The End Is Nigh for the Fed’s “Bubble Epoch”

Submitted by William Bonner, Chairman – Bonner & Partners

Market Mythology

LONDON – Twice in the last 15 years, markets have tried to correct the mistakes and excesses of the Bubble Epoch. Each time, the Fed came back with even more mistakes and excesses. Trillions in new credit… lower lending rates… easier terms… ZIRP… QE… and the Twist!

MW-BX052_FOMC_m_MG_20140319160153The gaggle of price-fixers the job of which is to regularly falsify one of the most important price signals in the economy. The idea that the economy can be “improved” by the interventions of a handful of people who have zero practical economic experience and rely on extremely dubious theories to guide their decisions is downright bizarre. Who can possibly believe that this works? It is a huge farce – one that is very dangerous for prosperity and economic progress.

Photo credit: Bloomberg

Over the short run, markets respond to myths. Investors are ready to believe almost anything… for a while. But over the long run, there is death and destruction – a reality outside of what we believe.

No matter how badly investors want asset prices to go up, for example, asset prices don’t always comply. On Wednesday, the Dow sank 560 points in the first few hours of trading. It then recovered half of those losses to end the day down 249 points – for a 1.5% fall.

U.S. crude oil plunged below $27 a barrel – the lowest level in 13 years. The financial media don’t know what to do. Typically, they downplay a bear market as long as they can… explaining the many reasons why the sell-off is “overdone” and why the “bottom” has already been found.

The Wall Street Journal, for example, tells us that the “market’s panic is incongruent” with economic reality. Yahoo! Finance already sees “signs of capitulation.” It offers advice on “how to trade a bear market,” too.

1-DJIA and WTICThe DJIA and crude oil. Over the past two days they have begun to bounce a little after becoming extremely oversold. Still, the market doesn’t care about anyone’s opinions – it will do whatever it needs to do – click to enlarge. Continue reading

Out of the mouths of babes….

Submitted by Alasdair Macleod –

Parents will tell you the most difficult questions to answer sometimes come from their children. Here are some apparently innocent questions to ask of economists, journalists, financial commentators and central bankers, which are designed to expose the contradictions in their economic beliefs. They are at their most effective using a combination of empirical evidence and simple, unarguable logic. References to economic theory are minimal, but in all cases, the respondent is invited to present a valid theoretical justification for what invariably are little more than baseless assumptions.

A pretense of economic ignorance by the questioner is best, because it is most disarming. Avoid asking questions couched in anything but the simplest logical terms. You will probably only get two or three questions in before the respondent sees you as a trouble-maker and refuses to cooperate further.

The nine questions that follow are best asked so that they are answered in front of witnesses, adding to the respondent’s discomfort. Equally, journalists and financial commentators, who make a living from mindlessly recycling others’ beliefs, can be great sport for an interrogator. The game is simple: we know that macroeconomics is a fiction from top to bottom: the challenge is to expose it as such. If appropriate, preface the question with an earlier statement by the respondent, which he cannot deny; i.e. “Last week you said that…”

Commentary follows each question, which is in bold.

  1. How do you improve economic prospects when monetary policy destroys wealth by devaluing earnings and savings?

Central bankers and financial commentators are always ready to point out the supposed merits of monetary expansion, but are never willing to admit to the true cost. You can add that Lenin, Keynes and Friedman agreed that debasing money destroyed wealth for the masses, if the respondent prevaricates. Often politicians will duck the question with the excuse that monetary policy is delegated to the central bank.

The argument in favour of devaluation relies on fooling all of the people some of the time by encouraging them through lower interest rates to spend instead of save. However, monetary debasement has become a permanent and continuing fixture today, instead of a short-term fix. Continue reading

China’s Year of the Monkees

“It does not matter how slowly you go as long as you do not stop.”

– Confucius

“Be extremely subtle, even to the point of formlessness. Be extremely mysterious, even to the point of soundlessness. Thereby you can be the director of the opponent’s fate.”

– Sun Tzu

While we in the West get used to writing “2016” on our documents, China is getting ready for its own Lunar New Year. Their calendar kicks off the “Year of the Monkey” next month. At the rate they are going, though, Chinese markets look more like that hapless rock band that can’t quite reach the main stage.

China isn’t the only reason markets got off to a terrible start this month, but it is definitely a big factor (at least psychologically). Between impractical circuit breakers, weaker economic data, stronger capital controls, and renewed currency confusion, China has investors everywhere scratching their heads.

When we focused on China back in August (see “When China Stopped Acting Chinese”), my best sources said the Chinese economy was on a much better footing than its stock market, which was in utter chaos. While the manufacturing sector was clearly in a slump, the services sector was pulling more than its fair share of the GDP load. Those same sources have new data now, which leads them to quite different conclusions. If you have exposure to China – which you do if you own just about any stock listed anywhere – you’ll want to read this issue carefully.

Let me remind you, before we delve into China, that the early-bird pricing for my annualStrategic Investment Conference ends next Sunday at midnight. I will admit to taking no small amount of pride in the fact that almost everyone who talks to me about the conference says it’s the best investment conference they have ever attended. I carefully craft a blend of speakers each year to speak to the particular dynamic environment we find ourselves operating in. Attendees who have been to most of the conferences tell me that the experience gets better every year, and I have worked hard to continue that positive trend. Continue reading

Square Holes and Currency Pegs

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Berenice Abbott Murray Hill Hotel, New York 1937

When David Bowie died, everybody, in what they wrote and said, seemed to feel they owned him, and owned his death, even if they hadn’t thought about him, or listened to him, for years. In the same vein, though the Automatic Earth has been talking about deflation (for 8 years, it’s our anniversary today) and the looming China Ponzi disaster for a long time, now that these things actually play out, everybody talks as if they own the story, and present it as new (because, for one thing, well, after all for them it is new…).

And that’s alright, it’s how people live, and function, they always have, and no-one’s going to change that. It’s just that for me, I’ve been wondering a little about what to write lately, because I’ve already written the deflation and China stories, many times, before most others tuned into them. But still, it’s strange to now, as markets start plunging, read things like ‘Deflation is Here’, as if deflation is something new on the block.

Deflation has been playing out for years. Central bank largesse has largely kept it at bay in the public eye, but that now seems over. Debt deflation is inevitable when -debt- bubbles burst, and when these bubbles are large enough, there’s nothing that can stop the process, not even miracle growth. But you’re not going to understand this if and when you look only at falling prices as the main sign of deflation; they’re merely a small part of the process, and a lagging one at that.

A much better indicator of deflation is the velocity of money, the speed at which ‘consumers’ spend money. And velocity has been going down for years. That’s where and how you notice deflation, when combined with the money and credit supply. Which have soared in most places, but were no match for a much faster declining velocity. People have much less money to spend. Which shouldn’t be a surprise if, just to name an example, new US jobs pay 23% less than the ones they’re -supposedly- replacing.

Continue reading

Presidential Crimes Then And Now

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

Not much remains of the once vibrant American left-wing. Among the brainwashed remnants there is such a hatred of Richard Nixon and Ronald Reagan that the commitment of these two presidents to ending dangerous military rivalries is unrecognized. Whenever I write about the illegal invasions of other countries launched by Clinton, George W. Bush, and Obama, leftists point to Chile, Nicaragua and Grenada and say that nothing has changed. But a great deal has changed. In the 1970s and 1980s Nixon and Reagan focused on reducing Cold War tensions. Courageously, Nixon negotiated nuclear arms limitation agreements with the Soviet Union and opened to China, and Reagan negotiated with Gorbachev the end of the dangerous Cold War.

Beginning with the Clinton regime, the neoconservative doctrine of the US as the Uni-power exercising hegemony over the world has resurrected tensions between nuclear-armed powers. Clinton trashed the word of the Reagan and George H.W. Bush administrations and expanded NATO throughout Eastern Europe and brought the military alliance to Russia’s border. The George W. Bush regime withdrew from the anti-ballistic missile treaty, revised US war doctrine to permit pre-emptive nuclear attack, and negotiated with Washington’s East European vassals to put anti-ballistic missiles on Russia’s borders in an effort to neutralize Russia’s nuclear deterrent, thus bringing major security problems to Russia. The Obama regime staged a coup against a government allied with Russia in Ukraine, traditionally a part of Russia, and imposed a Russophobia government as Washington’s vassal. Turning to China, Washington announced the “pivot to Asia” with the purpose of controlling shipping in the South China Sea. Additionally, the Clinton, George W. Bush, and Obama regimes fomented wars across a wide swath of the planet from Yugoslavia and Serbia through the Middle East and Africa to South Ossetia and now in Ukraine.

The neoconservative ideology rose from the post-Reagan collapse of the Soviet Union. The doctrine met the need of the US military/security complex for a new enemy in order to avoid downsizing. Washington’s pursuit of empire is a principal danger to life itself for everyone on the planet.

Unlike Clinton, George W. Bush, and Obama, Nixon and Reagan went against the military/security complex. Nixon opened to China and made arms reduction agreements with the Soviets. Reagan negotiated with Gorbachev the end of the Cold War. The military/security complex was displeased with these presidential initiatives. Both left and right accused Nixon and Reagan of nefarious machinations. Right-wing Republicans said that Nixon and Kissinger were selling America out to the communists and that the scheming Soviets would take advantage of Reagan, the old movie actor. “Communists,” we were assured, “only understand force.” Continue reading

On Podemos, Greece and DiEM – Interview in El Mundo

Submitted by Yanis Varoufakis  –  The Yanis Varoufakis Blog

Screen Shot 2016-01-24 at 21.14.09

For the El Mundo site (in Spanish), click here. To read my original English language responses…

Why did you resign the very next day after the ‘no’ victory in the Greek referendum?

Because the Prime Minister told me, on the night of that magnificent result, that it was time to surrender to the troika. Not what I had entered politics for and certainly not what the mandate that the 62% NO vote we had just received stipulated.

Did the European leaders press Tsipras to get rid from you? Jeroen Dijsselbloem, the president of the Eurogroup of finances ministers, has admitted that he did so…

They knew that I would never sign up to a new non-viable, toxic loan agreement. That was clear from the beginning. I was elected to negotiate a viable agreement. And since it is the finance minister who signs these agreements on behalf of the state, it was essential to the troika that I should be removed.

Why do you think you are so uncomfortable (and considered even dangerous) for the EU leaders?

Because I was an obstacle to the maintenance of their permanent denial regarding their failed fiscal reform programs.

What has been your major mistake during the time you were Greece Finance Minister?

To believe that the troika would honour the spirit and the letter of the 20th February Eurogroup agreement. It was on the basis of that false belief  that I signed, a few days later, the application for an extension to the previous loan agreement.

Some people blame you for the painful turn of the Greek situation during the first Syriza Government. Are you guilty?

If there was a painful turn due to our policies, I would of course be responsible (as the finance minister in charge). However, even Eurostat confirms that, during my 5 months in office, real national income in fact rose. The damage came right at the end of my ministry. And it did not come from some policy that I implemented. It came because the troika ruthlessly closed down Greece’s banks in order to force upon the Prime Minister further reductions in pensions, greater taxes for consumers and companies etc. And afterwards they blamed the damage they caused on… me. (Typical of bullies who blame the victim for her/his victimization.) Continue reading

If The PBOC Is Pegging Again, This Would Be Why

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The November update for TIC figures shows relatively few surprises given what was witnessed November into December then January. The heavy downdraft of October was somewhat reversed, and even the official sector was probably less strained (outside of China) than at any time in 2015. But these are reactive symptoms to the greater problem of “dollar” availability, so the most important numbers in terms of forward indicators of TIC are not necessarily UST’s or dollar-denominated assets.

ABOOK Jan 2016 TIC Overall by MonthABOOK Jan 2016 TIC Official Cumulative

There is certainly some lagged effects here, as the massive “selling UST’s” in October was surely trailing the events of August and September; particularly central banks trying to catch up to the illiquidity as best they can (under orthodox constraints, includinganachronistic philosophy). So where there was net selling of $50 billion for October, including -$17 billion in the official sector, November rebounded to net buying of $41 billion with only a net $152 million in official sales.

These are, again, only effects of the general eurodollar environment which is generated almost exclusively by eurodollar banks. The TIC figures provide a loose proxy for that very notion, estimating reported changes (flows) in bank liabilities denominated in dollars. Since the 2013 taper drama, these bank liabilities have shown a quarterly tendency to collapse in the last month of each quarter and then rebuild only somewhat during the next. That may account for what looks like a ratchet or waves of “dollar” effects globally. Continue reading

Gold Price May Lead Gold Mining Stocks – Latest Research

Submitted by Mark O’Byrne  –  GoldCore

Dr Brian Lucey and Dr Fergal O’Connor have just published some interesting research on the correlations of the gold price and gold mining indices.

Gold Bugs Index and Gold Close
In ‘Are Gold Bugs Coherent?’, the academics use wavelet models to surface the relationship between gold miners stock prices and the price of gold. Specifically, they examine the relationship between the gold price and the NYSE ARCA Gold Bugs index of gold miner share prices over a 17 year period using wavelet analysis.

They find that

“that there is little relationship in the short run but some significant and long standing long run relationships and that gold prices appear to lead gold miner stock prices.”

There is now a large body of academic research which shows that gold is a safe haven asset and a hedging instrument and can play a “useful role in reducing a portfolio’s risk.”

This has again been seen in recent weeks with gold having risen by more than 4% year to date, while leading stock indices such as the S&P 500 are down by more than 7%.

The research entitled ‘Are Gold Bugs Coherent?’ can be accessed here


The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Oil Falls 4% On Swelling Oversupply
• Commodities Stocks Sink As Oil Resumes Downward Slide (FT)
• Oil Price Crash Is Completely Changing The Industry’s Landscape (BIA)
• US Short Sellers Target China’s Alibaba (BBG)
• China Pledges Steel, Coal Capacity Cuts in Supply-Side Reforms (BBG)
• China’s Migrants Go Home – And Stay There (BBG)
• China’s Central Bank Prioritizes Strong Yuan (WSJ)
• The East Knows The West Is Bankrupt (Holter)
• Don’t Forget the Irish When Looking at New Risks in Euro Region (BBG)
• There’s a Giant Elephant at the Bank of England (BBG)
• The End Of Economic Growth (Robert Gordon)
• One Year On, Syriza Has Sold Its Soul For Power (Lapavitsas)
• Greece On The Brink Of ‘Education Tragedy’ (EurActiv)
• We Produced Enough Plastics Since WWII To Cover The Entire Earth (Guardian)
• Racism ‘Is At The Heart Of The Australian Dream’ (Guardian)
• Merkel’s Party, Sliding In Polls, Weighs German ‘Border Centres’ (Reuters)
• Greek Islanders To Be Nominated For Nobel Peace Prize (Observer)
• Sealing Greek Sea Border Is Impossible (AP)