On Economy


A 100% Consensus

This doesn't happen very often.  Marketwatch reports that Jim Bianco points out in a recent market comment that the 67 economists taking part in a regular Bloomberg survey have a unanimous forecast regarding treasury bond yields: they will be higher 6 months from now. This is a truly striking result, and given the well-known propensity of mainstream economists to guess wrong (their forecasts largely consist of extrapolating the most recent short term trend), it may provide us with a few insights.

In fact, considering that there have been only a handful of instances since 2009 when a majority of the economists surveyed predicted a decline in yields, we can already state that their forecasts regarding treasuries are quite often (though obviously not always) wide of the mark. In fact, so far this year they are already wrong again – and so are fund managers, as they hold their lowest exposure to treasuries in seven years.

This is not the only thing there is complete unanimity about. Not a single economist taking part in a separate survey believes an economic downturn is possible.


“Economists are unwavering in their assessment of where yields are headed in the next half year.

Jim Bianco, of Bianco Research, points out in a market comment Tuesday that a survey of 67 economists this month shows every single one of them expects the 10-year Treasury yield to rise in the next six months.

The survey, which is done each month by Bloomberg, has been notably bearish for some time now, with nearly everyone expecting rising rates. In March, 97% expected rising rates. In February, 95% expected yields to climb. And in January, 97% held that expectation. Since the beginning of 2009, there have only been a handful of instances where less than 50% expected rates to rise.

Still, the fact that every single survey participant is bearish is striking. The last time the survey had that result was in May 2012, when benchmark yields were well below 2%.

“Literally there is maybe one economist in the United States straddling the bullish/bearish divide on interest rates. The rest are bearish,” Bianco writes.

He adds that a J.P. Morgan client survey shows that the percentage of money manager respondents who said they are underweight Treasurys is the second highest in seven years.

This is all the more surprising when we consider that investors went into 2014 thinking yields would rise significantly. Instead, the benchmark yield is lower than when the year started, as the market waded throw subpar economic data, geopolitical tensions, and uncertainty over the Federal Reserve. The 10-year note last traded at a yield of 2.72% on Tuesday, down from just over 3% on Dec. 31.

Then again, a separate poll of economists recently showed that exactly zero expect the economy to contract.

But when the entire market thinks one thing is about to happen, the opposite outcome is often in store, notes James Camp, managing director of fixed income at Eagle Asset Management. So don’t count out that result with Treasurys, he advises.

“It’s the most hated asset class,” says Camp, but Treasurys are some of the best performers year-to-date.”


(emphasis added)

Color us unsurprised regarding the fact that the 'most hated asset class' has turned out to be one of the better performing so far this year. Gold is probably hated even more, and for similar reasons. Everybody expects the weakest recovery of the entire post WW2 era to reach 'escape velocity' (whatever that is supposed to mean), even after adding almost $8 trillion to the federal debt and some $4.8 trillion to the broad true money supply since the 2008 crisis have led to such a dismal outcome (of course as card-carrying Austrians we believe this development is precisely what should have been expected).


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Ongoing Correction

Last week, gold's rebound was cut short after Goldman Sachs and Morgan Stanley concurrently issued bearish reports on the gold price, which were widely trumpeted in the press (although it is such an allegedly unimportant asset class, gold gets an unusual amount of attention in the financial media – and there is almost always a bearish spin associated with the reportage. This is largely independent of whether the price is in trending up or down). It is of course de rigeur on Wall Street to hate gold, unless it is really overpriced, in which case it gets a little love out of sheer necessity.

As Steve Saville recently pointed out, it is not possible to assert that Goldman Sachs' analysts have any special insights into the future of the gold price. Apparently they raised their gold price targets more than once when the price was just about to suffer its biggest correction of the entire bull market. In other words, they loved gold when it was trading at $1,700 and $1,800, but they hate it at $1,300. Not that this is a big surprise, but those trading on the grounds that GS issues some arbitrary price target (whether higher or lower) should perhaps check their premises.

Saville also mentioned that the analysis offered by GS was at least correct in its basic assumptions (meaning, with respect to gold price drivers), as the forecast was based on the idea that the US economy will (once again) 'strengthen in the second half'. Every year, analysts engage in this 'prosperity is just around the corner' ritual, which is fatally reminiscent of the Harvard Economic Society and Herbert Hoover in the 1930s. However, we agree that if the big if in this 'if-then' proposition were to come true, it would be a bearish development for gold, and definitely more important than how much gold is moving from A to B, a point stressed far too often by many gold bulls (such as gold moving from COMEX warehouses to some other warehouses elsewhere in the world).


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The Smart and the Good

[excerpted from “The New Empire of Debt” -  ed.]

“Dere’s dem dat’s smart… an’dere’s dem dat’s good,” said Uncle Remus. Many young people today can’t even identify Uncle Remus. Some of their elders might want to arrest you for quoting him in the original dialect. But the man was a genius.

When we were young, we were a lot smarter. But as the years go by, many of the things we thought were smart don’t seem so smart anymore. And now we realize that, no matter how smart we think we are, we are never quite smart enough.

We think stocks are going up; we think we can build a better world in Mesopotamia; we think we can tell the fellow down the street how to discipline his children or decorate his house. But what do we know?

It is easier to be smart than to be good; that’s why there are so many smart people, and so few good ones. Smart men get elected to high office. They run major corporations. They write editorials for the newspaper.

Pity the poor good man; he goes to parties and has nothing to say that is not mocking and cynical. Others talk about their smart deals, their smart ideas, their smart plans and successes. Women crowd around them; a smart man grows taller as he speaks. The good man shrinks.


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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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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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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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Honest Work

Dow down 159 on Friday. Gold up $18 an ounce. Remember, it’s just a matter of time until US stocks begin to fall. How much time? Darned if we know!

We spent Friday cosechando (harvesting). We were on our knees going through the vineyard at the family ranch, harvesting grapes. The going rate for such work is 5.70 Argentine pesos (or about $0.70) per gamela – the plastic bin we dragged along after us.

This was the first time we had ever worked as a grape picker. Experienced, hardy pickers can fill 40 gamelas a day, giving them about 230 pesos (or about $28) for the day’s work. Your editor worked at fast as he could. Still, he was only able to pick at the rate of nine gamelas a day. That gave him an income for the day of 51.30 pesos … or about $6.40.

The sun beat down. The grapes hid behind leaves and clung to vines, making it hard to cut them off. Our knees found every rock in the field. Still, we were proud to be doing honest work … and happy to earn some extra money.


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Blundering Into Disaster

In yesterday’s Diary, we revealed economist and author Richard Duncan’s outlook for the months ahead. You noticed, surely, that it corresponds with our own, at least to an important point.

Duncan’s key insight is that asset prices – in particular stock prices – have come to depend on excess “liquidity” in the economy. We put liquidity in quotations, because it is not clear how fluid QE money really is. Our colleague Chris Hunter has pointed out that excess reserves can’t be spent in the economy… nor can banks multiply them into more loans – an issue of some debate around our offices. Still, there is no doubt in our minds that the S&P 500’s new record high is largely down to QE.

As long as the quantity of this liquidity exceeds the economy’s uses for it (principally borrowing by the federal government and corporations) stocks have a tendency to go up. When liquidity levels fall stocks tend to fall, too.

Duncan anticipates that liquidity will dive in the last quarter of this year (with less available cash and credit than the economy needs). If they haven’t sunk already, stocks will go down to where they belong.

But the Fed has taken a blood oath to keep the credit bubble expanding to the end of time… or until it blows up… whichever comes first. And Janet Yellen has recently revealed herself to be a remarkable personage for a central banker. (She is, after all, a disciple of the infamous Yuri Pavlovovich!) She will not stop or sidestep the trap; she will walk right into it … recklessly blundering into the biggest financial disaster of all time.


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A New Report by Variant Perception -  What Few Are Focused On

Our friends at Variant Perception have published an interesting report entitled “Understanding Market Tops” (please note: the article can be obtained for free here, but requires registration).

Readers will probably recall that we have frequently mentioned that the current 'echo boom' is more diffuse than previous booms in terms of bubble activities that can be easily identified. There is no focus on a specific sector of the economy (such as the tech boom of the late 90s, or the real estate bubble thereafter). Instead, the bubble is more broad-based, but there is one broad category of activity which we have indeed frequently singled out, and that is the dangerous growth in debt of all stripes, but especially in low quality debt.


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Birds of a Feather …

Where should gold be? In terms of buying power, we calculated that an ounce of gold should sell for between $800 and $1,200 an ounce. There are dark clouds hovering over the world’s financial system. Gold is the logical shelter.

You can’t buy gold for $800 an ounce partly because so many people see the storm coming. Once the storm hits, you may be glad you bought gold at any price.

But the shocking news this morning is that Janet Yellen admitted to a confidante, who spilled the beans, that she is a disciple of the late Yuri Pavlovovich.


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