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Those who the gods wish to destroy…

July 21, 2022

Those who the gods wish to destroy…

The UK is already in a de facto recession – only the fiddling of the data to count GP appointments as a value-adding activity led to a paltry 0.5 percent GDP growth in May.  Discretionary spending has already plummeted, and it is only a matter of time before we see widespread business failures and debt defaults.  Indeed, this is likely to be one reason why Britain is experiencing a wave of strikes – provoking a strike to save on energy costs and the wage bill was a common response to inflation in the 1970s and is likely to be one of the few similarities today (the big difference being that we no longer have nationalised industries, so nobody is going to give in to workers’ demands).

Internationally, there is a global dollar shortage – which the Federal Reserve is exacerbating – which threatens a sovereign debt implosion beginning with developing economies dependent upon a single commodity for foreign exchange, but eventually dragging down any economy which trades in dollars…  which brings us to the ill-advised sanctions salad imposed on Russia and China in response to the war in Ukraine.  This has brought forward the establishment of an alternative BRICS currency system which will cover around a third of global trade, and in the process crush the economies of Europe.  As if that wasn’t bad enough, Russia seems to be finally responding by halting its supply of gas to Europe, causing capital flight and industrial closures – including of the wind turbine industry which is supposed to save the day – across the continent.

In Britain, the “curse of oil” means that the unfolding collapse will be all the harder – since the 1980s, Britain’s neoliberal governments have used oil and gas revenues to underwrite the explosion of debt – and profits for the few – generated in the City of London…

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

Time to Get Real: Part I

September 10, 2016

Time to Get Real: Part I

its-time-to-get-real1In a world where fair value is a central bank veiled enigma it’s frankly a challenge to keep things real, but I’ll have a go at it in what will be a 3 part series covering central banks, the underlying fundamental picture, and a technical assessment of charts. In this part I’ll be covering central banks and putting their actions into context of the realities of a changing world and will aim to address some of the implications.

Part I: Central banks

After years of watching central bankers do their bidding I’ve come to the conclusion that they are the designers of the ultimate Pokemon Go game by leading investors to ever more extreme locations to find little yield nuggets on their screens.

My largest criticism of this game has been that free market price discovery is largely dead and nobody knows what is real any longer, producing a false sense of security as, at any signs of trouble, central banks feel compelled to intervene ever further removing markets from their natural balance. In short: Creating a bubble with devastating consequences we will all end up paying for in one form or another.

For now one may call it a market of pure multiple expansion as GAAP earnings and price have completely diverged in 2016:

gaap

Indeed, as earnings have declined since their peak in 2015 we have seen one central bank intervention after another. Just in 2016 alone we have witnessed dozens of new rate cuts, the ECB modified and added to its QE program with QE3 an almost forgone conclusion, Japan added stimulus with the BOJ on track to own 60% of all ETFs in Japan with more to come. China intervened repeatedly, the UK cut rates and re-launched QE as well, and central banks such as the SNB have been busy expanding their share purchases of US stocks.

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

Analysis: China Stalls on Debt Reforms

May 21, 2015

Analysis: China Stalls on Debt Reforms

Background

The Chinese government has a $3.5 trillion-dollar problem in the form of local government debt. Most of it accrued in the years between 2007 and 2014, when China’s total debt spiked from $7.4 trillion to $28 trillion, or from 158% of GDP to 282%.

At fault was a massive government fiscal and monetary stimulus program launched in the wake of the global financial crisis. The program succeeded in producing enough infrastructure and real estate projects to weather the economic storm admirably, but it did so at the cost of creating excess supply and a long list of insolvent ventures, many of which were financed by local governments.

Now Beijing is faced with the task of cleaning up this mess, and doing so won’t be easy. Local governments have since been capped on the amount of debt they can take on, and a pilot project for converting local debt to municipal bonds is slowly being implemented, though there are questions concerning the market demand for such bonds.

There will be tradeoffs every step of the way since this is often a question of short-term pain for long-term financial stability. Many observers are starting to draw parallels between China’s current situation and that of Japan’s leading up to its major economic crash in the 1990s. Both suffered from high levels of debt that policymakers were hesitant to write off for fear of a crash; both faced conflicts of interest from state-owned banks; and both bounced their debt problem around by providing easy liquidity in times of tepid growth.

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

 

When Exactly Will the Fed Launch QE4?

April 29, 2015

When Exactly Will the Fed Launch QE4?

Money From Nowhere

On Friday, the S&P 500 and the Nasdaq closed at record highs. It’s the first time both indexes have done so since December 31, 1999. Why such optimism? High profits, you say. But where do profits come from?

Households have less money to spend than they did 15 years ago. And companies cannot make money just by selling things to each other. The only explanation is that customers – including the US government – continue to borrow and spend.

Corporations borrow money to buy their own shares. Consumers borrow to buy products. Either way, the money comes “out of nowhere” and falls on balance sheets like manna from heaven.

the-us-federal-reserve-board-building-susan-candelarioThe great money temple, from whence fresh pronouncements shall issue today. How long before it floods us with fresh money again?

Photo credit: Susan Candelario

The Limits of Debt

US households appeared to reach “peak debt” in 2007. Now, the corporate and government sectors – not to mention students and auto buyers – are pulling up to their maximum debt limits, too.

Household debtCredit to US households and non-profits stood at $13.384 trillion as of March 18 2015 – still below the 2007 peak and declining in relative terms – click to enlarge.

“Everybody – including every corporation and government – has a capacity limit for debt,” says Swiss money manager Felix Zulauf. “Once they reach capacity, they stop buying. Then the additional sales turn to additional inventories, employees turn to jobless statistics, and profits turn to losses.”

Maybe the cycle will reverse soon. Maybe it won’t. But US corporate profits – already at record highs – can’t go much higher unless: (a) wages rise, (b) consumer borrowing rises or (c) government borrowing rises. None of which looks likely.

 

 

And I Didn’t Even Mention Greece, the End of the Euro or Evil Russia!! Yikes!

February 22, 2015

And I Didn’t Even Mention Greece, the End of the Euro or Evil Russia!! Yikes!

IMG_0061

This is a screen shot from my iPhone about a week ago.  And really this says it all.  Breaking news is highlighting the all time highs again while the underlying economic news is negative across the board.  No other time in history could the economy be in such dire straits and have the market completely apathetic to it.  Whether it’s total debt, Consumer debt, retail sales, housing, productivity, inventories, full time jobs, GDP, wages, just about any indicator it is negative.

And if we put it in the context of having such extreme monetary policies with the sole intent toward all of these moving in a highly positive direction the above indications aren’t just terrible they are frightening.  It’s kind of like when you’re in a fight and you’ve just hit the other guy with your best punch and he doesn’t flinch.  You start to think this ain’t going to end very well.  I expect the Fed folks are suffering from a case of the ‘oh shit that was the best I got’ syndrome.

Our nation’s ‘best and brightest’ economists and financial ‘experts’ have created policies that are their best ideas to generate economic growth and these policies have failed completely.  The only thing preventing this nation from a full on collapse is an all time high stock market.  And that is the only reason the market is at all time highs.   Volume is sparse, institutional money is on the sidelines and every damn metric you can think of is falling apart yet markets are at all time highs, thanks to the Fed.

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

 

‘Two Percent Inflation’ and The Fed’s Current Mandate

January 28, 2015

‘Two Percent Inflation’ and The Fed’s Current Mandate

Over the last 100 years the Fed has had many mandates and policy changes in its pursuit of becoming the chief central economic planner for the United States. Not only has it pursued this utopian dream of planning the US economy and financing every boondoggle conceivable in the welfare/warfare state, it has become the manipulator of the premier world reserve currency.

As Fed Chairman Ben Bernanke explained to me, the once profoundly successful world currency – gold – was no longer money. This meant that he believed, and the world has accepted, the fiat dollar as the most important currency of the world, and the US has the privilege and responsibility for managing it. He might even believe, along with his Fed colleagues, both past and present, that the fiat dollar will replace gold for millennia to come. I remain unconvinced.

At its inception the Fed got its marching orders: to become the ultimate lender of last resort to banks and business interests. And to do that it needed an “elastic” currency.  The supporters of the new central bank in 1913 were well aware that commodity money did not “stretch” enough to satisfy the politician’s appetite for welfare and war spending. A printing press and computer, along with the removal of the gold standard, would eventually provide the tools for a worldwide fiat currency. We’ve been there since 1971 and the results are not good.

Many modifications of policy mandates occurred between 1913 and 1971, and the Fed continues today in a desperate effort to prevent the total unwinding and collapse of a monetary system built on sand. A storm is brewing and when it hits, it will reveal the fragility of the entire world financial system.

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

Low inflation should not be feared, says George Osborne

January 14, 2015

Low inflation should not be feared, says George Osborne

The sharp fall in the UK inflation rate should not be feared, Chancellor George Osborne will say in a speech later.

“We should not confuse this welcome news with the threat of damaging deflation that we see in the eurozone,” he will say in a speech.

The speech comes a day after official figures showed the UK inflation rate had fallen to 0.5% in December – its lowest rate since May 2000.

Economists have warned the fall means an outright drop in prices is possible.

But in extracts from the speech released by the Treasury, Mr Osborne tries to distance the UK from the scenario playing out in the eurozone, where deflation has become a problem for policymakers.

He says the sharp drop in the Consumer Prices Index is “almost entirely driven by external factors such as the oil price”, which has more than halved since June, and is “much more welcome than in the eurozone”, where inflation has fallen to -0.2%.

‘Self-reinforcing spiral’

Mr Osborne will say that the UK could experience “a few months of very low or even negative inflation” without any significant risk to the economy.

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

 

How Will US Fed React To Low Oil Prices

December 16, 2014

How Will US Fed React To Low Oil Prices.

Falling oil prices are the newest wrench in the Fed’s decision making, but the effect might seem counter-intuitive.

Since the Fed’s last meeting in October, oil prices have fallen 25%. With a meeting scheduled for this week, markets have two major questions about the Federal Open Market Committee’s (FOMC) decision: how long will rates stay at zero, and will oil prices change that? There is a growing belief among market participants that the FOMC’s first rate hike will be delayed by the glut of oil.

That sentiment is misplaced. If anything, the fall in oil prices will cause the Fed to raise rates earlier. Inexpensive oil has had a stimulative effect on the US economy and will have no effect on the more relevant measure of inflation: core inflation.

Two kinds of inflation

The Federal Reserve prints two different inflation numbers: personal consumption expenditures (PCE) inflation and core PCE inflation. Both are calculated in the same way, but core PCE inflation excludes food and fuel prices.

Related: Could Falling Oil Prices Spark A Financial Crisis?

While it may seem like a mistake – after all, food and fuel are the second and third largest spending categories for US consumers – the point is to strip out the most volatile prices and give a clearer image of systematic inflation in the economy.

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

This Time Is The Same: Like The Housing Bubble, The Fed Is Ignoring The Shale Bubble In Plain Sight | David Stockman’s Contra Corner

December 10, 2014

This Time Is The Same: Like The Housing Bubble, The Fed Is Ignoring The Shale Bubble In Plain Sight | David Stockman’s Contra Corner.

We are now far advanced into the third central bank generated bubble of the last two decades, but our monetary politburo has taken no notice whatsoever of its self-evident leading wave.Namely, the massive malinvestments and debt mania in the shale patch.

Call them monetary bourbons. It is no exaggeration to say that inhabitants of the Eccles Building deserve every single word of Talleyrand’s famous epithet: “They learned nothing and forgot nothing.”

To wit, during the last cycle they claimed to be fostering the Great Moderation and permanent full employment prosperity. It didn’t work. When the housing and credit bubble blew-up, it washed out all the phony gains from the Greenspan/Bernanke printing spree. By the time the liquidation was finished in early 2010, there were 2 million fewer payroll jobs than there had been at the turn of the century.

Never mind. The Fed simply doubled-down. Instead of expanding its balance sheet by 50%, as happened during the eight years between 2000 and 2008, it went into monetary warp drive, ballooning its made-from-thin-air liabilities by 5X in only six years. Yet even after Friday’s ballyhooed jobs report there were three million fewer full-time breadwinner jobs in November 2014 than there were in the early 2000s.

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

The Consequences of Imposing Negative Interest Rates |

November 23, 2014

The Consequences of Imposing Negative Interest Rates |.

Negative Interest Rates and Capital Consumption

Ever since the ECB has introduced negative interest rates on its deposit facility, people have been waiting for commercial banks to react. After all, they are effectively losing money as a result of this bizarre directive, on excess reserves the accumulation of which they can do very little about.

At first, only a small regional bank, Deutsche Skatbank, imposed a penalty rate on large depositors – slightly in excess of the 20 basis points banks must currently pay for ECB deposits. It turns out this was a Trojan horse. Other banks were presumably watching to see if depositors would flee Skatbank, and when that didn’t happen, Commerzbank decided to go down the same road.

However, there is an obvious flaw in taking such measures – at least is seems obvious to us. The Keynesian overlords at the central bank who came up with this idea have failed to consider a warning Ludwig von Mises once uttered about the attempt to abolish interest by decree.

Obviously, the natural interest rate can never become negative, as time preferences cannot possibly become negative: ceteris paribus, consumption in the present will always be preferred to consumption in the future. Mises notes that if the natural interest rate were to decline to zero, all consumption would stop – we would die of hunger while investing all of our resources in capital goods, i.e., while directing all of our efforts and funds toward production for future consumption. This is obviously a situation that would make no sense whatsoever – it is simply not possible for this to happen in the real world of human action.

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

Olduvai IV: Courage
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Olduvai II: Exodus
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