Low Interest Rate Persons
She is a low-interest-rate person. She has always been a low-interest-rate person. And I must be honest. I am a low-interest-rate person. If we raise interest rates, and if the dollar starts getting too strong, we’re going to have some very major problems.
— Donald Trump
Two low interest rate persons! The Trumpsumptive president (Donald the Tremendous) can be seen here indicating the approximate size of the interest rate that will still keep us out of “major problems”.
BALTIMORE – We live in a world of sin and sorrow, infected by a fraudulent democracy, Facebook, and a corrupt money system. Wheezing, weak, and weary from the exertion of trying to appear “normal,” the economy staggers on.
Image credit: David Sidmond
The Left’s Distorted View of Charles Koch
DUBLIN – We met Charles Koch 40 years ago. In the meantime, he has gotten rich and accumulated enemies.
The leftists seem to think Koch – the CEO of Koch Industries, the second-largest privately held company in the U.S., and a big political donor – is a manipulator, pulling strings, passing out his money, and rigging the system for his own benefit.
They must not have met him. As we recall, he was a nice fellow – upright and sensible, with an earnest and well-meaning disposition.
Charles Koch: not a crony – on the contrary, a lifelong opponent of statism and its corruption.
Photo credit: Bo Rader / MCT / Landov
While the whole world is waiting with bated breath whether the bureaucrats running the Federal Reserve will alter, remove or retain a single adjective in their monetary policy statement today, it occurred to us to think a bit about the use of language in the context of economics and financial markets.
Many a word has seen its true meaning altered in our Orwellian age. One example we frequently cite in these pages is the term “inflation”. It once used to mean only one thing: An increase in the supply of money. It is the only way in which the term actually makes logical sense. And yet, in modern times its meaning has been altered to designate what is in fact only one of the many possible consequences of inflation, namely rising prices of consumer goods.
As Ludwig von Mises pointed out, this means that we actually no longer have a single word to describe what the term “inflation” once used to describe. By calling rising prices “inflation”, sight is lost of the root cause of rising prices. This is of course deliberate, as the instigators of inflation are now no longer seen for what they truly are. As a result of this it has become fashionable to call central banks “inflation fighters”. This is akin to calling an armed robber a saint, or calling an arsonist a firefighter.
Police are erecting barbed wire fences around the ECB’s new headquarter in Frankfurt.
Photo credit: Kai Pfaffenbach / Reuters
We’re glad we brought out our old “Crash Alert” flag last week. It looks like we may need it. The Dow plunged 333 points on Tuesday, or nearly 2%. Back to that in a minute…
“Jorge,” we asked our farm manager, “when was the last time you visited Marta Sandoval at Tacana?”
“Oh… maybe two years ago. She was okay then. A little crazy, maybe.”
“Don’t you have to go every year to count the animals?”
“Not up there. It’s not worth it. She only has about five goats.”
The farm is a marvel of ambiguity. We own it. On paper. But about 100 people live on it… work it… and use it. In fact, they control some of the best parts of it. They pay us “rent” in the form of a percentage of their animals – about 1 in 20. But since their animals aren’t worth anything, we count, but we don’t bother to collect.
And so, they pay nothing. They – and their descendants – can stay as long as they want. How long they will want to live in such harsh and lonely conditions is a subject of much conversation and speculation. But most show no signs of wanting to come down.
“They were born there,” says Jorge. “They want to die there too.”
“Can I ride up to Tacana sometime?”
“Yes. The trail is very rough. And you’d never find it on your own. I’ll take you.”
The tattered flag is flying again … sort of.
Is This Capitalism's Achilles' Heel?
Is capitalism wrong in some fundamental way?
New Year's Day found your editor up a tree. He was pruning pear trees. The trees had gotten some sort of blight. They're half-dead… and probably should be cut down and burned. Nevertheless, we went out into the cold – pruning shears in hand – and trimmed them.
Why? What was the point? Why invest time in a tree that won't produce?Perhaps it was a just habit.
This weekend, we will undertake another curious task. We bought a house down the road. The house was built in the 1950s. It is a wreck. The smart thing to do would be to tear it down, build a cheap new house and rent it out. The return on investment would be low. But at least it should be positive.
Instead, we are fixing up the house enough to rent it out…more or less as it is. Your editor is tearing off a decrepit porch and rebuilding it…as well as spackling the cracks on the inside and repainting. What for?
If he were to calculate the value of his time, the enterprise would be unprofitable. But what the hell?
Is the house an investment? What else would it be? We're not going to live there; we're going to rent it out. Why then are we not carefully calculating our investment and demanding a return – on time and money – to make it worthwhile?
Perhaps we are not good capitalists? Or perhaps capitalism is flawed?
Things Not Obvious to San Francisco Fed Chief
Marketwatch reports that San Francisco Fed president John Williams (a noted dove if memory serves) doesn't see the stock market as particularly overvalued at present, even though it sports a CAPE (cyclically adjusted P/E) or “Shiller P/E” of approximately 24, which is in the upper decile of all historical observations – we refer you to a recent article by Doug Short on market valuation in this context.
John Williams is correct insofar as we have not quite yet reached the crazy CAPE valuations of the 1929 peak or the tech mania peak. Of course those are not his yardsticks. With regard to valuations he says:
“With respect to stocks being near-record highs and the Fed’s hand in that, Williams said the media talks more about stock prices than the Fed does. Williams said policy makers take economic data, household wealth and money in the stock market into account, but they are not drivers of monetary policy.
“If you look at the valuation of stocks today compared to earnings and dividends and relative to historical averages, it’s not obvious that the stock market is overvalued. In fact a lot of models will tell you that it’s undervalued given how strong profits have been.”
Which 'models' might he be referring to? We hope not the so-called 'Fed model', a favorite tool of bubble spin doctors, which has been thoroughly debunked by John Hussman on several occasions (see e.g. here for an excellent overview).
When it comes to the S&P's dividend yield, one doesn't really need a 'model' to judge where we stand. A functioning pair of eyes will do just fine:
SPX dividend yield since 1926. Note that the level of administered interest rates and t-note yields has for the better part of market history proved irrelevant for dividend yields. Thus the 'Fed model' must not only be viewed skeptically with respect to price/earnings ratios, but also with respect to dividend yields. Since the beginning of the late 90s bubble, yields have remained at paltry levels – click to enlarge.
Read the rest of this entry »
Theory of Interest and Prices in Paper Currency Part IV (Rising Cycle)
In Part I , we looked at the concepts of nonlinearity, dynamics, multivariate, state, and contiguity. We showed that whatever the relationship may be between prices and the money supply in irredeemable paper currency, it is not a simple matter of rising money supply à rising prices.
In Part II, we discussed the mechanics of the formation of the bid price and ask price, the concepts of stocks and flows, and the central concept of arbitrage. We showed how arbitrage is the key to the money supply in the gold standard; miners add to the aboveground stocks of gold when the cost of producing an ounce of gold is less than the value of one ounce.
In Part III, we looked at how credit comes into existencevia arbitrage with legitimate entrepreneur borrowers. We also looked at the counterfeit credit of the central banks, which is not arbitrage. We introduced the concept of speculation in markets for government promises, compared to legitimate trading of commodities. We also discussed the prerequisite concepts ofMarginal time preference and marginal productivity, and resonance.
Part III ended with a question: “What happens if the central bank pushes the rate of interest below the marginal time preference?”
A Faible for Socialism
We have often remarked on the soft spot the New York Times has for socialism. It is after all the ideology that is most popular among the self-proclaimed intelligentsia, as can be easily ascertained by observing the unbroken support it enjoys in academe – in spite of the fact that the communist system has collapsed in what was the biggest bankruptcy in human history. Apparently they just failed to 'implement Marxism correctly'. It is easily forgotten today that Western intellectuals were cheering for the Soviet Union throughout its seven decade history, from the Lenin era until its ignominious demise.
Richard Duncan on Capitalism
Richard Duncan is a well-known author of popular books on economic topics, such as 'The Dollar Crisis: Causes, Consequences, Cures'. He has just written a new book, again with an apocalyptic theme as the title suggests: “The New Depression: The Breakdown of the Paper Money Economy.”
In order to promote his new book, he is currently touring the financial media to give interviews and familiarize people with what the book is actually about.
Let us first take a look at Duncan's analytical claims. We have highlighted the salient points in an excerpt from the Marketwatch article below (we are leaving aside his recommendations for now):
„Recognizing that the world operates on a different set of rules from the laissez-faire capitalism of the 19th century is among the key arguments in Duncan’s 2012 book, “The New Depression: The Breakdown of the Paper Money Economy.”
While it might seem like an arcane economic question, Duncan said that, in fact, the stakes are huge.
Global policy makers are running out of time to take advantage of opportunities offered up by the new system to help resolve the crisis, or otherwise face sliding into a corrosive period of economic contraction and rising geopolitical tensions, he said.
“The danger is that this new economic paradigm will collapse through debt deflation,” Duncan said.
Duncan sees the global economy as having undergone a fundamental transformation during the past 43 years. Since changes in 1968 that freed the Federal Reserve from holding physical gold in reserve against dollars in circulation, total global credit has expanded 50 times, or from about $1 trillion to $50 trillion in 2007.
Over that period, credit creation and consumption, or what Duncan calls “creditism,” took hold as the growth dynamic behind the global economy, displacing capitalism, which he says relied upon sound money, hard work and capital accumulation.
Duncan believes that true capitalism died in 1914, when nations across Europe abandoned gold-backed currencies, running up huge deficits in preparation for what would come to be known as the Great War“
A Crisis of Capitalism?
Ever since the 2008 financial crisis we have frequently remarked in these pages how ludicrous the assertions are – which keep being repeated ad nauseam in the mainstream media – that the financial and economic crisis was a result of 'laissez faire' allegedly gone too far. Not a week has passed since then without someone coming out and blaming the non-existent free market for the calamity.
First of all, it should be perfectly clear that the Western regulatory democracies do not represent free unhampered market economies. They have a socialistic, centrally planned monetary system and free enterprise and production are restricted by a mountain of licensing laws and administrative legislation that is unsurpassed in the history of mankind. At the center of the financial crisis we found in fact one of the most regulated sectors of the economy.
Operation 'Perfect Hedge' – the Criminalization of 'Greed'
As most of our readers are probably aware, the ongoing FBI investigations into insider trading at prominent hedge and mutual funds has just yielded another batch of arrests and indictments. This seems to be still the same investigation that ensnared the founder of Galleon, Raj Rajaratnam, a little while ago. Apparently the investigation has been going on for four years running.
Most read in the last 20 days:
- Alan “Bubbles” Greenspan Returns to Gold
Faking It Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961 He was in it for the power and the glory... Alan Greenspan gets presidential bling...
- End of an Era: The Rise and Fall of the Petrodollar System
The Transition “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
- Writing on the Wall
Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so. It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
- Gold – Eerie Pattern Repetition Revisited
Gold Continues to Mimic the 1970s Ask and ye shall receive... we promised we would update the comparison chart we last showed in late November in an article that kind of insinuated that it might be a good time to buy gold and gold stocks (see: “Gold and Gold Stocks – It Gets Even More Interesting” for the details). We are hereby delivering on that promise. A Lydian gold stater from the time of the famously rich King Croesus, approx. 570 BC. It seems they already had this...
- A Fully Automated Stock Market Blow-Off?
Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals. The bots keep buying... Illustration via...
- The Central Planning Virus Mutates
Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination. A...
- Destination Mars
Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks. If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical. But, in certain economies, this is now standard operating procedure. The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
- America Has Become a “Parasitocracy”
Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to. Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
- Fat People for Trump!
Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot. The protest vote attractor with the funny hair. Image credit: Liberty Maniacs Trigger warning: In the following ramble, we make fun of...
- Long Term Market Perspectives
Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world. Ye olde bristlecone Photo credit: Kosta Konstantinidis You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
- EU Sends Obsolete Industries Mission to China
“Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”) and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...
- Celebrating 45 Years of Phony Money
$300 Trillion in Debt DUBLIN – After our trip to Las Vegas, we spent one night in Baltimore and then got on another airplane. Standing in line, unpacking bags, getting zapped by X-ray machines – it has all become so routine we almost forget how absurd it is. Get ready to be invaded, citizen... Photo by David McNew / Getty Images While armies of TSA agents pat down grandmothers and Girl Scouts, ex-soldiers take aim at the police... nutcases run...