Category Archives: Lectura fácil

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

A rationale for the Fisherian high plateau in global equities.

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

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

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

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

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

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

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

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

Stating the obvious … and paying the piper!

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

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

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

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

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

Keynesian groupthink. Crowds and investors take it all in strides.

Not few smart people from main street are baffled: most investors not only calmly assume negative interest rates for their investments, but also seem to enjoy playing the Central Bank controlled “common knowledge game”. I am frequently asked: why is it that investors, both individuals and institutions, calmly accept NIRP or ZIRP? How come investors seem to be willing to buy either negative yielders, when they play it safe, or equities or high yielders, when they want to go for income? What’s more, they don’t look like being particularly stressed about it. Nobody senses the danger embedded in actual pricing. ¿Does that make sense?

groupthink1It’s a very good question. You know it is, when you understand the extraordinary relevance of the issue, and  you are nevertheless unable to provide a short, sharp reply. In order to find one, it may be time to switch out of economics (it offers no rational answers for this conduct), and take a look instead at both sociology and psychiatry. The observable fact is that rational investors are an endangered species. They seem to share the fate of the black Rhino. ¿Why?

Something is amiss in my long and elaborate reasoning. This crazy monetary and fiscal environment goes on and on with no signs of an end. Worse yet: it has been approved and consented by a majority of the population. And validated by institutional investors. There has to be a deep human reason for the market to blindly follow the  CB leader “du jour”.

victim-of-the-spanish-inquisition-everettMuch like in the Nazi Germany with Hitler, most of the population and investors are not in the Central Bank/keynesian groupthink game. But following the leader is the easiest way out of their personal conundrum. Individual thinkers have a tough time, and the Gestapo might single them out. It’s best to go with the flow.

Nothing new. When the time comes, humanity is seldom brave to stand up against wrongdoing. The Spanish medieval inquisition court is a case in point: people looked the other way. We are still there nowadays. Think of the standard witness behaviour in rape scenes in the NY underground! We have to invest in real education for the population: everywhere!

I was unable to see this. I thought people would not take any more lies at some point. I was wrong. We all get things wrong, Bernanke being the living exception of course, but nonetheless, my ego has to put up with it. Thankfully, when humbled by human behaviour, and conceding error, it does help it to see my shortcoming pale, when put in contrast with Eugene Fama’s EMH (efficient market hypothesis). This quote shows his degree of conviction in his theory:

I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.

I couldn’t disagree more. Markets can only be efficient, and the price generated optimal, when economic actors are buying and selling rationally, in full knowledge and understanding of all the relevant information. This is not realistic. Where’s the rationality to be found in a buyer of French debt at negative yields? He is just following the obvious course, the one that inflicts him less pain in the very short, inmediate term. We all expect too much of rational behaviour, and that doesn’t help our investment performance. We have to allow for ignorance, herding, misunderstanding, and central bank rigging. That makes investing a very difficult science to master. Continue reading

All u can borrow ¡for free!

Dear Ben (Bernanke),

Thank you for your famous blog. A compelling compilation of quaint narrative essays where all the conventions of storytelling: plot, character, setting, and ending, are present. Needless to say, you do experience that special feeling when reading through the specific, and often sensory details, provided to get the reader involved in the conveniently biased sequence of the story.

Fairy tales at their very best. Indeed, I expected no less. You have induced some interesting thinking in some readers. We must be grateful for your efforts to stimulate our minds, even if it comes at the cost of offending our “uncommon sense”.

The first thing that has come to my mind, is the stark contrast between your conduct and that of your predecessor Paul Volcker. You and Greenspan have validated that old latin adage that goes to say “Excusatio non petita, accusatio manifesta”. Funny how Volcker has never felt the urge to talk about his incumbency at the Fed. Okay, to be fair, maybe it’s just that you and the maestro are more outspoken. Perhaps.

And you are smart as well Ben. You sure know how to cover your tracks. Your last post “Should monetary policy take into account risks to financial stability?” is a compendium of self-serving prose. Let me see if I got you right:

1.- The Fed has kept rates low, “conditioned by the great recession”. No previous mistakes at all. No cause effect dynamics between the great recession and previous easy monetary policy. The miraculous “great moderation” that preceded the great recession was awesome, and fully enabled by the Fed. It was just bad luck that the great recession ensued. You don’t know why it happened. Monetary policy had nothing to do with it. It was a black swan. Nobody could have seen it coming. You did not keep rates too low for too long. We are not making the same mistake again.

2.- You, and the Fed, saved America, or at least, in your own words, “Fed policies had a lot to do with that”. And you did that despite the “headwinds” arising from fiscal policy, the financial crisis, and “other factors” (again, none of them your fault).  Superman wouldn’t have done better. No mistakes, only action of the right kind, accurately following the Princeton sect manual.

3.- The actual economic environment in the US is excellent, jobs have improved, and the terrible ogre of deflation is under control. Everything is as well as it could possibly be, particularly considering the difficult circumstances that you encountered during your tenure as chairman. Janet should be grateful for the wonderful position she finds herself in. You haven’t painted her into a corner at all. She’s a dove, and ought to feel comfortable with ZIRP anyway.

4.- Best of all, and topping the list, is the fact that Ajello, Laubach, and López-Salido have provided some insight on the fact that monetary policy cannot be used  to promote financial stability or pop asset bubbles. Nothing is said about inducing them with excess money and credit creation.  After all, monetary policy is, in your own words, a “blunt tool”, and “to the extent that it is diverted to the task of reducing risks to financial stability, (it) is not available to help the Fed attain its near-term objectives of full employment and price stability”. That makes sense because, in the long run, we are all dead, and who cares. So the near term objectives are all that counts. ¿Right?

5.- In truth, you are certain that monetary policy never generates instability and/or bubbles (the subtle implied message reading between the lines), and it is too blunt a tool to help prevent them. Instability just happens to exist, as Minsky said, and we have to use methods other than monetary policy to restrain it as much as possible. And if we can’t, well … tough luck. Again, it’s not your fault (see picture of your favourite pet).

6.- Even if moneatry policy is a blunt tool, it is the tool that God gave you (the last messiah after the maestro), to attain “full employment and price stability”. And, blunt as it is, you nevertheless used it wisely to save America and the world. It is for that reason and no other, that real interest rates below the five year term, have been negative for six years and still counting. But we should not think of you as a cold-hearted individual. You are after all, a compassionate man and feel sorry for retired savers. You and your people at the Fed lament their bad luck. But they really don’t matter because, even in the short run, they will probably be dead. Zero return on their savings will help them get there sooner (and suffer less on their way to the end).

You’ve done very well Ben. I hear you get a six figure number for every event you attend. Make sure you cash in a lot of money. If you live a long live you are going to need it (ask pension fund managers). pension underfunding gets worse ds9janUnfortunately Ben, one of the consequences of your policies is that it will probably cost you a couple of basis points (see fedspeak for the meaning of a couple) anually, just to remain invested in a portfolio of global safe bonds. More so, if you pay a wealth tax and the depositary. But don’t despair, you will probably make enough money beforehand to account for that.

Brilliant writing. Keep it up. It is always best to suffer martyrdom, than confess to any mischief or wrongdoing. Never do that. Beware of perfection though. Because nobody can be perfect, perfection puts your life at risk unnecessarily. I would recommend you allow for some minor imperfections, like not exercising enough, drinking too much cofee, or the likes. It would be good for your image as well.

And, not to forget, good luck with your equity portfolio if you have one. Hold on to it, you have to help preserve the wealth effect. No rushing for the exits when the time comes please, we don’t need another italian ship captain. Hold on to equities for the long run, and some new chairman will bail you and Siegel out. Trust the Fed.

Yours faithfully, 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:

Promissory-note-tablet-Mesopotamia

Promissory-note-tablet-Mesopotamia

“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.

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“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

Potpourri.

Take one.- On life and change

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

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

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

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

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

Small is beautiful.

“There seems to be only one cause behind all forms of social misery: bigness. Oversimplified as this may seem, we shall find the idea more easily acceptable if we consider that bigness, or oversize, is really much more than just a social problem … Whenever something is wrong, something is too big … if the body of a people becomes diseased with the fever of aggression, brutality, collectivism, or massive idiocy … It is because human beings, so charming as individuals or in small aggregations, have been welded into overconcentrated social units”

Leopold Kohr,  The Breakdown of Nations (1957)

Well, with all due respect for Mr. Kohr, I think we shouldn’t overstate the issue. Big or fat is undoubtedly a major problem, but it cannot be the only matter that needs to be addressed in the global village.

Some predefinitions. When I say small, I mean as small as possible, while technically feasible (due to cost optimization constraints). In all ambits. Implying productive units, listed companies, boards of directors, governments, countries, districts, municipalities, parliaments, committees,  etc. Small is then a relative term. It has to be understood as the smallest socially or economically efficient unit.

As usual, it is not difficult to find arguments of all kinds to fit your particular positioning on the issue. Mine is firm: let’s keep things light and small. My main self-indulgence is race sailing. The adage certainly applies to my racing boat. But, of course, racing is only a hobby. Let us outline the main “ex-racing” arguments for “smallness”.

1.- Human Behaviour. Herding is a social scourge. It is, de facto, expanding as I write. And yes, It is a terrible stigma of our times (Eugene please make a note of this, and factor it in your EMH theory). Sadly, it is underestimated by society.

Herding naturally increases with size; and “bigness” as Kohrs labels it, is growing everywhere. But herding not only grows with bigness. It has been expanding notably over the last thirty years as a side effect of social media (TV, radio, social networks, WhatsApp etc.) No way back on that, unfortunately.

To make things worse, take a look at this chart on the presumed intellectual evolution of humankind. Actual educational levels certainly do not help. Computers and pocket calculators are ensuring new generations lack our number crunching capabilities. Grammar is “out.” Reading the classics is not cool anymore. New generations no longer strive for excellence. The chart is awful; it does look as if we are walking the Darwinian path in the opposite direction.

I have no words ...

I have no words …

Herding minimization is a must for the survival of the human race. Smallness is an essential tool in a challenging context.

2.- Proximity to the problems, and above all, the underlying social and economic realities. A couple of years ago, the Spanish prime minister was questioned in a public debate, on the price of a cup of coffee (a cup of “cafe con leche” in Annie Bottle Spanglish). He didn’t have a clue. Do you think Super-Mario has any idea whatsoever? We need planes where a visual approach (as opposed to an instrument landing) is achievable. There is a limit to size to keep that option alive. As Corporate size increases, high management levels are more detached from the society they theoretically serve. 

3.- Democratic viability. It is the only way to save democracy from the likes of Jimmy Carter, Hollande, Berlusconi, or Zapatero. All of them provide ample anecdotal evidence of the validity of the previous chart. When something is small, a high percentage of the voters actually know the politician personally. It helps minimize the impact of image building for politicians -paid for and subsidized by their lobbyists. Lobbyists who will later ask for a return on their investment. Other changes are also appropriate to rescue democracy from the doldrums, but now is not the time to delve into that. In other posts. Smallness helps democracy, regardless of other needs to help it come along.

4.- Cost. Bigness increases the layers of power and control. Flat management is already a well-known concept and an accepted desideratum. Flat management is impossible in practice, so it ends up being an exercise of approximation. We want to be as close as we can to flat management. Above a certain size, excessive layers of power become unavoidable. Counterintuitively, upsizing is not cost-efficient. Once you achieve the units minimum size, coordination is way cheaper than subordination. We don´t need cities subordinated to provinces, who are in turn subordinated to federal states or autonomous regions, then subordinated to sovereigns, who subordinate partially to supra-sovereign areas like the European Union. Indisputable.

5.- Evolvement. Dinosaurs were the most robust species. But they were unable to adapt. They did not survive. Ants and mosquitoes did.

age-dinosaur-bones-1

The word “dinosaur” is now used to describe something that is “unwieldy in size or unable to adapt to change.” As a species, we have to evolve or die. We have to adapt to climate changes, potential asteroids, peak oil, limits to land fertilization (phosphates are a concern), and many other known and unknown challenges. We need to be flexible, and fast, to actually navigate them with minimal costs. Do you think we are speedy and flexible now? Please go and visit the “Disunited Nations” in N.Y. or the European Parliament. Do you believe that we are sized efficiently?

6.- Control. Anybody who has been an accountant knows that accounts with too many transactions are very difficult to monitor effectively. Most software programs provide accounting levels to split entries into different sub-accounts. Small certainly helps. Audits are easier and faster. Management control is greatly simplified. Ever heard the old proverb: keep it simple? Well, size generates complexity.

7.- Corruption goes with size and power. Most corrupt politicians or company managers play with percentages on the amount of the transaction. In Catalonia, a local politician made this explicit by talking about the 3% figure to be paid to the politician authorizing the deal. CEO’s VISA use is bound to go more unnoticed as the turnover of the company grows. Who’s to notice an annual VISA use of a couple of million euros in a bank with 10.000 branches? The recent scandal on VISA use in BANKIA (a large cap Spanish bank) is a case in point.

corruption

And corruption not only goes with size. Power plays a role. The more absolute the power is, the greater the possibilities to enforce the 3% figure. Or just make it higher. Cardinal Richelieu probably asked for a 5% standard rate. If you dilute power, even if the numbers involved are huge, we minimize corruption. If the tariff is too high, individuals and corporations will look for somebody else. Mission impossible if Richelieu was your counterpart in the deal. Any doubt left that power goes with size? Compare Jamie Dimon’s power with that of the chairman of your local savings bank.

I will try to keep this short. All kinds of economic units should be maintained as small as the cost structure of the different sectors allows. Same thing for social fabric, and more so in politics. Small is beautiful. Light, when possible, is a bonus. “Zero” would be best, but, regrettably, it is unachievable.

Some history to put things in perspective.

You have to look at history and the economy with a Hegelian dialectic approach. Thesis, antithesis, synthesis. We come from minuscule units, gradually evolved to large, and have to get back to small. As small as possible (cost and efficiency wise), rules out tiny and minuscule as an option (synthesis). But it does cut the average TBTF (too big to fail corporation) at least in three.

homersapienIn times of Adam Smith, and before, individualism (and even nomads before that) reigned supreme. Association or cooperation was to be found only in large family units, or very small and closed societies. Apes were more cooperative than human beings -Darwin would have been desperate about it. Size of everything -except castles for kings, mansions for landlords and cathedrals for God- was small.

Countryside fairs began the barter economy. But size remained small. Fairs offered mostly local produce, and commerce was economically irrelevant. Chapeau to some exceptions like Marco Polo. Some centuries later, Adam Smith worked on the specialization of labor (implying increased own production to be used then for barter).

Later on, David Ricardo coined the term “comparative advantage” to support his bid for free trade between different nations. By then it was evident to all that a barter economy was better off than an individually oriented economy, in which every unit produced a broad range of products and services to satisfy their needs. He introduced international trade, a more profound development of barter to enhance the concept further. That was the beginning of sizing up productive units. If you were good at silk scarves, you produced twenty a day and bartered them nationally and internationally, in exchange for food, shelter and other needs. Better still if you had an energy or commodity price advantage that favored your production inputs.

A second step forward was the division of labor brought forward with the industrial revolution. Even within the same productive unit, specialization and industrial manufacturing generated a socially undesirable -but economically efficient- use of human resources to repeat endless times the same action. This was devastating for individuals, but in the short run, it certainly optimized the productivity per worker. Thank god the “Volvo” people put a stop to that terrible method of industrial organization. Maximizing screws to be put in place by the same screwdriver (meaning employee)  in one day, was a terrible way to understand the need for productivity growth.

The economies of scale and size soon made their appearance. As is always the case nobody was looking for the negative externalities generated. Bastiat was right insisting on the need to discount hidden, lagged, or induced side effects to any policy. By the way; ever read Bastiat dear Janet?

Even worse. Had they known about the externalities of maximizing individual productivity at times, things wouldn’t have changed anyway, because it was the entrepreneur who profited from the economies of scale, and society who paid for the backlash. The bailout methodology has long roots. Society pays, and a few prosper.

Capitalism developed further, and companies went into a two-tier system. Public companies or huge private franchises had access to politicians (the most important issue in the long run), cheap financial costs, and could select labor at market prices effectively bidding top managers out of the small companies. Soon some businesses became stronger than most medium-sized countries.

The rest is well known. Same as in most DSGE models, once we lost the equilibrium saddle path, perverse trends reinforced themselves.

  • Listed companies, particularly large caps, bribe and blackmail governments. They certainly coerce their employees and the unemployed ensuring low salaries thanks to their oligopolistic structure in a context of excess labor. When necessary they squeezed competitors out (remember Netscape, Sun or Lotus suites?).
  • Governments control at times more than 50% of GDP (one single often brainless person controls all those resources). With pyramids of power both vast and profound. The government bosses about the region, who in turn interferes with the local town day to day handling of domestic affairs. Decisions are taken far away in time and space from where they are going to be implemented and generate the desired effects, and undesired side effects.
  • Government or corporate apparatus grew overweight and oversize. Salaries paid out to members of the ruling elite are ludicrous. Political or even legal responsibility is a chimera almost everywhere. Not only entities are significant. The high government of entities is also oversized (and overpaid dramatically). Why do we need parliaments with 400 members (bicameral)? What do we need large boards of directors (of 20 people or more) for?

fatness

So that’s where fat and big has taken us as a society. As pretty as a bunch of 200+ pound women. Suitable for birth control, but bad for everything else.

Fat governments, fat parliaments, fat corporations … And, more frequently than not, fat corrupt individuals at their helm that eat up as much added value as they can.

What’s to be done about it?

1.- Corporations are to be brought down to reasonable sizes. TBTF is social, economically, and morally unacceptable. Fiscal policy can readily conform them to the new desired standard. We must implement a system to tax corporations effectively. I will develop further in a future post.

Corporate taxation needs an overhaul. “In lieu” of social costs associated with salaries, and the traditional tax on corporate profits, they have to pay for the use of Aggregate demand. Aggregate demand is local, and supply (the factories), or the company’s nationality, can be anywhere. We have to implement a three-tier level to tax corporations with a higher rate as the companies global sales grow in size. We have to nail them down. Wherever they use Aggregate demand, they have to pay for it, regardless of their nationality, where they produce or hire people, or how much money they make. And size generates negative externalities they have to pay for. They must be applied a higher rate to cover them. We want them to split (like e-bay and PayPal). And we can give them reasons to do it. Don’t worry: money motivates them: they will comply.

2.- Country breakups are to be welcome. Not for nationalist reasons. Flags of all kinds (including the Catalonian, the Spanish, the European, and the UN flag) fail to turn me on. Maybe I am too old for all that nonsense. But it makes sense to split up into smaller units. Small countries do better. Scotland, California, Catalonia, Quebec, etc. would be better off on their own. The rest must follow suit. You can dress that up with a kosher flag, or with a separate language or cultural identity. But well underneath the social or political factors, the economic rationale for secession is clear. We need smaller countries that interact on a coordination basis. And yes, it would be great if the superpowers split up. A much better world for certain.

I seriously think Europe is also going to break up. It doesn’t make economic or social sense at all. No, I am not suggesting we become enemies. On the contrary, I think “high fences make good neighbors.” Sharing the garden does not make you better friends. I am European and hope to remain so. But coordination, flexibility, and free trade should be the new paradigm. No more costly layers of management. No more garden sharing, or else we will break up in a disorderly way.

3.- Decision levels have to be brought down as far as possible. As close to the citizen level as we can. Autonomous cities or regions like Hong Kong or Singapur thrive. Look at Delhi or Beijing instead. Not only areas that specifically demand it must strive for decentralization; all of them should. Harmonization is very dangerous. Monocultures are terrible. Conventional thinking is like Ebola for your brains. We need different countries, and different cities, with their own identities, interacting in the global village. Look at pharma. Big is increasingly being diversified, at least at the R&D level. We need lots of small biotech and not huge and dominant pharma.

I’d love to enjoy shopping again -when traveling. It doesn’t make sense today. You find the same franchises in the famous mile in Chicago or in ….. Beijing. Globalization is destroying what was left of cultural differentiation. We are impoverishing our minds. Free trade is a prerequisite, but underneath that reality, we should be welcoming cultural and social disseminate communities.

4.- Closed lists by political parties have to be eradicated. And people should not be able to live on the salary of a political post of any kind for more than ten years in their entire life. Nobody is “the last Coca-Cola in the desert.” Public service has to be the exceptional period in anybody’s life, not the rule. The “political class” has to be annihilated. We should all be politicians for a short time of our lives. But we should all have a real economy job as a base for living.

5.- And last, but also relevant. Government powers have to be spun off in tranches. Social transfers of all kinds, such as unemployment benefits, incapacity related entitlements, pensions, subsidies and food stamps, should be indexed to gross output or GDP, and controlled by a separate entity in every country. If we segregate power effectively, we increase our governance focus. We also prevent them from using our own money to win elections. We improve democracy separating government. Justice should have a head directly elected by the voters, and the entity in charge of wealth redistribution (welfare state payments) should also be elected separately and directly. The power of the prime minister should be divided by three.

Small is beautiful. We have to get there, and it won’t be easy to change the system. We have to cooperate, not subordinate.


“Great things are done by a series of small things brought together.”

Vincent Van Gogh