Monthly Archives: April 2016

Stalemated markets open a period of uneasy calm.

The last market move to reprice risk assets has been effectively stalemated by Central Banks. It does look as if they opted for the best choice available to them (in their own perverse logic). To be sure, back in February things were not looking pretty for extend-and-pretenders. So they met (at the G20 meeting in February, or elsewhere), and decided to intervene. Listed companies, with anxious executives, worried about the value of their options, and most banks, were glad to cooperate. The result was a new iteration in the recent series of resounding victories in financial markets -led by CB’s and establishment forces. Repricing risk was, once again, adjourned “sine die”. Long live POMO desks, and associates!

As I see it, politburos at CBs became apprehensive about the late, marked deterioration in global macroeconomic data. Unsurprisingly, they scented the chance that the market rout might become the last nail in the recession coffin. They are for certain, well aware of the fact that this last economic cycle, that began in the aftermath of the GFC, is already long in the tooth. And yes, they jumped the gun. I must say I expected better emotional control. Actually, I don’t think they spent a minute to brood over the option of changing course in the aftermath of a staggering credit and money base increase that had produced no substantial, meaningful result in the real economy. They confirmed that they get done fast with that kind of reasoning. No sweating over the real efficacy of their policies. No roadmap. Just survival techniques of the highest level. That amounts to no less than preserving the legacy bubbles of the Bernanke era. Continue reading

NIRP is the ultimate Hail Mary pass -it will not work.

Desperation rarely breeds genius. Survival biased thinking is gut based, and never stood a chance of succeeding, at least in economics. Nothing works better than keeping your feet warm, and a cool head, and not the other way around. Just what our beloved CB’s have not done as of late -in their desperate quest for a financial fix to the GFC.

Zirping lately turned to “Nirping”, of our money, will stabilize things short term. But if you are not one of the ultra-rich 0.1% of the population, it will not engender value for you, or your close friends and family. Interest rates have to go up big. But relax, maybe paying more for your mortgage isn’t going to be that bad if you add it all in. Direct, and indirect (Bastiat) effects. It is not easy to explain why, because it is counterintuitive. I will try to do it here, but let me previously decline the chance to explain this, or the need for debt and expenditure constraint, to a local crowd of “Podemos”, “Syriza”, Le Pen, or Trump supporters. Bloody solutions, and particularly beheadings, are hardly tasteful and always messy, particularly if it is your head that gets chopped off. Some in our brainless crowds are not more subtle than their mob colleagues back in 1789. Things would get nasty very fast if the mob perceives you are actually suggesting to reduce some of the entitlements and goodies (like low rates) they have become acquainted with (in fact they feel entitled to). We live incrementally dangerous times.

it-is-a-characteristic-of-wisdom-not-to-do-desperate-things-quote-1And we just cannot solve our problems with the same thinking we used when we created them. That is an axiom -we didn’t really need Einstein to remind us (he did). Keynesian economics is a backpack laden with theories that are “completely finished” (see definition of completely finished in postscript). We have to think different, and get rid of residual Keynesian thinking asap. Manipulating fiscal or monetary parameters is not the way to achieve sustainable prosperity. Fiscal and monetary policies “ad nauseam”, for the last quarter of a century, took us here. This last NIRP move is more of the same, and will not solve the problem, but likely finally tilt the cart.

Of course, the root of the problem is always the same story. An alcoholic needs more alcohol to keep the shakes away and preclude a “delirium tremens” crescendo. But in the long run, the one thing he doesn’t need is alcohol. We need low rates to “extend and pretend”, but we need high rates to reallocate capital correctly, revamp our supply side, get productivity growing forcefully again, and set up a deleveraging process. Eight years later, our patient is as dependent on alcohol as he ever was. Well done Ben!

One way or another, interest rates will be much higher -well before the end of this decade. And that will be good (if we can hold on to our financial wealth on the wild ride to that nirvana). The beauty of the concept is also that, as was and will always be the case, nobody expects that to happen. Analysts are expecting indefinite deflation. I am not. Markets always move in the direction that generates most pain, to the maximum number of players. Frightening, but equally thrilling. I adore (free) markets every bit as much as I hate Keynesian priests. They sure keep you alive every minute. Continue reading