Category Archives: Currency analysis

On “hopium” and the delusions of crowds.


“Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is the opium of the people.”

Karl Marx

In a world with scant, if any, religious feelings left, hope is the establishment’s spurious replacement. In the well known Marxist quote above, you just have to change the term “religion” and read “hope” instead. The wise but controversial adage is still valid today. The establishment and CB politburos have been using Hope & Opium to kick the ball forward -for a seemingly endless decade. So far so good, but it pays to remember that hope never was, and will never be, a viable investment strategy.

It’s bad for morale to discredit hope, and I am aware of the high probability of being ignored as the automatic defense mechanisms for “cognitive dissonance” immediately pop up. If you need the yield or the return (ROI), financially you just have to be  “all in”. Most investors are additionally even selling some volatility to enhance their returns, regardless of being aware of assuming undue financial risks. It is all understandable. If I need the return, TINA is my criteria of choice (load up with equities, sell volatility). And if I were all in, I would hate to read my posts. Nevertheless, take a close look at the next chart. It shows the exuberant levels of risk in the system and gives me the shivers.

It could all well be the result of a new era. And, according to Heli-Ben debt doesn’t matter (LOL). Apparently, valuation doesn’t either (low rates are thought to provide a waiver that protects them from valuation excesses). But, at least, let’s look at financial valuations in relative terms (compared to physical assets) in the next chart. Sobering, ain’t it?

Finally, I can’t resist talking valuation in absolute terms, if only for a short overview. The Schiller CAPE confirms all our fears (see for yourselves online). So do charts on market cap related to gross value added, or price to revenues ratios -and all others that do not use “estimated future adjusted earnings” and current rates. That applies to most markets, Japan being the exception.

But complacency is soothing, and its appeal is difficult to resist when investors feel that they hold a CB put covering their back. No wonder everybody and their dog is short the VIX, and markets are rallying on little more than hopium. I have no words. I can do no better than Paul Brodsky at summarizing what’s going on.

“Rising markets, an unwillingness to acknowledge fat tails (unlikely knowns), and the inability to model Black Swans (unknown unknowns) have concentrated popular wealth into a narrowly distributed range of highly vulnerable assets and investment strategies. … 

We cannot help but conclude that asset prices are generally rising due mostly to inertia, in spite of unreason, and that the most likely outcome will be something unexpected and disappointing. …

 A socialized market framework with implicitly guaranteed perpetual positive returns for all must fail. … Helping to close unsustainable distortions is the only way capitalism can survive. Capitalism without failure is like Catholicism without hell.” Continue reading

It’s not “the Donald”. It’s “the dollar”, stupid.

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies.

On the one hand, the monetary authorities cannot simply focus on domestic goals without carrying out their international responsibilities. On the other hand, they cannot pursue different domestic and international objectives at the same time. (…)

The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.”

 Governor Zhou, People’s Bank of China, 23 March 2009 (emphasis mine)

Most pundits are unaware of the relevance of the USD at this point in time. They’d rather skip the point. I listen to frequent complaints on the “unpredictability” of currency prices. Maybe, just being naughty here, the underlying reason is that trading the majors, ie USD/JPY or EUR/USD, is tantamount to singular trading capabilities for most. I honestly find currencies more predictable than equities, but a host of market players prefer to engage in stock trading with a long only bias. We have to bear in mind the extraordinary behavioral biases that have been engendered by decades of easy money -and it’s certainly addictive to go long with a Greenspan kinda put to cover your back.

Unfortunately, notwithstanding the difficulty of getting the dollar right, at this stage, it is a must. It is “the dollar” (and not “the Donald”) that will be the main driver of global financial market developments for the next couple of months -and even well after we transition into a new global economic regime.

In order to understand “the dollar”, we must understand the history of the International Monetary system (IMS), all the way from the Bretton Woods accord, where the USD was granted prime reserve currency status, to the Nixon letdown, and, finally, the Global Financial Crisis. And no, I am not forgetting the 1985 Plaza accord in between but it is hardly relevant from a structural point of view.

Please bear with me for some background. The role of the dollar as the primary reserve currency begins at the BW summit, and it is essential to understand why the newly bred system was flawed from the very moment of its inception. 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

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

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?


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

Game Over.

Right in the midst of the summer doldrums, some concerning news can be found this year. You just have to read between the lines of the infamous short-sighted essays of traditional economic analysis.

In my last post, I suggested that the days of extending and pretending, whilst playing the missionary role in the investors common knowledge game (that the Central banks have the investors back), were close to a point of no return. The game has evolved towards a bifurcation. I stand firm behind the assertion that CB’s will soon have to make a choice, opting either for deflation, and a falling domino of debt write-downs, or an explicit dilution of debt via hyperinflation.

After a fortnight of intense sail racing, and some sober thinking, I have concluded that the Fed’s next move will be crucial. The main Central Bank (sorry for the political sensibilities that might be injured when reading this) is the Fed, the issuer of what, up to now, is the reserve currency of our seriously flawed fiat currency global system. The rest are secondary players (more or less additional printing by Kuroda or Dragui, or a load of new credit via lower reserve requirements by the PBOC, will not change things substantially).

It’s the Fed that plays the cards now. Regardless of the eternal confrontation on SDR’s and everything related to the role of the reserve currency, what the immediate future may bring in this matter, is still to be seen. The USD is still the most relevant currency, notwithstanding the fact that its position is wobbly, and many other currencies are eager to take its place (CNY would love to).

But things are the way they are, at least at the time of writing this. An entirely new setup (show) is coming soon to your local cinema, but not before we write down most of the cosmic debt, or alternately dilute it seriously Zimbabwe style.ABOOK-June-2015-Bubble-Risk-Eurodollar-Standard2 My advice to candidates for taking up the USD’s role in a brave new world, would be “being careful for what you wish”. Advice that I am assured would not be heeded, even if I played a prominent role in the institutional infrastructure of this global fiat currency and credit Ponzi.

Even though being the reserve currency ever since Bretton Woods (in fact since WW II), has been great business in the past, in this particular case, past performance is certainly not indicative of future performance. It all comes at a cost, and the cost of dominance is rich today. I would not apply for the role. We live a world of accelerating change. Nothing lasts forever. Ask Eastman Kodak, Nokia, and the likes.

Banks, utilities (electricity providers in particular), or central banking, share a meager future. This is a strong conviction call I will go all in for. They are businesses of the past. Of course not immediately, it will take time for the crowd to realize that a new world order is emerging. Letting go of ideas, beloved ones, habits, or nearly everything else, is one of the most difficult things in human psycology. Just like a simple man -Graham Nash- once sung: “they Just Want to Hold on” even while saying and pretending  “they Don’t Want to Hold things Down”. Continue reading

What’s next for the USD?

Okay. I concede to loving it. Nothing like a good old-fashioned short squeeze to turn me on financially. I am old enough to remember those great days in which smart, no remorse investors, played the game in pork bellies or corn. Chicago was the financial far west. Short squeezes in commodities were awesome, despite their questionable underlying ethics. ¿Are markets ethical the other way around anyway? ¿Who can talk for POMO desk ethics?

Fortunately, I was too young to be directly involved at the time, but I found those trading techniques exhilarating. I say fortunately, because sailing can compensate for the lost adrenaline, but age is irreversible. I have my crew working hard to prepare the next ORC world sailing championship taking place in ¡Barcelona! That should fill in the adrenaline lost when missing pork belly trading.

Short squeezing the USD is for adults only. Forget lean hogs, iron ore, or copper. They are childs play. EURUSD and USDJPY are the central pillars of the financial universe. Volume remains gigantic, even as liquidity is seriously impaired in most markets. Ten year JGB’s are the paradigmatic example: there is no market without the BOJ as a counterparty!

That’s not the case in the two main currency crosses. Even POMO desks fear both trades. You can corner the JGB market if you own the BOJ balance sheet, but even printing JPY at will, leaves you short of a real control of the USDJPY. The same thing goes for superMario. In the end, even controlling the EUR base money supply, he ends up imploring or jawboning participants to iinfluence currency prices. Well, now that think of it, he never really does that, because “the price of the euros is not a target for monetary policy in itself”. Ha ha. A stunning actors studio representation indeed. A better liar than Michael Corleone in the final scene of the film.

The size of the actual USD short squeeze is mind-boggling. As Confucio said, there is beauty in all things. you just have to see it. Admittedly, it does help to be long the USD, it’s tough to see the beauty of it when you’re being massacred. I’m still there in large size, but no leverage. I wish I had remained leveraged all along. In retrospect, the strength of the move was clear. As I grow old, I become more and more risk averse. I should have been leveraged all the time. Continue reading

The longer the explanation, the bigger the lie.

I like Chinese proverbs (like the one above). They can be incisive. In an atmosphere of widespread confusion, long, convoluted, and incongruous explanations, are the predominant reasoning today for all that’s going on. Most of the narratives are lies, but some well intentioned commentary simply reflects the fact that the author doesn’t know what he’s talking about.

While some Governments (like Rajoy’s in Spain) say the worst is over, and others say crude pricing and European Q.E. will recreate an equity investors paradise,european growth expectations ds Janet Yellen is reported to be quietly expressing her concern about the international situation. Soros briskly labels markets as “hellish”. Some countries are backdating currency puts targeted for those caught indebted in CHF after the swissie’s price realignment (Eastern Europe).

Others, like “professor” Abe (I am anticipating a Nobel prize in economics for him – just to follow the Krugman gaffe) are rejoicing in the crude repricing effects for their economies. Some are desperate, rising rates outrageously, only to bring them down again weeks later (the Russian Central Bank). Venezuela’s Maduro (and his unfortunate fellow citizens) are close to suicide, literally imploring the OPEC to cut production.

It feels like Central Banks are losing their grip on the world economy further. In my view, the process began in November, with all those disorderly comments by the different members of the FOMC -just because the S&P had gone below 1900. It has been an ongoing development. The event flow conspicuously shows they are gradually losing control.

I have shown my surprise during more than a few of the different episodes of this GFC, when financials took a turn towards the entirely unexpected (to me). Like when Q-Eternity was born in mid 2012. I was overwhelmed by that decision. Or the “whatever it takes” wording by super-Mario. Both I didn’t expect. But, honestly, none of the seemingly extraordinary events taking place this January has taken me by surprise. Continue reading

How Junk are your currencies of choice?

I loved a Zero Hedge excerpt of Hugh Hendry’s letter to investors. Brilliant. Risk-on vs Risk-off, as the crucial choice in finance right now. I have carefully selected a few paragraphs.

There are times when an investor has no choice but to behave as though he believes in things that don’t necessarily exist. For us (Eclectica), that means being willing to be long risk assets, in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully. The good news (for him), is that mankind clearly has the ability to suspend rational judgment long and often. …

What is one to do with such a situation? In my view there are really only two responses.”

The bearish response.-

“Remember the film The Matrix? Morpheus offered Neo the choice of two pills -blue, to forget about the Matrix, and continue to live in the world of illusion, or red, to live in the painful world of reality… (Some) as the “enlightened”, chose red, and so are convinced that they understand everything which has become illusory about today’s markets. Their truth is Austrian economics. They know that today’s central bankers are spinning a falsehood of recovery; they steadfastly refuse to be suckered in by the euphoria of a monetary boom; and they are convinced that they will therefore be spared the consequences of the inevitable crash.”

The bullish proposition.-

“I (Hugh Hendry) have long thought of myself as one of the enlightened… I still believe that the attempt by central bankers to prevent the private sector from deleveraging via a non-stop parade of asset price bubbles will end in tears. But I no longer think that anyone can say when (so he says he has taken the blue pill). Look back on the last five years and I think that it is indisputable that mass injections of loose monetary policy have both fuelled asset prices and staved off further crisis. I am also absolutely persuaded that the global economy remains so fragile that modern monetary interventions are likely to persist, if not accelerate. They will therefore continue to overwhelm all qualitative factors in determining the course for stock prices in the year ahead.”

I am impressed with the clarity of thought underpinning the argument. As I would most likely do, after a representation of “La sonnambula” by María Callas, I can hardly temper the impulse to shout ¡¡¡¡ BRAVO !!!!!!  And yet, I fully disagree with his judgment.

First. I have always said that mathematics has been rightly quoted as introducing not only “rigor”, but also “mortis”, in economics.  I do not agree that we have to optimize the expected return on our portfolio, regardless of the shape of the bell curve representing the “normal distribution” of possible returns. Fat tails have to be considered when deciding. And tails denote morbid obesity right now. When I have to jeopardize the return of my capital (to a substantial degree), in order to enhance the return on my capital, I always leave the game. Invariably. Above a certain level, expected losses or gains, outweigh each other naturally in a normal distribution, but they don’t in my book of vital choices.

Second. The “blue pill” might be the right option, but I will never, ever, go for it. As Emiliano Zapata once said, “It is better to die on your feet than to live on your knees.” There is more to life than optimizing your well-being or survival options. Call me a Jesuit if you want, but I will always go for the red one. Serfdom to principles comes before serfdom to debt or performance. I respect other points of view.

Third. I loved his reasoning, but there is a clear inconsistency in it. If he asserts that it is not possible to say when the asset price bubbles will end in tears, how come he can be certain about the outlook for the year ahead. If you don’t know when, it could be a decade down the road, but it could also be tomorrow.

Fourth. I think he is not picking the best option for his clients (because his brainless clients are mostly unaware of this subtlety), but for himself. He needs performance to subsist in the industry, so he puts performance first, and all the other considerations behind. He is honest about it, a lot more than others who try to sell biased analysis of the underlying reality in order to sustain their businesses. Admittedly, he gives his customers what they want: performance at all costs.

So despite the harmony in our diagnosis, I think the only consistent policy available is to stand aside, because -agreed- you do not know when the meltdown is going to happen. And use patience (the new cool word in fedspeak). If you are a man, in the meantime you can enjoy playing with your nothing box. If you are female, do as James Montier suggests, listen to Winnie the Pooh, and do nothing!

My financial survival is highly more unlikely than his. In essence, our divergence is all about a well known aphorism: “the end (performance) justifies the means (the blue pill)”. To me, increasingly, it is the other way around, and “the means (the red pill) justify the end (a period of underperformance)”. As a rule, I am sure no end justifies the means. All my sympathy for Hendry nevertheless. He may be right, and he sure does not deceive his customers. You have to credit him with clear risk disclosure in this scripts.

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Take one.- On life and change

I got it. We are short of sex, drugs and rock and roll yet again.  And we want to laugh, or at least smile, as well. My posts are only about problems and quandaries. Things are certainly not looking good -but who needs a pessimist to remind us? After all we should not forget we are human beings. As Mark Twain said, “denial (sounds like but) is not a river in Egypt”. It is a behavioural pattern embedded in the human standard ADN. And partnering our life with it won’t make us happy -if we live a time of change.

But denial is always the initial reaction to any perceived problem. Society lives in denial right now. The good times will come back. Debt will be repaid. I will buy a third car again, as soon as this is over. My readers are yelling at me: “I promise I will read you again, but please, please tell me everything is going to be OK. I desperately need some hope”.

I will try hard. But the times they are a-changing. I can’t change that. Nobody can (not even omnipotent central bankers). So what if we change horses, sacrifice “denial”,  and ride “Audacity” or “Intrepid”. They are beautiful horses, even  if somewhat brisk. What if we look at the future challenges as an adventure. What if we pull ourselves together and just relax. It’s hardly the first time humanity confronts serious change.

As Von Mises (not me) clearly stated more than sixty years ago, there is no way out of a credit expansion. The only alternative is whether we take the bitter medicine now or later. And yes, I know, later is always the preferred option. Not mine: I’d rather get done with it. There will be a bright future, but only if we do our homework first. Isn’t that what we tell our kids at home?

Be careful with indefinite postponement. The lyrics of Bob Dylan are hard to ameliorate. This song was written in 1963! It is a masterpiece. Superb. If somebody was able to write this, it surely is a reason to be optimistic. Unfortunately it does not offer an alternative to change. It just says: do not obstruct it. Go with the flow. Continue reading

Star Wars.

Do we want to call it a beauty contest for the most anorexic currency -with the sexiest appeal? Or should would avoid nicknames and euphemisms, and call it a self perpetuating currency war?

Branding is a very relevant activity in the real economy. Our central bankers were not going to be immune to its charm. When you put a sticker on a concept or a fact, you are actually working on the unconscious level of the listener, trying to tilt his perception of the issue. That´s the reason Guido Mantega is never invited to jet set parties after 2010, when he dared label what was going on in the USDCNH fix, as a “currency war”. How daring! Who allowed that guy in our circles? Where is he from anyway? Did you say Brazil?

That was only the beginning of the beginning. Later on, the U.S. allowed its currency, the dollar, to devalue vía expansionary fiscal and monetary policy. Through increased spending, implementing ZIRP (NIRP was not an acronym yet), and increasing credit and the money supply. Over time, they managed to drive the USDJPY to a level of 76. A few months later they took the EURUSD to an astounding high of 1,40 this year.

The Swiss were the next to join the fray. Starting august 2011, they put a 1,20 floor on the EURCHF, and bought foreign currency to the value of more than 60% of their GDP,. They were forced by the market to put their money where their mouth was. Central Bank omnipotence was not yet a motto. It was the first central bank balance sheet bubble in the series. No NIRP enhancement was needed. When things were looking ugly, back in august 2012, super Mario came all in, with his survival of the euro gambit and took everybody on board for the ride. They will never thank him enough. Gratitude is not only the greatest of virtues, but the parent of all others. Go ask Marcus Tullius Cicero.

The Japanese were late to war this time. Maybe the emperor was as reluctant to combat the US economically, as his antecessor was when the Pearl Harbor attack was being crafted. Abe and Kuroda realized that they were being priced out of the global market with an exchange rate of  less than 80 to the dollar, and less than 100 to the euro. “Abenomics” was the euphemism to use this time around. It comprised a healthy dose of money printing, the continuation of ZIRP, and some currency bashing with the pretext of beefing up their inflation figures. Real wages and German and US exports would foot the bill. Germany and the US were not going to complain. After all, they had their own mischiefs to hide before becoming too vocal about it. Yen was to be reclassified to junk status (see may post). And japanese savers are being massacred. But don´t tell anybody. Nobody seems to know!

People and the BOJ keep buying. The BOJ is even buying debt with negative interest rate. Talk about backing NIRP with facts. Ludicrous.

People and the BOJ keep buying. The BOJ is even buying debt with negative interest rate. Talk about backing NIRP with facts. Ludicrous.

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