On Economy

 

Creating Enemies Everywhere

Over the weekend, we were down in Nashville at the Stansberry Conference Series event, along with Ron Paul, Porter Stansberry, Jim Rickards and others. The question on the table: What’s ahead for the US?

Ron Paul took up the question from a geopolitical angle. He told the crowd that the military-security industry had Congress in its pocket.

As a result, we can expect more borrowing, more spending and more pointless and futile wars. They may be bad for the country and its citizens, says Paul, but they are good for the people who make fighter jets and combat fatigues.

“We’ve been at war in the Middle East for decades,” he said. “We supported Osama bin Laden against the Soviets in Afghanistan… and the result of that was the creation of al-Qaeda.

“Then we supported Saddam Hussein against Iran. Saddam and bin Laden hated each other. But after 9/11 we attacked Saddam, using a bunch of lies to justify it. We sent over military equipment worth hundreds of billions of dollars. This equipment is now in the hands of ISIS – another enemy we created… and a far more dangerous one.”

 

isis-hummerISIS fighters proudly parading their new Hummer courtesy of US tax cows …

(Photo credit: REUTERS/Stringer)

 

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Dear Investors, the Time to Leave your Brains at the Door has Come …

This is really too funny. The latest investment fad – which strikes us as a typical “late bubble” idea, we might add – is letting machines do your “investing” for you. And statistically speaking, it actually seems to be a good idea. Of course, it presumably only works as long as no grueling long term bear market intervenes, such as has happened in Japan. Or even worse, something like the 68 year long bear market in Europe following the peak of the South Seas and Mississippi bubbles in Britain and France.

 

“Investment advisers concerned about competition from cut-rate digital investment firms known as “robo-advisers” received an olive branch on Wednesday from Betterment LLC, one of the largest of the new competitors.

The New York-based firm, which uses questionnaires and algorithms to create portfolios of inexpensive exchange-traded funds for individual investors, said it is now offering the program to advisers who tout financial planning and investment skills to generally wealthy individuals.

Fidelity Investments, which provides brokerage services to clients of 3,000 independent advisers and has custody of their assets, is referring Registered Investment Advisers (RIAs) who want to test digital investing to Betterment. The mutual fund giant will receive a one-time asset-based fee for RIA clients or prospects referred to Betterment.

Advisers who have tested the program said it will allow them to accept younger, less wealthy people who they had previously ignored and perhaps appeal to traditional clients. Betterment says that it produces returns 4.30 percent higher than those achieved by the average do-it-yourself investor.”

 

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A Rebound Attempt

Here is a brief update on the action in the stock and bond markets. In Wednesday’s trading, the stock market initially declined sharply and the action was accompanied by a frenzy of short-covering in treasury notes across the maturity curve (see Tuesday’s comment on the outsized speculative net short position in 10 year notes. Similarly large speculative short positions are also extant in shorter maturities).

The “trigger events” were many – an overnight plunge in crude oil prices cemented the idea that a global economic slowdown is underway (which seems indeed to be the case) and this idea received further ammunition when a few US economic data were released. Producer prices fell and the Empire State manufacturing survey plunged by 21 points, way below expectations. Significantly, new orders declined sharply (for more details on the survey see Mish’s write-up).

Of course, we don’t believe that the stock market is weakening because punters have suddenly found out that there is economic weakness. As so often, the fundamental news follow the market and don’t lead it – what’s more, the very same news would likely have been ignored only a few weeks earlier, or even have been met with bullish spin. The real reason for stock market’s weakness is the declining growth momentum of the money supply and the impending end of “QE3”. This has already created a great many negative effects in “risk assets”, which were merely masked by the previous strength in popular cap-weighted indexes. Readers may also want to check the comments by Variant Perceptions on the recent decline in stock buybacks and the market’s reliance on multiple expansion. Both seem relevant data points, which we have previously discussed here as well.

 

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The Market’s Knockout Punch Is Still to Come

The Fed’s EZ money policies will either succeed or fail. Either way, it will be a disaster. If they succeed, interest rates will rise … and America’s debt-addicted economy will get the shakes.

If they fail, the Fed will double down with further acts of reckless improvisation – including bigger doses of credit – until the whole thing blows up.

But let’s give credit where it is due. The recent employment numbers speak a kind of success. In spite of the Fed’s policies, the US economy is not only still alive … but also it’s getting back on its feet.

If this is so, it is good news for the people who have finally found meaningful employment. As for the future of the US economy, it is a disaster.

 

1014-DRE-blog

 

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Getting Worried

New England is stunning this time of year. Just what you’d expect. The leaves turn brown, yellow and red, putting on their best outfits and strutting their stuff in the cool autumn air.

Autumn, especially in New England, is the loveliest time of the year. The sun barely clears the tops of the trees, even at noon. The light, filtered through the colored leaves, gives the earth the rich and heavy air of a funeral parlor.

Perhaps that is why there are market crashes in the fall. Investors feel the approach of death. The stock market fell hard on Thursday … and then kept falling on Friday. Before the week was over, investors were worried.

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Derivatives “Stays” – The Next Step in Corralling Investor Funds

We previously discussed the debate over the introduction of new rules that would allow money market funds to stop withdrawals – see “Redemption Gates for Money Market Funds” for details. This debate followed on the heels of similar proposals being made for bond funds. These regulations aim to “forestall panics” by preventing investors from withdrawing their funds from wobbly looking entities in the event of another financial crisis.

We personally believe that there can hardly be a better argument for holding physical gold outside of the system, but apart from that such rules are obviously weakening property rights.

 

Now another set of similar regulation is about to be introduced, in this case concerning derivatives:

 

“The $700 trillion financial derivatives industry has agreed to a fundamental rule change from January to help regulators to wind down failed banks without destabilizing markets. The International Swaps and Derivatives Association (ISDA) and 18 major banks that dominate the market will now allow financial watchdogs to apply temporary stays to prevent a rush to close derivatives contracts if a bank runs into trouble, the ISDA said on Saturday.

A delay would give regulators time to ensure that critical parts of a bank, such as customer accounts, continue smoothly while the rest is wound down or sold off in an orderly way.

That would help to avoid the type of market chaos sparked by the collapse of Lehman Brothers in 2008 and also end the problem of banks being considered too big to fail.

The Financial Stability Board (FSB), a regulatory task force for the Group of 20 economies (G20), had asked the ISDA to make the changes with the aim of ending the too-big-to-fail scenario in which banks are propped up with taxpayer money to avoid market disruption.

Under the new contract terms, default clauses in derivatives contracts such as interest rate or credit default swaps would be suspended for a maximum of 48 hours.”

 

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Asia “Not Helped” by Chinese Data, Fed Officials Back-Pedaling

We wanted to see if there were any signs of concern in the mainstream financial press over the recent market decline (which is still small in terms of the major indexes, although this can no longer be claimed of the “average stock”).

We would characterize the mood as one of “mild concern” – generally it seems to be held that the decline is just another of the periodic (and ever smaller) corrections we have seen over the past few years. It is noteworthy though that the recent decline is referred to as a “growth scare”. For instance, Reuters reports on overnight weakness in Asian markets – which actually didn’t entail any overly big moves:

 

“Asian stocks stumbled to seven-month lows on Monday, while crude oil prices were pinned near a four-year trough as promising trade numbers out of China failed to cheer a market still worried about faltering global growth.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.8 percent, extending last week’s 1.1 percent drop. Mainland Chinese stocks skidded 1.1 percent and Hong Kong’s Hang Seng shed 0.7 percent. Australia’s S&P/ASX 200 index and South Korea’s KOSPI both slipped 0.6 percent. Tokyo’s Nikkei was spared the pain for now thanks to a public holiday in Japan. The declines in Asian markets came after U.S. stocks skidded 1.2 percent on Friday and Wall Street’s fear gauge, the CBOE Volatility Index, jumped to a near two-year high.”

 

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Trapped

How do you like that Dow? Down 272 on Tuesday. Then back up almost exactly as much on Wednesday. As we predicted, volatility is rising. Investors are beginning to squirm. Why?

The Fed is ending QE. And it could hike short-term interest rates as soon as next year. The EZ money is getting scarce.

“We are trapped in a cycle of credit booms,” writes Martin Wolf in the Financial Times. Wolf is wrong about most things. But he is not wrong about this. “On the whole,” he writes, “there has been no aggregate deleveraging since 2008.”

He does not mention his supporting role in this failure. When the financial world went into a tailspin, caused by too much debt, in 2008, he joined the panic – urging the authorities to take action!

As a faithful and long-suffering reader of the FT, we recall how Wolf howled against “austerity” in all its forms. His solution to the debt crisis?

Bailouts! Stimulus! Deficits! In short, more debt!

 

Wolf-1

Martin Wolf pleading for more money printing in 2010 …

 

Wolf-2… and again in 2011 – now he wonders how it comes that we’re trapped in credit boom-bust cycles?

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Firmly on the Road to Ruin

Well, we warned them not to do it. You can read it all in “How to Destroy Germany’s Economic Gains” and “Germany Rolls Back Labor Reforms”. As we pointed out on these occasions, economic laws cannot be suspended by political fiat. Germany has managed just fine for hundreds of years without a legislated minimum wage. However, when the new coalition agreement between Germany’s pseudo-Conservatives and the Socialists was made, the socialist faction finally saw an opening to push the minimum wage through.

The consequences were easy to predict: many unskilled workers would lose their jobs and become wards of the State forever. Minimum wages are not only truly hair-raising economic nonsense, they are moreover a violation of people’s right to freely enter into contracts. An unskilled worker is no longer even allowed to offer his labor at less than the minimum wage, since that would amount to “unfair competition”. A new underclass is thus created in Germany, and the country’s hard-won gains in terms of labor productivity are endangered. We can expect further side effects from this, such as e.g. rising crime rates.

Of course the socialists love it (even if they would never say so out loud). Higher unemployment means more people will depend on handouts from the State – and these people are regarded as a natural reservoir of votes for the socialists. Apparently they have forgotten that there was once a time when precisely such an underclass actually chose quite a different kind of political party, one that eventually made short shrift of all socialists.

Now we have the first empirical confirmation that the minimum wage is indeed about to wreak economic havoc on a breath-taking scale.

 

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An Update From the Pampas

Today, an update from the pampas – our favorite economic laboratory. The gauchos try one monetary experiment. It blows up in their faces. So what do they do? They back test! More on that in a minute…

Friday saw a big jump in the Dow – up 208 points. Gold fell hard – down $23 an ounce. What to make of that?

Nothing much. According to our Simplified Trading System (STS), readers should be out of US stocks and accumulating gold. Sell stocks on the rallies. Buy gold on the dips. Keep at it until further notice.

 

1006-DRE_blog

 

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Everybody Loves the Drone War … Including Al Qaeda

President Obama has long ago decided it is best to make war in video-game fashion (from high up, and preferably using remote-controlled devices), and it seems this is meeting with the public’s approval – some 65% of Americans are A-OK with the “drone war” according to surveys.

Admittedly, replies to such polls depend very much on how the questions are framed. Our guess would be that these questions contain no hints about the vast uncertainties involved and the many civilians killed in the process. Presumably not too many people know that in some of the targeted countries, entire communities are living in fear these days. Many people have lost relatives, who have become “regrettable collateral damage”.

 

predator-drone-238271

Predator drone

(Image via wn.com, author unknown)

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Market Reaction to Payrolls Data

Payrolls and unemployment reports should normally be regarded to be among the least useful economic data, as they are lagging indicators of the economy. Insofar the recent improvement in employment data only confirms what has already happened: economic activity has increased (note that this tells us nothing about the quality of said activity). It tells us absolutely nothing about the future.

The reason why the markets tend to react strongly to these data is mainly the Federal Reserve’s nonsensical “dual mandate”. Enacted in the heyday of Keynesianism, the mandate is based on the belief that both prices and employment can be successfully centrally planned by manipulating interest rates.

 

1-Employment dataCumulative non-farm payrolls, initial unemployment claims and the U3 unemployment rate (which excludes about half of the people who are actually unemployed). If we had asserted a few years ago that the Federal Funds rate would be at zero with the unemployment rate at 5.9%, we’d have been declared insane – click to enlarge.

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A new study suggests that money actually does buy happiness

Call in the quacks! The shrink. The counselor. Get the voodoo man on the line. The Rogue Economist is going soft and mushy… analyzing his own feelings and motivations… his own relationship with money.

It begins with a note from a dear reader:

 

“What a pile of garbage. There is no correlation between happiness and money. None.”

 

Oh yeah?

Half the world works just to survive. But the other half works to get ahead. It aims to get richer. Why so much effort if there is no connection – none at all – to happiness?

And why are so many people investing their money, if not in the hope that it will be fructified… making them wealthier?

On Thursday, neither the Dow nor the price of gold budged. You can interpret that any way you want. There was no follow through on Wednesday’s big drop in stock prices. But there was no rebound either. Mr. Market, are you listening? We await further instructions [Mr. Market delivered instruction on Friday, ed.].

 

prozac instead of a raiseA new study suggests that money actually does buy happiness (there’s a study for everything …)

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Dreaded October

The Dow fell 238 points on Wednesday. And Treasury debt rallied. The yield on the 10-year T-note fell the most in nine months – to 2.4%. News reports blamed “geopolitical challenges” in Hong Kong, the Middle East, Ukraine and elsewhere.

That may be part of it. But this is also October – the month QE is expected to end. Between 2009 and 2014, the Fed bought $3.6 trillion of US government and mortgage-related notes and bonds. During that time $5 trillion has been added to the value of the US stock market. And the price of the average house has risen by $60,000.

This was achieved largely by holding Mr. Market’s head underwater until he stopped squirming.

 

10-02-DRE-blog

(Photo via Deviantart)

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The Many Errors of His Ways …

An editorial by well-known leftist economist Joseph Stiglitz has recently been published in the Guardian, entitledAusterity has been an utter disaster for the euro zone”.

Before we are taking a closer look at it, we want to stress that we also believe that the EU’s approach to economic policy is worth criticizing in many respects. Just because we believe that Mr. Stiglitz is essentially an economic crank doesn’t mean that we disagree with every criticism of the so-called “austerity” policy as pursued by the EU. Below are several excerpts from his article with our comments interspersed.

 

“If the facts don’t fit the theory, change the theory,” goes the old adage. But too often it is easier to keep the theory and change the facts – or so German chancellor Angela Merkel and other pro-austerity European leaders appear to believe. Though facts keep staring them in the face, they continue to deny reality.”

 

The “old adage” is actually a well-known bonmot by J.M. Keynes – curiously, Stiglitz doesn’t mention that. Although it has merit with respect to the natural sciences, it does not apply to economic theory, which is a science of human action and not a study of inanimate objects without volition. Theorems of economics cannot be proved or disproved with “empirical data”. We do e.g. not need empirical data to prove the truth of the theorem of marginal utility, or to create a price or value theory, or to prove the truth of the law of association, etc.,etc..

All of these economic laws have been discovered by inner reflection and the process of logical deduction. They are only “empirical” in a Thomist or Aristotelian sense (for a detailed explanation of this point of view, we refer readers to Rothbard’s monograph In Defense of Extreme Apriorism -pdf).

To put it differently: one can use economic theory to explain the facts of economic history, but one cannot use economic history to argue for or against points of economic theory. If we look at economic statistics, we see that every slice of history is slightly different, as the contingent data, which are always extremely complex and varied, are different in every case. And yet, the same economic laws have time and place-invariantly operated in every instance and will continue to do so for all eternity, or at least as long as there are human beings who can act with purpose. Stiglitz continues:

 

Austerity has failed.But its defenders are willing to claim victory on the basis of the weakest possible evidence: the economy is no longer collapsing, so austerity must be working! But if that is the benchmark, we could say that jumping off a cliff is the best way to get down from a mountain; after all, the descent has been stopped.

But every downturn comes to an end. Success should not be measured by the fact that recovery eventually occurs, but by how quickly it takes hold and how extensive the damage caused by the slump.

Viewed in these terms, austerity has been an utter and unmitigated disaster, which has become increasingly apparent as European Union economies once again face stagnation, if not a triple-dip recession, with unemployment persisting at record highs and per capita real (inflation-adjusted) GDP in many countries remaining below pre-recession levels. In even the best-performing economies, such as Germany, growth since the 2008 crisis has been so slow that, in any other circumstance, it would be rated as dismal.

The most afflicted countries are in a depression. There is no other word to describe an economy like that of Spain or Greece, where nearly one in four people – and more than 50% of young people – cannot find work.

 

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