. We believed at the time that the U.S. economy would follow Japan into a long, slow slump. With Addison Wiggin, we wrote a book about it, Financial Reckoning Day: Surviving the Soft Depression of the 21st Century.

The Nasdaq’s bubble round-trip between the late 1990s and early 2000ds. No-one wanted to hear any warnings at the top (we still remember people buying profit-less wonder stocks for 100ds of dollars that don’t even exist anymore today) – click to enlarge.

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

Lost in Extrapolation

October 29, 2015

Lost in Extrapolation

Phillips Curve Fail

In the late 1970s the impossible happened. Inflation and unemployment simultaneously went vertical. The leading economists of the day were flummoxed.

summers Larry Summers favors us with his “eternal stagnation” shrug. The man is a sheer inexhaustible fount of truly atrocious ideas. As we have previously pointed out, when he’s around, the economy can only be deemed safe under certain circumstances.
Photo credit: Reuters

The Phillips curve said there’s an inverse relationship between inflation and unemployment. When unemployment goes down, inflation goes up. Conversely, when unemployment goes up, inflation goes down.

These are the data economist William Phillips originally studied – wage rates vs. unemployment in the UK in the years 1913 to 1948. Phillips’ study will forever stand as a monument as to why economic theory cannot possibly be derived from empirical data. In the wake of the 1970s experience, at least seven Nobel prizes in economics were awarded for work that debunked the Phillips curve-based assumptions of the Keynesians in some shape or form. Recently its long dead cousin NAIRU has risen from the grave again, like a zombie – click to enlarge.

How could it be that both were going up at once? Weren’t they mutually exclusive? Indeed, it took years of heavy handed government intervention to pull off such a feat.

When unemployment began creeping up in the 1970’s the U.S. Treasury, with backing from the Federal Reserve, did what Keynes had told them to do. They spent money to stimulate the economy and spur jobs creation.

According to the Phillips curve, with rising unemployment the planners could have their cake and eat it too. They could run large deficits without inflation.

Unfortunately, something unexpected happened. Instead of jobs they got inflation. Then, when they tried it again, they still didn’t get jobs. Astonishingly, they got more inflation.

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

Can the Fed Print Money?

October 28, 2015

Can the Fed Print Money?

Every morning is the dawn of a new error – Anonymous

It Can and it Does

In light of the upcoming October Fed (non-)decision, we want to briefly revisit a subject that still appears to be causing some confusion. We most recently encountered this confusion again in a quarterly update by the Hoisington Investment Management Company. To be sure, we very often, if not to say almost always, have tended to agree with the economic conclusions of Lacy Hunt and Van Hoisington since we have first come across their work (we may arrive at these conclusions in a somewhat different manner, but the conclusions as such are usually not much different).

2015-10-27_213416 Money from nothing and chicks for free – how the Fed does it.
Image credit: dreamstime

US true money supply TMS-2: this broad aggregate contains all the items that can be properly defined as money – click to enlarge.

In their third quarter update we have come across one sentence that we believe requires comment, as we have seen similar things asserted elsewhere and we believe it is important to be 100% clear on the topic. In addition to the assertion we want to challenge, which is highlighted below, we also quote the preceding paragraph, because it serves to elucidate a few additional conceptual problems.

“Despite the unprecedented increase in the Federal Reserve’s balance sheet, growth in M2 over the first nine months of this year fell below its average rate of growth over the past 115 years, a time when the growth in the monetary base was stable and quite modest. In addition, velocity of money, which is an equal partner to money in determining nominal GDP, has moved even further outside the Fed’s control. The drop in velocity to a six decade low is consistent with a misallocation of capital and an increase in debt used for either unproductive or counterproductive purposes.

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

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