Monthly Archives: September 2017

When they go low, we must go high.

Most likely, history will preserve Michelle Obama’s famous quote for a long time. Wise and to the point, the message neatly underlined the meanness of some press commentaries about her children. There is always a moment in our lives when we are under pressure -and have to choose between going low (the statistically “normal” choice), or going high. That applies to everybody, not only journalists and political commentators. Good nature, integrity, and dignity, are in short supply. Always have been.

And, talking ethics, what Central Banks have done to us all might be as legal as those press clips -but it is certainly immoral and reckless as well. Consequently, their politburo chairs still hold the “potestas” but have for certain lost the “auctoritas” (much like Mariano “Nicolas” Rajoy in Spain). I know some are still in the stages of adoration of the Central Bankers that supposedly saved the world. No other than Kevin Warsh opines that Ben Bernanke “stood tall” in the terrible days of the GFC. Wow! Does he really think so, or is he just trying to mend fences with his former boss?

I think he went lower and lower during his tenure as chairman of the FED. And he was not alone in his quest for the lows (Dragui flies lower yet: sucks junk sovereign debt into his -our- balance sheet). You have to concede to the fact that only one of them has lived up to what I would depict as “decent expectations” for their performance at the job. Bastiat or Hayek, if alive, would have confronted them openly. Immanuel Kant would have rated their conduct as not coming anywhere near a categorical imperative. Only the moral relativism now in vogue might allow for a favorable judgment of their misconduct.

Draghi’s well known smug smile. Not easy to go much lower than that. The establishment adores him.

You never read enough, and thus there is always the chance you are missing somebody out. Volcker is the only Central Banker of the fiat money era I can recall as really standing tall. His solitude goes a long way to prove that the fiat money system with fractional banking backed by a last resort central banker to bail them out when required, is notoriously wrong. It has to be when you observe that only one of them Central Bankers preserved the value of money decently -and precluded inordinate financial bubbles. As Warren Buffet would say, if the business model is sound it shouldn’t take an exceptionally able individual to run it.

Reality always sinks in.

Most economists are finally coming to terms with this fact -after a never-ending love story with Keynesianism. Passionate sex helped prolong the ecstasy. Fast forward and not a day passes without reading some pundit expressing an understanding of what happened to financial asset prices over the last decade and well before that. Even the Government Sachs people are worried and calling for caution. About time! Hayek would be pleased to see some wisdom finally creeping in.

“We shall not grow wiser before we learn that much that we have done was very foolish.”

Understanding our past foolishness is then a prerequisite to beginning the process to fix what hasn’t worked. Fiat money -with no explicit limits to CB balance sheet size- is always going to end up promoting boom and bust cycles. Human nature ain’t that reliable. Sure enough, even though “theory” is not always the same as practice, this statement is supported by a long series of arrogant and clientelist Central Bankers that knowingly allowed this to happen. They will do it again unless we stop the printing by law. We need stable money and stable credit aggregates to move forward -even if that requires a bust of the everything bubble now upholding the show.

We will pay dearly for this last “everything bubble”: the die is cast. Regardless, as Michelle said, we have to go high and let history do the judgment. It is not our job to judge. Sometimes you have to sit back and realize that our mandate is not to conduct or evaluate monetary policy -however glaringly wrong or “low” minded it may be-, but try to make money while preserving the value of capital.

Investing strategically in this context is a fool’s errand. Money is no longer a stable unit of value.

The problem with trying to make money (the honest way) in financial markets, is that investing is now a rigged game. You can’t play monopoly and expect to win consistently when one of the players controls the bank and can print money and manipulate rates at will. Ask most -if not all- macro hedge fund managers. If one player controls the value of money, it isn’t a game any longer: it’s a scam. Monopoly is the only game we investors can play. So we buy and sell stuff without knowing to what extent money is going to come flowing into the game or vice-versa (if QT survives the first quarter with a mostly symbolic balance sheet reduction).

Valuations are useless because the value of the units we use to value is subject to massive changes. I don’t care if one dollar buys the same amount of goods it did a year ago (if it does, I am not that certain that inflation figures are right). It is the total stock of minted dollars, relative to the size of the economy and real accumulated savings, that counts. Just think about what it would be like to buy equity in a company that can, on a daily basis, increase (or reduce) the amount of outstanding common stock. And markedly so. You can estimate the enterprise value, but you never know the value per share. Buy-backs should be illegal unless you are going private. Money printing as well. They wreck the game.

In the end, it all amounts to finding out how much they are going to print or tighten. The valuation of the currency unit used to measure value is a lot more important than the valuation of the financial asset itself. Critically, the financial value of a stock of euros equivalent to 20% of GDP is not even comparable to the value of the euro if the ECB has doubled the monetary base. Pure mathematics: a currency bill is a credit on a portion of the value of the underlying stream of assets, goods, and services. A larger monetary base dilutes the value (inflation or not). It is as simple as that.

Global socioeconomic model is broken beyond repair. Winner takes it all.

Recovery from the lows of the GFC looks great on the surface. But

  • Only if you look at it in nominal terms. If you factor currency debasement into the equation, the numbers are strikingly different. We have not recovered if we use real inflation figures and adapt GDP correspondingly. Less so if we consider the portion of debt-financed GDP. It’s easy to keep up GDP if we subsidize consumption with debt-financed subsidies. Only non deficit-financed GDP should be included in official statistics for growth.
  • The now prevalent “winner takes it all” trend is morphing this world into an oligopoly of states and corporations. Small countries are prohibited (funnily enough those that remain are doing exceptionally well though). Companies have become mastodontic and pay fewer and fewer taxes with every year that passes -abusing states and population with government complicity. And Central Bankers’ as well.

The average Joe is on the hook for debt and subsidies he desperately needs to make ends meet. Financial serfdom ensures his reluctant acceptance of government and corporate interests. This will not end well.

But it’s a long wait for the revolution.

Yes, I am fed up with the situation. I don’t trust the current global business model -and that puts me off even more than high valuations. High valuations are sometimes the price to pay to join an awesome party. Let’s go as far as even forgetting their present stratospheric level. Is the current state of affairs remarkable enough to justify euphoria?

When I see how productivity, natality, life expectancy, debt, contingency provisioning (Chicago style), inequality, geostrategic tensions, etc. are behaving, it gives me the creeps. I can compare my strategic thinking process to considering investing in Tesla common stock.

Tesla has become a cult. Not just the cars but the shares too. Short term it looks great. Gorgeous cars and the kind of product addiction Jobs was able to generate a decade ago. Long-term, my case is not against egregious valuation, but against the business model itself. I do not see Tesla competing and surviving the fight with the established large automakers. They will catch up and crucify Tesla. Bankruptcy or a sale is the long-term outlook in my view.

Investing at current levels is the same thing. It is not only that valuations are wrong. It’s the social and economic model that’s broken. Markets will follow with a long lag induced by ETF investing and the desperate quest for yield. Pension funds and people close to retirement need the income and will buy anything to survive. I have posted this chart before: still, look at what an investor stampede for yield looks like.

The bubble is seemingly unstoppable: the stock of real savings needs the yield (pension funds need 7% yearly!), and they will spare no risks to achieve their targets. Accordingly, this period of decadence is taking ages to crystallize into a new world order. The transition will not be pleasant to humankind. I do hope our grandchildren see better times.

We have to wait with the patience of the fisherman. Change is coming, and asset prices will plunge. We don’t know when and we don’t know if it will be in real or nominal terms. We will have to adapt as it goes. We live interesting times.


Freedom for Catalonia.

“An unjust law is itself a species of violence. Arrest for its breach is more so.” 

One has a moral responsibility to disobey unjust laws.” 

Mahatma Gandhi / Martin Luther King Jr.

We Catalans want to vote -and break free as well. No decent state can impose its sovereignty on citizens that reject it. At the very least, people have to be able to vote with their feet. The principle of self-determination is a cornerstone of international law. Recently it has been watered down to avoid quests for state shattering independence. But it is still the applicable international, and fair, law. We have a human right to vote out.

I am not a nationalist at heart. Not a Catalonian, Spanish or even a European nationalist for that matter. But, just like Brits did, I hope we place dignity and freedom above convenience and comfort. I favor free trade, and a global world, but from a perspective different to the one that has been used since WW II. Upsizing is wrong. We need smaller units in the future. Smaller Sovereigns and smaller Corporations. Small is beautiful, and “small” is what we should target as a critical methodology to clean up this global mess. My linked thoughts are dated October 2014 -long before this Catalonian independence issue climaxed.

Brits opted out of bigness and bureaucracy. We Catalans are about to choose out of hubris and financial repression. They yearly take away between five and seven percent of our GDP -final figures depending on who does the math. Unsustainable for any country or community when using IMF criteria (and uncommon sense). Greeks were unable to dispose of their debt servitude at their time, and the cost of their public debt is well below that level. But others (or even the Greeks later on) will follow. You can count on that. Is Italeave (the euro) next?

When I read that we have to punish Britain or Catalonia for opting or wanting out, it reminds me of some sage advice my father gave me when I was young. Capitalism and Communism could both be right, but both have intrinsic problems -he said. The difference between them is that in the former they have to keep immigrants out, while communists have to build walls to keep their people inside. What is your choice?

If the EEC or Spain had done their homework correctly, nobody would be voting out. Even if somebody did, it would not be an ominous precedent but a happy “good riddance to bad rubbish” reaction by the rest. We should always read the symptoms and causes, not the consequences. Killing messengers and dissidents might be emotionally rewarding but makes little, if any, sense. We criminalize “leavers” and forget the people and reasons that make us leave: they are the root of the problem.

Freedom never comes cheap. The establishment always refuses to concede when it affects their wallet or their power. As is always the case, Spaniards despise us but want to stymie our departure. Is it due to to the psychological proximity of love and hate, or is it just shameless selfishness?

Hopefully, we will vote our freedom soon. Economic and social problems will follow -but it pays to put as much distance as possible with Spanish hubris, disdain, and blatant inefficiency. A short-term pain for a long-term gain. Divorce is hopelessly messy. Ask Theresa May.