Category Archives: All

The Keynesians, the Pavlovians, and other tribes.

Staunch Austrian Economists argue that a known quote, attributed to Milton Friedman in 1965, was taken out of context. For most, he signed in for Keynesianism when he coined the phrase “We are all Keynesians now”. Well, maybe he did. But such enthusiasm does not jibe with the fact that, three years later, he felt the need to fine tune his views on the issue. He then stated that what he really meant was that “We all use the Keynesian language and apparatus; (but) … none of us any longer accepts the initial Keynesian conclusions.”

That goes a long way to prove that Keynesianism’s obsolescence has roots in the very distant past!  Fifty years ago, a key economist like Milton Friedman felt the urge to distance himself from the “Keynesian initial conclusions”. Not that he was a stand-alone dissenter. For that matter, Von Hayek had used much stronger words to underline the major economic shortcomings of Keynesianism. “Bon-Vivantism” or “Shortermism” might have been a more accurate depiction of the discipline’s content.

Unsurprisingly, it was only the initial, tweetable quote, that remained in the minds of the economists of the time. Fast forward to 1971, and Richard Nixon wasn’t in the mood for subtleties at the time. Reportedly talking off camera, he told an ABC news reporter “he had also become a Keynesian in economics”. Off camera, or not, he was just talking his book. He had no choice but to officially embrace Keynesianism, and the leeway provided by the indiscriminate use of monetary and fiscal indulgence it supported. Sure enough, six months later he suspended the USD convertibility into gold, effectively defaulting on the gold peg of the, from then on, reserve fiat currency of the global economy.

Regardless of the need to cut the peg short at the time (defaulting in full was the only other option), nobody in the Austrian School of Economics can pardon the fact that he failed to anchor the currency to some other alternative peg (I stand for a peg of the monetary base to “Gross Output”, with a 2% flexibility band on each side). From then on, money printing was to be unlimited in nature and relied exclusively on the collective decision of the FOMC, and that of the other Politburos.  Keynesianism provided a free entry into the wilderness of limitless public deficits, ever expanding debt levels, boundless CB balance sheets, and manipulated interest rates.

Taking his cue from that doctrine, Ben Bernanke pondered the merits of the modern technology called “printing press”, together with the use of helicopters to spread out the money. That infamous speech earned him the deserved nickname of “Heli-Ben” -and a long tenure as the chair of the Federal Reserve. From then on, the world has been run on the premise of full conversion to the Keynesian religion.

A couple of decades later, and we all ought to be enthusiastic Keynesian converts by now. If Nixon had no other choice at the time, just think about what our real options are, today! Even if we wished to abandon the Keynesian discipline we have long gone way past the point of no return. We are truly stuck.

  • Piles of debt effectively impede moving forward, or even backward, with fiscal or monetary recipes, for much longer.
  • Outrageous inequality has been enabled by financial repression (punishing savers to enrich investors in the top wealth tier), and fostered by the availability of ever cheaper debt, with the aim of subsidizing faltering aggregate demand. Obviously, technological change hasn’t helped either. Ditto for educational levels, nearly everywhere. Top chart with the daunting wealth pyramid, courtesy of Gordon Long.
  • Supply side neglect has rendered a substantial part of our goods and services produce, obsolete, or environmentally unsustainable.
  • Keynesian public spending has bloated government sectors to more than 50% of GDP in some countries. European Labor Unions think it is not enough!
  • Unlimited liquidity has generated bubbles and inefficient pricing in most markets.
  • Zero financial costs for borrowing has favored a gearing up of most non-financial conglomerates, and a desperate search for yield (read return) by most investors -at all costs.

Yet we keep switching from monetary to fiscal Keynesian policies, suggesting escape velocity came real close with QE, or, of late, suggesting that fiscal reflation would solve the previously described pathology of our global economy business model. An endless continuum of policy mistakes. For how long? Continue reading

Trumpocalypse Now?

Perception might be the reality in your retina, and the only relevant factor when working to push the ballot count in your favor. But in real life, sooner or later, it is reality that inevitably prevails. That goes for economics as well, regardless of the easy fixes offered by Trump’s economic program, and others. Our present global economic reality is, at best, worrisome -and with a sad prognosis for the next couple of years (or more). That is a fact that can be perceived in many different ways. Make it opposite ways if you wish. But a fact after all.

In this world of relative beliefs, and prevalent wishful and/or politically correct thinking, finding the truth should still be the underlying quest. Learning the (economic) truth takes time and effort because it is complex and difficult to fully grasp and comprehend. It is so tiring, that we have come to accept that there is an infinite amount of truths for the same fact -depending on the color of the lenses of the viewer. Can’t find the underlying truth? Don’t stress out. Relative values have long faded absolute ones. Most think there are different truths depending on the eye of the observer. Nobody wants to find the naked truth anymore. It might be sobering, and it is not worth the effort involved. Or is it?

Bearing this in mind, we have to take the recent Trump event with a grain of salt. Here comes “the Donald”, now Mr. President, stating the obvious to all (by now): that monetary policy with its reiterated tools of financial repression, and abundant printing and lending, was not the way to go (Of late, Theresa May apparently also got that message as well). The issue is, for both, and for the rest of us, that despair and depression (of the economic kind) are not a great alternative to Keynesian wishful thinking. Nobody dares mention them.

Thankfully, “the Donald” and team have thought up something “new” in order to inject some badly needed optimism. A good old bricks and mortar revival conveniently sprinkled with some fresh lending. That ought to help him pull it off!  After all, he knows both sectors well, his life has always been full of bricks and mortar, and debt -lots of it. I wonder why prolific Paul Krugman hadn’t thought it up beforehand (maybe too many vested interests in the Keynesian priesthood monetary cause).

yogi-berra-quote-its-deja-vu-all-over-againWe live interesting times. Hence, it was unsurprising to see a post-election healthy bid for Caterpillar and the Banks, while Alphabet, Amazon, and Microsoft were sold with disdain. The Dow up big, and the Nasdaq down correspondingly. Animal spirits are all over the place once again, because brick and mortar spending will save the day. Hip Hip Hooray!

Inadvertently, we are getting used to all this nonsense. A couple of months ago, just after Brexit, it was the promise of infinite NIRP and helicopter money taking equity markets to a new, if marginal, top. Now, it is the reflationary program that will allow the present economic cycle to endure. Only our species can be stupid enough to move from fiscal to monetary policy and then back again, reiterating the same mistakes “ad nauseam”. Whatever they do, they never try to fix the supply side. See (above) what infamous Yogi Berra had to say for situations of the sort. It always pays to smile when facing such a serious issue for mankind, particularly when high doses of Prozac are the only alternative. Continue reading

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

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

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

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

Stating the obvious … and paying the piper!

It’s been a while since I last wrote for my blog. I haven’t run out of ideas. But, after weeks of reading all day long, I think I am short of brand new ones. Reading others reminds you to remain humble, because you are never as good as you think you are. My readers time (same as mine) is precious. In fact it is the only irreplaceable asset in our personal balance sheet.

All of a sudden it does look like the scenario has changed. By now, most economists with a decent professional level are admitting to the fact that easy money is toxic, and cannot solve it all. Keynesians and neo-classics are allowing for defeat in private. The keynesian sect is already “out” in upper circles. Word will get to financial advisors and the masses before long. Pondering “ad nauseam” the economic atrocities being perpetrated daily by our central bank -and keynesian acolytes- does not generate any incremental added value. And, honest to God, I do not experience any pleasure kicking Keynesians hard, especially when they are in a weak position (about time!).


Finally, some “uncommon sense” is creeping in. Stanley Fisher is talking about market stability as a policy target time and again. Even “the maestro” openly allows for the fact that the Fed is painted into an increasingly narrow corner. Kuroda is, as I write this, very outspoken about the “enough is enough” paradigm when evaluating the exchange rate for the Yen. They are, naturally, allowing for defeat half-heartedly, and with the usual caveats, when not outright excuses. “We had to do it”, “we gained some extra time”, and other similar cover ups. Dudley or Williams are cautiously following the same track.

Bernanke and Krugman are, as was to be expected, the living exception. They will “die-hard”. And astonishingly enough Dragui has also become a “QE-aholic”. Stating the obvious: he surely thinks a lot of himself. And he is not even argentinian (argentino)! You know the adage: if you buy them at fair value and sell them for what they think of themselves, it’s the trade of a lifetime. My wife says converts are the worst. Dragui was late to QE-nomics, and  now …

Focusing on the big picture, I think it is hopeless to brood the huge and long reaching consequences of our economic mistakes of the last two decades (with a Grammy in store for “Bernanke-Krugman” duo performance over the last five). That is how history has always been written, and will be written over and over again. We all pay for the mistakes of others. New mistakes will be made, and we shall have to cope with the after-effects. Nothing new under the sun (idiocy has not affected sunlight up to now). Continue reading

Enduring Deflation.

I hope readers enjoyed the Sirtaki video in my last post. I found the last scene of “Zorba the Greek” inspiring. It’s nice to relax every now and then, notwithstanding full awareness of the global debt pile. Unfortunately, at the end of the day, we all need to remain focused on the affair of wealth preservation. This post will be on the serious side.

I’ve writen on the matter of deflation before. But that was months ago, and both posts were in Spanish. My views, however unconventional, have not changed. The degree of conviction behind them is high. Deflation is a negative outcome only because of accumulated debt. In a debt free economy, supply side induced deflation is a “goodie”, not the ogre they try to sell us. It might as well be a “goodie”, because deflation will be a lasting episode, and not the fleeting situation politicians try to convey.

Sick aggregate-demand induced deflation, is certainly not as good. But it is the pathology of aggregate demand itself that should worry us, and not merely deflation. Deflation is only one of its various negative consequences. Actual deflation has roots both in the supply and demand side. Deflation is a undeniably a relevant phenomenom, but it is over-rated as “crucial”, because it impacts the effectiveness of traditional keynesian monetary easing recipes. ¡Isn’t that a pity!

Yes, deflation is relevant as a game spoiler for keynesians and Princeton sect economists. And it influences both the long term investment strategy, and the tools available to politburos of Central Banks. QE is doomed in this context, because any new money that we generate, has flown, and will flow, into financial markets, parking itself either in bank reserves, bonds, or equities. It will not access the real economy. It will not reflate the stream of goods and services, unless we accept Weimar style money printing (and thankfully we are not there yet). There is no glide path to debt reduction with mild reflationary policies. We have to focus on the real stuff. In a deflationary environment, money printing only gives your some extra time.

I see five reasons for sustained deflation in developed countries, and they are endorsed and validated by Japan’s empirical evidence over the last two decades (in chart).japdeflation

Continue reading

HAMLET. Act III. Scene one

“To be, or not to be, that is the question:
Whether ’tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,
Or to take arms against a sea of troubles
And by opposing end them.”

To greek or not to greek your debt. “Greeking” is a new verb that indicates “the willingness to take arms against a sea of troubles, and by opposing them, end them”. “Extending and pretending” has the opposite meaning, and is equivalent to suffering and enduring “the slings and arrows of outrageous fortune”. After years of experimenting with extending and pretending, greeking debt is the new paradigm. ¿Will they stick to their guns?

It matters a lot. Because we are likely to follow different routes depending on the survival of the debt sustainability fantasy.  We can’t really know who will “greek” first, and when. The Greeks are the obvious frontrunners, but anybody else could also opt for “greeking”. In fact, a lot more will “greek” sooner or later. The powers that be are hoping for extending and pretending, but Tsipras and Varoufakis could be the worlds first to “greek out” and dance Sirtaki (like Zorba). Maybe sometime this year.

Greeking out greek debt is only  the tip of the iceberg. I find it particularly ridiculous when we engage in endless discussions over the pretended rate of growth of the top line (world GDP nominal growth), and we fail to mention the ocean of debt that encircles us in a spiral of seemingly eternal growth. The recent Mackinsey report gives me a great chance to further elaborate on this point. Just take a thorough look at the 57 trillion “debt recovery” that has been taking place over the last seven years. Take your time because there’s a lot of info there.Global Debt

Continue reading