Author Archives: Ricardo Tejero

A Botox high for makeup heavy financial prices.

We live in a finite world. Finite land, finite water, and resources, and a finite life. But sometimes our patience is stretched out to infinity -or close to it. We, financial experts, and ordinary fishermen, both share the need for patience. It comes as a tough achievement, because, as Franz Kafka once suggested, long waits (he mentioned eternity) can be exasperating, “surtout vers la fin“.

Ever since Alan Greenspan started to use his monetary tool box in order to conduct and conform market behavior (October 1987), valuation has mattered less and less, and financial markets have been morphing into casinos. Monetary aggregate levels and their growth, interest rate suppression (financial repression, and the consequential quest for yield), and the Fed’s valuation model (based on the infamous “ERP”) have fully taken a front seat. It’s now been nearly a decade since these three drivers for financial pricing became the only game in town.

It is indeed a brave new world. The world where equity prices can float comfortably above the 2.3 times price to sales ratio level (US), and while at it, brush off any inconvenient events. Like Brexit, a two-year negative growth spell in profits, or an increase in the debt/EBITDA ratio for NFC’s, that ought to affect the WACC seriously, and valuation correspondingly. Impressive -to say the least.

And it does look like a Fisherian permanently high plateau at first sight. Monetary policy tools have successfully suppressed volatility, driven markets the CB’s way, and helped improve consumer confidence. Yet, stubbornly, I still don’t buy the idea that you can indulge in ordinary “long-only” asset management, in this seemingly placid environment. Financial markets are the shakiest house of cards I can remember in 30+ years of trading.

Fortunately or not, depending on your point of view, all actions come at a cost, and nothing lasts forever. After years of monetary abuse, out in the open for everybody else to see, the true nature of the so-called “monetary policy tools” has been revealed. The essence of the much fantasized and overhyped, CB monetary toolbox, is, after all, a cosmetic kitfed-tool-box, with lots of lipstick, mascara, eye shadow, or rouge. The functional, basic health of the underlying financial system, or the economy, is unaffected by all those skin creams, lipstick, and even Botox of late.

I find it remarkable that CB’s got away so easily, doing no more than plain cosmetic manipulation, for so long -as mesmerized investors watched in awe what CB’s were apparently able to do. They did well at deceit, and their success has provided them with an invincibility aura that has kept them alive against all odds. In the meantime, we feast on supply side neglect. Nobody wants to streamline and update our productive capacities, Schumpeterian creative destruction costs votes. Votes are, literally, all that counts in politics.

Needless to say, I have been gradually running out of patience. Thankfully, not out of other people’s money. Not that past results protect you for long. We all have to remain humble, or else the market will do it for us. No, no problem with humility to report, but I am running real short of patience by now. Still some more left, but not much. I can’t wait to move on to a new phase in the solution of our global economic problems. One in which the use of Botox is forbidden. One in which I can cease to represent the Perma bear script. I’m fed up with the role. It’s boring!

We might be very close to the end. Witchcraft is “out”, as soon as the general public gets acquainted with the underlying bag of tricks. Sooner or later, somebody finds out there is no magic in what they are doing. Investors are currently dawning on the fact that Central Bankers are not the “magic people” they themselves think they are. Playing their missionary role, in the Common Knowledge game, becomes a lot more complicated from then onward.  Go ask Janet.

What has changed in financial markets over the last couple of months? Two things. First, Investor perception of Central Bank’s capability to keep these Botox treated markets looking pretty enough. Second, the degree of conviction of Keynesian priests in the efficacy of what they are doing.

Nothing else has changed substantially -hey, I think I know what you’re thinking now. What about debt and leverage? Well, sadly, the underlying health of the financial system is largely irrelevant for as long as we have the CB’s back. In the meantime, debt has, of course, kept growing exponentially, and the global economy looks anything but healthy. Everybody knows that! Still, being more of the same, this perception is not really a game changer. We got used to talking debt in trillions, and it hardly bothers us anymore. Continue reading

A subtle, self-restrained, change of heart.

Regarding eternity, it is my conviction that nothing; not even love, hope, or faith, springs eternal. Neither does life. Thankfully, there is an expiration date for all of us. Emotions, hopes, and beliefs are, more frequently than not, faded at some point. To all appearances, our Central Bank deities are also impaired by this human weakness. The very same year the 1975’s have begun to sing about it, most Central Banker’s, discreetly and dispassionately, have, all of a sudden, had A change of heart. About time! As Unamuno (famous Spanish essayist) once stated, a man has the permanent right to contradict himself. Good to know that, because it might come in handy soon enough!

Following up on that sudden change of heart, please don’t make too much of it. It’s not an abandonment of their firm beliefs in Keynesian utopia, and it is circumscribed to some specific, but highly relevant, matters. Like…. Well, amazingly enough, it is related to the merits and efficacy of “nirping” and “printing” ourselves all the way to financial disaster.

Most Central Bankers had a nightmare this summer, and the Kalecki path to monetary destruction was clearly exposed to them in a dream. It was a MLK kind of dream, vivid and clear -they are now scared to death. Of late, I can see the fear in the whites of their eyes -as they inevitably question their deeply held faith that the Bernanke policy mix would save the world. Bad for them, but, I will concede, it comforts me deeply. Apparently, insanity, unlike stupidity, does have some limits after all.

Not that the dream couldn’t have come earlier. It was crystal clear to anybody who wanted to see what was going on. In fact, it took ages. To prove the assertion, I am reproducing three great charts, courtesy of Tad Rivelle at TCW, John Hussman, and Jeffrey Sneider. They all summarize what the FOMC members have done over the last 25+ years (Greenspan, Bernanke and Yellen tenure).091916-tradingsecrets-01

wmc160919aabook-sept-2016-inefficiency-net-worth-to-spendingTake your time working on them. It is their simplicity that makes them so valuable. They are further explained at TCW’s, Hussman’s, and Alhambra’s websites. It is pretty obvious that there is no way to leave this party unscathed. To add insult to injury, the amount of global leverage (next chart) puts us, worldwide, in absolute terms, well past the Minsky moment. Stability, as he said, generates instability, as Ponzi debt takes over productive debt. At some point, leverage goes past the amount of income needed to service the debt. Then, the credit boom stalls and asset markets and the economy crash. Negative interest rates postpone this, but at the cost of suppressing productivity increases -because Schumpeterian creative destruction comes to a standstill. Hyman P. Minsky was a visionary. He saw, decades ago, what reality is only confirming right now.leverageglobal-zh

Continue reading

Confusion Reigns Supreme.

It has been an awfully hot summer in Spain. I did well enough (you can always do better) while sail racing intensely with my team, and, sadly, it’s time to engage in something more substantial. Not that I really crave for substance at this “Prozac” time of the year. I love the pleasures inherent to my bourgeois way of life that, save for my adrenaline generating sail racing, and abundant brainstorming, blend nicely with “easy economics”. So let me disclose my current emotional bias in favor of the Welfare States, Easy money, Easy credit, Liestatistics, Hail Mary passes, NIRPs, QEs, and bubbles of all kinds. They all increase the apparent NAV of our accumulated wealth. Next step is hugging good old Heli-Ben -and I’m real close to that right now.

No, I am not drunk! But I’m not serious anyway. This summer has further eroded my year to date return, as the sovereign spreads -and all others- collapsed to mind-numbing figures (considering the underlying fundamentals). I underestimated the quest for yield, and CB resolve, once again. On top of that, and confirming the fact that bad news rarely travel on their own, the Fed managed to contain and reverse, USD appreciation -that didn’t help.  My new updated return YTD is only 3% by now. When you are not happy, it helps to laugh at yourself -and anything that moves as well.

For an insight of the logic of these moves, I cherry picked two charts, on the fundamentals of the Italian Sovereign spread.20160713_italy_07d2b89a7-57ae-4550-8ddd-498409cc7bbc

And another two, related to the consistency of the USD weakness of late. Of course, in the new CB economic textbook, an upswing in the Ted spread is a clear precursor of an imminent dollar depreciation (excess dollars around?!!!). Am I being too sarcastic for my own good?8-TED-spreadABOOK-August-2016-TIC-TED Continue reading

Notwithstanding market euphoria, Central Banks finally face their Little Bighorn.

These last few weeks of trading have been tough. It looked like a promising week on Monday the 27th of June -just after the Brexit vote. Positioning in the less crowded Brexit related trade allowed me to make big money (10% return in two market days). And I had enough sense to cash in some of it. Better not to remember what happened to whatever positioning I left working in the global financial markets -on that very same Monday the 27th. The week did not end well. Ditto for the weeks that followed. Nevertheless, I will take solace in the fact that I managed to keep nearly a fourth of those hard earned profits. I am up barely above 5% for the year -but that is after being crushed by a deluge of coordinated CB indiscriminate buying. It is a difficult year indeed.

King 1_0More of the same happened once again. The previous Citibank chart (via Zerohedge) speaks for itself. Central Banks went all in, and we explored new depths in the meaning of the expression “whatever it takes”. CBs managed to turn the tide, in spite of 19 consecutive weeks of withdrawals by equity investors. They own the printing press, and they sure know how to use it by now.

Topping the list of their ruthless actions, they even resorted to rumors to suggest the ECB would buy sovereign bonds in its QE program according to the free float of every issue, and not adjusting to the GDP weights of the different Eurozone countries. They squeezed the price of the Italian 10-year sovereign up 4% in less than two trading days. Can you imagine?

In the US we saw an impeccable turnaround, in true POMO style, with a three-day awesome S&P rally handily beating the shock and awe generated by the Bullard rally in late 2014 -to name one of the preceding CB induced short squeezes. It gets better still. Some gruesome manipulation of BLS stats (any bets that those figures will be corrected next month?) helped recent liquidity increases, and stop busting by POMO desks, in their quest to penetrate the previous highs. So much for the old top. Nothing is forever, more so in this crazy, desperation driven, CB controlled, market environment. Please remember I always said that some relevant extra printing could impulse markets above the previous, one-year-old top. Liquidity and turbocharged CB buying are game changers. Everybody (meaning professional market players) is hastily playing catch up as I write.

With all this fresh liquidity, probably directly invested in equities, we could be in for a final blow off top. And it might take some time after this extraordinary run-up. CBs generate the need to cover by investors, and then they can sell them back part of what they bought for a profit. It would be a criminal activity if it was done by a corporation or, god forbid, a private investor. But CBs have a special waiver. They can manipulate all they want because they act in a metaphoric public interest (or so they say). I had to cover most of my shorts. Risk management always trumps conviction.

The-Three-MusketeersJanet is being helped worldwide by her colleagues. Japan joined in with a fresh 100 billion USD round of Abenomics monetized spending – unsurprisingly, following Heli-Ben’s visit. The PBOC and Mario Draghi also complied in their own way. State of the art, Mossad-level, coordination techniques. And, second to nothing, let’s remember we have seen a magnificent “One for all and all for one” musketeer interaction between them all.  I am not emotionally touched though. We ought to jail them all under the charge of manipulating market prices. Continue reading

Selling England by the Pound

“Can you tell me where my country lies?”
said the unifaun to his true love’s eyes.
“It lies with me!” cried the Queen of Maybe
– for her merchandise, he traded in his prize.

“Paper late!” cried a voice in the crowd.
“Old man dies!” The note he left was signed ‘Old Father Thames’
– it seems he’s drowned;
selling England by the pound.

Citizens of Hope & Glory,
Time goes by – it’s the ‘time of your life’.
Easy now, sit you down.
Chewing through your Wimpey dreams,
they eat without a sound;
digesting England by the pound…

I found the title of one of the early Genesis masterpieces particularly appropriate today. It was a long time ago, but I must have listened to the music at least a hundred times. Peter Gabriel, the unequivocally Brit lead singer and flutist, who was to leave the band months after the promotional tour, suggested the title and wrote the lyrics -as (nearly) always was the case. It is a metaphorically loaded lament on the destruction of the UK’s cultural heritage. At the time, the “enemy” was Americanization -but it could very well have been directed against Germanization or Europeanization nowadays. Colossal singing for the first two minutes, followed by impeccable, but somewhat aged, British-flavored homemade rock.

The “Brexit” referendum victory was hardly a smart voteBut it was a wise vote -even if entirely for the wrong reasons. Populism, Xenophobia, Class war, and tabloid supported nationalism implicit in headlines like “I beLeave in Britain”, are hardly desirable drivers for any vote, and those emotions were key to the outcome. Of course, if you are on the lookout for some evidence of voter wisdom, it pays to remember that famous Churchill quote about the main argument against democracy (a five-minute conversation with the average voter).  That is what democracy has to offer, and it is not a prerogative of the UK voter. Look at your own country for more of the same. Democracy is one of our global problems. Up to now, nobody has come up with a palatable solution.

Some more pain is still to come, and the City has been placed in the proverbial spot between a rock and a hard place. But it was, nevertheless, a wise long-term vote. I can cite two basic motives (that most standard UK voters are not even aware of) to support the “wisdom” epithet.

In the first place, the EEC is a sinking ship, and the euro disaster that must take fault as the main cause for the inevitable shipwreck is undoubtedly not Britain’s responsibility. So, why should they tie themselves to the ship deck and go under for something they were not even a part of. The euro is a huge Ponzi scheme where exporters lend importers the money, in exchange for keeping the buying up. Everybody is happy in the short run, but layers of irredeemable debt accumulate, until the total bankruptcy of the system. You are better out of that as soon as possible. Yet it is understandable that it makes the rest of the players uneasy about their own exit before it crumbles. Still, you want to go before the vortex of the sinking ship sucks you down with it. It is not an act of cowardice, but rather an act of prudence.

20160615_out1Brits did not suggest the euro, and never wanted anything to do with it -or with the credit boom and the macro disequilibrium, it generated in the periphery. And they did not profit from it either. If anything Sterling’s PPP has always come up as expensive relative to the euro cross, for the last couple of years. That shows in their trade balance -showing a deficit not far from 5% of GDP in their trade with the rest of the Union. They not only refrained from begging any of their neighbors, but are being used by their neighbors as a convenient goods market (services, and particularly financial services, are another matter).

Decoupling and navigating away from the Eurozone is a wise financial move. The Club Med countries are a postponed bankruptcy (they were a basket case long before that anyway). It makes sense to move away, annoying as it must be for Germany -that would like others to share the problem of financing the subsidies in the south. Why should Brits cooperate? After all, it is Germany’s interest to maintain their export markets, and preclude an episode of abundant German Banks going under together with the periphery bust. Think Deutsche Bank. Continue reading

A rationale for the Fisherian high plateau in global equities.

I have been predicting a bust in equities for so long that, over the course of time, I have engendered a reputational problem. I never said the timing of a system reset was easy (no bells are rung at tops). But, even after protecting myself with a long list of caveats, it is clear that the market reset I keep on anticipating, is long overdue. That’s a fact that I will reluctantly admit to (like it or not).

Thankfully, by now it is not only me. We are a solid bunch in the back and front benches of the “conspirationist horde” that believe all market pricing is now fake. That “we” includes us Austrian economists, Macros, and Hedge Fund managers, together with a bunch of the established banks that are ostensibly moving to the dark side of the force.

The issue is that it hurts our egos (and our pockets) to see that equity market pricing is conspicuously proving us wrong. Nothing exceptional. We are all wrong more frequently than we would care to admit, and I am no living exception.  The odd thing is that this time around, we got the reasoning, and the economic modeling right. A lot better for sure than the varied DGSE models run by the Fed banks. We anticipated the global macro outcome quite neatly, and we got the bond and currency markets mostly right. How come equity markets are not providing us with our well-deserved success fee?

Looking back, it’s been nearly a decade since a couple of us, timidly at first, began to explain the inconsistencies in the Central Bank driven, global pricing model for financial assets. It has been a long slog for an initially pitiful group of free thinkers. We were mostly on our own until we got to this point when the big names in investment and even Deutsche Bank, JP Morgan, Citi, Goldman, or Bank of America are expressing their concern for the ridiculous mispricing of assets. A ridiculous price level that only subsists because of the orgy of Central Bank, printing, nirping and outright manipulation. Not new. We said we were blowing a new bubble, years ago, but nobody listened. Now the big players are joining in.

Icahn, Gundlach, Bass, Druckenmiller, Gross, Grantham, Soros, Edwards, and many others are now clear, and outspoken, about the massive risks to the system that go unobserved for the majority of investors. It is easier for them than for the banks, they have weaker links to the establishment. Anyway, be it by relevant investors and analysts, Banks, or us bloggers and small size investment offices, I think the message has been clearly formulated. By now even dumb market players should be hinting that all is not well with actual market pricing. Yet the conundrum is that markets continue to price risk south (conversely risk assets are bid up).

From a purely intellectual standpoint, I feel my views have been vindicated by events. Most of the Keynesians are jumping ship, and converting to Say’s law in droves. The world economy is in a dreadful state after years of printing and lending. Nevertheless, I think it’s hopeless to treat myself and readers with more of the same reasoning. We deserve better.

We all know by now, that the great moderation and the subsequent grand monetary experiment did not succeed. Great! But what’s the use of winning the reasoning contest, if you cannot use your prescience to generate financial returns? I remember Bill Gross stating some time ago, that it is not about getting the GDP prognosis right, but about anticipating the shape of the yield curve. Despite being notoriously right in our real economy prognosis, explicitly suggesting how inefficient and wasteful this money printing and nirping episode would turn out to be, something is amiss or underestimated in our reasoning. Continue reading

The future ain’t what it used to be

To use Bob Dylan’s legendary lyrics, for better or worse, “the times they are A-changin”. Just in case you hadn’t noticed: Central Banks do not want to change. But you can’t stop the species’ evolution, and holding on to an obsolete model is not a viable strategy. They ought to know better.

Let’s forget Central Banks for a while. When talking about embracing the future, citing Cinderella has become a classic. Had she walked back to recover her shoe, she wouldn’t have married the prince. To all appearances, she did best not looking back. That is, provided she wanted to become a princess, because, in fact, she never asked for a prince -but a more mundane night off (and a dress). Any doubts? Read the story once again!

That goes a long way to corroborate that we never know what’s next, and, even if we did, we might be unable to single out the best available option, or the one that will work best for us. The world is now moving really fast, and my perception is that tectonic social and economic moves are accelerating. An unfortunate outcome indeed, because I don’t like where we are heading (nobody should), and because the speed of events inevitably unleashes some unwanted bad vibes. We all like to move at a more leisurely pace, particularly when facing deep and unpredictable social and economic changes. And we all feel the fear of change as well, even though, as Roosevelt once said, the only thing we should fear is fear itself.

Life is like cycling, to keep our balance, we have to keep moving. It takes courage to do so because, in times of change, moving can be jeopardous. Trading markets today generates feelings similar to sailing on a reach, flying our maximum size asymmetric spinnaker, on a thirty-knot breeze. Exhilarating, and, of course, great fun -but emotionally tiring if it goes on for long.

Constant adrenaline shots are unhealthy, and if you’re not careful, following very tiring days, you end up sleeping on your toes as well. Asian markets provide their fair share of trepidation. We get sparse moments of rest, even in these stalemated markets. No matter the reassuring establishment messages, we are all aware of the precarious state of both our global social contract, and global business model -low implied volatilities, and CB controlled markets do not fool our inner traders.

The result is we humans trade less, a lot less. Trading volume in equities came off a time ago, and bond and currency volumes are taking a beating as well. Only cyber traders subsist, they do not suffer angst, and they do not need a full night’s sleep. To CB delight, we, independent money managers and individuals, are trading less and less in this hazardous environment, and that facilitates rigging operations. Banks are not that happy about it.

It does look as if CBs are still in control. So, in the midst of this precarious, uneasy calm, it comes as a surprise to see more and more global strategists at core establishment banks changing sides ostensibly, and making sure everybody makes a note of it. Bank of America, JPM, Citi, and belatedly even establishment darling Goldman Sachs, are signaling a clear risk-reward imbalance for equity investing. They are flagging risks the traditional way: “small upside, large downside perspective for equity investments”. No VaR nonsense this time around (we all know implied probability inputs are POMO desk massaged figures). The result is that smart money ebbs out of equities in the US, for 14 consecutive weeks, and even buybacks are weakening.

Hard to believe, the reality is that, amazingly enough, prices haven’t budged, even as recession probabilities mount, and FOMC members put rate hikes back on the table. POMO desk price control is doing fine. Nothing comes for free though. As a downside for extend-and-pretenders, market intervention is taking place more and more in the open. Above certain levels of intervention, stealth techniques are no longer possible. We now see what looks like a direct intervention on a nearly daily basis. You know the adage: if it looks like a duck, swims like a duck, and quacks like a duck, it is probably a duck. The S&P 500 is rigged!

I think the FOMC’s actual policy stance was implicitly exposed by some Williams (San Francisco Fed) comments on the risks of a market plunge because of policy normalization. They are trying to put interest hikes on the table again while controlling market moves exhaustively. They probably think that if they can handle the initial headline impact, as a market mover, everything will be OK. To me, this is wishful thinking again. Market pricing follows valuation rules that are only invalidated when monetary aggregate variation takes a front seat. It is thus an impossible feat to maintain a pricing level related to previous printing and ZIRP levels, once these are gone. If the headlines do not move the market, market players will, only later on. Markets, like water, always end up finding a way forward. They only need time. Continue reading

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

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

One last print to come. Maybe a lot more.

“The return to monetary stability does not generate a crisis. It only brings to light the malinvestments and other mistakes that were made under the hallucination of the illusory prosperity created by the easy money. (Ludwig von Mises)”

The Fed’s trip to financial stability.

To anybody who has read Mises in depth, it was glaringly obvious that the road back to monetary stability would be treacherous. Regrettably, the date when we would get going with that uncomfortable transition was not predictable beforehand. Ever since Ben’s no-show in June 2014 (as a consequence of the taper tantrum), lots of confusing and contradictory fed-speak made it difficult to pinpoint the exact moment when they would go for monetary normalization.

It took Stanley Fischer well over a year to convince Janet and colleagues that rates had to take off soon. At long last, they did it last December. Good. We now know where we are, and what they are trying to do at the FOMC. Fisher or Williams have made it very clear, and even the most dovish members were not standing up against a suggested series of three to four rate hikes through 2016. Janet Yellen recently reiterated their commitment to normalization. Their mood will change in due time. In fact, it changes as I write. Back-pedalling is already real at least referred to interest rate hikes. More printing is hopefully not being contemplated… Yet!

“A weakening of the global economy accompanied by further appreciation in an already strong dollar could also have “significant consequences.” … We’re acknowledging that things have happened in financial markets, and in the flow of the economic data, that may be in the process of altering the outlook for growth and the risk to the outlook for growth going forward.” (Bill Dudley 02.03.2016).

I think it is safe to assume that, for the time being, they are going to try to stick to their course and normalize monetary policy -for financial stability reasons. And they are trying to normalize asset values as well. In Fischer’s own words: “if asset prices across the economy -that is, taking all financial markets into account- are thought to be excessively high, rising interest rates may be the appropriate step”. And he added, “the Fed should be open in the future, to raising interest rates to ward off potential asset bubbles”. I read him loud and clear, and it’s a nice change since Bernanke and Yellen last said that monetary policy was not the right way to avoid them.

Even if this reassuring talk comes at the eleventh hour, it is comforting to listen to Stanley Fischer. He means what he says, so we have to assume their commitment to a gradual tightening in the USD. And a tightening in the global reserve currency impacts us all. Together with that, the good news is that they now belatedly admit that the tightening is not really focused on business cycle related requirements. Rather, it is financial stability and risk building concerns that motivate the lift off. Is this as good as Fed-speak can get?

You never know. Anyway, regarding what we have already seen, I am not sure you can say better late than never this time around. There is no easy way out of the plateau of asset overvaluation, and accumulated debt increase, that easy money has engendered. I think a meltdown is inevitable. The deflationary forces unleashed by the tightening in liquidity and higher rates will lead us to financial disorder, and a financially induced recession, and make it necessary to print at least once again. Unless we want to allow the ATM network to run out of paper money! Continue reading