A Generous Offer He Couldn't Refuse

The tireless advocate of European-style socialism for America, the New York Times' famous promoter of Keynesian snake-oil, Paul Krugman, has joined the 'war against inequality' by deploying himself right on the front lines.

No, he still isn't going to debate Robert Murphy on economic theory so that $100,000 can be donated to New York food banks. That would be tantamount to participating in a 'circus'. Only 'serious debates' would be of interest to the great man. $106,000 have been pledged to help poor people? Well, f*** the poor people, the great man simply has no time for Mr. Murphy's 'circus'.

So what does he have time for? After all, the poor are dear to his heart, as he never tires to stress when he reminds his followers that the market is far 'too free', and that more regimentation, higher taxes and more deficit spending and money printing are absolutely needed to save the day and help the downtrodden against the nefarious schemes of the plutocrats (this is quite ironic, because the plutocrats probably agree wholeheartedly with Krugman's proposals).

Enter the University of New York (CUNY) and its Luxembourg Income Study Center , a research arm devoted to “studying income patterns and their effect on inequality”. Via 'Gawker' we learn that the institute has hired the selfless crusader to support its work on 'income inequality studies' for the pittance of $225,000, which he will receive for an engagement lasting 9 months. Surely an onerous workload awaits the poor man at the 'Income Study Center' if he should accept.

One imagines that there should at least be some 'serious debate', or perhaps that he will even teach a course that explains to students why free markets are bad. After all, growing inequality is only to be expected if one allows capitalist exploiters to run wild, as is the case in the completely unregulated free-for-all the world is forced to endure at present.


“According to a formal offer letter obtained under New York’s Freedom of Information Law, CUNY intends to pay Krugman $225,000, or $25,000 per month (over two semesters), to “play a modest role in our public events” and “contribute to the build-up” of a new “inequality initiative.”

It is not clear, and neither CUNY nor Krugman was able to explain, what “contribute to the build-up” entails.

It’s certainly not teaching. “You will not be expected to teach or supervise students,” the letter informs Professor Krugman, who replies: “I admit that I had to read it several times to be clear … it’s remarkably generous.” (After his first year, Krugman will be required to host a single seminar.)”


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It looks as though the US stock market is in the process of topping out. But if you’d bet heavily on a bear market, each time you saw one coming, you’d be broke by now. We will wait to see what happens…

Meanwhile, we are still puzzling over the miracle produced by the Fed. Uri Geller could bend spoons. The Fed bends the entire economy. Hardly a single price is unaffected. Hardly a single business plan or investment strategy goes forward without an eye on the central bank.

Jesus turned water into wine and multiplied loaves and fishes. But the Fed make the Nazarene seem like a two-bit shell game hustler. The loaves and the fishes couldn’t have had a market value of more than a few thousand shekels!


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Swiss Referendum on Introducing the World's Highest Minimum Wage

Most of our readers probably know what we think of minimum wages, but let us briefly recapitulate: there is neither a sensible economic, nor a sensible ethical argument supporting the idea.

Let us look at the economic side of things first: for one thing, the law of supply and demand is not magically suspended when it comes to the price of labor. Price it too high, and not the entire supply will be taken up. Rising unemployment inevitably results.

However, there is also a different way of formulating the argument: the price of labor must not exceed what the market can bear. In order to understand what this actually means, imagine just for the sake of argument a world without money. Such a world is not realistic of course, as without money prices the modern economy could not exist. However, what we want to get at is this: workers can ultimately only be paid with what is actually produced.

As Mises has pointed out, most so-called pro-labor legislation was only introduced after enough capital per worker was invested to make the payment of higher wages possible – usually, the market had already adjusted wages accordingly.

However, unskilled labor increasingly gets priced out of the market anyway, which is where the ethical argument comes in. If a worker cannot produce more than X amount of  goods or services, it is not possible to pay him X+Y for his work. Under minimum wage legislation he is condemned to remain unemployed, even if he is willing to work for less.


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Copying a Bad Idea

Why is there an IMF? It seems a good question, so here is the short answer: in the post gold standard world, central bank-supported fractional reserve banking has enabled the emergence of such huge credit booms, that governments frequently get into severe trouble when a boom collapses and their countries' current account deficits are suddenly no longer funded by foreign investors. Then they feel forced to go hat in hand to the IMF.

It should be obvious that the solution to the problem is not to let a tax payer funded bureaucracy treat the symptoms, but to strike at the root by returning to a sound monetary system. The only truly sound monetary system would be a market-based one. By adopting such a system, one could do away with a great many bureaucracies and regulations in one fell swoop.

Note in this context that today's popular views on the gold standard – or rather, the views that are promoted by all those with a stake in the current system – are entirely wrong. Not one of the canards brought up against it has any merit (we're thinking of a few often used lines like 'there is not enough gold', or 'we would not have the flexibility that is needed for central banks to steer the economy' and similar nonsense).


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Slip-Sliding Away …

As a little addendum to our recent ritual lambasting of Abenomics, here are the  latest news on Japan's consumer confidence – the reading, mind, is from March – before the introduction of the higher sales tax:


“Japan’s consumer confidence fell in March to the lowest level since August 2011, a reading that may tumble further this month after a sales-tax increase on April 1 sapped the public’s spending power.

The reading of 37.5, down from 38.5 in February, was released by the Cabinet Office in Tokyo today. About 90 percent of respondents to the survey expect prices to rise over the next 12 months, the highest in comparable data back to 2004.

Prime Minister Shinzo Abe risks the public souring on his campaign to sustain growth in the world’s third-biggest economy as prices start to rise while wages stay stagnant. Weaker sentiment could make it harder to drive a rebound from a contraction forecast this quarter, and raise the odds that the Bank of Japan adds to its already unprecedented easing.

“Consumer sentiment has been undermined to a large extent by rising prices,” Goldman Sachs Group Inc. economists Naohiko Baba and Yuriko Tanaka wrote in an e-mailed note before the release. “We expect a major retreat in sentiment from April as the tax hike drives inflation.”

The confidence reading was 39.9 when Abe took office in December 2012, and rose to 45.7 in May last year — the highest point during his current term as prime minister. The Topix index of stocks is down more than 10 percent this year after soaring 51 percent in 2013.

Confidence dropped in all five components in the survey, with willingness to buy durable goods dropping the most, down by 2 to 30.8.”


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A Thousand Clowns

Economics has been called the “dismal science.” But even that is merely fraud and flattery. Economics is dismal, but it isn’t science. At best it is merely voyeurism – peeping in people’s windows as they go about their business and trying to figure out what they are doing. At worst, it is pompous theorizing about how to get the schmucks to do better.

We doubt that you are especially interested in economics, dear reader. We know we are not. But we can’t resist a good comedy … or a good opportunity to point and giggle. We keep our eye on economists and politicians the way children watch clowns; we can’t wait to see them get whacked in the head or trip over each other.

But what is amusing is also instructive. Are clowns not people too? Are they not part of human life … human organization … and human economy? Every one of them is driven by the same motors that power everyone else. They want power … glory … money. But how do they get it? Can we not watch politicians and economists and learn something about ourselves?


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A Quick Overview

Below we briefly review updates of two charts we have employed in our recent market updates. The first one is a quick glance at several major indexes: the NDX, the SPX, the Russell 2000 and the DJIA. There have been multiple divergences between these indexes at their recent peaks, but there is also a divergence visible now that a rebound has begun – which is a direct result of the recent underperformance of momentum stocks. Note that we have taken this chart snapshot during the trading day, so it doesn't incorporate Wednesday's close yet.

The market has begun to bounce from a natural support level: lateral support in the NDX (as well as the Nasdaq Composite and the RUT) that has served as a support and resistance level on several previous occasions.

As you will see further below, although momentum and growth names are outperforming 'safe' stocks in Wednesday's trading, the trend toward safety is not undermined yet by this short term counter-trend move. There have been several short term pullbacks in the XLU-QQQ ratio since this new trend emerged in November, but the trend has continued all the same. On Tuesday, the ratio actually reached a new high for the move and is probably overdue for a pullback.

The Rydex sentiment measures we are keeping an eye on show practically no change since our last update. The only measure that is not firmly in cloud-cuckoo land just yet are total assets in bull and sector funds. However, relative to assets in money market funds and bear funds, they are near the peak levels recorded in early 2000. Bear fund assets and money market fund assets are at 17 year lows.


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Better Don't Make Crows Cross … it Could be Murder

Crows are among the most intelligent birds. In fact, it seems likely that they are among the most intelligent animals, period. A few years ago, research into crows made headlines when it was found out that they are not only able to memorize human faces and thus recognize specific human individuals, but are also able to tell their friends and relatives which humans are dangerous and which aren't. Not only that, they apparently tend to hold a grudge for many years. Once you've made a crow cross, members of its entire tribe will scold and even dive-bomb you whenever they catch sight of you.


“In results that can only be described as Hitchcockian, researchers in Seattle who trapped and banded crows for five years found that those birds don't forget a face . Even after going for a year without seeing the threatening human, the crows would scold the person on sight, cackling, swooping and dive-bombing in mobs of 30 or more.

"Most of the birds that are scolding us are not the ones we captured," said study researcher John Marzluff, a professor of wildlife science at the University of Washington and an occasional victim of crow attacks. "It's likely that they're learning from their parents and their peers that this dangerous person is still out there."


Marzluff and his colleagues similarly noticed that when they trapped and banded crows for research, mobs of angry birds would fly overhead, scolding them. When the researchers returned to the area later, the birds immediately recognized them and started scolding. "The more we messed with them, the more we thought they were really paying attention to us," Marzluff told LiveScience.

The researchers launched a five-year study to find out how much data their research subjects had been gathering on them. To ensure that crows were responding to their faces and not to their clothes, binoculars or some other ornithologist cue, the scientists wore different masks while trapping birds at each site. The masks included a caveman, Dick Cheney and several custom-made realistic faces.

The birds quickly learned that the masked bird-trapper was bad news and proceeded to scold the mask-wearer anytime they saw him or her. But over the years, the researchers found, the mobbing became more and more widespread. In February, Marzluff said, he ventured out of his office in a mask he'd worn five years earlier while trapping seven birds. "I got about 50 meters [165 feet] out of my office and I had about 50 birds on me, scolding me," he said. "I hadn't worn that mask on campus for a year."

It was clear the birds that had never seen the trapping were joining the angry murders. The question, Marzluff said, was whether those birds were simply following the lead of a single bird that had seen the trapping, or had learned from their flockmates that this was a face to watch out for.

To find out, the researchers tested a "dangerous" mask and a neutral mask on fledgling crows while their parents were in the nest and also while their parents were away. They found that the presence of a grudge-holding leader wasn't necessary: If the baby birds had ever seen their parents scold the mask, they started scolding it even when mom and dad weren't around.”


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Real Estate According to PIMCO

A friend sent me this PIMCO article recently, titled "How to Make Housing Safe for Private Capital".

This is a very "insightful" article about how the sub-prime bubble was allowed to happen and how it will happen again.  Here, Douglas Hodge, the new CEO of PIMCO, blames everyone except the man in the mirror.  He forgets that without fund managers, these private label securities would never have gotten off the ground.  

Hodge talks about "reps and warranties" and how loans should be put back to  originators.  While there was certainly a fair amount of shady loans, these private labels are not "Bernie Madoffs".  They openly disclosed that the security for these mortgages was from borrowers of questionable credit, with no downpayment, and that the applications had limited or no verification.  This information was in the open for anyone who cared to examine things beyond a few random letters (such as AAA) generated by equally irresponsible rating agencies.  

For an extra percent in yield, managers were not only putting their clients into these toxic products, they were begging the originators for more.  They have seemingly forgotten they were both instrumental in providing the funds for the sub-prime bubble and in driving the prices of these junk bonds to ridiculous levels, enriching the likes of Angelo Mozilo (ex-CEO of Countrywide) in the process with generous gain-on-sales profits.  Who in their right mind would put their clients' money into these high risk securities in return for a single digit yield?

Hodge opines that:


“[....] we believe that one meaningfully positive change would be to modify, through legislation, the relationship among trustees, servicers and investors. Each party involved in the lending process should be held fully accountable for fulfilling their duties properly and in a manner that safeguards the interests of both the borrower and investor. Importantly, trustees and servicers need to have an explicit fiduciary duty to the PLS trusts at all times.”


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Poco Agua

Herewith the sad finances of our Argentine ranch, Gualfin, literally at the end of the road, high up in the Andes. In business, as in other things, we are being roughened up … and toughened up.

When we adjourned on Monday we promised a grim accounting. So, we visited our accountant – a cheerful young man in the nearest city, Salta – and bothered ourselves with the figures.

“You have to understand, Señor Bonner, that you can’t expect to be competitive at anything,” Gerardo concluded. “You’re so far from everywhere. Everything costs you more. And, of course, you don’t have much water.”

“Poco agua” were practically the first words out of the mouth of our ranch foreman, Jorge, when we arrived in these parts. “We only got 90 millimeters of rain this year,” he reported. “We can survive on that amount. But barely.”


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April Fool's Day Has Become a Permanent Feature

There must be something in the water. After the world was forced to endure the almost physically painful nonsense emanating from various Japanese officials on the alleged benefits of its clearly failing monetary debasement program, it is the EU's turn to prove it is run by a bunch of economically illiterate nincompoops (to put it as politely as possible).

They are complaining about Germany, the only country that actually still has the economic strength to possibly keep the rickety euro zone from blowing sky high should the debt crisis return. Specifically, they are complaining about the fact that people the world over love to buy German products, while Germany's citizens concurrently like to save, which leads to Germany sporting a large trade surplus. The other side of this trade surplus are of course Germany's capital exports and investments abroad, about which we have as of yet heard no complaints uttered by anyone.

According to the Telegraph, the EU may even end up imposing a fine on Germany for having a trade surplus.


“Germany's current account surplus will smash all records this year, risking a serious political showdown with Brussels and the ultimate sanction of EU fines.

A joint report by the leading German institutes, or "Wise Men", said the country's external surplus would keep rising to a modern-era high of 7.9pc of GDP this year, far above the 6pc limit set by Brussels under the new Macroeconomic Imbalance Procedure.

The Commission warned Germany late last year that it faced possible sanctions if failed to do its "homework", either by boosting consumption at home or by weaning its economy off excess reliance on foreign markets. The threat caused consternation in Germany's press and a vitriolic exchange with Brussels.

The rest of the eurozone can order Germany to present an "action plan" to bring down its surplus. If Germany is relegated to the "corrective" phase of the mechanism, and if it then fails to deliver on demands, the EU Council of Ministers can then demand that Germany pay a deposit of up to 0.1pc of GDP. This money is seized if Berlin still fails to remedy the imbalance.

"We are looking under the bonnet at the German economy and monitoring this closely. If there is systematic abuse, and they don't respond, sanctions are available," said an EU official. The fines are imposed by a "reverse qualified majority vote", making it hard to block.”


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A Failing Scheme

Our idea that the Nikkei writes the news remains uncontested by any contrary developments. It still does. Since its peak at 16320 points on the final trading day of 2013, the Nikkei has lost 14.7% – and so it is no wonder that the 'miracle of Abenomics' continues to get the bad press it so richly deserves.

Note that it would be deserving of bad press even if the Nikkei index had not declined, but the ups and downs of the index seem to be in control of the public view of 'Abenomics' and what the media report about it.


NikkeiThe Nikkei has declined by about 14.7% since its late 2013 peak. Over this period of time, doubt about 'Abenomics' has increased – click to enlarge.


The theory behind Abenomics is as hoary as it is misguided. Allegedly, Japan has been in a long lasting economic stagnation due to 'deflation' -  meaning, in this case, not a decline in the money supply (that never happened), but the occasional, barely noticeable decline in consumer prices. Note that these minuscule declines in consumer prices have occurred in what is widely acknowledged to be one the most expensive places in the world. Until it was topped by Singapore in 2014, Tokyo has been regularly taking the top spot as the world's most expensive city. The main reason why it is considered 'cheaper' nowadays is the slide in the yen's exchange rate – but that has actually made it even more expensive for the Japanese. Only, now Japanese citizens will find other cities also very expensive, as they are forced to use a cheapened yen if they want to visit them.


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Buy Them When They're Cheap

The Dow fell 143 points on Friday. Gold was just about flat. Why the fall in stock prices? Many reasons were proposed, but no one knows for sure. There may not be a reason at all. Stocks don’t need a reason to fall. From time to time, they just do. Not to put too fine a point on it, but asset prices go up … and then they go down. Always have. Always will.

Generally, it’s a credit expansion that drives them up. A credit contraction takes them back down. Credit is still expanding, says economist and author of The New Depression: The Breakdown of the Paper Money Economy Richard Duncan. But come the next quarter, watch out. Duncan reckons “excess liquidity” (as he calculates it, the surplus left over between QE stimulus and what the federal government absorbs through borrowing) is going to contract – sharply.

It hardly matters to us anyway. We buy stocks when they are cheap, not expensive, relative to their historic average. And on a CAPE (Cyclically Adjusted PE Ratio) of 24.7, the S&P 500 now trades at a 50% premium to its historic average CAPE of 16.5. My advice: Get out. And stay out, until the index is cheap again.


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People Power Prevails as Government Backs Down in Nevada

The federal government was forced to climb down in an embarrassing development in its fight against a Nevada rancher, Cliven Bundy. At times it can obviously pay when the population is well armed, as the government was apparently (and luckily, we might add) not eager to have another Waco or worse on its hands.

As Reuters reports:


“U.S. officials ended a stand-off with hundreds of armed protesters in the Nevada desert on Saturday, calling off the government's roundup of cattle it said were illegally grazing on federal land and giving about 300 animals back to the rancher who owned them.

The dispute less than 80 miles northeast of Las Vegas between rancher Cliven Bundy and the U.S. Bureau of Land Management had simmered for days. Bundy had stopped paying fees for grazing his cattle on the government land and officials said he had ignored court orders.

Anti-government groups, right-wing politicians and gun-rights activists camped around Bundy's ranch to support him in a stand-off that tapped into long-simmering anger in Nevada and other Western states, where vast tracts of land are owned and governed by federal agencies.

The bureau had called in a team of armed rangers to Nevada to seize the 1,000 head of cattle on Saturday but backed down in the interests of safety.

"Based on information about conditions on the ground and in consultation with law enforcement, we have made a decision to conclude the cattle gather because of our serious concern about the safety of employees and members of the public," the bureau's director, Neil Kornze, said in a statement.

The protesters, who at the height of the standoff numbered about 1,000, met the news with applause. Then they quickly advanced on the metal pens where the cattle confiscated earlier in the week were being held. After consultations with the rancher's family, the bureau decided to release the cattle it had rounded up, and the crowd began to disperse.

"This is what I prayed for," said Margaret Houston, one of Bundy's sisters. "We are so proud of the American people for being here with us and standing with us."


(emphasis added)

Chalk one up for people power. It happens rarely enough.


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The 'Great Stretch'

Last week the Greek government celebrated its return to the bond market, selling 3 billion euros in five-year bonds at a yield of 4.95 percent. Reportedly there was great demand for the issue, which should be no surprise given the current propensity of investors to buy all sorts of junk debt as long as it yields more than just a smidgen.

Reuters report on the backdrop that made this successful auction possible:


“Call it the Great Stretch. Two years ago, Greece's debt crisis almost brought the euro zone crashing down. Now European partners are preparing to ease Athens' debt burden without writing off their loans but by stretching them out into the distant future, extending maturities from 30 to 50 years and further cutting some interest rates, EU officials say.

Greece made a successful, if artificially engineered, return to the long-term capital markets last week for the first time since its international bailout in 2010, and just two years after imposing heavy losses on its private creditors.

But with its economy shattered, the country is still a long way from being able to fund itself unassisted in the market. The International Monetary Fund says Greece is likely to need further financial help from the euro zone over the next two years.

One reason why the sale of 3 billion euros in five-year bonds at a yield of 4.95 percent went so smoothly, on the eve of a support visit by German Chancellor Angela Merkel, was that investors are widely anticipating official debt relief.

"That has been quite substantially priced in, and the market is also expecting Greece to be quickly upgraded by the credit rating agencies," said Alessandro Giansanti, senior rate strategist at ING bank in Amsterdam.

"In a second stage, the market is also expecting a reduction in principal on official debt, and no private sector involvement (write-down) in the coming years," he said.

Whether such expectations are fully realized will only become clear later this year, when negotiations start with the euro zone and the IMF on Greece's longer-term funding, and the end of its wrenching bailout program.

But EU leaders share an interest in helping conservative Prime Minister Antonis Samaras' shaky coalition cling to office rather than seeing leftist anti-bailout firebrand Alexis Tsipras sweep to power demanding a massive debt write-off.”


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THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future