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Myths That Just Won’t Die

Gold just had its best quarter in 30 years. Not surprisingly, gold bears are coming out of the woodwork en masse in the mainstream media and the analyst community (see e.g. this recent write-up by Mish on the Goldman Sachs analyst who has been screaming “short gold” since right before it started rocketing higher in early February). Below we will discuss a specific assertion that tends to be repeated over and over again.

Gold had a very strong quarter, but skepticism over the durability of the advance remains quite pronounced – click to enlarge.

If there is anything in this world that definitely has more lives than a cat, it is bad economics. Just think about it: Here we are, nearly 300 years after John Law drove France and most of continental Europe into utter ruin, and our central bankers are still doing the exact same things Law did. The only difference between John Law and the trifecta of Draghi, Kuroda and Yellen is really the modern-day level of obfuscation and the fact that there is far more wealth that can be destroyed, so it is taking a lot longer.

In terms of economic principles and the goals allegedly achievable by their policies, the difference between Law and today’s central bankers is precisely zero. It is astonishing that after 300 years of supposed scientific progress, atrociously bad economics has shown such persistence in surviving. We were reminded of this agan when reading a recent comment on gold in the Wall Street Journal. No matter how often and how convincingly they are refuted, unsound economic ideas keep being resurrected with unwavering regularity, as if they were a horde of zombies.

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

The Path to the Final Crisis

April 1, 2016

The Path to the Final Crisis

Reader Questions on Negative Interest Rates

Our reader L from Mumbai has mailed us a number of questions about the negative interest rate regime and its possible consequences. Since these questions are probably of general interest, we have decided to reply to them in this post.

The NIRP club – negative central bank deposit rates – click to enlarge.

Before we get to the questions, a few general remarks: negative interest rates could not exist in an unhampered free market. They are an entirely artificial result of central bank intervention. The so-called natural interest rate is actually a non-monetary phenomenon – it simply reflects time preferences. Time preferences are an inviolable category of human action and are always positive.

Market interest rates consist of the natural interest rate plus two additional components: a price (or inflation) premium that reflects the expected decline in money’s purchasing power, and a risk premium or entrepreneurial profit premium that reflects the perceptions of lenders of a borrower’s creditworthiness and generates an entrepreneurial profit for those engaged in lending.

One often reads that interest is the “price” of money, but that is actually not quite correct. It is really a price ratio, the difference between the valuation of present against that of future goods. An apple one can obtain today will always be worth more than a similar apple one can obtain at some point in the future. If time preferences were to decline to zero, people would stop consuming altogether. All efforts would be directed toward providing for the future, but they would never see that future, because they would starve to death before it arrives.

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

The Pitfalls of Currency Manipulation – A History of Interventionist Failure

March 30, 2016

The Pitfalls of Currency Manipulation – A History of Interventionist Failure

The G-20 and Policy Coordination

Readers may recall that the last G20 pow-wow (see “The Gasbag Gabfest” for details) featured an uncharacteristic lack of grandiose announcements, a fact we welcomed with great relief. The previously announced “900 plans” which were supposedly going to create “economic growth” by government decree seemed to have disappeared into the memory hole. These busybodies deciding to do nothing, is obviously the best thing that can possibly happen.
Yuan, weekly – since the sharp move in USDCNY in August, market participants have begun to worry about the yuan and China’s shrinking foreign exchange reserves – click to enlarge.

There have been rumors though that they did at least strike some sort of sub rosa agreement with respect to the future course of yuan manipulation. In other words, some kind of policy coordination between China and other major currency issuers has quite possibly been agreed upon, even if only tacitly. Officially, China merely used the occasion to “reassure trading partners on foreign exchange”:

“Chinese policymakers on Thursday ruled out an imminent devaluation of the yuan as they seek to reassure trading partners ahead of the G20 summit that they can manage market stability while driving structural reforms.”

When global stock markets swooned in late August 2015 and again in January 2016, the decline in the yuan’s exchange rate was widely blamed as the cause. Considering various central bank policy decisions announced since the G20 meeting, it does appear as though a coordinated move aimed at halting the yuan’s slide and support wobbly risk asset prices has been underway.

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

US Money Supply and Debt – Early Warning Signs Remain Operative

March 18, 2016

US Money Supply and Debt – Early Warning Signs Remain Operative

Still Slowing Down

Year-end distortions have begun to slowly come out of the data, and while broad true US money supply growth remains fairly brisk, it has begun to slow again relative to January’s y/y growth rate, to 7.8% from 8.32%.

Many dollars in the format of a gift box

So far it remains in the sideways channel (indicated by the blue lines below) between approx. 7.4% and 8.6%, in which it has meandered since mid 2013. We believe the next break “below the shelf” is likely to be a significant event.

Broad true US money supply TMS-2, annual growth rate: still in the channel, but slowing again from January’s brief upward spike – click to enlarge.

Readers may recall that it was primarily the US treasury’s general account at the Fed which was responsible for the recent upward spike in the growth rate of TMS-2, combined with a year-end surge in deposit money. We suspect the latter had to do with offshore dollars being moved to domestic accounts at year-end for various accounting-related reasons. This suspicion has been confirmed by the fact that the move has been largely reversed in the new year.

As an aside, total bank credit growth (total loans and leases, excl. mortgage debt) stands at 8.24% y/y as of the end of February, which is still well below the peak growth rates seen in previous boom periods (these were closer to 13%).

As can be seen below, the amount of money held in the general account has declined further in February as well, but it seems to us that this money has merely moved into other demand deposits, i.e., there has simply been a shift from one categorization to another:

Money held in the treasury’s general account at the Fed – the recent record spike has begun to reverse – click to enlarge.

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

The Monetary Base, Buybacks and the Stock Market

March 17, 2016

The Monetary Base, Buybacks and the Stock Market

A Useful Leading Indicator?

We often see charts comparing the S&P 500 to the growth in the Federal Reserve’s balance sheet, or more specifically, to assets held by the Fed. There is undeniably a close correlation between the two, but it has struck us as not very useful as a “timing device”, or an early warning device if you will.

Recently we have come across a video of a presentation by Bob Murphy, in which he uses a slightly different comparison that might prove more useful in this respect. Instead of merely looking at Fed assets, he uses the total monetary base. Here is a chart comparing the monetary base to the S&P 500 Index since 2009:

The monetary base (red line) vs. the S&P 500 (blue line) – as can be seen, sometimes one or the other series leads, but in recent years the monetary base has been a leading indicator. It probably lagged the market in 2010/11 due to the fact that traders at the time bought stocks in anticipation of more monetary pumping – whereas nowadays the market appears to be reacting with a slight lag to changes in base money – click to enlarge.

Below is a chart that shows consolidated assets held by the Federal Reserve system for comparison. Since the Fed is currently reinvesting funds from MBS and treasuries that mature, its total asset base is basically flat-lining since the end of QE3. Obviously, all that can be gleaned from this fact is that the central bank is currently not activelypumping up the money supply. Currently money supply growth is therefore largely the result of commercial bank credit growth.

Assets held by the Federal Reserve – flat-lining since the end of QE3. Interesting, but not useful as a short term leading indicator of the stock market – click to enlarge.

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

Draghobert the Terrible Strikes Again

March 13, 2016

Draghobert the Terrible Strikes Again

A Whiff of Panic

Ahead of Thursday’s ECB meeting, there was a widespread consensus that Europe’s chief printing press supervisor would make up for the alleged “mistake” of under-delivering on monetary lunacy last time around. Therefore, a sizable dose of fresh absurdities had to be expected, with only small disagreements on the details. It is fair to say the man didn’t disappoint.

Draghobert the Terrible, trying to assault the euro again Photo credit: Michael Probst / AP Photo

There was an even greater consensus that the punters populating the casino were eagerly awaiting such news, and that they stood ready to deploy wagon-loads of money (mostly other people’s) in the direction wished for by the central planning puppeteers. This particular detail didn’t quite work out as expected, at least not at first. For instance, after an initial swoon, the ECB’s very own confetti became more rather than less expensive.

June euro futures, 20 minute candles. At first, the euro did what it was “supposed” to do – and then it went “yen” on the Dragon and his minions – click to enlarge.

Similar scenes played out elsewhere. Here is for instance a 20 minute chart of the June Bund futures contract, which was subject to a similar sudden change in market opinion:

Instant hangover in Bund futures – click to enlarge.

Other playthings were similarly impacted, from the DAX to gold. All the stuff that used to habitually react in a certain manner to more ECB largesse essentially did the opposite of what it was “supposed” to do.

Readers may recall the last time when a similar thing happened. That was on occasion of Kamikaze Kuroda’s attempt to smite putative yen bulls by cutting the BoJ’s deposit rate into negative territory.

That didn’t quite work out as planned either… – click to enlarge.

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

Mr. MORE!

March 10, 2016

Mr. MORE!

The Man with the Inflation Plan

Proving beyond a shadow of doubt that Keynesian absurdity knows no bounds, Larry Summers has graced the FT – one of the West’s premier establishment propaganda mouthpieces advocating central economic planning as practiced by modern-day regulatory democracies – with yet another cringe-worthy editorial.

a danger to society Larry Summers – it is probably no exaggeration to call the man a danger to civilization Photo credit: Hyungwon Kang / Reuters / Corbis

The editorial is entitled “A world stumped by stubbornly low inflation” with a subheader reading “There is no evidence that policymakers are acting strongly to restore their credibility”.

The title and subheader alone deserve comment. First of all, absolutely no-one outside the inhabitants of the incestuous ivory tower of Keynesian and monetarist mainstream economists and the central planning bureaucrats infesting central banks is in any way “stumped” by “low inflation”.

We suspect that there are billions of consumers in the world who would prefer prices to stop rising altogether. In fact, we believe they not only want them to stop rising, they actually want them to decline. But what do they know? Mr. Summers and his central planning comrades have decreed that it is “bad” for them if they are able to buy more rather than less with their income!

As to the perceived lack of policymaker “credibility”: They don’t deserve any. The world’s economic malaise is to 100% their fault. If only it were true that they are “not acting”! The truth is unfortunately that they continue to heap folly upon folly.

Need we remind Mr. Summers of the Bank of Japan’s decision to implement the perversion of negative deposit rates, or the decision of the Riksbank to lower its negative rates to minus 50 basis points in the middle of a raging housing and consumer credit bubble, even though Sweden’s GDP is forecast to grow by 3%?

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

European Disunion

February 26, 2016

European Disunion

Greece vs. Austria: Non-Friendly Acts

Two days ago we came across a headline at Reuters, informing us that “Greece rages at neighbors as fears migrants could be halted”. Say what? What the hell is this supposed to mean? Is this even English? Possibly Reuters employs the same headline editor as Bloomberg….he or she is definitely equally bad.

Kotzias, enraged Nikos Kotzias (νίκοσ κοτζιάσ), a former member of the Central Committee of the Greek Communist Party. Nowadays, oddly enough, he is Greece’s foreign minister. Here seen enraged. Photo credit: Simela Pantzartzi

Anyway, we delved into the article to see what it was about. Here are a few pertinent excerpts:

“Greece raged at neighbors and began busing refugees and migrants back from its northern border on Tuesday, after new restrictions by countries on the main land route to Western Europe trapped hundreds behind a bottleneck at the frontier. Athens filed a rare diplomatic protest with fellow EU member Austria for excluding Greek officials from a high-level meeting on measures aimed at curbing Europe’s biggest inward migration since World War Two.

[…]

Austria is due to host west Balkan states on Wednesday to discuss efforts to manage and curb the flow, but did not invite Greece. In unusually heated language that shows how the migration crisis has raised passions across Europe, Greek Foreign Minister Nikos Kotzias described the snub as a “unilateral and non-friendly act”.

“The exclusion of our country at this meeting is seen as a non-friendly act since it gives the impression that some, in our absence, are expediting decisions which directly concern us.”

[…]

Austria, the last country on the overland route to Germany, said last week it had imposed a daily limit of 3,200 migrants passing through, and 80 asylum claims.

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

Australia’s Housing Bubble: In the Grip of Insanity

February 24, 2016

Australia’s Housing Bubble: In the Grip of Insanity

Perverse Incentives

We haven’t written about Australia’s residential real estate bubble for some time (readers may want to check out last year’s post “Australia’s Bubble Trouble”, which contains numerous relevant charts and data).

Property Auction in Sidney-3 Property auction in Sidney

Our friend Jonathan Tepper of Variant Perception has recently visited Australia for a fact-finding tour (more on this further below), so we felt we might as well take the opportunity to write an update on the topic.

House prices in Sidney vs. the administered interest rate of the Reserve Bank of Australia. As you will see below, interest rates aren’t the only driver of the bubble – click to enlarge.

Our reader D.S., who has moved to Australia five years ago, has provided us with a number of very interesting observations on the Australian housing market late last year, which we are sharing below. As D.S. notes, there are a number of interesting wrinkles specific to Australia’s real estate market, which outsiders are generally not likely to be aware of. We have highlighted a few passages in his report below which we think are especially important:

“The housing bubble in Australia has been talked about so extensively and has lasted so long without any harm coming to it that people here have pretty much dismissed the very possibility of a crash – including, it has to be said, the chances of a recession. The reason I was motivated to write this note is because there are some (I believe) unique dynamics at play in this housing market, which aren’t necessarily apparent to the outsider – at least, I was never aware of them until I moved here.

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

“Stimulus Hopes” – a Dog that Ain’t Hunting no More

February 17, 2016

“Stimulus Hopes” – a Dog that Ain’t Hunting no More

A Rebound in Stocks Begins

Given that a very sharp downturn in so-called “risk assets” is well underway globally, but not yet fully confirmed by US big cap indexes, we are keeping an eye out for confirmation. This is to say, we are looking for events, market moves, positioning data, even newspaper headlines, that will either confirm or refute the notion that a larger scale bear market (as opposed to just a deep correction) has begun.

Bank of Japan Governor Haruhiko Kuroda Haruhiko Kuroda will stimulate us back to Nirvana! Hurrah! Photo credit: Yuya Shino / Reuters

Readers may recall an article we posted earlier this year, discussing historical examples of the stock market swooning in the seasonally strong month of January (see: “Stock Market Suffers Worst Start to the Year Ever” for details). When the market does something like this, it is more often than not sending a message worth heeding. Chart patterns of course never repeat in precisely the same manner, but such historical patterns are nevertheless often useful as rough guides.

As a reminder, here is a chart of the DJIA from 1961 to 1962. Both the distribution period preceding the sell-off, as well as the timing and pattern of the sell-off itself show many similarities to what has so far occurred in 2015 to 2016:

The DJIA from 1961 to 1962. We may be at the beginning of the period equivalent to the one in the green rectangle – click to enlarge.

In keeping with this, we would now normally expect the market to rebound from the initial sell-off and retrace a portion of its losses over a period of several weeks before resuming the decline from a lower high. Last week the bond market delivered a technical signal on the daily chart, which based on well-known inter-market correlations suggests that such a rebound has likely begun.

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

This Time Is Different!

February 14, 2016

This Time Is Different!

Experts Agree: It Is Not 2008

If someone were to ask us what year it was, we would probably politely answer that it was 2016, curious to find out whether the inquirer was a) very confused, b) had only recently awoken from a coma and was still unsure of his when-abouts, or c) was a time traveler who got temporarily lost.

In the unlikely case that we should find ourselves unable to remember the year with sufficient precision to ensure a reliable answer, we’d probably consult a calendar. We recently found out that a great many people actually seem to be uncertain about what year it is. Or at least many mainstream media appear to think so, as they have launched an intense awareness campaign.

Specifically, numerous people seem to think it is still 2008. Wish that it were so – we’d be eight years younger. It all started on 24 August 2015, when two publications apparently discovered independently of each other that is was no longer 2008 and decided that this information should be urgently imparted to the rest of humanity. It all started with marketplace.org admonishing its readers to engage in mnemonic exercises so as not to forget:

1-Marketplace-dot-org-Aug-24-2015 If you repeat it often enough, remembering it will eventually become second nature… Photo via marketplace.org

On the very same day, NPR noted that a number of economists agreed: it was indeed no longer 2008. Incidentally, this was actually a correct estimate, as it was clearly 2015 at the time. It was presumably good though that some reassurance on the point was provided by experts – that is apparently helpful with averting panic attacks:

2-NPR Aug 24 2015 Lay your calendar-related phobias to rest pilgrims!

However, these efforts were evidently insufficient: general confusion about the precise year we are in must have promptly resurfaced in early 2016. In the interest of keeping the general population in the date-loop, USA Todayhad the following information on its January 8 front page:

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

Softening up the Rubes – the War on Cash Continues

February 3, 2016

Softening up the Rubes – the War on Cash Continues

More Anti-Cash Propaganda by Bloomberg

Former NYC mayor Bloomberg is probably one of the worst nannycrats who ever strode upon the US political scene. No-one has done more to take the fun out of New York than this man (we have chronicled the efforts of people of his ilk in “America’s Killjoys”). It always amazes us to no end when successful businessmen – once they have made enough money to last them a thousand lifetimes – suddenly discover their penchant for socialism and State control of every nook and cranny of people’s lives.

angry midget Ex-NYC mayor Michael Bloomberg, owner of the famous financial data service and professional nannycrat.

Photo via politistick.com

If not for the huge amount of capital our forebears wisely accumulated while the market economy was still relatively unhampered, Bloomberg wouldn’t have been able to amass his fortune – and yet, we strongly suspect that he has never really been a big fan of free market capitalism. His willingness to join the political class is by itself a major “crony indicator”. There is after all a big difference between wishing to serve consumers and wishing to rule over them.

The financial services offered by his company are nevertheless quite valuable – an unrivaled wealth of data is available via Bloomberg terminals and the financial commentary on the Bloomberg web site is often quite informative as well – as long as it is confined to the neutral reporting of facts that is. It is quite different with the magazine’s editorial line, which is steeped in the statism of the service’s founder.

For instance, central banking and central planning of the economy in general remain routinely unquestioned; Keynesian shibboleths are woven into the narratives as if they represented incontestable truth. It is therefore not a big surprise that the magazine is also editorializing in favor of banning cash.

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

The Bank of Japan – Ringing in the Endgame?

January 30, 2016

The Bank of Japan – Ringing in the Endgame?

Let’s Do More of What Doesn’t Work

It is the Keynesian mantra: the fact that the policies recommended by Keynesians and monetarists, i.e., deficit spending and money printing, routinely fail to bring about the desired results is not seen as proof that they simply don’t work. It is regarded as evidence that there hasn’t been enough spending and printing yet.

BoJ governor Haruhiko “Fly” Kuroda: is that a windshield I’m seeing?

Photo credit: Yuya Shino / Reuters

At the Bank of Japan this mantra has been gospel for as long as we can remember. Japan has always exhibited an especially strong penchant for central planning. We still recall that many Western observers were beginning to wonder in the late 1980s whether the Japanese form of state capitalism administered by the powerful Ministry of Trade and Industry and the BoJ wasn’t a superior economic system after all. Then this happened:

The Nikkei Index from 1989 to 2003. Japan’s seemingly never-ending boom coupled with forever rising stock prices, carefully administered by Tokyo’s powerful bureaucrats, suddenly became an intractable bust – click to enlarge.

This sudden change in fortunes should perhaps have been taken as a hint that central planning of the economy wasn’t such a good idea after all. That was not the conclusion of Japan’s movers and shakers though (or anyone else’s, for that matter). Instead it was decided that what was required were better planners, or at least a better plan.

For decades Japanese policymakers have been inundated with well-meaning advice by prominent Western economists. Even Ben Bernanke famously admonished them to just print more. According to Bernanke, holding interest rates at zero and implementing several iterations of QE were indicative of “policy paralysis” – after all, these efforts were obviously just not big and bold enough!

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

The FOMC Decision: The Boxed in Fed

January 29, 2016

The FOMC Decision: The Boxed in Fed

An Imaginary Bogeyman

What’s a Keynesian monetary quack to do when the economy and markets fail to remain “on message” within a few weeks of grandiose declarations that this time, printing truckloads of money has somehow “worked”, in defiance of centuries of experience, and in blatant violation of sound theory?

In the weeks since the largely meaningless December rate hike, numerous armchair central planners, many of whom seem to be pining for even more monetary insanity than the actual planners, have begun to berate the Fed for inadvertently summoning that great bugaboo of modern-day money cranks, the “ghost of 1937”.

Bugaboo of monetary cranks
The bugaboo of Keynesian money cranks – the ghost of 1937.

As the story goes, the fact that the FDR administration’s run-away deficit declined a bit, combined with a small hike in reserve requirements by the Fed “caused” the “depression-within-the-depression” of 1937-1938, which saw the stock market plunging by more than 50% and unemployment soaring back to levels close to the peaks seen in 1932-33.

This is of course balderdash. If anything, it demonstrates that the data of economic history are by themselves useless in determining cause and effect in economics. It is fairly easy to find historical periods in which deficit spending declined a great deal more than in 1937 and a much tighter monetary policy was implemented, to no ill effect whatsoever. If one believes the widely accepted account of the reasons for the 1937 bust, how does one explain these seeming “aberrations”?

The DJIA in 1937 (eventually, an even lower low was made in 1938, see also next chart) – click to enlarge.

As we often stress, economics is a social science and therefore simply does not work like physics or other natural sciences. Only economic theory can explain economic laws – while economic history can only be properly interpreted with the aid of sound theory.

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

Stocks, the Economy and the Money Supply – What to Watch

January 27, 2016

Stocks, the Economy and the Money Supply – What to Watch

In previous articles we have occasionally discussed the interaction between economic indicators and the stock market. Among the topics we have touched upon: for one thing, the capitalization-weighted indexes can hardly be called “leading indicators” of the economy anymore. In fact, if one studies specific major turning points over the past two decades or so, it is clear that the market seems to “know” very little (at least not in advance).

The impression one gets is actually that the major indexes are acting like coincident rather than leading indicators of the economy. However, the market is not completely bereft of leading indicator qualities. What seems to be leading the economy are not the cap-weighted indexes, but market internals.

Even while the SPX still rose, resp. went sideways in 2015, market internals began to deteriorate (here shown: S&P hi/low percent, NYSE a/d line, SPX stocks above 200 & 50 day ma) – click to enlarge.

We believe we can explain why this is the case. In an economy in which the money supply can be expanded ex nihilo by central planners and/or commercial banks, the pace of money supply growth tends to lead both stock market returns and the performance of the economy as measured in terms of aggregate data.

Readers may have noticed our habit of adding the qualifier “as measured by aggregate data”. We are doing this because the boom period is a kind of Potemkin village: seemingly busy economic activity and surging accounting profits are masking the fact that a great deal of capital is consumed. Simply put, accounts are falsified, because loose monetary policy distorts and falsifies the entire economy’s price structure.

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

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