If one searches for news on LIBOR (=London Interbank Offered Rate, i.e., the rate at which banks lend dollars to each other in the euro-dollar market), they are currently dominated by Deutsche Bank getting slapped with a total fine of $775 million for the part it played in manipulating the benchmark rate in collusion with other banks (fine for one count of wire fraud: US$150 m.; additional shakedown by US Justice Department: US$625 m., the price tag for a deferred prosecution agreement).
BALTIMORE – The Dow, the S&P 500, and the Nasdaq remain near record highs and are up about 10% since Election Day. Fed officials say they could raise interest rates “fairly soon.” Blah… blah… blah…
One of these days… sooner rather than later… as soon as the data permit…
Cartoon by Bob Rich
Everyone’s got a plan for sale these days. In fact, there are so many plans out there we cannot keep up with them all. Eat celery sticks and lose weight. Think and grow rich. Stocks for the long run. Naturally, plans like these run a dime a dozen.
All social engineers who get to impose their harebrained schemes on the rest of the world through the coercive powers of the State, as well as all armchair planners regaling us with their allegedly “better plans”, should have this highly perceptive quote by Robert Burns tattooed on their foreheads. In case you’re wondering, “gang aft a-gley” is slightly old English for “usually turn out to be total crap”. The second part that points out that as a rule, we get nothing but grief and pain instead of promised joy, is applicable to interventionism in general; the so-called “unintended consequences” of interventions almost always turn out to be their main feature and defining characteristic.
Looming Currency and Liquidity Problems
The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into account.
USD-CNY, the onshore exchange rate of the yuan vs. the USD. After years of relentless appreciation, the yuan topped in early 2014 and has weakened just as relentlessly ever since. The yuan’s top coincided with the beginning of the “tapering” of the Fed’s QE3 debt monetization program and the peak in China’s foreign exchange reserves at just below $4 trillion. There was practically no lead time involved, which is rare. Although the yuan is not convertible and therefore by definition a “manipulated currency” (is there a fiat currency that isn’t manipulated?), the assertion that China’s authorities are deliberately weakening the yuan is erroneous. The opposite is true: they are trying to keep it from falling or are at least trying to slow down its descent with every trick in the book (every intermittent phase of yuan strength since the beginning of the decline was triggered by intervention). Understandably so: due to the close correlation between the level of forex reserves and credit and money supply growth in China, a rapid depletion of reserves is likely to impact the country’s giant credit bubble. One of the moving parts in this equation are bank reserve requirements, which the PBoC essentially uses to control the extent of credit growth triggered by the accumulation of reserves (a.k.a. “sterilization”). These peaked at 21.5% in June 2011 and were since then lowered to 17% to keep domestic credit expansion going – click to enlarge.
India’s Currency Ban, Part VII
There is still huge support for Modi even among the poor. A big carrot is dangled before them, which makes many stay numb to their current suffering. During his election campaign in 2014, Modi promised to deposit more than Rs 1.5 million (~$22,000) in each poor person’s account once the government had seized all black money.
Massive problems have been reported with the new bills. Some have been printed on defective paper and are simply falling apart. The inferior quality of the print job is generally often on the appalling side of deplorable. The new notes are counterfeited with great abandon, quite likely to a much greater extent than they ever were in the past. So much for Modi’s plan to stop counterfeiting.
Photo credit: The Hindu
India’s Currency Ban – Part VI
India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, and Part-V, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.
There are undoubtedly many differences between the two gentlemen depicted above, but both appear to have mastered the age-old trick of extending one’s grip on political power by inflicting chaos.
Stimulus, in a general sense, is something that causes an action or response. A ringing alarm clock may prompt someone to exit their slumber. Or a fist to the gut may force someone to gasp for breath.
A classic case of gut-punch stimulus application. Now, all you have to do is imagine that the big person being stimulated is the economy. What should be your next question? Right! Will it achieve escape velocity?
Too Smart to Think
These days everything must be smart. There are smart cities, smart grids, smart policies, smart TVs, smart cars, smart phones, smart watches, smart shoes, and smart glasses. There’s even something called smart underwear.
Modern-day wedgie-proof thinking drawers. How was life even possible before them? An area of the body not usually known for its thinking prowess is suddenly smarting up!
The Nasty Habits of Reality
BALTIMORE – People never intend to bring disasters upon themselves. But they sometimes put themselves in situations in which disaster is the only way out.
The War Between the States was supposed to be quick and decisive. The glorious histories of the war were already written – at least in the minds of the combatants – by the time of the First Battle of Bull Run.
General Thomas “Stonewall” Jackson inspects the action at the First Battle of Bull Run. Confederate observers were suitably impressed. We’ve got this in the bag, they said to themselves. Let’s start writing the history books!
A Very Odd Growth Spurt in the True Money Supply
The growth rates of various “Austrian” measures of the US money supply (such as TMS-2 and money AMS) have accelerated significantly in recent months. That is quite surprising, as the Fed hasn’t been engaged in QE for quite some time and year-on-year growth in commercial bank credit has actually slowed down rather than accelerating of late. The only exception to this is mortgage lending growth – at least until recently. Growth in mortgage loans is still very slow though, especially compared to historical growth rates. It cannot really account for the recent surge in money supply growth either.
Year-on-year growth rates of TMS-2 (11.19%, black line) and total loans and leases at commercial banks (7.7%, red line) as of October. In absolute terms money TMS-2 has soared by a staggering $840 billion since the beginning of the year – click to enlarge.
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