Monthly Archives: February 2015

Enduring Deflation.

I hope readers enjoyed the Sirtaki video in my last post. I found the last scene of “Zorba the Greek” inspiring. It’s nice to relax every now and then, notwithstanding full awareness of the global debt pile. Unfortunately, at the end of the day, we all need to remain focused on the affair of wealth preservation. This post will be on the serious side.

I’ve writen on the matter of deflation before. But that was months ago, and both posts were in Spanish. My views, however unconventional, have not changed. The degree of conviction behind them is high. Deflation is a negative outcome only because of accumulated debt. In a debt free economy, supply side induced deflation is a “goodie”, not the ogre they try to sell us. It might as well be a “goodie”, because deflation will be a lasting episode, and not the fleeting situation politicians try to convey.

Sick aggregate-demand induced deflation, is certainly not as good. But it is the pathology of aggregate demand itself that should worry us, and not merely deflation. Deflation is only one of its various negative consequences. Actual deflation has roots both in the supply and demand side. Deflation is a undeniably a relevant phenomenom, but it is over-rated as “crucial”, because it impacts the effectiveness of traditional keynesian monetary easing recipes. ¡Isn’t that a pity!

Yes, deflation is relevant as a game spoiler for keynesians and Princeton sect economists. And it influences both the long term investment strategy, and the tools available to politburos of Central Banks. QE is doomed in this context, because any new money that we generate, has flown, and will flow, into financial markets, parking itself either in bank reserves, bonds, or equities. It will not access the real economy. It will not reflate the stream of goods and services, unless we accept Weimar style money printing (and thankfully we are not there yet). There is no glide path to debt reduction with mild reflationary policies. We have to focus on the real stuff. In a deflationary environment, money printing only gives your some extra time.

I see five reasons for sustained deflation in developed countries, and they are endorsed and validated by Japan’s empirical evidence over the last two decades (in chart).japdeflation

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HAMLET. Act III. Scene one

“To be, or not to be, that is the question:
Whether ’tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,
Or to take arms against a sea of troubles
And by opposing end them.”

To greek or not to greek your debt. “Greeking” is a new verb that indicates “the willingness to take arms against a sea of troubles, and by opposing them, end them”. “Extending and pretending” has the opposite meaning, and is equivalent to suffering and enduring “the slings and arrows of outrageous fortune”. After years of experimenting with extending and pretending, greeking debt is the new paradigm. ¿Will they stick to their guns?

It matters a lot. Because we are likely to follow different routes depending on the survival of the debt sustainability fantasy.  We can’t really know who will “greek” first, and when. The Greeks are the obvious frontrunners, but anybody else could also opt for “greeking”. In fact, a lot more will “greek” sooner or later. The powers that be are hoping for extending and pretending, but Tsipras and Varoufakis could be the worlds first to “greek out” and dance Sirtaki (like Zorba). Maybe sometime this year.

Greeking out greek debt is only  the tip of the iceberg. I find it particularly ridiculous when we engage in endless discussions over the pretended rate of growth of the top line (world GDP nominal growth), and we fail to mention the ocean of debt that encircles us in a spiral of seemingly eternal growth. The recent Mackinsey report gives me a great chance to further elaborate on this point. Just take a thorough look at the 57 trillion “debt recovery” that has been taking place over the last seven years. Take your time because there’s a lot of info there.Global Debt

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The longer the explanation, the bigger the lie.

I like Chinese proverbs (like the one above). They can be incisive. In an atmosphere of widespread confusion, long, convoluted, and incongruous explanations, are the predominant reasoning today for all that’s going on. Most of the narratives are lies, but some well intentioned commentary simply reflects the fact that the author doesn’t know what he’s talking about.

While some Governments (like Rajoy’s in Spain) say the worst is over, and others say crude pricing and European Q.E. will recreate an equity investors paradise,european growth expectations ds Janet Yellen is reported to be quietly expressing her concern about the international situation. Soros briskly labels markets as “hellish”. Some countries are backdating currency puts targeted for those caught indebted in CHF after the swissie’s price realignment (Eastern Europe).

Others, like “professor” Abe (I am anticipating a Nobel prize in economics for him – just to follow the Krugman gaffe) are rejoicing in the crude repricing effects for their economies. Some are desperate, rising rates outrageously, only to bring them down again weeks later (the Russian Central Bank). Venezuela’s Maduro (and his unfortunate fellow citizens) are close to suicide, literally imploring the OPEC to cut production.

It feels like Central Banks are losing their grip on the world economy further. In my view, the process began in November, with all those disorderly comments by the different members of the FOMC -just because the S&P had gone below 1900. It has been an ongoing development. The event flow conspicuously shows they are gradually losing control.

I have shown my surprise during more than a few of the different episodes of this GFC, when financials took a turn towards the entirely unexpected (to me). Like when Q-Eternity was born in mid 2012. I was overwhelmed by that decision. Or the “whatever it takes” wording by super-Mario. Both I didn’t expect. But, honestly, none of the seemingly extraordinary events taking place this January has taken me by surprise. Continue reading