Category Archives: Equity 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

A rationale for the Fisherian high plateau in global equities.

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

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

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

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

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

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

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

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

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).


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?


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

A mulligan for “The big short”.

I got stopped out of my S&P 500 shorts -once again. Total costs of trying to short the market are mounting (3 to 4% of my portfolio over the last year), and the sequence of stopped out trades is testing the limits of my resilience. But my conviction is as high as it has ever been. I’m “bruised and battered” but, unlike Bruce Springsteen, I know how I feel, recognize myself fully, but want to stay the course. Undeniably hardheaded and stubborn, this is not an example of being unable to see the complexity, or the other side of the trade. I understand the bullish arguments embedded in the common knowledge game we are playing. And I sure know timing is tough because they don’t ring bells at tops -and this mother-of-all-bubbles is no exception.

In order to fish, you have to deplete your sardine stocks on board. Particularly if you are fishing for bluefin tuna. To balance things out, the expected reward tastes sweet. On top of the shot of high octane adrenaline, one catch can be enough for the day -if you are a small fishing boat. Financially I am a small boat, and the big short can save the year (and the decade) for me. Smaller drawdowns are conceivable with easier trades, but there is not that many available with the same degree of conviction and decent potentiality.

When we look back in ten years’ time (if we are alive), the trade will be seen as “glaringly obvious”. The timing is not. It never is. It’s tough enough to fine tune a top or a bottom, but in a rigged, herd driven market, it is almost impossible to get it right from scratch. At the very least you need to spend some money in various attempts. And that does not guarantee your success. See what the people in Saxo Bank have to say about shorting the equity market. Hardly encouraging. It shows just how distorted markets have been over the last decades. The past testifies to how unfrequent and short bear markets are. Optimists say this can go on forever. I will just add ¡Amen!shorting the S&P

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

Central Banks win another round in financial markets.

Oh yes, they did it again. Central Banks won this last battle. They squeezed out all the shorts and non-believers in the markets. Next war I am involved in (hopefully none at all), I don’t want the Pentagon to lead the troops on my side of the conflict. I want the top central bank chiefs in my war room. Napoleon couldn’t have made a better choice of generals. Don Corleone’s consigliere was a “benedictine contemplative nun” when compared to them.

I entirely disagree with their keynesian roadmap -and their ethics-, but I have to respect their professionalism. They all know the content and extent connoted in the expression “whatever it takes”. In fact, doing “whatever it takes” to protect “Aggregate Demand” (and market levels and the actual establishment as a byproduct) is the central wording in their oath. They forcefully implement what they deem necessary to achieve their goals. It was a tremendous coordinated effort this last week. ¡¡¡¡ Bravo !!!! I am impressed.

Now I understand why I will never be named a central banker. I do not have the guts, and my grab bag of principles is bulky. Right or wrong, I say what I think, and I do what I say. In a stable way. Right or wrong, my structural position in financial markets rarely changes, unless there is a changing reality. Flexibility is essential for survival, but one must have a solid theoretical underpinning for his economic thoughts. And my point of view certainly does not change in a fortnight.

On a more philosophical note, in truth the trouble is I disagree with the wording “whatever it takes” in most ambits of life. As a rule, I think the end does not justify all available means. Much less so, when in an area like monetary policy.

Looking back at the last couple of days of trading, you can underwrite whatever option suits you best. Central Bankers are the best market timers in history, or the infamous Greenspan put is alive and well. Maybe it is a combination of both. Trading in top financial institutions must be fun. No more than one or two down days every quarter. How is a provincial economist in the north of Spain going to beat that? It helps me remain humble. ¡Aren’t they smart!

Take the the tough markets of the last trading days, when the “common knowledge game” was under pressure. Some comments on the tape by Williams and Bullard made for an instant read. Surprising, to say the least. Last post, I was nearly dogmatic about the fact that Qeternity was finished for good. I was wrong. QE will be used, together with the rest of the tools in their tool kit, “forever and ever (amen)” -if necessary.

Markets were clearly oversold, but a full 110 S&P 500 retracement, and a complete turnaround in risk spread direction, is a little bit too much for my faith in  market technicals. Of course I am always short of faith; I do have to improve that. Continue reading


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