Category Archives: Global Macro

What makes Yellen so confident in her ability to tighten without disruption?

The latest fad in CentralBankville is market manipulation. It has been the inescapable follow up to a long string of increasingly stimulative monetary policies. Easy money can be traced all the way back to the maestro’s nomination. He began with low rates, then came QE (BOE), even more QE (FED), please take it up to extreme QE (ECB, BOJ), introduce negative nominal rates (Riksbank), then profoundly negative rates (SNB), add some yield curve control (BOJ), and all while increasingly tilting towards “forward guidance” policies. Outright manipulation was, in retrospect, the next obvious step in the Central Bank’s conspicuous seizure of power in the global village. 

Why do I say manipulation? Because it is clear to me that the only difference between intervention and manipulation is communication. CB’s have been increasing their market intervention for the last two decades. So far so good, even if I doubt it’s a healthy habit if we want to continue to pretend that markets ensure the optimum allocation of resources. But post the GFC, and led by Bernanke, they have increasingly switched over to price manipulation.

Only the BOJ continues to intervene in the open as opposed to manipulating. If they want to keep the long bond yield low, they tell market players to expect unlimited buying by the BOJ at a certain level. If they want to support equities, they go on the tape to affirm they are buying ETFs. The rest, with a special mention for Bernanke (reluctantly, his successor as well), and Draghi, have fully embraced the dark side of the force.

Sure enough, manipulation is now a methodology applied regularly at most Central Banks. It gives them a feeling of control, and they are in control! They are pleased with their success. It does help to keep other players in the dark and confuse them with price and volume signals that they perceive as market generated -when they are in fact CB cooked.

All clear then? Nope. In the long run, it ain’t going to cut it either. Manipulation has never been a viable long term strategy, and this time is not different. Manipulation is only feasible at critical turning points, in a context of very easy money. At some point, when easy money ebbs, manipulation will fail, and it is hardly reassuring to see that Yellen is oblivious to the fate that awaits us.

Undisputably though, manipulation is working, for now, therefore helping Yellen, Draghi, Kuroda, and Co feel safe. It is a foolproof medium term strategy -when simultaneously implemented by coordinated Central Banks in the right liquidity environment. And it can wreak havoc within the ranks of the dissidents. Let me disclose that I got severely hit by the surreptitious short squeeze in European Banks post the Italian and Spanish bank bankruptcies of the month of June. I had a very strong short in the Euro Stoxx bank index and was stopped out two weeks ago for the second time in a row this year.

In truth, nothing new under the sun. Preemptive strikes against the possible generation of negative momentum in any of the financial or economic variables they target had already become the norm. I knew they did that in the Eurex market for sovereign bond spreads -but was unaware of the extended scope of their manipulative interventions. They manipulate not only rates but also equities, gold or even commodities when required -with timely and stealthy interventions. Even bank share prices are a target now! POMO desks are all over the place and preemptively strike against possible systemic risks when denoted by price moves of critical assets.

They do it for a substantial reason. Interventions are suddenly not enough if investors are aware of them. They would point their finger at inconsistencies in pricing. So CBs come up with a plausible narrative for a forced market move -and make sure it is attributed to market forces. In this way, they manipulate the variables that they think are essential to generate a guide for investors. They use market price manipulation to induce momentum following thus guiding investors in the “right”, extend and pretend direction. Press narratives make me laugh heartily.

I am near certain that coordinated manipulation is one of the taboo (nobody dares touch the subject) causes of the low VIX numbers. Low realized volatility influences implied volatility in the pricing structure -if sustained long enough. Of late implied volatility, however low, is still above realized volatility! Not to mention the most likely direct manipulation of the VIX that takes place when required. Pavlovian instincts are alive and well, and investors respond instantly to guidance and its enforcement by POMO desks when needed. Manipulated, powerful market moves show the way. The quest for yield ensures the crowd’s approval. Think on your own at your peril. I can attest to that.

I have no doubts that monetary largesse warrants the long term bullish bias in equity markets, but, regardless of the underlying trend, I have never seen a succession of bullish turnarounds (against all technicals) in such reiterated, almost standard fashion. Some major, vertical turnarounds take place when the volume and price activity have signaled a strong down move in most of the time frames. I have been trading global markets for a long, long time; I know what I am talking about! POMO desks prevent any breaks before they could near a systemic risk qualification. BTFDippers are happy to cooperate. ETFs do not leave the party. Stop busting and “fear of missing out” finish the job. POMOs end up making lots of money. Our money. It is a criminal conduct.

Manipulation is also the ultimate cause for the ridiculous pricing of Euro zone banks. I stumbled into a new widow-maker trade and was inevitably stopped out. Not that the situation for European Bank shareholders is not dire. Most of their shares are held by customers that have been told that what they are holding is a near risk-free product. It is vital that they remain oblivious to the risks of their holdings or else an investor stampede would ensue. The ECB can not afford that to happen. Mario is doing whatever it takes once again. I understand the ECB’s concern, but the end never justifies the means.

It is not manipulation that provides the overall bullish impulse. Liquidity and the quest for yield take care of that. Both provide the necessary bullish support for the success of manipulative activity that surged post the first 1Q2016 financial market scare. But even in a bullish market, we should have ups and downs; not everybody is that complacent. The problem is no “downs” are allowed to happen. The Yellen put is “at the money” and is permanently rolled over regardless of the price. Precluding a tsunami of ETF outflows is paramount. Bearish headlines must be avoided at all costs.

It doesn’t cost them money (they make it back from other players while manipulating prices), and they play the game in size. CB balance sheets have infinite elasticity when needed. With the additional help of ETF induced reduction in the total price-sensitive free float, their interventions are more and more meaningful. CBs are now firmly in control of the downside. They even think there will never be another financial crisis in our lifetime -forgetting the need for incrementally accommodative monetary policy to keep things stable. Yellen’s assuredness is eerily reminiscent of Keynes’ assertion of confidence back in 1927.

Pity the upside is another matter and has them worried enough. You cannot control everything -fooling everybody all the time. By now investors are exultant and play happily to the BTFD script -but refuse to take a more cautious stance in their asset allocation. Central Bankers are surprised by market froth. They completely forgot that it is always difficult to put the genie back in the bottle -particularly if you suppress downside risk for years.

As for their increasingly erratic guidance, the truth is they have us all confused -and their reputation is further tarnished by recent events showing that they have lost control of the upside in equities and High Yield. As the bubble soars, macro managers and global strategists are all at a loss when trying to understand Janet Yellen’s latest flip-flopped statements. Consequently, we have all been whipsawed to some extent (that is, of course, unless someone has played by the rules and stuck to a long only, trust the Fed, investment strategy). It is my worst year ever.

How do you blend the following Yellen conceptual contradictory statements into a coherent narrative? Let’s synthesize a couple of them:

  • We will probably never have another financial crisis in our lifetimes. Has she joined the Irving Fisher- John Maynard Keynes school of predictions?
  • QT (quantitative tightening) will be a peaceful process. Something akin to watching the paint dry. Wow! Best wishful thinking in town.
  • Weakness in economic growth and inflation figures is only transitory and should not affect the interest rate hike calendar or the QT schedule. Of late, she has tempered that view.
  • Valuations are probably on the high side and implicitly allowing for some “minor” financial stability concerns. Only on the high side? Really?
  • The QT process should start relatively soon (meaning September in Fed-speak). Got you, Janet. But is it going to last? Will it be market dependent?
  • The Wicksellian rate of interest is very near current levels and (implicitly) requires few additional rate hikes. Good guess! Sure of that or the precise NAIRU level as well?

Believe it or not, she said all of that in the last two months. When trying to make sense of it, I feel like I am working to decipher Egyptian hieroglyphs. Finally, I think I have a comprehensive view that fits it all in nicely. Let me explain is what I think she and the core members of the FOMC mean:

  1. We have had low or nonexistent interest rates for too long, and side effects are killing us. We want out of the NIRP and ZIRP business asap. We also need a cushion to use in the next recession when it inevitably comes. Some of us (Yellen and Fisher) would also love to leave positive real interest rates without a market bust before we quit (next year). Oh my God, please help us out of this corner we have painted ourselves into. Low rates cannot go on forever!
  2. Because I cannot even hint at admitting the detrimental side effects of low rates (Yellen), I have to base rate increases in perceived economic strength, and I have to sell the idea that the economy is doing fine -regardless of the disappointing figures in the data from March onwards. Whenever I see strength ain’t good enough and lose confidence in the ability to raise rates repeatedly without real or financial economy disruption, I will come back to being concerned not about a recession but about not having enough inflation. What worries me (Yellen) though, is being able to get out of low rates, and stop the bubble without bursting it -or collapsing the economy.
  3. We are terribly scared about equity valuations, high yield spreads, VIX levels, commercial estate valuations and perspectives, unstoppable stock markets worldwide, house price levels and lease prices. We are aware of the risks involved where we sit now. But we cannot voice our concerns -or talk bubbles even in conditional mode.
  4. We think taking out some excess reserves (QT) might be more useful to stop the bubble than some additional rate hikes. And probably also less disruptive to the real economy. The financial bubble is the problem, but we can always pull back if we see too many cracks. We will adapt QT as it goes, if needed, monitoring markets carefully.  We will engage in market manipulation when necessary, and feel confident we have done well at that in the past. On a positive note, we are comforted by the fact that the real economy is unlikely to be affected by QT (it wasn’t directly affected by QE either) unless something breaks in the financial world. Manipulative guidance should help make sure QT is an orderly process.
  5. The potential growth of the economy has been severely hampered by the demographic and productivity trends (of course they do not think they have also contributed to lower our growth potential). Debt levels are breathtaking: no way we can raise rates that much more. The rate level we can achieve is not high enough to stop the bubble. We have no alternative but to take some chips (sorry, money) of the table. At this stage, QT is a must do.
  6.  A strong dollar is not as good as it seems (Trump) but a very weak USD doesn’t help either. We need tighter financial conditions in the least disruptive manner. No interest in a weaker dollar anymore (but let’s make sure The Donald doesn’t get to know this). At some point though we will have to make a stand. Where?

Where do we go from here?

I think they are trying to take money out of the system and raise rates. CBs are now aware of the need to end easy money, or as they put it, normalize monetary policy. They will decrease stimulus as rapidly as they dare to, but keep an eye on both financial markets and the underlying economy.

If the markets or the economy tank, they will cease tightening, or even reverse course. It is too late in the game to change their strategy -however wrong they are beginning to understand it is. If only the market falls, manipulation and more base money or credit will most likely contain the damage. But if it is the economy that takes a nose dive all bets are off.

Success at market manipulation makes them confident that they can handle market volatility and prevent any serious downside. They know ETF volume is dumb money that will only sell if frightened enough to do so. They will try to break asset bubble dynamics, get rates up a little bit higher, and make sure that they do not induce a market event or a recession.

The real economy is the variable they do not control entirely. Printing and pushing credit aggregates has helped the economy short term but they haven’t fixed anything structural. They know it. Every new massive intervention has added a new layer to the global debt overhang. Debt matters and at some point, it will sink the ship. The real economy will be the final arbiter of our fate.

Accordingly, I think we have to wait for an end of this artificially extended business cycle and sell only on real economic weakness. Financial market weakness will be aborted quickly with the same recipes they are using now. If this is a financial play, the game is rigged in their favor. More money and credit and lots of coordinated manipulation in a context of a mass of investors starved for yield make their success a sure thing.

I will take advantage of the time in between to lick my wounds and wait for the kill. Until the real economy breaks, they are the dark side of the force and still in control. I have learned that lesson the hard way. In the end, the real economy will implode crushed by the debt pile, the disastrous aggregate demand (inequality and wages will impede any improvement there), and the revolt of the have-nots. It is only a matter of time.

Timing is always the problem. Growth keeps slowing, and it is an ongoing process once the brutal 2016 stimulus has worn off. Only the BOJ and the ECB continue to prime the pump. But we should not expect financial markets to front run that event. Rather, capital markets might be late to react to a deteriorating real economy because it will take a severe jolt in confidence to erase the Pavlovian mentality now embedded into most fund managers.

I have been too greedy, and CB’s found my back. I’m short of ammo now, and I have to make the next/my last shot at shorting this bubble, count. In the meantime, I am standing aside and bidding my time, as I remind myself that this summer of 2017 is irreplaceable -and I can already feel it slipping through my fingers. Let’s make the best of it while we wait for the CB orchestrated financial genocide, to take place.

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

Confusion Reigns Supreme.

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

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

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

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

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

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

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

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

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

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

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

Selling England by the Pound

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

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

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

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

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

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

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

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

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

NIRP is the ultimate Hail Mary pass -it will not work.

Desperation rarely breeds genius. Survival biased thinking is gut based, and never stood a chance of succeeding, at least in economics. Nothing works better than keeping your feet warm, and a cool head, and not the other way around. Just what our beloved CB’s have not done as of late -in their desperate quest for a financial fix to the GFC.

Zirping lately turned to “Nirping”, of our money, will stabilize things short term. But if you are not one of the ultra-rich 0.1% of the population, it will not engender value for you, or your close friends and family. Interest rates have to go up big. But relax, maybe paying more for your mortgage isn’t going to be that bad if you add it all in. Direct, and indirect (Bastiat) effects. It is not easy to explain why, because it is counterintuitive. I will try to do it here, but let me previously decline the chance to explain this, or the need for debt and expenditure constraint, to a local crowd of “Podemos”, “Syriza”, Le Pen, or Trump supporters. Bloody solutions, and particularly beheadings, are hardly tasteful and always messy, particularly if it is your head that gets chopped off. Some in our brainless crowds are not more subtle than their mob colleagues back in 1789. Things would get nasty very fast if the mob perceives you are actually suggesting to reduce some of the entitlements and goodies (like low rates) they have become acquainted with (in fact they feel entitled to). We live incrementally dangerous times.

it-is-a-characteristic-of-wisdom-not-to-do-desperate-things-quote-1And we just cannot solve our problems with the same thinking we used when we created them. That is an axiom -we didn’t really need Einstein to remind us (he did). Keynesian economics is a backpack laden with theories that are “completely finished” (see definition of completely finished in postscript). We have to think different, and get rid of residual Keynesian thinking asap. Manipulating fiscal or monetary parameters is not the way to achieve sustainable prosperity. Fiscal and monetary policies “ad nauseam”, for the last quarter of a century, took us here. This last NIRP move is more of the same, and will not solve the problem, but likely finally tilt the cart.

Of course, the root of the problem is always the same story. An alcoholic needs more alcohol to keep the shakes away and preclude a “delirium tremens” crescendo. But in the long run, the one thing he doesn’t need is alcohol. We need low rates to “extend and pretend”, but we need high rates to reallocate capital correctly, revamp our supply side, get productivity growing forcefully again, and set up a deleveraging process. Eight years later, our patient is as dependent on alcohol as he ever was. Well done Ben!

One way or another, interest rates will be much higher -well before the end of this decade. And that will be good (if we can hold on to our financial wealth on the wild ride to that nirvana). The beauty of the concept is also that, as was and will always be the case, nobody expects that to happen. Analysts are expecting indefinite deflation. I am not. Markets always move in the direction that generates most pain, to the maximum number of players. Frightening, but equally thrilling. I adore (free) markets every bit as much as I hate Keynesian priests. They sure keep you alive every minute. Continue reading

Learning the lessons of recent history

Aldous Huxley brilliantly reminded us, quite some time ago, that the main lesson of history is that we, the “homo not so sapiens” species, never learn from it. Being a touch deterministic, and consequently agnostic about the real chances of single-handedly steering clear of a pervasive human mistake, I plan nonetheless to give it a fresh try once again.

Frankly, this last Central Bank coordinated intervention has confused me somewhat. Surprisingly enough, because it’s hardly the first time Central Bankers cost me serious money. I was indeed, well prepared for that (I had previously made it, in the downdraft preceding their intervention), so I have no real damage to report. But the downside to the confusion is not just two great trades (my stock market shorts/my credit spread widener) gone down the drain, for a meager profit (I am still positioned in both trades with a reduced profile). The real harm is allowing for the situation to affect my self-confidence and, furthermore, cloud my view of the actual financial landscape. That could easily cost me big.

In my last post, I allowed for defeat, with that “mea culpa” Latin wording repeated twice -in bold characters. I tried to remain focused on what really counts: overwhelming debt levels. Reading it once again, I stand by every word in it. But now, being critical of my own work, I think it is hardly worth the typing (never mind the reading) if it just serves the purpose of reminding everybody of our precarious debt situation. Even underlining Central Bank stealth PKO techniques, as I did, is all but evident now when looking back.

The good news is that Barron’s now dares label the US stock market as a “Bullard market”. Conspirationists like me, repeatedly bashed in the past, have somehow stolen the spotlight now -a strikingly fast transition! In a brief concession to my ego, I will take pride in the fact that just after the Bullard October 2014 low, I outspokenly described him as “the most inconsistent central banker in the world”, suggesting he was actually the head cheerleader for manipulation techniques. I was afraid to be denied future entrance in the US at the time! If Barron’s now nods to manipulation, the assertion must be as close to stating the obvious as one can ever get.

And, once the PKO (price-keeping operation) situation, and the Bullard rigging, are an accepted fact of life, it is easier to note that debt is, notoriously, the other elephant in the financial room. Unnervingly, we have no alternative options to keep living and investing in this environment, so it’s best to concentrate on getting the next elephant (Bullard and/or debt) moves right, beforehand. The timing of prospective events adds value, whilst market rigging and debt have become too self-explanatory to be further discussed to some avail.

The real added value comes when finding a path forward that enables us to survive the hurricane season that is constantly being delayed by the financial climate change perpetrated by Central Banks. We do not have a nature driven financial climate anymore. The Fed and its acolytes plan and implement the financial weather daily. So prospective weather patterns have to allow for plenty of behavioral science -in order to be meaningfully accurate. Finding that hurricane safe path implies having some homework to do. I feel compelled to sum up the most relevant lessons of recent history. And learn from them.

1.- Gradually, during the Greenspan tenure at the Fed, the developed world changed the economic model from a savings and investment, productivity growth enhanced, business model, to an easy money, consumption and credit-driven growth. Neoclassics, Keynesians, and Friedmanites converged to point at the monetary mistakes during the great depression as the sole reason for what happened then. The real economy was not at fault, it was just a question of insufficient monetary stimulus, they said.

They then set up wonderful econometric models, fostered Central Bank independence (from parliaments, not from banks and the elites), bought themselves some helicopters and printing presses, and firmly believed that Keynesian fiscal and monetary policies, well used, would make the business cycle something of the distant past. Econometric models would allow them to preview the future value of the main variables of the economic machine, and thus target the adequate stimulus for them in order to stabilize the economies along their, saddle-like, self-sustaining path to eternal prosperity (in earth as it is in heaven; Amen).

Well, it didn’t work as expected. By now most of the Keynesian and Neoclassical economists are belatedly admitting that the experiment was a failure. They are, however, still sustaining that excess money and credit at least did no harm. “Excusatio non-petita accusatio manifesta”. No further comment on that. University is where paradigmatic changes in scientific perception take place. We ought to welcome this gradual change of status of the economic doctrine. In due time, this increasingly-felt shift will become mainstream. More printing will be met with increased contempt and incredulity by financial pundits. Continue reading

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