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In his recent posting on Linked In, entitled, ‘The death of macro-prudential’, Stuart Trow of the EBRD delivered a well-aimed broadside at the pitiable conduct of the Bank of England and elaborated on some of the malign consequences of its catalogue of errors. Without wishing to single him out unduly for criticism for a piece with whose broad outlines I concur, I see it as a prime example of where even those who are not wholly in thrall to the cult of ‘Whatever it Takes’ often miss the critical features of that cult’s essential evil. Left unaddressed, therefore, I fear this lack can only leave the intellectual soil fertile for a continued harvest of malign outcomes on the part of our clay-footed idols in the central banks.

Where better to start than with the following bold assertion of the author, viz., that ‘…if only policymakers had been allowed to exercise their judgement, crises could have been anticipated and avoided…’?

In my eyes, that heroic presumption of policymakers’ qualities of ‘judgement’ almost vitiates the argument from the off. Irrespective of whether one can be persuaded that Mario Draghi, Jerome Powell, Divus Marcus Carney and the like are the most intelligent, most far-sighted – most impartially Olympian – beings on the planet, the reality is that neither their fervid number-crunching of rows of abstracted, statistical time-series nor the GIGO output of their horribly over-specified macroeconomic ‘models’ can possibly substitute for the particular judgement and uniquely individual preferences of untold millions of men and women interacting, every minute of every day, every where in the market.

No, the best the central bankers can hope to achieve – in finest Hippocratic fashion – is that their own meddling does not send too any wrong signals, conjure up too many wrong incentives, or encourage too many, ultimately self-defeating behaviours among the innocent millions over whom they have been almost divinely-appointed to hold sway and over whom they hold seemingly limitless power.

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

The Relevance of Hayek’s Triangle Today

June 1, 2018

THE RELEVANCE OF HAYEK’S TRIANGLE TODAY

Most of us are aware of the inflationary pressures in the major economies, that so far are proving somewhat latent in the non-financial sector. But some central banks are on the alert as well, notably the Federal Reserve Board, which has taken the lead in trying to normalise interest rates. Others, such as the European Central Bank, the Bank of Japan and the Bank of England are yet to be convinced that price inflation is a potential problem.

Virtually no one in the central banks, government treasury departments, or independent analysts see the real inflationary danger. There is a lone exception perhaps in Dr Zhang Weiying, the top economist at Beijing University and formally in charge of China’s economic policy, who quoted Hayek’s business cycle theory to point out the dangers of excessive deficits.^[i] Whether he is listened to by his colleagues, we shall doubtless find out in due course. Otherwise, a sudden acceleration of price inflation will come as a complete surprise to our financially sophisticated markets.

This article explains why the danger lies in the structure of production, which in the West at least is seriously out of whack. The follies of post-crisis central bank monetary reflation are likely to drive us rapidly into the next credit crisis as a consequence. To understand why this is so requires us to revisit the 1930s writings of an Austrian-born economist, who was tasked by the London School of Economics with explaining to advanced students the disruption to the production process from changes in consumer demand.

Friedrich von Hayek was famously reported as the economic guru of both Margaret Thatcher and Ronald Reagan. This distinction owes its origin to his market-based approach to economics, which was in stark contrast with the statist approach that was predominant in political circles at that time, and still is today. It was simple shorthand for the media writing for a mass audience.

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

The Central Bank Bubble: It Will Be Ugly

March 21, 2018

The Central Bank Bubble: It Will Be Ugly

21
Mar

The global economy has been living through a period of central bank insanity, thanks to a little-understood expansion strategy known as quantitative easing, which has destroyed main-street and benefitted wall street.

Central Banks over the last decade simply created credit out of thin air. Snap a finger, and credit magically appears. Only central banks can perform this type of credit magic. It’s called printing money and they have gone on the record saying they are magic people.

Increasing the money supply lowers interest rates, which makes it easier for banks to offer loans. Easy loans allow businesses to expand and provides consumers with more credit to buy goods and increase their debt. As a country’s debt increases, its currency eventually debases, and the world is currently at historic global debt levels.

Simply put, the world’s central banks are playing a game of monopoly.

With securities being bought by a currency that is backed by debt rather than actual value, we have recently seen $9.7 trillion in bonds with a negative yield. At maturity, the bond holders will actually lose money, thanks to the global central banks’ strategies. The Federal Reserve has already hinted that negative interest rates will be coming in the next recession.

These massive bond purchases have kept volatility relatively stable, but that can change quickly. High inflation is becoming a real possibility. China, which is planning to dethrone the dollar by backing the Yuan with gold, may survive the coming central banking bubble. Many other countries will be left scrambling. Some central banks are attempting to turn the current expansion policies around. Both the Federal Reserve, the Bank of Canada, and the Bank of England have plans to hike interest rates. The European Central Bank is planning to reduce its purchases of bonds. Is this too little, too late?

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

Latest Wealth Data Shows Disproportionate Gains to the Rich During Era of QE

February 19, 2018

LATEST WEALTH DATA SHOWS DISPROPORTIONATE GAINS TO THE RICH DURING ERA OF QE

The latest ONS Wealth and Assets Survey, released last Thursday, once again showed the sheer extent of wealth inequality in the UK. A comparison of percentile figures with those from the previous wave suggests households in the wealthiest 10% gained on average nearly 700 times as much as the poorest 10% between 2012-2014 and 2014-2016.

The average total wealth of the of the bottom 10 percentile households rose by £330 between 2012-2014 and 2014-2016 (from £5,293 to £5623). The average total wealth of the top 10 percentile households increased by £229,541 over the same period (from £1,663,912 to £1,893,453).

The distribution of total wealth across UK households is extremely unequal. Naturally, so too are the gains in wealth in recent years.

The figures are significant because they are the latest to contradict the position taken by Bank of England governor Mark Carney in a 2016 speech, when he used the ONS data to claim that the “poorest have gained the most” from the Bank’s quantitative easing programme. As Positive Money showed in an analysis from October last year, the Bank painted a misleading picture by using relative rather than absolute figures. Data from the the 2006-08 to 2012-14 waves of the Wealth and Assets Survey showed an absolute gain for the wealthiest 10% almost 200 times greater than that for the poorest.

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

Soros – One of the Greatest Threats Against Society?

February 10, 2018

Soros – One of the Greatest Threats Against Society?

It is no secret that I have no respect for George Soros and that is aside from the fact that we would often be on opposite sides of the market. I never saw Soros as a great trader. Even the reputation that he broke the Bank of England was nonsense. The “Club” was all on that trade and it was a guaranteed trade where if the peg broke, you made a fortune and if you were wrong, you got your money back. I was on the opposite side back then being called in by those in the British government. After a 7-year bull market in equities, Soros finally threw in the towel ending his bets on the stock market crash only after being wrong for so long.

Soros lost big time on the Russian manipulation when the “Club” was bribing the IMF to keep the loans to Russia going so they could make a fortune in interest rates. That failed and ended up in Long-Term Capital Management debacle. Soros lost $2 billion on that one. I believe he also lost when the “Club” was targeting the Japanese yen in 1999. So I never saw Soros as some fantastic trader. I believe he was just simply on the right side of a few big plays orchestrated by the “Club” and never by himself.

Macedonia 3-26-2017

I personally believe he is very dangerous politically. I believe he stands for control of the people and is always plotting for the manipulation of society. He appears to be always on the side of Marxist/Socialism which disturbs me greatly. This is just his political philosophy. There has been a rising movement against Soros on a global scale. This is one person who the world will celebrate his death – not morn it.

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

Bank Of England Warns The UK: ‘Economic Collapse’ If UK Keeps Borrowing Money

December 14, 2017

Bank Of England Warns The UK: ‘Economic Collapse’ If UK Keeps Borrowing Money

The Bank of England is putting the United Kingdom on alert. Should the UK keep borrowing money, there will be a “Venezuela-style” economic collapse that will devastate normal citizens.

A senior Bank official has warned that the UK’s economy would be unlikely to surviveborrowing any more cash. Richard Sharp, a member of the Bank’s Financial Stability Committee, claimed an extra £1trillion had already been borrowed since the 2008 financial crisis, and any more could see the economy collapse in the same quick manner that Venezuela’s did.

Richard Sharp, Bank of England Financial Stability Committee

The Times reported on the stark warning mere days after Philip Hammond announced a £25 billion spending spree in the budget. It’s likely to dissuade the Chancellor from loosening the purse strings too far though, since the Bank rarely comments on government finances. It could also come as a wake-up call for Labour (a communist party), which is advocating borrowing an extra £250 billion.

In a speech at University College London, Sharp warned that Jeremy Corbyn’s public spending policies would be foolish and dire for the economy. Like any rational person understands, communist policies only work for those elites in the government. “A highly indebted government has less capacity to react to crises: we cannot assume that further shocks do not materialize, and evidence demonstrates that fiscal space is a vital national resource to have available to counteract such a shock,” Sharp said. “Reducing fiscal space, therefore, means financial stability is harder to achieve.”

The Wall Street giant, in its look-ahead to 2018, warned the UK’s “domestic political situation is at least as significant as Brexit” given the “perceived risks of an incoming Labour administration that could potentially embark on a radical change of policy direction”.

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

Mark Carney Forced To Explain Surge In UK Inflation To Highest In Almost 6 Years

December 12, 2017

Mark Carney Forced To Explain Surge In UK Inflation To Highest In Almost 6 Years

The market expected Mark Carney to avoid it but it was just not meant to be.

The BoE Governor will suffer the ignominy of a bizarre tradition of having to write a letter to the Chancellor of the Exchequer explaining why UK inflation is more than 1.0% above the target of 2.0%. The market had expected the UK CPI to rise by a modest 0.2% month-on-month, taking the year-on-year rate up to 3.0%. Instead the month-on-month rate hit 0.3% pushing the annual rate to 3.1%, its highest rate since March 2012.

As Bloomberg writes, “U.K. inflation unexpectedly accelerated to the fastest in more than 5 1/2 years in November, forcing Bank of England Governor Mark Carney to explain why price growth is so far above target. Consumer prices rose 3.1 percent from a year earlier, driven by the cost of air fares and computer games, the Office for National Statistics said on Tuesday. That’s up from 3 percent in October and the highest since March 2012.”

The latest reading means Carney is now compelled to write to Chancellor of the Exchequer Philip Hammond explaining why inflation is more than 1 percentage point away from the official 2 percent target. The letter will be published alongside the BOE’s policy decision in February, rather than this week, as the Monetary Policy Committee has already started its meetings for its Dec. 14 announcement.

Rising costs of airfares along with petrol and energy prices were expected to have been offset by an easing in food and clothing price pressures, the latter helped by seasonal promotions. However, the price of computer games rose more than expected and higher chocolate prices saw food and non-alcoholic drink prices rise 4.1% versus November 2016, the highest level since 2013.

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

700 Years Of Data Suggests The Reversal In Rates Will Be Rapid

November 8, 2017

700 Years Of Data Suggests The Reversal In Rates Will Be Rapid

Have we been lulled into a false sense of security about the future path of rates by ZIRP/NIRP policies? Central banks’ misguided efforts to engineer inflation have undoubtedly been woefully feeble, so far. As the Federal Reserve “valiantly” raises short rates, markets ignore its dot plot and yield curves continue to flatten. And thanks to Larry Summers, the term “secular stagnation” has entered the lexicon. While it sure doesn’t feel like it, could rates suddenly take off to the upside?

A guest post on the Bank of England’s staff blog, “Bank Underground”, answers the question with an unequivocal yes. Harvard University’s visiting scholar at the Bank, Paul Schmelzing, normally focuses on 20th century financial history. In his guest post (see here), he analyses real interest rates stretching back a further 600 years to 1311. Schmelzing describes his methodology as follows.

We trace the use of the dominant risk-free asset over time, starting with sovereign rates in the Italian city states in the 14th and 15th centuries, later switching to long-term rates in Spain, followed by the Province of Holland, since 1703 the UK, subsequently Germany, and finally the US.

Schmelzing calculates the 700-year average real rate at 4.78% and the average for the last two hundred years at 2.6%. As he notes “the current environment remains severely depressed”, no kidding. Looking back over seven centuries certainly provides plenty of context for our current situation, where rates have been trending downwards since the early 1980s. According to Schmelzing, we are in the ninth “real rate depression” since 1311 as shown in his chart below. We count more than nine, but let’s not be picky.

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

Bank Of England Hikes Rates By 25bps In 7-2 Vote; First Increase In A Decade; Pound Plunges

November 2, 2017

Bank Of England Hikes Rates By 25bps In 7-2 Vote; First Increase In A Decade; Pound Plunges

Over ten years since the last rate hike by the Bank of England in July 2007 (when incidentally, cable was trading above $2.00), and following years of market expectations of an imminent rate hike that failed to materialize…

…. moments ago the BOE – which had telegraphed the move extensively in recent months despite some dovish misgivings – finally pulled the trigger, and raised rates by 25bps to 0.5% in order to curb the effect of high inflation brought about by the post-Brexit plunge in the pound, squeezing local households and pressuring the UK economy. However, while cable initially spiked higher on the news, it subsequently slumped on the news that the vote was not a unanimous 9-0 decision as some had expected, as would telegraph a normal rate hike cycle, and instead had a decidedly dovish tilt with a far more contested 7-2 vote, with Cunliffe and Ramsden dissenting based on insufficient evidence that domestic costs, particularly wage growth, would pick up in line with central projections.

Here is the BOE assessment:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 1 November 2017, the MPC voted by a majority of 7-2 to increase Bank Rate by 0.25 percentage points, to 0.5%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

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

The Upcoming Increase in Interest Rates

October 16, 2017

THE UPCOMING INCREASE IN INTEREST RATES

Last week, both Janet Yellen of the Fed and Mark Carney of the Bank of England prepared financial markets for interest rate increases. The working assumption should be that this was coordinated, and that both the ECB and the Bank of Japan must be considering similar moves.

Central banks coordinate their monetary policies as much as possible, which is why we can take the view we are about to embark on a new policy phase of higher interest rates. The intention of this new phase must be to normalise rates in the belief they are too stimulative for current economic conditions. Doubtless, investors will be reassessing their portfolio allocations in this light.

It should become clear to them that bond yields will rise from the short end of the yield curve, producing headwinds for equities. The effects will vary between jurisdictions, depending on multiple factors, not least of which is the extent to which interest rates and bond yields will have to rise to reflect developing economic conditions. The two markets where the change in interest rate policy are likely to have the greatest effect are in the Eurozone countries and Japan, where financial stimulus and negative rates have yet to be reversed.

Investors who do not understand these changing dynamics could lose a lot of money. Based on price theory and historical experience, this article concludes that bond yields are likely to rise more than currently expected, and equities will have to weather credit outflows from financial assets. Therefore, equities are likely to enter a bear market soon. Commercial and industrial property should benefit from capital flows redirected from financial assets, giving them one last spurt before the inevitable financial crisis. Sound money, physical gold, should become the safest asset of all, and should see increasing investment demand.

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

Gold Standard Resulted In “Fewer Catastrophes” – FT

September 29, 2017

300 years ago last week on the 21st September, 1717 Sir Isaac Newton, Master of the Royal Mint of Great Britain, accidentally invented the gold standard.

Last month it was the 46th anniversary of President Nixon ending the gold standard. Since then the world has existed on a system of fiat paper and digital currency. It works so badly that it has lead to the global financial crisis, unending debt issues and a dramatic devaluation in sovereign currencies.

Despite this, much of the media and central banking system remain supporters of the current financial and monetary status quo.

They are so convinced that the time before fiat money was a disaster that anyone who suggests otherwise is labelled a gold-bug and told to move along.

Last week, there was a glimmer of light when the Financial Times’ Matthew C. Klein uncovered some 18-year old research into the gold standard and a recent speech by a Bank of England economist.

Mr Klein although a young man has quite an impressive journalistic c.v. He writes for FT Alphaville and Bloomberg View about the economy and financial markets.

He previously wrote for the Economist magazine and before that, Klein was a research associate at the Council on Foreign Relations (CFR), where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics.

Going off gold did the opposite of what many people think

Klein writing in FT Alphaville draws on research from former economics advisor to President Obama, Christina Romer:

Imagine you can choose between living in two kinds of societies:

Dynamic world prone to wild swings and big crashes, but ultimately more growth in the long run

Safe and stable world with greater consistency, less volatility, and much lower risk of catastrophe

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

Albert Edwards: “Citizen Rage” Will Soon Be Directed At “Schizophrenic” Central Banks

September 21, 2017

Albert Edwards: “Citizen Rage” Will Soon Be Directed At “Schizophrenic” Central Banks

Perhaps having grown tired of fighting windmills, it was several weeks since Albert Edwards’ latest rant against central banks. However, we were confident that recent developments out of the Fed and BOE were sure to stir the bearish strategist out of hibernation, and he did not disappoint, lashing out this morning with his latest scathing critique of “monetary schizophrenia”, slamming all central banks but the Fed and Bank of England most of all, who are again “asleep at the wheel, building a most precarious pyramid of prosperity upon the shifting sands of rampant credit growth and illusory housing wealth.”

Follows pure anger from the SocGen strategist:

These of all the major central banks were the most culpable in their incompetence and most prepared with disingenuous excuses. And 10 years on, not much has changed. The Fed and BoE are once again presiding over a credit bubble, with the BoE in particular suffering a painful episode of cognitive dissonance in an effort to shift the blame elsewhere. The credit bubble is everyone’s fault but theirs.

First, some recent context with this handy central bank holdings chart courtesy of Deutsche Bank’s Jim Reid which alone is sufficient to make one’s blood boil.

For those familiar with Edwards’ writings over the years, the gist of his note will come as no surprise: after all, how many different ways can you say that central banks have broken the market, have caused a credit bubble, and will be responsible for the crash when they finally run out of cans to kick.

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

The world’s most powerful bank issues a major warning

September 7, 2017

The world’s most powerful bank issues a major warning

In 1869, a 48-year old Jewish immigrant from the tiny village of Trappstadt in Germany’s Bavaria region hung a shingle outside of his small office in lower Manhattan to officially launch his new business.

His name was Marcus Goldman, and the business he started, what’s now known as Goldman Sachs, has become the preeminent investment bank in the world with nearly $1 trillion in assets.

They didn’t get there by winning any popularity contests.

Goldman Sachs has been at the heart of nearly every major banking scandal in recent history.

The company has settled lawsuits on countless charges, ranging from exchange rate manipulation, stock price manipulation, demanding bribes from their own clients, front-running retail customers, and just about every shady business practice that would put money in their pockets.

Yet throughout it all, Goldman Sachs has been protected from any serious punishment by its friends in highest offices of government.

Four out of the last eight US Treasury Secretaries, including the current one, have formerly been on the payroll of Goldman Sachs.

Three current Federal Reserve Bank presidents are Goldman Sachs alumni.

The current president of the European Central Bank and the current head of the Bank of England are both former Goldman Sachs employees.

You get the idea.

On its face, there’s nothing wrong with government staffing its departments with top executives from the private sector; taxpayers would probably rather have someone who knows what s/he’s doing behind the desk rather than some random guy off the street.

But the consequent favoritism that results from this revolving door is blatant and repulsive.

Case in point: in 2008 when the financial system was going up in flames and most banks were suffering enormous losses, the government orchestrated a sweetheart bailout deal, of which Goldman was the primary beneficiary.

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

Taken to the Cleaners

September 5, 2017

TAKEN TO THE CLEANERS

Introduction

Should regulators call the market? It has been a matter of vigorous debate in the regulatory community since the crisis. ‘Cleaners’ think you shouldn’t mess around with the market, although be prepared to clean up if markets collapse. ‘Leaners’ take the opposite view, divided between those who want to lean on the asset side of overheated balance sheets, principally by increasing capital requirements, and those who want to lean on overheated liabilities, using an ingenious accounting method called ‘matching adjustment’, which allows firms to reduce the present value of future liabilities by increasing the rate at which they are discounted. If spreads blow out on your assets you are allowed to add some of that spread to the discount rate for your liabilities, which cushions the impact in the short term.[1]

This article focuses on whether economists can identify trends or bubbles in the residential property market. The question is important for insurers, whose balance sheets have been damaged by the protracted fall in long gilt yields, and who are hunting for yield in alternative assets such as commercial and residential property. I asked three economists for their views.

John Cochrane of Stanford’s Hoover Institution, author of the magisterial Asset Pricing, complains about a common misunderstanding: ‘people say the market can’t be efficient, because it didn’t predict the 2008 crash. That’s exactly backward. Efficient markets theory says that the market aggregates all information that people have – and no more. The market is not clairvoyant. Consequently, the central empirical prediction of the efficient markets hypothesis is precisely that nobody can reliably tell where markets are going – neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences.’

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

China Battles “Impossible Trinity”

September 3, 2017

China Battles “Impossible Trinity”

Just because something is inevitable does not mean it cannot be postponed.

The popular name for this is “kicking the can down the road,” which is a perfectly good description.

I prefer more technical terms such as dynamic systems in “subcritical” and “supercritical” state space, but it amounts to the same thing.

A financial crisis can be a long time in the making, but it will definitely erupt. When it does, there will be huge losses for those who ignored the warning signs.

China is in a pre-crisis situation today.

It is confronting the harsh logic of the “Impossible Trinity.”

The Impossible Trinity theory was advanced in the early 1960s by Nobel Prize-winning economist Robert Mundell. It says that no country can have an open capital account, a fixed exchange rate and an independent monetary policy at the same time.

You can have one or two out of three, but not all three. If you try, you will fail — markets will make sure of that.

Those failures (which do happen) represent some of the best profit-making opportunities of all. Understanding the Impossible Trinity is how George Soros broke the Bank of England on Sept. 16, 1992 (still referred to as “Black Wednesday” in British banking circles. Soros also made over $1 billion that day).

The reason is that if more attractive total returns are available abroad, money will flee a home country at a fixed exchange rate to seek the higher return. This will cause a foreign exchange crisis and a policy response that abandons one of the three policies.

But just because the trinity is impossible in the long run does not mean it cannot be pursued in the short run. China is trying to peg the yuan to the U.S. dollar while maintaining a partially open capital account and semi-independent monetary policy. It’s a nice finesse, but isn’t sustainable.

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

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