Bankers Betting on Recovery?
The 'it's all good' meme got another boost at Reuters, which has published an article entitled “Looking up! Top bankers see rosier view of economy”. The biggest too-big-to-fail whale of them all chimed in as follows:
Loans to businesses have risen to a record high and bank executives say they are increasingly optimistic about the U.S. economy.
Increasing demand for bank loans often is a prelude to higher economic growth. With the U.S. government budget crisis fixed for now and Europe showing signs of economic recovery, companies feel more comfortable borrowing to invest in machinery, factories, and buildings.
JPMorgan Chase Chief Executive Jamie Dimon, who has long described himself as "cautiously optimistic" about the economy, recently dropped the modifier "cautiously," he said on a conference call with investors last week.
"We're using the word optimistic because we are actually optimistic," he added. "The sun and moon and stars are lined up for a very successful year" in the U.S., he said the next day at a conference in San Francisco.
The sun, the moon and the stars are aligned! What could possibly go wrong? The article goes on to list a plethora of lesser bankers expressing similar feelings. However, things are not always what they seem.
So allegedly bankers think everything is looking up and their opinion is even supported by the proper alignment of various celestial bodies – and presumably, a favorable reading from the Tarot deck (). If that's the case, one might be wondering about certain statistics. For instance, how come that total bank credit growth is exhibiting the lowest year-on-year rate of change of at least the past four decades, with the sole exception of the period immediately following the 2008-2009 financial system crash?
So the banks are not lending, but everything is going swimmingly? Something doesn't compute here. We should also point out that it is true that corporations are more indebted than ever before, but that is a reason for grave concern rather than a reason to be optimistic (and it partly reflects that fact that many big corporations drew down promised credit lines after the crash because they feared they might be cut off if they didn't act fast).
In the German language the statements of the bankers interviewed in the article would be referred to as 'gesundbeten' – which means literally 'to pray for the health of something'. However, the term conveys much more than that, namely that 1. it won't work, because the something that is being prayed for has actually long transmogrified into an irretrievable state close to or akin to death, and 2. that the act of 'gesundbeten' is a senseless act of motivational self-deception, precisely because there is obviously no point to it.
Anyway, it seems to us this is a case where it might be better to watch what they are doing instead of listening to what they are saying.
Hoping for a Capital Expenditure Boom?
Zerohedge recently reported on an analysis by SocGen that should be required reading for all economic faith healers.
A summary of the important points: 1. corporate cash piles may be high, but debt has been piled even higher – the result: unprecedented leverage (i.e., a record high in net corporate debt).
2. operational profit growth has completely stalled out over the past year (listed corporations are boosting EPS with share buybacks – which are partly funded with the growing debt pile mentioned in point 1), while sales growth has been in decline since 2010.
3. while growth in capital expenditures has been in a sharply declining trend for more than two years and looks like it may dip into negative territory soon, it has recently reached almost a historic high relative to sales and has exceeded free cash flow growth for three years running.
None of this is particularly surprising if one is convinced – as we are – that monetary pumping and the artificially low interest rates it produces falsifies economic calculation and spurs malinvestment. There may be little 'inflation' reflected in aggregate prices indexes such as CPI or PPI, but there can be no doubt that the valuation of capital goods changes relative to that of consumer goods when interest rates decline. This distortion in relative prices is the most harmful effect on the economy at large created by inflationary monetary policy. For instance, the depreciation of capital goods is still based on the prices that obtained prior to the distortion in prices, which makes profits appear larger than they really are (in other words, accounting profits do not reflect the price revolution and are therefore illusory). When the time comes to maintain worn out capital it turns out it costs more than expected and it would have been more accurate to depreciate it at different rates. By that time, the illusory profits may already have been distributed, i.e., capital will actually have been consumed.
In addition, contrary to a decline in interest rates based on a genuine increase in savings, the artificially lowered rate transmits the distorted information that savings are larger than they really are. Longer and theoretically more profitable production processes appear feasible, and investment activities are set into motion that later turn out to have been misguided because consumer time preferences have actually not changed. As Mises put it in a famous conceptual analogy:
“The whole entrepreneurial class is, as it were, in the position of a master-builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure.”
The 'later discovery' expresses itself as an economic bust. As our regular readers know, we like to keep an eye on changes in the capital structure via a ratio of production indexes, as imprecise as they probably are. Note here that the long term trend partly reflects the increase in global trade and the growing global division of labor, but the noticeable medium term volatility in the ratio suggest that the approach is sound:
While we cannot state with certainty when and where exactly the recent trend will turn, the current height of the ratio suggests that a negative inflection point is probably fairly close (or may have occurred already). If so, then the record high in net corporate indebtedness is likely to end up creating great difficulties – not only for the debtors, but also their recently officially optimistic creditors.
Charts by: St. Louis Federal Reserve Research
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
2 Responses to “Bankers Pronounce the Recovery Sound”
Most read in the last 20 days:
- Gold - Ready to Spring Another Surprise
Sentiment Extremes Below is an update of a number of interesting data points related to the gold market. Whether “interesting” will become “meaningful” remains to be seen, as most of gold's fundamental drivers aren't yet bullishly aligned. One must keep in mind though that gold is very sensitive with respect to anticipating future developments in market liquidity and the reaction these will elicit from central banks. Often this involves very long lead times. Blackbeard's...
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...