Category Archives: Global Macro

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

As time goes by.

The human race is an inherently emotional species. We were told that our origins are to be found in the “homo sapiens”, but, regrettably, no definite proof has been found. What’s more, anecdotal evidence piles up every day to suggest otherwise. We still have a ways to go before peak knowledge, but peak wisdom is, without doubt, something of the past. Let’s see if we can make wisdom a bullish market again, sometime after this effervescent madness settles down.

Herd behaviour, groupthink, and emotional conduct, are the pillars of our daily activities and desires. That is the main reason to be mindful of the consequences of shouting “fire” in a crowded cinema. Not one out of every ten will try to corroborate the information. Provoking stampedes is easier with humans than it is with Buffalos. Herd and human behaviour are becoming a synonym.

Politicians are aware of that, so they talk soft, and use whatever information they get from the market (well, nowadays the daily price fix of goods or investments that simulates a market), or society, to their convenience. And their convenience is “extending and pretending, as much as they can, for as long as it lasts”. They are not wise or honest, but they are not stupid either.

Politicians and Central Bankers are cognizant of the structural weaknesses of their model. They know the issues that can spoil the “extend and pretend common knowledge” game they are in:

  • Inequality and the ensuing social upheaval to cater for.
  • A domino of debt write downs, if the sustainability and thus validity of debt as an asset in balance sheets, is put to question.

How are they handling them?

  • Inequality and poverty have to be kept at bay. Entitlements and welfare are the drug that masks the symptoms of a notoriously unfair society. They can’t afford to mark them down to market (tell society that there is no way that the actual economic output will be able to finance those future costs, and has to lower them).
  • Debt has to be perceived as sustainable, so they have to print to death, and preserve the ZIRP and NIRP environment that keep the financial costs of the unpayable debt as low as possible. Printing also collaterally serves the purpose of helping finance the subsidies and welfare they need in order to ward off public protest and violent mass behaviour.
  • Markets have to be tamed (read supressed), to prevent their instability, and continue to keep alive the positive message embedded in the common knowledge game: CB’s will assure us endless prosperity no matter how much they have to print, or NIRP around. Or do whatever it takes.
  • Volatility and risk premiums should be outlawed, and while they are at it, supressed in practical terms.

Versailles 1919Greece is the poster child for the developed world.  In a nutshell, the second Versailles treaty in history is the victory of the policies that protect the second issue (debt sustainability), versus policies that protect the first (subsidies and entitlements well above society’s means). It’s not that one flank is more strategic than the other. The real Greek drama is that debt sustainability is in the interest of creditors, while fairness and social peace is in the interest of common people. Needed to know who would prevail?

It is to be expected that, in exchange for conceding to “extending and pretending” the sustainability of Greek debt, creditors are aware that they will have to give the mob some “bread and butter” in order to feed them, and pay for the maintenance of the status quo. Let’s hope there is still some memory cells left in German brains. I doubt it. Human memory is short lived. I expect no more than a few token financial aid kits. It would be the same result, the other way around, because magnanimity and wisdom usually pair together, and we are definitely short of them both, regardless of who happens to be at the top of the food chain at that particular time in history. Continue reading

Two possible outcomes for “our” world.

When you read a lot, you eventually stumble upon something really different. The poster above is a good example. I took it out of a very interesting read, pondering no less than the quantic side of our existence (not to be confused with our “dark side”). Now, that is indeed a subject (one in thousands), in which my knowledge is zero (getting closer and closer to the value of Fed thinking).

Not that the matter bothers me at all. My fate is death, and I am almost certain it will come well before those cosmic events take place -if they do at all. In the meantime, I plan to keep sailing every important race I can attend. So I really don’t care. It was just nice, thought provoking, reading. I love reading.

Giving things a second and third thought (using the inner female we all have), I recalled a vexing issue I do care about. It is something that will happen in the immediate future. Something beyond my control, not cosmic (just global), that will -if I am not extra careful- affect my sailing (unless the cost of my carbon membrane sails is cut down to a fourth. Hey can anybody get me a discount at quantum sails?). Let’s give it a fancy name: “the galactic debt meltdown”.

A couple of economists, bloggers and presumed pundits keep on saying the world is broke, and debt will never get paid back. I am one of them. Nobody knows when this will be “official”, and, to make things worse, nobody knows how debt will be reduced as a percentage of global (non-cosmic) GDP. Meaning, we don’t know if it’s going to be real GDP growth, GDP deflator growth, or debt write downs (a bookkeeping entry), that will allow us to get rid of the problem. Lastly, nobody knows the schedule of events to take place. In sum, a “helluva” lot of “unknowns”. The road map is far from the accuracy of differential GPS positioning (the one we use for race-sailing starts).

We have desperately tried to grow ourselves out of debt for the last seven years. We have tried to outgrow debt in real terms, or at least nominally, to no avail. Escape velocity has been a “chimera” in Keynesian groupthink for as long as I can remember (in fact most of Keynesian groupthink is plain, small talk broadcast, wishful thinking). By all means, I am not saying “escape velocity” will not finally come to pass -I just find this outcome included in the category of “infinitesimal probability”. Similar to that of the cosmic events we talked about above.

That leaves us with just two statistically significant alternatives: deflate debt, or hyperinflate GDP (we have already tried to reflate ourselves gently out of the problem). And it is -deep sigh- no other but a Central Bank decision that will orient us, for once and for all, in one or the opposite direction.  When is (as with death), the vital question. It should be over the next couple of months, but it could take years if we can chronify the desease. We should urgently hire some oncologists for the politburos: we are going to need them. Kicking the can forward is requiring, as we reiterate it time and again, an increasingly high level of expertise (and luck!!).

Yes, this can go on further for longer. But, what if we can’t chronify cosmic Keynesian groupthink? What if the whole set up melts down earlier than we think? For a time now, we have had two main drivers of instability: debt and inequality. Both are getting more powerful every day, even as I write. As I said in my post “debt sustainability and/or inequality will end the show”, one of them is likely to end the CB’s show. I humbly stand by everything I said in November. Time will say. I am aware that even a broken watch is right twice a day.

Of course ZIRP -and its upgraded high-octane form (NIRP), money printing, currency wars, and credit creation (57 trillion extra since 2007 and counting), are factors of instability in themselves. They show up in market behaviour (markets keep on “losing their cool”). But the ultimate reason for their existence is related to the omnipresent fictitious/phony asset of global debt (unpayable, and thus unreal) in our global non-consolidated balance sheet. In fact, and underlying all those monetary and fiscal measures, there is only one driver, the debt overhang (regardless of the multiple strategies and measures implemented by Central Banks). One thing I must say. They have seriously improved their implementation techniques. POMO desks are doing a good job -in the wrong direction, and for the wrong reasons- but a very good job indeed. They have almost “mastered” the markets. Continue reading

Beating and doping a dying donkey.

Albert Einstein conspicuously suggested, that the main difference between genius and stupidity was …, that the former had its limits. Stupidity is on the rise in a planet where groupthink is the norm. Furthermore, experience teaches us that groupthink begets stupidity, or, to say the least, they are undoubtedly highly correlated.

I keep on saying that there has to be a limit to everything. Put stupidity on the list of things that need an urgent regulatory limit. It is more urgent than limiting the expansion of too-big-to-fail’s. Hi Janet: happy to see how I take your point of view on the advantages of regulation vs monetary policy?

Confusing a donkey for a Ferrari shows stupidity at its top. As you try to increase the donkeys performance, you end up with no Ferrari … and a dead donkey as well. Add the unpleasant reality that you are not going to be happy during the years spent whipping the donkey, while trying to achieve a cruising 55 mph speed. Perpetual frustration is not what Buddists would recommend in order to achieve your personal nirvana.

I am 57 years old and absolutely nothing in my body works like I am still 21. I try to use wisdom to make up for other lost abilities, but, no matter how hard I try, it never seems to add enough to balance it all out.  At least wisdom helps me peacefully assume that I will never go past the 100 meter mark below 11 secs again. Or any other physical feat. That doesn’t mean we can’t be happy. In fact, as I grow in wisdom and lose on everything else, I live and increasingly happier and enjoyable life. I just have to realize I am not a yuppie (my generation’s desideratum) but an intellectually active loving grandfather, and a passable skipper.

The world’s economy has been steadily degrading from Ferrari, to donkey. We can only change that to an extent, and not before some hard work, plenty of time, and intelligent decisions to accompany the two previous requirements. Working out ten hours a day will not help me get my athletic high marks back again. Most likely, I will just generate some additional unwanted health problems. Equilibrium is always more important than growth, speed or achievement. It is always the journey that counts, not the destination (yes, in economics as well).

Keynesian cocktails, and euthanizing the saver and or the rentier (as John Maynard fervently wished) only jeopardize the donkey’s health, and certainly do not contribute to increasing his performance to something remotely similar to a Ferrari. Painting the donkey in red is as far as I would go, and only if I was pressed to do so. Flogging, or doping the donkey, makes no sense at all.

donkey-pulled-cart-gazaMoreover, now that the economy has morphed into a donkey, we have been loading the donkey like a drunken 19th century farmer as well. We load the donkey with debt and entitlements, steal a substantial portion of his food (with corruption of all kinds) and expect it to race faster still?

Come on Mr. Groupthink (wherever you are). Donkeys are not all that bad. You have to see the positive side of things. All assets come with a liability, and all balance sheet reductions also reduce the liability side. Maybe a donkey is not fast, or elegant, but it helps preserve the planet, fertilizes our land, and gives us more time to think and interact while travelling. In any case, a donkey is what we’ve got right now. And it works with a carrot and a stick. If you steal the carrot, overload the donkey, and use the stick intensively, you will end up carrying the entitlement and debt load on your own.

We are seven trillion souls alive right now, over time we will (in all likelihood) not be able to hold on to more than one house and car per family. The price of buying them will probably not be the main constraint. Maintenance and real estate taxes will make it unaffordable. But we will live longer than our grandparents, will also be able to work less, and we will remain fully active until well into our eighties or nineties (unless we are particularly unlucky). We are not getting such a bad deal after all.

So why not get rid of the whip, relax and enjoy the countryside and the trip, and begin to think of ways to engineer an improvement of the abilities of our donkey. Not feeding it ever higher doses of Keynesian drugs, but improving our genetic engineering capabilites. Think “Dolly” (yes, I am aware she is not a donkey).

This time around I will not engage in some additional sarcastic Keynesian thrashing. Ben and Paul deserve every bit of it, but it is a waste of time and energy. In fact the Keynesian mule (doctrine) is already dead, you can smell the corpse already. And we all know it’s hopeless to beat a dead horse.

The world’s economic infrastructure works on inputs in order to generate an output that has to be sold. Provided all output is sold, supply -in the Keynesian reviled long run-, always generates its own demand (Say). In fact prosperity is mainly about generating as much net output as possible, and simultaneously ensuring that it is sold. Unsold or unwanted output is a drag on the system that has to be constantly purged. Massive bail-outs are counterproductive because they fail to revamp the supply side. As a clear example of what I say, we have an obese financial sector in the US (and almost everywhere), and instead of allowing the GFC to streamline it, we have reinforced its weight as a percentage of GDP. As Paul Volcker constantly suggests, half of it is redundant.

financial-services april15

Generating output is not that difficult, as long as there is not excessive overcapacity installed. It requires a decent combination of technology, capital, and human resources to originate positive added value. If you can access the adequate resources at a market price, and the business model is more or less right, you are likely to get going. And yes, I know all sectors show overcapacity today. The fact being it should not be there, if we had allowed the Wicksellian interest rate to reign (vs the central bank directory imposed rates), and we had made a habit of a permanent healthy creative destruction of inefficient supply. Combing excess capacity in construction of finance, just to name two sectors, is going to take a long time. Particularly with an unhappy army of unemployed tensely watching.

Selling what you produce (be it a product or a service) is the difficult part. Henry Ford hit a home run when he began to make cars to serve people’s needs, and not the other way around. In order to get the product or service sold, you have to generate enough interest on the demand side. And additionally the demand side has to be able to pay for it. Your pricing has to consider the buying power of your target client. Business should be conducted with an embedded “build to order” mentality. Where is the need, how do you define it precisely, and how you configure your output to satisfy it, at a price that is payable by your prospective customer, and generates value for you. That’s a truism, both from a macro and a micro perspective.

It’s that simple, really. In a healthy system, some enterprises have to go bust when they do not get their business model right, in order to adapt global output to the requirements of the demand side (capex and consumption demand). A wise old axiom. Joseph Schumpeter discovered creative destruction a long time ago. Keynesian groupthink has forgotten that we need it on a daily basis. The supply side has to be in constant evolution to adapt to the new needs and buying power of the demand side. Doing that daily, will ensure we keep a Say based stable equilibrium in the real economy (the financial economy is a different story as Mr. Minsky proved not that long ago). Schumpeter would have been bewildered for months if had seen the GFC bailouts.

Fiscal or monetary shots are shortcuts to be used sparsely if at all. They can provide a quick fix for aggregate demand, but they are more addictive than heroin. Even prescribers end up with some characteristic hallucination symptoms. Intellectually sound people like Larry Summers are even advocating economic ¡free lunches! (not to mention brainless politicians in “Podemos”  or “Syriza”, that also think money printing or fiscal profligacy are the route to prosperity). Maybe they should read Milton Friedman: “there’s no such thing as a free lunch”. Economics 101. 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

Small talk.

Bank gossip. Thank you BIS.-

When the going gets tough, it’s always revitalizing to read somebody else (with a prominent reputation), that comes to back your views. I will be for a lifetime morally indebted to the BIS for playing that role ever so frequently. This is what they had to say about the October market swings that motivated my November post “CB’s win another round in financial markets”. Read Claudio Borio, head of the Economic Department, on the December quarterly review of events. Emphasis is mine.

“… what is going on? It is too early to say what exactly triggered these sharp, if brief, price swings.

…To my mind, these events underline the fragility – dare I say growing fragility? – hidden beneath the markets’ buoyancy. Small pieces of news can generate outsize effects. This, in turn, can amplify mood swings. And it would be imprudent to ignore that markets did not fully stabilise by themselves. Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions. Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets’ buoyancy hinges on central banks’ every word and deed.

The highly abnormal is becoming uncomfortably normal.”

In fact, what Borio is saying, is consistent with his thoughts expressed many times before. “The Economist” has labeled him as one of the world’s most provocative and interesting monetary economists. Financial cycles keep on being used and abused, once and again, to induce spurious short term reactions in the real economy. See what he was saying back in december 2012.

“Economists are now trying hard to incorporate financial factors into standard macroeconomic models… (but) the approach is firmly anchored in the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) paradigm… In the environment that has prevailed for at least three decades now, just as in the one that prevailed in the pre-WW2 years, it is simply not possible to understand business fluctuations and their policy challenges without understanding the financial cycle. This calls for a rethink of modelling strategies. And it calls for significant adjustments to macroeconomic policies.”

Needless to say, the BISs last  wording is fully applicable to the December swings -coetaneous to the recent, but nearly forgotten, crude oil black swan. A fresh victory on this last episode of financial instability is a done deal. Central Banks did a lot better than last time. It is undeniable that we didn’t get the 257 point S&P 500  rally Jason Haver was suggesting, but they got a better bang for their buck (word). Amazingly, they didn’t even have to mention the verb “print” in any of its forms. Verbal manipulation was nothing short of exquisite. No nervous breakdowns like back in October. This is an excerpt of what the FOMC actually skillfully said.

“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, …”

patience buddistSo, they dropped the term “considerable time”, …. and simultaneously they said that in fact they didn’t. Not even the “maestro” can beat that. Fedspeak at its very best. Janet Yellen then teased the reporters at the FOMC press conference when characterizing “patience” as … “a couple” of meetings.  Further questioned on the issue,  she reluctantly  detailed “a couple” as meaning two or more meetings. Undoubtedly a tiring depuration process for new words incorporated to Fedspeak. I find it easier to call a spade, a spade. But then, nobody would follow me at my press conferences. Continue reading

Markets are losing their cool.

Markets are not hermaphrodite, they are female. They are not about abstract intelligence, but more of the emotional intelligence type. So they move along in fits and starts, even though they do value objective data in the (very) long run. Women are very pragmatic and business minded, and markets also end up being rational. But in the short run, they are prone to effervescence. And, to be sure, waiting for rational conduct by the market can give you a hard time. Ask John Hussman.

When moving markets, greed, fear, hope, or denial, come first. Lately, Central Bank intervention has crept up to a consolidated second place in importance. Two decades ago, they weren’t even trading the global market.


9th floor of the NY Federal Reserve Building

There were no POMO desks, and the emblematic NY Fed desk ignored the underlying size of an “E-mini” contract. They only traded treasuries and USD crosses. Now they have incorporated the contract size in their spreadsheet macros. They even get a special discounted brokerage fee for their trading.

Prolific and highly inconsistent Bullard now affirms that they shouldn’t be intervening all the time. He must now think that verbal jawboning can do the job. Maybe, from now on, POMOs can permanently take monday to friday off. ¿Or should we just give each POMO desk member a pink slip?

In today’s market pricing process, fundamentals are a very distant last. They have always been last. The oddity is that they lost the second place to central banks, and are now well behind the first two factors. Decidedly, the keynesian proverb about the capacity of the market to remain irrational, for longer than you can stay solvent, has gone hyperbolic. Keynes would be pleased to know. It vexes most first class financial analysts. Benjamin Graham delineated the issue more precisely:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

You probably don’t understand why the market is selling off, on what should be considered good news. At least for main street. ¿Why on earth are deflation and cheaper energy a problem for equities, weak currencies, or interest rate spreads?

There is a simple answer to that one. Markets are very upset, because everybody hates it when somebody changes the rules of the game without notice. Young and old were assuming that the main four factors sustaining their happy financial life were still there. They had been told that: Continue reading

They have no other options left.

Sailboat racing is very much like Central Banking’. It is always about choices: starboard or port, right or left, higher or lower (prioritize angle or speed). A sailboat racer must be ambivalent; good reasons impel us to do one thing, but other reasons may compel us to do the other.

Just like Central Bankers, when racing, sometimes you have all the choices available, and some you don’t.  In order to have complete freedom of choice, you have to be in a good position. Unfortunately it is the nature of the game that all sailboat racers have spent more time in the middle of the fleet, than they would care to admit. It could have happened because we were not the fastest boat in our group (one of the problems with handicap racing). Alternatively it could have been a bad choice of the side to sail in the first beat. Or it could well be inadequate sail trim, generating below polar boatspeed. Maybe it was just a bad start or, worse yet, a full OCS (translated: an early start makes you go around the start line again). When various factors accumulate, your choices become limited. When you hit the layline, you have run out of them. Most of the CB’s are sailing their starboard laylines right now.Sailing_Performance

In the economy, the same situations apply. An economic system is much like a sailboat racing environment. It has to deal with structures of essential complexity whose characteristic properties can be exhibited only by DSGE models with large numbers of variables. It is also a system, as Hayek once said, of “organized complexity”. Events are not only determined by the properties of the individual elements that concur, but also on the manner in which the individual elements are connected with each other. Our tactics when racing condition the tactics of the rest. It is not all about the pure physical interaction of boat speed, wind, and currents. Every economic decision has not only objective direct implications on other variables (lagged or not), but game theory implications on the conduct of the other participants as well.

Central Banks are a substantial part of the economic system. They have climbed the ladder of economic relevance all the way up to a regrettable point -they are the only game in town. Their actions condition the reactions of the rest of the economic agents. Furthermore, they also condition the actions of the other Central Banks.

Continue reading

The day after (II).

One way or another, sooner or later, it’s going to be “Back to Mesopotamia”. More than three years ago, the Boston Consulting Group came out with a first class report that used the following words as a subtitle: “the looming threat of debt restructuring” (please translate as “the risk of massive defaulting”).

Needless to say, the BCG has been ridiculed by the Central Bank coordinated policy. Another POMO desk war casualty. That company makes a living on it’s reputation and it’s highly unlikely they are being hired by any central bank as an external consultant. I feel sorry for them because they were clear, and they were brave to say what they said. In a pre-whatever-it-takes world, it was a truism. In fact, we are long overdue for that euphemistic “restructuring”, another word that has been greatly abused.

We should try and give Cristina Kirshner a call, she’s sure to find some new extravagant term for a default. They excel at that. Defaulting is becoming a country tradition that goes deeper for nearly longer than the “asado argentino”. In point of fact, they are the front-runner for something that will spread faster than Ebola.

The “Back to Mesopotamia” report by the BCG said:



“It is likely that wiping out the debt overhang will be at the heart of any solution.

Such a course of action would not be new. In ancient Mesopotamia, debt was commonplace; individual debts were recorded on clay tablets. Periodically, on the ascendancy of a new monarch, debts would be forgiven.

In other words, the slate would be wiped clean. The challenge… is how clean to wipe the slates… Western economies … have to address the significant debt load accumulated over 25 years of credit-financed economic expansion… Writing off more than six trillion euros (in Europe) would have significant implications for lenders… Total debt overhang in the US equals 11.5 trillion dollars or 77% of GDP”

Forget the 2011 debt numbers they suggested at the time of the report  (and the implied suggested haircut). As a rule of thumb for the global village, the situation is much worse now (see latest BIS report), after three more years of “extend and pretend”. Public debt has increased exponentially, even if private debt has been trimmed moderately in some countries, offsetting some of the increase. No substantial deleveraging has taken place, and numbers are big enough for a nightmare scenario. The Geneva Report on the World Economy (published in September of this year by the Center for Economic Policy Research) says that the total burden of global non-financial debt, private and public, has risen from 60% of national income in 2001 to almost 200% after the crisis in 2009 and to 215% in 2013. Bloated Balance sheets of individuals, banks and NFC’s will be cut by at least 25% with the inevitable “restructuring” fad. More likely by a third or more. Creditors will be massacred.

You may consider this bizarre thinking, but it is not. There is no other way out. I wish there was. If you have the time, you can read this interesting post on debt cancellation in Mesopotamia and Egypt. Rome was no better (see picture below). I have selected the following paragraphs:

Health warning: Creditors, and junk bond holders, please check with your cardiologist before reading further. Continue reading

The day After.

I know I’m late this week. But let me say here, as Mark Twain once did, that the rumors of my death have been greatly exaggerated. I am physically alive… and not bankrupt (yet). Not that these last few days have been easy for us naysayers and permabears. We should never take life itself, or the solidity of our balance sheet (or income statement) for granted.

I painfully and gradually built a short in the E-mini S&P500 march futures, and was already dreaming a Caribbean retirement. It is always about greed and fear. Was my dream too greedy? It must have been, because it all crashed in five days of trading. When I take a look at the SP500 chart (or the IBEX35 index for that matter), I find the drawing quite extraordinary. I had never seen a market turn around technically like that in a life time. It was a sharper turn around than the one in june 2013. At least Central Bankers are enriching our life experience. My epitaph will read: “he saw it (nearly) all”.

Now, I am not saying the market does not have a right to be bullish. The market can do whatever it wants to do, in order to inflict the maximum pain, on the maximum number of participants. But it is a truism it used to respect certain rules. After all, market prices are only a series of numbers that normally show positive serial correlation. It is always clear that the market can change its mind from a bearish set up to a bullish one, in due time, and following certain numerical procedures. A 200 point SP500 round trip in a fortnight, on no news (except central banker timed remarks), is something to talk to my grandchildren about when I grow older (and they do as well). Gestapo, KGB, Stasi, or Mossad are a lot less efficient than POMOs.

Thank god I acknowledged total defeat last week, and left only a residual short in the low to mid 1900’s. I plan to hold on to half that short (leave 5% of the portfolio short the index). I still think the SP500 will pay my retirement extras (see timing the top), but I will have to be patient. Rome wasn’t built in a day. People who held on to their technically logical short positions were crushed. Hedge fund performance in october will be a disaster.

Natural disasters can be awful, but at least they are unpredictable. In this central bank coordinated battle, no POW were taken. POMO desks do not have the mandatory concentration camps for people like us. Losers were all executed in ISIS terrorist style (not to confuse with Isis, the greek godess). It has been a merciless victory for the establishment and the central banks. POMO desks manipulated prices efficiently and coordinately. They looked for stop areas and busted them. They retaliated against any anti-systemic positions in strength. The market did the rest. With the benefit of time, one can see that it was a resounding victory.

And then, last friday, the allied troops organized a celebration day, and Kuroda (he’s one of the allies this time around), put the icing on the cake.


“More free money (against unbridled debt of course). We will all be richer from now on”.

See in the side chart (from daily shot) the new, out of the blue, yen monetary base to be generated asap.

 Friday was  veritably a great party. And it was fully sponsored and paid for by Abenomics. Women and wine for the victorious POMO troops. How nice of them. The Japanese are cleaning up their bad reputation left overs from world war II. 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

Aggregate Demand. The holy grail of economics.

Humanity has a liking for both philias (in Greek, obsessive mental love) and phobias (in Greek, aversion, hatred). After all, if the Darwinian human evolution theories are correct, herd thinking preceded individual thinking  (my apologies to Adam and Eve believers). Philias and phobias are great for crowds. No subtle or complex thinking is required. You just follow the herd with simple binary answers. And now the herd is convinced that printing money is good. GDP growth (even prostitution and drug traffic induced) is good. Money should be lent for free (why pay the saver?). Deflation is bad (it’s better to degrade the purchasing power of your salary). Salaries should be as competitive (read low) as possible. Profits must soar to help equity price bubbles. Nowadays surely everyone must know that everything must be done to ensure the continuity and growth of the holy Aggregate Demand. If they don’t, they must be autistic (thanks Dustin Hoffman. What a film on the subject you made). They are sick -do not listen to them.

SPAIN-RELIGION-GRAILAggregate demand (AD) is the new new Holy Grail. It’s a better asset than gold, crude, water, or land. Pressed to choose an asset, I’d rather own the sovereignty of 500.000 citizens with substantial purchasing power, than a nuclear energy generation complex. All kinds of corporations would try to sell their products and services to my citizens. I’d make them pay for that. And, rest assured that they would pay me every time they tapped my  AD. Regardless of the fact they made a profit with it or not, and regardless of their nationality. AD is the best long term asset, if you learn to profit from it. Your bargaining position is exceptional.

Keynesians learnt this a long time ago. The rest of the economists were also aware of the importance of AD, but innocently thought it was the constant and gradual supply side improvement that would support it. That was naive; improving AD old style was heavy lifting. Nobody likes heavy lifting any more. Surfing in Hawaii is the new fad. So Keynesians  set up an altar to the AD god (goddess now that I think of it) instead, and prayed to the new god daily. Millions of economists and ordinary people converted to the new religion. We, non-converts, have all been declared heretic. Being burnt alive is our final destiny.

Needless to say, Keynesians are not (all) stupid. With their prayers they also offered the new god some action: daily sacrifices. Good for masses. True enough -no more ritual sacrifices of virgins at an altar. Too messy. Instead, they used monetary and fiscal policy regardless of the effects. Debt soared due to fiscal deficits, and somebody is allowed to starve every other day. After all starving by some is only an inevitable side effect. Same thing with crushing a  new generation with debt. Both effects are something like a war casualty – inevitable. Continue reading