The Bubble Finance Cycle – What Our Keynesian School Marm Doesn’t Get, Part 1

The world of Bubble Finance economies created by the Fed and other central banks is fundamentally different than that prevailing under the “Lite Touch” monetary policies which preceded the Greenspan era.

Those essentially reactive and minimally invasive central bank intrusions into the money and capital markets prevailed from the time of the Fed’s 1951 liberation from the US Treasury by the great William McChesney Martin through September 1985. That’s when the US Treasury/White House once again seized control of the Fed’s printing presses and ordered Volcker to trash the dollar via the Plaza Accord. In due course, the White House trashed him, too.

The problem today is that the PhDs running the Fed have an economic model which is a relic of the Lite Touch era. It is not only utterly irrelevant in today’s casino driven system, but is actually tantamount to a blindfold. It causes them to look at a dashboard full of lagging indicators like jobs and GDP components, while ignoring the explosive leading indicators starring them in the face on CNBC.

In a word, the rate of stock buybacks and M&A deals is 100X more important than the monthly jobs print, housing starts or retail sales.

The clueless inhabitants of the Eccles Building do not recognize that they have created a world in which Wall Street supersedes main street; and in which the monetary inflation that eventually brings the business cycle to a halt is soaring financial asset prices, not wage rates and new car prices.

During the Light Touch era recessions were triggered by sharp monetary tightening that caused interest rates to surge. This soon garroted business and household borrowing because credit became too expensive. And this interruption in the credit expansion cycle, in turn, caused spending on business fixed assets and household durables to tumble (e.g. auto and appliances), setting in motion a cascade of recessionary adjustments.

But always and everywhere the pre-recession inflection point was marked by a so-called wage and price spiral resulting from an overheated main street economy. Yellen’s Keynesian professors in the 1960s called this “excess demand”, and they should have known.

Professor James Tobin in particular, Yellen’s PhD advisor, had been the architect of a virulent outbreak of this condition during his tenure in the Kennedy-Johnson White House. He had been a pushy advocate of massive fiscal deficits under the guise of full employment accounting, and then had encouraged Johnson to unmercifully browbeat William McChesney Martin until he relented and monetized LBJ’s massive flow of “guns and butter” red ink.

Indeed, according to some historians Tobin and the White House Keynesians worked LBJ into a fiery rage about Martin’s reluctance to run the printing press, and had him summoned to the President’s Texas ranch for the “treatment”. As one journalist described it,

And in 1965, President Lyndon B. Johnson, who wanted cheap credit to finance the Vietnam War and his Great Society, summoned Fed chairman William McChesney Martin to his Texas ranch. There, after asking other officials to leave the room, Johnson reportedly shoved Martin against the wall as he demanded that the Fed once again hold down interest rates. Martin caved, the Fed printed money, and inflation kept climbing until the early 1980s.

This is to say, free market economies really don’t “overheat” on their own motion. The old fashioned kind of wage and price spirals happened because even Lite Touch central banks did not allow financial markets to fully and continuously clear. Continue reading

The declining interest rate cap

Submitted by Alasdair Macleod –

Believe it or not, one of the topics in economics that confuses macroeconomists is the actual role of interest rates.

For the most part they just assume that an interest rate is the cost of money, the price of money, or even the transfer of the fruits of production from producers to idle capitalists. This last assumption appears to have been Keynes’s motivation for his dislike of savers, or rentiers as he disparagingly labelled them. The thought that workers slave for a master who then pays interest to capitalists energises Marxism as well.

In a free market, consumption comes in two basic forms: that which is consumed today, and that which is postponed into the future. Deferred consumption is saving, and Keynes’s target was the saver, even “looking forward to the rentier’s euthanasia” as he put it in his General Theory.

Denying Say’s Law or the law of the markets allowed Keynes, in his own mind anyway, to replace the saver with the state as the principal source of funding for industrial investment. That he came to this conclusion can only be the result of moral principles unsupported by reasoned theory. But once you launch yourself down what amounts to the slipway of prejudice, there is no knowing where it will all end. In Keynes’s case, it produced a following which has become the mainspring of today’s macroeconomic mainstream. We play this down, commonly saying that the reason for discouraging saving is to encourage current consumption. This is an error, and everyone who utters this knows or should know it. All Keynes’s work, from his Tract on Monetary Reform onwards hints at his true desire, to eliminate idle savers as an economic factor.

Central to his argument was that the cost of interest is a part of the surplus of production, alongside profit. If you cause the rewards to idle savers to fall, he reasoned there would be more profit for the working entrepreneur. However, while interest is a business cost, it’s value does not arise from business per se; its origin is the value humans put on the difference between something possessed compared with the same thing promised at a future date, which in turn reflects the relative preference consumers express between current consumption and saving.

There are a number of elements to any interest rate, which is how this relative preference is expressed. The Austrian economist, Ludwig von Mises, coined the term “originary interest” for the underlying temporal difference between actual possession and a loan contract guaranteeing future possession. Originary interest is an expression of the discounted time-preference between today and a date in the future, annualized for convenience. Continue reading

Incumbents Swept from Office Around the World

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Election Trends in 2015 – No Incumbent is Safe

In the political sphere, this year has started with a bang, when Syriza won the Greek parliamentary election. All of Europe’s attention was focused on this outcome and its aftermath over the coming six months or so. As it turned out, it was a bad omen for political incumbents nearly everywhere.

More recently, we have seen the government of Stephen Harper in Canada go down in flames, with its opponents winning an unexpected landslide victory. As an aside to this particular election: as a friend of ours who hails from Canada remarked, pretty much the only positive policy initiative he could identify so far was the new government’s plan to pursue the legalization of soft drugs (in our opinion the decision to refrain from overseas military adventures is a good idea as well).

trudeau-harperElection winner Justin Trudeau (left) and loser Stephen Harper (right)

Photo credit: Adrian Wyld / The Canadian Press

Apart from that, Justin Trudeau’s new government seems to hold fast to the belief that the keys to “economic growth” are the redistribution of wealth and heavy government spending, which flies into the face of both theory and what are by now ages of bitter experience. On the other hand, Mr. Harper’s chief quality was that he refused to go along with global climate hysteria. Other than that, the man wasn’t much to write home about (for instance, his government did everything to boost an already dangerous housing and consumer credit bubble, with the aid of a more than willing central bank leadership).

In Guatemala, Jimmy Morales, a comedian who has never before been in politics (i.e., he seems to be Guatemala’s version of Beppe Grillo) and who reportedly has “eccentric policy ideas” (this doesn’t necessarily mean they are bad – we haven’t really checked them out) has decisively beaten the incumbent government. The previous government was apparently involved in corruption on a truly staggering scale (which is not necessarily a reason to lose an election). While we know little about Mr. Morales, he promises at the very least to have some entertainment value – which is the most voters can usually hope for anyway. Continue reading

Crime in the Jobs Report

– Calvin Coolidge, US president, 1923-29, in his role as Mr. Obvious

“Unemployment is of vital importance, particularly to the unemployed.”

– Edward Heath, UK prime minister, 1970-74

Every now and then you get some good news. Economists had projected a good solid 185,000 new jobs, with the range of expectations running from a low of 150,000 to a high of 240,000. What we got was a boffo 271,000 jobs. Plus some green shoots of potential actual wage-push inflation, the kind of inflation pressure that most workers like, which means that, for a change, wages might start going up faster than inflation.

The unemployment rate dropped a whopping 0.01%, but that was enough to push the rounded number down to a headline 5% unemployment (actual was 5.04%).

In today’s letter, we are going to look briefly at the latest employment numbers. Then we’ll explore some of the deeper, less understood facets of the employment data. For some of you this may be a lot of detail, but for those of us who think about employment (and you should, as it is THE ultimate driver for your business and investments), understanding how the numbers work and what they mean is important.

But first, we are going to open registration for my annual Strategic Investment Conference very soon. I’ll be hosting it in Dallas this year, May 24–27. It will be over at noon on Friday the 27th so you can easily get back home for the weekend. The airport is only about 25 minutes from the conference venue, and Dallas is central, with nonstop connections all over the US, Europe, Asia, and South America. You are going to want to register early, as there will be several events with limited seating that will fill up on a first-come, first-serve basis – your early registration will move you to the front of the line. You can sign up to get advance notice by clicking here.

And now let’s take a look at the unemployment picture in America.

The Employment Numbers Say a Rate Hike Is Pretty Much Done

Let’s rewind the tape from an email sent out by Philippa Dunne of the Liscio Report  so we can see where the new jobs came from:

Employers added 271,000 jobs in October, all but 3,000 in the private sector. Construction added 31,000 (well above its average of 19,000 over the last year, though two-thirds of the gain came from nonres specialty trade, those who finish buildings); wholesale trade, an above-average 10,000; retail, 44,000, also well above average; finance, 5,000, less than half its recent average; professional and business services, 78,000, well above-average; education and health, 57,000, somewhat above average; and leisure and hospitality, 41,000, also somewhat above average. Government added 3,000, all from state government; local was unchanged, and federal, off 2,000.

Manufacturing was unchanged.

This employment report was all about gains in services industries, plus a little in construction. Which squares with the data we have seen in recent months from the regional Fed banks. Manufacturing is getting soft, and services are doing well. Let’s look at a few charts that will help tell the story. The first is an amalgamation of the regional Fed manufacturing indexes. The second is the national manufacturing index, and the last one is the national non-manufacturing (read services) index.


Continue reading

China’s Obvious Baseline

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Once more we find no end in sight to the Chinese slowdown. To complete the weekly sweep of highly negative Chinese accounts, the major three released today were unfortunately complimentary to those already publicized. Only retail sales accelerated and by the smallest increment; in context, however, at 11% retail sales are still lower than the worst month of the China’s end of the Great Recession. Industrial production fell back to 5.6%, matching March (no more “transitory”) for the worst growth rate of this “cycle.” Perhaps most meaningfully, fixed asset investment (which is presented as an accumulated YTD growth rate, leaving indirect inference for individual months as they come out) was only 10.2% and the lowest levels since December 2000.

Private FAI, a relatively new addition from the National Bureau of Statistics China, was only 10.4% in September, having been 18.1% at the end of 2014 and 23.1% at the end of 2013. By all counts, the economic climate in China in 2015 is substantially worse than the rather steady slowing that has been at work since 2012. Despite the obviousness of that baseline, each positive monthly variation has been taken as if “stimulus” was working, only to be dependably tossed aside as long-forgotten, inappropriate memories. It is, instead, becoming increasingly clear the PBOC has no real power or effort by which to arrest the trend should it actually attempt to.

ABOOK Nov 2015 China IP Recent

By far, the worst element of China’s recent experience is the torture of extension. In other words, quite unlike even the worst of the Great Recession, this slowing is unending; grinding lower month after month after month (seeing past, of course, those monthly variations). It is almost too unrealistic to contemplate, but industrial production had been 8% or below in China for only three months during the Great Recession; it has been 8% or below in every month dating back to last July, for a total of 15 months and counting. That turn, while still conforming to the 2012 trend, represented a new amplification that dates exactly to when the “dollar” found new “tightening.” Continue reading

Russia Sees Gold Reserves As “Additional Financial Cushion” In Face Of “External Uncertainties”

Submitted by Mark O’Byrne  –  GoldCore

– Gold and FX reserves are “additional financial cushion” for state in face of “external uncertainties”
– Russia bought another 77 tonnes of gold in Q3
– Ruble volatility does not create risks for financial stability in Russia
– Russia intends building fx and gold reserves to $500 billion in coming years
– Gold is a “100% guarantee from legal and political risks”

Russian central bank governor, Elvira Nabiullina spoke about Russia’s gold and foreign currency reserves today saying Russia intended building them up to $500 billion in the coming years. More importantly, she confirmed that Russia continues to see gold reserves as an important monetary  asset – in her words as a “financial cushion.”

GoldCore: Russian Central Bank Gold Reserves

According to Russian news agency TASS, Nabiullina said: “Regarding gold and foreign currency reserves, we have the desired benchmark of $500 billion, and not in the three-year term, it could be 5-7 years and more.” Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Fresh Wave Of Selling Engulfs Oil And Metals Markets (FT)
• Fed Officials Lay Case For December Liftoff (Reuters)
• China Banks’ Troubled Loans Hit $628 Billion – More Than Sweden GDP (Bloomberg)
• China’s Demand For Cars Has Slowed. Overcapacity Is The New Normal. (Bloomberg)
• China Apparent Steel Consumption Falls 5.7% From January-October (Reuters)
• China Speeds Up Fiscal Spending in October to Support Growth (Bloomberg)
• China Panics, Sends Fiscal Spending Sky-High As Credit Creation Tumbles (ZH)
• China Learns What Pushing on a String Feels Like (WSJ)
• Oil Slumps 4%, Nears New Six-Year Low (Reuters)
• OPEC Says Oil-Inventory Glut Is Biggest in at Least a Decade (Bloomberg)
• IEA Says Record 3 Billion-Barrel Oil Stocks May Weaken Prices (Bloomberg)
• Number of First-Time US Home Buyers Falls to Lowest in Three Decades (WSJ)
• Striking Greeks Take To Tension-Filled Streets In Austerity Protest (Reuters)
• Europe’s Top Banks Are Cutting Losses Throughout Latin America (Bloomberg)
• Collapsing Greenland Glacier Could Raise Sea Levels By Half A Meter (Guardian)
• EU Leaders Race To Secure €3 Billion Migrant Deal With Turkey (Guardian)
• PM Trudeau Says Canada To Settle 25,000 Syrian Refugees In Next 7 Weeks (G&M)