Author Archives: Ricardo Tejero

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

Learning the hard way. Is there any other?

“Education is what survives when what has been learned has been forgotten”

Language is great. When used properly, you can sometimes come up with some easy to read, compressed wisdom. And making reading easy and short is not an unwanted or unnecessary outcome. It is paramount in our present “low intellectual effort” social environment. In that sense, I get lots of complaints about my posts. Not that they induce the remotest doubt that I should adapt to the easy-reading, no-substance, dominant posts of today. Private banking weekly “résumés” are guaranteed to make you laugh -or sob, in a heavyhearted remembering of what the “homo sapiens” once was like. No new ideas to share, and a compendium of financial press statements and reasoning of the lowest level. Yet it is exactly what their clients and readers want.

People talk monetary policy like it was soccer. As a Spanish politician, now defunct, once said: if everybody only spoke of what he knew about, there would be a planetary silence that we could all take advantage of in order to read and learn. Twain also cleverly phrased the problem. It ain’t what you don’t know, but what you think you know and you don’t, that will get you into trouble. Most investors think they know what they are doing because Fed chairs have eliminated downside risks for what seems an eternity. They don’t. They are in serious trouble today.quotes-about-education-hd-wallpaper-19

Brainless, memory-worn investors, humbled now to a degree, are getting what their educational level has entitled them to. Only education might have prevented investment patterns that enabled the last financial boom (and the previous ones). Greed always follows fear in the investment cycle, and only strict educational levels can help us humans remain disciplined at all times. Particularly if CB’s are playing cheerleaders and conducting the herd to economic suicide (with the inestimable support of the sell side segment of the securities industry). Investors followed the pied piper of Hamelin in droves, because once they had forgotten 2008, those memories gone, there was nothing else left to prevent them from doing so. And it sure helped that Ben played his Hamelin pied piper role magnificently. I hope history will be able to assign responsibilities for all the grief and misgivings his conduct has produced. More than a few Central Bankers ought to be jailed by the time this financial clean up is over. Highly unlikely though -save for isolated cases like Iceland.

Following up on compressed, easy to read wisdom, but somewhat bloodier, the adage about bulls and bears making money -while pigs get slaughtered-, is also a universal truth. A truth that had been deep frozen by the “easy money” and the  “put for all” idiotic Fed policy. Greed has been relentlessly rewarded by CB’s -generating a pervasive moral hazard environment for the masses. We ran out of examples of risk materializing in heavy losses for imprudent investors. Investors were bailed out time and again at no cost. CB’s sponsored the party and ensured an “all you can drink” punch bowl use. I have felt like a priest recommending sexual constraint in a permanent non-stop sexual orgy, assuaged with lots of alcohol and drugs in order to make it last.

But, if something could not go on forever, it was certain to stop at some point. Yellen and Fisher finally understood the printing orgy had gone too far, for too long. Bubble pricing in financial assets, excessive risk undertaking by investors, and notorious malinvestment were all too evident. All their fed-talk about the strength of the US economy is bullsh.. to cover their backs. And they know it. Anyway, even if they try to hide the reasons for tightening us out of the easy money mess, we have to credit them for being brave enough to try to put an end to the party. Regrettably, their decision will induce gargantuan consequences that were baked in the cake by then. If global money magnitudes remain more or less stable, the traditional investment rules and adages will be applicable again. And even if that is undoubtedly good news for the long run, we will likely be unable to get to that point -while remaining financially alive. Continue reading

Kalecki plotted Central Banks’ actual course.

The rate of interest, or income tax, is reduced in a slump, but not increased in the subsequent boom. In this case, the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump, it will be necessary to reduce the rate of interest or income tax again and so on.

Thus in the not too remote future, the rate of interest would have to be negative, and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.”

Political aspects of full employment (emphasis mine). M Kalecki. Spring 1942 lecture.

imagesThe quote above is a great synthesis of the actual state of affairs. Obviously, the easy money FED chairs, Greenspan, Bernanke and Yellen (not to forget Arthur Burns, the hawk that morphed to Dove/Nixon-puppet) never read that paper. It’s not that this excerpt hasn’t been used before. Brilliant, it cuts to the chase, and therefore it comes as a surprise that it is not well known by mainstream economists. Really the text says it all -when judging economic policy in the last two decades. You just have to combine Kalecki’s implied prognosis for an easy money policy (lowering rates ends up in increasingly negative rates), with the well-known Von Mises statement about the inevitability of a melt-down after an easy money and credit orgy. Monetary and fiscal policies efficacy, truly revealed.

Seventy-some years after Kalecki wrote that lecture, we are now in the midst of the remote future suggested. We have negative rates spreading around, and income tax is about to be compensated with an entitlement scheme for every single citizen -in countries with an outstanding economic reputation. No other government than Finland is now suggesting a salary for all (employed or unemployed, rich or poor) of around 800 dollars a month, for a final cost of 20% of GDP annually, and coming close to the income levels of public sectors in Japan or the US. We are not far from Kalecki’s prediction of paying out in entitlements more than what we obtain with taxation. Yet this is only the beginning. Helicopter money and nirping of our savings (outlawing the use of cash just to make sure negative rates do their job) are being actively discussed. QE for the people (a nice slogan for a viral strain of “helicopter money”) is increasingly being touted as the new tool of (delusive) economic policy. The apex of economic madness it must all be. If not, what else (hat tip: Nespresso)?

b2ac113cdd5fc256ce2a4e43ecd3da41What’s to follow next? Indefinite incrementally higher negative rates (lower rates again and again), and more and higher out payments financed with helicopter money?  Do we have a roadmap to economic heaven?

To heaven, it sure will not be, but more likely to Dante Alighieri’s description of the reading on Hell’s entrance (“Lasciate ogne speranza, voi ch’intrate“). I must have seen that reading before (maybe in a previous incarnation I can’t remember) because it has been some time now since I ran out of hope that we could gradually solve our economic quandaries. Of course, we can live without hope if we are aged enough. But can millennials do well at that?

freedom of choiceFiscal stimulus (lowering taxes or increasing public expenditure above the government income level), and/or monetary stimulus (more money, cheaper money, or both) are a self-defeating strategy in the long run. By now even mainstream economists begin to grasp the inevitability of the route described by Kalecki. He really thought that fiscal spending stimulus (as opposed to lowering taxes) could do better than tax reduction stimulation. Maybe, but the dead end is equally clear to me. Overspending, relative to public budget income levels (be it lowering taxes or increasing public expenditure), or easy money, always end up somewhere in the Kalecki path. So much for Keynesian stimulus. To corroborate that, just ask the Finns in a couple of years. Continue reading

Still crazy after all these years

Yeah! Crazy I very well might be, or at least I will admit to looking like it -to conventional thinkers. Fighting the tape has not been the best therapy to preserve my sanity, and that is what I’ve been doing for a long time. Constant procrastination by our economic and monetary authorities has, more frequently than not, driven me mad. It upsets me deeply to observe how, time and again, we avoid the decisions that are desperately needed to reroute us to a viable and peaceful future. Looking back, I still can’t believe what we have done to ourselves as a species.

Crazy or not, decidedly, I stand for the species assuming full responsibility for our leaders’ mischief. We have the leaders we deserve. It is, unquestionably, a depressing reality. To make things worse, it is hard not to be reminded daily, of the dismal quality of our dominant macho-alpha representatives. All the way from Hollande, Zapatero, Corbyn, or Putin to prospects like Le Pen or Donald and Hillary, across the Atlantic, you can recreate the same story. Honest and wise people never progress. Only populist procrastinators, dumb, ruthless, or radical politicians get to lead the pack. And that has been going on for a long time now. Think as far back as Jimmy Carter. Democracy is a disaster when the mob’s educational level is not above the minimum requirements for a wise vote. Take a hard look at our elected macho-alphas. Recently John Mauldin wrote an article considering the chance that we have reached the apex of stupidity as investors. That goes for voters as well. If we are not there, we are indeed close enough. Continue reading

‘Piecemeal World War III’

Have we, as a global society, gone way past the point of no return? Reading my last post again, just after the Paris counterattack by ISIS, it struck me that maybe I shouldn’t be constantly denigrating the wolves shepherding the human herd. After all, sporadic social upheavals and terrorism, can -and will- get worse. Much worse. Confronted with ISIS, or Nicolas Maduro, I’d rather have Mario Dragui and friends running the show. Recently drone defunct ISIS “John” and co, or any other radical group, might be the herd-backed alternative. Our choices are increasingly limited to picking the lesser evil. Maybe I should back them Goldmanites after all -at least they do not know how to handle a Kalashnikov.

We dissidents might be entering a time where Austrian based economic surgery is no longer an availble option. We tried hard to prevent public, government, and CB endorsing of the actual state of affairs, but nobody really listened. Let me tell you it felt lonely in the Austrian club -for endless years. But resentment is not a constructive emotion, however unfair and shortsighted Goldmanites and affiliates may have been.

That doesn’t mean I have changed my mind regarding global macroeconomic policy, though. I have no doubts that Bernanke, Krugman, Summers et al should be put to jail for their grave neglect, or at least condemned to economic ignominy. The piles of debt and layers of inequality accumulated are daunting. But, no matter how thoughtless and stupid economic policy may have been, the harm is done -and is likely beyond peaceful & orderly repair. As Ghandi used to say, an eye for an eye and we all end up blind (sorry I can’t side with the Jews, or Hollande bombing, on this). With WW III already well started, we have to remain focused on some crucial and urgent achievements.

  • An economic landing as soft as possible, after the long overdue, debt write-downs.
  • An economic system with a strong supply side in order to improve employment, wealth distribution, and mental health of the unemployed and underemployed.
  • An efficient, and fair, distribution of generated wealth.

That’s a hell of a job, in a very short time -in the meantime let’s forget the responsibilities accrued to those implementing the economic policies that took us here in the first place.

I increasingly doubt the patient (our social tissue), would survive surgery if we cease money printing, bring about some modest interest rates, downsize public expenditure, and compel people to read and work. Without reading and working, exponentially growing parts of our population are in for morbid mental obesity (if they are not there already). Economic surgery implies short term pain, for a long term gain -and a payback to our children. These are concepts unlikely to be understood by the mob. So maybe it’s best to just keep printing money, and “nirping” away our savings, for as long as it goes.

For sure all those surgical changes, that imply giving JMK a decent but irreversible funeral (and nothing less than a total cremation will do), cannot be implemented simultaneously. No question we need some time lags, and adequate phasing of the appropriate policy. But even playing our cards deftly, over a couple of years, I doubt we can survive the ensuing social turmoil. We have stretched unfairness and inequality well past the limits. And corruption is now, for all intents and purposes, obvious to everybody. abraham-lincoln-president-the-shepherd-drives-the-wolf-from-the-sheeps-for-which (1)

What finally makes economic surgery an unlikely success, is the fact the world population is more and more a mob of brainless short-sighted residual leftovers from the Homo sapiens species. They would not understand that we need surgery, if we are to clean up the mess, and set up an economic infrastructure that can grow moderate and sustainably -while preventing and uprooting the constant generation of outrageous inequality. Lastly, let’s not forget, if democracy continues to play, they control the votes.

Redistributing wealth will not do the job -as a stable fix. It is not about entitlements or redistribution of incomes. It is about distributing properly from scratch. Redistribution comes at a heavy cost, because it impairs entrepreneurship and personal effort. It will take time for society to understand this. Increased taxation is not the way to go. We have to route value fairly, as it is generated, to the right economic agent. And unfortunately for anybody holding equity, the consequences of doing so, will be severe for after tax free cash flow (explanation below).

The main generators of atrocious inequality are,

  • large, corrupt and inefficient governments -with their elites,
  • large ultra-efficient, but ruthless large caps and multinationals and their boards of directors,
  • Goldmanite politburo controlled CB’s and all those near them that profit from the Cantillon effect.

They are responsible for most of the inequalities that have surged over the last two decades. Definitely, lots of bad news in the pipeline for those groups. Continue reading

I still think the top is in place -or thereabouts.

We got it all wrong.-

I came across some old reads regarding the Taylor rule for the monetary policy imposed rate of interest -the fed funds rate (not to be confused with the Wicksellian, natural rate). As most economists would have done, I immediately engaged in a quick mental check of the implied rate applicable in our actual economic conditions -both for the Euroarea and the US. You can think for yourself, it is pretty straightforward to calculate -if you can trust the published inflation rate, and figure out the output gap with some sense of accuracy (I suggest you better just trust the official liestatistics).

tr-slide

And then, I began to think about its components. It was built for the US, and, as a consequence of the dual mandate, it sports two weighted structural components. The inflation weighting, arbitrarily set at 0.5%, and the output gap coefficient also at 0,5% (in the original formula). Both figures stink of a Solomonic compromise between the two mandates. No scientific backing is to be found for those equal weightings. His guess is as good as mine -or any other.

What’s more, the math also includes an “out of the blue” implicit inflation target at two per cent, and a Wicksellian-estimated long term equilibrium real interest rate of 2%. Take all those subjective factors in, put some faith to play (of the religious kind), and assume they are right. Now, that, and no other, is the run of the mill amount of predefinitions that apply even for a relatively simple (and brilliant) formula. Just imagine what the formula would be like with a DSGE model like math. No matter how good the formula is, the estimated pre-introduced parameters are bound to be wrong. We are following the wrong economic manuals.

Do you really think that any of us can get those parameters consistently right -much less so the mediocre FOMC? Come on! We have to be realistic. Give me the formula and the chance to chair the Fed, and I will provide you with some decent arguments for a Taylor rule rate calculation with a double result. And a spread between the two numbers in hundredths of basis points! They are really playing “God”. And they like it so much… They feel powerful. It’s like pretending to be Superman. Some say power is a great aphrodisiac. Maybe. I have to give it a try someday.

Once you decide that monetary policy plays not only a role, but even allows for a dual mandate, it is all a downhill walk to arrogance. Planetary arrogance. The equation (or its most basic principles), is also applicable for China, Japan, or the Eurozone, provided we can convert it into a somewhat more sophisticated algorithm. Why only two mandates?

The ECB may not have an explicit dual mandate, but de facto, and viciously late, it always goes all the way to “whatever it takes”. At least ever since we lost good old fashioned Jean Claude Trichet. Talk about crappy dual mandates like in the US. You want to be generous and open minded. Dragui and Co feel they have a spherical multipolar mandate to do, whatever it takes, for any end that they feel might be desirable. It gets better yet with Chinese monetary policy. When it comes to the Chinese we really need a half a dozen formulas. Monetary policy, credit growth, child birth policy or fiscal profligacy are all levers to fine tune the economic engine. And I am missing some more. Fine tuning? Or gruesome manipulation?

Maybe Taylor should work on his math and take climate change, social distress, and immigration policy -or any other relevant issues that suit the politburó, as new elements for the formula. He can give them equal weighting (following up on his previous Solomonic strain) or opt otherwise. Maybe he can give climate change an 80% weighting. Or he might even enjoy introducing some ideological factor with a relevant weighting to please the Chinese communist party. Does it matter?

magic moneyConventional wisdom has it that monetary policy really solves it all. It’s just magic. People are beginning to whisper the miraculous result of joint immunotherapy and NIRP in the advanced treatment of cancer metastases. Can you imagine that? Once you do think that monetary policy is a tool for anything other than stabilizing the value of our medium of exchange (money), you are booked into Hotel California. You can never leave. You will need more and more of the drug. And while you are still booked in, why not try to use the hotel drug saloon-spa to bulge investment, lower unemployment, or combat corruption or climate change with it. The whole set up smacks of arrogance and insane reasoning. And yet nobody dares question this axiom.

If you manage money, and you are serious about it, you just have to double-check all the economic conventions constantly. This is a rapidly changing world, and you’d better see risks before others do. On this particular rule, and the implied wisdom underlining it, the validity of the recipe is crucial. Right or wrong, I like to think, and challenge conventional wisdom in key axioms. Some of us are perpetual dissidents in whatever area of science we happen to be involved. Actually, believe me, it is very tiring to question daily what everybody else takes for granted.

US Taylor rule

The chart is a little dated. Taylor rule rate right now is likely below zero again (inflation is down and the output gap is a tad worse)

The Taylor rule is like the ten commandments list. Everybody is wholeheartedly confident that it is the work of a genius. In fact I have nothing but praise for the maths in the formula. My discrepancies go much deeper. Why do we need a formula?

Taylor’s algo has certainly helped provide a coherent explanation for the interest rate levels set by the FOMC since Volcker -up to roughly 2010. Alan and Ben adore it, so I have to be extra-careful about my critique. Right now, it is suggesting no tightening for the USD -that most likely wouldn’t last long because of instantaneous further deterioration of the real economy. To be very honest, I really don’t care. And anyway, as of late they are actually ignoring it. Interest rates have to go up, but not because of Taylor rule numbers, inflation expectations, or taming the cycle. And the best we will get, if we do get it, is a “one and done” job.

The issue is not if this is the applicable formula or we should use any other. It is not about dual or even single mandates. The issue is if monetary (and fiscal) policy guided economic activity is the way to go, or a self-perpetuating delusion. Continue reading

Enduring a new deal

Je dis que rien ne m’épouvante,
  je dis, hélas! que je réponds de moi;
  mais j’ai beau faire la vaillante,
  au fond du coeur, je meurs d’effroi!
  Seule en ce lieu sauvage,
  toute seule j’ai peur,
  mais j’ai tort d’avoir peur;
  vous me donnerez du courage,
  vous me protégerez, Seigneur!

I found the lyrics of Micaela’s song, in Bizet’s “Carmen”, particularly appropiate today. Micaela has always been my darling in the aforementioned opera. Maybe it’s just that “je ne suis que faiblesse” with French women (and no, no mails please, I’m not looking for an affair at Ashley Madison’s). The “You tube” video I have linked is, in my view, the top (or near top) soprano performance, for that particular aria. There are no live images in the video I found, but the quality of the singing (not to forget the aria itself) is superlative. I think Mireia Freni, Montserrat Caballé, or Anna Netrebko, can’t beat it -at least for this particular aria.

And now, let’s get down to business. Not before precluding some readers getting lost in translation. Micaela, in plain English, “… for all my pretense of daring, deep in my heart I’m full of fear! In this wild place, so lonely, all alone, I’m afraid. But I’m wrong being afraid …” As FDR famously stated, the only thing we have to fear, is fear itself. We should be brave and get rid of this monetary orgy ASAP. Time will put things in perspective. Inaction is a lot worse.

We are all afraid aren’t we? This is a big mess we are all in, and we know we are going to have a hard time navigating our way out of it. Deep under, whether we admit it or not (depending on your degree of Keynesianism, or self interest in preserving our job and status), we all know the monetary Princetonian-Keynesian experiment hasn’t worked. We have digged ourselves ever deeper into the proverbial hole. Mises was right all along: the only way out of an orgy of credit and easy money is taking the bitter medicine. More credit and easier money was never going to do the job.

By now, an increasing number of top strategists concede that only QE 4ever can reliquify markets again. POMO desks need urgent air support. With financial napalm. The next two charts by Societé make it very clear. AE1_0

AE2_0The minute we ran out of fresh daily printed USD, the reserve currency began to regain some previously lost ground (over the previous three QE’s) in forex markets. That pressured the Asian currencies, and all others with an explicit or implicit peg to the USD. Their CB issuers were forced to intervene in order to preserve their forex stability. Global reserves began their downward run with two results: an obvious reserve crunch and global liquidity reduction, as outlined above…

And a less evident direct pressure on financial prices. After all, according to the  2015 GPI report from the OMFIF, it happens to be that investments held by 400 public institutions in 162 countries add up to a value of more than 40% of global GDP. CB’s, step by step, are beginning to own the financial market. The equity portion of their portfolio is higher every day. How on earth are they going to allow it to fall? In Ken Follett’s wording, public institutional buying, together with buy backs, are the late “pillars of financial prices” (helped an assisted by nirping and printing by CBs). CBs have it best. They print money, and then go buy financial assets. Very convenient indeed. Continue reading

The top is in (save 4 QE4)

Life comes with an expiration date, only we don’t know it. Everything in life expires as well. In the world economy the time has come, for the end to a means (maximizing growth with easy money and easy credit). A means of achieving a laudable end (super-welfare states, unlimited credit, and two cars and houses  per middle income family). A great end. Yeah! I know the reader loves that “end”. We now think happiness depends on the make of your car. We can’t do without our BMW, or can we?

camper_van_1_1112565i

Will this do for a Hummer?

Don’t be upset. The end to a means doesn’t mean it is the end of “the end” (perpetual prosperity) itself. There are other means we can use to achieve it (depending on how lavishly you define prosperity). wallpapers-hummer-h2And that must be what super Mario had in mind when he stated he would do “anything it takes” to save … the euro, his job, and prosperity (at least for himself and his family).

Three disagreements. First, the end doesn’t justify the means, no matter how laudable it might turn out to be. Second, he got the option spectrum wrong. More of the same will not do. I said that five years ago, and I was 90% confident. Now, I’m 100% confident my call is correct. Third, the euro will not survive in its actual form, regardless of the means used by the ECB. It’s just a matter of time. It is unfortunate that I share Varoufakis’ point of view, but that’s the way it is. I can’t help it.

From now on, it will take something else, something different. More credit growth and easy money (in any of the garden varieties available) will not hold this farce together much longer. Unless it is a load of brand new USD notes. So he, Dragui, and them at the politburos of our beloved Central Banks, will have to come up with an entirely new hat trick. Smart people, and cheaters, always have one last ace up their sleeve. Let’s pray they do. Do you think Mario is smart? A liar he certainly is. But he gets paid to do that -or that’s exactly what his friend Junckers told him he had to do when things got difficult enough. He should have been rewarded with a super bonus for the best lie since Puzo’s “The Godfather”.

Because if they don’t … Well, Houston, we’ve got a problem here. The top is in for risky assets, and debt write downs will begin in earnest.

We’ve been here before. Why won’t easy money suffice any longer? Because they have already fooled themselves and the population for too long. The common knowledge game is losing players by the hour. When you play liars poker, you just have to be patient and wait long enough -liars always set their own traps. They (our central bankers and politicians) have as well. Think global. They are cornered now. It has taken humanity a full seven years to realize that more credit and heli-money was a bluff. It will only take a couple more months (more than two in fedspeak) to put the last nail in the coffin for that paradigm. The medicine is not working any more. With every new round of credit and currency debasement people are becoming more and more skeptical. For a reason (see chart)3-debtdebt-and-GDP-1024x485

Continue reading