Monthly Archives: March 2016

Learning the lessons of recent history

Aldous Huxley brilliantly reminded us, quite some time ago, that the main lesson of history is that we, the “homo not so sapiens” species, never learn from it. Being a touch deterministic, and consequently agnostic about the real chances of single-handedly steering clear of a pervasive human mistake, I plan nonetheless to give it a fresh try once again.

Frankly, this last Central Bank coordinated intervention has confused me somewhat. Surprisingly enough, because it’s hardly the first time Central Bankers cost me serious money. I was indeed, well prepared for that (I had previously made it, in the downdraft preceding their intervention), so I have no real damage to report. But the downside to the confusion is not just two great trades (my stock market shorts/my credit spread widener) gone down the drain, for a meager profit (I am still positioned in both trades with a reduced profile). The real harm is allowing for the situation to affect my self-confidence and, furthermore, cloud my view of the actual financial landscape. That could easily cost me big.

In my last post, I allowed for defeat, with that “mea culpa” Latin wording repeated twice -in bold characters. I tried to remain focused on what really counts: overwhelming debt levels. Reading it once again, I stand by every word in it. But now, being critical of my own work, I think it is hardly worth the typing (never mind the reading) if it just serves the purpose of reminding everybody of our precarious debt situation. Even underlining Central Bank stealth PKO techniques, as I did, is all but evident now when looking back.

The good news is that Barron’s now dares label the US stock market as a “Bullard market”. Conspirationists like me, repeatedly bashed in the past, have somehow stolen the spotlight now -a strikingly fast transition! In a brief concession to my ego, I will take pride in the fact that just after the Bullard October 2014 low, I outspokenly described him as “the most inconsistent central banker in the world”, suggesting he was actually the head cheerleader for manipulation techniques. I was afraid to be denied future entrance in the US at the time! If Barron’s now nods to manipulation, the assertion must be as close to stating the obvious as one can ever get.

And, once the PKO (price-keeping operation) situation, and the Bullard rigging, are an accepted fact of life, it is easier to note that debt is, notoriously, the other elephant in the financial room. Unnervingly, we have no alternative options to keep living and investing in this environment, so it’s best to concentrate on getting the next elephant (Bullard and/or debt) moves right, beforehand. The timing of prospective events adds value, whilst market rigging and debt have become too self-explanatory to be further discussed to some avail.

The real added value comes when finding a path forward that enables us to survive the hurricane season that is constantly being delayed by the financial climate change perpetrated by Central Banks. We do not have a nature driven financial climate anymore. The Fed and its acolytes plan and implement the financial weather daily. So prospective weather patterns have to allow for plenty of behavioral science -in order to be meaningfully accurate. Finding that hurricane safe path implies having some homework to do. I feel compelled to sum up the most relevant lessons of recent history. And learn from them.

1.- Gradually, during the Greenspan tenure at the Fed, the developed world changed the economic model from a savings and investment, productivity growth enhanced, business model, to an easy money, consumption and credit-driven growth. Neoclassics, Keynesians, and Friedmanites converged to point at the monetary mistakes during the great depression as the sole reason for what happened then. The real economy was not at fault, it was just a question of insufficient monetary stimulus, they said.

They then set up wonderful econometric models, fostered Central Bank independence (from parliaments, not from banks and the elites), bought themselves some helicopters and printing presses, and firmly believed that Keynesian fiscal and monetary policies, well used, would make the business cycle something of the distant past. Econometric models would allow them to preview the future value of the main variables of the economic machine, and thus target the adequate stimulus for them in order to stabilize the economies along their, saddle-like, self-sustaining path to eternal prosperity (in earth as it is in heaven; Amen).

Well, it didn’t work as expected. By now most of the Keynesian and Neoclassical economists are belatedly admitting that the experiment was a failure. They are, however, still sustaining that excess money and credit at least did no harm. “Excusatio non-petita accusatio manifesta”. No further comment on that. University is where paradigmatic changes in scientific perception take place. We ought to welcome this gradual change of status of the economic doctrine. In due time, this increasingly-felt shift will become mainstream. More printing will be met with increased contempt and incredulity by financial pundits. Continue reading

Fed up with fake markets (but still in the money ytd).

“According to Hoisington, debt in the U.S., that has jumped from 200% in 1987 to about 370% now. In the euro zone, it has gone from about 300% of GDP in 1999 to more than 460%. Japan’s debt stands at a monstrous 650% of GDP, while China’s total debt has quadrupled since 2008, to 300% of GDP.”

Barrons, 20th of february 2016 

Using various statistics, Paul Singer recently summarized the total nominal value of global debt at 161 trillion, while global market cap., as defined by the World Federation of Exchanges, comparatively floats just above the 64 trillion mark. Sobering numbers. It pays to refocus every now and then, on what really matters. Like debt. In fact, I think it is an indispensable obligation. The stream of social, economic and market events of late flows faster and faster yet -in a seemingly unstoppable acceleration. QEs, LTROs, ZIRPs, NIRPs, CoCos, and a large list of acronyms, speak for the financial revolution taking place worldwide. It is easy to get lost in the media narrative, if not in the details. The devil lives there, and if you lose sight of the big picture you are lost (regardless of translation or not). Now is not the time for bottom-up approaches. The big picture is overwhelming.

Ubiquitous debt is the name of the disease, and most of the pathology in actual global economic performance is caused, directly or remotely, by the debt overhang. Too simple? I am cognizant of the limits to simplification. Einstein constantly mentioned that processes and realities ought to be outlined as simply as possible, but no more. The debt overhang is, of course, not a simple stand-alone concept (nothing in economics is), and is deeply rooted in the easy money policies of the last 25 years, regardless of Keynesian denial.

In truth, it is fair to say that easy money in itself can not affect the real economy negatively (or positively), if it has not morphed into asset bubbles, malinvestments, or altered inflation levels. Krugman has been fast to vindicate his success, regardless of belatedly allowing for a questionable efficiency of the monetary policy he endorsed over the last couple of years, those policies did no harm -conveniently forgetting the second round effects of those policies. Ain’t he smart! Somehow, miraculously, Keynesian priests never seem to be at fault.

stickyinflation ds22feb16Excess money is then, apparently, only a benign malfunction of the system. Hence, at the end of the day, it has to be something else (and not the Princeton doctrine) that spoils the party.

Like debt accumulation or inflation. Up to know, the former has indeed played the primary role as a GDP growth buster, but the role of inflation might be upgraded if easy money persists -and relentless printing to support the “statu-quo” ensues. At some point (not linear and thus impossible to predict accurately) it will alter the equilibriums in the economic system. Not likely in the short term, but not to be discarded lightly for the longer run. Stanley Fisher keeps on mentioning the issue, and I think he is one of the few central bankers to deserve our respect.

Or like asset bubbles or malinvestments. They are, of course, the sole cause of the problem. Helicopters, printing presses, and their respective pilots and maintenance engineers are not to be blamed for that. After all, according to Ben, literally, Monetary Policy is too blunt a tool to prevent them. Even if it is now crystal clear that monetary recipes did not work as expected (something we have for years been arrogantly stating was sure to happen), Keynesian priests are not to be blamed: all their zirping, printing and, late nirping, did no direct harm to the real economy. Have Keynesian priests never read Frederic Bastiat?

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Debt matters and monetary policy has notorious side effects. Malheureusement“, for as long as we keep the debt overhang growing, the only way to stabilize the system is pervasive monetary debasement. Options for that questionable end are: printing in the reserve currency (the most effective stabilizer), printing in other currencies (inconveniently it generates USD strength), or nirping away the value of the currency kept as long term savings. Not to mention the permanent and constant redistribution of income from savers to debtors, and all the economic inconvenient it generates (moral issues aside). It is for that main reason (and some others) that I am totally confident that reigniting growth is incompatible with the maintenance of the debt overhang. Japan showed us the way. At best, we will muddle through, with low growth and deteriorating debt ratios, and increasingly unfunded entitlement contingencies.

images (1)On a different note, markets just moved up dramatically, and I have been adamant about the continuation of the downward moves in equities and credit spreads (particularly in the low to below investment-grade universe of debt securities). The market has proved me wrong. “Mea culpa”.  Maybe I should refrain from further Keynesian bashing while my reputation is at stake. I ought to Forget Paul and Ben, and try to make money -and help my readers make money. What about equity prices? What’s going on? Continue reading