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They’ve Done It Again

August 21, 2020

The stars are back in their courses. The angels are back in the heavens. And the Perfections are back within sight…

For merely 148 trading days after bottoming… the S&P returned to record heights today.

The index closed the day at 3,389 — eclipsing its February 19 height of 3,386.

Thus Jerome Powell’s maniacal persistence has yielded a reward truly fantastic. He has successfully reflated the bubble.

The Federal Reserve has itself become the market.

Shannon Saccocia, Boston Private’s chief investment officer:

Equity markets are reflecting the massive monetary and fiscal stimulus that has been injected over the past four months… the rationale to diversify away from risk assets is hard to pinpoint.

For many the rationale to diversify away from risk assets is indeed hard to pinpoint…

No Longer Considered a Bear Market Rally

Bank of America has concluded its August Global Fund Manager survey. This survey revealed that:

The majority of professional investors no longer believe this market spree represents a bear market rally.

It is as genuine as gold itself, they believe.

What is more, 31% of those surveyed believe it is “early cycle” — the highest percentage since the financial crisis.

Meantime, Deutsche Bank reports, “companies have already restarted buybacks or are considering doing so.”

Buybacks were of course a primary source of helium for the bubble presently reflating.

And the Federal Reserve’s artificially depressed rates opened the taps…

Corporations Take on More Debt Than Ever

These exorbitantly low rates enabled corporations to pile on cheap debt.

With this debt they often purchased their own stock… which reduced shares outstanding… and raised the price per share.

That is, corporations often took on debt to conduct financial sorcery.

And now — as Deutsche Bank reports — the sorcerers are at their tricks again.

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

Inflation

July 21, 2020

Inflation

Remember all those “green shoots?”

That was the ubiquitous phrase used by White House officials and TV talking heads in 2009 to describe how the U.S. economy was coming back to life after the 2008 global financial crisis.

The problem was we did not get green shoots, we got more like brown weeds.

The economy did recover, yes, but it was the slowest recovery in U.S. history.

After the green shoots theory had been discredited, Treasury Secretary Tim Geithner promised a “recovery summer” in 2010.

That didn’t happen either.

The recovery did continue, but it took years for the stock market to return to its previous highs and even longer for unemployment to come down to levels that could be regarded as close to full employment.

Now, in the aftermath of the 2020 pandemic and market crash, we’re getting the same happy talk.

Green Shoots, or Brown Weeds?

The White House is talking about “pent-up demand” as the economy reopens and consumers flock to stores and restaurants to make up for the lost spending during the March to July pandemic lockdown.

But, the data shows that the “pent-up demand” theory is just as much of a mirage as the green shoots we heard about a decade ago..

Many of the businesses that closed have failed in the meantime. They will never reopen and those lost jobs are never coming back. Even people who kept their jobs are not spending like it’s 2019, they’re saving at record levels.

Meanwhile, the “reopening” of the economy is now in doubt.

In some cities, the reopening was derailed by riots that left shopping districts in ruins. In other cities, the reopening was stopped in its tracks by new outbreaks of the virus that led to new lockdowns and strict application of rules on wearing masks and social distancing.

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

The Last Gasps of “Late Degeneracy Capitalism”

July 19, 2020

The Last Gasps of “Late Degeneracy Capitalism”

It was a mid-afternoon in 2006 in Cannes, where I joined Dr. Kurt Richebächer at his apartment to collaborate on a book project that, unfortunately, failed to come together before his death a year later.

The old man grabbed his cane and moved to a comfy chair and clicked on a widescreen TV.

Bloomberg. In German.

It was bad news from what I remember. But as far as the economic commentariat was concerned, it was good news. It meant the Fed would simply pump more money into the market.

Traders loved the report; stock futures back in New York had already begun to rally.

Kurt, on the other hand, was flabbergasted. He started talking to me and to the television in German. Neither I nor the TV understood German…

Dr. Richebächer was kind of a crank. He was a special kind of crank, though.

He used to say something like: “the sins of the boom, will be laid bare in the bust.”

A Market Prophet

Kurt wrote a newsletter for more than 40 years. And back in the late 90s and early 2000s we published The Richebächer Letter.

Kurt accurately forecast the tech wreck. And for having done so, he became a semi-celebrity among the geeks — present company included — who like to read and think about an obscure outpost in the field of economics — the Austrian school.

Kurt never claimed to adhere to the Austrian school, but that hardly seemed to matter. His insights apply just as much today as they did 14 years ago — probably more.

It all started after World War II when Kurt had made a name for himself as the best-known financial journalist in Germany — a razor-sharp critic of what he saw as the stupid economic and fiscal policies of the post-war German government.

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

The Fed Isn’t a Magic Money Tree

June 28, 2020

The Fed Isn’t a Magic Money Tree

There seems to be no end to the Federal Reserve’s arrogance. Fed officials believe that through their wise actions, they can eliminate the business cycle, lower unemployment and make society prosperous.

But it’s actually much more limited in what it can do.

All the Fed can reliably do is stop bank runs and limit liquidity panics. It can also fund (or “monetize”) the U.S. federal deficit, as it has done in recent months.

By buying essentially the same amount of U.S. Treasury securities the government has issued, the Fed has taken pressure to fund mammoth federal deficits off of the private sector.

But such actions are not cost-free.

They store up trouble for the future. These actions swell the Fed’s balance sheet, which will limit the Fed’s flexibility and its willingness to tighten policy during the next inflation spike.

The more the Fed intervenes, the harder it is for it to reverse course without causing damage.

By promising the public that it can do anything more than offer dollar liquidity, the Fed is setting up both investors and workers for disappointment.

Yet it’s going to try anyway. And it’ll only undermine its limited reputational capital in the process.

“Yield Curve Control”

The Wall Street Journal recently reported that the Fed is considering implementing “yield curve control” in the Treasury market. This policy hasn’t been used since WWII and the early postwar period.

It essentially funded the war effort. If unleashed today, it wouldn’t be done to support a civilization-saving war effort but to maintain the debt-saturated economy to which we’ve become accustomed.

Here’s how it would work in practice:

The Fed would set a target range, or cap, on yields for Treasury bonds of a specific maturity — say, 3-, 5- or 7-year Treasuries.

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

REVEALED: The Fed’s Next Trick

June 20, 2020

REVEALED: The Fed’s Next Trick

Today we lower our ear to the rail… and report the approach of a rumbling locomotive.

Free and honest markets are roped to the tracks, squirming, writhing, sobbing.

This iron horse is barreling toward them. Mr. Jerome Powell is at the controls…

And murder is on his mind.

What is the Federal Reserve’s latest plot against the remains of free and honest markets?

And will it pull off the caper?

Answers anon.

We first look in on the seemingly condemned — squirming, writhing, sobbing on the tracks…

A Quiet Day on Wall Street

The day counted plus and minus.

The Dow Jones lost 39 points. The S&P scratched out a 1.85-point gain today. The Nasdaq, meantime, took the ribbon with a 32-point advance.

A dull affair altogether. Yet tomorrow may bring high adventure of course.

And so we now return to today’s central question:

What is the Federal Reserve’s latest plot against the remains of free and honest markets?

Let us first flip back the calendar to the war year of 1942… where our tale begins.

How the Fed Fought WWII

Wars are costly enterprises. And taxes alone would not purchase the arsenals of democracy.

Uncle Samuel therefore held his cap before the bond market… and went upon the borrow.

But the authorities were hot to keep borrowing costs within reasonable limits.

The Federal Reserve and the Treasury Department therefore signed onto an agreement:

The Federal Reserve would place a cap on the government’s borrowing costs.

This it accomplished by purchasing any government bond with yields above a predetermined level.

These purchases shrunk the yield (purchasing Treasuries hammers down the yield; selling Treasuries ratchets yields higher).

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

Goodbye, Free Market

June 18, 2020

Goodbye, Free Market

Fremdschämen.

Fremdschämen is a noun of the German language. It translates this way:

Embarrassment for those incapable of feeling embarrassment.

Today we suffer embarrassment for Mr. Jerome Powell and his fellows of the Federal Reserve…

For no action they take lowers their heads in shame… or blushes their cheeks with embarrassment.

Mr. Powell is simply in the hands of Wall Street… and on his knees to Wall Street.

Well does he know the taste of shoeblack.

Yesterday Mr. Powell got a fresh coat on his tongue. Details to follow.

But first, let us look in on his masters…

A Banner Day on Wall Street

Wall Street was in full roar today.

The Dow Jones jumped an additional 582 points. The S&P gained 58 points; the Nasdaq, 169 points of its own.

CNBC, by way of explanation:

Stocks rose on Tuesday as a record jump in retail sales — coupled with positive trial results from a potential coronavirus treatment and hopes of more stimulus — sent market sentiment soaring.

Government number-torturers reported this morning that May retail sales jumped a record 17.7%.

The chronically erring Dow Jones survey of economists had projected a 7.7% increase.

Yet we are not surprised by the surge. April’s numbers were true abominations. But certain economic restrictions were waived in May.

A trampolining back was therefore expected.

Meantime, a medicine named dexamethasone — a widely available medicine — is evidently effective in the treatment of deathly ill coronavirus patients.

It reportedly axed hospital deaths by perhaps one-third.

Thus the market had its spree today. But it merely added to yesterday afternoon’s joys…

Powell Licks Wall Street’s Shoes

The Dow Jones had been off 762 points in early trading yesterday, quaking with coronavirus-related fear.

But then Mr. Powell sank to his knees… and tongued Wall Street’s wingtips…

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

The Fed’s Forever War Against Savers

June 14, 2020

The Fed’s Forever War Against Savers

The war on savers rages into its second decade.

And yesterday Field Marshal Powell vowed indefinite bombing, shelling, machine-gunning and bayoneting… until the white flag rises over enemy lines.

It is war to the knife… and from the knife to the hilt.

The only peace terms he will accept are these:

Complete, undiluted and unconditional surrender.

These hoarding hellcats must be vanquished. And their cities must be sowed with salt… as triumphant Rome vanquished Carthage… and sowed it with salt.

Here is yesterday’s dispatch from headquarters:

We are going to be deploying our tools — all of our tools — to the fullest extent for as long as it takes… We are not thinking about raising rates; we are not even thinking about thinking of raising rates.

Zero Rates Through at Least 2022

Powell and staff indicated they will clamp rates to zero, or near zero… through 2022.

We wager rates will remain clamped to zero longer yet.

Deflation hangs over the battlefield like a thick cloud of chlorine gas. And the Federal Reserve’s 2% inflation target appears more wishful than ever.

We do not expect any rate hikes until it lifts. And we hazard little will lift until 2022 has passed.

Meantime, Marshal Powell reminded us yesterday that the pre-pandemic 3.5% unemployment rate yielded little inflation.

He suggested, that is, that unemployment could sink below 3.5% before inflation menaced.

But it could be a long, long while before unemployment drops to pre-pandemic levels.

As we recently noted:

After the last financial crisis, over six years lapsed before employment fully recovered — 76 months.

If we assume a parallel recovery… pre-pandemic unemployment would return in 2026.

Of course comes our disclaimer: Pre-pandemic unemployment would return before 2026.

We simply do not know. Nor does anyone.

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

Popular Delusions and the Madness of Crowds

June 11, 2020

Popular Delusions and the Madness of Crowds

The oppressed rise to their feet. Police sink to their knees. Silence is violence.

And violence is speech.

From sea to glittering sea, from one continent to the next… protests yet rage.

An injustice somewhere on a Minneapolis street evidently threatens justice everywhere.

It certainly threatens the peace everywhere.

Here in Baltimore, storefronts up Charles Street and down Charles Street are barricaded against bricks:

Is there a greater symbol of hope, of love, than a plywood sheet stretched across a storefront window?

We have yet to encounter one in this world.

“When a Man Enters a Crowd He Exits Civilization”

We have nothing to say against protests, of course. If a man wishes to march against perceived injustice, let him march… lest the heavens fall.

Yet our spacious and tolerant disposition places us in a pickle jar. For a man in a protest is a man in a crowd…

And when a man enters a crowd he exits civilization.

He goes in, his blood goes up… and his reason goes out.

As Herr Nietzsche observed, madness is a rarity in individuals — but the rule in crowds.

Or as argued Mr. Charles Mackay, author of the 1841 classic Extraordinary Popular Delusions and the Madness of Crowds:

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

“A Crowd Runs Not on Thought but on Hormones”

A man in a crowd ceases to be a man but a face.

He ceases to be an independent unit but a cog in a lunatic machine.

A man in a crowd does not think for himself. The crowd thinks for him.

That is, the man ceases to think whatsoever.

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

Rise up, America!

June 7, 2020

Rise up, America!

Today we hoist the black flag of anarchy… and plot illicit acts.

For the spirit of sedition steals over us. And passion overmasters our typical Olympian serenity.

We may be declared infamous and set down as an insurrectionist. We may be sent to the gallows.

Yet the time for meek submission is gone. And the time for bald defiance is here.

Do we break heads? Do we holler against the police?

Do we incite our fellow Americans to thieving, to arson, to bedlam?

We do none of it, no.

We are as peaceful as a napping baby, as peaceful as grazing sheep.

Instead we beseech Americans to reclaim their ancient and God-granted liberties.

That is, we beseech Americans to defy the government freezes that imprison them in their homes… and wreck their livelihoods.

All About Saving Lives?

We issue today’s war cry for one central because:

The government authorities that mandated these “lockdowns” clearly do not take them heavily.

Their enforcement has proven selective. Capricious. Nonsensical. Idiotic.

That is to say, predictable.

These gushers of human compassion assured us the public health was their highest thought, that they had no thought beyond the preservation of life.

In consequence… they mandated the self-incarceration of perhaps 300 million Americans.

Yes, it would comatize the economy, they conceded. Yes, stores, restaurants, alehouses, theaters, schools, worship houses, beaches, parks and other places of public resort would be locked.

Yes, millions and millions of Americans would be thrown from their jobs.

Yet these unprecedented, egregious and breath-stealing measures were necessary… else the pandemic would overwhelm us. We were denied all choice.

This is what our jailors told us.

And they sobbed the saltiest tears that ever streamed down cheeks…

“If it saves one life,” sniffled Gov. Cuomo, the incalculable expense was worth the sacrifice.

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

The Biggest Economic Threat Today

May 14, 2020

The Biggest Economic Threat Today

Kind heaven, no! A fresh economic scourge is upon the land. Announces CNN:

“New Threat to the Economy: Americans Are Saving Like It’s the 1980s.”

Is a higher evil possible? Thus we are informed:

Americans are slashing their spending, hoarding cash and shrinking their credit card debt as they fear their jobs could disappear during the coronavirus pandemic…
Although caution is a logical response to that uncertainty, hunkering down also poses a risk to the recovery in an economy dominated by consumer spending. A so-called V-shaped recovery can’t happen if consumers are sitting on the sidelines…
The savings rate in the United States climbed from 8% in February to 13.1% in March. That was the highest savings rate since November 1981.
The article further reminds us that consumer spending constitutes some 70% of the United States economy.

And so the old bugaboo rises from the grave yet again — the “paradox of thrift.”

The Evils of Saving

The individual saver may be the model of prudence, of frugality, of forbearance… of thrift itself.

But if the entire nation tied down its money?

A savage cycle would feed and feed upon itself… until the economy is devoured to the final crumbs.

Consumption would dwindle to near-nonexistence. GDP would collapse in a heap. Waves of bankruptcies would wash through.

All this because the selfishness of savers. They refuse to untie their purse strings… and spend for the greater good.

This paradox of thrift is perhaps the mother myth of economists in the Keynesian line.

Yet no paradox exists whatsoever.

Today we maintain — again — that saving is an unvarnished blessing, at all times, under all circumstances.

Let us first plunge a stake through the squirming heart of another myth:

The myth that consumer consumption constitutes 70% of the United States economy…

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

Rickards: This Time IS Different

May 13, 2020

Rickards: This Time IS Different

Stocks stumbled out of the gate today, at least partially on fears about a resurgence in coronavirus cases.

South Korea, which did an excellent job containing the virus, has reported a new batch of cases. Japan and Singapore also reported new cases. Infections are increasing in Germany as well, where lockdown restrictions are being lifted.

We can also expect a rise in U.S. cases as several states lift their own restrictions.

From both epidemiological and market perspectives, the pandemic has a long way to go. Its economic effects are already without precedent…

In the midst of this economic collapse, many investors and analysts return reflexively to the 2008 financial panic.

That crisis was severe, and of course trillions of dollars of wealth were lost in the stock market. That comparison is understandable, but it does not begin to scratch the surface.

This collapse is worse than 2008, worse than the 2000 dot-com meltdown, worse than the 1998 Russia-LTCM panic, worse than the 1994 Mexican crisis and many more panics.

You have to go back to 1929 and the start of the Great Depression for the right frame of reference.

But even that does not explain how bad things are today. After October 1929, the stock market fell 90% and unemployment hit 24%. But that took three years to fully play out, until 1932.

In this collapse the stock market fell 30% in a few weeks and unemployment is over 20%, also in a matter of a few weeks.

Since the stock market has further to fall and unemployment will rise further, we will get to Great Depression levels of collapse in months, not years. How much worse can the economy get?

Well, “Dr. Doom,” Nouriel Roubini, can give you some idea.

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

This Isn’t Just Another Crash

May 6, 2020

This Isn’t Just Another Crash

Like addicts who cannot control their cravings, financial analysts cannot stop themselves from seeking some analog situation in the past which will clarify the swirling chaos in their crystal balls.

So we’ve been swamped with charts overlaying recent stock market action over 1929, 1987,2000 and 2008 — though the closest analogy is actually the Oil Shock of 1973, an exogenous shock to a weakening, fragile economy.

But the reality is there is no analogous situation in the past to the present, and so all the predictions based on past performance will be misleading. The chartists and analysts claim that all markets act on the same patterns, which are reflections of human nature, and so seeking correlations of volatility and valuation that “worked” in the past will work in 2020.

Does anyone really believe the correlations of the past decade or two are high-probability predictors of the future as the entire brittle construct of fictional capital and extremes of globalization and financialization all unravel at once?

Here are a few of the many consequential differences between all previous recessions and the current situation:

1. Households have never been so dependent on debt as a substitute for stagnating wages.

2. Real earnings (adjusted for inflation) have never been so stagnant for the bottom 90% for so long.

3. Corporations have never been so dependent on debt (selling bonds or taking on loans) to fund money-losing operations (see Netflix) or stock buybacks designed to saddle the company with debt service expenses to enrich insiders.

4. The stock market has never been so dependent on what amounts to fraud — stock buybacks — to push valuations higher.

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

Bailouts Can’t Save This Fragile System

May 5, 2020

Bailouts Can’t Save This Fragile System

It’s obvious the global economy is painfully fragile. What is less obvious is the bailouts intended to “save” the fragile economy actually increase its fragility, setting up an inevitable collapse of the entire precarious system.

Systems that are highly centralized, i.e., dependent on a handful of nodes that are each points of failure — are intrinsically fragile and prone to collapse.

Put another way, systems in which all the critical nodes are tightly bound are prone to domino-like cascades of failure as any one point of failure quickly disrupts every other critical node that is bound to it.

Ours is an economy in which capital, wealth, power and control are concentrated in a few nodes of the network we call “the economy.”

A handful of corporations own the vast majority of the media; a handful of banks control most of the lending and capital; a handful of hospital chains, pharmaceutical companies and insurers control health care; and so on.

Control of digital technologies is even more concentrated, in virtual monopolies: Google for search and YouTube for video. Facebook/Instagram and Twitter for social media. Microsoft and Apple for operating systems and services.

The vast majority of participants in the economy are tightly bound to these concentrated nodes of capital and power, and these top-down, hierarchical dependencies generate fragility.

When unexpectedly severe volatility occurs, the disruption of a few nodes brings down the entire system. Thus the disruption of the subprime mortgage subsystem — a relatively small part of the total mortgage market and a tiny slice of the global financial system — nearly brought down the entire global financial system in 2008 because it is a tightly bound system of centralized concentrations of capital, power and control.

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

Worst Recession in 150 Years

April 15, 2020

Worst Recession in 150 Years

The stock market had another big day today, spurred by the Fed’s massive recent liquidity injections.

But you really shouldn’t be terribly surprised by the rally. Even the worst bear markets see substantial bouncebacks. And you can expect the market to give back all of its recent gains in the months ahead as the economic fallout of the lockdowns becomes apparent.

This bear market has a long way to run. And we could actually be looking at the worst recession in 150 years if one economist is correct. Let’s unpack this…

My regular readers know I have a low opinion of most academic economists, the ones you find at the Fed, the IMF and in mainstream financial media.

The problem is not that they’re uneducated; they have the Ph.D.s and high IQs to prove otherwise. I’ve met many of them and I can tell you they’re not idiots.

The problem is that they’re miseducated. They learn a lot of theories and models that do not correspond to the reality of how economies and capital markets actually work.

Worse yet, they keep coming up with new ones that muddy the waters even further. For example, concepts such as the Phillips curve (an inverse relationship between inflation and unemployment) are empirically false.

Other ideas such as “comparative advantage” have appeal in the faculty lounge but don’t work in the real world for many reasons, including the fact that nations create comparative advantage out of thin air with government subsidies and mercantilist demands.

Not the Early 19th Century Anymore

It’s not the early 19th century anymore, when the theory first developed. For example, at that time, a nation that specialized in wool products like sweaters (England) might not make the best leather products like shoes (Italy).

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

Markets and Black Swans

April 11, 2020

Markets and Black Swans

I began studying complexity theory as a consequence of my involvement with Long-Term Capital Management, LTCM, the hedge fund that collapsed in 1998 after derivatives trading strategies went catastrophically wrong.

After the collapse and subsequent rescue, I chatted with one of the LTCM partners who ran the firm about what went wrong. I was familiar with markets and trading strategies, but I was not expert in the highly technical applied mathematics that the management committee used to devise its strategies.

The partner I was chatting with was a true quant with advanced degrees in mathematics. I asked him how all of our trading strategies could have lost money at the same time, despite the fact that they had been uncorrelated in the past.

He shook his head and said, “What happened was just incredible. It was a seven-standard deviation event.”

In statistics, a standard deviation is symbolized by the Greek letter sigma. Even non-statisticians would understand that a seven-sigma event sounds rare. But, I wanted to know how rare. I consulted some technical sources and discovered that for a daily occurrence, a seven-sigma event would happen less than once every billion years, or less than five times in the history of the planet Earth!

I knew that my quant partner had the math right. But it was obvious to me his model must be wrong. Extreme events had occurred in markets in 1987, 1994 and then 1998. They happened every four years or so.

Any model that tried to explain an event, as something that happened every billion years could not possibly be the right model for understanding the dynamics of something that occurred every four years.

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

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