Monthly Archives: October 2017

That nagging feeling of impending doom.

I can’t help it. The pervasive feeling of doom, I mean. Not that I should try to stop it: you must embrace that sentiment today. In the midst of a noisy, chaotic environment it is the only certain truth. Like in most pre-revolutionary times, our current situation is mostly made up of lies, lie-statistics and monopoly money aplenty.

Nevertheless, I do my best to remain optimistic. I have always considered myself a cheery individual trying to help build a better world -and make some money for my sail racing needs in the meantime. But it takes an increasingly vigorous effort to remain that way when you feel like in a financial death corridor -waiting for the hangman to appear any day. Reality is there for you to see. You can’t help casting a glance now and then. And it is indeed sobering.

We all know that the real economy is only hitting the apparently right numbers because of the continuous printing and credit aggregate increases (direct credit to consumers, or indirect credit using marginal sovereign credit and then entitlements paid out by those sovereigns). The next two charts by 720 global are very, very explicit -and fully back my previous assertion. Take your time with them.

The first chart shows why GDP growth of any kind fails to ignite aggregate demand moves. Fixing inequality in Disposable Income generation is not only a moral imperative. We need to do so to get the Walrasian equilibrium working again. This business model will not generate sustainable growth if it can’t generate sustainable aggregate demand.

But wait, if that first chart was appalling (growth is impossible), the second graph is shocking. It shows the precarious health of US aggregate demand after more than a decade of daunting inequality. We’re pondering US data, but figures are worse in entitlement land -Europe. Much worse.

The Walrasian equilibrium is already broken beyond non-disruptive repair. The system only works because CB’s inject external money or fresh credit (indirectly via the fractional banking system) on a daily basis. Supply no longer generates its own demand. Aggregate demand is markedly artificial. Nearly 50% of consumption is financed, not by supply-side generated disposable income, but by credit or entitlements. Immigrants unsurprisingly want to share the entitlement pie. It is a consequence of the entitlement-driven, aggregate demand led, economic model. A self-reinforcing negative loop of entitlement and credit led growth.

Things can get worse -and they sure will. Can you imagine the impact on aggregate demand of having to reduce pensions sometime in the not too distant future (to preclude state bankruptcies)? Just ask Greece how it felt. The developed world GDP will collapse. We survive because we go further in debt, rob savers of their income, curtail savings (never mind the funding disaster of most pension funds, private or public), and, not to forget, print. We print like there is no tomorrow. Fiat money debasement is the only reason for the real economy to keep chugging along. It is understandable that people are unable to see this. What’s surprising about it is that the standard mainstream economist is unable as well. They don’t want to see it. The establishment pays them well not to do so. Peak blindness is that of those who do not want to see.

And what do we get for all this artificial, unsustainable stimulus? Not much growth, or population satisfaction I’m afraid. To add to our woes, the ratio of money growth to economic activity keeps deteriorating. We need more and more monetary stimulus just to remain afloat. Jeffrey Snider keeps editing a chart that saves a thousand words.

Things are not better in the financial world. We are aware that financial market pricing is the result of a sophisticated fabrication process sponsored by global Central Banks. Everything is fake, market functioning is rigged, and fiat money is no longer a stable valuation tool for assets. Bitcoin and gold are in my view no robust, foolproof alternatives. We even know that our current itinerary is a direct course to economic hell: we cannot keep growing on new credit and freshly minted money, forever. But we like to see the sunny side of things: we feel that there might be some time left to enjoy. Like Saint Augustine, we plan to be chaste but not yet: lets print just a little more. Bull markets are adorable, aren’t they?

We pretend not to care much while listening to the Titanic orchestra in full splendor, but in truth we do. Jobs and pensions are a permanent concern to all. War to some of us. Many can’t sleep when they consider portfolio risks: put me in that lot. Only ETF and long-only fund managers can afford some decent sleep. They don’t care when this ends; they just have to keep a steady portfolio going. Easy for ETF managers, difficult for the long only’s, but nowhere near impossible. Unfortunately, timing Armaggedon is. The odds are stacked against you even if it is not a matter of “if” but only of “when”.

I keep on reading everything decent I can put my hands onto. We all sound like a broken record to some extent. Tell me the author and I can anticipate the content. Some insist in outlining, with surgical precision, the valuation case against financial markets at current levels (exquisite Hussman, a must read). His table with correlations for the different valuation parameters is excellent, despite underestimating the high validity of the Fed model (sarcasm alert). Valuations are atrocious.Other authors delve into the absurd real interest rate level suggesting the fixed income market is out of whack. Historical charts prove current negative real rates are incompatible with 2017 growth levels -however brittle that monetarily induced growth might be. I hand-picked one BlackRock chart for that end. There are lots more proving the same insanity. It’s just that aggregate demand is so sick that even this crazy monetary environment consistently fails to ignite severe inflation. And the money printing process feeds back on itself.

Both bonds and equities are a bubble. The mother of all bubbles if you consider the chart underneath (via zerohedge). Of course, there is always an alternative read to events. Maybe we have all been so smart that we have achieved the highest wealth to income ratio in history in just ten years. We have to thank Paul and Ben for that. Do we?Every single asset price is bubbly -unless you consider the currency debasement in the ROI calculations. Maybe your expected return is zero in real inflationary adjusted terms, but it pays to hold that asset if you know the real economic value of the currency (GDP/monetary base) is going down close to ten percent yearly (Japan, Europe 2016). The fact that goods and services inflation is contained helps hide the colossal debasement in the value of fiat in economic flow terms. Inflation is not the way to measure the value of money if we want to be coherent. Valuing wealth is 6.5 times more important than evaluating disposable income -according to the chart above.

A couple of pundits (more than two in Fedspeak), have brought back the goods and services pricing debate. They have a point. Inflation appears to be inching back after literally dying only a few months ago. Maybe it wasn’t as dead as I thought. Perhaps Yellen was right for once. The implications of a surge in inflation would be huuuge! Can we still generate inflation -regardless of the chronic state of decay of aggregate demand? If you want to delay chasteness, Saint Augustine style, we’d better not. If rates turn loose … that’s a game changer.

CBs should be careful about what they wish. A rapid rise in rates would wreak havoc in financial market pricing. The desperate search for yield has generated a 1.4 trillion short of volatility worldwide -according to Cole at Artemis. Part of that is an explicit volatility short (gamma short of option selling), and the rest is an implicit short. Investors unknowingly engineer strategies that are naturally exposed to the same risks as a short option portfolio.

While the situation is calm on the outside, the number of critical variables keeps growing. We have long been unable to afford a recession to uphold the debt sustainability paradigm. And we’ve had to be careful about interest rises and the increase in the cost of rolling over the debt pile for some time now. Now we have to worry about earnings leverage as well, as Corporates have overplayed the buyback engineering option to keeps eps growing (in a context where revenue is not). Lastly, in the last twist of events, we have to be terrified about a possible unwinding of the short volatility trade or the possible selling avalanche of the risk parity strategies if the VIX or bond volatility spike. Do you still think nothing will go wrong?

In the meantime, everything is awesome; we macro fund managers and other hedgies have all bought ourselves a beautiful Japanese sword. We will all die with dignity -like the last samurai. Matter of factly writing, before I forget, Kyle Bass is engaged in a new country short, Italy, after getting killed in China by the top manipulator ever: the PBOC. By the way, he is fundamentally right regarding both China and Italy -but I don’t think that’s relevant to his final fate. The PBOC and the ECB are.

The real question is: does all this matter at all? Sabre-rattling, stratospheric valuation, the huge volatility short, bankrupt banking systems, hidden contingencies (future pension and subsidy discounted value -never mind the rate), increasingly subsidized aggregate demand, and daunting inequality?

Let’s be realistic: it does not. For as long as we can keep growing money and credit aggregates at no inflationary or socially disruptive cost, the show will go on. Bill Gross dubbed the ongoing process as “writing checks for free”, and that adequately describes the ultimate functionality of what we are doing.

We have all seen this game being played before, but not on a planetary basis. Charles Ponzi invented the game -and now it is a necessary exercise for money managers. Ignominy and final harakiri are your destiny if you are left out. Full Armaggedon someday if you play ETF investing.

All in all, it reminds me of “Le Choix de Sophie”.  Less dramatic, for sure, but essentially the same kind of insurmountable choice. I can’t help that deeply melancholic feeling when listening to the song. It helps prepare for the ultimate harakiri moment for money managers -when bubble blowing goes eternal, and we have become entirely obsolete. Not that far away, I fear.

Regardless, I’ll keep waiting: the law of gravity will reassert itself at some point. If it can’t go on forever, it’s going to stop. I know it’s asking too much, but we need the patience of the fisherman and the resilience of Nelson Mandela. Will God provide?

Catalonian Intifada (but no violence please).

Liberalism knows no conquests, no annexations; just as it is indifferent towards the state itself, so the problem of the size of the state is unimportant to it. It forces no one against his will into the structure of the state. (…)

State practice has gradually perverted the pacifistic nationality principle of liberalism into its opposite, into the militant, imperialistic nationality principle of oppression. It has set up a new ideal that claims a value of its own, that of the sheer numerical size of the nation. (…)

For a long time nations have been regarded as unchanging categories, and it has not been noticed that peoples and languages are subject to very great changes in the course of history. (…) For an individual, belonging to a nation is no unchangeable characteristic. One can come closer to one’s nation or become alienated from it; one can even leave it entirely and exchange it for another. (…)

Democracy is self-determination, self-government, self-rule. In a democracy, too, the citizen submits to laws and obeys state authorities and civil servants. But the laws were enacted with his concurrence; the bearers of official power got into office with his indirect or direct concurrence. The laws can be repealed or amended, officeholders can be removed, if the majority of the citizens so wishes. That is the essence of democracy; that is why the citizens in a democracy feel free.

Nation and State. Ludwig Von Mises, 1919 (emphasis mine).

Sometimes, to anticipate what your view is going to be on a subject, you just have to listen to other people’s beliefs. When I hear Macron (the paradigmatic European imperialist), Juncker (the self-declared political liar), Trump (top presidential moron in history), or Mariano “Nicolas” Rajoy, not to mention smarty pants Soraya (Spanish VP), all sustaining the same side of the contention … I know where I stand: 99.9% of the time I am going to take the opposite view. On virtually any philosophical or sociological issue: from drinking to sex, life, love or death.

Lots of people ask me how come I became a Catalan nationalist (see “Freedom for Catalonia”). I have not. I am not a nationalist. I am a liberal, and I have long endorsed the supremacy of the Austrian economist’s view of the world. Almost by definition, I happen to agree with Ludwig Von Mises most of the time. So it is not an issue of proclaiming the superiority of the Arian (Catalonian) race or any other, but a matter of profound principles.

To keep it short, I stand for most, if not all, separatist movements based on the principle of self-determination. Provided a majority backs that option (something evident at this point in Catalonia, but not the case just a year ago).

I think the paragraphs I have quoted sum it all up:

  • Freedom and liberalism come before a state-size desideratum. They are superior principles. When in conflict always opt for human rights. Freedom as a quest still beats the desire for wealth -or the cowardly addiction to pragmatism now prevalent. If we concede to state needs above individual rights, it is the beginning of the end.
  • There is no democracy without self-determination. The first and most critical vote for a democratic society must help determine what laws people want to submit to. Choosing their nation-state is the reason to be able to demand those citizens comply with that nation’s regulations. The French and Palestinians did not opt for Petain’s Vichy regime or the Israelian dominance. You could not expect them to obey the law if they did not choose it. We have rejected Spanish law as explicitly as we possibly could -in extraordinarily repressive circumstances (Soraya’s police corps is even harsher than Maduro’s when playing innocent population’s repression). It is not our natural law anymore. It can’t be unless a majority says so.
  • The ideal state-size is not an absolute concept. Even if it was, nations are not unchanging categories because people, culture, ideas, and languages change. And it is best if they continue to do so. 
    • The desirable State size has evolved through history, much like the perfect, iconic female body is not what it was like when Rubens was painting.  There is no such thing as a “perfect-size” for anything. Rubens liked them fat, and now we look at 90-60-90 centimeters as the perceived feminine perfection. There are no ideal measures for men either (well, admittedly, size seems to matter to ladies). Okay. No kidding now: medieval times brought the supremacy of the city-state and it is only in the 20th-century that the desire for huge sovereigns is a prevalent call (conveniently suggested by interested elites). Why is forty million pax a better size than six million?
    • It is radically false to suggest that downsizing countries runs against the sign of the times. I respect that point of view -but it is wrong! I have no doubts that history will confirm this as the appropriate view. Certain situations may make it best for sovereigns to grow in size and reduce in number. At other times it might be the other way around. I strongly suggest smaller sovereigns and more coordination instead of subordination to supranational organizations. Think about it. It is not suitable for Juncker, Mariano-Nicolas, and friends: it is probably right for you!
    • Even if a state size consensus can be traced to a specific time frame in history, at that particular time, there will always be different views on the ideal size for countries. The Austrian school has long advocated that small is better for sovereigns. A Keynesian establishment mandated picture would be just the opposite. One must be right, but the other proposal assuredly is not: let people judge for themselves! The “one size fits all” category is disgusting for nearly everything, above all, thinking.
  • Law and justice are not the same notions. Unfair laws abound. Sometimes determining fairness can be tricky and fickle. But in some cases, it is pretty apparent. It is not a law but a swindle when they take at least five to seven percent of your GDP yearly, to subsidize the south, and that goes on for forty years with no tangible results. It is not a fair law when it says that a Catalan has to be taxed and contribute to other region’s welfare in hugely different terms to the contribution from the Basque region. In fact, it is not constitutional because it discriminates different regions within the same country. Of course, it would be hopeless to bring that up in our politically designated Constitutional Court. Montesquieu never lived in Spain. The ruling party handpicks the judiciary in true Erdogan style: no dissidents allowed.
  • Law enforcement is based on two principles. Democracy, and there is no democracy without self-determination. And Fairness: there is no fairness when it discriminates between identical regions. If the law is not democratic (it has been imposed by a state that the majority of the population despises), and or it is notoriously unfair, you have “the moral obligation to disobey” (MLK)

Independence is a marathon, not a sprint.

In the short run, they call the shots. In the long term, we win. Like the French would say, “patientez”, but keep fighting oppression. It is Spanish oppression today. Some other country might be coming up on your radar screen as soon as tomorrow. On any issue confronting civil rights against legal, establishment-convenient, rulings.

Maybe they won’t allow you to kneel to protest when listening to the national anthem. Maybe it will be compulsory to shout “God save the King”, or suggest he is a smart and nice guy. It might be your country next: beware putting state desires before individual rights!

Europe is in this case, as in many other fields, a disgrace. I feel ashamed: I’d rather be ruled by Mugabwe or Erdogan -I would be better off with my civil rights. Great Britain did the right thing. Brexit will come at a hefty price -but jumping the European ship is worth every penny. If I were Theresa May I would not pay them one euro unless the negotiate on a peer to peer basis. No more European arrogance!

I always disagree with Keynes: the long run matters most. If you are economically efficient, you survive corporate moves changing a couple of things. Sovereigns and Corporations are all the same interest. Scrapping corporate tax and labor social security costs for an aggregate demand tax instead is the first hit. A lot more is possible if you have the right productive culture: like ours. The one Spain has been feasting on for decades.

We have to ignore threats and pragmatism and never accept to be subjugated. Freedom comes first. Without freedom, the rest doesn’t matter. A country that rejects fundamental civil rights is hardly your best option in a crazy, unfair world. Catalonian intifada!