On Economy


When Things Grow Old …

The Dow rose on Friday, after falling by more than 200 points the day before. This left us with little idea about where the stock market was going. Was it still going up? Or down? Mr. Market couldn’t seem to make up his mind.

And now we’re beginning a new week. The leaves are turning. October begins the day after tomorrow. The sun sinks lower and lower in the noonday sky. And day after day, all the Earth ages… drooping unto death.

The dollar is going up. For now. But the long-term trend for both the greenback and the empire it supports is probably down. The share of world GDP produced by the US is in decline. The share of world trade that goes to or from the US is also in decline.

America’s share of the world population is falling, too – though not as fast as Europe’s or Japan’s. The US is aging… with old people… old industries… old technologies… old government… old institutions.

The Interstate Highway System was built over 50 years ago. The train system is even older. And Social Security got its start nearly 80 years ago. Not that we have anything against old people or old things – we’re fast becoming old ourselves. But old things don’t grow; they shrink.


0929-dre-blogThe Bonner Family château in France

(Photo credit: David Jouas)

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Greek Government Worried About Its Survival

Antonis Samaras has a problem: just as the relatively tough austerity medicine Greece was forced to take seems to be beginning to bear some fruit (Greece is the one euro area country where nominal government spending has indeed declined significantly), his shaky coalition government may soon be stumbling over the country’s upcoming presidential election. The problem in a nutshell is that if Samaras fails to get his presidential candidate elected, new parliamentary elections would be triggered – and according to current polls, the coalition would lose against SYRIZA.


1-greece-government-spendingGreek government spending has declined significantly in nominal terms (though not as a percentage of GDP, as GDP has declined a lot) – click to enlarge.


SYRIZA as readers may recall, once was a smallish coalition of tiny left-wing parties to the left of the social democrats that didn’t really have a lot of electoral support. After the financial crisis and the bankruptcy of the Greek government, it quickly became the country’s largest party. SYRIZA is anti-bailout, whereby we are not quite sure what this stance actually entails. Presumably, a SYRIZA victory would mean a Greek exit from the euro, as Greece’s creditors would have to accept the country’s bankruptcy, and its banking system would lose the ECB’s support (since it would be instantly bankrupt, and hence no longer eligible to receive ECB funding). Moreover, tearing up the agreements with the “troika” would definitely lead to Greece being made into a pariah, so as to discourage others from following suit.


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$60 Million for a Blow-Up Dog?


0926-DRE-blogShatura Power Station. Russia has the largest peak power capacity in the world

(Photo via moskva-stroyka.ru)


Talk about ringing a bell!

This ring-a-ding-ding comes from the New York Observer:


“Sales of contemporary art at public auctions surpassed $2 billion for the first time last year, the Paris-based arts-data organization Artprice said.

The report tallied auction sales between July 2013 and July 2014, and it found that contemporary art sales grew 40% from the previous year. The number of big-ticket items that sold for over 10 million euro ($12.8 million) more than doubled in the period.

Those who follow the art market will remember the record-breaking Christie’s auction in November that saw buyers walk away with the most expensive publicly auctioned piece of art ever, Francis Bacon’s $142.4 million Three Studies of Lucian Freud (1969). That auction also minted Jeff Koons’ $58.4 million Balloon Dog (Orange) (1994-2000) as the most expensive piece by a living artist ever sold at auction.”


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A Comprehensive Interview with the ECB Dissenter

Jens Weidmann, president of the German Bundesbank, is well-known for his disdain of the ECB’s unconventional policy measures. He continues to believe that the way forward does not require ever looser monetary policy, but economic reform. On these points we tend to agree with him; however, just as other central bankers, he of course supports the nonsensical ECB “price stability target”.

Needless to say, if the money issued by the central bank were to lose 2% of its purchasing power every year as planned, we would say that this would not represent price stability by any stretch of the imagination. However, we are actually not really critical of the precise “target” of the policy, but of the entire concept as such. It is a dangerous concept even if it were to target 0% price inflation. It has produced untold mischief over the past century, mainly in the form of major booms and busts (we have detailed the problems in “The Errors and Dangers of the Price Stability Policy”).

Anyway, Weidmann has recently given an interview to German news magazine Der Spiegel, which is well worth reading in its entirety. Weidmann evidently does not trust the calm in the financial markets and definitely does not believe that the euro area crisis is over and done with just because sovereign bond yields have declined a lot. Below are excerpts containing the parts we found most interesting:


SPIEGEL: Mr. Weidmann, you are notorious for being a tough critic of European Central Bank President Mario Draghi. But the euro crisis seems to be over, largely thanks to ECB intervention. Has he not been proven right?

Weidmann: It’s not about being right or a personal confrontation. When it comes to extremely important monetary policy decisions, the ECB Governing Council does its utmost to find the correct path. And the decisions are so difficult because the crisis is not yet behind us, even if the current calm on the financial markets might suggest as much.

SPIEGEL: Yet Spain, once wracked by the euro-zone crisis, can today borrow money more cheaply than ever before in the history of the monetary union. Do you not think that is a consequence of Mario Draghi’s 2012 pledge to save the euro “whatever it takes”?

Weidmann:You shouldn’t mistake the thermometer for the illness. I have never disputed that the ECB could impress and move the markets with the announcement that it would make massive purchases of sovereign bonds if necessary. But such measures focus on the symptoms and don’t cure the causes of the crisis. As such, the current calm is misleading and even dangerous, because it takes pressure off of the governments to implement badly needed reforms. If they are not undertaken, investors could quickly change their risk evaluations.

SPIEGEL: But if the ECB hadn’t intervened, the euro zone patient may well have died from its 2012 fever.

Weidmann: I don’t believe that is the case. In reaction to the crisis, policymakers established a multibillion euro bailout fund to assist the crisis countries in exchange for their adherence to certain stipulations. That was the correct, democratically legitimate path. Even more so given that the bailout fund can also purchase sovereign bonds. The central bank in the euro zone, by contrast, is forbidden from providing credit to countries and from purchasing sovereign bonds on the primary market. By making targeted bond purchases on the secondary market, the ECB opened itself to accusations of skirting this ban.

SPIEGEL: Since the beginning of the financial crisis, the European Central Bank has injected liquidity into the markets at decreasing intervals. It is a bit reminiscent of a junkie who has to continually up the dosage to have the desired effect.

Weidmann:It is certainly true that after each loosening of monetary policy, the public immediately begins speculating about what might come next.


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Money’s Declining Marginal Utility

Let us continue our series on “How to Get Rich” with a warning: It may not be such a good idea. This is why we’ve titled this first part “Homage to Poverty.” In it, we try to show you that: (1) you will find it hard to get rich at all if you are afraid of poverty, and (2) poverty isn’t really so bad, after all.

The simple explanation for why you may prefer poverty to wealth is that it allows you to appreciate money! Yes, dear reader, if there is one thing for which the principle of declining marginal utility seems to have been invented, it is for money. Like shots of Irish whiskey, each additional dollar you get is worth less than the dollar that preceded it.

If you are down to your last nickel, finding a $5 bill on the street is a godsend. You pick it up immediately and head for the liquor store. But if you have $1 million in the bank, you might graciously leave the fiver for someone who needs it more than you.

This explains why rich people so often and so readily give away money. It just isn’t worth very much to them. If you have $10 million in the bank, another million is just an accounting detail. It doesn’t change your life one bit. If you have no money in the bank, on the other hand, $50,000 could make you feel rich. Your first million could change everything.

In short, money is especially important when you don’t have any. When you have gotten rich, money doesn’t mean much to you. And as we pointed out yesterday, this could leave you feeling empty. After all, if money doesn’t mean anything… what does?




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Buybacks Soar While Insiders Sell

Dow down 116 points on Tuesday. Why? Airstrikes against ISIS… Ebola… inversion crackdown… housing slowdown… record stock high prices… Alibaba? The smart money knows what to do.

From Bloomberg:


“American companies have seldom spent more money than they are now buying back shares. The same can’t be said for their executives. A total of 7,181 insiders bought their own stock this year through Sept. 12 and 23,323 sold shares, according to data compiled by Bloomberg and Washington Service. The ratio of buys to sells is near the lowest since 2000.

At the same time, corporate repurchases reached $275 billion in the first half of the year, the second busiest since S&P Dow Jones Indices began tracking the data in 1998. Share purchases by executives are becoming rarer after seven straight quarters of advances pushed valuations in the Standard & Poor’s 500 Index to a four-year high.

While companies are pouring money into their own stock because they have nothing better to do with it, officers and directors aren’t – and that’s a bearish signal for share prices, said Brad McMillan, chief investment officer at Commonwealth Financial Network.

“It doesn’t say anything very good about the growth prospect for the business,” McMillan, whose firm oversees $86 billion, said in a phone interview on Sept. 18 from Waltham, Massachusetts. “Who would know the business better than an executive in the middle of it? Even though executives are buying on the corporate level, their hearts are not in it personally.”

Insiders buying stock have dropped 8% from a year ago, poised for the fewest in more than a decade, according to data compiled by Bloomberg and Bethesda, Maryland-based Washington Service. Monsanto Co. and Cisco Systems Inc. are among companies whose executives have done less buying even as corporate repurchases increased.”


They say they don’t ring a bell at the top of a market. But we hear alarms going off all over the place. Corporations are buying back shares with borrowed money… pumping up prices. Then the pumped-up shares are awarded to managers as performance bonuses. What do the managers do with them? They dump them.



Pump the market with zero-cost credit … Push up share prices, shifting trillions of dollars in wealth to the richest people in the country … Draw more naïve Mom and Pop into the stock market …

(Photo credit: Tomas Castelazo)


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Flash PMI Disappointment

Markit released its euro area composite Flash PMI and the Flash PMIs for the “core” countries Germany and France on Tuesday. The data once again showed that economic growth in Europe is not much to write home about. Germany’s data look superficially good, but there is a widening gulf between manufacturing and service sector data, with the former weakening markedly.

The euro area composite output index fell to a 9 month low, the manufacturing PMI to a 14 month low – at 50.5 it remains barely in positive territory. Note in this context that in spite of the popular myth that manufacturing is only an insignificant part of the economy, it is actually its largest and most important part. In GDP accounting, almost the entire production structure is ignored (only investment in fixed capital assets is considered). And yet, if one looks at industry gross output tables, it becomes clear that this ignored portion of the economy actually represents the bulk of economic activity. Properly considered, consumer spending amounts only to about 35%-40% of economic activity, not 70% as is generally assumed. In short, manufacturing PMI data are actually a rather important gauge of an economy’s health.

France’s PMIs remain in contraction, even if it is mild at this point. However, it is not surprising that French unemployment remains near multi-year highs and that the government consistently fails to meet its budget deficit targets.


1-EZ-PMI and growthEuro area, Markit composite PMI and GDP growth – click to enlarge.


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Central Planners and Untenable Theories

The European Central Bank again cut the interest rates it controls. Notably, the deposit rate was moved deeper into negative territory. It is now -0.2% (minus 20 basis points, that is not a typo). The ECB says it’s trying to nudge prices higher, but it’s actually feeding the cancer of falling interest.

The linked article above, like most, is focused on the quantity of euros and the presumed direct relationship to price. The following bit of editorializing from that article is uncontroversial in Frankfurt, London, New York, Mumbai, or Shanghai.

“Inflation weakened to a five-year low in August, just 0.3% in annual terms. That is far below the ECB’s target of a little under 2% over the medium term, raising fears that the region could face a debilitating stretch of weak or falling prices that hampers debt-financing and investment. Those fears intensified as market-based measures of inflation expectations weakened, too.”


Mario DraghiThe chart shows the 5yr./5yr. swap rate, a.k.a. the 5 year forward inflation breakeven rate. This is the “inflation rate”, or rather the annual rate of change in harmonized euro area CPI, which market participants expect to reign 5 years hence over the following 5 years. This inherently imprecise datum is employed by the ECB as a measure of whether long term inflation expectations are “well anchored” (chart caption by PT).


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Writing on the Wall?

The Dow was down on Monday, but not alarmingly. Meanwhile, comes evidence that the dollar is doomed. It may get a boost in the short run from the euro zone’s ultra-low rates. But the writing is moving from the wall to the newspapers. From ZeroHedge:


“Russia’s prime minister, Dmitry Medvedev, told Rossiya TV in an interview earlier today, [that the BRICs] should conduct transactions in national currencies, bypassing cross-rates with the US dollar, adding that “we can easily make mutual settlements directly,” and the mechanism should be beneficial to both sides of transactions.

And if it wasn’t clear by now, Russia’s pivot away from the West and toward China is pretty much complete. Medvedev also said that “our collaboration with China is of strategic importance. We have great, brilliant political contacts. We have excellent economic relations. [China] is our strategic partner, and we are interested in expanding the volume of cooperation. We are not afraid of collaborating because we are confident that this is equal, friendly and mutually beneficial collaboration in all areas.”


Portugal in the 15th century. Spain in the 16th century. Followed by the Netherlands. France. Britain. And finally, the US. Each empire gets its chance to throw its weight around… and its money. About a century for each.

Now, it’s America’s turn. But the US “Empire of Debt” already lives on borrowed money… and borrowed time. The dollar, US stocks and bonds – in fact, the entire capital structure – are overpriced… and in danger. Anything could happen in the near term. But in the long term… all will go down. In the meantime, we continue our series on “How to Get Rich.”


medvedev and xiRussian prime minister Dimitry Mededev and China’s CEO Xi Jinping

(Photo via government.ru)

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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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THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future