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Weekly Commentary: Full Capitulation

Weekly Commentary: Full Capitulation

April 16 – Bloomberg (Rich Miller and Craig Torres): “Federal Reserve Chairman Jerome Powell and his colleagues have made an important shift in their strategy for dealing with inflation in a prelude to what could be a more radical change next year. The central bank has backed off the interest-rate hikes it had been delivering to avoid a potentially dangerous rise in inflation that economic theory says could result from the hot jobs market. Instead, Powell & Co. have put policy on hold until sub-par inflation rises convincingly.”

April 15 – CNBC (Thomas Franck): “Chicago Federal Reserve President Charles Evans said on Monday that he’d be comfortable leaving interest rates alone until autumn 2020 to help ensure sustained inflation in the U.S. ‘I can see the funds rate being flat and unchanged into the fall of 2020. For me, that’s to help support the inflation outlook and make sure it’s sustainable,’ Evans told CNBC’s Steve Liesman.”

April 15 – Reuters (Trevor Hunnicutt): “The U.S. Federal Reserve should embrace inflation above its target half the time and consider cutting rates if prices do not rise as fast as expected, a top policymaker at the central bank said… ‘While policy has been successful in achieving our maximum employment mandate, it has been less successful with regard to our inflation objective,’ Federal Reserve Bank of Chicago President Charles Evans said… ‘To fix this problem, I think the Fed must be willing to embrace inflation modestly above 2% 50% of the time. Indeed, I would communicate comfort with core inflation rates of 2-1/2%, as long as there is no obvious upward momentum and the path back toward 2% can be well managed.”

It’s stunning how dramatically the Fed’s perspective has shifted since the fourth quarter. There’s now a chorus of Fed governors and Federal Reserve Bank Presidents calling for the central bank to accommodate higher inflation.

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

China & Buying Gold – Why?

China & Buying Gold – Why? 

QUESTION: Mr. Armstrong; I believe you said at the WEC in 2017 that central banks will diversify and increase their gold reserves going into the currency crisis coming in 2021. China has continued to increase its gold reserves. You would please update on that development.

Thank you

PK

ANSWER: Central banks are in a very difficult position. The ECB has really put the entire world at risk. Draghi is now realizing that negative interest rates have seriously harmed the European economy and led to a major growing liquidity crisis in European banking. The euro is regarded as a time bomb for it is neither a national currency nor a stable unit of account. The failure to have consolidated the debts from the outset has simply left the euro vulnerable to separatist movements and sheer chaos.

This is what has been behind the strength in the dollar. Central banks outside Europe have been caught in this dollar vortex. They have been selling dollars and buying gold in an effort to stem the advance of the dollar. China also has a debt problem with many provinces and companies who borrowed in dollars. Here in 2019, there is $1.2 trillion in Chinese dollar borrowings that must be rolled over. There is a rising concern that this year there could be a major threat of a dollar funding crunch. The total debt issued in US dollars outside the USA approached $12 trillion at the end of 2018. That is about 50% of the US national debt. The forex risk is huge, no less the interest rate risk on top of that. The more crises we see in Europe, the greater the pressure on the dollar to rise regardless of the Fed trying to stop capital inflows by delaying raising rates.

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

No Fix for Recession: Without a Financial Crisis, There’s No Central Bank Policy Fix

No Fix for Recession: Without a Financial Crisis, There’s No Central Bank Policy Fix

There are no extreme “fixes” to secular declines in sales, profits, employment, tax revenues and asset prices. 

The saying “never let a crisis go to waste” embodies several truths worth pondering as the stock market nears new highs. One truth is that extreme policies that would raise objections in typical times can be swept into law in the “we have to do something” panic of a crisis.

Thus wily insiders await (or trigger) a crisis which creates an opportunity for them to rush their self-serving “fix” into law before anyone grasps the long-term consequences.

A second truth is that crises and solutions are generally symmetric: a moderate era enables moderate solutions, crisis eras demand extreme solutions. Nobody calls for interest rates to fall to zero in eras of moderate economic growth, for example; such extreme policies may well derail the moderate growth by incentivizing risk-taking and excessive leverage.

Speculative credit bubbles inevitably deflate, and this is universally viewed as a crisis, even though the bubble was inflated by easy money, fraud, embezzlement and socializing risk and thus was entirely predictable.

The Federal Reserve and other central banks are ready for bubble-related financial crises: they have the extreme tools of zero-interest rate policy (ZIRP), negative-interest rate policy (NIRP), unlimited credit lines, unlimited liquidity, the purchase of trillions of dollars of assets, etc.

But what if the current speculative credit bubbles in junk bonds, stocks and other assets don’t crash into crisis? What if they deflate slowly, losing value steadily but with the occasional blip up to signal “the Fed has our back” and all is well?

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

The World-Wide Suppression of Interest Rates Has Been Something Very Near to a Crime

The World-Wide Suppression of Interest Rates Has Been Something Very Near to a Crime

James Grant, editor of the renowned investment newsletter «Grant’s Interest Rate Observer», warns about the growing herd of corporate «zombies» and other fatal market distortions caused by modern monetary policy.

Once again, the expedition to go back to normal has been postponed. After the big market scare at the end of 2018, central banks have abolished their plans to tighten interest rates further. Wall Street loves it. The first quarter has been the best one for risk assets in a decade, and after Lyft’s successful going public, a record year for IPOs seems to be in sight. Jim Grant observes the madding crowd from a sober distance. «Interest rates are the traffic signals of a market economy. Turn them all green, and errors and pileups abound», says the sharp thinking editor of the iconic Wall Street newsletter «Grant’s Interest Rate Observer. He states that a decade after the financial crisis, many companies are so heavily addicted to easy monetary policies that they wouldn’t be able to survive on their own. Consequentially, the proficient value seeker has a hard time to find attractive investments in today’s markets. Where he spots rare opportunities, he tells «The Market» in this extended interview.


Mr. Grant, once again, the Federal Reserve is giving investors the green light. US equities are off to their best start since 1998. What’s your take on the current state of the global financial markets?
Stocks are up, bond yields are down and economists are speaking of full employment: Everything seems perfect and improving. But I remain a non-believer in these modern monetary methods. If it were this easy, mankind would have solved the economic problems a long time ago.

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

Counterfeiting Money Is a Crime — Whether Done by the Fed or A Private Individual

Counterfeiting Money Is a Crime — Whether Done by the Fed or A Private Individual

A few years ago, shortly after the 2008 subprime lending disaster, the Fed sent a public relations team around the country to conduct supposedly “educational sessions” about how the Fed works and the wonderful things it does. The public was invited, and there was a question and answer session at the end of the presentation. One such session was held in Des Moines, Iowa. At the time I was teaching a course in Austrian economics at the University of Iowa, so I lusted at the prospect of hearing complete nonsense and having a shot at asking a question. I was not disappointed.

The educational part of the session lasted about an hour, and it became clear to me that the panel of four knew almost nothing about monetary theory. They may even have been hired especially for this grand tour, because all were relatively young, well scrubbed, and very personable–let’s face it, not your typical Fed monetary policy wonks or bank examiners! The panelists discussed only one of the Fed’s two remits–its remit to promote the economic advancement of the nation. Its other remit is to safeguard the monetary system. However, the panelists did touched upon the Fed’s control of interest rates and ensuring that money continued to flow to housing and other high profile areas of the economy.

Finally, at the end of the presentation, those with questions were asked to form a queue and advance one at a time to a microphone. I was last in a line of about a dozen. Here’s my recollection of what followed:

Me: You say that you (the Fed) have the power to increase the money supply. Is that right?

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

Combustion

Combustion

This is all going to end badly, even some ardent bulls will freely admit this, the question is the how, when and the where. Frankly it’s a tragedy that’s unfolding and discerning eyes can see it. Since the December lows markets have taken the scripted route higher salivating at the prospect of dovish central bankers once again levitating asset prices higher. A Pavlovian response learned over the past 10 years. Record buybacks keep flushing through markets and cheap money days are here again as yields have dropped markedly since their peak last fall.

But investors may sooner or later learn the hard way that this sudden capitulation by central bankers is not a positive sign, but rather a sign of desperation.

Fact is central banks are hopelessly trapped:

10 years after the financial crisis is there any conceivable scenario under which central banks will ever normalize balance sheets to pre-crisis levels?
Anyone?

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Implications:
1. The Fed stopping here is an admission of failure
2. Full normalization would crash global equities
3. Central banks are trapped & are forced to remain accommodative
4. Central bank policy is still in crisis mode
5. It’s all a propped up shell game

The capitulation is as complete as it is global and 10 years after the financial crisis there is not a single central bank that has an exit plan. As today’s Fed minutes again highlighted: No rate hikes in 2019 while the tech sector is making a new all time human history high this week. What an absurdity. A slowing economy ignored by markets as cheap money once again dominates everything.

So great is the fear of falling markets and a slowing economy that the grand central bank experiment has ended in utter failure. But at least the Fed tried for a little bit before capitulating. The enormity of the central bank failure is perhaps best encapsulated by the state of the ECB under Mario Draghi:

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

Can Expansionary Fiscal and Monetary Policies Counter Recessions?

CAN EXPANSIONARY FISCAL AND MONETARY POLICIES COUNTER RECESSIONS?

When signs of economic weakness emerge, most economics experts are quick to embrace the ideas of John Maynard Keynes.

For most economists the Keynesian remedy is always viewed with positive benefits- if in doubt just push more money and boost government spending to resolve any possible economic crisis.

In this way of thinking, economic activity is presented in terms of the circular flow of money. Spending by one individual becomes a part of the earnings of another individual, and spending by another individual becomes a part of the first individual’s earnings.

So if for some reason people have become less confident about the future and have decided to reduce their spending this is going to weaken the circular flow of money. Once an individual spends less, this worsens the situation of some other individual, who in turn also cuts their spending.

Following this logic, in order to prevent a recession from getting out of hand, the government and the central bank should step in and lift government outlays and monetary pumping, thereby filling the shortfall in the private sector spending.

Once the circular monetary flow is re-established, things should go back to normal and sound economic growth is re-established, so it is held.

Can government really grow an economy?

The whole idea that the government can grow an economy originates from the Keynesian multiplier. On this way of thinking an increase in government outlays gives rise to the economy’s output by a multiple of the initial government increase.

An example will illustrate how initial spending by the government raises the overall output by a multiple of this spending. Let us assume that out of an additional dollar received individuals spend $0.9 and save $0.1. Also, let us assume that consumers have increased their expenditure by $100million. Individuals now have more money to spend because of an increase in government outlays.

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

Interest Rates, Funny Money, and Economic Malaise

Interest Rates, Funny Money, and Economic Malaise

Since the 2007–8 financial crisis, more and more economists have entertained the idea that there might be some connection between artificially low interest rates and business cycles. By “artificially low” I mean interest rates that are pushed below their natural levels by expansionary monetary policy. The relationship between monetary policy and interest rates is tricky; beyond the immediate short run, it is hard to say whether liquidity effects (which tend to push down rates) or rising income effects (which tend to push up rates) dominate. But in the short run, to the extent that expansionary monetary policy is a surprise, there should be a fall in market interest rates that is not justified by economic fundamentals — namely, real saved resources available for investment projects.

The way the business cycle unfolds looks like this: The monetary authority injects new money into capital markets in an attempt to give the economy a shot in the arm. Investors see artificially low rates and increase their investments in projects that will pay out in the future. But households are not saving any more real resources. In fact, households will probably respond to low interest rates in the same way: the costs of reallocating purchasing power from future you to present you have fallen, so you are more likely to borrow to equalize your intertemporal marginal utility of consumption. With both consumers and investors using up more real resources in ways that are fundamentally at odds with each other’s plans, something’s got to give. The comovement of consumption and investment beyond the economy’s production possibility frontier is ultimately unsustainable. When everyone wakes up to the fact that the low interest rates were the result of funny money, rather than real economic forces, the bubble bursts.

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

David Rosenberg: Fed Will Embrace ‘Helicopter Money’ In The Next Few Years

David Rosenberg: Fed Will Embrace ‘Helicopter Money’ In The Next Few Years

Jerome Powell has denounced MMT has “just wrong”, but many Wall Street luminaries have surprisingly communicated an openness to the proposal. Most recently Ray Dalio proposed a marriage of monetary and fiscal policy that sounded suspiciously similar to MMT. Bill Gross, once a vocal critic of the Federal Reserve’s stimulus program, told Bloomberg shortly after he retired from managing outside money that higher taxes and the advent of MMT might be ‘necessary evils’  to combat the widening economic gap between the rich and the poor.

MMT has been perhaps the most widely discussed topic in the realm of economics since Alexandria Ocasio-Cortez proposed it as a possible mechanism for financing her ‘revolutionary’ Green New Deal. But this past week, President Trump’s exhortation that the Federal Reserve usher in QE4 by cutting interest rates stoked a frenzy of speculation that the world’s most powerful central bank might be closer to outright debt monetization – aka ‘helicopter money’ – than mainstream economists had realized. Of course, debt monetization is a central plank of the MMT program.

But just days before Trump made his now-infamous QE4 comment, Gluskin Sheff chief economist David Rosenberg offered a prediction during an interview with MacroVoice’s Erik Townsend that, in retrospect, seems surprisingly prescient. 

David Rosenberg

David Rosenberg

During a discussion about how the Fed ‘pause’ impacted Sheff’s monetary policy outlook, Rosenberg, a frequent guest on CNBC, declared that, instead of giving QE another try, the central bank would opt for something even more radical by embracing MMT. And not without good reason. Just because the Fed is ostensibly insulated from political considerations, doesn’t mean it’s not obligated to protect its credibility.

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

Utopian Vision

Utopian Vision

There is nothing that a human mind can’t conceive. It can shoot for the stars or dive in the ocean which twinkles in the shadows of stars and ascend back with sparkling mind bearing uncanny ambition only to float contended.  

Today, we live in fear of losing wealth, we worry what economic consequences would do to our cash, we look through a microscope and scrutinize every word, every policy, every regulation or find something to put above ‘every’ and list out the glaring negatives with a slight trace of approval. If only one could notice the lens of the microscope, would then one could tell reel and real apart. 

Such is the case of negative interest rates. It is dealt differently by different flock of loaded individuals, generally in ways which would not only prevent losses but essentially gain cash. This flock stands on one side of the transaction contemplating means to win regardless of the loss that still deliberating other doomed flock endures. Well, this is how the world works. It is a Bernoulli trial. But there exists a splash of humble wit folks floating beneath the starry sky delighted by the victory of each one and beaten down none. 

Theory? Without thinking too much, negative rates indicate that the economy is unable to generate sufficient income to service its debt. Almost always, all roads leads us back to debt sustainability levels. In order for an economic system to reduce debt, it requires growth or inflation or currency devaluation. For an economic system to exercise one of the two (growth not included), capital transfer is to be facilitated. This capital movement in negative rates environment is from the savers to the borrowers. Your invested value, the money you gave to borrowers would have a value lower than the face value. Barbaric! Savers should be the winners not the borrowers!

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

The Japanification of the World

The Japanification of the World

Zombification / Japanification is not success; it is only the last desperate defense of a failing, brittle status quo by doing more of what’s failed.

A recent theme in the financial media is the Japanification of Europe.Japanification refers to a set of economic and financial conditions that have come to characterize Japan’s economy over the past 28 years: persistent stagnation and deflation, a low-growth and low-inflation economy, very loose monetary policy, a central bank that is actively monetizing debt, i.e. creating currency out of thin air to buy government debt and a government which funds “bridges to nowhere” and other stimulus spending to keep the economy from crashing into outright contraction.

The parallels with Europe are obvious, but they don’t stop there: the entire world is veering into a zombified financial, economic, social and political status quo that is the core of Japanification.

While most commentators focus on the economic characteristics of Japanification, social and political stagnation are equally consequential. If we only measure economic/financial stagnation, it appears as if Japan and Europe are holding their own, i.e.maintaining the status quo via near-zero growth and near-zero interest rates.

But if we measure social and political decay, the erosion is undeniable. Here’s one example. Few Americans have access to or watch Japanese TV, so they are unaware of the emergence of the homeless as a permanent feature of urban Japan. The central state propaganda media is focused on encouraging tourism, a rare bright spot in Japan’s moribund economy, and so you won’t find much media coverage of homelessness or other systemic signs of social breakdown.

If you watch Japanese detective / police procedural dramas, however, you’ll find constant references to homeless people and homeless encampments: detectives seek witnesses to a crime in the nearby homeless encampment; a homeless man living in an abandoned warehouse is found murdered, etc.

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

One Reason You Might Have Some Time To Prepare For The Next Economic Recession

One Reason You Might Have Some Time To Prepare For The Next Economic Recession

There’s is one big reason why the U.S. will go into another recession eventually, but it’s the same reason you will have some time to prepare for it as well. Making money more expensive to borrow will lead to a recession, but the Federal Reserve isn’t raising rates.

That’s great news, but far too many Americans have already overspent and are in massive amounts of debts. Student loan debt is dragging down the economy and will eventually come to a head, regardless of the interest rates arbitrarily chosen by the central bankers at the Fed.

But according to Market Watch, the refusal to make money more expensive to borrow also buys the United States time before the next recession. Ed Yardeni opined that the inverted yield curve drove the Fed’s decision to keep interest rates where they are at as opposed to raising them.

In my recent book, Predicting the Markets, I wrote: “The Yield Curve Model is based on investors’ expectations of how the Fed will respond to inflation. It is more practical for predicting interest rates than is the Inflation Premium Model. It makes sense that the federal funds rate depends mostly on the Fed’s inflation outlook, and that all the other yields to the right of this rate on the yield curve are determined by investors’ expectations for the Fed policy cycle.” –Ed Yardeni, Market Watch

Yardeni suggested that after studying the relationship between the yield curve and the monetary, credit, and business cycles, the conclusion is that credit crunches, not inverted yield curve, and not aging economic expansions that cause recessions. The inverted yield curve also has a great track record when it comes to predicting recessions. 

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

Zombified Economy: What Will the Next Recession Look Like?

Zombified Economy: What Will the Next Recession Look Like?

The short answer is nothing like the last.

If you search for “next recession” numerous ideas pop up. Many believe there will not be a recession soon.

Condition Comparison

Conditions are radically different than in 2007 and 2000.

The Fed re-blew a housing price bubble but the number of jobs tied to construction, sales, CDOs, agents and even the impact on banks is a shell of what happened then.

Technology is bubbly, but not like 2000. This is how I see things.

  1. We will not have bank failures in the US.
  2. There will be major bank failures or bail-ins in Europe.
  3. Housing will not have a major role but will strengthen the recession.
  4. Millennials simply cannot afford houses so housing will not lead a Fed attempt at a recovery even if interest rates plunge.
  5. Low interest rates will keep zombie companies alive for a while longer .
  6. Proliferation of retail stores, Walmart, Target, everything requires minimum staffing levels no matter how poor sales become.
  7. Unemployment will not rise much like last time. Instead, expect to see hours cut.Also expect for many of those currently working two jobs to lose one of them.
  8. Retail sales will plunge with the reduction in work.
  9. The impact of the above is very weak profits but not massive labor disruption
  10. Stocks will get clobbered as earnings take a huge hit.
  11. Junk bonds also get clobbered on fears of rolling over debt.
  12. This malaise can potentially last for years.

Zombified Economy

Japan is in a state of zombification and Europe is on the verge.

The US may not and likely will not go through Japanese-like extremes just yet. However, the demography setup is poor, the student debt problem is a huge overhang, boomers unprepared for retirement is a huge overhang, and pensions are a huge overhang.

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

Being and Time (And Central Banks)

BEING AND TIME (AND CENTRAL BANKS)

People value present goods more highly than future goods. For instance, an apple available today is considered more valuable than the same apple available in, say, one month. This is expressive of time preference — which is an undeniable fact, a category of human action.

The sentence “Humans act” is a logically irrefutable truth. It cannot be denied without causing a logical contradiction. By saying “Humans can not act”, you act and thus contradict your very statement.

From the true insight that humans act we can deduce that human action takes place in time. There is no timeless human action. Were it otherwise, people’s goals would be instantaneously reached, and action would be impossible — but we cannot think that we cannot act.

The market interest rate is expressive of time preference, and as such, it is also a category of human action. If determined in an unhampered market, the (natural) market interest rate denotes the discount that future goods are subject to relative to present goods.

If one US-dollar available in a year is trading at, say, 0.95 US-dollar, it means that the market interest rate is 5.0% (the calculation is: [0.95 / 1 – 1]*100).

Should people start valuing present goods more highly than future goods — which is expressive of a rise in time preference —, the discount on future goods vis-à-vis present goods and thus the market interest rate go up.

If peoples’ time preference declines, the discount on future goods vis-à-vis present goods drops, and so does the market interest rate — meaning that people wish to save more and consume less out of their current income.

The interest rate and central banking

In an unhampered market, the market interest rate reflects peoples’ time preference. Nowadays, however, the market interest rate is no longer determined in an unhampered market. It is dictated by the central bank.

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

The Capitulation of Jerome Powell and the Fed

The Capitulation of Jerome Powell and the Fed

This past week, on March 20, 2019, Federal Reserve chairman Jerome Powell announced the US central bank would not raise interest rates in 2019. The Fed’s benchmark rate, called the Fed Funds rate, is thus frozen at 2.375% for the foreseeable future, i.e. leaving the central bank virtually no room to lower rates in the event of the next recession, which is now just around the corner.

The Fed’s formal decision to freeze rates follows Powell’s prior earlier January 2019 announcement that the Fed was suspending its 2018 plan to raise rates three to four more times in 2019. That came in the wake of intense Trump and business pressure in December to get Powell and the Fed to stop raising rates. The administration had begun to panic by mid-December as financial markets appeared in freefall since October. Treasury Secretary, Steve Mnuchin, hurriedly called a dozen, still unknown influential big capitalists and bankers to his office in Washington the week before the Christmas holiday. With stock markets plunging 30% in just six weeks, junk bond markets freezing up, oil futures prices plummeting 40%, etc., it was beginning to look like 2008 all over again. Public mouthpieces for the business community in the media and business press were calling for Trump to fire Fed chair Powell and Trump on December 24 issued his strongest threat and warning to Powell to stop raising rates to stop financial markets imploding further.

In early January, in response to the growing crescendo of criticism, Powell announced the central bank would adopt a ‘wait and see’ attitude whether or not to raise rates further. The Fed’s prior announced plan, in effect during 2017-18, to raise rates 3 to 4 more times in 2019 was thus swept from the table. So much for perennial academic economist gibberish about central banks being independent! Or the Fed’s long held claim that it doesn’t change policy in response to developments in financial markets!

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

Olduvai IV: Courage
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