Monthly Archives: November 2014

They have no other options left.

Sailboat racing is very much like Central Banking’. It is always about choices: starboard or port, right or left, higher or lower (prioritize angle or speed). A sailboat racer must be ambivalent; good reasons impel us to do one thing, but other reasons may compel us to do the other.

Just like Central Bankers, when racing, sometimes you have all the choices available, and some you don’t.  In order to have complete freedom of choice, you have to be in a good position. Unfortunately it is the nature of the game that all sailboat racers have spent more time in the middle of the fleet, than they would care to admit. It could have happened because we were not the fastest boat in our group (one of the problems with handicap racing). Alternatively it could have been a bad choice of the side to sail in the first beat. Or it could well be inadequate sail trim, generating below polar boatspeed. Maybe it was just a bad start or, worse yet, a full OCS (translated: an early start makes you go around the start line again). When various factors accumulate, your choices become limited. When you hit the layline, you have run out of them. Most of the CB’s are sailing their starboard laylines right now.Sailing_Performance

In the economy, the same situations apply. An economic system is much like a sailboat racing environment. It has to deal with structures of essential complexity whose characteristic properties can be exhibited only by DSGE models with large numbers of variables. It is also a system, as Hayek once said, of “organized complexity”. Events are not only determined by the properties of the individual elements that concur, but also on the manner in which the individual elements are connected with each other. Our tactics when racing condition the tactics of the rest. It is not all about the pure physical interaction of boat speed, wind, and currents. Every economic decision has not only objective direct implications on other variables (lagged or not), but game theory implications on the conduct of the other participants as well.

Central Banks are a substantial part of the economic system. They have climbed the ladder of economic relevance all the way up to a regrettable point -they are the only game in town. Their actions condition the reactions of the rest of the economic agents. Furthermore, they also condition the actions of the other Central Banks.

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Debt sustainability and/or inequality will end the show.

In order to appraise the actual state of affairs in this global village, let me break the ice by crudely exposing the three main ideas of this post.

On the after-effects of inequality: 

“An imbalance between rich and poor is the oldest and most fatal ailment of all republics.”                    Plutarch  (senior priest of Apollo at the Oracle of Delphi)

“The causes which destroyed the ancient republics were numerous; but in Rome, one principal cause was the vast inequality of fortunes.”  Webster

On the hangover post debt accumulation:

“Blessed are the young, for they shall inherit the national debt.” Herbert Hoover

“Interest on debts grows without rain.”
Yiddish Proverb

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This concept, brilliantly outlined by Eccles, is a part of our actual society. It is economic metastasic cancer, terminal stage.  And now let’s go for the kind of wording you used to expect from a chairman of the Federal Reserve:

“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth … to provide men with buying power. … Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. … The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

On inadvertently playing the common knowledge game (that the global central bank put will at all times save risk assets):

“An error does not become truth by reason of multiplied propagation, nor does truth become error because nobody sees it.”                                                                                                               Mahatma Gandhi

 Joseph Goebbels really explains it all. This is exactly what they are doing up at the top; conforming our opinion as if we were acolyte “moonies” in the Unification Church (Sung Myun Moon sect) . Bernanke is thrilled.

“It is the absolute right of the state to supervise the formation of public opinion.” Continue reading

The day after (II).

One way or another, sooner or later, it’s going to be “Back to Mesopotamia”. More than three years ago, the Boston Consulting Group came out with a first class report that used the following words as a subtitle: “the looming threat of debt restructuring” (please translate as “the risk of massive defaulting”).

Needless to say, the BCG has been ridiculed by the Central Bank coordinated policy. Another POMO desk war casualty. That company makes a living on it’s reputation and it’s highly unlikely they are being hired by any central bank as an external consultant. I feel sorry for them because they were clear, and they were brave to say what they said. In a pre-whatever-it-takes world, it was a truism. In fact, we are long overdue for that euphemistic “restructuring”, another word that has been greatly abused.

We should try and give Cristina Kirshner a call, she’s sure to find some new extravagant term for a default. They excel at that. Defaulting is becoming a country tradition that goes deeper for nearly longer than the “asado argentino”. In point of fact, they are the front-runner for something that will spread faster than Ebola.

The “Back to Mesopotamia” report by the BCG said:

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“It is likely that wiping out the debt overhang will be at the heart of any solution.

Such a course of action would not be new. In ancient Mesopotamia, debt was commonplace; individual debts were recorded on clay tablets. Periodically, on the ascendancy of a new monarch, debts would be forgiven.

In other words, the slate would be wiped clean. The challenge… is how clean to wipe the slates… Western economies … have to address the significant debt load accumulated over 25 years of credit-financed economic expansion… Writing off more than six trillion euros (in Europe) would have significant implications for lenders… Total debt overhang in the US equals 11.5 trillion dollars or 77% of GDP”

Forget the 2011 debt numbers they suggested at the time of the report  (and the implied suggested haircut). As a rule of thumb for the global village, the situation is much worse now (see latest BIS report), after three more years of “extend and pretend”. Public debt has increased exponentially, even if private debt has been trimmed moderately in some countries, offsetting some of the increase. No substantial deleveraging has taken place, and numbers are big enough for a nightmare scenario. The Geneva Report on the World Economy (published in September of this year by the Center for Economic Policy Research) says that the total burden of global non-financial debt, private and public, has risen from 60% of national income in 2001 to almost 200% after the crisis in 2009 and to 215% in 2013. Bloated Balance sheets of individuals, banks and NFC’s will be cut by at least 25% with the inevitable “restructuring” fad. More likely by a third or more. Creditors will be massacred.

You may consider this bizarre thinking, but it is not. There is no other way out. I wish there was. If you have the time, you can read this interesting post on debt cancellation in Mesopotamia and Egypt. Rome was no better (see picture below). I have selected the following paragraphs:

Health warning: Creditors, and junk bond holders, please check with your cardiologist before reading further. Continue reading

The day After.

I know I’m late this week. But let me say here, as Mark Twain once did, that the rumors of my death have been greatly exaggerated. I am physically alive… and not bankrupt (yet). Not that these last few days have been easy for us naysayers and permabears. We should never take life itself, or the solidity of our balance sheet (or income statement) for granted.

I painfully and gradually built a short in the E-mini S&P500 march futures, and was already dreaming a Caribbean retirement. It is always about greed and fear. Was my dream too greedy? It must have been, because it all crashed in five days of trading. When I take a look at the SP500 chart (or the IBEX35 index for that matter), I find the drawing quite extraordinary. I had never seen a market turn around technically like that in a life time. It was a sharper turn around than the one in june 2013. At least Central Bankers are enriching our life experience. My epitaph will read: “he saw it (nearly) all”.

Now, I am not saying the market does not have a right to be bullish. The market can do whatever it wants to do, in order to inflict the maximum pain, on the maximum number of participants. But it is a truism it used to respect certain rules. After all, market prices are only a series of numbers that normally show positive serial correlation. It is always clear that the market can change its mind from a bearish set up to a bullish one, in due time, and following certain numerical procedures. A 200 point SP500 round trip in a fortnight, on no news (except central banker timed remarks), is something to talk to my grandchildren about when I grow older (and they do as well). Gestapo, KGB, Stasi, or Mossad are a lot less efficient than POMOs.

Thank god I acknowledged total defeat last week, and left only a residual short in the low to mid 1900’s. I plan to hold on to half that short (leave 5% of the portfolio short the index). I still think the SP500 will pay my retirement extras (see timing the top), but I will have to be patient. Rome wasn’t built in a day. People who held on to their technically logical short positions were crushed. Hedge fund performance in october will be a disaster.

Natural disasters can be awful, but at least they are unpredictable. In this central bank coordinated battle, no POW were taken. POMO desks do not have the mandatory concentration camps for people like us. Losers were all executed in ISIS terrorist style (not to confuse with Isis, the greek godess). It has been a merciless victory for the establishment and the central banks. POMO desks manipulated prices efficiently and coordinately. They looked for stop areas and busted them. They retaliated against any anti-systemic positions in strength. The market did the rest. With the benefit of time, one can see that it was a resounding victory.

And then, last friday, the allied troops organized a celebration day, and Kuroda (he’s one of the allies this time around), put the icing on the cake.

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“More free money (against unbridled debt of course). We will all be richer from now on”.

See in the side chart (from daily shot) the new, out of the blue, yen monetary base to be generated asap.

 Friday was  veritably a great party. And it was fully sponsored and paid for by Abenomics. Women and wine for the victorious POMO troops. How nice of them. The Japanese are cleaning up their bad reputation left overs from world war II. Continue reading