On Economy


It’s a Deal – We Will Make Growth Together …

News from the recent G20 pow-wow range from the slightly scary – such as a deal to further undermine financial privacy under the guise of “battling global tax evasion” – to the outright hilarious. The by far funniest report on the meeting appeared in the Australian press and reads as though it came straight from some stand-up comedy routine. You have to see this to believe it (put down the coffee, just to be safe…):


“A global deal on growth appears on track to create millions of jobs after the world’s most powerful finance ministers announced plans to add at least 1.8 per cent to their combined economic output.

The G20 finance summit has ended in Cairns with a renewed commitment to a growth target that is meant to add $2 trillion to the world economy, in a positive sign for Australia’s leadership of the group this year. Joe Hockey hailed the outcome as another step towards a major agreement on reform alongside progress on bank regulation, infrastructure investment and a crackdown on tax evasion.

“We are 90 per cent of the way there to meet out 2 per cent goal but I want to emphasize there is much to do,” he told a press conference in Cairns shortly after midday. “It is critical that we take concrete steps to boost growth and create jobs.”

While observers warn the global forum is not acting fast enough to deliver on its rhetoric, the meeting of finance ministers and central bank governors issued a formal communique that commits to actions to lift growth. Central to the agenda is a growth ambition agreed in February to add 2 per cent over the next five years to collective growth when compared to a “business as usual” scenario without new action.

G20 members have submitted about 900 plans to reach the target, ranging from workplace participation programs to infrastructure investments and competition reforms, but the Cairns summit concluded these were not enough to meet the target. The communique said the preliminary analysis of the plans showed collective growth could be 1.8 per cent higher.

“These measures, along with macroeconomic policies, are designed to lift global growth and contribute to rebalancing global demand,” the statement said.


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Priced for Perfection

We got back from Argentina on Saturday …

The Argentines have seen it all. They know that politics, like markets, follow cycles. Good follows bad… followed by good again.

“We’ve had a rough time,” said one Argentine analyst we talked to.

“Because the government has been so stupid. But people now know it has been stupid. There’ll be a change in a year, and it will almost surely be for the better.

“The trouble with the US,” continued our friend, “is stocks are already priced for good things. The Fed has to manage its withdrawal from money printing flawlessly. Profits have to go higher. Inflation and interest rates have to stay at record lows.

“The economy doesn’t have to get a lot better, but it can’t give us any big surprises on the downside. And none of the geopolitical or other threats – like the Ebola virus – can get much worse.

“I’d rather invest in a market that is already priced for disaster and be pleasantly surprised when it works out better than expected. Going into a market that is priced for perfection is always a mistake.”


Operation Iraqi FreedomCleared for release  by SFC VeShannah Lovelace, PAO, MNC-I, DSN 318-822-1414 Email: VeShannah.Lovelace@iraq.centcom.mil

Looking out for evil dudes hiding in the sand …

(Photo via talkmarkets.com)


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The Man with Nothing to Lose

France’s president Francois Hollande these days finds himself at a similar crossroads as another French socialist president once upon a time: Francois Mitterand. After nationalizing vast swathes of industry and introducing all sort of policies favored by the Left, Mitterand was eventually forced to do an 180 degree turn to avoid inflation spiraling out of control and in order not to suffer the embarrassment of the French franc falling out of the ERM (European Exchange Rate Mechanism). Mitterand later was forced into cohabitation with a conservative parliamentary majority, and concentrated on foreign policy and defense, leaving economic policy to Jacques Chirac.

Mr. Hollande these days enjoys the relative freedom that comes from being the most despised French president in all of history. The “welfare state incarnate” as Gaspard Koenig once called him, has seen his approval rating plunge to 13% in September. Ironically, if one adds up the approval ratings of Hollande and the reportedly evil Vladimir Putin, one gets 100%. And yet, it is Hollande who is now the relatively more unconstrained of the two, after all, no matter what he does from here on out, things simply cannot get much worse.

A first sign that Hollande realizes that different economic policies are required was his appointment of the centrist Manuel Valls as prime minister about six months ago. The recent “purge”, that saw former economy minister Arnaud Montebourg, minister of culture Aurelie Filipetti and education minister Benoit Hamon replaced by people more in line with Valls’ new course was an even stronger sign. Montebourg specifically was highly influential early in Hollande’s term and as might be expected, pursued policies extremely hostile to business. All three of the ministers that were replaced were considered “Socialist rebels” – i.e., far to the left of Mr. Valls. Montebourg was replaced by his polar opposite, someone on the very right of the Socialist Party,  former investment banker Emmanuel Macron. How did Valls survive the confidence vote the purge necessitated? In spite of the rebellion of the left, French socialist parliamentarians are well aware that a new election would sweep most of them out of the halls of power. It is this fear Hollande and Valls gambled on, and they were proved right.


Readers may recall that earlier in Hollande’s term, we often argued that Hollande’s baffling reluctance to embrace reform could be explained by his fear of being overtaken from the left – not only the extreme leftist wing of his own party, but also the La Gauche party led by Jean-Luc Melenchon. However, recent polls in France seem to suggest that Melenchon’s outfit is facing a lot of competition from another radical party, namely the Front National (FN). To be sure, the FN is likely to steal votes from every quarter, but for a small party like Melenchon’s this can conceivably mean total wipe-out. And so it comes that Hollande is now embracing Valls’ reform course, which aims to slash government spending, lower business taxes and introduce some badly needed deregulation.


manuel-valls-et-francois-hollande-10975172oxxld_1713Manuel Valls and Francois Hollande, thinking things over …

(Photo credit: AFP)


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This Country Will Get Worse Before It Gets Better

Scotland voted to stay part of Britain …




Even so, we’re considering a campaign to free Maryland (about which, more anon).

We are in Uruguay giving a speech to a group of Argentine investors.  What can we tell them that they don’t already know? They’ve seen it all.

Yesterday’s edition of El Clarín newspaper reported that the Argentine peso had dropped past the 15-to-the-dollar level for the first time. When we first came to Argentina – it must have been in about 2005 – we recall getting only 5 pesos per dollar.

“No one knows what the annual rate of inflation is,” says a friend. “Most think it is about 40%.”  Based on that alone, it should be obvious why the peso is dropping – to everyone but Argentina’s 42-year-old minister of the economy, Axel Kicillof, that is.
In loose translation from El Clarín:


“Kicillof accused the US of having pushed the peso down. “Oddly, [US ambassador] Sullivan used the word ‘default’ [to describe Argentina's failure to make the required payment on its foreign debt] when everyone knows it was selective… and then the dollar goes up and gives the impression of a general panic.

“Contrary to the opinion of the market,” Kicillof continued, “there is no economic or financial reason for the peso to trade at 15 to the dollar.”


Well, that pretty much settles it for us!

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Calamities Imposed by Nature and Man …

We are traveling today. No time or place to catch up on the financial markets. All we know is that the Dow closed at a new record. Gold lost $13 an ounce.

So we will tell you a bit of what went on at our ranch in Salta Province in northwestern Argentina…

It’s a beautiful spot, in a harsh and majestic sort of way. In early spring it’s windy, cold and very dry. The cattle are getting thin. But the grapes, irrigated from a small stream, are beginning to put out leaves.

“We’ll feed the cows what is left of the hay and the alfalfa in the fields. It should last until the rains begin in December,” Jorge, our capataz (foreman), explained.

“What if it doesn’t rain?” we asked.

“That happened in the late 1990s,” Jorge continued. “It didn’t rain all year.”

“What happened to the cattle?”

“We sold a few. But everybody was trying to get rid of cattle. Most of them died. We had 3,000 when the drought began. We had only a few hundred when it was over.”

In addition to the calamities imposed by nature, there are those imposed by man. Most countries operate with more or less sensible policies, most of the time… with a “hormegeddon” disaster (caused by misguided public policy on a grand scale) only rarely.

Argentina seems to prefer a rolling hormegeddon, with the economy always either going into a disaster or coming out of one. But we’ll come back to that soon …


puente_transbordadorPuente Transpordador (ferry bridge) in Buenos Aires in the 1940s.

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Dancing on Tables with Lampshades on Their Heads …

The Dow rose 100 points on Tuesday. Gold was up one lousy dollar. We’ll take the gold, thank you very much. Because our guess is that this stock market is living not only on borrowed money but also on borrowed time.

With the addition of Chinese Web portal Alibaba, there are now 44 start-ups preparing to enter the public markets. Each of these has a valuation of more than $1 billion.

The last time there was this kind of action in the IPO market was 2000, just before the dot-com bubble blew up. And the last time stocks were this expensive was 2007, when the sub-prime/finance bubble blew up.

That was also the last time share buybacks by US corporations passed the $600 billion mark, which they will do again this year. Yes, dear reader, the party has gotten out of hand – thanks to all the free booze supplied by Ben Bernanke and Janet Yellen. It’s time to look for the car keys.


Q2 buybacksShare buybacks per quarter, via Capital IQ and Zero Hedge. If you didn’t know whether stocks are expensive or not, you only would have to look at this chart…when buybacks approach the zero line, stocks are cheap and it would actually make sense to buy them back. It sure makes no sense now. This is another example of how the monetary bureaucrats distort markets and perceptions with their policies. Those who think this is not going to end badly are deluding themselves (chart comment by PT) – click to enlarge.


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Abenomics Keeps Sputtering – What To Do?

We have frequently discussed the nonsensical attempt by Japanese prime minister Shinzo Abe and BoJ governor Haruhiko Kuroda to print and spend Japan back to prosperity in these pages. By now it is well known that devaluing the yen has not achieved the desired effect, but rather the opposite. Not only have exports not really received the expected boost, but Japan’s trade and current account surplus have decreased markedly, even posting negative numbers for the first time in decades. Of course, currency debasement never works: it cannot work.



1-Japan, current accountJapan’s current account over the past two decades.

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We’ll Have to Add Them to the Endangered Species List …


bearThe kind of bad-ass bear that inhabits nightmares. You don’t want to meet this one when he’s in a bad mood

(Photo via badassoftheweek.com)


As we recently pointed out, stock market bears are a dying breed (see “Total Capitulation of the Bears” for details). The WWF’s official endangered species list contains only a handful of members of the family Ursidae, which range from “vulnerable” (polar bear) to “least concern” (brown bear). The Wall Street bear clearly is in a lot more danger.

What prompts this missive is news that yet another prominent bear has apparently given up. The thing is, this bear – Wells Fargo analyst Gina Martin Adams – wasn’t even a bear, but merely a somewhat reluctant bull, whose targets got taken out a few times. It is interesting from a psychological perspective that a not overly foaming-at-the-mouth bull is considered a “bear” by the financial media, a “famous bear” even. She has now recanted, and has apparently been preceded by several others. An SPX target of 1850 points apparently made her the “most bearish strategist” on Wall Street!


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Gummed Up by Taxes, Debt and Regulation

At 7 a.m. on Saturday morning we were in our room at the China World Hotel, looking down on eight lanes of traffic that had come to a dead stop in the Beijing traffic.

“The last century was America’s century,” says our Chinese colleague. “This is China’s century.”

“You know why America was such a success,” he continued. “Because it was a fairly free market with massive domestic demand. Companies could scale up in the highly competitive US market. That would make them larger and more advanced than their foreign competitors. They could then enter foreign markets and easily beat the locals.

“Now, the US is gummed up by taxes, debt and regulation. Outside of Silicon Valley most of the companies are old. There are few new businesses and not much new technology.

“I think you wrote something about the declining number of start-ups in the US. It’s a big deal that few people recognize. I think you said it was a result of crony capitalism. The feds subsidize and protect the big boys… and bail them out when they get into trouble. That’s why GM and Fannie Mae are still in business. But the little guys can’t even get credit.

“China, meanwhile, is full of new companies. Everything is new. And the internal market is fairly free compared to America. Talk about scale. These companies have massive domestic growth and learning capacity before they have to compete on the world markets.”


140513_$BOX_Entrepreneurship_1.png.CROP.promovar-mediumlargeUS company births and deaths, via a (slightly dated) Brookings report (pdf) – click to enlarge.


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Surreal Art and Car Lotteries

A huge plastic bull with a mushroom cloud coming out of his fundament … and a guy with horns on his head, crushed against the wall.

It is art. Titled: Things Are Not What They Seem. It is also a puzzle. Because we can’t tell what it seems to be. In fact, it doesn’t seem to be anything at all… just an odd piece of surreal art.  It is exactly what it seems to be, in other words. Maybe that is the joke.
Another statue … in a kind of rough bronze … has a woman (at least, it appears to be a woman) with her legs splayed, and her arms over her head, lying on the floor.

The Parkview Green mall in downtown Beijing is easily the biggest, most modern and most stylish mall your editor has ever seen. It looks like something imagined from the future – made of steel, glass and concrete… with soaring interior spaces crisscrossed by elevated walkways and escalators… and a collection of oversize pieces of art that rivals the Tate Modern in London.


china-2Tianjin Goldin Finance 117

(Photo credit: unknown)

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No Country for Old Men

We are sitting in the lobby of the China World Hotel in Beijing. It is a very large space and very unlike most hotels.  Monday, we stopped into the lobby of the Marriott Opera Ambassador Hotel on Boulevard Haussmann in Paris. Like most lobbies, it was quiet, with just a few people having coffee. 

Here, there are hundreds of people – almost all young. I am the oldest person, a fossil from another continent and another time. The young people are dressed casually but well. They sit in groups talking… as though planning their next marketing campaign. 

There is scarcely anyone over the age of 40. We have started a small publishing business in China. It, too, is staffed by people in their twenties.  What happened to the old people? Maybe they have not been able to keep up with the breathtaking changes in China. This is no country for old men… 

“Everyone has great confidence in the future,” says a Chinese colleague. “Things have gotten so much better over the last 20 years. And we expect that to continue. 

“Our new president, Xi Jinping, is serious about trying to get rid of corruption, even at the highest levels. He is trying to deregulate whole industries. Regulations and licenses were just a way for officials to demand bribes and payoffs. So, Xi wants to get rid of a lot of this so we can do business more freely.” 

Whether he will succeed or not, we can’t say. But at least it sounds promising.


fairbanks and chaplinCharlie Chaplin stands on Douglas Fairbanks' shoulders during a rally at Wall Street in 1918. 

(Photo author unknown)


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Another Keynesian Meme Dragged Up

A recent Fed paper reports that the Fed's wild money printing orgy has failed to produce much CPI inflation because “consumers are hoarding money”. It is said that this explains why so-called “money velocity” is low.

The whole argument revolves around the Fisherian “equation of exchange”, as you can see here. Now, it may be true that the society-wide demand for money (i.e., for holding cash balances) has increased. Rising demand for money can indeed cancel some of the effects of an increasing money supply. However, it should be obvious that there is 1. no way of “measuring” the demand for money and 2. the “equation of exchange” is a useless tautology.

Consider for instance this part of the argument:


“Though American consumers might dispute the notion that inflation has been low, the indicators the Fed follows show it to be running well below the target rate of 2 percent that would have to come before interest rates would get pushed higher.

That has happened despite nearly six years of a zero interest rate policy and as the Fed has pushed its balance sheet to nearly $4.5 trillion.

Much of that liquidity, however, has sat fallow. Banks have put away close to $2.8 trillion in reserves, and households are sitting on $2.15 trillion in savings-about a 50 percent increase over the past five years.”


(emphasis added)

First of all, banks have not “put away” $2.8 trillion in reserves; in reality, they have no control whatsoever over the level of excess reserves. They are solely a function of quantitative easing: when the Fed buys securities with money from thin air, bank reserves are invariably created as a side effect. Credit can be pyramided atop them, or for they can be used for interbank lending of reserves, or they can be paid out as cash currency when customers withdraw money from their accounts. That's basically it.


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The Real Reason American Capitalism Is Failing

We’ve come to China to check on our investments. Not that we have many. But the fewer you have, the more each one is important to you. Of all the world’s major stock markets, only two are reasonably priced. China is one. Russia is the other. We are long-term bullish on both.

It is raining here in Beijing. Outside, the roads are clogged with slowly moving traffic. The scene appears normal for a big city. It could be New York, London or Paris. What is remarkable about the view from our window is that it came about so fast. Never before have so many people moved so quickly into the modern world.

Paris looked much like it does today after Baron Haussmann completed his makeover of the city in the 1850s and 1860s. The London skyline has changed significantly over the last few decades – with the addition of many new landmarks, such as the London Eye, The Gherkin and The Shard. But the basics of the city were put together over hundreds of years and remain relatively unchanged.

New York, too, was largely completed 60 years ago. But modern Beijing is brand new. A few years ago, it barely existed. In 1979, when former Chinese leader Deng Xiaoping announced that henceforth it was okay to make money, there were few decent roads… few decent cars… and few decent bars in Beijing. Now, they are all over the place.


ShanghaiComposite Index

Shanghai Composite – this is actually a good-looking chart these days … – via StockCharts, click to enlarge.


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It Wasn't Always Easy …

“What’s the secret?”  We had decided to put the question directly. Why not? How often do you have dinner with a Rothschild, much less dozens of them? 

Today, one of Bordeaux’s most notable winemakers goes to her grave. Philippine de Rothschild was already stone cold when we arrived in town on Saturday; she died last week at 80. Today, she will be buried. 

But we came not to bury a Rothschild, but to praise one. That is to say we came not for an unhappy occasion, but for a happy one: the marriage of one of Philippine’s cousins. 

“She was so loved and respected in the wine industry here in Bordeaux,” a relative reported, “that the other winegrowers, merchants, and even the field hands lined the road and took off their hats when they brought her body back from Paris.” 

Philippine told the French leftist newspaper Libération that, despite the family name and the family fortune, she had not always had an easy time of it. During World War II, being a Rothschild in France was hazardous. Philippine’s mother was sent to a concentration camp near Berlin, where she was murdered in 1945. 

Philippine used her mother’s maiden name, escaped the deportations and, after the war, she went onstage in Paris as Philippine Pascal. Then in 1988, her father died. And she came back to Bordeaux to run the famous Château Mouton Rothschild wine estate. 


James_Mayer_de_Rothschild_by_Southworth__Hawes-231x300James Meyer de Rothchild


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Comprehensive Assessment Paranoia

The ECB is currently busy stress-testing all “systemically relevant” banks in the euro area, the supervision of which it is going to take over as part of the banking union plan later this year. This stress test has given birth to new acronyms, such as “AQR” (asset quality review) and “CA” (comprehensive assessment). Banks that are found to be short of sufficient tier 1 capital will have to submit a credible  recapitalization plan very quickly after the CA has been concluded, and thereafter will have several months to implement it. 

As a result of the massive carry trade in government bonds of the periphery initiated by the LTROs and Draghi's OMT promise (as we have previously mentioned, the timing and sequence of events suggests that there were sub-rosa agreements between governments, the ECB and large commercial banks, with the caveat that this is impossible to prove), a number of bank balance sheets in countries like Spain and Italy probably look significantly improved  simply due to their vast accumulation of zero risk-weighted government debt. Moreover, the ECB's war on savers has clearly served as a redistributive device in favor of banks.

Nevertheless, the recent downfall of the Espirito Santo empire including the bank (Banco Espirito Santo) of the same name in Portugal, was a reminder that there may still be skeletons in a number of closets (an interesting backgrounder on the Espirito Santo affair can be found here by the way). A recent report in the NYT's dealbook suggests that there is a growing consensus that the ECB's stress test will discover many a bank balance sheet falling significantly short.  The Texas ratio has emerged as the analytical tool of choice for guessing which banks will be found wanting:


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