Friday, 18 May 2018

Tulip Mania? No, Just The U.S. Stock Market

Friday, 4 May 2018

Monday, 30 April 2018

Charts of The Day: The U.S. Savings Disaster Just Gets Worse And Worse

Data as of March published today:

Personal Saving in % of the money supply for the U.S.

For more on this, see:

A Glum Note On The U.S. Savings Disaster

Sunday, 29 April 2018

Chart of The Day: Fundamentals Are Not Catching Up

Contrary to theory, market valuations do not primarily reflect future prospects. They reflect current conditions.

Friday, 27 April 2018

It's Not For Me To Tell You How This Can End Well, It's For You To Tell Me Why It Will Not

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”- Mark Twain

Broad-based financial bubbles are created by an expanding rate of monetary inflation whether expected or not. The more aggressive this expansion and the longer it lasts, the bigger the bubble, especially when official CPI inflation measures remain "subdued" and "well-anchored". Add a near decade-long ZIRP on top and you've got the recipe for a stock market bubble of epic proportions - like we currently have in the U.S. and in many other stock markets around the fiat-money world. The few minor corrections this year do little to change that.

About four years ago, stock prices started dislocating from a broad range of economic aggregates spanning GDP, manufacturing, retail sales, corporate earnings and dividends, personal income, and personal spending- and saving. And that is just mentioning a few of many - you name it and stocks have dislocated.  Already back then, stock market valuations started resembling those of the late 1990s and the build up to the previous U.S. banking crisis back in 2007. 

Today, the U.S. stock market bubble far surpasses these two, both in terms of length and height. Not in terms of earnings, but in terms of every other fundamental. This cannot be rationalized away by merely pointing to historically low interest rates. After all, they are in epic bubble territory as well as the low interest rates we have today are possible only thanks to central bank interventions and the resurgence of bank credit a few years back which, if continued, would mean the death of the current monetary system - of which there are great forces in play to protect the very existence of.

Naturally, the low level of interest rates (no matter how they come about) do justify elevated valuation multiples. But nothing like those observed today this late in the money cycle and certainly not while interest rates are now actually rising.

Sure, a slim margin of interest rate increases were indeed baked into equity valuations when judged by the spread between the earnings yields and treasury bond yield. But these modest expectations as to where the future level of interest rates might be heading are now perhaps dawning on speculators as somewhat optimistic. The extravagant valuations of U.S. stocks today alone bear promises of poor future returns, even after the dip after January (in case you're thinking about "buying any dip"). A 50% decline should surprise no sane person.

But the corrections this year is a healthy one. At least so I've been told on numerous occasions. But healthy for whom and why? Pundits are either dumb or incompetent, and I'm still not sure which one is preferable. My vote however goes to the former. A drop in stock market prices is only healthy for those waiting to buy. Period. It's not like the economy is reset somehow and gain strength to grow further after a dip. Nothing fundamental happens when stock prices fall. The only thing affected is confidence, the very "foundation" of the faulty economic doctrines promoted by new-Keynesians, politicians, and other demagogues and cranks alike. Falling stock market prices have nothing to do with the real economy as all they ever accomplish is to change the hands of whom ever has the claim on real wealth. It's a matter of distribution, not loss of wealth to society. This is a fundamental concept few pundits are capable of even thinking about it seems. 

For decades, but on a substantially larger scale today than perhaps ever, we all in the western hemisphere live in societies where an ever-expanding class of parasites feed off an ever-shrinking class of wealth creators. Should you doubt this sweeping claim, I dare you to tell me why debt keeps expanding relative to income and saving despite ingenious entrepreneurs hard at work reducing our daily costs of living and chores. If you can answer that question convincingly and conclusively, I see few reasons why you should not be awarded an accurate version of the Nobel memorial prize in economics. Attempts linking debt to nominal wealth will not be accepted, for reasons too obvious to mention. Government employees, lawyers and consultants making a living thanks to bureaucrats' imagined and self-created problems, organisations living on grants and subsidies; these are the sectors where "growth" are found, in addition to those hopeless projects aimed too far in the future to benefit any present-day living person. The economic waste that is the war machine, destroying livelihoods, dreams, and life around the world, especially the middle east - nothing to do with oil and countries wanting to be independent of western powers and doctrines, right? Not to mention the armies of accountants wasting precious resources upholding meaningless accounting standards not benefiting the companies footing the bills, but the government narcissists demanding it. The list is incredibly long, so long no one central planner or group possesses all the information necessary to keep an accurate account. 

So what's the path from here? I see two extremes; rampant money printing or a firm return to sound money. The truth will be neither. Progressives always choose the middle-road. And they are the ones whom after all run financial regulations and politics, with the absent consent from voters whom increasingly know more and more about less and less. 

Poverty will increase. Options will shrink. Decisions made on behalf of you and me will increase on account of people who are further and further distanced from where real decisions ought to be made. The socialist path, the chosen one after WWII, will prevail for many years to come and with ever-greater force and conviction. Until we all run out of purchasing power to buy the bear necessities. That's when mini-revolutions find their breeding ground and new socialists solutions are once again re-invented to save everybody at the expense of everyone else. 

The Economic Stimulus Fable

Economic stimulus generally refers to the use of monetary and fiscal policies implemented centrally by a government or government agencies to "spur" or “kick-start” economic growth in a struggling economy. Stimulus is usually called for following a period of inflationary growth that necessarily must come to an end. The central bank, whose policies are partly founded on the doctrine that interest rates should be raised during good times and lowered during bad, controls the monetary element of the “stimulus.” Furthermore, the thinking goes, money supply growth therefore needs to be slowed during good times and managed up during bad times. Why? Because lowering interest rates and increasing the money supply growth rate fuel demand and with it economic activity while rising interest rates and decreasing money supply growth achieve the opposite according to this line of thinking.

Through manipulating the money supply and interest rates, a central bank is able to steer the economy and smooth out booms and busts. At least this is the claim made by central banks and the institutions and scholars that support such politics and interventions.

The view that lower interest rates will support economic activity is held by, to my knowledge, all central banks around the world in their quest to “combat” the lack of growth. In recent years, central banks have held a zero interest rate policy (ZIRP) including the Fed, ECB, Bank of England, and Bank of Japan, and the Bank of Canada. This line of thinking makes it sound like the artificially lowering of interest rates, i.e. implementing policies that push interest rates lower than what the market would establish with no intervention, unleashes some sort of untapped economic potential.

The economy is no horse however and should not be handled like one. While lower interest rates brought about by increased voluntary saving certainly bodes well for future economic growth, artificial lowering of interest rates by central banks and commercial banks do not achieve the same feat. In this regard, it should be observed that it is not the lower interest rates per se resulting from increased saving that generate brighter economic prospects. Rather, it is everything that made the interest rate decrease in the first place that is the deciding factor, i.e. the increased accumulation of saving and the factors that made it possible in the first place. It therefore does not help one iota to artificially decrease interest rates when it is not fueled by increased saving.

Unwittingly, rather than planting the seeds of economic progression, an artificial lowering of interest rates is a fertilizer for economic regression. Lower interest rates of course do lower the borrowing costs for entrepreneurs seeking to expand production or invest in new facilities and lines of business. Likewise, people with floating interest debt payments and owners of a wide range of interest-sensitive securities gain with lower interest rates.

But these gains need to be paid for by someone as they did not appear out of nothing and without consequences elsewhere. If there were no costs attached to an artificial lowering of interest rates, we could just abandon interest rates altogether and implement a permanent zero-interest rate policy and make everybody better off in economic terms as a result. Common sense tells us that interest rates would have been abandoned long ago if creating economic prosperity was that simple. Well, it is not that simple. Someone needs to pay for these gains as no economic wealth whatsoever is created by the act of artificially lowering interest rates.

And these gains for some are certainly not paid for by central- or commercial banks. They are instead paid for by the people not benefiting from lower interest rates. First and foremost, it is those with most of their savings deposited with the local bank and people on fixed wages and salaries that foot the bill, i.e. the great majority of people in any economy. Secondly, as an artificial lowering of the interest rate is accomplished mainly through increasing the quantity of money, it is especially the late receivers of these new monies that lose out as the purchasing power of their existing money have become diluted by the time they get their hands on the new ones. Thirdly, monetary expansion creates economic distortions that create the business cycle and which tends to reduce, not increase, economic growth over the longer term. In this sense, the great majority lose out in the long run.

The stimulus button is little more than the grandest of schemes (referred to as "tools" in central bank speak) to make consumers spend more and facilitate ever-growing government spending and to lure businesses into investing above and beyond what they can possible make an adequate return on during the life of the asset. Business owners might have figured that out during the last couple of cycles which might in part explain why investment levels have ran at relatively low levels after 2008.

“Economic stimulus” through monetary inflation and an artificial lowering of interest rates never was, nor will it ever be, a source of untapped economic growth that can be turned on and off by the whims of central planners. It is a button however that does squander scarce resources by facilitating overconsumption and capital misallocations. In essence, economic stimulus is little else than spurring current economic activity and hoping the market will make up for the costs attached to this stimulus in time to make it appear as though it was achieved by the stimulus. In reality, the increased economic activity over the shorter term comes at the expense of future economic growth. Hence the expression kicking the can down the road, leaving the problems to be solved by those elected at a later stage.

Additionally, and of the greatest importance for the central bank and the banking system, monetary stimulus is highly effective in inflating asset prices and the market values of the very collateral bank credit is secured by. Specifically, fractional reserve banks depend on ongoing inflation not only for growth, but for their very existence. Deflation on the other hand is a death sentence for commercial banks as the market values of collateral shrink while their liabilities (mostly deposits) remain largely unchanged at face value.

But for the real economy, it is increased savings and production that is really required, not increased spending financed by newly created money which had already been artificially boosted and then saturated during the previous boom (the reason for the bust!). Consequently, economic growth likely slumps even lower when stimulus is once again added. Which so happens to be the case for the U.S. economy for especially the past decade.

But the central planners' fable is now again nearing its end as the Fed has been turning the stimulus button off and the tightening button on. But as there is no real growth to turn off, the result is an inevitable one; the revelation that the economy has in fact been doing poorly all along. And when confidence vanishes as it must since it cannot forever be disconnected to reality, everyone that desire so can now see that the people at the FOMC had been walking nude this whole time. The dumb audience, spanning well know mainstream economists to financial news statists stuck comfortably in their ivory towers now should look silly to all except for the permanently incompetent. Until it is all forgotten and the whole parade starts all over again.

Yes, Fundamentals Usually Appear Strong Prior To A Sell-Off

My latest article on Seeking Alpha. Access the article for free here.

Wednesday, 25 April 2018

"...An Awesome Overview Of Some Great Thinking On Money..."

What great words about my book - thank you, Chris!

Tuesday, 24 April 2018