The crux of the matter

“Every time the economy stops slowing or contracting, people seem to become irrationally hopeful that means something truly radical and positive even though all experience since 2007 has demonstrated that there actually is no rational basis for that hope. The road to Japanification is surely paved with so much disbelief. It’s completely understandable in a sense since it has been almost eight years of all the “experts” constantly claiming that things were definitely going to get better.”

Jeffrey P. Snider

So much for the Hopium apex of H1 2017. Hope has never been a viable investment strategy, and if you base ten investment decisions on hope, on average you are going to turn out as a loser. But if you do it just once, maybe you can pull it off. Not because hope helped your chances of success (it sure didn’t), but because what you were hoping for just happened.

So right now, this is a binary risk. Like tossing a coin for heads or tails. After ten years extending and pretending (in fact a couple more if you take into account some pre-GFC central bank practices), we are about to find out which side of the intellectual divide of our economics profession got it right. Can we reignite a credit cycle without cleaning up the previous excess, or is it correct to state that Japanification is our course, and no sustainable recovery can take place in this context?

Everything I read or hear points to a state of mind where investors have decided that the time has come for an economic take off after the crisis. This must be it, everybody thinks. Yeah, lots of risks looming, but experience has taught them that BTFD is the thing to do. Central Banks will prevail. And it has unsurprisingly become a self-fulfilling, self-reinforcing, prophecy. Investors keep on buying the tiniest dip in spite of nuclear war threats, or even a couple of FOMC members coming out “en masse” to suggest that the time has come for the Fed to shrink its balance sheet. Nothing can stop this train.

Monetary Policy started this last tranche of the bubble (the “everything bubble”) when credit growth flopped in 2007. Ironically, this last 2017 bull market blow off comes at a time when monetary policy is being accepted as nearly exhausted everywhere. Isolated and pretentious as they are, even CB politburo members have begun to realize the long-term dangers of shoring up monetary and credit aggregates. Not only The Fed openly suggests it is going to reduce its balance sheet, but the Dutch parliament gives Draghi a warm welcome with a beautiful tulip -to remind him of one of the best bubbles of all times. Very subtle. I’ve got more examples, but I feel these two suffice. Confidence in monetary policy has declined markedly, at least in academia.

Nevertheless, we Austrian economists are all discredited by now. Some very respected names are in deep trouble for failing to join the mob in their indiscriminate buying. Case in point, this is personally a year to forget. At some point, CBs were going to hit me too. One after the other, we are all failing to keep up with ETFs and long only’s. Why should investors trust us? The best thing you can underline about our thesis is that it sounds good, even makes sense, but is not surviving confrontation with reality. Sooner or later, we are all ending up behind the curve.

Long only active managers are doing a lot better, but not well enough. QE has been a killer of alpha generation (chart via Zerohedge). The clear winner is the ETF. To paraphrase Buffet, I think they are, if not weapons of, at least vehicles for, mass destruction. Less powerful than the 500 trillion in derivatives now trading in the global markets, but certainly more far reaching. At least derivatives are traded by professionals. People buying ETFs don’t have a clue of the risks they are undertaking. They are destroying the markets, and they will bankrupt themselves.

“A single percentage point increase in ETF ownership has demonstrable effects on an individual stock, the researchers found. Over the ensuing year, correlation to the share’s industry group and the broader market ticks up 9 percent, while the relationship between its price and future earnings falls 14 percent. Meanwhile, bid-ask spreads rise 1.6 percent and absolute returns grow 2 percent.”

Doron Israeli, Charles Lee and Suhas Sridharan, researchers at Stanford University, Emory University and the Interdisciplinary Center of Herzliya in Israel.

On a positive note, I find something to like about this state of affairs. My strong perception is that this long credit cycle, stretched and supported by monetary base growth almost everywhere, is about to end. If we do take off into a new cycle, following the reflation narrative, we Austrian economists must accept defeat and assume we were wrong. The world must look for help in a different direction. If we don’t take off, the recession that ensues will wipe out more than half of the false wealth effect embedded in current market pricing. Maybe a lot more than a half! A full repricing of asset values will be well on its way by the time hopium is gone for good. One way or another we are near the end. Thank God.

If it sounds philosophical and detached from market reality, it is meant to be. After lots of hours reading, working on the macro, visualizing charts, and checking inconsistencies in the system, you realize this is a major turn point in history. Ray Dalio, pressed for a sentence in which to combine what he thinks is going on, says that the short term looks good, but the long term does not.

To put it another way, it is not a matter of short versus long term but stability breeding instability. The surface looks as stable as ever, but underneath we have a volcanic substrate. Regardless of apparently calm waters (US VIX below 11, European VIX below 14), the global economy is not in equilibrium -and asset pricing is a fantasy. Examples are everywhere. European high-yield returns less than 3%! That is not investing: it is gambling.

I always end up talking about valuations. They never seem to matter anymore. Europe, the last fad, is no longer cheap relative to the US, and the US is outrageously expensive. Japan is the only relatively cheap market left, and not without some serious risks. I like the valuation criteria in the following charts because you can’t manipulate those ratios playing games with leverage to increase ROE, or using non-GAAP operating earnings in your P&L statement.

Markets are priced for more than perfection, not just today but fifty years ahead. If we fail to reflate this last time, it is going to be bad. Why? Because we have been “selling” this reflationary outcome to investors, for nearly a decade now. After more than a few false dawns, the general public, fed up with the situation, has taken one of two routes. The “have-nots” have embraced populism. The “haves” have signed up for Keynesianism and Central Banking. Both sides are in fact engaging in a planetary exercise of wishful groupthink. For some, it is populism that will save the day. For others, it is Central Bank priests that will help them preserve their status in society. Both are wrong.

Entitlement driven stability and protectionism, are not the solution. And a credit and money growth driven perpetuation of the model is not going to work. We will soon find out. In the meantime, we naysayers are going to have a hard time.

“The real tragedy of our life is not that someone else is getting richer or healthier than us, but that he is getting there faster than us. (…) 

This habit of unintelligently buying things because someone else is making fast money on them comes to the fore when the markets have been rising for some time. (…)

But if you can’t ignore and avoid the temptation that comes from watching other people get rich due to a sharp rise in stock prices, it’s best to know sooner than later that that’s often a path to destruction.”

Vishal Khandelwal (hat tip: Lance Roberts)

It is not just my point of view. Professionals are increasingly skeptical about the sustainability of market valuations. This last tranche of the bull market is being driven by individual investors. An ominous event. They are always the last to join the party.

In my last post, I elaborated on the three central risks for this cycle: a strong dollar, inflation, or a recession. The first of them has been well taken care of by CBs -helped by the time lag between the US economic cycle and the rest. The US is cooling well before Europe and Japan. A sudden, harsh turnaround is unlikely. I hedged 85% of my EURUSD risks a couple of weeks ago.

Inflation seems to be taking care of itself. Aggregate demand is too weak to support cost increases in pricing. Nevertheless, cost pressures subsist, and somebody has to pay for that. If inflation does not go up (it looks as if it won’t), then it will be margins or disposable income that suffer. Both ways, not good for the economy. But not a game changer.

A global recession is looking more and more likely. Credit impulse is the life of this global economy, and China has some frightening figures showing up in that area. The importance of Chinese credit growth cannot be overstated. China is crucial for the cycle and, on its own, as a tail risk.

It is too early to say. Central banks might have the upper hand once again. The PBOC will do anything if needed to stabilize the country before the Communist Party meeting this fall. They are powerful. But the credit cycle is in its last stages in the US and China, and Draghi is running out of options to prolong QE much more. We live interesting times.

On “hopium” and the delusions of crowds.

 

“Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is the opium of the people.”

Karl Marx

In a world with scant, if any, religious feelings left, hope is the establishment’s spurious replacement. In the well known Marxist quote above, you just have to change the term “religion” and read “hope” instead. The wise but controversial adage is still valid today. The establishment and CB politburos have been using Hope & Opium to kick the ball forward -for a seemingly endless decade. So far so good, but it pays to remember that hope never was, and will never be, a viable investment strategy.

It’s bad for morale to discredit hope, and I am aware of the high probability of being ignored as the automatic defense mechanisms for “cognitive dissonance” immediately pop up. If you need the yield or the return (ROI), financially you just have to be  “all in”. Most investors are additionally even selling some volatility to enhance their returns, regardless of being aware of assuming undue financial risks. It is all understandable. If I need the return, TINA is my criteria of choice (load up with equities, sell volatility). And if I were all in, I would hate to read my posts. Nevertheless, take a close look at the next chart. It shows the exuberant levels of risk in the system and gives me the shivers.

It could all well be the result of a new era. And, according to Heli-Ben debt doesn’t matter (LOL). Apparently, valuation doesn’t either (low rates are thought to provide a waiver that protects them from valuation excesses). But, at least, let’s look at financial valuations in relative terms (compared to physical assets) in the next chart. Sobering, ain’t it?

Finally, I can’t resist talking valuation in absolute terms, if only for a short overview. The Schiller CAPE confirms all our fears (see for yourselves online). So do charts on market cap related to gross value added, or price to revenues ratios -and all others that do not use “estimated future adjusted earnings” and current rates. That applies to most markets, Japan being the exception.

But complacency is soothing, and its appeal is difficult to resist when investors feel that they hold a CB put covering their back. No wonder everybody and their dog is short the VIX, and markets are rallying on little more than hopium. I have no words. I can do no better than Paul Brodsky at summarizing what’s going on.

“Rising markets, an unwillingness to acknowledge fat tails (unlikely knowns), and the inability to model Black Swans (unknown unknowns) have concentrated popular wealth into a narrowly distributed range of highly vulnerable assets and investment strategies. … 

We cannot help but conclude that asset prices are generally rising due mostly to inertia, in spite of unreason, and that the most likely outcome will be something unexpected and disappointing. …

 A socialized market framework with implicitly guaranteed perpetual positive returns for all must fail. … Helping to close unsustainable distortions is the only way capitalism can survive. Capitalism without failure is like Catholicism without hell.” Continue reading

It’s not “the Donald”. It’s “the dollar”, stupid.

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies.

On the one hand, the monetary authorities cannot simply focus on domestic goals without carrying out their international responsibilities. On the other hand, they cannot pursue different domestic and international objectives at the same time. (…)

The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.”

 Governor Zhou, People’s Bank of China, 23 March 2009 (emphasis mine)

Most pundits are unaware of the relevance of the USD at this point in time. They’d rather skip the point. I listen to frequent complaints on the “unpredictability” of currency prices. Maybe, just being naughty here, the underlying reason is that trading the majors, ie USD/JPY or EUR/USD, is tantamount to singular trading capabilities for most. I honestly find currencies more predictable than equities, but a host of market players prefer to engage in stock trading with a long only bias. We have to bear in mind the extraordinary behavioral biases that have been engendered by decades of easy money -and it’s certainly addictive to go long with a Greenspan kinda put to cover your back.

Unfortunately, notwithstanding the difficulty of getting the dollar right, at this stage, it is a must. It is “the dollar” (and not “the Donald”) that will be the main driver of global financial market developments for the next couple of months -and even well after we transition into a new global economic regime.

In order to understand “the dollar”, we must understand the history of the International Monetary system (IMS), all the way from the Bretton Woods accord, where the USD was granted prime reserve currency status, to the Nixon letdown, and, finally, the Global Financial Crisis. And no, I am not forgetting the 1985 Plaza accord in between but it is hardly relevant from a structural point of view.

Please bear with me for some background. The role of the dollar as the primary reserve currency begins at the BW summit, and it is essential to understand why the newly bred system was flawed from the very moment of its inception. Continue reading

Lost in translation.

The more things change, the more they stay the same.

Gary Lineker synthesized the essentials of soccer in a memorable, if somewhat simplistic quote. “Football is a simple game. Twenty-two men chase a ball for ninety minutes, and at the end, the Germans always win.”

When it comes to finance, the same postulate applies. Politicians, and Politburo members (read central bankers), or us fund managers and analysts of all kinds, come and go, but “Government Sachs” is the permanent result. As the French (Karr) would put it, “plus ça change plus c’est la meme chose”.

Trump is a teenager minded social disruptor, not an economic game changer. Trumponomics, or reflationism, are nothing new, and are not going to be all that different. Expectations with Obama were even higher, and the economic result at the time was … more Government Sachs (with the Obamacare disaster as a poisoned heritage)! Trumpist honeymooners please come back down to earth. Deflation or reflation, more QE, yield curve control, infrastructure spending, or some helicopter money, hardly matter -in the neglected long run.

No president can change deep secular trends. Like global warming, debt overhang, growth to debt increased dependency, factual bankruptcy of not few sovereigns, ageing society, technology based job destruction, decreased educational level of the workforce, or unfeasible promised entitlements. On these issues, Government Sachs people argue that the glass is half full. I won’t argue about it -it is not a worthwhile contribution to engage in estimating the degree of fullness or emptiness.

Half full or half empty, these issues are serious stuff. Changing the unnerving, deep structural trends, takes commitment, hard work, a couple of decades, and it sure implies turning things upside down. This US president, and his Government Sachs team, are certainly not interested in turning this “winner takes it all” economic model upside down. They want to remain on top. They are a club of smart, self-serving billionaires!

So, what’s all the market fuss about?

I talked about all those 2016 liquidity enhanced financial price swings in my last post, and I stated that the narrative follows the facts. I still think so. Let me add something else: behavioural economics runs the show today. The success of the ongoing (quasi aeternal) Central Bank put, and constant risk suppression by hyperactive POMO desks, has finally modified the behaviour of economic agents. They feel that risk has effectively been outsourced to Dragui, Yellen, Kuroda and Co. Consequentially, and for as long as we are in a context of negligible yields for IG bonds and Sovereigns, speculation with term premiums and equity will remain rampant. There is no alternative parking for the smart money, so the show must go on. We will bet the ranch on every twist and turn in whatever narrative “du jour“.

Sadly, it follows that liquidity pumped swings, fabricated credit booms (like the PBOC turbocharged credit boom in 2016), and outright POMO manipulation, have all but taken me to being “lost in translation”. So far, I still know where I want to go, but I wonder where and when the next surprising/unexpected move is going to flare up. Short term handling of the fund’s NAV has become exhausting -you never know what’s going to hit you next. Sometimes you are unable to find out what hit you last!

Market price swings are getting worse, and even more unpredictable. And it’s not a question of just being humble and looking up what somebody else has to say -in order to find the lost thread in your narrative. I do that daily, and, unfortunate as it is, I can see that I am not alone in my musings and contradictions. The latest “pissing” contest between Gundlach, Gross and Minerd, on the TA limit needed to declare the end of the bull market in Treasuries, is a case in point. When it Is all about how to use the ruler to define your trades, it is an ominous sign for us all. With all respect to classic TA (I use it as a tactical discipline), rulers are becoming much too prominent. I crave for substance. Continue reading

The Keynesians, the Pavlovians, and other tribes.

Staunch Austrian Economists argue that a known quote, attributed to Milton Friedman in 1965, was taken out of context. For most, he signed in for Keynesianism when he coined the phrase “We are all Keynesians now”. Well, maybe he did. But such enthusiasm does not jibe with the fact that, three years later, he felt the need to fine tune his views on the issue. He then stated that what he really meant was that “We all use the Keynesian language and apparatus; (but) … none of us any longer accepts the initial Keynesian conclusions.”

That goes a long way to prove that Keynesianism’s obsolescence has roots in the very distant past!  Fifty years ago, a key economist like Milton Friedman felt the urge to distance himself from the “Keynesian initial conclusions”. Not that he was a stand-alone dissenter. For that matter, Von Hayek had used much stronger words to underline the major economic shortcomings of Keynesianism. “Bon-Vivantism” or “Shortermism” might have been a more accurate depiction of the discipline’s content.

Unsurprisingly, it was only the initial, tweetable quote, that remained in the minds of the economists of the time. Fast forward to 1971, and Richard Nixon wasn’t in the mood for subtleties at the time. Reportedly talking off camera, he told an ABC news reporter “he had also become a Keynesian in economics”. Off camera, or not, he was just talking his book. He had no choice but to officially embrace Keynesianism, and the leeway provided by the indiscriminate use of monetary and fiscal indulgence it supported. Sure enough, six months later he suspended the USD convertibility into gold, effectively defaulting on the gold peg of the, from then on, reserve fiat currency of the global economy.

Regardless of the need to cut the peg short at the time (defaulting in full was the only other option), nobody in the Austrian School of Economics can pardon the fact that he failed to anchor the currency to some other alternative peg (I stand for a peg of the monetary base to “Gross Output”, with a 2% flexibility band on each side). From then on, money printing was to be unlimited in nature, and relied exclusively on the collective decision of the FOMC, and that of the other Politburos.  Keynesianism provided a free entry into the wilderness of limitless public deficits, ever expanding debt levels, boundless CB balance sheets, and manipulated interest rates.

Taking his cue from that doctrine, Ben Bernanke pondered the merits of the modern technology called “printing press”, together with the use of helicopters to spread out the money. That infamous speech earned him the deserved nickname of “Heli-Ben” -and a long tenure as the chair of the Federal Reserve. From then on, the world has been run on the premise of full conversion to the Keynesian religion.

A couple of decades later, and we all ought to be enthusiastic Keynesian converts by now. If Nixon had no other choice at the time, just think about what our real options are, today! Even if we wished to abandon the Keynesian discipline we have long gone way past the point of no return. We are truly stuck.

  • Piles of debt effectively impede moving forward, or even backwards, with fiscal or monetary recipes, for much longer.
  • Outrageous inequality has been enabled by financial repression (punishing savers to enrich investors in the top wealth tier), and fostered by the availability of ever cheaper debt, with the aim of subsidizing faltering aggregate demand. Obviously, technological change hasn’t helped either. Ditto for educational levels, nearly everywhere. Top chart with the daunting wealth pyramid, courtesy of Gordon Long.
  • Supply side neglect has rendered a substantial part of our goods and services produce, obsolete, or environmentally unsustainable.
  • Keynesian public spending has bloated government sectors to more than 50% of GDP in some countries. European Labor Unions think it is not enough!
  • Unlimited liquidity has generated bubbles and inefficient pricing in most markets.
  • Zero financial costs for borrowing has favored a gearing up of most non-financial conglomerates, and a desperate search for yield (read return) by most investors -at all costs.

Yet we keep switching from monetary to fiscal Keynesian policies, suggesting escape velocity came real close with QE, or, of late, suggesting that fiscal reflation would solve the previously described pathology of our global economy business model. An endless continuum of policy mistakes. For how long? Continue reading

Trumpocalypse Now?

Perception might be reality in your retina, and the only relevant factor when working to push the ballot count in your favour. But in real life, sooner or later, it is reality that inevitably prevails. That goes for economics as well, regardless of the easy fixes offered by Trump’s economic program, and others. Our present global economic reality is, at best, worrisome -and with a sad prognosis for the next couple of years (or more). That is a fact that can be perceived in many different ways. Make it opposite ways if you wish. But a fact after all.

In this world of relative beliefs, and prevalent wishful and/or politically correct thinking, finding the truth should still be the underlying quest. Learning the (economic) truth takes time and effort, because it is complex, and difficult to fully grasp and comprehend. It is so tiring, that we have come to accept that there is an infinite amount of truths for the same fact -depending on the color of the lenses of the viewer. Can’t find the underlying truth? Don’t stress out. Relative values have long faded absolute ones. Most think there is different truths depending on the eye of the observer. Nobody wants to find the naked truth anymore. It might be sobering, and it is not worth the effort involved. Or is it?

Bearing this in mind, we have to take the recent Trump event with a grain of salt. Here comes “the Donald”, now Mr. President, stating the obvious to all (by now): that monetary policy with its reiterated tools of financial repression, and abundant printing and lending, was not the way to go (Of late, Theresa May apparently also got that message as well). The issue is, for both, and for the rest of us, that despair and depression (of the economic kind) are not a great alternative to Keynesian wishful thinking. Nobody dares mention them.

Thankfully, “the Donald” and team have thought up something “new” in order to inject some badly needed optimism. A good old bricks and mortar revival conveniently sprinkled with some fresh lending. That ought to help him pull it off!  After all, he knows both sectors well, his life has always been full of bricks and mortar, and debt -lots of it. I wonder why prolific Paul Krugman hadn’t thought it up beforehand (maybe too many vested interests in the Keynesian priesthood monetary cause).

yogi-berra-quote-its-deja-vu-all-over-againWe live interesting times. Hence, it was unsurprising to see a post-election healthy bid for Caterpillar and the Banks, while Alphabet, Amazon and Microsoft were sold with disdain. The Dow up big, and the Nasdaq down correspondingly. Animal spirits are all over the place once again, because brick and mortar spending will save the day. Hip hip Hooray!

Inadvertently, we are getting used to all this nonsense. A couple of months ago, just after Brexit, it was the promise of infinite NIRP and helicopter money taking equity markets to a new, if marginal, top. Now, it is the reflationary program that will allow the present economic cycle to endure. Only our species can be stupid enough to move from fiscal to monetary policy and then back again, reiterating  the same mistakes “ad nauseam”. Whatever they do, they never try to fix the supply side. See (above) what infamous Yogi Berra had to say for situations of the sort. It always pays to smile when facing such a serious issue for mankind, particularly when high doses of Prozac are the only alternative. Continue reading

A Botox high for makeup heavy financial prices.

We live in a finite world. Finite land, finite water and resources, and a finite life. But sometimes our patience is stretched out to infinity -or close to it. We, financial experts, and ordinary fishermen, both share the need for patience. It comes as a tough achievement, because, as Franz Kafka once suggested, long waits (he mentioned eternity) can be exasperating, “surtout vers la fin“.

Ever since Alan Greenspan started to use his monetary tool box in order to conduct and conform market behaviour (October 1987), valuation has mattered less and less, and financial markets have been morphing into casinos. Monetary aggregate levels and their growth, interest rate suppression (financial repression, and the consequential quest for yield), and the Fed’s valuation model (based on the infamous “ERP”), have fully taken front seat. It’s now been nearly a decade since these three drivers for financial pricing became the only game in town.

It is indeed a brave new world. A world where equity prices can float comfortably above the 2.3 times price to sales ratio level (US), and while at it, brush off any inconvenient events. Like Brexit, a two year negative growth spell in profits, or an increase in the debt/EBITDA ratio for NFC’s, that ought to affect the WACC seriously, and valuation correspondingly. Impressive -to say the least.

And it does look like a Fisherian permanently high plateau at first sight. Monetary policy tools have successfully suppressed volatility, driven markets the CB’s way, and helped improve consumer confidence. Yet, stubbornly, I still don’t buy the idea that you can indulge in ordinary “long-only” asset management, in this seemingly placid environment. Financial markets are the shakiest house of cards I can remember in 30+ years of trading.

Fortunately or not, depending on your point of view, all actions come at a cost, and nothing lasts forever. After years of monetary abuse, out in the open for everybody else to see, the true nature of the so called “monetary policy tools” has been revealed. The essence of the much fantasized and overhyped, CB monetary tool box, is, after all, a cosmetic kitfed-tool-box, with lots of lipstick, mascara, eye shadow, or rouge. The functional, basic health of the underlying financial system, or the economy, is unaffected by all those skin creams, lipstick, and even Botox of late.

I find it remarkable that CB’s got away so easily, doing no more than plain cosmetic manipulation, for so long -as mesmerized investors watched in awe what CB’s were apparently able to do. They did well at deceit, and their success has provided them with an invincibility aura that has kept them alive against all odds. In the meantime we feast on supply side neglect. Nobody wants to streamline and update our productive capacities, Shumpeterian creative destruction costs votes. Votes are, literally, all that counts in politics.

Needless to say, I have been gradually running out of patience. Thankfully, not out of other people’s money. Not that past results protect you for long. We all have to remain humble, or else the market will do it for us. No, no problem with humility to report, but I am running real short of patience by now. Still some more left, but not much. I can’t wait to move on to a new phase in the solution of our global economic problems. One in which the use of Botox is forbidden. One in which I can cease to represent the permabear script. I’m fed up with the role. It’s boring!

We might be very close to the end. Witchcraft is “out”, as soon as the general public gets acquainted with the underlying bag of tricks. Sooner or later, somebody finds out there is no magic in what they are doing. Investors are currently dawning on the fact that Central Bankers are not the “magic people” they themselves think they are. Playing their missionary role, in the Common Knowledge game, becomes a lot more complicated from then onward.  Go ask Janet.

What has changed in financial markets over the last couple of months? Two things. First, Investor perception of Central Bank’s capability to keep these Botox treated markets looking pretty enough. Second, the degree of conviction of Keynesian priests in the efficacy of what they are doing.

Nothing else has changed substantially -hey, I think I know what you’re thinking now. What about debt and leverage? Well, sadly, the underlying health of the financial system is largely irrelevant for as long as we have the CB’s back. In the meantime, debt has, of course, kept growing exponentially, and the global economy looks anything but healthy. Everybody knows that! Still, being more of the same, this perception is not really a game changer. We got used to talking debt in trillions, and it hardly bothers us anymore. Continue reading

A subtle, self-restrained, change of heart.

Regarding eternity, it is my conviction that nothing; not even love, hope, or faith, springs eternal. Neither does life. Thankfully, there is an expiration date for every one of us. Emotions, hopes, and beliefs are, more frequently than not, faded at some point. To all appearances, our Central Bank deities are also impaired by this human weakness. The very same year the 1975’s have begun to sing about it, most Central Banker’s, discreetly and dispassionately, have, all of a sudden, had A change of heart . About time! As Unamuno (famous Spanish essayist) once stated, a man has the permanent right to contradict himself. Good to know that, because it might come in handy soon enough!

Following up on that sudden change of heart, please don’t make too much of it. It’s not an abandonment of their firm beliefs in Keynesian utopia, and it is circumscribed to some specific, but highly relevant, matters. Like…. Well, amazingly enough, it is related to the merits and efficacy of “nirping” and “printing” ourselves all the way to financial disaster.

Most Central Bankers had a nightmare this summer, and the Kalecki path to monetary destruction was clearly exposed to them in a dream. It was a MLK kind of dream, vivid and clear -they are now scared to death. Of late, I can see the fear in the whites of their eyes -as they inevitably question their deeply held faith that the Bernanke policy mix would save the world. Bad for them, but, I will concede, it comforts me deeply. Apparently, insanity, unlike stupidity, does have some limits after all.

Not that the dream couldn’t have come earlier. It was crystal clear to anybody who wanted to see what was going on. In fact, it took ages. To prove the assertion, I am reproducing three great charts, courtesy of Tad Rivelle at TCW, John Hussman, and Jeffrey Sneider. They all summarize what the FOMC members have done over the last 25+ years (Greenspan, Bernanke and Yellen tenure).091916-tradingsecrets-01

wmc160919aabook-sept-2016-inefficiency-net-worth-to-spendingTake your time working on them. It is their simplicity that makes them so valuable. They are further explained at TCW’s, Hussman’s, and Alhambra’s web sites. It is pretty obvious that there is no way to leave this party unscathed. To add insult to injury, the amount of global leverage (next chart) puts us, worldwide, in absolute terms, well past the Minsky moment. Stability, as he said, generates instability, as Ponzi debt takes over productive debt. At some point, leverage goes past the amount of income needed to service the debt. Then, the credit boom stalls and asset markets and the economy crash. Negative interest rates postpone this, but at the cost of suppressing productivity increases -because Shumpeterian creative destruction comes to a standstill. Hyman P. Minsky was a visionary. He saw, decades ago, what reality is only confirming right now.leverageglobal-zh

Continue reading

Confusion Reigns Supreme.

It has been an awfully hot summer in Spain. I did well enough (you can always do better) while sail racing intensely with my team, and, sadly, it’s time to engage in something more substantial. Not that I really crave for substance at this “Prozac” time of the year. I love the pleasures inherent to my bourgeois way of life that, save for my adrenaline generating sail racing, and abundant brain storming, blend nicely with “easy economics”. So let me disclose my current emotional bias in favour of Welfare states, Easy money, Easy credit, Liestatistics, Hail Mary passes, NIRPs, QEs, and bubbles of all kinds. They all increase the apparent NAV of our accumulated wealth. Next step is hugging good old Heli-Ben -and I’m real close to that right now.

No, I am not drunk! But I’m not serious anyway. This summer has further eroded my year to date return, as the sovereign spreads -and all others- collapsed to mind numbing figures (considering the underlying fundamentals). I underestimated the quest for yield, and CB resolve, once again. On top of that, and confirming the fact that bad news rarely travel on their own, the Fed managed to contain and reverse, USD appreciation -that didn’t help.  My new updated return YTD is only 3% by now. When you are not happy, it helps to laugh at yourself -and anything that moves as well.

For an insight of the logic of these moves I cherry picked two charts, on the fundamentals of the Italian Sovereign spread.20160713_italy_07d2b89a7-57ae-4550-8ddd-498409cc7bbc

And another two, related to the consistency of the USD weakness of late. Of course, in the new CB economic textbook, an upswing in the Ted spread is a clear precursor of an imminent dollar depreciation (excess dollars around?!!!). Am I being too sarcastic for my own good?8-TED-spreadABOOK-August-2016-TIC-TED Continue reading

Notwithstanding market euphoria, Central Banks finally face their Little Bighorn.

These last few weeks of trading have been tough. It looked like a promising week on Monday the 27th of June -just after the Brexit vote. Positioning in the less crowded Brexit related trade allowed me to make big money (10% return in two market days). And I had enough sense to cash in some of it. Better not to remember what happened to whatever positioning I left working in the global financial markets -on that very same Monday the 27th. The week did not end well. Ditto for the weeks that followed. Nevertheless, I will take solace in the fact that I managed to keep nearly a fourth of those hard earned profits. I am up barely above 5% for the year -but that is after being crushed by a deluge of coordinated CB indiscriminate buying. It is a difficult year indeed.

King 1_0More of the same happened once again. The previous Citibank chart (via Zerohedge) speaks for itself. Central Banks went all in, and we explored new depths in the meaning of the expression “whatever it takes”. CBs managed to turn the tide, in spite of 19 consecutive weeks of withdrawals by equity investors. They own the printing press, and they sure know how to use it by now.

Topping the list of their ruthless actions, they even resorted to rumours to suggest the ECB would buy sovereign bonds in its QE program according to the free float of every issue, and not adjusting to the GDP weights of the different Eurozone countries. They squeezed the price of the Italian 10 year sovereign up 4% in less than two trading days. Can you imagine?

In the US we saw an impeccable turn around, in true POMO style, with a three day awesome S&P rally handily beating the shock and awe generated by the Bullard rally in late 2014 -to name one of the preceding CB induced short squeezes. It gets better still. Some gruesome manipulation of BLS stats (any bets that those figures will be corrected next month?) helped recent liquidity increases, and stop-busting by POMO desks, in their quest to penetrate the previous highs. So much for the old top. Nothing is forever, more so in this crazy, desperation driven, CB controlled, market environment. Please remember I always said that some relevant extra printing could impulse markets above the previous, one year old top. Liquidity, and turbocharged CB buying, are game changers. Everybody (meaning professional market players) is hastily playing catch up as I write.

With all this fresh liquidity, probably directly invested in equities, we could be in for a final blow off top. And it might take some time after this extraordinary run up. CBs generate the need to cover by investors, and then they can sell them back part of what they bought for a profit. It would be a criminal activity if it was done by a corporation or, god forbid, a private investor. But CBs have a special waiver. They can manipulate all they want because they act in a metaphoric public interest (or so they say). I had to cover most of my shorts. Risk management always trumps conviction.

The-Three-MusketeersJanet is being helped worldwide by her colleagues. Japan joined in with a fresh 100 billion USD round of Abenomics monetized spending – unsurprisingly, following Heli-Ben’s visit. The PBOC and Mario Dragui also complied in their own way. State of the art, Mossad level, coordination techniques. And, second to nothing, let’s remember we have seen a magnificent “One for all and all for one” musketeer interaction between them all.  I am not emotionally touched though. We ought to jail them all under the charge of manipulating market prices. Continue reading

Selling England by the Pound

“Can you tell me where my country lies?”
said the unifaun to his true love’s eyes.
“It lies with me!” cried the Queen of Maybe
– for her merchandise, he traded in his prize.

“Paper late!” cried a voice in the crowd.
“Old man dies!” The note he left was signed ‘Old Father Thames’
– it seems he’s drowned;
selling England by the pound.

Citizens of Hope & Glory,
Time goes by – it’s the ‘time of your life’.
Easy now, sit you down.
Chewing through your Wimpey dreams,
they eat without a sound;
digesting England by the pound…

I found the title of one of the early Genesis masterpieces particularly appropriate today. It was a long time ago, but I must have listened to the music at least a hundred times. Peter Gabriel, the unequivocally Brit lead singer and flautist, who was to leave the band months after the promotional tour, suggested the title and wrote the lyrics -as (nearly) always was the case. It is a metaphorically loaded lament on the destruction of the UK’s cultural heritage. At the time, the “enemy” was Americanization -but it could very well have been directed against Germanization or Europeanization nowadays. Colossal singing for the first two minutes, followed by impeccable, but somewhat aged, British flavoured homemade rock.

The “Brexit” referendum victory was hardly a smart voteBut it was a wise vote -even if entirely for the wrong reasons. Populism, Xenophobia, Class war, and tabloid supported nationalism implicit in headlines like “I beLeave in Britain”, are hardly desirable drivers for any vote, and those emotions were key to the outcome. Of course if you are on the lookout for some evidence of voter wisdom, it pays to remember that famous Churchill quote about the main argument against democracy (a five minute conversation with the average voter).  That is what democracy has to offer, and it is not a prerogative of the UK voter. Look inside your own country for more of the same. Democracy is one of our global problems. Up to now, nobody has come up with a palatable solution.

Some more pain is still to come, and the City has been placed in the proverbial spot between a rock and a hard place. But it was, nevertheless, a wise long term vote. I can cite two basic motives (that most standard UK voters are not even aware of) to support the “wisdom” epithet.

In the first place, the EEC is a sinking ship, and the euro disaster that must take fault as the main cause for the inevitable shipwreck is undoubtedly not Britain’s responsibility. So, why should they tie themselves to the ship deck and go under for something they were not even a part of. The euro is a huge Ponzi scheme where exporters lend importers the money, in exchange for keeping the buying up. Everybody is happy in the short run, but layers of irredeemable debt accumulate, until the total bankruptcy of the system. You are better out of that as soon as possible. Yet it is understandable that it makes the rest of the players uneasy about their own exit before it crumbles. Still, you want to go before the vortex of the sinking ship sucks you down with it. It is not an act of cowardice, but rather an act of prudence.

20160615_out1Brits did not suggest the euro, and never wanted anything to do with it -or with the credit boom and the macro disequilibrium it generated in the periphery. And they did not profit from it either. If anything Sterling’s PPP has always come up as expensive relative to the euro cross, for the last couple of years. That shows in their trade balance -showing a deficit not far from 5% of GDP in their trade with the rest of the Union. They not only refrained from begging any of their neighbours, but are being used by their neighbours as a convenient goods market (services, and particularly financial services, are another matter).

Decoupling and navigating away from the Eurozone is a wise financial move. The Club Med countries are a postponed bankruptcy (they were a basket case long before that anyway). It makes sense to move away, annoying as it must be for Germany -that would like others to share the problem of financing the subsidies in the south. Why should Brits cooperate? After all, it is Germany’s interest to maintain their export markets, and preclude an episode of abundant German Banks going under together with the periphery bust. Think Deutsche Bank. Continue reading

A rationale for the Fisherian high plateau in global equities.

I have been predicting a bust in equities for so long that, over the course of time, I have engendered a reputational problem. I never said the timing of a system reset was easy (no bells are rung at tops). But, even after protecting myself with a long list of caveats, it is clear that the market reset I keep on anticipating, is long overdue. That’s a fact that I will reluctanctly admit to (like it or not).

Thankfully, by now it is not only me. We are a solid bunch in the back and front benches of the “conspirationist horde” that believe all market pricing is now fake. That “we” includes us Austrian economists, Macros, and Hedge Fund managers, together with a bunch of the establishment banks that are ostensibly moving to the dark side of the force.

The issue is that it hurts our egos (and our pockets) to see that equity market pricing is conspicuously proving us wrong. Nothing exceptional. We are all wrong more frequently than we would care to admit, and I am no living exception.  The odd thing is that, this time around, we got the reasoning, and the economic modelling right. A lot better for sure than the varied DGSE models run by the Fed banks. We anticipated the global macro outcome quite neatly, and we got bond and currency markets mostly right. How come equity markets are not providing us with our well deserved success fee?

Looking back, it’s been nearly a decade since a couple of us, timidly at first, began to explain the inconsistencies in the Central Bank driven, global pricing model for financial assets. It has been a long slog for an initially pitiful group of free thinkers. We were mostly on our own, until we got to this point when the big names in investment, and even Deutsche Bank, JP Morgan, Citi, Goldman, or Bank of America are expressing their concern for the ridiculuous mispricing of assets. A ridiculous price level that only only subsists because of the orgy of Central Bank, printing, nirping and outright manipulation. Not new. We said we were blowing a new bubble years ago, but nobody listened. Now the big players are joining in.

Icahn, Gundlach, Bass, Druckenmiller, Gross, Grantham, Soros, Edwards, and many others are now clear, and outspoken, about the massive risks to the system that go unobserved for the majority of investors. It is easier for them than for the banks, they have weaker links to the establishment. Anyway, be it by relevant investors and analysts, Banks, or us bloggers and small size investment offices, I think the message has been clearly formulated. By now even dumb market players should be hinting that all is not well with actual market pricing. Yet the conundrum is that markets continue to price risk south (conversely risk assets are bid up).

From a purely intellectual standpoint, I feel my views have been vindicated by events. Most of the Keynesians are jumping ship, and converting to Say’s law in droves. The world economy is in a dreadful state after years of printing and lending. Nevertheless, I think it’s hopeless to treat myself and readers with more of the same reasoning. We deserve better.

We all know by now, that the great moderation and the subsequent grand monetary experiment did not succeed. Great! But what’s the use of winning the reasoning contest, if you cannot use your prescience to generate financial returns? I remember Bill Gross stating some time ago, that it is not about getting the GDP prognosis right, but about anticipating the shape of the yield curve. Despite being notoriously right in our real economy prognosis, explicitly suggesting how inefficient and wasteful this money printing and nirping episode would turn out to be, something is amiss or underestimated in our reasoning. Continue reading