Falling Prices are “Really Bad” for You
It is quite comical how the idea that falling prices are somehow bad for society is continually pushed by the establishment and its mouthpieces. We imagine it is not easy to create propaganda in support of such an obvious absurdity. No doubt every consumer in the world would love nothing more than genuine price deflation. After all, what can possibly be bad about one’s income and savings stretching further and buying more, rather than fewer goods and services?
Consumers and savers all over the world must surely be scratching their heads by now after hearing for the umpteenth time that it will be somehow “good” for them if their real incomes decline and the value of their savings is eroded by rising prices. What exactly is the justification for this nonsense?
Bloomberg has a strongly pro-interventionist, pro-central planning editorial line. This is possibly the case because its owner is a well-known champagne socialist and nannycrat. However, the statist quo is actually supported by a great many prominent financial publications, including the Financial Times, the Economist, and several others. As far as we are aware, there are no major mainstream financial media supporting genuine free market capitalism.
Image credit: Dreamstime
Underwater in Their Cars
The best things in life are free
But you can keep them for the birds and bees
Now give me money
That’s what I want
– “Money (That’s What I Want)” by Berry Gordy
We have high hopes for 2015. It is starting off so well. Only three weeks in and we almost tore a stomach muscle laughing. So many unwitting comedians. So many political pratfalls and financial gags.
No fraud or no foolishness is too absurd. And the spectators are willing not only to suspend disbelief but also to chuck it out the window.
Recently came news that US auto sales were increasing. Everyone hailed this as good news. Then it emerged that auto sales have become the latest subprime finance scheme. Bloomberg:
Automakers are increasingly selling vehicles with 84-month loans that reduce monthly payments while making it tougher to repay faster than cars lose value, John Mendel, Honda’s US sales chief, said in an interview.
The Tokyo-based company will avoid longer-term loans even as Nissan tries to supplant it as the fifth-biggest automaker in the US, he said.
Sales will keep growing as the Federal Reserve’s zero-interest-rate policy encourages investors to collect yield from auto loans, said Tom Webb, chief economist at Manheim Consulting.
“We’ve seen this movie before, we know how it ends, and it’s not pretty,” Webb told reporters at an event before last week’s show.
“It can have some negative impact on the market in creating a vicious cycle of negative equity if the consumer doesn’t hold onto their vehicle long enough,” Melinda Zabritski, senior director of automotive finance for Experian, said by phone.
“Something has to be done to keep the market affordable, or consumer buying is going to have to change and we’ll have to return to less frequent purchases.”
In other words, auto buyers will be underwater … in their cars. They have, in effect, “taken out” the equity from their wheels just as they once did their bedrooms.
Where you don’t want to be with your car…(as we detailed here, the problems actually started showing up some time ago already).
Photo credit: jasondecairestaylor.com
The Utterly Absurd Becomes the “New Normal”
“Bankers at the World Economic Forum in Davos are applauding the European Central Bank’s announcement of quantitative easing. Some said they were pleased the ECB’s plan, to buy about €60 billion a month in government bonds, is larger than expected. “It was positive and it was needed,” said Francisco Gonzalez, chairman of Spain’s BBVA. “Having said that, governments have to keep with reforms for the plan to meet its purpose,” he added.”
The ECB surprised markets today by unveiling a slightly larger than expected “QE” program. Yesterday’s leak of the decision referred to money printing to the tune of €50 billion per month, so the actual announcement of a €60 billion per month program was seen as a “positive surprise”. Just think about this for a moment. The charlatans running the central bank announce that they will make a grandiose effort to debase their confetti currency even further by printing a huge amount of additional money every month, and this is greeted as a “positive surprise” and is “applauded by bankers”. It should be glaringly obvious by now that the lunatics are running the asylum.
This time it will work! Mr. Draghi unwraps the chief weapon of the John Law School of Economics, which has been failing with unwavering regularity since at least the times of Roman Emperor Diocletian.
Image author unknown
Taking Full Advantage of Winners
Investors returned from a three-day holiday and found stocks and gold right where they wanted them. Neither registered any change. So let’s return to the nuts and bolts of investing…
Take a look at your portfolio. Imagine how much better off you’d be if all those 50%… 60%… 80% losses were removed. Unless you’re a true “deep value” investor, and happy to ride out these drawdowns, you could do that by using a trailing stop. That’s the easy part.
“More important,” says TradeStops.com’s Dr. Richard Smith, “is that trailing stops allow you to take full advantage of your winners.”
You buy a stock. It doubles. What do you do? Many investors would sell, feeling that they had made a good profit. Why be greedy?
Often, they then watch as the stock goes higher and higher, as they sit on the sidelines grousing about having gotten out too soon. Old-timer Richard Russell, of Dow Theory Letters fame, tells the story of how he invested in Buffett’s Berkshire Hathaway in the early 1970s.
The stock doubled and he sold. He has been kicking himself ever since. Class A Berkshire Hathaway shares, which Buffett bought for $11 in 1962, are now worth $222,636.
Swiss Franc Revaluation Repercussions – Swiss, Polish and Austrian Banks in the Crosshairs
The SNB’s unexpected suspension of the EURCHF minimum exchange rate continues to claim victims. There have been a number of spontaneous combustion events striking forex brokers and hedge funds, but there are also effects that will only play out over a longer time period.
As Coveredbondreport.com reports, the credit rating agencies feel compelled to reevaluate their ratings of a number of European banks and their covered bond issues, i.e., European-style mortage-backed securities. Contrary to “normal” MBS or ABS, the assets backing covered bonds remain on the balance sheets of the issuing banks. This makes them safer for investors, as e.g. non-performing assets are usually replaced with performing ones, and other safety-enhancing measures are often taken; at the same time, it means that banks issuing these bonds are exposed to risks that in US style MBS are borne by investors. According to the report:
“Noting that while the move is credit positive for the Swiss sovereign, Moody’s said that the removal of the peg is credit negative for Austrian, Polish and Swiss banks and to covered bonds exposed to euro/Swiss franc exchange rate risk”
Most affected are apparently Austrian banks, with 17% of their mortgage covered bond assets denominated in CHF and Austrian households exposed to the tune of €25 bn. to CHF denominated mortgage loans. The “bad bank” that is administering the wind-down of the assets of Hypo Alpe Adria, an Austrian bank that fell victim to the 2008 crisis and has turned into a major headache for the country’s taxpayers, has taken a hit as well. 21% of its public sector covered bonds are denominated in CHF, which is so to speak adding insult to injury, as it makes the already horrendously expensive wind-down even more so.
When this happens, it’s all over.
Photo via grassvalley.com
It’s Tough to Make Predictions, Especially About the Future
Markets were closed in the US on Monday for Martin Luther King Jr. Day. So, today, we really are going to talk about stop losses.
Mathematician Dr. Richard Smith, who runs TradeStops.com, was kind enough to visit us in Nicaragua and allow us to buy him a drink or two. He explained how they worked. And he told us about how he’s made them work even better.
“The world is much more uncertain than people think,” began the man with a Ph.D. in the subject.
“There are always far more potential outcomes than you can imagine. So, you’re going to be wrong about the future more often than you will be right.”
We have demonstrated that often enough ourselves. We needed no more proof. But Richard wouldn’t let up:
“Just look at the price of oil. There must be thousands of analysts and economists following the price of oil. Do you remember a single one forecasting $40 oil?”
Warren Buffett: plays the Ukulele and has so much money he doesn’t need to worry about stops. Not to mention, when push comes to shove, his portfolio is also prone to becoming the beneficiary of bailouts, as demonstrated in 2008.
Photo credit: Dexter Shoes
Decades of Falling Rates
The old joke is, “(with a Russian accent) In America, you correct newspaper, but in Soviet Union, newspaper corrects you.” Switzerland is now experiencing the bond market equivalent. In America, the government pays you to borrow but in Switzerland you pay the government. All Swiss bonds have a negative yield out to 9 years. Negative means you pay them to lend them your money. The 10-year Swiss government bond has effectively zero yield. For comparison, the 10-year US Treasury is 1.8%.
Here is a graph of the Swiss yield curve.
Allah’s Credit Card
Today, we were going to talk about stop losses. But we need to look first at what is going on in the markets. In short: Things are starting to happen! The Dow rose 191 points, or 1.1%, on Friday. Gold topped off a 5% rise for the week.
You probably thought we were exaggerating the connection between the Paris terrorist killings and the credit bubble, right? We almost thought so ourselves. But then a report in the French newspaper Libération told us about Amedy Coulibaly, the terrorist who took hostages at a kosher supermarket and killed four of them.
With no job and no income, how did he finance his life? How did he buy his weapons? He borrowed €6,000 ($6,964) from a consumer credit company, Cofidis, which offers online loans. His attack was financed on credit! And not just his. He also helped finance the brothers who attacked Charlie Hebdo. Coulibaly:
“I helped him (one of the Kouachi brothers) by giving him a few thousand euro so he could finish buying what he needed.”
So, now we see that both sides in the war on terror are financed on credit. But wait. How are those terrorists going to pay back these loans? The local radical imam had a conversation with Coulibaly. Don’t worry about your debts, he told the terrorists, “Allah will take charge of them.”
No kidding. And he’s right, of course. The gods will take care of it.
Only the Sheeple Are Sane
This post is about an issue that is by now a bit dated (though the topic as such certainly isn’t), but we have only just become aware of it and it seemed to us worth rescuing it from the memory hole. In late 2013, the then newest issue of the American Diagnostic and Statistical Manual of Mental Disorders (DSM for short) defined a new mental illness, the so-called “oppositional defiant disorder” or ODD.
As TheMindUnleashed.org informs us, the definition of this new mental illness essentially amounts to declaring any non-conformity and questioning of authority as a form of insanity. According to the manual, ODD is defined as:
[…] an “ongoing pattern of disobedient, hostile and defiant behavior,” symptoms include questioning authority, negativity, defiance, argumentativeness, and being easily annoyed.
Every time a new issue of the DSM appears, the number of mental disorders grows – and this growth is exponential. A century ago there were essentially 7 disorders, 80 years ago there were 59, 50 years ago there were 130, and by 2010 there were 374 (77 of which were “found” in just seven years). A prominent critic of this over-diagnosing (and the associated over-medication trend) is psychologist Dr. Paula Caplan. Here is an interview with her:
Allen Gregg in conversation with psychologist Dr. Paula Caplan
Central Planners Alleged to Have Higher Tolerance for Market Volatility
Bloomberg informs us that the new broom at the Fed, Janet Yellen, won’t immediately rush to the stock market’s aid when the next downturn comes. Could it be that an article from the Onion has been smuggled in while they were not looking? Lately, Fed doves have been wheeled out at every market dip exceeding 3%. The shrinking contingent of haws (such as Charles Plosser) is usually only allowed to hold forth on weekends.
A few excerpts from the Bloomberg fantasy on the miraculous change in central planner focus:
Janet Yellen is leaving the Greenspan “put” behind as she charts the first interest-rate increase since 2006 amid growing financial-market volatility.
The Federal Reserve chair has signaled she wants to place the economic outlook at the center of policy making, while looking past short-term market fluctuations. To succeed, she must wean investors from the notion, which gained currency under predecessor Alan Greenspan, that the Fed will bail them out if their bets go bad — just as a put option protects against a drop in stock prices.
“The succession of Fed puts over the years has led to a wide range of distortions in financial markets,” said Lawrence Goodman, president of the Center for Financial Stability, a monetary research group in New York. “There have been swollen asset values followed by sharp declines. This is a very good time for the Fed to move away.”
When Fed officials met in October, two weeks after the Standard and Poor’s 500 Index (SPX) wiped out all of its gains for the year, they discussed adding a reference to market turmoil in their statement. They rejected the idea to avoid the “misimpression that monetary policy was likely to respond to increases in volatility,” according to minutes of the meeting.
“Let me be clear, there is no Fed equity market put,” William C. Dudley, president of the New York Fed, the central bank’s watchdog on financial markets, said in a Dec. 1 speech in New York. “Because financial-market conditions affect economic activity only slowly over time, this suggests that we should look through short-term volatility.”
NY Fed chief William Dudley: there’s no Fed put, honest injun.
Governments in Dire Straits
A number of governments find themselves in severe financial trouble – these represent the fringe of the fiat money bubble, the fraying edge of it, if you will. They will provide us with a preview of what is eventually going to happen on a global scale. It would actually be better to say: what is going to happen on a global scale unless significant monetary and economic reform is undertaken in time. Obviously, we cannot be certain what the future holds in store – however, we can certainly extrapolate the path we are currently on.
Looking at efforts that have been undertaken in this respect thus far, they are partly insufficient and partly extremely wrong-headed. For instance, the euro zone received a rather clear wake-up call in the sovereign debt crisis of 2009-2012. The effort to create a “fiscal compact” that forces governments to limit their deficits and public debt to specific percentages of economic output is a laudable attempt to bring the problem under control. However, the effort is lacking in many respects. For one thing, the accord will likely prove unenforceable when push really comes to shove. It is already meeting with considerable resistance, and one suspects that enforcement against core countries like France will continue to be lax.
Secondly, there are many ways in which such fiscal targets can be achieved, and we can be certain that in many cases European politicians will opt for the worst methods. Simply hiking taxes and bleeding the private sector dry is not a workable or sustainable policy. What is required are massive cuts in government spending, combined with economic liberalization on a vast scale. In other words, the kind of reforms that the ruling classes of the European socialist super-state project are most unlikely to consider. Even if they were considering them, they would have to overcome a plethora of vested interests to implement them.
Thirdly, one of the methods chosen to get a grip on government finances is financial repression, aided and abetted by the central bank’s ultra-loose monetary policies. This is certain to lead to capital consumption and impoverishment, thus making the long term success of the fiscal compact strategy even less likely.
Empty shelves in a supermarket in Caracas. The government has tried to counter spiraling inflation with price controls – this is the inevitable result.
Photo credit: Getty Images
Returning to a Traditional Subject
We promised to return to a more traditional subject: money. And so we do. The Dow was down 187 points, or 1.1%, on Wednesday.
We repeat our guess: It will probably take a real crisis in the stock market to bring the Fed back into the QE business. Then we’ll see the real fireworks of a bubble market.
In the meantime, money changes hands in a world filled with economists, central banks, newspapers and TV. What people believe about it, and what they see and hear, affects what they think of the money in their pockets and what they do with it.
This morning the Swiss National Bank did what central banks supposedly don’t do anymore nowadays: it surprised the socks off the markets. After still solemnly insisting in its most recent monetary policy assessment that it would “defend the minimum exchange rate of the Swiss franc against the euro with the utmost determination”, the SNB’s planners finally got cold feet and decided to abandon the policy without warning overnight (not that a warning would have done any good).
In so doing, the SNB’s board members have not only violated modern-day central bank etiquette, but have presented us with a reminder of how wonderfully stable today’s fiat currencies are. Bloomberg adopts a miffed tone of voice in its report on the matter:
“The Swiss National Bank unexpectedly scrapped its three-year policy of capping the Swiss franc against the euro in a U-turn that may change the perception of a century-old institution known for reliability.
In a surprise statement that sent shock waves through equities and currency markets, the central bank ended its cap of 1.20 franc per euro and reduced the interest rate on sight deposits, deepening a cut announced less than a month ago.
The shift marks an attempt by the SNB to reinforce its defenses of the economy before government bond purchases by the European Central Bank that could crumple the franc cap. The currency surged after the announcement, Swiss stocks including UBS AG tumbled and the chief executive of watchmaker Swatch Group AG said the policy shift would hurt exports. SNB President Thomas Jordan defended the move, saying surprise was necessary.
“It’s amazing that such a stoic central bank could end up abandoning such a long held policy with such short shrift,” said George Buckley, an economist at Deutsche Bank AG in London. “I thought we were out of the situation where central banks surprise so significantly as this.”
With reverberations hitting everyone from currency traders in London to mortgage holders in Poland, economists responded to the SNB announcement with comments including “surprise” and “seismic.” Coming from a nation that has attracted investors for its stability, the change captures the scale of the battle policy makers have repeatedly faced going back decades to rein in a currency popular with investors at times of crisis.”
FX trader Margo Spreadbottom upon hearing the news
Dow down a little on Tuesday. Gold almost unchanged. Oil kept slipping.
“Oil fell below $45 a barrel amid speculation that US stockpiles will increase, exacerbating a global supply glut that’s driven prices to the lowest in more than 5½ years.
Oil slumped almost 50% last year, the most since the 2008 financial crisis, as the US pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production.
Goldman Sachs said crude needs to drop to $40 a barrel to “re-balance” the market, while Societe Generale also reduced its price forecasts.”
We’re studying the drop in the oil price. Is it an isolated phenomenon – the product of fracking technology, petro politics and other special circumstances? Or is it, too, a feature of the worldwide credit bubble?
We will write up our conclusion in this month’s Bill Bonner Letter. But you can probably guess. The more we look, the more we find telltale signs of the credit bubble at every accident and crime scene.
More Articles of Interest:
- It's Official: If You Question Authority, You Are Mentally Ill
- Peggywhack - The Wonderful Stability of Centrally Planned Fiat Currencies
- Joke of the Week: No More “Greenspan Put”
- The Riskiest Sovereign Credits
- Repeat After Me: The Dollar Is Not Real Money
- The Lunatics Are Running the Asylum: Draghi's Money Printing Bazooka
- The Fat Lady is Clearing her Throat
- The Best “Old-Timer” Advice for Investors
- In America, Government Pays You Interest. In Switzerland, You Pay Government.
- The Ph.D.’s Guide to Avoiding Big Stock Market Losses