On January 1, 1994, the North American Free Trade Agreement (NAFTA) officially came into effect, virtually eliminating all tariffs and trade restrictions between the United States, Canada, and Mexico. Bill Clinton, who lobbied extensively to get the deal done, said it would encourage other nations to work towards a broader world-trade pact. ‘NAFTA means jobs. American jobs, and good-paying American jobs,’ said Clinton, as he signed the document, ‘If I didn’t believe that, I wouldn’t support this agreement.’ Ross Perot had a contrary perspective. Lobbying heavily against the agreement, he noted that if it was ratified, Americans would hear a giant ‘sucking sound’ as jobs went south of the border to Mexico. It’s a Complicated World Fast forward 20 years, and NAFTA is a hot-button issue again. Donald Trump has said he is working on ‘renegotiating’ the agreement, and many Americans are sympathetic to this course of action. However, coming to a decisive viewpoint on NAFTA’s success or failure can be difficult to achieve. Over two decades, the economic and political landscape has changed. China has risen and created a surplus of cheap labor, technology has changed massively, and central banks have kept the spigots on with QE and ultra-low interest rates. Deciphering what results have been the direct cause of NAFTA – and what is simply the result of a fast-changing world – is not quite straightforward.
The economy of 2015 started out ‘unexpectedly’ weak before succumbing to ‘global turmoil.’ It was the events of last summer that began to sow serious doubts about not just the economic narrative seeking to dismiss weakness (‘transitory’) but rather central banking and QE itself. The repeat in January/February further eroded mainstream credibility, particularly since only a few weeks before the Federal Reserve in particular pronounced full health. It was an embarrassing but poignant ‘dollar’ rebuke. In the middle of 2015 just prior to the outbreak of the ‘dollar’ ‘run’, it was perhaps somewhat understandable for the layperson or the general public to wonder what was going on. Any disruption in terms of the domestic economy did seem as Janet Yellen was claiming. For all the grief even by late July last year, everything seemed to be limited to overseas events; a fact which economists and policymakers played up whenever they could. They should have known better. I wrote at the end of last July that what was going on overseas was yet another warning even though it may not have seemed like it had anything to do with the United States: Sticking with purely financial expression of the eurodollar standard it is easy at times to forget such monetary influence has very real consequences. That is true in the US in particular, as even though the recovery is both deficient and waning it isn’t the disaster it is in other, connected places. It was, after all, the rise of the eurodollar standard as a wholesale system starting in the middle 1990′s that more tightly stitched the global economy, an open system architecture that eludes, still, the grasp of monetary policymakers. As such, they have a great tendency to miss and misapprehend what is really happening and because of that they will simply make it all worse without much hope for an upside.
Since truth hardly matters anymore, we all get numb to the day-to-day barrage of falsities and outright lies that come at us every day. But something clicked today and caused me to simply stop and take it all in. And even “take it all in” is an exaggeration on my part. I couldn’t take it all in if I wanted to. I simply paused this morning as I perused the headlines and let the lies and corruption wash over me for a moment. Let’s start with The Federal Reserve. Not only is this organization named in a way that is intentionally trying to deceive you, their mission of sparking inflation through the endless creation of new fiat cash (upon which their owners can charge interest) is theft on a grand scale. All of your hard work, in the form of your accumulated savings, is being constantly devalued and stolen by these criminal bankers. But no, you’re told that The Fed is this omnipotent, altruistic and benevolent organization that works for the American people. Wrong! They work for their owners, first and foremost. And who are their owners? Their member Banks. And then there’s this notion that The Fed must now raise the Fed Funds rate because “the economy is robust and strong”. Really? Last I checked, Q1 GDP came in at just 1.1% and the just-revised estimate of Q2 GDP is also just 1.1%. Even today, productivity has declined again while US manufacturing levels have collapsed to economic contraction levels. Again, you’re being lied to. A Fed Funds rate hike by The Fed is NOT designed to benefit you or the general economy. Instead, it’s designed to benefit The Fed’s member Banks. How and why is hard to know but, like every other Fed decision from TARP to QE, the moves the FOMC and Fed make are ALL designed with The Banks’ best interests at heart, not yours. Is this what you are told on CNBS or BBG? Of course not. Instead, just lies and deception in order to pump an agenda.
………. The inexorable effect of contemporary central banking is serial financial booms and busts. With that comes increasing levels of systemic financial instability and a growing dissipation of real economic resources in misallocations and malinvestment. At length, the world becomes poorer. Why? Because gains in real output and wealth depend upon efficient pricing of capital and savings, but the modus operandi of today’s central banking is to deliberately distort and relentlessly falsify financial prices. As we have seen, the essence of ZIRP and NIRP is to drive interest rates below their natural market clearing levels so as to induce more borrowing and spending by business and consumers. It’s also the inherent result of massive QE bond-buying where central banks finance their purchases with credits conjured from thin air. Consequently, the central banks’ Big Fat Thumb on the bond market’s supply/demand scale results in far higher bond prices (and lower yields) than real savers would accept in an honest free market.
Markets are extravagantly confident that brokers are too bearish, and that their profit forecasts for US companies are too low. The multiple of 18 times next year’s projected earnings at which the S&P 500 currently trades, according to Bloomberg data, allows little other interpretation. It is at its highest since 2002, outstripping any level it reached during the credit bubble, or when the Federal Reserve was pumping up asset prices with QE bond purchases. *** There are other signs that optimism on earnings is taking hold. For a while, the S&P has been dominated by high dividend-yielding stocks. This is a sensible strategy when you do not have faith in corporate profitability or growth. In the past few weeks, however, the S&P 500 Dividend Aristocrats index has started to lag behind the market. Classic income-producing sectors, such as utilities and real estate investment trusts, have also ceded leadership.
Policymakers have chosen to ignore the central issue of debt as they try to resuscitate activity. Since 2008, total public and private debt in major economies has increased by over $60tn to more than $200tn, about 300 per cent of global gross domestic product (‘GDP’), an increase of more than 20 percentage points. Over the past eight years, total debt growth has slowed but remains well above the corresponding rate of economic growth. Higher public borrowing to support demand and the financial system has offset modest debt reductions by businesses and households. If the average interest rate is 2 per cent, then a 300 per cent debt-to-GDP ratio means that the economy needs to grow at a nominal rate of 6 per cent to cover interest. Financial markets are now haunted by high debt levels which constrain demand, as heavily indebted borrowers and nations are limited in their ability to increase spending. Debt service payments transfer income to investors with a lower marginal propensity to consume. Low interest rates are required to prevent defaults, lowering income of savers, forcing additional savings to meet future needs and affecting the solvency ofpension funds and insurance companies. Policy normalisation is difficult because higher interest rates would create problems for over-extended borrowers and inflict losses on bond holders. Debt also decreases flexibility and resilience, making economies vulnerable to shocks.
Most of what passes for modern monetary policy is nothing more than one assumption piled upon another (and then another, and so on). Taken for granted for so long, rarely are these unproven precepts ever challenged to justify themselves to the minimal standard of internal consistency, let alone prove discrete validity by parts. The latest is ‘helicopter money’, another sham in a long line of them proffered by at least one central bank today because it knows, as the others, nothing they have done has worked. The fact that the world is even discussing the helicopter option should instill great skepticism as a first impulse, not more rabid faith. The way this latest scheme is being described is exactly the same as quantitative easing was really not that long ago. Clearly the expectation for it is rising, as Bloombergreported today that, ‘Nearly one-third of clients and colleagues surveyed by Citigroup Inc. think that so-called helicopter money could be on its way within a fortnight.’ Forty-three percent in the same survey believed that the ‘market’ was expecting it. To do what? That is the question that is never asked because it is just accepted by economists and their media that the helicopter, as QE, will perform as designed even though the last almost decade has proven beyond doubt that never happens. Separately, Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett opined that helicopter money would be the best option to bring money into risk assets, a common goal of monetary stimulus, particularly of the unconventional variety. Stocks are at record highs, and had made them regularly following QE3. And it didn’t have any impact on the economy whatsoever. The most charitable supposition is that it might have been worse (jobs saved rather than created) had stocks more accurately reflected even earnings rather than unhinged forward versions of them. Even that is dubious, because the entire idea of monetarism is nothing more than assumptions never before tested in the real world. QE sounded nearly fool-proof in the laboratories of Ivy League universities; put into action it has left many pining instead for something else.
The Cleveland Fed’s Loretta Mester is a clueless apparatchik and Fed lifer, who joined the system in 1985 fresh out of Barnard and Princeton and has imbibed in its Keynesian groupthink and institutional arrogance ever since. So it’s not surprising that she was out flogging – -albeit downunder in Australia – – the next step in the Fed’s rolling coup d etat. We’re always assessing tools that we could use,’ Mester told the ABC’s AM program. ‘In the US we’ve done quantitative easing and I think that’s proven to be useful. ‘So it’s my view that [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative. This is beyond the pale because ‘helicopter money’ isn’t some kind of new wrinkle in monetary policy, at all. It’s an old as the hills rationalization for monetization of the public debt – – that is, purchase of government bonds with central bank credit conjured from thin air. It’s the ultimate in ‘something for nothing’ economics. That’s because most assuredly those government bonds originally funded the purchase of real labor hours, contract services or dams and aircraft carriers. As a technical matter helicopter money is exactly the same thing as QE. Nor does the journalistic confusion that it involves ‘direct’ central bank funding of public debt make a wit of difference.
The inexorable effect of contemporary central banking is serial financial booms and busts. With that comes increasing levels of systemic financial instability and a growing dissipation of real economic resources in misallocations and malinvestment. At length, the world becomes poorer. Why? Because gains in real output and wealth depend upon efficient pricing of capital and savings, but the modus operandi of today’s central banking is to deliberately distort and relentlessly falsify financial prices. After all, the essence of ZIRP and NIRP is to drive interest rates below their natural market clearing levels so as to induce more borrowing and spending by business and consumers. It’s also the inherent result of massive QE bond-buying where central banks finance their purchases with credits conjured from thin air. The central banks’ big fat thumb on the bond market’s supply/demand scale results in far lower yields than real savers would accept in an honest free market. The same is true of the hoary doctrine of ‘wealth effects’ stimulus. After being initiated by Alan Greenspan 15 years ago, it has been embraced ever more eagerly by his successors at the Fed and elsewhere ever since. Here, the monetary transmission channel is through the top 1% that own 40% of the financial assets and the top 10% that own upwards of 85%. To wit, stock prices are intentionally driven to artificially high levels by means of ‘financial easing’. The latter is a euphemism for cheap or even free finance for carry trade gamblers and subsidized hedging insurance for fast money speculators.
Nominal disposable income in Japan fell 4.4% year-over-year in May 2016. In what can only be a sign of the times being far too familiar in Japanese, realdisposable income was thus slightly better at ‘only’ -3.9%. For all the hundreds of trillions in new Japanese bank reserves provided by so many QE’s I have lost count, ‘real’ in Japan means better than nominal since the CPI is negative yet again. For the month of May, the overall CPI was -0.38% less than May 2015; excluding imputed rent, the CPI was -0.48% below the same month a year earlier. On the economic side, household spending fell in the latest update. Like DPI, nominal spending declined year-over-year by 1.6% while real household spending contracted by ‘only’ 1.1%. In the 28 months since January 2014, real household spending has astoundingly fallen in 24 of them. Since the start of QQE in April 2013, spending in real terms is down more than 6%, while real current income is 5% lower. At this point, the fact that QQE didn’t work is a blessing since Japanese households can really bear no more of the monetary genius-ness.
‘Understand that securities are not net economic wealth. They are a claim of one party in the economy – by virtue of past saving – on the future output produced by others. Fundamentally, it’s the act of value-added production that ‘injects’ purchasing power into the economy (as well as the objects available to be purchased), because by that action the economy has goods and services that did not exist previously with the same value. True wealth is embodied in the capacity to produce (productive capital, stored resources, infrastructure, knowledge), and net income is created when that capacity is expressed in productive activity that adds value that didn’t exist before. ‘New securities are created in the economy each time some amount of purchasing power is transferred to others, rather than consuming it. Once issued, all of these pieces of paper can vary in price later, so the saving that someone did in a prior period, embodied in the form of some paper security, may be worth more or less consumption in the current period than it was initially. That’s really the main effect QE has – to encourage yield-seeking speculation that drives up the prices of risky securities, but without having any material effect on the real economy or the underlying cash flows that those securities will deliver over time. ‘If one carefully accounts for what is spent, what is saved, and what form those savings take (securities that transfer the savings to others, or tangible real investment of output that is not consumed), one obtains a set of ‘stock-flow consistent’ accounting identities that must be true at each point in time: 1) Total real saving in the economy must equal total real investment in the economy; 2) For every investor who calls some security an ‘asset’ there is an issuer that calls that same security a ‘liability’;
I keep hearing that the ‘Chicken Little’s’ are once again being proved wrong. We keep being shown chart, after chart, after chart, after chart how the market recovers from perilous sell-offs. This is expressed as ‘proof’ the ‘market’ doesn’t want to go down, and has legs to vault ever higher. Cause for concern is being dismissed by the hordes of next in rotation fund managers, economists, Ivory Tower academics, or Nobel Laureates as they themselves stampede to any available cameras, microphones, or keyboards that will quote them as saying ‘See…all that worrying is for naught. And expressing anything other is strictly for the gloom and doom crowd.’ Which they then will triumphantly state: ‘Which has been wrong over, and over, and over again.’ My response is this: Then why is nobody buying it? (e.g., the market) Figuratively, as well as literally. If one looks at any credible volume report, the participation rate as to those ‘buying’ into these rallies, which by the way, are the result of a previous fall instilling (once again) a near death experience. It rivals that of a BLS report. i.e., great headlines – just don’t look at how many people are actually ‘participating.’ I have another question: Why can’t the markets proceed any higher than when QE ended in Oct/Nov of 2014? You know, if this is truly: a fundamentally based bull market that is. Or, is it that – its fundamentally full of bull? I believe it’s a big-ole-pile of the latter, and little to none of the former.
Crescat Capital letter to investors for the second quarter ended June 30, 2016 See more great hedge fund letters here – also Crescat’s whole letter is great as always but the stat on China in the headline is mind-boggling – check it all below. Dear Investors, The markets have been turbulent in the wake of the unexpected Brexit vote. Crescat’s hedge funds were well prepared for the shock based on our diversified global macro themes, well hedged long/short positioning, and disciplined risk model. As evidence, our Global Macro Fund posted gains on both Friday and Monday when the S&P 500 was down 3.6% and 1.8% respectively. Crescat Large Cap, our long-only strategy, was also well prepared for Brexit with its large cash position, precious metals exposure, and ample defensive equity holdings. Even after the sharp snap back rally on Tuesday and Wednesday, all three Crescat Strategies are ahead of the S&P 500 in June month to date through yesterday’s close with the S&P 500 down 1.1%. Far and away, our best performing macro theme year to date remains Global Fiat Currency Debasement, our long precious metals theme across all three strategies. Gold, the world’s perennial reserve currency, remains near a historically low valuation relative to the global fiat monetary base. Meanwhile, silver remains near a historically low valuation relative to gold. The problems caused by debt-to-GDP excess in Europe, China, Japan, and elsewhere auger well for further global central bank fiat money debasement and substantial future hard money, i.e., gold and silver, appreciation. Brexit is just one of the catalysts. Despite a broadly rallying market in April and May, we also saw positive returns in the hedge fund strategies from our short-oriented China Currency and Credit bubble theme. We believe that this theme, along with our New Oil and Gas Resources and Asian Contagion themes represent significant opportunities for the second half of 2016. In addition, our Yahoo/Alibaba Spread trade has continued to be a low volatility and high return winner for the hedge fund strategies. We think this has much further to play out in our favor as we show below.
On June 14, the 10-year German bund yield traded briefly below zero for the first time. It was an inauspicious record but one that defines the contradictions at the center of all this economic and monetary controversy. On the one hand, that is what central banks tell us they are after especially with QE, to reduce interest rates even at the long end. By buying government bonds all throughout Europe, the reduction in benchmark rates (as sovereigns are judged to be the risk-free equivalent component of the Fisherian hierarchy) is supposed to spread through the rest of the financial system to be ‘accommodative’ to the wider economy. This is ‘stimulus.’ Yet, on the other hand government bond yields are taken as a safety bid, meaning a natural tension between ‘accommodation’ and concern. As theWall Street Journal on June put it: Bond yields in Europe have been sliding for a year, weighed down by aggressive central-bank bond buying, negative short-term rates and skepticism about an economic recovery that seems persistently to falter. If QE and NIRP actually worked then the rest of that quote would never have been written, as yields have been sliding for far, far more than a year. The mainstream can’t figure out the inequity at the center of all this because orthodox economics has confused everyone with its models of dubious assumptions. Among them is that credit and money are interchangeable substitutes. They are not.
California Rep. Edward Royce had the temerity yesterday to ask Janet Yellen whether the Fed was propping up stock prices. Imagine that! In fact, he hit the nail on the head when he characterized the Fed’s unrelenting intrusion in financial markets and constant dithering on rate normalization as a ‘third pillar’, and one found nowhere in its statutory authorities: ROYCE: I’m worried that the Federal Reserve has created a third pillar of monetary policy, that of a stable and rising stock market. And I say that because then-Chairman Bernanke, when he appeared here, stated repeatedly that, ‘the goal of QE was to increase asset prices like the stock market to create a wealth effect.’ That seems as though that was goal. It would stand to reason then that in deciding to raise rates and reduce the Fed’s QE balance sheet standing at a still record $4.5 trillion, one would have to be prepared to accept the opposite result, a declining stock market and a slight deflation of the asset bubble that QE created. Yet, every time in the past three years when there has been a hint of raising rates and the stock market has declined accordingly, the Fed has cited stock market volatility as one of the reasons to stay the course and hold rates at zero. So indeed, the Fed has backed away so many times from rate normalization that – and I think this is a conceptual problem here that the market now expects stock market volatility to diminish the odds of a rate increase. So Madame Chair, is having a stable and rising stock market a third pillar or the Federal Reserve’s monetary policy if I go back to what I originally heard Ben Bernanke articulate? Yellen’s reply is a risible insult to the intelligence of anyone who can fog a mirror. The sum and substance of what the Fed does these days is wealth effects pumping via the Greenspan/Bernanke/Yellen Put, but that did not stop our duplicitous school marm from denying the obvious:
In February 1999, the Bank of Japan announced that its call money rate would be zero ‘until deflationary concerns subside.’ Other than a temporary shift in 2001 and 2006, deflationary concerns remain. How effective was monetary policy? That point has been partially answered by the introduction of QE over and over and over again. The zero lower bound is to orthodox economists a major problem. They do not, however, have an answer for why it is now a global problem as the ZLB spread out everywhere. In a speech to the ASSA in Boston, MA, in January 2000, Princeton professor Ben Bernanke criticized the Bank of Japan for its, in his view, reluctance to act. Though he applauded ZIRP and BoJ’s announced intention to keep it in place for as long as ‘necessary’ (without addressing why that might be forever forward), it was nearly enough as he said in conclusion: Policy options exist that could greatly reduce these [economic] losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. There is enormous conceit in that statement, compelled by an inflated sense of duty. Why, if monetary policy isn’t working, does that necessarily lead to more of it? The easy answer is because that is the task central banks have given themselves, covered politically by governmental paralysis on any central bank question. The more central banks fail, the easier they cry ‘independence.’
Sad to say, you haven’t seen nothin’ yet. The world is drifting into financial entropy, and it is going to get steadily worse. That’s because the emerging stock market slump isn’t just another cyclical correction; it’s the opening phase of the end-game. That is, the end game of the PhD Tyranny. During the last two decades the major central banks of the world have been colonized lock, stock and barrel by Keynesian crackpots. These academic scribblers and power-hungry apparatchiks have now pushed interest rate repression, massive monetization (QE) and relentless rigging of the financial markets to the limits of sanity and beyond. Honest, market-driven price discovery is dead as a doornail. No more proof is needed than the ‘matrix’ below. The very thing that history proves, above all else, is that governments can’t be trusted to honor their debts. In fact, modern welfare state democracies have a veritable fiscal death wish. What else can you call Japan’s announcement to defer yet again an increase in the consumption tax? Its public debt is already at 240% of GDP, even as its tax-paying population is rapidly streaming toward it’s national old age home. At a 135% debt-to-GDP ratio, Italy is not far behind. It’s economy is still smaller than it was in 2007, its banking system has more than $200 billion of bad debt, its public sector squanders more than 50% of GDP and its politically fractured and corruption-ridden government is paralyzed.
Donald Trump can instantly get to the left of Hillary with respect to Wall Street and the one percenters by embracing Super Glass-Steagall. The latter would cap U. S. banks at $180 billion in assets (<1% of GDP) if they wished to have access to the Fed’s discount window and have their deposits backed by FDIC insurance. Such Federally privileged institutions would also be prohibited from engaging in trading, underwriting, investment banking, private equity, hedge funds, derivatives and other activities outside of deposit taking and lending. Instead, these latter inherently risky economic functions would be performed on the free market by at-risk banks and financial services companies. The latter could never get too big to fail or to manage because the market would stop them first or they would be disciplined by the fail-safe institution of bankruptcy. No taxpayer would ever be put in harms’ way of trades like those of the London Whale. By embracing this kind of Super Glass-Steagall Trump would consolidate his base in the flyover zones and reel in some of the Bernie Sanders throng, too. The latter will never forgive Clinton for her Goldman Sachs speech whoring. And that’s to say nothing of her full-throated support for the 2008 bank bailouts and the Fed’s subsequent giant gifts of QE and ZIRP to the Wall Street gamblers. Besides, breaking up the big banks and putting Wall Street back on a free market based level playing field is the right thing to do. Today’s multi-trillion banks are simply not free enterprise institutions entitled to be let alone. Instead, they are wards of the state dependent upon its subsidies, safety nets, regulatory protections and legal privileges. Consequently, they have gotten far larger, more risky and dangerous to society than could ever happen in an honest, disciplined market.
Some legitimate scientists are legitimately worried about the spread of information. The lack of boundaries afforded by an open internet has left the world awash in it, and with no shortage of opinion. This is a good thing. However, there is a downside in that unfiltered and unrefined information as it can be used to mislead both the person wielding it and those that choose to be swayed by it. There is certainly an immense amount of noise on the internet, and it is the job of any scientist in any field to be a trained engine of filtering. Science itself achieved a level of reverence, however, that isn’t wholly healthy. It has become a barrier which is exposed the more it becomes closed off. Thus, the information available in the internet age can be a check upon the immutable fact that scientists, while deserving respect, are still human and thus should be comfortable with some level of public skepticism. Some accept this proposition more so than others: What does the evolving frontier of knowledge mean for society’s relationship with science? Long borders are difficult to patrol. Professional gatekeepers of scientific knowledge can no longer control the flow of information as they used to. In an age of the ‘University of Google,’ people no longer rely on established, peer-reviewed literature but rather seek out manifold sources on the Internet. Fragments of scientific knowledge get absorbed into society this way, as do some scientific values and thinking – which by itself is good. But many of these fragmented bits of knowledge are also invalidated, politicized, and of dubious quality.
We are now in month 83 of this so-called recovery. Yet there are still 45 million people on food stamps – – one out of every seven Americans. The median real household income is still 5% below its level in the fall of 2007. There are still only 71 million full-time, full-pay ‘breadwinner’ jobs in the nation – – nearly 2 million fewer than when Bill Clinton was packing his bags to vacate the White House. At the same time, we have had monetary stimulus like never before. There has been 90 straight months of virtually zero interest rates. The balance sheet of the Fed has been expanded by $3.5 trillion. For point of reference, that is 4X more than all the bond-buying during the entire first 94 years of the Fed’s history. So something doesn’t parse, and that’s to put it charitably. The truth is, the Fed’s entire radical regime of ZIRP and QE constitutes a monumental monetary fraud. It has not ‘stimulated’ a wit the struggling main street economy of flyover America. Instead, it has showered Wall Street speculators with trillions of windfall gains and gifted the bicoastal elites with a false prosperity derived from financial inflation and government expansion.